1) Firms facing asset retirement obligations must estimate the expected present value of
the outflows that will occur when the assets are eventually retired.
2) Inventory carrying cost includes transportation costs paid by the seller.
3) GAAP requires that the interest component of the periodic cash flows from
installment sales be recorded separately.
4) A firm’s financial statements can be dramatically affected when the firm is required
to consolidate special purpose entities that had previously been off-balance sheet.
5) The cost of capital, expressed in dollars, reflects the level of earnings investors
demand from the company as compensation for the risks of investment.
6) Earnings are considered high quality when they are reliable.
7) The Summary of Significant Accounting Policies explains the important accounting
choices that the reporting entity uses to account for selected transactions and accounts.
8) SFAS No. 123 was issued as a compromise to the FASB’s original position regarding
stock options as it allowed companies to choose either the APB No. 25 intrinsic value
method or to expense the fair value of the options.
9) Under the Exposure Draft issued by the FASB (based on joint deliberations with
IASB), debt instruments held for collection of contractual cash flows will be reported at
amortized cost.
10) Management occasionally deliberately overstates inventory. If the economic
adversity that motivated the initial deliberate overstatement continues, the inventory
overstatements must continue as well.
11) Inventories are reported on the balance sheet at historical cost.
12) Even though well-organized markets for agricultural commodities exist, GAAP
requires that farmers use only the completed-transaction method of revenue recognition.
13) Which of the following statements does not correctly describe required income tax
disclosures in the notes to the financial statements?
A.The statutory tax rate and the effective tax rate are disclosed
B.The sources that created deferred tax assets and deferred tax liabilities is a required
disclosure
C.The effective tax rate applicable to firms in the same industry is a required disclosure
D.The expiration date of net operating loss carryforwards must be disclosed
14) One financial disclosure cost is the possibility that competitors may use the
information to harm the company providing the disclosure. All of the following
disclosures might create a competitive disadvantage except
A.detailed information about company operations, such as sales and cost figures for
individual product lines
B.information about the company’s technological and managerial innovations
C.information on the company’s level of spending on research and development
D.details about the company’s strategies, plans and tactics
15) The following information has been provided to you by the Rae Corporation for the
year ending December 31, 2011:
Net income was $979,000.
Cash dividends totaling $120,000 were paid to the common shareholders.
6% convertible bonds with a par value of $2,000,000 were issued on February 1, 2011 .
The corporation’s marginal income tax rate is 40%.
6% convertible preferred stock with a par value of $800,000 was outstanding during the
entire year.
Assuming that both the bonds and preferred stock are dilutive, what is the numerator
that should be used in the calculation of basic earnings per share and diluted earnings
per share?
A.Option a
B.Option b
C.Option c
D.Option d
16) The type of analysis that uses financial statements to assess valuation of current
market price is
A.valuation analysis
B.efficient market analysis
C.fundamental analysis
D.technical analysis
17) If Sun Company acquired Star, Inc. in a pooling of interests transaction, the entry
would have used which one of the following to account for the pooling?
A.Fair value of Star’s assets
B.Book value of Star’s assets
C.Net present value of Star’s assets
D.Future value of Star’s assets
18) Marketable debt and equity securities that a firm expects to hold as a short-term
investment are reported on the balance sheet at
A.current market value
B.historical cost
C.amortized current market value
D.amortized historical cost
19) Using the same accounting methods to record and report similar events from period
to period demonstrates
A.consistency
B.comparability
C.neutrality
D.faithful representation
20) 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 amount of cash interest paid in Year 1 on the bonds is
A.$450,000
B.$467,503
C.$500,000
D.$538,895
21) The Pond Company sold some machinery to the Vista Company on January 1, 2011,
for which the cash selling price was $500,000. Vista entered into an installment sales
contract with Pond at an interest rate of 10%. The contract required payments of
$114,804 a year over six years, with the first payment due on December 31, 2011 .
Required:
Prepare an amortization schedule for the first two scheduled payments that shows (a)
what portion of each payment will be included in interest income, and (b) the loan
balance after each payment is made.
22) Condensed financial data are presented below for the Phoenix Corporation:
If there is no preferred stock, the financial structure leverage for 2012 is (rounded):
A.0.6 times
B.1.54 times
C.1.66 times
D.1.80 times
23) What is the amount of Hickory’s cash-basis expense for the month of May?
A.$33,600
B.$42,400
C.$50,000
D.$51,600
24) The Retained Earnings account is comprised of
A.cash retained in the business
B.cash reinvested in the business by shareholders
C.the cumulative earnings less dividends since the inception of the corporation
D.the earnings of the corporation for the current year
25) Financially healthy companies
A.will always generate positive operating cash flows
B.should generate positive operating cash flows in most years
C.should generate positive investing cash flows
D.should always see total cash inflows exceed total cash outflows
26) Which of the following statements with respect to floating-rate debt is incorrect?
A.If the market rate of interest increases, the market value of the floating-rate debt will
remain the same
B.If the market rate of interest decreases, the cash interest payment required by the
issuing company would decrease
C.If the market rate of interest increases, the investors benefit while the issuing
corporation does not benefit
D.If the market rate of interest decreases, both the issuing company and the investors
benefit
27) Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at
$25,000 at the end of each year. The equipment has a fair value of $175,000 and an
estimated useful life of 10 years. The lease includes a guaranteed residual value of
$10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a
maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The
lessor’s implicit lease rate, known to the lessee, is 10%. Round all calculations to the
nearest whole dollar amount.
Present value interest factors are:
How much straight-line depreciation expense will Pepper record for Year 1?
A.$14,747
B.$15,362
C.$15,747
D.$17,500
28) Trend statements help the user
A.determine the reason(s) for changes over time in each financial statement line item
B.spot relationships among financial statement items
C.spot changes over time in each financial statement line item
D.identify variations between companies in financial statement line items
29)
The implied total earnings multiple of Firm C is
A.1.00
B.3.75
C.4.00
D.15.00
30) Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus
$8,000 accrued interest on October 1, 2011 . Island and Mutual Bank enter into an
agreement whereby Island will pay Mutual $128,000 on the due date of the note on
October 1, 2013 .
Island will record this transaction to recognize
A.an extraordinary debt restructuring gain of $20,000
B.an extraordinary debt restructuring loss of $20,000
C.an ordinary debt restructuring gain of $20,000
D.neither a gain nor a loss from debt restructuring
31) Panera Bread Company is a national bakery-cafe concept with 1,380
Company-owned and franchise-operated bakery-cafe locations in 40 states and in
Ontario, Canada. The company has grown from serving approximately 60 customers a
day at its first bakery-cafe to currently serving nearly six million customers a week
system-wide, becoming one of the largest food service companies in the United States.
Sara Lee Corporation is a global manufacturer and marketer of high-quality,
brand-name products for consumers throughout the world focused primarily on the
meats, bakery and beverage categories. Selected financial information about each
company follows:
Required:
a. Why is Sara Lee less profitable than Panera Bread?
b. Return on assets and return on sales in the bakery industry are 4.85% and 8.16%,
respectively. How do these two companies compare to their industry and what might
explain any noted differences?
32) Smith Company is a manufacturer of medical devices and has an excellent quality
control department, thus defective product returns are rare. In 2011, Smith reported
sales of $276,344,000. The company did, however, have two returns in 2011 related to
the wrong product model being shipped. Smith’s 2011 journal entry to record a $37,500
return from Foxtrot Medical would be
A.Option a
B.Option b
C.Option c
D.Option d
33) King Company began constructing a building for its own use in January 2011 .
During 2011, King incurred interest of $60,000 on specific construction debt and
$12,000 on other borrowings. Interest computed on the weighted-average amount of
accumulated expenditures for the building during 2011 as $50,000.
Required:
a. What amount of interest should King capitalize?
b. Prepare the journal entry to record payment of the interest.
34) Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year
2 are as follows:
What are Kris’ cash flows from financing activities for Year 2?
A.$0
B.$50,000 inflow
C.$50,000 outflow
D.$150,000 outflow
35) The service cost of a defined benefit pension plan is the
A.annual fee charged by the plan administrator
B.change in the pension liability caused by plan amendments
C.change in the pension liability caused by one additional year of employee service
D.the retirement benefit earned by the employees for services provided to date
36) The widespread use of accounting-based incentives for executive compensation is
controversial for which one of the following reasons?
A.Earnings growth does not automatically increase shareholder value
B.Accounting-based incentive plans can encourage managers to adopt a long-term
business focus
C.Executives cannot use their discretion over the accounting policies
D.Managers do not have accounting flexibility
37) Goods available for sale needs to be allocated between
A.beginning inventory and inventory purchases
B.beginning inventory and ending inventory
C.ending inventory and cost of goods sold
D.inventory purchases and cost of goods sold
38) Floating-rate debt is the most common method for lenders to protect themselves
from losses that arise as a result of
A.increases in the market interest rate
B.decreases in the market interest rate
C.increases in the stated interest rate on bonds
D.decreases in the stated rate on bonds
39) The section of published reports of public companies that includes a description of
the company’s business risks, results of operations, financial condition, and future plans
for the company is known as the
A.management’s discussion and analysis
B.management representation letter
C.president’s message
D.board of directors’ analysis
40) Salvadore Land & Pineapple Company, Inc. is a Hawaii corporation that consists of
a landholding and operating parent company and its principal subsidiaries, including
Salvadore Pineapple Company, Ltd. and Kapawau Land Company, Ltd. Refer to the
excerpts that follow from the December 31, 2011 annual report. All questions relate to
the year ended December 31, 2011 unless stated otherwise. Assume a 35% corporate tax
rate where necessary.
INVENTORIES: Inventories of tinplate, cans, ends and processed pineapple products
are stated at cost, not in excess of market value, using the dollar value last-in, first-out
(“LIFO”) method.
Agriculture product inventories were comprised of the following components at
December 31, 2011 and 2010:
The replacement cost of Agriculture product inventories at year-end approximated $8
million in 2011 and $10 million in 2010. In 2011 and 2010, there were partial
liquidations of LIFO inventories; thus, cost of sales included prior years’ inventory
costs, which were lower than current costs. Had current costs been charged to cost of
sales, income from continuing operations before income taxes for 2011 and 2010 would
have decreased by $2.3 million and $2.9 million, respectively.
Required:
a. What amount of agricultural products inventory is on the balance sheet at December
31, 2011?
b. Assume that ending inventory was overstated at December 31, 2011 . Explain how
net income would be affected by the error.
c. The inventory note states that inventory amounts are ‘stated at cost, not in excess of
market value, using the dollar value last-in, first-out (“LIFO”) method.” Which
accounting principle or concept justifies writing down assets when market prices are
lower than cost, but leaving them at cost when market prices are higher than cost?
d. How much has Salvadore Land & Pineapple Company deferred in income taxes
since being on LIFO?
e. What impact did LIFO liquidations have on net income for the year ended December
31, 2011? Explain why investors would want to know about this impact.
f. Compute the inventory turnover ratio to approximate physical unit flow for the year
ended December 31, 2011 .