Chapter 24 Intermediate Accounting: Review

20. All of the following are significant limitations of ratio analysis except (LO 5) (a)use of estimates (b)lack of standards against which to make comparisons (c)differences in companies' accounting methods (d)use of historical data

(b) lack of standards against which to make comparisons. While comparisons may be imperfect, there is no lack of standards against which to make comparisons.

9. Cheffing Corp. has estimated that total depreciation expense for the year ending December 31, 2017 will amount to $880,000. In Cheffing's interim income statement for the three months ended March 31, 2017, what is the total amount of expense relating to this item that should be reported? (LO 2) (a)$0. (b)$220,000. (c)$440,000. (d)$880,000.

(b)$220,000. $880,000 ÷ 4 = $220,000.

11. Sorrento Park Corp. has estimated that total amortization expense for the year ending December 31, 2017 will amount to $350,000, and that 2017 year-end bonuses to employees will total $260,000. In Sorrento Park's interim income statement for the six months ended June 30, 2017, what is the total amount of expense relating to these two items that should be reported? (LO 2) (a)$0. (b)$305,000. (c)$350,000. (d)$610,000.

(b)$305,000. ($350,000 + $260,000) ÷ 2 = $305,000.

5. The following information pertains to Corsig Corp. and its divisions for the year ended December 31, 2017. Sales to unaffiliated customers...$2,125,000 Intersegment sales of products similar to those sold to unaffiliated customers...1,250,000 Interest earned on loans to other operating segments...56,000 Reyes and all of its divisions are engaged solely in manufacturing operations. Corsig has a reportable segment if that segment's revenue exceeds (LO 2) (a)$212,500. (b)$337,500. (c)$343,100. (d)$331,900.

(b)$337,500. ($2,125,000 + $1,250,000) × 10% = $337,500.

16. Who bears the ultimate responsibility for the financial statements and for the company's system of internal controls? (LO 3) (a)The stockholders. (b)The management. (c)The auditors. (d)The board of directors.

(b)The management. Management bears the ultimate responsibility for both the company's financial statements its system of internal controls.

5. Which indicators would both a bondholder and stockholder look to?

Earnings and financial position.

Net income minus preferred dividends divided by weighted shares outstanding.

Earnings per share.

Unintentional mistakes.

Errors.

Prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows.

Financial forecast.

Intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements.

Fraudulent financial reporting.

The interim report is an integral part of the annual report and deferrals and accruals should take into consideration what will happen for the entire year.

Integral approach.

Reports that cover periods of less than one year.

Interim reports.

Intentional distortions of financial statements.

Irregularities.

An SEC rule which provides protection to an enterprise that presents an erroneous forecast as long as the forecast is preparedon a reasonable basis and is disclosed in good faith.

Safe harbor rule.

2. Lardner Inc. has six industry segments with total revenues as follows: Eastern...$1,200 Snack...$960 Roffet...400 Saveco...250 Allied...830 DCS...480 Based only on the revenues test, which industry segments are reportable?

Total revenue = $1,200 + $400 + $830 + $960 + $250 + $480 = $4,120. $4,120 × 10% = $412. Eastern, Allied, Snack, and DCS meet this test, since their revenues equaled or exceeded $412.

The auditor's opinion that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with generally accepted accounting principles.

Unqualified opinion (clean opinion).

6. Presented below are four segments that have been identified by Compass Productions: Segments Total Revenue (Unaffiliated) Operating Profit (Loss) Identifiable Assets A $510,000 $60,000 $1,800,000 B 1,200,000 (110,000) 1,600,000 C 450,000 8,000 900,000 D 180,000 10,000 450,000 For which of the segments would information have to be disclosed in accordance with professional pronouncements? (LO 2) (a)Segments A, B, C, and D (b)Segments A, B, and C (c)Segments A and B (d)Segments A and D

(b)Segments A, B, and C Revenue test: Total revenue = $2,340,000 × 10% = $234,000. Operating profit test: $110,000 × 10% = $11,000. Asset test: Total assets = $4,750,000 × 10% = $475,000, so A, B, and C.

14. If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statements as a whole, the opinion is said to be (LO 3) (a)unqualified. (b)qualified. (c)adverse. (d)exceptional.

(b)qualified. The opinion is said to be qualified.

17. Which of the following best characterizes the difference between a financial forecast and a financial projection? (LO 4) (a)Forecasts include a complete set of financial statements, while projections include only summary financial data. (b)A forecast is normally for a full year or more and a projection presents data for less than a year. (c)A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen. (d)A forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification.

(c)A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen. A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen.

1. Which of the following is not a reason for the increase in disclosure requirements? (LO 1) (a)Accounting as a control and monitoring device. (b)Complexity of the business environment. (c)Segment reporting for nonpublic enterprises. (d)Necessity for timely information.

(c)Segment reporting for nonpublic enterprises. All of the options are reasons for increased disclosure requirements except the full disclosure principle.

13. Which is the most common form of auditor's report? (LO 3) (a)Qualified opinion. (b)Adverse opinion. (c)Unqualified opinion. (d)Disclaimer.

(c)Unqualified opinion. The most common report is the unqualified opinion.

2. Common notes to the financial statements include major disclosures for all of the following except: (LO 1) (a)credit claims. (b)equity holders' claims. (c)executive compensation. (d)property, plant & equipment.

(c)executive compensation. All of the options are common notes to the financial statements except disclosures for executive compensation.

15. In preparing the auditor's report, the auditor follows all of the following reporting standards except the report shall: (LO 3) (a)contain either an expression of opinion regarding the financial statements or an assertion that an opinion cannot be expressed. (b)identify circumstances in which accounting principles have not been consistently observed in the current period in relation to the prior period. (c)state whether the financial statements are presented in accordance with generally accepted auditing standards. (d)All of the options are followed by the auditor.

(c)state whether the financial statements are presented in accordance with generally accepted auditing standards. The auditor follows all of the options except the report states whether financial statements are presented in accordance with generally accepted accounting principles - not auditing standards.

12. Unusual and infrequent items (gains and losses) that occur in interim reports are: (LO 2) (a) prorated over the four quarters. (b) omitted from the quarterly net income. (c) disclosed only by note. (d) absorbed entirely in the quarter in which they occur.

(d) absorbed entirely in the quarter in which they occur. Usual and infrequent items are charged or credited to income in the quarter that they occur.

10. Virginia Corp. has estimated that total depreciation expense for the year ending December 31, 2017 will amount to $1,280,000, total amortization expense for that period will be $420,000, and employee bonuses for the period will total $320,000. In Virginia's interim income statement for the six months ended June 30, 2017, what is the total amount of expense relating to this item that should be reported? (LO 2) (a)$0. (b)$505,000. (c)$850,000. (d)$1,010,000.

(d)$1,010,000. ($1,280,000 + $420,000 + $320,000) ÷ 2 = $1,010,000.

8. The following information pertains to Bass Lake Development Corp. and its divisions for the year ended December 31, 2017. Sales to unaffiliated customers $3,750,000 Intersegment sales of products similar to those sold to unaffiliated customers 1,110,000 Interest earned on loans to other operating segments 66,000 Bass Lake and all of its divisions are engaged solely in manufacturing operations. Bass Lake has a reportable segment if that segment's revenue exceeds (LO 2) (a)$110,000. (b)$375,000. (c)$381,600. (d)$486,000.

(d)$486,000. ($3,750,000 + $1,110,000) × 10% = $486,000.

18. Which of the following would not be an opportunity for fraudulent financial reporting? (LO 4) (a)Accounting estimates, requiring significant subjective judgment. (b)Unusual or complex transactions. (c)Weak or nonexistent internal accounting controls. (d)All of the answer choices are correct.

(d)All of the answer choices are correct. All of the options would be opportunities for fraudulent financial reporting.

19. Which of the following are considered situational pressures which may lead to fraudulent financial reporting? (LO 4) (a)Sudden decreases in revenues. (b)Financial pressure resulting from bonus plans. (c)Unrealistic budget pressures. (d)All of the answer choices are correct.

(d)All of the answer choices are correct. All of the answers are considered situational pressures.

3. Which of the following would not be included in the Summary of Significant Accounting Policies note? (LO 1) (a)Inventory valuation method used. (b)Depreciation method used. (c)How marketing costs are reported. (d)Tax accounting method used.

(d)Tax accounting method used. All of the options except the method used to prepare the tax report would be disclosed.

The ratio of cash, short-term investments, and net receivables to total current liabilities.

*Acid-test ratio

Ratios that measure how effectively an enterprise is using the assets employed.

*Activity ratios.

Net sales divided by the average total assets during the year.

*Asset turnover.

Common stockholders' equity divided by outstanding shares.

*Book value per share.

Net cash provided by operating activities divided by average total liabilities.

*Cash debt coverage ratio

Reducing all the dollar amounts to a percentage of a base amount.

*Common-size analysis.

The same information is presented for two or more different dates or periods so that like items can be compared.

*Comparative analysis.

Ratios that measure the degree of protection for long-term creditors and investors.

*Coverage ratios.

The ratio of total current assets to total current liabilities.

*Current ratio.

Financial reporting of any financial facts significant enough to influence the judgment of an informed reader.

Full disclosure principle.

The auditor's standard opinion contains an exception.

Qualified opinion.

Transactions which arise when a business enterprise engages in transactions in which one of the transacting parties has the ability to influence significantly the policies of the other, or in which a non-transacting party has the ability to influence the policies of the two transacting parties.

Related party transactions.

The auditor has gathered so little information on the financial statements that no opinion can be expressed.

Disclaimer of an opinion.

Debt divided by total assets or equities.

*Debt to assets.

Percentage analysis that indicates the proportionate change over a period of time.

*Horizontal analysis.

Standards Board (IASB) The primary organization involved in developing international accounting standards.

*International Accounting

Cost of goods sold divided by the average inventory during the year.

*Inventory turnover.

Ratios that measure an enterprise's short-run ability to pay its maturing obligations.

*Liquidity ratios.

The ratio of cash dividends to net income.

*Payout ratio.

Reducing a series of related amounts to a series of percentages of a given base.

*Percentage analysis.

Net income divided by net sales.

*Profit margin on sales.

Ratios that measure the degree of success or failure of a given enterprise or division for a given period of time.

*Profitability ratios.

Net sales divided by the average receivables outstanding during the year.

*Receivables turnover.

Net income divided by average total assets during the year.

*Return on assets.

Net income minus preferred dividends divided by the average common stockholders' equity.

*Return on common stock equity.

Net Income plus interest expense plus income tax expense divided by interest expense.

*Times interest earned.

Percentage analysis that indicates the proportional expression of each item on a financial statement in a given period to a base figure.

*Vertical analysis.

An accounting professional who conducts an independent examination of the accounting data presented by a business enterprise.

Auditor.

Prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows.

Financial projection.

4. The FASB decided that the upper limit for the number of segments that a company should be required to disclose is: (LO 2) (a)12. (b)10. (c)8. (d)None of these answers are correct.

(b)10. The FASB decided that 10 segments were the most segments that should be disclosed in order to keep from overwhelming financial statement users.

7. Presented below are three segments that have been identified by Hayes Development Corp.: Segments Total Revenue (Unaffiliated) Operating Profit (Loss) Identifiable Assets A $500,000 $50,000 $1,500,000 B 1,100,000 (100,000) 1,500,000 C 400,000 10,000 500,000 For which of the segments would information have to be disclosed in accordance with professional pronouncements? (LO 2) (a)Segments A and C only (b)Segments A, B, and C (c)Segments A and B only (d)Segments B and C only

(b)Segments A, B, and C Total revenue = $2,000,000 × 10% = $200,000. Operating profit test: $100,000 × 10% = $10,000. Asset test: Total assets = $3,500,000 × 10% = $350,000, so A, B, and C.

1. For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose. 1.________Dismissal of the company president. 2.________Settlement of prior year's litigation against the company at no cost. 3.________Issuance of a significant number of shares of preferred stock. 4.________Sale of 10% of the company's assets. 5.________Prolonged employee strike. 6.________Gain a significant customer. 7.________Charges of fraud filed against a vice-president. 8.________Filing for protection under Chapter 11 of the Bankruptcy Code. 9.________Acquisition of another company with sales of approximately one-half of the company. 10.________Loss of an overseas plant due to expropriation.

1.c 2.a 3.b 4.c 5.b 6.b 7.b 8.b 9.b 10.b

6. A company has current assets of $920,000 and current liabilities of $540,000. The board of directors declares a cash dividend of $90,000. What is the current ratio before the declaration? What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

A company has current assets of $920,000 and current liabilities of $540,000. The board of directors declares a cash dividend of $90,000.What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend? $920,000 ÷ $540,000 = 1.70:1 before declaration $920,000 ÷ $630,000 = 1.46:1 after declaration, but before payment $830,000 ÷ $540,000 = 1.54:1 after payment

The specific accounting principles and methods currently employed and considered most appropriate to present fairly the financial statements of an enterprise.

Accounting policies

There are so many material exceptions that in the auditor's judgment the financial statements taken as a whole are not presented in accordance with generally accepted accounting principles.

Adverse opinion.

3. Under what circumstances is an explanatory paragraph be added to the audit report?

An explanatory paragraph is included in the audit report 1. to explain a going concern issue; 2. to discuss a change in accounting principles or the method of their application in a way that has a material effect on the comparability of its financial statements; and 3. to emphasize a matter regarding the financial statements while intending to express an unqualified opinion.

The auditor's expression of an opinion concerning whether financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Auditor's report.

Costs that are incurred for the benefit of more than one segment and whose interrelated nature prevents a completely objective division of costs among segments.

Common costs.

Net cash provided by operating activities divided by average current liabilities.

Current cash debt ratio.

Each interim period should be treated as a separate accounting period; deferrals and accruals would therefore follow the principles employed for annual reports.

Discrete approach.

The section of the annual report which covers three financial aspects of the enterprise's business liquidity, capital resources, and results of operations.

Management discussion and analysis (MD&A).

4. What is the difference between a financial forecast and a financial projection?

The difference between a financial forecast and a financial projection is clear-cut. A forecast provides information on what is expected to happen, whereas a projection provides information on what might take place but is not necessarily expected to happen.

1. What types of information are required to be disclosed for property, plant and equipment?

The following items are required to be disclosed: 1.the basis of valuation; 2.pledges, liens, and other commitments related to these assets; 3.depreciation expense for the period; 4.balances of major classes of depreciable assets, by nature and function, at the balance sheet date; 5.accumulated depreciation, either by major classes of depreciable assets or in total, at the balance sheet date; 6.a general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets; and 7.an explanation for any major impairments.