ACCTG 641 Exam #1 Review - MC Questions
Sally collects a nonrefundable up-front fee of $192 when a new customer signs up for a 24-month contract for services. A monthly fee of $32 is also assessed for each customer. How much revenue does Sally record on the date the contract is signed? A) $0 B) $40 C) $192 D) $224
A) $0
On January 1, 20X2, Dot Company sold a three-year, service type extended warranty to Matrix Company for $36,000. The warranty took effect on the date of purchase (January 1, 20X2). What amount of Unearned Warranty Revenue should be reported on Dot's December 31, 20X3 Balance Sheet? A) $12,000 B) $24,000 C) $36,000 D) $0
A) $12,000
On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest bearing note with a face amount of $629,406. The goods have an inventory cost on Fullbright's books of $240,000. What amount of Sales Revenue should Fullbright recognize in 2017? A) $400,000 B) $229,406 C) $240,000 D) $629,406
A) $400,000
Sara consigns goods to Lee Company who charges a 10% commission on consignment sales. Lee sells $750 worth of goods on Sara's behalf. Assuming no other costs of selling, what amount of Accounts Receivable should Sara record from Lee Company for the consignment sales? A) $675 B) $750 C) $75 D) $0, Sara will record Cash
A) $675
For a good or service to be considered distinct and identified as a separate performance obligation, it must be: A) Able to be used by the customer on its own or with resources readily available to the customer and able to be separately identified from other promises in the contract. B) Sold separately in other contracts C) Identified in the contract specifically as a performance obligation, and the transaction price attributable to the good or service must be distinctly identified D) Must be used by the customer with other performance obligations in the contract and must be dependent on other performance obligations in the contract to support including each obligation in a single contract
A) Able to be used by the customer on its own or with resources readily available to the customer and able to be separately identified from other promises in the contract.
Which of the following generally provides a better indication of an enterprise's present and continuing ability to generate favorable cash flows? A) Accrual basis accounting B) Cash basis accounting C) Tax basis accounting D) None of the above
A) Accrual basis accounting
Fundamental considerations the FASB must keep in mind in its rule-making activities include: A) All of the options are correct. B) Simplification of the accounting literature C) Improvement in financial reporting D) International convergence
A) All of the options are correct.
A conceptual framework is necessary for which of the following reasons? A) All of these answer choices are correct. B) It increases financial statement users' understanding of and confidence in financial reporting C) It enables standard setters to issue more useful and consistent pronouncements over time. D) It allows the profession to quickly solve new and emerging issues.
A) All of these answer choices are correct.
All of the following statements are FALSE EXCEPT: A) Comparability pertains to the reporting of information in a similar manner for different companies as well as a company reporting under the same accounting policies over time. B) The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. C) Verifiability is solely an enhancing characteristic for faithful representation. D) Information that possesses faithful representation is characterized as having predictive or confirmatory value.
A) Comparability pertains to the reporting of information in a similar manner for different companies as well as a company reporting under the same accounting policies over time.
On January 1, 2017, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2017. On March 15, 2017, Purdy delivers Rain to Georgia. Purdy should record: A) Contract Asset of $110,000 on February 10 B) Contract Asset of $110,000 on January 1 C) Accounts Receivable of $300,000 on January 1 D) Accounts Receivable of $110,000 on February 10
A) Contract Asset of $110,000 on February 10
Allocating a transaction price to multiple performance obligations includes which of the following steps: A) Identify distinct goods and/or services as separate performance obligations B) Obtain an independent appraisal of the value of services identified as a performance obligation. C) Complete every performance obligation before recognizing any revenue from the contract. D) Consolidate the components of the contract to two performance obligations because a contract should not have more than two performance obligations.
A) Identify distinct goods and/or services as separate performance obligations
Which of the following statements is TRUE? A) The objective of financing reporting uses an entity (A=L+OE) approach rather than a proprietary approach (A-L = OE) in determining what information to report. B) Because they are generally shorter, FASB interpretations are subject to less due process compared to FASB standards. C) The primary objective of financial statements is to allow for a stewardship approach for reporting financial information - as opposed to efficient capital allocation. D) The objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and statement of owners' or stockholders' equity
A) The objective of financing reporting uses an entity (A=L+OE) approach rather than a proprietary approach (A-L = OE) in determining what information to report.
In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. A) True B) False
A) True
The objective or pervasive criterion of the conceptual framework is: A) decision usefulness B) understandability C) reliability D) comparability
A) decision usefulness
Preparation of merged financial statements when a parent-subsidiary relationship exists does NOT violate the: A) economic entity assumption B) comparability characteristic C) neutrality characteristic D) relevance characteristic
A) economic entity assumption
In the US, inflation/deflation is ignored in accounting under which of the following assumptions? A) monetary unit assumption B) periodicity or time period assumption C) going concern assumption D) economic entity assumption
A) monetary unit assumption
The objective of financial reporting places most emphasis on: A) reporting to capital providers (i.e., investors and creditors) B) providing information to individuals who are experts in the field C) providing specific guidance related to specific needs D) reporting on stewardship (i.e., managements effective use of assets)
A) reporting to capital providers (i.e., investors and creditors)
All of the following are true regarding the FASB Codification EXCEPT: A) the purpose of the Codification is to create new GAAP B) the Codification was created to simplify user access C) the Codification changes the way GAAP is documented, presented, and updated D) The goal of the Codification was to provide one place where all authoritative literature about a particular topic could be found.
A) the purpose of the Codification is to create new GAAP
The expectations gap is: A) what the public thinks accountants should do and what accountants think they can do. B) what the users of financial statements want from the government and what is provided C) what financial information management provides and what users want D) what governmental agencies want from standard-setting and what the standard setters provide
A) what the public thinks accountants should do and what accountants think they can do.
Historical Cost Principle
An accounting principle that states that companies should record assets at their cost. It is though to be verifiable.
Monetary Unit Assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
Periodicity Assumption
An assumption that the economic life of a business can be divided into artificial time periods.
Foghorn Company entered into a sales transaction in which it agreed to receive common stock from Leghorn Corporation as payment for services provided to Leghorn Corporation. The journal entry to record the receipt of payment for the sales transaction will include a: A) Credit to Noncash Consideration B) Debit to Leghorn Investment C) Debit to Cash D) Credit to Common Stock
B) Debit to Leghorn Investment
The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of five of the seven board members. A) True B) False
B) False - only requires 4/7
Mott Company purchases a machine from Janelle Company. Installation of the machine requires specialized knowledge that Mott does not possess. Janelle Company regularly includes installation as part of its sales contracts. The machine has a stand-alone price of $50,000, and the value of the installation is estimated to be $5,000. Mott agrees to purchase the machine for $50,000. How much of the contract price should be allocated to the machine and installation respectively? A) Machine $50,000; Installation $5,000 B) Machine $50,000; Installation $0 C) Machine $45,000; Installation $5,000 D) Machine $45,455; Installation $4,545
B) Machine $50,000; Installation $0
Which of the following statements is FALSE regarding the SEC? A) Corporations whose securities are listed on a US stock exchange are required to file audited financial statements with the SEC. B) The SEC established the PCAOB (Public Company Accounting Oversight Board) C) The SEC was established by Congress with the Securities Exchange Act of 1934. D) The SEC has the authority to enforce its regulations.
B) The SEC established the PCAOB (Public Company Accounting Oversight Board)
Rubin Company is the only company in its industry to depreciate its plant assets on a straight-line basis. What qualitative characteristic of accounting information is NOT being followed? A) confirmatory value B) comparability C) consistency D) verifiability
B) comparability
One criteria that indicates that a company should disregard revenue guidance for contracts (i.e., a valid contract does not exist) is when: A) The contract has commercial substance B) each party can unilaterally terminate the contract without compensation C) Each party's rights regarding the goods or services to be transferred can be identified D) The payment terms for the goods and services to be transferred can be identified.
B) each party can unilaterally terminate the contract without compensation
A company charges its sales commission costs to expense is an example of: A) measurement principle B) expense recognition or matching principle C) full disclosure principle D) periodicity assumption
B) expense recognition or matching principle
An increase in equity (net assets) arising from peripheral or incidental transactions is called a(n): A) investment by owners B) gain C) revenue D) asset
B) gain
Which type of revenue or gain is generally recognized with the passage of time? A) gain or loss from disposition B) long-term construction contracts C) revenue from sales D) revenue from fees or services
B) long-term construction contracts
Hendrix Inc., an equipment dealer, sells equipment on January 1, 2016, to Jimi Company for $200,000. Also, on January 1, 2016, Hendrix agrees to repurchase this equipment from Jimi Company on December 31, 2017 for a price of $233,280. At 1/1/16, Hendrix should record: A) Sales Revenue of $200,000 B) Sales Revenue of $200,000 and a liability of $33,280 C) A liability of $200,000 D) Sales Revenue of $200,000 and Interest Expense of $33,280
C) A liability of $200,000
The organization that provides implementation guidance within the framework of the Codification to reduce diversity in practice on a timely basis is the: A) FASAC B) EITF C) FASB D) AICPA
C) FASB
Which of the following statements about the fair value principle is true? A) Measurements based on fair value increase the objectivity in financial reporting B) GAAP requires the use of fair value for all financial assets and liabilities C) Fair value is a market-based measure D) Fair value is generally less relevant than historical cost.
C) Fair value is a market-based measure
A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for? A) Expensed in the period incurred because the company paid for the costs in the current period B) Recorded as a liability and expensed in the period paid C) Recorded as an asset and amortized over four years. D) Recorded as a liability and amortized over four years.
C) Recorded as an asset and amortized over four years.
Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price: A) The combine, the navigational system, and the training as three performance obligations. B) The combine, the navigational system, and the training account for one performance obligation because they are all part of the same contract. C) The combine including the navigational system and the training as two separate performance obligations D) No performance obligations exist because the work on the contract, including the training, has not begun.
C) The combine including the navigational system and the training as two separate performance obligations
In a bill-and-hold arrangement, which of the following is NOT one of the criteria which must be met for the customer to have obtained control of the product? A) The reason for the bill-and-hold arrangement must be substantive B) The seller cannot have the ability to use the product or to direct it to another customer C) The product must be physically located in the seller's warehouse D)The product currently must be ready for physical transfer to the customer
C) The product must be physically located in the seller's warehouse
Since the completion of the codification project, GAAP can best be described as consisting of: A) FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations B) FASB financial standards only C) any authoritative guidance included in the FASB codification D) Financial standards, interpretations, and concept statements
C) any authoritative guidance included in the FASB codification
Accounting standard setters use the following process in establishing accounting standards: A) discussion paper, research, exposure draft, standard B) research, exposure draft, discussion paper, standard C) research, discussion paper, exposure draft, standard D) research, preliminary views paper, discussion paper, standard
C) research, discussion paper, exposure draft, standard
An indication that the customer has NOT taken control of the good or service is: A) the customer has physical possession of the asset B) The selling company has transferred legal title to the asset C) the customer has not taken on the significant risks or rewards of ownership D) The selling company has right to payment for the good or service
C) the customer has not taken on the significant risks or rewards of ownership
Murray Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? A) comparability B)confirmatory value C) verifiability D)materiality
C) verifiability
Holt Company enters into a contract to build a new plant facility for Segal Company for $2,500,000. In the contract, Segal will pay a performance bonus of $100,000 if Holt is able to complete the facility by October 1, 20X6. The performance bonus is reduced by 50% for each of the first two weeks after October 1, 20X6. If the completion is delayed more than two weeks, then Holt forfeits the entire performance bonus. Holt's prior experience with performance bonuses on similar contracts indicates the following probabilities of completion outcomes: Completed by: Probability: October 1, 20X6 80% October 8, 20X6 10% October 15, 20X6 5% After October 15, 20X6 5% How much should Holt record as the transaction price of the contract and why? A) $2,461,250 because Holt should use the expected value method. B) $2,500,000 because the performance bonus is not guaranteed. C)$2,586,250 because Holt should use the expected value method D) $2,600,000 because the most likely outcome is that Holt will deliver the facility by October 1, 20X6
C)$2,586,250 because Holt should use the expected value method
A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? A) $185,000 B) $195,000 C)$200,000 D) $190,000
D) $190,000
The following information is available about a signed agreement between two entities: - The entities have agreed to specific performance obligations - The entities have agreed on a price related to the performance obligations - No work has begun on the performance obligations, and the contract is cancelable without payment of penalty or other consideration. - It is probable that the company completing the work will collect the agreed-upon consideration. Does a valid contract exist between the entities to which the revenue recognition criteria may be applied? A) A valid contract exists because it identifies specific performance obligations and collectibility of the consideration is probable. B) A valid contract exists because the contract includes important terms, such as the agreed-upon price and specific performance obligations. C) A valid contract does not exist because the transaction price has not yet been allocated to the specific performance obligations. D) A valid contract does not exist because it is cancelable without penalty and no work on the performance obligations has begun.
D) A valid contract does not exist because it is cancelable without penalty and no work on the performance obligations has begun.
Lavender Corporation sells 100 jars of essential oil to Bed, Bath & Relax on December 1, 20X5, for $10 each. Lavender offers a right to return the product for any reason. Based on past sales, Lavender expects BB&R to return 5 jars. What adjusting entry, if any, should Lavender record on December 31, 20X5, to reflect BB&R's right of return? A) Dr. Sales Returns & Allowances $50; Credit Accounts Receivable $50 B) Dr. Sales Returns & Allowance $50; Credit Cash $50 C) No entry is required because BB&R has not returned any jars. D) Dr. Sales Returns & Allowances $50; Credit Allowance for Sales Returns & Allowances $50
D) Dr. Sales Returns & Allowances $50; Credit Allowance for Sales Returns & Allowances $50
Wolf Company produces large pieces of machinery for use in the manufacturing industry. Blue Jay Manufacturing Company purchases a large piece of machinery from Wolf for use in Blue Jay's new production plant. Although Blue Jay could install the equipment on its own, management decides to include installation of the machinery in its contract with Wolf. Blue Jay agrees to a total contract price of $850,000 for both the equipment and the installation. Wolf does not offer a discount on the machinery if it completes the installation. The fair value of the equipment is $850,000, and its cost is $760,000. The fair value of the installation is $50,000 and the cost of the labor to Wolf is $40,000. How much of the contract price should Wolf allocate to the equipment and installation respectively? If a proportion is necessary, round to the nearest one hundredth of a percent (e.g. .####) and round all answers to the nearest dollar. A) Equipment $850,000; Installation $0 B) Equipment $800,000; Installation $50,000 C) Equipment $807,500; Installation $42,500 D) Equipment $802,740; Installation $47,260
D) Equipment $802,740; Installation $47,260
The major players in financial reporting in the U.S. are FASB and the SEC. On the international side, the major players are: A) IOSCO and the SEC B) IASB and FASB C) FASB and IOSCO D) IASB and IOSCO
D) IASB and IOSCO
The purpose of financial accounting is to provide information primarily for which of the following groups? A) Governments B) Internal Revenue Service C) Employees D) Investors and Creditors
D) Investors and Creditors
The authoritative status of FASB's conceptual framework is as follows: A) It takes precedence over all other authoritative literature. B) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue C) US GAAP does not have a conceptual framework; only the international standards do. D) It is used when there is no standard or interpretation related to the reporting issues under consideration.
D) It is used when there is no standard or interpretation related to the reporting issues under consideration.
Which of the following is NOT a significant difference between the FASB and its predecessor, the APB? A) Increased independence B) Greater member autonomy C) Broader representation D) Larger number of members
D) Larger number of members
The change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources is called: A) revenues B) net income C) gains D) comprehensive income
D) comprehensive income
Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the: A) economic entity assumption B) periodicity assumption C) monetary unit assumption D) going concern assumption
D) going concern assumption
The failure of financial reports to provide information on customer satisfaction indexes, reject rates, and company sustainability efforts describes the financial reporting challenge of: A) understandability B) forward-looking information C) soft assets D) nonfinancial measurements
D) nonfinancial measurements
In determining the transaction price, the company must consider: A) the time value of money, but not consideration payable B) non-cash consideration, but not the time value of money C) variable consideration, but not non-cash consideration D) variable consideration, non-cash consideration, time value of money, and consideration payable
D) variable consideration, non-cash consideration, time value of money, and consideration payable
Entity Assumption
Organization stands apart from other organizations and individuals as a separate economic unit
Going Concern Assumption
The assumption that the company will continue in operation for the foreseeable future.
Fair Value Principle
assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
