Intermediate II Final Exam
In 2020 the Flynn Company has changed from the percentage-ofcompletion method to the completed-contract method for long-term construction contracts. The difference in pre-tax income prior to 2020 is a decrease of $60,000 and for 2020 is a decrease of $20,000. The estimated tax effect is 40%. The journal entry made by Flynn Company should include a: A. Debit to Deferred Tax Liability of $24,000. B. Credit to Deferred Tax Liability of $32,000. C. Debit to Deferred Tax Liability of $32,000. D. Credit to Deferred Tax Liability of $24,000
A
In general, financing activities as used in the statement of cash flows refer to: A. liability and owners' equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed and (b) obtaining capital from owners and providing them with a return on, and a return of, their investment. B. transactions involving long-term assets and include (a) making and collecting loans and (b) acquiring and disposing of investments and productive long-lived assets. C. only debt transactions that result from long-term borrowings from financial institutions. D. the cash effect of transactions that enter into the determination of net income and, thus, help finance the operations of the business through the generation of cash.
A
Questions 7, 8, and 9 are based on the following information: In 2021, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2016 35,000 33,000 2017 63,000 67,000 2018 74,000 75,000 2019 79,000 78,000 2020 93,000 94,000 2021 87,500 89,000 What journal entry should Skaggs report at the beginning of 2018? A. No entry is necessary B. Inventory 2,000 Retained Earnings 2,000 C. Retained Earnings 2,000 Inventory 2,000 D. Retained Earnings 4,000 Inventory 4,000
A
Schoen Company experienced a change in accounting principle which it accounted for in the following manner: opening balances were not adjusted and no attempt was made to allocate charges or credits for prior events. This method of recording an accounting change is known as handling the change: A. prospectively. B. currently. C. retrospectively. D. haphazardly
A
Schroeder Company uses the indirect method in computing net cash provided by operating activities. How would reported net income be adjusted for the following items? Loss on Sale of Machinery Increase in Inventories A. Added To Deducted From B. Deducted From Added To C. Added To Added To D. Deducted From Deducted From
A
The method used to compute net cash provided by operating activities that adjusts net income for items that affected reported net income but did not affect cash is known as the: A. Indirect method. B. Direct method. C. Adjustment method. D. Income statement method.
A
Which of the following is not considered a direct effect of a change in accounting principle? A. An employee profit-sharing plan based on net income when a company uses the percentage-of-completion method. B. The inventory balance as a result of a change in the inventory valuation method. C. An impairment adjustment resulting from applying the lower-of-cost-or-markettest to the adjusted inventory balance. D. Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance
A
A change in accounting principle results when a company adopts a new principle in recognition of events that were previously immaterial.
Adoption of a new principle in recognition of events that were previously immaterial is not an accounting change.
According to the FASB, which approach is required for reporting changes in an accounting principle? A. Currently B. Retrospectively C. Prospectively D. Futuristically
B
Assume that no correcting entries were made at 12/31/20 or 12/31/21 and that no additional errors occurred in 2022. By how much will 2022 income before income taxes be overstated or understated? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.
B
Before the correction was made and before the books were closed on December 31, 2020, retained earnings was understated by: A. $300,000. B. $236,000. C. $224,000. D. $221,333.
B
In its first year of operations Trumbo Company reported net income of $257,000. Total sales, all on account, amounted to $486,000, and collections of receivables during the year totaled $396,500. Trumbo uses the allowance method in accounting for bad debts expense and during the year recorded bad debt expense of $21,000. Based on these facts alone, what is the net cash provided by operating activities? A. $146,500 B. $188,500 C. $236,000 D. $325,500
B
Questions 19, 20, and 21 are based on the following information: Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending inventory $5,000 overstatement $8,000 understatement Depreciation expense $2,000 understatement $4,000 overstatement. Assume that the 2020 errors were not corrected and that no errors occurred in 2019. By what amount will 2020 income before income taxes be overstated or understated? A. $3,000 overstatement. B. $7,000 overstatement. C. $3,000 understatement. D. $7,000 understatement.
B
The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as a(n): A. Addition to net income. B. Deduction from net income. C. Investing activity. D. Financing activity
B
The basis recommended by the FASB for the statement of cash flows is "cash and cash equivalents." As described by GAAP, cash equivalents are: A. All current assets that have no realization problems associated with them. B. Short-term, highly liquid investments that are both readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in interest rates. C. All cash and near cash items that will be turned into cash within one operating period or one year, whichever is shorter. D. All cash and investments in short-term securities that have a maturity of three months or less from the date of the financial statements.
B
The first step in the preparation of the statement of cash flow requires the use of information included in which comparative financial statements? A. Statements of Cash Flows. B. Balance Sheets. C. Income Statements. D. Statements of Retained Earnings
B
Which of the following financial statement characteristics is adversely affected by accounting changes? A. Usefulness. B. Consistency. C. Timeliness. D. Relevance.
B
Which of the following is not a part of applying the current and prospective approach in accounting for a change in an estimate? A. Report current and future financial statements on a new basis. B. Restate prior period financial statements. C. Disclose in the year of change the effect on net income and earnings per share data for that period only. D. Make no adjustments to current period opening balances for purposes of catch-up.
B
A change in accounting principle is evidenced by: A. a change from the historical cost principle to current value accounting. B. adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted. C. changing the basis of inventory pricing from weighted-average cost to LIFO. D. a change from current value accounting to the historical cost principle.
C
Crabbe Company reported $80,000 of selling and administrative expenses on its income statement for the past year. The Company had depreciation expense and an increase in prepaid expenses associated with the selling and administrative expense for the year. Assuming use of the direct method, how would these items be handled in converting the accrual based selling and administrative expense to the cash basis? Depreciation Increase in Prepaid Expenses A. Deducted From Deducted From B. Added To Added To C. Deducted From Added To D. Added To Deducted From
C
How should significant noncash transactions (purchase of equipment in exchange for common stock) be reported in the statement of cash flows according to GAAP? A. They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions." B. Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major component of the transaction. C. These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials. D. They should be handled in a manner consistent with the transactions that affect cash flows.
C
In a statement of cash flows, the cash flows from investing activities section should report: A. the issuance of common stock in exchange for legal services. B. a stock split. C. the assignment of accounts receivable. D. a payment of dividends
C
Of the following questions, which one would not be answered by the statement of cash flows? A. Where did the cash come from during the period? B. What was the cash used for during the period? C. Were all the cash expenditures of benefit to the company during the period? D. What was the change in the cash balance during the period?
C
On December 31, 2020, accrued wages in the amount of $6,500 were not recognized by Shwenk Company. What effect would this error have on the following account balances at 12/31/20? Expenses Retained Earnings Liabilities Assets A. No Effect Overstate Overstate No Effect B. Overstate Understate No Effect Overstate C. Understate Overstate Understate No Effect D. No Effect Overstate No Effect Understate
C
Tang Corporation has a change in accounting that requires Tang to restate the financial statements of all prior periods presented and disclose in the year of change the effect on net income and earnings per share data for all prior periods presented. This change is most likely the result of a: A. change in depreciation methods. B. change in accounting estimate. C. change in reporting entity. D. change in estimated recoverable mineral reserves
C
To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by: A. re-recording all income statement transactions that directly affect cash in a separate cash flow journal. B. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions. C. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash. D. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.
C
What journal entry should Skaggs report at the beginning of 2021? A. Retained Earnings 3,000 Inventory 3,000 B. Retained Earnings 4,500 Inventory 4,500 C. Inventory 3,000 Retained Earnings 3,000 D. Inventory 4,500 Retained Earnings 4,500
C
Which of the following is a condition in which retrospective application is not impracticable? A. The company cannot determine the effects of retrospective application. B. Retrospective application requires assumptions about management's intent in a prior period. C. The company has changed auditors. D. Retrospective application requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates.
C
Which of the following is not a change in accounting principle? A. A change from completed-contract to percentage-of-completion. B. A change from FIFO to average cost. C. Using a different method of depreciation for new plant assets. D. A change from LIFO to FIFO for inventory valuation
C
Which of the following is not one of the benefits investors and creditors can expect as a result of the presentation of the statement of cash flows? A. Assess the enterprise's ability to meet its obligations, its ability to pay dividends, and its need for external financing. B. Assess the effects on an enterprise's financial position of both its cash and noncash investing and financing transactions during a period. C. Assess the enterprise's ability to expand its operating facilities through the issuance of long-term debt. D. Assess the reasons for differences between net income and associated cash receipts and payments.
C
If a change in an accounting estimate affects current net income by an amount equal to or greater than 1% of net income, the change should be handled retrospectively
Changes in accounting estimates must be handled prospectively, that is, no changes should be made in previously reported results. Opening balances are not adjusted and no attempt is made to catch-up for prior periods
Companies should use retrospective application if the company cannot determine the effects of the retrospective application.
Companies should not use retrospective application if the company cannot determine the effects of the retrospective application.
When accounts payable increase during a period, cost of goods sold on an accrual basis is lower than cost of goods sold on a cash basis
Cost of goods sold is the same under either basis. Even if items for which cash has not been expended are eliminated from the computation, the amount of cost of goods sold remains the same.
Counterbalancing errors are two separate errors that offset one another in the same accounting period.
Counterbalancing errors are errors that will offset or correct themselves over two periods. For example, the failure to record accrued wages in period one will cause (1) net income to be overstated, (2) accrued wages payable to be understated, and (3) wages expense to be understated. If no attempt is made to correct this error, then in period two net income will be understated, accrued wages payable will be correct, and wages expense will be overstated. The net effect of this error for the two years (at the end of the second year) is that net income, accrued wages payable, and wages expense will be correct.
A company that reports changes retrospectively would: A. report the cumulative effect in the current year's income statement as an irregular item. B. not change any prior-year financial statements. C. make changes prospectively. D. show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.
D
Assume that no correcting entries were made at 12/31/20, or 12/31/21. Ignoring income taxes, by how much will retained earnings at 12/31/21 be overstated or understated? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.
D
Cashman Company reported net income after taxes of $85,000 for the year ended 12/31/2017. Included in the computation of net income were: depreciation expense, $15,000; amortization of a patent, $8,000; income from an investment in common stock of Linda Inc., accounted for under the equity method, $12,000; and amortization of a bond premium, $3,000. Cashman also paid a $20,000 dividend during the year. The net cash provided by operating activities would be reported at: A. $57,000. B. $73,000. C. $77,000. D. $93,000
D
Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of a: A. change in accounting estimate. B. change in accounting principle. C. change in segment reporting. D. change in reporting entity.
D
During 2020, Greta Company reported net income of $128,000 which included depreciation expense of $26,000. In addition, the Company experienced the following changes in the account balances listed below: Increases Accounts payable ............................................... $15,000 Inventory ............................................................. 12,000 Decreases Accounts receivable............................................ $ 4,000 Prepaid expenses ............................................... 11,000 Accrued liabilities 8,000 Based upon this information what amount will be shown for net cash provided by operating activities for 2020. A. $ 89,000. B. $ 95,000. C. $155,000. D. $164,000.
D
During 202017, Osborn Corporation, which uses the allowance method of accounting for doubtful accounts, recorded a provision for bad debt expense of $75,000 and in addition it wrote off, as uncollectible, accounts receivable of $23,000. As a result of these transactions, net cash provided by operating activities would be calculated (indirect method) by adjusting net income with a(n): A. $23,000 increase. B. $52,000 increase. C. $52,000 decrease. D. $75,000 increase.
D
If Skaggs presents comparative statements for 2019, 2020 and 2021, then it should: A. Change the beginning balance of retained earnings at January 1, 2016 by showing a decrease of $2,000. B. Change the beginning balance of retained earnings at January 1, 2017 by showing a decrease of $2,000. C. Change the beginning balance of retained earnings at January 1, 2018 by showing an increase of $2,000. D. Change the beginning balance of retained earnings at January 1, 2019 by showing an increase of $3,000.
D
Julie Company has accounted for its inventory using the NIFO (next-in, first-out) inventory method for the past two years. During the current year they changed to the FIFO inventory method at the insistence of their public accountant. The effect of this change should be reported, net of applicable income taxes, in the current: A. income statement after income from continuing operations and before discontinued operations. B. retained earnings statement after net income but before dividends. C. income statement after discontinued operations. D. retained earnings statement as an adjustment of the opening balance
D
The December 31, 2020, physical inventory of Dunn Company appropriately included $4,500 of merchandise inventory that was not recorded as a purchase until January, 2021. What effect will this error have on the following account balances at 12/31/20? COGS Liabilities Retained Earnings Assets A. Overstate Overstate Understate Understate B. No Effect Understate Understate Understate C. Understate No Effect Overstate Overstate D. Understate Understate Overstate No Effect
D
The cash received from the sale of property, plant, and equipment at no gain or loss is classified as what type of activity on the statement of cash flows? Investing Financing Operating A. Yes Yes No B. No No Yes C. No Yes No D. Yes No No
D
The general rule for differentiating between a change in an estimate and a correction of an error is: A. based on the materiality of the amounts involved. Material items are handled as a correction of an error, whereas immaterial amounts are considered a change in an estimate. B. if a generally accepted accounting principle is involved, it's usually a change in an estimate. C. if a generally accepted accounting principle is involved, it's usually a correction of an error. D. a careful estimate that later proves to be incorrect should be considered a change in an estimate.
D
Use the following information for questions 24 and 25. Kielty Company purchased machinery that cost $300,000 on January 1, 2018. The entire cost was recorded as an expense. The machinery has a nine-year life and a $12,000 residual value. Kielty uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2020. Ignore income tax considerations. Kielty's income statement for the year ended December 31, 2020, should show that cumulative effect of this error in the amount of: A. $236,000. B. $224,000. C. $221,333. D. $ -0-.
D
Weaver Company changes from the LIFO method to the FIFO method in 2021. The increase in pre-tax income as a result of the difference in the two methods prior to 2019 is $ 100,000 and for the year 2019 is $40,000 and for the year 2020 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2020 should include. A. A debit to Deferred Tax Liability of $68,000. B. A credit to Deferred Tax Liability of $68,000. C. A debit to Deferred Tax Liability of $56,000. D. A credit to Deferred Tax Liability of $56,000.
D
When preparing a statement of cash flows, an increase in accounts receivable during the period would cause which one of the following adjustments in determining cash flows from operating activities? Direct Method Indirect Method A. Increase Decrease B. Decrease Increase C. Increase Increase D. Decrease Decrease
D
Which of the following activities is classified as an investing activity on the statement of cash flows? A. Cash received from the sale of goods and services. B. Cash paid to suppliers for inventory. C. Cash paid to lenders for interest. D. Cash received from the sale of property, plant, and equipment.
D
Determining net cash provided by operating activities involves analysis of the income statement alone as it is the statement that reflects the amount of cash generated from operations as well as the amount of cash used to conduct the operations.
Determining net cash provided by operating activities involves analyzing not only the current year's income statement but also comparative balance sheets as well as selected transaction data.
When the direct method is used in determining cash provided by operating activities, users of the statement of cash flows are unable to reconcile the net income to the net cash provided by operations because this is only provided when the indirect method is used.
If the direct method of reporting net cash provided by operating activities is used, the FASB requires that the reconciliation of net income to net cash provided by operating activities be provided in a separate schedule.
If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a change in principle.
If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a correction of an error.
If a cash inflow and a cash outflow result from similar type transactions, such as the purchase and sale of property, plant, and equipment or the issuance and repayment of debt, they may be shown as a net amount from the two transactions in the statement of cash flows.
Individual inflows and outflows from investing and financing activities are reported separately. Thus, cash outflow from the purchase of property, plant, and equipment is reported separately from the cash inflow from the sale of property, plant, and equipment
As its name implies, the indirect method is not directly involved with the computation of accrual based net income because it results in the presentation of a condensed cash basis income statement.
It is the direct method that results in the presentation of a condensed cash basis income statement.
Stock dividends and stock splits are classified as financing activities.
Stock dividends and stock splits are significant noncash transactions that generally are not reported in conjunction with the statement of cash flows.
A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable should be treated as an accounting error
T
A change in accounting principle results when a company changes from one GAAP to another GAAP.
T
Accounting alternatives diminish the comparability of financial information between periods and between companies. They also obscure useful historical trend data.
T
An understatement in ending inventory will result in a corresponding understatement of net income
T
Cash flows from events whose effects are included in net income, but which are not related to operations, should be reported either as investing activities or as financing activities.
T
Changes in estimates must be handled prospectively
T
If a company records a loss on the sale of equipment, the amount of the loss must be added back to net income to determine the proper amount of net cash provided by operating activities.
T
If a counterbalancing error is discovered after the books are closed in the second year, no correcting entry is needed.
T
If accrued wages are overlooked at the end of the accounting period, expenses and liabilities will be understated and net income will be overstated.
T
If it becomes impracticable to use retrospective application for a change in accounting principle, a company should prospectively apply the new accounting principle.
T
Operating activities as defined by GAAP, involve the cash effects of transactions that enter into the determination of net income.
T
Recording the purchase of land as an expense is an example of a noncounterbalancing error.
T
Some changes in working capital, although they affect cash, do not affect net income
T
The cash received from the sale of property, plant, and equipment at a gain, although reported in the income statement, is classified as an investing activity.
T
The conversion of net income to net cash provided by operating activities may be accomplished using either the direct method or the indirect method.
T
The direct method is more consistent with the objective of the statement of cash flows because it shows operating cash receipts and payments where the indirect method does not.
T
The information in a statement of cash flows should help investors, creditors, and others to assess the reasons for the difference between net income and net cash flow from operating activities.
T
The principal advantage of the indirect method is that it focuses on the difference between net income and net cash provided by operating activities, thus providing a useful link between the statement of cash flows, the income statement, and the balance sheet.
T
The reconciling items in the work sheet are not entered in any journal or posted to any account.
T
The statement of cash flows provides information not available from other financial statements
T
Unlike the other financial statements, the statement of cash flows is not prepared from the adjusted trial balance.
T
When a company changes an accounting principle under the retrospective approach it adjusts its financial statements for each prior period presented.
T
When a company changes an accounting principle, one of the disclosure requirements is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.
T
When a company makes changes that result in different reporting entities, the company should report the change by changing the financial statements of all prior periods presented and the revised statements should show the financial information for the new reporting entity for all periods.
T
Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate.
T
The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principle.
The FASB requires companies to use the retrospective approach for reporting changes in accounting principle.
The FASB takes the position that companies should retrospectively apply the indirect effects of a change in accounting principle.
The FASB takes the position that companies should not change prior-period amounts for indirect effects of a change in accounting principle.
The amortization of a bond premium should be handled in the same manner as depreciation of a plant asset, that is, added to net income when determining net cash provided by operating activities.
The amortization of bond premium reduces the amount of interest expense reported on the income statement, but it does not reduce the amount of cash flowing out of the business. Thus, the amount of premium amortization must be deducted from net income to arrive at cash provided by operating activities
When a repair to equipment is debited to accumulated depreciation because it extends the asset's useful life, the transaction is considered neither an increase nor a decrease in cash for the period.
The debit to accumulated depreciation as a result of an equipment repair is most likely offset by a credit to cash. Thus, such a transaction would cause a decrease in cash and be shown as an outflow on the statement of cash flows
Because the payment of cash dividends reduces both cash and retained earnings by a similar amount, this transaction has no effect on the statement of cash flows.
The payment of dividends obviously has an impact on the statement of cash flows as it is an outflow of cash. Dividends are reported as an outflow in the financing activities section of the statement of cash flows
GAAP requires that corrections of errors be handled prospectively and shown in the current operating section of the income statement in the year the correction is made.
The profession requires that corrections of errors be treated as prior period adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. If comparative statements are presented, the prior statements affected should be restated to correct for the error.
The redemption of bonds would be classified as an investing activity.
The redemption of bonds would be classified as a financing activity.
Instituting a policy whereby customers can now purchase merchandise on account, when in the past only cash sales were accepted, is evidence that a change in accounting principle has occurred.
This is not a change in an accounting principle but rather a new transaction that results in the use of a principle not previously required.
Financing activities include (a) making and collecting loans and (b) acquiring and disposing of investments and productive long-lived assets.
This is the definition of investing activities.
To prepare the statement of cash flows, only comparative balance sheets and a current income statement are needed.
To prepare the statement of cash flows, comparative balance sheets, the current income statement, and selected transaction data are needed.
When a company changes an accounting principle it should not adjust any assets or liabilities.
When a company changes an accounting principle it adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented.
When computing net cash provided by operating activities under the indirect method, an increase in accounts receivable (net) during the year must be added to accrual based net income because more sales were made then those reflected in the income statement.
When accounts receivable increase during the year, revenues on an accrual basis are higher than revenues on a cash basis because goods sold on account are reported as revenues. In other words, sales for the period led to increased revenue, but not all of those sales resulted in an increase in cash.
When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a correction of an error.
When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a change in estimate.
