1) Changes in the fair value of all derivatives other than hedges must be recognized in
income when they occur.
2) Analysts must always be vigilant about the possibility that accounting distortions are
present and complicate the interpretation of financial ratios, percentage relations, and
trend indices.
3) When the ownership percentage of voting stock exceeds 20 percent, GAAP presumes
that the investor is able to exert significant influence over the investee company.
4) IFRS reports all impairment losses for AFS-debt securities in income regardless of
reason.
5) The amount of revenue recognized under the percentage-of-completion method is
equal to the progress payments received during the reporting period.
6) Firms may choose the fair value option for a group of financial instruments.
7) While until recently accounting standards were developed by home-country
organizations for use by domestic companies, countries in (at least) the European Union
based their standards on a common philosophy and shared financial reporting
objectives.
8) Trend statements often provide a clearer indication of growth and decline than do
common size statements.
9) The Financial Accounting Standards Board has the sole responsibility for setting
generally accepted auditing standards.
10) The key accounting issue related to bundled (multiple-element) sales transactions is
how much of the lump-sum contract price should be recognized up front when the
product is delivered to the customer, and how much should be deferred and recognized
as the seller satisfies its commitment for other deliverables specified in the contract.
11) Dividends paid by a corporation represent a distribution of earnings to shareholders
and are reported as an expense in the income statement.
12) The recent financial crisis was not caused by fair value accounting but it may have
been aggravated by the way in which mark-to-market losses reduced regulatory capital.
13) In the banking industry, the ratio of invested capital/gross assets, as defined by
RAP, is the capital asset ratio.
14) Because the special purpose entity’s credit rating is based on the quality of the
transferred receivables, it will be the same as the rating of the transferor’s general debt.
15) Under IFRS rules, nonfinancial firms are permitted to report interest and dividends
received either as operating or investing activities and interest paid as either an
operating or financing activity.
16) Decreasing discretionary spending for such items as research and development is a
popular technique for meeting earnings targets.
17) For years, two widely divergent financial reporting approaches existed in the world
(the economic performance approach and the commercial and tax law approach).
18) Smith, Inc. has a pension plan with the following data available for 2011 and 2012:
Smith’s pension expense for 2011 is
A.$30,000
B.$32,000
C.$33,000
D.$48,000
19) The amount reported as net cash provided by financing activities is
A.$25,000
B.$30,000
C.$150,000
D.$200,000
20) In January 2011, Rock Company purchased a copper mine for $8,500,000, with
removable ore estimated at 2,400,000 tons. After it has extracted all the ore, Rock will
be required by law to restore the land to its original condition at an estimated cost of
$500,000. Rock believes it will be able to then sell the property for $200,000. During
2008, Rock incurred $750,000 of development costs to prepare the mine for production,
and it removed and sold 80,000 tons of ore.
Required:
a. What amount should Rock capitalize as the cost of the mine?
b. What amount should Rock report as depletion expense in its 2011 income statement?
21) Goff Industries has applied for a loan, and as the bank loan officer, you’ve been
assigned to evaluate Goff’s financial statements. Your evaluation reveals that Goff has
no capital leases recorded on its financial statements while most other companies in its
industry do have such leases. To effectively evaluate Goff’s financial position and
compare it to industry standards, you’ve decided to constructively capitalize Goff’s
operating leases. The following information is available from Goff’s financial
statements for the year ended December 31, 2012: (Round all intermediate calculations
to the nearest whole dollar.)
Assuming Goff’s long-term debt rate is 10%, what amount would you constructively
capitalize in order to effectively analyze Goff’s financial position?
A.$ – 0 – since the company has no capital leases
B.$6,680
C.$11,504
D.$3,223
22) Palmon Industries owns an investment that experienced a decline during 2012 that
has been judged to be “other than temporary”. The investment is held in Palmon’s
available-for-sale debt portfolio, and Palmon expects to sell the security before recovery
of its amortized cost basis less current-period credit loss. It was purchased in March
2011 at a cost of $460,000. At the end of 2011, the fair value of the investment was
$520,000 and its amortized cost basis was $454,000. At the end of 2012, the fair value
of the investment is $410,000 and its amortized cost is $448,000. What amount of loss
will Palmon Industries report on its income statement for the year ending December 31,
2012 related to this investment?
A.An unrealized loss $110,000
B.An unrealized loss of $38,000
C.An unrealized loss of $44,000
D.An unrealized loss of $50,000
The amount of impairment is recognized in earnings is equal to the entire difference
between the investment’s amortized cost basis and its fair value at the balance sheet
date. $448,000 – $410,000 = $38,000
23) 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.
On Ford’s books, this lease is treated as a/an
A.operating lease
B.capital lease
C.direct financing capital lease
D.sales-type capital lease
24) Which one of the following contingencies requires financial statement disclosure?
A.A lawsuit that the firm’s attorneys believe will be dropped
B.A lawsuit that the firm’s attorneys believe will probably be settled for $75,000
C.A reasonably possible loss on a lawsuit that the firm’s attorneys cannot estimate the
loss
D.A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled
for $100,000
25) Financial information that does not favor one set of interested parties over another
is
A.relevant
B.verifiable
C.neutral
D.faithfully represented
26) Operating and financial flexibility refers to a company’s ability to
A.adjust to unexpected downturns in the economic environment in which it operates or
to take advantage of profitable investment opportunities as they arise
B.generate sufficient cash flows to maintain its productive capacity and still meet
interest and principal payments on long-term debt
C.readily convert assets to cash relative to how soon liabilities will have to be paid in
cash
D.increase sales
27) Loan provisions that are specifically designed to restrict asset substitution are called
A.debt covenants
B.debt obligations
C.credit covenants
D.credit agreements
28) The Carrasco Company has provided you the following information pertaining to its
defined benefit pension plan that was adopted on January 1, 2011:
The service cost was $750,000 during 2011 and $1,125,000 during 2012 .
The contribution to the pension plan was $600,000 on December 31, 2011 and
$1,200,000 on December 31, 2012 .
The actuarially determined discount rate and the expected return on plan assets was
10%.
The actual return on plan assets was 10.5%.
Retirement benefits pertaining to years of service prior to 2011 were not granted to the
employees.
What is the pension plan fund balance as of December 31, 2012?
A.$1,863,000
B.$1,800,000
C.$1,953,750
D.$1,860,000
29) Sam Jones is the president of Apollo Finance, a payday lender. The company’s
proxy statement contains the following description of Mr. Jones’ pay package.
Mr. Jones is eligible for an annual incentive bonus equal to 1% of Net Income of the
company and is eligible for an additional bonus based upon annual increases in EPS
only after earnings exceed 15% over the prior year. The additional bonus is determined
as follows:
Assume no change in the number of shares of outstanding stock during the year.
Required:
a. Suppose that Apollo Finance had $75 million of Net Income for the year. How much
of a bonus would Mr. Jones receive if the EPS increase for the year was 12%?
b. Suppose that Apollo Finance had $75 million of Net Income for the year. How much
of a bonus would Mr. Jones receive if the EPS increase for the year was 28%?
30) The formula to convert the cost of goods sold LIFO to an estimate of the cost of
goods sold FIFO is
A.cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO
B.cost of goods sold LIFO – increase in LIFO reserve = cost of goods sold FIFO
C.cost of goods sold LIFO – decrease in LIFO reserve = cost of goods sold FIFO
D.cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO
31) The general accounting for accounts and notes receivable under IFRS
A.presumes off-balance sheet treatment when these assets are sold
B.has yet to be determined by the IASB
C.is different than U.S. GAAP in that IFRS does not allow the fair value option
D.is similar to the accounting under U.S. GAAP
32) Which one of the following is an example of sustainable earnings?
A.Loss from debt retirement
B.Expenditures for advertising
C.Earnings from repeat customers
D.Gain from corporate restructuring
33) The inventory under dollar-value LIFO at the end of Year 3 is
A.$274,075
B.$276,800
C.$278,857
D.$300,000
34) By examining the statement of shareholders’ equity an investor can determine all of
the following except
A.shares issued to employees for share-based compensation
B.unrealized losses on available-for-sale securities
C.the amount of convertible bonds issued during the year
D.dividends declared on common stock
35) Which of the following statements pertaining to defined benefit pension plans is not
correct?
A.The funded status of a pension plan is an indicator of potential cash flow problems
B.Pension plan sponsors must make an annual contribution to the pension fund for an
amount equal to the service cost regardless of the funded status of the pension plan
C.A small change in the pension discount rate can shift the funded status of the pension
from year to year
D.Research provides evidence that firms with underfunded pension plans have lower
current cash flows and are likely to have lower future cash flows relative to firms with
overfunded pension plans
36) 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 rent during Year 4?
A.$0
B.$15,000
C.$25,000
D.$40,000
37) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January
1, 2011 and completed construction of the ship on October 31, 2012 . To finance
construction, Doggy took out an $8,000,000, 2-year 6% construction loan on February
1, 2011 . Interest on the loan was to be paid annually on the anniversary date of the
loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following
expenditures in conjunction with this construction project:
What would be the amount of Doggy’s cumulative weighted average expenditure during
2012 related to the cutter project?
A.$2,966,667
B.$4,341,250
C.$4,941,667
D.$5,450,000
38) Inventory turnover distortion under LIFO inventory costing may be adjusted by
A.adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and
ending inventory for LIFO liquidation profits whenever LIFO liquidation occurs
B.subtracting the LIFO reserve amounts from cost of goods sold and adjusting
beginning and ending inventory for LIFO liquidation profits whenever LIFO liquidation
occurs
C.adding the LIFO reserve amounts to beginning and ending inventory and adjusting
cost of goods sold for LIFO liquidation profits whenever LIFO liquidation occurs
D.subtracting the LIFO reserve amounts from beginning and ending inventory and
adjusting cost of goods sold for LIFO liquidation profits whenever LIFO liquidation
occurs
39) Which of the following statements is correct if treasury stock costing $25,000 was
sold for $27,500?
A.Total owners’ equity increases $2,500
B.Total owners’ equity increases $27,500
C.Net income increases $2,500
D.Total owners’ equity increases $25,000
40) Which of the following is not a proper description with respect to the financial
accounting and reporting of income taxes?
A.A permanent difference does not create a deferred tax asset or liability
B.An originating timing difference will eventually create a reversing timing difference
C.A net operating loss carryforward does not have any impact on income tax expense
for the year the loss occurs
D.Income tax expense changes during the year that it is known that future tax rates will
be increasing
41) Echo Company’s 2011 beginning and ending accounts receivable balances were
$72,500 and $41,250 respectively. During 2011, the company’s sales (all on credit)
amounted to $857,250. Per Echo’s 2011 cash flow statement, $873,500 was collected
from customers while $18,750 related to uncollectible accounts was listed among the
“non-cash expenses.” If Echo’s beginning balance in the allowance for uncollectibles
was $17,600, the ending balance in this account must be
A.$15,000
B.$21,350
C.$36,350
D.The required “allowance for uncollectibles” balance cannot be determined from the
data given.
42) All of the following disclosures would appear in the Summary of Significant
Accounting Policies except
A.inventory method
B.depreciation method
C.long-term construction contract method
D.financing method
43) Kim Company uses the installment method of revenue recognition. The following
data pertain to Kim’s installment sales for the years ended December 31, 2011 and
2012:
Required:
a. What amount should Kim report as deferred gross profit in its December 31, 2011
and 2012 balance sheets?
b. What amounts should Kim report as realized gross profit in its 2011 and 2012 income
statements?
44) A bond with a carrying value of $790,000 was converted into 100,000 shares of $5
per share par value common stock at a time when the market value per share was $9.00
per share. Which of the following statements does not accurately describe the financial
accounting for the conversion?
A.A loss of $110,000 will be recognized if the market value method of recording the
conversion is used
B.Total owners’ equity increases $790,000 if the market value method of recording the
conversion is used
C.Total owners’ equity increases $790,000 if the book value method of recording the
conversion is used
D.Total owners’ equity increases $900,000 if the market value method of recording the
conversion is used
45) Which one of the following ratios deteriorates with the lessee’s capitalization of a
lease?
A.Current ratio
B.Return on equity
C.Inventory turnover
D.Common earnings leverage