1) When agents do not act on behalf of their principals, the agency cost is borne by the
principal alone.
2) Under current GAAP, volatility in asset returns translates directly into net income
volatility because the return on plan assets reduces pension expense.
3) Research indicates that few managers would engage in real transaction management
(e.g., delaying research and development or advertising) in order to meet earnings
targets.
4) Under U.S. GAAP, cash interest from investments is reported on the statement of
cash flows as part of investing activities whereas under IFRS, cash interest from
investments is reported as part of financing activities.
5) When sales growth exceeds receivables growth, this could be an indication of
aggressive revenue recognition policies.
6) Changes in accounting principle arise only when there are changes mandated by a
standards-setting body such as the FASB.
7) When the outcome of a service contract cannot be reliably estimated, IFRS rules
require firms to use the completed contract method.
8) Under current U.S. and IFRS guidance, most securitization entities will stay on the
balance sheet.
9) The advent of widely used computerized optical scanning equipment has led to the
adoption of perpetual systems in high-volume settings where such systems were
previously not cost effective.
10) The advantage of the retrospective approach to accounting for changes in
accounting principle is that the financial statements in the year of the change and for
prior years presented for comparative purposes are prepared on the same basis of
accounting.
11) When a firm does not adopt the fair value option, it still must disclose the fair value
of its accounts receivable.
12) Firms may choose the fair value option for either a single financial instrument or a
group of financial instruments.
13) Central Investments bought 4,000 shares of Benet Company common stock on
January 1, 2015, for $20,000, and 4,000 shares of Roy Company common on July 1,
2015, for $24,000. Benet declared dividends on December 31, 2015 of $3,000. At the
end of 2015, the market value of Roy was $30,000 and the market value of Benet was
$28,000. At the end of 2016, the market value of Roy was $32,000 and the market value
of Benet was $24,000. The stocks were considered to be held for their long-term
investment potential. Central owns 8% of Benet Company and 12% of Roy Company.
Assume that the Roy Company stock was sold during 2017 for $31,000. The proper
accounting recognition at the date of sale was
A.an unrealized loss of $1,000.
B.a realized gain of $7,000.
C.a realized gain of $6,000.
D.a realized loss of $1,000.
14) Selected information taken from the 2014 annual report of Aardvark Company
follows. During 2014, the company had no nonoperating or nonrecurring items included
in income and had no outstanding preferred stock.
Required:
a. For 2014, calculate: ROA, ROCE, operating profit margin, and asset turnover. Round
your percentage answers to one decimal place. For example, .1234 = 12.3%.
b. Based on the industry data provided, does Aardvark appear to have a competitive
advantage (briefly explain your answer)? If so, what strategy is the firm apparently
following?
15) The Heath Corporation reported net income for 2015 of $177,500. Heath began the
year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares
of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000
shares of common stock for $6 per share. Heath paid dividends to the common
shareholders in December.
The basic earnings per share for 2015 is
A.$1.43 per share.
B.$1.50 per share.
C.$1.54 per share.
D.$1.73 per share.
16) The Sarver Farm has completed the fall harvest with 50,000 bushels of premium
wheat. The wheat cost $75,000 from planting to harvest and the market price of the
wheat on the day it is placed in the silo is $2.50 per bushel. Sarver sells 42,000 bushels
in Year 1 and holds the remaining 8,000 until Year 2 when it sells for $3.00 per bushel.
Using the market price (production) method, how much net income should Sarver
recognize in Year 1?
A.$42,000
B.$50,000
C.$105,000
D.$125,000
17) GAAP specifies that for a seller to record revenue at time of sale when right of
return exists the following conditions must be met except:
A.The seller’s price to the buyer is substantially fixed or determinable at the date of
sale.
B.The buyer has paid the seller, or the buyer is obligated to pay the seller and the
obligation is not contingent on resale of the product.
C.The buyer’s obligation to the seller does not change in the event of theft or physical
destruction or damage of the product.
D.The buyer is a special purpose entity established by the seller for the sole purpose of
buying and reselling the seller’s product.
18) Konan, Inc. uses the lower of cost or market method to determine inventory value.
The following information pertains to the ending inventory:
The “market” value for item N-05 is
A.$20.
B.$24.
C.$28.
D.$30.
19) Konan, Inc. uses the lower of cost or market method to determine inventory value.
The following information pertains to the ending inventory:
The lower of cost or market for product N-05 is
A.$20.
B.$22.
C.$24.
D.$28.
20) How much realized gross profit on installment sales will Ford recognize in Year 1?
A.$20,000
B.$30,000
C.$60,000
D.$100,000
21) Differences between IFRS and U.S. GAAP in accounting for pensions include all of
the following except:
A.Under U.S. GAAP the asset (liability) on the balance sheet differs from the plan’s
actual funded status, while under IFRS the asset (liability) on the balance sheet equals
the plan’s actual funded status.
B.Under IFRS past service costs are recognized immediately as part of pension
expense.
C.Under IFRS actuarial gains and losses are recognized in OCI without subsequent
amortization to pension expense.
D.Pension expense computed using U.S. GAAP is likely to be higher because it allows
firms to use an expected rate of return that exceeds the discount rate.
22) Condensed financial data are presented below for the Phoenix Corporation:
The operating cash flows to total liabilities for 2014 is (rounded):
A.13.4%
B.21.5%
C.23.4%
D.28.1%
23) Which one of the following entries would be made in Year 1 to record the income
recognized using the percentage-of-completion method of revenue recognition?
A.
B.
C.
D.
24) The Heath Corporation reported net income for 2015 of $177,500. Heath began the
year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares
of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000
shares of common stock for $6 per share. Heath paid dividends to the common
shareholders in December.
The weighted average number of common shares used to compute earnings per share
for 2015 is
A.100,000.
B.102,500.
C.105,000.
D.110,000.
25) Trend statements are better than common size statements at indicating which of the
following?
A.Stability.
B.Monetary changes.
C.Profitability.
D.Growth and decline.