1) Because covenant compliance can be jeopardized by mandated changes in
accounting principles, many loan agreements have financial covenants that rely on the
accounting rules in place when the loan is first granted.
2) Costs matched with the passage of time are called period costs.
3) A prior period adjustment results in an adjustment to the company’s beginning
retained earnings balance.
4) Financial information capable of making a difference in a decision is relevant.
5) A rise in the market rate of interest will cause the value of a financial instrument such
as a bond to rise.
6) Receivables that result from transactions other than trade receivables, if material, are
separately disclosed on the balance sheet.
7) Capitalization of interest for the construction of long-lived assets is limited to the
lesser of avoidable interest or interest incurred on actual borrowings from third parties.
8) When the market rate of interest is above the nominal rate, a bond sells at a premium.
9) All derivatives must be carried on the balance sheet at historical cost.
10) The IASB and the FASB jointly issued an Exposure Draft entitled “Financial
Statement Presentation” calls for the statement of cash flows to be broken down into
major categories that include Business, Income taxes, and Discontinued operations.
11) Politically vulnerable firms with high earnings (like oil companies) are often
attacked in the financial and popular media, which alleges that those earnings are
evidence of anticompetitive business practices.
12) The most common financial performance measure used in annual incentive plans is
GAAP net income or some variation thereof.
13) Debt or equity securities held in a firm’s trading portfolio that suffer
other-than-temporary declines in market value are recorded at fair value with the
unrealized losses recognized in other comprehensive income, net of applicable taxes.
14) A five-year bond with a maturity value of $900,000 and a stated interest rate of 8%
initially sold for $879,000; total interest expense during the five-year life of the bond
will be $339,000.
15) The mechanics of absorption costing can lead to year-to-year income changes
A.whenever inventory levels remain fairly constant
B.if the productivity of factory workers improves
C.whenever production and sales are not parallel
D.when raw material prices are increasing
16) On January 1, 2011, Lessee Company entered into a five-year lease which required
annual payments of $120,000. The first payment was due at the inception of the lease.
The present value of the minimum lease payments to initially record the lease was
$500,384; the applicable discount rate was 10%. Lessee Company treated the lease as a
capital lease. What is the balance of Lessee Company’s lease liability immediately after
the January 1, 2012 payment was made?
A.$430,422
B.$260,384
C.$298,422
D.$380,384
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 amount of future returns cannot be reasonably estimated
18) U.S. GAAP requires that virtually all costs incurred for research and development
of an internally generated patent be
A.capitalized
B.expensed
C.amortized over 40 years
D.ignored
19) Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year
2 are as follows:
What are Kris’ cash flows from operating activities for Year 2?
A.$0
B.$50,000 outflow
C.$150,000 outflow
D.$400,000 inflow
20) In case of goods shipped on consignment
A.revenue should be recognized by the manufacturer or seller on delivery
B.revenue should not be recognized by the manufacturer or seller on delivery
C.the risk of ownership of the goods is passed on to the distributors
D.they are always counted in the customer’s inventory
21) Perez Company sold equipment to Gomez, receiving in exchange a note that called
for three equal annual principal payments of $100,000 plus annual interest payments of
$4,000. Because the market rate of interest for companies with Gomez’ credit standing
was 6% at the time of the sale, Perez correctly recorded the note at its present value of
$277,993. After receiving the first payment, Perez learns that the market rate of interest
on loans of this type has fallen to 5%. Assume that there is an active market for these
types of notes. The present value of $1 to be received n periods in the future = 1 (1 + r)n
where r is the rate of interest per period.
Required:
a. Prepare the journal entry Perez should make to adjust the carrying value of the note
to its fair value.
b. At what amount would this note appear on Perez Company’s December 31, 2012
balance sheet?
22) The degree to which cash needs can be satisfied during periods of fiscal stress is
known as
A.credit availability
B.credit worthiness
C.working capital
D.financial flexibility
23) Income from continuing operations, excluding special or nonrecurring items, is
generally regarded as
A.permanent earnings
B.transitory earnings
C.value-irrelevant earnings
D.quiet
24) Companies that consistently earn rates of return above the competitive floor in the
industry are considered to possess a
A.dominant market share
B.niche market
C.competitive advantage
D.monopolistic advantage
25) A periodic system of inventory
A.reduces record keeping
B.increases record keeping
C.increases the cost of maintaining inventory
D.eliminates the need for a physical count
26) The direct method and the indirect method are alternative presentations for
presenting cash flows from
A.investing activities
B.operating activities
C.financing activities
D.research activities
27) Equity or debt securities designated by the investor intended to be held for a short
period of time are usually classified as
A.available-for-sale securities
B.trading securities
C.fair value securities
D.adjusted historical cost securities
28) A lease is legally a/an ___________ contract.
A.mutually performed
B.executed
C.executory
D.unilateral
29) Manero Company included the following information in its annual report:
In a common size balance sheet, all items are expressed as a percentage of
A.total assets
B.total liabilities
C.total equity
D.total sales
30) Regal has elected the fair value option to account for equity method investments.
The fair value of the Air investment as of December 31, 2012 was $295,000. The
carrying value of the Air investment on December 31, 2012 was
A.$295,000
B.$300,000
C.$310,500
D.$313,500
31) Potential conflicts of interest permeate
A.few business relationships
B.only relationships between investors and managers
C.only relationships between borrowers and lenders
D.many business relationships
32) Which of the following is not a factor in the determination of pension expense when
the employer sponsors a defined benefit pension plan?
A.The amount of retirement benefits that will vest
B.The rate of return on the pension fund investment
C.The rate that salaries will increase until retirement
D.The amount of funding during a particular period
33) Condensed financial data are presented below for the Phoenix Corporation:
The return on assets ratio for 2012 is (rounded):
A.16.3%
B.16.9%
C.17.7%
D.18.2%
34) The price of equity at time 0 is equal to the
A.book value of equity at time 0
B.expected abnormal earnings in all future periods
C.book value of equity at time 0 plus expected abnormal earnings in all future periods
divided by discount factors for all future periods
D.book value of equity at time 0 minus expected abnormal earnings in all future periods
divided by discount factors for all future periods
35) Cash flows arising from the payment of dividends are cash flows from
A.investing activities
B.operating activities
C.financing activities
D.research activities
36) Roadrunner Co. is building a waste landfill in the desert near Phoenix, AZ.
Roadrunner estimates that this landfill will be in operation for 4 years, will cost
$175,000,000 to build, and will generate $600 million in revenues during its useful life.
Federal law requires that Roadrunner decommission and decontaminate the site at the
end of its useful life. A team of engineers has studied the decontamination procedure
and has estimated that Roadrunner will have to spend $20,000,000 on the
decommissioning process when the landfill is shut down four years from now.
Roadrunner’s credit-adjusted risk-free rate of interest is 10%; the PV factor for 4
periods at 10% equals 0.683013.
Required:
a. In accordance with U.S. GAAP, how should Roadrunner Co. account for the costs
associated with the decommissioning process? Prepare the journal entry required and
prepare an amortization table for the asset retirement obligation.
b. How are the costs associated with the decommissioning process reflected on the
income statement? Explain how this accounting treatment improves the matching
process.
37) The Fair value adjustmentaccounts receivable account is an asset valuation account
A.that would be adjusted upward or downward as fair values change and as the
receivables are collected
B.that is created when fair value accounting is adopted but is not subsequently adjusted
C.that can only be adjusted downward
D.that is unaffected by the subsequent collection of receivables
38) A lessor mistakenly treated a direct financing lease as an operating lease (the lessor
uses straight-line depreciation). How does this mistake impact the following at the end
of the first year of the lease term?
A.Option a
B.Option b
C.Option c
D.Option d
39) The LIFO conformity rule states that
A.if LIFO is used for tax purposes, the external financial statements must also use LIFO
B.if FIFO is used for tax purposes, the external financial statements must also use FIFO
C.if LIFO is used for tax purposes, the external financial statements must also use FIFO
D.if FIFO is used for tax purposes, the external financial statements must also use LIFO
40) When two parties agree to the sale of some asset or commodity on some specified
future date at a price specified today it is a/an
A.forward contract
B.swap contract
C.performance contract
D.options contract
41) Amortization of discount on bonds payable (bond discount) results in which of the
following?
A.A decrease in bond interest expense
B.An increase in net income
C.An increase in the carrying value of the bond
D.An increase in stockholders’ equity due to the decrease in bond interest expense