ACCT 370 Quiz 2 Essentials of Financial Statement Analysis solutions complete answers

ACCT 370 Quiz 2 Essentials of Financial Statement Analysis solutions complete answers 

 

When actuarial estimates related to defined benefit pension plans are adjusted

 

Recent changes in _______ accounting standards require companies to group items within OCI based on __________:

 

Adjusting entries are used in all but which of the following situations?

 

T-account analysis can be used to gain insights into why accrual basis earnings and cash basis earnings differ and to

 

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

 

Adjusting entries must be made

 

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

 

Any increase in an asset may be offset by

 

The basic accounting equation may be expressed as

 

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

 

GAAP requires firms to report comprehensive income

 

Which one of the following is part of other comprehensive income (OCI)?

 

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

 

Which statement below is not correct with respect to earnings management?

 

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

 

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 cumulative effect of a change in an accounting principle is measured as

 

Which one of the following events would be considered an unusual or infrequent event?

 

For a disposal group to be considered held for sale, which of the following conditions are required to be met?

 

Which of the following is not considered an unusual or infrequently occurring item on an income statement?

 

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?

 

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

 

When transitory earnings are present, which of the following correctly depicts the order used on the income statement?

 

On the income statement, income from discontinued operations is shown

 

The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates

 

Which item is not correct with respect to the treatment of sustainable and transitory items and a company’s income statement?

 

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

 

The matching principle requires that expenses be recognized

 

Misstatements of tax expense, improper restructuring charges, asset impairment charges and gains/losses related to acquisitions are which type of restatement?

 

Which of the following does not properly state the reporting requirements when a change in reporting entity occurs?

 

Which of the following is not a change in reporting entity?

 

The real accounting issue in net income recognition is the

 

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

 

Net asset valuation and net income determination are inextricably intertwined.

 

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.

 

Traditional financial reporting presents forecasted cash flow information.

 

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.

 

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.

 

To get revenue and expense account balances to zero an adjusting entry is made.

 

For each transaction, the dollar total of the debits must equal the dollar total of the credits.

 

U. S. GAAP permits companies to report components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity.

The point within the operating cycle when the company’s net assets have increased is the point when revenue should be recognized.

 

Which statement below best describes when to record an expense?

 

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

 

If a transfer of receivables is actually a borrowing but is erroneously treated as a sale,

 

Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables have a related allowance for credit losses of $3,500.

 

Assume that the transaction was a factoring arrangement with recourse and included a holdback of $6,000. If the fair value of the recourse obligation is equal to the allowance of $3,500, which one of the following entries will Ritter make to record this transaction?

 

Consistent with FASB Concept Statement No. 8, accounting information should be useful to:

 

Earnings Before Interest (EBI) adjusts net income for which one of the following groups of items?

 

A financial analyst will carefully review company financial statements for evidence of transactions involving related parties in part because such transactions may create the risk of wealth transfer to single stockholders.

 

On December 31, 20X1, Katherine Company purchases merchandise with shipping terms FOB destination. The company’s accountant records the purchase on the day the order is placed. The merchandise is not included in the ending inventory. No additional journal entry is made when the merchandise arrives on January 5, 20X2.

Assume that Katherine Company discovers the error is discovered at the beginning of 20X3. What journal entry should be made to correct the 20X1 error?

 

Which of the following situations may create an accounting error?

 

A change in accounting principle that is implemented in 20X1 with full retrospective effect will result in which of the following, as reported in the financial statements presented in the 20X1 annual report?

 

Which of the following items is not a type of accounting change?

 

Corona Industries purchased a stamping machine on January 2, 20X1, for $100,000. It made an initial payment of $20,000 and financed the balance over 5 years at State Bank. The loan terms were for annual payments of $16,000 plus 10% interest, payable on December 31 each year. The year 20X4 proves to be a difficult year and on December 1, 20X4 Corona negotiates a debt restructuring with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current fair value of $22,000.

On December 1, 20X4, how much interest is accrued on this loan?

 

Manero Company included the following information in its annual report:

 
20X3
 
20X2
 
20X1
Sales
$
178,400
 
 
$
162,500
 
 
$
155,500
 
Cost of goods sold
 
115,000
 
 
 
102,500
 
 
 
100,000
 
Operating expenses
 
50,000
 
 
 
50,000
 
 
 
45,000
 
Operating income
 
13,400
 
 
 
10,000
 
 
 
10,500
 
 
In comparison to year 20X2, the increase in operating income of 20X3 was primarily caused by the effect of margin increase of (ignore taxes):

 

When receivables are bundled and transferred to another organization that issues securities collateralized by the transferred receivables, the arrangement is defined as:

 

If a note receivable from a customer is discounted at a bank with recourse and the customer defaults on final payment, the seller:

 

Management must periodically assess the reasonableness of the allowance for credit losses if it uses the

 

XYZ Co.’s 20X2 ratio of allowance for credit losses to gross receivables has declined from the ratio at the end of 20X1. To help evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should do all of the following except:

 

The use of a bank manager’s discretion in the timing and amount of loan loss provisions and loan charge-offs can falsely understate the losses and:

 

Which of the following is not a purpose served by debt covenants?

 

Covenants that place direct restrictions on managerial decisions are called:

 

When conflicts of interest exist, lenders generally take all of the following actions at the creation of a contract except:

 

A decrease in market-wide interest rates will result in a/an:

 

Which of the following is not an accurate statement regarding the compensation committee?

 

A qualitative assessment of the business, its customers and suppliers, and management’s character and capability is known as:

 

An earnings surprise:

 

As transitory or value-irrelevant components become a larger part of a firm’s reported earnings, which of the following effects would you not expect to witness?

 

If most firms’ price/earnings ratios are between 10 and 15, what is the range of the risk-adjusted interest rate?

 

A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This assumption is best applied to:

 

Which of the following statements is false regarding the flows to equity model?

 

When assessing a company's credit risk:

 

Condensed financial data are presented below for the Phoenix Corporation:

 
20X2
 
20X1
Accounts receivable
$
267,500
 
 
$
230,000
 
Inventory
 
312,500
 
 
 
257,500
 
Total current assets
 
670,000
 
 
 
565,000
 
Intangible assets
 
50,000
 
 
 
60,000
 
Total assets
 
825,000
 
 
 
695,000
 
Current liabilities
 
252,500
 
 
 
200,000
 
Long-term liabilities
 
77,500
 
 
 
75,000
 
Sales
 
1,640,000
 
 
 
 
 
Cost of goods sold
 
982,500
 
 
 
 
 
Interest expense
 
10,000
 
 
 
 
 
Income tax expense
 
77,500
 
 
 
 
 
Net income
 
127,500
 
 
 
 
 
Cash flow from operations
 
71,000
 
 
 
 
 
Cash flow from investing activities
 
(6,000
)
 
 
 
 
Cash flow from financing activities
 
(62,500
)
 
 
 
 
Tax rate
 
30
%
 
 
 
 
 
The current ratio for 20X2 is (rounded):

 

The days receivable outstanding for 20X2 is (rounded):

 

The profit margin used to calculate return on assets for 20X2 is (rounded): 

 

The days inventory held for 20X2 is (rounded):

 

If there is no preferred stock, the return on common equity for 20X2 is (rounded):



In a common size balance sheet for 20X2, accounts receivable is expressed as:

 

The accounts receivable turnover for 20X2 is (rounded): (Assume all sales are on account.)

 

The interest coverage for 20X2 is:

 

The inventory turnover for 20X2 is (rounded):

 

The long-term debt to assets for 20X2 is (rounded):

 

The quick ratio for 20X2 is (rounded): (Assume that total current assets include cash, marketable securities, accounts receivable and inventory).

 

The return on assets ratio for 20X2 is (rounded):

 

The total asset turnover ratio for 20X2 is (rounded):

 

If the intangible assets in 20X2 are $50,000, then the long-term debt to tangible assets for 20X2 is:

 

Return on Assets (ROA) measures a firm’s

 

Advanced technology and performance capabilities, consistent quality, availability in multiple colors and sizes, prompt delivery, technical support services, customer financing, distribution channels, or some other feature of importance to customers are examples of:

 

Which of the following is not correct with respect to an analyst’s use of financial information?

 

The financial statement reporting "filter" is

 

A type of analysis that helps identify similarities and differences across companies or business units at a single moment in time is:

 

Which statement below is not correct with respect to a company’s strategy?

 

Revision restatements differ from reissuance restatements in that revision restatements address misstatements

 

All the following disclosures would appear in the Summary of Significant Accounting Policies except:

 

The Summary of Significant Accounting Policies

 

When a company changes from straight-line depreciation to double-declining-balance depreciation, the change is reported

 

Angela Dams purchases new equipment for $66,000 with an estimated useful (service) life of 6 years and a salvage value of $6,000. The company depreciates the equipment over six years. After two years, the company revises its estimate to total useful life of 8 years, with no change in salvage value. Depreciation for year 3 will be:

 

What is the primary accounting and reporting issue arising from accounting changes?

 

Accounting changes may be

 

Which of the following is false regarding uncollectible accounts?

 

A study of discretionary accounting accruals found that abnormal accruals in the year prior to reporting covenant violations:

 

When agents do not act in the best interest of their principals, the cost is borne by which of the following?

 

Which of the following is an accounting strategy most likely used by management to meet EPS guidance?

 

Financial ratio, percentage, and trend comparisons can be distorted by all of the following except:

 

Although a company’s earnings are important in financial statement analysis, with respect to credit evaluations and lending decisions an analysis of its cash flows is:

 

The Common Stock account is reported on the balance sheet at the:

 

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

 

When reporting a change in an accounting principle, the general rule requires that the current year’s income from continuing operations reflect:

 

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

 

If an inventory error is discovered during the reporting year,

 

Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to:

 

IFRS accounting for inventory (IAS 2) does not permit which of the following cost flow assumptions?

 

The use of the lower of cost or market (Old-LCM) method to value inventory indicates a probable loss has been sustained. This is an application of the accounting principle of:

 

Which of the following statements regarding inventory accounting is false?

 

The following information pertains to the Fan Company’s inventory item B1008: 

  
 
 
 
 
 
 
 
 
March
1
Inventory Balance
400
units
@
$
3.10
 
 
5
Purchase
1,400
units
@
$
3.20
 
 
14
Purchase
280
units
@
$
3.25
 
 
31
Inventory Balance
520
units
 
 
 
 
 
In a periodic inventory system, the ending FIFO inventory is

 

Manufacturing costs not considered to be closely associated with production are called:

 

A perpetual inventory system:

 

Goods available for sale needs to be allocated between:

 

When troubled debt is restructured via continuation with modification of debt terms, the original loan is:

 

If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price:

 

Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables have a related allowance for doubtful accounts of $3,500.

 

Assuming the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make?

 

If sales terms, customer creditworthiness, and accounting methods remain constant, the percentage change in sales and the percentage change in accounts receivable:

 

An analyst notes that ABC Inc.’s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change?

 

Edsel Inc. has the following unadjusted year end trial balance information available for 2018:

 
 
 
 
Credit sales
$
600,000
 
Ending accounts receivable balance
$
180,000
 
Ending allowance for uncollectibles
$
1,500
 
Estimated uncollectibles
 
2
%
 
 If Edsel uses the gross accounts receivable approach for estimating the bad debt provision, the allowance for uncollectibles account, after the proper adjustments to the accounts are recorded, should show a balance of:

 

In the utilities industry, image advertising and customer safety advertising are:

 

A typical rate formula for a public utility includes:

 

Contract terms:

 

With respect to executive pay, which of the following is not correct?

 

Financial statement forecasts are:

 

A bond that is considered unsecured is referred to as a:

 

Prior to the announcement of unexpected bad earnings (a negative earnings surprise), a firm’s stock price will generally exhibit:

 

Which one of the following is an example of sustainable earnings?

 

In the process of determining fair value, the exit price refers to:

 

By using accruals and deferrals, accrual accounting:

 

The two ways to implement the discounted cash flow valuation approach are:

 

Which of the following statements is false regarding the business valuation process?

 

With respect to financial ratios:

 

Select one of the following statements that best reflects the relationship between the operating cycle and the cash conversion cycle:

 

Which of the following is not correct with respect to computing ROCE?

 

Trend statements are better than common size statements at indicating which of the following?

 

Strategies to gain a competitive advantage include product differentiation and:

 

Manero Company included the following information in its annual report:

 
2019
 
2018
 
2017
Sales
$
178,400
 
 
$
162,500
 
 
$
155,500
 
Cost of goods sold
 
115,000
 
 
 
102,500
 
 
 
100,000
 
Operating expenses
 
50,000
 
 
 
50,000
 
 
 
45,000
 
Operating income
 
13,400
 
 
 
10,000
 
 
 
10,500
 
 In a common-size income statement for 20X2, the cost of goods sold is expressed as:

 

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.
The accounts receivable turnover ratio:

A. is not useful in determining changes in customer payment patterns.
B. uses total sales and not just credit sales in the computation.
C. is computed using net credit sales and average accounts receivable. 
D. is computed using net credit sales and ending accounts receivable.
 
 
3.
Accrual accounting decouples measured earnings from operating cash inflows and outflows.
 
 
4.
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.
 
 
5.
Activity ratios describe the profitability of a company.
 
 
6.
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.
 
 
7.
Advanced technology and performance capabilities, consistent quality, availability in multiple colors and sizes, prompt delivery, technical support services, customer financing, distribution channels, or some other feature of importance to customers are examples of:

A. competitive advantage.
B. differentiation. 
C. product leadership.
D. low-cost leadership.
 
 
8.
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.
 
 
9.
Although a company’s earnings are important, an analysis of its cash flows is central to credit evaluations and lending decisions.
 
 
10.
An analyst interested in learning the degree to which a company’s earnings have fluctuated historically in relation to changes in economic growth would employ cross-sectional analysis.
 
 
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.
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.
The Barden Company provides the following trial balance as of December 31, 2018.

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 current assets on its balance sheet?

A. $460,000
B. $580,000
C. $892,500
D. $627,500
 
 
 
 
 
 
 
 
 
 

14.
The Barden Company provides the following trial balance as of December 31, 2018.

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?

A. $300,000
B. $387,500
C. $637,500
D. $87,500
 
 
15.
The basic accounting equation may be expressed as assets = liabilities - owners’ equity.
 
 
16.
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.
 
 
17.
Both common and preferred stock dividends are subtracted in arriving at net income available to common stockholders.
 
 
18.
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
 
 
19.
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
 
 
20.
Cash-basis accounting provides the most useful measure of future operating performance.
 
 
21.
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. Correct
C. by appropriately adjusting revenue for changes in accounts payable.
D. by analyzing changes to the reserve for doubtful accounts.
 
 
22.
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.
 
 
23.
The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.
 
 
24.
A common-size balance sheet presents each item as a percentage of total assets.
 
 
25.
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.
 
 
 

26.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

If there is no preferred stock, the return on common equity for 2019 is (rounded):

A. 25.8%
B. 27.9% 
C. 41.4%
D. 43.4%
 
 
27.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

In a common size balance sheet for 2019, accounts receivable is expressed as:

A. 86%.
B. 116.3%.
C. 32.4%.
D. 16.3%.
 
 
 
 
 
 
 
 
 
 

28.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The accounts receivable turnover for 2019 is (rounded): (Assume all sales are on account.)

A. 2.0 times.
B. 6.4 times.
C. 6.6 times.
D. 7.1 times.
 
 
29.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The current ratio for 2019 is (rounded):

A. 1.4 to 1
B. 2.0 to 1
C. 2.7 to 1
D. 3.4 to 1
 
 
 
 
 
 
 
 
 
 

31.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The days receivable outstanding for 2019 is (rounded):

A. 51 days.
B. 55 days. 
C. 60 days.
D. 183 days.
 
 
 

32.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The interest coverage for 2019 is:

A. 12.8 times.
B. 13.8 times.
C. 20.5 times.
D. 21.5 times.
 
 
33.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The inventory turnover for 2019 is (rounded):

A. 2.61 times.
B. 3.12 times.
C. 3.45 times. 
D. 3.80 times.
 
 
 
 
 
 
 
 
 

34.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The long-term debt to assets for 2019 is (rounded):

A. 9.4% 
B. 10.2%
C. 40.0%
D. 43.4%
 
 
 

36.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The quick ratio for 2019 is (rounded): (Assume that total current assets include cash, marketable securities, accounts receivable and inventory).

A. 1.1 to 1
B. 1.4 to 1
C. 1.6 to 1
D. 2.8 to 1
 
 
37.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The return on assets ratio for 2019 is (rounded):
Multiple Choice
A. 16.3%
B. 16.9%
C. 17.7% 
D. 18.2%
 
 
 
 
 
 
 
 
 
 

38.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 230,000 
Inventory 
312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 
825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 
1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 
127,500 
Cash flow from operations 71,000 
Cash flow from investing activities 
(6,000) 
Cash flow from financing activities 
(62,500) 
Tax rate - 30% 

The total asset turnover ratio for 2019 is (rounded):

A. 1.7 times.
B. 2.0 times.
C. 2.2 times.
D. 2.4 times
 
 
39.
Credit risk analysis uses financial ratios that focus on an assessment of liquidity and solvency.
 
 
40.
Days payable outstanding helps analysts understand the company’s pattern of cash receipts from customers.
 
 
41.
Depreciation is added back to net income to determine cash from operating activities under the indirect method.
 
 
42.
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.
 
 
43.
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.
 
 
44.
Events that occur after the financial statements are issued are referred to as subsequent events.
 
 
45.
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.
 
 
46.
The following information is available from Moran Industries’ accounting system for the year ended December 31, 2018.

Cash received from customers 
$750,000 
Cash paid to suppliers 
$300,000 
Cash paid to employees 
$150,000 
Taxes paid 
$25,000 
Cash dividends paid 
$50,000 

What would the company’s statement of cash flows report as cash flow from operations?

A. $225,000
B. $275,000
C. $300,000
D. $250,000
 
 
47.
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.
 
 
48.
Hansel Corporation’s condensed balance sheets appear below:

2019 2018 2017
Assets: 
Current assets 55,000 56,500 70,000 
Plant & equipment, net 495,000 410,000 440,000 
Intangible assets, net 20,000 27,500 40,000 
Total assets 570,000 494,000 550,000 

Liabilities & Stockholders’ Equity: 
Current liabilities 40,000 35,000 32,500 
Long-term liabilities 395,000 310,000 375,000 
Stockholders’ equity 135,000 149,000 142,500 
Total liabilities & equity 570,000 494,000 550,000 

In a common size balance sheet for 2018, plant and equipment (net) is expressed as:

A. 83.0%
B. 83.6%
C. 91.1%
D. 100.0%
 
 
 

49.
Hansel Corporation’s condensed balance sheets appear below:

2019 2018 2017
Assets: 
Current assets 55,000 56,500 70,000 
Plant & equipment, net 495,000 410,000 440,000 
Intangible assets, net 20,000 27,500 40,000 
Total assets 570,000 494,000 550,000 

Liabilities & Stockholders’ Equity: 
Current liabilities 40,000 35,000 32,500 
Long-term liabilities 395,000 310,000 375,000 
Stockholders’ equity 135,000 149,000 142,500 
Total liabilities & equity 570,000 494,000 550,000

In a common size balance sheet for 2019, total liabilities and equity are expressed as:

A. 89.9%
B. 96.5%
C. 100.0% 
D. 111.3%
 
 
50.
Hansel Corporation’s condensed balance sheets appear below:

2019 2018 2017
Assets: 
Current assets 55,000 56,500 70,000 
Plant & equipment, net 495,000 410,000 440,000 
Intangible assets, net 20,000 27,500 40,000 
Total assets 570,000 494,000 550,000 

Liabilities & Stockholders’ Equity: 
Current liabilities 40,000 35,000 32,500 
Long-term liabilities 395,000 310,000 375,000 
Stockholders’ equity 135,000 149,000 142,500 
Total liabilities & equity 570,000 494,000 550,000

In a trend balance sheet for 2019, long-term liabilities are expressed as:

A. 69.3%
B. 100.0%
C. 105.3% 
D. 127.4%
 
 
51.
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
 
 
52.
In a common-size balance sheet, all items are expressed as a percentage of:

A. total assets. 
B. total liabilities.
C. total equity.
D. total sales.
 
 
53.
In a common size cash flow statement, all items are expressed as a percentage of:

A. sales. 
B. total assets.
C. net income.
D. total equity.
 
 
54.
In a trend balance sheet, each balance sheet item is expressed as a percentage of:

A. total assets.
B. the base year item. 
C. sales.
D. equity.
 
 
55.
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.
 
 
56.
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.
 
 
57.
Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.
 
 
 
 
 
 
 
 
 
 

58.
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.
 
 
59.
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.
 
 
60.
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.
 
 
61.
Liquidity refers to how quickly noncurrent assets will be converted into cash to pay liabilities.
 
 
62.
A low-credit-risk company generates operating cash flows substantially in excess of what are required to sustain its business activities.
 
 
64.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales
178,400 162,500 155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 

In a common-size income statement for 2019, the operating expenses are expressed as:

A. 28.0% 
B. 30.3%
C. 43.8%
D. 100.0%
 
 
65.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales
178,400 162,500 155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 

In a trend income statement for 2017, where 2017 is the base year, sales are expressed as:

A. 84.4%
B. 92.6%
C. 100.0%
D. 150.5%
 
 
66.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales
178,400 162,500 155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500

In a trend income statement for 2019, where 2017 is the base year, sales are expressed as:

A. 87.2%
B. 100.0%
C. 114.7% 
D. 148.7%
 
 
67.
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.
 
 
68.
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.
 
 
 
 
 
 
 
 
 

69.
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.
 
 
70.
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.
 
 
71.
Operating and administrative efficiencies that result in lower expenses per dollar of sales possibly explain a trend where net income grows faster than sales.
 
 
72.
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.
 
 
73.
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.
 
 
74.
The percentage of assets financed by long-term debt is best described by the:

A. debt to equity ratio.
B. interest coverage ratio.
C. long-term debt to asset ratio. 
D. long-term debt to tangible assets ratio.
 
 
75.
Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.
 
 
76.
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.
 
 
77.
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.
 
 
78.
The ratio that captures information about property, plant, and equipment utilization is:

A. current asset turnover.
B. long-term asset turnover. 
C. asset turnover.
D. property turnover.
 
 
79.
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.
 
 
80.
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.
 
 
81.
Return on Assets (ROA) can be broken down into these two components: profit margin and:

A. asset utilization margin.
B. asset turnover. 
C. common earnings leverage.
D. financial structure leverage.
 
 
82.
Return on Assets (ROA) measures a firm’s:

A. cost effectiveness of its operating activities.
B. profitable use of its assets. 
C. profitability of sales.
D. return on shareholders’ investment.
 
 
83.
Return on assets will generally equal return on common equity except when the company has no long-term debt.
 
 
84.
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.
 
 
 
 
 
 
 
 
 

85.
Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

Year 1 Year 2
Assets 
Cash 
100,000 (50,000)
Accounts receivable (net) 50,000 100,000 
Inventory 
100,000 250,000 
Equipment (net) 300,000 350,000 
Total assets 550,000 650,000 

Liabilities and Equity 
Accounts payable 150,000 100,000 
Income taxes payable 80,000 30,000 
Bonds payable 100,000 80,000 
Common stock 100,000 200,000 
Retained earnings 120,000 240,000 
Total liabilities and Equity 550,000 650,000

The change in the Accounts Payable balance would be recorded on the statement of cash flows as:

A. an increase of $50,000 under financing activities.
B. a decrease of $50,000 under financing activities.
C. an increase of $50,000 under operating activities.
D. an decrease of $50,000 under operating activities.
 
 
86.
Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

Year 1 Year 2
Assets 
Cash 
100,000 (50,000)
Accounts receivable (net) 50,000 100,000 
Inventory 
100,000 250,000 
Equipment (net) 300,000 350,000 
Total assets 550,000 650,000 

Liabilities and Equity 
Accounts payable 150,000 100,000 
Income taxes payable 80,000 30,000 
Bonds payable 100,000 80,000 
Common stock 100,000 200,000 
Retained earnings 120,000 240,000 
Total liabilities and Equity 550,000 650,000

The change in the balance of the Bonds Payable account would be recorded on the statement of cash flows as:

A. an increase of $20,000 under financing activities.
B. an increase of $80,000 under investing activities.
C. a decrease of $20,000 under financing activities. 
D. a decrease of $80,000 under operating activities.
 
 
87.
Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

Year 1 Year 2
Assets 
Cash 
100,000 (50,000)
Accounts receivable (net) 50,000 100,000 
Inventory 
100,000 250,000 
Equipment (net) 300,000 350,000 
Total assets 550,000 650,000 

Liabilities and Equity 
Accounts payable 150,000 100,000 
Income taxes payable 80,000 30,000 
Bonds payable 100,000 80,000 
Common stock 100,000 200,000 
Retained earnings 120,000 240,000 
Total liabilities and Equity 550,000 650,000

The change in the balance of the common stock account would be recorded on the statement of cash flows as:

A. an increase of $100,000 under financing activities. 
B. an increase of $100,000 under investing activities.
C. an increase of $100,000 under operating activities.
D. an increase of $300,000 under financing activities.
 
 
88.
Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

Year 1 Year 2
Assets 
Cash 
100,000 (50,000)
Accounts receivable (net) 50,000 100,000 
Inventory 
100,000 250,000 
Equipment (net) 300,000 350,000 
Total assets 550,000 650,000 

Liabilities and Equity 
Accounts payable 150,000 100,000 
Income taxes payable 80,000 30,000 
Bonds payable 100,000 80,000 
Common stock 100,000 200,000 
Retained earnings 120,000 240,000 
Total liabilities and Equity 550,000 650,000

The change in the equipment balance would be recorded on the statement of cash flows as:

A. a decrease of $50,000 under investing activities. 
B. an increase of $50,000 under investing activities.
C. a decrease of $150,000 under investing activities.
D. an increase of $150,000 under operating activities.
 
 
 

89.
Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

Year 1 Year 2
Assets 
Cash 
100,000 (50,000)
Accounts receivable (net) 50,000 100,000 
Inventory 
100,000 250,000 
Equipment (net) 300,000 350,000 
Total assets 550,000 650,000 

Liabilities and Equity 
Accounts payable 150,000 100,000 
Income taxes payable 80,000 30,000 
Bonds payable 100,000 80,000 
Common stock 100,000 200,000 
Retained earnings 120,000 240,000 
Total liabilities and Equity 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:

A. a decrease of $400,000
B. an increase of $400,000
C. an increase of $150,000
D. a decrease of $150,000.
 
 
90.
Selected unrealized gains (or losses) sometimes bypass the income statement and are reported as direct adjustments to a stockholders’ equity account.
 
 
92.
Solvency refers to:

A. short-term ability to fund the company’s operating needs.
B. long-term ability to generate cash to for plant capacity needs and to fuel growth.
C. long-term ability to generate sufficient cash to satisfy plant capacity needs, fuel growth, and to repay debt when due. 
D. the company’s ability to generate sufficient cash to repay debt when due.
 
 
93.
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.
 
 
94.
The statement of cash flows shows the user why a firm’s investments and financial structure have changed between two balance sheets dates.
 
 
96.
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.
 
 
97.
Traceable costs are also called:

A. period costs.
B. expired costs.
C. product costs.
D. administrative costs.
 
 
99.
A type of analysis that helps identify similarities and differences across companies or business units at a single moment in time is:

A. trend analysis.
B. common-size statements analysis.
C. time-series analysis.
D. cross-sectional analysis.
 
 
100.
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.
 
 
101.
When analyzing a company’s risk of bankruptcy using Altman’s Z-score, a high Z-score indicates low risk of default.
 
 
102.
When return on assets is high at a highly levered firm, return on common equity will be low.
 
 
 
 
 
 
 
 
 
 

103.
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.
 
 
104.
Which of the following actions is not an option for the lender when the borrower is in default?

A. Petition a court to judge the borrower insolvent.
B. Adjust the loan payment schedule to better suit the company’s anticipated operating cash flows.
C. Modify the payment schedule in exchange for an increased interest rate or additional collateral, such as receivables, inventory, or equipment.
D. Contact the borrower’s customers and collect their receivables.
 
 
105.
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.
 
 
106.
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.
 
 
107.
Which of the following does not properly describe the Altman Z-score?

A. The Z-score is a multiple discriminant analysis using five financial ratios to estimate default risk.
B. The Z-score was originally designed only for publicly traded manufacturing firms.
C. Each ratio has its own unique weight in calculating the final score.
D. A high score is an indication of default risk.
 
 
108.
Which of the following factors does not negatively impact operating cash flows?

A. Accounts receivable are increasing.
B. Inventories are increasing.
C. Operating costs are increasing faster than sales.
D. Sales are increasing faster than operating costs.
 
 
109.
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.
 
 
110.
Which of the following is not correct with respect to an analyst’s use of financial information?

A. Analysts use financial statement information to assess the economic activities of a company and its condition.

B. The first step to informed financial statement analysis is a careful examination of the auditor’s opinion. 

C. Analysts need to understand what accounting data do and do not reveal about a company’s economic activities and condition.

D. Analysts must always be vigilant about the possibility that accounting distortions are present and complicate the interpretation of financial ratios, percentage relations, and trend indices.
 
 
111.
Which of the following is not correct with respect to the debt to assets ratio?

A. Cyclical companies (those whose sales fluctuate widely due to changing economic conditions) generally have a smaller debt to assets ratio. 

B. Cyclical companies (those whose sales fluctuate widely due to changing economic conditions) generally have a higher debt to assets ratio.

C. The percentage of long-term debt to assets would be higher for a utility company than for a retailer.

D. A high debt ratio increases long-term solvency risk.
 
 
112.
Which of the following items will not cause the company’s ROA to increase?

A. Reducing company assets without impacting sales.
B. Reducing costs.
C. Increasing the selling price per unit.
D. Increasing company assets.
 
 
113.
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.
 
 
114.
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.
 
 
115.
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.
 
 
 

116.
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.
 
 
117.
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.
 
 
118.
Which one of the following successful strategies will increase the Return on Assets (ROA)?

A. Increase the investment in assets used in the business.
B. Increase the profit margin. 
C. Decrease sales volume.
D. Increase the annual depreciation amounts of long-lived assets.
 
 
119.
Working capital accounts include:

A. all assets.
B. all assets and liabilities.
C. current assets and all liabilities.
D. current assets and current liabilities.
 
 
120.
The Z-score model combines five financial ratios in a precise way to estimate a company’s default risk.
 
 
 

 

1.
The ability to raise additional cash by selling assets, issuing stock, or borrowing more is:

A) financial flexibility.
B) a credit risk indicator.
C) one way to project earnings.
D) a stock price predictor.
 
 
2.
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? There is an additional performance obligation for additional goods or services if: 

A) The option in the contract provides for the additional goods or services at their stand-alone selling price.
B) 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.
C) The customer could obtain the same rights to additional goods or services without entering into the current contract agreement.
D) 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.
 
 
3.
Accounting information is heavily regulated:

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

b. To increase reporting efficiency.

c. With the intention of preventing market failure.

d. All of these answer choices are correct.
 
 
4.
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. Tax effects are ignored when reporting changes in accounting principles.

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. Changes in accounting principle that are always accounted for using the retrospective approach which requires only a restatement of prior years’ presented financial information.
 
 
5.
Accumulated depreciation is a/an:

a.owners’ equity account.
b. contra-asset account.
c. expense account.
d. liability account.
 
 
6.
The Additional Paid-In Capital account is reported on the balance sheet at the:

A) original sales price of the stock minus the par value.
B) current market value of the stock minus par value.
C) net realizable value of the stock minus par value.
D) discounted present value of the future dividends minus par value.
 
 
7.
The allowance for uncollectibles account is classified as:

A) a contra-revenue account.
B) a contra-equity account.
C) a contra-expense account.
D) a contra-asset account.
 
 
8.
Analytical review procedures include all of the following except:

A) comparison of the company’s reported financial results to benchmarks established by the SEC.
B) simple ratio and trend analysis.
C) complex statistical techniques.
D) general reasonableness tests.
 
 
9.
Analytical review procedures include all of the following except:

a. general reasonableness tests.

b. complex statistical techniques.

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

d. simple ratio and trend analysis.
 
 
10.
A balance sheet prepared in accordance with U.S. GAAP typically:

A) provides critical information for understanding a firm’s capital structure.
B) provides critical information for understanding a firm’s profitability.
C) helps to determine the proper mix of debt and equity financing.
D) reports common stock at the current market price of the stock.
 
 
11.
The balance sheet provides information on all of the following except:

a. where the money came from.

b. how management invested its money.

c. assessing rates of return.

d. the market price of the company’s stock.
 
 
 
 
 
 
 
 
 
 

12.
Being verifiable and neutral is part of what makes financial information:

A) useful.
B) relevant.
C) consistent.
D) comparable.
 
 
14.
Carrying amounts in a GAAP balance sheet are measured using all the following except:

A) projected ROI.
B) net realizable value.
C) historical cost.
D) discounted present value.
 
 
15.
Carrying amounts in a GAAP balance sheet are measured using all the following except:

historical cost.
net realizable value.
projected ROI.
discounted present value.
 
 
16.
Cash collected from customers can be derived:

by appropriately adjusting revenue for changes in accounts receivable.
by analyzing changes to the reserve for doubtful accounts.
by analyzing changes in the Accounts Payable balance.
by appropriately adjusting revenue for changes in accounts payable.
 
 
17.
Cash flows from operating activities include:

deferred income taxes.

increases in Accumulated Depreciation.

cash payments received from customers.

All of these would be included in cash flows from operating activities.
 
 
18.
The change in equity of an entity during a period from transactions and other events from non-owner sources is known as:

a. net change in assets.
b. comprehensive income.
c. net operating income.
d. net income.
 
 
19.
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 based on an economic performance approach. 
b. is in accordance with IFRS. 
c. is based on a commercial and tax law approach. 
d. is in accordance with U.S. GAAP.
 
 
20.
Companies that consistently earn rates of return above the competitive floor in the industry are considered to possess a:

A) niche market.
B) monopolistic advantage.
C) dominant market share.
D) competitive advantage.
 
 
21.
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) violating security trading laws.
D) income smoothing.
 
 
22.
A component that is valuation-relevant, but is not expected to persist into the future is a:

noise component.
quiet component.
transitory earnings component.
permanent earnings component.
 
 
 
 
 
 
 
 
 

23.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 $230,000 
Inventory 312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 127,500 
Cash flow from operations 71,000 
Cash flow from investing activities (6,000) 
Cash flow from financing activities (62,500) 
Tax rate 30 % 

The accounts receivable turnover for 2019 is (rounded): (Assume all sales are on account.)

a. 6.6 times. 
b. 6.4 times. 
c. 2.0 times. 
d. 7.1 times.
 
 
26.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 $ 230,000 
Inventory 312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 127,500 
Cash flow from operations 71,000 
Cash flow from investing activities (6,000 ) 
Cash flow from financing activities (62,500 ) 
Tax rate 30 % 

The total asset turnover ratio for 2019 is (rounded):
A) 2.0 times.
B) 1.7 times.
C) 2.4 times
D) 2.2 times.
 
 
 
 
 
 
 
 
 
 

27.
Consider the following table of Actual earnings:
Firm A Firm B Firm C
Actual earnings $ 6,000 $ 14,000 $ 18,000
r 10 % 8 % 12 %
BVt-1 $ 100,000 $ 150,000 $ 190,000
What are the abnormal earnings for Firm B?

A) $1,000
B) $12,000
C) $14,000
D) $2,000
 
 
28.
A consolidated balance sheet:

a. includes the net assets of the parent company and all of its subsidiaries.

b. includes the net assets of only the subsidiary companies.

c. reports separately the net assets of the parent company and its subsidiaries.

d. includes the net assets of the parent company and all components in which it owns more than 75% of the outstanding voting stock.
 
 
29.
Contributed capital might be a negative dollar amount because:

A) excess liabilities reduced contributed capital.
B) treasury stock was in excess of stock originally issued.
C) dividends paid were in excess of net income accumulated in retained earnings.
D) net losses exceeded net income over the years.
 
 
30.
Corona Industries purchased a stamping machine on January 2, 2018, for $100,000. It made an
initial payment of $20,000 and financed the balance over 5 years at State Bank. The loan terms
were for annual payments of $16,000 plus 10% interest, payable on December 31 each year. The
year 2021 proves to be a difficult year and on December 1, 2021 Corona negotiates a debt
restructuring with State Bank. The settlement calls for cash payment of accrued interest plus
$4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The
land has a current fair value of $22,000.
Which one of the following entries will Corona make to adjust for the land just prior to transfer?

A) DR Land $7,000
CR Note payable-State Bank $7,000
B) DR Land $7,000
CR Gain on disposal of asset $7,000
C) DR Loss on disposal of asset $7,000
CR Land $7,000
D) DR Note payable-State Bank $7,000
CR Gain on disposal of asset $7,000
 
 
31.
Current U.S. GAAP permits firms to display the components of other comprehensive income in which of the following formats?

a. as a part of the statement of cash flows. 

b. as a schedule appearing in the notes to the financial statements. 

c. in a two-statement approach, one in which net income comprises one statement and a second, which presents a separate statement of comprehensive income. 

d. as part of the statement of changes in stockholders’ equity.
 
 
32.
A debit does which of the following?

a. Decreases the value in a liability account.

b. Increases the value in an asset account and also decreases the value in a liability account.

c. Increased the value in a contra-asset account.

d. Increases the value in an asset account.
 
 
33.
The determining factor for accounting treatment of a troubled debt restructuring when there is a continuation with modification of terms is whether:

the undiscounted sum of the future cash flows under the restructured note is above or below the note’s carrying value (including accrued interest) at the restructuring date.

the discounted sum of the future cash flows under the restructured note is above or below the note’s carrying value (including accrued interest) at the restructuring date.

there is a gain or loss on the transaction to the lender.

there is a gain or loss on the transaction to the debtor.
 
 
34.
The expense matching principle states that:

A) Expenses are recognized when paid.
B) All expenses are recognized when the corresponding revenue is recorded.
C) Expenses are recognized when the invoice is received.
D) Some expenses are recognized when the corresponding revenue is recognized and some are spread over time.
 
 
 
 
 
 
 
 
 

35.
The fact that a firm’s stock price does not change when earnings are announced indicates that:


the securities markets are rational and efficient.
per share earnings were the same as the previous quarter.
the information contained in the earnings release was fully anticipated by investors.
the earnings deviate from investors’ expectations.
 
 
36.
The Financial Accounting Standards Board has responsibility for the establishment of U. S. accounting standards and:

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

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

c. full statutory power to enforce compliance with GAAP.

d. responsibility imposed by AICPA to enforce compliance with GAAP.
 
 
37.
Financial information capable of making a difference in a decision is:

A) relevant.
B) neutral.
C) verifiable.
D) consistent.
 
 
38.
Financial ratios used to determine credit risk include an assessment of:

A) solvency and liquidity.
B) liquidity and asset utilization.
C) profitability and solvency.
D) asset utilization and profitability.
 
 
39.
The financial statement reporting "filter" is:

a. SEC required reporting regulations for all entities.

b. management’s distortion of accounting data.

c. SEC reporting regulations that vary from GAAP for publicly traded companies.

d. management’s discretion to choose alternative accounting procedures with in GAAP
 
 
40.
GAAP requires that each set of EPS numbers includes separately reported numbers for all of the following except:

A) net income.
B) discontinued operations.
C) special or unusual items.
D) income from continuing operations.
 
 
41.
GAAP’s flexibility in its reporting standards allows companies to:

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

b. avoid adopting specific accounting techniques and reporting procedures.

c. smooth reported earnings over several reporting periods.

d. change accounting principles to improve reported earnings.
 
 
42.
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) $42,400
B) $43,600
C) $33,600
D) $50,000
 
 
44.
If a company currently earns $5.00 per share, and has a risk-adjusted equity cost of capital of 9%, a share of common stock should theoretically sell for approximately:

$0.45
$55.55
$48.00
$5.00
 
 
45.
If a company currently earns $6.00 per share and has a risk-adjusted cost of equity capital of
12.5%, a share of common stock should theoretically sell for:

A) $6.00
B) $75.75
C) $48.00
D) $0.75
 
 
 
 
 
 
 
 
 

46.
If most firms’ price/earnings ratios are between 10 and 15, what is the range of the risk-adjusted interest rate?

6.67% to 10%
6.67% to 15%
10% to 16.67%
10% to 15%
 
 
47.
If most firms’ price/earnings ratios are between 10 and 15, what is the range of the risk-adjusted
interest rate?

A) 10% to 16.67%
B) 6.67% to 10%
C) 10% to 15%
D) 6.67% to 15%
 
 
48.
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 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.
B) 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.
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, then a new contract must be created.
 
 
49.
In a common size balance sheet for 2019, total liabilities and equity are expressed as:

100.0%

89.9%

111.3%

96.5%
 
 
50.
In a common size cash flow statement, all items are expressed as a percentage of:

A) sales.
B) net income.
C) total equity.
D) total assets.
 
 
52.
In a trend balance sheet, each balance sheet item is expressed as a percentage of:

the base year item.

total assets.

equity.

sales.
 
 
53.
In a troubled debt restructuring, the restructured loan can differ from the original loan in any of the ways listed below except:

The repayment schedule is shortened and the interest rate is significantly increased.

The customer and lender can settle the loan.

The repayment schedule may be extended over a longer time period.

Scheduled interest and principal payments may be reduced or eliminated.
 
 
54.
In comparison to year 2018, the increase in operating income of 2019 was primarily caused by (ignore taxes):

the answer cannot be derived from the information provided.

the effect of margin growth.

the effect of sales growth.

the effect of cost of goods sold growth.
 
 
55.
Information found on a company’s balance sheet can tell a story about:

a. the company’s performance.

b. the company’s industry.

c. the company and its strategies.

d. All of these can be derived from the information on the balance sheet.
 
 
56.
The interest rate charged on bank loans must be sufficient to cover all the following except:

the costs of administering, monitoring, and servicing the loan.

a premium for exposure to default risk.
a risk premium when loans are personally guaranteed by the borrower.
the lender’s cost of borrowing funds.
 
 
 
 
 
 
 
 
 

57.
The interest rate on a revolving loan will usually:

A) remain fixed.
B) be below the prime interest rate.
C) float.
D) be equal to the prime interest rate.
 
 
58.
International Financial Reporting Standards (IFRS) are:

a. built on broad principles. 
b. seldom different than those issued by the FASB. 
c. narrowly defined, detailed standards. 
d. rules-based.
 
 
60.
Investors and analysts must have certain capabilities regarding financial reporting which include:

A) an ability to recognize that financial statement information reported is grounded in judgment as well as facts.
B) recognition that management selects the financial reporting standards used.
C) an understanding of current financial reporting standards.
D) all of these answer choices are correct.
 
 
61.
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 2018, Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2020.

Island will record this transaction to recognize:
a debt restructuring gain of $8,000.

neither a gain nor a loss from debt restructuring.

a debt restructuring gain of $20,000.

a debt restructuring loss of $20,000.
 
 
62.
It is common for shareholders to initiate litigation when:

A) the company introduces new products that are found to be harmful to the environment.
B) there is a sudden drop in stock price shortly after the company released new financial information.
C) rumors about the company appear in the media that, if true, would result in slower growth in future profits.
D) the company reports record profits, but does not declare dividends.
 
 
63.
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) increase cash flow from operating activities.
B) decrease cash flow from operating activities.
C) decrease cash flow from financing activities.
D) increase cash flow from investing activities.
 
 
64.
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 investing activities.
B) decrease cash flow from financing activities.
C) increase cash flow from operating activities.
D) increase cash flow from investing activities.
 
 
65.
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 investing activities.

b. increase cash flow from operating activities.

c. decrease cash flow from operating activities.

d. decrease cash flow from investing activities.
 
 
66.
Long-term debt:

A) when issued, is carried at an amount based on the proceeds received.
B) consists of monetary obligations that fall due beyond two years from the balance sheet date.
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.
 
 
67.
Long-term debt is reported on the balance sheet at:

a. future value.

b. net realizable value.

c. present value.

d. current market value
 
 
68.
Long-term debt:

when issued, is carried at an amount based on the proceeds received.

never has any portion classified as a current liability.

consists of monetary obligations that fall due beyond two years from the balance sheet date.

usually has an effective yield that is much different than the cost of borrowing.
 
 
 
 
 
 
 
 
 

69.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales $178,400 $162,500 $155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 

In a common-size income statement for 2019, the operating expenses are expressed as:

a. 30.3% 
b. 43.8% 
c. 28.0% 
d. 100.0%
 
 
70.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales $178,400 $162,500 $155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 

In a trend income statement for 2017, where 2017 is the base year, sales are expressed as:

a. 100.0%
b. 84.4% 
c. 150.5% 
d. 92.6%
 
 
71.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales $178,400 $162,500 $155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 

In comparison to year 2017, the effect of sales growth on operating income of 2018 was (ignore taxes):

a. $431.

b. $6,667.

c. $7,000.

d. $473.
 
 
72.
Net income recognition always increases:

a.liabilities.
b. net assets.
c. net liabilities.
d. assets.
 
 
73.
The new ASC Topic 606 for revenue recognition:

a. is more rules based than are existing standards.

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

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. eliminates both the percentage-of-completion method and the installment sales method of revenue recognition.
 
 
74.
Non-interest bearing notes are initially recorded at:

A) present value, based on the prevailing interest for loans of this type.
B) future value, based on the prevailing interest for loans of this type.
C) historical cost.
D) maturity value because they bear no interest.
 
 
75.
Operating activities result from the cash effects of:

selling stocks and bonds to raise capital for the generation of revenue.

purchasing and disposing of fixed assets used in production of revenue.

borrowing and repaying loans used in the production of revenue.

producing and delivering goods and services.
 
 
76.
Other comprehensive income:

A) does not include foreign currency gains and losses.
B) is consistently defined in international balance sheet presentation.
C) consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.
D) is never adjusted for tax effects.
 
 
77.
Other comprehensive income:

is consistently defined in international balance sheet presentation.

is never adjusted for tax effects.

consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.

does not include foreign currency gains and losses.
 
 
 
 
 
 
 
 
 

78.
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and
interest payable at the end of each quarter. All notes are due in one year. Palmer makes the
following sales on July 1, 2018:
Customer Note Maturity Interest Due Interest Rate
J.Perez $ 100,000 Quarterly 10%
P.Berg $ 100,000 — Negotiated
To encourage sales, Berg was given a special deal on interest. Additional information:
Future value of $100,000 in one year (quarterly interest) is $110,381.
Present value of $100,000 for one year (quarterly interest) is $90,595.

What amount will Palmer use to record the sale to Perez?
A) $100,000
B) $90,595
C) $90,000
D) $110,381
 
 
79.
Per authoritative accounting literature, the determination of whether a transfer of receivables is a
sale or collateralized borrowing hinges on whether the:

A) customer ultimately defaults.
B) transfer was with or without recourse.
C) transferor surrenders control over the receivable.
D) transferor collects payments directly from the customer.
 
 
80.
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) equity.
B) retained earnings.
C) liabilities.
D) assets.
 
 
81.
The reciprocal of the risk-adjusted equity cost of capital used to discount future earnings is the:

A) return on assets.
B) price/earnings ratio.
C) profit margin on sales.
D) return on common equity.
 
 
82.
A related-party transaction:

A) presents less risk than a similar transaction with a third party.
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) is assumed to be an arms-length transaction.
 
 
83.
Reported earnings numbers often contain three distinctly different components possibly subject to different earnings capitalization rates. Which of the following is not one of these components?

A value-irrelevant earnings component.
A transitory earnings component.
A permanent earnings component.
A restructured earnings component.
 
 
84.
Research evidence suggests that:

A) companies do not adjust their provision for doubtful accounts whether earnings are high or
low.
B) companies increase their provision for doubtful accounts when earnings are otherwise low
and then decrease the provision when earnings are high.
C) companies reduce their provision for doubtful accounts when earnings are otherwise high and
then increase the provision when earnings are low.
D) companies reduce their provision for doubtful accounts when earnings are otherwise low and
then increase the provision when earnings are high.
 
 
85.
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 seller receives payment for the goods.

b. the seller promises to pay the manufacturer.

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

d. the goods are sold by the retail store.
 
 
86.
The rules used for determining taxable income in various countries:

a. measure changes in a firm’s underlying economic condition.

b. have the same objective as the rules used for determining income for financial reporting purposes.

c. have an objective designed to provide a basis for funding government operations.

d. are not the result of a political process.
 
 
87.
The rules used for determining taxable income in various countries:

measure changes in a firm’s underlying economic condition.

have the same objective as the rules used for determining income for financial reporting purposes.

are not the result of a political process.

have an objective designed to provide a basis for funding government operations.
 
 
88.
The sale of productive assets:

A) represents an operating activity.
B) represents an investing activity.
C) is always considered a related party transaction.
D) does not impact the period cash flows.
 
 
 
 
 
 
 
 
 

90.
Short-term notes sold directly to investors by large, highly rated companies are called:

A) commercial paper.
B) secured notes.
C) debentures.
D) bonds.
 
 
91.
Smith Company is a manufacturer of medical devices and has an excellent quality control
department, thus defective product returns are rare. In 2018, Smith reported sales of $276,344,000.
The company did, however, have two returns in 2018 related to the wrong product model being
shipped. Smith’s 2018 journal entry to record a $37,500 return from a customer (Foxtrot Medical)
would be:

A) DR Sales returns expense $37,500
CR Accounts receivable-Foxtrot Medical $37,500
B) DR Sales returns and allowances $37,500
CR Accounts receivable-Foxtrot Medical $37,500
C) DR Sales $37,500
CR Accounts receivable-Foxtrot Medical $37,500
D) DR Sales returns and allowances $37,500
CR Sales $37,500
 
 
92.
Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 2018, Smith reported sales of $276,344,000. The company did, however, have two returns in 2018 related to the wrong product model being shipped. Smith’s 2018 journal entry to record a $37,500 return from a customer (Foxtrot Medical) would be:

DR Sales $37,500 CR Accounts receivable—Foxtrot Medical $37,500

DR Sales returns and allowances $37,500 CR Accounts receivable—Foxtrot Medical $37,500

DR Sales returns and allowances $37,500 CR Sales $37,500

DR Sales returns expense $37,500 CR Accounts receivable—Foxtrot Medical $37,500
 
 
94.
To achieve faithful representation, the financial information must be:

A) complete, neutral, and free from material error.
B) relevant, consistent, and timely.
C) relevant, comparable, and timely.
D) consistent, unbiased, and relevant.
 
 
95.
To obtain a better current price, the net present value of future growth opportunities (NPVGO) can be calculated and:

multiplied by the price per share calculated from the P/E ratio.
divided into the price per share calculated from the P/E ratio.
added to the price per share calculated from the P/E ratio.
subtracted from the price per share calculated from the P/E ratio.
 
 
96.
Traceable costs are also called:

a. expired costs.
b. administrative costs. 
c. period costs. 
d. product costs.
 
 
97.
Under ASC Topic 606 for revenue recognition, which of the following factors is not an indicator of the principal/agent determination?

a. Shipping terms.
b. Control of prices of the goods or services.
c. Credit risk.
d. Inventory risk.
 
 
98.
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 the aggregate amount of the transaction price allocated to unsatisfied performance obligations.

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

d. Firms must disclose warranties provided.
 
 
99.
Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has:

None of these answer choices are correct.

limited control over the sale of the securities.

the power to direct the activities of the SE and the right to participate in the SE’s gains and losses..

the power to direct the activities of the SE but not the right to participate in the SE’s gains and losses.
 
 
102.
When comparing U.S. GAAP and IFRS standards, which of the following is not correct?

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

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

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

d. U.S. GAAP standards provide too many scope exceptions.
 
 
103.
When determining the fair value of an asset using an exit price approach,

A) fair value is determined by how the company uses the asset.
B) management may choose to reduce the fair value of the asset by the approximate amount of
expected transaction costs (i.e., costs to dispose of the asset) if such costs are deemed to be
material.
C) transaction costs reduce the asset’s fair value.
D) transaction costs do not reduce the asset’s fair value
 
 
104.
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.
 
 
105.
When operating earnings and cash flows from operations are dissimilar, which of the following ratios is a better measure of long-term solvency?

Operating cash flow to total liabilities

Long-term debt to asset

Interest coverage

Long-term debt to tangible assets
 
 
106.
When the sum of the future cash flows of a restructured note is above the current note’s carrying value, the debtor recognizes:

a loss on the debt restructure.

a gain on the debt restructure.

neither a gain nor a loss on the debt restructure.

both a restructure gain and an early extinguishment loss.
 
 
107.
Which of the following actions is not an option for the lender when the borrower is in default?

A) Petition a court to judge the borrower insolvent.
B) Contact the borrower’s customers and collect their receivables.
C) Modify the payment schedule in exchange for an increased interest rate or additional collateral, such as receivables, inventory, or equipment.
D) Adjust the loan payment schedule to better suit the company’s anticipated operating cash flows.
 
 
108.
Which of the following best describes measures of immediate liquidity?

The current ratio and the quick ratio will always have different results regardless of the industry in which the company operates.

The quick ratio excludes inventory in the denominator because most businesses cannot readily convert inventory to cash.

The current ratio reflects existing cash as well as amounts to be converted to cash in the normal operating cycle.

The quick ratio reflects existing cash as well as amounts to be converted to cash in the normal operating cycle.
 
 
109.
Which of the following causes basic EPS to differ from fully diluted EPS?

A) Management stock options.
B) Warrants.
C) Convertible preferred stock.
D) All of these answer choices are correct.
 
 
110.
Which of the following is not an action taken by shareholders when the earnings and share price fall below acceptable levels?
a. Filing a lawsuit for the lost value of the share price.
b. Launching a proxy contest.
c. Letters to management and outside directors.
d. Phone calls to management and outside directors.
 
 
111.
Which of the following is not true regarding the tax note to the financial statements?

a. The tax note can explain how foreign tax rates affect income tax expense.

b. The tax note can describe how tax disputes may affect future tax payments.

c. The tax note is never required to include any information on foreign tax rate implications.

d. The tax note can describe how financial reporting differs from tax accounting.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

112.
Which of the following items will not cause the company’s ROA to increase?

a.Increasing the selling price per unit.

b. Increasing company assets.

c. Reducing company assets without impacting sales.

d. Reducing costs.
 
 
113.
Which of the following methods can be used to recognize revenue when a performance obligation is satisfied over time?

A) The present value method.
B) The output method.
C) The fair value method.
D) The future value method.
 
 
114.
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 may represent a large portion of stockholders’ equity.
C) Retained earnings measures the cumulative earnings of the company since inception, minus dividends distributed.
D) Retained earnings represents cumulative earnings that have been reinvested in the business.
 
 
115.
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.
 
 
116.
Which of the following statements does not apply to the principal/agent relationship under ASC Topic 606 guidance for revenue recognition?

a. Inventory risk is not an important factor in determining the relationship.
b. An agent reports revenue only for the net amount retained.
c. An agent may recognize revenue when its performance obligation to the principal is satisfied.
d. A principal recognizes revenue for the gross amount paid by the customer.
 
 
117.
Which of the following statements is false regarding accounts receivable reporting?

A) Growth in accounts receivable could exceed sales growth because a firm allows its customers
more time to pay.
B) When a firm’s sales growth exceeds its growth in receivables, it could be an indication of
aggressive revenue recognition policies.
C) Many irregularities in receivables recognition can be discovered by tracking the relationship
between changes in sales and changes in receivables.
D) When a company adopts an aggressive revenue recognition policy, it can lead to significant
journal entries of sales returns in later periods.
 
 
118.
Which of the following statements is false regarding factoring receivables?

When a company accepts credit cards, it is engaging in a form of factoring.

When a company sells its accounts receivable to a factor with recourse, a recourse obligation that is recorded would be a credit entry on its books.

When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer’s account proves to be uncollectible.

Factoring can be done either with or without recourse.
 
 
 
 
 
 
 
 
 

119.
Which of the following statements is false regarding interest on receivables?

Interest must be accounted for on all long-term notes receivable whether the interest rate is stated or not.

For long-term credit sales transactions using notes receivable, interest income should be recorded over the term of the note using the prevailing borrowing rate at the time of the transaction.

Interest must be imputed when the stated rate is higher than the prevailing borrowing rate at the time of the transaction.

Interest must be imputed when the stated rate is lower the prevailing borrowing rate at the time of the transaction.
 
 
121.
Which of the following statements is false regarding traditional lending products?

A) A bond that has collateral to protect the bondholder is referred to as a debenture bond.
B) A term lending agreement has an original maturity of more than one year with maturities
ranging from two to five years being the most common.
C) The written agreement between the between the borrowing company and its lenders is
referred to as the indenture.
D) A call provision allows the borrowing company to repurchase part or all the debt at a stated
price over a specific period.
 
 
122.
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. Current guidance on long-term contracts gives more flexibility to firms for determining when revenue is recognized.
c. The new standard precludes the use of percentage-of-completion method for long-term construction contracts.
d. Adoption for calendar reporting entities is first required for calendar 2018.
 
 
123.
Which of the following statements is not true regarding the cash flow statement?

A) The cash flow statement generally shows that cash flows and accrual earnings are substantially the same.
B) The cash flow statement explains the causes for year-to-year changes in cash and cash equivalents.
C) The change in cash is classified into cash flow from three categories: operating activities, investing activities and financing activities.
D) The cash flow statement provides information about changes in all the balance sheet accounts.
 
 
124.
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.
 
 
125.
Which of the following statements regarding IFRS is incorrect?

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

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. All companies listed on the London Stock Exchange must use IFRS.
 
 
126.
Which one of the following explanations for the growth of accounts receivable outstripping the
growth of sales represents a red flag?

A) The firm changes its timing of revenue recognition to a more conservative approach.
B) The firm develops an attractive credit policy for first time buyers.
C) The firm adopts new credit terms that lengthen the payment terms to the industry average.
D) The firm adopts an aggressive revenue recognition policy.
 
 
127.
Which one of the following helps the analyst remove the effects of an information filter?

A) Trend analysis.
B) Financial statements.
C) Note disclosures in financial statements.
D) SEC Form 10-K.
 
 
 
 
 
 
 
 
 

128.
Which one of the following is an example of an aggressive revenue recognition policy?

A) A firm recognizes revenue at the expiration of the sales returns period.
B) A firm with a liberal sales return policy recognizes revenue at shipment with a corresponding
allowance for returns and allowances.
C) A firm recognizes revenue at time of collection.
D) A firm with a liberal sales return policy recognizes revenue at shipment.
 
 
129.
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) FASB when drafting generally accepted accounting principles.
B) Management of the company publishing the statements.
C) The public accounting firm performing the audit.
D) The SEC by enforcing reporting standards.
 
 
130.
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 contract asset and recognize a loss equal to the difference between the amount of maintenance contracts expected and the carrying amount.
C) write down the full amount of installation costs.
D) do nothing until the customers fail to renew the maintenance contracts.
 
 
131.
Working capital accounts include:

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

 

1.
Accounting errors or irregularities can occur for which reasons?
 
 
2.
Accounting treatment for changes in accounting principle are best described as:
 
 
3.
The balance sheet provides information on all of the following except:
 
 
4.
Banks that fail to comply with regulations, including the failure to maintain an adequate capital adequacy ratio, face:
 
 
5.
The Barden Company provides the following trial balance as of December 31, 2018.

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?
 
 
6.
The best measure of a firm’s sustainable income is:
 
 
7.
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?
 
 
8.
Companies offering higher risk securities have incentives to mask their true condition by:
 
 
9.
Companies that consistently earn rates of return above the competitive floor in the industry are considered to possess a:
 
 
10.
Compensation incentives that motivate and reward executives for three to seven years of growth and prosperity are called:
 
 
11.
Condensed financial data are presented below for the Phoenix Corporation:

2019 2018
Accounts receivable 267,500 $ 230,000 
Inventory 312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 127,500 
Cash flow from operations 71,000 
Cash flow from investing activities (6,000) 
Cash flow from financing activities (62,500) 
Tax rate 30 % 


If the intangible assets in 2019 are $50,000, then the long-term debt to tangible assets for 2019 is:
 
 
 
 
 
 
 
 
 
 
 
 
 

13.
Consider the following table of Actual earnings:

Firm A Firm B Firm C
Actual earnings $ 6,000 $14,000 $18,000 
r 10% 8% 12%
BVt-1 $100,000 $150,000 $190,000 


What are the abnormal earnings for Firm C?
 
 
14.
Continuing franchise fees that are based on the franchisee’s percentage of sales should be recognized by the franchisor as revenue:
 
 
15.
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).
 
 
16.
Employees demand financial statement information because the firm’s performance is often linked to all of the following except:
 
 
17.
Entering the DR or CR amount in the appropriate left or right side of the affected T-account is called:
 
 
18.
The expected abnormal earnings of a firm that has earnings of $40,000 with a required equity cost of capital of 8% and a beginning book value of $800,000 is
 
 
19.
Financial information which does not favor one set of interested parties over another is:
 
 
20.
The following information pertains to the Fan Company’s inventory item B1008: 


March 1 Inventory Balance 400 units @ $ 3.10 
5 Purchase 1,400 units @ $ 3.20 
14 Purchase 280 units @ $ 3.25 
31 Inventory Balance 520 units 


In a periodic inventory system, the FIFO cost of goods sold is
 
 
22.
Goodwill:
 
 
24.
In a common-size balance sheet, all items are expressed as a percentage of:
 
 
 
 
 
 
 
 
 

25.
In an actual business, which of the following is an inventory accounting issue that frequently arises?
 
 
26.
In a trend balance sheet for 2018, stockholders’ equity is expressed as:
 
 
27.
Income statements are classified into sections to:
 
 
28.
Investors and analysts must have certain capabilities regarding financial reporting which include:
 
 
29.
Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:
 
 
30.
Manero Company included the following information in its annual report:

2019 2018 2017
Sales $178,400 $162,500 $155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 


In a common-size income statement for 2019, the operating expenses are expressed as:
 
 
31.
The network of conventions, rules, guidelines, and procedures used by the accounting profession is known as generally accepted:
 
 
32.
On January 1, 2018, Monroe Contractors signed a contract to inspect and complete needed repairs to the water lines for the town of Pleasantville. Because Monroe 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, Monroe will recognize revenue for the contract using the completed-contract method. The work is expected to be completed in 2020.

Which of the following is not a permitted simpler approach to revenue recognition under ASC Topic 606 for revenue recognition?
 
 
33.
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.

What amount will Jensen recognize as interest income during 2019?
 
 
34.
Operating activities result from the cash effects of:
 
 
 
 
 
 
 
 
 

35.
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 2018:



Customer Note Maturity Interest Due Interest Rate
J.Perez $ 100,000 Quarterly 10%
P.Berg $ 100,000 — Negotiated


To encourage sales, Berg was given a special deal on interest. Additional information:

Future value of $100,000 in one year (quarterly interest) is $110,381.

Present value of $100,000 for one year (quarterly interest) is $90,595.

What amount will Palmer use to record the sale to Perez?
 
 
36.
Payments to a customer for slotting fees:
 
 
37.
Potential conflicts of interest permeate:
 
 
38.
Relevant financial information:
 
 
39.
Restatements occur for a number of reasons. Which of the following is the most common type of restatement?
 
 
41.
Subsequent events:
 
 
42.
To achieve faithful representation, the financial information must be:
 
 
44.
Valuing an entire company, an operating division of that company or its ownership shares involves three basic steps. These steps include all of the following except:
 
 
45.
When a company changes from any inventory method to LIFO, the change is reported
 
 
46.
When a specific account receivable is written off, the entry:
 
 
47.
When faced with falling short of a desired earnings target, financial executives reportedly might consider any of the following actions except:
 
 
48.
When reporting a change in an accounting principle, the general rule requires that the current year’s income from continuing operations reflect:
 
 
49.
Which is not correct regarding Regulation Fair Disclosure (Reg FD) ?
 
 
50.
Which item below does not describe a politically vulnerable firm?
 
 
51.
Which of the following are primary qualitative characteristics of accounting information?
 
 
 
 
 
 
 
 
 

52.
Which of the following does not describe the impact of a firm’s capital structure on ROA and ROCE?
 
 
53.
Which of the following is not an example of an affirmative covenant?
 
 
55.
Which of the following statements is false regarding the global vantage point of fair value measurement?
 
 
56.
Which of the following statements is true regarding the five-step model in the ASC Topic 606 guidance for revenue recognition?
 
 
57.
Which of the following statements regarding inventory accounting is true?
 
 
58.
Which of the following would not be considered a revenue recognition abuse?
 
 
59.
With respect to asset utilization, which of the following is not correct?
 
 
60.
XYZ Co.’s 2018 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2017. To help evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should do all of the following except:
 
 
 

 

The fundamental valuation approach to business valuation uses basic accounting measures to assess the amount, timing and:

 

The steps involved in business valuation are forecasting the future values of a financial attribute that drives a company’s value, determining the risk associated with that forecasted value and determining the:

 

Cash flow assessment plays a central role in analyzing:

 

Valuing an entire company, an operating division of that company or its ownership shares involves three basic steps. These steps include all of the following except:

 

When using the discounted flows to equity valuation model, the market value of common shares depends upon investors’:

 

A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This assumption is best applied to:

 

To apply the discounted free cash flow model, the analyst needs to estimate:

 

The FASB stresses that the primary objective of financial reporting is to provide information useful to investors and creditors in assessing the amount, timing and uncertainty of future net cash flows. The FASB contends that:

 

Research indicates that stock returns correlate better with:

 

The reciprocal of the risk-adjusted equity cost of capital used to discount future earnings is the:

 

If a company currently earns $5.00 per share, and has a risk-adjusted equity cost of capital of 9%, a share of common stock should theoretically sell for approximately:

 

If a company currently earns $6.00 per share and has a risk-adjusted cost of equity capital of 12.5%, a share of common stock should theoretically sell for:

 

If most firms’ price/earnings ratios are between 10 and 15, what is the range of the risk-adjusted interest rate?

 

Risky firms have a higher risk-adjusted cost of capital. Which one of the following factors would contribute to a risky firm also having a relatively high price/earnings ratio?

 

To obtain a better current price, the net present value of future growth opportunities (NPVGO) can be calculated and:

 

The net present value of future growth opportunities (NPVGO) will contribute to an above average P/E multiple when the additional share value created is:

 

In general, the growth rate in earnings will depend on the portion of earnings reinvested each period and:

 

A component that is valuation-relevant, but is not expected to persist into the future is a:

 

Income from continuing operations, excluding special or nonrecurring items, is generally regarded as:

 

Income or loss from discontinued operations is regarded as:

 

An adjustment to income due to a non-recurring item is regarded as:

 

Consider the following table of Earnings Components:

 
Firm A
 
Firm B
 
Firm C
 
Reported EPS
$
12
 
 
$
15
 
 
$
18
 
Analyst’s EPS composition:
 
 
 
 
 
 
 
 
 
 
 
Permanent component (βP = 5)
 
80
%
 
 
60
%
 
 
75
%
Transitory component (βT = 1)
 
10
%
 
 
35
%
 
 
25
%
Value-irrelevant component (β0 = 0)
 
10
%
 
 
5
%
 
 
0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 The implied share price of Firm A’s stock is:

 

The implied share price of Firm B’s stock is:

 

The implied share price of Firm C’s stock is:

 

 The implied total earnings multiple of Firm A is:

 

The implied total earnings multiple of Firm B is:

 

The implied total earnings multiple of Firm C is:

 

Reported earnings numbers often contain three distinctly different components possibly subject to different earnings capitalization rates. Which of the following is not one of these components?

 

As transitory components become a more important part of a firm’s reported earnings, the reported earnings:

 

The assessment of earnings quality to calculate an implied share price is best accomplished using which of the following?

 

As transitory or value-irrelevant components become a larger part of a firm’s reported earnings, which of the following effects would you not expect to witness?

 

Under the abnormal earnings approach of equity valuation, investors willingly pay a premium for those firms that:

 

One popular approach to estimating the equity cost of capital is:

 

When calculating forecasted cash flows available to common stockholders (CF) under the flows to equity model,:

 

The expected abnormal earnings of a firm that has earnings of $40,000 with a required equity cost of capital of 8% and a beginning book value of $800,000 is

 

Consider the following table of Actual earnings:

 
Firm A
 
Firm B
 
Firm C
 
Actual earnings
$
6,000
 
 
$
14,000
 
 
$
18,000
 
r
 
10
%
 
 
8
%
 
 
12
%
BVt-1
$
100,000
 
 
$
150,000
 
 
$
190,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
What are the abnormal earnings for Firm A?

 

What are the abnormal earnings for Firm B?

 

What are the abnormal earnings for Firm C?

 

Assume that Firm A can increase earnings $4,000 by cutting costs. Abnormal earnings would be:

 

Assume that at the beginning of the year, Firm B divested itself of $20,000 of unproductive capital and earnings for the year fell by only $3,000. Abnormal earnings are:

 

A company with a return on equity that consistently exceeds the industry average ROCE will generally have shares that sell at a:

 

Per U.S. GAAP, fair value for accounting purposes is:

 

Carrying amounts in a GAAP balance sheet are measured using all the following except:

 

When determining the fair value of an asset using an exit price approach,

 

An earnings surprise:

 

The fact that a firm’s stock price does not change when earnings are announced indicates that:

 

The interest rate on a revolving loan will usually:

 

Short-term notes sold directly to investors by large, highly rated companies are called:

 

A qualitative assessment of the business, its customers and suppliers, and management’s character and capability is known as:

 

The degree to which cash needs can be satisfied during periods of fiscal stress is known as:

 

The interest rate charged on bank loans must be sufficient to cover all the following except:

 

Preparing comprehensive financial statement forecasts involves six steps. Among these steps are all the following except:

 

Which of the following statements is false regarding the global vantage point of fair value measurement?

 

Common value-relevant attributes for determining the value of a company include all the following except:

 

Which of the following statements is false regarding the flows to equity model?

 

Which of the following statements is false regarding the FASB’S view on valuation?

 

Which of the following statements is false regarding the abnormal earnings approach to valuation?

 

Which of the following statements is false regarding credit risk analysis?

 

Which of the following statements is false regarding credit risk analysis?

 

Which of the following statements is false regarding traditional lending products?

 

Financial accounting numbers can be used to define contract terms and monitor compliance with contract terms. 

 

An essential feature of the modern corporation and most business relationships is the delegation of financial reporting responsibility. 

 

When one party to a business relationship can make decisions that benefit him or her but harm the other party a conflict of interest arises. 



Contract terms can be designed to eliminate or reduce conflicting incentives that arise in business relationships. 



Financial statement data is useful for contracting purposes regardless of the accounting methods used by the company and its freedom to change them. 



One low-cost, effective way of eliminating or reducing conflicts of interest in business relationships is to use lawyers to negotiate all terms. 



Commercial lending agreements may contain provisions that are designed to protect the lender from a deterioration of the borrower’s creditworthiness. 



Contracting parties understand that financial reporting flexibility affects how contracts are written and enforced. 



Debt covenants benefit creditors because the covenants reduce default risk. 



It is possible to lower the interest rate on a loan by accepting more stringent loan covenant restrictions. 



Affirmative covenants stipulate actions the borrower must take. 



One way to reduce conflicts of interest between lenders and borrowers is by writing contracts that restrict the borrowers’ ability to harm lenders by taking risky actions. 



Debt covenants help guard against conflicts of interest between creditors and bank regulators. 



Debt covenants can be designed to serve a signaling function by assuring a steady flow of information from borrower to lender. 



"Triggers" enable the lender to decide whether it might be appropriate to modify or waive restrictions, or to demand immediate repayment. 



Some debt covenants preserve repayment capacity by preventing mergers and acquisitions unless the debt is first repaid. 

 

Preventing mergers and acquisitions is an example of a covenant designed to protect against credit-damaging events.

 

A Certificate of Compliance affirms that the creditor’s managers have reviewed the financial statements and found no violation of any covenant provision. 



Financial covenants establish minimum financial tests with which a borrower must comply. 



Negative covenants tend to be less significant than affirmative covenants because they place direct restrictions on the actions lenders can take. 



Payment default occurs when the borrower violates one or more loan covenants but has made all principal and interest payments. 



Management tends to make accounting changes and to manipulate discretionary accruals that increase income in order to avoid violating debt covenants. 



Covenants restricting the use of funds for dividend payments, share repurchases, capital expenditures, and other business purposes are included so the creditor has greater assurance that cash will be available to make principle and interest payments when due. 



A covenant that specifies a required minimum level of net worth and working capital is a compliance covenant. 



The events of default section of a loan agreement describes circumstances in which the creditor has the right to terminate the lending relationship. 



Technical default occurs only when the borrower fails to make interest and principle payments when due. 



Seizure of collateral is one possible remedy for breach of covenant restrictions. 



A technical default occurs when the borrower violates one or more loan covenants but has not missed any interest or principal payments. 



Managers wishing to avoid loan covenant violations may resort to making accounting changes that increase reported earnings. 



Because covenant compliance can be jeopardized by mandated changes in accounting principles, many loan agreements have financial covenants that rely on the accounting rules in place when the loan is first granted. 



Although covenant compliance can be jeopardized by mandated changes in accounting principles, few loan agreements have financial covenants that rely on the accounting rules in place when the loan is first granted. 



When "fixed GAAP" is not permitted by the loan agreement, lenders still have the option to waive or renegotiate covenants that are harmed by a new accounting standard. 



Borrowers do not appear willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations. 



Potential conflicts of interest between managers and owners can be overcome if compensation packages are tied to improvement in firm value. 



Managerial strategies and decisions clearly affect stock prices both in the short and long run. 



Long-term incentives motivate and reward executives for the company’s growth and prosperity in three to seven years. 



Stock options are the most common short-term incentive device. 



Most executive compensation packages involve a base salary, an annual incentive, and a long-term incentive. 



The most common financial performance measure used in annual incentive plans is GAAP net income or some variation thereof. 



Stock options come in various forms, the choice of which is largely dependent on the tax treatment for the executive and the company. 



Stock options come in various forms, the choice of which is largely dependent on the financial accounting treatment for the executive and the company. 



Nonqualified stock options do not qualify for ordinary income tax treatment, but rather the executive exercising the options is taxed at the higher capital gains tax rate. 



Information about a company’s executive compensation practices can be found in the company’s annual report. 



Since 2002, stock options have become a smaller component of long-term incentive pay due to a fundamental change in the tax treatment that options receive. 



Firms now must provide a compensation discussion and analysis in the proxy statement which describes the specific items of corporate performance that are taken into account when making compensation decisions. 



Firms are required to disclose executive retirement and other postemployment compensation, generally for the ten most highly paid executives serving as corporate officers. 



The wide use of accounting-based incentives is controversial because earnings growth does not automatically translate into increased shareholder value. 



Accounting-based incentive plans can encourage managers to adopt a long-term business focus. 



Research shows that managers sometimes use accounting flexibility to evade contract constraints in order to gain bonus benefits. 



A factor that can reduce managers’ short-term focus is the fact that incentive compensation plans are administered by a compensation committee that can intervene when circumstances warrant modification of the scheduled incentive award. 



Critics of stock options as a form of compensation argue that stock options encourage managers to cater to Wall Street’s short-term earnings expectations. 



Decreasing discretionary spending for such items as research and development is a popular technique for meeting earnings targets. 



The methods and procedures that must be followed for financial statements that are utilized by regulatory agencies are known as RAP. 



In the banking industry, the ratio of invested capital/gross assets, as defined by RAP, is the capital asset ratio. 



A bank’s estimated bad debt expense associated with its loan receivables is the loan loss provision. 



IRS regulations govern the computation of net income for the SEC. 



RAP sometimes shows up in a company’s GAAP financial statements. 



Banks and other financial institutions are required by federal and state regulatory agencies to meet minimum capital requirements. 



In industries that are subject to unwanted attention from politicians, managers sometimes use accounting methods to make the company seem less profitable than it really is. 



Asset substitution occurs when a company borrows to engage in a low-risk investment project, but instead invests in a higher risk project. 



Loan provisions that are specifically designed to restrict asset substitution are called 



A lender may be protected from deterioration of the borrower’s creditworthiness if the commercial lending agreement requires the borrower to maintain a 



When one party to a business relationship can make decisions that benefit him or her but harm the other party a 



Potential conflicts of interest permeate 



One low-cost, effective way of eliminating or reducing conflicts of interest in business relationships is to 



A covenant that specifies a required minimum level of net worth and working capital is a/an 



Affirmative covenants generally would not include which of the following stipulations? 



Many loan agreements have financial covenants that rely on 



Which of the following is not an example of a negative covenant provision? 



Based on a comprehensive survey of U.S. companies, the most common performance measure used in annual and long-term incentive plans for senior executives is 



Debt covenants benefit 



Which one of the following is not a broad function served by debt covenants? 



A financial covenant stipulates all of the following except 



A requirement to maintain a certain level of fixed charge coverage 



Covenants that place direct restrictions on managerial decisions are called 



Which one of the following is an example of a negative covenant? 



The section of a loan agreement that describes circumstances in which the creditor has the right to terminate the lending relationship is called the 



The failure of a company to pay other debts, such as payables or other loans, when due is called 



According to the SEC any breach of a loan covenant that existed at the balance sheet date that has not subsequently been cured should 



When a debt covenant is violated, the related debt must be classified as current if it is 



When a borrower is unable to make a scheduled interest payment, the type of default that occurs is a 



A study examining how incentives arising out of debt contracts affect managers’ accounting choices found that the most common violations of accounting-based covenants occurred with 



Discretionary accounting accruals are 



In a study of discretionary accounting accruals, it was found that abnormal accruals in the year prior to reporting covenant violations were 



Studies seem to suggest that management tends to make accounting changes and/or manipulate discretionary accruals to 



Potential conflicts of interest between shareholders and managers may be overcome if managers are given incentives which cause them to behave as if they were 



Firms must now provide detailed disclosure of three broad executive pay categories. Which of the following is not one of these categories? 



A decrease in market-wide interest rates will result in a/an 



Compensation incentives that motivate and reward executives for five years of growth and prosperity are called 



Incentive stock options 



An award of stock that is not transferable or subject to forfeiture for a period of years is called 



Most executive compensation plans link bonus awards to one or more 



The widespread use of accounting-based incentives for executive compensation is controversial for which one of the following reasons? 

 

Several studies show that incoming CEOs have an incentive to 



Managers believe it is important to meet earnings benchmarks. When a number of executives were asked—within the parameters of GAAP—which choices your company might make to hit an earnings target, the most popular choice was to 



The widespread use of accounting-based incentives to determine executive compensation is controversial for which one of the following reasons? 



Research has shown that research and development expenditures during the years immediately prior to a CEO’s retirement tend to 



Compensation plans should 



Long-term incentive components of executive compensation plans should include stock options 



A compensation committee should be comprised of 



Regulatory accounting principles are important to those outside the regulatory agencies because 



Banks that fail to comply with regulations, including the failure to maintain an adequate capital adequacy ratio, face 



The use of a bank manager’s discretion in the timing and amount of loan loss provisions and loan charge-offs can falsely understate the losses and 



In the banking industry, the ratio of invested capital/gross assets, as defined by RAP, is the 



A bank’s estimated bad debt expense associated with its loan receivables is the 



In the utilities industry, rate formulas are established to allow the utilities to set total allowed revenues to recover 



Rate regulation provides incentives for public utility managers to 



IRS regulations govern the 



When a company has differing investment project possibilities with the same dollar cost and the same expected return over the same investment horizon, a creditor would prefer the investment with 



All other things equal, stockholders of companies with debt financing prefer investment projects with 



All other things equal, creditors of companies with debt financing prefer investment projects with 



Creditors have a more serious problem when an investment has a high risk and the expected value of the project is 



Banking regulators have a powerful weapon to encourage compliance with minimum capital guidelines as they can impose costs on noncomplying banks by doing any or all of the following except 

 

1.
An analytical tool that measures a company’s performance against a predetermined
standard is a/an:
 
 
2.
As transitory components become a more important part of a firm’s reported earnings,
the reported earnings:
 
 
3.
At the acquisition date of an active investment, when the cost of the shares acquired
exceeds the underlying book value, the investor is required to amortize any excess that
is attributable to separately identifiable assets have an indefinite life. Which of the
following is a separately identifiable asset that might not be recognized on the
investee’s balance sheet?
 
 
4.
Carrying amounts in a GAAP balance sheet are measured using all the following
except:
 
 
5.
Changes in deferred tax assets and liabilities from one year to the next that are not
included in the income tax entry based on continuing operations are explained by:
 
 
6.
A clawback provision in an employment contract:
 
 
7.
Common-size financial statements recast each statement item as:
 
 
8.
Companies that consistently earn rates of return above the competitive floor in the
industry are considered to possess a:
 
 
9.
Company A’s interest ratio has fallen below the level required by its lender. The lender
may not take which action?
 
 
10.
A company instituted an IRS-approved plan to contribute monies to a plan that would
pay each employee a percentage of his or her highest year of salary for each year of
service upon termination of services. This plan is a:
 
 
11.
Compensation incentives that motivate and reward executives for three to seven years
of growth and prosperity are called:
 
 
12.
The components of pension expense are
 
 
13.
A component that is valuation-relevant, but is not expected to persist into the future is
a:
 
 
14.
Consolidation adjustments that are made to prepare consolidated financial statements of
the parent and subsidiary are required in order to:
 
 
15.
A covenant that specifies a required minimum level of net worth and working capital is
a/an:
 
 
16.
Debt covenants benefit:
 
 
17.
Defined contribution plans are preferred by companies for all except which of the
following reasons?
 
 
18.
The degree to which cash needs can be satisfied during periods of fiscal stress is known
as:
 
 
19.
The disclosure rules pertaining to GAAP accounting for business combinations
complicates financial analysis for which of the following reasons?
 
 
20.
The fact that a firm’s stock price does not change when earnings are announced
indicates that:
 
 
21.
The financial statement reporting "filter" is:
 
 
22.
Firms must provide detailed disclosure of three broad executive pay categories. Which
of the following is not one of these categories?
 
 
23.
For income tax purposes, pension plan sponsors deduct the amount of the:
 
 
24.
The fundamental valuation approach to business valuation uses basic accounting
measures to assess the amount, timing and:
 
 
25.
The GAAP solution for avoiding distortions that would result from setting income tax
expense equal to taxes owed is called:
 
 
26.
If the parent company owns more than 50% of the subsidiary’s voting stock, and
effectively has control of the subsidiary, consolidated financial statements are:
 
 
27.
In 2018 under the rules for minority passive investments in equity securities, which of
the following statements is not correct?
 
 
28.
In a common-size balance sheet, all items are expressed as a percentage of:
 
 
29.
In a trend balance sheet, each balance sheet item is expressed as a percentage of:
 
 
30.
Income from continuing operations, excluding special or nonrecurring items, is
generally regarded as:
 
 
31.
Income or loss from discontinued operations is regarded as:
 
 
 
 
 
 
 
 
 
 
 
 
 

32.
Information about a company’s executive compensation practices can be found in a
company’s:
 
 
33.
In general, the growth rate in earnings will depend on the portion of earnings reinvested
each period and:
 
 
34.
Investments in debt securities made to generate trading gains are classified as:
 
 
35.
A lender may be protected from deterioration of the borrower’s creditworthiness if the
commercial lending agreement requires the borrower to maintain a:
 
 
36.
Loan provisions that are specifically designed to restrict dividend payments to
shareholders are called:
 
 
37.
Long-term incentive components of executive compensation plans should include stock
options:
 
 
38.
Many loan agreements have financial covenants that rely on:
 
 
39.
A minority active ownership is represented by:
 
 
40.
A minority ownership interest generally occurs when an investor owns less than which
of the following percentages of the stock of an investee company?
 
 
41.
Most executive compensation plans link bonus awards to one or more:
 
 
42.
The net pension liability that must be shown on the balance sheet of the plan sponsor is
the:
 
 
43.
Of the following items, which would not be a circumstance that may trigger goodwill
impairment?
 
 
44.
One popular approach to estimating the equity cost of capital is:
 
 
45.
Per U.S. GAAP, fair value for accounting purposes is:
 
 
46.
Potential conflicts of interest permeate:
 
 
47.
The prevalence of stock options in executive pay packages:
 
 
48.
A qualitative assessment of the business, its customers and suppliers, and management’s
character and capability is known as:
 
 
49.
The ratio that captures information about property, plant, and equipment utilization is:
 
 
50.
The reciprocal of the risk-adjusted equity cost of capital used to discount future
earnings is the:
 
 
51.
Regulatory accounting principles are important to those outside the regulatory agencies
because:
 
 
52.
Reported earnings numbers often contain three distinctly different components possibly
subject to different earnings capitalization rates. Which of the following is not one of
these components?
 
 
53.
Return on Assets (ROA) can be broken down into these two components: profit margin
and:
 
 
54.
Return on Assets (ROA) measures a firm’s:
 
 
55.
The return on plan assets component of pension expense for a defined benefit pension
plan is:
 
 
56.
Risky firms have a higher risk-adjusted cost of capital. Which one of the following
factors would contribute to a risky firm also having a relatively high price/earnings
ratio?
 
 
 
 
 
 
 
 
 

57.
The service cost component of a defined benefit pension plan is computed as the:
 
 
58.
Short-term notes sold directly to investors by large, highly rated companies are called:
 
 
59.
A simplified version of the discounted free cash flow valuation model assumes a
zero-growth perpetuity for future cash flows. This assumption is best applied to:
 
 
60.
The smoothing of pension expense is:
 
 
61.
Strategies to gain a competitive advantage include product differentiation and:
 
 
62.
Temporary differences that will cause taxable income in future periods to be higher than
pre-tax book income in future periods give rise to:
 
 
63.
Temporary differences that will cause taxable income in future periods to be lower than
pre-tax book income in future periods give rise to:
 
 
64.
Time-series analysis helps identify financial trends:
 
 
65.
To apply the discounted free cash flow model, the analyst needs to estimate:
 
 
66.
To compute the amortization on the cumulative net actuarial gains and losses in AOCI
for a pension plan, the corridor is computed as 10% of the:
 
 
67.
To obtain a better current price, the net present value of future growth opportunities
(NPVGO) can be calculated and:
 
 
68.
Trend statements help the user:
 
 
69.
A type of analysis that helps identify similarities and differences across companies or
business units at a single moment in time is:
 
 
71.
Under the balance sheet approach, the full change in the amount of future liability is
recognized as an increase or decrease in income tax expense in the year the:
 
 
72.
Valuing an entire company, an operating division of that company or its ownership
shares involves three basic steps. These steps include all of the following except:
 
 
73.
What purpose is served by including covenants that place strict limits on new
borrowing, prohibit stock repurchases and dividends without prior lender approval, or
ensure that cash generated both from ongoing operations and from asset sales will not
be diverted away from servicing debt?
 
 
74.
When a firm has noncontrolling interests, analysts may compute and review all except
which of the following return on equity ratios?
 
 
75.
When agents do not act in the best interest of their principals, the cost is borne by which
of the following?
 
 
76.
When an investor is capable of influencing the investee company’s dividend policy, the
investor is able to augment its own reported income when using:
 
 
 
 
 
 
 
 
 

77.
When an investor owns less than 20 percent of the investee company, the investor may
still be able to exert influence over the investee company if the other stock is:
 
widely distributed across a large number of individual investors
78.
When calculating forecasted cash flows available to common stockholders (CF) under
the flows to equity model,:
 
cash interest payments, debt repayments, and preferred dividends are subtracted.
79.
When conflicts of interest exist, lenders generally take all of the following actions at the
creation of a contract except:
 
Accept the risk and set up a reserve for potential future issues.
80.
When determining the fair value of an asset using an exit price approach,
 
transaction costs DO NOT reduce the asset’s fair value
81.
when income tax expense equals current income tax payable to the government plus
(minus) the increase (decrease) in deferred tax liabilities, income tax expense is
properly matched for the:
 
current period
82.
When one party to a business relationship can make decisions that benefit him or her
but harm another other party in the relationship:
 
 
83.
When two companies form a joint venture and each company owns exactly 50% of the
joint venture:
 
 
84.
When using the discounted flows to equity valuation model, the market value of
common shares depends upon investors’:
 
 
85.
Which accounting choice would not be used to reduce the likelihood of a technical
default?
 
 
86.
Which of the following correctly describes the accounting for assets and liabilities that
were created from foreign currency transactions?
 
 
87.
Which of the following does not accurately inform about a variable interest entity
(VIE)?
 
 
88.
Which of the following does not reflect disclosures in financial statements?
 
 
89.
Which of the following is not a factor in the determination of pension expense when the employer sponsors a defined benefit pension plan?
 
 
90.
Which of the following is not an accurate statement regarding the compensation
committee?
 
 
91.
Which of the following is not a purpose served by debt covenants?
 
 
92.
Which of the following is not a use of a variable interest entity (VIE)?
 
 
93.
Which of the following is not a valid statement?
 
 
94.
Which of the following is not correct regarding prior service costs?
 
 
95.
Which of the following is not correct with regard to the translation of a self-contained
foreign subsidiary?
 
 
 
 
 
 
 
 
 

96.
Which of the following is not correct with respect to an analyst’s use of financial
information?
 
 
97.
Which of the following items will not cause the company’s ROA to increase?
 
 
98.
Which of the following situations does not lead to default of a loan contract?
 
 
99.
Which of the following statements does not properly describe accounting for OPEB
plans?
 
 
100.
Which of the following statements does not properly describe a defined benefit pension
plan?
 
 
101.
Which of the following statements does not properly describe the accounting for
business combinations?
 
 
102.
Which of the following statements does not properly reflect the new rules for
accounting for minority equity investment securities, if fair value is not readily
determinable?
 
 
103.
Which of the following statements is correct?
 
 
104.
Which of the following statements is correct with respect to a defined contribution
plan?
 
 
105.
Which of the following statements regarding minority passive investments in equity
securities is not correct for 2018 and thereafter?
 
 
106.
Which of the following transactions would create a deferred tax liability on foreign
income?
 
 
107.
Which one of the following helps the analyst remove the effects of an information
filter?
 
 
108.
Which statement below is not correct with respect to a company’s strategy?
 
 
109.
The widespread use of accounting-based incentives for executive compensation is
controversial for which one of the following reasons?
 
 
110.
With respect to executive compensation, which statement is not valid?
 
 
 
 
 
 
 
 
 

 

 
Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company’s financial statements would be expected to show:

A) a reduction in the percentage of the bad debt provision to receivables.
B) an increase in the percentage of the bad debt provision to receivables.
C) no difference in the percentage of the bad debt provision to receivables.
D) None of these answer choices are correct.
 
As a firm liquidate sold LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:

A) inflated.
B) deflated.
C) lower than normal.
D) always the same as under FIFO.
 
Which one of the following items would be charged to the cost of land rather than the cost of a building?

A) Demolition of an existing structure.
B) Capitalization of interest.
C) Architectural fees.
D) Cost of the foundation.
 
Which one of the following items would be charged to the cost of a building rather than the cost of land?

A) Architectural fees.
B) Grading of land.
C) Demolition of an existing structure.
D) Cost of hauling material from a demolished structure.
 
Goods held on consignment are included in the inventory valuation of:

A) the consignor.
B) the consignee.
C) both the consignor and the consignee.
D) neither the consignor nor the consignee.
 
Goods available for sale is determined by:

A) adding the cost of any beginning inventory and the cost of purchases during the period.
B) subtracting the cost of any ending inventory from the cost of any beginning inventory.
C) subtracting the cost of any beginning inventory from the cost of any ending inventory.
D) subtracting the cost of any beginning inventory from the cost of purchases during the period.
 
Which of the following statements is false regarding factoring receivables?

A) When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer’s account proves to be uncollectible.
B) When a company accepts credit cards, it is engaging in a form of factoring.
C) Factoring can be done either with or without recourse.
D) When a company sells its accounts receivable to a factor with recourse, a recourse obligation that is recorded would be a credit entry on its books.
U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across companies unless the firms:

A) apply the same depreciation methods and the same useful lives among similar groups of assets. 
B) market their products to the same customers.
C) are of approximately the same size.
D) have similar operating cycles.
 
An expenditure that increases a long-lived asset’s useful life should be:

A) capitalized.
B) expensed.
C) ignored.
D) written off immediately.
 
The sale of receivables to a third party is called:

A) factoring.
B) collateralizing.
C) discounting.
D) securitization.
 
Current ratio distortion under LIFO inventory costing may be adjusted by:

A) adding the LIFO reserve to current assets.
B) subtracting the LIFO reserve from current assets.
C) adding the LIFO reserve to current liabilities.
D) subtracting the LIFO reserve from current liabilities.
 
The LIFO conformity rule states that:

A) if LIFO is used for tax purposes, the external financial statements must also use LIFO.
B) if FIFO is used for tax purposes, the external financial statements must also use FIFO.
C) if LIFO is used for tax purposes, the external financial statements must use FIFO.
D) if FIFO is used for tax purposes, the external financial statements must use LIFO.
The allocation of the cost of a wasting asset to future periods of benefit is termed as:

A) depletion.
B) amortization.
C) depreciation.
D) allocation.
The allowance for uncollectibles account is classified as:

A) a contra-asset account.
B) a contra-revenue account.
C) a contra-expense account.
D) a contra-equity account.
 
 
 
 
 
 
 

 
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:

A) match current costs with current revenues.
B) match current costs with oldest revenues.
C) match oldest costs with current revenues.
D) match oldest costs with oldest revenues.
 
Edsel Inc. has the following unadjusted year end trial balance information available for 2018:

Credit sales $600,000 
Ending accounts receivable balance $ 180,000 
Ending allowance for uncollectibles $ 1,500 
Estimated uncollectibles 2 %

If Edsel uses the gross accounts receivable approach for estimating the bad debt provision, the income statement will show an expense of:

A) $2,100
B) $3,600
C) $5,100
D) $8,500
 
Henry Co. manufactures DVD players. At the end of Year 1, Henry’s management believes the growing popularity of streaming video content will reduce the demand for Henry’s DVD players. The DVD players are manufactured using specialized equipment with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000. The managers estimate the equipment has a remaining useful life of 4 years and will generate the following undiscounted cash flows:

Year 2 $ 540,000 
Year 3 $ 420,000 
Year 4 190,000 
Year 5 125,000 
Salvage value 50,000 

If the equipment were sold today, the sales price would be $1,600,000. Is the equipment considered impaired? Why, or why not?

A) Yes, the equipment is impaired. The undiscounted cash flows are lower than the carrying amount of the asset by $155,000. 
B) No, the equipment is not impaired. The fair value of the equipment is greater than the carrying value of the asset by $120,000.
C) Yes, the equipment is impaired. The undiscounted cash flows are less than the fair value of the equipment by $275,000.
D) Cannot determine impairment without discounted cash flows.
 
The following information pertains to the Fan Company’s inventory item B1008: 

Mar 1 Inv Balance 400 units @ $ 3.10 
5 Purchase 1,400 units @ $ 3.20 
14 Purchase 280 units @ $ 3.25 
31 Inv Balance 520 units 

In a periodic inventory system, the ending LIFO inventory is:

A) $1,624.
B) $1,655.
C) $1,678.
D) $1,733.
 
The following information pertains to the Fan Company’s inventory item B1008: 

Mar 1 Inv Balance 400 units @ $ 3.10 
5 Purchase 1,400 units @ $ 3.20 
14 Purchase 280 units @ $ 3.25 
31 Inv Balance 520 units

In a periodic inventory system, the FIFO cost of goods sold is

A) $4,952.
B) $4,967.
C) $4,993.
D) $5,006.
 
The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, pre-tax income would have been:

A) $75,000 higher over the 15-year period.
B) $75,000 lower over the 15-year period.
C) $75,000 higher in the current year.
D) $75,000 lower in the current year.
 
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.

What amount will Jensen recognize as interest income during 2018?

A) $4,356 
B) $4,704
C) $5,111
D) $0
 
 
 
 
 
 
 

 
The Skone Corporation reported a LIFO reserve of $25,000 at the end of the year. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be:

A) $192,500.
B) $197,500.
C) $202,500.
D) $222,500.
 
When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans, it is recorded at:

A) present value based on the stated interest rate.
B) present value based on the prevailing rate of interest.
C) maturity value.
D) net realizable value.
 
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 2018:

Customer Note Maturity Int Due Int Rate
J.Perez $ 100,000 Quarterly 10%
P.Berg $ 100,000 — Negotiated

To encourage sales, Berg was given a special deal on interest. Additional information:

Future value of $100,000 in one year (quarterly interest) is $110,381.

Present value of $100,000 for one year (quarterly interest) is $90,595.

What amount will Palmer use to record the sale to Berg?

A) $90,000
B) $90,595
C) $100,000
D) $110,382
 
U.S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be:

A) capitalized.
B) expensed. 
C) amortized over 40 years.
D) ignored.
 
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag?

A) The firm adopts new credit terms that lengthen the payment terms to the industry average.
B) The firm adopts an aggressive revenue recognition policy.
C) The firm develops an attractive credit policy for first time buyers.
D) The firm changes its timing of revenue recognition to a more conservative approach.
 
A major problem facing financial analysts who compare long-lived assets on balance sheets of various companies is that different companies often use different:

A) formats of balance sheet.
B) estimated lives.
C) salvage values.
D) tax methods of depreciation.
 
An impairment loss is the difference between the carrying value of the asset and the:

A) historical cost of the asset.
B) fair value of an asset.
C) future value of the asset.
D) price-level adjusted value of the asset.
 
The allocation of the cost of a copyright to future periods of benefit is termed as:

A) depletion.
B) amortization.
C) depreciation.
D) allocation.
 
The LIFO reserve disclosure is required because LIFO inventory costs are:

A) higher than FIFO inventory costs.
B) lower than FIFO inventory costs.
C) equal to FIFO inventory costs.
D) usually of no consequence.
 
The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is:

A) cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO
B) cost of goods sold LIFO − increase in LIFO reserve = cost of goods sold FIFO
C) cost of goods sold LIFO − decrease in LIFO reserve = cost of goods sold FIFO
D) cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO
 
Long-lived assets are:


A) non-operating assets expected to yield their economic benefits (or service potential) over a period longer than one year.
B) operating assets expected to yield their economic benefits (or service potential) over a period longer than one year.
C)non-operating assets expected to yield their economic benefits (or service potential) over a period longer than five years.
D) operating assets expected to yield their economic benefits (or service potential) over a period longer than two years.
 
When applying the lower of cost or net realizable value (LCNRV) method, inventory value reported cannot exceed the:

A) market floor.
B) selling price less the expected cost of completion and disposal.
C) selling price less a normal profit margin.
D) replacement cost.
 
 
 
 
 

 
Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and completed construction of the ship on October 31, 2019. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2018. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:

Date Amount
2/1/2018 $ 1,050,000 
3/31/2018 900,000 
6/1/2018 750,000 
10/1/2018 1,000,000 
12/31/2018 600,000 
3/1/2019 900,000 
9/1/2019 250,000 

How much interest should Doggy capitalize in 2018 related to the cutter project?

A) $129,000
B) $139,500
C) $440,000
D) $480,000
 
Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and completed construction of the ship on October 31, 2019. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2018. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:

Date Amount
2/1/2018 $ 1,050,000 
3/31/2018 900,000 
6/1/2018 750,000 
10/1/2018 1,000,000 
12/31/2018 600,000 
3/1/2019 900,000 
9/1/2019 250,000 

What is the amount of Doggy’s cumulative weighted average expenditures during 2018 related to the cutter project?

A) $2,150,000
B) $2,325,000
C) $2,536,364
D) $4,300,000
 
Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and completed construction of the ship on October 31, 2019. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2018. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:

Date Amount
2/1/2018 $ 1,050,000 
3/31/2018 900,000 
6/1/2018 750,000 
10/1/2018 1,000,000 
12/31/2018 600,000 
3/1/2019 900,000 
9/1/2019 250,000 

How much interest should Doggy expense in 2018?

A) $220,000
B) $300,500
C) $340,500
D) $440,000
 
Kitty Co. broke ground on its new building on March 1, 2018, and completed construction November 30, 2018. Kitty made the following expenditures in conjunction with this project:

Date Expenditure
April 1, 2018 $ 450,000 
June 1, 2018 200,000 
September 1, 2018 400,000 
November 30, 2018 100,000 

Kitty’s cumulative weighted average expenditures on this project would be

A) $287,500
B) $500,000
C) $508,333
D) $595,833
 
 
 
 
 

 
Echo Company’s 2018 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2018, the company’s credit sales amounted to $857,250. Per Echo’s 2018 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo’s beginning balance in the allowance for uncollectibles was $17,600, the ending balance in this account must be:

A) $15,000
B) $21,350
C) $36,350
D) The required "allowance for uncollectibles" balance cannot be determined from the data given.
 
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.

What depreciation method is used if depreciation expense is $6,000 in 2021?

A) Straight-line.
B) Sum of years’ digits.
C) Double-declining balance.
D) Composite.
 
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.

What amount will Jensen recognize as interest income during 2019?

A) $4,356
B) $4,704
C) $5,111
D) $0
 
The Mick Company reported a LIFO cost of goods sold for the year of $100,000. The LIFO reserve decreased by $30,000 for the year. An estimate of the cost of goods sold under FIFO is:

A) $70,000.
B) $130,000.
C) $160,000.
D) $200,000.
 
Edsel Inc. has the following unadjusted year end trial balance information available for 2018:

Credit sales $600,000 
Ending accounts receivable balance $ 180,000 
Ending allowance for uncollectibles $ 1,500 
Estimated uncollectibles 2 %

If Edsel uses the sales revenue approach for estimating the bad debt provision, the income statement should show an expense of:

A) $10,000
B) $12,000
C) $14,000
D) $20,000
 
Edsel Inc. has the following unadjusted year end trial balance information available for 2018:

Credit sales $600,000 
Ending accounts receivable balance $ 180,000 
Ending allowance for uncollectibles $ 1,500 
Estimated uncollectibles 2 %

If Edsel uses the sales revenue approach for estimating the bad debt provision, the allowance for uncollectibles account, after the proper adjustments to the accounts are recorded, should show a balance of:

A) $11,500
B) $13,500
C) $15,500
D) $21,500
 
Regarding accounts receivable and an allowance for uncollectible accounts, which of the following statements is false?

A) Net realizable value equals the sales price of an item less reasonable further costs to both make the item ready to sell and to sell it.
B) An aging of accounts receivable is a determination of how long each receivable has been on the books.
C) The net realizable value of accounts receivable is decreased when a bad debt is written off.
D) Receivables that result from transactions other than trade receivables, if material, are to be separately disclosed on the balance sheet.
 
 
 
 
 
 
 

 
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 2018:

Customer Note Maturity Int Due Int Rate
J.Perez $ 100,000 Quarterly 10%
P.Berg $ 100,000 — Negotiated

To encourage sales, Berg was given a special deal on interest. Additional information:

Future value of $100,000 in one year (quarterly interest) is $110,381.

Present value of $100,000 for one year (quarterly interest) is $90,595.

What amount will Palmer use to record the sale to Perez?

A) $90,000
B) $90,595
C) $100,000
D) $110,381
 
The carrying cost of inventory should include all the following costs except:

A) purchase costs.
B) sales taxes and transportation costs paid by the purchaser.
C) general administrative costs associated with the purchase of inventory.
D) insurance and storage costs.
 
Inventory turnover distortion under LIFO inventory costing may be adjusted by:

A) adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
B) subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
C) adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
D) subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
 
Which of the following statements regarding inventory accounting is true?

A) FIFO charges the most recent costs against revenues on the income statement.
B) In the U.S., FASB prefers replacement cost accounting because it records holding gains on the financial statements as they arise.
C) The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost.
D) The specific identification method of inventory accounting is generally considered to be the most prevalent.
 
Non-interest bearing notes are initially recorded at:

A. historical cost.
B. maturity value because they bear no interest.
C. present value, based on the prevailing interest for loans of this type.
D. future value, based on the prevailing interest for loans of this type.
 
Which one of the following factors makes it difficult for financial analysts to use trend analysis?

A) Decreasing costs and prices.
B) Deflation.
C) An aging asset base. 
D) A relatively new asset base.
 
XYZ Co.’s 2018 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2017. To help evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should do all of the following except:

A) compare the ratio to other firms in XYZ’s industry.
B) look for additional discussion in XYZ’s annual report.
C) contact the SEC for more information.
D) listen to the company’s earnings briefing for the analysts.
 
According to the 2012 AICPA survey of 2011 annual reports, the most favored method of depreciation for financial reporting purposes is:

A) declining-balance.
B) sum-of-the-years’ digits.
C) straight-line.
D) units-of-production.
 
The allowance for uncollectibles account is:

A) added to gross accounts receivable.
B) added to net accounts receivable.
C) subtracted from gross accounts receivable.
D) subtracted from net account receivable.
 
The dominant method under GAAP for measuring long-lived assets is the:

A) expected benefit approach.
B) discounted present value approach.
C) historical cost approach.
D) replacement cost approach.
 
Net realizable value of receivables is gross receivables minus:

A) bad debt provision and sales returns.
B) bad debt provision and estimated returns and allowances.
C) estimated uncollectible accounts and estimated returns and allowances.
D) proven uncollectible accounts and estimated returns and allowances.
 
Capitalization of interest for the construction of long-lived assets is limited to interest arising from actual borrowings from:

A) owners.
B) stockholders.
C) outsiders.
D) the board of directors.
 
Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment?

A) Undiscounted total future cash inflows minus future outflows.
B) Undiscounted total future cash inflows minus the current carrying value of the asset.
C) Fair value of the asset minus the current carrying value of the asset.
D) Discounted total future cash inflows minus future outflows.
 
 
 
 
 

 
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.

The cost of the building recorded by Reid Co. is:

A) $300,000
B) $326,000
C) $333,000
D) $335,000
 
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.

How much is the depreciation expense in 2019 if double-declining balance depreciation is used?

A) $6,000
B) $9,000
C) $12,000
D) $15,000
 
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.

How much is the depreciation expense in 2019 if sum-of-years digits depreciation is used?

A) $6,000
B) $9,000
C) $12,000
D) $15,000
 
The Johnson Corporation reported a LIFO reserve of $45,000 at the end of the year. The beginning LIFO reserve was $60,000. The cost of goods sold was $260,000 under LIFO. The cost of goods sold under FIFO should be:

A) $245,000.
B) $260,000.
C) $275,000.
D) $305,000.
 
Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:

Replace Sell Complete Norm Prof
L-19 $40 $38 $50 $2 $11
M-23 52 40 60 10 8
N-05 20 24 30 2 6 

Assuming Konan uses the FIFO method for costing its inventory, the net realizable value for product L-19 is:

A) $37.
B) $38.
C) $48.
D) $50.
 
Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:

Replace Sell Complete Norm Prof
L-19 $40 $38 $50 $2 $11
M-23 52 40 60 10 8
N-05 20 24 30 2 6 

Assuming Konan uses the FIFO method for costing its inventory, the reported value of product M-23 is:

A) $42.
B) $52.
C) $50.
D) $60.
 
 
 
 
 

 
Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:

Replace Sell Complete Norm Prof
L-19 $40 $38 $50 $2 $11
M-23 52 40 60 10 8
N-05 20 24 30 2 6 

Assuming Konan uses the FIFO method for costing its inventory, writedown of inventory value for item M-23 is:

A) $10.
B) $8.
C) $2.
D) $0.
 
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.

What will be the balance in the Notes Receivable - Lewisburg Fabricators account at the end of 2019?

A) $54,447
B) $58,802
C) $63,507
D) $80,000
 
Devine Company sold a machine for $6,000 that originally cost $34,000 and had accumulated depreciation of $27,000. Devine had a/an:

A) gain of $1,000.
B) sales revenue of $6,000.
C) loss of $1,000.
D) cost of goods sold of $1,000.
 
Expenditures included in the initial balance sheet carrying amount of a long-lived asset are:

A) charge-off costs.
B) expensed costs.
C) intangible costs.
D) capitalized costs.
 
If a long-lived amortizable intangible asset’s future undiscounted net cash flows fall below the asset’s net book value, the asset is considered to be a/an:

A) discontinued asset.
B) discontinued operation.
C) valuable asset.
D) impaired asset.
 
The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes is a departure from the accounting principle of:

A) going concern.
B) conservatism.
C) matching.
D) historical cost.
 
When a specific account receivable is written off, the entry:

A) increases net income.
B) decreases net income.
C) can either decrease or increase net income.
D) has no effect on net income.
 
When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose:

A) the dollar impact of LIFO liquidation on both a pre-tax and after-tax basis.
B) the dollar impact of LIFO liquidation on the year-end inventory balance.
C) this fact following a prescribed disclosure format.
D) the dollar impact of LIFO liquidation on net income.
 
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?

A)Historical cost.
B) Current replacement value.
C) Current cost.
D) Discounted present value.
 
The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?

A) FIFO inventory = LIFO inventory × LIFO reserve
B) FIFO inventory = LIFO inventory ÷ LIFO reserve
C) FIFO inventory = LIFO inventory - LIFO reserve
D) FIFO inventory = LIFO inventory + LIFO reserve
Under U. S. GAAP, software development costs are capitalized as intangible assets:

A) from the beginning of development.
B) after a copyright is obtained.
C) once the product is introduced into the marketplace.
D) once the technological feasibility of the product is established.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:

A) The useful life of the asset is extended.
B) The capacity of the asset is increased.
C) The efficiency of the asset is increased.
D) There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company’s offices).
 
 
 
 
 
 

 
Which of the following statements is false regarding accounts receivable reporting?

A) Growth in accounts receivable could exceed sales growth because a firm allows its customers more time to pay.
B) Many irregularities in receivables recognition can be discovered by tracking the relationship between changes in sales and changes in receivables.
C) When a company adopts an aggressive revenue recognition policy, it can lead to significant journal entries of sales returns in later periods.
D) When a firm’s sales growth exceeds its growth in receivables, it could be an indication of aggressive revenue recognition policies.
 
The major issue in inventory accounting is:

A) deciding whether to maintain records on a periodic or perpetual basis.
B) determining whether to take inventory using cycle counts instead of counting all inventory only at the end of the year.
C) determining what goods to include in inventory.
D) choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
 
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.

The cost of the land recorded by Reid Co. is:

A) $100,000
B) $115,000
C) $116,000
D) $118,000
 
The following information pertains to the Fan Company’s inventory item B1008: 

Mar 1 Inv Balance 400 units @ $ 3.10 
5 Purchase 1,400 units @ $ 3.20 
14 Purchase 280 units @ $ 3.25 
31 Inv Balance 520 units 

In a periodic inventory system, the LIFO cost of goods sold is:

A) $4,952.
B) $4,967.
C) $4,993.
D) $5,006.
 
The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimate of the inventory balance if the inventory had been reported using the FIFO assumption is

A) $382,000.
B) $416,000.
C) $461,000.
D) $484,000.
 
Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:

Replace Sell Complete Norm Prof
L-19 $40 $38 $50 $2 $11
M-23 52 40 60 10 8
N-05 20 24 30 2 6 

Assuming Konan uses the FIFO method for costing its inventory, the writedown of inventory value for Product N-05 is:

A) $6.
B) $2.
C) $8.
D) $0.
 
Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee training cost $7,000. The state charged a 5% sales tax on the invoice price. What is the capitalized cost of the machine?

A) $260,000
B) $264,600
C) $271,600
D) $284,600
 
GAAP requires the cost flow assumption to correspond to the actual physical flow of inventory.
 
When a firm disposes of a long-lived asset before the end of its useful life, the difference between the net book value of the asset and the sale proceeds is a gain or loss from a discontinued item.
 
For ratio analysis, a distortion in the current ratio under LIFO inventory costing may be adjusted by subtracting the LIFO reserve from current assets.
 
Under the sales revenue approach to estimating uncollectible accounts receivable, a loss percentage is applied to gross accounts receivable.
 
 
 
 
 

 
Cost of goods available for sale is always the same regardless of the inventory cost flow assumption in use.
 
U. S. tax rules specify that if LIFO is used for tax purposes, the external financial statements must also use LIFO.
 
When a LIFO firm liquidates old LIFO layers, the net income number under LIFO can be seriously distorted because the older costs in the LIFO layers that are liquidated are matched against sales dollars that are stated at higher current prices.
 
For purposes of impairment tests, the fair value of an asset is defined by U.S. GAAP as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
 
When using LIFO, management occasionally deliberately stops normal purchases for the last few weeks of the year in an attempt to boost profits.
 
For international financial reporting, the accounting standard IAS 2 permits the use of either the FIFO or weighted average cost flow assumption, but prohibits the use of LIFO.
 
Depreciation is the apportionment of the cost of a long-lived tangible asset to the future periods in which it provides benefits.
 
For long-term credit sales transactions utilizing notes receivable, interest income is recorded each period over the note’s term to maturity using the prevailing borrowing rate.
 
Under U.S. GAAP, firms have the option to record accounts and notes receivable at fair value.
 
An increase in receivables growth exceeding sales growth could indicate aggressive revenue recognition policies.
 

 

1.
Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue:
 
 
4.
Blago Wholesale Company began operations on January 1, 2017, and uses the average cost method in costing its inventory. Management is contemplating a change to the FIFO method in 2018 and is interested in determining how such a change will affect net income. Accordingly, the following information has been developed:

Final Inventory:
Average Cost: 
2017 $150,000 
2018 $255,000
FIFO: 
2017 $160,000 
2018 $270,000

Condensed income statements for Blago Wholesale appear below:

Sales:
2017 $1,000,000 
2018 $1,200,000
COGS: 
2017 $600,000
2018 $720,000
Gross Profit: 
2017 $400,00
2018 $480,00
Selling, general, and admin:
2017 $250,000
2018 $275,000
Net Income:
2017 $150,000
2018 $205,000

Based on this information, what would 2018 net income be after the change to the FIFO method? Ignore any income tax effects of this change in accounting method.
 
 
5.
The carrying cost of inventory should include all the following costs except:

A)purchase costs.

B)sales taxes and transportation costs paid by the purchaser.

C)general administrative costs associated with the purchase of inventory.

D)insurance and storage costs.
 
 
 
 
 
 
 
 
 

6.
Echo Corporation had the following balances immediately prior to writing off a $100 uncollectible account:

Current Assets: $30,000
A/R: $3,300
Allowance for doubtful accounts: $300
Current Liabilities: $10,000

Calculate the following amounts or ratios and determine the relationship between the amount or ratio before the write-off (x) with the amount or ratio after the write-off (y):
Current Ratio
Net Accounts Receivable Balance
Gross Accounts Receivable Balance
 
 
7.
Edsel Inc. has the following unadjusted year end trial balance information available for 2018:

Credit Sales: $600,000
Ending A/R Balance: $180,000
Ending Allowance for Uncollectibles: $1,500
Est. uncollectibles: 2%

If Edsel uses the sales revenue approach for estimating the bad debt provision, the income statement should show an expense of:
 
 
8.
Expected benefit approaches for valuing long-lived assets are not used in current U.S. GAAP because the numbers generated under these methods are inaccurate and:
 
 
9.
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas?
 
 
10.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:
 
 
11.
The following information is available for Day Company for 2017:

Cash disbursements fro purchase of merchandise: $290,000
Increase in trade Accounts Payable: $25,000
Decrease in Merchandise Inventory: $10,000

What is the cost of goods sold for 2017?
 
 
12.
The following information is available for Fess Company:

Credit Sales during 2017: $150,000
Allowance doubtful Accounts at Dec 31, 2016: $1,450
A/R deemed worthless and written off during 2017: $1,800

During 2017, Fess estimated that its provision for bad debts should be 1% of all credit sales.



As a result of a review and aging of accounts receivable in early January 2018, it has been determined that an allowance for doubtful accounts of $1,600 is needed at December 31, 2017.

1. What is the total amount that Fess should record as provision for bad debts for the year ended December 31, 2017?

2. Show the journal entries affecting the Allowance for doubtful accounts that Fess made during 2017.
 
 
13.
For the month of December 2017, Ranger Corporation’s records show the following information:

Cash Received on A/R: $35,000
Cash Sales: $30,000
A/R Dec 1, 2017: $80,000
A/R Dec 31, 2017: $74,000
A/R written off uncollectibles: $1,000

Determine the gross sales for the month of December 2017.
 
 
14.
For the year 2017, Dumas Company’s gross profit was $96,000; the cost of goods manufactured was $340,000; the beginning inventories of goods in process and finished goods were $28,000 and $45,000, respectively; and the ending inventories of goods in process and finished goods were $38,000 and $52,000, respectively.


What is the dollar amount of Dumas Company sales for 2017?
 
 
15.
Goods held on consignment are included in the inventory valuation of:
 
 
 
 
 
 
 
 
 

16.
Henry Co. manufactures DVD players. At the end of Year 1, Henry’s management believes the growing popularity of streaming video content will reduce the demand for Henry’s DVD players. The DVD players are manufactured using specialized equipment with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000. The managers estimate the equipment has a remaining useful life of 4 years and will generate the following undiscounted cash flows:

Year 2: $540,000
Year 3: $420,000
Year 4: $190,000
Year 5: $125,000
Salvage Value: $50,000

If the equipment were sold today, the sales price would be $1,600,000. Is the equipment considered impaired? Why, or why not?
 
Yes, the equipment is impaired. The undiscounted cash flows are lower than the carrying amount of the asset by $155,000. 

Carrying value = $3,000,000 - $1,520,000 = $1,480,000. 

Undiscounted future cash flow = Sum of year 1 - 5 and salvage value = $1,325,000. 

Undiscounted future cash flow $1,325,000 is less than the carrying value of $1,480,000 (in the amount of $155,000) and thus the asset is impaired.
19.
In comparing firms in the same industry, which of the following does not present a challenge for analysts?


A) Differences in estimates of useful lives.

B) The age of the companies being compared.

C) The use of different depreciation methods.

D) Each of these answer choices presents a challenge for analysts.
 
 
20.
Inventory turnover distortion under LIFO inventory costing may be adjusted by:
 
 
21.
Lake Company sold some machinery to View Company on January 1, 2017, for which the cash selling price was $758,200. View entered into an installment sales contract with Lake at a 10% interest rate. The contract required payments of $200,000 a year over five years with the first payment due on December 31, 2017.


Prepare an amortization schedule that shows what portion of each $200,000 payment will be shown as interest income over the period 2017-2021.
 
 
22.
The LIFO reserve disclosure is required because LIFO inventory costs are:
 
 
23.
Long-lived assets are:
 
 
24.
Net realizable value of receivables is gross receivables minus:
 
 
25.
On December 31, 2017, Fenton Company sold equipment to Denver, Inc., accepting a $275,000 noninterest-bearing note receivable in full payment on December 31, 2017. Denver, Inc., normally pays 12% for its borrowed funds. The equipment is carried in Fenton’s perpetual inventory records at 65% of its cash selling price. Use the following links to the present value tables to calculate answers

1. Prepare an amortization schedule for the note.

2. Prepare Fenton’s journal entries to record the sale on December 31, 2017.

3. Prepare Fenton’s journal entry on December 31, 2018, necessitated by this transaction. (Hint: Prepare an amortization schedule for the loan.)

4. Show Fenton’s balance sheet presentation of Denver’s note at December 31, 2018.
 
 
26.
On December 31, 2017, Vale Company had an unadjusted credit balance of $1,000 in its Allowance for uncollectible accounts. An analysis of Vale’s trade accounts receivable at that date revealed the following:

0-30 days $60,000 5%
31-60 days $4,000 10%
Over 60 days $2,000 70%

What amount should Vale report as Allowance for uncollectible accounts in its December 31, 2017, balance sheet?
 
 
27.
On January 1, 2017, Manuel Company’s merchandise inventory was $300,000. During 2017, Manuel purchased $1,900,000 of merchandise and recorded sales of $2,000,000. The gross profit margin on these sales was 20% of the selling price.

What is Manuel’s merchandise inventory at December 31, 2017?
 
 
28.
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.

What amount will Jensen recognize as interest income during 2018?
 
 
 
 
 
 
 
 
 

29.
On June 30, 2017, a tornado damaged Jensen Corporation’s warehouse and factory, completely destroying the work-in-process inventory. Neither the raw materials nor finished goods inventories were damaged. A physical inventory taken after the tornado revealed the following valuations:

Raw Materials: $87,000
Work-in-process: $0
Finished Goods: $151,000
Total: $238,000

The inventory of January 1, 2017, consisted of the following:

Raw Materials: $41,000
WIP: $128,000
Finished Goods: $173,000
Total: $342,000

A review of the books and records disclosed that the gross profit margin historically approximated 28% of sales. The sales total for the first six months of 2017 was $405,000. Raw material purchases totaled $150,000. Direct labor costs for this period were $112,000, and manufacturing overhead has historically been applied at 50% of direct labor.

Compute the value of the work-in-process inventory lost at June 30, 2017.
 
 
30.
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.

The cost of the building recorded by Reid Co. is:
 
 
31.
The sale of receivables to a third party is called:
 
 
32.
The Skone Corporation reported a LIFO reserve of $25,000 at the end of the year. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be:
 
 
33.
U.S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be:
 
 
34.
When a specific account receivable is written off, the entry:
 
 
35.
Which of the following does not present a challenge to analysts using financial statements?


A) The return-on-asset ratio increases if a firm does not modernize and innovate.

B) U.S. GAAP allows upward adjustments to long-lived assets.

C) The use of historical cost makes comparisons of new and old firms in the same industry difficult.

D) The expected benefit of a long-lived asset may increase over time.
 
 
36.
Which of the following statements about research and development costs is not valid?


A) As long as a firm continues to invest in R&D, total assets and total shareholders’ equity will be understated.

B) Asset utilization ratios of R&D-intensive firms will be higher than those of non-R&D- intensive firms.

C) Decreases in R&D expenditures can be used to boost current period income.

D) Asset utilization ratios of R&D-intensive firms will be lower than those of non-R&D -intensive firms.
 
 
40.
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag?

A)The firm adopts new credit terms that lengthen the payment terms to the industry average.


B)The firm adopts an aggressive revenue recognition policy.


C)The firm develops an attractive credit policy for first time buyers.


D)The firm changes its timing of revenue recognition to a more conservative approach.
 
 
41.
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?


A) Historical cost.

B) Current replacement value.

C) Current cost.

D) Discounted present value.
 
 
 
 
 
 
 
 
 
 
 
 
 

 

1.
accrued payroll taxes
 
 
2.
accumulated depreciation
 
 
3.
The Additional Paid-In Capital account is reported on the balance sheet at the:
 
 
4.
An adjustment to income due to a non-recurring item is regarded as:
 
 
5.
allowance for uncollectible accounts
 
 
6.
The allowance for uncollectibles account is classified as:
 
 
7.
All the following disclosures would appear in the Summary of Significant Accounting Policies except:
 
 
8.
Balance sheets developed under US GAAP:
 
 
9.
Balance sheets prepared in compliance with U.S. GAAP reflect a mixture of:
 
 
10.
Briefly explain why current period accrual earnings may be substituted for future operating cash flows in valuation models?
 
 
11.
Common-size financial statements recast each statement item as:
 
 
12.
A compensation committee should be comprised of:
 
 
13.
Compute the profit margin and asset turnover components of ROA for 2017
 
 
14.
Compute Weber Corporation’s return on assets (ROA) for 2017 using a combined federal and state income tax rate of 40% where needed.
 
 
15.
copyrights
 
 
16.
current assets
 
 
17.
Current assets are assets expected to:
 
 
18.
Current Liabilities
 
 
19.
current maturities of long term debt
 
 
20.
The current ratio for 2019 is (rounded):
 
 
21.
The debt covenants in TCBY’s loan agreement do not mention explicitly the accounting methods the company must use when it prepares financial statements for submission to the lender. Why don’t lenders require the use of specific accounting methods rather than letting management pick from among GAAP alternatives?
 
 
22.
deferred revenue (long term)
 
 
23.
deferred tax liability (long term)
 
 
24.
Define the terms paid-in-capital and retained earnings.
 
 
25.
Describe the common characteristics of assets classified as property, plant, and equipment and identify some assets included in this classification.
 
 
26.
Describe what is meant by an operating cycle for a typical manufacturing company
 
 
27.
Did financial leverage help or hurt Whole Foods Market in 2015?
 
 
28.
Disclosure notes are an integral part of the information provided in financial statements. In what ways are the notes critical to understanding the financial statements and to evaluating the firm’s performance and financial health?
 
 
29.
Discuss how management discretion in accounting and conflicts of interest may impact the quality of the financial information provided by a company.
 
 
30.
Distinguish between property, plant, and equipment and intangible assets.
 
 
31.
donated capital
 
 
32.
Edsel uses the sales revenue approach for estimating the bad debt provision, the income statement should show an expense of:
 
 
33.
Explain how companies determine the net realizable value of accounts receivable.
 
 
34.
Explain some of the limitations of financial statement analysis.
 
 
 
 
 
 
 
 
 

35.
Explain the difference between pledging and factoring accounts receivable
 
 
36.
Explain the form of analysis called "Cause of change Analysis"
 
 
37.
Financial ratio, percentage, and trend comparisons can de distorted by all of the following except:
 
 
38.
Financial ratios used to determine credit risk include an assessment of:
 
 
39.
Financial statement forecasts are:
 
 
41.
The fundamental valuation approach to business valuation uses basic accounting measures to assess the amount, timing and
 
 
42.
Goodwill arising from a business combination is reported on the balance sheet as a(n):
 
 
43.
How does ratio analysis assist in evaluating a company’s credit risk?
 
 
44.
How many times was bond interest earned in 2017?
 
 
45.
Identify some typical noncurrent liability accounts.
 
 
46.
If a company currently earns $6.00 per share and has a risk-adjusted cost of equity capital of 12.5%, a share of common stock should theoretically sell for
 
 
47.
If Edsel uses the gross accounts receivable approach for estimating the bad debt provision, the income statement will show an expense of:
 
 
48.
In a common size balance sheet for 2019, accounts receivable is expressed as:
 
 
49.
In a common size balance sheet for Hansel Corporation for 2019, total liabilities and equity are expressed as:
 
 
50.
In a common size income statement for 2019, cost of goods sold is expressed as:
 
 
51.
In assessing credit risk, what do the terms liquidity and solvency mean?
 
 
52.
In a trend income statement for 2019, where 2017 is the base year, sales are expressed as:
 
 
53.
The interest coverage for 2019 is:
 
 
54.
In using financial statements to monitor compliance with debt covenants:
 
 
55.
inventory
 
 
56.
Leasehold improvements
 
 
57.
The long-term debt to assets for 2019 is (rounded):
 
 
58.
Long-term incentive components of executive compensation plans should include stock options:
 
 
59.
long term receivables
 
 
60.
machinery
 
 
61.
Major sections of balance sheets
 
 
62.
major subtotal and totals for liabilities and shareholders’ equity
 
 
63.
Major subtotals and totals for assets
 
 
64.
Net property, plant and equipment are reported on the balance sheet at:
 
 
65.
Net realizable value of receivables is gross receivables minus:
 
 
66.
notes payable (short term)
 
 
67.
notes receivable short term
 
 
68.
Notes to the financial statements typically contain all the following except:
 
 
69.
One popular approach to estimating the equity cost of capital is:
 
 
70.
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note. What amount will Jensen recognize as interest income during 2018?
 
 
71.
Potential conflicts of interest permeate:
 
 
72.
premium on bonds payable
 
 
 
 
 
 
 
 
 

73.
The prevalence of stock options in executive pay packages:
 
 
74.
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:
 
 
75.
Purpose of balance sheet
 
 
76.
The quick ratio for 2019 is (rounded): (Assume that total current assets include cash, marketable securities, accounts receivable and inventory).
 
 
77.
A requirement that a company maintain a fixed-charge coverage ratio:
 
 
78.
Research indicates that stock returns correlate better with:
 
 
79.
The Retained Earnings account is comprised of:
 
 
80.
retained earnings appropriated for plant expansion
 
 
81.
Return on Assets (ROA) can be broken down into these two components: profit margin and:
 
 
82.
short term investment
 
 
83.
Stock options:
 
 
84.
A study examining how incentives arising out of debt contracts affect managers’ accounting choices found that the most common violations of accounting-based covenants occurred with:
 
 
85.
A summary of the company’s significant accounting policies is a required disclosure. Why is this disclosure important to external financial statement users?
 
 
86.
supplies inventory
 
 
87.
To apply the discounted free cash flow model, the analyst needs to estimate:
 
 
88.
Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has:
 
 
89.
Weber’s management believes that various business initiatives will produce an asset turnover rate of 2.25 next year. If the profit margin next year is unchanged from 2017, what will be the company’s ROA?
 
 
90.
What are common-sized statements and why are they useful?
 
 
91.
What are notes receivable? How do they differ from accounts receivable?
 
 
92.
What are percentage change statements and why are they useful?
 
 
93.
What are the advantages of loan agreements that contain covenants tied to accounting numbers? Are there any disadvantages? Explain.
 
 
94.
What factors might explain the difference in the P/E ratios of these companies?
 
 
95.
What is a debt covenant? Why do lenders include them in loan agreements? Why do borrowers agree to include covenants in loan agreements?
 
 
96.
What is an agency relationship, and what are agency costs? How do these concepts apply to your investment in the oil and gas partnership?
 
 
97.
What is a Receivable?
 
 
98.
What is included in subsequent event and related party footnotes and why are these disclosures important?
 
 
 
 
 
 
 
 
 

99.
What is involved in what the textbook refers to as "trend" analysis? What are its advantages?
 
 
100.
What is the accounts receivable turnover for 2017?
 
 
101.
What is the cash conversion cycle and what does it tell you?
 
 
102.
What is the inventory turnover for 2017?
 
 
103.
What is the justification for converting the basic stock price dividend discount model of finance into an earnings based model.
 
 
104.
What is the role of credit rating agencies in the bond/commercial paper markets?
 
 
106.
Whole Foods earned an ROA of 9.7% in 2012. What was ROCE that year?
 
 
107.
Why are ratios and trends used in financial analysis?
 
 
108.
With a loan collateralized by receivables,
 
 
109.
work in process inventory
 
 
 

 

1.
The accounts receivable turnover ratio:
 
 
2.
The Additional Paid-In Capital account is reported on the balance sheet at the:
 
 
3.
All of the following are used as financial analysis tools except:
 
 
4.
The allowance for uncollectibles account is:
 
 
5.
The allowance for uncollectibles account is classified as:
 
 
6.
An analytical tool that measures a company’s performance against a predetermined standard is a/an:
 
 
7.
Balance sheets developed under US GAAP:
 
 
8.
Common-size balance sheets may be used for all the following except:
 
 
10.
Companies that consistently earn rates of return above the competitive floor in the industry are considered to possess a:
 
 
11.
Current assets are assets expected to:
 
 
12.
Current liabilities are reported on the balance sheet at:
 
 
13.
Financing activities include the cash effects of:
 
 
14.
Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables have a related allowance for doubtful accounts of $3,500.
Assuming the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make?
 
 
15.
If a note receivable from a customer is discounted at a bank with recourse and the customer defaults on final payment, the seller:
 
 
16.
In a common-size balance sheet, all items are expressed as a percentage of:
 
 
17.
In a common-size balance sheet, each balance sheet account is expressed as a percentage of total:
 
 
18.
Investing activities include the cash effects of:
 
 
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. An increase in the Computer Equipment account would:
 
 
20.
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:
 
 
21.
Long-term debt is reported on the balance sheet at:
 
 
22.
Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:
 
 
23.
Net realizable value of receivables is gross receivables minus:
 
 
24.
Paying dividends to stockholders:
 
 
25.
Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the:
 
 
26.
Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events defines:
 
 
27.
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:
 
 
28.
Regarding accounts receivable and an allowance for uncollectible accounts, which of the following statements is false?
 
 
29.
The residual interest in the resources of an entity that remains after deducting its debts to third parties defines:
 
 
30.
The Retained Earnings account is comprised of:
 
 
31.
Return on Assets (ROA) measures a firm’s:
 
 
32.
The sale of receivables to a third party is called:
 
 
33.
When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans, it is recorded at:
 
 
34.
When a specific account receivable is written off, the entry:
 
 
36.
Which of the following does not properly describe the Altman Z-score?
 
 
37.
Which one of the following equations explains why successive balance sheets can be used to prepare a firm’s cash flow statement?
 
 
38.
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag?
 
 
 
 
 
 
 
 
 
 
 

1.
ABC Company has elected to adopt the dollar-value LIFO inventory method when the inventory is valued at $125,000. The adoption takes place as of January 1, 2008 when the entire inventory represents a single pool. ABC Company determined that the inventory at December 31, 2008 was $144,375 at current year cost and $131,250 at base year cost using a relevant price index of 1.10. The inventory at December 31, 2008 under dollar value LIFO is:
 
 
2.
AD, Inc. uses the lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true?
 
 
3.
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported income tends to:
 
 
4.
Analysts must recognize that the use of the specific identification method to value inventory has a serious deficiency because it:
 
 
5.
As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
 
 
6.
The carrying cost of inventory should include all of the following costs except:
 
 
7.
Current ratio distortion under LIFO inventory costing may be adjusted by:
 
 
8.
*Examples of variable costs include all of the following except:
 
 
9.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:
 
 
10.
Firms that use FIFO inventory cost assumptions always include some realized holding gains in reported income in periods of:
 
 
11.
For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs
 
 
12.
*Goods available for sale needs to be allocated between:
 
 
13.
Goods held on consignment are included in the inventory of
 
 
14.
If no correcting entries were made at the end of 2006, by how much will retained earnings be overstated or understated at the end of 2007? Ignore tax consequences.
 
 
15.
If the proper correcting entries were made at the end of 2006, how much will 2007 income before taxes be overstated or understated?
 
 
16.
In an periodic inventory system, the LIFO cost of goods sold is:
 
 
18.
In a periodic inventory system the ending inventory and cost of goods sold must be determined by:
 
 
19.
In a periodic inventory system, the ending LIFO inventory is:
 
 
20.
In a periodic inventory system, the FIFO cost of goods sold is:
 
 
21.
The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as:
 
 
22.
The inventory accounts of a manufacturer would include all of the following accounts except:
 
 
23.
The inventory at the end of Year 2 under dollar-value LIFO is:
 
 
24.
Inventory turnover distortion under LIFO inventory costing may be adjusted by:
 
 
25.
The inventory under dollar-value LIFO at the end of Year 3 is:
 
 
26.
The inventory under dollar-value LIFO at the end of Year 4 is:
 
 
27.
The Johnson Corporation reported at the end of the year a LIFO reserve of $45,000. The beginning LIFO reserve was $60,000. The cost of goods sold was $260,000 under LIFO. The cost of goods sold under FIFO should be:
 
 
28.
The LIFO conformity rule states that:
 
 
29.
LIFO layers are more likely to be liquidated when inventory records are kept on:
 
 
30.
The LIFO reserve disclosure is required because LIFO inventory costs are:
 
 
31.
The lower of cost or market for item M-23 is:
 
 
32.
The lower of cost or market for product N-05 is:
 
 
34.
The "market" value for item N-05 is:
 
 
35.
The maximum limit for market value of product L-19 is:
 
 
36.
The mechanics of absorption costing can lead to year-to-year income changes:
 
 
37.
The Mick Company reported a LIFO cost of goods sold for the year of $100,000. The LIFO reserve decreased by $30,000 for the year. An estimate of the cost of goods sold under FIFO is:
 
 
 
 
 
 
 
 
 
 
 

38.
The minimum limit for market value of product M-23 is:
 
 
39.
A periodic system of inventory:
 
 
40.
A perpetual inventory system:
 
 
41.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:
 
 
42.
The Skone Corporation reported at the end of the year a LIFO reserve of $25,000. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be
 
 
43.
*The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
 
 
44.
*The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is:
 
 
45.
The use of perpetual inventory systems is preferred where a
 
 
46.
The use of the lower of cost or market method to value inventory for reporting purposes employs the accounting principle of :
 
 
47.
The use of the lower of cost or market method to value inventory for reporting purposes is a departure from the accounting principle of
 
 
49.
Variable costing is also referred to as:
 
 
50.
The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, income before income taxes would have been
 
 
51.
*When a company uses absorption costing:
 
 
52.
*When applying the lower of cost or market method, market value cannot exceed the:
 
 
53.
When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose
 
 
54.
The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimate of the inventory balance if the inventory had been reported using the FIFO assumption is:
 
 
 
 
 
 
 
 
 

 

Cost of goods available for sale is always the same regardless of the inventory cost flow assumption in use.

 

Under a periodic inventory system, cost of goods sold automatically includes the cost of inventory "shrinkage."

 

All inventory items to which the firm has legal title should be included in the inventory account although most firms record inventory only when they physically receive it.

 

Generally accepted accounting principles do not allow variable costing to be used in external financial statements because absorption costing makes it easier for financial statement users to interpret year-to-year changes in reported net income.

 

Absorption costing makes it difficult for financial statement users to interpret year-to-year changes in cost of goods sold when production levels significantly change between one year and the next.

 

GAAP requires the cost flow assumption to correspond to the actual physical flow of inventory.

 

For ratio analysis, a distortion in the current ratio under LIFO inventory costing may be adjusted by subtracting the LIFO reserve from current assets.

 

When a LIFO firm liquidates old LIFO layers, the net income number under LIFO can be seriously distorted because the older costs in the LIFO layers that are liquidated are matched against sales dollars that are stated at higher current prices.

 

U. S. tax rules specify that if LIFO is used for tax purposes, the external financial statements must also use LIFO.

 

During periods of rising inventory costs, LIFO cost of goods sold is understated because of the inventory holding gains that have occurred during the period.

 

When using LIFO, management occasionally deliberately stops normal purchases for the last few weeks of the year in an attempt to boost profits.

 

In the Old-LCM approach to valuing inventory, the ceiling is the inventory’s net realizable value.

 

For international financial reporting, the accounting standard IAS 2 permits the use of either the FIFO or weighted average cost flow assumption, but prohibits the use of LIFO.

 

IFRS only permits the use of either the FIFO or weighted average cost flow assumption.

 

Dollar-value LIFO avoids much of the detailed recordkeeping required under standard LIFO.

 

The major issue in inventory accounting is:

 

Goods available for sale is determined by:

 

In an actual business, which of the following is an inventory accounting issue that frequently arises?

 

A periodic system of inventory:

 

A perpetual inventory system:

 

Goods held on consignment are included in the inventory valuation of:

 

Manufacturing costs not considered to be closely associated with production are called:

 

The carrying cost of inventory should include all the following costs except:

 

The inventory accounts of a manufacturer would include all the following accounts except:

 

Which of the following statements regarding inventory accounting is false?

 

When a company uses absorption costing:

 

Examples of variable costs include all the following except:

 

The mechanics of absorption costing can lead to year-to-year income changes:

 

Analysts must recognize that the use of the specific identification method to value inventory has a serious deficiency because it:

 

Goods available for sale needs to be allocated between:

 

Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:

 

The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as:

 

The following information pertains to the Fan Company’s inventory item B1008: 

March
1
 Inventory Balance
400
units
@
$
3.10
 
 
5
 Purchase
1,400
units
@
$
3.20
 
 
14
 Purchase
280
units
@
$
3.25
 
 
31
 Inventory Balance
520
units
 
 
 
 
In a periodic inventory system, the ending LIFO inventory is:

 

In a periodic inventory system, the LIFO cost of goods sold is:

 

In a periodic inventory system, the FIFO cost of goods sold is

 

In a periodic inventory system, the ending FIFO inventory is

 

The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, pre-tax income would have been:

 

The LIFO reserve disclosure is required because LIFO inventory costs are:

 

The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?

 

The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is:

 

The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimate of the inventory balance if the inventory had been reported using the FIFO assumption is

 

The Skone Corporation reported a LIFO reserve of $25,000 at the end of the year. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be:

 

The Mick Company reported a LIFO cost of goods sold for the year of $100,000. The LIFO reserve decreased by $30,000 for the year. An estimate of the cost of goods sold under FIFO is:

 

The Johnson Corporation reported a LIFO reserve of $45,000 at the end of the year. The beginning LIFO reserve was $60,000. The cost of goods sold was $260,000 under LIFO. The cost of goods sold under FIFO should be:

 

Inventory turnover distortion under LIFO inventory costing may be adjusted by: 

 

As a firm liquidate sold LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:

 

Current ratio distortion under LIFO inventory costing may be adjusted by:

 

When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose:

 

For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs:

 

The LIFO conformity rule states that:

 

LIFO’s tax advantage is that:

 

Firms that use FIFO inventory cost assumptions always include some realized holding gains in reported income in periods of:

 

The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:

 

The World Company’s financial statements for 2018 and 2017 contain the following errors: 

 
2018
 
2017
 
 
 
 
Ending Inventory
$
6,000
 
overstated
 
$
16,000
 
overstated
 
 
 
Insurance Expense
$
4,000
 
understated
 
$
12,000
 
overstated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If the proper correcting entries were made at the end of 2017, how much will 2018 income before taxes be overstated or understated?

 

If no correcting entries were made at the end of 2017, how much will retained earnings be overstated or understated at the end of 2018? (Ignore income tax.)

 

The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes is a departure from the accounting  principle of:

 

TAD, Inc. uses the lower of cost or market method ("Old -LCM") to value inventory. If the inventory value is replacement cost, which one of the following statements is true?

 

When applying the lower of cost or net realizable value (LCNRV) method, inventory value reported cannot exceed the:

 

The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes employs the accounting principle of:

 

Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:

Product
Cost
Replacement Cost
Selling Price
Cost of Completion
Normal Profit
L-19
$40
$38
$50
$2
$11
M-23
52
40
60
10
  8
N-05
20
24
30
 2
  6
Assuming Konan uses the LIFO method for costing its inventory, the maximum limit for market value of product L-19 is:

 

Assuming Konan uses the LIFO method for costing its inventory, the minimum limit for market value of product M-23 is:

 

Assuming Konan uses the LIFO method for costing its inventory, the lower of cost or market for product N-05 is:

 

Assuming Konan uses the LIFO method for costing its inventory, the lower of cost or market for item M-23 is:

 

Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:

Product
Cost
Replacement Cost
Selling Price
Cost of Completion
Normal Profit
L-19
$40
$38
$50
$2
$11
M-23
52
40
60
10
8
N-05
20
24
30
2
6
Assuming Konan uses the LIFO method for costing its inventory, the "market" value for item N-05 is:

 

Assuming Konan uses the FIFO method for costing its inventory, the net realizable value for product L-19 is:

 

Assuming Konan uses the FIFO method for costing its inventory, the reported value of product M-23 is:

 

Assuming Konan uses the FIFO method for costing its inventory, writedown of inventory value for item M-23 is:

 

Assuming Konan uses the FIFO method for costing its inventory, the writedown of inventory value for Product N-05 is:

 

Similarities between U.S. GAAP and IFRS include which of the following?

 

When applying lower of cost or market under IFRS, market is defined as:

 

Reported income for FIFO firms ________ includes some realized holding gains during periods of rising inventory costs. Which of the following terms (when inserted in the blank) makes the previous sentence a true statement?

 

Analysts try to remove holding gains from reported FIFO income because

 

The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on:

 

ABC Company has elected to adopt the dollar-value LIFO inventory method when the inventory is valued at $125,000. The adoption takes place as of January 1, 2018 when the entire inventory represents a single pool. ABC Company determined that the inventory at December 31, 2018 was $144,375 at current year cost and $131,250 at base year cost using a relevant price index of 1.10. The inventory at December 31, 2018 under dollar value LIFO is:

 

The Shill Company uses the dollar-value LIFO method for valuing inventory. The following inventory information is available at the end of the year:

Year
Year-End Price
Price Index
 
1
 
$
200,000
 
 
100
2
 
 
250,000
 
 
105
3
 
 
296,000
 
 
108
4
 
 
286,000
 
 
110
 
 
 
 
 
 
 
 
 
The inventory at the end of Year 2 under dollar-value LIFO is:

 

The inventory under dollar-value LIFO at the end of Year3 is:

 

The inventory under dollar-value LIFO at the end of Year 4 is:

 

LIFO layers are more likely to be liquidated when inventory records are kept on:

 

Which of the following statements regarding inventory accounting is false?

 

Which of the following statements regarding inventory accounting is true?

 

Which of the following statements regarding inventory accounting is true?

 

1.
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.
c. costs incurred to date by the contract price.
d. profits earned to date by the contract price.
 
 
2.
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.
 
 
3.
Copletion ratio
 
 
4.
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.
 
 
5.
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
 
 
6.
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.
 
 
7.
Examples of variable consideration include the following except:
a. rebates.
b. slotting fees.
c. performance bonuses.
d. volume discounts.
 
 
8.
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.
 
 
9.
If consideration is received before a contract is identified and the consideration is nonrefundable, revenue may be recognized if
 
 
10.
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
 
 
11.
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.
 
 
12.
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.
 
 
13.
. 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.
 
 
14.
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.
 
 
15.
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.
 
 
 
 
 
 
 
 
 
 
 
 
 

16.
The new ASC Topic 606 for revenue recognition
 
 
17.
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.
 
 
18.
Payments to a customer for slotting fees
 
 
19.
Prior to ASC Topic 606 for revenue recognition, when losses occur on long-term contracts using the completed-contract method, they are recognized
 
 
20.
Regarding ASC Topic 606 guidance for revenue recognition, which of the following statements is not true?
 
 
21.
The residual approach to allocate transaction prices to multiple performance obligations in a contract is appropriate when
 
 
22.
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.
 
c
23.
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.
 
 
25.
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.
 
 
26.
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.
 
 
27.
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.
 
 
 
 
 
 
 
 
 

28.
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.
 
 
29.
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.
 
 
30.
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.
 
 
31.
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.
 
 
32.
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.
 
 
33.
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.
 
 
34.
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.
 
 
35.
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.
 
 
36.
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.
 
 
 

37.
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.
 
 
38.
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.
 
 
39.
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.
 
 
40.
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.
 
 
41.
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.
 
 
42.
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.
 
 
43.
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.
 
 
44.
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.
 
 
45.
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.
 
 
 

46.
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.
 
 
47.
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
 
 
48.
Which of the following statements is NOT true regarding revenue recognition regarding gift cards?
 
 
 

 

1.
1. Of the following options, you can find these 4 values being used on a balance sheet prepared in accordance with US GAAP (historical cost, current value, future value, net realizable value, discounted future cash flows, discounted present value and future cash values)
 
 
2.
3. A statement of cash flows that begins with net income at the top of operations activities seciong must be prepared using
 
 
3.
4. Credit risk analysis for a company typically involves looking at ratios in these two categories
 
 
4.
5. These are significant events that occur after the date of the financial statements
 
 
5.
6. This is the number of steps in the new rev recognition model from the ASC topic 606
 
 
6.
7. Income from discounted operations is shown in this way (where/how) on the income statement
 
 
7.
8. What are the two options for presenting other comprehensive income according to US GAAP?
 
 
8.
9. This account is initially measured as the difference between...
 
 
9.
10. This type of analysis identifies similarities and differences across companies or business units at a single point in type
 
 
10.
11. This method of dealing with accounting principles changes requires that prior years income statements presented for comparative purposes be restated to reflect use of the new principle unless is impractical to do so
 
 
11.
12. This says that expenses should be recognized in same period in which revenue is generated by these expenses is recognized
 
 
12.
13. If percentage of completion revenue recognition is being used this is the method that is used for calculating how much revenue should be recognized to date
 
 
13.
15. These are the individuals that ultimately bear the cost of a company providing financial info
 
 
14.
16. A borrower that violates one or more loan covenants but makes all interest and principal payments timely is in this type of default
 
 
15.
17. Of the following items listed, this info is least likely to be derived from the balance sheet ( an assessment of rates of return, the market price of company’s stock, how managmenet invested money, where the money came from)
 
 
16.
18. This organization is responsible for est. auditing standards and inspecting and investigating audit practices of public accounting firms
 
 
17.
20. Companies that consistenly earn rates of retrun above competitrive floor in industry
 
 
18.
21. Category of ratio analysis refers to entity’s long term ability to generate sufficient cash to satisfy plant capacity needs, fuel growth, and to repay debt when due
 
 
19.
22. A rev or expense item that is reported in a different period for book purposes than tax purposes is called
 
 
20.
23. This type of analysis helps ID financial trends over time for a single company or business unit
 
 
21.
24. This is the value that is somewhat arbitrary in nature, but is used as the basis to record common stock in accounting records
 
 
22.
25. These immediately follow the financial statements in a company’s annual 10K report
 
 
23.
26. Income from continuing operations, excluding special or nonrecurring items, would generally be regarded as this type of income
 
 
24.
27. Theoretically, these are the 2 ways that a company can increase its return on assets
 
 
25.
. Accounting errors or irregularities can occur for which reasons?

• management exploitation of the flexibility in GAAP.
• simple oversight.
• misapplication of GAAP.
• all of these answer choices are correct.
 
 
26.
Accounting treatment for changes in accounting principle are best described as:

A.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.
B.Tax effects are ignored when reporting changes in accounting principles.
C.Changes in accounting principle that are only permitted when FASB issues a standard that revises GAAP.
D.Changes in accounting principle that are always accounted for using the retrospective approach which requires only a restatement of prior years’ presented financial information.
 
 
27.
The balance sheet provides information on all of the following except:
• assessing rates of return.
• the market price of the company’s stock.
• where the money came from.
• how management invested its money.
 
 
28.
Banks that fail to comply with regulations, including the failure to maintain an adequate capital adequacy ratio, face:
• lower costs.
• higher costs.
• mergers and expansion of services.
• incarceration of officers.
 
 
 
 
 
 
 
 
 

29.
The Barden Company provides the following trial balance as of December 31, 2018.
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?
• $87,500
• $387,500
• $637,500
• $300,000
 
 
30.
The best measure of a firm’s sustainable income is:

a. net income.
b. income before income tax.
c. income from continuing operations.
d. income before unusual items and change in accounting principle.
 
 
31.
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?
• DR Accounts receivable 40,000 CR 
Copier sales 40,000
• DR Cash 16,000 CR Copier sales 16,000
• DR Cash 16,000 DR Accounts receivable 
24,000CR Copier sales 40,000
• DR Cash 40,000 CR Copier sales 40,000
 
 
32.
Companies offering higher risk securities have incentives to mask their true condition by:
• listing on foreign exchanges where reporting requirements are less stringent than those in the U.S.
• including testimonials from well known executives in their financial statements.
• supplying overly optimistic financial information.
• not having their financial statements audited.
 
 
33.
Companies that consistently earn rates of return above the competitive floor in the industry are considered to possess a:
Multiple Choice
• niche market.
• competitive advantage.
• dominant market share.
• monopolistic advantage.
 
 
34.
Compensation incentives that motivate and reward executives for three to seven years of growth and prosperity are called:

• long-term incentives.
• executive compensation packages.
• short-term incentives.
• base salaries.
 
 
35.
Condensed financial data are presented below for the Phoenix Corporation:
2019 2018
Accounts receivable 267,500 $ 230,000 
Inventory 312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 127,500 
Cash flow from operations 71,000 
Cash flow from investing activities (6,000 ) 
Cash flow from financing activities (62,500 ) 
Tax rate 30 % 

If the intangible assets in 2019 are $50,000, then the long-term debt to tangible assets for 2019 is:
Multiple Choice
• 30.7%
• 10.2%
• 42.5%
• 10.0%
 
 
 
 
 
 
 
 
 

36.
Condensed financial data are presented below for the Phoenix Corporation:
2019 2018
Accounts receivable 267,500 $ 230,000 
Inventory 312,500 257,500 
Total current assets 670,000 565,000 
Intangible assets 50,000 60,000 
Total assets 825,000 695,000 
Current liabilities 252,500 200,000 
Long-term liabilities 77,500 75,000 
Sales 1,640,000 
Cost of goods sold 982,500 
Interest expense 10,000 
Income tax expense 77,500 
Net income 127,500 
Cash flow from operations 71,000 
Cash flow from investing activities (6,000 ) 
Cash flow from financing activities (62,500 ) 
Tax rate 30 % 

The days inventory held for 2019 is (rounded):

• 138 days.
• 106 days.
• 116 days.
• 96 days.
 
 
37.
Consider the following table of Actual earnings:
Firm A Firm B Firm C
Actual earnings $ 6,000 $ 14,000 $ 18,000 
r 10 % 8 % 12 %
BVt-1 $ 100,000 $ 150,000 $ 190,000 


What are the abnormal earnings for Firm C?
• $(2,400)
• $(4,800)
• $4,800
• $9,600
 
 
38.
Continuing franchise fees that are based on the franchisee’s percentage of sales should be recognized by the franchisor as revenue:
a. in accordance with the franchise agreement.
b. only after the balance of the initial franchise fee has been received.
c. when the fee is received.
d. over time when the sales are reported to the franchisor.
 
 
39.
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. zero
b. three
c. one
d. two
 
 
40.
Employees demand financial statement information because the firm’s performance is often linked to all of the following except:

• negotiated wage increases in union contracts.
• employee profit sharing.
• social security benefits.
• pension plan benefits.
 
 
41.
Entering the DR or CR amount in the appropriate left or right side of the affected T-account is called:

a. cross-referencing.
b. journalizing.
c. posting.
d. recording.
 
 
42.
The expected abnormal earnings of a firm that has earnings of $40,000 with a required equity cost of capital of 8% and a beginning book value of $800,000 is

a. $(24,000)
b. $(64,000)
c. $40,000 
d. $104,000
 
 
43.
Financial information which does not favor one set of interested parties over another is:
• relevant.
• faithfully represented.
• verifiable.
• neutral.
 
 
44.
The following information pertains to the Fan Company’s inventory item B1008: 


March 1 Inventory Balance 400 units @ $ 3.10 
5 Purchase 1,400 units @ $ 3.20 
14 Purchase 280 units @ $ 3.25 
31 Inventory Balance 520 units 


In a periodic inventory system, the FIFO cost of goods sold is
• $5,006.
• $4,967.
• $4,993.
• $4,952.
 
 
45.
. Goods available for sale needs to be allocated between:

• beginning inventory and inventory purchases.
• beginning inventory and ending inventory.
• inventory purchases and cost of goods sold.
• ending inventory and cost of goods sold.
 
 
46.
Goods available for sale should always be allocated between these two accounts
 
 
 
 
 
 
 
 
 

47.
Goodwill:

a. is a tangible asset recognized as part of a business combination.
b. is classified on the balance sheet as a current asset.
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 not subject to impairment.
 
 
48.
IFRS accounting for inventory (IAS 2) does not permit which of the following cost flow assumptions?
• FIFO.
• LIFO.
• Specific identification.
• Weighted average.
 
 
49.
In a common-size balance sheet, all items are expressed as a percentage of:
• total liabilities.
• total sales.
• total equity.
• total assets.
 
 
50.
In an actual business, which of the following is an inventory accounting issue that frequently arises?

• What items should be included in ending inventory?.
• How should physical quantities in inventory be determined?.
• What costs should be included in inventory purchases?.
• All of these answer choices are correct.
 
 
51.
In a trend balance sheet for 2018, stockholders’ equity is expressed as:

a. 10.2%
b. 100.0%
c. 104.6%
d. 110.4%
 
 
52.
Income statements are classified into sections to:

• distinguish between sustainable and transitory income.
• separate revenue recognized from deferred revenue.
• distinguish between book income and taxable income.
• separate real income from book income.
 
 
53.
Investors and analysts must have certain capabilities regarding financial reporting which include:

• an ability to recognize that financial statement information reported is grounded in judgment as well as facts.
• all of these answer choices are correct.
• an understanding of current financial reporting standards.
• recognition that management selects the financial reporting standards used.
 
 
54.
Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:

• direct write-off method.
• percent of gross receivables method only.
• percent of sales or the percent of gross receivables method.
• percent of sales method only.
 
 
55.
Manero Company included the following information in its annual report:
2019 2018 2017
Sales $ 178,400 $ 162,500 $ 155,500 
Cost of goods sold 115,000 102,500 100,000 
Operating expenses 50,000 50,000 45,000 
Operating income 13,400 10,000 10,500 

In a common-size income statement for 2019, the operating expenses are expressed as:
• 43.8%
• 30.3%
• 28.0%
• 100.0%
 
 
56.
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.
 
 
57.
On January 1, 2018, Monroe Contractors signed a contract to inspect and complete needed repairs to the water lines for the town of Pleasantville. Because Monroe 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, Monroe will recognize revenue for the contract using the completed-contract method. The work is expected to be completed in 2020.
Which of the following is not a permitted simpler approach to revenue recognition under ASC Topic 606 for revenue recognition?

• Using the previous revenue recognition rules instead of the 5-step model.
• Recognizing revenue for the amount invoiced to the customer.
• Applying the 5-step model to a portfolio of similar contracts.
• Not adjusting for significant financial components if the contract period is one year or less.
 
 
58.
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.
What amount will Jensen recognize as interest income during 2019?
• $0
• $4,704
• $4,356
• $5,111
 
 
59.
Operating activities result from the cash effects of:
• selling equipment.
• producing and delivering goods.
• paying dividends to shareholders.
• issuing long-term debt
 
 
 
 
 
 
 
 
 

60.
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 2018:

Customer Note Maturity Interest Due Interest Rate
J.Perez $ 100,000 Quarterly 10%
P.Berg $ 100,000 — Negotiated


To encourage sales, Berg was given a special deal on interest. Additional information:
Future value of $100,000 in one year (quarterly interest) is $110,381.
Present value of $100,000 for one year (quarterly interest) is $90,595.
What amount will Palmer use to record the sale to Perez?

• $110,381
• $90,595
• $90,000
• $100,000
 
 
61.
Payments to a customer for slotting fees:
A. can never be recognized.
B. are always expensed over the period benefited for the right to shelf space.
C. must be expensed immediately
D. might be considered a reduction in the selling price of goods sold to the customer.
 
 
62.
Potential conflicts of interest permeate:

• few business relationships.
• only relationships between investors 
and managers.
• many business relationships.
• only relationships between borrowers 
and lenders.
 
 
63.
Relevant financial information:

a. is free from bias and error.
b. can be independently verified.
c. is capable of making a difference in a 
decision.
d. is measured in a similar manner among 
different companies.
 
 
64.
Restatements occur for a number of reasons. Which of the following is the most common type of restatement?

• items related to non-core expense issues.
• those related to revenue recognition.
• reclassification and disclosure issues.
• items related to core expense issues.
 
 
65.
Select one of the following statements that best reflects the relationship between the operating cycle and the cash conversion cycle:

• The operating cycle reflects how long it takes to sell inventory.
• A mismatch between the two cycles indicates the company is headed for bankruptcy.
• The cash conversion cycle includes the operating cycle and the number of days related to the purchase of inventory.
• The two cycles will always match.
 
 
66.
Subsequent events:

• are those significant events that occur in the last quarter of the reporting period.
• are subject to optional disclosure based on a recommendation from top management.
• 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.
• are those significant events that occur after the financial statements are issued
 
 
67.
This is the formula for net realizable value of receivables
 
 
68.
To achieve faithful representation, the financial information must be:

a.consistent, unbiased, and relevant.
b.relevant, consistent, and timely.
c.relevant, comparable, and timely.
d.complete, neutral, and free from material error.
 
 
69.
The two ways to implement the discounted cash flow valuation approach are:

• the price/earnings model and the cash flows model.
• CAPM and the weighted average cost of capital.
• the free cash flow model and the flows to equity model.
• the weighted cash flows model and the capital assets model.
 
 
70.
Valuing an entire company, an operating division of that company or its ownership shares involves three basic steps. These steps include all of the following except:

• Determining the risk or uncertainty associated with the forecasted future amounts.
• Forecasting future amounts of a value-relevant attribute.
• Determining the dividends the company will pay in the future based on the company’s dividend policy and expected future earnings.
• Determining the discounted present value of the expected future amounts using an appropriate discount rate.
 
 
 
 
 
 
 
 
 

71.
When a company changes from any inventory method to LIFO, the change is reported

a. as a change in an accounting estimate. Incorrect
b. as an error correction.
c. using the retrospective approach.
d. prospectively because it is usually impractical to determine the effects of this change on prior years’ net income.
 
 
72.
When a specific account receivable is written off, the entry:

• can either decrease or increase net income.
• has no effect on net income.
• decreases net income.
• increases net income.
 
 
73.
When faced with falling short of a desired earnings target, financial executives reportedly might consider any of the following actions except:

• decreasing discretionary spending.
• providing incentives for customers to buy more product this quarter.
• prematurely taking an accounting charge.
• delaying the start of a new project.
 
 
75.
Which is not correct regarding Regulation Fair Disclosure (Reg FD) ?

• It does not limit what management can say in private conversations with analysts or investors.
• It limits what management can say in private conversations with analysts and investors .
• It was passed by the SEC.
• It helps level the playing field between individual and insitutional investors.
 
 
76.
Which item below does not describe a politically vulnerable firm?

• The firm may be attacked in the 
financial and popular press for 
generating high earnings.
• The firm may face antitrust litigation or 
loss of protective import quotas.
• The firm is in a highly visible industry 
such as oil & gas or pharmaceuticals.
• The firm has contracts controlled by the 
government.
 
 
77.
Which of the following are primary qualitative characteristics of accounting information?
• Comparability and Timeliness.
• Verifiability and Understandability.
• Relevance and Faithful Representation.
• Relevance and Timeliness
 
 
78.
Which of the following does not describe the impact of a firm’s capital structure on ROA and ROCE?

a. For a high-debt firm experiencing a profitable year, ROCE will likely be lower than ROA if the debt was not used to support operations.
b. For a firm with no debt, ROCE will likely be the same as the ROA.
c. A highly levered firm can be advantageous to common stockholders.
d. For a high-debt firm experiencing a profitable year, ROCE will likely be higher than ROA if the debt was used to support operations.
 
 
79.
Which of the following is not an example of an affirmative covenant?

• Limiting new business ventures.
• Complying with laws.
• Allowing the lender to inspect business assets and business contracts.
• Providing periodic, audited financial statements.
 
 
80.
Which of the following is not correct with respect to computing ROCE?

a. ROCE is affected by both ROA and the degree of financial leverage employed by the company.
b. Interest charged on loans, and dividends declared on preferred stock, are both subtracted in arriving at net income available to common shareholders.
c. Both common and preferred stock dividends are subtracted in arriving at net income available to common stockholders.
d. The capital provided by common shareholders during the period can be computed by averaging total common shareholders’ equity at the beginning and end of the period.
 
 
81.
Which of the following statements is false regarding the global vantage point of fair value measurement?

• ASC Topic 820 provides fair value guidance for companies, investors and company auditors.
• IFRS 13 "Fair Value Measurement" is not in agreement with U.S. GAAP.
• The FASB and the IASB have done a joint convergence project on fair value measurement and disclosure.
• The FASB revised ASC 820-10 to make the U.S. fair value disclosure rules more consistent with IFRS.
 
 
82.
Which of the following statements is true regarding the five-step model in the ASC Topic 606 guidance for revenue recognition?

A. The transaction price is not relevant.
B. If a sale is not paid for on time, the seller should not recognize revenue.
C. The sale itself is the sole criterion for recognizing revenue.
D. The performance obligations in the contract need to be identified.
 
 
 
 
 
 
 
 
 

83.
Which of the following statements regarding inventory accounting is true?

a. The specific identification method of inventory accounting is generally considered to be the most prevalent.
b. In the U.S., FASB prefers replacement cost accounting because it records holding gains on the financial statements as they arise.
c. FIFO charges the most recent costs against revenues on the income statement.
d. The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost.
 
 
84.
Which of the following would not be considered a revenue recognition abuse?

• Recording revenue on goods ready for delivery to the customers, segregated in the company warehouse without a bill-and-hold arrangement in the contract.
• Recording goods on layaway for a customer as a final sale.
• Recording goods on consignment as part of inventory when there is a right of return.
• Recording revenue on a large shipment to a customer whose ability to pay is not reasonably assured.
 
 
85.
With respect to asset utilization, which of the following is not correct?

• Issues with inventory obsolescence will be evidenced in the current asset turnover ratio.
• How efficient the company is in utilizing its property, plant, and equipment is reflected in the long-term asset turnover ratio.
• Asset turnover is only one part of the ROA calculation.
• Efficiency gains arise from improvements in managing accounts receivable.
 
 
86.
XYZ Co.’s 2018 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2017. To help evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should do all of the following except:

• look for additional discussion in XYZ’s annual report.
• contact the SEC for more information.
• compare the ratio to other firms in XYZ’s industry.
• listen to the company’s earnings briefing for the analysts.
 
 
 

1.
The accounts receivable turnover ratio:
 
 
2.
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to:
 
 
3.
As a firm liquidate sold LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
 
 
4.
The carrying cost of inventory should include all the following costs except:
 
 
5.
Current ratio distortion under LIFO inventory costing may be adjusted by:
 
 
6.
The dominant method under GAAP for measuring long-lived assets is the:
 
 
7.
Evaluation and testing for impairment assessments of indefinite-lived intangible assets:
 
 
8.
Examples of variable costs include all the following except:
 
 
9.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:
 
 
10.
For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs:
 
 
11.
Goods held on consignment are included in the inventory valuation of:
 
 
12.
If a long-lived amortizable intangible asset's future undiscounted net cash flows fall below the asset's net book value, the asset is considered to be a/an:
 
 
13.
An impairment loss is reported on the income statement as:
 
 
14.
In an actual business, which of the following is an inventory accounting issue that frequently arises?
 
 
15.
LIFO layers are more likely to be liquidated when inventory records are kept on:
 
 
16.
The LIFO reserve disclosure is required because LIFO inventory costs are:
 
 
17.
LIFO's tax advantage is that:
 
 
18.
The major issue in inventory accounting is:
 
 
19.
A major problem facing financial analysts who compare long-lived assets on balance sheets of various companies is that different companies often use different:
 
 
20.
The percentage of assets financed by long-term debt is best described by the:
 
 
21.
The ratio that captures information about property, plant, and equipment utilization is:
 
 
22.
Return on Assets (ROA) measures a firm's:
 
 
23.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:
 
 
24.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
 
 
25.
When a company uses absorption costing:
 
 
26.
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life,
 
 
27.
When firms dispose of a long-lived asset by selling it before the end of its useful life,the difference between the net book value of the asset and the disposition proceeds is a/an:
 
 
28.
When operating earnings and cash flows from operations are dissimilar, which of the following ratios is a better measure of long-term solvency?
 
 
29.
Which of the following best describes measures of immediate liquidity?
 
 
30.
Which of the following does not present a challenge to analysts using financial statements?
 
 
31.
Which of the following factors does not negatively impact operating cash flows?
 
 
32.
Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets?
 
 
33.
Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment?
 
 
34.
Which of the following items will not cause the company's ROA to increase?
 
 
35.
Which of the following statements regarding inventory accounting is false?
 
 
36.
Which of the following statements regarding inventory accounting is false?
 
 
 
 
 
 
 
 
 
 
 

37.
Which of the following statements regarding inventory accounting is true?
 
 
38.
Which of the following statements regarding inventory accounting is true?
 
 
39.
Which one of the following factors makes it difficult for financial analysts to use trend analysis?
 
 
 

 

 

2.
The formula for forecasting inventory is ____________ /365 X .
 
 
3.
All of the following are true regarding projected financial statements except:
 
 
4.
All of the following are true regarding the key principles of forecasting except:
 
 
5.
All of the following statements are true regarding ratios and forecasts except:
 
 
6.
Analysts must develop realistic expectations for the outcomes of future business activities.
To develop these expectations, analysts build a set of _____________________________.
 
 
7.
An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that
 
 
8.
As a firm progresses through the decline life-cycle stage, what type of flexible account will it be more likely to use to balance the balance sheet?
 
 
9.
As a firm progresses through the growth life-cycle stage, what type of flexible account will it be more likely to use to balance the balance sheet?
 
 
10.
As a firm progresses through the introduction life-cycle stage, what type of flexible account will it be more likely to use to balance the balance sheet?
 
 
11.
Common-size financial statements recast each statement item as
 
 
12.
A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
 
 
14.
Financial statement forecasts are important analysis tools because forecasts of ______________________________ play a central role in valuation and many other financial decision contexts.
 
 
15.
Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information forecasts of future growth in inventory will most likely affect growth in
 
 
16.
Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information sales growth forecasts will most likely affect growth in
 
 
17.
Financial statement forecasts should rely on _________________________ across financial statements.
 
 
18.
Financial statement forecasts should rely on ____________________ within financial statements.
 
 
19.
A firm in a mature industry with little expected change in its market share might anticipate volume increases equal to the growth rate in the _________________________ within its geographic markets.
 
 
20.
A firm in transition from the high growth to the mature phase of its life cycle, or a firm with significant technological improvements in its production processes, might expect increases in ______________________________ but decreases in sales prices per unit.
 
 
21.
Firms which have differentiated ___________________________________ for its products may have a greater potential to increase prices.
 
 
22.
For some types of assets, such as accounts receivable, asset growth typically ____________________ future sales growth.
 
 
23.
For some types of assets, such as plant, property and equipment, asset growth typically ____________________ future sales growth.
 
 
24.
If a company has very low operating leverage (i.e. a low proportion of fixed costs in the cost structure) and no changes are expected in operations
 
 
25.
If a firm competes in a capital-intensive industry with excess capacity, all of the following are true except:
 
 
26.
If a firm operates at less then full capacity then price _______________________ are not likely
 
 
27.
In developing forecasts of expenses the analyst must take into consideration that expenses can be broken down into ________________________ or ______________________ components.
 
 
28.
It may be difficult to forecast sales for firms with _________________________ patterns because their historical growth rates reflect wide variations in both direction and amount from year to year.
 
 
29.
Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns. Nichols and Wahlen's findings indicate
 
 
30.
The objective of forecasting is to develop
 
 
31.
Projected financial statements can be used to assess the sensitivity of all of the following except:
 
 
32.
Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following companies would most likely not be able to increase prices in the near future?
 
 
 
 
 
 
 
 
 

33.
Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?
 
 
34.
Realistic expectations are ____________________ and ____________________.
 
 
35.
To develop forecasts of individual assets, the analyst must first link historical growth rates for individual assets to historical growth rates in ____________________ and other activity-based drivers.
 
 
36.
To ensure that the financial statements articulate, it is important that the change in the cash balance on the balance sheet each year agrees with
 
 
37.
Using common-size balance sheet percentages to project individual assets, liabilities, or shareholders' equity has all of the following shortcomings except:
 
 
38.
When projecting operating expenses it is important to determine the mix of fixed and variable costs, one clue suggesting the presence of fixed costs is
 
 
39.
When projecting ____________________, the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.
 
 
40.
Which of the following statements does not apply to preventing "garbage in, garbage out" when implementing a forecasting game plan?
 
 
 

The discounted cash flow valuation approach expresses current value of a firm as the discounted present value of expected future cash flows.

 

In applying the free cash flow valuation model, the discount rate used is the weighted-average cost of capital.

 

Accrual accounting produces an earnings number that depicts the effects of economic events on cash flows in the period in which the effects occur and provides an estimate of sustainable long-run future free cash flows.

 

In the flows to equity model of valuation, and using simplifying assumptions, the current stock price estimate can be expressed as a capitalization rate (1 × r) multiplied by a perpetuity equal to cash flow after paying debtholders and preferred shareholders.

 

The two most significant explanations for variations in the earnings multiple are risk differences and maturity of the firm.

 

The value of the future growth opportunities of a firm can be determined by considering the firm’s potential earnings from reinvesting current earnings in new projects that will eventually earn a rate of return more than the cost of equity capital.

 

Return on assets (ROA) can be used to assess whether a firm is likely to earn a return on reinvested earnings that exceeds its cost of equity capital.

 

A component that is unrelated to future free cash flows or future earnings and is not pertinent to assessing current share price is a noise component.

 

The degree of conservatism associated with a firm’s accounting choices will have a direct bearing on the relationships among share price, earnings, and the firm’s equity book value components of the abnormal earnings valuation approach.

 

Much of the information needed for assessing the quality and value-relevance of a company’s reported accounting numbers cannot be found in the company’s Form 10-K.

 

Under the GAAP hierarchy of approaches used in measuring fair value, Level 3 uses quoted prices from active markets for identical assets or liabilities to determine fair value.

 

Because income from discontinued operations is not likely to be recurring, it would be considered transitory earnings and be valued at a lower multiple than recurring components (such as income from operations).

 

If securities markets are rational and efficient in that they fully and correctly include all available information into a company’s stock price, the resulting price will reflect investors’ unbiased expectations about the company’s future earnings and cash flows.

 

Lenders form opinions about a firm’s credit risk by comparing current and future debt-service requirements to the estimates of the firm’s current and expected future cash flows.

 

The starting point for developing comprehensive financial statement forecasts is a detailed understanding of the company, its recent financial performance and its health.

 

The fundamental valuation approach to business valuation uses basic accounting measures to assess the amount, timing and

 

The steps involved in business valuation are forecasting the future values of a financial attribute that drives a company’s value, determining the risk associated with that forecasted value and determining the

 

Cash flow assessment plays a central role in analyzing

 

Valuing an entire company, an operating division of that company or its ownership shares involves three basic steps. These steps include all of the following except:

 

When using the discounted flows to equity valuation model, the market value of common shares depends upon investors’

 

A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This assumption is best applied to

 

To apply the discounted free cash flow model, the analyst needs to estimate

 

The FASB stresses that the primary objective of financial reporting is to provide information useful to investors and creditors in assessing the amount, timing and uncertainty of future net cash flows. The FASB contends that

 

By using accruals and deferrals, accrual accounting

 

Research indicates that stock returns correlate better with

 

The reciprocal of the risk-adjusted equity cost of capital used to discount future earnings is the

 

If a company currently earns $5.00 per share, and has a risk-adjusted equity cost of capital of 9%, a share of common stock should theoretically sell for approximately

 

If a company currently earns $6.00 per share and has a risk-adjusted equity cost of capital of 12.5%, a share of common stock should theoretically sell for

 

If most firms’ price/earnings ratios are between 10 and 15, what is the range of the risk-adjusted interest rate?

 

Risky firms have a higher risk-adjusted cost of capital. Which one of the following factors would contribute to a risky firm also having a relatively high price/earnings ratio?

 

To obtain a better current price, the net present value of future growth opportunities (NPVGO) can be calculated and

 

The net present value of future growth opportunities (NPVGO) will contribute to an above average P/E multiple when the additional share value created is

 

In general, the growth rate in earnings will depend on the portion of earnings reinvested each period and

 

A component that is valuation-relevant, but is not expected to persist into the future is a

 

Income from continuing operations, excluding special or nonrecurring items, is generally regarded as

 

Income or loss from discontinued operations is regarded as

 

An adjustment to income due to a non-recurring item is regarded as

 

Use the following to answer questions:

 
Firm A
Firm B
Firm C
Reported EPS
$12
$15
$18
Analyst’s EPS composition:
 
 
 
Permanent component (bP = 5)
80%
60%
75%
Transitory component (bT = 1)
10%
35%
25%
Value-irrelevant component (b0 = 0)
10%
5%
0%
 

The implied share price of Firm A’s stock is

 

The implied share price of Firm B’s stock is

 

The implied share price of Firm C’s stock is

 

The implied total earnings multiple of Firm A is

 

The implied total earnings multiple of Firm B is

 

The implied total earnings multiple of Firm C is

 

Reported earnings numbers often contain three distinctly different components possibly subject to different earnings capitalization rates. Which of the following is not one of these components?

 

Which one of the following is an example of sustainable earnings?

 

As transitory components become a more important part of a firm’s reported earnings, the reported earnings

 

The assessment of earnings quality to calculate an implied share price is best accomplished using which of the following?

 

As transitory or value-irrelevant components become a larger part of a firm’s reported earnings, which of the following effects would you not expect to witness?

 

Under the abnormal earnings approach of equity valuation, investors willingly pay a premium for those firms that

 

One popular approach to estimating the equity cost of capital is

 

When calculating forecasted cash flows available to common stockholders (CF) under the flows to equity model,

 

The expected abnormal earnings of a firm that has earnings of $40,000 with a required equity cost of capital of 8% and a beginning book value of $800,000 is

 

Use the following to answer questions :

 
Firm A
Firm B
Firm C
Actual earnings
$6,000
$14,000
$18,000
r
10%
8%
12%
BVt-1
$100,000
$150,000
$190,000
 

What are the abnormal earnings for Firm A?

 

What are the abnormal earnings for Firm B?

 

What are the abnormal earnings for Firm C?

 

Assume that Firm A can increase earnings $4,000 by cutting costs. Abnormal earnings would be

 

Assume that at the beginning of the year, Firm B divested itself of $20,000 of unproductive capital and earnings for the year fell by only $3,000. Abnormal earnings are

 

A company with a return on equity that consistently exceeds the industry average ROCE will generally have shares that sell at a

 

Per U.S. GAAP, fair value for accounting purposes is

 

Carrying amounts in a GAAP balance sheet are measured using all the following except

 

In the process of determining fair value, the exit price refers to

 

When determining the fair value of an asset using an exit price approach,

 

Prior to the announcement of unexpected bad earnings (a negative earnings surprise), a firm’s stock price will generally exhibit

 

An earnings surprise

 

The fact that a firm’s stock price does not change when earnings are announced indicates that

 

The interest rate on a revolving loan will usually

 

Short-term notes sold directly to investors by large, highly rated companies are called

 

A bond that is considered unsecured is referred to as a

 

A qualitative assessment of the business, its customers and suppliers, and management’s character and capability is known as

 

The degree to which cash needs can be satisfied during periods of fiscal stress is known as

 

The two ways to implement the discounted cash flow valuation approach are

 

The interest rate charged on bank loans must be sufficient to cover all the following except

 

Financial statement forecasts are

 

Preparing comprehensive financial statement forecasts involves six steps. Among these steps are all the following except:

 

Which of the following statements is false regarding the global vantage point of fair value measurement?

 

Common value-relevant attributes for determining the value of a company include all the following except:

 

Which of the following statements is false regarding the flows to equity model?

 

Which of the following statements is false regarding the FASB’S view on valuation?

 

Which of the following statements is false regarding the abnormal earnings approach to valuation?

 

Which of the following statements is false regarding credit risk analysis?

 

Which of the following statements is false regarding credit risk analysis?

 

Which of the following statements is false regarding traditional lending products?

 

Which of the following statements is false regarding the business valuation process?

 

Which of the following statements is false regarding the business valuation process?

 

Which of the following statements is false regarding the business valuation process?

 

Contract terms can be designed to eliminate or reduce conflicting incentives that arise in business relationships.

 

Contracts include financial reporting information and create incentives for earnings management.

 

Debt covenants help guard against conflicts of interest between creditors and bank regulators.

 

Some debt covenants preserve repayment capacity by preventing mergers and acquisitions unless the debt is first repaid.

 

Negative covenants tend to be less significant than affirmative covenants because they place direct restrictions on the actions lenders can take.

 

Managers wishing to avoid loan covenant violations may resort to making accounting changes that increase reported earnings.

 

Potential conflicts of interest between managers and owners can be overcome if compensation packages are tied to improvement in firm value.

 

Most compensation packages involve a base salary, an annual incentive, and a short-term incentive.

 

When restricted stock is granted as executive compensation, the recipient must wait for collecting dividends and exercising voting rights until the restriction period ends.

 

Research shows that managers sometimes use accounting flexibility to evade contract constraints in order to gain bonus benefits.

 

A factor that can affect managers’ incentives for short-term focus on performance is that a compensation committee oversees incentive plans and can intervene when circumstances warrant modification of the scheduled incentive award.

 

Banks and other financial institutions are required by federal and state regulatory agencies to meet minimum lending requirements.

 

Under RAP, loan charge-offs decrease bank capital and also reduce bank net income.

 

Many managers believe that meeting earnings benchmarks helps to build credibility with investors.

 

A difference of one penny between reported EPS and analysts’ expectations of EPS matters a lot to investors.

 

Loan provisions that are specifically designed to restrict dividend payments to shareholders are called

 

A lender may be protected from deterioration of the borrower’s creditworthiness if the commercial lending agreement requires the borrower to maintain a

 

A borrower that violates one or more loan covenants but makes all interest and principal payments timely

 

Which of the following is not a purpose served by debt covenants?

 

When one party to a business relationship can make decisions that benefit him or her but harm another other party in the relationship

 

Potential conflicts of interest permeate

 

Contract terms

 

A typical rate formula for a public utility includes

 

When conflicts of interest exist, lenders generally take all of the following actions at the creation of a contract except

 

A covenant that specifies a required minimum level of net worth and working capital is a/an

 

Affirmative covenants generally would not include which of the following stipulations?

 

Many loan agreements have financial covenants that rely on

 

What purpose is served by including covenants that place strict limits on new borrowing, prohibit stock repurchases and dividends without prior lender approval, or ensure that cash generated both from ongoing operations and from asset sales will not be diverted away from servicing debt?

 

Which of the following is not an example of a negative covenant provision?

 

Based on a comprehensive survey of U.S. companies, the most common financial performance measure used in annual and long-term incentive plans for senior executives is

 

Which of the following situations does not lead to default of a loan contract?

 

Debt covenants benefit

 

Which one of the following is not a broad function served by debt covenants?

 

A financial covenant would stipulate all of the following except

 

In the event of a default, lenders may do all of the following except

 

In using financial statements to monitor compliance with debt covenants

 

A lender’s requirement for a borrower to maintain a certain level of fixed charge coverage

 

Covenants that place direct restrictions on managerial decisions are called

 

Which one of the following is an example of a negative covenant?

 

Which of the following is not an example of an affirmative covenant?

 

A requirement that a company maintain a fixed-charge coverage ratio

 

The section of a loan agreement that describes circumstances in which the creditor obtains additional rights is called the

 

The failure of a company to pay other debts, such as payables or other loans, when due is called

 

Which statement below best describes a technical default?

 

According to the SEC, any breach of a loan covenant that existed at the balance sheet date that has not subsequently been cured should

 

When a debt covenant is violated, the related debt must be classified as current if it is

 

Company A’s interest ratio has fallen below the level required by its lender. The lender may not take which action?

 

Which accounting choice would not be used to reduce the likelihood of a technical default?

 

When a borrower is unable to make a scheduled interest payment, the type of default that occurs is a

 

A study examining how incentives arising out of debt contracts affect managers’ accounting choices found that the most common violations of accounting-based covenants occurred with

 

Discretionary accounting accruals are

 

Studies seem to suggest that management tends to make accounting changes and/or manipulate discretionary accruals to

 

Potential conflicts of interest between shareholders and managers may be overcome if managers are given incentives which cause them to behave as if they were

 

Firms must provide detailed disclosure of three broad executive pay categories. Which of the following is not one of these categories?

 

Information about a company’s executive compensation practices can be found in a company’s

 

A decrease in market-wide interest rates will result in a/an

 

Compensation incentives that motivate and reward executives for three to seven years of growth and prosperity are called

 

Which of the following is not an accurate statement regarding the compensation committee?

 

Stock options

 

An award of stock that is not transferable or subject to forfeiture for a period of years is called

 

Most executive compensation plans link bonus awards to one or more

 

The widespread use of accounting-based incentives for executive compensation is controversial for which one of the following reasons?

 

Several studies show that incoming CEOs have an incentive to

 

Which statement best describes stock options?

 

Managers believe it is important to meet earnings benchmarks. When a number of executives were asked—within the parameters of GAAP—which choices your company might make to hit an earnings target, the most popular choice was to

 

A clawback provision in an employment contract

 

With respect to executive pay, which of the following is not correct?

 

Research has shown that research and development expenditures during the years immediately prior to a CEO’s retirement tend to

 

Compensation plans should

 

Long-term incentive components of executive compensation plans should include stock options

 

With respect to executive compensation, which statement is not valid?

 

A compensation committee should be comprised of

 

Regulatory accounting principles are important to those outside the regulatory agencies because

 

Banks that fail to comply with regulations, including the failure to maintain an adequate capital adequacy ratio, face

 

The use of a bank manager’s discretion in the timing and amount of loan loss provisions and loan charge-offs can falsely understate the losses and

 

In the banking industry, the ratio of investor capital/gross assets, as defined by RAP, is the

 

A bank’s estimated bad debt expense associated with its loan receivables is the

 

In the utilities industry, rate formulas are established to allow the utilities to set total allowed revenues to recover

 

In the utilities industry, image advertising and customer safety advertising are

 

Rate regulation provides incentives for public utility managers to

 

IRS regulations govern the

 

Regulatory Accounting Principles (RAP) can be used

 

Which of the following does not properly represent the relation of tax and GAAP accounting?

 

Which of the following statements does not reflect the provisions of ASU 2016-01 related to fair value measurement?

 

Which of the following did not contribute to the 2008 financial meltdown?

 

Banking regulators have a powerful weapon to encourage compliance with minimum capital guidelines as they can compel a noncomplying bank to do any or all of the following except

 

The prevalence of stock options in executive pay packages

 

Managers cater to Wall Street (i.e., try to meet earnings benchmarks) for which of the following reasons?

 

When faced with falling short of a desired earnings target, financial executives reportedly might consider any of the following actions except

 

Which of the following does not represent the impact of changes in EPS on the stock price?

 


 

Net realizable value equals the sales price minus reasonable further costs to both make the item ready to sell and to sell it.

 

Under the sales revenue approach to estimating uncollectible accounts receivable a percentage of gross uncollectible accounts receivable is determined to establish the bad debts expense.

 

The net realizable value of accounts receivable is decreased when a bad debt is written off.

 

An aging of accounts receivable is a determination of how long each receivable has been on the books.

 

In U.K. financial reports, receivables are called "creditors."

 

Receivables that result from transactions other than trade receivables, if material, are separately disclosed on the balance sheet.

 

Generally accepted accounting principles require that accounts receivable be carried on the balance sheet at their net realizable value as opposed to their face amount.

 

When establishing credit policies, companies choose what they believe is a profit-minimizing balance between the expected cost of credit sales and benefits of increased credit sales.

 

Under the sales revenue approach, no bad debt expense is recorded when a specific account (known to be uncollectible) is written off.

 

The gross accounts receivable approach is consistent with the accrual accounting philosophy of recording estimated bad debt expense when the sale was made.

 

When sales returns occur, they are debited to the sales account.

 

The sales returns and allowances account is a contra-asset account.

 

Ignoring estimated future returns and allowances violates the matching concept.

 

Ignoring estimated future returns and allowances has a trivial effect on income when the amount of actual returns and allowances does not vary greatly from year to year.

 

In practice, no end-of-period accrual is typically made for estimated future returns and allowances as these items are very difficult to accurately estimate.

 

A change in the percentage rate used to estimate bad debts expense will have a negligible impact on reported earnings.

 

When firms sell receivables, the receivables number reported in the ending balance sheet only includes the remaining receivables and will overstate the true growth in receivables over the period.

 

Readers of financial statements must scrutinize the note disclosures, and the financing activities section of the cash flow statement, for evidence of dispositions of receivables that may be masking overly aggressive revenue recognition policies or bad receivables management.

 

Determining whether the allowance for uncollectibles is adequate requires judgment.

 

Authoritative accounting literature provides little guidance regarding revenue recognition when a sales agreement contains conditions that may allow the buyer to return the product.

 

Research evidence suggests that companies reduce bad debt expense when earnings are otherwise high and then increase the expense when earnings are low.

 

Companies occasionally adopt "aggressive" revenue recognition practices which then generate significant returns in later periods.

 

Many receivables recognition irregularities can be discovered by tracking the relationship between changes in sales and changes in receivables.

 

In a bill and hold sale, the company recognizes revenue and the associated account receivable, but does not ship the product to the customer until later.

 

Receivables growth could exceed sales growth because the firm allows its customers more time to pay.

 

When receivables growth exceeds sales growth, this could be an indication of aggressive revenue recognition policies.

 

When accounts receivables growth exceeds sales growth, this usually indicates an aggressive revenue recognition policy or some other accounting irregularity.

 

While collectibility of receivables requires forecasts which could later prove to be inaccurate, typical audit procedures of the current period will ensure that extreme overstatement of net receivables is rare.

 

Shipments to a company's distributors should normally be treated as sales when they occur.

 

Bill and hold sales should never be booked as revenue before shipment occurs.

 

Interest must be accounted for on all long-term notes receivable whether the interest rate is stated or not.

 

Interest must be imputed when the stated rate is lower than the prevailing borrowing rate at the time of the transaction.

 

Interest must be imputed whenever the stated rate is not the same as the prime rate of interest at the time of the transaction.

 

For long-term credit sales transactions utilizing notes receivable, interest income is recorded each period over the note's term to maturity using the prevailing borrowing rate.

 

Firms record accounts and notes receivable at net realizable value because that is the only option GAAP permits.

 

Firms may choose the fair value option for a group of financial instruments.

 

If the fair value option is elected, the carrying value of a note receivable would reflect general changes in interest rates and changes in the creditworthiness of the borrower.

 

If the fair value option is elected, the carrying value of a note receivable would reflect general changes in interest rates and changes in the creditworthiness of the lender.

 

When a firm does not adopt the fair value option, it still must disclose the fair value of its long-term notes receivable.

 

When a company factors its receivables to a bank with recourse, the company cannot be required to pay the bank if a customer's account proves uncollectible.

 

When a company accepts credit cards (e.g., VISA or MasterCard) it engages in a form of factoring.

 

Factoring can either be with, or without, recourse.

 

When a company sells its accounts receivable to a factor with recourse, it usually maintains an allowance for uncollectible accounts.

 

In a transaction where the transferor surrenders control over its receivables, the transaction is treated as a collateralized borrowing and any gain or loss is recognized in earnings.

 

In a transaction where the transferor surrenders control over its receivables, the transaction is treated as a sale and any gain or loss is recognized in earnings.

 

Accelerating cash collection on notes receivable by assigning or selling them is referred to as discounting.

 

The only condition required for control over receivables to be surrendered is that the transferred assets should be beyond the reach of the transferor and its creditors.

 

Securitization occurs when receivables are bundled together and sold or transferred to another organization that issues securities which are not collateralized by the transferred receivables.

 

A special purpose entity is a trust or corporation that is legally distinct from the transferor and may be created solely for the purpose of undertaking securitization transactions.

 

Securitizations have always been carefully designed to enable the transferor to consolidate the special purpose entity.

 

Per current GAAP, the sponsor of a special purpose entity may be required to treat a securitization as a collateralized borrowing instead of a sale.

 

Because the special purpose entity's credit rating is based on the quality of the transferred receivables, it will be the same as the rating of the transferor's general debt.

 

A firm's financial statements can be dramatically affected when the firm is required to consolidate special purpose entities that had previously been off-balance sheet.

 

The off-balance sheet treatment of special purpose entities applies only when financial assets are transferred.

 

Mortgage applications fraud played a role in the recent economic crisis.

 

Subprime loans can be securitized as part of a general portfolio of loans.

 

A restructuring of debt constitutes a troubled debt restructuring if the creditor, for legal or economic reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would otherwise not consider.

 

A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms where the original loan is cancelled and a new loan agreement is signed.

 

In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender.

 

In a troubled debt restructuring, GAAP restructuring gains and losses are equal to real economic gains and losses for the companies involved.

 

Lenders are willing to restructure a customer's loan to help the customer resolve present financial difficulties and stay in business and also because lenders often receive more through restructuring than they would get from foreclosure.

 

International financial reporting standards allow firms to voluntarily opt, in some cases, to measure financial assets at fair market value.

 

International financial reporting standards permit fair value disclosures for short term trade receivables and loans as well as for long term notes receivable.

 

Special purpose entities generally stay on the balance sheet under both IFRS and current U.S. GAAP.

 

IFRS only explicitly covers troubled debt restructurings from the lender's perspective.

 

Net realizable value of receivables is gross receivables minus

 

The matching principle requires that bad debts be treated as an expense in the year

 

The allowance for uncollectibles account is

 

If Edsel uses the sales revenue approach for estimating bad debt expense, the income statement should show an expense of

 

If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the income statement will show an expense of

 

If Edsel uses the sales revenue approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of

 

If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of

 

When a specific account receivable is written off, the entry

 

Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the

 

Echo Company's 2011 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2011, the company's sales (all on credit) amounted to $857,250. Per Echo's 2011 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo's beginning balance in the allowance for uncollectibles was $17,600, the ending balance in this account must be

 

Sales returns and allowances account is

 

Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 2011, Smith reported sales of $276,344,000. The company did, however, have two returns in 2011 related to the wrong product model being shipped. Smith's 2011 journal entry to record a $37,500 return from Foxtrot Medical would be

 

An analyst notes that ABC Inc.'s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed. Which of the following would be a plausible explanation for the change?

 

Research evidence suggests that

 

XYZ Co.'s 2012 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2011. To evaluate whether the reduction in XYZ's ratio is reasonable, an analyst should

 

Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales presents a red flag?

 

Which one of the following is an example of an aggressive revenue recognition policy?

 

When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans, it is recorded at

 

Non-interest bearing notes are initially recorded at

 

What amount will Palmer use to record the sale to Perez?

 

What amount will Palmer use to record the sale to Berg?

 

At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Perez note?

 

At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Berg note?

 

On January 2, 2012, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided instead to let Jensen hold the note.

 

What amount will Jensen recognize as interest income during 2012?

 

What amount will Jensen recognize as interest income during 2013?

 

What will be the balance in the Notes Receivable—Lewisburg Fabricators account at the end of 2013?

 

Accounting for long-term credit sales transactions utilizing notes receivable

 

Guthrie Corporation reports accounts receivable at a net realizable value of $2,940,000 (gross receivable of $3,000,000 minus allowance for uncollectible accounts of $60,000). Assume that there is an active market for these types of receivables and that the price is 94% of face value. To adjust the receivable's carrying value to fair value Guthrie would make which of the following entries?

 

The Fair value adjustment—accounts receivable account is an asset valuation account

 

When a firm does not adopt the fair value option, it

 

The sale of receivables to a third party is called

 

With a loan collateralized by receivables,

 

Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter's receivables for a 6% fee. These receivables have a related allowance for doubtful accounts of $3,500.

 

Assuming that the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make?

 

Assuming that the transaction was a collateralized loan, which one of the following entries will Ritter make to record this transaction?

 

Harry Jones accepted a six-month, 8% $40,000 note receivable from a customer on July 1, 2011. Jones has an arrangement with the National Bank to discount selected customer notes at 10%.

 

On August 1, 2011, Jones discounted the note under the arrangement with National Bank. How much were the proceeds of the discounted note?

 

If the note were discounted on August 1 under the terms of agreement with National Bank, which one of the following journal entries would Jones record?

 

Net realizable value equals the sales price minus reasonable further costs to both make the item ready to sell and to sell it.

 

Under the sales revenue approach to estimating uncollectible accounts receivable a percentage of gross uncollectible accounts receivable is determined to establish the bad debts expense.

 

The net realizable value of accounts receivable is decreased when a bad debt is written off.

 

An aging of accounts receivable is a determination of how long each receivable has been on the books.

 

In U.K. financial reports, receivables are called "creditors."

 

Receivables that result from transactions other than trade receivables, if material, are separately disclosed on the balance sheet.

 

Generally accepted accounting principles require that accounts receivable be carried on the balance sheet at their net realizable value as opposed to their face amount.

 

When establishing credit policies, companies choose what they believe is a profit-minimizing balance between the expected cost of credit sales and benefits of increased credit sales.

 

Under the sales revenue approach, no bad debt expense is recorded when a specific account (known to be uncollectible) is written off.

 

The gross accounts receivable approach is consistent with the accrual accounting philosophy of recording estimated bad debt expense when the sale was made.

 

When sales returns occur, they are debited to the sales account.

 

The sales returns and allowances account is a contra-asset account.

 

Ignoring estimated future returns and allowances violates the matching concept.

 

Ignoring estimated future returns and allowances has a trivial effect on income when the amount of actual returns and allowances does not vary greatly from year to year.

 

In practice, no end-of-period accrual is typically made for estimated future returns and allowances as these items are very difficult to accurately estimate.

 

A change in the percentage rate used to estimate bad debts expense will have a negligible impact on reported earnings.

 

When firms sell receivables, the receivables number reported in the ending balance sheet only includes the remaining receivables and will overstate the true growth in receivables over the period.

 

Readers of financial statements must scrutinize the note disclosures, and the financing activities section of the cash flow statement, for evidence of dispositions of receivables that may be masking overly aggressive revenue recognition policies or bad receivables management.

 

Determining whether the allowance for uncollectibles is adequate requires judgment.

 

Authoritative accounting literature provides little guidance regarding revenue recognition when a sales agreement contains conditions that may allow the buyer to return the product.

 

Research evidence suggests that companies reduce bad debt expense when earnings are otherwise high and then increase the expense when earnings are low.

 

Companies occasionally adopt "aggressive" revenue recognition practices which then generate significant returns in later periods.

 

Many receivables recognition irregularities can be discovered by tracking the relationship between changes in sales and changes in receivables.

 

In a bill and hold sale, the company recognizes revenue and the associated account receivable, but does not ship the product to the customer until later.

 

Receivables growth could exceed sales growth because the firm allows its customers more time to pay.

 

When receivables growth exceeds sales growth, this could be an indication of aggressive revenue recognition policies.

 

When accounts receivables growth exceeds sales growth, this usually indicates an aggressive revenue recognition policy or some other accounting irregularity.

 

While collectibility of receivables requires forecasts which could later prove to be inaccurate, typical audit procedures of the current period will ensure that extreme overstatement of net receivables is rare.

 

Shipments to a company's distributors should normally be treated as sales when they occur.

 

Bill and hold sales should never be booked as revenue before shipment occurs.

 

Interest must be accounted for on all long-term notes receivable whether the interest rate is stated or not.

 

Interest must be imputed when the stated rate is lower than the prevailing borrowing rate at the time of the transaction.

 

Interest must be imputed whenever the stated rate is not the same as the prime rate of interest at the time of the transaction.

 

For long-term credit sales transactions utilizing notes receivable, interest income is recorded each period over the note's term to maturity using the prevailing borrowing rate.

 

Firms record accounts and notes receivable at net realizable value because that is the only option GAAP permits.

 

Firms may choose the fair value option for a group of financial instruments.

 

If the fair value option is elected, the carrying value of a note receivable would reflect general changes in interest rates and changes in the creditworthiness of the borrower.

 

If the fair value option is elected, the carrying value of a note receivable would reflect general changes in interest rates and changes in the creditworthiness of the lender.

 

When a firm does not adopt the fair value option, it still must disclose the fair value of its long-term notes receivable.

 

When a company factors its receivables to a bank with recourse, the company cannot be required to pay the bank if a customer's account proves uncollectible.

 

When a company accepts credit cards (e.g., VISA or MasterCard) it engages in a form of factoring.

 

Factoring can either be with, or without, recourse.

 

When a company sells its accounts receivable to a factor with recourse, it usually maintains an allowance for uncollectible accounts.

 

In a transaction where the transferor surrenders control over its receivables, the transaction is treated as a collateralized borrowing and any gain or loss is recognized in earnings.

 

In a transaction where the transferor surrenders control over its receivables, the transaction is treated as a sale and any gain or loss is recognized in earnings.

 

Accelerating cash collection on notes receivable by assigning or selling them is referred to as discounting.

 

The only condition required for control over receivables to be surrendered is that the transferred assets should be beyond the reach of the transferor and its creditors.

 

Securitization occurs when receivables are bundled together and sold or transferred to another organization that issues securities which are not collateralized by the transferred receivables.

 

A special purpose entity is a trust or corporation that is legally distinct from the transferor and may be created solely for the purpose of undertaking securitization transactions.

 

Securitizations have always been carefully designed to enable the transferor to consolidate the special purpose entity.

 

Per current GAAP, the sponsor of a special purpose entity may be required to treat a securitization as a collateralized borrowing instead of a sale.

 

Because the special purpose entity's credit rating is based on the quality of the transferred receivables, it will be the same as the rating of the transferor's general debt.

 

A firm's financial statements can be dramatically affected when the firm is required to consolidate special purpose entities that had previously been off-balance sheet.

 

The off-balance sheet treatment of special purpose entities applies only when financial assets are transferred.

 

Mortgage applications fraud played a role in the recent economic crisis.

 

Subprime loans can be securitized as part of a general portfolio of loans.

 

A restructuring of debt constitutes a troubled debt restructuring if the creditor, for legal or economic reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would otherwise not consider.

 

A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms where the original loan is cancelled and a new loan agreement is signed.

 

In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender.

 

In a troubled debt restructuring, GAAP restructuring gains and losses are equal to real economic gains and losses for the companies involved.

 

Lenders are willing to restructure a customer's loan to help the customer resolve present financial difficulties and stay in business and also because lenders often receive more through restructuring than they would get from foreclosure.

 

International financial reporting standards allow firms to voluntarily opt, in some cases, to measure financial assets at fair market value.

 

International financial reporting standards permit fair value disclosures for short term trade receivables and loans as well as for long term notes receivable.

 

Special purpose entities generally stay on the balance sheet under both IFRS and current U.S. GAAP.

 

IFRS only explicitly covers troubled debt restructurings from the lender's perspective.

 

Net realizable value of receivables is gross receivables minus

 

The matching principle requires that bad debts be treated as an expense in the year

 

The allowance for uncollectibles account is

 

If Edsel uses the sales revenue approach for estimating bad debt expense, the income statement should show an expense of

 

If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the income statement will show an expense of

 

If Edsel uses the sales revenue approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of

 

If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of

 

When a specific account receivable is written off, the entry

 

Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the

 

Echo Company's 2011 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2011, the company's sales (all on credit) amounted to $857,250. Per Echo's 2011 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo's beginning balance in the allowance for uncollectibles was $17,600, the ending balance in this account must be

 

Sales returns and allowances account is

 

Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 2011, Smith reported sales of $276,344,000. The company did, however, have two returns in 2011 related to the wrong product model being shipped. Smith's 2011 journal entry to record a $37,500 return from Foxtrot Medical would be

 

An analyst notes that ABC Inc.'s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed. Which of the following would be a plausible explanation for the change?

 

Research evidence suggests that

 

XYZ Co.'s 2012 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2011. To evaluate whether the reduction in XYZ's ratio is reasonable, an analyst should

 

Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales presents a red flag?

 

Which one of the following is an example of an aggressive revenue recognition policy?

 

When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans, it is recorded at

 

Non-interest bearing notes are initially recorded at

 

What amount will Palmer use to record the sale to Perez?

 

What amount will Palmer use to record the sale to Berg?

 

At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Perez note?

 

At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Berg note?

 

What amount will Jensen recognize as interest income during 2012?

 

What amount will Jensen recognize as interest income during 2013?

 

What will be the balance in the Notes Receivable—Lewisburg Fabricators account at the end of 2013?

 

Accounting for long-term credit sales transactions utilizing notes receivable

 

Guthrie Corporation reports accounts receivable at a net realizable value of $2,940,000 (gross receivable of $3,000,000 minus allowance for uncollectible accounts of $60,000). Assume that there is an active market for these types of receivables and that the price is 94% of face value. To adjust the receivable's carrying value to fair value Guthrie would make which of the following entries?

 

The Fair value adjustment—accounts receivable account is an asset valuation account 

 

When a firm does not adopt the fair value option, it

 

The sale of receivables to a third party is called

 

With a loan collateralized by receivables,

 

Assuming that the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make?

 

Assume that the transaction was a factoring arrangement with recourse and included a holdback of $6,000. If the fair value of the recourse obligation is equal to the allowance of $3,500, which one of the following entries will Ritter make to record this transaction?

 

Assuming that the transaction was a collateralized loan, which one of the following entries will Ritter make to record this transaction?

 

On August 1, 2011, Jones discounted the note under the arrangement with National Bank. How much were the proceeds of the discounted note?

 

If the note were discounted on August 1 under the terms of agreement with National Bank, which one of the following journal entries would Jones record?

 

If a note receivable is discounted with recourse and the customer defaults at final payment, the seller

 

According to authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the

 

Jones Co. sells on credit and maintains an allowance for doubtful accounts equal to 2% of the company's $3,450,000 receivables balance. Due to a cash shortfall, Jones sells $275,000 of its receivables with recourse to Ninth National Bank, and the bank withholds $12,000 from the factoring proceeds to cover possible noncollections. If the noncollections eventually amount to $15,000, the entry on Jones' books when notified of this fact would be:

 

Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue

 

If a transfer of receivables is really a borrowing but is erroneously treated as a sale

 

When a company transfers receivables with recourse

 

When receivables are bundled together and transferred to another organization that issues securities collateralized by the transferred receivables, the arrangement is

 

Reasons why companies might accelerate cash collections include the following except:

 

If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than that yielded, on average, by the mortgages in the portfolio, the selling price

 

Under current GAAP, the sponsor of a special purpose entity (SPE) will have to treat a securitization as a collateralized borrowing instead of a sale if it has

 

On December 1, 2011, how much interest is accrued on this loan?

 

Which one of the following entries will Corona make to adjust the land just prior to transfer?

 

What is the amount of the restructuring gain or loss to Corona?

 

What is the amount of the receivable restructuring gain or loss to State Bank?

 

The determining factor for accounting treatment of a troubled debt restructuring when there is a continuation with modification of terms is whether

 

When the sum of the future cash flows of a restructured note is above the current note's book value, the debtor recognizes

 

Island will record this transaction to recognize

 

What will be Island's carrying value of the restructured note?

 

What effective interest rate will Island use for the restructured note?

 

If the present value interest factor for two years at 10% is .82645, what will be the new note receivable balance (rounded) for Mutual Bank?

 

Mutual Bank will record this transaction to recognize

 

What effective interest rate will Mutual Bank use for the restructured note?

 

A restructured loan can differ from the original loan in any of the several ways listed below 

 

When troubled debt is restructured via continuation with modification of debt terms, the original loan is

 

The general accounting for accounts and notes receivable under IFRS