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Chapter 1

Multiple Choice:

1. Which of the following bodies has the ultimate authority to issue accounting pronouncements in the United States?a. Securities and Exchange Commissionb. Financial Accounting Standards Boardc. International Accounting Standards Committeed. Internal Revenue Service

Answer 2. What historical evidence of the business operations of the private estate of Apollonius was discovered early inthe20th century?a. The Iliadb. Plato's Republicc. The Zenon papyrid. Paciolis work, Summa de Arithmetica Geometria Proportioni et Proportionalita, Answer

3. Who has been given credit or developing the double-entry system of bookkeeping?a. Francis Wheatb. Fra Luca Paciolic. A. C. Littletond. William Paton

Answer

4. Which of the following was not a criticism of the development of accounting standards by the Accounting Principles Board?a. The independence of the members of the APB. The individuals serving on the board had full-time responsibilities elsewhere that might influence their views of certain issues.b. The structure of the board. The largest eight public accounting firms (at that time) were automatically awarded one member, and there were usually five or six other public accountants on the APB.c. Harmonization. The accounting standards developed were dissimilar to those developed by the International Accounting Standards Committee.d. Response time. The emerging accounting problems were not being investigated and solved quickly enough by the part-time members.

Answer

5. Which of the following is the professional organization of university accounting professors?a. American Accounting Associationb. American Institute of Certified Public Accountantsc. American Institute of Accountantsd. Financial Executives Institute

Answer

6. What controversy originally highlighted the need for standard setting groups to have more authority?a. Accounting for stock optionsb. Accounting for derivativesc. Accounting for marketable securitiesd. Accounting for the investment tax credit

Answer

7. Which of the following committees recommended abolishing the Accounting Principles Board and replacing it with the Financial Accounting Board ?a. Wheatb. Cohenc. Truebloodd. Anderson

Answer

8. Which of the following is a public sector accounting standard setter?a. FASBb. SECc. APBd. CAP

Answer

9. Which of the following types of pronouncements now establishes generally accepted accounting principles?a. Statements of Conceptsb. Statements of Financial Accounting Standardsc. APB Opinionsd. Accounting Standards Updates

Answer

10. Which of the following types of pronouncements are intended to establish the objectives and concepts that the FASB will use in developing standards of financial accounting and reporting?a. Statements of Conceptsb. Statements of Financial Accounting Standardsc. APB Opinionsd. Accounting Standards Updates

Answer

11. Which of the following is not a consequence of the standards overload problem to small businesses?

a. If a small business omits a GAAP requirement from audited financial statements, a qualified or adverse opinion may be rendered.b. Small businesses do not need to keep financial recordsc. The cost of complying with GAAP requirements may cause a small business to forgo the development of other, more relevant information.d. Small CPA firms that audit smaller companies must keep up to date on all the same requirements as large international firms, but they cannot afford the specialists that are available on a centralized basis in the large firms.

Answer

12. Some accountants maintain that accounting standards are as much a product of political action as they are of careful logic or empirical findings. This belief is an example of the concept ofa. Standard setting as apolitical processb. Standards overloadc. Economic consequencesd. The role of ethics in accounting

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13. T he impact of accounting reports on various segments of our economic society is the definition of the concept of a. Standard setting as apolitical processb. Standards overloadc. Economic consequencesd. The role of ethics in accounting

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14. Considering and understanding how business decisions affect the financial statements isa.The sole responsibility of the Securities and Exchange Commission.b.Provided in the auditors report.c.Referred to as an economic consequence perspective. d. Interpreted strictly by the companys suppliers.

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15. Which of the following is a source of nonauthoritative accounting guidance and literature?a. Financial Accounting Standards Board Statements b. Financial Accounting Standards Board Interpretations c. Financial Accounting Standards Board Technical Bulletins d. Practices that are widely recognized and prevalent either generally or in the industry

Answer

16. Which of the following companies was involved in an accounting failure that caused the public accounting firm Arthur Andersen to gout of business?a. Goldman Sachsb. Wachoviac. Enrond. AIG

Answer

Essay

1. What is the difference between normative and positive theory?

2. Why is the development of a general theory of accounting important

3. Discuss the evolution of accounting during the 1930s.

4. Discuss the evolution of the three private sector accenting standard setting organizations.

5. What were the purposes of the Wheat and Trueblood committees?

6. What was the purpose of the GAAP Hierarchy?

7. What were the four types of pronouncements issued by the FASB?

8. Discuss why standard setting may be viewed as a political process.

9. Define the following terms

10. Discuss the evolution of the phrase generally accepted accounting principles.

11. What controversy caused the AICPA to issue Rule 203 that requires companies to use GAAP when issuing financial statements?

12. Discuss the FASB ASC including the reasons for its adoption and the FASBs goals in developing it..

13. Discuss the role of ethics in accounting.

14. What is a special purpose entity and how do they work?

15. How did the Sarbanes-Oxley Act change the way the FASB is funded?

16. Discuss the objectives of the International Accounting Standards Board.

Chapter 2

Multiple Choice

1. Which early accounting theorist was among the first to express the view that all changes in the value of assets and liabilities should be reflected in the financial statements ?\a. A. C. Littletonb. John Canning c. William Patond. DR Scott

Answer

2. Which of the following economists most influenced the views of DR Scott?a. Thorstein Veblenb. John Hicksc. Karl Marxd. John Smith

Answer

3. Which of the following is not one of DR Scotts hierarchy of accounting postulates and principles?a. Orientation postulate.b. The principles of truth and fairness. c. The materiality principled. The principles of adaptability and consistency.

Answer

4. Which of the following organizations published the monograph titled A Tentative Statement of Accounting Principles Affecting Annual Corporate Reportsa. SECb. AAAc. AIAd. NAA

Answer

5. Which of the following organizations published the monograph titled A Statement of Accounting Principles?a. SECb. AAAc. AIAd. NAA

Answer

6. Who was the author of Accounting Research Study No. 1, The Basic Postulates of Accounting?a. Robert Sprouseb. Maurice Moonitzc. Alvin Jennings\d. Thomas Hatfield

Answer

7. Which of the following is not an approaches to accounting theory AS categorized by Statement on Accounting Theory and Theory Acceptance? a. Classical, b. Neoclassical c. Decision usefulnessd. Information economics.

Answer

8. Under Statement of Financial Accounting Concepts No. 2, feedback value is an ingredient of the primary quality o Relevance Reliabilitya. No Nob. NoYesc.YesYesd.Yes No

Answer

9. Under Statement of Financial Accounting Concepts No. 2, which of the following interacts with both relevance and reliability to contribute to the usefulness of information?a. Comparabilityb. Timelinessc. Neutralityd. Predictive value

Answer

10. Which of the following hierarchy of qualities did Statement of Financial Accounting Concepts No. 2 indicate as being most important?a. Relevanceb. Reliabilityc. Verifiabilityd. Decision usefulness

Answer

11. Which of the following is considered a pervasive constraint by Statement of Financial Accounting Concepts No. 2a. Benefits>costsb. Conservatismc. Timelinessd. Verifiability

Answer

12. Under Statement of Financial Accounting Concepts No. 2, which of the following is an ingredient of the primary quality of relevance?a. Predictive valueb. Materialityc. Understandabilityd. Verifiability

Answer

13. Under Statement of Financial Accounting Concepts No. 2, which of the following is an ingredient of the primary quality of reliability?a. Understandabilityb. Verifiabilityc. Predictive valued. Materiality

Answer

14. Under Statement of Financial Accounting Concepts No. 2, the ability through consensus of measures to ensure that information represents what it purports to represent is an example of the concept of a. Relevanceb. Verifiabilityc. Representational faithfulnessd. Feedback value

Answer

15. Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability?a. Timelinessb. Materialityc. Verifiabilityd. Neutrality

Answer16. Which of the following is not a qualitative characteristic associated with reliability?a.Verifiableb.Conservatismc.Neutrald.Faithful representation

Answer17. An item is considered material ifa.It doesnt costs a lot of money.b.It is of a tangible good.c.It is likely to influence the decision of an investor or creditor.d. The cost of reporting the item is greater than its benefits

Answer

Essay1. Discuss the contributions of Paton and Canning to the development of accounting theory.

2. Discuss DR Scotts hierarchy of postulates and principles.

3. Discuss the contributions of the works by Sanders Hatfield and More, and Paton and Littleton to accounting theory.

4. Discuss accounting Research Study No. 1.

5. Discuss the objectives of accounting as outlined by the T rueblood Committee.

6. What were the approaches to accounting theory identified by SATTA?

7. According to Kuhn, how dies scientific progress occur?

8. What is the purpose of the conceptual framework?

9. List the objectives of financial accounting as outlined in SFAC No 1: Objective of Financial Reporting by Business Enterprises.

10. What quality of information is viewed as the most important in SFAC No. 2: Qualitative Characteristics of Accounting Information?

11. Define the following terms:

a. Relevance.b. Reliability

12. According to SFAC No. 5, what should a full set of financial statements for a period show?

13. What is the purpose of SFAC No. 7: Using Cash Flow Information and Present Value in Accounting Measurements?

14. What two approaches to present value were discussed in SFAS No. 7?

15. Discuss the issue of principles based vs. rule based accounting standards.

16. Discuss how the FASB and the IASC acted to improve comparability under the Norwalk Agreement.

Chapter 3

Multiple Choice

1. Which of the following is not an environmental actor that could impact on the development of a countrys accounting system?a. Level of education\b. Political systemc. Geographic locationd. Legal system

Answer

2. What is the current acronym for the body most responsible for issuing international accounting standards?a. IASBb. SECc. FASBd. IASC

Answer

3. How many trustees serve on the IASC Foundation?a. 14b. 18c. 20d. 22

Answer

4. How many members serve on the IASB?a. 14b. 18c. 20d. 22

Answer

5. Which of the following bodies has the responsibility to issue international financial reporting standards (IFRS)a. The International Financial Reporting Interpretations Committeeb. The International Standards Advisory Councilc. The IASC Foundationd. The International Accounting Standards Board

Answer

6. Which of the following is not a use of international accounting standards?a. As national requirements.b. As standards to be violated to improve intercountry comparability..c. As an international benchmark for those countries that develop their own requirements.d. By regulatory authorities for domestic and foreign companies

Answer

7. How does the IASC enforce its standards?a. Through , the International Organization of Securities Commissionb. Through the concept of best endeavorsc. Through the Securities and Exchange Commissiond. Through the Financial Accounting Standards Board

Answer

8. What is the name given to the agreement between the FASB and IASC to harmonize accounting standards?a. The Norwalk Agreementb. The London agreementc. The Washing ton D C agreementd. The Paris Accords

Answer

9. What is the title of the form that foreign companies have used to reconcile their financial statements to U. S. GAAP?a. Form 10-Kb. Form 10-Qc. Form SXd. Form20-F

Answer

10. Which of the following is not a qualitative characteristic contained in the IASBs Framework for the Preparation of Financial Statements?a. Understandabilityb. Timelinessc. Relevance d. Reliability

Answer

11. Which of the following is not an element of financial statements contained in the IASBs Framework for the Preparation of Financial Statements?a. Gainb. Incomec. Expensed. Asset

Answer

12. Which of the following is seen as a pervasive difference between IASBs and FASBs Conceptual Frameworks?a. Definition of elementsb. Number of qualitative characteristicsc. Scope of authorityd. Level of detail

Answer

13. Which of the following concepts is contained in the FASBs conceptual framework but not in the IASCsa. Expenseb. Comprehensive incomec. Assetd. Liability

Answer

Essay

1. Discuss the environmental factors that impact on the development of a countrys accounting system.

2. Discuss the approaches a company might take when issuing financial reports to users in foreign countries.

3. What is the purpose of the International Accounting Standards Board?

4. Discuss the factors that have contributed to the need for new approaches to international standard setting.

5. Discuss the IASBs annual improvements project..

6. Discuss the composition and role of The International Accounting Standards Board..

7. Discuss the role of The International Financial Reporting Interpretations Committee

8. How are IASB standards used by various countries?

9. Discuss the Short-term International Convergence Project

10. Discuss the IASB-FASB Norwalk agreement.

11. List the milestones contained in the FASB-IASB Roadmap Convergence Project.

12. What is the objective of the joint FASB-IASB Convergence Project?

14. Under rules enacted prior to 2007, how could a foreign company list its securities for sale in U. S. capital markets? How did this rule change?

15. Discuss the objectives of accounting as defined by the IASBs Framework for the Preparation of Financial Statements

16. Discuss the qualitative characteristics of accounting information as defined by the IASBs 17. Discuss the elements of financial statements defined by the IASBs Framework for the Preparation of Financial Statements.

18. Discuss the concepts of capital and capital maintenance discussed in the Framework for the Preparation of Financial Statements.

19. Discuss IFRS No. 1, First Time Adoption of International Reporting Standards.

Chapter 4

Multiple Choice

1. Which of the following research approaches emphasizes going from the specific to the general?a. Deductiveb. Behavioralc. Inductive d. Pragmatic

Answer

2. Which of the following research approaches is based on the concept of utility or usefulness?a. Deductiveb. Behavioralc. Inductive d. Pragmatic

Answer

3. Which of the following research approaches is attributed to DR Scott?a. Deductiveb. Ethicalc. Inductive d. Pragmatic

Answer

4. Which of the following outcomes of providing accounting information is an attempt to identify individual securities that are mispriced by reviewing all available financial information?a. Agency theoryb. Efficient markets c. Fundamental analysisd. Capital asset pricing model

Answer

5. Which of the following outcomes of providing accounting information is an attempt to deal with both risks and returns?

a. Agency theoryb. Efficient markets c. Fundamental analysisd. Capital asset pricing model

Answer

6. Which of the following outcomes of providing accounting information is based on the supply and demand modela. Agency theoryb. Efficient markets c. Fundamental analysisd. Capital asset pricing model

Answer

7. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as knowledge of past security prices?a. Weakb. Semi-weakc. Semi-strongd. Strong

Answer

8. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as all publicly available information including past stock prices?a. Weakb. Semi-weakc. Semi-strongd. Strong

Answer

9. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as information, including security price trends, publicly available information, and insider information?a. Weakb. Semi-weakc. Semi-strongd. Strong

Answer

10. What theory on the outcomes of providing accounting information attempts to answer the question: What is an individuals expected benefit from a particular course of action?a. Agency theoryb. Efficient markets c. Fundamental analysisd. Capital asset pricing model

Answer

11. Which of the following is not viewed as a cost to the principal in an agency relationship?a. Monitoring expenditures by the principalb. Monitoring expenditures by the agentc. Bonding expenditures by the agentd. The residual loss

Answer

12. What theory on the outcomes of providing accounting information attempts to assess an individuals ability to use information?a. Agency theoryb. Efficient markets c. Human information processing d. Capital asset pricing model

Answer

13. Which of the following is not a conclusion that has been drawn from human information processing research?a. An individuals perception of information is quite selective. That is, since individuals are capable of comprehending only a small part of their environment, their anticipation of what they expect to perceive about a particular situation will determine to a large extent what they do perceive.b. Since individuals make decisions on the basis of a small part of the total information available, they do not have the capacity to make optimal decisionsc. Individuals are able to process and integrate large amounts of information simultaneously d. Since individuals are incapable of integrating a great deal of information, they process information in a sequential fashion.

Answer

14. What theory on the outcomes of providing accounting information rejects the view that knowledge of accounting is grounded in objective principlesa. Agency theoryb. Critical perspectivec. Fundamental analysisd. Capital asset pricing model

Answer

Essay

1. Briefly describe the following research approaches:

2. What is fundamental analysis and what is its goal?

3. Describe the efficient market hypothesis and its three forms.

4. Discuss the capital asset pricing model including the concepts of unsystematic risk, systematic risk and beta.

5. Discuss the difference between normative and positive accounting theory.

6. What is the basic assumption of agency theory? Why is the relationship between shareholders and management an agency relationship?

7. What is the goal of human information processing studies? What are the genera findings of these studies and what is the implication for accounting?

8. Discuss the concept of critical perspectives research in accounting.

9. Discuss the relationship among research, education, and practice in accounting.

Chapter 5

Multiple Choice

1. One concept of income suggests that income be measured by determining the net change over time in the discounted present value of net cash flow expected to be received by the firm. Under this concept of income, which of the following, ignoring income taxes would not affect the amount of income for a period?a. Providing services to outsiders and investments of the funds receivedb. Production of goods or services not yet sold not yet delivered to customers or clients.c. Windfall gains and losses due to external causes.d. The method used to depreciate property, plant and equipment.

Answer

2. The term revenue recognition conventionally refers to a. The process of identifying transactions to be recorded as revenue in an accounting period.b. The process of measuring and relating revenue and expenses of an enterprise for an accounting period.c. The earning process that gives rise to revenue realization.d. The process of identifying those transactions that result in an inflow of assets from customers.

Answer

3. In the transactions approach to income determination, income is measured by subtracting the expenses resulting from specific transactions during the period from revenues of the period also resulting from transactions. Under a strict transactions approach to income measurement, which of the following would not be considered a transaction?a. Sale of goods on account at 20 percent markupb. Exchange of inventory at a regular selling price for equipmentc. Adjustment of inventory in lower of cost or market inventory valuations when market is below cost.d. Payment of salaries

Answer

4. Conventionally accountants measure income a. By applying a value added conceptb. By using a transactions approachc. As a change in the value of owners equityd. As a change in the purchasing power of owners equity

Answer

5. Arid Lands, Inc., is engaged in extensive exploration for water in the Caprock Desert. If upon discovery of water the corporation does not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition being employed is the a. Production basisb. Cash (or collection) basisc. Sales (or accrual) basisd. Sunk cost (or cost recovery) basis

Answer

6. The installment method of recognizing revenue is not acceptable for financial reporting ifa. The collectability of the sales price is reasonably assuredb. The installment period is less than 12 monthsc. The method is applied to only a portion of the totald. Collection expenses can be reasonably predicted

Answer

7. The principal disadvantage of using the percentage of completion method of recognizing revenue from long-term contracts is that ita. Is unacceptable for income tax purposesb. May require that intraperiod tax allocation procedures be usedc. Gives results bases upon estimates that may be subject to considerable uncertaintyd. Is likely to assign a small amount of revenue to a period during which much revenue was actually earned

Answer

8. One of the basic features of financing accounting is thea. Direct measurement of economic resources and obligations and changes in them in terms of money and sociological and psychological impactb. Direct measurement of economic resources and obligations and changes in them in terms of moneyc. Direct measurement of economic resources and obligations and changes in them in terms of money and sociological impactd. Direct measurement of economic resources and obligations and changes in them in terms of money and psychological impact

Answer

9. Uncertainty and risks inherent in business situations should be adequately considered in financial reporting. This statement is an example of the concept ofa. Conservatismb. Completenessc. Neutralityd. Representational faithfulness

Answer

10. Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to a. Disclosureb. Accrual accountingc. Materialityd. The matching concept

Answer

11. Under what condition is it proper to recognize revenues prior to the sale of the merchandise?a. When the ultimate sale of the goods is at an assured sales priceb. When the revenue is to be reported as an installment salec. When the concept of internal consistency (of amounts of revenue) must be complied withd. When management has a long-established policy to do so

Answer

12. Which of the following is not a concept of income identified by Bedford?a. Psychicb. Realc. Investmentd. Money

Answer

13. The definition of the economic concept ofincomeis usually attributed towhich of the following economists?a. J. R. Hicksb. Paul Samuelsonc. Ben Bernanked. Adam Smith

Answer

14. Which of the following is not an approach to determining current value?a. Replacement costb. Thrift valuec. Selling priced. Discounting present value

Answer

15. Each assetinventory, plant, equipment, and so onwould be valued based on the selling price that would be realized if the firm chose to dispose of it is the definition of which of the following current value concepts?a. Replacement costb. Entry pricec. Exit valued. Discounted present value

Answer

16. The cost to replace assets with similar assets in a similar condition is the definition of which of the following current value concepts?a. Replacement costb. Selling pricec. Exit valued. Discounted present value

Answer

17. Income is equal to the difference between the present value of the net assets at the end of the period and their present value at the beginning of the period, excluding the effects of investments by owners and distributions to owners is the definition of which of the following current value concepts?a. Replacement costb. Selling pricec. Exit valued. Discounted present value

Answer

18. Which of the following is not a criteria outlined in SEC Staff Accounting Bulletin No. 101 for the recognition of revenue?a. Persuasive evidence of an arrangement exists.b. Delivery has not occurred.c. The vendors fee is fixed or determinable.d. Collectability is probable.

Answer

19. Which of the following accounting theorists called of conservatism the most influential principle of valuation in accounting?a. Henry Sweeneyb. Robert Sprousec. Robert Sterlingd. Edgar Edwards

Answer

20. The one-time overstatement of restructuring charges to reduce assets, which reduces future expenses, is the definition of which of the following earnings management techniques?a. Taking a bathb. Creative acquisition accountingc. Creasing cookie jar reservesd. Abusing the materiality concept

Answer21. Deliberately recording errors or ignoring mistakes in the financial statements under the assumption that their impact is not significant, is the definition of which of the following earnings management techniques?a. Taking a bathb. Creative acquisition accountingc. Creasing cookie jar reservesd. Abusing the materiality concept

Answer22. Overstating sales returns or warranty costs in good times and using these overstatements in bad times to reduce similar charges, is the definition of which of the following earnings management techniques?a. Taking a bathb. Creative acquisition accountingc. Creasing cookie jar reservesd. Abusing the materiality concept

AnswerEssay

1. List and three reasons why income reporting is important to our economic society.

2. Discuss the differences between the economic and accounting concepts of income.

3. Discuss the three basic concepts of income as defined by Bedford.

4. Discuss the difference between financial capital maintenance and physical capital maintenance.

5. Define the following terms:

a. Entry price

b. Exit price

c. Discounted present value

6. Discuss the four types of income defined by Edwards and Bell.

7. What conditions must be satisfied in order to recognize revenue according to Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements?

8. Discuss how revenue might be recognized at various points in a companys production - sale cycle.

9. Discuss the matching concept.

10. Define the following terms:a. Holding gains

b. Materiality

c. Conservatism

11. Discuss the concepts of earnings quality and earnings management including:

Chapter 6

Multiple choice1. The disposal of a significant component of a business is calleda.A change in accounting principleb.An extraordinary itemc.An other expensed.Discontinued operation

Answer

2. If year one sales equal $800,000, year two equal $840,000 and year three equals $896,000 the percentage to be assigned for year two in a sales trend analysis, assuming that year 1 is the base year, isa.100%b.89%c.105%d.112%

Answer

3. A measure of a companys profitability is thea.Current ratiob.Current cash debt coverage ratioc.Return on assets ratiod.Debt to total assets ratio

Answer

4. Which of the following is not an economic consequence of financial reporting?a. Financial information can affect the distribution of wealth among investors. More informed investors, or investors employing security analysts, may be able to increase their wealth at the expense of less informed investors.b. Financial information can affect the level of risk accepted by a firm. Focusing on short-term, less risky projects may have long-term detrimental effects.c. Financial information can affect the rate of capital formation in the economy and result in a reallocation of wealth between consumption and investment within the economy.d. Financial information can affects the allocation of psychic income among investors.

Answer

5. Which of the following is not an income statement element?a. Assetb. Gainc. Revenued. Expense

Answer

6. The statement, net income should reflect all items that affected the net increase or decrease in stockholders equity during the period is consistentwithwhich of the following concepts of income?a. Economicb. All inclusivec. Current operating performanced. Money

Answer

7. The phrase events and transactions that are distinguished by both their unusual nature and their infrequency of occurrence describes:a. Changes in accounting principlesb. Prior period adjustmentsc. Extraordinary itemsd. Prior period adjustments

Answer

8. Which of the following is not an accounting change?a. Change in accounting principleb. Change in accounting estimatec. Change in a reporting entityd. Change because of an error

Answer

9. Which of the following is not an example of an error?a. A change from an accounting practice that is not generally acceptable to a practice that is generally acceptable.b. Mathematical mistakes.c. A change from LIFO to FIFO inventory costingd. The incorrect classification of costs and expense

Answer

10. The formula, Operating profit/Sales, is used to calculatea. Gross profit percentageb. Net profit percentagec. Comprehensive income percentaged. Operating profit percentage

Answer

11. The accounts receivable turnover and inventory turnover ratios are used to analyzea.Long-term solvencyb.Profitabilityc.Liquidityd.Leverage

Answer

12. A high accounts receivable turnover ratio indicates a.Customers are making payments quicklyb.A large portion of the companys sales are on creditc.Many customers are not paying their receivables in a timely mannerd.The companys sales have increased

Answer

13. The return on assets ratio is comprised of a.Profit margin and debt to total assets ratio.b.Profit margin and asset turnover ratio.c.Times interest earned and debt to stockholders equity ratio.d.Profit margin and free cash flow.

Answer

14. An example of the correction of an error in previously issued financial statements is a changea. From the completed contract to the percentage-of-completion method of accounting for long-term construction-type contracts. b. In the depletion rate, based on new engineering studies of recoverable mineral resources.c. From the sum-of-years-digits to the straight-line method of depreciation for all plant assets.d. From the installment basis of recording sales to the accrual basis, when collection of the sales price has been and continues to be reasonably assured

Answer

15. Which of the following is characteristic of a change in an accounting estimate?a. It usually need not be disclosedb. It does not affect the financial statements of prior periodsc. It should be reported through the restatement of the financial statementsd. It makes necessary the reporting of pro forma amounts for prior periods

Answer

16. Which of the following items, if material in amount would normally be considered an extraordinary item for reporting results of operations?a. Utilization of a net operating loss carryforwardb. Gains or losses on disposal of a segment of a businessc. Adjustments of accruals on long-term contractsd. Gains or losses from a fire

Answer

17. Which of the following is an example of an extraordinary item in reporting results of operations?a. A loss incurred because of a strike by employeesb. The write-off of deferred research and development costs believed to have no future benefitc. A gain resulting from the devaluation of the U.S. dollard. A gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot

Answer

18. A company changed its method of inventory pricing from last-in, first-out to first-in, first-out during the current year. Generally accepting accounting principles require that this change in accounting method be reported by:a. Accounting for the effects of the change in the current and future periods.b. Showing the cumulative effect of the change in the current years financial statements and pro forma effects on prior years financial statements in an appropriate footnotec. Disclosing the reason for the change in the significant accounting policies footnote for the current year but not restating prior year financial statementsd. Applying retroactively the new method in restatements of prior years and appropriate footnote disclosures

Answer

19. A transaction that is material in amount, unusual in nature, but not infrequent in occurrence should be presented separately as a (an)a. Component of income from continuing operations, but not net of applicable income taxesb. Component of income from continuing operations, net of applicable income taxes c. Extraordinary item, net of applicable income taxes d. Prior period adjustment, but not net of applicable income taxes

Answer

20. An extraordinary item should be reported separately as a component of incomea. After discontinued operations of a component of a businessb. Before discontinued operations of a component of a businessc. After cumulative effect of accounting changes and after discontinued operations of a component of a businessd. After cumulative effect of accounting changes and before discontinued operations of a component of a business

Answer

21. The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current a. Income statement after income from continuing operations and before extraordinary itemsb. Income statement after income from continuing operations and after extraordinary itemsc. Retained earnings statement as an adjustment of the opening balanced. Retained earnings statement after net income but before dividends

Answer

22. A loss from the disposal of a component of a business enterprise should be reported separately as a component of incomea. Before extraordinary itemsb. After extraordinary itemsc. After extraordinary items and cumulative effect of accounting changesd. Before extraordinary items and cumulative effect of accounting changes

Answer

23. A prior period adjustment should be reflected, net of applicable income taxes, in the financial statements of a business entity in the a. Retained earnings statement after net income but before dividendsb. Retained earnings statement as an adjustment of the opening balancec. Income statement after income from continuing operationsd. Income statement as part of income from continuing operations

Answer

24. Antidilutive securities would generally be used in the calculation of Basic Diluted Earnings per share Earnings per sharea. Yes Yesb. No Yesc. No Nod. Yes No

Answer

25. A change in the salvage value of an asset depreciated on a straight-line basis and arising because additional information has been obtained is a. An accounting change that should be reported in the period of change and future periods of change if the change affects bothb. An accounting change that should be reported by restating the financial statements of all prior periods presentedc. A correction of an errord. Not an accounting change

Answer

26. A loss should be separately as a component of net income when it is unusual in nature and which of the following?MaterialInfrequent In Amount In Occurrencea. No Yesb. No Noc. Yes Nod. Yes Yes

Answer

27. When a component of a business has been discontinued during the year, this s component s operating losses of the current period up to the measurement date should be included in the a. Income statement as part of the income (loss) from operations of the discontinued componentb. Income statement as part of the loss on disposal of the discontinued componentc. Income statement as part of the income (loss) from continuing operationsd. Retained earnings statement as a direct decrease in retained earnings

AnswerEssay

1. Discuss the economic consequences of financial reporting.

2. Discuss the four income statements elements defined by SFAC No. 2.

3. Discuss the all inclusive vs. current operating performance views of income.

4. Define and discuss the accounting treatment for discontinued operations.

5. Define and discuss the accounting treatment for extraordinary items.

6. What are accounting changes and why is it an issue. List and define the three types of accounting changes.

7. Discuss the concept of simple vs. complex capital structures and how it relates to the reporting of earnings per share.

8. Define and discuss the accounting treatment for prior period adjustments.

9. Define comprehensive income. What is the purpose of reporting comprehensive income?

10. Obtain a companys income statement and ask the students to compute the following:.

11. Discuss the sources of guidance for recording accounting transactions outlined by IAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Chapter 7

Multiple Choice

1. On a balance sheet, what is the preferable presentation of notes or accounts receivable from officers, employees, or affiliated companies?a. As trade notes and accounts receivable if they otherwise qualify as current assetsb. As assets but separately from other receivablesc. As offsets to capitald. By means of notes or footnotes

Answer

2. The basis for classifying assets as current or noncurrent is the period of time normally elapsed from the time the accounting entity expends cash to the time it convertsa. Inventory back to cash or 12 months, whichever is shorterb. Receivable s back into cash or 12 months, whichever is longerc. Tangible fixed assets back into cash or 12 months, whichever is longerd. Inventory back to cash or 12 month, whichever is longer

Answer

3. The valuation basis used in conventional financial statements isa. Replacement costb. Market valuec. Original costd. A mixture of costs and values

Answer

4. A transaction that would appear as an application of funds on a conventional funds statement using the all-financial-resources concept, but not on a statement using the traditional working capital concept would be thea. Acquisition of property, plant, and equipment for cashb. Reacquisition of bonds issued by the reporting entityc. Acquisition of property, plant, and equipment with an issue of common stockd. Declaration and payment of dividends

Answer

5. There would probably be a major difference between a statement of source and application of working capital and a cash flow statement in the treatment of a. Dividends declared and paidb. Sales of noninventory assets for cash at a lossc. Payment of long-term debtd. A change during the period in the accounts payable balance

Answer

6. A basic objective of the statement of cash flows is to a. Supplant the income statement and balance sheetb. Disclose changes during the period in all asset and all liability accountsc. Disclose the change in working capital during the periodd. Provide essential information for financial statements users in making economic decisions

Answer

7. A statement of cash flows should be issued by a profit-oriented business a. As an alternative to the statement of income and retained earningsb. Only if the business classifies its assets and liabilities as current and noncurrentc. Only when two-year comparative balance sheets are not issuedd. Whenever a balance sheet and a statement of income and retained earnings are issued

Answer

8. When preparing a statement of changes in financial position using the cash basis for defining funds, an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings becausea. Funds were increased since inventory is a current assetb. The net increase in inventory reduced cost of goods sold but represents an assumed use of cashc. Inventory is an expense deducted in computing net earnings, but is not a use of fundsd. All changes in noncash accounts must be disclosed under the all financial resources concept

Answer

9. Which of the following should theoretically be presented in a statement of changes in financial position only because of the all-financial-resources concept?a. Conversion of preferred stock to common stockb. Purchase of treasury stockc. Sale of common stockd. Declaration of cash dividend

Answer

10. When preparing a funds statement using the all financial resources concept, the retirement of long-term debt by the issuance of common stock should be presented in a statement of changes in financial position as a

Source of FundsUse of Fundsa. No Nob. No Yesc. Yes Nod. Yes Yes

Answer

11. The working capital format is one possible format for presenting a statement of changes in financial position. Which of the following formats is (are) also theoretically acceptable?

CashQuick Assetsa. AcceptableNot acceptableb. Not acceptableNot acceptablec. Not acceptableAcceptabled. Acceptable Acceptable

Answer

12. A gain on the sale of plant assets in the ordinary course of business should be presented in a statement of cash flows as a (an)a. Source and use of cashb. Use of cashc. Addition to income from continuing operationsd. Deduction from income from continuing operations

Answer

13. Which of the following should be presented nn a statement of cash flows?Conversion ofConversion ofLong-term debtpreferred stock to common stock to common stocka. NoNo b. NoYesc.YesYesd. YesNo

Answer14. The balance sheet disclosesa. Stocksb. Flowsc. Both stocks andf lowsd. Neither stocks nor flows

Answer

15. Which of the following is not a balance sheet element?a. Assetsb. Liabilitiesc. Gainsd. Equities

Answer

16. Which of the following is nota component of equity?a. Common stock b. Treasury stockc. Retained earningsd. Unearned revenue

Answer

17. Which of the following is not an important aspects of SFAS No. 157(FASB ASC 820)?a. A new definition of fair value.b. A requirement that all assets and liabilities are to be measured at their fair value.c. A fair value hierarchy used to classify the source of information used in fair value measurements (for example, market based or nonmarket based).d. New disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.

Answer

18. The definition of fair value in SFAS No 157(FASB ASC 820) is a. Entry price basedb. Exit price basedc. Replacement cost based d. Historical cost based

Answer

19. The SFAS No 157 (FASB ASC 820) fair value hierarchy containsa. Two levelb. Three levelsc. Four levelsd. Five levels

Answer

20. Which of the following s the lowest level of the SFAS 157 (FASB ASC 820) fair value hierarchy?a. Unobservable inputs (that are corroborated by observable market data)b. Unobservable inputs (that are not corroborated by observable market data)c. Observable market-based inputs (or unobservable inputs that are corroborated by market data)d. Quoted market prices for identical assets or liabilities in active markets

Answer

21. The calculation net income/sales is the formula for which of the following ratiosa. Return on assetsb. Profit margin c. Asset turnoverd. Asset usage

Answer

22. The calculation sales/average total assets is the formula for which of the following ratiosa. Return on assetsb. Profit margin c. Asset turnoverd. Asset usage

Answer

23. The calculation net income/average total assets is the formula for which of the following ratiosa. Return on assetsb. Profit margin c. Asset turnoverd. Asset usage

Answer

24. The firms ability to use its financial resources to adapt to change is the definition of a. Liquidityb. Solvencyc. Financial flexibilityd. Working capital

Answer

25. A firms ability to obtain cash for business operations change is the definition of a. Liquidityb. Solvencyc. Financial flexibilityd. Working capital

Answer

26. The firms ability to convert an asset to cash or to pay a current liability change is the definition of a. Liquidityb. Solvencyc. Financial flexibilityd. Working capital

Answer

27. Net cash provided (used) by operating activitiesnet cash used in acquiring property, plant, and equipmentcash dividends paid is the calculation fora. Free cash flowb. Cash flow f rom investing activitiesc. Working capitald. Current ratio

Answer

28. Which of the following is a difference between IAS No. 7 and SFAS No. 95 (FASB ASC 230)? a. IAS No. 7 requires the use of the direct methodb. IAS No. 7 required the use of the indirect methodc. IAS No 7 requires the use of the all financial resources concept of fundsd. IAS No. 7 requires extraordinary items be disclosed separately as operating, investing, or financing activities

Answer

29. Investments in equity securities are disclosed as current assets on a companys balance sheet ifa.Management intends to sell them within a year and they have a ready market exists.b.The fair market value cannot be determined. c. Management intends to convert them into common stock within one year.d. Management owns less than 50% of the outstanding stock.

Answer

30. What is reported on the statement of cash flows? a. Operating, investing, and financing activities of an entity for a period of time b. All revenues and expense listed by operating, financing, and operating actitivityc. Operating, investing, and financing activities of an entity at the balance sheet dated. A detail of all incoming and outgoing cash flows of a business

Answer

Essay

1. Discuss the following balance sheet elements as defined by SFAC No. 2:a. Assets

b. Liabilities

c. Equity

2. List three valuation techniques currently used on the balance sheet and discuss how each are used (What accounts?).

3. Define the following terms:a. Current assets

b. Investments

c. Property, plant and equipment

d. Current liabilities

e. Treasury stock

4. How is fair value defined in SFAS No. 157 (FASB ASC 820)?

5. Describe the fair value hierarchy as defined in SFAS No.157.

6. Obtain a companys financial statements and ask the students to compute the following:a. Return on investmentb. Adjusted return on investmentc. Profit margin ratiod. Asset turnover ratioe. Free cash flow

7. What question does the statement of cash flows enable financial statement users to answer?

8. Define the following terms:a. Liquidity

b. Solvency

c. Financial flexibility

9. Discuss the direct vs. indirect methods of preparing the statement of cash flows.

10. Define and discuss the three major sections of the statement of cash flows.

ACC 563 Final Exam Solved

Chapter 8

Multiple Choice

1. Of the following items, the one that should be classified as a current asset isa. Trade installment receivables normally collectible in 18 monthsb. Cash designated for the redemption of callable preferred stockc. Cash surrender value of a life insurance policy of which the company is beneficiaryd. A deposit on machinery ordered, delivery of which will be made within six months

Answer

2. The advantage of relating a companys bad debt experience to its accounts receivable is that this approach a. Gives a reasonable correct statement of receivables in the balance sheetb. Relates bad debts expense to the period of salec. Is the only generally accepted method for valuing accounts receivable d. Makes estimates of uncollectible accounts unnecessary

Answer

3. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading becausea. Most short-term receivables are not interest bearingb. The allowance for uncollectible accounts includes a discount elementc. The amount of the discount is not materiald. Most receivables can be sold to a bank or factor

Answer

4. An account that would be classified as a current liability isa. Dividends payable in stockb. Accounts payable - debit balancec. Reserve for possible losses on purchase commitmentsd. Excess of replacement cost over LIFO cost of basic inventory temporarily liquidated

Answer

5. Which of the following statements is not valid as it applies to inventory costing methods?a. If inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices.b. LIFO tends to smooth out the net income pattern, since it matches current cost of goods sold with current revenue, when inventories remain at constant quantities.c. When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old costs with current revenue.d. The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO.

Answer

6. Jamison Corporations inventory cost on its statement of financial position was lower using first-in, first-out than last-in, first-out. Assuming no beginning inventory, what direction did the cost of purchases move during the period?a. Upb. Downc. Steadyd. Cannot be determined

Answer

7. If inventory levels are stable or increasing an argument that favors the FIFO method as compared to LIFO is a. Income taxes tend to be reduced in periods of rising pricesb. Cost of goods sold tends to be stated at approximately current cost in the income statementc. Cost assignments typically parallel the physical flow of the goodsd. Income tends to be smoothed as prices change over time

Answer

8. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation isa. FIFOb. LIFOc. Conventional retaild. Weighted average

Answer

9. When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?a. Sales price net of conversion costsb. Net realizable valuec. Historical costd. Net realizable value reduced by a normal profit margin

Answer

10. Which of the following inventory cost flow methods involves computations based on broad inventory pools of similar items?a. Regular quantity of goods LIFOb. Dollar-value LIFOc. Weighted averaged. Moving average

Answer11. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off woulda. Increase net incomeb. Have no effect on total current assetsc. Increase working capitald. Decrease total current liabilities

Answer

12. The original cost of an inventory item is above the replacement cost. The replacement cost is below the net realizable value less the normal profit margin. Under the lower of cost or market method the inventory item should be priced at itsa. Original costb. Replacement costc. Net realizable valued. Net realizable value less the normal profit margin

Answer13. Liquidity is the ability a.To increase net assets through regular operationsb.To generate cash from sources other than regular operationsc.To convert existing assets into cashd. Of financial statement users to predict a companys cash flows

Answer

14. Liquidity ratios measures thea.Operating success of a company over a period of timeb.The ability of a company to survive over a long period of timec.The short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cashd.The number of times interest is earned

Answer

15. Working capital is a measure ofa.Financial flexibilityb.Liquidity.c.Profitability.d.Solvency.

Answer

16. A common measure of liquidity isa.Return on assets.b.Accounts receivable turnover.c.Profit margin.d.Debt to equity.

Answer

17. The net realizable value of receivables is calculated as the face value of the receivables less adjustments fora. Credit salesb. Actual uncollected amounts adjusted for purchase discounts.c. Bad debts already written off.d. Estimated uncollectible accounts

18. A successful discount retail store such as Wal-Mart would probably havea.A low inventory turnoverb.A high inventory turnoverc.Zero profit margind.Low volume

AnswerUse the following information to answer questions Acme Auto SuppliesBalance SheetDecember 31, 2007

Cash $ 60,000Accounts Payable$ 65,000Prepaid Insurance 40,000Salaries Payable 10,000Accounts Receivable 50,000Mortgage Payable 90,000Inventory 70,000Total Liabilities$165,000Land held for investment80,000Land95,000Building$100,000 Common Stock$120,000 Less AccumulatedRetained Earnings 250,000 Depreciation(30,000)70,000 Total stockholders equity$370,000Trademark 70,000 Total Liabilities and Total Assets$535,000 Stockholders Equity$535,000

19. The total amount of working capital isa.$155,000.b.$145,000.c.$60,000.d.$150,000.

Answer

20. The current ratio isa.1.86 : 1.b.2.00 : 1.c.3.38 : 1.d.2.93 : 1.

Answer

Essay

1. Define working capital.

2. Define the following terms:a. Cash equivalents

b. Temporary investments

c. Receivables

d. Inventories

e. Payables

f. Deferrals

g. Current maturities

3. Define the following terms:a. LIFO liquidation

b. LIFO conformity

c. Lower of cost or market inventory valuation.

4. List and briefly define the methods of accounting for investments under SFAS No. 115Accounting for Certain Investments in Debt and Equity Securities (FASB ASC 320).

5. Define and discuss the two methods of estimating bad debts on receivables.

6. Why are cost flow assumptions used to determine inventory valuations? Define and explain the rationale for using each of the cost flow assumptions.

.

7. Obtain a companys financial statements and ask the students to compute the following:a. Working capitalb. Current ratioc. Acid test ratiod. Cash flow from operations to current liabilities ratioe. Accounts receivable turnoverf. Inventory turnover

Chapter 9

Multiple Choice

1. When a closely held corporation issues preferred stock for land, the land should be recorded at the a. Total par value of the stock issuedb. Total book value of the stock issuedc. Appraised value of the landd. Total liquidating value of the stock issued

Answer

2. A principal objection to the straight-line method of depreciation is that it a. Provides for the declining productivity of an aging assetb. Ignores variations in the rate of asset usec. Tends to result in a constant rate of return on a diminishing investment based. Gives smaller periodic write-offs than decreasing charge methods

Answer

3. Property, plant, and equipment are conventionally presented n the balance sheet ata. Replacement cost less accumulated depreciationb. Historical cost less salvage valuec. Original cost adjusted for general price level changesd. Acquisition cost less depreciated portion thereof

Answer

4. As generally used in accounting, depreciationa. Is a process of asset valuation for balance sheet purposesb. Applies only to long-lived intangible assetsc. Is used to indicate a decline in market value of a long-lived assetd. Is an accounting process that allocates long-lived asset cost to accounting periods

Answer

5. Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2011. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued ata. The present value of a $20,000 ordinary annuity for five yearsb. $120,000c. $120,000 less imputed interestd. $120,000 plus imputed interest

Answer

6. For income statement purposes, depreciation is a variable expense if the depreciation method used for book purposes is a. Units of production b. Straight linec. Sum-of-the-years-digitsd. Declining balance

Answer

7. A method that excludes salvage value from the base for the depreciation calculation is a. Straight lineb. Sum-of-the-years digitsc. Double-declining balanced. Productive output

Answer

8. When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building should bea. Expensed as incurredb. Added to the cost of the plantc. Added to the cost of the landd. Amortized over the estimated time period between the tearing down of the building and the completion of the plant

Answer

9. A machine with a four-year estimated useful life and an estimated 15 percent salvage value was acquired on January 1, 2010. On December 31, 2012, the accumulated depreciation using the sum-of-years digits method would be a. (Original cost less salvage value) multiplied by 9/10b. Original cost multiplied by 9/10c. Original cost multiplied by 9/10 less total salvage valued. (Original cost less salvage value) multiplied by 1/10

Answer

10. The theoretical justification for reporting depreciation expense isa. Depreciation expense represents a decrease in the value of the asset that has occurred during the accounting period.b. Depreciation expense represents the impairment of the asset that has occurred during the accounting period.c. Depreciation expense represents the unrealized loss that has been incurred by using the asset during the accounting period.d. Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period.

Answer

11. A company using the group depreciation method for its delivery trucks retired one of its delivery trucks due to damage before the average service life of the group was reached. An insurance recovery was received. The net book value of these group asset accounts would be decreased by thea. Original cost of the truckb. Original cost of the truck less the insurance recovery receivedc. Original cost of the truck less depreciation on the truck to the date of retirement d. Insurance recovery received

Answer

12. When equipment is retired, accumulated depreciation is debited for the original cost less any residual recovery under which of the following depreciation methods?

Composite Group Depreciation Depreciationa. No Nob. No Yesc. Yes Nod. Yes Yes

Answer

13. Recognizing depletion expense is an example of the accounting process of Allocation Amortizationa. No Nob. No Yesc. Yes Yesd. Yes No

Answer

14. A donated plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to itsa. Incidental costs incurredb. Fair value and incidental costs incurredc. Book value on books of donor and incidental costs incurredd. Book value on books of donor

Answer

Essay

1. List the objectives of accounting for property, plant and equipment.

2. Describe how cost is assigned to individual assets when they are acquired in a lump-sum group purchase.

3. Discuss the three approaches to allocating fixed overhead to a self-construction project.

4. Discuss the issue of allocating interest to self construction projects. That is, when should interest be allocated and how much interest should be allocated?

5. Explain the concept of commercial substance originally outlined in SFAS No. 158.

6. How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for donated assets?

7. Discuss the factors comprising the depreciation process.

8. Discuss the distinction between capital and revenue expenditures for long-term assets.

9. Define and discuss accounting for asset retirement obligations under SFAS No. 14FASB ASC 410-20.

10. Discuss the guidelines for accounting for property, plant and equipment outlined in IAS No. 16.

11. How does IAS no. 23 define borrowing costs?

12. Discuss accounting for the impairment of assets as outlined in IAS No. 36.

Chapter 10

Multiple Choice

1. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. Investor sells the investmentb. Investee declares a dividendc. Investee pays a dividendd. Earnings are reported by the investee in its financial statements

Answer

2. Pence Corporation, which accounts for its investments in the common stock of Walsh Company by the equity method, should ordinarily record a dividend received from Walsh asa. An addition to the carrying value of the investmentb. Dividend revenuec. A reduction of the carrying value of the investmentd. Revenue from affiliate

Answer

3. On January 15, 2002, a corporation was granted a patent on a product. On January 2, 2010, to protect its patent, the corporation purchased a patent on a competing product the originally was issued on January 10, 2008. Because of its unique plant, the corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should bea. Amortized over a maximum period of 17 yearsb. Amortized over a maximum period of 13 yearsc. Amortized over a maximum period of 9 yearsd. Expensed in 2010

Answer

4. Pacer Company purchased 300 of the 1, 000 outstanding shares of Queen Companys common stock for $80,000 on January 2, 2008. During 2009, Queen Company declared dividends of $8,000 and reported earnings for the year of $20,000.If Pacer Company uses the equity method of accounting for its investment in Queen Company, its Investment in Queen Company account at December 31, 2009 should bea. $100, 000b. $88,000c. $83,600d. $80,000

Answer

5. Refer to the facts in problem (4). If Pacer Company uses the lower of cost or market method of accounting for its investment in Queen Company, and the value of its investment hasnt changed, its Investment in Queen Company account on December 31, 2009, should bea. $100, 000b. $88,000c. $80,000d. $73,600

Answer

6. A large, publicly held company developed and registered a trademark during 2010. The cost of developing and registering the trademark should be accounted for bya. Charging it to an asset account that should not be amortizedb. Expensing it as incurredc. Amortizing it over 25 years if in accordance with managements evaluationd. Amortizing it over its useful life or 17 years, whichever is shorter

Answer

7. Goodwill should be written offa. As soon as possible against retrained earningsb. When there is evidence that its carrying value has been impaired c. By systematic charges against retained earnings over the period benefited, but not more than 40 yearsd. By systematic charges to expense over the period benefited, but not more than 40 years

Answer

8. A net unrealized loss on a companys long-term portfolio of available for sale securities should be reflected in the current financial statements as a. An extraordinary item shown as a direct reduction from retained earningsb. A current loss resulting from holding marketable equity securitiesc. A footnote or parenthetical disclosure onlyd. A component of other comprehensive income

Answer

9. Changes in the fair value of a long-term available for sale equity securities portfolio should be reported as a component of a. Other comprehensive incomeb. Noncurrent assetsc. Noncurrent liabilitiesd. Net income

Answer

10. Cash dividends declared out of current earnings are distributed to an investor. How will the investors investment account be affected by those dividends under each of the following accounting methods?Fair Value MethodEquity Method a. Decrease No effectb. Decrease Decreasec. No effect Decreased. No effect No effect

Answer

11. An activity that would be expensed currently as research and development costs is the a. Testing in search for or evaluation of product or process alternativesb. Adaptation of an existing capability to a particular requirement or customers need as a part of continuing commercial activityc. Legal work in connection with patent applications or litigation, and the sale or licensing of patentsd. Engineering follow-through in an early phase of commercial production

Answer

12. Should the following fees associated with the registration of an internally developed patent be capitalized? Registration Legal fees feesa. Yes Yesb. Yes Noc. No Yesd. No No

Answer

13. Which of the following assets acquired in 2010 are amortizable? Goodwill Trademarksa. No Nob. No Yesc. Yes Nod. Yes No

Answer

14. A purchased patent has a remaining life of 15 years. It should be a. Expensed in the year of acquisitionb. Amortized over 15 years regardless of its useful lifec. Amortized over its useful life if less than 15 yearsd. Amortized over 40 years

Answer

15. Which of the following amounts incurred in connection with a trademark should be capitalized? Cost of a Registration Successful defense feesa. Yes Nob. Yes Yes c. No Yesd. No No

Answer 16. Zink Company owns 32% of Ace Company's outstanding voting stock. Zink Company normally should account for its investment in Ace Company using thea. Fair value method.b. Cost method.c. Consolidation procedure. d. Equity method.

Answer

18. An investor purchased a bond as a long-term investment on January 1. Annual interest was received on December 31. The investors interest income for the year would be lowest if the bond was purchased ata. A discountb. A premiumc. Pard. Face value

Answer

19. The theoretical justification for expensing research and development (R&D) cost as it is incurred is based on which of the following arguments?a. R&D costs provide no future benefits, thus it does not meet the definition of an assetb. R&D costs are incurred to generate current period revenue, thus the matching concept requires that it be expensed as incurred.c. Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it does not meet the definition of an asset.d. Since R&D costs have been incurred during the current period, they meet the definition of an expense.

Answer

20. When a patent is successfully defended in court, the cost of the lawsuita. Should be expensed as incurred because it is a period cost.b. Should be added to the cost of the patent and depreciated over the remaining useful life of the patent.c. Should be added to the cost of the patent which is then expensed as a period cost.d. Has already been expensed so there is no further action to take.

Answer

21. Goodwill is an intangible asseta. That has a definite life and its cost should be amortized over its useful life.b. That is recorded when the company has projected earnings in excess of earnings expected for an investment in a similar company in the same industry.c. That is reviewed for impairment when circumstances indicate that impairment may have occurred. d. That is reviewed annually to determine whether impairment has occurred.

Answer

22. A trading security is measured at fair value on the balance sheet date and reported asa. A current asset, and changes in fair value are reported in earnings as unrealized gains and losses.b. A current asset, and changes in fair value are reported in earnings as realized gains and losses.c. Either a current or noncurrent asset depending on whether they meet the definition of a current asset.d. A current asset, and changes in fair value are reported in accumulated other comprehensive income as unrealized gains and losses.

Answer

23. Current accounting for an available-for-sale (AFS) security is consistent witha. The financial capital maintenance concept of income because AFS security unrealized gains and losses are reported in earnings.b. The financial capital maintenance concept of income because AFS security unrealized gains and losses are reports in other comprehensive income.c. The physical capital maintenance concept of income because AFS security unrealized gains and losses are reported in earnings.d. The physical capital maintenance concept of income because AFS security unrealized gains and losses are reported in other comprehensive income.

Answer

24. The physical capital maintenance concept of income would require that an investment in the common stock of another entity bea. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.b. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.

Answer

25. The economic concept of income would require that an investment in the common stock of another entity bea. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.b. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.

Answer26. Under the fair value option, an investment in the common stock of another entity will be

a. Reported as a current assetb. Reported as a noncurrent assetc. Reported as either a current or noncurrent asset depending on managerial intent.d. Reported as a current asset only if it was not previously reported as an equity method investment.

Answer

27. When a company reports goodwill in its balance sheet, we know thata. It was internally generated because the company has earnings in excess of those of other companies in the industry.b. The company purchased it.c. The company will be reporting amortization expense for the goodwill.d. The company will not be reporting an impairment loss for the goodwill.

AnswerEssay

1. How are income and balance sheet values determined under the equity method?

2. Discuss accounting for equity securities under the cost method.

3. Discuss accounting for equity securities under the SFAS No. 115 now contained at FASB ASC 320.

4. Summarize the accounting requirements for investments in equity securities. That is, what methods are available and when is each method appropriate?

5. Discuss the use of the fair value option originally described in SFAS No. 159 now contained at FASB ASC 825-10.

6. Discuss accounting for investments in debt securities.

7. What is an intangible asset? How is the cost of an intangible asset amortized?8. What is goodwill? How is goodwill written off under the provisions of SFAS No. 142 now FASB ASC 350?

9. Define research and development. How are research and development costs recorded

10. How does IAS No 39 define fair value?

Chapter 11

Multiple Choice

1. A loss from early extinguishment of debt, if material, should be reported as a component of income a. After cumulative effect f accounting changes and after discontinued operations of a segment of a businessb. After cumulative effect of accounting changes and before discontinued operations of a segment of a business c. Income from continuing operationsd. Before cumulative effect of accounting changes and before discontinued operation s of a segment of a businessAnswer

2. Unamortized debt discount should be reported on the balance sheet of the issuer asa. A direct deduction from the face amount of the debtb. A direct deduction from the present value of the debtc. A deferred charged. Part of the issue costs

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3. An example of an item that is not a liability is a. Dividends payable in stockb. Advances from customers on contractsc. Accrued estimated warranty costsd. The portion of long-term debt due within one year

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4. If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the earlier years will be a. Greater than if the compound interest method were usedb. The same as if the compound interest method were usedc. Less than if the compound interest method were usedd. Less than the amount of the interest payments

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5. Cole Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue. If the bonds were issued at a premium, this indicates that a. The yield (effective or market) rate of interest exceeded the nominal (coupon) rateb. The nominal rate of interest exceeded the yield ratec. The yield and nominal rates coincidedd. No necessary relationship exists between the two rates

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6. Trading on the equity (financial leverage) is likely to be a good financial strategy for stockholders of companies havinga. Cyclical high and low amounts of reported earningsb. Steady amounts of reported earningsc. Volatile fluctuation in reported earnings over short periods of timed. Steadily declining amounts of reported earnings

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7. Theoretically, a bond payable should be reported at the present value of the interest discounted at a. Stated interest rate for both principal and interestb. Effective interest rate for both principal and interestc. Stated interest rate for principal and effective interest rate for interestd. Effective interest rate for principal and stated interest rate for interest

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8. A threat of expropriation of assets that is reasonably possible, and for which the amount of loss can be reasonably estimated, is an example of a (an)a. Loss contingency that should be disclosed, but not accruedb. Loss contingency that should be accrued and disclosedc. Appropriation of retained earnings against which losses should be chargedd. General business risk which should not be accrued and need not be disclosed

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9. When it is necessary to impute an interest rate in connection with a note payable, the rate should bea. Two-thirds of the prime rate effective at the time the obligation is incurredb. The same as that used in the GNP Implicit Price Deflatorc. At least equal to the rate at which the debtor can obtain financing of a similar nature from other sources at the date of the transactiond. As near zero as can be justified

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10. Taft Company sells Lee Company a machine, the usual cash price of which is $10,000, in exchange for an $11,800 non-interest-bearing note due three years from date. If Taft records the note at $10,000, the overall effect will bea. A correct sales price and correct interest revenueb. A correct sales price and understated interest revenuec. An understated sales price and understated interest revenued. An overstated interest price and understated interest revenue

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11. In the situation described in problem 10, if Lee records the asset and note at $11,800, the overall effect will bea. A correct acquisition cost and correct interest expenseb. A correct acquisition cost and understated interest expensec. An understated acquisition cost and understated interest expensed. An overstated acquisition cost and understated interest expense

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12. How would the amortization of premium bonds payable affect each of the following?Carrying value of Bond Net Incomea. Increase Decreaseb. Increase Increasec. Decrease Decreased. Decrease Increase

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13. For a trouble debt restructuring involving only modification of terms, it is appropriate for a debtor to recognize a gain when the carrying amount of the debta. Exceeds the total future cash payments specified by the new termsb. Is less than the total future cash payments specified by the new termsc. Exceeds the present value specified by the new termsd. Is less than the present value specified by the new terms

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14. How should the value of warrants attached to a debt security be account for?a. No value assignedb. A separate portion of paid-in capitalc. An appropriation of retained earningsd. A liability

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15. For the issuer of a 10-year term bond, the amount of amortization using the interest method would increase each year if the bond was sold at a DiscountPremiuma. No Nob. Yes Yesc. No Yesd. Yes No

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16. Gain contingencies are usually recognized in the income statement whena. Realizedb. Occurrence is reasonably possible and the amount can be reasonably estimatedc. Occurrence is probable and the amount can be reasonably estimatedd. The amount can be reasonably estimated

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17. An estimated loss from a loss contingency should be accrued whena. It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss can be reasonably estimatedb. The loss has been incurred by the date of the financial statements and the amount of the loss may be materialc. It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss may be materiald. It is probable that a loss will be incurred in a future period and the amount of the loss can be reasonably estimated

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18. When the issuer of bonds exercises the call provision to retire the bonds, the excess of the cash paid over the carrying amount of the bonds should be recognized separately as a (an)a. Extraordinary lossb. Extraordinary gainc. Loss from continuing operationsd. Loss from discontinued operations

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19. A two-year note was issued in an arms-length transaction at face value solely for cash at the beginning of the year. There were no other rights or privileges exchanged. The interest rate is specified at 10 percent per year. Principal and interest are payable at maturity. The prevailing rate of interest for a loan of this type is 15 percent per year. What annual interest rate should be used to record interest expense for this year and next year? This year Next Yeara. 10 percent15 percentb. 10 percent10 percentc. 15 percent10 percentd. 15 percent15 percent

Answer20. The interest rate used to calculate the cash interest payments by the issuer of bonds isa.The market rate of interestb.The effective interest ratec.The stated interest rated. Equal to the actual interest expense rate

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21. Ace Corporation has a debt to total assets ratio of 65%. This tells the user of Aces financial statementsa. Ace is getting a 35% return on its assetsb. There is a risk Ace cannot pay its debts as they come duec. 65% of the assets are financed by the stockholdersd. Ace should issue more debt to reduce its risk

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22. Trading on the equity (leverage) refers to thea.Amount of working capitalb.Amount of capital provided by ownersc.Use of borrowed money to increase the return to ownersd.Number of times interest is earned

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23. The current accounting treatment for convertible debt is to treat it as straight debt. This treatment can be defended on what basis?

a. Convertible debt is a complex financial instrument.b. Convertible debt comprises two financial instruments a debt instrument and the option to convert.c. The debt instrument and the option to convert are not separable.d. The option to convert is equity.

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24. XYZ Companys yearend is December 31, 20x1 and its financial statements are issued in the following March. On January 24, 20x2. A 10 year note payable came due and was paid by issuing XYZ common stock to the creditor. In its December 31, 20x1 balance sheet, XYZ shoulda. Report the note as a current liability because it was due on January 24, 20x2 only 24 days after the year end.b. Report the note as a long-term liability because it was not paid off with a current asset or replaced by another current liability.c. Report the note as a long-term liability because it was extinguished (paid off) on January 24, 20x2 only 24 days after the year end.d. Report the note as a long-term liability because it was a 10 year note.

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25. A zero coupon bond is different from a typical bond issue becausea. The investor can clip the coupons and get paid for the periodic interest on the bond while a typical bond does not have coupons.b. It is reported in the balance sheet net of the discount on the bond.c. The zero coupon bonds deep discount is reported as an asset and a typical bond that is issued at a discount is reported net of the discount. d. It does not pay any periodic interest while the typical bond does.

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26. An unearned revenue is an example of a(an)a. Deferred credit.b. Accrued liability.c. Customer billing that takes place before a job is finished.d. Accounts receivable.

Answer 27. A deferred credit meets the definition of a liability becausea. It is a probable future sacrifice of assets as the result of a past transaction or event.b. It is a present obligation to transfer assets to another entity.c. It is an accrual representing an obligation to pay money in the future.d. It is a present obligation to provide services to another entity.

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28. The physical capital maintenance concept of income would require that a companys bonds payable bea. Reported in the balance sheet at their amortized issue price and that changes in their market values be reported in earnings.b. Reported in the balance sheet at their amortized issue price and that changes in their market values not be reported in earnings.c. Reported in the balance sheet at their fair market values and that changes in their market values be reported in earnings.d. Reported in the balance sheet at their fair market values and that changes in their market values be reported in other comprehensive income.

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29. ABC Company has a note payable that is due six months after its year end. Under which of the following conditions will ABC be able to classify the note as a long term debt.a. ABC cannot classify the note as long term because it is due within the current operating cycle or one year, whichever is longer.b. ABC can classify the note as long term because it is due next year.c. ABC can classify the note as long term because management intends to refinance it with long term debt and has an agreem