Exam 1 Review: Intermediate Accounting 201 Ivy Tech

Which of the following does not apply to a seller who is an agent? A. Has control over goods or services B. Not primarily responsible for providing goods or services to customer C. Not exposed to risks associated with holding inventory D. Primary performance obligation is to facilitate the transfer of goods or services

A. Has control over goods or services An agent's primary performance obligation is to facilitate the transfer of goods or services. It typically does not have control over goods, is not responsible for providing goods or services, and is not exposed to the risks associated with holding inventory.

The underlying assumption that presumes a company will continue indefinitely is: A. Periodicity. B. Going concern. C. Economic entity. D. Monetary unit.

B. Going concern. Going concern assumes the company will continue to operate indefinitely.

Earnings per share should be reported for each of the following income statement captions except: A. Income from continuing operations. B. Discontinued operations. C. Operating income. D. Net income.

C. Operating income. Earnings per share is only reported on income from continuing operations, discontinued operations, and net income.

Which of the following captions would more likely be found in a multiple-step income statement? A. Total expenses. B. Total revenues and gains. C. Operating income. D. All of the other answer choices are incorrect.

C. Operating income. Operating income is an important subtotal in a multiple-step income statement.

A prepaid expense is an expense: A. Incurred before the cash is paid. B. Incurred and paid. C. Paid but not yet incurred. D. All of these answer choices are incorrect.

C. Paid but not yet incurred. Prepaid expenses are expenses paid for in advance and initially recorded as an asset.

We can state the accounting equation as: A. (A + L= OE.) B. (A = L − OE.) C. (−A + L − OE = 0.) D. (A − L − OE = 0.)

D. (A − L − OE = 0.) If we add OE to both sides of the equation, A − L − OE = 0 becomes A − L = OE.

Income statement: 20X2 Sales $2,500,000 Cost of goods sold 1,300,000 Net income 200,000 Balance sheets: 20X2 20X1 Accounts receivable$300,000 $200,000 Total assets 2,000,000 1,800,000 Total shareholders' equity 900,000 700,000 The return on shareholders' equity for 20X2 is: A. 20% B. 8% C. 22.22% D. 25%

D. 25% ROE = net income ÷ average shareholders' equity balance, so ROE = $200,000 ÷ ((900,000 + 700,000) ÷ 2) = 25%.

Which of the following adjusting entries causes a decrease in assets? A. Recognizing the portion of revenue collected in advance. B. Recording depreciation expense. C. Accruing unrecorded salaries expense. D. Accruing unrecorded interest revenue.

B. Recording depreciation expense. The associated credit in the depreciation expense entry is to accumulated depreciation; a contra-asset account (which reduces the associated asset balance).

A list of the general ledger accounts and their balances at a particular date is a: A. Journal. B. Ledger. C. Financial statement. D. Trial balance.

D. Trial balance. A list of the general ledger accounts and their balances at a particular date is a trial balance.

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is: A. A deferred annuity. B. An ordinary annuity. C. An annuity due. D. A delayed annuity.

B. An ordinary annuity. In an ordinary annuity, cash flows occur at the end of each period. In an annuity due, cash flows occur at the beginning of each period.

Which of the following is most likely an accrued liability? A. Depreciation. B. Interest. C. Cost of goods sold. D. Office supplies.

B. Interest. An accrued liability arises when all or part of an expense is recognized before the associated cash disbursement.

The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is: A. Verifiability. B. Representational faithfulness. C. Neutrality. D. Materiality.

B. Representational faithfulness. Representational faithfulness exists when there is agreement between a measure or description and the phenomenon it purports to represent. Verifiability is an enhancing characteristic. Neutrality and materiality are components/aspects.

Harry Morgan plans to make 30 quarterly deposits of $200 into a savings account at the end of each quarter. The savings account pays interest at an annual rate of 8%, compounded quarterly. What is the value of the savings account after the 30 quarterly deposits? A. $8,114 B. $24,469 C. $6,000 D. $8,276

A. $8,114 $8,114: $200 × 40.5681 (future value of an ordinary annuity for 30 periods at 2%).

Sanchez Corporation Selected Financial Information 12/31/X2 12/31/X1 Cash$20,000 $25,000 Accounts receivable (net) 100,000 110,000 Inventories 190,000 155,000 Total current assets 310,000 290,000 Long-term assets 230,000 210,000 Current liabilities 200,000 190,000 Long-term liabilities 40,000 50,000 Shareholders' equity 300,000 260,000 Net income$40,000 Interest expense 10,000 Income tax expense 20,000 The debt to equity ratio for 20X2 is: A. 0.80 B. 0.44 C. 0.67 D. 0.13

A. 0.80 Debt to equity ratio=total liabilities / shareholders' equity =($200,000 + $40,000) / $300,000 =0.80

Marcella displays her artwork in local coffee shops for sale. If a painting sells, Marcella remits a 10% fee to the owner of the coffee shop; if a painting doesn't sell, Marcella takes it back to her studio. This arrangement is an example of: A. A consignment arrangement. B. A bill-and-hold arrangement. C. A franchise arrangement. D. A licensing arrangement involving symbolic intellectual property.

A. A consignment arrangement. Under a consignment arrangement, the seller transfers property to an intermediary but still retains title and the risk of ownership, as the property reverts to the seller if it is not sold to a third party.

Which of the following adjusting entries causes an increase in liabilities? A. Accruing unrecorded interest expense. B. Recording the amount of expired prepaid insurance. C. Accruing unrecorded interest revenue. D. Recording depreciation expense.

A. Accruing unrecorded interest expense. The associated credit to accrue unpaid interest is to interest payable, a liability.

Which of the following is typically treated as a separate performance obligation? A. Extended warranty. B. Quality-assurance warranty. C. Customer prepayment. D. An option to purchase additional goods at the normal discount provided to all customers.

A. Extended warranty. An extended warranty is typically treated as a separate performance obligation, as it provides a service that is not provided for ordinary purchases without additional payment.

In a statement of cash flows, cash received from the issuance of common stock would be classified as a: A. Financing activity. B. Investing activity. C. Operating activity. D. Non-cash activity.

A. Financing activity. The issuance of common stock is reported as a financing activity.

In general, revenue is recognized when the earnings process is virtually complete and: A. Goods or services are transferred to the customer. B. A purchase order is received. C. Cash is collected. D. Production is completed.

A. Goods or services are transferred to the customer. Revenues are recognized when goods or services are transferred to the customer. That is when the seller has satisfied its obligation to the customer.

Allocation of the transaction price to performance obligations: A. Is based on relative standalone selling prices. B. Cannot be based on estimated selling prices. C. May not use the residual method when selling prices are uncertain. D. Is not allowed when bad debts are material.

A. Is based on relative standalone selling price. Allocation is based on the proportion of each standalone selling price to the sum of the standalone selling prices.

The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by: A. Monitoring the development of GAAP within the accounting profession and using its stature to influence that development. B. Exercising its statutory authority to prescribe external financial reporting requirements. C. Allying with the AICPA to lobby the efforts of the FASB. D. Providing auxiliary funding to the FASB.

A. Monitoring the development of GAAP within the accounting profession and using its stature to influence that development. The SEC has the final authority on accounting standards but has delegated the task of setting accounting standards to the private sector.

Western Appliance Company, which began business on January 1, 2018, appropriately uses the installment sales method of accounting. The following data are available for 2018: Installment sales $350,000 Cash collections on installment sales 150,000 Gross profit on sales 40% The gross profit on installment sales for 2018 should be: Realized Deferred a.$60,000 $80,000 b.$80,000 $60,000 c.$140,000 $80,000 d.$140,000 $60,000 A. Option a B. Option b C. Option c D. Option d

A. Option a Gross profit realized is 40% × $150,000 = $60,000. Gross profit deferred is 40% × ($350,000 - $150,000) = $80,000.

An item not generally classified as a current asset is a: A. Patent. B. Trade receivables. C. Prepaid rent. D. Inventories.

A. Patent Patents offer an exclusive 20-year right to manufacture a product or use a process. Within the next year, trade receivables are generally collected, inventories are generally sold, and prepaid rent generally expires, so these items are generally classified as current assets.

Danielle wants to know how much she should invest now at 5% interest in order to accumulate a sum of $45,000 in four years. She should use a table for the: A. Present value of $1. B. Future value of $1. C. Present value of an ordinary annuity of $1. D. Future value of an annuity due of $1.

A. Present value of $1. $45,000 × (PV of $1: n = 4, i = 5%) = Amount to Invest

An "unqualified" opinion in the auditor's report provides the opinion that: A. The financial statements are presented in conformity with generally accepted accounting principles (GAAP). B. The audit process has been limited or there has been a departure from GAAP. C. The financial statements are seriously misstated or misleading. D. The auditor has not be able to gather sufficient information to form an opinion.

A. The financial statements are presented in conformity with generally accepted accounting principles (GAAP). An auditor issues an unqualified (or "clean") opinion when the auditor has undertaken professional care to ensure that the financial statements are presented in conformity with GAAP.

Which of the following describes the modified retrospective approach to implementing a change in accounting principle? A. The new standard is applied only to the current period and all future periods, and the cumulative effects of prior periods is shown as an adjustment to retained earnings. B. The new standard is applied to all periods presented in the financial statements. C. The new standard is applied only to current period and all future periods. D. The new standard is applied only to all future periods and not the current or previous periods.

A. The new standard is applied only to the current period and all future periods, and the cumulative effects of prior periods is shown as an adjustment to retained earnings.

Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The present value of Loan A will be: A. higher than Loan B. B. lower than Loan B. C. the same as Loan B. D. Indeterminate with respect to Loan B.

A. higher than Loan B. Since payments from an annuity due are received sooner, its value is higher than if the payments are received later.

Laser World's income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash flows from operating activities were: A. $126,000 B. $166,000 C. $174,000 D. $186,000

B. $166,000 $130,000 (net income) + $40,000 (depreciation expense) − $10,000 (increase in accounts receivable) + $6,000 (increase in accounts payable) = $166,000

Consider the following year-end information for a company: Cost of goods sold$420,000 Sales revenue 800,000 Nonoperating expenses 10,000 Operating expenses 170,000 Income tax expense 80,000 What amount will the company report for operating income? A. $200,000 B. $210,000 C. $380,000 D. $120,000

B. $210,000 Operating income = $800,000 − $420,000 − $170,000 = $210,000.

Winchell wrote a contract that involves two performance obligations. Product A has a stand-alone selling price of $50, and product B has a stand-alone selling price of $100. The price for the combined product is $120. How much of the transaction price would be allocated to the performance obligation for delivering product A? (Do not round intermediate calculation.) A. $50. B. $40. C. $30. D. $20.

B. $40. ($50 ÷ ($100 + 50)) × $120 = $40.

Smith Company earns a 12% return on assets. If net income is $720,000, average total assets must be: A. $86,400 B. $6,000,000 C. $6,086,400 D. $3,000,000

B. $6,000,000 ROA = net income ÷ assets, so 12% = $720,000 ÷ assets, so assets = $6,000,000.

Lorette sells $10,000 of product to KiethCo, and also purchases $2,000 of cleaning services from KiethCo. The cleaning services have a fair value of $1,500. Lorette should record revenue on its sale of product to KiethCo of: A. $10,000 B. $9,500 C. $8,500 D. $8,000

B. $9,500 Lorette is paying more for cleaning services than the fair value of those services, so the excess of $500 (computed as $2,000 price paid − $1,500 fair value of the services) is viewed as a refund of part of the $10,000 sale. Therefore, Lorette records revenue of $9,500 (computed as $10,000 − $500).

If the required adjusting entry for depreciation expense is omitted: A. Assets will be overstated and income understated. B. Assets will be overstated and income overstated. C. Assets will be understated and income overstated. D. Assets will be understated and income understated.

B. Assets will be overstated and income overstated. The adjusting entry for depreciation is a debit to depreciation expense and a credit to accumulated depreciation. By not recording the expense, net income will be overstated. By not recording accumulated depreciation, the asset's book value will be overstated.

Which ratio most directly indicates the extent of the company's reliance on financial leverage? A. Times interest earned. B. Debt to equity. C. Return on shareholders' equity. D. Current ratio.

B. Debt to equity. The debt to equity ratio compares financing provided by creditors (total liabilities) to financing provided by owners (total shareholders' equity).

Financial statements generally include all of the following except: A. Income statement. B. Federal income tax return. C. Balance sheet. D. Statement of cash flows.

B. Federal income tax return. The fourth financial statement is the statement of shareholders' equity. The Federal tax return is not a financial statement.

Which of the following explains why a company's book value as reported in the balance sheet may not equal the company's market value? I. Many assets are measured at their historical cost rather than amounts for which the assets could be sold. II. Many valuable resources of the company are not directly reported as assets in the balance sheet. III. Investors do not use the balance sheet to judge a company's value. A. I. B. I and II. C. III. D. I,II, and III.

B. I and II. Many assets (such as land, buildings, and equipment) often are measured at historical cost. Many of the company's valuable resources (such as trained employees, experienced management team, loyal customer relationships, and product knowledge) are not directly reported as an asset in the balance sheet. Despite these limitations, the balance sheet provides useful information to investors on the company's liquidity and long-term solvency.

A multiple-step income statement and a single-step income statement would report the same subtotal for which of the following amounts? A. Gross profit. B. Income before taxes. C. Operating income. D. All of the other choices are incorrect.

B. Income before taxes. In a single-step income statement, companies usually report income tax expense in a separate line in the income statement. The subtotal of all other expenses and losses are subtracted from the subtotal of all revenues and gains to calculate a subtotal equal to income before taxes.

On May 31, 20X1, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. The assets of the component were sold on October 13, 20X1, for $1,200,000. The book value of those assets equaled $1,000,000 at the time of the sale. The component generated an operating loss of $300,000 from January 1, 20X1, through disposal. The company's tax rate is 25%. For what amount would the company report income from discontinued operations? A. Loss of $100,000. B. Loss of $75,000. C. Loss of $225,000. D. Loss of $25,000.

B. Loss of $75,000. The gain on the sale of assets of $200,000 ($1,200,000 - $1,000,000) minus the operating loss of $300,000 equals pretax loss on discontinued operations of $100,000. Net of a 25% tax benefit ($25,000 = $100,000 × 25%), the loss reduces to $75,000.

The application of intraperiod income taxes requires that income taxes be apportioned to each of the following items except: A. Income from continuing operations. B. Operating income. C. Discontinued operations. D. All of the other answer choices are incorrect.

B. Operating income. Income tax expense is not reported on operating income. Discontinued operations are reported net of their tax effect. Income tax expense reported on the income statement is based on income from continuing operations.

Which of the following is not true about accounting for stock compensation? A. Some types of stock compensation previously resulted in little compensation expense recognition. B. Political pressure has not been exerted relevant to accounting for stock compensation. C. Stock compensation has historically been important to many high-tech companies. D. Stock compensation typically results in some expense recognition.

B. Political pressure has not been exerted relevant to accounting for stock compensation. Much political pressure was exerted on the FASB with respect to accounting for stock compensation.

The Sanchez Company purchased a delivery truck on February 1, 2021. The purchase agreement required Sanchez to pay the total amount due of $15,000 on February 1, 2022. Assuming an 8% rate of interest, the calculation of the price of the truck would involve multiplying $15,000 by the: A. Future value of an ordinary annuity of $1. B. Present value of $1. C. Present value of an ordinary annuity of $1. D. Future value of $1.

B. Present value of $1. The calculation is for the present value today of the $15,000 to be received one year from now.

The asset/liability approach: A. Emphasizes principles for recognizing revenues and expenses, and not assets and liabilities. B. Recognizes amounts in the income statement necessary to account for the changes in assets and liabilities from the previous measurement date. C. Discourages the use of fair values in accounting measurement. D. None of the choices are correct.

B. Recognizes amounts in the income statement necessary to account for the changes in assets and liabilities from the previous measurement date. Under the asset/liability approach, we first recognize and measure the assets and liabilities that exist at a balance sheet date and, secondly, recognize and measure the revenues, expenses, gains and losses needed to account for the changes in these assets and liabilities from the previous measurement date.

Balance sheets prepared using International Financial Reporting Standards often: A. Report property and equipment as a current asset. B. Report long-term assets and liabilities before current assets and liabilities. C. Report long-term debt as part of shareholders' equity. D. All of these answer choices are incorrect.

B. Report long-term assets and liabilities before current assets and liabilities. Balance sheets under U.S. GAAP and IFRS have many similarities, but a distinguishing feature is that balance sheets under IFRS report long-term assets and liabilities before current assets and liabilities.

The documents that set forth fundamental concepts on which financial accounting and reporting standards will be based are: A. Statements of Financial Accounting Standards. B. Statements of Financial Accounting Concepts. C. Accounting Principles Board Opinions. D. All of the choices.

B. Statements of Financial Accounting Concepts. Statements of Financial Accounting Standards and Accounting Principles Board Opinions are actual accounting standards.

The ending balance of retained earnings can best be described as: A. The amount of cash received from stockholders over the life of the company. B. The amount of net income over the life of the company not paid to owners in the form of dividends. C. The amount of dividends paid over the life of the company. D. The amount of net income over the life of the company.

B. The amount of net income over the life of the company not paid to owners in the form of dividends. Retained earnings represents the accumulated net income reported by a company since its inception minus all dividends distributed to shareholders. In other words, it's the accumulated lifetime profits a company has earned for its shareholders but has not yet distributed to those shareholders.

The net amount of property, plant, and equipment reported in the balance sheet generally is equal to: A. The assets' original costs. B. The assets' original costs minus their accumulated depreciation since purchased. C. The assets' original costs minus their depreciation in the current year only. D. The assets' current fair value.

B. The assets' original costs minus their accumulated depreciation since purchased. The net amount of property, plant, and equipment reported in the balance sheet generally equals the assets' original cost minus their accumulated depreciation. Accumulated depreciation represents depreciation for all years since the assets were purchased up to the current year.

Under the realization principle, revenue is recognized as earned when there is reasonable certainty as to the collectibility of the asset to be received and: A. The sales price has been collected. B. The earnings process is virtually complete. C. Production is completed. D. A purchase order has been received.

B. The earnings process is virtually complete. The realization principle requires that the earnings process be virtually complete before revenue recognition can occur.

Under IFRS, revenue for the sale of goods is recognized when the seller has transferred to the buyer: A. A signed invoice. B. The risks and rewards of ownership. C. Compelling evidence that substantive installation has occurred. D. None of the choices are correct.

B. The risks and rewards of ownership. IFRS focuses on transfer of risks and rewards of ownership to determine the timing of revenue recognition.

Given a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information is necessary to calculate the present value of the series of payments? A. The future value of the annuity. B. The timing of the payments (whether they are at the beginning or end of the period). C. The rate of inflation. D. No other information is required.

B. The timing of the payments (whether they are at the beginning or end of the period). If the payments are made at the end of each period, it is an ordinary annuity. If the payments are made at the beginning of each period, it is an annuity due.

The closing process involves: A. Recording year-end adjusting entries. B. Transferring revenue and expense balances to retained earnings. C. Closing out the permanent account balances. D. All of these answer choices are incorrect.

B. Transferring revenue and expense balances to retained earnings. Revenues, expenses and other temporary equity accounts are closed, reduced to $0, with the balances transferred to retained earnings.

A collection of storage areas, called accounts, used to keep track of increases and decreases in financial position elements is: A. a journal. B. a ledger. C. a financial statement. D. a locker.

B. a ledger. A ledger is a collection of storage areas, called accounts, used to keep track of increases and decreases in financial position elements.

The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning immediately. The installment payments include interest at 8%. What is the required annual installment payment? A. $1,720 B. $2,154 C. $1,994 D. $1,466

C. $1,994

On December 31, 2021, the end of Adie, Miles, & Auer Used Cars' first year of operations, the accounts receivable was $107,200. The company estimates that $2,400 of the year-end receivables will not be collected. Accounts receivable in the 2021 balance sheet will be valued at: A. $107,200. B. $109,600. C. $104,800. D. $2,400.

C. $104,800 Accounts receivable = $107,200 − $2,400 = $104,800

Wellman Company is considering investing in a two-year project. Wellman's required rate of return is 10%. The present value of $1 for one period at 10% is 0.909 and for two periods at 10% is 0.826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the project's cost is less than or equal to: A. $180,000 B. $163,620 C. $155,320 D. $148,680

C. $155,320 $155,320: ($80,000 × 0.909) + ($100,000 × 0.826).

CrayFry offers a discount on an extended warranty on its CrayFrier when the warranty is purchased at the time the fryer is purchased. The warranty normally has a price of $25, but CrayFry offers it for $20 when purchased along with a fryer. CrayFry anticipates a 60% chance that a customer will purchase the extended warranty along with the fryer. Assume CrayFry sells to 1,000 fryers with the extended warranty discount offer. What is the total stand-alone selling price that CrayFry would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 fryer contracts? A. $0 B. $5,000 C. $3,000 D. $2,000

C. $3,000 The $5 discount has a 60% chance of being taken by a customer, so the stand-alone selling price associated with 1,000 warranties is $3,000 (computed as $5 × 60% × 1,000 fryers).

The ending balance of retained earnings increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the amount of net income during the year? A. $1.9 million. B. $3.2 million. C. $4.5 million. D. $1.3 million.

C. $4.5 million. Increase in retained earnings ($3.2 million) = net income − dividends ($1.3 million). Net income = $3.2 million + $1.3 million = $4.5 million.

On May 31, 20X1, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. By the end of the year, the assets have not been sold. The book value of those assets equals $850,000, and the company estimates their fair value to be $1,100,000. The component generated operating income of $450,000 for the year. In its income statement for the year ended December 31, 20X1, for what amount would the company report income from operations of a discontinued component (ignoring taxes). A. $300,000 B. $550,000 C. $450,000 D. $700,000

C. $450,000 The operating income of the component ($450,000) would be reported as part of discontinued operations. The amount by which the assets' fair value exceeds their book value is not included.

TVLand sells home entertainment systems and also offers a complementary installation service. TVLand estimates that it incurs $40 in labor and materials to complete one installation, with an average of 25% profit based on cost. Using the expected cost plus margin approach, the stand-alone selling price of the installation service is: A. $10. D. $40. C. $50. D. $70.

C. $50. Under the expected cost plus margin approach, TVLand would base its estimate of the stand-alone selling price of the installation service on the $40 cost it incurs, plus its normal margin of 25% × $40 = $10. Therefore, TVLand would estimate the stand-alone selling price of the installation service to be $40 + $10 = $50.

Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2019. The accounting records disclosed the following data at the end of 2018: Costs incurred $5,400,000 Estimated cost to complete 3,600,000 Progress billings 4,100,000 Cash collections 3,200,000 How much gross profit should Sandlewood have recognized in 2018? A. $700,000 B. $1,000,000 C. $600,000 D. $0

C. $600,000 As of year-end 2018, revenue recognized to date is ($5,400,000 ÷ ($5,400,000 + 3,600,000)) × $10,000,000 = $6,000,000, and cost of construction recognized to date is $5,400,000, so gross profit recognized to date is $600,000.

Lewis is selling a product with some of the transaction price depending on the outcome of a future event. There is a 75% chance that the event will result in $100,000 of consideration to Lewis, and a 25% chance that the event will result in $40,000 of consideration to Lewis. Which of the following is not an appropriate estimate of the amount of uncertain consideration for purposes of Lewis estimating the transaction price? A. $100,000. B. $85,000. C. $70,000. D. All of the choices are appropriate estimates.

C. $70,000. $85,000 = 75% × $100,000 + 25% × $40,000. The most likely amount is $100,000. $70,000, is not an acceptable estimate.

TVLand sells home entertainment systems and also offers a complementary installation service. The same service is offered by other vendors for $50 on average, and TVLand typically charges approximately 40% more than other vendors for similar services on a stand-alone basis. Using the adjusted market assessment approach, the stand-alone selling price of the installation service is: A. $20. B. $50. C. $70. D. $90.

C. $70. Under the adjusted market assessment approach, TVLand would base its estimate of the stand-alone selling price of the installation service on the prices charged by other vendors for the same service, adjusted as necessary. Because TVLand typically charges 40% more than competitors, it would estimate the stand-alone price of the assembly service to be $50 × 140% = $70.

Income statement: 20X2 Sales $2,500,000 Cost of goods sold 1,300,000 Net income 200,000 Balance sheets: 20X2 20X1 Accounts receivable$300,000 $200,000 Total assets 2,000,000 1,800,000 Total shareholders' equity 900,000 700,000 The asset turnover for 20X2 is: A. 1.25 B. 0.80 C. 1.32 D. 0.72

C. 1.32 Asset turnover = sales revenue ÷ average total assets, so asset turnover = $2,500,000 ÷ ((1,800,000 + 2,000,000) ÷ 2) = 1.32.

Consider the following items: (a) Decrease in accounts receivable (b) Issuance of common stock (c) Increase in interest receivable (d) Purchase of land (e) Decrease in accounts payable (f) Gain on the sale of equipment (g) Depreciation expense (h) Payment of dividends (i) Decrease in utilities payable (j) Increase in inventory How many of these items would be subtracted from net income when using the indirect method to prepare the operating activities section of the statement of cash flows? A. 1 B. 4 C. 5 D. 2

C. 5 The increase in interest receivable, decrease in accounts payable, gain on the sale of equipment, decrease in utilities payable, and increase in inventory would be subtracted.

The journal entry to record the borrowing of cash and the signing of a note payable involves: A. A debit to note payable and a credit to cash. B. Debits to cash and interest expense and a credit to note payable. C. A debit to cash and a credit to note payable. D. All of these answer choices are incorrect.

C. A debit to cash and a credit to note payable. Cash is an asset, so it is increased with a debit and note payable is liability, so it is increased with a credit.

Fernblatt Inc. recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Fernblatt's accounting approach is an example of: A. Matching. B. Cash basis accounting. C. Accrual accounting. D. Periodicity.

C. Accrual accounting. Accrual accounting recognizes revenue and related receivables in the period in which a company satisfies its performance obligations, which may differ from the period in which it collects a receivable.

A series of equal periodic payments in which the first payment is made on the date of the contract is: A. A deferred annuity. B. An ordinary annuity. C. An annuity due. D. A delayed annuity.

C. An annuity due. In an ordinary annuity, cash flows occur at the end of each period. In an annuity due, cash flows occur at the beginning of each period.

Which of the following is not an indicator that control of a good has passed from the seller to the buyer? A. Buyer has an unconditional obligation to pay. B. Buyer has legal title. C. Buyer has scheduled delivery. D. Buyer has assumed the risk and rewards of ownership.

C. Buyer has scheduled delivery. Whether the buyer has scheduled delivery is not an indicator of passage of control. Delivery, such that the customer has physical possession, is a control indicator.

Relevance requires that information possess predictive and/or: A.Neutrality. B. Completeness. C. Confirmatory value. D. Freedom from error.

C. Confirmatory value. The three components/aspects of relevance are predictive value, confirmatory value and materiality. Neutrality, completeness and freedom from error are the components/aspects of faithful representation.

Which of the following is considered a practical constraint on the qualitative characteristics? A. Verifiability. B. Conservatism. C. Cost effectiveness. D. Timeliness.

C. Cost effectiveness. The benefits of the information being provided must exceed the costs of doing so.

In a classified balance sheet, supplies would be classified among: A. Noncurrent assets. B. Current liabilities. C. Current assets. D. Noncurrent liabilities.

C. Current assets. Supplies are a current asset since they will most likely be consumed/used within the next year or operating cycle, whichever is longer.

Which of the following is not one of the steps for recognizing revenue? A. Identify the performance obligations of the contract. B. Identify the contract with the customer. C. Estimate the total transaction price of the contract based on the sum of the stand-alone selling prices of the goods and services in the contract. D. Allocate the transaction price to the performance obligations.

C. Estimate the total transaction price of the contract based on the sum of the stand-alone selling prices of the goods and services in the contract. The third step is "Determine the transaction price", which is not necessarily based on the sum of the stand-alone selling prices of goods and services in the contract.

Sandra wants to calculate how much money she needs to deposit today into a savings account which earns 5% in order to be able to withdraw $3,000 at the end of each of the next 6 years. She should use which present value concept? A. Present value of $1 for 6 periods. B. Present value of an annuity due of $1 for 6 periods. C. Present value of an ordinary annuity of $1 for 6 periods. D. Future value of $1 for 6 periods.

C. Present value of an ordinary annuity of $1 for 6 periods. The calculation is how much needs to be deposited today, the present value, so that equal amounts can be withdrawn over the next six years at the end of the year (ordinary annuity).

Laura won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the: A. Present value of an annuity due of $1. B. Future value of an annuity due of $1. C. Present value of an ordinary annuity of $1. D. Future value of an ordinary annuity of $1.

C. Present value of an ordinary annuity of $1. In an ordinary annuity, cash flows occur at the end of each period. In an annuity due, cash flows occur at the beginning of each period.

Which of the following items would not be included as a cash flow from operating activities in a statement of cash flows? A. Collections from customers. B. Interest on note payable. C. Purchase of equipment. D. Purchase of inventory.

C. Purchase of equipment. Purchase of equipment is reported as an investing activity in the statement of cash flows.

Which of the following characteristics does not describe an asset? A. Probable future economic benefits. B. Controlled by an entity. C. Requires the receipt of cash. D. Result of a past transaction.

C. Requires the receipt of cash. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

In the current year, a company has a gain of $50,000. The company's accountant is deciding whether to report this gain as part of nonoperating income in the income statement or as part of other comprehensive income. Which of the following is true? A. Total shareholders' equity will be greater if the gain is reported as part of other comprehensive income. B. Net income will be same under either choice. C. Retained earnings will be greater if the gain is reported as part of net income. D. Total assets will be greater if the gain is reported as part of other comprehensive income.

C. Retained earnings will be greater if the gain is reported as part of net income. All amounts reported in the income statement to calculate net income for the year accumulate in the retained earnings account. All amounts reported as part of other comprehensive income accumulate in the accumulated other comprehensive income account. Both retained earnings and accumulated other comprehensive income are equity accounts. This means that reporting the gain under either choice has no effect on total equity (or total assets), but the choice affects the amount of net income. Net income is increased only if the gain is reported as nonoperating income in the income statement.

When IFRS uses the cost recovery method to account for a long-term contract, A. Revenue typically is recognized in excess of costs incurred early in the life of the contract. B. Costs in excess of revenue are typically recognized early in the life of the contract. C. Revenue equal to costs are typically recognized early in the life of the contract. D. Revenue is based on contract completion, not on costs, early in the life of the contract.

C. Revenue equal to costs are typically recognized early in the life of the contract. Under the cost recovery method, the seller does not recognize any gross profit until all costs have been recovered.

A company's liquidity most often refers to: A. The assessment of whether a company will be able to pay all its liabilities, including both current and long-term. B. The ability of a company to withstand various events and circumstances that might impair its ability to earn profits. C. The ability of a company to convert its assets to cash to pay its current obligations. D. The ability of a company to respond to the changing needs of its customers and employees.

C. The ability of a company to convert its assets to cash to pay its current obligations. By examining a company's liquidity, we can obtain a general idea of a company's ability to pay its short-term debts as they come due.

For a firm with a current ratio of 2.0, which of the following transactions would most likely cause the ratio to decrease? A. The collection of cash from customers on account. B. The sale of a building for cash. C. The purchase of inventory on account. D. The issuance of capital stock for cash.

C. The purchase of inventory on account. The current ratio equals current assets divided by current liabilities. The purchase of inventory on account has the effect of increasing both current assets and current liabilities. Because the current ratio equals 2.0, the purchase of inventory on account has the effect of proportionately increasing current assets less than it increases current liabilities, so the current ratio declines. For example, if current assets are currently $80 and current liabilities are $40, the current ratio is 2.0 (= $80 / $40). If the company purchases inventory on account for $10, then current assets increase to $90 and current liabilities increase to $50, and the current ratio falls to 1.8 (= $90 / $50).

The basis used to classify assets as current or long-term is: A. Whether an asset is monetary or nonmonetary. B. The operating cycle or one year, whichever is shorter. C. Usually one year, because the operating cycle typically is less than one year. D. Whether the asset is currently used in the company's operations.

C. Usually one year, because the operating cycle typically is less than one year. The determination of current versus long-term assets is based on whether the asset is expected to be converted to cash or consumed within the coming year, or within the normal operating cycle of the business if that's longer than one year.

The reason we post journal entries is to A. provide a chronological record of all economic events affecting the firm. B. ensure that all accounts are up to date prior to preparing financial statements. C. ensure that debits equal credits in the trial balance. D. reflect the information in journal entries in ledger accounts.

C. ensure that debits equal credits in the trial balance.

Hailey wants to cash in her winning lottery ticket. She can either receive eight $200,000 semiannual payments starting today, based on a 6% annual interest rate, or she can receive a single-amount payment today. What is the single-amount payment she can receive today that would be equivalent to the eight-payment option except that she would not have to wait for years to collect her prize money? A. $1,403,938. B. $1,283,438. C. $1,578,80 D. $1,446,056.

D. $1,446,056. PVAD = $200,000 × 7.23028* = $1,446,056* PVAD of $1: n = 8; i = 3%

On May 31, 20X1, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. By the end of the year, the assets have not been sold. The book value of those assets equals $1,100,000, and the company estimates their fair value to be $850,000. The component generated operating income for the year of $450,000. In its income statement for the year ended December 31, 20X1, for what amount would the company report income from operations of a discontinued component (ignoring taxes). A. $300,000 B. $50,000 C. $450,000 D. $200,000

D. $200,000 The operating income of the component ($450,000) would be reported as part of discontinued operations. The amount by which the assets' fair value is less than their book value is included as an impairment loss (−$250,000). Income from discontinued operations = $450,000 − $250,000 = $200,000.

Selected information from the accounting records of Dunn's Auto Dealers is as follows: Cost of furniture purchased for cash$8,000 Proceeds from bank loan 100,000 Repayment of bank loan (includes interest of $4,000) 44,000 Proceeds from sale of equipment 5,000 Cash collected from customers 320,000 Purchase of stock of another corporation as an investment 20,000 Common stock issued for cash 200,000 In its statement of cash flows, Dunn's should report net cash outflows from investing activities of: A. $27,000 B. $32,000 C. $28,000 D. $23,000

D. $23,000 $5,000 (proceeds from sale of equipment) − $8,000 (cost of furniture purchased for cash) − $20,000 (purchase of stock of another corporation as an investment) = $23,000.

The Esquire Clothing Company borrowed a sum of cash on October 1, 2018, and signed a note payable. The annual interest rate was 12% and the company's year 2018 income statement reported interest expense of $1,260 related to this note. What was the amount borrowed? A. $22,000 B. $31,500 C. $10,500 D. $42,000

D. $42,000 Amount borrowed × 12% × 3/12 = $1,260. Amount borrowed × 0.03 = $1,260. $1,260 ÷ 0.03 = $42,000.

The Richards Company purchased a machine for $5,000 down and $300 a month payable at the end of each of the next 36 months. How would the cash price of the machine be calculated, assuming the annual interest rate is given? A. $5,000 plus the present value of $10,800 ($300 x 36). B. $5,000 plus the present value of an annuity due of $300 for 36 periods. C. $15,800. D. $5,000 plus the present value of an ordinary annuity of $300 for 36 periods.

D. $5,000 plus the present value of an ordinary annuity of $300 for 36 periods. The cash price is equal to the present value of the future cash outflows. This includes the $5,000 today plus the value today, present value, of the $300 payments made at the end of each month (ordinary annuity).

The Wazoo Times Newspaper Company reported an $11,200 liability in its 2018 balance sheet for subscription revenue received in advance. During 2019, $62,000 was received from customers for subscriptions and the 2019 income statement reported subscription revenue of $63,700. What is the liability amount for deferred subscription revenue that will appear in the 2019 balance sheet? A. $0 B. $11,200 C. $12,900 D. $9,500

D. $9,500 [$11,200 (beginning balance) + $62,000 (additional receipts) − $63,700 (subscription revenue recognized)]

Sanchez Corporation Selected Financial Information 12/31/X2 12/31/X1 Cash$20,000 $25,000 Accounts receivable (net) 100,000 110,000 Inventories 190,000 155,000 Total current assets 310,000 290,000 Long-term assets 230,000 210,000 Current liabilities 200,000 190,000 Long-term liabilities 40,000 50,000 Shareholders' equity 300,000 260,000 Net income$40,000 Interest expense 10,000 Income tax expense 20,000 The times interest earned ratio is: A. 4.0 times B. 5.0 times C. 6.0 times D. 7.0 times

D. 7.0 times Times interest earned ratio= (net income + interest expense + income taxes)/interest expense =($40,000 + $10,000 + $20,000) / $10,000 =7.0

Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2019. The accounting records disclosed the following data at the end of 2018: Costs incurred $5,400,000 Estimated cost to complete 3,600,000 Progress billings 4,100,000 Cash collections 3,200,000 In addition to accounts receivable, what would appear in the 2018 balance sheet related to the construction accounts? A. A current asset of $1,300,000 B. A current liability of $900,000 C. A current asset of $900,000 D. A current asset of $1,900,000

D. A current asset of $1,900,000. Construction in progress (CIP) would include cost + gross profit, or $5,400,000 + 600,000 = $6,000,000. The balance sheet would show a current asset for CIP − progress billings, or $6,000,000 − $4,100,000 = $1,900,000.

A series of equal periodic payments that starts more than one period after the agreement is called: A. An annuity due. B. An ordinary annuity. C. A future annuity. D. A deferred annuity.

D. A deferred annuity. An example of a deferred annuity is a pension plan whose retirement payments begin upon the employee's retirement several years later.

GAAP includes which of the following pronouncements: A. Statements of Financial Accounting Standards. B. Accounting Research Bulletins. C. Accounting Principles Board Opinions. D. All of the choices are correct.

D. All of the choices are correct. All of the answer choices are official GAAP pronouncements.

Which of the following is true about revenue recognition under ASU 2014-09? A. The realization principle guides the ASU. B. Construction contracts are typically broken into the various separate goods and services that are included in them for purposes of revenue recognition. C. The time value of money is considered when estimating all transaction prices. D. Collectibility of the receivable is considered when determining whether revenue can be recognized.

D. Collectibility of the receivable is considered when determining whether revenue can be recognized. A contract only exists for purposes of revenue recognition if the seller believes it's probable that it will collect the amount it's entitled to receive under the contract.

A sale of merchandise on account would be recorded by: A. Debiting a revenue. B. Crediting an asset. C. Crediting a liability. D. Debiting an asset.

D. Debiting an asset. Accounts receivable is an asset, so it is increased with a debit and sales is a revenue, so it is increased with a credit.

Long-lived assets used in the operations of the business refer to property, plant, and equipment, and: A. Receivables. B. Inventories. C. Investments. D. Intangible assets.

D. Intangible assets. Receivables and inventories are generally classified as current assets. Investments are assets that are not used directly in the operations of the business. Intangible assets are used in the operations of the business and provide long-term benefits, but have no physical substances (such as patents, franchises, trademarks, and copyrights).

The section of a company's annual report that provides management's views on significant events, trends and uncertainties pertaining to the company's (a) operations, (b) liquidity, and (c) capital resources is: A. Compensation of Directors and Top Executives. B. Management's Responsibilities. C. Summary of Significant Accounting Policies. D. Management's Discussion and Analysis.

D. Management's Discussion and Analysis. The management's discussion and analysis (MD&A) section may embody management's biased perspective, but it can offer an informed insight that might not be available elsewhere.

The two primary decision-specific qualities that make accounting information useful are: A. Verifiability and representational faithfulness. B. Predictive value and feedback value. C. Cost effectiveness and materiality. D. Relevance and faithful representation.

D. Relevance and faithful representation Relevance and faithful representation are the two fundamental characteristics of financial information.

The primary objective of financial reporting is to provide information: A. About a firm's financing and investing activities. B. About a firm's management team. C. About a firm's product lines. D. That is useful in decision making.

D. That is useful in decision making. The objectives of financial reporting are to provide information: (1) useful for decision making; (2) that helps predict cash flows; and (3) about economic resources, claims to resources, and changes in resources and claims.

Which of the following is an intangible asset reported in the balance sheet? A. Land that is being held for future company expansion. B. Investments in equity securities of another company. C. Natural resources such as mineral mines. D. The exclusive right to use a franchisor's trademark or tradename.

D. The exclusive right to use a franchisor's trademark or tradename. Franchises are contractual arrangements under which a franchisor grants the franchisee the exclusive right to use the franchisor's trademark or tradename and certain product rights. The cost of such arrangements is reported as an intangible asset. Land held for future expansion and investments in equity securities are classified as long-term investments, and natural resources would be included as part of property, plant, and equipment.

Which of the following is an acceptable way to estimate uncertain consideration? A. Most likely amount to be received. B. the lowest amount in a range of equally likely amounts that could be received C. Expected value of the amount to be received. D. either the most likely amount to be received or the expected value of the amount to be received

D. either the most likely amount to be received or the expected value of the amount to be received The minimum amount that is likely to be received is not an acceptable way to estimate uncertain consideration.

The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. What is the required annual installment payment? A. $1,720 B. $2,154 C. $1,994 D. $1,466

B. $2,154 $8,600 ÷ 3.99271 (Present value of an ordinary annuity of $1 at 8% for 5 years) = $2,154