1) Interest must be imputed when the stated rate is lower than the prevailing borrowing
rate at the time of the transaction.
2) All economic events and activities that affect a company are reflected in a company’s
financial statements.
3) Differences between reported EPS and analysts’ expectations only matter to investors
when they are relatively large.
4) Many receivables recognition irregularities can be discovered by tracking the
relationship between changes in sales and changes in receivables.
5) When inventory increases under absorption costing it absorbs more fixed cost and
increases net income.
6) To prevent abuses when accounting for nonmonetary asset exchanges, U.S. GAAP
requires companies to record certain exchanges of nonmonetary assets at the existing
book value of the relinquished assets.
7) Current GAAP defines lessors’ treatment of leases according to Type I and Type II
characteristics. Type I characteristics are linked to the critical event criteria for revenue
recognition.
8) The SEC issued regulation FD to help level the playing field between individual and
institutional investors.
9) IFRS consists of a set of rigid standards that are now in use in over 100 countries
worldwide.
10) By charging the oldest costs to the income statement, FIFO automatically includes
in income the holding gain on the unit that was sold.
11) 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 $130,000 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
12) A decrease in accounts receivable of $16,000 for the year
A.decreases cash flow from operating activities by $8,000
B.increases cash flow from operating activities by $8,000
C.decreases cash flow from operating activities by $16,000
D.increases cash flow from operating activities by $16,000
13) Prior to the announcement of bad news earnings (a negative earnings surprise),
stock returns exhibit
A.a negative drift downward
B.no change in stock returns
C.a negative drift downward followed by an immediate upward drift
D.a positive drift upward
14) The conversion of a LIFO inventory to approximate the inventory at FIFO is
accomplished through application of which one of the following formulas?
A.FIFO inventory = LIFO inventory LIFO reserve
B.FIFO inventory = LIFO inventory LIFO reserve
C.FIFO inventory = LIFO inventory – LIFO reserve
D.FIFO inventory = LIFO inventory + LIFO reserve
15) Financial reporting philosophies differ across countries. These philosophies evolve
from and reflect several factors including all of the following except
A.the language(s) spoken in the country
B.the specific political institutions within the country
C.the specific financial institutions within the country
D.the country’s social customs
16) How much of a company’s assets are financed from debt versus equity sources
refers to the company’s
A.capital structure.
B.maturity structure
C.solvency
D.liquidity
17) A company with a return on equity that consistently exceeds the industry average
ROE will generally have shares that sell at a
A.market-to-book ratio equal to the industry average
B.lower market-to-book ratio than the industry average
C.higher market-to-book ratio than the industry average
D.higher market price than its competitors
18) Traceable costs are also called
A.period costs
B.expired costs
C.product costs
D.administrative costs
19) Cash is always measured for the balance sheet at
A.future transaction value
B.current market value
C.realizable future value
D.net transaction value
20) Which of the following arguments wasn’t used to support the continuation of the
accounting for stock-based compensation plans as allowed under APB Opinion No. 25?
A.Stock options do not involve a cash flow, therefore the recording of an expense
would violate appropriate income measurement
B.The Black-Scholes method of valuing stock options has not been widely accepted and
is arbitrary
C.The fair value approach could jeopardize compliance with contract terms and
conditions
D.The fair value approach would increase expenses and lower net income which would
result in lower stock prices
21) Cost-plus contracts
A.refers to contracts that are modified from their original terms during the course of the
contract
B.refers to contracts where the contractor is not expected to recover all costs incurred in
completing the project
C.are only used in countries where IFRS rules are followed
D.are those for which the contractor is reimbursed for allowable or otherwise defined
costs plus a profit markup
22) When the year-to-year changes in comparative balance sheet accounts do not
coincide with the changes implied from amounts reported on the statement of cash
flows, the analyst may find useful information for reconciliation in notes to the
financial statements and the
A.operating activities section of the cash flow statement
B.capital stock account
C.balance sheet
D.investments account
23) Hansel Corporation’s condensed balance sheets appear below:
In a common size balance sheet for 2011, plant and equipment (net) is expressed as
A.83.0%
B.83.6%
C.1%
D.100.0%
24) Once a decision to restructure is made, GAAP requires companies to
A.accrue for the cost of services to be provided in some future period by lawyersand
accountants
B.overstate estimated charges for future expenditures when such charges are difficult to
measure
C.take excessive restructuring write-offs thereby complying with the conservatism
principle
D.estimate the future costs they expect to incur to carry out the restructuring
25) On January 2, 2012, Jensen Corporation sells equipment it manufactured to
Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note
bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end
of five years. Jensen recently sold the same equipment to another company for $54,447.
When Lewisburg Fabricators sought bank financing for this purchase the company was
offered the funds at 8%, but decided instead to let Jensen hold the note.
What amount will Jensen recognize as interest income during 2012?
A.$4,356
B.$4,704
C.$5,111
D.$0
26) Firms must now provide detailed disclosure of three broad executive pay categories.
Which of the following is not one of these categories?
A.Retirement and other postemployment compensation
B.Costs incurred by the corporation for executive travel, entertainment, and other
“expense account” items
C.Compensation for the last fiscal year and the two preceding years
D.Holdings of equity-related interests that relate to compensation
27) If a company sells an asset for a profit of $175,000 and immediately leases it back
with a capital lease, the gain is recognized
A.immediately as an ordinary gain
B.immediately as an extraordinary gain
C.over the life of the lease in proportion to the rental payment
D.over the life of the lease using the same rate and life used to amortize the leased asset
28) The following information and financial statements excerpts pertain to Liquidity
Inc.
a. All short term investments (securities available for sale) were purchased on 12/31/11
and sold during 2012 .
b. The company entered a lease agreement on 12/31/12.
c. Fixed assets with a net book value of $15 were sold during the year.
d. The company repaid the current portion of long-term debt during the year.
e. Dividend was declared and partially paid.
Required:
1> Prepare the statement of cash flows for the year 2012 using the direct method.
2> Reconcile net income and net cash flows from operating activities for the year
2012 .
29) 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%.
Present value interest factors are:
The Pepper lease is a/an
A.operating lease because the lease value is less than 90% of the fair value of the asset
B.capital lease because the lease value is 90% of the fair value of the asset
C.operating lease because the asset reverts to Blue at the end of the lease
D.capital lease because the lease term is more than 75% of the life of the asset
30) Under the FASB’s proposed Statement of Comprehensive Income, the investing
activities category within the business section reflects
A.those activities not related to the central purpose for which the entity is in business
B.the effects of a single acquisition or disposal transaction that recognizes or
derecognizes assets or liabilities that are classified in more than one section or category
on the statement of financial position
C.the revenues and expenses related to the central purpose(s) for which an entity is in
business
D.the effects of transactions with customers, suppliers and employees
31) Revenues are earned when
A.a contract is signed by both parties
B.the seller substantially completes performance requiredby an agreement
C.the buyer completes payment required under an agreement
D.the buyer accepts delivery and completes required payments
32) Intentional misstatement of estimates
A.are highly unusual in financial reporting
B.do not have any impact on earnings
C.are unlikely to draw attention from the external auditor if they fall within acceptable
ranges
D.are acceptable under GAAP
33) A company’s retained earnings on December 31, 2011 was $2,190,000 and its
shareholders equity was $8,760,000. During 2012 the company reported the following:
net income $225,000; a sale of treasury stock costing $75,000 for $79,750; a treasury
stock purchase costing $125,700; a cash dividend declaration of $73,200; a 10,000
share ‘small” common stock ($10 par value) dividend was declared and distributed
when the market value was $12.75 per share.
What is the retained earnings balance on December 31, 2012?
A.$1,994,050
B.$2,219,050
C.$2,214,300
D.$2,246,550
34) When interest rates have increasedand bonds are retired before maturity, market
value is
A.below book value generating an accounting gain
B.below book value generating an accounting loss
C.above book value generating an accounting gain
D.above book value generating an accounting loss
35) Noah Construction Company is building a large complex for a contract price of
$5,000,000. This is a three-year project estimated to cost $4,000,000 and the following
information is available:
Using the percentage-of-completion method of revenue recognition, how much income
is recognized in Year 3?
A.$375,000
B.$625,000
C.$1,000,000
D.$1,250,000
36) A decrease in prepaid expenses of $8,000 for the year
A.decreases cash flow from operating activities by $8,000
B.increases cash flow from operating activities by $8,000
C.decreases cash flow from operating activities by $16,000
D.increases cash flow from operating activities by $16,000
37) Under IFRS, service revenue should be recognized when it is probable that future
economic benefits will be received and the entity can reliably measure all of the
following except the
A.amount of revenue
B.stage of completion
C.date of completion
D.costs to complete the project
38) Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1,
2011 . The bonds pay interest annually on December 31 . The bonds were sold at a
discount of $24,578. The amount of bond discount amortization for 2012 is
A.$1,696
B.$2,458
C.$3,080
D.$4,000
39) The Kerry Company began operations during 2011 and purchased shares of Molson
Corporation stock during the year. The market value of the Molson stock had increased
as of the end of 2011 . Kerry should have classified this investment as a trading security
but mistakenly classified it as an available-for-sale security. Which of the following
properly describes the impact of this error?
A.The 2011 net income was not misstated
B.Total assets as of December 31, 2011 were understated
C.Total stockholders’ equity as of December 31, 2011 was understated
D.Total stockholders’ equity as of December 31, 2011 was not misstated
40) Treasury stock costing $89,050 was sold for $94,375 cash. Which of the following
statements accurately describes the reporting of this transaction within the cash flow
statement assuming that the indirect method is used to determine net cash flows from
operating activities?
A.A gain of $5,325 is deducted from net income and a $94,375 cash inflow is reported
within the investing activities section of the cash flow statement
B.A gain of $5,325 is deducted from net income and a $94,375 cash inflow is reported
within the financing activities section of the cash flow statement
C.There is no adjustment necessary to net income but a $94,375 cash inflow is reported
within the financing activities section of the cash flow statement
D.There is no adjustment necessary to net income but a $94,375 cash inflow is reported
within the investing activities section of the cash flow statement
41) 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:
How much interest should Doggy expense in 2011?
A.$220,000
B.$300,500
C.$340,500
D.$440,000
42) A type of analysis that helps identify similarities and differences across companies
or business units at a single moment in time is
A.trend analysis
B.common size statements’ analysis
C.time-series analysis
D.cross-sectional analysis
43) The following information pertains to the Fan Company’s inventory item B1008:
In a periodic inventory system, the ending FIFO inventory is
A.$1,624
B.$1,655
C.$1,678
D.$1,733
44) The amounts of executive compensation and bonuses are often determined by
A.auditor’s recommendations
B.evaluations by subordinates
C.company contracts
D.industry guidelines
45) The income statement reporting for other postretirement benefits is based on the
A.cash basis of accounting
B.accrual basis of accounting
C.cash or accrual basis of accounting
D.regulations established by the tax code
46) Ford Corporation paid $10,200,000 for a 47% interest in Allen Corporation on
January 1, 2011 when Allen had the following identifiable assets and liabilities:
At the time of Ford’s purchase, the fixed assets had a remaining life of 8 years. For the
year ended December 31, 2011, Allen reported sales of $9 million and expenses of $5
million and declared and paid dividends of $1 million. At December 31, 2011, Allen
reported the following balance sheet information:
Required:
1> Give the income statement and balance sheet accounts and amounts as they would
appear on Ford’s financial statements under the equity method for the year ended
December 31, 2011 . Be sure to show calculations.
2> Explain how your answer to requirement a’ would change if Ford determined that it
actually controlled Allen and had to consolidate its investment. Give specific income
statement and balance sheet accounts and amounts where possible. Be sure to show
calculations.
47) Briefly explain the forces behind the rise of IFRS.
48) Beemer Company has provided the following information regarding its investment
portfolios:
Trading securities purchased for $150,000 during 2011 had a fair value of $165,000 as
of December 31, 2011 and a fair value of $154,300 as of December 31, 2012 .
Available-for-sale securities purchased for $275,000 during 2011 had a fair value of
$293,700 on December 31, 2011 and a fair value of $301,900 on December 31, 2012 .
Required:
1> Determine the impact that the investment portfolios had on net income during 2012 .
2> Determine the amount of the realized gain/loss to be recorded during 2013 if the
trading securities were sold for $159,500.
3> Describe the difference in the financial accounting and reporting when comparing
trading security portfolios to available-for-sale security portfolios.
49) Rome Company’s net accounts receivable was $200,000 at December 31, 2010 and
$350,000 at December 31, 2011 . Net cash sales for 2011 were $250,000. The accounts
receivable turnover for 2011 was 8.0, and this turnover figure was computed from net
credit sales for the year.
Required:
What were Rome’s total net sales for 2011?
50) On April 1, 2012, GMR Company purchased 30% of the outstanding voting stock
of the Victory Corporation for $960,000. Victory’s net assets on April 1, 2012 totaled
$2,500,000. Victory’s equipment was undervalued by $500,000 and its inventory was
undervalued by $200,000 as of the date of purchase. The equipment has a ten-year
remaining life as of April 1, 2012; the inventory was sold during 2012 . Victory
reported $450,000 of net income during 2012 and paid dividends of $75,000. Assume
that net income was earned evenly during 2012 and dividends were declared and paid
evenly during 2012 .
Required:
1> Determine the amount of investment income to be reported by GMR during 2012
assuming that the equity method of accounting is applicable.
2> Determine the balance in the investment account as of December 31, 2012 assuming
that the equity method is applicable.
3> Describe how the financial accounting and reporting would have differed if the
equity method wasn’t applicable.
4> Describe how equity method investments are accounted for when the fair value
option is chosen.
51) John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2011
Dr. Hamilton collected $220,000 in fees from his patients. At December 31, 2010 Dr.
Hamilton had accounts receivable of $30,000. At December 31, 2011 Dr. Hamilton had
accounts receivable of $35,000 and had collected unearned fees of $8,000.
Required:
On the accrual basis, what was Dr. Hamilton’s patient service revenue for 2011?
52) Firms may meet earnings benchmarks via operational excellence or by taking real
actions to maintain accounting appearances. Explain why the latter approach may be
detrimental to a firm’s stockholders.