1) Predictive value, feedback value, and timeliness are ingredients needed to ensure that
the information is reliable.
2) For a statement of financial condition, the figure that will usually be most important
is the total asset amount.
3) The accountant records only the events that affect the financial position of the entity
and that can be reasonably determined in monetary terms.
4) For the income statement under IFRS, there is a required format.
5) For a bank, loans to customers are assets.
6) Reasonable inaccuracies of accounting for an entity, short of its complete life span,
are accepted.
7) The responsibility for the preparation and integrity of financial statements rests with
the auditors.
8) When used properly, pro forma financial information makes a positive contribution
to financial reporting.
9) Banks operate either under a federal or state charter.
10) The Sarbanes-Oxley Act has far-reaching consequences for financial reporting and
the CPA profession.
11) To qualify as a marketable security, the investment must be readily marketable and
it must be the intent of management to convert the investment to cash within the current
operating cycle or a year, whichever is longer.
12) In order to classify cash as a current asset, it must be free from any restrictions that
would prevent its deposit or use to pay creditors classified as long-term.
13) Most companies are on a 51-52 week fiscal year.
14) Using IFRS, usually noncurrent assets are presented first, followed by current
assets.
15) Not all reports to the SEC are made available on EDGAR.
16) Under IFRS, equipment may be revalved.
17) With the indirect method of presenting cash from operations, the income statement
is essentially presented on a cash receipts and cash payments basis.
18) The accounting principle that assumes that inflation will not take place or will be
immaterial is:
a. monetary unit
b. historical cost
c. realization
d. going concern
e. None of the answers are correct
19) Answer the questions below.
Selected partial note with 2012 financial statements: Inventories have been reduced by
$10,000 and $7,000 at December 31, 2012, and December 31, 2011 respectively, from
amounts which would have been reported under the fifo method (which approximated
current cost). Had the company valued all of its inventories under the fifo method, net
income would have been approximately $5,600 in 2012 and $5,601 in 2011 .
Required:
a. Compute the following ratios for 2012 from the financial statements (using lifo):
1> Days’ Sales in Inventory
2> Working Capital
3> Current Ratio
4> Debt Ratio
b. Compute the following ratios for 2012, using fifo disclosure:
1> Days’ Sales in Inventory
2> Working Capital
3> Current Ratio
4> Debt Ratio
c. Comment on the difference in the indicated liquidity and debt between the ratios
computed under lifo and the ratios computed under fifo.
20) Jones Company has long-term debt of $1,000,000, while Smith Company, Jones’
competitor, has long-term debt of $200,000. Which of the following statements best
represents an analysis of the long-term debt position of these two firms?
a. Smith Company’s times interest earned should be lower than Jones
b. Jones obviously has too much debt when compared to its competitor
c. Jones should sell more stock and use less debt
d. Smith has five times better long-term borrowing ability than Jones
e. Not enough information to determine if any of the answers are correct
21) There are a number of assumptions about future events that must be made regarding
a defined benefit plan. An assumption that does not need to be made is:
a. interest rates
b. employee turnover
c. mortality rates
d. compensation
e. how long the firm will continue
22) Which of the following would not be classified as a current asset?
a. Cash
b. Marketable securities
c. Receivables
d. Inventories
e. Investments
23) Which of the following is the focus for the statement of cash flows?
a. Cash
b. Cash and cash equivalents
c. Current assets
d. Working capital
e. None of the answers are correct
24) The price/earnings ratio:
a. measures the past earning ability of the firm
b. is a gauge of future earning power as seen by investors
c. relates price to dividends
d. relates price to total net income
e. All of the answers are correct
25) The assumption that allows accountants to accept some inaccuracy, because of
incomplete information about the future, in exchange for more timely reporting is:
a. conservatism
b. time period
c. business entity
d. materiality
e. realization
26) Which of the following is not true for a regulated electric utility that has
construction work in progress?
a. The political climate of the utility commission that will be ruling on the construction
work in progress costs is not an issue to be considered
b. Most utility commissions allow no construction work in progress or only a small
amount in the rate base
c. In the long run, everybody pays for inefficiency and excess capacity because
disallowed costs are a risk that can drive the stock price down and interest rates up for
the utility.
d. Costs related to construction work in progress that are disallowed are, in effect,
charged to the stockholders
e. Future income will not include a return on disallowed costs
27) Good Boss Inc. had the following pattern of results related to stock appreciation
rights.
The compensation expense would be:
a. I
b. II
c. III
d. IV
e. none of the answers are correct
28) Which of the following is not a type of operating asset?
a. Inventory
b. Cash
c. Land
d. Long-term investments
e. Equipment
29) Canco Inc. owns 70% of Supersonics and consolidates this subsidiary. In 2012,
Supersonics earned $100,000 after tax and Canco earned $1,000,000. Without
consideration of minority interests, the stockholders’ equity of Supersonics at the end of
2012 was $1,200,000.
Required:
a. Determine the minority share of earnings in 2012 .
b. Determine the consolidated net income.
c. Determine the minority interest at the end of 2012 on the balance sheet.
d. How should minority interest be classified on the balance sheet for analysis?
30) Which of the following depreciation methods is considered to be the least
conservative?
a. Sum-of-the-Years’ Digits
b. Declining-Balance Method
c. Straight-Line
d. each method is equally conservative
e. Sum-of-the-Years’ Digits and Declining-Balance Method are equally conservative
31) Anchor Company has 1,000,000 shares of common stock with a par value of $5.
Additional paid-in capital totals $5,000,000 and retained earnings is $8,000,000. The
directors declare a 10% stock dividend when the market value is $15. The reduction of
retained earnings as a result of the declaration will be:
a. $0
b. $500,000
c. $800,000
d. $1,000,000
e. $1,500,000
32) Which of the following statements best compares long-term borrowing capacity
ratios?
a. The debt/equity ratio is more conservative than the debt ratio
b. The debt ratio is more conservative than the debt/equity ratio
c. The debt/equity ratio is more conservative than the debt to tangible net worth ratio
d. The debt to tangible net worth ratio is more conservative than the debt/equity ratio
e. The debt ratio is more conservative than the debt to tangible net worth ratio
33) A number of assumptions about future events must be made regarding a defined
benefit plan. Which of the following does not represent one of the assumptions?
a. Interest rates
b. Termination date for the firm
c. Employee turnover
d. Mortality rates
e. Compensation
34) Jones Company presents the following data for 2012 .
The days’ sales in receivables is
a. 53.1
b. 48.2
c. 43.1
d. 38.1
e. 40.0
35) A times interest earned ratio of 0.90 to 1 means:
a. that the firm will default on its interest payment
b. that net income is less than the interest expense
c. that the cash flow is less than the net income
d. that the cash flow exceeds the net income
e. none of the answers are correct
36) Which of the following accounts is not part of working capital?
a. Cash
b. Accounts receivable
c. Inventory
d. Accounts payable
e. Investments
37) Which of the following ratios usually reflects investors opinions of the future
prospects for the firm?
a. Dividend yield
b. Book value per share
c. Price/earnings ratio
d. Earnings per share
e. Dividend payout
38) The ratio percentage of earnings retained is the same as that termed:
a. dividend yield
b. dividend payout
c. this year’s retained earnings to net income
d. return on common equity
e. book value
39) Which of the following will not cause times interest earned to drop? Assume no
other changes than those listed.
a. An increase in bonds payable with no change in operating income
b. An increase in interest rates
c. A rise in preferred stock dividends
d. A rise in cost of goods sold with no change in interest expense
e. A drop in sales with no change in interest expense
40) Which of the following is most likely the largest expense of a bank?
a. Income taxes
b. Occupancy expense
c. Salaries
d. Interest on loans
e. Interest on deposits
41) You have been asked to evaluate the long-term borrowing position of Client, Inc.
However, you were given only the following limited information.
Required:
Assuming that this is the only information you will receive, estimate the following
ratios:
a. Times interest earned ratio
b. Debt ratio
c. Debt/equity ratio
d. Debt to tangible net worth ratio
42) Using financial leverage is a good financial strategy from the viewpoint of
stockholders of companies having:
a. a high debt ratio
b. cyclical highs and lows
c. steady or rising profits
d. a steadily declining current ratio
e. none of the answers are correct
43) Which of the following is not true about a stock dividend?
a. With a stock dividend, the firm issues a percentage of outstanding stock as new
shares to existing shareholders
b. The overall effect of a stock dividend is to leave total stockholders’ equity and each
owner’s share of stockholders’ equity unchanged
c. In theory, with a stock dividend, total market value considering all outstanding shares
should not change
d. Since the number of shares changes under a stock dividend, any ratio based on the
number of shares must be restated
e. The accounting for a stock dividend, assuming the distribution is relatively small,
requires that the par value of the stock be removed from retained earnings
44) In 2012, ABC Company reported earnings per share of $2.00 for 10,000 shares. In
2013, there was a 2-for-1 stock split, for which 2013 earnings per share were reported at
$2.10. The appropriate earnings per share presentation for a 2-year comparative
analysis would be:
a. I
b. II
c. III
d. IV
e. none of the answers are correct
45) Which of the following accounts would not be classified as an intangible?
a. Franchises
b. Research and development
c. Patent
d. Trademarks
e. Goodwill
46) The first balance sheet asset for a regulated utility is:
a. cash
b. receivables
c. inventory
d. plant
e. investments
47) If a firm consolidates subsidiaries that are not wholly owned, an income statement
item is created that is termed:
a. dividend income
b. minority share of earnings
c. equity income
d. extraordinary
e. gain from sale of subsidiary
48) Various techniques are used in the analysis of financial data to emphasize the
comparative and relative importance of the data presented and to evaluate the position
of the firm. Which of the following is not one of the techniques used in analysis?
a. Ratio analysis
b. Common-size analysis
c. Theory consistency
d. Examination of relative size among firms
e. Review of descriptive material
49) The largest asset for airlines will usually be:
a. accounts receivable
b. inventory of spare parts
c. investment in subsidiaries
d. flight equipment
e. ground equipment
50) Smith reported the following for 2012 .
The price earnings ratio and dividend payout were:
a. 16.25 and 62.50%
b. 16.25 and 65.00%
c. 17.00 and 62.50%
d. 15.00 and 62.50%
e. 15.00 and 60.00%
51) Denver Dynamics has net income of $2,000,000. Oakland Enterprises has net
income of $2,500,000. Which of the following best compares the profitability of
Denver and Oakland?
a. Oakland Enterprises is 25% more profitable than Denver Dynamics
b. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison
can’t be quantified
c. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics
d. Further information is needed for a reasonable comparison
e. Oakland Enterprises is more profitable if it is a larger firm than Denver Dynamics
52) Listed below are several accounting principles and assumptions.
Required:
Match the letter of each principle or assumption or qualitative characteristic with the
appropriate statement.
a. Business entity
b. Going concern
c. Time period
d. Monetary unit
e. Historical cost
f. Conservatism
g. Realization
h. Consistency
i. Full disclosure
j. Verifiability
k. Materiality
l. Industry practices
1>Some industry practices lead to accounting reports that do not conform to the general
theory that underlies accounting.
2>Requires the accountant to adhere as closely as possible to verifiable data.
3>Requires the entity to give the same treatment to comparable transactions.
4>Directs that the measurement that has the least favorable effect on net income and
financial position in the current period be selected.
5>The decision is made to accept some inaccuracy because of incomplete information
about the future in exchange for more timely reporting.
6>Involves the relative size and importance of an item to a firm.
7>A reasonable summarization of financial information is required.
8>Deals with the problem of when to recognize revenue.
9>The primary value that is used for financial statements.
10>Standard of measure for financial statements.
11>The assumption that the entity being accounted for will remain in business for an
indefinite period of time.
12>Assumption that a business’s financial statements are separate and distinct from the
personal transactions of the owners.
53) The best dividend payout ratio:
a. approximates 50%
b. continues at the same level as was historically paid
c. is similar to the industry average
d. is higher than that of competitors
e. does not follow any rule of thumb for dividend payout
54) Listed below is information related to the accounts of Jasper Company.
Required:
Fill in the blank with the appropriate dollar amount.
55) Listed below is information related to several entry situations. Assume that the
accounting year ends on December 31 .
Required:
Record these entries using T-accounts. Use the number of the transaction in lieu of a
date for identification purposes.
56) Amsterdam Antiques reported the following comparative income figures in 2012.
Your boss, the president of Amsterdam bank, is concerned about Amsterdam’s
borrowing capacity. A representative of Amsterdam Antiques feels that there should be
no problem, since net income are the same with slightly higher sales.
Required:
Compute times interest earned and comment on the bank’s position.
57) Monroe Company recorded these transactions during the year. Monroe Company
has an accounting year-end of December 31 .
Required:
Record the adjusting entries at December 31 using T accounts. Use the number of the
transaction in lieu of a date for identification purposes.
58) DuBois, Inc., experienced the following trend in operating profit ratios for the five
years ended in 2012 .
Required:
Using the DuPont analysis, determine whether the trend in turnover increased the return
on operating assets or lowered it.
59) Required:
Determine the cost of goods sold of a firm with the financial data given below:
*Assume that the acid test ratio is computed as follows:
60) The following are simplified, vertical, common-size balance sheets for three firmsa
retailer, a service firm, and a manufacturer.
Required:
Match the statements to the type of firm and explain your choice.