Intermediate II Exam 3 Practice Questions

A change in accounting principle is a change that occurs as a result of new information or additional experience

False

A company should add back bond premium amortization to net income to arrive at net cash flow from operating activities.

False

A financial projection is a set of prospective financial statements that present a company's expected financial position and results of operations.

False

A pension plan is contributory when the employer makes payments to a funding agency.

False

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

False

Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.

False

An employer does not have to report a liability on its balance sheet in a defined-benefit plan.

False

Benefits under a pension plan can include the retiree, the retiree's spouse, and other dependents.

False

Cash payments for operating expenses are computed by subtracting an increase in prepaid expenses and a decrease in accrued expenses payable from operating expenses.

False

Companies account for a change in depreciation methods as a change in accounting principle.

False

Companies recognize the accumulated benefit obligation in their accounts and in their financial statements.

False

Companies report Accumulated Other Comprehensive Income (PSC) as a liability on the balance sheet.

False

Companies report changes in accounting estimates retrospectively.

False

Companies report extraordinary items in interim reports by prorating them over the four quarters.

False

Companies should recognize the entire increase in projected benefit obligation due to a plan initiation or amendment as pension expense in the year of amendment.

False

Companies should report accounting transactions as they occur, and expense recognition should not change with the period of time covered under the integral approach.

False

Counterbalancing errors are those errors that take longer than two periods to correct themselves.

False

FASB standards directly affect financial statements, notes to the financial statements, and management's discussion and analysis.

False

If the Accumulated Other Comprehensive Income (G/L) account is less than the corridor, the net gains and losses are subject to amortization.

False

If the loss on an account receivable results from a customer's bankruptcy after the balance sheet date, the company only discloses this information in the notes to the financial statements.

False

In most situations, an auditor issues a qualified opinion or disclaims an opinion.

False

In order to make adequate disclosure of related party transactions, companies should report the legal form, rather than the economic substance, of these transactions.

False

Income from an investment in common stock using the equity method is added to net income in computing net cash provided from operating activities.

False

Influences in a company's internal environment may relate to industry conditions, poor internal control systems, or legal and regulatory considerations.

False

Management's discussion and analysis section covers three financial aspects of an enterprise's business-liquidity, profitability, and solvency.

False

Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees' service during the current year.

False

The FASB encourages the use of the indirect method over the direct method.

False

The FASB makes it mandatory to use only the years-of-service method for amortization of prior service cost.

False

The FASB requires allocations of joint, common, or company-wide costs for external reporting purposes.

False

The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels.

False

The direct method, also called the reconciliation method, reports cash receipts and cash disbursements from operating activities.

False

The first step in the preparation of the statement of cash flows is to determine the net cash flow from operating activities.

False

The primary purpose of the statement of cash flows is to provide cash-basis information about the company's operating, investing, and financing activities.

False

The unexpected gains and losses from changes in the projected benefit obligation are called asset gains and losses.

False

Under the accrual basis of accounting, net income is usually the same as net cash flow from operating activities.

False

When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in the current year's income statement.

False

When changing from the equity method to the fair value method, a company must eliminate the balance in Unrealized Holding Gain or Loss.

False

When companies make changes that result in different reporting entities, the change is reported prospectively.

False

When numerous adjustments are necessary, companies often use a cash flow worksheet instead of preparing a statement of cash flows.

False

When prepaid expenses decrease during a period, expenses on the accrual-basis are lower than they are on a cash-basis.

False

For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

True

Fraudulent financial reporting is intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements.

True

If 10 percent or more of company revenue is derived from a single customer, the company must disclose the total amount of revenue from each such customer by segment.

True

If an FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle, the change is considered clearly acceptable.

True

Noncash investing and financing activities are disclosed either in a separate schedule or in a separate note to the financial statements.

True

To compute the year-to-date tax, companies apply the estimated annual effective tax rate to the year-to-date ordinary income at the end of each interim period.

True

When a company amends its defined benefit plan, and recognizes prior service, the projected benefit obligation is increased to recognize this additional liability.

True

When accounts receivable decrease during a period, cash-basis revenues are higher than revenues reported on an accrual basis.

True

When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.

True

A company can convert net income to net cash flow from operating activities through either the direct method or the indirect method.

True

A qualified opinion is issued when the exception to the standard opinion is not of sufficient magnitude to invalidate the statements as a whole.

True

Accounting policies are the specific accounting principles and methods a company uses and considers most appropriate to present fairly its financial statements.

True

An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.

True

Cash receipts from customers are computed by adding a decrease in accounts receivable to revenue from sales.

True

Changing the cost or equity method of accounting for investments is an example of a change in reporting entity.

True

Companies classify some cash flows relating to investing or financing activities as operating activities.

True

Companies compute the vested benefit obligation using only vested benefits, at current salary levels.

True

Companies must disclose a reconciliation of how the projected benefit obligation and the fair value of plan assets changed during the year either in their financial statements or in the notes.

True

Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year's books.

True

Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

True

Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.

True

Companies should generally use the same accounting principles for interim reports and for annual reports.

True

Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines

True

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.

True

FASB Statement 131 requires that general purpose financial statements include selected information on a single basis of segmentation.

True

One of the disclosure requirements for a change in accounting principle is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

True

Qualified pension plans permit deductibility of the employer's contributions to the pension fund.

True

Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

True

Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements- as if the new principle had always been used.

True

The Accumulated Other Comprehensive Income (G/L) account is amortized only if it exceeds 10% of the larger of the beginning balances of the projected benefit obligation or the market-related plan assets value.

True

The MD&A section must provide information about the effects of inflation and changing prices, if they are material to financial statement trends.

True

The Pension Asset / Liability account balance equals the difference between the projected benefit obligation and the fair value of pension plan assets.

True

The SEC requires that companies report to it certain substantive information that is not found in their annual reports.

True

The difference between a financial forecast and a financial projection is that a forecast provides information on what is expected to happen, while a projection provides information on what might take place.

True

The difference between the expected return and the actual return is referred to as the unexpected gain or loss.

True

The indirect method adjusts net income for items that affected reported net income but did not affect cash.

True

The interest component of pension expense in the current period is computed by multiplying the settlement rate by the beginning balance of the projected benefit obligation.

True

The issuance of stock dividends is entered on the cash flow worksheet, but is not reported in the statement of cash flows.

True

The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning and ending cash balances reported in the comparative balance sheets.

True

The statement of cash flows provides information to help investors and creditors assess the cash and noncash investing and financing transactions during the period.

True

In accounting for a defined-benefit pension plan a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised. b. the employer's responsibility is simply to make a contribution each year based on the formula established in the plan. c. the expense recognized each period is equal to the cash contribution. d. the liability is determined based upon known variables that reflect future salary levels promised to employees.

a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.

One component of pension expense is actual return on plan assets. Plan assets include a. assets that a company holds to earn a reasonable return, generally at minimum risk. b. plan assets still under the control of the company. c. only assets reported on the balance sheet of the employer as prepaid pension cost. d. None of these answers are correct

a. assets that a company holds to earn a reasonable return, generally at minimum risk.

The projected benefit obligation is the measure of pension obligation that a. is required to be used for reporting the service cost component of pension expense. b. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels. c. requires the longest possible period for funding to maximize the tax deduction. d. is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.

a. is required to be used for reporting the service cost component of pension expense.

The computation of pension expense includes all the following except a. service cost component measured using current salary levels. b. interest on projected benefit obligation. c. expected return on plan assets. d. All of these are included in the computation.

a. service cost component measured using current salary levels.

The accumulated benefit obligation measures a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels. c. the level cost that will be sufficient, together with interest to provide the total benefits at retirement. d. the shortest possible period for funding to maximize the tax deduction.

a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

26. Which of the following is not a characteristic of a defined-contribution pension plan? a. The employer's contribution each period is based on a formula. b. The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan. c. The accounting for a defined-contribution plan is straightforward and uncomplicated. d. The benefit of gain or the risk of loss from the assets contributed to the pension fund is borne by the employee.

b. The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan.

25. In a defined-benefit plan, a formula is used that a. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee. b. defines the benefits that the employee will receive at the time of retirement. c. requires that pension expense and the cash funding amount be the same. d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

b. defines the benefits that the employee will receive at the time of retirement.

The actual return on plan assets a. is equal to the change in the fair value of the plan assets during the year. b. includes interest, dividends, and changes in the fair value of the fund assets. c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period. d. All of these answers are correct.

b. includes interest, dividends, and changes in the fair value of the fund assets.

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as a. an offset to the liability for prior service cost. b. pension asset/liability. c. as other comprehensive income (G/L) d. as accumulated other comprehensive income (PSC).

b. pension asset/liability.

The interest on the projected benefit obligation component of pension expense a. reflects the incremental borrowing rate of the employer. b. reflects the rates at which pension benefits could be effectively settled. c. is the same as the expected return on plan assets. d. may be stated implicitly or explicitly when reported.

b. reflects the rates at which pension benefits could be effectively settled.

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees? Amortization of Fair value prior of plan assets service cost a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

c. Projected benefit obligation

In a defined-benefit plan, the process of funding refers to a. determining the projected benefit obligation. b. determining the accumulated benefit obligation. c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. d. determining the amount that might be reported for pension expense.

c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

In a defined-contribution plan, a formula is used that a. defines the benefits that the employee will receive at the time of retirement. b. ensures that pension expense and the cash funding amount will be different. c. requires an employer to contribute a certain sum each period based on the formula. d. ensures that employers are at risk to make sure funds are available at retirement.

c. requires an employer to contribute a certain sum each period based on the formula.

In computing the service cost component of pension expense, the FASB concluded that a. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis. b. a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees. c. the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense. d. All of these answers are correct.

c. the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

Differing measures of the pension obligation can be based on a. all years of service—both vested and nonvested—using current salary levels. b. only the vested benefits using current salary levels. c. both vested and nonvested service using future salaries. d. All of these answers are correct.

d. All of these answers are correct.

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary? a. Retirement and mortality rate. b. Interest rates. c. Benefit provisions of the plan. d. All of these are considered.

d. All of these are considered.

Vested benefits a. usually require a certain minimum number of years of service. b. are those that the employee is entitled to receive even if fired. c. are not contingent upon additional service under the plan. d. are defined by all of these answers.

d. are defined by all of these answers.

In all pension plans, the accounting problems include all the following except a. measuring the amount of pension obligation. b. disclosing the status and effects of the plan in the financial statements. c. allocating the cost of the plan to the proper periods. d. determining the level of individual premiums.

d. determining the level of individual premiums.

The relationship between the amount funded and the amount reported for pension expense is as follows: a. pension expense must equal the amount funded. b. pension expense will be less than the amount funded. c. pension expense will be more than the amount funded. d. pension expense may be greater than, equal to, or less than the amount funded.

d. pension expense may be greater than, equal to, or less than the amount funded.