Intermediate Accounting Exam 1

Of the following statements, which best illustrates the fact that the formal distinction made between current and non-current assets is somewhat arbitrary? A. Cash in a checking account is a current asset, while cash in a savings account is more permanent and is normally classified as non-current. B. Inventory that may be sold next year, or in the subsequent year as demand dictates may be classified as current or non-current. C. Accounts receivable due in less than one year or the operating cycle are classified as current assets, while accounts receivable due in longer than one year or the operating cycle are classified as non-current. D. An amount equal to the current depreciation charge on buildings should be placed in the current assets section at the beginning of the year, because it will be consumed in the next operating cycle.

D

Rent collected in advance by a landlord is a (an): A. Accrued liability. B. Deferred asset. C. Accrued revenue. D. Unearned revenue.

D

The Murphy Company sublet a portion of its warehouse for five years at an annual rental of $24,000, beginning on May 1, 2017. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to unearned rental income. Murphy reports on a calendar year basis. The adjustment on December 31, 2017 for Murphy should be: Debt - Credit A. No entry B. Unearned rental income 8,000 Rental income 8,000 C. Rental income 8,000 Unearned rental income 8,000 D. Unearned rental income 16,000 Rental income 16,000

D

The concept adopted by the accounting profession that reports most unusual or infrequent gains or losses in the income statement is called: A. phaseout period concept. B. prior period adjustment concept. C. current operating performance concept. D. modified all-inclusive concept.

D

The concept referred to by the "expense recognition" principle is A. that current liabilities have the same period of existence as the current assets. B. that all cash disbursements for a period be matched to cash receipts for the period. C. that net income should be reported on a quarterly basis. D. that where possible the expenses to be included in the income statement were incurred to produce the revenues.

D

The income statement reveals: A. resources and equities of a firm at a point in time. B. resources and equities of a firm for a period of time. C. net earnings (net income) of a firm at a point in time. D. net earnings (net income) of a firm for a period of time.

D

What amount should be deposited in a bank today at an interest rate of 10% to grow to $2,000 four years from today? A. $2,000/0.68301 B. $2,000 × 0.90909 × 3 C. ($2,000 × 0.90909) + ($2,000 × 0.82645) + ($2,000 × 0.75132) + ($2,000 × 0.68301) D. $2,000 × 0.68301

D

Which of the following asset disposals would qualify as a disposal of a segment? A. Phasing out of a product line or class of service. B. Changes occasioned by a technological improvement. C. Sale by an auto parts manufacturer of one of its five parts-manufacturing subsidiaries. D. Sale by a transportation company of its bus operations but not its airline operations.

D

Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure? A. Current assets. B. Current liabilities. C. Plant assets. D. Longterm liabilities.

D

Which of the following is a correct statement regarding the expense recognition principle? A. Expenses are recognized when they make a contribution to revenue. B. Costs can be charged to the current period as an expense simply because no connection with revenue can be determined. C. In recognizing expenses, accountants attempt to follow the approach of let the expense follow the revenue. D. All of the choices are correct.

D

Which of the following is not a benefit associated with the FASB Conceptual Framework Project? A. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. B. Practical problems should be more quickly solvable by reference to an existing conceptual framework. C. A coherent set of accounting standards and rules should result. D. Business entities will need far less assistance from accounts because the financial reporting process will be quite easy to apply.

D

Which of the following is not a generally practiced method of presenting the income statement? A. The consolidated statement of income. B. The multiple-step income statement. C. Including gains and losses from discontinued operations of a segment of a business in determining net income. D. Including prior-period adjustments in determining net income.

D

Which of the following is not a principal purpose of an unadjusted trial balance? A. It proves that debits and credits of equal amounts are in the ledger. B. It is the basis for any adjustments to the account balances. C. It supplies a listing of open accounts and their balances. D. It proves that debits and credits were properly entered in the ledger accounts.

D

Which of the following items should never be included in the current section of the balance sheet? A. Receivable from a customer outstanding for more than a year. B. Deferred income taxes resulting from inter-period tax allocation. C. Three year premium for fire insurance on plant and equipment. D. A pension fund.

D

Which of the following reflects proper use of the term "reserve" in the preparation of financial statements? A. The term used to describe amounts deducted from assets, such as "reserve for depreciation." B. The initial term used in connection with an estimated liability, such as "estimated reserve for product warranty." C. The term used to describe the setting aside of funds for the subsequent payment of an existing liability, such as "reserve for bonds payable." D. The term used to describe an appropriation of retained earnings in the stockholders' equity section of the balance sheet.

D

Which of the following would represent the least likely use of an income statement prepared for a business enterprise? A. Use by customers to determine a company's ability to provide needed goods and services. B. Use by labor unions to examine earnings closely as a basis for salary discussions. C. Use by government agencies to formulate tax and economic policy. D. Use by investors interested in the financial position of the entity.

D

With regard to the accounting cycle, which of the following pairings of activities provides a correct chronology? A. The financial statements are prepared and later an adjusted trial balance is prepared. B. Reversing entries are prepared and later a post-closing trial balance is prepared. C. Closing entries are prepared and later financial statements are prepared. D. Transactions are journalized and later posted to the ledger.

D

According to the FASB Conceptual Framework, the elements—assets, liabilities, and equity—describe amounts of resources and claims to resources at/during a Moment in Time - Period of Time A. Yes - No B. Yes - Yes C. No - Yes D. No - No

A

According to the FASB conceptual framework, equity A. is the residual interest in the assets of an entity that remains after deducting its liabilities. B. is the same thing as comprehensive income. C. is the net gains less the net loses for a period of time. D. is the net revenues and expenses for a period of time.

A

Although many objections have been raised about the "cost" principle, it is still widely supported for financial reporting because it A. is an objectively determinable amount. B. is a good measure of current value. C. facilitates comparisons between years. D. takes into account price -level adjusted information.

A

During the year 2017, Siska Corporation had the following information available related to its income statement: Disbursements for purchases $630,000 Increase in trade accounts payable 80,000 Decrease in merchandise inventory 25,000 Cost of goods sold for 2017 amounted to A. $735,000 B. $685,000 C. $575,000 D. $525,000

A

If $1,240 cash and a $4,760 note are given in exchange for a delivery truck to be used in a business: A. assets and liabilities will change by the same amount. B. owners' equity will be increased. C. assets will increase and liabilities decrease. D. assets and liabilities will increase but by different amounts.

A

If the following journal entry was made for the purchase of a three-year insurance policy in February of the first year, would an adjusting entry and/or a reversing entry be appropriate at the end of the first year? Unexpired Insurance 3,000 Cash 3,000 Adjusting Entry - Reversing Entry A. Yes - No B. No - Yes C. Yes - Yes D. No - No

A

Ingredients of faithful representation are Completeness - Neutrality - Free from Error A. Yes - Yes - Yes B. Yes - No - Yes C. No - No - No D. No - Yes - No

A

Of the following items, the one which should be classified as a current asset is A. trade installment receivables normally collectible in 20 months. B. a deposit on equipment ordered, delivery of which will be made within 7 months. C. cash designated for the redemption of callable bonds. D. cash surrender value of a life insurance policy of which the company is a beneficiary.

A

On June 1, 2017, Walsh Company sold some equipment to Fischer Company. The two companies entered into an installment sales contract at a rate of 8%. The contract required 8 equal annual payments with the first payment due on June 1, 2017. What type of compound interest table is appropriate for this situation? A. Present value of an annuity due of 1 table. B. Present value of an ordinary annuity of 1 table. C. Future value of an ordinary annuity of 1 table. D. Future value of 1 table.

A

One of the main reasons for separating liabilities into current and longterm is: A. to provide decision makers with information regarding currently maturing debts. B. to separate large and small debts. C. to separate capital into its component parts. D. to separate total equity into its two basic parts.

A

One of the primary benefits of the multiple-step income statement over the single-step income statement is that the A. multiple-step income statement shows gross margin and recognizes different types of costs and expenses. B. multiple-step income statement shows last year's figures in comparison with the current year. C. multiple-step income statement discriminates between administrative and selling expenses. D. multiple-step income statement recognizes no distinction in types of costs or expenses.

A

Solvency refers to: A. the ability of an enterprise to pay its debts as they mature. B. the amount of time that is expected to elapse until an asset is realized. C. the amount of time that is expected to elapse until a liability has to be paid. D. the amount of time that is expected to elapse until an asset is converted into cash.

A

The accounting equation (A = L + SE) must remain in balance: A. throughout each step in the accounting cycle. B. only when journal entries are recorded. C. only at the time the trial balance is prepared. D. only when formal financial statements are prepared.

A

Under the revenue recognition principle, revenue is generally recognized when: A. a company satisfies its performance obligations. B. the merchandise has been ordered. C. all expenses have been identified. D. the accounting process is virtually complete.

A

What amount should Spencer Forman have in his 6% bank account today before withdrawal if he needs $3,000 each year for three years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (He is to have exactly a zero balance in his bank account after the third withdrawal.) A. $3,000 + ($3,000 × 0.94340) + ($3,000 × 0.89000) B. ($3,000/0.83962) × 3 C. ($3,000 × 0.94340) + ($3,000 × 0.89000) + ($3,000 × 0.83962) D. ($3,000/0.94340) × 3

A

What is the constraint that supports considering that the benefits of the information outweigh the sacrifices to provide the information? A. Cost. B. Prudence. C. Consistency. D. Conservatism.

A

When a manufacturing company sells one of its plant assets at a price in excess of its book value it should recognize Revenue - Gain A. No - Yes B. No - No C. Yes - No D. Yes - Yes

A

Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? A. Monetary unit assumption. B. Periodicity assumption. C. Going concern assumption. D. Economic entity assumption.

A

Which of the following items would be presented in the income statement only in the account affected (not in a separate section)? A. Changes in estimates. B. Earnings per share. C. Unusual or infrequent gains or losses. D. Discontinued operations.

A

Which of the following transactions would best use the present value of an annuity due of 1 table. A. Diamond Bar, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year. B. Michener Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year. C. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years. D. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years.

A

During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,540 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will: A. increase net income $4,390. B. increase expenses by $4,390. C. decrease store supplies by $6,540. D. debit accounts payable for $2,150.

B

In general, the basic difference between the concepts of revenues and gains concerns: A. the materiality of the item being considered. B. whether the event giving rise to the item relates to the typical activity of the enterprise. C. whether the item is taxable in the current year. D. the effect on total assets of the enterprise.

B

Material gains or losses resulting from the disposition of a segment of the business should be reported separately as a component of income A. administrative expenses. B. after results from continuing operations. C. selling expenses. D. before results from continuing operations and after cost of goods sold.

B

One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is: A. failure to reflect current value information. B. the extensive use of separate classifications. C. an extensive use of estimates. D. failure to include items of financial value that cannot be recorded objectively.

B

One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility? A. The nearness to cash of assets and liabilities. B. The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. C. The firm's ability to pay its debts as they mature. D. The firm's ability to invest in a number of projects with different objectives and costs.

B

Prepaid expenses are included in the current assets section of the balance sheet because A. they will be converted into cash within one year or the operating cycle, whichever is longer. B. if they had not been already paid they would require the use of cash during the next year or operating cycle. C. they were already included in operating expenses on the income statement in the year cash was expended. D. they reflect payments that were made in a prior period that will not be charged to expense in the current period.

B

Sharon Walsh has developed and patented a computer chip that allows telecommunications in race cars to become more efficient. She agrees to sell the patent to Pensca for five annual payments of $50,000 each. The payments are to begin three years from today. Given an annual rate of 6%, what is the present value of the five payments? A. $176,839 B. $187,450 C. $210,618 D. $218,820

B

The major objective of the quality of comparability is to: A. provide timely financial information for statement users. B. promote comparability between financial statements of different accounting periods. C. enable users to identify the real similarities and differences in economic events between companies. D. be sure the same information is disclosed in each accounting period.

B

The payment of cash dividends to the common shareholders would be reported on a company's statement of cash flows under the classification of A. Operating Activities. B. Financing Activities. C. Investing Activities. D. Significant Transactions.

B

The primary purpose of the balance sheet is to reflect A. the firm's potential for growth in stock values in the stock market. B. items of value, debts, and net worth. C. the value of items owned by the firm. D. the status of the firm's assets in case of forced liquidation of the firm.

B

When a company makes reversing entries A. it credits all cash payments of expenses to the related expense account. B. it debits all cash payments of expenses to the related expense account. C. it debits all cash receipts to the related revenue account. D. all subsequent cash receipts and cash payments are credited to Income Summary.

B

Which of the following is a characteristic describing the primary quality of relevance? A. Materiality. B. Predictive value. C. Verifiability. D. Understandability.

B

Which of the following is an example of an accrued liability? A. Supplies purchased at the beginning of the year and debited to an expense account. B. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. C. Depreciation expense. D. Rent, provided as a service during the period, cash to be received next year.

B

Which of the following is not a current asset? A. Prepaid property taxes that relate to the next operating period. B. The cash surrender value of a life insurance policy carried by a corporation on its president. C. Marketable securities purchased as a temporary investment of cash. D. Installment notes receivable due over 15 months in accordance with normal trade practices.

B

Which of the following should not be reported on the income statement as an unusual or infrequent gain or loss? A. The write-off of major assets as a result of new environmental laws prohibiting their use. B. The sale of a component that is an equity investment that represents 30 percent of a company's total assets. C. A large loss as a result of an earthquake. D. Expropriation of assets by a foreign government.

B

Which of the following violates the concept of faithful representation? A. The management report refers to new discoveries and inventions made, but the financial statements never report the results. B. Financial statements included buildings with a carrying amount estimated by management. C. Financial statements were issued one year late. D. All of the choices violate faithful representation.

B

A characteristic of all assets and liabilities comprising working capital is that they are A. monetary. B. marketable. C. current. D. cash equivalents.

C

A liability to be paid next year would not be included in the current liability section of the balance sheet if the debt is expected to be refinanced through another longterm issue, or A. the operating cycle is less than one year. B. the liability will be paid with cash that the company earns during the next year. C. when the debt is retired out of non-current assets. D. the liability is a non-operating debt instrument due within the next year.

C

A trial balance prepared at year end showed Puccineli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by: A. the balance of $47,000 in accounts receivable being entered in the trial balance as $40,700. B. an error in adding the Sales Journal. C. the balance of $700 in the Equipment account being entered as a debit of $7,000. D. a net loss of $6,300.

C

Bob Geimer plans on going on vacation to Asia in four years. The trip will cost $4,000. He proposes to finance the trip by investing a sum of money now at 9% compound interest. How much should Bob invest now in order to obtain his goal of $4,000? A. $2,474.67 B. $2,654.35 C. $2,833.72 D. $3,088.72

C

Companies report earnings per share either on the face of the income statement or in the notes for: A. net income and gross margin. B. net income and pretax income. C. net income and discontinued operations. D. discontinued operations and prior period adjustments.

C

Continuation of an accounting entity in the absence of evidence to the contrary is an example of the basic concept of Consistency - Going Concern A. No - No B. Yes - No C. No - Yes D. Yes - Yes

C

During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of: Objectivity - Periodicity A. No - No B. Yes - No C. No - Yes D. Yes - Yes

C

For accounting purposes the "operating cycle concept" A. has become obsolete. B. affects the income statement but not the balance sheet. C. permits some assets to be classified as current even though they are more than one year removed from becoming cash. D. causes the distinction between current and non-current items to depend on whether they will affect cash within one year.

C

How are the following items handled in computing the total stockholders' equity section of the balance sheet? Treasury Stock - Additional Paid-in Capital A. Added - Added B. Added - Subtracted C. Subtracted - Added D. Subtracted - Subtracted

C

If J.J. Morse put $1,000 in a 12% savings account today, what amount of cash would be available 3 years from now? A. $1,000 × .71178 B. $1,000 × .71178 × 3 C. $1,000/.71178 D. ($1,000/.89286) × 3

C

If a company converted a short-term note payable into a longterm note payable, this transaction would A. increase both working capital and net income. B. decrease only working capital. C. increase only working capital. D. decrease both working capital and owners' equity.

C

In complying with the full disclosure principle, an accountant must determine the amount of disclosure necessary. How much disclosure is enough? A. Information sufficient for a person without any knowledge of accounting to understand the statements. B. All information that might be of interest to an owner of a business enterprise. C. Information that is of sufficient importance to influence the judgment and decisions of an informed user. D. Information sufficient to permit most persons coming in contact with the statements to reach an accurate decision about the financial condition of the enterprise.

C

Jeanie Pearson plans to buy a golf course in 10 years. Because of cash flow problems, Jeanie is able to budget deposits of $900,000 that are expected to earn 10% annually only at the end of the seventh, eighth, ninth, and tenth periods. What future amount will Jeanie accumulate at the end of the tenth year? A. $3,600,000 B. $3,960,000 C. $4,176,900 D. $6,902,631

C

Lindsey Corp. is concerned with measuring its ability to meet interest payments as they come due. Lindsey Corp. would most likely use which following ratio? A. Payout ratio. B. Inventory turnover. C. Times interest earned. D. Price earnings ratio.

C

The balance sheet contributes to financial reporting by providing a basis for all of the following except A. computing rates of return. B. evaluating the capital structure of the enterprise. C. determining the increase in cash due to operations. D. assessing the liquidity and financial flexibility of the enterprise.

C

The economic entity assumption in accounting is best reflected by which of the following statements? A. When a parent and subsidiary company are merged for accounting and reporting purposes the economic entity assumption is violated. B. The best way to truly measure the results of enterprise activity is to measure them at the time the enterprise is liquidated. C. The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. D. A business enterprise is in business to enhance the economic well being of its owners.

C

The occurrence that most likely would have no effect on 2017 net income is the: A. sale in 2017 of an office building contributed by a stockholder in 1971. B. collection in 2017 of a dividend from an investment. C. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. D. stock purchased in 2003 deemed worthless in 2017.

C

The primary reason the income statement is so important to investors and creditors relates to its ability to provide information helpful in A. determining the honesty of those involved in managing the enterprise. B. assessing the financial position of the entity at a point in time. C. predicting the amount, timing, and uncertainty of future cash flows. D. determining the amount of future income the entity may generate from current operations.

C

The statement of cash flows provides answers to all of the following questions except: A. Where did the cash come from during the period? B. What was the cash used for during the period? C. What is the impact of inflation on the cash balance at the end of the year? D. What was the change in the cash balance during the period?

C

Those who favor the philosophy that the most useful income measure reflects only regular and recurring revenues and expenses adhere to Current Operating Performance Concept - Modified AllInclusive Concept A. Yes - Yes B. No - No C. Yes - No D. No - Yes

C

When a company changes from one accounting principle to another accounting principle: A. the company does not have to disclose anything about it. B. the current income statement should include only footnote disclosure so readers will be aware of the change. C. a retrospective adjustment should be made to the financial statements. D. it should always be reflected as a cumulative effect in the current year's financial statements.

C

Which of the following is correct regarding double-entry accounting? A. Each transaction is recorded twice, once in the general journal and once in a specialized journal. B. Each transaction must involve two entries, either two debits, two credits, or one debit and one credit. C. Each transaction must result in equal amounts of debits and credits. D. Each transaction appears in at least two of the financial statements.

C

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services? A. Debit cash and credit an expense account. B. Credit cash and debit a revenue account. C. Debit cash and credit a liability account. D. Credit cash and debit a liability or revenue account.

C

Which of the following statements best describes the purpose of closing entries? A. To facilitate posting and preparing a trial balance. B. To determine the amount of gain or loss for the period. C. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. D. To complete the record of various transactions that were started in a prior period.

C

Which of the following tables would show the largest value for an interest rate of 10% for 8 periods? A. Future value of 1 table. B. Present value of 1 table. C. Future value of an ordinary annuity of 1 table. D. Present value of an ordinary annuity of 1 table.

C

Which of the following would not be considered a basic source of information useful in preparing a statement of cash flows? A. Selected transaction data. B. Comparative balance sheets. C. An analysis of sales by territory. D. The current income statement.

C

A prepaid expense can best be described as an amount: A. Paid and currently matched with earnings. B. Paid and not currently matched with earnings. C. Not paid and not currently matched with earnings. D. Not paid and currently matched with earnings.

B

An accrued expense can best be described as an amount: A. Paid and not currently matched with earnings. B. Not paid and currently matched with earnings. C. Not paid and not currently matched with earnings. D. Paid and currently matched with earnings.

B

An adjusting entry should never include: A. a debit to expense and a credit to a liability. B. a debit to expense and a credit to revenue. C. a debit to a liability and a credit to revenue. D. a debit to revenue and a credit to a liability.

B

Changing the basis of inventory pricing from FIFO to average cost is an example of a(n): A. Unusual or infrequent gain or loss. B. Change in principle. C. Change in estimate. D. Discontinued operation.

B

Comprehensive income includes all changes in equity during a period except: A. sale of assets other than inventory. B. those resulting from investments by or distribution to owners. C. sales to a particular entity where ultimate payment by the entity is doubtful. D. those resulting from revenue generated by a totally owned subsidiary.

B

Corrections of errors: A. should only be reflected in the current year's financial statements if a company presents prior years' financial statement for comparative purposes even if the error effected prior years. B. should be treated as prior period adjustments, similar to changes in accounting principles. C. should only be disclosed in a footnote so readers will be aware of the errors. D. should only be reflected in the current year's balance sheet and never the income statement.

B

A worksheet A. can be used in place of financial statements. B. is a formal device for accumulating, sorting, and recording information in the general ledger. C. is used to record and post the closing entries. D. provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

D

Amy Carlson Company had current assets of $12,000, current liabilities of $20,000, net sales of $40,000, cost of goods sold of $24,000, and net income of $8,000. What is Amy Carlson's profit margin on sales? A. 80%. B. 60%. C. 50%. D. 20%.

D

How would the two items shown below be handled in arriving at cash provided by operations in the statement of cash flows? Increase in Accounts Receivable - Increase in Accounts Payable A. Add to net income, Add to net income B. Deduct from net income, Deduct from net income C. Add to net income, Deduct from net income D. Deduct from net income, Add to net income

D

If accounting information is complete, free from error, and neutral, it can be considered: A. relevant B. timely. C. comparable. D. a faithful representation.

D

If expenses are greater than revenues, the Income Summary account will be closed by a debit to: A. Income Summary and a credit to Cash. B. Income Summary and a credit to Retained Earnings. C. Cash and a credit to Income Summary. D. Retained Earnings and a credit to Income Summary.

D

In accounting an economic entity may be defined as: A. a business enterprise. B. an individual. C. a division within a business enterprise. D. all of the above.

D

Kimberly Nelson, a computer programmer, wishes to create her own retirement fund. Kimberly deposits $4,000 today in a fixed rate savings account that earns 5% interest. She plans to deposit $4,000 every year for the next 24 years (total of 25 deposits). How much cash will she have accumulated in her retirement account when she retires in 25 years? A. $186,908 B. $190,908 C. $194,908 D. $200,454

D