ACCT 370 Quiz 1 Introduction to Financial Reporting solutions complete answers

ACCT 370 Quiz 1 Introduction to Financial Reporting solutions complete answers 

 

Which of the following statements is correct regarding reporting of “Extraordinary gains and losses” as a separate category on the income statement?

 

When adjusting accrual earnings to obtain cash flows from operations, an increase in Prepaid Rent Expense is subtracted to arrive at cash flow from operations.

 

The Barden Company provides the following trial balance as of December 31, 20X1.

 
 
Debit
 
Credit
Cash and cash equivalents
 
$
345,000
 
 
 
 
 
Accounts receivable
 
 
115,000
 
 
 
 
 
Inventory
 
 
120,000
 
 
 
 
 
Prepaid insurance
 
 
7,500
 
 
 
 
 
Prepaid rent
 
 
40,000
 
 
 
 
 
Equipment
 
 
265,000
 
 
 
 
 
Accumulated depreciation – Equipment
 
 
 
 
 
 
65,000
 
Accounts payable
 
 
 
 
 
 
45,000
 
Accrued liabilities
 
 
 
 
 
 
10,000
 
Notes payable, due in 2020
 
 
 
 
 
 
135,000
 
Common stock
 
 
 
 
 
 
300,000
 
Additional paid-in capital
 
 
 
 
 
 
87,500
 
Retained earnings
 
 
 
 
 
 
250,000
 
Total
 
$
892,500
 
 
$
892,500
 
 
What would Barden report as total stockholders’ equity on its balance sheet?

 

Which of the following statements is not true regarding the cash flow statement?

 

Which of the following statements is not true?

 

The U.K. Equity account "Hedging reserve" is reported on a U.S. GAAP balance sheet as

 

The balance sheet provides information on all of the following except:

 

Balance sheet amounts would not be measured as:

 

Which of the following statements is not true regarding the adoption of ASC Topic 606 guidance for revenue recognition?

 

In accounting for revenue recognition under ASC Topic 606, when there is a modification of a contract, which of the following is correct?

 

Under ASC Topic 606 for revenue recognition, which of the following factors is not an indicator of the principal/agent determination?

 

Under ASC Topic 606 for revenue recognition, which of the following statements is not accurate regarding performance obligations?

 

Payments to a customer for slotting fees:

 

Hargren Publishing offers its Accounting textbooks as e-texts through its online homework management system. Purchase of an access code provides the student with access to the e-text and online learning materials for six months. During that time, students have access to updates to the text and learning materials. Hargren should recognize revenue for purchases of access codes:

 

Under the ASC Topic 606, which of the following statements is not a criteria that may determine whether revenue may be recognized over time?

 

Which of the following statements is not true regarding the software developer example provided in ASC Topic 606 guidance for revenue recognition?

 

Under ASC Topic 606 for revenue recognition, a performance obligation is considered satisfied when control over the goods and services is transferred to the customer. Which of the following is not an indicator that control has transferred?

 

Which of the following statements is true regarding the new ASC Topic 606 for revenue recognition?

 

To get revenue and expense account balances to zero requires a/an:

 

Which of the following statements is correct regarding revenue and expense accounts?

 

A debit does which of the following?

 

Other Comprehensive Income (OCI) is used both in U.S. GAAP and IFRS. Which of the following statements is correct?

 

When actuarial estimates related to defined benefit pension plans are adjusted:

 

When analysts provide basic EPS for income from continuing operations that exclude the effects of special (i.e., nonrecurring) gains or losses and certain other non-cash charges, such earnings are frequently referred to as:

 

Black & Decker decides to discontinue producing toasters in lieu of more versatile toaster ovens. In the process of discontinuing this line, the company disposes of the old production equipment and buys new equipment. The disposal of the old equipment would be reported in the income statement as:

 

A component of an entity may be a/an:

 

When reporting unusual or infrequent items in the income statement which of the following is not correct?

 

The statement, "linkage between these costs and individual sales is difficult to establish," refers to

 

The matching principle requires that expenses be recognized:

 

The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

Under the accrual basis, how much revenue should Canon recognize in November?

 

Which of the following is not correct with respect to accrual accounting?

 

Which of the following does not describe how FASB endeavors to draft pronouncements?

 

Which of the following is not an accurate statement related to the demand for financial reporting?

 

When a company changes from straight-line to the declining balance method of accounting for depreciation, the financial statements lack:

 

Which of the following create a competitive disadvantage according to the full disclosure principle?

 

When financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the _____________ function of financial reports.

 

Business enterprises enter into many different types of contracts. Examples of such contracts that often contain language that refers to verifiable financial statement numbers include all of the following except:

 

Which of the following may cause fully diluted EPS to differ from basic EPS?

 

Muenster Company sells its network servers with a warranty than includes preventive maintenance. Muenster should account for the warranty as a(n):

 

Losses must be accrued if they are:

 

1.
A 3-for-1 stock split will reduce the per share par value and will
 
 
2.
accounting errors or irregularities can occur for what reason?
 
 
3.
Accrual accounting net income can differ from operating cash flows for all of the following reasons except:
A) future pension and healthcare benefits.
B) estimates of uncollectible accounts. 
C) useful lives of assets. 
D) dividend declaration and payment dates.
 
 
4.
Assuming the requirements for recognizing revenue over time are met, and using the
percentage-of-completion method to recognize revenue, the measure of completion is
computed by dividing:
 
 
5.
A balance sheet prepared in accordance with U.S. GAAP typically:
 
 
6.
The balance sheet provides information on all of the following except:
A) where the money came from. 
B) assessing rates of return. 
C) how management invested its money. 
D) the market price of the company’s stock.
 
 
7.
Balance sheets prepared under IFRS:
 
 
8.
Being verifiable and neutral is part of what makes financial information
 
 
9.
The best measure of a firm’s sustainable income is
 
 
10.
Cash collected from customers can be derived:
 
 
11.
The cash flow from operating activities:
 
 
12.
The cash flow statement of the company is in process for 2019. They are reporting the following balances:
12/31/18 12/31/19
Equipment $ 100,000 $ 170,000
Loss on sale of equipment 0 10,000
Accumulated dep.—equipment 75,000 95,000
During 2019, they sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash. Equipment purchases in 2019 were:
 
 
13.
The cash flow statement of the company is in process for 2019. They are reporting the following balances:
12/31/18 12/31/19
Equipment $ 100,000 $ 170,000
Loss on sale of equipment 0 10,000
Accumulated dep.—equipment 75,000 95,000
During 2019, they sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash. If these were the only investing activities, the cash flow from investing activities is a net cash:
 
 
14.
Changes in the balance sheet accounts at June 30, 2018 and 2019 for the Company are presented below:
Assets
Cash $ 480,000
Accounts receivable 200,000
Inventory 300,000
Long-term investments 200,000
Equipment (200,000 )
Accumulated depreciation (60,000 )
Liabilities and Stockholders’ Equity
Accounts payable $ (40,000 )
Dividends payable 400,000
Notes payable—Current (200,000 )
Notes payable—Long-term 400,000
Common stock, $1.00 par 300,000
Additional paid-in capital 100,000
Retained earnings 80,000
Additional Information for 2019:
-Net income was $480,000 and dividends of $400,000 were declared.
-Common stock was issued for cash.
-A new long-term investment was acquired for $360,000.
-A long-term investment was sold for $160,000.
-Equipment that cost $600,000 was sold for $200,000. -The book value of those assets was $150,000.
The cash flow from financing activities for 2019 is a:
 
 
15.
Changes in the balance sheet accounts at June 30, 2018 and 2019 for the Company are presented below:
Assets
Cash $ 480,000
Accounts receivable 200,000
Inventory 300,000
Long-term investments 200,000
Equipment (200,000 )
Accumulated depreciation (60,000 )
Liabilities and Stockholders’ Equity
Accounts payable $ (40,000 )
Dividends payable 400,000
Notes payable—Current (200,000 )
Notes payable—Long-term 400,000
Common stock, $1.00 par 300,000
Additional paid-in capital 100,000
Retained earnings 80,000
Additional Information for 2019:
-Net income was $480,000 and dividends of $400,000 were declared.
-Common stock was issued for cash.
-A new long-term investment was acquired for $360,000.
-A long-term investment was sold for $160,000.
-Equipment that cost $600,000 was sold for $200,000. -The book value of those assets was $150,000.
The gain on the sale of equipment for 2019 is:
 
 
 
 
 
 
 
 
 

16.
Changes in the balance sheet accounts at June 30, 2018 and 2019 for the Company are presented below:
Assets
Cash $ 480,000
Accounts receivable 200,000
Inventory 300,000
Long-term investments 200,000
Equipment (200,000 )
Accumulated depreciation (60,000 )
Liabilities and Stockholders’ Equity
Accounts payable $ (40,000 )
Dividends payable 400,000
Notes payable—Current (200,000 )
Notes payable—Long-term 400,000
Common stock, $1.00 par 300,000
Additional paid-in capital 100,000
Retained earnings 80,000
Additional Information for 2019:
-Net income was $480,000 and dividends of $400,000 were declared.
-Common stock was issued for cash.
-A new long-term investment was acquired for $360,000.
-A long-term investment was sold for $160,000.
-Equipment that cost $600,000 was sold for $200,000. -The book value of those assets was $150,000.
The purchase of equipment during 2019 is:
 
 
17.
Companies that have projected operating cash flow that are more than sufficient to meet debt payments are:
 
 
18.
Companies with a history of net operating losses are prone to issue which one of the
following to raise money?
 
 
19.
A company decides to discontinue producing toasters in lieu of more versatile
toaster ovens. In the process of discontinuing this line, the company disposes of the old
production equipment and buys new equipment. The disposal of the old equipment
would be reported in the income statement as:
 
 
20.
A company discovered that equipment purchased on January 1, 2018 for $300,000 will not last as long as originally estimated. The firm was depreciating the equipment at the rate of $40,000 per year with an estimated salvage value of $20,000. New estimates on January 1, 2021 indicate that the equipment will last a total of five years with no salvage value. How much should the company record as depreciation in 2021?
 
 
21.
A company has the following shareholders’ equity accounts at December 31, 2018:
Preferred stock, $100 par value, 10% dividend, 50,000 shares issued and outstanding $5,000,000
Common stock, $6 par value, 1 million shares issued and outstanding $6,000,000
Paid-in capital in excess of par $119,000,000
Unrestricted retained earnings $7,500,000
RE restricted for plant expansion $2,500,000
Assuming that the preferred stock is cumulative, and that there are no dividends in arrears, what is the maximum dividend that may be distributed to common shareholders at December 31, 2018?
 
 
22.
A company installs and maintains manufacturing equipment. The contract with
its customers to purchase equipment includes installation and includes a one-year
maintenance contract, renewable for up to five years. Because the useful life of the
equipment is expected to be five years, the company can reasonably expect its
customers to renew the maintenance contracts for the full five years. The company records the
cost of installation of the equipment as a capitalized contract and amortizes the cost over the five-year maintenance agreement period. Because of a defect in model A5403, the company anticipates that many of its customers will trade in the model and not renew the maintenance contracts. The company should,
 
 
23.
A company is building a large complex for a contract price of $5,000,000. This is a three-year project and the requirements for recognizing revenue over time are met. The total estimated cost of the project is $4,000,000 and the following information is available:
($ in thousands) Year 1 Year 2 Year 3
Costs incurred $ 1,000 $ 1,500 $ 1,250
Est. com. costs $ 3,000 $ 1,500 $ 0
Billings $ 750 $ 1,750 $ 2,500
Cash collected $ 500 $ 1,500 $ 3,000
Using the percentage-of-completion method of revenue recognition, how much income is recognized in Year 2?
 
 
24.
A company records revenue on the installment sales method, prior to ASC Topic 606 for revenue recognition. The following information is available for the first two years of business. 
Year 1 Year 2
Sales $ 200,000 $ 250,000
COGS 140,000 162,500
Cash collections:
Yr 1 sales 100,000 80,000
Yr 2 sales 130,000
Assume that the company has consistently recognized revenue on installment sales using the cost recovery method. How much realized gross profit on installment sales will Ford recognize in Year 1?
 
 
25.
A company reported net income for 2018 of $100,000. The company reported depreciation expense of $17,500 and amortization of $5,000. The company also reported a loss on the sale of equipment of $2,500. Based only on this information, the company would report cash flow from operating activities of:
 
 
26.
A company reported net income for 2018 of $177,500. They began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, they sold 10,000 shares of common stock for $6 per share. They paid dividends to the common shareholders in December. The basic earnings per share for 2018 is:
 
 
27.
A company reported net income for 2018 of $177,500. They began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, they sold 10,000 shares of common stock for $6 per share. They paid dividends to the common shareholders in December. The weighted average number of common shares used to compute earnings per share for 2018 is
 
 
28.
A company reported net income of $770,000 for 2018. They sold 15,000 shares of treasury stock acquired in a previous year on July 1 and 15,000 new shares on
November 1. At year-end, 180,000 shares were outstanding. They had 20,000 shares of
$100 par value 7% preferred stock outstanding all year. They paid dividends to the preferred shareholders. The basic earnings per share for 2018 is:
 
 
29.
A company’s financial statements reflect information about: 
 
 
 
 
 
 
 
 
 

30.
A company’s retained earnings on December 31, 2018 was $2,190,000 and its shareholders’ equity was $8,760,000. During 2019 the company reported the following:
-Net income $225,000
-A sale of treasury stock costing $75,000 for $79,750
-A treasury stock purchase costing $125,700
-A cash dividend declaration of $73,200
-A 10,000 share “small” common stock ($10 par value) dividend was declared and distributed when the market value was $12.75 per share.
What is the shareholders’ equity balance on December 31, 2019?
 
 
31.
Contributed capital might be a negative dollar amount because:
 
 
32.
A corporation reported the following during 2018:
-Net income $175,250
-Sale of 10,000 shares of $5 par value common stock for $8.75 per share
-A repurchase of shares as treasury stock, costing $24,750
-A resale of treasury stock for $14,695; the shares cost $15,500 when repurchased.
-A declaration and distribution of a $39,000 cash dividend
-A declaration and distribution of a “small” stock dividend of 5,000 shares of $5 par value common stock at a total market value of $50,000.
What was the increase in shareholders’equity during 2018?
 
 
33.
Creditors assess credit risk by comparing a firm’s required principal and interest payments to estimates of the firm’s current and future
 
 
34.
Current liabilities are reported on the balance sheet at:
 
 
35.
A decrease in accounts receivable of $16,000 for the year:
 
 
36.
The denominator used in the calculation of basic earnings per share is the:
 
 
38.
Employee demand financial information for all the following EXCEPT:
A) monitoring how much the senior executives earn
B) monitoring union contracts that link negotiated wage increases to company financial performance
C) monitoring profit sharing and stock ownership plans
D) monitoring the health of company pension plans
 
 
39.
Examples of variable consideration include all of the following except:
A) bonuses for completing performance on a contract early. 
B) discounts on transaction prices. 
C) penalties for not completing performing on a contract on time. 
D) all of the answer choices are correct.
 
 
41.
financial information capable of making a difference in a decision is:
 
 
42.
financial information which does not favor one set of interested parties over another is:
 
 
43.
The following data is for a company for 2018:
Gain on sale of equipment $ 8,000
Purchase of bonds (face value $250,000) 275,000
Proceeds from sale of machinery 300,000
Dividends paid 50,000
Proceeds from sale of treasury stock 200,000
The amount reported as net cash provided by financing activities is
 
 
44.
The following data is for the company for 2018:
Loss on sale of equipment $ 4,000
Purchase of bonds (face value $400,000) 375,000
Proceeds from sale of machinery 200,000
Dividends paid 25,000
Proceeds from sale of treasury stock 100,000
The amount reported as net cash from investing activities is:
 
 
45.
The following information has been obtained from a company:
-550,000 shares of common stock were outstanding on January 1, 2018.
-Bonds convertible into 50,000 shares of common stock were issued on July 1, 2018; the bonds have been determined to be dilutive.
-36,000 shares of common stock were issued on November 1, 2018.
-24,000 shares of common stock were purchased on December 1, 2018.
What is the weighted average number of shares to be used in the calculation of diluted
earnings per share for 2018?
 
 
46.
The following information has been provided to you by a company for the year ending December 31, 2018:
-Net income was $979,000.
-Cash dividends totaling $120,000 were paid to the common shareholders.
-6% convertible bonds with a par value of $2,000,000 were issued on February 1, 2018.
-The corporation’s marginal income tax rate is 40%.
-6% convertible preferred stock with a par value of $800,000 was outstanding during the entire year.
Assuming that both the bonds and preferred stock are dilutive, what is the numerator that should be used in the calculation of basic earnings per share and diluted earnings per share?
 
 
47.
The following information has been provided to you by a company for the year ending December 31, 2018:
-The numerator used in the calculation of basic earnings per share was $797,000.
-Cash dividends were paid to the common shareholders.
-8% convertible bonds with a par value of $1,000,000 were issued on July 1, 2018.
-The corporation’s marginal income tax rate is 40%.
-6% convertible preferred stock with a par value of $800,000 were outstanding during the entire year.
Assuming that both the bonds and preferred stock are dilutive, what is the numerator
that should be used in the calculation of diluted earnings per share?
 
 
 
 
 
 
 
 
 

48.
The following information has been provided to you by a company:
Net income $ 175,300
Increase in accounts payable 18,500
Increase in inventory 17,500
Increase in accounts receivable 9,700
Increase in bonds payable 75,000
Amortization of bond premium 5,400
Depreciation expense 21,300
Decrease in income taxes payable 7,300
What is their net cash flow from operating activities?
 
 
49.
The following information has been provided to you by your controller:
Net income $ 100,000
Decrease in accounts payable $ 38,000
Decrease in inventory $ 7,500
Increase in accounts receivable $ 8,000
Decrease in bonds payable $ 75,000
Amortization of bond discount $ 9,400
Depreciation expense $ 20,000
Increase in income taxes payable $ 6,000
What is the net cash flow from operating activities?
 
 
50.
head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. A decrease in the balance of the Accounts Receivable account would:
 
 
51.
head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. An
increase in the Computer Equipment account would:
 
 
52.
If consideration is received before a contract is identified and the consideration is
nonrefundable, revenue may be recognized if:
 
 
53.
In 2017, a company was contracted to build an apartment complex for its client. The project was estimated to cost $15 million; however, on December 31, 2017, when the project was 75% complete. The company estimated that the project costs would be much less, and agreed to adjust the contract
price to $10 million. Prior to December 31, 2017, they had recognized revenue of $10 million. At year end, the company should:
 
 
54.
An increase in accounts receivable of $6,000 for the year:
 
 
55.
in designing audit procedures the auditor will include all of the following except:
A) Global economic trends
B) Industry conditions
C) Assessing the reasonableness of the numbers in relation to the company’s activities
D) Fraud risk factors that may be present
 
 
56.
The indirect method of presenting cash flow from operating activities
 
 
57.
Initial franchise fees should be recorded as revenue by the franchisor:
 
 
58.
Internet companies that simply act as agent or broker for the transfer of goods must
record revenue based on:
 
 
59.
investors who follow a fundamental analysis approach:
 
 
60.
the matching principle requires that expenses be recognized
 
 
61.
misstatements of tax expense, improper restructuring charges, asset impairment charges and gains/losses related to acquisitions are which type of restatement?
 
 
62.
net income recognition always increases:
 
 
63.
Net property, plant and equipment are reported on the balance sheet at:
 
 
64.
On balance sheets prepared in accordance with U.S. GAAP:
 
 
65.
On January 1, 2018, a company adopted a compensatory stock option plan and granted its managers 10,000 options to buy shares of common stock; each option can be used to acquire a share of common stock at a price of $25 a share. The fair value of each option was $7.50 on January 1, 2018. The options can be converted into common stock
after July 1, 2018. The required service period is three years. What is the balance in paid-in capital-stock options as of December 31, 2019 assuming
that the fair value approach to accounting for stock options is used?
 
 
66.
On January 1, 2018, a company signed a contract to inspect and complete needed repairs to the water lines for the town of Pleasantville. Because the company will not know which water lines will need repairs until after it completes the inspections, it is
difficult to accurately estimate the amount it will charge the town. Therefore, the company will recognize revenue for the contract using the completed-contract method. The work is expected to be completed in 2020. Using a completed-contract method prior to ASC Topic 606 for revenue recognition, if the company had $1.5 million in its Construction In Progress Inventory account and billings to Pleasantville of $2 million as of December 31, 2018, how much net income should the company recognize for 2018?
 
 
67.
Other Comprehensive Income (OCI) is used both in U.S GAAP & IFRS. Which statement is correct?
A) Both IFRS & GAAP require companies to report in other comprehensive income each period and valuation changes from changes in actuarial estimates affecting defined benefit pension plans
B) As a general rule, US GAAP allows more opportunities for managers to change balance sheets valuations of certain assets even when management has no intention to sell the assets
C) Changes in the valuation of property, plant, and equipment create a Revaluation Surplus used in both IFRS and US GAAP
D) US GAAP requires a separate statement of OCI to immediately follow the income statement in the financial reporting statement
 
 
68.
Recent changes in ______ accounting standards require companies to group items within OCI based on ____
 
 
 
 
 
 
 
 
 

69.
Revenue for goods to be sold under a consignment arrangement of a manufacturer and a
retail store should be recognized by the manufacturer when:
 
 
70.
The Revised Model Business Corporation Act defines solvency as a situation where the fair value of:
 
 
71.
A right of return exists when:
A) the customer is entitled to a full or partial refund, B) the customer is entitled to another product in exchange, 
C) if the customer is entitled to a credit against amounts owed. 
D) any one of these conditions is met.
 
 
72.
Selected data for a company’s comparative balance sheets for Year 1 and Year 2 are as follows:
Year 1 Year 2
Assets
Cash $100,000 $(50,000 )
AR (net) 50,000 100,000
Inventory 100,000 250,000
Equipment 300,000 350,000
--------------------------------------
Total assets $550,000 $650,000
Liabilities and Equity
AP $150,000 100,000
Taxes Payable80,000 30,000
Bonds payable100,000 80,000
Common stock100,000 200,000
RE 120,000 240,000
--------------------------------------
Total L&E $ 550,000 $ 650,000
The change in the balance of the Bonds Payable account would be recorded on the statement of cash flows as:
 
 
73.
Selected data for a company’s comparative balance sheets for Year 1 and Year 2 are as follows:
Year 1 Year 2
Assets
Cash $100,000 $(50,000 )
AR (net) 50,000 100,000
Inventory 100,000 250,000
Equipment 300,000 350,000
--------------------------------------
Total assets $550,000 $650,000
Liabilities and Equity
AP $150,000 100,000
Taxes Payable80,000 30,000
Bonds payable100,000 80,000
Common stock100,000 200,000
RE 120,000 240,000
--------------------------------------
Total L&E $ 550,000 $ 650,000
The change in the balance of the common stock account would be recorded on the
statement of cash flows as:
 
 
74.
Selected data for a company’s comparative balance sheets for Year 1 and Year 2 are as follows:
Year 1 Year 2
Assets
Cash $100,000 $(50,000 )
AR (net) 50,000 100,000
Inventory 100,000 250,000
Equipment 300,000 350,000
--------------------------------------
Total assets $550,000 $650,000
Liabilities and Equity
AP $150,000 100,000
Taxes Payable80,000 30,000
Bonds payable100,000 80,000
Common stock100,000 200,000
RE 120,000 240,000
--------------------------------------
Total L&E $ 550,000 $ 650,000
The changes in the Accounts Payable balance would be recorded on the statement of
cash flows as:
 
 
75.
Selected data for a company’s comparative balance sheets for Year 1 and Year 2 are as follows:
Year 1 Year 2
Assets
Cash $100,000 $(50,000 )
AR (net) 50,000 100,000
Inventory 100,000 250,000
Equipment 300,000 350,000
--------------------------------------
Total assets $550,000 $650,000
Liabilities and Equity
AP $150,000 100,000
Taxes Payable80,000 30,000
Bonds payable100,000 80,000
Common stock100,000 200,000
RE 120,000 240,000
--------------------------------------
Total L&E $ 550,000 $ 650,000
Using the indirect method to create the operating activities section of the statement of
cash flows, the cash flow recorded based on the change in inventory would be:
 
 
76.
The statement of cash flows is used by outside parties in all but which of the following
ways?
A) To assess if the proper amount of income taxes is reported and can be paid from current funds. 
B) To assess credit risk, as cash flows provide the resources for periodic interest and principal repayment. 
C) To assess whether to underwrite an issue of debt or equity securities, using the firm’s expected operating cash flows in the analysis. 
D) To assess equity values since the firm’s value is dependent on the discounted present value of its expected future cash flows.
 
 
 
 
 
 
 
 
 

77.
which of the following statements is not correct regarding a company’s financial statements?
 
 
78.
the type of analysis that uses financial statements to assess a company’s current market price is:
 
 
79.
The U.K. Equity account “Share premium” is reported on U.S. GAAP balance sheets as:
 
 
80.
Under the indirect method, the gain on sale of equipment should be:
 
 
81.
What describes efficient market investors?
 
 
82.
What isn’t a change in reporting entity?
 
 
83.
What isn’t correct of Regulation Fair Disclosure?
A) It limits what management can say in private conversations with analysts and investors
B) It helps level the playing field between individual and institutional investors
C) it was passed by the SEC
D) it does not limit what management can say in private conversations with analysts or investors
 
 
84.
When analysts provide basic EPS for income from continuing operations that exclude the effects of special (i.e nonrecurring) gains or losses other non-cash chargers, such as earnings are frequently referred to as:
 
 
85.
when financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the ______ function of financial reports.
 
 
86.
When independent measurers get similar results when using the same accounting measurement methods, the financial information is:
 
 
87.
Which of the following does not accurately describe the “ownership” perspective of the firm?
A) Its focus is on owners’ capital. 
B) Its focus is on the firm’s net capital deployed. 
C) It is the prevailing view of GAAP. 
D) It requires that financing transactions generate income or loss
 
 
88.
Which of the following is not an accurate statement related to the demand for financial reporting?
A) Cross-country differences have no impact on capital funding opportunities and financial reporting practices
B) Economically realistic reporting standards are low when there are few important capital providers 
C) External investors who provide capital demand a reporting system that accurately depicts a company past economic performance and its future prospects
D) Comprehensive financial data is demanded when there is broad base of external investors
 
 
89.
Which of the following is not correct with respect to accrual accounting?
A) Accrual accounting does not decouple measured earnings from operating cash inflows and outflows
B) Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance
C) Accrual accounting can produce large discrepancies between the firm’s reported profit performance and the amount of cash generated from operations
D)the principle that govern revenues and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting
 
 
90.
Which of the following statements does not apply to the installment sales method?
A) The deferred gross profit account is generally classified as a contra-account to accounts receivable. B) The accounting system must match cash collections with the specific sales year to which the cash collections relate. 
C) Deferred gross profit on installment sales is generally treated as a deduction from
installment sales in calculating the gross profit percentage. 
D) Selling, general and administrative expenses related to installment sales are treated
as period costs.
 
 
91.
Which of the following statements does not correctly describe an adjustment to net
income in determining cash flows from operating activities when using the indirect
method?
A) Amortization of bond premium will be deducted from net income. 
B) An increase in inventory will be added to net income. 
C) An increase in accounts payable will be added to net income.
D) A decrease in accounts receivable will be added to net income.
 
 
92.
Which of the following statements is correct if treasury stock costing $25,000 was sold
for $27,500?
 
 
93.
Which of the following statements is correct when a company has a complex capital
structure?
A) The company might have convertible bonds outstanding. 
B) Diluted earnings per share and basic earnings per share must both be shown on the income statement. C) Diluted earnings per share must be shown on the income statement. 
D) The company must have participating preferred stock outstanding.
 
 
 
 
 
 
 
 
 

94.
Which of the following statements is not true regarding the adoption of ASC Topic 606
guidance for revenue recognition?
A) When using the cumulative approach, the prior three years of financial statements need to be restated.
B) Under the cumulative effect, the firm determines how the balance sheet would differ as of the first day of the year of adoption. 
C) Upon adoption, entities can choose between the retrospective approach or the cumulative effect approach. 
D) Under the retrospective approach, each period presented is restated to what the financial statements would have been had the new standard always been in place.
 
 
95.
Which of the following statements is not true regarding the treatment of warranties
under the new revenue recognition guidance in ASC Topic 606?
A) A warranty that covers services that are normally considered routine maintenance is an assurance warranty. 
B) Warranties that provide services beyond assuring the product is defect-free at the time of sale are separate performance obligations. 
C) The length of the warranty period should be considered. 
D) A warranty that assures the product is free of defects is not a distinct performance
obligation.
 
 
96.
Which of the following transactions would be reported within the investing activities
section of the cash flow statement?
A) The sale of a building in exchange for a parcel of land. 
B) The acquisition of treasury stock in exchange for cash. 
C) The exchange of a stock investment in order to retire a long-term debt. 
D) The cash sale of a building at a loss
 
 
97.
Which of the following would not be considered a revenue recognition abuse?
A) Recording goods on layaway for a customer as a final sale
B) Recording revenue on goods ready for delivery to the customers, segregated in the company warehouse without a bill-and-hold arrangement in the contract
C) recording goods on consignment as part of inventory when there is a right of return
D) recording revenue on a large shipment to a customer whose ability to pay is not reasonably assured
 
 
98.
Which statement isn’t true regarding the conservatism convention in accounting: 
A) Conservatism is sometimes used to defend poor accounting judgments
B) Conservatism strives to ensure that business risks and uncertainties are adequately reflected in the financial statements
C) Conservatism means we only record that of which we are 100% certain
D) Conservatism guides us to choose the approach that leads to lower assets or higher liabilities
 
 
 

 

1.
39. Which of the following statements is correct with respect to economic incentives to release financial information?

a.Because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose.
b.Because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.
c.Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.
d.Owners and managers do not have an economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost.
 
 
2.
51. Which statement is not true regarding the conservatism convention in accounting?

a.Conservatism guides us to choose the approach that leads to lower assets or higher liabilities.
b.Conservatism means we only record that of which we are 100% certain.
c.Conservatism is sometimes used to defend poor accounting judgments.
d.Conservatism strives to ensure that business risks and uncertainties are adequately reflected in the financial statements.
 
 
3.
The ability to raise additional cash by selling assets, issuing stock, or borrowing more is

a. financial flexibility.
b. a credit risk indicator.
c. a stock price predictor.
d. one way to project earnings.
 
 
4.
All financial statements

a. provide a picture of the company at a moment in time.
b. describe changes that took place over a period of time.
c. help to evaluate what happened in the past.
d. contain the most up to date information about the company.
 
 
5.
The amounts of executive compensation and bonuses are often determined by
a. auditor’s recommendations.
b. evaluations by subordinates.
c. company compensation contracts.
d. industry guidelines.
 
 
6.
Analytical review procedures include all of the following except

a. simple ratio and trend analysis.
b. complex statistical techniques.
c. general reasonableness tests.
d. comparison of the company’s reported financial results to benchmarks established by the SEC.
 
 
7.
Being verifiable and neutral is part of what makes financial information
a. useful.
b. consistent.
c. comparable.
d. relevant.
 
 
8.
Business enterprises enter into many different types of contracts. Examples of such contracts that often contain language that refers to verifiable financial statement numbers include all of the following except
a. royalty contracts with inventors.
b. sales contracts with customers.
c. compensation contracts with managers.
d. debt contracts with bankers.
 
 
9.
A companies financial statements reflect information about:

a. future projections of sales, expenses, and other future economic events.
b. product information and competitive positions.
c. the general economy of the industry in which the company operates.
d. economic events that affect a company that can be translated into accounting numbers.
 
 
10.
Companies offering higher risk securities have incentives to mask their true condition by 

a. supplying overly optimistic financial information.
b. not having their financial statements audited.
c. listing on foreign exchanges where reporting requirements are less stringent than those in the U.S.
d. including testimonials from well known executives in their financial statements.
 
 
11.
Companies that have projected operating cash flows that are more than sufficient to meet debt payments are

a. financially flexible.
b. good credit risk companies.
c. undervalued.
d. overvalued.
 
 
12.
A company manages a large portfolio of marketable securities and sells only stocks with substantial gains in poor income years or sells only stocks with substantial losses in good income years. This strategy is an indication of: 
a. securities fraud.
b. unstable portfolio management.
c. income smoothing.
d. violating security trading laws.
 
 
13.
A company’s financial statements can be used for all of the following purposes except

a. as a scorecard on the company’s social responsibility.
b. as a management report card.
c. as an early warning signal.
d. as a measure of accountability.
 
 
15.
Creditors assess credit risk by comparing a firm’s required principal and interest payments to estimates of the firm’s current and future

a. net assets.
b. gross income.
c. net income.
d. cash flows.
 
 
16.
Differences between IFRS and U.S. GAAP include all of the following except

a. Reversal of inventory write-downs.
b. Carrying value of investment property.
c. Revenue recognition.
d. Research and development costs.
 
 
 
 
 
 
 
 

17.
Employees demand financial information for all of the following except:
a.Monitoring profit sharing and stock ownership plans.
b.Monitoring how much the senior executives earn.
c.Monitoring the health of company pension plans.
d.Monitoring union contracts that link negotiated wage increases to company financial performance.
 
 
18.
Employees demand financial statement information because the firm’s performance is often linked to all of the following except
a. negotiated wage increases in union contracts.
b. social security benefits.
c. pension plan benefits.
d. employee profit sharing.
 
 
19.
The Financial Accounting Standards Board has responsibility for the establishment of U. S. accounting standards and
a. full statutory power to enforce compliance with GAAP.
b. authority from the SEC to enforce compliance with GAAP.
c. no authority or responsibility to enforce compliance with GAAP.
d. responsibility imposed by AICPA to enforce compliance with GAAP.
 
 
20.
Financial information capable of making a difference in a decision is
a. relevant.
b. verifiable.
c. consistent.
d. neutral.
 
 
21.
Financial information that is provided to decision makers before it loses its capacity to influence their decisions is
a. neutral.
b. verifiable.
c. timely.
d. consistent.
 
 
22.
Financial information which does not favor one set of interested parties over another is
a. relevant.
b. verifiable.
c. neutral.
d. faithfully represented.
 
 
23.
Financial statements follow

a. rigid guidelines that require specific adherence to regulated procedures.
b. generally accepted guidelines that allow management a degree of flexibility in choices
c. general guidelines with little choice among different procedures.
d. legal requirements for uniform presentation and disclosure.
 
 
24.
A firm’s financial statements contain trends that give users insight into the firm’s

a. future market share.
b. position within its industry.
c. profitability, productivity, and liquidity.
d. current market price for common and preferred stock.
 
 
25.
GAAP’s flexibility in its reporting standards allows companies to
a. smooth reported earnings over several reporting periods.
b. change accounting estimates to meet target sales or earnings.
c. change accounting principles to improve reported earnings.
d. avoid adopting specific accounting techniques and reporting procedures.
 
 
26.
The goal of generally accepted accounting principles is to ensure that a company’s financial statements
a. do not contain any representation that could jeopardize management.

b. provide stockholders all of the information they need to assess management’s performance.
c. are accurate and free from fraud.
d. clearly represent its economic condition and performance of the company.
 
 
27.
Identify the correct order of the three steps constituting the FASB’s "due process" procedure.

a. Public-hearing stage, exposure-draft stage, and voting stage.
b. Discussion-memorandum stage, public-hearing stage, and voting stage.
c. Exposure-draft stage, discussion-memorandum stage, and voting stage.
d. Discussion-memorandum stage, exposure-draft stage, and voting stage.
 
 
28.
If a company fails to disclose information about a lawsuit because it might be embarrassing to the company, it is violating
a. relevance.
b. verifiability.
c. neutrality.
d. timeliness.
 
 
29.
IFRS frequently

a. are automatically approved for any foreign listed company, as soon as a new standard is issued.
b. permit only one accounting treatment for similar business transactions and events to promote comparability.
c. allow firms less latitude when compared to U.S. GAAP.
d. follow a more generalized overview approach than do U.S. GAAP counterpart standards.
 
 
30.
In designing audit procedures the auditor will include all of the following except:

a.Industry conditions.
b.Global economic trends.
c.Assessing the reasonableness of the numbers in relation to the company’s activities.
d.Fraud risk factors that may be present.
 
 
31.
International financial reporting standards are currently established by the
a. IASC.
b. IASB.
c. FASB.
d. PCAOB.
 
 
32.
Investors and analysts must have certain capabilities regarding financial reporting which include

a. an understanding of current financial reporting standards.
b. recognition that management selects the financial reporting standards used.
c. an ability to recognize that financial statement information reported is grounded in judgment as well as facts.
d. all of these answer choices are correct.
 
 
33.
Investors who compare a firm’s discounted future cash flows to the current market price of a stock are using the

a. efficient market hypothesis.
b. market-to-market approach.
c. fundamental analysis approach.
d. technical analysis approach.
 
 
 
 
 
 
 
 
 

34.
Investors who follow a fundamental analysis approach

a. determine the value the company’s assets would yield if sold individually.
b. estimate the value of a stock by assessing the amount, timing, and uncertainty of future cash flows that will accrue to the issuing company.
c. assess the company’s ability to meet its debt-related financial obligations.
d. assess the company’s ability to raise additional cash by selling assets, issuing stock, or borrowing more
 
 
35.
Investors who presume that they have no insights about company value beyond the current market price and use financial statement data to assess firm-specific attributes believe in the
a. market-to-market hypothesis.
b. efficient market hypothesis.
c. fundamental market hypothesis.
d. technical market hypothesis.
 
 
36.
The market analysis known as fundamental analysis
a. predicts future trends in the financial drivers of a company’s economic success or failure.
b. relies on price and volume movement of stock.
c. has no insights about company value beyond current market price.
d. uses microeconomic data to forecast stock values.
 
 
37.
The network of conventions, rules, guidelines, and procedures used by the accounting profession is known as generally accepted

a. auditing standards.
b. accounting procedures.
c. accounting principles.
d. auditing principles.
 
 
38.
Omissions or misstatements within a financial statement which could influence the decisions of the user of the statement violates 
a. neutrality.
b. consistency.
c. conservatism.
d. materiality.
 
 
39.
The only authoritative source of U.S. GAAP is created by FASB and exists in a single database known as

a. the accounting standards database.
b. FASB financial reporting standards.
c. the converged accounting standards.
d. the accounting standards codification.
 
 
40.
Professional analysts need information on a company’s future earnings and cash flow to evaluate audit vulnerabilities, to assess debt repayment prospects and to

a. certify good values in the stock market.
b. indemnify creditors against losses.
c. certify that no fraud exists in the company.
d. value its equity securities.
 
 
41.
Relevant financial information

a. is free from bias and error.
b. is measured in a similar manner among different companies.
c. can be independently verified.
d. is capable of making a difference in a decision.
 
 
42.
The Securities and Exchange Act of 1934 required all publicly traded firms to
a. purchase insurance against corporate bankruptcy.
b. register with an authorized stock exchange.
c. provide annual financial statements audited by independent accountants.
d. file balance sheets, income statements, and statements of cash flow with the SEC each year.
 
 
43.
To achieve Faithful Representation, accounting information presented must meet which of the following requirements?

a. It must be comparable so that analysts can use it.
b. It must have predictive and confirmatory value.
c. It must depict the underlying economic event, be complete, neutral, and free from material error.
d. It must meet a materiality threshold.
 
 
44.
To achieve faithful representation, the financial information must be
a. consistent, unbiased, and relevant.
b. relevant, comparable, and timely.
c. relevant, consistent, and timely.
d. complete, neutral, and free from material error.
 
 
45.
The type of analysis that uses financial statements to assess a company’s current market price is
a. valuation analysis.
b. efficient market analysis.
c. fundamental analysis.
d. technical analysis.
 
 
46.
What type of trends and relationships can be gleaned from a company’s financial statements?
a. Rates of sales and accounts receivable growth.
b. Rates of expense growth and expenses as a percentage of sales.
c. How the company’s growth rates compare to their competitors.
d. All of these answer choices are correct.
 
 
47.
When a borrower violates a loan covenant that requires minimum achievement of an accounting measure in the financial statements, the lender can
a. immediately seize the loan collateral.
b. fire the chief operating officer of the borrower.
c. report the borrower to the IRS.
d. call for immediate repayment of the loan.
 
 
48.
When comparing U.S. GAAP and IFRS standards, which of the following is not correct?
a. IFRS is principles-based while U.S. GAAP is rules-based.
b. U.S. GAAP standards provide too many scope exceptions.
c. IFRS provides more detailed guidance than U.S. GAAP.
d. U.S. GAAP provides more detailed guidance than IFRS.
 
 
49.
When financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the _____________ function of financial reports.
a. proxy.
b. fundamental.
c. technical.
d. stewardship.
 
 
50.
When independent measurers get similar results when using the same accounting measurement methods, the financial information is 
a. relevant.
b. verifiable.
c. timely.
d. faithfully represented.
 
 
 

51.
Which is not correct regarding Regulation Fair Disclosure (Reg FD) ?

a.It helps level the playing field between individual and insitutional investors.
b.It does not limit what management can say in private conversations with analysts or investors.
c.It was passed by the SEC.
d.It limits what management can say in private conversations with analysts and investors .
 
 
52.
Which item below does not describe a politically vulnerable firm? 

a. The firm has contracts controlled by the government.
b. The firm may face antitrust litigation or loss of protective import quotas.
c. The firm is in a highly visible industry such as oil & gas or pharmaceuticals.
d. The firm may be attacked in the financial and popular press for generating high earnings.
 
 
53.
Which of the following are correct with respect to information contained in financial statements?

a.Information asymmetry occurs when management has access to more and better information than do people outside the company.
b.Financial statements cannot solve the issue of information asymmetry.
c.Financial statements help solve the issue of information asymmetry.
d.Financial statements help solve the issue of information asymmetry which is when management has access to more and better information than do people outside the company.
 
 
54.
Which of the following are primary qualitative characteristics of accounting information? 

a. Relevance and Timeliness.
b. Relevance and Faithful Representation.
c. Comparability and Timeliness.
d. Verifiability and Understandability.
 
 
55.
Which of the following create a competitive disadvantage according to the full disclosure principle?

a.Details about the company’s strategies, plans and tactics.
b.Information about the company’s technological and managerial innovations.
c.Detailed information about the company’s operations.
d.All of these answer choices are correct.
 
 
56.
Which of the following is not an accurate statement related to the demand for financial reporting?

a.Economically realistic reporting standards are low when there are few important capital providers.
b.Cross-country differences have no impact on capital funding opportunities and financial reporting practices.
c.External investors who provide capital demand a reporting system that accurately depicts a company past economic performance and its future prospects.
d.Comprehensive financial data is demanded when there is a broad base of external investors.
 
 
57.
Which of the following is not an action taken by shareholders when the earnings and share price fall below acceptable levels? 
a. Letters to management and outside directors.
b. Phone calls to management and outside directors.
c. Launching a proxy contest.
d. Filing a lawsuit for the lost value of the share price.
 
 
58.
Which of the following people outside the company do not demand financial statement information as a key input?
a. Suppliers and Lenders.
b. Government and Regulatory Agencies.
c. Competitors.
d. Customers.
 
 
59.
Which of the following statements is not correct regarding a company’s financial statements?

a.They may present a picture of the company at a moment in time.
b.They may describe changes that took place over a period of time .
c.They reflect economic events that affect the company.
d.They are comparable to the statements of other companies as all publicly held companies follow the very precise science of accounting.
 
 
60.
Which one of the following has statutory authority to determine accounting rules for companies whose securities are owned by the general public?
a. American Institute of Certified Public Accountants
b. State Boards of Accountancy
c. Securities and Exchange Commission
d. Financial Accounting Standards Board
 
 
61.
Which one of the following types of disclosure costs is the cost of disclosing the company’s pricing strategies?

a. Political cost
b. Litigation cost
c. Competitive disadvantage cost
d. Information collection, processing, and dissemination cost
 
 
62.
Which statement below describes efficient market investors?
a.They presume they have no insight beyond the share price.
b.They believe that any new development is quickly and correctly reflected in the stock price.
c.They use financial statements to assess risk and dividend yields to make portfolio decisions.
d.All of these answer choices are correct.
 
 
63.
Whose responsibility is it to ensure that the company’s financial information is properly assembled, classified, characterized, and presented clearly and concisely in order to make it understandable?

a. The public accounting firm performing the audit.
b. The SEC by enforcing reporting standards.
c. Management of the company publishing the statements.
d. FASB when drafting generally accepted accounting principles.
 
 
 

 

1.
Accounting errors or irregularities can occur for which reasons?

a. simple oversight
b. misapplication of GAAP
c. management exploitation of the flexibility in GAAP
d. all of these answer choices are correct
 
 
2.
All financial statements: 
a. contain the most up to date information about the company 
b. describe changes that took place over a period of time
c. provide a picture of the company and this moment in time 
d. help to evaluate what happened in the past
 
 
3.
An analysts gathered the following information about a company whose fiscal year end is December 31, 2018

Net Income for the year was 23.7 million 
Preferred stock dividends of $3 million were paid for the year
Common stock dividends of $6 million were paid for the year
There were 10 million shares of common stock outstanding on Jan 1 2018
The company issued 6 million new shares of common stock on July 1 2018
The capital structure does not include any potential dilutive securities 

Calculate the company’s basic earnings per share for 2018

a. 1.80
b. 1.59
c. 2.06
d. 1.36
e. cannot tell from the information provided
 
 
4.
Any increase in an asset may be offset by: 

a. a corresponding decrease in owners equity
b. an increase in another asset account 
c. a corresponding decrease in a liability 
d. a decrease in some other asset account
 
 
5.
The basic accounting equation may be expressed as:

a. assets = liabilities - owners’ equity
b. liabilities = assets + owners’ equity
c. owners’ equity = assets - liabilities
d. assets = owners’ equity - liabilities
 
 
6.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

Under the accrual basis, how much revenue should Canon recognize in November?

a. $0
b. $16,000
c. $24,000
d. $40,000
 
 
8.
Contracts must be: 

a. communicated verbally
b. in writing
c. drafted by an attorney
d. legally enforceable
 
 
9.
The costs of providing financial information is ultimately borne by: 

a. management 
b. shareholders
c. auditors 
d. professional analysts
 
 
11.
Examples of variable consideration include all of the following except: 

a. bonuses for completing performance on a contract early 
b. penalties for not completing performance on a contract on time
c. discounts on transaction prices 
d. all of the answer choices are correct
 
 
12.
Financial information that is provided to decision makers before it loses its capacity to influence their decisions is: 

a. timely 
d. consistent 
c. neutral
d. verifiable
 
 
13.
Financial information which does not favor one of interested parties over another is: 
a. faithfully represented 
b. relevant 
c. verifiable 
d. neutral
 
 
 
 
 
 
 
 
 
 

14.
For what reasons does management have incentive to meet analysts’ expectations?

a. To build credibility with capital markets.
b. To convey future earnings prospects to investors.
c. To increase stock price.
d. All of these answer choices are correct.
 
 
15.
The goal of generally accepted accounting principles is to ensure that a company’s financial statements:

a. do not contain any representation that could jeopardize management.
b. provide stockholders all of the information they need to assess management’s performance.
c. are accurate and free from fraud.
d. clearly represent its economic condition and performance of the company.
 
 
16.
Hargren Publishing offers its Accouting textbooks and e-texts through its online homework management system. Purchases of an access code provides the students with access to the e-text and online materials for 6 months. During that time, students have access to updates to the text and learning materials. Hargren should recognize revenue for purchases of access codes: 
a. over the sex-month period during which the customer has access
b. at the beginning of the semester in which the student will use the access code 
c. at the end of the six month access period 
d. when they occur
 
 
17.
Hickory Furniture Company paid for the following costs during the month of May: 

Inventory purchases $40,000
Advertising costs $8,000
Delivery costs $2,000

Hickory sold 32,000 of the inventory and has agreed to pay warranty expenses for its customers. There are expected to be $1600 and occur evenly over the next fours months (starting in June)

What is the amount of Hickory’s accrual-basis expenses for the month of May? 

a. 43,600
b. 33,600
c. 50, 000
d. 42,400
 
 
18.
Hickory Furniture Company paid for the following costs during the month of May:

 
 
 
 
Inventory purchases
$
40,000
 
Advertising costs
 
8,000
 
Delivery costs
 
2,000
 
 
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

What is the amount of Hickory’s cash-basis expenses for the month of May?


a. 51,600
b. 33,600
c. 42,400
d. 50,000
 
 
19.
If consideration is received before a contract is identified and the consideration is nonrefundable, revenue may be recognized if: 
a. there is no remaining obligation to transfer goods
b. goods have been delivered 
c. the contract has been terminated 
d. any of these answer choices is correct
 
 
20.
If the financial reporting environment were unregulated, disclosure would occur voluntarily:

a. as long as other companies in the reporting company’s industry voluntarily disclosed financial information.
b. only to analysts that the company believes will report favorably on the company’s prospects.
c. only when managers wanted to raise additional capital.
d. as long as the incremental benefits to the company from supplying financial information exceeded the incremental costs of providing the information.
 
 
21.
Income statements are classified into sections to:

a. separate revenue recognized from deferred revenue.
b. distinguish between sustainable and transitory income.
c. separate real income from book income.
d. distinguish between book income and taxable income.
 
 
22.
Investors and analysts must have certain capabilities regarding financial reporting which include:

a. an understanding of current financial reporting standards.
b. recognition that management selects the financial reporting standards used.
c. an ability to recognize that financial statement information reported is grounded in judgment as well as facts.
d. all of these answer choices are correct.
 
 
23.
The key accounting issue related to bundled products such as software licenses and technical support: 
a. is the method of revenue recognition 
b. concerns the amount of transaction price to allocate to each contract element 
c. is the amount of revenue to recognize over the life of the contract 
d. depends on whether the customer is able to pay for the contracted services
 
 
24.
A patient of Dr. Jones presents his Medicare card after his appointment. The total charge for the services was $100; however, Medicare will pay only $60 for this service and the patient is pay $20. Acceptance of the patient’s Medicare insurance creates a contract: 

a. for payment of $100, regardless of what Medicare will pay 
b. for $20 and an $80 discount discount or price concession 
c. for payment of $80 and a $20 discount or price concession 
d. for payment of $60 and a price concession of $40
 
 
25.
The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:

a. cash flows 
b. forecasting
c. tax return preparation 
d. audits
 
 
 
 
 
 
 
 
 

26.
Relevant financial information:

a. is free from bias and error.
b. is measured in a similar manner among different companies
c. can be independently verified.
d. is capable of making a difference in a decision.
 
 
27.
A right to return exists when: 

a. the customer is entitled to another product in exchange 
b. the customer is entitled to a credit against amounts owed
c. the customer is entitled to a full or partial return 
d. any one of these conditions is met
 
 
28.
To achieve faithful representation, the financial information must be:

a. consistent, unbiased, and relevant.
b. relevant, comparable, and timely.
c. relevant, consistent, and timely.
d. complete, neutral, and free from material error.
 
 
29.
Under ASC Topic 606 for revenue recognition, a performance obligation is considered satisfied when control over the goods and services is transferred to the customer. Which of the following is not an indicator that control has been transferred ? 

a. the customer has accepted the goods and has physical possession 
b. the customer is legally obligated to pay for the goods and services 
c. the customer has legal title of the goods
d. all of these are indicators that control has transferred
 
 
30.
When financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the _____________ function of financial reports.

a. proxy
b. fundamental
c. technical
d. stewardship
 
 
31.
Which of the following are correct with respect to information contained in financial statements?

a. Information asymmetry occurs when management has access to more and better information than do people outside the company.
b. Financial statements cannot solve the issue of information asymmetry.
c. Financial statements help solve the issue of information asymmetry.
d. Financial statements help solve the issue of information asymmetry which is when management has access to more and better information than do people outside the company.
 
 
32.
Which of the following are primary qualitative characteristics of accounting information?

a. Relevance and Timeliness
b. Relevance and Faithful Representation 
c. Comparability and Timeliness 
d. Verifiability and Understandability
 
 
33.
Which of the following create a competitive disadvantage according to the full disclosure principle? 
a. Details about the company’s strategies, plans and tactics 
b. Information about the company’s technological and managerial innovations 
c. Detailed information about the company’s operations 
d. All of these answer choices are correct
 
 
34.
Which of the following is a true statement? 

a. Revenue decreases owners’ equity and increases liabilities 
b. revenue decreases owner’s equity and expenses increase owners’ equity
c. expenses increase owner’s equity and decrease liabilities 
d. revenue increases owners’ equity and expenses decrease owners’ equity
 
 
35.
Which of the following parties are responsible for the detection of errors and accounting irregularities in a company’s financial statements?

a. external auditors
b. the SEC staff during their review process.
c. internal audit staff and audit committee of the board of directors.
d. all of these answer choices are correct.
 
 
36.
Which of the following statements best describes expenses?

a. They are recorded in the accounting period when they are "earned" and become "measurable."
b. They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
c. They are the expired costs or assets "used up" during the accounting period.
d. They consist of cash payments to employees during the period for services rendered.
 
 
37.
Which of the following statements is correct with respect to economic incentives to release financial information?

a. Because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose.
b. Because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.
c. Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.
d. Owners and managers do not have an economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost.
 
 
 
 
 
 
 
 
 

38.
Which of the following statements is correct with respect to economic incentives to release financial information? 
a. because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose 
b. owners and managers fo not have economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost
c. companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost
d. because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply
 
 
39.
Which of the following statements is NOT correct regarding a company’s financial statements?

a. They may present a picture of the company as a moment in time 
b. They may describe changes that took place over a period of time
c. They reflect economic events that affect the company
d. They are comparable to the statements of other companies as all publicly held companies follow the very precise science of accounting
 
 
40.
Which of the following statements is not true regarding the treatment of warranties under the new revenue recognition guidance in ASC Topic 606?
a. Warranties that provide services beyond assuring the product is defect-free at the time of sale are separate performance obligations 
b. the length of the warranty period should be considered 
c. a warranty that covers services that are normally considered routine maintenance is an assurance warranty
d. a warranty that assures the product is free of defects is not a distinct performance obligation
 
 
41.
Which one of the following types of disclosure costs is the cost of disclosing the company’s pricing strategies?

a. Political cost
b. Litigation cost
c. Competitive disadvantage cost
d. Information collection, processing, and dissemination costs
 
 
42.
Which statement below is not correct with respect to earnings management?

a. It is increasingly common because of the pressure to meet analysts’ expectations.
b. More firms just beat rather than just miss the analyst expectations.
c. More than 80% of CEOs surveyed indicated that reporting a profit is an important benchmark.
d. More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.
 
 
43.
Working capital accounts include: 

a. all assets
b. all assets and liabilities 
c. current assets and all liabilities 
d. current assets and current liabilities
 
 
 

 

2.
Accounting errors or irregularities can occur for which reasons?
A) simple oversight.
B) misapplication of GAAP.
C) management exploitation of the flexibility in GAAP.
D) all of these answer choices are correct.
 
 
3.
Accounting treatment for changes in accounting principle are best described as:
A) Changes in accounting principle that are only permitted when FASB issues a standard that revises GAAP.
B) Changes in accounting principle that are always accounted for using the retrospective approach which requires only a restatement of prior years' presented financial information.
C) Changes in accounting principle that may require both a restatement of prior years' financial information and the recording of a cumulative adjustment to retained earnings.
D) Tax effects are ignored when reporting changes in accounting principles.
 
 
4.
Accrual accounting decouples measured earnings from operating cash inflows and outflows.
 
 
5.
Accumulated depreciation is a/an:
A) expense account.
B) liability account.
C) contra-asset account.
D) owners' equity account.
 
 
6.
Adjusting entries are used in all but which of the following situations?
A) Prepayments.
B) Deferred Revenue and Expenses.
C) Accrued Revenue and Expenses.
D) Prepayments, Deferred Revenue, Accrued Expenses, Accrued Revenue.
 
 
7.
Adjusting entries must be made:
A) to correct errors in the accounts.
B) to reconcile the accounts to the budget.
C) because auditing standards require them.
D) because certain types of events will otherwise not be recorded in the accounts.
 
 
8.
Any increase in an asset may be offset by:
A) a corresponding decrease in a liability.
B) a decrease in some other asset account.
C) a corresponding decrease in owner' equity.
D) an increase in another asset account.
 
 
9.
The basic accounting equation may be expressed as:
A) assets = liabilities - owners' equity
B) liabilities = assets + owners' equity
C) owners' equity = assets - liabilities
D) assets = owners' equity - liabilities
 
 
10.
The basic accounting equation may be expressed as assets = liabilities - owners' equity.
 
 
11.
The best measure of a firm's sustainable income is:
A) income from continuing operations.
B) income before income tax.
C) income before unusual items and change in accounting principle.
D) net income.
 
 
12.
Black and Decker decides to discontinue producing toasters in lieu of more versatile toaster ovens. In the process of discontinuing this line, the company disposes of the old production equipment and buys new equipment. The disposal of the old equipment would be reported in the income statement as:
A) gain or loss on the sale of equipment as part of continuing operations.
B) gain or loss on the sale of production equipment as part of cost of goods manufactured and sold.
C) gain or loss on the disposal of discontinued business component.
D) income from operation of a discontinued business component.
 
 
13.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

Under the accrual basis, how much revenue should Canon recognize in November?
A) $0
B) $16,000
C) $24,000
D) $40,000
 
 
14.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

Under the cash basis, how much revenue should Canon recognize in October?
A) $0
B) $16,000
C) $24,000
D) $40,000
 
 
15.
Cash-basis accounting provides the most useful measure of future operating performance.
 
 
16.
The change in equity of an entity during a period from transactions and other events from non-owner sources is known as:
A) net income.
B) net operating income.
C) comprehensive income.
D) net change in assets.
 
 
17.
The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.
 
 
18.
A component of an entity may be a/an:
A) reportable or operating segment.
B) subsidiary.
C) asset group.
D) reportable or operating segment, subsidiary, or asset group.
 
 
19.
A cumulative effect of a change in an accounting principle is measured as:
A) the difference between prior periods' net income under the old method and what would have been reported if the new method had been used in the prior years.
B) the after-tax difference between prior periods' net income under the old method and what would have been reported if the new method had been used in the prior years.
C) the difference between prior periods' net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.
D) the after-tax difference between prior periods' net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.
 
 
20.
Current U.S. GAAP permits firms to display the components of other comprehensive income in which of the following formats?
A) as a schedule appearing in the notes to the financial statements.
B) in a two-statement approach, one in which net income comprises one statement and a second, which presents a separate statement of comprehensive income.
C) as part of the statement of changes in stockholders' equity.
D) as a part of the statement of cash flows.
 
 
 

21.
A debit:
A) increases Accounts Payable.
B) increases Cost of Goods Sold.
C) decreases Accounts Receivable.
D) decreases Equipment.
 
 
22.
A debit does which of the following?
A) Increases the value in an asset account.
B) Increased the value in a contra-asset account.
C) Decreases the value in a liability account.
D) Increases the value in an asset account and also decreases the value in a liability account.
 
 
23.
The discontinued operations section of the income statement is comprised of which one of the following?
A) Income from the operation of a discontinued business component and gain or loss from the disposal of the discontinued component.
B) Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component, net of tax.
C) Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component.
D) Gain or loss from the disposal of the discontinued component, net of tax.
 
 
24.
Each set of EPS numbers includes separately reported numbers for income from continuing operations and the items that appear below it on the income statement.
 
 
25.
Earnings management can occur through a variety of manipulations including:
A) Manipulating accrual estimates to impact expenses.
B) Misapplications of GAAP deemed immaterial on an account by account basis.
C) Big bath restructuring charges.
D) All of these answer choices are correct.
 
 
26.
Entering the DR or CR amount in the appropriate left or right side of the affected T-account is called:
A) posting.
B) cross-referencing.
C) journalizing.
D) recording.
 
 
27.
The expense matching principle states that: 
A) Expenses are recognized when paid.
B) All expenses are recognized when the corresponding revenue is recorded.
C) Some expenses are recognized when the corresponding revenue is recognized and some are spread over time.
D) Expenses are recognized when the invoice is received.
 
 
28.
For a disposal group to be considered held for sale, which of the following conditions are required to be met?
A) Management has committed to a plan to see the component.
B) The sale is probable and is expected to be completed within one year.
C) The component is available for immediate sale in its present condition subject only to usual and customary terms for such sales.
D) All of these conditions must be met.
 
 
29.
For each transaction, the dollar total of the debits must equal the dollar total of the credits.
 
 
30.
For what reasons does management have incentive to meet analysts' expectations?
A) To build credibility with capital markets.
B) To convey future earnings prospects to investors.
C) To increase stock price.
D) All of these answer choices are correct.
 
 
31.
GAAP requires firms to report comprehensive income:
A) at the end of the income statement.
B) as one separate statement of comprehensive income.
C) in the statement of changes in stockholders' equity.
D) in a statement that is displayed with the same prominence as other financial statements.
 
 
32.
GAAP requires that each set of EPS numbers includes separately reported numbers for all of the following except:
A) special or unusual items.
B) income from continuing operations.
C) discontinued operations.
D) net income.
 
 
33.
Gains and losses from continuing operations that are not typical recurring costs are presented as a separate line in the income from continuing operations section of the income statement.
 
 
34.
Hickory Furniture Company paid for the following costs during the month of May:




Inventory purchases
$
40,000

Advertising costs

8,000

Delivery costs

2,000


Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

What is the amount of Hickory's cash-basis expenses for the month of May?
A) $33,600
B) $42,400
C) $50,000
D) $51,600
 
 
 

35.
Hickory Furniture Company paid for the following costs during the month of May:




Inventory purchases
$
40,000

Advertising costs

8,000

Delivery costs

2,000


Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

What is the amount of Hickory's May expenses when applying the matching principle?
A) $33,600
B) $42,400
C) $43,600
D) $50,000
 
 
36.
Hickory Furniture Company paid for the following costs during the month of May:

 
 
 
 
Inventory purchases
$
40,000
 
Advertising costs
 
8,000
 
Delivery costs
 
2,000
 
 
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

What type of cost is the advertising expense?


A) Product cost
B) Traceable cost
C) Inventory cost
D) Period cost
 
 
37.
Income statements are classified into sections to:
A) separate revenue recognized from deferred revenue.
B) distinguish between sustainable and transitory income.
C) separate real income from book income.
D) distinguish between book income and taxable income.
 
 
38.
In its accrual-basis income statement for the year ended December 31, 2018, Ralph Company reported revenue of $2,565,000. Additional information was as follows:
Accounts receivable 12/31/17
$
418,500
Uncollectible accounts written off during 2018

17,200
Accounts receivable 12/31/18

391,700

Required: 
Under the cash basis of net income determination, how much should Ralph report as revenue for 2018?
 
 
39.
John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2018 Dr. Hamilton collected $220,000 in fees from his patients. At December 31, 2017, Dr. Hamilton had accounts receivable of $30,000. At December 31, 2018 Dr. Hamilton had accounts receivable of $35,000 and had collected deferred fee revenue of $8,000.

Required:
On the accrual basis, what was Dr. Hamilton's patient service revenue for 2018?
 
 
40.
The matching principle requires that expenses be recognized:
A) in the same period in which all the assets are used up.
B) in the same period in which the revenue generated by these expenses is recognized.
C) when the costs are paid by the entity.
D) in the same period in which the revenue generated by these expenses is received.
 
 
41.
The matching principle says that expenses are matched to the revenue recognized during the period, not that revenue is matched to the period's expenses.
 
 
42.
Misstatements of tax expense, improper restructuring charges, asset impairment charges and gains/losses related to acquisitions are which type of restatement?
A) those related to revenue recognition
B) items related to core expense issues
C) items related to non-core expense issues
D) reclassification and disclosure issues
 
 
43.
Net asset valuation and net income determination are inextricably intertwined.
 
 
44.
Net income recognition always increases:
A) assets.
B) net assets.
C) liabilities.
D) net liabilities.
 
 
 
 
 
 
 
 
 

45.
On the income statement, income from discontinued operations is shown:
A) as a separate section of income from continuing operations.
B) as an accounting principle change.
C) without any income tax effect.
D) net of taxes after income from continuing operations.
 
 
46.
Other Comprehensive Income (OCI) is used both in U.S. GAAP and IFRS. Which of the following statements is correct?
A) As a general rule, U.S. GAAP allows more opportunities for managers to change balance sheet valuations of certain assets even when management has no intention to sell these assets.
B) Changes in the valuation of property, plant, and equipment create a Revaluation Surplus used in both IFRS and U.S. GAAP.
C) Both IFRS and U.S. GAAP require companies to report in other comprehensive income each period the valuation changes from changes in actuarial estimates affecting defined benefit pension plans.
D) U.S. GAAP requires a separate statement of OCI to immediately follow the income statement in the financial reporting statement.
 
 
47.
Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.
 
 
48.
The point within the operating cycle when the company's net assets have increased is the point when revenue should be recognized.
 
 
49.
The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:
A) cash flows.
B) forecasting.
C) tax return preparation.
D) audits.
 
 
50.
The real accounting issue in net income recognition is the:
A) quantity of income recognized.
B) type of income recognized.
C) timing of the recognition.
D) basis of net income recognition.
 
 
51.
Recent changes in ________ accounting standards require companies to group items within OCI based on ________:
A) U.S. GAAP; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
B) IFRS; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
C) U.S. GAAP; their expected future categorization on the income statement into income from continuing operations and discontinued operations.
D) IFRS; their expected future categorization on the income statement into income from continuing operations and discontinued operations.
 
 
52.
Restatements occur for a number of reasons. Which of the following is the most common type of restatement?
A) those related to revenue recognition.
B) items related to core expense issues.
C) items related to non-core expense issues.
D) reclassification and disclosure issues.
 
 
53.
Revenue is recognized when:
A) a contract is signed by both parties.
B) the seller completes performance required by an agreement.
C) the buyer completes payment required under an agreement.
D) the buyer accepts delivery and completes required payments.
 
 
54.
Royal, Inc. discovered that equipment purchased on January 1, 2018 for $300,000 will not last as long as originally estimated. The firm was depreciating the equipment at the rate of $40,000 per year with an estimated salvage value of $20,000. New estimates on January 1, 2021 indicate that the equipment will last a total of five years with no salvage value. How much should Royal, Inc. record as depreciation in 2021?
A) $40,000
B) $60,000
C) $90,000
D) $120,000
 
 
55.
Schlegel Department Store sells gift certificates—redeemable for store merchandise—that expire one year after their issuance. Schlegel has the following information pertaining to its gift certificates sales and redemptions:




Unredeemed certificates at 12/31/17
$
90,000
2018 sales

400,000
2018 redemptions of prior year sales

60,000
2018 redemptions of current year sales

325,000

Schlegel's experience indicates that 10% of gift certificates will not be redeemed. The company's policy is to record revenue on gift certificates when they are redeemed or expire.

Required:
In its 2018 income statement, what amount should Schlegel report as gift certificate revenue?
 
 
56.
Selected unrealized gains (or losses) sometimes bypass the income statement and are reported as direct adjustments to a stockholders' equity account.
 
 
57.
A special one-time charge resulting from corporate restructurings would be reported on the income statement as a/an:
A) operating item before gross profit.
B) special item in continuing operations.
C) special item in continuing operations, shown net of tax.
D) special item in discontinued operations, shown net of tax.
 
 
58.
The statement, "linkage between these costs and individual sales is difficult to establish," refers to:
A) period costs.
B) expired costs.
C) product costs.
D) traceable costs.
 
 
59.
T-account analysis can be used to gain insights into why accrual basis earnings and cash basis earnings differ and to:
A) journalize future transactions.
B) reconstruct transactions that have occurred during a given reporting period.
C) post transactions that have occurred during a given reporting period.
D) determine the current market price of common stock.
 
 
 
 
 
 
 
 
 

60.
) The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

Using the accrual basis, which one of the following entries would properly record Canon's revenue recognition for October?
A) 
DR Cash
40,000

CR Copier sales

40,000

B) 
DR Cash
16,000

CR Copier sales

16,000

C) 
DR Cash
16,000

DR Accounts receivable
24,000

CR Copier sales

40,000

D) 
DR Accounts receivable
40,000

CR Copier sales

40,000
 
 
61.
To get revenue and expense account balances to zero an adjusting entry is made.
 
 
62.
To get revenue and expense account balances to zero requires a/an:
A) adjusting entry.
B) closing entry.
C) operating entry.
D) reversing entry.
 
 
63.
Traceable costs are also called:
A) period costs.
B) expired costs.
C) product costs.
D) administrative costs.
 
 
64.
Traditional financial reporting presents forecasted cash flow information.
 
 
65.
Under Bart Company's accounting system, all insurance premiums paid are debited to prepaid insurance. For interim reports, Bart makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, 2018 is as follows:




Prepaid insurance at December 31, 2017
$
310,000
Charges to insurance expense during 2018, including a year-end adjustment of $50,000

975,000
Unexpired insurance premiums at December 31, 2018

265,000

Required: 
What was the total amount of insurance premiums paid by Bart during 2018?
 
 
66.
U. S. GAAP permits companies to report components of other comprehensive income (OCI) as part of the statement of changes in stockholders' equity.
 
 
67.
When a company changes from any inventory method to LIFO, the change is reported
A) prospectively because it is usually impractical to determine the effects of this change on prior years' net income.
B) as an error correction.
C) as a change in an accounting estimate.
D) using the retrospective approach.
 
 
68.
When a company changes from LIFO to another inventory method, the change is reported
A) prospectively because it is impractical to determine the effects of this change on prior years' net income.
B) as an error correction.
C) as a change in an accounting estimate.
D) using the retrospective approach.
 
 
69.
When a company changes from straight-line depreciation to double-declining-balance depreciation, the change is reported
A) prospectively because it is impractical to determine the effects of this change on prior years' net income.
B) as an error correction.
C) as a change in an accounting estimate.
D) using the retrospective approach.
 
 
70.
When actuarial estimates related to defined benefit pension plans are adjusted:
A) Both U.S. GAAP and IFRS require companies to report these valuation changes in OCI each period.
B) Only U.S. GAAP requires companies to report these valuation changes in OCI each period.
C) Only IFRS requires companies to report these valuation changes in OCI each period.
D) Neither U.S. GAAP nor IFRS requires companies to report these valuation changes in the financial statements.
 
 
 
 
 
 
 
 
 

71.
When analysts provide basic EPS for income from continuing operations that exclude the effects of special (i.e., nonrecurring) gains or losses and certain other non-cash charges, such earnings are frequently referred to as:
A) normal earnings.
B) pro forma earnings.
C) sustainable earnings.
D) real earnings.
 
 
72.
When reporting a change in an accounting principle, the general rule requires that the current year's income from continuing operations reflect:
A) use of the newly adopted principle for the current year recognition.
B) use of the old principle for the current year recognition.
C) management's choice of either the old or newly adopted principle for the current year recognition.
D) FASB's designation of either the old or newly-adopted principle based on the item being changed.
 
 
73.
When reporting unusual or infrequent items in the income statement which of the following is not correct?
A) If a material event is either unusual in nature or an infrequent occurrence it is classified on the income statement as a special or unusual item in continuing operations.
B) If a material event is either unusual in nature or an infrequent occurrence—such as a one-time charge resulting from a major restructuring—it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company’s last major restructuring. 

C) Firms that use early debt retirement on a recurring basis as part of their ongoing risk management practices will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.
D) The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.
 
 
74.
When transitory earnings are present, which of the following correctly depicts the order used on the income statement?
A) Income from continuing operations, unusual items, income tax expense, discontinued operations, net income.
B) Income from continuing operations, discontinued operations, income tax expense, net income.
C) Income from continuing operations, income tax expense, discontinued operations, net income.
D) Income tax expense, income from continuing operations, unusual items, discontinued operations, net income.
 
 
75.
When using the retrospective approach for a change in accounting principle, disclosure rules require that:
A) prior years' income statements presented for comparative purposes be restated to reflect use of the new principle unless it is impractical to do so.
B) all prior years' income statements be restated to reflect use of the new principle, and include a pro forma net income figure of the previously reported income.
C) no prior years' income statements be restated, but a pro forma net income figure be provided to reflect use of the new principle for each year presented.
D) no prior years' income statements be restated, and no pro forma net income figures be provided.
 
 
76.
Which item is not correct with respect to the treatment of sustainable and transitory items and a company's income statement?
A) Financial reporting assists statement users in forecasting future cash flows by providing an income statement format that segregates components of net income.
B) Income statements prepared in accordance with GAAP differentiate between income components that are believed to be sustainable and those that are transitory.
C) The income statement isolates a key figure called "income from sustainable operations."
D) Transitory items are disclosed separately on the income statement so that statement users can place less weight on these earnings components when forecasting future profitability.
 
 
77.
Which of the following best describes the reporting for discontinued operations?
A) Discontinued operations will not generate future cash flows and thus the results of transactions related to operations the firm intends to discontinue, or has already discontinued, must be reported separately from other income items on the income statement.
B) Discontinued operations presentation is used only when a component of an entity has been sold.
C) There are 4 criteria that must be met to classify a disposal group as held for sale.
D) Discontinued operations may generate future cash flows and thus there will be results of transactions related to operations the firm intends to discontinue. If the firm does generate future transactions before disposing of the disposal group, it will report that revenue in continuing operations revenue.
 
 
78.
Which of the following causes basic EPS to differ from fully diluted EPS?
A) Convertible preferred stock.
B) Warrants.
C) Management stock options.
D) All of these answer choices are correct.
 
 
79.
Which of the following does not properly state the reporting requirements when a change in reporting entity occurs?
A) Comparative financial statements for prior years must be restated to reflect the new reporting entity as if it had been inexistence during all the years presented.
B) Comparative financial statements for the prior year only must be restated to reflect the new reporting entity.
C) The effect of the change on income before extraordinary items, net income and other comprehensive income must be restated.
D) Per share amounts must be disclosed for all periods presented.
 
 
80.
Which of the following is a true statement?
A) Revenue decreases owners' equity and increases liabilities.
B) Expenses increase owners' equity and decrease liabilities.
C) Revenue increases owners' equity and expenses decrease owners' equity.
D) Revenue decreases owners' equity and expenses increase owners' equity.
 
 
81.
Which of the following is not a change in reporting entity?
A) When combined statements replace statements of individual entities.
B) When there is a change in the subsidiaries to be consolidated or combined.
C) When a business combination is accounted for under the acquisition method.
D) All of these answer choices are correct.
 
 
82.
Which of the following is not considered an unusual or infrequently occurring item on an income statement?
A) Corporate restructuring charges.
B) Gains and losses from sales of investments.
C) Operating income or loss from discontinued operations.
D) Foreign currency transaction gains and losses.
 
 
83.
Which of the following is not correct with respect to accrual accounting?
A) Accrual accounting can produce large discrepancies between the firm's reported profit performance and the amount of cash generated from operations.
B) The principles that govern revenue and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting.
C) Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance.
D) Accrual accounting does not decouple measured earnings from operating cash inflows and outflows.
 
 
84.
Which of the following items is not a type of accounting change?
A) Change in accounting principles used; for example, a change from LIFO to FIFO.
B) Change in the majority owner of the company.
C) Change in accounting estimate; for example, a change in the useful life or salvage value of a depreciable asset.
D) Change to consolidated financial statements from individual financial statements.
 
 
85.
Which of the following parties are responsible for the detection of errors and accounting irregularities in a company's financial statements?
A) external auditors.
B) the SEC staff during their review process.
C) internal audit staff and audit committee of the board of directors.
D) all of these answer choices are correct.
 
 
86.
Which of the following situations may create an accounting error?
A) Simple oversight.
B) Parties disagree on accounting for a transaction resulting in a misapplication of GAAP.
C) Management exploits the flexibility in GAAP to inflate earnings.
D) All of these answer choices are correct.
 
 
 

87.
Which of the following statements best describes expenses?
A) They are recorded in the accounting period when they are "earned" and become "measurable."
B) They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
C) They are the expired costs or assets "used up" during the accounting period.
D) They consist of cash payments to employees during the period for services rendered.
 
 
88.
Which of the following statements is correct regarding revenue and expense accounts?
A) These are really owners' equity accounts.
B) These are really contributed capital accounts.
C) They have no impact on the balance sheet.
D) These are balance sheet accounts.
 
 
89.
Which of the following would not be considered a revenue recognition abuse?
A) Recording goods on consignment as part of inventory when there is a right of return.
B) Recording goods on layaway for a customer as a final sale.
C) Recording revenue on a large shipment to a customer whose ability to pay is not reasonably assured.
D) Recording revenue on goods ready for delivery to the customers, segregated in the company warehouse without a bill-and-hold arrangement in the contract.
 
 
90.
Which one of the following events would be considered an unusual or infrequent event?
A) a tornado in Kansas.
B) an earthquake in New York.
C) a flood in St. Louis near the Mississippi River.
D) an earthquake in southern California.
 
 
91.
Which one of the following is part of other comprehensive income (OCI)?
A) Unrealized gains resulting from translating foreign currency financial statements of majority-owned subsidiaries to U.S. dollar amounts.
B) Gains on sales of treasury stock.
C) Receipt of land donated by a governmental unit.
D) Sale of common stock above par.
 
 
92.
Which statement below best describes when to record an expense?
A) When the expense is paid.
B) When the resource paid for is consumed.
C) Always taken in one period only.
D) Never is recognized before revenue is recognized.
 
 
93.
Which statement below is not correct with respect to earnings management?
A) It is increasingly common because of the pressure to meet analysts' expectations.
B) More firms just beat rather than just miss the analyst expectations.
C) More than 80% of CEOs surveyed indicated that reporting a profit is an important benchmark.
D) More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.
 
 
94.
While the earnings process is the result of many separate activities, it is generally acknowledged that there is usually one critical event or key stage considered to be absolutely essential to the ultimate increase in net asset value of the firm.
 
 
95.
Working capital accounts include:
A) all assets.
B) all assets and liabilities.
C) current assets and all liabilities.
D) current assets and current liabilities.
 
 
 

 

1.
32. Which of the following is not true?
a) The indirect method begins with net income.
b) Cash flows from operating activities will differ between the direct and indirect methods. 
c) Most firms use the indirect method to prepare the statement of cash flows.
d) The direct method presents cash inflows and outflows.
 
 
3.
36. Paying dividends to stockholders:
a) represents an investing activity.
b) does not impact the period cash flows.
c) represents an operating activity.
d) represents a financing activity.
 
 
4.
39. A temporary difference is the result of:
a) a revenue or expense item reported in different periods for book purposes and tax purposes. 
b) fluctuations in the exchange rate.
c) adjustments between the trial balance and general ledger.
d) delays between the sale of a product and the recording of the account receivable.
 
 
5.
40. A related party transaction:
a) is assumed to be an arms-length transaction.
b) can take place between subsidiaries of a common parent. 
c) does not need to be disclosed in financial statements prepared under U.S. GAAP.
d) presents less risk than a similar transaction with a third party.
 
 
6.
41. Other comprehensive income: 
a) consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.
b) is never adjusted for tax effects.
c) does not include foreign currency gains and losses.
d) is consistently defined in international balance sheet presentation.
 
 
7.
42. Which of the following statements is not true regarding cash flow from operating activities?
a) Most firms use the indirect method for presentation.
b) Each line item in a direct method cash flow statement is actually a cash flow.
c) The direct method begins with net income and then shows the differences between operating cash flow and net income. 
d) There are two methods for presenting cash flow from operating activities.
 
 
8.
43. A balance sheet prepared under U.S. GAAP includes the following elements except:
a) an asset section
b) a liabilities section
c) an equity section
d) a cash flow section
 
 
9.
Accrued liabilities represent:
a) income that has not yet been recognized on the income statement.
b) expenses that have not yet been recognized on the income statement.
c) expenses that have been recognized on the income statement but not yet been paid
d) income that has been recognized on the income statement but not yet collected.
 
 
10.
The Additional Paid-In Capital account is reported on the balance sheet at the:
a) current market value of the stock minus par value.
b) original sales price of the stock minus the par value.
c) net realizable value of the stock minus par value.
d) discounted present value of the future dividends minus par value.
 
 
11.
All the following disclosures would appear in the Summary of Significant Accounting Policies except:
a) inventory method. 
b) depreciation method.
c) revenue recognition method.
d) financing method.
 
 
12.
Balance sheets developed under us GAAP: 
a) may, but are not required to, list assets from most liquid to least liquid.
b) must list assets from most liquid to least liquid.
c) must list assets from least liquid to most liquid.
d) must list assets in alphabetical order
 
 
13.
Common-size balance sheets may be used for all the following except:
a) gaining insights into the nature of a company's operations.
b) analyzing a company's asset and financial structure.
c) determining how management assesses the risks a company faces. 
d) learning about the underlying economics of an industry
 
 
14.
Financing activities result from the cash effects of:
a) producing and delivering goods and services.
b) purchasing and disposing of productive assets used in production of revenue.
c) purchasing and disposing of debt securities of other companies.
d) selling stocks and bonds to raise capital used to produce revenue.
 
 
15.
Goodwill arising from a business combination is reported on the balance sheet as a(n):
a) current asset
b) fair value asset
c) impaired asset
d) intangible asset
 
 
16.
Investing activities result from the cash effects of:
a) producing and delivering goods and services.
b) purchasing and disposing of productive assets used in production of revenue. 
c) borrowing and repaying loans used to purchase equipment. 
d) selling stocks and bonds to raise capital to purchase land.
 
 
17.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. A decrease in the balance of the Accounts Receivable account would:
a) decrease cash flow from financing activities.
b) increase cash flow from investing activities.
c) decrease cash flow from operating activities.
d) increase cash flow from operating activities.
 
 
18.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. An increase in the Computer Equipment account would:
a) decrease cash flow from financing activities.
b) decrease cash flow from investing activities. 
c) increase cash flow from operating activities.
d) increase cash flow from investing activities.
 
 
19.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. Joe would use an increase in Accumulated Depreciation to:
a) increase cash flow from operating activities. 
b) increase cash flow from investing activities.
c) decrease cash flow from investing activities.
d) decrease cash flow from operating activities.
 
 
 
 
 
 
 
 

20.
Net property, plant and equipment are reported on the balance sheet at:
a) current market value.
b) historical cost.
c) historical cost minus accumulated depreciation. 
d) net realizable value.
 
 
21.
Notes to the financial statements typically contain all the following except:
a) a summary of significant accounting policies.
b) disclosure of important subsequent events.
c) management's discussion and analysis. 
d) related-party transactions.
 
 
22.
Operating activities result from the cash effects of:
a) producing and delivering goods and services. 
b) purchasing and disposing of fixed assets used in production of revenue.
c) borrowing and repaying loans used in the production of revenue.
d) selling stocks and bonds to raise capital for the generation of revenue.
 
 
23.
Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events defines:
a) assets
b) liabilities
c) equity
d) retained earnings
 
 
24.
Probable future sacrifices of economic benefits arising from an entity's present obligations to transfer resources or provide services to other entities in the future as a result of past transactions or events defines:
a) assets
b) liabilities
c) equity
d) retained earnings
 
 
25.
The residual interest in the resources of an entity that remains after deducting its debts to third parties defines:
a) assets
b) liabilities
c) equity
d) retained earnings
 
 
26.
The Retained Earnings account is comprised of:
a) cash retained in the business.
b) cash reinvested in the business by shareholders.
c) the cumulative earnings less dividends since the inception of the corporation. 
d) the earnings of the corporation for the current year.
 
 
27.
Subsequent events:
a) are those significant events that occur after the financial statements are issued.
b) are subject to optional disclosure based on a recommendation from top management.
c) are required to be disclosed if they are material and likely to influence investors' appraisal of the risk and return prospects of the reporting entity.
d) are those significant events that occur in the last quarter of the reporting period.
 
 
28.
T or F: A common-size balance sheet presents each item as a percentage of total assets
 
 
29.
T or F: A related party transaction occurs when a company enters a transaction with individuals or other companies that are connected in some way with it or its management
 
 
30.
T or F: Depreciation is added back to net income to determine cash from operating activities under the indirect method
 
 
31.
T or F: Events that occur after the financial statements are issued are referred to as subsequent events
 
 
32.
T or F: Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets
 
 
33.
T or F: Liquidity refers to how quickly noncurrent assets will be converted into cash to pay liabilities
 
 
34.
T or F: The statement of cash flows shows the user why a firm's investments and financial structure have changed between two balance sheets dates
 
 
 
 
 
 
 
 
 

 

1.
Accrued liabilities represent 
a. income that has not yet been recognized on the income statement.
b. expenses that have not yet been recognized on the income statement.
c. expenses that have been recognized on the income statement but not yet been paid.
d. income that has been recognized on the income statement but not yet collected.
 
 
2.
. A common-size balance sheet presents each item as a percentage of total assets. 
True or false
 
 
3.
The Additional Paid-In Capital account is reported on the balance sheet at the
a. current market value of the stock minus par value.
b. original sales price of the stock minus the par value.
c. net realizable value of the stock minus par value.
d. discounted present value of the future dividends minus par value
 
 
4.
All the following disclosures would appear in the Summary of Significant Accounting Policies except
a. inventory method.
b. depreciation method.
c. revenue recognition method.
d. financing method.
 
 
5.
. A related party transaction occurs when a company enters a transaction with individuals or other companies that are connected in some way with it or its management.
True or false
 
 
6.
Balance sheet amounts would not be measured as
a. effective value.
b. fair value.
c. present value.
d. historical cost value.
 
 
7.
The balance sheet
a. provides a summary of a firm's assets, liabilities, equity and cash flows as of a specific date.
b. classifies assets as current if they are expected to be converted into cash within 24 months.
c. is an expression of the accounting equation.
d. is comprised of items shown only at historical costs.
 
 
8.
A balance sheet prepared in accordance with U.S. GAAP typically
a. includes both "noncurrent liability" and "long-term obligation" sections.
b. reports inventory at historical costs.
c. reports cash at its current market value.
d. reports retained earnings comprised of the cumulative earnings less dividends since the inception of the entity.
 
 
9.
A balance sheet prepared in accordance with U.S. GAAP typically
a. reports common stock at the current market price of the stock.
b. provides critical information for understanding a firm's capital structure.
c. helps to determine the proper mix of debt and equity financing.
d. provides critical information for understanding a firm's profitability.
 
 
10.
A balance sheet prepared under U.S. GAAP can have amounts presented in the following measurement bases except
a. foreign currency
b. historical costs
c. discounted present values
d. current replacement costs
 
 
11.
A balance sheet prepared under U.S. GAAP includes the following elements except
a. an asset section
b. a liabilities section
c. an equity section
d. a cash flow section
 
 
12.
The balance sheet provides information on all of the following except
a. how management invested its money.
b. where the money came from.
c. assessing rates of return.
d. the market price of the company's stock.
 
 
13.
Balance sheets developed under US GAAP 
a. may, but are not required to, list assets from most liquid to least liquid.
b. must list assets from most liquid to least liquid.
c. must list assets from least liquid to most liquid.
d. must list assets in alphabetical order.
 
 
14.
Balance sheets prepared in compliance with U.S. GAAP reflect a mixture of
a. historical cost and future cash values.
b. current value and discounted future cash flows.
c. discounted cash flows and future values.
d. historical cost, fair value, net realizable value, and discounted present values.
 
 
15.
Balance sheets prepared in other countries using international accounting standards (IFRS) might use different account titles than are allowed for US. GAAP, such as
a. Capital reserve.
b. Share premium.
c. Hedging reserve.
d. all of these answer choices might be used in balance sheets prepared using IFRS.
 
 
16.
Balance sheets prepared under IFRS 
a. may list assets and liabilities from least liquid to most liquid.
b. must list assets, but not liabilities in order of liquidity.
c. must list assets and liabilities from least liquid to most liquid.
d. must list liabilities, but not assets, from most to least liquid.
 
 
17.
Cash collected from customers can be derived
a. by analyzing changes in the Accounts Payable balance.
b. by appropriately adjusting revenue for changes in accounts receivable.
c. by appropriately adjusting revenue for changes in accounts payable.
d. by analyzing changes to the reserve for doubtful accounts.
 
 
18.
The cash flow from operating activities
a. is required to be presented using the direct method by U.S. GAAP and IFRS.
b. can be presented by using either the direct method or the indirect method.
c. comprises only the increase in cash arising from the firm's profit-making activities.
d. can vary depending on whether the presentation is done under the direct method or the indirect method.
 
 
19.
Cash flows from operating activities include:
a. cash payments received from customers.
b. increases in Accumulated Depreciation.
c. deferred income taxes.
d. All of these would be included in cash flows from operating activities.
 
 
20.
The cash flow statement explains why a firm's cash position has changed between successive balance sheet dates while simultaneously explaining the changes that have taken place in the firm's noncash asset, liability, and stockholders' equity accounts over the same period.
True or false
 
 
21.
Cash interest from investments is recorded as _______ in statements of cash flows for U.S. GAAP, but can be recorded as ________ when using IFRS.
a. cash flows from investing activities / cash flows from financing activities
b. cash flows from financing activities / cash flows from operating activities
c. cash flows from operating activities / cash flows from financing activities
d. cash flows from operating activities / cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
 
 

22.
Cash is always measured for the balance sheet at
a. future transaction value.
b. current market value.
c. realizable future value.
d. net transaction value.
 
 
23.
The change in a firm's cash position between successive balance sheet dates will not equal the reported net income for that period for all the following reasons except:
a. Reported net income usually will not equal cash flow from operating activities because noncash revenues and expenses are often recognized as part of accrual income.
b. Reported net income usually will not equal cash flow from operating activities because certain operating cash inflows and outflows are not recorded as revenues or expenses under accrual accounting in the same period the cash flows occur.
c. Changes in cash are also caused by nonoperating investing activities like the purchase of treasury stock.
d. Additional changes in cash are caused by financing activities like the repayment of a bank loan.
 
 
24.
Common-size balance sheets may be used for all the following except
a. gaining insights into the nature of a company's operations.
b. analyzing a company's asset and financial structure.
c. determining how management assesses the risks a company faces.
d. learning about the underlying economics of an industry.
 
 
25.
The Common Stock account is reported on the balance sheet at the
a. par value of the stock.
b. current market value of the stock.
c. net realizable value of the stock.
d. discounted present value of the future dividends.
 
 
26.
Companies having cash denominated in foreign currency units will not translate those units into U.S. dollars because cash has the same value in all currencies.
True or false
 
 
27.
A consolidated balance sheet 
a. includes the net assets of the parent company and all of its subsidiaries. 
b. reports separately the net assets of the parent company and its subsidiaries 
c. includes the net assets of the parent company and all components in which it owns more than 75% of the outstanding voting stock.
d. includes the net assets of only the subsidiary companies.
 
 
28.
Contributed capital might be a negative dollar amount because 
a. net losses exceeded net income over the years.
b. excess liabilities reduced contributed capital.
c. treasury stock was in excess of stock originally issued.
d. dividends paid were in excess of net income accumulated in retained earnings.
 
 
29.
Current assets are assets expected to
a. be converted to cash within twelve months.
b. be converted to cash within twelve months or one operating cycle if the operating cycle is longer than twelve months.
c. remain on the books for at least twelve months.
d. remain on the books for at least twelve months or one operating cycle if the operating cycle is longer than twelve months.
 
 
30.
Current liabilities are reported on the balance sheet at
a. current market value.
b. historical cost.
c. discounted present value.
d. future value.
 
 
31.
Deferred income taxes will be reported as either a noncurrent asset or noncurrent liability.
True or false
 
 
32.
Depreciation is added back to net income to determine cash from operating activities under the indirect method.
True or false
 
 
33.
Events that occur after the financial statements are issued are referred to as subsequent events.
True or false
 
 
34.
Financing activities include the cash effects of
a. producing and delivering goods and services.
b. purchasing and disposing of productive assets used in production of revenue.
c. purchasing and disposing of debt securities of other companies.
d. selling stocks and bonds to raise capital used to produce revenue.
 
 
 
 
 
 
 
 
 

35.
Goodwill
a. is a tangible asset recognized as part of a business combination.
b. is not subject to impairment.
c. is initially measured as the difference between the consideration given in an acquisition and the fair value of the separately identifiable net assets acquired on the acquisition date.
d. is classified on the balance sheet as a current asset.
 
 
36.
Goodwill arising from a business combination is reported on the balance sheet as a(n)
a. current asset.
b. fair value asset.
c. impaired asset.
d. intangible asset.
 
 
37.
In a common-size balance sheet, each balance sheet account is expressed as a percentage of total: 
a. liabilities.
b. assets.
c. shareholders' equity.
d. assets plus shareholders' equity.
 
 
38.
The indirect method of presenting cash flow from operating activities
a. is strongly recommended by both U.S. GAAP and IFRS.
b. focuses on how cash flows deviate from a natural benchmark - net income.
c. presents cash transactions related to the determination of net income.
d. is more difficult than the direct method to incorporate working capital changes into a financial model.
 
 
39.
Information found on a company's balance sheet can tell a story about 
a. the company and its strategies.
b. the company's industry.
c. the company's performance.
d. All of these can be derived from the information on the balance sheet
 
 
40.
Inventory and accounts receivable are both carried at net realizable value.
True or false
 
 
41.
Investing activities include the cash effects of
a. producing and delivering goods and services.
b. purchasing and disposing of productive assets used in production of revenue.
c. borrowing and repaying loans used to purchase equipment.
d. selling stocks and bonds to raise capital to purchase land.
 
 
42.
Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.
True or false
 
 
43.
It is permissible for a firm that reports in accordance with IFRS to emphasize its liquidity by placing current assets and current liabilities in close proximity to one another on the balance sheet.
True or false
 
 
44.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. A decrease in the balance of the Accounts Receivable account would
a. decrease cash flow from financing activities.
b. increase cash flow from investing activities.
c. decrease cash flow from operating activities.
d. increase cash flow from operating activities.
 
 
45.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. An increase in the Computer Equipment account would 
a. decrease cash flow from financing activities.
b. decrease cash flow from investing activities.
c. increase cash flow from operating activities.
d. decrease cash flow from investing activities.
 
 
46.
. Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. He notices that the Retained Earnings account increased from the beginning of the year. This information is used to
a. increase cash flow from financing as it indicates receipt of payments from customers.
b. decrease cash flow from investing as it indicates payment of debt.
c. increase cash flow from operations as it signifies a net income.
d. decrease cash flow from operations as it indicates a net loss.
 
 
47.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. Joe would use an increase in Accumulated Depreciation to
a. increase cash flow from operating activities.
b. increase cash flow from investing activities.
c. decrease cash flow from investing activities.
d. decrease cash flow from operating activities.
 
 
 

48.
Liabilities represent amounts that are
a. probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
b. always classified as current on the balance sheet.
c. never shown on the balance sheet at historical cost.
d. netted against assets on the balance sheet.
 
 
49.
Liquidity refers to how quickly noncurrent assets will be converted into cash to pay liabilities. 
True or false
 
 
50.
Long-term debt
a. consists of monetary obligations that fall due beyond two years from the balance sheet date.
b. when issued, is carried at an amount based on the proceeds received.
c. usually has an effective yield that is much different than the cost of borrowing.
d. never has any portion classified as a current liability.
 
 
51.
Long-term debt is reported on the balance sheet at
a. current market value.
b. net realizable value.
c. present value.
d. future value.
 
 
52.
Net property, plant and equipment are reported on the balance sheet at
a. current market value.
b. historical cost.
c. historical cost minus accumulated depreciation.
d. net realizable value.
 
 
53.
Notes to the financial statements typically contain all the following except
a. a summary of significant accounting policies.
b. disclosure of important subsequent events.
c. management's discussion and analysis.
d. related-party transactions.
 
 
54.
On a balance sheet prepared under U.S. GAAP
a. accounts receivable is presented at net realizable value.
b. inventories are presented at current market price.
c. any cash denominated in a foreign currency is disclosed in a footnote.
d. most short-term investments are presented at historical cost.
 
 
55.
On balance sheets prepared in accordance with U.S. GAAP
a. assets are generally listed from least liquid to most liquid.
b. liabilities are generally netted against assets.
c. assets are generally listed from most liquid to least liquid.
d. both tangible and intangible long-lived assets can be revalued upward periodically.
 
 
56.
Operating activities result from the cash effects of
a. paying dividends to shareholders.
b. producing and delivering goods.
c. selling equipment.
d. issuing long-term debt.
 
 
57.
Operating activities result from the cash effects of
a. producing and delivering goods and services.
b. purchasing and disposing of fixed assets used in production of revenue.
c. borrowing and repaying loans used in the production of revenue.
d. selling stocks and bonds to raise capital for the generation of revenue.
 
 
58.
Other comprehensive income
a. consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.
b. is never adjusted for tax effects.
c. does not include foreign currency gains and losses.
d. is consistently defined in international balance sheet presentation.
 
 
59.
Paying dividends to stockholders
a. represents an investing activity.
b. does not impact the period cash flows.
c. represents an operating activity.
d. represents a financing activity.
 
 
60.
Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events defines
a. assets.
b. liabilities.
c. equity.
d. retained earnings.
 
 
61.
Probable future sacrifices of economic benefits arising from an entity's present obligations to transfer resources or provide services to other entities in the future as a result of past transactions or events defines
a. assets.
b. liabilities.
c. equity.
d. retained earnings
 
 
62.
Properly prepared statements of cash flows 
a. include stock issued for cash as an investing activity.
b. present depreciation as a subtraction from net income to arrive at a firm's cash flow from operations under the indirect method.
c. are frequently used by investment analysts to cash flows from operations across two or more companies.
d. will show the change in cash during a period to be equal to the net income for the period.
 
 
 
 
 
 
 
 
 

63.
A related-party transaction
a. is assumed to be an arms-length transaction.
b. can take place between subsidiaries of a common parent.
c. does not need to be disclosed in financial statements prepared under U.S. GAAP.
d. presents less risk than a similar transaction with a third party.
 
 
64.
The Retained Earnings account is comprised of
a. cash retained in the business.
b. cash reinvested in the business by shareholders.
c. the cumulative earnings less dividends since the inception of the corporation.
d. the earnings of the corporation for the current year.
 
 
65.
Retained earnings are reported on the balance sheet at
a. historical cost.
b. current market value.
c. net realizable value.
d. a mixture of different measurement bases.
 
 
66.
The rules used for determining taxable income in various countries
a. have the same objective as the rules used for determining income for financial reporting purposes.
b. have an objective designed to provide a basis for funding government operations.
c. are not the result of a political process.
d. measure changes in a firm's underlying economic condition.
 
 
67.
The sale of productive assets
a. does not impact the period cash flows.
b. is always considered a related party transaction.
c. represents an investing activity.
d. represents an operating activity.
 
 
68.
The statement of cash flows shows the user why a firm's investments and financial structure have changed between two balance sheets dates. 
True or false
 
 
69.
Subsequent events 
a. are those significant events that occur after the financial statements are issued.
b. are subject to optional disclosure based on a recommendation from top management.
c. are required to be disclosed if they are material and likely to influence investors' appraisal of the risk and return prospects of the reporting entity.
d. are those significant events that occur in the last quarter of the reporting period.
 
 
70.
The Summary of Significant Accounting Policies
a. explains the important accounting choices the reporting entity uses to account for selected transactions and accounts.
b. does not contain an explanation of the company's revenue recognition policies.
c. is generally a part of the equity section of the balance sheet.
d. is only required as part of a prospectus for the sale of new shares of stock.
 
 
71.
The summary of significant accounting policies does not help explain
a. the cost flow assumptions for valuing inventory.
b. management's assessment of the financial condition of the firm.
c. the method used for determining depreciation expense.
d. whether certain investments are accounted for using the equity method.
 
 
72.
A temporary difference is the result of
a. a revenue or expense item reported in different periods for book purposes and tax purposes.
b. fluctuations in the exchange rate.
c. adjustments between the trial balance and general ledger.
d. delays between the sale of a product and the recording of the account receivable.
 
 
73.
The term "consolidated" is used in financial statements under U.S. GAAP to refer to the financial reporting for a parent and its subsidiaries. The equivalent term used on balance sheets in the United Kingdom is
a. cooperative.
b satellite.
c. consolidated.
d. group.
 
 
74.
. The residual interest in the resources of an entity that remains after deducting its debts to third parties defines
a. assets.
b. liabilities.
c. equity.
d. retained earnings.
 
 
 
 
 
 
 
 
 

75.
The U.K. Equity account "Hedging reserve" is reported on a U.S. GAAP balance sheet as 
a. capital reserve.
b. revaluation reserve.
c. capital in excess of par.
d. an accumulated other comprehensive income account.
 
 
76.
The U.K. Equity account "Share premium" is reported on U.S. GAAP balance sheets as
a. capital reserve.
b. revaluation reserve.
c. capital in excess of par.
d. an accumulated other comprehensive income account.
 
 
77.
. Under the direct method for cash flow statement preparation, net cash flows from operating activities is calculated by adjusting net income for the differences between accrual-basis revenues and expenses and cash inflows and outflows during the period.
True or false
 
 
78.
Under U.S. GAAP, assets are presented in decreasing order of liquidity. Under IFRS, 
a. tangible assets may be presented first followed by the current assets displayed in increasing order of liquidity.
b. the current assets are displayed in increasing order of liquidity.
c. investments are listed first in descending order of maturity.
d. a company may present its assets in alphabetical order if it so desires.
 
 
79.
Under U.S. GAAP, cash interest from investments is reported on the statement of cash flows as part of investing activities whereas under IFRS, cash interest from investments is reported as part of financing activities.
True or false
 
 
80.
What would Barden report as total stockholders' equity on its balance sheet?
a. $300,000
b. $387,500
c. $637,500
d. $87,500
 
 
81.
When adjusting accrual earnings to obtain cash flows from operations,
a. an increase in Accounts Payable is added to determine cash flow from operations.
b. a decrease in Accounts Payable is added to determine cash flow from operations.
c. an increase in Accounts Payable is deducted to determine cash flows from operations.
d. it is not necessary to consider any changes to Accounts Payable.
 
 
82.
When adjusting accrual earnings to obtain cash flows from operations, an increase in Prepaid Rent Expense is subtracted to arrive at cash flow from operations.
Ture or false
 
 
83.
Which of the following is not true regarding the tax note to the financial statements?
a. The tax note is never required to include any information on foreign tax rate implications.
b. The tax note can describe how financial reporting differs from tax accounting.
c. The tax note can describe how tax disputes may affect future tax payments.
d. The tax note can explain how foreign tax rates affect income tax expense.
 
 
84.
Which of the following statements about retained earnings is not true?
a. Retained earnings reflect the net income of previous accounting periods only.
b. Retained earnings measures the cumulative earnings of the company since inception, minus dividends distributed.
c. Retained earnings represents cumulative earnings that have been reinvested in the business.
d. Retained earnings may represent a large portion of stockholders' equity.
 
 
85.
Which of the following statements is not true?
a. The indirect method begins with net income.
b. Cash flows from operating activities will differ between the direct and indirect methods.
c. Most firms use the indirect method to prepare the statement of cash flows.
d. The direct method presents cash inflows and outflows.
 
 
86.
Which of the following statements is not true regarding cash flow from operating activities?
a. Most firms use the indirect method for presentation.
b. Each line item in a direct method cash flow statement is actually a cash flow.
c. The direct method begins with net income and then shows the differences between operating cash flow and net income.
d. There are two methods for presenting cash flow from operating activities.
 
 
 
 
 
 
 
 
 

87.
Which of the following statements is not true regarding the cash flow statement?
a. The cash flow statement provides information about changes in all the balance sheet accounts.
b. The change in cash is classified into cash flow from three categories: operating activities, investing activities and financing activities.
c. The cash flow statement generally shows that cash flows and accrual earnings are substantially the same.
d. The cash flow statement explains the causes for year-to-year changes in cash and cash equivalents.
 
 
88.
Which one of the following equations explains why successive balance sheets can be used to prepare a firm's cash flow statement?
a. Assets = Liabilities - Equity
b. Cash - Noncash assets = Liabilities - Equity
c. Cash = Liabilities - Noncash assets + Stockholders' equity
d. Cash = Liabilities + Stockholders' equity
 
 
 

A company’s financial statements reflect information about: 

a. future projections of sales, expenses, and other future economic events.

b. product information and competitive positions.

c. the general economy of the industry in which the company operates.

d. economic events that affect a company that can be translated into accounting numbers.

 

 

All financial statements:

a. provide a picture of the company at a moment in time.

b. describe changes that took place over a period of time.

c. help to evaluate what happened in the past.

d. contain the most up to date information about the company.

 

 

A firm’s financial statements contain trends that give users insight into the firm’s

a. future market share.

b. position within its industry.

c. profitability, productivity, and liquidity.

d. current market price for common and preferred stock.

 

 

The ability to raise additional cash by selling assets, issuing stock, or borrowing more is

a. financial flexibility.

b. a credit risk indicator.

c. a stock price predictor.

d. one way to project earnings.

 

 

Creditors assess credit risk by comparing a firm’s required principal and interest payments to estimates of the firm’s current and future

a. net assets.

b. gross income.

c. net income.

d. cash flows.

 

 

Professional analysts need information on a company’s future earnings and cash flow to evaluate audit vulnerabilities, to assess debt repayment prospects and to

a. certify good values in the stock market.

b. indemnify creditors against losses.

c. certify that no fraud exists in the company.

d. value its equity securities.

 

 

The costs of providing financial information is ultimately borne by: 

a. management.

b. shareholders.

c. auditors.

d. professional analysts.

 

 

Which of the following statements is not correct regarding a company's financial statements?

a. They may present a picture of the company at a moment in time.

b. They may describe changes that took place over a period of time

c. They reflect economic events that affect the company.

d. They are comparable to the statements of other companies as all publicly held companies follow the very precise science of accounting.

 

 

Which of the following are correct with respect to information contained in financial statements?

a. Information asymmetry occurs when management has access to more and better information than do people outside the company.

b. Financial statements cannot solve the issue of information asymmetry.

c. Financial statements help solve the issue of information asymmetry.

d. Financial statements help solve the issue of information asymmetry which is when management has access to more and better information than do people outside the company.

 

 

Which is not correct regarding Regulation Fair Disclosure (Reg FD)?

a. It helps level the playing field between individual and institutional investors.

b. It does not limit what management can say in private conversations with analysts or investors.

c. It was passed by the SEC.

d. It limits what management can say in private conversations with analysts and investors 

 

 

Companies that have projected operating cash flows that are more than sufficient to meet debt payments are

a. financially flexible.

b. good credit risk companies.

c. undervalued.

d. overvalued.

 

Investors who compare a firm’s discounted future cash flows to the current market price of a stock are using the

a. efficient market hypothesis.

b. market-to-market approach.

c. fundamental analysis approach.

d. technical analysis approach.

 

 

A company’s financial statements can be used for all of the following purposes except

a. as a scorecard on the company’s social responsibility.

b. as a management report card.

c. as an early warning signal.

d. as a measure of accountability.

 

 

The market analysis known as fundamental analysis

a. predicts future trends in the financial drivers of a company’s economic success or failure.

b. relies on price and volume movement of stock.

c. has no insights about company value beyond current market price.

d. uses microeconomic data to forecast stock values.

 

 

Investors who follow a fundamental analysis approach

a. determine the value the company’s assets would yield if sold individually.

b. estimate the value of a stock by assessing the amount, timing, and uncertainty of future cash flows that will accrue to the issuing company.

c. assess the company’s ability to meet its debt-related financial obligations.

d. assess the company’s ability to raise additional cash by selling assets, issuing stock, or borrowing more.

 

 

In designing audit procedures the auditor will include all of the following except:

a. Industry conditions.

b. Global economic trends.

c. Assessing the reasonableness of the numbers in relation to the company's activities.

d. Fraud risk factors that may be present.

 

 

Analytical review procedures include all of the following except

a. simple ratio and trend analysis.

b. complex statistical techniques.

c. general reasonableness tests.

d. comparison of the company’s reported financial results to benchmarks established by the SEC.

 

 

Relevant financial information

a. is free from bias and error.

b. is measured in a similar manner among different companies.

c. can be independently verified.

d. is capable of making a difference in a decision.

 

 

To achieve faithful representation, the financial information must be

a. consistent, unbiased, and relevant.

b. relevant, comparable, and timely.

c. relevant, consistent, and timely.

d. complete, neutral, and free from material error.

 

 

Financial information that is provided to decision makers before it loses its capacity to influence their decisions is

a. neutral.

b. verifiable.

c. timely.

d. consistent.

 

 

Financial information which does not favor one set of interested parties over another is

a. relevant.

b. verifiable.

c. neutral.

d. faithfully represented.

 

 

Employees demand financial information for all of the following except:

a. Monitoring profit sharing and stock ownership plans.

b. Monitoring how much the senior executives earn.

c. Monitoring the health of company pension plans.

d. Monitoring union contracts that link negotiated wage increases to company financial performance.

 

 

Which of the following statements is correct with respect to economic incentives to release financial information?

a. Because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose.

b. Because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.

c. Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.

d. Owners and managers do not have an economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost.

 

 

Which statement below describes efficient market investors?

a. They presume they have no insight beyond the share price.

b. They believe that any new development is quickly and correctly reflected in the stock price.

c. They use financial statements to assess risk and dividend yields to make portfolio decisions.

d. All of these answer choices are correct.

 

 

Which of the following create a competitive disadvantage according to the full disclosure principle?

a. Details about the company’s strategies, plans and tactics.

b. Information about the company’s technological and managerial innovations.

c. Detailed information about the company’s operations.

d. All of these answer choices are correct.

 

 

When independent measurers get similar results when using the same accounting measurement methods, the financial information is

a. relevant.

b. verifiable.

c. timely.

d. faithfully represented.

 

 

Being verifiable and neutral is part of what makes financial information

a. useful.

b. consistent.

c. comparable.

d. relevant.

 

 

If a company fails to disclose information about a lawsuit because it might be embarrassing to the company, it is violating

a. relevance.

b. verifiability.

c. neutrality.

d. timeliness.

 

 

Which of the following is not an accurate statement related to the demand for financial reporting?

a. Economically realistic reporting standards are low when there are few important capital providers.

b. Cross-country differences have no impact on capital funding opportunities and financial reporting practices.

c. External investors who provide capital demand a reporting system that accurately depicts a company past economic performance and its future prospects.

d. Comprehensive financial data is demanded when there is a broad base of external investors.

 

 

Financial information capable of making a difference in a decision is

b. verifiable.

c. consistent.

d. neutral.

 

 

To be Determined 

a. royalty contracts with inventors.

b. sales contracts with customers.

c. compensation contracts with managers.

d. debt contracts with bankers.

 

 

What type of trends and relationships can be gleaned from a company's financial statements?

a. Rates of sales and accounts receivable growth.

b. Rates of expense growth and expenses as a percentage of sales.

c. How the company's growth rates compare to their competitors.

d. All of these answer choices are correct.

 

 

The type of analysis that uses financial statements to assess a company’s current market price is: 

a. valuation analysis.

b. efficient market analysis.

c. fundamental analysis.

d. technical analysis.

 

 

When financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the _______ function of financial reports.

a. proxy.

b. fundamental.

c. technical.

d. stewardship.

 

 

Which statement is not true regarding the conservatism convention in accounting?

a. Conservatism guides us to choose the approach that leads to lower assets or higher liabilities.

b. Conservatism means we only record that of which we are 100% certain.

c. Conservatism is sometimes used to defend poor accounting judgments.

d. Conservatism strives to ensure that business risks and uncertainties are adequately reflected in the financial statements.

 

 

Investors who presume that they have no insights about company value beyond the current market price and use financial statement data to assess firm-specific attributes believe in the

a. market-to-market hypothesis.

b. efficient market hypothesis.

c. fundamental market hypothesis.

d. technical market hypothesis.

 

 

Which of the following people outside the company do not demand financial statement information as a key input?

a. Suppliers and Lenders.

b. Government and Regulatory Agencies.

c. Competitors.

d. Customers.

 

 

Which item below does not describe a politically vulnerable firm?

a. The firm has contracts controlled by the government.

b. The firm may face antitrust litigation or loss of protective import quotas.

c. The firm is in a highly visible industry such as oil & gas or pharmaceuticals.

d. The firm may be attacked in the financial and popular press for generating high earnings.

 

 

Which of the following are primary qualitative characteristics of accounting information?

a. Relevance and Timeliness.

b. Relevance and Faithful Representation.

c. Comparability and Timeliness.

d. Verifiability and Understandability.

 

 

To achieve Faithful Representation, accounting information presented must meet which of the following requirements?

a. It must be comparable so that analysts can use it.

b. It must have predictive and confirmatory value.

c. It must depict the underlying economic event, be complete, neutral, and free from material error.

d. It must meet a materiality threshold.

 

 

The amounts of executive compensation and bonuses are often determined by

a. auditor’s recommendations.

b. evaluations by subordinates.

c. company compensation contracts.

d. industry guidelines.

 

 

Whose responsibility is it to ensure that the company’s financial information is properly assembled, classified, characterized, and presented clearly and concisely in order to make it understandable?

a. The public accounting firm performing the audit.

b. The SEC by enforcing reporting standards.

c. Management of the company publishing the statements.

d. FASB when drafting generally accepted accounting principles.

 

 

Which of the following is not an action taken by shareholders when the earnings and share price fall below acceptable levels?

a. Letters to management and outside directors.

b. Phone calls to management and outside directors.

c. Launching a proxy contest.

d. Filing a lawsuit for the lost value of the share price.

 

 

Employees demand financial statement information because the firm’s performance is often linked to all of the following except

a. negotiated wage increases in union contracts.

b. social security benefits.

c. pension plan benefits.

d. employee profit sharing.

 

 

When a borrower violates a loan covenant that requires minimum achievement of an accounting measure in the financial statements, the lender can

a. immediately seize the loan collateral.

b. fire the chief operating officer of the borrower.

c. report the borrower to the IRS.

d. call for immediate repayment of the loan.

 

 

Investors and analysts must have certain capabilities regarding financial reporting which include

a. an understanding of current financial reporting standards.

b. recognition that management selects the financial reporting standards used.

c. an ability to recognize that financial statement information reported is grounded in judgment as well as facts.

d. all of these answer choices are correct.

 

 

The goal of generally accepted accounting principles is to ensure that a company’s financial statements

a. do not contain any representation that could jeopardize management.

b. provide stockholders all of the information they need to assess management’s performance.

c. are accurate and free from fraud.

d. clearly represent its economic condition and performance of the company.

 

 

Timeliness is a qualitative characteristic of accounting information that indicates that information should be provided to users

a. within one month after the close of the books.

b. before it loses its capacity to influence their decisions.

c. before statutory deadlines.

d. every month.

 

 

Which one of the following types of disclosure costs is the cost of disclosing the company’s pricing strategies?

a. Political cost

b. Litigation cost

c. Competitive disadvantage cost

d. Information collection, processing, and dissemination cost

 

 

If the financial reporting environment were unregulated, disclosure would occur voluntarily

a. as long as other companies in the reporting company’s industry voluntarily disclosed financial information.

b. only to analysts that the company believes will report favorably on the company’s prospects.

c. only when managers wanted to raise additional capital.

d. as long as the incremental benefits to the company from supplying financial information exceeded the incremental costs of providing the information.

 

 

Companies offering higher risk securities have incentives to mask their true condition by

a. supplying overly optimistic financial information.

b. not having their financial statements audited.

c. listing on foreign exchanges where reporting requirements are less stringent than those in the U.S.

d. including testimonials from well known executives in their financial statements.

 

 

One financial disclosure cost is the possibility that competitors may use the information to harm the company providing the disclosure. All of the following disclosures might create a competitive disadvantage except

a. detailed information about company operations, such as sales and cost figures for individual product lines.

b. information about the company’s technological and managerial innovations.

c. information showing the company’s amount of spending on research and development.

d. details about the company’s strategies, plans and tactics.

 

 

It is common for shareholders to initiate litigation when

a. the company reports record profits, but does not declare dividends.

b. there is a sudden drop in stock price shortly after the company released new financial information.

c. the company introduces new products that are found to be harmful to the environment.

d. rumors about the company appear in the media that, if true, would result in slower growth in future profits.

 

 

When comparing U.S. GAAP and IFRS standards, which of the following is not correct?

a. IFRS is principles-based while U.S. GAAP is rules-based.

b. U.S. GAAP standards provide too many scope exceptions.

c. IFRS provides more detailed guidance than U.S. GAAP.

d. U.S. GAAP provides more detailed guidance than IFRS.

 

 

Using the same accounting methods to record and report similar events from period to period demonstrates

a. consistency.

b. comparability.

c. neutrality.

d. faithful representation.

 

 

Which one of the following has statutory authority to determine accounting rules for companies whose securities are owned by the general public?

a. American Institute of Certified Public Accountants

b. State Boards of Accountancy

c. Securities and Exchange Commission

d. Financial Accounting Standards Board

 

 

Which of the following does not describe how FASB endeavors to draft pronouncements?

a. Provide enough implementation guidance for consistent application.

b. Explain the accounting principles being applied.

c. Clearly define bright-line rules.

d. Avoid bright line rules.

 

 

The growth of global investing has spurred development of worldwide accounting standards that are written by the

a. American Institute of Certified Public Accountants.

b. Institute of Global Auditors.

c. Global Committee on Accounting Standards.

d. International Accounting Standards Board.

 

 

The organization responsible for establishing auditing standards and inspecting and investigating auditing practices of public accounting firms is

a. Congress under the authority of the Sarbanes-Oxley Act (SOX).

b. the American Institute of Certified Public Accountants (AICPA).

c. the Securities and Exchange Commission (SEC).

d. the Public Company Accounting Oversight Board (PCAOB).

 

 

The only authoritative source of U.S. GAAP is created by FASB and exists in a single database known as

a. the accounting standards database.

b. FASB financial reporting standards.

c. the converged accounting standards.

d. the accounting standards codification.

 

 

The ASC uses a structure in which the FASB’s authoritative accounting guidance is organized into all of the following except

a. chapters.

b. topics.

c. sections.

d. paragraphs.

 

 

ASC content is organized

a. alphabetically by topic.

b. in chronological order based on the issue date of the major pronouncement on which the content is based.

c. without numerical reference to the original standard from which the content was derived.

d. in the manner prescribed by the IASB.

 

 

GAAP’s flexibility in its reporting standards allows companies to

a. smooth reported earnings over several reporting periods.

b. change accounting estimates to meet target sales or earnings.

c. change accounting principles to improve reported earnings.

d. avoid adopting specific accounting techniques and reporting procedures.

 

 

Financial statements follow

a. rigid guidelines that require specific adherence to regulated procedures.

b. generally accepted guidelines that allow management a degree of flexibility in choices

c. general guidelines with little choice among different procedures.

d. legal requirements for uniform presentation and disclosure.

 

 

A company manages a large portfolio of marketable securities and sells only stocks with substantial gains in poor income years or sells only stocks with substantial losses in good income years. This strategy is an indication of: 

a. securities fraud.

b. unstable portfolio management.

c. income smoothing.

d. violating security trading laws.

 

 

Identify the correct order of the three steps constituting the FASB’s “due process” procedure.

a. Public-hearing stage, exposure-draft stage, and voting stage.

b. Discussion-memorandum stage, public-hearing stage, and voting stage.

c. Exposure-draft stage, discussion-memorandum stage, and voting stage.

d. Discussion-memorandum stage, exposure-draft stage, and voting stage.

 

 

The Securities and Exchange Act of 1934 required all publicly traded firms to

a. purchase insurance against corporate bankruptcy.

b. register with an authorized stock exchange.

c. provide annual financial statements audited by independent accountants.

d. file balance sheets, income statements, and statements of cash flow with the SEC each year.

 

 

The Financial Accounting Standards Board has responsibility for the establishment of U. S. accounting standards and

a. full statutory power to enforce compliance with GAAP.

b. authority from the SEC to enforce compliance with GAAP.

c. no authority or responsibility to enforce compliance with GAAP.

d. responsibility imposed by AICPA to enforce compliance with GAAP.

 

 

When financial information is measured and reported in a similar manner across different companies in the same industry it is

a. consistent.

b. comparable.

c. neutral.

d. faithfully represented.

 

 

When a company changes from straight-line to the declining balance method of accounting for depreciation, the financial statements lack

a. comparability.

b. consistency.

c. neutrality.

d. faithful representation.

 

 

The network of conventions, rules, guidelines, and procedures used by the accounting profession is known as generally accepted

a. auditing standards.

b. accounting procedures.

c. accounting principles.

d. auditing principles.

 

 

Omissions or misstatements within a financial statement which could influence the decisions of the user of the statement violates

a. neutrality.

b. consistency.

c. conservatism.

d. materiality.

 

 

Some countries’ philosophy of financial reporting differs from U.S. GAAP because their financial reports are required to

a. be verifiable.

b. conform to tax and/or commercial law.

c. be reported and measured in a similar manner across companies.

d. use the same accounting methods for similar events period to period.

 

 

Differences between IFRS and U.S. GAAP include all of the following except

a. Reversal of inventory write-downs.

b. Carrying value of investment property.

c. Revenue recognition.

d. Research and development costs.

 

 

Financial reporting philosophies differ across countries. These philosophies evolve from and reflect several factors including all of the following except

a. the language(s) spoken in the country.

b. the specific political institutions within the country.

c. the specific financial institutions within the country.

d. the country’s social customs.

 

 

Companies needing to access new and ever larger sources of capital in response to increased international competitiveness face a severe disadvantage if their financial reporting: 

a. is in accordance with IFRS.

b. is in accordance with U.S. GAAP.

c. is based on a commercial and tax law approach.

d. is based on an economic performance approach.

 

 

International financial reporting standards are currently established by the

a. IASC.

b. IASB.

c. FASB.

d. PCAOB.

 

 

IFRS frequently

a. are automatically approved for any foreign listed company, as soon as a new standard is issued.

b. permit only one accounting treatment for similar business transactions and events to promote comparability.

c. allow firms less latitude when compared to U.S. GAAP.

d. follow a more generalized overview approach than do U.S. GAAP counterpart standards.

 

 

International Financial Reporting Standards (IFRS) are

a. built on broad principles.

b. rules-based.

c. narrowly defined, detailed standards.

d. seldom different than those issued by the FASB.

 

 

Which of the following statements regarding IFRS is incorrect?

a. All companies listed on the London Stock Exchange must use IFRS.

b. The SEC-required Form 20-F must be filed with the SEC by foreign issuers within 30 days.

c. The European Commission must “endorse” IFRS for required use by EU companies.

d. The SEC has expressed concern that transitioning to IFRS might be prohibitively expensive and might lessen U.S. influence over standard setting.

 

 

Accounting information is heavily regulated

a. To increase reporting efficiency.

b. With the intention of preventing market failure.

c. To prevent abuse given that the incentives of information producers are not necessarily aligned with those of users.

d. All of these answer choices are correct.

 

 

When is it permissible to issue financial statements that contain a material departure from GAAP?

a. It is never permitted.

b. When it is a non-US corporation.

c. When the auditor can demonstrate that due to unusual circumstances the financial statements would otherwise have been misleading.

d. When management does not like the GAAP results.

 

 

The time that the performance obligation is satisfied for revenue recognition is usually

a. before the sale.

b. after the sale.

c. at the time of sale.

d. when payment is received.

 

 

If consideration is received before a contract is identified and the consideration is nonrefundable, revenue may be recognized if 

a. the contract has been terminated.

b. goods have been delivered.

c. there is no remaining obligation to transfer goods.

d. any of these answer choices is correct.

 

 

Under ASC Topic 606 guidance for revenue recognition, all of the following conditions must be met to account for a contract with a customer, except 

a. the contract has commercial substance.

b. collection is likely.

c. each party’s rights are identified regarding goods or services to be exchanged.

d. all parties to the contract have approved the contract.

 

 

Assuming the requirements for recognizing revenue over time are met, and using the percentage-of-completion method to recognize revenue, the measure of completion is computed by dividing

a. profits earned to date by estimated total profits.

b. costs incurred to date by estimated total costs. – Actual / Plan

c. costs incurred to date by the contract price.

d. profits earned to date by the contract price.

 

 

Assuming the requirements for recognizing revenue over time are met, and using the percentage-of-completion method, the profit to be recognized in any year is based on the completion ratio of

a. incurred contract costs divided by estimated total contract costs.

b. incurred contract costs multiplied by estimated total contract costs.

c. estimated total contract costs divided by incurred contract costs.

d. estimated total contract costs multiplied by incurred contract costs.

 

 

Noah Construction Company is building a large complex for a contract price of $5,000,000. This is a three-year project and the requirements for recognizing revenue over time are met. The total estimated cost of the project is $4,000,000 and the following information is available:

($ in thousands)
Year 1
Year 2
Year 3
Costs incurred
$ 1,000
$ 1,500
$ 1,250
Estimated completion costs
$ 3,000
$ 1,500
$        0
Billings
$    750
$ 1,750
$ 2,500
Cash collected
$    500
$ 1,500
$ 3,000
 

Using the percentage-of-completion method of revenue recognition, how much income is recognized in Year 2?

a. $250,000

b. $375,000

c. $625,000

d. $3,125,000

 

Using the percentage-of-completion method of revenue recognition, how much income is recognized in Year 3?

a. $375,000

b. $625,000

c. $1,000,000

d. $1,250,000

 

Which one of the following entries would be made in Year 1 to record the costs incurred using the percentage-of-completion method of revenue recognition?

a.
DR Inventory: Construction in progress
$1,000,000
 
 
        CR Accounts payable, cash, etc.
 
$1,000,000
b.
DR Inventory: Construction in progress
$1,000,000
 
 
        CR Income on long-term construction contract
 
$1,000,000
c.
DR Inventory: Construction in progress
$1,000,000
 
 
        CR Billings on construction in progress
 
$1,000,000
d.
DR Income on long-term construction contract
$1,000,000
 
 
        CR Accounts payable, cash, etc.
 
$1,000,000
 

 

Which one of the following entries would be made in Year 1 to record the income recognized using the percentage-of-completion method of revenue recognition?

a.
DR Inventory: Construction in progress
$250,000
 
 
DR Construction expense
$1,000,000
 
 
        CR Construction revenue
 
$1,250,000
b.
DR Inventory: Construction in progress
$375,000
 
 
        CR Billings on construction in progress
 
$375,000
c.
DR Inventory: Construction in progress
$675,000
 
 
        CR Billings on construction in progress
 
$675,000
d.
DR Income on long-term construction contract
$3,125,000
 
 
        CR Accounts payable, cash, etc.
 
$3,125,000
 

 

Which one of the following entries would be made in Year 2 to record the customer billing using the percentage-of-completion method of revenue recognition?

a.
DR Accounts receivable
$1,500,000
 
 
        CR Cash
 
$1,500,000
b.
DR Accounts receivable
$1,500,000
 
 
        CR Billings on construction in progress
 
$1,500,000
c.
DR Accounts receivable
$1,750,000
 
 
        CR Income on long-term construction contract
 
$1,750,000
d.
DR Accounts receivable
$1,750,000
 
 
        CR Billings on construction in progress
 
$1,750,000
 

 

Using revenue recognition standards prior to ASC Topic 606, which one of the following entries would be made in Year 3 to record the completion and acceptance of the project using the completed-contract method of revenue recognition?

a.
DR Inventory: Construction in progress
$5,000,000
 
 
        CR Billings on construction in progress
 
$5,000,000
b.
DR Billings on construction in progress
$5,000,000
 
 
        CR Inventory: Construction in progress
 
$3,750,000
 
        CR Income on long-term construction contract
 
$1,250,000
c.
DR Inventory: Construction in progress
$3,750,000
 
 
DR Income on long-term construction contract
$1,250,000
 
 
        CR Billings on construction in progress
 
$5,000,000
d.
DR Billings on construction in progress
$1,250,000
 
 
        CR Inventory: Construction in progress
 
$1,250,000
 

 

Borden Construction entered into the following contracts with Lovely Landscaping, LLP: (1) construct a paver patio, (2) plant trees, and (3) landscape planting beds for a new home construction project. Lovely Landscaping should treat the contracts

a. as a single contract.

b. as three separate contracts.

c. as two contracts—one for hardscaping and one for landscaping.

d. None of these.

 

 

Prior to ASC Topic 606 for revenue recognition, when losses occur on long-term contracts using the completed-contract method, they are recognized

a. proportionately over the contract period using costs incurred as a base.

b. evenly over the contract period.

c. in their entirety as soon as it becomes known that a loss will be suffered.

d. at the completion of the project.

 

 

Using a completed-contract method prior to ASC Topic 606 for revenue recognition, if Monroe had $1.5 million in its Construction In Progress Inventory account and billings to Pleasantville of $2 million as of December 31, 2018, how much net income should Monroe Construction recognize for 2018?

a. $0

b. $500,000

c. $2 million

d. $1.5 million

 

 

 

Which of the following is not a permitted simpler approach to revenue recognition under ASC Topic 606 for revenue recognition? 

a. Applying the 5-step model to a portfolio of similar contracts 

b. Using the previous revenue recognition rules instead of the 5-step model. 

c. Not adjusting for significant financial components if the contract period is one year or less. 

d. Recognizing revenue for the amount invoiced to the customer.

 

 

Burgers and More operates a chain of fast-food restaurants across the United States. The restaurants are franchised operations. Under the franchise agreement, restaurant owners have the right to use the Burgers and More trade name, financing arrangements for franchisees, and management training at the corporate headquarters as well as the right to use training videos for their employees. The Burgers and More franchise contracts contain the following separate performance obligations:

a. intellectual property, training

b. intellectual property, financing, and training

c. intellectual property 

d. financing and training

 

 

Which of the following criteria must be met to recognize revenue under a bill-and-hold arrangement?

a. The reason for the bill-and-hold arrangement is substantive.

b. The product is identified separately as belonging to the customer.

c. The product is ready for physical transfer to the customer

d. All of these criteria must be met to recognize revenue under a bill-and-hold arrangement.

 

 

Ford Appliance Center records revenue on the installment sales method, prior to ASC Topic 606 for revenue recognition. The following information is available for the first two years of business.

 
Year 1
Year 2
Sales
$200,000
$250,000
Cost of goods sold
140,000
162,500
Cash collections:
 
 
     Year 1 sales
100,000
80,000
     Year 2 sales
 
130,000
 

How much realized gross profit on installment sales will Ford recognize in Year 1?

a. $20,000

b. $30,000

c. $60,000

d. $100,000

 

Assume that Ford Appliance Center has consistently recognized revenue on installment sales using the cost recovery method. How much realized gross profit on installment sales will Ford recognize in Year 1?

a. $0

b. $30,000

c. $60,000

d. $100,000

 

 

How much realized gross profit on installment sales will Ford recognize in Year 2?

a. $24,000

b. $45,500

c. $69,500

d. $130,000

 

Which one of the following entries properly records the installment sales for Year 2?

a.
DR Accounts receivable—Year 1
$200,000
 
 
DR Accounts receivable—Year 2
$250,000
 
 
        CR Realized gross profit on installment sales
 
$450,000
b.
DR Realized gross profit on installment sales
$250,000
 
 
        CR Installment sales revenue
 
$250,000
c.
DR Installment sales revenue
$250,000
 
 
        CR Realized gross profit on installment sales
 
$250,000
d.
DR Accounts receivable—Year 2
$250,000
 
 
        CR Installment sales revenue
 
$250,000
 

 

Which one of the following entries properly records the cost of installment goods sold for Year 2?

a.
DR Cost of installment goods sold
$162,500
 
 
        CR Inventory
 
$162,500
b.
DR Cost of installment goods sold
$302,500
 
 
        CR Inventory
 
$302,500
c.
DR Cost of installment goods sold
$162,500
 
 
        CR Installment sales revenue
 
$162,500
d.
DR Cost of installment goods sold
$302,500
 
 
        CR Installment sales revenue
 
$302,500
 

 

Which of the following is not a factor that indicates multiple performance obligations in a contract?

a. The integration of multiple goods and services provides a significant service to the customer.

b. One or more of the goods or services significantly modifies other goods or services promised in the contract.

c. The goods or services in the contract are highly interdependent or interrelated.

d. All of these are factors.

 

 

CPA Now developed an app to help prepare for the CPA exam. Customers may separately purchase (a) the app, (b) updates to the app, and (c) coaching support for the exam, or a package that includes the app and free updates coaching support until they pass the exam. The package deal includes performance obligation(s).

a. one

b. two

c. three

d. zero

 

 

Yashito Corporation sells cameras and accessories. The company’s newest model, popular with preteens, takes wallet-sized instant photos. The wholesale price for this camera is $50. In addition, the company sells carrying cases ($25), film cartridges ($15), and selfie lenses ($10) made especially for this camera. During the holiday season, Yashito offers the camera, film, carrying case, and selfie lens as a package for $75. For each package sold, the transaction price allocated to the camera is

a. $100.

b. $75.

c. $50.

d. $37.50.

 

 

Under ASC Topic 606 for revenue recognition, a performance obligation is considered satisfied when control over the goods and services is transferred to the customer. Which of the following is not an indicator that control has transferred?

a. The customer is legally obligated to pay for the goods or services.

b. The customer has legal title of the goods.

c. The customer has accepted the goods and has physical possession of the goods.

d. All of these are indicators that control has transferred.

 

 

Hargren Publishing offers its Accounting textbooks as e-texts through its online homework management system. Purchase of an access code provides the student with access to the e-text and online learning materials for six months. During that time, students have access to updates to the text and learning materials. Hargren should recognize revenue for purchases of access codes

a. at the end of the six-month access period.

b. when they occur.

c. over the six-month period during which the customer has access.

d. at the beginning of the semester in which the student will use the access code.

 

 

In 2017, Borden Construction was contracted to build an apartment complex for its client, Deer Park Realty Management. The project was estimated to cost $15 million; however, on December 31, 2017, when the project was 75% complete, Borden estimated that the project costs would be much less, and agreed to adjust the contract price to $10 million. Prior to December 31, 2017, Borden Construction had recognized revenue of $10 million. At year end, Borden should 

a. make a correction for $2.5 million in over-recognized revenue.

b. record nothing.

c. record additional $5 million in revenue.

d. make a correction for $5 million in over-recognized revenue.

 

 

Continuing franchise fees that are based on the franchisee’s percentage of sales should be recognized by the franchisor as revenue

a. when the fee is received.

b. over time when the sales are reported to the franchisor. 

c. in accordance with the franchise agreement.

d. only after the balance of the initial franchise fee has been received.

 

 

Initial franchise fees should be recorded as revenue by the franchisor

a. in accordance with the franchise agreement.

b. when cash is received from the franchisee.

c. when all material services relating to the sale have been performed.

d. during the year the franchise agreement is signed.

 

 

Under GAAP prior to ASC Topic 606 for revenue recognition, which of the following conditions is not necessary for a seller to recognize revenue at time of sale when a right of return exists? 

a. The seller’s price to the buyer is fixed.

b. The buyer has paid the seller.

c. The goods must have been delivered under a formal consignment arrangement.

d. The amount of future returns can be reasonably estimated.

 

 

GAAP prior to ASC Topic 606 for revenue recognition specifies that for a seller to record revenue at time of sale when right of return exists the following conditions must be met except:

a. The seller’s price to the buyer is substantially fixed or determinable at the date of sale.

b. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.

c. The buyer’s obligation to the seller does not change in the event of theft or physical destruction or damage of the product.

d. The buyer is a special purpose entity established by the seller for the sole purpose of buying and reselling the seller’s product.

 

 

The key accounting issue related to bundled products such as software licenses and technical support:  

a. is the method of revenue recognition.

b. is the amount of revenue to recognize over the life of the contract.

c. depends on whether the customer is able to pay for the contracted services.

d. concerns the amount of transaction price to allocate to each contract element.

 

 

Under ASC Topic 606 for revenue recognition, which of the following statements is not accurate regarding performance obligations?

a. Firms must disclose qualitative information about their performance obligations.

b. Firms must disclose warranties provided.

c. Firms are not required to disclose any judgments used to apply the standard.

d. Firms must disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations.

 

 

Examples of variable consideration include all of the following except

a. penalties for not completing performing on a contract on time.

b. bonuses for completing performance on a contract early.

c. discounts on transaction prices.

d. all of the answer choices are correct.

 

 

A right of return exists when

a. the customer is entitled to a full or partial refund.

b. the customer is entitled to a credit against amounts owed.

c. the customer is entitled to another product in exchange.

d. any one of these conditions is met.

 

 

Under ASC Topic 606 for revenue recognition, which of the following factors is not an indicator of the principal/agent determination? 

a. Inventory risk.

b. Credit risk.

c. Shipping terms.

d. Control of prices of the goods or services.

 

 

Which of the following disclosures is not required by ASC Topic 606 guidance for revenue recognition?

a. Explanation of significant changes in contract assets and liabilities.

b. Beginning and ending balances of contract assets and liabilities.

c. Amount of revenue recognized in the current period that was included in the beginning contract liability balance.

d. Financial stability of major customers.

 

 

Under the new revenue recognition guidance in ASC Topic 606, a performance obligation is satisfied over time if

a. the customer simultaneously receives and consumes the goods and services provided by the firm.

b. the firm’s performance creates or enhances an asset under the customer’s control.

c. the firm’s performance does not create an asset with an alternative use and the firm has a right to receive payment for its performance to date.

d. any of these answer choices is correct.

 

 

Which of the following statements is not applicable to revenue recognition guidance under ASC Topic 606?

a. Firms must disaggregate revenues into categories that depict how revenue is affected by economic factors.

b. The standard applies a minimum number of categories that must be provided.

c. Disaggregated revenues are to be disclosed in a note to the financial statements.

d. Revenue may be disaggregated by geographic region.

 

 

Which of the following statements is not applicable to contract acquisition costs under ASC Topic 606 guidance for revenue recognition?

a. Incremental costs of acquiring a contract must be capitalized and amortized over the life of the contract.

b. Costs that would be incurred regardless of whether a contract is obtained are not capitalized.

c. The capitalization requirement is subject to a practical expedient.

d. Costs must be capitalized even if the amortization period is one year or less.

 

 

Which of the following statements is not applicable to ASC Topic 606 guidance for revenue recognition?

a. A contract asset is written down if it is deemed impaired and any related loss is recognized.

b. A contract asset is impaired if the carrying amount exceeds the recoverable amount.

c. The recoverable amount is the remaining expected consideration to be received less the costs of providing the goods and services that have not yet been expensed.

d. A contract asset is written down if it is deemed impaired and any related loss is deferred.

 

 

The new ASC Topic 606 provides a model for revenue recognition that includes

a. five steps.

b. four steps.

c. three steps.

d. two steps.

 

 

Under ASC Topic 606, which of the following is not a criteria for revenue recognition?

a. Rights regarding goods or services have been identified.

b. Delivery has occurred or services have been rendered.

c. Collectibility is probable.

d. The shipping terms are clearly stated in the contract.

 

 

Revenue for goods to be sold under a consignment arrangement of a manufacturer and a retail store should be recognized by the manufacturer when 

a. the manufacturer delivers the product to a retail store.

b. the seller promises to pay the manufacturer.

c. the goods are sold by the retail store.

d. the seller receives payment for the goods.

 

 

In the case of sales where the customer is billed before delivery of the goods,

a. the seller should always recognize revenue before the products are delivered to the customer.

b. the goods belong to the customer and revenue recognition is deferred until delivery.

c. the seller may recognize revenue if control of the goods has been transferred to the customer even though physical delivery has not taken place.

d. revenue will not be recognized until the goods are shipped to the customer.

 

 

In the case of goods delivered to a consignee under a consignment arrangement,

a. the consignor should not recognize revenue until the goods are transferred to a third party.

b. the cash received to date should be recognized by the consignor as deferred revenue until merchandise is delivered to the consignee.

c. revenue should be recognized when the consignor collects payment from the consignee.

d. the seller should recognize revenue although the goods have not yet been transferred to a third party.

 

 

Payments to a customer for slotting fees

a. can never be recognized.

b. must be expensed immediately.

c. might be considered a reduction in the selling price of goods sold to the customer.

d. are always expensed over the period benefited for the right to shelf space.

 

 

Internet companies that simply act as agent or broker for the transfer of goods must record revenue based on: 

a. the cost of the product sold.

b. the fees it charges sellers.

c. the sales price of the product.

d. the gross profit of the product sold.

 

 

Which of the following statements does not apply to the principal/agent relationship under ASC Topic 606 guidance for revenue recognition?

a. An agent reports revenue only for the net amount retained.

b. An agent may recognize revenue when its performance obligation to the principal is satisfied.

c. A principal recognizes revenue for the gross amount paid by the customer.

d. Inventory risk is not an important factor in determining the relationship.

 

 

Under ASC Topic 606, revenue should be recognized for services when 

a. the customer promises to pay for the service and the service date is confirmed.

b. the service contract is in writing and signed.

c. the service performance obligation is satisfied.

d. it is assured that there will be no need for warranty performance after service is rendered.

 

 

The cost-plus approach

a. refers to contracts that are modified from their original terms during the course of the contract.

b. refers to contracts where the contractor is not expected to recover all costs incurred in completing the project.

c. is not allowed under ASC Topic 606 guidance for revenue recognition.

d. uses an assumed reasonable profit margin to determine the stand-alone price.

 

 

Examples of variable consideration include the following except:

a. rebates.

b. slotting fees.

c. performance bonuses.

d. volume discounts.

 

 

Wilson, Inc. sells, installs and maintains manufacturing equipment. The contract with its customers to purchase equipment includes installation and includes a one-year maintenance contract, renewable for up to five years. Because the useful life of the equipment is expected to be five years, the company can reasonably expect its customers to renew the maintenance contracts for the full five years. Wilson records the cost of installation of the equipment as a capitalized contract and amortizes the cost over the five-year maintenance agreement period. Because of a defect in model A5403, Wilson anticipates that many of its customers will trade in the model and not renew the maintenance contracts. Wilson, Inc. should: 

a. write down the full amount received for maintenance contracts for the full five years.

b. write down the full amount of installation costs.

c. write down the contract asset and recognize a loss equal to the difference between the amount of maintenance contracts expected and the carrying amount.

d. do nothing until the customers fail to renew the maintenance contracts.

 

 

The new ASC Topic 606 for revenue recognition

a. addresses when and how revenue should be recognized in contracts that provide both goods and services to customers.

b. eliminates both the percentage-of-completion method and the installment sales method of revenue recognition.

c. will require companies to recognize a net liability contract position on all new contracts; revenue will then arise from increases in the net contract position over the life of the contract.

d. is more rules based than are existing standards.

 

 

Which of the following statements is not true regarding ASC Topic 606?

a. Long-term construction contracts is an area where the new standard clearly differs from existing guidance.

b. Adoption for calendar reporting entities is first required for calendar 2018.

c. Current guidance on long-term contracts gives more flexibility to firms for determining when revenue is recognized.

d. The new standard precludes the use of percentage-of-completion method for long-term construction contracts.

 

 

Which of the following methods can be used to recognize revenue when a performance obligation is satisfied over time? 

a. The output method

b. The present value method.

c. The future value method..

d. The fair value method.

 

 

Which of the following statements is true regarding the new ASC Topic 606 for revenue recognition?

a. The focus is on when the firm has earned the consideration to which it is entitled.

b. Early adoption is not allowed.

c. The new rules are more rules-based than principle-oriented.

d. Under IFRS, both public and non-public firms must adopt by 2018.

 

 

Which of the following statements is true regarding the five-step model in the ASC Topic 606 guidance for revenue recognition?

a. The sale itself is the sole criterion for recognizing revenue.

b. If a sale is not paid for on time, the seller should not recognize revenue.

c. The performance obligations in the contract need to be identified.

d. The transaction price is not relevant.

 

 

Which of the following is not a necessary condition for a firm to account for a customer contract under the ASC Topic 606 guidance for revenue recognition?

a. The contract has commercial substance.

b. Collection is probable.

c. Payment terms may not include a variable component.

d. The rights of each party can be identified.

 

 

Contracts must be

a. legally enforceable.

b. in writing.

c. communicated verbally.

d. drafted by an attorney.

 

 

The residual approach to allocate transaction prices to multiple performance obligations in a contract is appropriate when

a. The stand-along price of one or more of the goods or services is highly variable or uncertain.

b. None of the goods and services included in the contract are not sold on a stand-alone basis.

c. The stand-alone price of all of the goods or services is known. 

d. None of these.

 

 

A patient of Dr. Jones presents his Medicare card after his appointment. The total charge for the services was $100; however, Medicare will pay only $60 for this service and the patient is to pay $20. Acceptance of the patient’s Medicare insurance creates a contract

a. for payment of $100, regardless of what Medicare will pay.

b. for $20 and an $80 discount or price concession.

c. for payment of $80 and a $20 discount or price concession.

d. for payment of $60 and a price concession of $40.

 

 

Under the ASC Topic 606, which of the following statements is not a criteria that may determine whether the percentage of completion method may be used to recognize revenue

a. The customer receives and consumes the goods and services as the performance obligations are satisfied.

b. The firm’s performance creates or enhances an asset under the customer’s control.

c. Satisfying the performance obligations does not create an asset with an alternative use and the firm has a right to receive payment fro performance to date.

d. All of these are criteria that may be used to determine whether the percentage of completion method may be used.

 

 

Which of the following statements does not apply to the installment sales method?

a. Deferred gross profit on installment sales is generally treated as a deduction from installment sales in calculating the gross profit percentage.

b. Selling, general and administrative expenses related to installment sales are treated as period costs.

c. The deferred gross profit account is generally classified as a contra-account to accounts receivable.

d. The accounting system must match cash collections with the specific sales year to which the cash collections relate.

 

 

Which of the following statements is true prior to ASC Topic 606 regarding accounting for revenue recognition?

a. Under GAAP, the completed-contract method is always an acceptable alternative to the percentage-of-completion method of accounting for a long-term construction project.

b. At the end of a long-term construction project, “retained earnings” will be the same whether the completed-contract or the percentage-of-completion method of accounting is used for the project.

c. Net asset balances will be the same no matter what revenue recognition method is used.

d. Input measures are not applicable to any revenue recognition accounting method.

 

 

According to revenue recognition under ASC Topic 606, which of the following is a factor applicable to identifying performance obligations in a contract?

a. The length of the contract.

b. The obligation is distinct in the context of the contract.

c. The payment terms of the contract.

d. The shipping terms of the contract

 

 

Regarding ASC Topic 606 guidance for revenue recognition, which of the following statements is not true?

a. Prior to ASC Topic 606, U.S. GAAP related to revenue recognition was generally based on industry-specific guidance.

b. The FASB was involved with deciding to create a single, unifying framework for revenue recognition.

c. ASC Topic 606 is based on principles that are radically different from prior guidance.

d. A goal was to create a framework that could be applied to any industry and provide similar results for similar fact sets.

 

 

Which of the following statements is not true regarding ASC Topic 606 guidance for revenue recognition?

a. ASC Topic 606 applies to the sales of used equipment.

b. ASC Topic 606 includes the definition of a customer.

c. ASC Topic 606 allows for the combination of certain separate contracts.

d. ASC Topic 606 covers contract modifications.

 

 

Which of the following statements is true regarding contracts in ASC Topic 606 guidance for revenue recognition?

a. Contracts need to be legally enforceable to be considered under ASC Topic 606.

b. Contracts need to be in written form to be considered under ASC Topic 606.

c. No consideration can be received before a contract exists.

d. No price concessions can be made to an existing contract.

 

 

Which of the following statements is not true regarding the software developer example provided in ASC Topic 606 guidance for revenue recognition?

a. The example deals with the license of software.

b. Software installation, software updates, and technical support are not addressed.

c. The example covers four distinct performance obligations.

d. All the performance obligations can be separately identified.

 

 

Which of the following statements is not true regarding the treatment of warranties under the new revenue recognition guidance in ASC Topic 606?

a. A warranty that assures the product is free of defects is not a distinct performance obligation.

b. Warranties that provide services beyond assuring the product is defect-free at the time of sale are separate performance obligations.

c. A warranty that covers services that are normally considered routine maintenance is an assurance warranty.

d. The length of the warranty period should be considered.

 

 

Under the new revenue recognition guidance in ASC Topic 606, which of the following statements is true regarding contracts with customer options?

a. In some cases where customers have an option to acquire additional goods or services, an evaluation is required to determine if the option creates an additional performance obligation.

b. An additional performance obligation is created if the customer could obtain the same rights to additional goods or services without entering the contract.

c. An additional performance obligation is created if the option provides the customer a right to purchase the goods or services at the stand-alone selling price for those goods or services.

d. It is generally not considered a performance obligation when a retailer grants a “customer appreciation dividend” to a customer.

 

 

Under ASC Topic 606 guidance for revenue recognition, which of the following factors is not a consideration when determining the transaction price of a contract?

a. Variable consideration.

b. Shipping terms.

c. Significant financing components.

d. Whether the firm is a principal or an agent.

 

 

Under the new revenue recognition guidelines in ASC Topic 606, which of the following statements is not true regarding performance obligations satisfied over time?

a. The firm must determine at each reporting date the extent to which the performance obligation has been satisfied.

b. Output and input methods may be used for measurement purposes.

c. To obtain quality measurement, input methods must always be closely related to the transfer of the goods or services to the customer.

d. Usable input measures include labor hours, costs incurred, and time elapsed.

 

 

Which of the following statements is not true regarding transactions involving intellectual property?

a. A transaction involving intellectual property can represent a sale or a license.

b. The revenue recognition approach depends on whether the transaction is considered a sale or a license.

c. If a contract is considered a license, the firm must determine if the license is a distinct performance obligation.

d. If the customer’s right to use the intellectual property is not limited, the contract is considered a license.

 

 

Which of the following statements is not true regarding revenue recognition regarding gift cards?

a. “Breakage” refers to the unused portion of gift card balances.

b. “Breakage” can only be recognized as revenue to the extent that it is probable a reversal will not be necessary.

c. The amount received from the sale of gift cards is required to be recognized as revenue when the gift cards are sold.

d. It is typical that a portion of gift card sales will go unused by customers.

 

 

Under ASC Topic 606, which of the following statements is not true regarding the use of practical expedients in applying the revenue recognition model?

a. A firm can file an application to use a practical expedient on a large contract if it is under severe time pressure.

b. One expedient is to use a portfolio approach to numerous contracts with similar characteristics.

c. Determining the use of an expedient is dependent on whether there would not be a material difference in the financial statements from a more vigorous application of the standard.

d. A firm is not required to adjust the transaction price for a significant financing component if at the contract inception, the period between the payment and the transfer of goods or services is expected to be a year or less.

 

 

Which of the following statements is not true regarding the adoption of ASC Topic 606 guidance for revenue recognition?

a. Upon adoption, entities can choose between the retrospective approach or the cumulative effect approach.

b. When using the cumulative approach, the prior three years of financial statements need to be restated.

c. Under the cumulative effect, the firm determines how the balance sheet would differ as of the first day of the year of adoption.

d. Under the retrospective approach, each period presented is restated to what the financial statements would have been had the new standard always been in place.

 

 

Under IFRS in accounting for revenue recognition, for collection to be probable in order for revenue to be recognized on a contract, “probable” means

a. Likely to occur.

b. More likely to occur.

c. Most likely than not to occur.

d. More likely than not to occur.

 

 

In accounting for revenue recognition under ASC Topic 606, a contract modification is considered a new, separate contract when: 

a. The modification adds distinct goods or services to the agreement.

b. The revised contract price reflects the original contract price cost of the additional goods or services.

c. The revised contract adds distinct goods or services and the revised contract price reflects the allocated transaction price for the additional goods or services.

d. The revised contract adds distinct goods or services and the revised contract price reflects the stand-alone selling price of the additional goods or services.

 

 

In accounting for revenue recognition under ASC Topic 606, when there is a modification of a contract, which of the following is correct?

a. If the modification adds distinct goods or services to the original contract, then a new contract must be created.

b. If the new contract price does not reflect the stand-alone selling price of the additional goods or services to be exchanged, then a new contract must be created.

c. If the modification adds distinct goods or services to the original contract and the change in the original contract price reflects the stand-alone price of the additional goods or services to be exchanged, then a new contract need not be created.

d. If the modification adds distinct goods or services to the original contract and the change in the original contract price reflects the stand-alone price of the additional goods or services to be exchanged, then a new contract must be created.

 

 

In accounting for revenue recognition under ASC Topic 606, revenue can be recognized before a contract exists when cash has been received and

a. Goods have already been delivered to a customer, and there is no further obligation for the seller to deliver goods or services.

b. The cash has been received for goods identified to be delivered and the cash is refundable.

c. The cash has been received for goods or services to be delivered and the cash is nonrefundable.

d. Revenue should never be recognized before a contract exists.

 

 

According to ASC Topic 606 guidance for revenue recognition, which of the following statements is true regarding customer options when identifying performance obligations in a contract?

a. There is an additional performance obligation for additional goods or services if the customer could obtain the same rights to additional goods or services without entering into the current contract agreement.

b. There is an additional performance obligation for additional goods or services if the option in the contract provides for the additional goods or services at their stand-alone selling price.

c. There is an additional performance obligation for additional goods or services if the customer could obtain the same rights to additional goods or services elsewhere but the additional good or services are provided for free or at a discount in the current contract.

d. There is no additional performance obligation for additional goods or services if they will be received for free or at a discount, as long as the goods or services are similar to the other goods in the current contract.

 

 

Sew & More sells sewing machines and sewing supplies. The company recently ran a sales promotion on sewing machines that allowed customers to purchase a new sewing machine using store credit. The terms of the contract stated that customers would make 12 monthly payments that included a 6% annual interest rate. On the date of each sale, Sew & More should record 

Required:

a. No revenue until the contract is paid in full.

b. Sales revenue equal to the sales price of the sewing machine, interest revenue equal to the total amount of interest for the contract, and a receivable for the total of the sales price plus the interest.

c. revenue equal to the sales price of the sewing machine plus the total interest to be collected and a receivable for the same amount.

d. revenue equal to the sales price of the sewing machine and a receivable for the same amount.