Financial Reporting And Analysis 7th Ed By Revsine – Test Bank

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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

Financial Reporting And Analysis 7th Ed By Revsine – Test Bank

 

Sample  Questions

 

Chap002  Accrual Accounting and Net income determination

 

 

True/False

 

 

[QUESTION]

  1. Accrual accounting decouples measured earnings from operating cash inflows and outflows.

Answer:  True

Learning Objective: 02-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Accrual versus cash basis of accounting

 

[QUESTION]

  1. Cash-basis accounting provides the most useful measure of future operating performance.

Answer:  False

Learning Objective: 02-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Accrual versus cash basis of accounting

 

[QUESTION]

  1. Net asset valuation and net income determination are inextricably intertwined.

Answer:  True

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Net assets and Net income interrelationship

 

[QUESTION]

  1. 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.

Answer:  True

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Net assets and Net income interrelationship

 

[QUESTION]

  1. 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.

Answer:  True

Learning Objective: 02-03

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Accrual basis―Expense recognition

 

[QUESTION]

  1. Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.

Answer:  True

Learning Objective: 02-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Income statement―Traceable or period costs

 

[QUESTION]

  1. Traditional financial reporting presents forecasted cash flow information.

Answer:  False

Learning Objective: 02-05

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Multiple-step

 

[QUESTION]

  1. 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.

Answer:  True

Learning Objective: 02-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Unusual or infrequent items

 

[QUESTION]

  1. 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.

Answer:  True

Learning Objective: 02-09

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: EPS―Earnings per share

 

[QUESTION]

  1. The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.

Answer:  True

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Comprehensive income

 

[QUESTION]

  1. Selected unrealized gains (or losses) sometimes bypass the income statement and are reported as direct adjustments to a stockholders’ equity account.

Answer:  True

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB:  Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Comprehensive income

 

[QUESTION]

  1. The basic accounting equation may be expressed as assets = liabilities – owners’ equity.

Answer:  False

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: T Account analysis

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

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

Answer:  False

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

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

Answer:  True

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: T Account analysis

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

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

Answer: False

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Comprehensive income

 

[QUESTION]

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

Answer: True

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Accrual basis―Revenue recognition

 

 

 

Multiple Choice

 

 

[QUESTION]

  1. Which of the following statements best describes expenses?
  2. They are recorded in the accounting period when they are “earned” and become “measurable.”
  3. They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
  4. They are the expired costs or assets “used up” during the accounting period.
  5. They consist of cash payments to employees during the period for services rendered.

Answer:  c

Learning Objective: 02-03

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Accrual basis―Expense recognition

 

 

[QUESTION]

18.  The expense matching principle states that

a.  Expenses are recognized when paid.
b.  All expenses are recognized when the corresponding revenue is recorded.
c.  Some expenses are recognized when the corresponding revenue is recognized and some are spread over time.
d.  Expenses are recognized when the invoice is received.
Answer:  c
Learning Objective: 02-03
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Accrual basis―Expense recognition

 

REFERENCE: Ref. 02_01

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.

 

[QUESTION]

REFER TO: Ref. 02_01

  1. Under the cash basis, how much revenue should Canon recognize in October?
  2. $0
  3. $16,000
  4. $24,000
  5. $40,000

Answer:  b

Learning Objective: 02-01

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Accrual versus cash basis of accounting

 

 

[QUESTION]

REFER TO: Ref. 02_01

  1. Under the accrual basis, how much revenue should Canon recognize in November?
  2. $0
  3. $16,000
  4. $24,000
  5. $40,000

Answer:  a

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Accrual basis―Revenue recognition

 

[QUESTION]

REFER TO: Ref. 02_01

  1. Using the accrual basis, which one of the following entries would properly record Canon’s revenue recognition for October?
a. DR  Cash 40,000
        CR  Copier sales 40,000
b. DR  Cash 16,000
        CR  Copier sales 16,000
c. DR  Cash 16,000
DR  Accounts receivable 24,000
        CR  Copier sales 40,000
d. DR  Accounts receivable 40,000
        CR  Copier sales 40,000

Answer:  c

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Accrual basis―Revenue recognition

 

REFERENCE: Ref. 02_02

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).

 

[QUESTION]

REFER TO: Ref. 02_02

  1. What is the amount of Hickory’s cash-basis expenses for the month of May?
  2. $33,600
  3. $42,400
  4. $50,000
  5. $51,600

Answer:  c

Feedback: Cash expenses = Inventory purchases $40,000, Advertising $8,000, Delivery Costs $2,000

Learning Objective: 02-01

Difficulty: 1 Easy

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Accrual versus cash basis of accounting

 

[QUESTION]

REFERENCE: Ref. 02_02

  1. What is the amount of Hickory’s May expenses when applying the matching principle?
  2. $33,600
  3. $42,400
  4. $43,600
  5. $50,000

Answer:  c

Feedback: Accrual expenses = Cost of Goods Sold $32,000, Advertising $8,000, Delivery Costs $2,000, and Warranty Costs $1,600

Learning Objective: 02-03

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Accrual basis―Expense recognition

 

[QUESTION]
24.  Which statement below best describes when to record an expense?
a.  When the expense is paid.
b.  When the resource paid for is consumed.
c.  Always taken in one period only.
d.  Never is recognized before revenue is recognized.
Answer:  c
Learning Objective: 02-01
Difficulty: 3 Hard
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Accrual basis―Expense recognition

 

 

 

[QUESTION]
25.  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.
Answer:  d
Learning Objective: 02-09
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: EPS―Earnings per share

 

[QUESTION]

  1. Which of the following is not correct with respect to accrual accounting?
a.        Accrual accounting can produce large discrepancies between the firm’s reported profit performance and the amount of cash generated from operations.
b.       The principles that govern revenue and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting.
c.        Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance.
d.       Accrual accounting does not decouple measured earnings from operating cash inflows and outflows.
Answer:  d
Learning Objective: 02-01
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Accrual versus cash basis of accounting

 

[QUESTION]

REFERENCE: Ref. 02_02

  1. What type of cost is the advertising expense?
  2. Product cost
  3. Traceable cost
  4. Inventory cost
  5. Period cost

Answer:  d

Learning Objective: 02-04

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Traceable or period costs

 

[QUESTION]

  1. Revenue is recognized when
  2. a contract is signed by both parties.
  3. the seller completes performance required by an agreement.
  4. the buyer completes payment required under an agreement.
  5. the buyer accepts delivery and completes required payments.

Answer:  b

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Accrual basis―Revenue recognition

 

[QUESTION]

  1. Net income recognition always increases
  2. assets.
  3. net assets.
  4. liabilities.
  5. net liabilities.

Answer:  b

Feedback: Net income recognition can occur by reducing Deferred Revenue and increasing Service Revenue.  In this case, there is no change in assets, but net assets have increased.

Learning Objective: 02-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Net assets and Net income interrelationship

 

[QUESTION]

  1. The real accounting issue in net income recognition is the
  2. quantity of income recognized.
  3. type of income recognized.
  4. timing of the recognition.
  5. basis of net income recognition.

Answer:  c

Learning Objective: 02-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Accrual versus cash basis of accounting

 

[QUESTION]

  1. Which of the following is not a change in reporting entity?
  2. When combined statements replace statements of individual entities.
  3. When there is a change in the subsidiaries to be consolidated or combined.
  4. When a business combination is accounted for under the acquisition method.
  5. All of these answer choices are correct.

Answer:  c

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Change in accounting entity

 

[QUESTION]

  1. Which of the following does not properly state the reporting requirements when a change in reporting entity occurs?
  2. Comparative financial statements for prior years must be restated to reflect the new reporting entity as if it had been inexistence during all the years presented.
  3. Comparative financial statements for the prior year only must be restated to reflect the new reporting entity.
  4. The effect of the change on income before extraordinary items, net income and other comprehensive income must be restated.
  5. Per share amounts must be disclosed for all periods presented.

Answer:  b

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Change in accounting entity

 

 

[QUESTION]

Accounting errors or irregularities can occur for which reasons?

  1. simple oversight.
  2. misapplication of GAAP.
  3. management exploitation of the flexibility in GAAP.
  4. all of these answer choices are correct.

Answer:  d

Learning Objective: 02-08

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Risk Analysis

Blooms: Remember

Topic: Error Correction

 

[QUESTION]

Which of the following parties are responsible for the detection of errors and accounting irregularities in a company’s financial statements?

  1. external auditors.
  2. the SEC staff during their review process.
  3. internal audit staff and audit committee of the board of directors.
  4. all of these answer choices are correct.

Answer:  d

Learning Objective: 02-08

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Risk Analysis

Blooms: Understand

Topic: Error Correction

 

 

[QUESTION]

  1. Restatements occur for a number of reasons. Which of the following is the most common type of restatement?
  2. those related to revenue recognition.
  3. items related to core expense issues.
  4. items related to non-core expense issues.
  5. reclassification and disclosure issues.

Answer:  b

Learning Objective: 02-08

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Error Correction

 

[QUESTION]

  1. Misstatements of tax expense, improper restructuring charges, asset impairment charges and gains/losses related to acquisitions are which type of restatement?
  2. those related to revenue recognition
  3. items related to core expense issues
  4. items related to non-core expense issues
  5. reclassification and disclosure issues

Answer:  c

Learning Objective: 02-08

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Error Correction

 

[QUESTION]

  1. The matching principle requires that expenses be recognized
  2. in the same period in which all the assets are used up.
  3. in the same period in which the revenue generated by these expenses is recognized.
  4. when the costs are paid by the entity.
  5. in the same period in which the revenue generated by these expenses is received.

Answer:  b

Learning Objective: 02-03

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Accrual basis―Expense recognition

 

[QUESTION]

  1. Traceable costs are also called
  2. period costs.
  3. expired costs.
  4. product costs.
  5. administrative costs.

Answer:  c

Learning Objective: 02-04

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Traceable or period costs

 

[QUESTION]

  1. The statement, “linkage between these costs and individual sales is difficult to establish,” refers to
  2. period costs.
  3. expired costs.
  4. product costs.
  5. traceable costs.

Answer:  a

Learning Objective: 02-04

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Traceable or period costs

 

[QUESTION]

  1. Income statements are classified into sections to
  2. separate revenue recognized from deferred revenue.
  3. distinguish between sustainable and transitory income.
  4. separate real income from book income.
  5. distinguish between book income and taxable income.

Answer:  b

Learning Objective: 02-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Multiple-step

 

[QUESTION]

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

a.  Financial reporting assists statement users in forecasting future cash flows by providing an income statement format that segregates components of net income.
b.  Income statements prepared in accordance with GAAP differentiate between income components that are believed to be sustainable and those that are transitory.
c.  The income statement isolates a key figure called “income from sustainable operations.”
d.  Transitory items are disclosed separately on the income statement so that statement users can place less weight on these earnings components when forecasting future profitability.
Answer:  c
Learning Objective: 02-05
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Income statement―Multiple-step

 

[QUESTION]

  1. The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates
  2. cash flows.
  3. forecasting.
  4. tax return preparation.
  5. audits.

Answer:  b

Learning Objective: 02-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Income statement―Multiple-step

 

[QUESTION]

  1. The best measure of a firm’s sustainable income is
  2. income from continuing operations.
  3. income before income tax.
  4. income before unusual items and change in accounting principle.
  5. net income.

Answer:  a

Learning Objective: 02-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Income statement―Multiple-step

 

[QUESTION]

  1. On the income statement, income from discontinued operations is shown
  2. as a separate section of income from continuing operations.
  3. as an accounting principle change.
  4. without any income tax effect.
  5. net of taxes after income from continuing operations.

Answer:  d

Learning Objective: 02-06

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Discontinued operations

 

[QUESTION]

  1. When transitory earnings are present, which of the following correctly depicts the order used on the income statement?
  2. Income from continuing operations, unusual items, income tax expense, discontinued operations, net income.
  3. Income from continuing operations, discontinued operations, income tax expense, net income.
  4. Income from continuing operations, income tax expense, discontinued operations, net income.
  5. Income tax expense, income from continuing operations, unusual items, discontinued operations, net income.

Answer:  c

Learning Objective: 02-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Multiple-step

Topic: Income statement―Unusual or infrequent items

 

[QUESTION]

  1. 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
  2. gain or loss on the sale of equipment as part of continuing operations.
  3. gain or loss on the sale of production equipment as part of cost of goods manufactured and sold.
  4. gain or loss on the disposal of discontinued business component.
  5. income from operation of a discontinued business component.

Answer:  a

Learning Objective: 02-06

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Income statement―Unusual or infrequent items

 

[QUESTION]
47.  When reporting unusual or infrequent items in the income statement which of the following is not correct?

a.  If a material event is either unusual in nature or an infrequent occurrence it is classified on the income statement as a special or unusual item in continuing operations.
b.  If a material event is either unusual in nature or an infrequent occurrence—such as a one-time charge resulting from a major restructuring—it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company’s last major restructuring
c.  Firms that use early debt retirement on a recurring basis as part of their ongoing risk management practices will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.
d.  The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.
Answer:  b
Learning Objective: 02-05
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Income statement―Unusual or infrequent items

 

[QUESTION]

  1. A component of an entity may be a/an
  2. reportable or operating segment.
  3. subsidiary.
  4. asset group.
  5. reportable or operating segment, subsidiary, or asset group.

Answer:  d

Learning Objective: 02-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Discontinued operations

 

[QUESTION]
49.  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.
Answer:  a
Learning Objective: 02-06
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Discontinued operations

 

[QUESTION]

  1. The discontinued operations section of the income statement is comprised of which one of the following?
  2. Income from the operation of a discontinued business component and gain or loss from the disposal of the discontinued component.
  3. 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.
  4. Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component.
  5. Gain or loss from the disposal of the discontinued component, net of tax.

Answer:  b

Learning Objective: 02-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Discontinued operations

 

[QUESTION]

  1. Which of the following is not considered an unusual or infrequently occurring item on an income statement?
  2. Corporate restructuring charges.
  3. Gains and losses from sales of investments.
  4. Operating income or loss from discontinued operations.
  5. Foreign currency transaction gains and losses.

Answer:  c

Learning Objective: 02-06

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Discontinued operations

Topic: Income statement―Unusual or infrequent items

 

[QUESTION]

  1. For a disposal group to be considered held for sale, which of the following conditions are required to be met?
  2. Management has committed to a plan to see the component.
  3. The sale is probable and is expected to be completed within one year.
  4. The component is available for immediate sale in its present condition subject only to usual and customary terms for such sales.
  5. All of these conditions must be met.

Answer:  d

Learning Objective: 02-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Discontinued operations

 

[QUESTION]

  1. Which one of the following events would be considered an unusual or infrequent event?
  2. a tornado in Kansas.
  3. an earthquake in New York.
  4. a flood in St. Louis near the Mississippi River.
  5. an earthquake in southern California.

Answer:  b

Learning Objective: 02-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Income statement―Unusual or infrequent items

 

[QUESTION]

  1. A special one-time charge resulting from corporate restructurings would be reported on the income statement as a/an
  2. operating item before gross profit.
  3. special item in continuing operations.
  4. special item in continuing operations, shown net of tax.
  5. special item in discontinued operations, shown net of tax.

Answer:  b

Learning Objective: 02-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Income statement―Unusual or infrequent items

 

[QUESTION]

  1. When reporting a change in an accounting principle, the general rule requires that the current year’s income from continuing operations reflect
  2. use of the newly adopted principle for the current year recognition.
  3. use of the old principle for the current year recognition.
  4. management’s choice of either the old or newly adopted principle for the current year recognition.
  5. FASB’s designation of either the old or newly-adopted principle based on the item being changed.

Answer:  a

Learning Objective: 02-07

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Change in accounting principle

 

[QUESTION]
56.  Accounting treatment for changes in accounting principle are best described as:

 

a.  Changes in accounting principle that are only permitted when FASB issues a standard that revises GAAP.
b.  Changes in accounting principle that are always accounted for using the retrospective approach which requires only a restatement of prior years’ presented financial information.
c.  Changes  in accounting principle that may require both a restatement of prior years’ financial information and the recording of a cumulative adjustment to retained earnings.
d.  Tax effects are ignored when reporting changes in accounting principles.
Answer:   c
Learning Objective: 02-07
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Change in accounting principle

 

[QUESTION]

  1. A cumulative effect of a change in an accounting principle is measured as
  2. the difference between prior periods’ net income under the old method and what would have been reported if the new method had been used in the prior years.
  3. the after-tax difference between prior periods’ net income under the old method and what would have been reported if the new method had been used in the prior years.
  4. the difference between prior periods’ net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.
  5. the after-tax difference between prior periods’ net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.

Answer:  b

Learning Objective: 02-07

Difficulty: 3 Hard

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Change in accounting principle

 

[QUESTION]

  1. When using the retrospective approach for a change in accounting principle, disclosure rules require that
  2. prior years’ income statements presented for comparative purposes be restated to reflect use of the new principle unless it is impractical to do so.
  3. 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.
  4. 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.
  5. no prior years’ income statements be restated, and no pro forma net income figures be provided.

Answer:  a

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Change in accounting principle

 

[QUESTION]
59.  Which of the following items is not a type of accounting change?

a.  Change in accounting principles used; for example, a change from LIFO to FIFO.
b.  Change in the majority owner of the company.
c.  Change in accounting estimate; for example, a change in the useful life or salvage value of a depreciable asset.
d.  Change to consolidated financial statements from individual financial statements.
Answer:   b
Learning Objective: 02-07
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Changes―Select the type of accounting change

 

[QUESTION]

  1. When a company changes from LIFO to another inventory method, the change is reported
  2. prospectively because it is impractical to determine the effects of this change on prior years’ net income.
  3. as an error correction.
  4. as a change in an accounting estimate.
  5. using the retrospective approach.

Answer:  d

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Change in accounting principle

 

[QUESTION]

  1. When a company changes from straight-line depreciation to double-declining-balance depreciation, the change is reported
  2. prospectively because it is impractical to determine the effects of this change on prior years’ net income.
  3. as an error correction.
  4. as a change in an accounting estimate.
  5. using the retrospective approach.

Answer:  c

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Change in estimate effected by change in principle

 

[QUESTION]

  1. When a company changes from any inventory method to LIFO, the change is reported
  2. prospectively because it is usually impractical to determine the effects of this change on prior years’ net income.
  3. as an error correction.
  4. as a change in an accounting estimate.
  5. using the retrospective approach.

Answer:  a

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Change in accounting principle

 

[QUESTION]

  1. 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?
  2. $40,000
  3. $60,000
  4. $90,000
  5. $120,000

Answer:  c

Feedback: $300,000 – ($40,000 ´ 3) = $180,000 (remaining book value) ÷ 2 (remaining useful life) = $90,000

Learning Objective: 02-07

Difficulty: 3 Hard

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Change in accounting estimate

 

[QUESTION]
64.  For what reasons does management have incentive to meet analysts’ expectations?

a.  To build credibility with capital markets.
b.  To convey future earnings prospects to investors.
c.  To increase stock price.
d.  All of these answer choices are correct.
Answer:   d
Learning Objective: 02-12
Difficulty: 1 Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Earnings management

 

[QUESTION]
65.  Which statement below is not correct with respect to earnings management?

a.  It is increasingly common because of the pressure to meet analysts’ expectations.
b.  More firms just beat rather than just miss the analyst expectations.
c.  More than 80% of CEOs surveyed indicated that reporting a profit is an important benchmark.
d.  More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.
Answer:   d
Learning Objective: 02-12
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Earnings management

 

[QUESTION]

  1. GAAP requires that each set of EPS numbers includes separately reported numbers for all of the following except
  2. special or unusual items.
  3. income from continuing operations.
  4. discontinued operations.
  5. net income.

Answer:  a

Learning Objective: 02-09

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: EPS―Earnings per share

 

[QUESTION]

  1. 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
  2. normal earnings.
  3. pro forma earnings.
  4. sustainable earnings.
  5. real earnings.

Answer:  b

Learning Objective: 02-09

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: EPS―Earnings per share

 

[QUESTION]

  1. The change in equity of an entity during a period from transactions and other events from non-owner sources is known as
  2. net income.
  3. net operating income.
  4. comprehensive income.
  5. net change in assets.

Answer:  c

Learning Objective: 02-10

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Comprehensive income

 

[QUESTION]

  1. Which one of the following is part of other comprehensive income (OCI)?
  2. Unrealized gains resulting from translating foreign currency financial statements of majority-owned subsidiaries to U.S. dollar amounts.
  3. Gains on sales of treasury stock.
  4. Receipt of land donated by a governmental unit.
  5. Sale of common stock above par.

Answer:  a

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Comprehensive income

 

[QUESTION]

  1. GAAP requires firms to report comprehensive income
  2. at the end of the income statement.
  3. as one separate statement of comprehensive income.
  4. in the statement of changes in stockholders’ equity.
  5. in a statement that is displayed with the same prominence as other financial statements.

Answer:  d

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Comprehensive income

 

[QUESTION]

  1. Current U.S. GAAP permits firms to display the components of other comprehensive income in which of the following formats?
  2. as a schedule appearing in the notes to the financial statements.
  3. in a two-statement approach, one in which net income comprises one statement and a second, which presents a separate statement of comprehensive income.
  4. as part of the statement of changes in stockholders’ equity.
  5. as a part of the statement of cash flows.

Answer:  b

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Comprehensive income

 

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

a.  As a general rule, U.S. GAAP allows more opportunities for managers to change balance sheet valuations of certain assets even when management has no intention to sell these assets.
b.  Changes in the valuation of property, plant, and equipment create a Revaluation Surplus used in both IFRS and U.S. GAAP.
c.  Both IFRS and U.S. GAAP require companies to report in other comprehensive income each period the valuation changes from changes in actuarial estimates affecting defined benefit pension plans.
d.  U.S. GAAP requires a separate statement of OCI to immediately follow the income statement in the financial reporting statement.
Answer:  c
Learning Objective: 02-11
Difficulty: 2 Medium
AACSB: Diversity
AICPA: BB Global

AICPA: FN Measurement

Blooms: Remember
Topic: Comprehensive income―IFRS

 

[QUESTION]

  1. The basic accounting equation may be expressed as
  2. assets = liabilities – owners’ equity
  3. liabilities = assets + owners’ equity
  4. owners’ equity = assets – liabilities
  5. assets = owners’ equity – liabilities

Answer:  c

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. Any increase in an asset may be offset by
  2. a corresponding decrease in a liability.
  3. a decrease in some other asset account.
  4. a corresponding decrease in owner’ equity.
  5. an increase in another asset account.

Answer:  b

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB:  Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. Which of the following statements is correct regarding revenue and expense accounts?
  2. These are really owners’ equity accounts.
  3. These are really contributed capital accounts.
  4. They have no impact on the balance sheet.
  5. These are balance sheet accounts.

Answer:  a

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. A debit
  2. increases Accounts Payable.
  3. increases Cost of Goods Sold.
  4. decreases Accounts Receivable.
  5. decreases Equipment.

Answer:  b

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: T-account analysis

 

[QUESTION]

  1. Adjusting entries must be made
  2. to correct errors in the accounts.
  3. to reconcile the accounts to the budget.
  4. because auditing standards require them.
  5. because certain types of events will otherwise not be recorded in the accounts.

Answer:  d

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. Accumulated depreciation is a/an
  2. expense account.
  3. liability account.
  4. contra-asset account.
  5. owners’ equity account.

Answer:  c

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. Entering the DR or CR amount in the appropriate left or right side of the affected T-account is called
  2. posting.
  3. cross-referencing.
  4. journalizing.
  5. recording.

Answer:  a

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: T-account analysis

 

[QUESTION]
80.  Which of the following situations may create an accounting error?

a.  Simple oversight.
b.  Parties disagree on accounting for a transaction resulting in a misapplication of GAAP.
c.  Management exploits the flexibility in GAAP to inflate earnings.
d.  All of these answer choices are correct.
Answer:   d
Learning Objective: 02-08
Difficulty: 1 Easy
AACSB: Reflective
AICPA: FN Measurement
Blooms: Remember
Topic: Error corrections

 

 

[QUESTION]
81.  A debit does which of the following?

a.  Increases the value in an asset account.
b.  Increased the value in a contra-asset account.
c.  Decreases the value in a liability account.
d.  Increases the value in an asset account and also decreases the value in a liability account.
Answer:   d
Learning Objective: 02-13
Difficulty: 1 Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Transaction analysis and adjusting entries

Topic: T-account analysis

 

[QUESTION]

  1. Which of the following is a true statement?
  2. Revenue decreases owners’ equity and increases liabilities.
  3. Expenses increase owners’ equity and decrease liabilities.
  4. Revenue increases owners’ equity and expenses decrease owners’ equity.
  5. Revenue decreases owners’ equity and expenses increase owners’ equity.

Answer:  c

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Analytical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: T-account analysis

 

[QUESTION]

  1. To get revenue and expense account balances to zero requires a/an
  2. adjusting entry.
  3. closing entry.
  4. operating entry.
  5. reversing entry.

Answer:  b

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. T-account analysis can be used to gain insights into why accrual basis earnings and cash basis earnings differ and to
  2. journalize future transactions.
  3. reconstruct transactions that have occurred during a given reporting period.
  4. post transactions that have occurred during a given reporting period.
  5. determine the current market price of common stock.

Answer:  b

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: T-account analysis

 

[QUESTION]

  1. Working capital accounts include
  2. all assets.
  3. all assets and liabilities.
  4. current assets and all liabilities.
  5. current assets and current liabilities.

Answer:  d

Learning Objective: 02-13

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Transaction analysis and adjusting entries

 

[QUESTION]
86.  Adjusting entries are used in all but which of the following situations?

a.  Prepayments.
b.  Deferred Revenue and Expenses.
c.  Accrued Revenue and Expenses.
d.  Prepayments, Deferred Revenue, Accrued Expenses, Accrued Revenue.
Answer:   b
Learning Objective: 02-13
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. Recent changes in _______ accounting standards require companies to group items within OCI based on __________:
  2. U.S. GAAP; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
  3. IFRS; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
  4. U.S. GAAP; their expected future categorization on the income statement into income from continuing operations and discontinued operations.
  5. IFRS; their expected future categorization on the income statement into income from continuing operations and discontinued operations.

Answer:  b

Learning Objective: 02-11

Difficulty: 3 Hard

AACSB: Diversity

AICPA: FN Measurement

AICPA:  BB Global

Blooms: Remember

Topic: Comprehensive income―IFRS

 

[QUESTION]

  1. When actuarial estimates related to defined benefit pension plans are adjusted
  2. Both U.S. GAAP and IFRS require companies to report these valuation changes in OCI each period.
  3. Only U.S. GAAP requires companies to report these valuation changes in OCI each period.
  4. Only IFRS requires companies to report these valuation changes in OCI each period.
  5. Neither U.S. GAAP nor IFRS requires companies to report these valuation changes in the financial statements.

Answer:  a

Learning Objective: 02-10

Difficulty: 2 Medium

AACSB: Diversity

AICPA: FN Measurement

AICPA: BB Global

Blooms: Remember

Topic: Comprehensive income―IFRS

 

[QUESTION]
89.  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.
Answer:   d
Learning Objective: 02-12
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Earnings management

 

 

 

[QUESTION]
90.  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.
Answer:   a
Learning Objective: 02-12
Difficulty: 2 Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Earnings management

 

Essay and Computational Questions

 

 

[QUESTION]

  1. In its accrual-basis income statement for the year ended December 31, 2018, Ralph Company reported revenue of $2,565,000. Additional information was as follows:
Accounts receivable 12/31/17 $418,500
Uncollectible accounts written off during 2018 17,200
Accounts receivable 12/31/18 391,700

 

Required:

Under the cash basis of net income determination, how much should Ralph report as revenue for 2018?

 

Answer:

Accrual basis revenue $2,565,000
+  Beginning accounts receivable balance 418,500
−  Ending accounts receivable balance (391,700)
−  Write-offs of accounts receivable (17,200)
Cash basis revenue (cash collections on accounts receivable) $2,574,600

 

Feedback: Under the cash basis of net income determination, the company would not regard its accounts receivable as revenue.  To find cash basis revenue, add the decrease in accounts receivable to the revenue figure and subtract the write-offs to determine cash collections on accounts receivable.

Learning Objective: 02-01

Learning Objective: 02-13

Difficulty: 3 Hard

AACSB: Knowledge Application

AICPA: FN Measurement

Blooms: Analyze

Topic: Accrual versus cash basis of accounting

Topic: T-account analysis

 

[QUESTION]

  1. John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2018 Dr. Hamilton collected $220,000 in fees from his patients.  At December 31, 2017, Dr. Hamilton had accounts receivable of $30,000.  At December 31, 2018 Dr. Hamilton had accounts receivable of $35,000 and had collected deferred fee revenue of $8,000.

 

Required:

On the accrual basis, what was Dr. Hamilton’s patient service revenue for 2018?

 

Answer:

Cash basis revenue $220,000
− Beginning accounts receivable (12/31/17) (30,000)
+ Ending accounts receivable (12/31/18) 35,000
− Deferred fee revenue on 12/31/18 (8,000)
= Accrual basis revenue $217,000

 

Feedback: To change Dr. Hamilton’s revenue from cash basis to an accrual basis, add the recognized but uncollected accounts receivable and subtract the beginning accounts receivable collected in 2018 but recognized in 2017.  Also, subtract fees collected in 2018 but not recognized until after 2018 (deferred fee revenue at 12/31/18).

Learning Objective: 02-01

Learning Objective: 02-02

Learning Objective: 02-13

Difficulty: 3 Hard

AACSB: Knowledge Application

AICPA: FN Measurement

Blooms: Analyze

Topic: Accrual versus cash basis of accounting

Topic: Accrual basis―Revenue recognition

Topic: T-account analysis

 

 

[QUESTION]

  1. Under Bart Company’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim reports, Bart makes monthly estimated charges to insurance expense with credits to prepaid insurance.  Additional information for the year ended December 31, 2018 is as follows:
Prepaid insurance at December 31, 2017 $310,000
Charges to insurance expense during 2018, including a year-end

adjustment of $50,000

 

975,000

Unexpired insurance premiums at December 31, 2018 265,000

 

Required:

What was the total amount of insurance premiums paid by Bart during 2018?

 

Answer:

Charges to insurance expense during 2018 $975,000
− Decrease in prepaid insurance ($310,000 − $265,000) (45,000)
= Insurance premiums paid in 2018 $930,000

 

Feedback: The total amount of insurance premiums paid in 2018 is equal to the insurance expense for 2018 less the decline in the balance in prepaid insurance.

Learning Objective: 02-01

Learning Objective: 02-13

Difficulty: 3 Hard

AACSB: Knowledge Application

AICPA: FN Measurement

Blooms: Analyze

Topic: Accrual versus cash basis of accounting

Topic: T-account analysis

 

[QUESTION]

  1. Schlegel Department Store sells gift certificates—redeemable for store merchandise—that expire one year after their issuance. Schlegel has the following information pertaining to its gift certificates sales and redemptions:
Unredeemed certificates at 12/31/17 $90,000
2018 sales 400,000
2018 redemptions of prior year sales 60,000
2018 redemptions of current year sales 325,000

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

 

Required:

In its 2018 income statement, what amount should Schlegel report as gift certificate revenue?

 

Answer:

2017 sales redeemed or expired in 2018 $90,000
2018 sales redeemed in 2018 325,000
     2018 gift certificate revenue $415,000

 

Feedback: Any 2017 certificates unredeemed at 1/1/18 will either be redeemed or expire in 2018 and thus should be included in 2018 net income along with the dollar amount of certificates sold and redeemed in 2018.

Learning Objective: 02-01

Learning Objective: 02-02

Learning Objective: 02-13

Difficulty: 2 Medium

AACSB: Knowledge Application

AICPA: FN Measurement

Blooms: Analyze

Topic: Accrual versus cash basis of accounting

Topic: Accrual basis―Revenue recognition

Topic: Transaction analysis and adjusting entries

 

[QUESTION]

  1. Lazer Industries, Inc. manufactures medical equipment parts and accessories. Assume all amounts are pre-tax and a 30% tax rate for 2018.
Net sales $1,200,000
Interest expense $150,000
Gain on sale of discontinued operations $400,000
Cost of goods sold $300,000
Selling, general and administrative expenses $170,000
Gain on sale of investments $30,000
Restructuring charges $20,000

 

 

 

 

 

 

 

 

 

Required:

Prepare a multiple-step income statement for Lazer Industries, Inc. based on the available information for the year ended December 31, 2018.  Indicate all negative numbers using parentheses, and include all subtotals, appropriately labeled, to present your income statement in good form.

 

Answer:

 

                                     Lazer Industries, Inc.
                                       Income Statement
                        For the year ended December 31, 2018
Net sales $1,200,000
Cost of goods sold  (300,000)
Gross profit 900,000
Selling, general and administrative expenses  (170,000)
Unusual or infrequently occurring items:
Interest expense  (150,000)
Gain on sale of investments  30,000
Restructuring charges         (20,000) 
Income from continuing operations before income tax 590,000
Income tax expense (177,000)
Income from continuing operations  413,000
Discontinued operations:
Gain on sale of discontinued operations, net of tax 280,000
Net income $693,000

 

Learning Objective: 02-05

Difficulty: 3 Hard

AACSB: Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Income statement―Multiple-step

 

[QUESTION]

  1. Berg, Inc. provides exotic wedding planning services. Berg’s facilities are located in an elevated area with a dry climate.  Assume all amounts are pre-tax and a 30% tax rate for 2018.
Interest expense $30,000
Cost of goods sold 900,000
Flood damage to facilities 60,000
Revenue 2,100,000
Office salaries expense 150,000
Advertising expense 180,000
Rent expense 100,000
Restructuring charges 80,000

 

Required:

Based on the available information, provide a multiple-step income statement for Berg, Inc. for the year ended December 31, 2018. Indicate all negative numbers using parentheses, and include all subtotals, appropriately labeled, to present your income statement in good form.

 

Answer:

                                                     Berg, Inc.
                                              Income Statement
                                For the year ended December 31, 2018
Revenue $2,100,000
Cost of goods sold (900,000)
Gross profit 1,200,000)
Selling, general and administrative expenses:
Office salaries expense (150,000)
Advertising expense (180,000)
Rent expense (100,000)
Unusual or infrequently occurring items:
Interest expense (30,000)
Flood damage to facilities (60,000)
Restructuring charges (80,000)
Income from continuing operations before income tax 600,000
Income tax expense (180,000)
Net income $420,000

 

Learning Objective: 02-05

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Income statement―Multiple-step

 

[QUESTION]

  1. On August 1, 2018, Alpha Co. approved a plan to dispose of an unprofitable segment of its business. Alpha expected that the sale would occur on April 30, 2019, at an estimated gain of $250,000.  The segment had actual and estimated operating profits (losses) as follows:
Realized loss from 1/1/18 to 7/31/18 ($400,000)
Realized loss from 8/1/18 to 12/31/18 (250,000)
Expected loss from 1/1/19 to 4/30/19 (300,000)

Assume Alpha’s tax rate is 30%.

 

Required:

In its 2018 income statement, what should Alpha report as profit or loss from discontinued operations (net of tax effects)?

 

Answer:

Realized loss from 1/1/18 to 7/31/18 ($400,000)
Realized loss from 8/1/18 to 12/31/18 (250,000)
Total pre-tax loss (650,000)
Tax benefit at 30% 195,000
Loss from discontinued operations, net of tax effect ($455,000)

 

Feedback: Under GAAP, results of operations on an operating segment or component of an entity classified as held for sale are to be reported in discontinued operations in the periods in which they occur (net of tax effects).  None of the expected profit from operating the segment or component of the entity in 2019 or the estimated gain on sale is recognized in 2018. These amounts will be recognized in 2019 as they occur.

Learning Objective: 02-06

Difficulty: 3 Hard

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Discontinued operations

 

[QUESTION]

  1. On November 15, 2018, Jones Co. sold a segment of its business for $2,750,000. The net book value of the segment at the time of its disposal was $2,900,000.  Jones had pretax income from operations of $1,750,000 for 2018 which included $360,000 recognized by the discontinued segment prior to its disposal.  Assume Jones’ tax rate is 30%.

 

Required:

Prepare a partial income statement for Jones Co. for 2018, beginning with pretax income from continuing operations.

 

Answer:

Income from continuing operations ($1,750,000 − $360,000) $1,390,000
Income tax expense ($1,390,000 × .30) 417,000
Income from continuing operations 973,000
Discontinued operations:
Income from discontinued operations (net of taxes of $108,000) from 1/1/18 through 11/15/18  

252,000

Loss on disposal of discontinued operations (net of tax benefit of $45,000) (105,000)
Net income $1,120,000

 

Feedback: Sale price of segment − book value of segment = gain (loss) on disposal = $2,750,000 − $2,900,000 = $(150,000) pretax loss.

Learning Objective: 02-06

Difficulty: 3 Hard

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

 

[QUESTION]

  1. Delta Co. began operations on January 1, 2018. During 2018 and 2019, the company used the weighted-average method for its inventory costing.    In 2020, the company changed its method of inventory costing to FIFO so that its financial statements would be more comparable to those of other firms in its industry.  If the FIFO method had been used, Delta’s cost of goods sold would have been $45,000 less in 2018 and $35,000 less in 2019.  Delta’s income statements, as originally presented, appear below.  Delta’s tax rate is 30%.

 

2018 2019 2020
Sales $1,000,000 $1,100,000 $1,210,000
Cost of goods sold 645,000 695,000 726,000
Gross profit 355,000 405,000 484,000
Selling, general and administrative expenses 250,000 255,000 265,000
Depreciation expense 55,000 55,000 55,000
Income before tax 50,000 95,000 164,000
Income tax expense 15,000 28,500 49,200
Net income $35,000 $66,500 $114,800

 

Required:

Assume that for comparison purposes Delta presents 2018 and 2019 income statements in its 2020 annual report.  Revise Delta’s 2018 and 2019 income statements to appear as they should in the 2020 annual report.

 

Answer:

2018 2019 2020
Sales $1,000,000 $1,100,000 $1,210,000
Cost of goods sold 600,000 660,000 726,000
Gross profit 400,000 440,000 484,000
Selling, general and administrative expenses 250,000 255,000 265,000
Depreciation expense 55,000 55,000 55,000
Income before taxes 95,000 130,000 164,000
Income tax expense 28,500 39,000 49,200
Net income $66,500 $91,000 $114,800

 

Feedback: Adjustment to inventory = cost of goods sold as originally reported under weighted-average – cost of goods sold under FIFO = ($645,000 + $695,000) − ($600,000 + $660,000) = $80,000 over the two-year period of 2018 and 2019.  Since pretax income—as restated for the two years—is increased by $80,000, taxes on the increase @ 30% = $24,000 total for the two years.

Learning Objective: 02-07

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: Change in accounting principle

 

[QUESTION]

  1. An analyst gathered the following information about a company whose fiscal year end is December 31, 2018.
Net income for the year was $23.7 million.
Preferred stock dividends of $3 million were paid for the year.
Common stock dividends of $6 million were paid for the year.
There were 10 million shares of common stock outstanding on January 1, 2018.
The company issued 6 million new shares of common stock on July 1, 2018.
The capital structure does not include any potentially dilutive securities.

 

Required:

Calculate the company’s basic earnings per share for 2018.

 

Answer:

Net income – Preferred stock dividend = $23.7 − $3.0 = $20.7 million.

Weighted Average number of common shares = (0.5 × 10) + (0.5 × 16) = 13 million shares.

EPS = $20.7 million net income ÷ 13 million shares = $1.59 per share.

 

Learning Objective: 02-08

Difficulty: 2 Medium

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Apply

Topic: EPS―Earnings per share

 

[QUESTION]

  1. Primo Landscaping commenced its business on January 1, 2018. On December 31, 2018, Primo Landscaping did not record any adjusting entries with respect to the following transactions:
a. During the first year of its operations, Primo purchased supplies in the amount of $10,000 (debited to “Supplies expense”), and of this amount, $3,000 were unused as of December 31, 2018.
b. On March 15, 2018 Primo received $36,000 for landscape maintenance services to be rendered for 24 months (beginning July 1, 2018).  This amount was credited to “Landscaping revenue.”
c. The company’s fuel bill for $1,300 for the month of December 2018 was not received until January 15, 2019.
d. The company borrowed $100,000 from First Bank on April 1, 2018 at an interest rate of 12% per year.  The principal, along with all of the interest, is due on March 30, 2019.
e. On January 17, 2018 the company purchased a backhoe for $65,000.  The backhoe is expected to last for 10,000 hours and have no salvage value.  During 2018, Primo operated the backhoe for 500 hours.

 

Required:

Complete the table below, showing the effect of the omission of each year-end adjusting entry on assets, liabilities, and net income.  Use “OS” for overstated, “US” for understated, and “NE” for no effect.

Item Number  

Effect of Omission

 

Assets

 

Liabilities

 

Net Income

a. Direction of effect

Dollar amount of effect

b. Direction of effect

Dollar amount of effect

c. Direction of effect

Dollar amount of effect

d. Direction of effect

Dollar amount of effect

e. Direction of effect

Dollar amount of effect

 

Answer:

Item Number  

Effect of Omission

 

Assets

 

Liabilities

 

Net Income

a. Direction of effect

Dollar amount of effect

US

$3,000

NE US

$3,000

b. Direction of effect

Dollar amount of effect

NE US

$27,000

OS

$27,000

c. Direction of effect

Dollar amount of effect

NE US

$1,300

OS

$1,300

d. Direction of effect

Dollar amount of effect

NE US

$9,000

OS

$9,000

e. Direction of effect

Dollar amount of effect

OS

$3,250

NE OS

$3,250

 

Feedback: a.  Asset not recorded = $3,000 supplies on hand at 12/31/2018.  b.  Deferred revenue not adjusted for = $1,500 per month for services to be rendered from 1/1/2019 to 6/30/2020.  c.  Fuel expense not recorded = $1,300.  d.  Interest expense for 9 months not accrued = $100,000 × 0.12 × 9/12 = $9,000.  e.  Depreciation expense not recorded = $65,000 ÷ 100,000 hours = $6.50/hour depreciation rate × 500 hours used in 2018 = $3,250.

Learning Objective: 02-13

Difficulty: 3 Hard

AACSB: Knowledge Application

AICPA: FN Measurement

Blooms: Analyze

Topic: Transaction analysis and adjusting entries

File: Chapter 4 Structure of the Balance Sheet and Statement of Cash Flows

 

True/False

 

[QUESTION]

  1. Liquidity refers to how quickly noncurrent assets will be converted into cash to pay liabilities.

Answer: False

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Classification

 

[QUESTION]

  1. A common-size balance sheet presents each item as a percentage of total assets.

Answer: True

Learning Objective: 04-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business information from financial statements

 

[QUESTION]

  1. Companies having cash denominated in foreign currency units will not translate those units into U.S. dollars because cash has the same value in all currencies.

Answer: False

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

Blooms: Understand

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. Inventory and accounts receivable are both carried at net realizable value.

Answer: False

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. Deferred income taxes will be reported as either a noncurrent asset or noncurrent liability.

Answer: True

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Balance sheet―Classification

 

[QUESTION]

  1. It is permissible for a firm that reports in accordance with IFRS to emphasize its liquidity by placing current assets and current liabilities in close proximity to one another on the balance sheet.

Answer: True

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

Blooms: Understand

Topic: IFRS and US GAAP differences―Balance sheet

 

[QUESTION]

  1. A related party transaction occurs when a company enters a transaction with individuals or other companies that are connected in some way with it or its management.

Answer: True

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

[QUESTION]

  1. Events that occur after the financial statements are issued are referred to as subsequent events.

Answer: False

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

[QUESTION]

  1. The statement of cash flows shows the user why a firm’s investments and financial structure have changed between two balance sheets dates.

Answer: True

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Cash flow―Explain changes in balance sheet

 

[QUESTION]

  1. The cash flow statement explains why a firm’s cash position has changed between successive balance sheet dates while simultaneously explaining the changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same period.

Answer: True

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Cash flow―Explain changes in balance sheet

 

[QUESTION]

  1. Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.

Answer: False

Learning Objective: 04-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Distinguish categories

 

[QUESTION]

  1. Depreciation is added back to net income to determine cash from operating activities under the indirect method.

Answer: True

Learning Objective: 04-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Indirect method

 

 

[QUESTION]

  1. Under the direct method for cash flow statement preparation, net cash flows from operating activities is calculated by adjusting net income for the differences between accrual-basis revenues and expenses and cash inflows and outflows during the period.

Answer: False

Learning Objective: 04-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Direct method

 

[QUESTION]

  1. Under U.S. GAAP, cash interest from investments is reported on the statement of cash flows as part of investing activities whereas under IFRS, cash interest from investments is reported as part of financing activities.

Answer: False

Learning Objective: 04-09

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

Blooms: Understand

Topic: IFRS and US GAAP differences―Cash flow statement

 

[QUESTION]

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

Answer: True

Learning Objective: 04-08

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurment

Blooms: Understand

Topic: Cash flow―Changes in current accounts

 

 

Multiple Choice

 

 

[QUESTION]

  1. Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events defines
  2. assets.
  3. liabilities.
  4. equity.
  5. retained earnings.

Answer: a

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Assets

 

[QUESTION]

  1. The residual interest in the resources of an entity that remains after deducting its debts to third parties defines
  2. assets.
  3. liabilities.
  4. equity.
  5. retained earnings.

Answer: c

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Liabilities and stockholders equity

 

[QUESTION]

  1. 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
  2. assets.
  3. liabilities.
  4. equity.
  5. retained earnings.

Answer: b

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Liabilities and stockholders equity

 

[QUESTION]

  1. The balance sheet provides information on all of the following except
  2. how management invested its money.
  3. where the money came from.
  4. assessing rates of return.
  5. the market price of the company’s stock.

Answer: d

Learning Objective: 04-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Business information from financial statements

 

[QUESTION]

  1. Contributed capital might be a negative dollar amount because
  2. net losses exceeded net income over the years.
  3. excess liabilities reduced contributed capital.
  4. treasury stock was in excess of stock originally issued.
  5. dividends paid were in excess of net income accumulated in retained earnings.

Answer: c

Learning Objective: 04-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Business information from financial statements

 

[QUESTION]

  1. Accrued liabilities represent
  2. income that has not yet been recognized on the income statement.
  3. expenses that have not yet been recognized on the income statement.
  4. expenses that have been recognized on the income statement but not yet been paid.
  5. income that has been recognized on the income statement but not yet collected.

Answer: c

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Balance sheet―Liabilities and stockholders equity

 

 

[QUESTION]

  1. Balance sheet amounts would not be measured as
  2. effective value.
  3. fair value.
  4. present value.
  5. historical cost value.

Answer: a

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. Goodwill arising from a business combination is reported on the balance sheet as a(n)
  2. current asset.
  3. fair value asset.
  4. impaired asset.
  5. intangible asset.

Answer: d

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Balance sheet―Assets

 

[QUESTION]

  1. Balance sheets prepared in other countries using international accounting standards (IFRS) might use different account titles than are allowed for US. GAAP, such as
  2. Capital reserve.
  3. Share premium.
  4. Hedging reserve.
  5. all of these answer choices might be used in balance sheets prepared using IFRS.

Answer: d

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

Blooms: Understand

Topic: IFRS and US GAAP differences―Balance sheet

 

[QUESTION]

  1. Balance sheets prepared in compliance with U.S. GAAP reflect a mixture of
  2. historical cost and future cash values.
  3. current value and discounted future cash flows.
  4. discounted cash flows and future values.
  5. historical cost, fair value, net realizable value, and discounted present values.

Answer: d

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. Current assets are assets expected to
  2. be converted to cash within twelve months.
  3. be converted to cash within twelve months or one operating cycle if the operating cycle is longer than twelve months.
  4. remain on the books for at least twelve months.
  5. remain on the books for at least twelve months or one operating cycle if the operating cycle is longer than twelve months.

Answer: b

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Classification

 

[QUESTION]

  1. Cash is always measured for the balance sheet at
  2. future transaction value.
  3. current market value.
  4. realizable future value.
  5. net transaction value.

Answer: b

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. He notices that the Retained Earnings account increased from the beginning of the year. This information is used to
  2. increase cash flow from financing as it indicates receipt of payments from customers.
  3. decrease cash flow from investing as it indicates payment of debt.
  4. increase cash flow from operations as it signifies a net income.
  5. decrease cash flow from operations as it indicates a net loss.

Answer: c

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Critical Thinking

Blooms:  Apply

Topic: Cash flow—Explain changes in balance sheet

 

[QUESTION]

  1. 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
  2. increase cash flow from operating activities.
  3. increase cash flow from investing activities.
  4. decrease cash flow from investing activities.
  5. decrease cash flow from operating activities.

Answer: a

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: Critical Thinking

Blooms:  Apply

Topic: Cash flow—Explain changes in balance sheet

 

[QUESTION]

  1. 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
  2. decrease cash flow from financing activities.
  3. decrease cash flow from investing activities.
  4. increase cash flow from operating activities.
  5. decrease cash flow from investing activities.

Answer: b

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: Critical Thinking

Blooms: Apply

Topic: Cash flow—Explain changes in balance sheet

 

 

[QUESTION]

  1. 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
  2. decrease cash flow from financing activities.
  3. increase cash flow from investing activities.
  4. decrease cash flow from operating activities.
  5. increase cash flow from operating activities.

Answer: d

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: Critical Thinking

Blooms: Apply

Topic: Cash flow—Explain changes in balance sheet

 

[QUESTION]

  1. Net property, plant and equipment are reported on the balance sheet at
  2. current market value.
  3. historical cost.
  4. historical cost minus accumulated depreciation.
  5. net realizable value.

Answer: c

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. Current liabilities are reported on the balance sheet at
  2. current market value.
  3. historical cost.
  4. discounted present value.
  5. future value.

Answer: b

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Long-term debt is reported on the balance sheet at
  2. current market value.
  3. net realizable value.
  4. present value.
  5. future value.

Answer: c

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. Cash interest from investments is recorded as _______ in statements of cash flows for U.S. GAAP, but can be recorded as ________ when using IFRS.
  2. cash flows from investing activities / cash flows from financing activities
  3. cash flows from financing activities / cash flows from operating activities
  4. cash flows from operating activities / cash flows from financing activities
  5. cash flows from operating activities / cash flows from investing activities

Answer: d

Learning Objective: 04-09

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: IFRS and US GAAP differences – Cash flow statement

 

 

[QUESTION]

  1. Balance sheets developed under US GAAP
  2. may, but are not required to, list assets from most liquid to least liquid.
  3. must list assets from most liquid to least liquid.
  4. must list assets from least liquid to most liquid.
  5. must list assets in alphabetical order.

Answer: b

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: IFRS and US GAAP differences—Balance sheet

 

 

[QUESTION]

  1. Balance sheets prepared under IFRS
  2. may list assets and liabilities from least liquid to most liquid.
  3. must list assets, but not liabilities in order of liquidity.
  4. must list assets and liabilities from least liquid to most liquid.
  5. must list liabilities, but not assets, from most to least liquid.

Answer: a

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: IFRS and US GAAP differences—Balance sheet

 

 

[QUESTION]

  1. The Common Stock account is reported on the balance sheet at the
  2. par value of the stock.
  3. current market value of the stock.
  4. net realizable value of the stock.
  5. discounted present value of the future dividends.

Answer: a

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. The Additional Paid-In Capital account is reported on the balance sheet at the
  2. current market value of the stock minus par value.
  3. original sales price of the stock minus the par value.
  4. net realizable value of the stock minus par value.
  5. discounted present value of the future dividends minus par value.

Answer: b

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. The Retained Earnings account is comprised of
  2. cash retained in the business.
  3. cash reinvested in the business by shareholders.
  4. the cumulative earnings less dividends since the inception of the corporation.
  5. the earnings of the corporation for the current year.

Answer: c

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Liabilities and stockholders equity

 

 

[QUESTION]

  1. Retained earnings are reported on the balance sheet at
  2. historical cost.
  3. current market value.
  4. net realizable value.
  5. a mixture of different measurement bases.

Answer: d

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

[QUESTION]

  1. In a common-size balance sheet, each balance sheet account is expressed as a percentage of total
  2. liabilities.
  3. assets.
  4. shareholders’ equity.
  5. assets plus shareholders’ equity.

Answer: b

Learning Objective: 04-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Business information from financial statements

 

 

[QUESTION]

  1. Common-size balance sheets may be used for all the following except
  2. gaining insights into the nature of a company’s operations.
  3. analyzing a company’s asset and financial structure.
  4. determining how management assesses the risks a company faces.
  5. learning about the underlying economics of an industry.

Answer: c

Learning Objective: 04-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Business information from financial statements

 

[QUESTION]

  1. Under U.S. GAAP, assets are presented in decreasing order of liquidity. Under IFRS,
  2. tangible assets may be presented first followed by the current assets displayed in increasing order of liquidity.
  3. the current assets are displayed in increasing order of liquidity.
  4. investments are listed first in descending order of maturity.
  5. a company may present its assets in alphabetical order if it so desires.

Answer: a

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Blooms: Understand

Topic: IFRS and US GAAP differences―Balance sheet

 

[QUESTION]

  1. The term “consolidated” is used in financial statements under U.S. GAAP to refer to the financial reporting for a parent and its subsidiaries. The equivalent term used on balance sheets in the United Kingdom is
  2. cooperative.

b  satellite.

  1. consolidated.
  2. group.

Answer: d

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Blooms: Understand

IFRS and US GAAP differences―Balance sheet

 

 

[QUESTION]

  1. All the following disclosures would appear in the Summary of Significant Accounting Policies except
  2. inventory method.
  3. depreciation method.
  4. revenue recognition method.
  5. financing method.

Answer: d

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

[QUESTION]

  1. Notes to the financial statements typically contain all the following except
  2. a summary of significant accounting policies.
  3. disclosure of important subsequent events.
  4. management’s discussion and analysis.
  5. related-party transactions.

Answer: c

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

[QUESTION]

  1. Which one of the following equations explains why successive balance sheets can be used to prepare a firm’s cash flow statement?
  2. Assets = Liabilities – Equity
  3. Cash – Noncash assets = Liabilities – Equity
  4. D Cash = D Liabilities – D Noncash assets + D Stockholders’ equity
  5. D Cash = D Liabilities + D Stockholders’ equity

Answer: c

Learning Objective: 04-06

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Cash flow―Explain changes in balance sheet

 

 

[QUESTION]

  1. The change in a firm’s cash position between successive balance sheet dates will not equal the reported net income for that period for all the following reasons except:
  2. Reported net income usually will not equal cash flow from operating activities because noncash revenues and expenses are often recognized as part of accrual income.
  3. Reported net income usually will not equal cash flow from operating activities because certain operating cash inflows and outflows are not recorded as revenues or expenses under accrual accounting in the same period the cash flows occur.
  4. Changes in cash are also caused by nonoperating investing activities like the purchase of treasury stock.
  5. Additional changes in cash are caused by financing activities like the repayment of a bank loan.

Answer: c

Learning Objective: 04-06

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Critical Thinking

Blooms: Analyze

Topic: Cash flow―Explain changes in balance sheet

 

 

[QUESTION]

  1. Operating activities result from the cash effects of
  2. producing and delivering goods and services.
  3. purchasing and disposing of fixed assets used in production of revenue.
  4. borrowing and repaying loans used in the production of revenue.
  5. selling stocks and bonds to raise capital for the generation of revenue.

Answer: a

Learning Objective: 04-07

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Cash flow statement―Distinguish categories

 

[QUESTION]

  1. Investing activities include the cash effects of
  2. producing and delivering goods and services.
  3. purchasing and disposing of productive assets used in production of revenue.
  4. borrowing and repaying loans used to purchase equipment.
  5. selling stocks and bonds to raise capital to purchase land.

Answer: b

Learning Objective: 04-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Distinguish categories

 

 

[QUESTION]

  1. Financing activities include the cash effects of
  2. producing and delivering goods and services.
  3. purchasing and disposing of productive assets used in production of revenue.
  4. purchasing and disposing of debt securities of other companies.
  5. selling stocks and bonds to raise capital used to produce revenue.

Answer: d

Learning Objective: 04-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Distinguish categories

 

[QUESTION]

  1. Cash flows from operating activities include:
  2. cash payments received from customers.
  3. increases in Accumulated Depreciation.
  4. deferred income taxes.
  5. All of these would be included in cash flows from operating activities.

Answer: d

Learning Objective: 04-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement – Distinguish categories

 

REFERENCE: Ref. 04_01

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

Assets Year 1 Year 2
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
   
 

 

[QUESTION]

REFER TO: Ref. 04_01

  1. Using the indirect method to create the operating activities section of the statement of cash flows, the cash flow from accounts receivable would be recorded as
  2. an increase of $50,000
  3. an increase of $150,000
  4. a decrease of $50,000
  5. a decrease of $150,000

Answer: c

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

[QUESTION]

REFER TO: Ref. 04_01

  1. 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
  2. a decrease of $400,000
  3. an increase of $400,000
  4. an increase of $150,000
  5. a decrease of $150,000.

Answer: d

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Critical Thinking

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

 

[QUESTION]

REFER TO: Ref. 04_01

  1. The change in the balance of the common stock account would be recorded on the statement of cash flows as
  2. an increase of $100,000 under financing activities.
  3. an increase of $100,000 under investing activities.
  4. an increase of $100,000 under operating activities.
  5. an increase of $300,000 under financing activities.

Answer: a

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Critical Thinking

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

[QUESTION]

REFER TO: Ref. 04_01

  1. The changes in the Accounts Payable balance would be recorded on the statement of cash flows as
  2. an increase of $50,000 under financing activities.
  3. a decrease of $50,000 under financing activities.
  4. an increase of $50,000 under operating activities.
  5. an decrease of $50,000 under operating activities.

Answer: d

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

 

[QUESTION]

REFER TO: Ref. 04_01

  1. The change in the equipment balance would be recorded on the statement of cash flows as
  2. a decrease of $50,000 under investing activities.
  3. am increase of $50,000 under investing activities.
  4. a decrease of $150,000 under investing activities.
  5. an increase of $150,000 under operating activities.

Answer: a

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Critical Thinking

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

 

[QUESTION]

REFER TO: Ref. 04_01

  1. The change in the balance of the Bonds Payable account would be recorded on the statement of cash flows as
  2. an increase of $20,000 under financing activities.
  3. an increase of $80,000 under investing activities.
  4. a decrease of $20,000 under financing activities.
  5. a decrease of $80,000 under operating activities.

Answer: c

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Critical Thinking

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

 

[QUESTION]

  1. Which of the following statements is not true?
  2. The indirect method begins with net income.
  3. Cash flows from operating activities will differ between the direct and indirect methods.
  4. Most firms use the indirect method to prepare the statement of cash flows.
  5. The direct method presents cash inflows and outflows.

Answer: b

Learning Objective: 04-05

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms:  Understand

Topic: Cash flow statement—Direct method

Topic: Cash flow statement—Indirect method

 

 

REFERENCE: Ref. 04_02

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

Debit Credit
Cash and cash equivalents

Accounts receivable

$345,000

115,000

Inventory 120,000
Prepaid insurance 7,500
Prepaid rent

Equipment

Accumulated depreciation – Equipment

40,000

265,000

 

 

65,000

Accounts payable

Accrued liabilities

Notes payable, due in 2020

Common stock

Additional paid-in capital

Retained earnings

Total

 

 

 

 

 

 

$892,500

45,000

10,000

135,000

300,000

87,500

250,000

$892,500

 

 

[QUESTION]

REFER TO: Ref. 04_02

  1. What would Barden report as current assets on its balance sheet?
  2. $460,000
  3. $580,000
  4. $892,500
  5. $627,500

Answer: d

Feedback: $345,000 cash + 115,000 A/R + 120,000 Inventory + 7,500 Prepaid insurance + 40,000 Prepaid rent

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Balance sheet—Classification

 

[QUESTION]

REFER TO: Ref. 04_02

  1. What would Barden report as total stockholders’ equity on its balance sheet?
  2. $300,000
  3. $387,500
  4. $637,500
  5. $87,500

Answer: c

Feedback:  $300,000 Common stock + $87,500 Additional paid-in capital + $250,000 Retained earnings = $637,500

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Analytical Thinking

AICPA: FN Critical Thinking

Blooms: Analyze

Topic: Balance sheet—Classification

 

[QUESTION]

  1. A consolidated balance sheet
  2. includes the net assets of the parent company and all of its subsidiaries.
  3. reports separately the net assets of the parent company and its subsidiaries
  4. includes the net assets of the parent company and all components in which it owns more than 75% of the outstanding voting stock.
  5. includes the net assets of only the subsidiary companies.

Answer: a

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic:  Balance sheet—Measurement

 

 

[QUESTION]

  1. Which of the following statements about retained earnings is not true?
  2. Retained earnings reflect the net income of previous accounting periods only.
  3. Retained earnings measures the cumulative earnings of the company since inception, minus dividends distributed.
  4. Retained earnings represents cumulative earnings that have been reinvested in the business.
  5. Retained earnings may represent a large portion of stockholders’ equity.

Answer: a

Learning Objective: 04-01

Difficulty:  1 Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic:  Balance sheet—Measurement

 

[QUESTION]

  1. Information found on a company’s balance sheet can tell a story about
  2. the company and its strategies.
  3. the company’s industry.
  4. the company’s performance.
  5. All of these can be derived from the information on the balance sheet.

Answer: d

Learning Objective: 04-02

Difficulty: 1 Easy

AACSB:  Knowledge Application

AICPA: FN Measurement

Blooms: Understand

Topic: Business information from financial statements

 

 

[QUESTION]

  1. The U.K. Equity account “Share premium” is reported on U.S. GAAP balance sheets as
  2. capital reserve.
  3. revaluation reserve.
  4. capital in excess of par.
  5. an accumulated other comprehensive income account.

Answer: c

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Blooms: Understand

Topic: IFRS and US GAAP differences―Balance sheet

 

[QUESTION]

  1. The U.K. Equity account “Hedging reserve” is reported on a U.S. GAAP balance sheet as
  2. capital reserve.
  3. revaluation reserve.
  4. capital in excess of par.
  5. an accumulated other comprehensive income account.

Answer: d

Learning Objective: 04-03

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Topic: IFRS and US GAAP differences―Balance sheet

Blooms: Understand

 

 

[QUESTION]

  1. When adjusting accrual earnings to obtain cash flows from operations,
  2. an increase in Accounts Payable is added to determine cash flow from operations.
  3. a decrease in Accounts Payable is added to determine cash flow from operations.
  4. an increase in Accounts Payable is deducted to determine cash flows from operations.
  5. it is not necessary to consider any changes to Accounts Payable.

Answer: a

Learning Objective: 04-08

Difficulty: 2 Medium

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

 

 

[QUESTION]

  1. Cash collected from customers can be derived
  2. by analyzing changes in the Accounts Payable balance.
  3. by appropriately adjusting revenue for changes in accounts receivable.
  4. by appropriately adjusting revenue for changes in accounts payable.
  5. by analyzing changes to the reserve for doubtful accounts.

Answer: b

Learning Objective: 04-08

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow―Changes in current accounts

 

 

[QUESTION]

  1. The sale of productive assets
  2. does not impact the period cash flows.
  3. is always considered a related party transaction.
  4. represents an investing activity.
  5. represents an operating activity.

Answer: c

Learning Objective: 04-07

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Cash flow statement―Distinguish categories

 

 

[QUESTION]

  1. Paying dividends to stockholders
  2. represents an investing activity.
  3. does not impact the period cash flows.
  4. represents an operating activity.
  5. represents a financing activity.

Answer: d

Learning Objective: 04-07

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Cash flow statement―Distinguish categories

 

 

[QUESTION]

  1. Operating activities result from the cash effects of
  2. paying dividends to shareholders.
  3. producing and delivering goods.
  4. selling equipment.
  5. issuing long-term debt.

Answer: b

Learning Objective: 04-07

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Cash flow statement―Distinguish categories

 

 

[QUESTION]

  1. The Summary of Significant Accounting Policies
  2. explains the important accounting choices the reporting entity uses to account for selected transactions and accounts.
  3. does not contain an explanation of the company’s revenue recognition policies.
  4. is generally a part of the equity section of the balance sheet.
  5. is only required as part of a prospectus for the sale of new shares of stock.

Answer: a

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

 

[QUESTION]

  1. Subsequent events
  2. are those significant events that occur after the financial statements are issued.
  3. are subject to optional disclosure based on a recommendation from top management.
  4. 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.
  5. are those significant events that occur in the last quarter of the reporting period.

Answer: c

Learning Objective: 04-04

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Notes to financial statements

 

 

[QUESTION]

  1. The cash flow from operating activities
  2. is required to be presented using the direct method by U.S. GAAP and IFRS.
  3. can be presented by using either the direct method or the indirect method.
  4. comprises only the increase in cash arising from the firm’s profit-making activities.
  5. can vary depending on whether the presentation is done under the direct method or the indirect method.

Answer: b

Learning Objective: 04-09

Learning Objective: 04-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: IFRS and US GAAP differences―Cash flow statement

Topic: Cash flow statement―Distinguish categories

 

 

[QUESTION]

  1. The balance sheet
  2. provides a summary of a firm’s assets, liabilities, equity and cash flows as of a specific date.
  3. classifies assets as current if they are expected to be converted into cash within 24 months.
  4. is an expression of the accounting equation.
  5. is comprised of items shown only at historical costs.

Answer: c

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. 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?

  1. $225,000
  2. $275,00
  3. $300,000
  4. $250,000

Answer: b

Learning Objective: 04-07

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Apply

Topic: Cash flow statement—Distinguish categories

 

 

[QUESTION]

  1. Liabilities represent amounts that are
  2. probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
  3. always classified as current on the balance sheet.
  4. never shown on the balance sheet at historical cost.
  5. netted against assets on the balance sheet.

Answer: a

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Liabilities and stockholders equity

 

 

[QUESTION]

  1. On balance sheets prepared in accordance with U.S. GAAP
  2. assets are generally listed from least liquid to most liquid.
  3. liabilities are generally netted against assets.
  4. assets are generally listed from most liquid to least liquid.
  5. both tangible and intangible long-lived assets can be revalued upward periodically.

Answer: c

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Classification

 

 

[QUESTION]

  1. A balance sheet prepared in accordance with U.S. GAAP typically
  2. includes both “noncurrent liability” and “long-term obligation” sections.
  3. reports inventory at historical costs.
  4. reports cash at its current market value.
  5. reports retained earnings comprised of the cumulative earnings less dividends since the inception of the entity.

Answer: d

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. A balance sheet prepared in accordance with U.S. GAAP typically
  2. reports common stock at the current market price of the stock.
  3. provides critical information for understanding a firm’s capital structure.
  4. helps to determine the proper mix of debt and equity financing.
  5. provides critical information for understanding a firm’s profitability.

Answer: b

Learning Objective: 04-02

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business information from financial statements

 

 

[QUESTION]

  1. A temporary difference is the result of
  2. a revenue or expense item reported in different periods for book purposes and tax purposes.
  3. fluctuations in the exchange rate.
  4. adjustments between the trial balance and general ledger.
  5. delays between the sale of a product and the recording of the account receivable.

Answer: a

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. The indirect method of presenting cash flow from operating activities
  2. is strongly recommended by both U.S. GAAP and IFRS.
  3. focuses on how cash flows deviate from a natural benchmark – net income.
  4. presents cash transactions related to the determination of net income.
  5. is more difficult than the direct method to incorporate working capital changes into a financial model.

Answer: b

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Indirect method

 

 

[QUESTION]

  1. A related-party transaction
  2. is assumed to be an arms-length transaction.
  3. can take place between subsidiaries of a common parent.
  4. does not need to be disclosed in financial statements prepared under U.S. GAAP.
  5. presents less risk than a similar transaction with a third party.

Answer: b

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

 

[QUESTION]

  1. Properly prepared statements of cash flows
  2. include stock issued for cash as an investing activity.
  3. present depreciation as a subtraction from net income to arrive at a firm’s cash flow from operations under the indirect method.
  4. are frequently used by investment analysts to cash flows from operations across two or more companies.
  5. will show the change in cash during a period to be equal to the net income for the period.

Answer: c

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow―Explain changes in balance sheet

 

 

[QUESTION]

  1. On a balance sheet prepared under U.S. GAAP
  2. accounts receivable is presented at net realizable value.
  3. inventories are presented at current market price.
  4. any cash denominated in a foreign currency is disclosed in a footnote.
  5. most short-term investments are presented at historical cost.

Answer: a

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Long-term debt
  2. consists of monetary obligations that fall due beyond two years from the balance sheet date.
  3. when issued, is carried at an amount based on the proceeds received.
  4. usually has an effective yield that is much different than the cost of borrowing.
  5. never has any portion classified as a current liability.

Answer: b

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Goodwill
  2. is a tangible asset recognized as part of a business combination.
  3. is not subject to impairment.
  4. 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.
  5. is classified on the balance sheet as a current asset.

Answer: c

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Other comprehensive income
  2. consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.
  3. is never adjusted for tax effects.
  4. does not include foreign currency gains and losses.
  5. is consistently defined in international balance sheet presentation.

Answer: a

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Liabilities and stockholders equity

 

 

[QUESTION]

  1. Which of the following is not true regarding the tax note to the financial statements?
  2. The tax note is never required to include any information on foreign tax rate implications.
  3. The tax note can describe how financial reporting differs from tax accounting.
  4. The tax note can describe how tax disputes may affect future tax payments.
  5. The tax note can explain how foreign tax rates affect income tax expense.

Answer: a

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

 

[QUESTION]

  1. The rules used for determining taxable income in various countries
  2. have the same objective as the rules used for determining income for financial reporting purposes.
  3. have an objective designed to provide a basis for funding government operations.
  4. are not the result of a political process.
  5. measure changes in a firm’s underlying economic condition.

Answer: b

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Diversity

AICPA: BB Global

Blooms: Understand

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Which of the following statements is not true regarding cash flow from operating activities?
  2. Most firms use the indirect method for presentation.
  3. Each line item in a direct method cash flow statement is actually a cash flow.
  4. The direct method begins with net income and then shows the differences between operating cash flow and net income.
  5. There are two methods for presenting cash flow from operating activities.

Answer: c

Learning Objective: 04-05

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow statement―Direct method

Topic: Cash flow statement―Indirect method

 

 

[QUESTION]

  1. A balance sheet prepared under U.S. GAAP includes the following elements except
  2. an asset section
  3. a liabilities section
  4. an equity section
  5. a cash flow section

Answer: d

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Classification

 

 

[QUESTION]

  1. The summary of significant accounting policies does not help explain
  2. the cost flow assumptions for valuing inventory.
  3. management’s assessment of the financial condition of the firm.
  4. the method used for determining depreciation expense.
  5. whether certain investments are accounted for using the equity method.

Answer: b

Learning Objective: 04-04

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Notes to financial statements

 

 

[QUESTION]

  1. A balance sheet prepared under U.S. GAAP can have amounts presented in the following measurement bases except
  2. foreign currency
  3. historical costs
  4. discounted present values
  5. current replacement costs

Answer: a

Learning Objective: 04-01

Difficulty: 1 Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Balance sheet―Measurement

 

 

[QUESTION]

  1. Which of the following statements is not true regarding the cash flow statement?
  2. The cash flow statement provides information about changes in all the balance sheet accounts.
  3. The change in cash is classified into cash flow from three categories: operating activities, investing activities and financing activities.
  4. The cash flow statement generally shows that cash flows and accrual earnings are substantially the same.
  5. The cash flow statement explains the causes for year-to-year changes in cash and cash equivalents.

Answer: c

Learning Objective: 04-06

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Cash flow―Explain changes in balance sheet

 

 

Essay and Computational Questions

 

[QUESTION]

  1. Blimpy’s Doughnuts, Inc.’s adjusted trial balance appears below.

Required: Prepare a classified balance sheet at December 31, 2018 for Blimpy’s.  Hint: Account categories for several of the items listed are found in parentheses.

 

                             Blimpy’s Doughnuts, Inc.
                 Adjusted Trial Balance (alphabetical order)
                                    December 31, 2018
Debits Credits
Accounts and notes receivable             $27,603
Accounts payable          $7,874
Accrued litigation settlement (current liability)        86,772
Accumulated deficit       191,010
Accumulated other comprehensive income          1,266
Cash and cash equivalents        36,242
Common stock       310,942
Current maturities of long-term debt          1,730
Deferred income taxes (noncurrent asset)               20
Deferred income taxes (current liability)               20
Depreciation and amortization        21,046
Direct operating expenses       389,379
Equity in (losses) of equity method franchisees             842
General and administrative expenses        48,860
Goodwill and other intangible assets        28,934
Impairment charges and lease termination costs        12,519
Insurance recovery receivable (current asset)        34,967
Interest expense        20,334
Interest income          1,627
Inventories        21,006
Investments in equity method franchisees          3,224
Long-term debt, less current maturities       105,966
Other accrued liabilities        38,474
Other assets        16,842
Other current assets        12,000
Other income          5,105
Other long-term obligations        29,694
Property and equipment       168,654
Provision for income taxes          1,211
Revenues       461,195
Settlement of litigation (expense)        15,972  
     Totals  $1,050,665  $1,050,665

 

 

 

 

 

Answer:

                                 Blimpy’s Doughnuts, Inc.
                              Consolidated Balance Sheet
                                     December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents  $   36,242
Accounts and notes receivable            27,603
Inventories       21,006
Insurance recovery receivable       34,967
Other current assets       12,000
     Total current assets     131,818
Property and equipment     168,654
Investments in equity method franchisees         3,224
Goodwill and other intangible assets       28,934
Deferred income taxes              20
Other assets       16,842
     Total assets  $ 349,492
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt  $     1,730
Accounts payable         7,874
Accrued litigation settlement       86,772
Deferred income taxes              20
Other accrued liabilities       38,474
     Total current liabilities     134,870
Long-term debt, less current maturities     105,966
Other long-term obligations       29,694
Shareholders’ equity:
Common stock     310,942
Accumulated other comprehensive income         1,266
Accumulated deficit   (233,246)
     Total shareholders’ equity       78,962
     Total liabilities and shareholders’ equity  $ 349,492

 

Learning Objective: 04-01

Difficulty: 3 Hard

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Apply

Topic: Balance sheet―Classification

 

 

[QUESTION]

  1. Harry’s Clothing, Inc. used the following headings on the company’s December 31, 2018 balance sheet:

(A)  Current assets

(B)  Long-term investments

(C)  Property and equipment

(D)  Intangible assets

(E)  Other assets

(F)  Current liabilities

(G)  Long-term debt

(H)  Shareholders’ equity

 

Required: For each of the following items, indicate its normal balance sheet classification category.  Use (NA) for items that would not appear on the face of the balance sheet, but would be discussed in the notes to the financial statements.

 

_____ 1.  Accounts receivable

_____ 2.  Accrued interest on notes payable (2019 maturity)

_____ 3.  Accumulated depreciation

_____ 4.  Goodwill

_____ 5.  Preferred stock

_____ 6.  Common stock

_____ 7.  Customer deposits on products to be shipped in a few months

_____ 8.  Depreciation methods and estimated lives of equipment

_____ 9.  Prepaid insurance

_____ 10.  Assets (surplus production equipment) held for sale

 

Answer:

___A__ 1.  Accounts receivable

___F__ 2.  Accrued interest on notes payable (2019 maturity)

___C__ 3.  Accumulated depreciation

___D__ 4.  Goodwill

___H__ 5.  Preferred stock

___H__ 6.  Common stock

___F__ 7.  Customer deposits on products to be shipped in a few months

___NA__ 8.  Depreciation methods and estimated lives of equipment

___A__ 9.  Prepaid insurance

___A or E__ 10.  Assets (surplus production equipment) held for sale

 

Learning Objective: 04-01

Difficulty: 2 Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Balance sheet―Classification

 

 

[QUESTION]

  1. Below are the condensed balance sheets and income statement for the Beltway Company, Inc. Reformat the balance sheet as a common-size balance sheet and evaluate the company’s performance by responding to the questions provided.

 

Condensed balance sheet December 31, 2018

  2017 2018
Assets:
Current assets
Cash $8 $15
Accounts receivable 53 58
Inventory 52 40
Prepaid insurance 5 3
Property plant and equipment 140 150
Accumulated depreciation (45) (55)
Net PP&E 95  95 
Total assets $213  $211 
Liabilities:
Accounts payable $35 $21
Wages payable 12 16
Interest payable 5 2
Taxes payable 3 4
Long-term debt 92 92
Equity:
Common stock 50 50
Retained earnings 16  26 
Total liabilities and equity $213  $211 

Required:

  1. Reformat the balance sheet to be a common-sized balance sheet
  2. Respond to the following question:
    1. What does the common-size balance sheet suggest about the company’s performance? [Hint: Review items that show a significant difference—as a percentage—from 2017 to 2018.]

 

 

Answer:

a. Collections from customers $480 – 5 = $475
b. Payments to suppliers $328 – 12 + 14 = $330
c. Insurance premium payment $3 – 2 = $1
d. Interest payment $12 + 3 = $15
e. Utility payments $11
f. Wages payment $103 – 4 = $99
g. Capital expenditures $10

 

2018 % 2017 %
Assets:
Current assets
Cash $28 11% $15 6%
Accounts receivable 50 19% 55 23%
Inventory 52 20% 40 16%
Prepaid insurance 5 2% 3 1%
Property, plant and equipment 80 30% 90 37%
Accumulated depreciation -45 -17% -55 -23%
Net PP&E 95 36% 95 39%
Total assets $265 100% $243 100%
Liabilities:
Accounts payable $60 23% $46 19%
Wages payable 12 5% 16 7%
Interest payable 5 2% 9 4%
Taxes payable 5 2% 4 2%
Long-term debt 92 35% 92 38%
Equity:
Common stock 75 28% 50 21%
Retained earnings 16 6% 26 11%
Total liabilities and equity $265 100% $243 100%

 

Student responses to the question will differ, but may include discussion about:

  • The decrease in A/R suggests that the company is doing a better job of collecting it’s a/r.
  • The increase in Inventory as a % of total sales suggests that inventory sales may be decreasing.
  • The increase in A/P as a % of total sales suggests that the company is either purchasing more with debt or that it might be struggling to meet its short-term obligations.
  • The decrease in PP&E as a % of total assets suggests that the company disposed of some of its long-term assets.
  • The decrease in long-term debt as a % of total assets suggests that the company is paying off some of its long-term debt.
  • The decrease in retained earnings as a % of total assets suggests that the company’s profit decreased or that it paid dividends.

 

Learning Objective: 04-02

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Business information from financial statements

 

[QUESTION]

  1. Below are the condensed balance sheet and income statement for the Beltway Company, Inc. Assuming there were no disposals of fixed assets during the year 2018, provide a statement of cash flows using the indirect method for the year ended December 31, 2018.

 

Condensed balance sheet December 31, 2018

  2017 2018
Assets:
Current assets
Cash $8 $15
Accounts receivable 53 58
Inventory 52 40
Prepaid insurance 5 3
Property plant and equipment $140 $150
Accumulated depreciation (45) (55)
Net PP&E 95  95 
Total assets $213  $211 
Liabilities:
Accounts payable $35 $21
Wages payable 12 16
Interest payable 5 2
Taxes payable 3 4
Long-term debt 92 92
Equity:
Common stock 50 50
Retained earnings 16  26 
Total liabilities and equity $213  $211 

 

Condensed income statement for year ended December 31, 2018

Sales $480
COGS 328
Operating expenses:
Wages 103
Utilities 11
Insurance 3
Depreciation 10
Operating income 25
Interest 12
Income before tax 13
Tax 3
Net income $10

 

Answer:

                    Beltway Company, Inc.
                   Statement of Cash Flows
          For the year ended December 31, 2018
Net income $10
Depreciation 10
$20
Increase in A/R –5
Decrease in inventory 12
Decrease in prepaid insurance 2
Decrease in A/P –14
Increase in wages payable 4
Decrease in interest payable –3
Increase in taxes payable 1
Net cash provided by operating activities $17
Capital expenditures: PP&E acquisitions –10
Cash flow from investing activities
 

–10

Cash flow from financing activities 0
Change in cash balance $7
Cash balance 12/31/2017 8
Cash balance 12/31/2018 $15

 

Learning Objective: 04-06

Learning Objective: 04-08

Difficulty: 3 Hard

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Blooms: Analyze

Topic: Cash flow―Changes in current accounts

Topic: Cash flow―Explain changes in balance sheet