1) Waller Corporation had the following account balances for 2014:
Wallers 2014 net income is $450,000. What amount should Waller include as net cash
provided by operating activities in its 2014 statement of cash flows?
a. $436,200
b. $445,200
c. $453,600
d. $454,200
2) Which of the following investments should be classified as cash equivalents for
Lastima Company in preparing the statement of cash flows?
a. 2, 3
b. 2, 4
c. 2, 3, 4
d. 1, 2, 3, 4
3) The following is NOT one of the fundamental criteria for recognition?
a. Timeliness
b. Measurability
c. Relevance
d. Reliability
4) Stiller Company owns a machine that was bought on January 2, 2011, for $376,000.
The machine was estimated to have a useful life of five years and a salvage value of
$24,000. Stiller uses the sum-of-the-years’-digits method of depreciation. At the
beginning of 2014, Stiller determined that the useful life of the machine should have
been four years and the salvage value $35,200. For the year 2014, Stiller should record
depreciation expense on this machine of
a. $19,200
b. $44,400
c. $59,200
d. $70,400
5) A companys income statement disclosed $45,000 of investment revenue on equity
method investments. The company did not purchase or dispose of any such investments
during the year, yet the equity method investments account increased $30,000 during
the year. What is the complete disclosure of these events in the statement of cash flows
prepared under the indirect method?
a. Operating cash inflow, $45,000; $30,000 subtraction in reconciliation of earnings and
net operating cash flow
b. $30,000 subtraction in reconciliation of earnings and net operating cash flow
c. Operating cash inflow, $15,000; $30,000 subtraction in reconciliation of earnings and
net operating cash flow
d. Operating cash inflow, $15,000
6) The following information was obtained from the accounts of Foxx Company:
Given this information, the cost of goods available for sale is
a. $65,000
b. $59,000
c. $69,000
d. $61,000
7) Montague Company reported the following balances:
Montague paid suppliers $122,500 during the year. What is Montagues cost of goods
sold for the year?
a. $136,250
b. $123,750
c. $121,250
d. $108,750
8) For the issuer of ten-year bonds, the amount of amortization using the
effective-interest method would increase each year if the bonds were sold at a
Discount Premium
a. No No
b. Yes Yes
c. No Yes
d. Yes No
9) Barron Co.’s current ratio is 2:1. Which of the following transactions would normally
increase Barney’s current ratio?
a. Purchasing inventory on account
b. Borrowing money by signing a long-term note
c. Collecting an account receivable
d. Purchasing land for cash
10) See information for Digipro Inc. above. If Digipro Inc. uses a moving average
perpetual inventory system, the ending inventory of the VTC cameras at July 31 is
reported as
a. $153,400
b. $156,912
c. $158,736
d. $159,464
11) The sum-of-the-years’-digits method of depreciation is being used for a machine
with a five-year estimated useful life. What would be the fraction applied to the cost to
be depreciated in the fourth year?
a. 2/5
b. 4/5
c. 2/15
d. 4/15
12) In a period of falling prices, the use of which of the following inventory cost flow
methods would typically result in the highest cost of goods sold?
a. Weighted average cost
b. Specific identification
c. LIFO
d. FIFO
13) When preparing a statement of cash flows using the direct method, amortization of
a patent is
a. shown as an increase in cash flows from operating activities
b. shown as a reduction in cash flows from operating activities
c. included with supplemental disclosures of noncash transactions
d. not reported in the statement of cash flows or related disclosures
14) According to the most current FASB standards, intangible assets acquired in a
basket purchase that does not represent the acquisition of an entire business should be
a. valued by allocating the total purchase price according to the relative fair values of
all assets acquired, regardless of whether the assets are separately tradable or contract
based
b. valued by allocating the total purchase price according to the relative fair values only
of intangible assets that are separately tradable or contract based
c. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being recognized as goodwill
d. valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being expensed in the year of
acquisition
15) An asset is being constructed for an enterprise’s own use. The asset has been
financed with a specific new borrowing. The interest cost incurred during the
construction period as a result of expenditures for the asset is
a. a part of the historical cost of acquiring the asset to be written off over the estimated
useful life of the asset
b. interest expense in the construction period
c. recorded as a deferred charge and amortized over the term of the borrowing
d. a part of the historical cost of acquiring the asset to be written off over the term of the
borrowing used to finance the construction of the asset
16) All of the following can result in a temporary difference between pretax financial
income and taxable income except
a. payment of premiums for life insurance
b. depreciation expense
c. contingent liabilities
d. product warranty costs
17) Which of the following is NOT a long-term investment?
a. Stock held to exert influence on another company
b. Land held for speculation
c. Trademarks
d. Cash surrender value of life insurance
18) Security Inc. manufactures equipment that is sold or leased. On December 31, 2014,
Security leased equipment to Quirky for a five-year period expiring December 31,
2019, at which date ownership of the leased asset will be transferred to Quirky. Equal
$40,000 payments under the lease are due on December 31 of each year. The first
payment was made on December 31, 2014. Collectibility of the remaining lease
payments is reasonably assured, and Security has no material cost uncertainties. The
normal sales price of the equipment is $144,000 and cost is $110,000. For the year
ended December 31, 2014, how much income should Security recognize from the lease
transaction?
a. $46,000
b. $40,000
c. $34,000
d. $28,000
19) Treasury stock should be reported
a. as a current asset only if it will be sold within the next year or the operating cycle,
whichever is longer
b. as a current asset only if it will be sold within the next year or the operating cycle,
whichever is shorter
c. in the Investments and Funds section of the balance sheet
d. as a deduction from total stockholders equity on the balance sheet
20) The composite depreciation method
a. is applied to a group of homogeneous assets
b. is an accelerated method of depreciation
c. does not recognize gain or loss on the retirement of specific assets in the group
d. excludes salvage value from the base of the depreciation calculation
21) Lakeview Corporation provides the following account balances for 2014 and 2013:
22) Which of the following is the proper time period in which to record a change in
accounting estimate?
a. Current period and future periods
b. Current period and retroactively
c. Retroactively only
d. Current period only
23) Which of the following events would be considered an extraordinary item?
a. An airline experienced a significant loss due to a strike by employees of the company
who provide its aircraft maintenance
b. A food cannery was faced with a large loss of inventory of canned soups due to
government condemnation because of possible botulism contamination; the company
had never experienced a similar situation in its history
c. A company, located on an island which has experienced severe flooding three times
in the past 25 years, was subjected to a heavy loss of physical plant due to flooding
d. A medical corporation was required to pay damages equal to three times its average
net income to a patient. The corporation had experienced suits of this nature in the past,
but the amount of the losses had never exceeded 5 percent of the corporation’s average
net income
24) In a statement of cash flows, which of the following would increase reported cash
flows from operating activities using the direct method?
a. Collection of a note receivable
b. Dividends received from investments
c. Gain on purchase of treasury stock
d. Gain on sale of equipment
25) An entity changed from the FIFO to the LIFO cost flow assumption for inventories.
Assuming that inventory and sales remain constant over time, and that prices are rising,
how would the current ratio be changed as a result of converting from FIFO to LIFO?
a. The current ratio did not change
b. The current ratio increased
c. The current ratio decreased
d. The effect on the current ratio cannot be determined from the information given
26) Unlike a stock split, a stock dividend requires a formal journal entry in the financial
accounting records because stock dividends
a. represent a transfer from Retained Earnings to Capital Stock
b. increase the stockholders’ equity in the issuing firm
c. are payable on the date they are declared
d. increase the relative book value of an individual’s stock holdings
27) Heartland Company reported liabilities totaling $1,230,000 as of December 31,
2014. The following information relates to those liabilities:
(a) Heartland reported a $100,000 bank loan payable. However, Heartland intends to
repay this loan on January 10, 2015.
(b) Heartland has reported a $40,000 liability for the estimated cost of future warranty
repairs based on product sales for the past year.
(c) Heartland is being sued for $350,000 by a disgruntled employee. Heartland’s
attorney thinks that it is possible that Heartland will lose the case. Heartland has not yet
recorded any liability for this potential loss.
(d) Heartland receives consulting services from a local CPA. Expected services by the
CPA for the coming year will cost $35,000. No liability has been recorded.
(e) Heartland has reached an agreement with a major customer. Heartland expects to
provide services totaling $400,000 over the coming three years. The customer has
already paid Heartland $100,000. No liability has been recorded.
After considering these items, what should be the total of Heartland’ reported liabilities?
28) Lincoln Corporation provides an incentive compensation plan under which its
president is to receive a bonus equal to 15 percent of Lincoln’s income in excess of
$150,000 before deducting income tax but after deducting bonus. If income before
income tax and bonus is $320,000 and the effective tax rate is 40 percent, the amount of
the bonus should be
a. $22,174
b. $24,174
c. $34,000
d. $46,000
29) On a statement of cash flows prepared using the direct method, cash from
customers would be sales plus a(n)
a. decrease in accounts payable
b. increase in accounts payable
c. decrease in accounts receivable
d. increase in accounts receivable
30) A company already has calculated its basic earnings per share (EPS). In determining
diluted earnings per share, the annual dividend on convertible cumulative preferred
stock which is dilutive should be
a. added back to the number of basic EPS whether declared or not
b. deducted from the numerator of basic EPS only if declared
c. added back to the numerator of basic EPS only if declared
d. deducted from the numerator of basic EPS whether declared or not
31) Which of the following is true?
a. Form 10-K is required under the FASB Conceptual Framework
b. Form 10-Q is a quarterly report of significant events required by the SEC
c. Form 8-K is a quarterly report of significant events required by the SEC
d. Form 8-K is the annual report submitted by small businesses to the SEC
32) Canarsie Company leased equipment to Fulton Inc. on January 1, 2014. The lease is
for an eight-year period expiring December 31, 2021. The first of eight equal annual
payments of $900,000 was made on January 1, 2014. Canarsie had purchased the
equipment on December 29, 2013, for $4,800,000. The lease is appropriately accounted
for as a sales-type lease by Canarsie. Assume that the present value at January 1, 2014,
of all rent payments over the lease term discounted at a 10 percent interest rate was
$5,280,000. What amount of interest revenue should Canarsie record in 2015 (the
second year of the lease period) as a result of the lease?
a. $490,000
b. $480,000
c. $438,000
d. $391,800
33) Which of the following represents the maximum amortization period mandated by
current generally accepted accounting principles for amortizable intangible asset?
a. 10 years
b. 20 years
c. 40 years
d. No arbitrary cap on the useful life of amortizable intangible assets has been
established.
34) Accrued interest on bonds that are sold between interest dates
a. is ignored by both the seller and the buyer
b. increases the amount a buyer must pay to acquire the bonds
c. is recorded as a loss on the sale of the bonds
d. decreases the amount a buyer must pay to acquire the bonds
35) SFAS No. 109 rejected the approach of its predecessor SFAS No. 96 regarding the
classification of deferred tax assets and liabilities on the balance sheet. SFAS No. 96
required that the deferred tax consequences of temporary differences that will result in
taxable or deductible amounts during the following year or operating cycle (if longer
than one year) be classified as current. SFAS No. 109 requires that deferred tax assets
and liabilities be classified based on the asset or liability to which the temporary
difference relates or, if no clear relationship between the temporary difference and an
asset or liability can be established, based on the date on which the deferred tax item
will be realized or settled.
Required:
Explain why the FASB rejected the approach in SFAS No. 96 and the basis for the
method required in SFAS No. 109.
36) SFAS No. 109 uses the term tax-planning strategy. The meaning of this term in the
pronouncement is somewhat different from its usage in ordinary business conversation.
Typically, one would expect the term tax-planning strategy to connote the actions
management takes to minimize the enterprises long-run tax obligation. An enterprise
may, for example, structure its credit sales activities such that these sales would qualify
for treatment as installment sales for tax purposes. Such an approach would allow the
deferral of taxable revenue until cash is actually received. The use of the term
tax-planning strategy in SFAS No. 109 differs from the traditional use, however.
Required:
Explain the meaning of the term tax-planning strategy as the term is used in SFAS No.
109.
37) The 2014 annual report of Fracking, Inc., provides the following disclosures
regarding its oil and gas operations:
During 2014, the company reported exploration expenses totaling $306 million, and
depreciation, depletion, and amortization totaling $1,198 million. The amount of
capitalized costs for the fiscal years ending December 31, 2014, and 2013, were:
Fracking uses the successful-efforts method to account for exploration costs.
Required:
38) On January 1, 2014 Flora Enterprises obtained a contract to construct a building. It
was estimated at the beginning of the contract that it would take three years to complete
the project at an expected cost of $200,000. The contract price was $250,000. The
following information describes the status of the job at the close of production each
year:
Compute the items listed below for each year assuming the use of the
percentage-of-completion cost-to-cost method. (Round all percentages to two
decimals).
39) The cost of capital is the cost a company bears to obtain external financing. A
companys cost of capital is critical because it determines which long-term projects are
profitable for the entity to undertake. The higher the cost to obtain funds, the fewer the
long-term projects are profitable for a company to pursue.
Required:
Explain the role of financial statements generally and the roles of the FASB, the
40) The price of a bond issue is determined by the market or effective rate of interest. A
bond issue with a 8% stated interest rate will sell for less than face value if the market
or effective rate of interest is 10%. The creditworthiness of the issuing entity is one of
the factors that influence the market rate for a specific bond issue. Investors rely heavily
on bond ratings provided by Standard & Poors Corporation and by Moodys Investors
Service, Inc.
Required:
Complete the table below by entering the appropriate rating for each level of risk under
the S&P and Moodys rating systems.
41) The following is Grafton Corporations comparative balance sheets for 2014 and
2013:
Additional information:
Required:
Prepare a statement of cash flows for Grafton Company for 2014 using the indirect
method. Include relevant supplemental schedules.
