Accounting 4356 Test 1 Study guide
Which of the following statements is not true regarding the treatment of warranties under the new revenue recognition guidance in ASC Topic 606?
A warranty that covers services that are normally considered routine maintenance is an assurance warranty.
Which of the following is not correct with respect to accrual accounting?
Accrual accounting does not decouple measured earnings from operating cash inflows and outflows.
Munster Inc, a U.S.-based multinational company, voluntarily issues a sustainability report consistent with the guidelines of the Global Reporting Initiative (GRI). The company's report is audited by one of the Big 4 accounting firms. Munster reports significant detail related to the company's environmental impact, use of renewable energy, and programs that benefit the community. Consistent with GRI guidelines, Munster Inc. also should report information on the following issues:
All of the these must be reported consistent with GRI guidelines
Accounting information is heavily regulated:
All of these answer choices are correct.
Earnings management can occur through a variety of manipulations including:
All of these answer choices are correct.
What type of trends and relationships can be gleaned from a company's financial statements?
All of these answer choices are correct.
Which of the following create a competitive disadvantage according to the full disclosure principle?
All of these answer choices are correct.
Which of the following may cause fully diluted EPS to differ from basic EPS?
All of these answer choices are correct.
For a disposal group to be considered held for sale, which of the following conditions are required to be met?
All of these conditions must be met.
Which statement below best describes when to record an expense?
Always taken in one period only.
Other Comprehensive Income (OCI) is used both in U.S. GAAP and IFRS. Which of the following statements is correct?
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.
When actuarial estimates related to defined benefit pension plans are adjusted:
Both U.S. GAAP and IFRS require companies to report these valuation changes in OCI each period.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10. Using the accrual basis, which one of the following entries would properly record Canon's revenue recognition for October?
DR Cash 16,000 DR Accounts receivable 24,000 CR Copier sales 40,000
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10. Under the accrual basis, how much revenue should Canon recognize in November?
$0
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10. Under the cash basis, how much revenue should Canon recognize in October?
$16,000
Yashito Corporation sells cameras and accessories. The company's newest model, popular with preteens, takes wallet-sized instant photos. The wholesale price for this camera is $50. In addition, the company sells carrying cases ($25), film cartridges ($15), and selfie lenses ($10) made especially for this camera. During the holiday season, Yashito offers the camera, film, carrying case, and selfie lens as a package for $75. For each package sold, the transaction price allocated to the camera is:
$37.50.
Hickory Furniture Company paid for the following costs during the month of May: Inventory purchases $ 40,000 Advertising costs 8,000 Delivery costs 2,000 Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June). What is the amount of Hickory's May expenses when applying the matching principle?
$43,600
Michel Company owns 75% of the outstanding common stock of Aber Corp. On its current consolidated income statement, Michel Company should report:
100% of Aber's revenue and expenses.
Adjusting entries are used in all but which of the following situations?
Deferred Revenue and Expenses.
Which of the following best describes the reporting for discontinued operations?
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.
Identify the correct order of the three steps constituting the FASB's "due process" procedure.
Discussion-memorandum stage, exposure-draft stage, and voting stage.
Exeter Company reports all revenues and expenses of Gregg Company on its consolidated income statement. Which of the following conditions must have been met?
Exeter owns more than 50% of Gregg Company's common stock.
Which of the following disclosures is not required by ASC Topic 606 guidance for revenue recognition?
Financial stability of major customers.
Under ASC Topic 606 for revenue recognition, which of the following statements is not accurate regarding performance obligations?
Firms are not required to disclose any judgments used to apply the standard.
In designing audit procedures the auditor will include all of the following except:
Global economic trends.
Which of the following accounting standards permit(s) companies to apply short-term lease accounting rules to low-value assets?
IFRS only.
When comparing U.S. GAAP and IFRS standards, which of the following is not correct?
IFRS provides more detailed guidance than U.S. GAAP
_______ accounting standards require companies to group items within OCI based on __________:
IFRS; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
When reporting unusual or infrequent items in the income statement which of the following is not correct?
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.
Which of the following statements is not true regarding transactions involving intellectual property?
If the customer's right to use the intellectual property is not limited, the contract is considered a license.
In accounting for revenue recognition under ASC Topic 606, when there is a modification of a contract, which of the following is correct?
If the modification adds distinct goods or services to the original contract and the change in the original contract price reflects the stand-alone price of the additional goods or services to be exchanged, then a new, separate contract must be created.
Which statement below is not correct with respect to earnings management?
In a recent survey, more than 80% of CFOs surveyed indicated that meeting or beating consensus EPS is an important benchmark
The discontinued operations section of the income statement is comprised of which one of the following?
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.
When transitory earnings are present, which of the following correctly depicts the order used on the income statement?
Income tax expense, income from continuing operations, discontinued operations, net income.
Which of the following statements does not apply to the principal/agent relationship under ASC Topic 606 guidance for revenue recognition?
Inventory risk is not an important factor in determining the relationship.
Which of the following statements is correct regarding reporting of "Extraordinary gains and losses" as a separate category on the income statement?
It is no longer permitted under U.S. GAAP.
To achieve Faithful Representation, accounting information presented must meet which of the following requirements?
It must depict the underlying economic event, be complete, neutral, and free from material error.
Under IFRS in accounting for revenue recognition, for collection to be probable in order for revenue to be recognized on a contract, "probable" means:
More likely than not to occur.
Which of the following is not a necessary condition for a firm to account for a customer contract under the ASC Topic 606 guidance for revenue recognition?
Payment terms may not include a variable component.
Which of the following would not be considered a revenue recognition abuse?
Recording goods on consignment as part of inventory when there is a right of return.
Elaine Company, a clothing store, sells clothing for a total selling price of $50,000 with a related cost of $35,000. Customers have a right of return within 30 days. Elaine Company estimates that 10% of the sales will be returned by customers. The journal entry to recognize the sales will include a credit to:
Refund liability.
Which of the following are primary qualitative characteristics of accounting information?
Relevance and Faithful Representation.
Differences between IFRS and U.S. GAAP include all of the following except:
Revenue recognition.
Accumulated other comprehensive income increases or decreases
Shareholders' Equity.
Under ASC Topic 606 for revenue recognition, which of the following factors is not an indicator of the principal/agent determination?
Shipping terms.
Which of the following statements is not true regarding the software developer example provided in ASC Topic 606 guidance for revenue recognition?
Software installation, software updates, and technical support are not addressed.
The expense matching principle states that:
Some expenses are recognized when the corresponding revenue is recognized and some are spread over time.
According to ASC Topic 606 guidance for revenue recognition, which of the following statements is true regarding customer options when identifying performance obligations in a contract?
There is an additional performance obligation for additional goods or services if the customer could obtain the same rights to additional goods or services elsewhere but the additional good or services are provided for free or at a discount in the current contract.
Which of the following statements is correct regarding revenue and expense accounts?
These are really owners' equity accounts.
Under the new revenue recognition guidelines in ASC Topic 606, which of the following statements is not true regarding performance obligations satisfied over time?
To obtain quality measurement, input methods must always be closely related to the transfer of the goods or services to the customer.
Investors who presume that they have no insights about company value beyond the current market price and use financial statement data to assess firm-specific attributes believe in the:
efficient market hypothesis.
Investors who follow a fundamental analysis approach:
estimate the value of a stock by assessing the amount, timing, and uncertainty of future cash flows that will accrue to the issuing company.
Accrued liabilities represent:
expenses that have been recognized on the income statement but not yet been paid.
IFRS frequently:
follow a more generalized overview approach than do U.S. GAAP counterpart standards.
The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:
forecasting.
As part of a new franchise agreement, the franchisor provides quarterly training of the franchisee's employees, periodic promotion of the franchisee's weekly specials, annual seminars for the franchisee's key personnel, as well as allowing the franchisee to utilize the franchisor's name and logo. This agreement likely includes:
four performance obligations.
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:
gain or loss on the sale of equipment as part of continuing operations.
Financial statements follow:
generally accepted guidelines that allow management a degree of flexibility in choices.
Companies that have projected operating cash flows that are more than sufficient to meet debt payments are
good credit risk companies.
Which of the following most accurately describes the SEC's current role in sustainability reporting? The SEC:
has outlined how climate change could affect Regulation S-K disclosures.
It is common for shareholders to initiate litigation when:
here is a sudden drop in stock price shortly after the company released new financial information.
Net property, plant and equipment are reported on the balance sheet at:
historical cost minus accumulated depreciation.
Balance sheets prepared in compliance with U.S. GAAP reflect a mixture of:
historical cost, fair value, net realizable value, and discounted present values.
Current liabilities are reported on the balance sheet at:
historical cost.
Current U.S. GAAP permits firms to display the components of other comprehensive income in which of the following formats?
in a two-statement approach, one in which net income comprises one statement and a second, which presents a separate statement of comprehensive income.
The matching principle requires that expenses be recognized:
in the same period in which the revenue generated by these expenses is recognized.
Smidt Company reports a loss related to a recent warehouse flood. Financial statement users should expect to find the related loss reported on the Smidt's multiple-step income statement as part of:
income from continuing operations.
The best measure of a firm's sustainable income is:
income from continuing operations.
A company manages a large portfolio of marketable securities and sells only stocks with substantial gains in poor income years or sells only stocks with substantial losses in good income years. This strategy is an indication of:
income smoothing.
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:
increase cash flow from operating activities.
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:
increase cash flow from operating activities.
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:
increase cash flow from operations as it signifies a net income.
Assuming the requirements for recognizing revenue over time are met, the profit to be recognized in any year is based on the completion ratio of:
incurred contract costs divided by estimated total contract costs.
One financial disclosure cost is the possibility that competitors may use the information to harm the company providing the disclosure. All of the following disclosures might create a competitive disadvantage except:
information showing the company's amount of spending on research and development.
Goodwill arising from a business combination is reported on the balance sheet as a(n):
intangible asset.
Burgers and More operates a chain of fast-food restaurants across the United States. The restaurants are franchised operations. Under the franchise agreement, restaurant owners have the right to use the Burgers and More trade name, financing arrangements for franchisees, and management training at the corporate headquarters as well as the right to use training videos for their employees. The Burgers and More franchise contracts contain the following separate performance obligations:
intellectual property, financing, and training
Companies needing to access new and ever larger sources of capital in response to increased international competitiveness face a severe disadvantage if their financial reporting:
is based on a commercial and tax law approach.
In 2017, Borden Construction was contracted to build an apartment complex for its client, Deer Park Realty Management. The project was estimated to cost $15 million; however, on December 31, 2017, when the project was 75% complete, Borden estimated that the project costs would be much less, and agreed to adjust the contract price to $10 million. Prior to December 31, 2017, Borden Construction had recognized revenue of $10 million. At year end, Borden should:
make a correction for $2.5 million in over-recognized revenue.
Omissions or misstatements within a financial statement which could influence the decisions of the user of the statement violates:
materiality.
GAAP requires firms to report comprehensive income:
n a statement that is displayed with the same prominence as other financial statements.
Net income recognition always increases:
net assets.
If a company fails to disclose information about a lawsuit because it might be embarrassing to the company, it is violating:
neutrality
The Financial Accounting Standards Board has responsibility for the establishment of U.S. accounting standards and:
no authority or responsibility to enforce compliance with GAAP.
Margot reviews the financial statements of a potential investment target. She notices that in the company's multiple-step income statement a separately listed gain is reported as part of "income from continuing operations." Based on this information, Margot should:
not assume that the gain will recur regularly.
The Additional Paid-In Capital account is reported on the balance sheet at the
original sales price of the stock minus the par value.
Hargren Publishing offers its Accounting textbooks as e-texts through its online homework management system. Purchase of an access code provides the student with access to the e-text and online learning materials for six months. During that time, students have access to updates to the text and learning materials. Hargren should recognize revenue for purchases of access codes:
over the six-month period during which the customer has access.
The basic accounting equation may be expressed as:
owners' equity = assets − liabilities
Donna is reviewing the income statement of Brier Company. She notices that Brier's income statement includes an item labeled "income attributable to noncontrolling interests." Donna should assume that Brier Company:
owns a controlling interest in another company that is less than 100%.
The market analysis known as fundamental analysis:
predicts future trends in the financial drivers of a company's economic success or failure.
Long-term debt is reported on the balance sheet at:
present value.
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:
pro forma earnings.
A firm's financial statements contain trends that give users insight into the firm's:
profitability, productivity, and liquidity.
Donald Company, which operates in the life sciences industry, routinely fulfills services subject to ongoing negotiations that determine reimbursement of regulated rates. Donald properly applies the "variable revenue" guidance under ASC 606. Donald should:
recognize revenue over time.
T-account analysis can be used to gain insights into why accrual basis earnings and cash basis earnings differ and to:
reconstruct transactions that have occurred during a given reporting period.
Vogel Inc. reports income related to discontinued operations in its current-year multiple-step income statement. Financial statement users should expect that the line item "income tax expense":
relates only to income from continuing operations.
A component of an entity may be a/an:
reportable or operating segment, subsidiary, or asset group.
Business enterprises enter into many different types of contracts. Examples of such contracts that often contain language that refers to verifiable financial statement numbers include all of the following except:
sales contracts with customers.
Muenster Company sells its network servers with a warranty than includes preventive maintenance. Muenster should account for the warranty as a(n):
separate performance obligation.
The costs of providing financial information is ultimately borne by:
shareholders.
A special one-time charge resulting from corporate restructurings would be reported on the income statement as a/an:
special item in continuing operations.
GAAP requires that each set of EPS numbers includes separately reported numbers for all of the following except:
special or unusual items.
When financial statements are used by shareholders and investors to evaluate the performance of a company's top executives it is referred to as the _____________ function of financial reports.
stewardship.
Under U.S. GAAP, assets are presented in decreasing order of liquidity. Under IFRS,
tangible assets may be presented first followed by the current assets displayed in increasing order of liquidity.
The organization responsible for establishing auditing standards and inspecting and investigating auditing practices of public accounting firms is:
the Public Company Accounting Oversight Board (PCAOB).
In the case of goods delivered to a consignee under a consignment arrangement,
the consignor should not recognize revenue until the goods are transferred to a third party.
The Retained Earnings account is comprised of
the cumulative earnings less dividends since the inception of the corporation.
Internet companies that simply act as agent or broker for the transfer of goods must record revenue based on:
the fees it charges sellers.
Revenue for goods to be sold under a consignment arrangement of a manufacturer and a retail store should be recognized by the manufacturer when:
the goods are sold by the retail store.
Financial reporting philosophies differ across countries. These philosophies evolve from and reflect several factors including all of the following except:
the language(s) spoken in the country.
The balance sheet provides information on all of the following except:
the market price of the company's stock.
Revenue is recognized when:
the seller completes performance required by an agreement.
In the case of sales where the customer is billed before delivery of the goods,
the seller may recognize revenue if control of the goods has been transferred to the customer even though physical delivery has not taken place.
Under ASC Topic 606, revenue should be recognized for services when:
the service performance obligation is satisfied.
CPA Now developed an app to help prepare for the CPA exam. Customers may separately purchase (a) the app, (b) updates to the app, and (c) coaching support for the exam, or a package that includes the app and free updates coaching support until they pass the exam. The package deal includes performance obligation(s).
three
The real accounting issue in net income recognition is the:
timing of the recognition.
Contributed capital might be a negative dollar amount because:
treasury stock was in excess of stock originally issued.
The cost-plus approach:
uses an assumed reasonable profit margin to determine the stand-alone price.
Professional analysts need information on a company's future earnings and cash flow to evaluate audit vulnerabilities, to assess debt repayment prospects and to:
value its equity securities.
ASC content is organized:
without numerical reference to the original standard from which the content was derived.
Wilson, Inc. sells, installs and maintains manufacturing equipment. The contract with its customers to purchase equipment includes installation and includes a one-year maintenance contract, renewable for up to five years. Because the useful life of the equipment is expected to be five years, the company can reasonably expect its customers to renew the maintenance contracts for the full five years. Wilson records the cost of installation of the equipment as a capitalized contract and amortizes the cost over the five-year maintenance agreement period. Because of a defect in model A5403, Wilson anticipates that many of its customers will trade in the model and not renew the maintenance contracts. Wilson, Inc. should:
write down the contract asset and recognize a loss equal to the difference between the amount of maintenance contracts expected and the carrying amount.
Which one of the following equations explains why successive balance sheets can be used to prepare a firm's cash flow statement?
Δ Cash = Δ Liabilities − Δ Noncash assets + Δ Stockholders' equity
Which of the following statements is true regarding the new ASC Topic 606 for revenue recognition?
Under IFRS, both public and non-public firms must adopt by 2018.
Which one of the following is part of other comprehensive income (OCI)?
Unrealized gains resulting from remeasuring foreign currency financial statements of majority-owned subsidiaries to U.S. dollar amounts.
In the U.S., disclosure of climate change risks and performance is:
Voluntary.
When is it permissible to issue financial statements that contain a material departure from GAAP?
When the auditor can demonstrate that due to unusual circumstances the financial statements would otherwise have been misleading.
Which of the following statements is not true regarding the adoption of ASC Topic 606 guidance for revenue recognition?
When using the cumulative approach, the prior three years of financial statements need to be restated.
Any increase in an asset may be offset by:
a decrease in some other asset account.
Examples of variable consideration include all of the following except:
all of the answer choices are correct.
Investors and analysts must have certain capabilities regarding financial reporting which include:
all of these answer choices are correct.
Balance sheets prepared in other countries using international accounting standards (IFRS) might use different account titles than are allowed for US. GAAP, such as:
all of these answer choices might be used in balance sheets prepared using IFRS.
Which one of the following events would be considered an unusual or infrequent event?
an earthquake in New York.
If consideration is received before a contract is identified and the consideration is nonrefundable, revenue may be recognized if:
any of these answer choices is correct.
Under the new revenue recognition guidance in ASC Topic 606, a performance obligation is satisfied over time if:
any of these answer choices is correct.
A right of return exists when:
any one of these conditions is met.
A company's financial statements can be used for all of the following purposes except:
as a scorecard on the company's social responsibility.
Borden Construction entered into the following contracts with Lovely Landscaping, LLP: (1) construct a paver patio, (2) plant trees, and (3) landscape planting beds for a new home construction project. Lovely Landscaping should treat the contracts:
as a single contract.
If the financial reporting environment were unregulated, disclosure would occur voluntarily:
as long as the incremental benefits to the company from supplying financial information exceeded the incremental costs of providing the information.
In a common-size balance sheet, each balance sheet account is expressed as a percentage of total:
assets.
Current assets are assets expected to:
be converted to cash within twelve months or one operating cycle if the operating cycle is longer than twelve months.
Adjusting entries must be made:
because certain types of events will otherwise not be recorded in the accounts.
Cash interest from investments is recorded as _______ in statements of cash flows for U.S. GAAP, but can be recorded as ________ when using IFRS.
cash flows from operating activities / cash flows from investing activities
Kunze Company, an information technology firm, routinely discloses internet traffic to its product line-up site. Financial statement users may be using this information to help predict future
cash outflows.
The goal of generally accepted accounting principles is to ensure that a company's financial statements:
clearly represent its economic condition and performance of the company.
Under ASC Topic 606 guidance for revenue recognition, all of the following conditions must be met to account for a contract with a customer, except:
collection is likely.
Analytical review procedures include all of the following except:
comparison of the company's reported financial results to benchmarks established by the SEC.
The key accounting issue related to bundled products such as software licenses and technical support:
concerns the amount of transaction price to allocate to each contract element.
Some countries' philosophy of financial reporting differs from U.S. GAAP because their financial reports are required to:
conform to tax and/or commercial law.
When a company changes from straight-line to the declining balance method of accounting for depreciation, the financial statements lack:
consistency.
Assuming the requirements for recognizing revenue over time are met, the measure of completion is computed by dividing
costs incurred to date by estimated total costs.
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:
decrease cash flow from investing activities.
Common-size balance sheets may be used for all the following except
determining how management assesses the risks a company faces.
Income statements are classified into sections to:
distinguish between sustainable and transitory income.
Under ASC Topic 606, which of the following is not a criteria for revenue recognition?
The shipping terms are clearly stated in the contract.
Which of the following does not describe how FASB endeavors to draft pronouncements?
Clearly define bright-line rules.
Which of the following statements is correct with respect to economic incentives to release financial information?
Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.
Which one of the following types of disclosure costs is the cost of disclosing the company's pricing strategies?
Competitive disadvantage cost
Which statement is not true regarding the conservatism convention in accounting?
Conservatism means we only record that of which we are 100% certain.
Which of the following statements is not applicable to contract acquisition costs under ASC Topic 606 guidance for revenue recognition?
Costs must be capitalized even if the amortization period is one year or less.
Which of the following is not an accurate statement related to the demand for financial reporting?
Cross-country differences have no impact on capital funding opportunities and financial reporting practices.
Which of the following statements regarding IFRS is incorrect?
The SEC-required Form 20-F must be filed with the SEC by foreign issuers within 30 days.
Which item below does not describe a politically vulnerable firm?
The firm has contracts controlled by the government.
Which item is not correct with respect to the treatment of sustainable and transitory items and a company's income statement?
The income statement isolates a key figure called "income from sustainable operations."
Which of the following statements is not true regarding ASC Topic 606?
The new standard precludes the use of percentage-of-completion method for long-term construction contracts.
Which of the following methods can be used to recognize revenue when a performance obligation is satisfied over time?
The output method.
