CMA Exam 1 Section A: External Financial Reporting Decisions

All of the following statements are correct concerning the relationship between revenue recognition and related expense recognition except:

recognizing the marketing expense associated with a product as the product is sold.

All of the following are elements of an income statement except:

shareholders' equity.

Use V-O keys to navigate. In the financial statements, the presentation of an accumulated other comprehensive loss is similar to the presentation of what other financial item?

The cost of treasury stock

The management accountant of Kathryn Software decided to alter the financial statements due to an event that occurred after the balance sheet date. Which of the following is the most likely reason for her decision?

The event provides additional evidence about conditions that existed as of the balance sheet date and alters the estimates used.

Which aspect of a firm's statement of cash flows most interests potential stockholders?

The firm's ability to pay dividends

Which of the following conditions is not likely to be part of a finance lease?

The legal owner (lessor) is responsible for all insurance on the property.

High-technology and fashion are types of industries likely to frequently use which of the following?

The lower-of-cost-or-net-realizable-value basis

Brendan Bishop Scientific is considering acquiring a new plant and paying for it with common stock at par value. However, the CFO is not in favor of the acquisition. Which of the following is the most likely reason for the CFO's disagreement?

The true cost of the asset cannot be determined as the stock's trading activity should also be considered.

When accounts receivable decreases during the period under the indirect method:

To convert net income to net cash provided by operating activities, the decrease in accounts receivable must be added to net income.

Which of the following is true of an income statement presented as per U.S. GAAP?

When a company sells a component of its business, the income or loss associated with the component should be reported net of tax separately from income from continuing operations.

A statement of financial position provides a basis for all of the following except:

determining profitability and assessing past performance.

All of the following statements are correct except:

Deferred compensation (earned by the employee now, but paid in a later year) creates a permanent difference between GAAP income and tax income, and sales of gift cards create a temporary difference between GAAP income and tax income.

What are the six capitals in integrated reporting?

Financial, Intellectual, Human, Social and Relationship, Manufactured, and Natural

In addition to the purchase price of goods, the inventory account includes which cost?

Freight costs to acquire the inventory

Comprehensive income includes which of the following?

Gains and gross margin

The following information is available for Becker Manufacturing. Net income $300,000 Depreciation expense $90,000 Dividends paid $135,000 Gain on sale of land $22,500 Increase in accounts receivable $45,000 Increase in accounts payable $135,000 What is Becker's net cash provided by operating activities? $457,500

$457,500 Explanation: The final result is a net inflow from operating activities of $457,500 ($300,000 + $90,000 − $22,500 − $45,000 + $135,000). Therefore, this is the correct answer.

Which of the following inventory methods is not allowed under IFRS?

LIFO.

In which section of the statement of cash flows would depreciation expense be found?

Operating

Which section of the statement of cash flows includes interest payments?

Operating

A physical count of inventory at the end of the accounting period is required under which inventory system(s)?

Periodic system

What is the result of stock dividends?

Retained earnings decrease while total paid-in capital increases.

Which method for warranty accounting requires the organization to record deferred revenue?

Service Warranty approach.

Millennium Motors is a luxury car dealership. Which method of inventory costing would they most likely use?

Specific identification

Niles Industries is a merchandising company. It currently holds $6,000 in consignment goods for Martin Corporation. In addition, it has $4,000 in FOB shipping point goods in transit to Delta Enterprises and $5,000 in FOB destination goods in transit to Troy Manufacturing. Finally, Niles has $7,000 in FOB destination goods in transit from Gregg Supply. For which group of goods does Niles hold the title?

The $5,000 in goods in transit to Troy Manufacturing

The HYU Company purchased 500 Company G bonds on March 1, 20X9, for $1,000 per bond. When it purchased these bonds, HYU planned to hold them until maturity. It purchased 500 shares of Company L's stock at $100 per share on March 5, 20X9. Company L has issued 10,000,000 shares of stock. It sold 100 shares of Company L stock on March 16, 20X9, for $105 per share. At the end of March Company L's stock was selling for $106 per share and Company G's bonds were selling for $1,040 per bond. How would these transactions be reflected on HYU's financial statements issued as of March 31, 20X9?

A $500 realized gain on the income statement and a $2,400 unrealized gain on the income statement

Which of the following should be disclosed in the summary of significant accounting policies?

Basis of consolidation.

Which section of the statement of cash flows includes the proceeds from selling equipment?

Investing

ABC Company is working under a contract where it recognizes revenue over time using the input method of costs expended. The contract is for $500,000 with estimated project costs of $350,000. After Year 1, ABC has incurred $70,000 of costs. How much revenue can ABC recognize in Year 1?

$100,000 Explanation: ABC incurred 20% ($70,000/$350,000) of costs, so it will recognize 20% of gross margin, or $30,000. $70,000 + $30,000 = $100,000.

Larry Mitchell, Bailey Company's controller, is gathering data for the Statement of Cash Flows for the most recent year end. Mitchell is planning to use the direct method to prepare this statement, and has made the following list of cash inflows for the period. Collections of $100,000 for goods sold to customers. Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000. Proceeds from the issuance of additional company stock totaling $10,000. The correct amount to be shown as cash inflows from operating activities is:

$100,000.

During June Year 1, Maxwell Corporation determined that actual costs incurred associated with the equipment used in its assembly line significantly exceeded original expected costs. At June 30, Year 1, Maxwell had compiled the following information: Original cost of the equipment $800,000 Accumulated depreciation $300,000 Expected net future cash inflows (undiscounted) related to the continued use and eventual disposal of the equipment $450,000 Fair value of the equipment $375,000 What is the amount of impairment loss that should be reported on Maxwell's income statement prepared for the period ended June 30, Year 1?

$125,000 Explanation: The undiscounted expected net future cash inflows ($450,000) are less than the carrying amount of the equipment ($500,000). Therefore, the equipment is deemed impaired. The impairment loss is calculated by subtracting the fair value of the equipment ($375,000) from its carrying value ($500,000). (Note: Both values are at the impairment date, June 30, Year 1.)

On January 1, Year 2, Justo purchases 30,000 shares of the 100,000 outstanding shares of stock in Bonita Corp. for $5 per share. During the year, Bonita Corporation has $20,000 of net income and pays $4,000 in dividends. On December 31, Year 2, the value of a share of Bonita Corporation stock is $6 per share. Assuming Justo properly uses the equity method of accounting for Bonita stock, what is the amount shown for Investment in Bonita on the December 31, Year 2, balance sheet?

$154,800 Explanation: Therefore, at December 31, Year 2, Justo will have $154,800 in its Investment in Bonita account [$150,000 + (30% × 20,000) − (30% × $4,000) = $154,800].

In its first year of operations, the BGH Company reported taxable income on its income tax return of $600,000. BGH has a current tax rate of 25% and this rate is expected to remain in effect for the foreseeable future. BGH calculated a taxable temporary difference of $50,000 and a deductible temporary difference of $20,000. No valuation allowances were required. What amount would BGH report on its income statement as "income tax expense"?

$157,500 Explanation: A deductible temporary difference results is a reduction of tax in the future but is recognized as a benefit in the current period. In this example, the amount currently payable is $150,000 ($600,000 × 25%). The taxable temporary difference of $50,000 generates a $12,500 tax ($50,000 × 25%) that will be paid in the future, but is recognized in the current period. Similarly, the deductible temporary difference of $20,000 generates a reduction to future taxes of $5,000 ($20,000 × 25%) that is recognized in the current period. The result is income tax expense of $157,500 ($150,000 + $12,500 - $5,000).

The table shows the inventory of Elkins Light Fixtures. If Elkins applies the lower-of-cost-or-net-realizable-value basis per bulb, what would be the value of the inventory reported on the balance sheet? Cost Net Realizable Value Bulb A $66,000 $70,000 Bulb B $36,000 $30,000 Bulb C $80,000 $84,000

$176,000 Explanation: This results in a total value of $176,000 ($66,000 + $30,000 + $80,000).

In the Bein Company, net income is $65,000. If accounts receivable increased $35,000 and accounts payable decreased $10,000, what is the net cash provided by operating activities using the indirect method?

$20,000

On October 1, 20X2, FGH, a newly formed insurance company, received $120,000 in cash from customers for 12-month insurance policies that take effect on November 1, 20X2. What amount should FGH report in its 20X2 income statement for insurance premium revenue?

$20,000 Explanation: This means it earns 2/12 of the insurance premiums in 20X2. This translates to $20,000 of revenue in 20X2 (2/12 × $120,000).

At Line Drive Apparel, practice jerseys are sold for $30. The disposal costs are $5 per jersey. The historical cost is $22 per jersey but the current replacement cost is $20 per jersey. Line Drive Apparel's normal profit margin is 20% of the sale price. What is the net realizable value of each jersey that Line Drive Apparel should use in the lower-of-cost-or-net-realizable-value (NRV) comparison?

$25

Pegasus Software has reported the following items related to its cash flows: Cash at the end of the period $14,500,809 Cash outflows from investing activities ($18,986,983) Cash outflows from financing activities ($2,975,425) If Pegasus Software had $4,650,657 in cash at the beginning of the year, what was the total of cash flows from operating activities?

$31,812,560 Explanation: Pegasus's net change in cash during the year is an increase of $9,850,152 ($14,500,809 − $4,650,657). This means the sum of cash from operating, investing, and financing activities must be $9,850,152. Rearranging the figures results in operating cash flow being equal to "the change in cash - investing − financing." Based on the given information, cash inflows from operating activities must be $31,812,560 ($9,850,152 + $18,986,983 + $2,975,425).

The following information is available for Mercer Industries. Net income $240,000 Depreciation expense $72,000 Dividends paid $108,000 Loss on sale of land $18,000 Decrease in accounts receivable $36,000 Decrease in accounts payable $54,000 What is Mercer's net cash provided by operating activities?

$312,000 Explanation: The final result is a net inflow from operating activities of $312,000 ($240,000 + $72,000 + $18,000 + $36,000 − $54,000).

Blue Fox Industries had the following account balances at year-end. Sales $452,000 Cash 23,400 Accounts payable 14,300 Rent expense 3,700 Accounts receivable 9,400 Cost of goods sold 214,000 Land 104,000 Unearned revenue 6,800 Gain on sale 17,500 Equipment 28,800 Inventories 2,200 Notes payable 67,000 What is the amount of total current assets reported on the balance sheet?

$35,000 Explanation: Cash $23,400 Accounts receivable 9,400 Inventories 2,200 Total $35,000

Use the partial comparative balance sheets for Benchmark Industries to determine the net cash inflow from operating activities. The company had a net income of $300,000, which includes depreciation of $75,000. Equipment with a book value of $140,000 was sold for $90,000 and new equipment was purchased for $290,000. Entry 20X7 20X6 Accounts receivable $59,000 $46,000 Inventory $84,000 $70,000 Prepaid expenses $13,000 $17,000 Buildings $3,800,000 $3,800,000 Accounts payable $105,000 $121,000 Accrued expenses payable $22,000 $15,000

$393,000 Explanation: Increases (decreases) in current assets are then subtracted (added). Last, increases (decreases) in current liabilities are added (subtracted). The final result is a net inflow of $393,000 ($300,000 + $75,000 + $50,000 − $13,000 − $14,000 + $4,000 − $16,000 + $7,000).

The following costs pertain to Den Co.'s purchase of inventory: 700 units of product A $3,750 Freight-in 175 Cost of materials and labor incurred to bring product A to saleable condition 900 Insurance cost during transit of purchased goods 100 Total $4,925 What amount should Den record as the cost of inventory as a result of this purchase?

$4,925

At Feline Fancy, the historical cost of the deluxe cat home is $40 and the retail price is $55. The company will spend $4 to sell the deluxe cat home and can replace it for $42. The company wishes to use the lower-of-cost-or-net-realizable-value comparison and has a profit margin is 30%. What number should they use for the net realizable value?

$51.00 Explanation: This is the selling price ($55) less the costs to sell ($4). This is the definition of net realizable value. Therefore, this is the correct answer.

Echo Company reported net income of $360,000 for the current year. Depreciation recorded on buildings and equipment amounted to $160,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $40,000 $30,000 Accounts receivable 48,000 64,000 Inventories 100,000 130,000 Prepaid expenses 19,000 10,000 Accounts payable 24,000 36,000 Income taxes payable 3,200 2,400 What amount did Echo Company report as cash flows from operating activities?

$545,800 Explanation: The final result is a net inflow from operating activities of $545,800 ($360,000 + $160,000 + $16,000 + $30,000 − $9,000 − $12,000 + $800).

On 1/1/20X9 the CAF Company purchased 30% of the outstanding common stock of the DFG Company for $550,000. During 20X9 CAF earned $1,000,000 in net income and DFG earned $100,000 in net income. In addition, CAF declared $160,000 in dividends and DFG declared $20,000 in dividends. What value will CAF's investment in DFG be carried at on the 12/31/20X9 balance sheet?

$574,000 Explanation: CAF increases its investment account by 30% of DFG's income (30% × $100,000) and decreases its investment account by 30% of DFG's declared dividends (30% × $20,000). This results in an ending balance of $574,000 ($550,000 + $30,000 - $6,000).

Robbins, Inc., leased a machine from Ready Leasing Co. The lease qualifies as a finance lease and requires 10 annual payments of $10,000, with the first payment due at the end of the year. The lease specifies an interest rate of 12% and a purchase option of $10,000 at the end of the tenth year, even though the machine's estimated value on that date is $20,000. Robbins' incremental borrowing rate is 14%. What amount should Robbins record as lease liability at the beginning of the lease term?

$59,722 Explanation: Enter 10 in the N key Enter 12 in the I/YR key Enter 10,000 in the PMT key Hit PV: -56,502 is the present value of the lease payments. The present value of the bargain purchase option: Calculator steps: Clear All Enter 10 in the N key Enter 12 in the I/YR key Enter 10,000 in the FV key Hit PV: -3,220 is the present value of the bargain purchase option. The present value of the finance lease = $56,502 + $3,220 = $59,722. Since the 12% interest rate implicit in the lease is known, the implicit rate is used rather than the 14% incremental borrowing rate. The minimum lease payments include the option payment since it is a bargain purchase option. To calculate the present value of the lease payments with the Time Value Tables, select the Present Value of an Annuity table and look for the factor where 10 Payments and 12% intersect, which is 5.6502. Multiply $10,000 by 5.6502 to get $56,502. To calculate the present value of the bargain purchase option with the Time Value Tables, select the Present Value of $1 table and look for the factor where 10 Periods and 12% intersect, which is 0.3220. Multiply $10,000 by 0.3220 to get $3,220. The present value of the finance lease = $56,502 + $3,220 = $59,722.

On 1/1/20X8 the BNF Company purchased 40% of the outstanding common stock of the CTN Company for $700,000. During 20X8 BNF earned $2,000,000 in net income and CTN had a net loss of $50,000. In addition, BNF declared $200,000 in dividends and CTN declared $15,000 in dividends. What value will BNF's investment in CTN be carried at on the 12/31/20X8 balance sheet?

$674,000 explanation: BNF decreases its investment account by 40% of CTN's net loss (40% × $50,000) and decreases its investment account by 40% of CTN's declared dividends (40% × $15,000). This results in an ending balance of $674,000 ($700,000 - $20,000 - $6,000).

Selected financial information for Kristina Company for the year just ended is shown below. Net income $2,000,000 Increase in accounts receivable 300,000 Decrease in inventory 100,000 Increase in accounts payable 200,000 Depreciation expense 400,000 Gain on sale of available-for-sale securities 700,000 Cash received from the issuance of common stock 800,000 Cash paid for dividends 80,000 Cash paid for the acquisition of land 1,500,000 Cash received from the sale of available-for-sale securities 2,800,000 Kristina's cash flow from financing activities for the year is:

$720,000. Explanation: The answer is calculated as the cash received from the issue of common stock − cash paid for dividends or $800,000 − 80,000 = $720,000. Financing activities include long-term debt and equity cash transactions. The cash acquisition of land and the cash sale of available-for-sale securities are investing transactions.

On December 30, Year 5, Howard Co., leased a typical new machine from Gavin Corp. The following data relate to the lease transaction at the inception of the lease. Lease term 11 years Annual lease payment at the end of each lease year $120,000 Useful life of the machine 13 years Implicit interest rate 11% Present value of an annuity due of $1 for 11 periods at 11% 6.8892 Present value of an ordinary annuity of $1 for 11 periods at 11% 6.2065 Fair value of the machine $1,000,000 The lease has no purchase option, and the possession of the machine reverts to Gavin when the lease terminates. At the inception of the lease, Howard should record a lease liability of:

$744,780.

The IASB has been working closely with the FASB to harmonize the international standards with U.S. GAAP. Differences in accounting treatment exist for all of the following except:

Accounting for inventory using first-in-first out (FIFO).

Which of the following statements concerning differences between US GAAP and IFRS is correct?

Accounting for research expenditures is the same under US GAAP and IFRS but the accounting for development expenditures differs between the two.

When preparing a statement of cash flows, a company must make an adjustment to net income for sales that have been made but for which cash collections have not yet been received. Which of the following describes this circumstance?

An increase in accounts receivable account during the year

ABC Company wants its lease to be considered an operating lease instead of a finance lease. Which of these items should ABC ensure occurs?

Avoiding a transfer of ownership at the conclusion of the lease.

What is one way that cash flows from investing activities are the opposite of cash flows from financing activities?

Cash flows from investing activities frequently reflect cash flows related to cash the company has loaned to others, whereas cash flows from financing activities frequently reflect cash flows related to cash the company has borrowed from others.

Four companies each have a similar total Account Receivables balance and a similar estimated percentage collectible for the number of days past due. If the companies are trying to estimate their bad debt expense using the percentage-of-receivables basis, which company should record the LOWEST amount of Bad Debt Expense? The table reports the company's percentage of total Accounts Receivable in each category. Not Due 1-30 days past due 31-60 days past due Over 60 days past due Company 1 65% 20% 10% 5% Company 2 40% 30% 15% 15% Company 3 10% 20% 35% 35% Company 4 35% 30% 20% 15%

Company 1

Which of the following must be done in order to determine net cash provided by operating activities?

Convert accrual based net income to a cash basis.

A retail company shipped two orders of the same product on the same day. Shipment A was shipped FOB Destination and Shipment B was shipped FOB Shipping Point. Which of the following statements concerning the recognition of cost of goods sold is correct?

Cost of goods sold is recognized for Shipment A when the shipment arrives at the buyer and for Shipment B when the shipment leaves the seller.

In its first year of operations, the LMN Company reported pretax income on its GAAP income statement of $400,000. LMN has a current tax rate of 25% and a future enacted tax rate of 20%. Additional information from LMN is below: Excess of tax depreciation over book depreciation $5,000 Life insurance proceeds from the death of insured executive $10,000 Estimated bad debt expense over actual write-offs $8,000 Cash collected in advance of the provision of goods $11,000 What is LMN's net deferred tax asset or deferred tax liability to be reported on the balance sheet?

Deferred tax asset of $2,800 Explanation: the $5,000 excess tax depreciation results in a deferred tax liability of $1,000 ($5,000 × 20%), the $8,000 estimated bad debt expense over actual write-offs results in a deferred tax asset of $1,600 ($8,000 × 20%), and the $11,000 cash collected in advance of the provision of goods results in a deferred tax asset of $2,200 ($11,000 × 20%).

Mike's Ice Cream Shop has 500 shares of stock outstanding at $1 par value per share. As a reward for a great year, Mike (the majority owner and CEO) is issuing a stock dividend of 300 shares to all shareholders. Current market value of the stock is $20/share. What are the appropriate accounting entries to record this stock dividend?

Dr. Retained earnings $300, Cr. Par value distributable $300

Pristine Products, a wholesaler, uses a periodic inventory system. At year-end, Pristine conducts a physical inventory count to determine which of the following?

Ending inventory

The acquisition cost of a heavily used raw material changes frequently. The inventory amount of this material at year end will be the same if perpetual records (units and costs) are kept as it would be under a periodic inventory method only if the inventory amount is computed under which of the following methods?

First-in, first-out method

The following information is extracted from the records of Silvia Garner Laboratories about marketable securities. Date of purchase Jan-1 Acquisition cost $25,000 Option premium $4,000 Holding cost $8,000 Brokerage fees $2,000 Market value on Dec-31 $30,000 Calculate the amount of gain or loss on revaluation to be reported of the income statement as of December 31.

Gain of $3,000. Explanation: Revaluation gain = $30,000 − ($25,000 + $2,000) = $3,000

While approving the financial statements for the current year, the management accountant of Rachael Groups discovered that sales were overstated. Which of the following is the most likely reason for the overstatement?

General sales tax collected from customers was not accounted for.

According to the FASB's conceptual framework, which of the following is/are included in comprehensive income?

Gross margin and operating income

Which of the following would change as a result of changing inventory cost flow assumptions?

Gross profit on sales

Howe Corporation calculates inventory and cost of goods sold one time at the end of every accounting period. In contrast, Kelty Industries updates their inventory and cost of goods sold accounts multiple times in one day. What is the difference between Howe and Kelty?

Howe uses a periodic system of inventory, whereas Kelty uses a perpetual system of inventory.

Consider the statements below regarding accounting treatments for goodwill under IFRS. Which statement describes the correct accounting treatment for goodwill under IFRS?

IFRS tests goodwill for impairment but goodwill is not amortized.

Washington Rare Coins reported the following stockholders' equity on December 31, 20x6: Common stock, 15,000 shares at $25 par value $375,000 Paid-in capital in excess of par $92,000 Retained earnings $68,000 Total stockholders' equity $535,000 On August 14, 20x7, Washington declared a 2-for-1 stock split. At the time of declaration, shares were selling for $114 per share. Through the first two quarters of the fiscal year, Washington recorded a net loss of $6,500. How will Washington's stockholders' equity section change as a result of this information?

Number of shares will increase to 30,000, par value will decrease to $12.50 per share, and stockholders' equity will decrease to $528,500.

Hayes Incorporated reported the following stockholders' equity on December 31, 20x6: Common stock, 85,000 shares at $50 par value $4,250,000 Paid-in capital in excess of par $583,000 Retained earnings $716,000 Total stockholders' equity $5,549,000 On June 30, 20x7, Hayes declared a 5-for-1 stock split. At the time of declaration, shares were selling for $300 per share. Through the first two quarters of the fiscal year, Hayes recorded a net income of $103,000. How will Hayes' stockholders' equity section change as a result of this information?

Number of shares will increase to 425,000, par value will decrease to $10 per share, and stockholders' equity will increase to $5,652,000.

If a company uses the indirect method to depict cash flows, where, if at all, would the beginning-of-year to end-of-year change in accounts receivable be classified on the statement of cash flows?

Operating activities section

The calculation of comprehensive income includes which of the following?

Operating income

A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?

Operating income will increase by $200,000. Explanation:

A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders?

Operating, investing, financing.

Pierre Company had the following transactions during the fiscal year ending December 31, year 3: Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a gain of $1,000. Paid interest to bondholders for the amount of $275,000 Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million shares outstanding, payable to shareholders of record on January 31, year 4. No dividends were declared or paid in prior years. Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000 on December 31, year 3. Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on December 31, year 3.The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31, year 3 What is the net effect of taking the total cash provided (used) by operating activities, adding it to the cash provided (used) by investing activities, and adding that to the cash provided (used) by financing activities?

Positive cash flow of $27,500. Explanation: The difference between the beginning balance of cash of $150,000, and the ending balance of cash of $177,500 is equal to $27,500.

What are the two steps to determine and measure impairment?

Recoverability Test and Impairment Loss Test.

Which of the following is allowable for financial reporting under IFRS?

Recoveries of previous losses on inventory write-downs.

According to U.S. GAAP, where on the income statement should a multinational company report the loss from the disposal sale of a major operating unit?

Report the loss, net of tax, in a separate section between income from continuing operations and net income.

Curry Seasonings has a patented technology for finely grinding spices while maintaining flavor. This has allowed the company to make some of the world's finest spices. However, recently a competitor patented a newer technology that results in the production of more potent spices than Curry's spices. What would you recommend they do to revalue the intangible asset?

Run a recoverability test and then an impairment loss test by comparing book value to fair value.

What is one major difference between a stock split and a stock dividend?

The par value per share decreases with a stock split but has no change with a stock dividend.

All of the following statements about the accounting for investments in debt securities are true except:

Unrealized gains on available-for-sale securities and held-to-maturity securities are recognized on the statement of comprehensive income as other comprehensive income.

The LIFO conformity rule requires companies using LIFO for tax purposes to do which of the following?

Use LIFO for financial reporting purposes.

All of the following statements concerning valuation allowances and deferred taxes are correct except:

Valuation allowances are most often required for deferred tax liabilities.

Which of the following would result in Walker Industries' inventory being higher than it should be?

Walker miscategorized FOB shipping point goods in transit to a customer as FOB destination.

Ruby has purchased a set of handmade soaps and lotions from HandSpun Corp., which is located out of state. The goods are being shipped FOB destination. When did ownership of these soaps and lotions pass to Ruby?

When they arrived

What is one primary difference between determining cost of goods sold with a periodic system rather than a perpetual system?

With a periodic system, cost of goods sold is calculated only once at the end of the period. In contrast, with a perpetual system, cost of goods sold is recorded each time a sale is made.

Best Billiard Company owns 40% of Supreme Table Company's stock at a historical cost of $300,000. Supreme Table recently reported its earnings for the prior year. Best Billiard's proportional share of Supreme Table's prior year net income was $10,000. Best Billiard also received $15,000 in dividends from Supreme Table in the prior year. Best Billiard uses the equity method as the accounting treatment for this investment. Based on the information presented, the proper presentation of this investment would result in Best Billiard reporting:

a decrease in the book value of its investment in Supreme Table.

Although ________ show changes in account balances from year to year, a ________ gives more detail about how those changes occur.

comparative balance sheets; statement of cash flows

The presentation of the major classes of operating cash receipts (such as receipts from customers) less the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the:

direct method of calculating net cash provided or used by operating activities.

The most commonly used method for calculating and reporting a company's net cash flow from operating activities on its statement of cash flows is the:

indirect method.

Both stock splits and stock dividends ________ total stockholders' equity, while only ________ result in a decrease in the par value of common stock.

maintain; stock splits

A firm has just signed a 6-year lease on a new standardized machine, after which the machine will be returned to the lessor. Fair value of the machine is $450,000. Lease payments are $75,000 per year, payable at the end of the year. The machine has a 10-year useful life. The firm's incremental borrowing cost is 8%. The PV of an ordinary annuity having 6 payments of $1 at 8% is $4.6229. The lease should be classified as:

operating lease.

Whereas comparing a firm's annual balance sheets can help investors ________, analysis of the firm's statements of cash flows will ________.

spot any changes in account balances; provide greater insight as to how these changes occurred

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock was sold for $150,000 during the current fiscal year. The result of this transaction should be shown in the Investing Activities Section of James' Statement of Cash Flows as:

$150,000.

Carlson Company has the following payments recorded for the current period. Dividends paid to Carlson shareholders $150,000 Interest paid on bank loan 250,000 Purchase of equipment 350,000 The total amount of the above items to be shown in the Operating Activities Section of Carlson's Cash Flow Statement should be:

$250,000.

Fielding Manufacturing reported net income of $296,000 including depreciation expense of $90,000. The company sold investments for $12,000 that had a cost of $36,000. Accounts receivable decreased $50,000 and accounts payable increased $46,000. What amount did Fielding report as net cash provided by operating activities?

$506,000 Explanation: This means that cost of goods sold overstates cash used to purchase inventory, which means net income understates cash provided by operating activities. The final result is a net inflow from operating activities of $506,000 ($296,000 + $90,000 + $24,000 + $50,000 + $46,000).

At the end its first year of operations, Hopkins Co. prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $1,500,000 Estimated litigation expense 2,000,000 Extra depreciation for taxes (3,000,000) Taxable income $ 500,000 The estimated litigation expense of $2,000,000 will be deductible in the following year, when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax asset to be recognized is

$600,000 current. Explanation: The amount of the asset is $2,000,000 × 30% = $600,000.

Mirr, Inc. was incorporated on January 1, year 1, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, year 2. No additional activities affected owners' equity in year 1. Mirr's liabilities increased to $120,000 by December 31, year 1. On Mirr's December 31, year 1 balance sheet, total assets should be reported at:

$885,000 Explanation: Assets = Liabilities + Owners' equity $860,000 = $110,000 + $750,000 During year 1, liabilities increased to $120,000, and owners' equity increased to $765,000 [$750,000 beginning balance + $18,000 net income ($82,000 revenues − 64,000 expenses) − $3,000 dividends declared]. Therefore, 12/31/Y1 assets must be $885,000. Assets = Liabilities + Owners' equity $885,000 = $120,000 + $765,000

Let A equal the reported inventory value if the lower-of-cost-or-NRV rule is applied to individual items of inventory, while B equals the reported inventory value if the lower-of-cost-or-NRV rule is applied to the inventory as a whole. In this situation, which of the following is true?

A will always be equal to or less than B.

Alex and Grace are both analyzing intangible assets to determine if they need to be amortized. Alex is analyzing an indefinite-life intangible asset, whereas Grace is analyzing a limited-life intangible asset. What do you expect their conclusions will be?

Alex will decide not to amortize his asset, while Grace will decide to amortize her asset.

Wilson Industries holds a number of government securities. $10,000 of these securities have a one-year maturity date, while $4,000 have an 18-month maturity date. Wilson prepares a classified balance sheet using a 2-year operating cycle. How should these securities be classified?

All $14,000 in government securities should be classified as current assets.

On May 1, Year 1, Reynolds purchased 5,000 shares of common stock of Haywood Corp. for $250,000 and and does not have signifianct influence over Haywood Corp. On December 31, Year 1, the Haywood stock had a fair value of $257,000. How is the gain on the investment in Haywood stock reported in Reynolds's Year 1 financial statements?

As a $7,000 gain in current earnings of the period.

What will be the effect on the financial statements in the year when slower-moving inventory items continue to be valued at historical cost instead of the lower of cost or net realizable value basis?

Assets are overstated and net income is overstated.

When should a typical merchandiser recognize an account receivable?

At the point of sale

In terms of integrated reporting, an organization's system of transforming inputs through its business activities into outputs and outcomes that aim to fulfil the organization's strategic purposes and create value over the short, medium, and long term is known as its:

Business model.

Gadget Corp., a wholesaler, uses a periodic inventory system. At year-end, how does Gadget Corp. determine its ending inventory?

By conducting a physical count of inventory

How does the allowance method of accounting for bad debts satisfy the expense recognition principle?

By estimating uncollectible accounts at the end of each period

Which of the following would be in the noncash activities section of the statement of cash flows?

Conversion of bonds into common stock

The following information is extracted from the financial statements of Foster Machines. Net income $15,000 Depreciation on equipment 2,500 Dividend income 2,500 Interest income 5,000 Increase in accounts receivable 8,000 Increase in current liabilities 6,500 Redemption of bonds 8,500 The cash flows from operations were calculated to be $23,500. Assuming that the company follows U.S. GAAP, which of the following is a potential error in the calculation of cash flow from operations?

Dividend income and interest income were added back to net income to calculate cash flows from operations.

Which depreciation method generally results in the lowest net income for the first year a plant asset is utilized?

Double declining-balance

The entry to record the initial recognition of a finance lease would include which of the following:

Dr. ROU Asset, Cr. Lease Liability

Companies wishing to minimize income taxes should use which inventory cost flow method during times when prices are declining?

FIFO

If a company wishes to maximize net income, which inventory cost flow method would it use during inflationary periods?

FIFO

In periods of rising prices, which inventory cost flow assumption will yield the highest gross profit?

FIFO

Amanda Williams, a financial analyst, is converting a last in, first out (LIFO) income statement to a first in, first out (FIFO) income statement to value a stock. She finds it difficult to calculate FIFO cost of goods sold (COGS), so she develops a mathematical expression to show the relationship. Which is the most likely expression that she can derive to calculate FIFO COGS for all companies?

FIFO COGS = LIFO COGS − Change in LIFO reserve

Reflecting on the six capitals included in Integrated Report, all of the following statements about Financial Capital are true except:

Financial Capital includes all elements of Working Capital.

The symbol <IR> refers to:

Integrated Reporting.

A company's portfolio of patents is an example of which of the Six Capitals under Integrated Reporting?

Intellectual capital

As of December 31, 20x8, Mather Corporation's net cash flow from operating activities was $174,000 and its net income was $158,600. Over the course of 20x8, Mather's accounts payable balance dropped by several thousand dollars. If Mather uses the indirect method to calculate net cash flows and the only other asset and liability is accounts receivable, then which of the following statements is accurate?

Mather must have seen a significant decrease in its accounts receivable balance over the course of 20x8.

FIFO is used when prices are declining and companies wish to do which of the following?

Minimize income taxes

LIFO is used when prices are rising and companies wish to do which of the following?

Minimize income taxes

Which of the following statements regarding natural capital, as defined within Integrated Reporting, is true?

Natural capital includes biodiversity and eco-system health.

In which section of the statement of cash flows would a gain on the sale of equipment be reported?

Operating

Assuming no beginning inventory, what is the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?

Prices will decrease.

Saunders Publishing has been the most recognized name in publishing science fiction novels over the past 50 years. However, recently a new publisher that only publishes books digitally has greatly cut into the company's profit, and the Saunders Publishing brand (valued and recorded by the current owner when they purchased the business three years ago) is declining in recognition. What would you recommend that Saunders do to revalue the intangible asset?

Run an impairment test based on fair value only.

How is the comparative balance sheet related to the statement of cash flows when accounting for the purchase of property, plant, or equipment?

The comparative balance sheet shows the increase to the Property, Plant, and Equipment account during the year, and the statement of cash flows shows how the purchase of the property, plant, or equipment was financed.

All of the following are criteria for a lease to be classified as a finance lease except:

The lease term is for a minor part of the remaining economic life of the asset.

Last year, XYZ Inc. sold one of its warehouse facilities for $1.5 million. It also earned $25,000 in interest on a loan that it made to another company. How should these transactions be reflected on XYZ's annual statement of cash flows, and why?

The two transactions should be reported in separate sections of the statement because one involves long-term assets while the other involves income. Specifically, XYZ should record a $1.5 million cash inflow in the investing activities section and a $25,000 cash inflow in the operating activities section.

What is the difference in accounting between a research cost and a development cost?

There are no differences in accounting between research costs and development costs.

Candela Company has retained earnings of $500,000, common stock of $400,000, and total common stockholders' equity of $1,200,000. It has 200,000 shares of $2 par value common stock outstanding, which is currently selling for $5 per share. If Candela Company declares a 2-for-1 stock split on its common stock, which of the following will occur?

There will be no effect on total common stockholders' equity.

How are expenses and losses similar?

They both decrease net income.

Jason is meeting with the accounting staff and executives at Haskins Plumbing to discuss significant year end tax provision issues related to financial statement preparation. For which of the following reasons might the accountants and executives have called this meeting?

They have deferred tax assets that need to be assessed for a valuation allowance.

Benson Toys spent $21 million on research and development in 20x6. This R&D resulted in eight new product patents. The fees associated with obtaining the patents totaled $517,000. When Benson does their accounting, how will they record these costs?

They will expense $21 million and capitalize $517,000.

The management accountant of Tillboard Inc. has recognized a sale of receivables (factoring) in the books for the current year. In support of the decision to record this transaction as a sale, management points to the ability of the buyer to sell the receivables and the surrender of control over the receivables to the buyer. Which of the following contract terms for the transfer of the receivables to the buyer may prohibit Tillboard from recording the transaction as a sale?

Tillboard agrees to repurchase the asset before its maturity.

All of the following are conditions for recognizing revenue at a point in time under the FASB's revenue recognition standard except:

Title to the asset transfers to the customer when they pay for the asset in full.

Under the allowance method, what happens when a specific account is written off?

Total assets will be unchanged.

How does IFRS differ from U.S. GAAP with respect to accounting for development costs?

U.S. GAAP does not allow capitalization of development costs until technically feasible, whereas IFRS does.

Consider the statements below regarding accounting treatments for goodwill under U.S. GAAP. Which statement is the most correct description of the accounting treatment for goodwill under U.S. GAAP?

U.S. GAAP tests goodwill for impairment but goodwill is not amortized.

A company building its own warehouse expects to spend $1,000,000 on the project. It took out a loan for $400,000 to finance part of the construction of the building. It also has taken out loans for general corporate purposes totaling $2,000,000. Which of the following statements concerning capitalized interest is correct?

Under US GAAP the company could capitalize interest from both loans, while under IFRS the company could capitalize only the interest on the $400,000 loan.

All of the following statements concerning the Assurance Warranty approach to accounting for warranties is correct except:

Under the Assurance Warranty approach, a liability for deferred revenue is recorded when a product is sold with an attached warranty.

Sweetwater Water Sports owns 35% of Surfside Surf Shop's voting stock. In 20X6, Surfside recorded net income of $300,000 and paid dividends of $30,000. If Sweetwater mistakenly recorded these transactions using the fair value method (no significant influence) rather than the equity method (significant influence), how would this affect the balance of their investment account, net income, and retained earnings, respectively?

Understate, understate, understate

If the allowance method is used to account for uncollectible accounts, when is bad debt expense debited?

When management estimates the amount of uncollectibles

Whitlow Incorporated and Tanaka Manufacturing both have unrealized gains from purchased debt securities. Whitlow reported their unrealized gains on the income statement as part of net income, but Tanaka did not. Why?

Whitlow classified their debt securities as trading securities, whereas Tanaka classified their debt securities as available-for-sale securities.

Wells Enterprises holds a debt that is due 20 months from now. Wells prepares a classified balance sheet using a one-year operating cycle. How would classification of this debt be different if Wells used a two-year operating cycle?

With the one-year cycle it is classified as a long-term liability, while with a two-year cycle it is classified as a current liability.

Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000, in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year's financial statements under U.S. GAAP?

$0 Explanation: This answer is correct because under U.S. GAAP, previously recognized impairments of fixed assets may not be recovered or reversed.

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale securities purchased 10,000 increase Bonds payable—issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year?

$0 Explanation: the net cash from operating activities is $70,000 − $40,000 − $30,000 = $0. The mortgage repayment is a financing activity. The available-for-sale securities purchased are an investing activity, and the bonds issued are a financing activity.

Filmore Construction has a 5-year construction contract to build 300 miles of highway for $2,000,000. The estimated total cost to complete the project is $900,000. During Year 1, Filmore incurred costs of $270,000 and completed 75 miles of highway. At the end of Year 2, Filmore incurred total costs of $540,000 and completed a total of 180 miles of highway. How much revenue would Jackson report in Year 1 and Year 2 assuming the contract does not qualify for revenue recognition over time?

$0 and $0

For the fiscal year just ended, Doran Electronics had the following results. Net income $ 920,000 Depreciation expense 110,000 Increase in accounts payable 45,000 Increase in accounts receivable 73,000 Increase in deferred income tax liability 16,000 Doran's net cash flow from operating activities is:

$1,018,000.

Acompany is preparing its financial statements in accordance with U.S. GAAP. Listed below are select financial data for the company. Net income = $950,000 Depreciation = $40,000 Investment by owners = $60,000 Unrealized gain on available-for-sale securities = $90,000 Foreign currency translation loss = $20,000 What is the amount that would be reported as comprehensive income?

$1,020,000 Explanation: In this example, comprehensive income includes the net income of $950,000, the unrealized gain on available-for-sale securities of $90,000, and the foreign currency translation loss of $20,000 ($950,000 + $90,000 − $20,000).

The Smalltown Technology Corporation has prepared the following information. Comparative Balance Sheets, end of year ($000 omitted) Current Year Prior Year Current Year Prior Year Cash $ 300 $ 400 Accounts payable $1,000 $ 900 Accounts receivable 1,200 1,000 Accrued liabilities 150 180 Inventory 1,000 800 Current liabilities 1,150 1,080 Current assets 2,500 2,200 Long-term debt 1,200 900 Plant & equipment 6,250 4,300 Accum. depreciation (2,050) (900) Common stock 100 100 Net Plant & equipment 4,200 3,400 Additional paid-in capital 2,900 2,900 Retained earnings 1,350 620 Total assets $6,700 $5,600 Debt and Equity $6,700 $5,600 Income Statement ($000 omitted) Current Year Prior Year Revenue $12,800 $8,350 Cost of goods sold 9,856 6,263 Gross profit 2,944 2,087 Selling and admin expense 577 154 Depreciation 1,150 900 Pre tax income 1,217 1,033 Income tax 487 413 Net income $ 730 $ 620 Calculate the cash flow from operating activities in Current year.

$1,550. Explanation: Cash flow from operations (indirect method) = net income + non-cash debits in income statement − non-cash credits in income statement + increases in current liabilities (except dividends payable) + decreases in current assets (except cash and cash equivalents) − decreases in current liabilities (except dividends payable) − increases in current assets (except cash and cash equivalents) Cash flow from operations (indirect method) = $730 net income + $1,150 depreciation + $100 increase in accounts payable − $30 decrease in accrued liabilities − $200 increase in accounts receivable − $200 increase in inventory = $1,550.

A consulting company won a $20.8 million three-year contract. The contract requires software development, hosting, and maintenance over three years. The total estimated cost of the project is $17 million, with $10 million expected in Year 1, $5 million in Year 2, and $2 million in Year 3. The billing schedule shows that $5 million will be billed upon start of the work, and then $5 million at each year end. At the end of the first year, the actual cost incurred is $9 million, and total estimated costs are unchanged at $17 million. Using the percentage-of-completion method, how much revenue should be recognized at the end of the first year?

$11 million Explanation: This means that revenue of $11 million should be recognized at the end of the first year [($9 ÷ $17) × $20.8 million].

On January 1, 20X5, Blaugh Co. signed a lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 20X5, and continuing each year for 30 years. The lease qualifies as a finance lease. On January 1, 20X5, the present value of the lease payments is $112,578 at the 8% interest rate implicit in the lease. In Blaugh's December 31, 20X5, balance sheet, the finance lease liability should be:

$111,584. Explanation: The finance lease liability is calculated below. Present value at 1/1/X5 $112,578 Payment made 12/30/X5 $10,000 Interest portion for 20X5 (8% × $112,578) $ 9,006 Portion applied to the liability $ 994 Finance lease liability 12/31/X5 $111,584

A company signs a 4-year lease for a piece of machinery on January 1, 20X0, with the first payment of $68,000 being due on December 31, 20X0, and continuing on December 31 thereafter. The company's incremental borrowing rate is 9% and the rate implicit in the lease is unknown. The present value of the minimum lease payments is $220,301. The lease is correctly classified as an operating lease. What is the balance in the lease liability after the second lease payment is made on December 31, 20X1?

$119,620 Explanation: Implicit interest in 20X0 is $19,827 (9% × $220,301) and the lease liability amortization is $48,173 ($68,000 - $19,827). This results in a lease liability balance of $172,128 on December 31, 20X0 ($220,301 - $48,173). In the same way, the implicit interest in 20X1 is $15,492 (9% × $172,128) and the lease liability amortization is $52,508 ($68,000 - $15,492). This results in a lease liability balance of $119,620 on December 31, 20X1 ($172,128 - $52,508).

A company signs a 4-year lease for a piece of machinery on January 1, 20X0, with the first payment of $75,000 being due on December 31, 20X0, and continuing on December 31 thereafter. The company's incremental borrowing rate is 8% and the rate implicit in the lease is unknown. The present value of the minimum lease payments is $248,410. The lease is correctly classified as a finance lease. What is the balance in the lease liability after the second lease payment is made on December 31, 20X1?

$133,745 Explanation: Interest expense in 20X0 is $19,873 (8% × $248,410) and the lease liability amortization is $55,127 ($75,000 - $19,873). This results in a lease liability balance of $193,283 on December 31, 20X0 ($248,410 - $55,127). In the same way, the interest expense in 20X1 is $15,462 (8% × $193,283) and the lease liability amortization is $59,538 ($75,000 - $15,462). This results in a lease liability balance of $133,475 on December 31, 20X1 ($193,283 - $59,538).

Ironwood Company's net income is $399,000. During the year accounts receivable increased $196,000 and accounts payable decreased $56,000. Using the indirect method of preparing the statement of cash flows, what amount will be reported as cash provided by operating activities?

$147,000 Explanation: The final result is a net inflow from operating activities of $147,000 ($399,000 − $196,000 − $56,000). Therefore, this is the correct answer.

In January Year 1 Colonial Company purchased equipment for $120,000, to be used in its manufacturing operations. The equipment was estimated to have a useful life of 8 years, with salvage value estimated at $12,000. Colonial considered various methods of depreciation and selected the sum-of-the-years' digits method. On December 31, Year 2, the related allowance for accumulated depreciation should have a balance:

$18,000 greater than under the straight-line method. Explanation: SYD depreciation = (# of years remaining sum of the year's digits) × (cost − salvage value) Year 1: (8 ÷ 36) × ($120,000 − $12,000) = $24,000 Year 2: (7 ÷ 36) × ($120,000 − $12,000) = $21,000 SYD accumulated depreciation: $45,000 Straight-line depreciation = (cost − salvage value) ÷ useful life Straight-line: ($120,000 − $12,000) ÷ 8 = $13,500 depreciation per year Straight-line accumulated depreciation: $27,000 DDB depreciation = (2 ÷ useful life) × book value Year 1: (2 ÷ 8) × $120,000 = $30,000 Year 2: (2 ÷ 8) × ($120,000 − $30,000) = $22,500 DDB accumulated depreciation: $52,500 Difference between SYD and straight-line: $45,000 − $27,000 = $18,000 Difference between SYD and DDB: $45,000 − $52,500 = −$7,500

The LAL Company signs a contract with GHY Company that will run from March 1, 20X2, through June 30, 20X2. GHY agrees to purchase a minimum of 100 units from LAL during that time. The selling price for the first 100 units is $200 per unit. The selling price for between 101 and 200 units is $180 per unit, and any additional units above 200 will be $160 per unit. LAL estimates that there is a 30% chance GHY will purchase 100 units under the contract, a 50% chance it will purchase 200 units, and a 20% chance it will purchase 250 units. On March 15, GHY purchases 75 units. What is the transaction price per unit LAL should use for the purchase?

$191.11

Bucca Warehousing Corporation, a company in the business of buying and selling buildings, bought a building at auction on June 30, Year 1, for $1,000,000. On July 2, Year 1, Bucca sold it to a triple-A rated company for $1,200,000. Title and physical possession of the building have transferred to the purchasing company, and they have formally accepted it. Bucca received a cash down payment of $300,000 and a first mortgage note at the market rate of interest for the balance. No additional payments were required until Year 2. On September 1, Year 1, an independent appraiser valued the building at $1,500,000. On its Year 1 income tax return, Bucca reported the sale on the installment basis. How much gain or loss should Bucca recognize in its income statement for the year ended December 31, Year 1?

$200,000 Sales price - Cost of building = Gain recognized $1,200,000 - $1,000,000 = $200,000

Onyx Inc.'s net income is $570,000. During the year accounts receivable increased $280,000 and accounts payable decreased $80,000. Using the indirect method of preparing the statement of cash flows, what amount will be reported as cash provided by operating activities?

$210,000

At Line Drive Apparel, practice jerseys are sold for $30. The disposal costs are $5 per jersey. The historical cost is $22 per jersey but the current replacement cost is $20 per jersey. Line Drive Apparel's normal profit margin is 20% of the sale price. Using the lower-of-cost-or-net-realizable-value (NRV) comparison, what should be the inventory value of each jersey?

$22

The following information is extracted from the financial statements of BrentPage. Net income $25,000 Depreciation on equipment 2,000 Dividend income 3,500 Interest income 3,000 Increase in current assets 5,400 Increase in current liabilities 500 Loans granted to subsidiaries 12,000 Assuming the company follows U.S. GAAP, calculate the cash flow from operating activities.

$22,100 Explanation: CFO = Net income + Depreciation − Increase in current assets + Increase in current liabilities = $25,000 + $2,000 − $5,400 + $500 = $22,100. Remember that dividend and interest income are already included in net income and should not be added a second time.

The XYZ Company has the following liabilities as of 12/31/20X8: Liabilities as of 12/31/20X8 Liability Comments Note Payable of $100,000 $20,000 is due on 12/15/20X9 Bond Payable of $200,000 Bonds mature on 5/1/20X9. The Board of Directors voted on 11/30/20X8 to approach the lender in January about refinancing for 5 additional years. No agreement has been reached. Bond Payable of $100,000 Bonds mature on 3/1/20X9 The Board of Directors voted on 11/30/20X8 to approach the lender about refinancing for an additional 10 years. An agreement to refinance for 10 years was reached on 2/1/20X9. Assuming XYZ's operating cycle is less than 12 months and it issues its financial statements on 3/15/20X9, how much would it classify as current liabilities on its 12/31/20X8 balance sheet?

$220,000 Explanation: The $20,000 of the note maturing on 12/15/20X9 is a current liability as of 12/31/20X8. Under US GAAP, companies can classify a debt due within the next 12 months or one operating (whichever is longer) as a long-term liability if it has the intent and ability to refinance the debt on a long-term basis. While XYZ has the intent to refinance the $200,000 in bonds due on 5/1/20X9, it does not have the ability. Therefore, the $200,000 is a current liability. The $100,000 qualifies as a long-term liability since XYZ has the intent and ability to refinance the debt on a long-term basis. As long as the refinancing agreement is made prior to the financial statements being issued, ability is demonstrated.

The following information is available for Matthews Holdings Inc.: Net sales $25,000 Depreciation 2,000 Cost of goods sold 3,500 Gain on sale of asset 3,000 Loss from discontinued operations 5,400 Gain from unusual items 500 Calculate the income from continuing operations.

$23,000 Explanation: Net sales $25,000 Less: Cost of goods sold 3,500 Less: Depreciation 2,000 Add: Gain on sale of asset 3,000 Add: Gain from unusual items 500 $23,000

In its first year of operations, the ABC Company reported pretax income on its GAAP income statement of $250,000. Additional information from ABC is below: Excess of tax depreciation over book depreciation $25,000 Interest revenue received on municipal bonds $3,500 Interest revenue received on corporate bonds $5,000 Estimated warranty expense over actual warranty expenditures $8,000 Fines paid $4,000 How much taxable income will ABC report on its tax return?

$233,500 Explanation: This results in taxable income of $233,500 ($250,000 - $3,500 + $4,000 - $25,000 + $8,000).

Atwater Company has recorded the following payments for the current period. Purchase Trillium stock $300,000 Dividends paid to Atwater shareholders 200,000 Repurchase of Atwater Compnay stock 400,000 The amount to be shown in the Investing Activities Section of Atwater's Cash Flow Statement should be:

$300,000.

Neiman Textiles has reported the following items related to its cash flows: Cash at the end of the period $18,472,496 Cash outflows from investing activities ($21,951,713) Cash outflows from financing activities ($4,276,384) If Neiman Textiles had $12,384,697 in cash at the beginning of the year, what was the total of cash inflows from operating activities?

$32,315,896 Explanation: Neiman's net change in cash during the year is an increase of $6,087,799 ($18,472,496 − $12,384,697). This means the sum of cash from operating, investing, and financing activities must be $6,087,799. Rearranging the figures results in operating cash flow being equal to "the change in cash - investing - financing." Based on the given information, cash inflows from operating activities must be $32,315,896 ($6,087,799 + $21,951,713 + $4,276,384).

Big Seller Co. sells a TV and Speaker combination for $510 dollars. The TV is delivered immediately, and the speakers are shipped to the customer later that week. The TV sells alone for $380 dollars, and the speakers sell alone for $190 dollars. How much revenue should Big Seller Co. recognize from the TV when sold as part of the combo?

$340 Explanation: the standalone selling prices are used. The TV's proportion of the standalone selling prices is ($380) ÷ ($380 + $190) = 66.67%. This percentage is then multiplied by the selling price of the combination; 66.67% × $510 = $340.

Triton Corp reported net income of $207,200, including depreciation expense of $63,000. The company sold investments for $8,400 that had a cost of $25,200. Accounts receivable decreased $35,000 and accounts payable increased $32,200. What amount did Triton report as net cash provided by operating activities?

$354,200 Explanation: The final result is a net inflow from operating activities of $354,200 ($207,200 + $63,000 + $16,800 + $35,000 + $32,200).

The following information is available for Mercer Industries. Net income $240,000 Depreciation expense $72,000 Dividends paid $108,000 Gain on sale of land $18,000 Increase in accounts receivable $36,000 Increase in accounts payable $108,000 What is Mercer's net cash provided by operating activities?

$366,000 Explanation: The final result is a net inflow from operating activities of $366,000 ($240,000 + $72,000 − $18,000 − $36,000 + $108,000).

A company signs a contract to provide two separate products to a customer for $500. The products are considered to be separate performance obligations. Product 1 has a stand-alone price of $450 and Product 2 has a stand-alone price of $150. How should the contract price of $500 be allocated between Product 1 and Product 2?

$375 for Product 1 and $125 for Product 2

The following information is available for Becker Manufacturing. Net income $300,000 Depreciation expense $90,000 Dividends paid $135,000 Loss on sale of land $22,500 Decrease in accounts receivable $45,000 Decrease in accounts payable $67,500 What is Becker's net cash provided by operating activities?

$390,000

Jackson Construction has a 4-year construction contract to build 250 miles of highway for $1,000,000. The estimated total cost to complete the project is $400,000. During Year 1, Jackson incurred costs of $120,000 and completed 60 miles of highway. At the end of Year 2, Jackson incurred total costs of $280,000 and completed a total of 130 miles of highway. How much revenue would Jackson report in Year 2 under the input method and the output method to recognize revenue, respectively, assuming the contract qualifies for revenue recognition over time?

$400,000 and $280,000 Explanation: At the end of Year 1, Jackson has incurred 30% of the total expected costs ($120,000 ÷ $400,000) and completed 24% of the miles (60 ÷ 250). This means it would recognize $300,000 of revenue under the input method ($1,000,000 × 30%) and $240,000 of revenue under the output method ($1,000,000 × 24%) in Year 1. At the end of Year 2, Jackson has incurred 70% of the total expected costs ($280,000 ÷ $400,000) and completed 52% of the miles (130 ÷ 250). This means it would recognize $700,000 of total revenue under the input method ($1,000,000 × 70%) and $520,000 of total revenue under the output method ($1,000,000 × 52%) by the end of Year 2. Since it recognized $300,000 and $240,000, respectively, in Year 1, it would recognize $400,000 ($700,000 - $300,000) under the input method and $280,000 ($520,000 - $240,000) under the output method in Year 2.

The following was reported for Jyn's Company for 2016: Sales revenue $1,530,000 Cost of goods sold 1,050,000 Operating expenses 165,000 Unrealized holding gain on available-for-sale securities 90,000 Cash dividends received on the securities 6,000 What would be the amount of comprehensive income for 2016?

$411,000 Explanation: To find the comprehensive income, we must subtract the cost of goods sold and the operating expenses from sales revenue and then add both the unrealized holding gain and the cash dividends received: $1,530,000 -- $1,050,000 - $165,000 + $90,000 + $6,000 = $411,000

Orchid Company reported net income of $288,000 for the current year. Depreciation recorded on buildings and equipment amounted to $128,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $32,000 $24,000 Accounts receivable 38,400 51,200 Inventories 80,000 104,000 Prepaid expenses 15,200 8,000 Accounts payable 19,200 28,800 Income taxes payable 2,560 1,920 What is cash flow from operating activities?

$436,640

In its first year of operations, the XYZ Company reported taxable income on its tax return of $400,000. Additional information from XYZ is below: Excess of tax depreciation over book depreciation $20,000 Life insurance proceeds on its CFO $25,000 Interest expense paid on its bonds $6,000 Estimated bad debt expense over actual write-offs $1,000 Fines paid $2,000 How much pretax income was reported on XYZ's GAAP income statement?

$442,000 Explanation: This results in pretax income on XYZ's GAAP income statement of $442,000 ($400,000 + $25,000 - $2,000 + $20,000 - $1,000).

In the Winterbottom Company, land decreased $75,000 because of a cash sale for $75,000, the equipment account increased $30,000 as a result of a cash purchase, and Bonds Payable increased $100,000 from an issuance for cash at face value. What is the net cash provided by investing activities?

$45,000 Explanation: The net result is a cash inflow of $45,000 from investing activities ($75,000 − $30,000).

A company grants its employees $180,000 in stock-based compensation. The grant will vest (graded vesting) over 4 years. How much expense may be recorded under US GAAP and IFRS, respectively, in the year the grant is made?

$45,000 and $93,750. Explanation: $45,000 ($180,000 ÷ 4) one-half of the second "grant" is expensed ($45,000 ÷ 2), one-third of the third "grant" is expensed ($45,000 ÷ 3), and one-fourth of the fourth "grant" is expensed ($45,000 ÷ 4). This results in total expense in year 1 of $93,750 ($45,000 + $22,500 + $15,000 + $11,250).

At the end of the current fiscal year, XL Company reported net income of $40,000. In addition, the following information is available: Prior Fiscal Year Current Fiscal Year Accounts receivable $ 15,000.00 $ 18,000.00 Inventories 33,000 28,500 Prepaid expenses 9,000 10,500 Accounts payable 21,000 28,500 Long-term debt 105,000 93,000 Using the indirect method, what amount should be reported as cash flow from operating activities on XL's Statement of Cash Flows for the current fiscal year?

$47,500. Explanation: The cash flow provided from operating activities is computed by taking the net income of $40,000, less the increase in accounts receivable of $3,000 and less the prepaid expenses increase of $1,500, plus the decrease inventories of $4,500, plus the increase in accounts payable of $7,500.

A company uses the calendar year as its financial results reporting time period. On May 31 of the prior year, the company committed to a plan to sell a line of business. As a result, the operation of this line of business and cash flows will be eliminated from the company's operations, and the company will have no significant continuing involvement with the line of business subsequent to the disposal. For the period January 1 through May 31of the prior year, the line of business had revenues of $1,000,000 and expenses of $1,600,000. The assets of the line of business were sold on November 30 at a loss for which no tax benefit is available. In its income statement for the year ended December 31of prior year, how should the company report the line of business operations from January 1 through May 31?

$600,000 should be included in the determination of income or loss from operations of a discontinued component.

Barber Company has recorded the following payments for the current period. Interest paid on bank loan $300,000 Dividends paid to Barber shareholders 200,000 Repurchase of Barber Company stock 400,000 The amount to be shown in the Financing Activities Section of Barber's Cash Flow Statement should be:

$600,000. Explanation: Both dividends paid to Barber shareholders and the repurchase of Barber Company stock are financing activities. Financing activities include long-term debt and equity cash transactions. Interest paid is included in operating cash flows.

A company signs a 4-year lease for a piece of machinery on January 1, 20X0, with the first payment of $68,000 being due on December 31, 20X0, and continuing on December 31 thereafter. The company's incremental borrowing rate is 9% and the rate implicit in the lease is unknown. The present value of the minimum lease payments is $220,301. The lease is correctly classified as an operating lease. What is the total expense related to the lease for 20X0?

$68,000

If a company recognizes total lease-related expense of $70,000 in the first year of an operating lease, how much expense would it recognize in the second year of the lease, assuming lease payments are the same each year?

$70,000

A company signs a 4-year lease for a piece of machinery on January 1, 20X0, with the first payment of $75,000 being due on December 31, 20X0, and continuing on December 31 thereafter. The company's incremental borrowing rate is 8% and the rate implicit in the lease is unknown. The present value of the minimum lease payments is $248,410. The lease is correctly classified as a finance lease. What is the total expense related to the lease for 20X0?

$81,976 Explanation: For this lease, the annual amortization expense is $62,103 ($248,410 ÷ 4). The annual interest expense is calculated using the effective-interest method. The interest expense on the lease liability in 20X0 is $19,873 (8% × $248,410). The total expense is $81,976 ($62,103 + $19,873).

Ashe Co. recorded the following data pertaining to raw material X during January Year 2: Date Units Received Cost Sold On hand 1/01/Y2 Inventory $8.00 3,200 1/11Y2 Sale 1,600 1,600 1/22Y2 Purchase 4,800 $9.60 6,400 The moving-average unit cost of X inventory at January 31, Year 2, is:

$9.20 Explanation: After the 1/11/Y2 issue, Ashe has on hand 1600 units (3200 − 1600) at a cost of $8.00 each. After the 1/22/Y2 purchase, Ashe has on hand 6400 units at a total cost of $58,880 (see computation below). Units Cost Extension 1,600 × $8.00 = $12,800 4,800 × $9.60 = $46,080 6,400 $58,880 Therefore, the moving-average unit cost is $9.20 ($58,880 ÷ 6,400). Note that since 1/4 of the units cost $8.00 and 3/4 cost $9.60, a shortcut approach is: (1/4 × $8.00) + (3/4 × $9.60) = $9.20.

A company uses the IFRS lower-of-cost-or-market (LCM) rule to value its inventory of frozen foods. The company applies this LCM method on a total inventory basis, not directly to each item of frozen food. Information on the frozen food inventory at December 31 of the year just ended is provided below. Replacement cost $80,000 Net realizable value less profit margin 85,000 Weighted average cost 90,000 Net realizable value 100,000 Using this LCM approach, the company should value its inventory at

$90,000. Explanation: The IFRS LCM rule uses the lower of cost or net realizable value. $90,000 is the lower of weighted average cost used by the company for its inventory valuation and net realizable value.

In the Tolmer Company, Treasury Stock increased $15,000 from a cash purchase, and Retained Earnings increased $40,000 as a result of net income of $62,000 and cash dividends paid of $22,000. What is the net cash used by financing activities?

($37,000) Explanation: The net result is a cash outflow of $37,000 from financing activities ($15,000 + $22,000).

At the end of the current fiscal year, XL Company reported net income of $40,000. In addition, the following information is available. Prior Fiscal Year Current Fiscal Year Notes Payable $ 13,000 $ 14,500 Additional Paid-in Capital 17,500 20,500 Long-term debt 105,000 93,000 Common Stock 100,000 101,000 Cash dividends paid 30,000 33,000 Using the indirect method, what amount should be reported as cash flow from financing activities on XL's Statement of Cash Flows for the current fiscal year?

($39,500). Explanation: Increase in notes payable of $1,500, adding the increase in additional paid-in capital of $3,000, less the decrease in long-term debt of $12,000, plus the increase in common stock of $1,000, less the entire amount of the cash dividends paid (not the increase/decrease from prior year) of $33,000.

Gourmet Foods has reported the following items regarding its cash/cash flows: Cash at the beginning of the period $4,864,908 Cash outflows from investing activities ($8,986,983) Cash inflows from operating activities $8,465,425 If Gourmet Foods had $3,650,657 in cash at the end of the year, what was the amount of cash inflows or outflows from financing activities?

($692,693)

The sum-of-the-years' digits method of depreciation is being used for a machine with a 5-year estimated useful life. What would be the fraction applied to the cost to be depreciated in the second year?

4/15 Explanation: remaining useful life at the beginning of the year for which depreciation is to be taken/ SYD (1+2+3+4+5)

How does the classification of a cash equivalent differ from the classification of a current asset?

A cash equivalent is an investment that will be turned into cash within three months or less, whereas a current asset will be turned into cash within one year or within one operating cycle, whichever is longer.

Which of the following situations is not an example of what could cause impairment in an asset?

A current-period gain combined with a history of gains or a projection of continuing gains associated with the asset.

Which one of the following should be classified as an operating activity on the statement of cash flows?

A decrease in accounts payable during the year.

Which of the following would cause a reduction in stockholders' equity on the balance sheet?

A deficit in retained earnings

Which of the following statements concerning differences between US GAAP and IFRS is correct?

A fixed asset comprised of separately identifiable components is depreciated as one asset under US GAAP and as separate components under IFRS.

Which of the following is a distinguishing feature of the declining balance method of calculating depreciation?

A larger cost of depreciation is associated with the earlier years of the asset's useful life.

The LMN Company purchased 1,000 Company X bonds on December 1, 20X9 for $1,050 per bond. When it purchased these bonds, LMN did not intend to sell them in the short-term in order to raise cash or to hold onto them until maturity. It purchased 200 shares of Company B's stock at $50 per share on December 3, 20X9. Company B has issued 5,000,000 shares of stock. It sold 120 shares of Company B stock on December 16, 20X9, for $53 per share. At the end of December, Company B's stock was selling for $52 per share and Company X's bonds were selling for $1,000 per bond. How would these transactions be reflected on LMN's financial statements issued as of December 31, 20X9?

A realized gain of $360 on the income statement, an unrealized gain of $160 on the income statement, and an unrealized loss of $50,000 on the statement of comprehensive income

The XYZ Company purchased 90 Company D bonds on June 1, 20X9, for $950 per bond. When it purchased these bonds, it had the intent to sell them in the short-term in order to raise cash. It purchased 100 shares of Company A's stock at $10 per share on June 3, 20X9. Company A has issued 1,000,000 shares of stock. XYZ sold 60 shares of Company A stock on June 19, 20X9, for $11 per share. At the end of June, Company A's stock was selling for $11.25 per share and Company D's bonds were selling for $975 per bond. How would these transactions be reflected on XYZ's financial statements issued as of June 30, 20X9?

A realized gain of $60 on the income statement and unrealized gains of $2,300 on the income statement

The SMF Company purchased 900 Company K bonds on December 1, 20X5, for $1,000 per bond. When it purchased these bonds, SMF did not intend to sell them in the short-term in order to raise cash or to hold onto them until maturity. It purchased 1,000 shares of Company O's stock at $70 per share on December 3, 20X5. Company O has issued 10,000,000 shares of stock. It sold 400 shares of Company O stock on December 16, 20X5, for $72 per share. On December 29, 20X5, Company O paid SMF $100 in dividends and Company K paid SMF $85 in interest. At the end of December, Company O's stock was selling for $73 per share and Company K's bonds were selling for $1,010 per bond. How would these transactions be reflected on SMF's financial statements issued as of December 31, 20X5?

A realized gain of $800 on the income statement, dividend revenue of $100 on the income statement, interest revenue of $85 on the income statement, an unrealized gain of $1,800 on the income statement, and an unrealized gain of $9,000 on the statement of comprehensive income

The KIP Company purchased 200 Company Y bonds on June 1, 20X7, for $1,000 per bond. When it purchased these bonds, it had the intent to sell them in the short-term in order to raise cash. It purchased 600 shares of Company E's stock at $60 per share on June 3, 20X7. Company E has issued 10,000,000 shares of stock. KIP sold 200 shares of Company E stock on June 19, 20X7, for $58 per share. On June 29, 20X7, Company E paid KIP $25 in dividends and Company Y paid KIP $65 in interest. At the end of June, Company E's stock was selling for $55 per share and Company Y's bonds were selling for $1,025 per bond. How would these transactions be reflected on KIP's financial statements issued as of June 30, 20X7?

A realized loss of $400 on the income statement, interest revenue of $65 on the income statement, $25 in dividend revenue on the income statement, an unrealized loss of $2,000 on the income statement, and an unrealized gain of $5,000 on the income statement

Disposal of which of the following would qualify as a disposal of a component?

A transportation company sells its bus operations but not its airline operations.

Sandra Bellucci, a financial analyst, is analyzing inventory of companies from four different industries: consumer goods, sports goods manufacturers, electronics, and aircraft manufacturers. Assuming that the inventory valuation methods reflect the actual flow of inventory and the inventory includes finished goods only, which of the following industries will most likely have zero last in, first out (LIFO) reserve?

Aircraft manufacturers.

Integrated Reporting is similar to Cost of Quality Reporting, Triple Bottom-Line Reporting, and Sustainability Reporting. Which statement about these reporting formats is true?

All these reports involve participation and cooperation of non-financial members of the organization.

When using the indirect method, which statement provides the most accurate description of the relationship between accounts receivable and the operating activities section on the statement of cash flows?

An increase in accounts receivable results in a decrease in the operating activities section on the statement of cash flows.

Which of the following demonstrates the results of failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory? Assume the periodic method is used.

An understatement of liabilities and an overstatement of owners' equity

Delgado Corp. purchased some common stock from Keller Enterprises. Delgado plans to hold this stock for a minimum of five years, although they could sell it sooner if they need to. How do you expect Delgado to classify the stock on their balance sheet?

As a long-term investment

In the Lucas Company, there was an increase in the land account during the year of $24,000. Analysis reveals that the change resulted from a cash sale of land at cost $55,000, and a cash purchase of land for $79,000. In the statement of cash flows, how should the change in the land account be reported in the investment section?

As a purchase of land $79,000 and a sale of land $55,000

How does a corporation recognize a deficit in retained earnings?

As a reduction in stockholders' equity on the balance sheet

Where are the freight costs to sell goods included?

As a selling expense

Accurate Auditing is conducting an inventory count for Blake Industries. Blake intermingles empty boxes with full boxes in the storeroom. How would falsifying its inventory account have affected Blake's financial statements if the auditors had not discovered the fraud?

Assets would have been overstated.

Assets, liabilities, and equity describe the amount of resources and claims to resources that a company has at which time(s)?

At a moment in time

Using the percentage-of-receivables basis, Continental Industries estimates it will have total bad debts of $25,150 in the existing receivables balance. If Continental's trial balance shows an Allowance for Doubtful Accounts with a debit balance of $8,750, which of the following adjusting entries should the firm include on its balance sheet?

Bad Debt Expense = Debit of $33,900; Allowance for Doubtful Accounts = Credit of $33,900

Using the percentage-of-receivables basis, First Manufacturing estimates it will have total bad debts of $8,235 in the existing receivables balance. If First's trial balance shows an Allowance for Doubtful Accounts with a credit balance of $750, which of the following adjusting entries should the firm include on its balance sheet?

Bad Debt Expense = Debit of $7,485; Allowance for Doubtful Accounts = Credit of $7,485 Explanation: The result of the analysis is the credit balance needed in allowance for doubtful accounts after bad debt is recorded. Since there is a credit balance of $750 in allowance for doubtful accounts prior to recording bad debt expense, $7,485 must be added to allowance for doubtful accounts to make the balance a credit of $8,235. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts.

Lynch Company reports the following information for its most recent fiscal year, before adjustments: Sales $821,500 Beginning Accounts Receivable Balance $72,500 Sales Returns and Allowances $12,200 Ending Accounts Receivable Balance $68,845 Allowance for Doubtful Accounts $4,100 (debit balance) A review of the accounts receivable aging schedule results in $7,100 of estimated bad debts. If Lynch uses the percentage-of-receivables basis to estimate bad debts, journalize the appropriate year-end adjusting entry.

Bad debt expense 11,200 Allowance for doubtful accounts 11,200

Laser Company reports the following information for its most recent fiscal year, before adjustments: Sales: $581,500 Beginning Accounts Receivable Balance: $32,500 Sales Returns and Allowances: $9,500 Ending Accounts Receivable Balance: $34,400 Allowance for Doubtful Accounts: $2,100 (credit balance) A review of the accounts receivable aging schedule results in $4,800 of estimated bad debts. If Laser uses the percentage-of-receivables basis to estimate bad debts, journalize the appropriate year-end adjusting entry.

Bad debt expense 2,700 Allowance for doubtful accounts 2,700

In January of last year, Newton Inc. sold 15,000 shares of its own common stock for $180,000. Ten months later, Newton repurchased 5,000 of those shares at a price of $11 per share. When compiling its statement of cash flows for the year, Newton should record which of the following entries in relation to these stock transactions, and why?

Both a $180,000 cash inflow and a $55,000 cash outflow should be recorded in the financing section because both transactions involve stockholders' equity items, and all cash flows must be reported gross.

How does direct issuance of common stock to purchase assets compare to direct issuance of debt to purchase assets?

Both are significant noncash activities.

Which of the following describes a similarity between an income statement and a statement of cash flows?

Both statements summarize activities that took place during an accounting period.

Which of the following would prevent a company from concluding a contract exists for purposes of recognizing revenue?

Both the buyer and seller have the right to unilaterally cancel the contract without compensating the other party.

Last quarter Hyperion Enterprises sold new stock and paid dividends. How do these activities compare?

Both would be reported as a financing activity of the statement of cash flows.

In 20x7, Sweet Treats sold a piece of equipment with a purchase value of $371,000 and accumulated depreciation of $247,000 for $75,000. Sweet Treats realized a loss of $49,000 on the sale. How would this transaction affect overall cash flows?

Cash flows would increase by $75,000.

Holcomb Industries sold a piece of machinery with a purchase value of $918,000 and accumulated depreciation of $856,800 for $80,000. They realized a gain of $18,800 on the sale. How would this transaction affect overall cash flows?

Cash flows would increase by $80,000.

Claire and David hold stock in two different companies, but both recently received additional shares of common stock rather than a cash dividend. After receiving the additional stock, the par value of Claire's stock decreased by 67%, but the par value of David's stock remained the same. What is the difference between the stock that Claire and David received?

Claire received a stock split, and David received a stock dividend.

On February 1, Year 1, Kew Corp., a newly formed company, had the following stock issued and outstanding: Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share. Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share. Kew's February 1, Year 1, statement of stockholders' equity should report.

Common stock $10,000 Preferred stock $30,000 Additional paid-in capital $185,000

Which accounts are affected by a small stock dividend?

Common stock, paid-in capital in excess of par—common stock, and retained earnings

All of the following statements concerning performance obligations within a contract are true except:

Companies must satisfy all performance obligations in a contract before it can recognize any revenue from the contract.

How are financial statements related to the objective of financial reporting?

Companies use financial statements to provide financial information to potential capital providers, and providing information to capital providers is the objective of financial reporting.

Four companies are trying to estimate their bad debt expense using the percentage-of-receivables basis. Assuming each company has a similar total Account Receivables balance and a similar estimated percentage collectible for the number of days past due, which company should record the HIGHEST amount of Bad Debt Expense? The table reports the company's percentage of total Accounts Receivable in each category. Not Due 1-30 days past due 31-60 days past due Over 60 days past due Company 1 45% 30% 10% 15% Company 2 25% 25% 25% 25% Company 3 15% 5% 20% 60% Company 4 20% 15% 35% 30%

Company 3 Explanation: In general, the "older" a receivable is, the less likely it will be collected. Company 3 has the highest percentage of receivables in the "over 60 days past due" category and the highest combined percentage in the "over 60 days past due" and "31-60 days past due" categories. This implies that it will have the highest amount of uncollectible accounts and the highest bad debt expense. Therefore, this is the correct answer.

Challenges which might deter organizations from implementing Integrated Reporting include:

Complexity, cost, and litigation risk.

When using the allowance method, what should a firm do to record bad debt expense?

Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at the end of each accounting period.

Which GAAP-approved depreciation method generally allocates a larger cost in the earlier years of the asset's useful life?

Declining-balance

Which one of the following would result in a decrease to cash flow in the indirect method of preparing a statement of cash flows?

Decrease in income taxes payable.

Theoretically, cash discounts permitted on purchased raw materials should be:

Deducted from inventory, whether taken or not.

In its first year of operations, the ABC Company reported pretax income on its GAAP income statement of $300,000. ABC has a current tax rate of 24% and a future enacted tax rate of 21%. Additional information from ABC is below: Excess of tax depreciation over book depreciation $22,000 Interest revenue received on municipal bonds $3,500 Estimated warranty expense over actual warranty expenditures $10,000 Fines paid $3,000 What is ABC's net deferred tax asset or deferred tax liability to be reported on the balance sheet?

Deferred tax liability of $2,520 Explanation: A deferred tax liability results from temporary differences where book income is recognized before taxable income. Another way of looking at it is that a deferred tax liability arises from temporary differences where tax expenses are higher than book expenses. A deferred tax asset results from temporary differences where tax income is recognized before book income. Another way of looking at it is that a deferred tax asset arises from temporary differences where book expenses are higher than tax expenses. When preparing financial statements, total deferred tax liabilities are netted against total deferred tax assets and either a deferred tax liability or deferred tax asset is disclosed in the long-term section of the balance sheet. The enacted tax rate expected to be in effect when the timing differences reverse is used in the calculation. Permanent differences do not impact deferred tax liabilities or deferred tax assets. In this example, the $22,000 excess tax depreciation results in a deferred tax liability of $4,620 ($22,000 × 21%) and the $10,000 estimated warranty expense over actual warranty expenditures results in a deferred tax asset of $2,100 ($10,000 × 21%). These two net to a deferred tax liability of $2,520.

"Employing different accounting methods will yield different net incomes." How is this factor a limitation of financial statements?

Difference in results due to change in accounting methods makes it difficult for users to compare the performance of different entities.

Which of the following financial statement changes would best represent the impact of incurring and paying interest on a note payable for the period:

Effect on Equity Section of the Balance Sheet: Decrease Statement of Cash Flows Direct Method: Outflow from Operating Activities.

The allowance method of accounting for bad debts is an application of which of the following?

Expense recognition principle

What happens if a company fails to record estimated bad debt expense?

Expenses are understated.

Joanie's Caterers bought 10 green tablecloths from Fabric Town for a reception planned for one of their clients. When the package arrived, there were 10 red tablecloths included, but no green. If Joanie's Caterers decides to keep the tablecloths, then:

Fabric Town may grant a purchase allowance, which will reduce the caterer's accounts payable.

The underlying asset for Lease A is so specialized for the lessee that it is expected to have no alternative future use to the lessor at the end of the lease term; however, Lease A does not contain a bargain purchase option. The lease term for Lease B is less than 75% of the estimated economic life of the leased property, but Lease B does transfer ownership of the property to the lessee by the end of the lease term. How should the lessee classify Lease A and Lease B, respectively?

Finance lease; Finance lease

From a theoretical viewpoint, which of the following costs would be considered inventoriable?

Freight-IN and Warehousing Unfinished Goods Yes

Hat Trick Manufacturing reported a net income that was 20% smaller than the reported net cash flow from operations. What is the best explanation?

Hat Trick Manufacturing had items, such as depreciation and amortization, that reduced net income but did not affect cash flows.

McCarthy Corp. is issuing its first financial statements. The CFO of the company is of the view that all assets shall be recorded at historical cost throughout the life of the organization. Which of the following is the best critique of such a disclosure?

Historical value is less relevant for assessing a company's current financial position.

Howard Incorporated is doing inventory. In the inventory process, Howard inadvertently miscategorized a $6,000 shipment of FOB destination goods in transit from a supplier as FOB shipping point. How will this miscategorization impact Howard's total inventory?

Howard's total inventory will be $6,000 too high.

Consider the statements below regarding accounting treatments under U.S. GAAP and IFRSs. Which statements are correct? I. U.S. GAAP permits intangible assets to be revalued to fair value (the revaluation model) if there is an active market for the asset.II. IFRS does not permit the use of LIFO to account for inventory.III. Under IFRS, fair value accounting for property, plant and equipment is only allowed when fair value is reliably measurable.IV. Under U.S. GAAP research and development costs are capitalized as incurred.

II and III, only.

Maxlan Company holds a 30% stake in Pront Company, which was purchased in 20X7 at a cost of $6,000,000. After applying the equity method, the investment in Pront Company account has a balance of $6,040,000. At December 31, 20X7 the fair value of the investment is $6,120,000. On its balance sheet at December 31, 20X7, it would be acceptable for Maxlan to use: $6,000,000 $6,040,000 $6,120,000

II or III only

Consider the statements below regarding accounting classifications for leases under U.S. GAAP and IFRSs. Which statements are correct? IFRS only allows classification of a lease as an operating lease. U.S. GAAP does not allow classification of a lease by the lessee as a finance lease. U.S. GAAP allows for classification of a lease as a capital lease. U.S. GAAP allows classification of a lease by the lessor as either a sales-type, direct financing, or operating lease based on the substance of the transaction.

IV only

The management of Arthur Energy recognized a contingent liability of $50,000 in the current year. However, before the annual report was issued, the company resolved the issue, making a lump-sum payment of $42,000. The board of directors has decided to incorporate the transaction in the subsequent year's financial statements. Which of the following provisions of U.S. GAAP, if applicable, is likely to prove the management decision wrong?

If an event provides additional evidence about conditions that existed as of the balance sheet date and alters the estimates used, then the financial statements should be adjusted.

When considering research and development costs, how are equipment costs different if they are used for one project only versus current and future projects?

If equipment is purchased for one project only, the costs are expensed as incurred; if equipment is purchased for more than one project, the costs are capitalized and amortized.

Claire Enterprises has $150,000 in accounts receivable at the end of the current year, and it estimates its bad debts to be 5% of the receivables. Hence, the accountant reports $7,500 as the allowance for doubtful accounts and the net realizable value as $142,500. Under which of the following circumstances will the amount of bad debt expense reported for the year most likely be less than the allowance for doubtful accounts at the end of the year?

If the allowance for doubtful accounts had a credit balance of $1,500 before the year end adjustments.

How is factoring of receivables different from securitization of receivables?

In factoring, factors buy receivables and take on the billing and collection functions, whereas securitization is the process of converting illiquid assets into liquid assets by bundling similar receivables into an investment fund.

An extract of the footnotes of Chavez Inc., with 13 subsidiaries across 4 countries, reads as follows:"The company uses the current rate method for translation of subsidiary accounts. Paid-in capital accounts have been translated using the historic rate. All assets and liabilities have been translated using the current exchange rate on the balance sheet date, whereas income statement accounts have been translated using the end-of-year rate."The CEO of the company did not approve the financial statements, stating that the accounting policies followed are not in line with U.S. GAAP. Which of the following statements support the CEO's decision?

Income statement accounts should be translated based on the average rate for the current year.

On January 1, XYZ Company (lessee) entered into a finance lease with ABC Company (lessor). XYZ Company will make an annual payment of $25,000 for five years as part of the lease, with the first payment due at the end of the year. The interest rate implicit in the lease is 8% and the lease liability is properly calculated to be $99,818. How much of the first payment is interest expense and how much is a reduction of the lease liability?

Interest expense $7,985 Lease Liabilitiy $17,015

New Haven Products has used LIFO inventory valuation for the life of the company. Each year, their LIFO reserve increases. What can be assumed about the prices of inventory?

Inventory prices have increased each year.

Suzanne Rogers, a financial analyst, is analyzing Capital One's stock. She is more interested in estimating the cash flows Capital One can generate. From the financial analyst's perspective, which of the following balance sheet reporting is best suited to avoid adjustments?

Inventory reported at current market value; fixed assets reported at historical cost.

Global Industries is a merchandising company that sells goods on consignment. Currently, Global has $14,000 worth of consignment goods in its warehouse that it included in its inventory. What effect will this have on Global's total inventory?

Inventory will be $14,000 higher than expected.

The most likely use of an income statement prepared by a business enterprise is its use by which of the following?

Investors interested in the financial performance of the entity.

Unlike the allowance method, the direct write-off method:

Is forbidden by GAAP because it does not incorporate the expense recognition principle.

The straight-line depreciation method:

Is simple to apply

Palmer Beauty Products wants to increase their number of shares to decrease the stock's market value, but they do not want to change the par value of the shares. What would you recommend they do?

Issue a large stock dividend.

How does the balance sheet help users?

It assesses an entity's liquidity, solvency, financial flexibility, and operating capability.

When a sale is made on account, what impact does a sales discount have on the amount of cash eventually received?

It decreases the amount of cash received.

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?

It is prohibited.

What is one distinguishing feature of the straight-line method for calculating depreciation?

It is simple to calculate.

What is one advantage of the periodic inventory system?

It requires less record keeping than a perpetual inventory system.

What is one disadvantage of the perpetual inventory system?

It requires more record keeping than a periodic inventory system.

Compared to other methods of calculating depreciation, how does the double-declining balance method affect net income in the first year?

It usually results in the lowest net income.

How would the issue of common stock to acquire an $8,000 machine appear on the statement of cash flows?

It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.

Which of the following errors will have no impact on the company's total inventory reported on the balance sheet?

JT Engineering lists $7,500 worth of work-in-process inventory as finished goods inventory.

Kaitlyn runs a U.S. company that often does a lot of business with companies in London and Ireland. Sean runs a company in London that often does business with many companies in the U.S. What is implied here about their reporting standards?

Kaitlyn will likely use GAAP, whereas Sean will likely use IFRS.

Parisi Incorporated and Keeling International both sold some old equipment. Parisi sold their equipment because it was outdated, and they replaced it with new equipment. Keeling sold their equipment because the operations that needed the equipment are being shut down by the company. How would the income or loss from the sale of this equipment be reported differently by these companies?

Keeling would report their income or loss under discontinued operations, whereas Parisi would not.

Based on the net income of the shop, the sales staff at Francesca's Fashions receive performance bonuses. In periods of declining prices, which inventory costing method would bring the sales staff the most benefit?

LIFO

Companies hoping to minimize income tax expense will use which inventory cost flow assumption when prices are rising?

LIFO

Companies that want to maximize the assets section of the balance sheet will use which inventory cost flow method during deflationary periods?

LIFO

Bell Retail Company sells antique replica trunks to customers all over the world. Bell's inventory records show the following. Quantity (units) Cost (each) Beginning inventory 200 $1,055 Purchases: June 3 170 1,062 September 18 190 1,070 December 10 160 1,076 Bell sells 470 units this year. Management is researching whether the company should use last in, first out (LIFO) or first in, first out (FIFO). If Bell's management wants to lower the company's income taxes, which inventory cost flow assumption should Bell select?

LIFO, because the operating income will be $4,360 lower than FIFO.

On 1/1/20X8 the LOU Company acquired 80% of Company SUB for $1,200,000. The remaining 20% of Company SUB is valued at $300,000. Company SUB's net identifiable assets are appraised for $1,000,000 but are on SUB's books for $850,000. The difference is attributable to a piece of land SUB owns that has a book value of $300,000 and a fair market value of $450,000. All of the following statements are correct except:

LOU will record its investment in SUB at $1,200,000 on its consolidated balance sheet prepared immediately after the acquisition.

Lease A covers 60% of a standardized machine's expected useful life, the present value of the minimum lease payments equals 81% of the machine's fair market value, and the owner of the machine retains ownership of the machine at the end of the lease. Lease B covers 68% of a standardized machine's expected useful life, the present value of the minimum lease payments equals 85% of the machine's fair market value, and the lessee has the option to buy the asset at the end of the lease for $1. How should the lessee classify Lease A and Lease B?

Lease A is an operating lease and Lease B is a finance lease.

Under U.S. GAAP, which of the following expenditures qualifies for asset capitalization?

Legal costs associated with obtaining a patent on a new product.

In terms of integrated reporting, all of the following are providers of financial capital except:

Legislators.

If a company recognizes total lease-related expense of $50,000 in the first year of a finance lease, how much expense would it recognize in the second year of the lease, assuming lease payments are the same each year?

Less than $50,000

All of the following statements are correct except:

Life insurance proceeds on the death of an insured executive create GAAP income in the current year and taxable income in the future.

In good years, Dailey Industries often loans cash to other companies, but in difficult years, they have to borrow cash from other entities. How would they record these differently on the statement of cash flows?

Loaning money would be classified as an investing activity, whereas borrowing money would be classified as a financing activity.

The financial statements included in the annual report to the shareholders are least useful to which one of the following?

Managers in charge of operating activities.

When an organization begins to design and implement integrated reporting, the organization would likely perform all of the following except:

Mandate the specific KPIs within all segments of the organization that will be included in the integrated report.

LIFO is used when prices are falling and companies wish to do which of the following?

Maximize asset value

Last year Urban Kicks earned $5.2 million from the sale of shoes and $1.4 million from the sale of one of their manufacturing plants. How would these cash flows be categorized on the statement of cash flows?

Money from the sale of shoes would be recorded as an operating activity in the statement of cash flows, while money from the sale of property would be recorded as an investing activity in the statement of cash flows.

Last week, Sweet Treats Bakery spent $30,000 on wages for employees and $15,000 on new ovens. How do these expenses compare?

Money spent on wages would be recorded as an operating activity on the statement of cash flows, while money spent on ovens would be recorded as an investing activity on the statement of cash flows.

Which of the following is the best comparison of net income and net cash flow from operations?

Net income is different from net cash flow from operations because noncash flow items such as depreciation and amortization are part of income.

With regard to comprehensive income, how does net income differ in a one-statement approach compared to a two-statement approach?

Net income is reported as a subtotal in a one-statement approach but as a total on a two-statement approach.

Newman Shoes and Bowman Footwear both decided to write off a specific customer's uncollectible account as a bad debt expense. If Newman Shoes uses the direct write-off method and Bowman Footwear uses the allowance method for uncollectible accounts, what will be the difference in the journal entries for these two companies?

Newman Shoes will record a debit to Bad Debt Expense, whereas Bowman Footwear will record a debit to Allowance for Doubtful Accounts.

The ending inventory of the Ryan Company is understated in year one by $20,000. This error is not corrected in year one or in year two. What impact will this error have on total net income for years one and two combined?

No effect on total net income for the two years

Which section of the statement of cash flows would include the conversion of bonds into common stock?

Noncash activities

When should revenue from sales be recognized?

None of these answer choices are correct. Explanation: Organizations recognize revenue by using the following steps: 1) Identify the contract with a customer. 2) Identify separate performance obligations in the contract. 3) Determine the transaction price. 4) Allocate the transaction price to the performance obligation(s) identified in the contract. 5) Recognize revenue for each performance obligation.

O'Brien Brewery and Delgado Vintage Wines both decided to write off a specific customer's uncollectible account as a bad debt expense. To record this transaction, O'Brien Brewery recorded a debit to Bad Debt Expense, whereas Delgado Vintage Wines recorded a debit to Allowance for Doubtful Accounts. What is the difference between these two companies?

O'Brien Brewery uses the direct write-off method for uncollectible accounts, whereas Delgado Vintage Wines uses the allowance method for uncollectible accounts.

Which of the following is not included in product costs?

Officer's salaries

Under which set of facts would a company be able to classify a liability due within the next 12 months as a long-term liability under US GAAP?

On 12/31/20X6 a company has a liability due on 6/15/20X7. On 11/30/20X6, the company's board of directors voted to seek to refinance the debt with the lender. On 2/1/20X7, the lender agreed to refinance the debt with a new due date of 12/31/20X9. The company issued its financial statements on 2/15/20X7.

During the year, Deltech Inc. acquired a long-term productive asset for $5,000 and also borrowed $10,000 from a local bank. These transactions should be reported on Deltech's Statement of Cash Flows as:

Outflow for Investing Activities, $5,000; Inflow from Financing Activities, $10,000.

In an integrated report, which Content Element would be used to answer this question: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy?

Outlook

The beginning inventory for 20x4 is overstated. The effects of this error on cost of goods sold for 20x4, net income for 20x4, and assets at December 31, 20x4, respectively, are represented by which of the following options?

Overstatement, understatement, no effect

In March, Parker Products repurchased 25,000 of its outstanding common shares at a price of $14 per share. Seven months later, Parker sold 15,000 of these shares on the open market for $15.50 each. When recording the effects of these transactions on its annual statement of cash flows, Parker reports only a $117,500 cash outflow related to financing activities. Is this entry correct, and why?

Parker is correct in placing this entry in the financing section. However, rather than recording only a net cash outflow of $117,500, Parker should have reported both a cash outflow of $350,000 and a cash inflow of $232,500.

Badger Enterprises purchased aluminum from JG Metals. When Badger Enterprises recorded this transaction, they made entries into three accounts: Purchases, Freight Costs, and Purchase Discounts. Based on this, what type of inventory system does Badger Enterprises use?

Periodic system of inventory

According to the Integrated Reporting Framework, the primary users of an integrated report are:

Providers of financial capital.

For a manufacturing firm, which of the following would be included in cash outflows from financing activities on the Statement of Cash Flows?

Repayment of the principal portion of firm debt

How would the declaration of a 10% stock dividend by a corporation affect each of the following on its books?

Retained earnings (RE) decrease Total stockholders' equity (SE) No effect

What is the difference between a revenue and a gain?

Revenues result from transactions related to central operations, whereas gains result from transactions related to peripheral operations.

All of the following statements concerning impairment are correct except:

Reversals of previous asset impairments are not allowed under either US GAAP or IFRS.

When a company collects on an account after writing it off as uncollectible (under the allowance method), it makes one journal entry:

Reversing the entry made when writing off the account, and another entry recording the collection in the usual manner

Carla's company uses the periodic inventory system, and Carla is attempting to determine cost of goods sold. Her records show the company paid $12,000 in freight charges for the year ended December 31, but she is unsure whether to add or subtract this value. What should she do? Why?

She should add freight charges because freight costs are considered part of the cost of purchasing inventory.

Both Fowler Landscaping and Stanley Cleaning Services have estimated their uncollectible accounts as of the end of 20X7 to be $3,500. In addition, both companies use the allowance method for uncollectible accounts. If Stanley Cleaning Services has to record a larger adjusting entry for their Allowance for Doubtful Accounts account at the end of 20X7, which of the following could be true about the balance of the Allowance for Doubtful Accounts account for each company?

Stanley Cleaning Services has a debit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a credit balance.

To get the best possible idea of a firm's ability to pay cash dividends to its stockholders, potential investors should focus on the firm's:

Statement of cash flows

By using a perpetual inventory system, companies can better track when to replenish inventory, thus reducing which of the following?

Storage costs

A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset's estimated useful life?

Straight-line No Double-declining balance No

All of the following concepts are one of the eight Content Elements on an integrated report except:

Sustainability.

A justification for the periodic recording of depreciation expense can be demonstrated by which of the following?

Systematic and rational allocation of cost over the periods benefited

Pierre Company had the following transactions during the fiscal year ending December 31, year 3: Sold a delivery van with a net book value of $5,000 for $6,000 cash, reporting a gain of $1,000. Paid interest to bondholders for the amount of $275,000 Declared dividends on December 31, year 3, of $.08 per share on the 1.3 million shares outstanding, payable to shareholders of record on January 31, year 4. No dividends were declared or paid in prior years. Accounts receivable decreased from $70,000 on December 31, year 2 to $60,000 on December 31, year 3. Accounts payable increased from $40,000 on December 31, year 2 to $45,000 on December 31, year 3. The cash balance was $150,000 on December 31, year 2, and $177,500 on December 31, year 3. Which of the answers below describes the correct entry for Pierre Company's statement of cash flows on December 31, year 3 using the indirect method?

The $1,000 gain from the sale of the delivery van is included in operating activities as a deduction.

JT Engineering currently holds two debts: a $9,000 debt due in 9 months and a $7,000 debt due in 14 months. JT prepares a classified balance sheet using a 1-year operating cycle. How should these debts be classified?

The $9,000 should be classified as a current liability, and the $7,000 should be classified as a long-term liability.

Which statement concerning accounting for warranties is correct?

The Assurance Warranty approach is used to account for warranties that are automatically included in the purchase of a product and the Service Warranty approach is used to account for extended warranties that are sold separately from the product for additional revenue.

Juan Baker Inc. filed a suit against Foster Desserts in the second quarter of the current year and claimed damages worth $15,000. There was also a pending litigation against Juan Baker Inc. for $12,000 to its customers for supplying lower-quality goods. The company was expecting to win the suit against Foster Desserts. For presenting the financial statements for the year, Juan Baker's accountant realized a net gain of $3,000 as other comprehensive income. As per U.S. GAAP, how should this information be presented?

The accountant should recognize contingent liability of $12,000 and disclose contingent gains of $15,000 as footnotes.

A customer of Irving Gemstones owed $20,000 on account. Due to nonreceipt of payments after 5 months of the due date, the amount was written off as doubtful using the direct write-off method. After 2 years, the customer paid the full amount due. How should this transaction be journalized?

The amount received should be debited to Cash and credited to an income statement account, such as Uncollectible Accounts Recovered.

Jimenez Transportation purchased five new transportation vehicles in 20x6. They plan to pay these vehicles off in even installments over the next 8 years. On the 20x7 year-end financial statements, how would the amount Jimenez plans to pay off in 20x8 differ from the amount they plan to pay off in 20x9?

The amount they plan to pay off in 20x8 would be classified as a current liability, and the amount they plan to pay off in 20x9 would be classified as a long-term liability.

The Horton Corporation accepted the delivery on August 15, 20x4, of merchandise that it had purchased on account. As of August 31, Horton, which uses the periodic method, had not recorded the transaction or included the merchandise in its inventory count. What is the impact of this on their August 31, 20x4, balance sheet?

The assets and liabilities would be understated but stockholders' equity would not be affected.

How does the balance sheet differ from the statement of cash flows in regard to reporting a company's financial information related to cash?

The balance sheet reports the cash amount at a single point in time, and the statement of cash flows reports how cash is used over a period of time.

A statement of cash flows can partially reconcile which of the following?

The cash basis and accrual bases of accounting

The multi-step income statement, with additional income statement items, for Harrington Technologies Inc. is given below. Net sales $2,000,000 Less: Cost of goods sold 890,000 Gross profit 1,110,000 Less: Transportation and travel 45,000 Depreciation 68,000 Pension contributions 21,000 Operating income 976,000 Less: Discontinued operations 76,000 Income before taxes 900,000 Less: Tax expense @ 30% 270,000 Net income $630,000 Glen Hamilton, a financial analyst, analyzed the company's financial statements and concluded that the real net income should be $683,200 instead of $630,000. Which of the following arguments is most likely to support his conclusion?

The company has included expenses in relation to discontinued operations as part of income from continued operations.

The cash flow from operations for Charlene Energy Inc. is $25,000 for the current year. If the amortization expense increases by $5,000 and other factors remain same, under which of the following assumptions will the cash flow from operations remain unaffected?

The company is operating in a tax-free environment.

Karen and Ron are studying the financial information for two different corporations. In particular, they are looking at the difference in net income and gross profit between the two. One of the companies uses LIFO and the other uses FIFO. In an inflationary environment, what changes between the two will Karen and Ron most likely notice?

The company that uses FIFO will likely have a higher net income and gross profit than the company that uses LIFO.

Marci is looking over the profit and income information for two different companies. One company uses LIFO and the other uses FIFO. Prices are rising. What is Marci most likely to notice about these two companies?

The company that uses FIFO will likely have a higher net income and gross profit than the company that uses LIFO.

Shelton Devin Corp. has two stock investments in which they own 30% of the outstanding stock. The CEO of the company is not in favor of presenting consolidated financial statements. Based on the information, which of the following is most likely true?

The decision of the CEO is correct as companies are required to issue consolidated statements only when the ownership exceeds 50%.

As of December 31, 20x8, a firm's net income was $92,000 and its net cash flow from operating activities was $101,600. Over the course of 20x8, the firm's accounts receivable balance increased by several thousand dollars. Given this information and assuming that the firm uses the indirect method and the only other asset and liability is accounts payable, which of the following statements must be true?

The firm must have seen a significant increase in its accounts payable balance over the course of 20x8.

As of January 1, 20x8, a firm's net income was $219,600 and its net cash flow from operating activities was $203,850. Over the course of 20x7, the firm's accounts payable balance increased by several thousand dollars. Given this information and assuming that the firm uses the indirect method and the only other asset and liability is accounts receivable, which of the following statements must be true?

The firm must have seen a significant increase in its accounts receivable balance over the course of 20x7.

Which of the following presents a challenge to an organization looking to adopt Integrated Reporting?

The forward-looking nature of Integrated Reporting may increase an organization's litigation risk.

Which of the following statements concerning accounting for income taxes is correct?

The income tax expense recognized on the income statement consists of an amount currently payable under tax law and a deferred amount related to changes in tax-affected cumulative temporary differences.

AWS Inc. is engaged in the construction of rail tracks. The CEO suggests allocating all of the insurance, property taxes, and supervisory factory labor to construction, but the management accountant disagrees. The management accountant will argue that the indirect costs should be allocated in what way?

The indirect costs should be allocated proportionally based on the value of the asset.

Once a recoverability test has been performed, how is loss of impairment calculated differently if the asset has a resale value vs. if it does not have a resale value?

The loss of impairment for the asset with a resale value would be calculated based on the difference between the book value and the resale value; the loss of impairment for the asset without a resale value would be calculated based on the difference between the book value and the present value of the future cash flows.

Kate's Company received merchandise on consignment. The company recorded the transaction as a purchase and included the goods in inventory, as of October 31. What would the effect of this be on the financial statements for October 31?

The net income would be correct and current assets and current liabilities would be overstated.

The Preston Company received merchandise on consignment. Preston included the goods in inventory as of April 30, but did not record the transaction. What would the effect of this be on its financial statements for April 30?

The net income, current assets, and retained earnings would all be overstated.

Merchandise that was purchased on account was accepted by the Orion Company. As of December 31, Orion had recorded the transaction using the periodic method, but did not include the merchandise in its inventory. What would be the effect of this on the financial statements for December 31?

The net income, current assets, and retained earnings would all be understated.

Which of the following statements is true about accounting for uncollectible accounts under the allowance method of accounting?

The net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.

A lease is considered a finance lease if any of five specific conditions are true. Which of the following is not one of those conditions?

The present value of the minimum lease payments exceeds approximately half of the fair value of the underlying asset.

Madsen Pharmaceuticals has spent 15 years developing a new medication for epileptic seizures. They finally have a new FDA-approved drug and have applied for a patent. When you look at Madsen's accounting books, what would you expect to find?

The research and development costs for the new drug would have been expensed throughout the past 15 years as money was spent on the project.

How is the retained earnings statement related to the statement of cash flows when accounting for dividends?

The retained earnings statement shows dividends declared, and the statement of cash flows shows dividends paid.

Emerson Industries sold a new issue of common stock to investors. How would this be recorded differently in the statement of cash flows than if they used the stock to purchase equipment?

The sale of stock to investors should be included in cash flows from financing activities, whereas exchange of stock for equipment should be disclosed in a separate schedule.

You have hired a third-party consultant to improve efficiency at your company. The consultant requests a detailed summary of what cash was available to the company and how it was spent. What would be the most helpful documents?

The statement of cash flows and supplementary schedules

Your boss at Trinitron Inc. wants to discuss the origin of the company's cash in the last year and how it was used. What documents should you bring to the meeting?

The statement of cash flows and supplementary schedules

How can comparing a company's income statement to its statement of cash flows reveal information about the "quality" of the company's reported net income?

The statement of cash flows reflects cash-based accounting technique and thus relies on fewer estimates than the income statement.

Treasury stock and a retained earnings deficit will have what effect on stockholders' equity?

They will reduce stockholders' equity.

Morgan and Tina are discussing the difference between debt and equity securities. Morgan says that they are essentially the same thing, except that they are categorized differently in the accounting records. Tina disagrees, saying that they have different valuation approaches. Who is correct?

Tina is correct, because debt securities use fair value and amortized cost, whereas equity securities do not use amortized cost.

During a period of rising prices, why would Paisley Inc. choose the LIFO inventory cost flow assumption?

To minimize income tax expense

During a period of rising prices, why would Mariposa Corp. choose the FIFO inventory cost flow assumption?

To record the highest gross profit

A multinational company maintains its financial records under both IFRS and U.S. GAAP. Last year, the company determined its inventory was impaired because demand for its product collapsed when a competitor launched a new product with innovative features. As a result, the company wrote down its inventory to $0 with a carrying amount of $500,000. This year, however, government authorities unexpectedly announced that the competitor's product was defective, and the product was removed from the market. As a result, the company's products were again in demand, and the company estimated its net realizable value to be $750,000 at the end of the current quarter. How should the company record this new development in the current quarter?

Under IFRS, $500,000 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.

Which of the following statements concerning the Service Warranty approach to accounting for warranties is correct?

Under the Service Warranty approach, a liability for deferred revenue is recorded when a warranty is sold.

All of the following statements about the consolidation method of accounting are true except:

Under the consolidation method of accounting, the investor only includes its proportionate share (based on its ownership percentage) of the investee's assets and liabilities on the consolidated balance sheet.

Sweetwater Water Sports owns 35% of Surfside Surf Shop's voting stock. In 2016, Surfside recorded net income of $300,000 and paid dividends of $30,000. If Sweetwater mistakenly recorded these transactions using the fair value method rather than the equity method, how would this affect the balance of its investment account, net income, and retained earnings, respectively?

Understate, understate, understate

Which of the following statements concerning deferred tax assets and deferred tax liabilities is correct?

Using the allowance method to account for bad debt expense for book purposes results in a deferred tax asset.

Gilliam Industries records revenue of $6.4 million for an accounting period. In that same accounting period, they have a beginning balance of $392,000 and an ending balance of $439,000 in the Accounts Receivable account. How should the cash flows from operating activities be adjusted to account for these items? Why? Assume Gilliam uses the indirect method.

Using the indirect method, Gilliam will only have to adjust for the change in Accounts Receivable, resulting in a $47,000 decrease in cash flows from operating activities.

Under which of the following circumstances will cash, set aside to fulfill terms of an agreement, be determined as a long-term asset?

When it is used to pay liabilities beyond the operating cycle or year, whichever is longer, or for the retirement of a specific long-term debt.

Griffin Industries holds a debt that is due 16 months from now. Griffin prepares a classified balance sheet using an 18-month operating cycle. How would classification of this debt be different if Griffin used a one-year operating cycle?

With the 18-month cycle it is classified as a current liability, while with a one-year cycle it is classified as a long-term liability.

A firm leases a piece of machinery having an 8-year expected life for 4 years. The lease was properly classified as an operating lease. After the initial lease ended, the company signed a second lease for the same machinery for another 4 years with the same terms as the initial lease (same annual payment, same implied discount rate, etc.). Assuming the market value and the overall expected life of the machine has not materially changed during the 4 years, how should this new lease be classified? The lease should be classified as:

a finance lease since it satisfies one of the criteria established by the FASB for classifying a lease as a finance lease.

A publicly traded company has 100,000 outstanding shares of common stock, with a par value of $5. The company uses U.S. GAAP to prepare its financial statements. The company recently declared a 5% stock dividend. On the date the stock dividend was declared, the company's stock was trading at $25 per share. On the date of declaration, the company's

additional paid-in capital will increase.

When recording bad debt expense under the allowance method, ________ is credited, and ________ is debited at the end of the accounting period.

allowance for doubtful accounts; bad debt expense

Ownership to goods shipped FOB destination is passed to the ________ when the goods ________.

buyer; arrive at the purchaser's business

The statement of cash flows emphasizes ________, and should be used alongside rather than in place of ________.

cash basis accounting; accrual basis accounting

Stock dividends ________ retained earnings and ________ total paid-in capital.

decrease, increase

Because the ________ method violates the ________, it is unacceptable for financial reporting.

direct write-off; expense recognition principle

All of the following are classifications on the Statement of Cash Flows except:

equity activities.

A firm has just signed an 8-year lease on a new standardized machine after which, the machine will be returned to the lessor. Fair value of the machine is $420,000. Lease payments are $72,000 per year, payable at the end of the year. The machine has a 12-year useful life. The firm's incremental borrowing cost is 10%. The PV of an ordinary annuity having 8 payments of $1 at 10% is $5.3349. The lease should be classified as:

finance lease.

The financial statement that provides a summary of the firm's operations for a period of time is the:

income statement.

Although the perpetual inventory system is used by most businesses, a year-end ________ is taken to reconcile actual inventory with inventory records.

inventory count

The sale of available-for-sale securities should be accounted for on the statement of cash flows as a(n):

investing activity.

The contents of the section of the annual report entitled "Management's Discussion and Analysis" (MD&A) are:

mandated by regulations of the Securities and Exchange Commission (SEC).

A firm's statement of cash flows is often said to be ________ than its other financial statements because it ________.

more reliable; does not employ accrual-based accounting

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli's Statement of Cash Flows as a(n):

non-cash financing and investing activity.

All of the following statements are correct concerning the relationship between revenue recognition and related expense recognition except:

recognizing the research and development expense that went into the development of a product in the same period as the product is sold.

The statement of shareholders' equity shows a:

reconciliation of the beginning and ending balances in shareholders' equity accounts.

All of the following are associated with Integrated Reporting except:

reporting standards determined by the International Integrated Reporting Council (IIRC).

Net sales are calculated by subtracting ____________ from __________.

sales returns and allowances; sales revenue

Based on the stock's par value, a large stock dividend is most similar to a ________; but based on the stock's market value, a large stock dividend is most similar to a ________.

small stock dividend; stock split

All of the following are limitations of the balance sheet except that

the balance sheet provides information on the liquidity and solvency of the company.

All of the following express a primary purpose of Integrated Reporting except:

to provide additional audited information to regulators such as the SEC.