1) Financial statement users can see whether debt financing is being used to enhance
shareholders’ returns by comparing ROA and ROCE.
2) Inventory carrying cost includes storage costs.
3) Foreign companies registered with the SEC that use IFRS no longer have to
reconcile their financial statements to U.S. GAAP.
4) Two companies, Company A and Company B, issue convertible bonds at par. If
Company A uses IFRS and Company B follow U.S. GAAP, the amount Company A
records for interest expense will be greater than the amount Company B records for
interest expense.
5) Impairment losses are reported as a component of income from continuing
operations.
6) Receivables growth could exceed sales growth because the firm allows its customers
more time to pay.
7) Service cost is the increase in the discounted present value of the pension benefits
ultimately payable that is attributable to an additional year’s employment.
8) Management tends to make accounting changes and to manipulate discretionary
accruals that increase income in order to avoid violating debt covenants.
9) Debt covenants can be designed to serve a signaling function by assuring a steady
flow of information from borrower to lender.
10) All costs necessary to acquire an asset and make it ready for use are included in the
asset account.
11) Research evidence suggests that companies reduce bad debt expense when earnings
are otherwise high and then increase the expense when earnings are low.
12) A year-by-year transfer of wealth from bondholders to stockholders occurs when the
market rate of interest increases and the historical cost accounting model is used to
account for bonds.
13) Current cost accounting is preferred by the FASB because it records holding gains
on financial statements as they arise.
14) When a company has an operating lease for its primary premises it would record a
lease asset on the balance sheet.
15) When the differences in useful lives of long-lived assets reflect real economic
differences, the attempt on the part of financial analysts to undo those differences may
impede profit and loss comparisons.
16) The growth rate in earnings generally depends on the earnings retention rate and the
rate of return earned on new investment.
17) Under IFRS deferred tax assets are recognized only to the extent it is deemed
probable that they will be realized.
18) Issuing capital stock for cash represents an investing activity.
19) Because financial fraud is rare, investors and other users of financial statements can
safely accept the numbers in financial statements at face value.
20) When using the acquisition method to account for a business combination, the
subsidiary’s assets and liabilities are reported on the consolidated balance sheet at their
fair values regardless of the level of ownership attributable to the minority shareholders.
21) Devine Company sold a machine that originally cost $34,000, in a transaction that
had commercial substance. The machine had accumulated depreciation of $27,000 and
sold for $6,000. Devine had a/an
A.gain of $1,000
B.extraordinary gain of $1,000
C.loss of $1,000
D.extraordinary loss of $1,000
22) Probable future economic benefits obtained or controlled by an entity as a result of
past transactions or events define
A.assets
B.liabilities
C.equity
D.retained earnings
23) Mesquite, Inc. has held-to-maturity debt securities it purchased in 2011 . At
December 31, 2012, the amortized cost basis of the securities is $220,000 and the fair
value of the securities is $208,000. The present value of estimated future cash flows
discounted at the original effective interest rate is $210,000. Mesquite, Inc. uses IFRS
for its external reporting. What amount of loss, if any, will Mesquite, Inc. report related
to these securities for 2012?
A.$ – 0 –
B.$12,000
C.$10,000
D.$2,000
24) With the development of modern option pricing methods, the Accounting Principles
Board would probably have reached the conclusion today that the conversion feature of
convertible bonds
A.has no value
B.has value
C.has value, but should be ignored
D.does not lend itself to these option pricing models
25) Under IFRS, deferred tax assets
A.are not recognized
B.require a valuation allowance if it’s more likely than not that the deferred tax asset
will not be realized
C.are recognized only to the extent it is deemed probable that they will be realized
D.are reported as current or noncurrent based on the expected date of the reversal of the
timing difference
26) A lessee mistakenly treated an operating lease as a capital lease. How does this
mistake impact the following at the inception of the lease?
A.Option a
B.Option b
C.Option c
D.Option d
27) In an effort to “clean up” company balance sheets, managers have often
A.taken minimal restructuring write-offs
B.understated estimated charges for future expenditures
C.overstated estimated charges for future expenditures
D.been required to invest their own assets in the company
28) The Barden Company provides the following information from its Year 3 and Year
4 balance sheets:
The following information is available from the Year 4 income statement:
How much cash did Barden pay for insurance during Year 4?
A.$6,000
B.$9,000
C.$12,000
D.$18,000
29) Corona Industries purchased a stamping machine on January 2, 2008, for $100,000.
It paid $20,000 down and financed the balance over 5 years at State Bank. Terms of the
loan were 10% interest payable on December 31 each year with a required $16,000
principal payment. 2011 proves to be a difficult year and on December 1, Corona
negotiates a debt restructuring with State Bank. The settlement calls for cash payment
of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held
by Corona that cost $15,000. The land has a current market value of $22,000.
What is the amount of the restructuring gain or loss to Corona?
A.$6,000 loss
B.$6,000 gain
C.$8,933 loss
D.$13,000 gain
30) Consolidation adjustments that are made to prepare consolidated financial
statements of the parent and subsidiary are required in order to
A.obey the state laws
B.avoid double counting
C.follow tax laws
D.eliminate transactions with third parties
31) T-account analysis can be used to gain insights into why accrual basis earnings and
cash basis earnings differ and to
A.journalize future transactions
B.reconstruct transactions that have occurred during a given reporting period
C.post transactions that have occurred during a given reporting period
D.determine the current market price of common stock
32) Managers believe it is important to meet earnings benchmarks. When a number of
executives were askedwithin the parameters of GAAPwhich choices your company
might make to hit an earnings target, the most popular choice was to
A.decrease discretionary spending
B.alter accrual assumptions (such as allowances)
C.postpone taking an accounting charge
D.draw down on reserves previously set aside
33) Which of the following statements does not accurately describe the current
accounting standards for goodwill?
A.If the fair value of the reporting unit is greater than its book value there is not a
goodwill impairment
B.Goodwill should not be amortized
C.If the fair value of the reporting unit is less than its book value there will always be a
goodwill impairment
D.Goodwill should be tested for impairment on at least an annual basis and in certain
conditions between annual dates
34) TKE Corporation established a defined benefit pension plan in 2009 . TKE has
provided the following information for the year ended December 31, 2011:
If the company contributes $170,000 cash to the pension plan trustee, which one of the
following journal entries properly records the payment?
A.Option a
B.Option b
C.Option c
D.Option d
35) Current ratio distortion under LIFO inventory costing may be adjusted by
A.adding the LIFO reserve to current assets
B.subtracting the LIFO reserve from current assets
C.adding the LIFO reserve to current liabilities
D.subtracting the LIFO reserve from current liabilities
36) During 2012, a company reported an increase in the deferred tax liability account of
$47,790, a decrease in the deferred tax asset account of $17,225, and an income tax
liability as per the 2012 income tax return of $198,375. What is the income tax expense
to be reported on the income statement for the year ending December 31, 2012?
A.$263,390
B.$228,940
C.$167,810
D.$198,375
37) The use of the lower of cost or market method to value inventory for reporting
purposes is a departure from the accounting principle of
A.going concern
B.conservatism
C.matching
D.historical cost
38) Which of the following statements does not properly describe a defined benefit
pension plan?
A.Many assumptions are made in the determination of pension expense
B.The employee bears little risk with respect to estimating the amount of the annual
contributions to the plan
C.The employer bears little risk with respect to estimating the amount of the annual
contributions to the plan
D.A pension plan asset is not recorded on the employer’s balance sheet
39) Working capital accounts include
A.all assets
B.all assets and liabilities
C.current assets and all liabilities
D.current assets and current liabilities
40) Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell
for $32,000. For credit-approved customers, Blue leases the lathes for $8,500 per year
for five years. The lathes are guaranteed to last four years and generally have a six-year
life.
What is the financing profit of Blue Manufacturing on a leased lathe?
A.$7,000
B.$8,500
C.$10,500
D.$17,500
41) Current assets are assets expected to
A.be converted to cash within twelve months
B.be converted to cash within twelve months or one operating cycle if it is longer than
twelve months
C.remain on the books for at least twelve months
D.remain on the books for at least twelve months or one operating cycle if longer than
twelve months
42) The allocation of income tax expense across periods when book and tax income
differ is called
A.interperiod tax allocation
B.intraperiod tax allocation
C.current income tax allocation
D.constructive receipt allocation
43) Revenue from nonrefundable up-front fees
A.can never be recognized
B.must be recognized immediately
C.are not allowed under GAAP
D.are usually deemed to be earned as the services are delivered over the full term of the
service contract
44) The Vernon Corporation was formed on January 2, 2011 . The company sold 20,000
shares of $8.00 par value stock for $20.00 per share. On July 1, 2011, Vernon bought
back 4,000 shares of stock for $24.00 per share. The treasury stock was resold on
September 1, 2011 for $32.00 per share.
Which one of the following is the entry to record the original sale of the stock?
A.Option a
B.Option b
C.Option c
D.Option d
45) Smith, Inc. has a pension plan with the following data available for 2011 and 2012:
Smith’s pension expense for 2012 is
A.$32,400
B.$34,000
C.$34,800
D.$54,000
46) Probable future sacrifices of economic benefits arising from an entity’s present
obligations to transfer resources or provide services to other entities in the future as a
result of past transactions or events define
A.assets
B.liabilities
C.equity
D.retained earnings
47) When a borrower violates a loan covenant that requires minimum achievement of
an accounting measure in the financial statements, the lender can
A.immediately seize the loan collateral
B.fire the chief operating officer of the borrower
C.report the borrower to the IRS
D.call for immediate repayment of the loan
48) Sand engaged in operations at the start of 2011 and reported $550,000 in pre-tax
book income for the year. Tax depreciation for Sand exceeded book depreciation by
$50,000. The tax rate for 2011 was 30%, and Congress had enacted a tax rate of 20%
for the years after 2011 .
What is the total tax expense for Sand for 2011?
A.$100,000
B.$150,000
C.$160,000
D.$175,000
49) Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby
Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables
have a related allowance for doubtful accounts of $3,500.
Assuming that the transaction was a collateralized loan, which one of the following
entries will Ritter make to record this transaction?
A.Option a
B.Option b
C.Option c
D.Option d
50) To recognize revenue during the production phase, a specific customer must be
identified, an exchange price agreed upon, remaining costs to complete are reliably
estimated, a significant portion of the services contracted are performed, and
A.a reasonable estimate of cash collection determined
B.the seller has the right to terminate the exchange
C.a firm delivery date established
D.the product is immediately salable at quoted market prices