1) Income tax expense when interperiod tax allocation is used creates a more stable
effective tax rate over time relative to using tax payments as income tax expense.
2) Analyzing the disclosures pertaining to deferred income taxes can provide relevant
insights into the actions that a company’s management has taken to manipulate net
income.
3) As a bond matures, annual amortization of premium on bonds payable (bond
premium) increases while annual interest expense decreases.
4) Interest must be accounted for on all long-term notes receivable whether the interest
rate is stated or not.
5) When the fair value of the asset received in a nonmonetary exchange is more clearly
evident than the fair value of the asset(s) given up, the fair value of the asset received is
used as the new cost base of the asset.
6) In a transaction where the transferor surrenders control over its receivables, the
transaction is treated as a sale and any gain or loss is recognized in earnings.
7) Recognition of revenueunder the cash basis occurswhen the revenueis received.
8) Shareholders usually benefit when managers take real actions to maintain
appearances of the firm’s performance.
9) When interest rates have increased and bonds are retired before maturity, market
value is below book value generating an accounting loss.
10) In the lower of cost or market determination, the ceiling is the inventory’s net
realizable value.
11) When accounting for indefinite-lived intangible assets under IFRS, carrying values
are compared to the recoverable amount instead of fair value to ascertain if a
write-down is needed.
12) The correction of an error causes previous year financial statements to be
retroactively restated for comparative purposes.
13) The retirement of a bond which has a $250,000 maturity value and a $10,000
balance in premium on bonds payable (bond premium) creates a $15,000 gain if the
bond is retired at a cost of $245,000.
14) Midyear LIFO liquidations receive the same accounting treatment regardless of
whether they are deemed to be temporary or permanent.
15) Loan default rates are relatively low as only a few companies fall into the high
credit risk pool and of those only about 12% default within one year.
16) IFRS only explicitly covers troubled debt restructurings from the lender’s
perspective.
17) By using the book value method to record the conversion of convertible bonds,
managers are able to protect themselves from recording conversion losses.
18) Companies needing to access new and ever larger sources of capital in response to
increased international competitiveness face a severe disadvantage if their financial
reporting
A.is in accordance with IFRS
B.is in accordance with U.S. GAAP
C.is based on a commercial and tax law approach
D.is based on an economic performance approach
19) Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an
implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray’s
incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray
believes that the equipment has a 10-year service life but has reason to suspect that a
major overhaul might be required in the fifth to seventh year. Since this is the first year
of the equipment’s production, Ray warrants equipment for eight full years anyway.
Ford uses which one of the following interest rates to record this lease?
A.Use 9.0% because it is the lessee’s incremental borrowing rate
B.Use 10.0% because it is the implicit lease rate of return to the lessor
C.Use 8.5% because it is the lesser of the implicit rate and Ray’s incremental borrowing
rate
D.Use 9.0% because it is the lesser of the implicit rate and Ford’s incremental
borrowing rate
20) When the effective yield of a bond is the same as the stated rate on the bond, the
bond is sold at
A.a discount
B.a premium
C.par
D.a price above par
21) Ford Appliance Center records revenue on the installment sales method. The
following information is available for the first two years of business.
Assume that Ford Appliance Center reports installment sales in accordance with IFRS
rules. How much realized gross profit on installment sales will Ford recognize in Year
1?
A.$0
B.$30,000
C.$60,000
D.$100,000
22) The amount of the excess cost over book value attributable to inventory written off
in 2012 is
A.$3,000
B.$4,500
C.$7,500
D.$9,000
23) Expenses
A.are recorded in the accounting period when they are “earned” and become
“measurable”
B.consist of amounts paid for consumable items and services rendered to the
organization during the accounting period
C.are the expired costs or assets “used up” during the accounting period
D.would include cash payments to employees during the period for services rendered
24) Strategies to gain a competitive advantage include product differentiation and
A.low-cost leadership
B.building brand loyalty
C.developing superior products
D.improving product quality and reliability
25) The method of preparing the statement of cash flows used by the majority of firms
is the
A.direct method
B.indirect method
C.revenue method
D.dividend method
26) A qualitative assessment of the business, its customers and suppliers, and
management’s character and capability is known as
A.covenant waivers
B.due diligence
C.indenture evaluation
D.a debenture
27) Which of the following statements does not correctly describe an adjustment to net
income when determining cash flows from operating activities when using the indirect
method?
A.A decrease in accounts receivable will be added to net income
B.An increase in inventory will be added to net income
C.An increase in accounts payable will be added to net income
D.Amortization of bond premium will be deducted from net income
28) Financial information that is provided to decision makers before it loses its capacity
to influence their decisions is
A.neutral
B.verifiable
C.timely
D.consistent
29) Under IFRS, SPEs are consolidated when evidence indicates that the reporting
company “controls” the SPE. Control is presumed if which of the following conditions
exist?
I. The reporting entity performs activities on behalf of the SPE.
II. The SPE has decision-making powers over the activities of the reporting entity.
III. The reporting company has the right to obtain the majority of the benefits of the
SPE activities.
IV. The reporting company retains the majority of the residual or ownership risks
related to the SPE or its assets.
A.I and II only
B.I, II, and III only
C.III and IV only
D.I, II, III, and IV
30) Under IFRS
A.Disclosure of lessee future minimum lease payments for the periods within one year,
within years two through five, and after five years are required
B.Lessees can classify some assets held under leases as investment property
C.The two additional lessor criteria provided under U.S. GAAP for lease revenue
recognition are absent
D.All of the choices are correct
31) On the income statement, income from discontinued operations is shown
A.as a separate section of income from continuing operations
B.as an accounting principle change
C.without any income tax effect
D.net of taxes after income from continuing operations
32) Which of the following is often not a component of other post retirement benefit
expense?
A.Service cost
B.Interest cost
C.Prior service cost amortization
D.Actual return on plan assets
33) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year.
The bonds have an effective yield of 9%. Present value factors are below:
The bond carrying value at the end of Year 1 is
A.$4,500,000
B.$5,000,000
C.$5,126,556
D.$5,161,978
34) GAAP for long-lived assets significantly impedes rate-of-return comparisons across
companies unless the firms
A.are within the same industry
B.market their products to the same customers
C.are of approximately the same size
D.have similar operating cycles
35) During 2012, Autumn Company had the following information related to cash
flows:
If Autumn Company’s statement of cash flows is prepared using the proposal on the
statement of cash flows put forth by the IASB and the FASB, which of the following is
correct?
A.Net cash from financing activities would be $152,000 cash outflow
B.Net cash from business activities would be $74,000 cash outflow
C.Net cash from business activities would be $4,000 cash outflow
D.Net cash from financing activities would be $132,000 cash outflow
36) Return on assets (ROA) can be used to assess whether a firm is likely to earn a
return on reinvested earnings that exceeds its cost of equity capital.
37) When accounting for an operating lease, which one of the following accounts are
charged with the expense on the lessee’s income statement?
A.Depreciation Expense
B.Amortization Expense
C.Rent Expense
D.Lease Operating Expense
38) ABC Company has elected to adopt the dollar-value LIFO inventory method when
the inventory is valued at $125,000. The adoption takes place as of January 1, 2011
when the entire inventory represents a single pool. ABC Company determined that the
inventory at December 31, 2011 was $144,375 at current year cost and $131,250 at base
year cost using a relevant price index of 1.10. The inventory at December 31, 2011
under dollar value LIFO is
A.$139,438
B.$131,875
C.$138,125
D.$144,375
39) Which one of the following businesses is likely to recognize revenue during the
production phase?
A.Mining company
B.Cruise ship builder
C.Citrus grower
D.Department store
40) Cash flows arising from the purchase or sale of marketable securities are cash flows
from
A.investing activities
B.operating activities
C.financing activities
D.research activities
41) Banks that fail to comply with regulations, including the failure to maintain an
adequate capital adequacy ratio, face
A.higher costs
B.lower costs
C.mergers and expansion of services
D.incarceration of officers
42) When a borrower is unable to make a scheduled interest payment, the type of
default that occurs is a
A.technical default
B.covenant default
C.payment default
D.transitory default
43) Condensed financial data are presented below for the Phoenix Corporation:
If there is no preferred stock, the return on common equity for 2012 is (rounded):
A.25.8%
B.27.9%
C.41.4%
D.43.4%
44) Financing activities include the cash effects of
A.producing and delivering goods and services
B.purchasing and disposing of fixed assets used in production of revenue
C.purchasing and disposing of debt securities of other companies
D.selling stocks and bonds to raise capital for the production of revenue
45) An impairment loss is the difference between the carrying value of the asset and the
A.historical cost of the asset
B.fair value of an asset
C.future value of the asset
D.price-level adjusted value of the asset
46) GAAP requires that each set of EPS numbers includes separately reported numbers
for all of the following except
A.special or unusual items
B.income from continuing operations
C.discontinued operations
D.extraordinary items
47) Which one of the following is an example of an aggressive revenue recognition
policy?
A.A firm recognizes revenue at time of collection
B.A firm recognizes revenue at the expiration of the return period
C.A firm with a liberal return policy recognizes revenue at shipment
D.A firm with a liberal return policy recognizes revenue at shipment with a
corresponding allowance for returns and allowances
48) Which one of the following factors makes it difficult for financial analysts to use
trend analysis?
A.Decreasing costs and prices
B.Deflation
C.An aging asset base
D.A relatively new asset base
49) The allowance for uncollectibles account is
A.added to gross accounts receivable
B.added to net accounts receivable
C.subtracted from gross accounts receivable
D.subtracted from net account receivable
50) In the United States, assets are presented in decreasing order of liquidity. In the
United Kingdom and other European countries using IFRS
A.fixed assets may be presented first followed by the current assets displayed in
increasing order of liquidity
B.the current assets are displayed in increasing order of liquidity
C.investments are listed first in descending order of maturity
D.a company may present its assets in alphabetical order if it so desires
51) Morey Corporation leases a tractor from Equity Leasing with a five-year
non-cancelable lease on January 1, 2011 under the following terms:
1> Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end
each year.
2> The payments were calculated based on the fair value (which is also the book value
for Equity) of the tractor.
3> The lease is nonrenewable and the tractor reverts to Equity at the end of the lease
term.
4> The tractor has a six-year economic life.
5> Morey has an excellent credit rating.
6> Equity offers no warranty on the tractor other than the manufacturer’s two-year
warranty that is handled directly with the manufacturer.
Equity records this lease with which one of the following journal entries?
A.Option a
B.Option b
C.Option c
D.Option d
52) Condensed financial data are presented below for the Phoenix Corporation:
If the intangible assets in 2012 are $50,000, the long-term debt to tangible assets for
2011 is:
A.10.0%
B.10.2%
C.30.7%
D.42.5%
53) The FASB stresses that the primary objective of financial reporting is to provide
information useful to investors and creditors in assessing the amount, timing, and
uncertainty of future net cash flows. The FASB contends that
A.users pay attention to firms’ accounting earnings because this accrual measure of
periodic firm performance improves their ability to forecast companies’ future cash
flows
B.information about current cash receipts and payments is the most pertinent for this
task
C.users pay attention to managements’ estimates of free cash flows because this
information improves their ability to forecast companies’ future cash flows
D.current cash flows outperform current earnings in predicting future cash flows
54) If the joint FASB/IASB discussion paper on revenue recognition (issued in
December 2008) is adopted, substantial changes from current accounting practices
would likely occur when accounting for
A.long-term construction contracts
B.agricultural commodities
C.services contracts
D.none of the above
55) Which of the following statements is not correct?
A.The U.S. income tax code influences pension fund contributions
B.The U.S. income tax code creates incentives for firms to overfund their pension plans
C.The earnings from pension fund investments are taxable to the pension plan sponsor
D.Firms with larger union memberships tend to have higher pension funding ratios