Income Measurement & Asset Valuation Exam 1

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Addison, Inc. reports: Cash provided by operating activities $2,300,000 Cash used by investing activities 640,000 Cash used by financing activities 220,000 Beginning cash balance 340,000 What is Addison's ending cash balance? - $1,780,000. - $1,440,000. - $3,060,000. - $3,500,000.

$1,780,000. (Cash provided by operating activities, $2,300,000 less Cash used by investing activities, $640,000 less Cash used by financing activities, $220,000 = Net increase in Cash, $1,440,000. Then add: Net increase in Cash, $1,440,000 + Beginning cash balance, $340,000 = Addison's ending cash balance, $1,780,000.)

Josie Corporation reported the following information for 2017: - Sales revenue $1,000,000 - Cost of goods sold 700,000 - Operating expenses 110,000 - Unrealized holding gain on 40,000 available-for-sale securities - Cash dividends received on the securities 4,000 For 2017, Josie would report comprehensive income of - $234,000. - $40,000. - $194,000. - $230,000.

$234,000. (Sales revenue, $1,000,000, less Cost of goods sold, $700,000, less Operating expenses, $110,000, plus Unrealized holding gain on available-for-sale securities, $40,000, plus Cash dividends received on the securities, $4,000, equals Comprehensive income, $234,000.)

Clair, Inc. reports net income of $700,000. It declares and pays dividends of $100,000 for the year, one-half of which relate to the preferred shares. The weighted-average number of common shares outstanding during the year is 200,000 shares, and the weighted-average number of preferred shares outstanding during the year is 10,000 shares. Earnings per share for Clair, Inc. is (round your answer to the nearest cent): - $2.95. - $3.25. - $3.18. - $3.00.

$3.25 (Net income, $700,000, minus preferred dividends, $50,000 ($100,000 x ½), is divided by the weighted average of common shares outstanding, 200,000, to compute earnings per share, $3.25.)

Peterson Enterprises reports the following information: Net income $5,000,000 Depreciation expense 680,000 Loss on the sale of investments 154,000 Increase in accounts receivable 320,000 Peterson should report cash provided by operating activities of - $3,846,000. - $5,514,000. - $5,000,000. - $6,154,000.

$5,514,000. (Net Income, $5,000,000 plus Depreciation Expense, $680,000 plus Loss on the sale of investments, $154,000 less Increase in accounts receivable, $320,000 equals $5,514,000, the cash provided by operating activities.)

Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In 2017, however, Sawyer determines that it must revise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2017 financial statements? - $500,000 of expense and $500,000 as an unusual loss in the income statement. - $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet. - $500,000 of expense in the income statement as an ordinary item, $500,000 of expense reported as an adjustment to the beginning balance of retained earnings (net of tax). - $500,000 of expense reported as a change in accounting principle and accounted for under the retrospective approach.

$500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet. (Sawyer accounts for this change in estimate in the period of change by reporting the newly calculated amount of bad debt expense as an ordinary item of income. Changes in estimate are not considered an unusual item, an error correction, or a change in accounting principle. It is correctly reported as $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet.)

Trent Co. reports the following information: Net cash provided by operating activities $430,000 Average current liabilities 300,000 Average long-term liabilities 200,000 Dividends paid 120,000 Capital expenditures 220,000 Purchase of treasury stock 22,000 Payments of debt 70,000 Trent's free cash flow is - $210,000. - $310,000. - $90,000. - $20,000.

$90,000. (Net cash provided by operating activities, $430,000, less capital expenditures, $220,000, less dividends paid, $120,000 equals a free cash flow of $90,000.)

Barger Enterprises has an unusual or infrequent loss of $300,000, an unusual gain of $700,000, and a tax rate of 30%. At what amount should Barger report each item? Unusual loss Unusual gain 1. $(300,000) $700,000 2. (300,000) 490,000 3. (210,000) 700,000 4. (210,000) 490,000 - 4 - 2 - 1 - 3

1 (Correct! $(300,000) as an unusual loss and $700,000 as an unusual gain. Unusual and infrequent gains and losses are reported in the "Other revenues and gains" or "Other expenses and losses" section of the income statement. They are not reported net of tax.)

From the four statements that follow, which are true? 1. Technical competence is not enough when encountering ethical decisions. 2. The pressures "to bend the rules," "to play the game," "to just ignore it" can be considerable. 3. Time, job, client, personal, and peer pressures do not complicate the process of ethical sensitivity and selection among alternatives. 4. The decision may be easier because there is no comprehensive ethical system to provide guidelines. - 1 and 2 are true. - 2 and 4 are true. - 1, 2, 3, and 4 are all true. - 1, 2, and 4 are true.

1 and 2 are true (Statements 3 and 4 are false because pressures do complicate ethics and the decision is more difficult because there is no comprehensive ethical system to provide guidelines.)

Which level of the conceptual framework is devoted to elements of financial statements and the qualitative characteristics? - 3rd - 2nd - 1st - 4th

2nd (The second level (the bridge) is devoted to the elements of financial statements and the qualitative characteristics.)

The conceptual framework for financial reporting consists of how many levels? - 3 - 2 - 1 - 4

3 (There are 3 levels: Level 1, the "Why"; Level 2, the Bridge between levels 1 & 3; and Level 3, the "How".)

Companies and their auditors generally have adopted a rule of thumb that anything under _____ of net income is considered not material. - 5% - 2% - 10% - 15%

5% (Anything under 5% of net income is generally considered not material.)

The conceptual framework contains how many Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises? - 6 - 7 - 5 - 4

7 (The framework consists of 7 Statements of Financial Accounting Concepts.)

Which of the following is an acceptable method of presenting the income statement? - A classified income statement. - A current operating performance income statement. - A condensed income statement. - None of these answer choices are correct.

A condensed income statement. (Acceptable presentations of the income statement include a single-step income statement, a multiple-step income statement, and a condensed income statement.)

Which of the following is not classified as an unusual and infrequent gain or loss? - Impairment losses on intangible assets. - Flood damage losses to property. - A discontinued operation. - Losses from inventory write-downs.

A discontinued operation. (Discontinued operations are not classified as an unusual and infrequent gain or loss. Companies report discontinued operations in a separate income statement category, net of tax.)

A company with a _________________ is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities. - A high degree of financial flexibility - A low degree of solvency - Low degree of financial flexibility - A low degree of liquidity

A high degree of financial flexibility (A company with a high degree of financial flexibility is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities.)

Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? - Single step form. - Account form. - Report form. - Multiple step form.

Account form. (The account form lists assets on the left and liabilities and stockholders' equity on the right.)

Which of the following generally provides a better indication of an enterprise's present and continuing ability to generate favorable cash flows? - Cash basis accounting. - Accrual basis accounting. - Financial basis accounting. - Managerial basis accounting.

Accrual basis accounting (Better indicates present and continuing ability to generate favorable cash flows for a company.)

Which of the following is NOT one of the classifications in owners' equity? - Capital stock. - Retained earnings. - Accumulated capital. - Noncontrolling interest.

Accumulated capital. (Classifications included in owners' equity include capital stock, retained earnings, additional paid-in capital (not accumulated capital), and noncontrolling interest (minority interest).)

Which of the following ratios measures how effectively the company uses its assets? - Activity ratios. - Profitability ratios. - Coverage ratios. - Liquidity ratios.

Activity Ratio (Activity ratios measure how effectively the company uses its assets.)

Which one of the following guidelines regarding reversing entries is INCORRECT? - All accruals should be reversed. - All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed. - Adjusting entries for bad debts are reversed. - None of these answer choices are correct.

Adjusting entries for bad debts are reversed. (Adjusting entries for bad debts are not reversed. This is incorrect regarding the guidelines for reversing entries.)

Adjustments are often prepared - After the balance sheet date, but dated as of the balance sheet date. - Before the balance sheet date, but dated as of the balance sheet date. - After the balance sheet date, and dated after the balance sheet date. - Before the balance sheet date, and dated after the balance sheet date.

After the balance sheet date, but dated as of the balance sheet date. (Adjustments are often prepared after the balance sheet date but are dated as of the balance sheet date.)

The Financial Accounting Standards Board Accounting Standards Codification - Does not create new GAAP. - Eliminates nonessential information. - Simplifies user access to all authoritative U.S. generally accepted accounting principles. - All of these answer choices are correct.

All of these answer choices are correct.

A multiple-step income statement - Highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. - Separates operating transactions from nonoperating transactions. - Matches costs and expenses with related revenues. - All of these answer choices are correct.

All of these answer choices are correct. (A multiple-step income statement separates operating transactions from nonoperating transactions, and matches costs and expenses with related revenues. It also highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. This is the best answer.)

A conceptual framework is necessary for which of the following reasons? - All of these answer choices are correct. - It allows the profession to quickly solve new and emerging issues. - It enables standard setters to issue more useful and consistent pronouncements over time. - It increases financial statement users' understanding of and confidence in financial reporting.

All of these answer choices are correct. (The conceptual framework allows the profession to quickly solve new and emerging issues and to issue more useful consistent standards. It also increases financial statement users' understanding of and confidence in financial reporting.)

Factors that shape an accounting information system include the - Volume of data to be handled. - Transactions in which the business engages. - Informational demands of management. - All of these answer choices are correct.

All of these answer choices are correct. (The nature of the business and the transactions in which the business engages, the informational demands of management, and the volume of data to be handled are all factors that shape the accounting information system.)

Which of the following is a reason the trial balance may not contain up-to-date and complete data? - Some items may be unrecorded. - Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. - Some events are not recorded daily because it's not efficient to do so. - All of these answer choices are correct.

All of these answer choices are correct. (The trial balance may not be up-to-date because some items may be unrecorded, some events are not recorded daily because it's not efficient to do so, or some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. This is the best answer.)

To convert cash receipts from customers to revenue on an accrual basis, which of the following adjustments is necessary? - Add ending Accounts Receivable. - Subtract ending Unearned Service Revenue. - Subtract beginning Accounts Receivable. - All of these answer choices are correct.

All of these answer choices are correct. (To convert cash receipts from customers to revenue on an accrual basis, the following adjustments are made: Revenue on accrual basis = Cash receipts from customers - beginning accounts receivable + ending accounts receivable + beginning unearned service revenue - ending unearned service revenue.)

Under IFRS - The monetary unit assumption is used, however since every country has its own currency the unit of measure will vary depending on the country in which the company is incorporated. - The existing conceptual framework is very similar to the conceptual framework under GAAP. - Companies may apply fair value to natural resources. - All of these answer choices are correct.

All of these answer choices are correct. (Under IFRS companies may apply fair value to natural resources and the monetary unit assumption is still used (although the unit of measure will vary depending on the currency used in the country in which the company is incorporated). The existing conceptual frameworks under IFRS and GAAP are very similar.)

Which of the following would result if there was not a set of generally accepted and universally practiced accounting standards? - It would be almost impossible to prepare statements that could be compared. - Each company would have to develop its own standards. - Readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. - All of these answer choices are correct.

All of these answer choices are correct. (If there was no set of generally accepted and universally practiced accounting standards it would be almost impossible to prepare statements that could be compared, each company would have to develop its own standards, and readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices.)

An effective capital allocation process - Promotes productivity. - Encourages innovation. - Provides an efficient market for buying and selling securities. - All of these choices are correct.

All of these are correct (An effective capital allocation process does all of these items. It promotes productivity, encourages innovation and provides an efficient market for buying and selling securities.)

To be recognized in the main body of financial statements, an item should - Meet the definition of a basic element. - Be relevant and reliable. - Be measurable with sufficient certainty. - All of these answer choices are correct.

All of these choices are correct (To be recognized in the main body of the financial statements, an item should meet the definition of a basic element, be measurable with sufficient certainty, and be relevant and reliable.)

Prior period adjustments are reported as: - An addition to (or deduction from) net income in the income statement. - An unusual gain or loss item in the income statement. - An addition to (or deduction from) the ending balance of retained earnings. - An addition to (or a deduction from) the beginning balance of retained earnings.

An addition to (or a deduction from) the beginning balance of retained earnings. (Prior period adjustments are added to (or deducted from) the beginning retained earnings balance.)

The adjusting entry to record an accrued expense includes a debit to: - A liability account and a credit to a revenue account. - A liability account and a credit to an expense account. - An expense account and a credit to a revenue account. - An expense account and a credit to a liability account.

An expense account and a credit to a liability account. (The adjusting entry for accrued expenses includes a debit to an expense account and a credit to a liability account.)

An accrued expense is - An expense for which cash is paid before the expense is incurred. - An expense which is recorded with the passage of time. - An expense that has been incurred but for which payment has not yet been made. - Initially recorded as an asset.

An expense that has been incurred but for which payment has not yet been made. (An accrued expense is an expense that has been incurred but for which payment has not yet been made.)

Ostriker Company uses IFRS and has property and equipment on an historical cost basis of $3,600,000. At the end of the year, Ostriker appraises its property and equipment and determines it had a revaluation increase of $67,000. Ostriker records this revaluation under IFRS with - An increase to property and equipment and a decrease to accumulated depreciation. - A decrease to property and equipment and a decrease on the income statement. - An increase to property and equipment and an increase to a valuation reserve in equity. - An increase to property and equipment and an increase on the income statement.

An increase to property and equipment and an increase to a valuation reserve in equity. (Ostriker records this revaluation under IFRS with an increase to property and equipment as well as a valuation reserve in equity.)

When a company transfers an amount of restricted retained earnings into a different account, that account is titled - Unappropriated Retained Earnings. - Comprehensive Retained Earnings. - Noncontrolling Retained Earnings. - Appropriated Retained Earnings.

Appropriated Retained Earnings. (When a company transfers an amount of restricted retained earnings into a different account, that account is titled Appropriated Retained Earnings.)

For each item below, indicate to which category of elements of financial statements it belongs. (b) Interest receivable

Assets

For each item below, indicate to which category of elements of financial statements it belongs. (d) Prepaid insurance

Assets

For each item below, indicate to which category of elements of financial statements it belongs. (h) Cash

Assets

For each item below, indicate to which category of elements of financial statements it belongs. (i) Equipment

Assets

Which of the following is an INCORRECT depiction of the accounting equation? - Assets + Stockholder's Equity = Liabilities. - Assets = Liabilities + Stockholders' Equity. - Assets - Liabilities = Stockholders' Equity. - Assets - Stockholders' Equity = Liabilities.

Assets + Stockholder's Equity = Liabilities. (The accounting equation is A = Liabilities + Stockholders' Equity. It can be rearranged as Assets - Stockholders' Equity = Liabilities or Assets - Liabilities = Stockholders' Equity. An incorrect depiction of the accounting equation is Assets + Stockholders' Equity = Liabilities.)

The passage new FASB guidance in the form of an Accounting Standards Update requires the support of four of the seven Board members.

True

If an adjusting entry is NOT made for a deferred revenue which was initially credited to an unearned revenue account, which of the following results? - Liabilities are understated. - Revenues are overstated. - Assets are unaffected. - All of these answer choices are correct.

Assets are unaffected. (If an adjusting entry is not made for a deferred revenue which was initially credited to an unearned revenue account, liabilities are overstated, revenues are understated, and assets are unaffected.)

Which of the following elements of financial statements describes amounts of resources and claims to resources at a moment in time? - Investments by owners. - Revenues. - Comprehensive income. - Assets, Liabilities, and Equity.

Assets, Liabilities, and Equity. (The elements that describe resources and claims to resources at a moment in time include assets, liabilities, and equity. The other elements (investments by owners, revenues, comprehensive income) describe transactions, events and circumstances that affect a company during a period of time.)

The difference between the cost of a depreciable asset and its related contra account, Accumulated Depreciation is referred to as the asset's: - Fair value. - Book value. - Market value. - Real value.

Book Value (The difference between the cost of a depreciable asset and its related contra account, Accumulated Depreciation is referred to as the asset's book value.)

Which of the following statements is true regarding the conceptual frameworks developed by FASB and IASB? - The existing conceptual frameworks underlying U.S. GAAP and IFRS are quite dissimilar. - The monetary unit assumption is part of each framework and the U.S. dollar will be the established as the common unit of currency. - Both have similar measurement principles based on historical cost and fair value. - The economic entity assumption is not part of the framework due to cultural differences.

Both have similar measurement principles based on historical cost and fair value. (Both IASB and FASB have similar measurement principles based on historical cost and fair value.)

Financial information that is better provided, or can only be provided, by means of financial reporting other than formal financial statements include all of the following except: - News releases. - Management's forecasts. - President's letter. - Cash flow information.

Cash flow information (Cash flow information is provided in the statement of cash flows, which is a formal financial statement.)

True or False. Capital allocation is the process of determining how and at what cost money is allocated among competing interests.

True

The correct order to present current assets is - Cash, accounts receivable, inventories, prepaid items. - Cash, accounts receivable, prepaid items, inventories. - Cash, inventories, prepaid items, accounts receivable. - Cash, inventories, accounts receivable, prepaid items.

Cash, accounts receivable, inventories, prepaid items. (The correct order to present current assets is cash, accounts receivable, inventories, and prepaid items.)

A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an): - Change in estimate. - Part of discontinued operations. - Accounting error. - Change in accounting principle.

Change in accounting principle. (A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a change in accounting principle.)

Which of the following would NOT represent an accounting error? - Change in the method of inventory pricing form FIFO to average-cost. - Mistakes in the application of accounting principles. - Mathematical mistakes. - Oversight or misuse of facts that existed at the time financial statements were prepared.

Change in the method of inventory pricing form FIFO to average-cost. (A change in method of inventory pricing from FIFO to average-cost would not be an accounting error because it is a change in accounting principle.)

Companies are required to highlight certain items in the financial statements so that users can better determine the long-run earning power of the company. Which of the following is not one of those items? - Changes in accounting principle. - Noncontrolling interest. - Discontinued operations. - Unusual gains and losses.

Changes in accounting principle. (A change in accounting principle is recognized by making a retrospective adjustment to the financial statements. The four items companies are required to highlight include unusual gains and losses, discontinued operations, noncontrolling interest, and earnings per share.)

Which of the following is NOT a recordable event or item? - Declaration of dividends. - Purchase of supplies. - Changes in managerial policy. - Sales of the company's product in overseas markets.

Changes in managerial policy. (All sales, the declaration of dividends, and the purchase of supplies are all recordable events. While changes in managerial policy may be important, the company does not record it in the accounts.)

The occurrence which most likely would have no effect on 20x7 net income (assuming that all amounts involved are material) is the - Settlement based on litigation in 20x7 of previously unrecognized damages from a serious accident which occurred in 20x5. - Sale in 20x7 of an office building contributed by a stockholder in 20x5. - Collection in 20x7 of a receivable from a customer whose account was written off in 20x6 by a charge to the allowance account. - Worthlessness determined in 20x7 of stock purchased on a speculative basis in 20x4.

Collection in 20x7 of a receivable from a customer whose account was written off in 20x6 by a charge to the allowance account. (The collection of a written off account would not affect net income.)

Which of the following is NOT transferred to Retained Earnings at the end of the period? - Revenues. - Common stock. - Dividends. - Expenses.

Common Stock (A company transfers dividends, revenues and expenses to retained earnings at the end of the period. Common stock is a stockholders' equity account, and is not closed to retained earnings at the end of the period.)

True or False. The balance sheet is sometimes referred to as the Statement of Net Resources.

False (A balance sheet reports on the financial position of a business enterprise and is sometimes referred to as the Statement of Financial Position, not the Statement of Net Resources.)

The objective of general purpose financial reporting adopts an entity perspective, which means that - Financial reporting should be focused on assessing the company's stewardship. - Financial reporting should be focused solely on the needs of the owners. - Companies are viewed as separate and distinct from their owners. - None of these answer choices are correct.

Companies are viewed as separate and distinct from their owners.

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (h) Rubin Company is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

Comparability

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (a) Sprull Inc. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

Comparability (Consistency)

Enhancing qualities of accounting information include: - Relevance and consistency. - Comparability and verifiability. - Comparability and materiality. - Relevance and faithful representation.

Comparability and verifiability. (The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability.)

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 - Net income. - Revenues. - Comprehensive income. - Gains.

Comprehensive income (Comprehensive income is the change in equity (net assets) during a period from transactions and other events and circumstances from non-owner sources.)

Confirmatory Value

In order to be relevant, financial information must be/have - Neutrality. - Comparability. - Free from error. - Confirmatory or predictive value.

Confirmatory or predictive value. (Relevant information has predictive value or confirmatory value (or both), and is material.)

When a company changes accounting principles, it financial statements lack ______________. - Confirmatory value - Faithful representation - Predictive value - Consistency

Consistency (When a company changes accounting principles its financial statements lack consistency since the same accounting treatment is not being applied to similar events from period to period.)

All of the following statements about contra asset accounts are true EXCEPT: - Contra asset accounts are not reported in the financial statements. - Contra asset accounts are deducted from the related asset account to determine book value. - Contra asset accounts are increased with credits. - Contra asset accounts have normal credit balances.

Contra asset accounts are not reported in the financial statements. (Contra asset accounts are reported on the balance sheet as deductions from the related asset account.)

Cost

In developing accounting standards, the FASB attempts to determine that each proposed pronouncement will fill a significant need and that the costs imposed to meet the rule are justified in relation to overall benefits of the resulting information. What accounting assumption, principle, or constraint is being illustrated?

Cost Constraint

The income statement can be used to assess - Liquidity. - Solvency. - Creditworthiness. - All of these answer choices are correct.

Creditworthiness. (The business and investment community uses the income statement to determine profitability, investment value, and creditworthiness.)

Companies use a ____________ to show a direct relationship between an asset and a liability on the balance sheet? - Supporting schedule - Note - Cross-reference - Parenthetical explanation

Cross-reference (Companies use a "cross-reference" to show a direct relationship between an asset and a liability on the balance sheet.)

The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average - Current liabilities. - Total long-term liabilities. - Total liabilities. - Total assets.

Current liabilities. (The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average current liabilities.)

Which of the following is an intangible asset? - Restricted cash. - Prepaid pension costs. - Customer lists. - Deferred income taxes.

Customer lists. (Intangible assets include patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.)

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (a) Intangible assets are capitalized and amortized over periods benefited.

Expense Recognition Principal

An adjusting entry would never include a: - Debit to a liability account and a credit to a revenue account. - Debit to an expense account and a credit to a liability account. - Debit to an asset account and a credit to a liability account. - Debit to an expense account and a credit to an asset account.

Debit to an asset account and a credit to a liability account. (An adjusting entry including a debit to an asset account and a credit to a liability account would never occur because income statement amounts would not be adjusted. Every adjusting entry includes the adjustment of one balance sheet account and one income statement account.)

The objective of general-purpose financial reporting in the conceptual framework is - Reliability. - Decision usefulness. - Comparability. - Understandability.

Decision usefulness. (The objective of general-purpose financial reporting is to provide financial information about the entity that is useful in making decisions about providing resources to the entity.)

Adjusting entries can be classified as either: - Accruals or reversals - Real or nominal. - Deferrals or accruals. - Internal or external.

Deferrals or accruals. (The two types of adjustments are deferrals and accruals.)

The mission of the International Accounting Standards Board (IASB) is to - Issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. - Arbitrate accounting disputes between auditors and international companies. - Develop a single set of high-quality and understandable IFRS for general-purpose financial statements. - Develop a uniform currency in which the financial transactions of companies throughout the world would be measured.

Develop a single set of high-quality and understandable IFRS for general-purpose financial statements.

Which of the following would be reported in a separate income statement category, separately from continuing operations, on the income statement? - Unusual gains. - Income tax expense. - Discontinued operations. - Unusual losses.

Discontinued operations. (Discontinued operations would be reported in a separate income statement category, separately from continuing operations on the income statement.)

For each item below, indicate to which category of elements of financial statements it belongs. (a) Dividends

Distributions to Owners

Which of the following is a nominal account? - Interest Payable. - Retained earnings. - Cash. - Dividends.

Dividends (Interest payable, cash, and retained earnings are all real (permanent) accounts. Dividends is a nominal (temporary) account.)

The organization that provides implementation guidance within the framework of the Codification to reduce diversity in practice on a timely basis is the, - FASAC (Financial Accounting Standards Advisory Council). - EITF (Emerging Issues Task Force). - FASB (Financial Accounting Standards Board). - AICPA (American Institute of Certified Public Accountants).

EITF (Emerging Issues Task Force).

Identify which basic accounting assumption is best described in each item below. (b) The financial statements of General Motors combine all of the activities of its subsidiaries.

Economic Entity

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (c) Each enterprise is kept as a unit distinct from its owner or owners.

Economic Entity Assumption

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (j) The use of consolidated statements is justified.

Economic Entity Assumption

Preparation of merged financial statements when a parent-subsidiary relationship exists does not violate the - Comparability characteristic. - Neutrality characteristic. - Economic entity assumption. - Relevance characteristic.

Economic entity assumption. (Parent-subsidiary financials are an example of the economic entity assumption. The entity concept does not necessarily refer to a legal entity. A parent and its subsidiaries are separate legal entities, but merging their activities for accounting and reporting purposes does not violate the economic entity assumption.)

The assumption that implies that the economic activities of an enterprise can be identified with a particular unit of accountability is the: - Going concern assumption. - Periodicity assumption. - Monetary unit assumption. - Economic entity assumption.

Economic entity assumption. (The economic entity assumption implies that the economic activities of an enterprise can be identified with a particular unit of accountability.)

If the adjusting entry for an accrued revenue is NOT made: - Liabilities will be understated. - Revenues will be overstated. - Assets will be overstated. - Equity will be understated.

Equity will be understated. (An accrued revenue relates to services performed but not yet received in cash or recorded. When an adjusting entry is not made to record the accrued revenue, assets are understated, revenues are understated, and equity will be understated. There is no impact on liabilities for accrued revenues.)

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (n) A company charges its sales commission costs to expense.

Expense Recognition Principal

Expense Recognition and Revenue Recognition Principals

For each item below, indicate to which category of elements of financial statements it belongs. (e) Amortization

Expenses

For each item below, indicate to which category of elements of financial statements it belongs. (f) Cost of goods sold

Expenses

Which group selects members of the FASB? - AICPA (American Institute of Certified Public Accountants). - SEC (Securities and Exchange Commission). - FAF (Financial Accounting Foundation). - FASAC (Financial Accounting Standards Advisory Council).

FAF (Financial Accounting Foundation).

Which of the following statements about the fair value principle is true? - Fair value is generally less relevant than historical cost. - Fair value is a market-based measure. - GAAP requires the use of fair value for financial assets and financial liabilities. - Measurements based on fair value increase the objectivity in financial reporting.

Fair value is a market-based measure. (Fair value is a market-based measure. It is more relevant, more subjective, and FASB gives companies the option of using fair value for financial assets and financial liabilities.)

Indicate whether the following statements about the conceptual framework are true or false. (b) The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.

False

Indicate whether the following statements about the conceptual framework are true or false. (c) Verifiability is solely an enhancing characteristic for faithful representation.

False

Indicate whether the following statements about the conceptual framework are true or false. (d) Relevant information only has predictive value, confirmatory value, or both.

False

Indicate whether the following statements about the conceptual framework are true or false. (f) Information that is a faithful representation is characterized as having predictive or confirmatory value.

False

True or False. The historical cost of a liability cannot be established, so companies use the present value of cash flows to value liabilities.

False (Companies issue liabilities such as bonds and accounts payable in exchange for assets or services for an agreed-upon price. The price established in the exchange transaction is the "cost" of a liability.)

True or False. Losses as a result of a strike are reported net of tax as a subdivision of noncontrolling interest section.

False (Effects of a strike, including those against competitors and major suppliers are common types of unusual or infrequent gains and losses. Unusual and infrequent gains and losses are reported in the "Other revenues and gains" or "Other expenses and losses" section of the income statement, not as a subdivision of the noncontrolling interest section. They are not reported net of tax.)

True or False. Borrowing money from creditors is considered an investing activity on the statement of cash flows.

False (Financing, not investing, activities include obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed.)

True or False. Foreign companies listed on U.S. exchanges are required to issue statements that comply with U.S. GAAP.

False (Foreign companies listed on U.S. exchanges are permitted to use IFRS.)

True or False. Politics play no role in establishing GAAP (Generally Accepted Accounting Principles).

False (GAAP is as much a product of political action as it is of careful logic or empirical findings.)

True or False. IFRS is more "rules-based" in its approach to standards than U.S. GAAP.

False (IFRS is more "principles-based", not "rules-based", in its approach to standards than is U.S. GAAP.)

True or False. In order to justify requiring a particular measurement or disclosure, the costs perceived to be associated with it must exceed the benefits perceived to be associated with it.

False (In order to justify requiring a particular measurement or disclosure, the benefits perceived to be associated with it must exceed the costs perceived to be associated with it.)

True or False. Cost of goods sold appears on the income statement of a service firm but not a merchandising firm.

False (Only merchandisers report cost of goods sold on their income statements, service firms do not report cost of goods sold.)

True or False. The statement of retained earnings is one of the financial statements most frequently provided by public companies.

False (The financial statements most frequently provided by public companies include the balance sheet, the statement of cash flows, and the statement of stockholder's equity.)

True or False. The fundamental quality of faithful representation ensures that financial statements are totally free from error.

False (The fundamental quality of faithful representation does not ensure that financial statements are totally free from error because financial reporting involves various types of estimates that incorporate management's judgment.)

True or False. The objective of the conceptual framework is to provide financial information about the reporting entity primarily to company management and other internal users.

False (The objective of the conceptual framework is to provide financial information about the reporting entity primarily to present and guide potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.)

True or False. When comparing the account form and the report form of the balance sheet, the dollar amount of current assets will be higher under the report form, but total assets will be equal under both forms

False (The only difference in balance sheets prepared using the report form or account form is the layout of the balance sheet. The account form lists assets on the left and liabilities and stockholders' equity on the right. The report form list the sections one above the other. Current assets and total assets will be the same in both formats.)

True or False. Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point GAAP has adopted it more broadly.

False Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point IFRS has adopted it more broadly.

True or False. Discontinued operations occur when a company eliminates the results of operations of a component of the business. The elimination of the component need not represent a strategic shift, having a major effect on the company's operations and financial results.

False (Discontinued operations occur when a company eliminates the results of operations of a component of the business. The elimination of the component represents a strategic shift, having a major effect on the company's operations and financial results.)

True or False. Financial reports generally focus on soft assets such as Apple's brand image or Wal-Mart's supply chain management system.

False (Financial reports focus on hard assets such as inventory and plant assets, instead of soft assets such as intangibles which are often the best assets.)

True or False. For information to be relevant, it must have both predictive value AND confirmatory value.

False (For information to be relevant, it needs to have predictive value OR confirmatory value OR both.)

True or False. GAAP is established strictly through the application of careful logic and empirical findings.

False (GAAP is as much a product of political action as it is of careful logic or empirical findings.)

True or False. Information that has been measured and reported in a similar manner for different enterprises is considered consistent.

False (Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency is present when a company applies the same accounting treatment to similar events, from period to period.)

True or False. Real accounts are periodically closed.

False (Real or permanent accounts are not closed; only nominal (also called temporary) accounts are closed at the end of each accounting period.)

True or False. The difficulty in cost-benefit analysis is that the benefits are usually evident and easily measurable, while the costs are not always evident or measurable.

False (The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.)

True or False. The existing conceptual frameworks underlying IFRS and GAAP are strikingly different and the FASB and IASB will likely change many aspects of each of the frameworks in order to create a common conceptual framework.

False (The existing conceptual frameworks underlying IFRS and GAAP are very similar and there is no need to change many aspects of the existing frameworks other than to converge different ways of discussing essentially the same concepts.)

True or False. The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly.

False (The periodicity assumption suggests that the economic life of a business can be divided into artificial time periods such as a month, quarter or year.)

Payment of dividends would come under which activity on the statement of cash flows? - Financing. - Operating. - Investing. - None of these answer choices are correct.

Financing. (Financing activities include obtaining resources from owners and providing them with a return on their investment (payment of dividends), and borrowing money from creditors and repaying the amounts borrowed.)

Which level of the conceptual framework is devoted to the "why" - the purpose of accounting? - Second. - All three levels. - Third. - First.

First (First is the "How" and second is "The Bridge" between the two)

Each general journal entry consists of how many parts? - Two. - Three. - One. - Four.

Four (Each journal entry consists of four parts: (1) the accounts and amounts to be debited; (2) the accounts and amounts to be credited; (3) a date; and (4) an explanation.)

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (d) All significant post-balance-sheet events are reported.

Full Disclosure Principal

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (f) Supplemental information is presented so that investors will not be misled.

Full Disclosure Principal

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (h) All important aspects of bond indentures are presented in financial statements.

Full Disclosure Principal

An increase in equity (net assets) arising from peripheral or incidental transactions is called a(n) - Revenue. - Investment by owners. - Asset. - Gain.

Gain (An increase in equity (net assets) from peripheral or incidental transactions is called a gain.)

Which of the following occur from peripheral or incidental transactions? - Gain on the sale of equipment. - Sales revenue. - Operating expenses. - Cost of goods sold.

Gain on the sale of equipment. (Gains and losses result from peripheral or incidental transactions.)

For each item below, indicate to which category of elements of financial statements it belongs. (j) Gain on sale of equipment

Gains

Identify which basic accounting assumption is best described in each item below. (c) Office Depot records depreciation on its equipment over their estimated useful lifes.

Going Concern

Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the: - Periodicity assumption. - Monetary unit assumption. - Going concern assumption. - Economic entity assumption.

Going concern assumption. (The going concern assumption is the justification for depreciation and amortization policies.)

Accounting principles are "generally accepted" only when I. an authoritative accounting rule-making body has established it in an official pronouncement. II. a given practice has been accepted as appropriate because of its universal application. - I only. - II only. - I or II. - Neither I nor II.

I or II (Accounting principles are "generally accepted" only when an authoritative accounting rule-making body has established it in an official pronouncement or over time it has been accepted as appropriate because of its universal application.)

International Financial Reporting Standards (IFRS) are issued by the: - IASB (International Accounting Standards Board). - EITF (Emerging Issues Task Force). - SEC (Securities and Exchange Commission). - FASB (Financial Accounting Standards Board).

IASB (International Accounting Standards Board). (The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).)

All of the following are true regarding IFRS except: - The adoption of IFRS by U.S. companies would make it easier to compare them with foreign companies. - IFRS includes standards referred to as International Auditing Standards (IAS). - IFRS are developed by the IASB. - IFRS is more "principles-based" than U.S. GAAP.

IFRS includes standards referred to as International Auditing Standards (IAS). (IFRS includes standards referred to as International Financial Reporting Standards, rather than International Auditing Standards.)

Unusual and infrequent gains and losses - Include restructuring charges and are reported net of tax. - Are reported net of tax. - Include restructuring charges. - Include the elimination of a component of the business.

Include restructuring charges. (Unusual and infrequent gains and losses include restructuring charges, and other gains and losses that are only incidentally related to the ordinary activities of the company and are not expected to recur in the foreseeable future. They are not reported net of tax and they do not include the elimination of a component of the business which is reported as a discontinued operation.)

In the closing process, all of the revenue and expense account balances are closed to the: - Retained Earnings account. - Income Summary account. - Capital account. - Dividends account.

Income Summary account. (All revenue and expense account balances are closed to the Income Summary account.)

Which limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation? - Companies omit from the income statement items they cannot measure reliably. - Income measurement involves judgment. - Income numbers are affected by the accounting methods employed. - All of these answer choices are correct.

Income numbers are affected by the accounting methods employed. (An example of income numbers being affected by the accounting methods employed is usage of different depreciation methods. An example of how income measurement involves judgment would be when companies use different useful lives to depreciate similar assets. An example of how a company omits items that cannot be measured reliably is that a company may not record unrealized gains and losses on certain investment securities in income when there is uncertainty that it will ever realize the changes in value.)

Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as: - Financing activities. - Investing activities. - Operating activities. - Noncash activities.

Investing activities. (Investing activities include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment.)

For each item below, indicate to which category of elements of financial statements it belongs. (c) Issuance of preferred stock

Investments by Owners

Noncontrolling interest - Is shown in a separate section of the income statement after discontinued operations, net of tax. - Is not shown on the face of the income statement. - Is shown in a separate section of the income statement after continuing operations but before discontinued operations net of tax. - Is reported as a separate item below net income or loss.

Is reported as a separate item below net income or loss. (Noncontrolling interest is reported as a separate item below net income or loss as an allocation of the net income or loss (that is, it is not an item of income or expense).)

Which of the following statements about a trial balance is INCORRECT? - It is useful in the preparation of financial statements. - Its primary purpose is to prove the mathematical equality of debits and credits after posting. - It uncovers errors in journalizing and posting. - It proves that all transactions have been recorded.

It proves that all transactions have been recorded. (A trial balance does not prove that all transactions have been recorded.)

Which of the following is true about intraperiod tax allocation? - Its purpose is to allocate income tax expense evenly over a number of accounting periods. - Its purpose is to relate the income tax expense to the items that give rise to the amount of income tax provision. - It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. - It is required for discontinued operations but not for prior period adjustments.

Its purpose is to relate the income tax expense to the items that give rise to the amount of income tax provision. (Its purpose is to relate the income tax expense to the items that give rise to the amount of income tax provision.)

In the single-step income statement: - Just two groupings exist - revenues and expenses - Expenses are classified by functions, such as merchandising, selling and administration - An income from operations figure is presented - Interest revenue and rental revenue are reported as other revenues and gains

Just two groupings exist - revenues and expenses (Just two groupings exist in the single-step income statement - revenues and expenses.)

Which of the following is NOT a significant difference between the FASB (Financial Accounting Standards Board) and its predecessor, the APB? - Greater autonomy. - Broader representation. - Increased independence. - Larger membership.

Larger Membership (Board membership decreased from 18 to 7 members.)

Which of the following is not included in the summary of significant accounting policies? - Inventory cost flow assumption. - Depreciation methods. - Length of operating cycle. - Valuation method for investments.

Length of operating cycle. (A company discloses its accounting policies including depreciation methods used, inventory cost flow assumption used, and the basis for valuing investments. A company does not disclose the length of its operating cycle.)

TravelCo Company made three investments during 2017. Where will TravelCo report these investments in the fair value hierarchy? (1) It purchased 5,000 shares of Microsoft stock, which trades on the NASDAQ.

Level 1

TravelCo Company made three investments during 2017. Where will TravelCo report these investments in the fair value hierarchy? (3) It invested $10,000 in utility bonds of a small neighboring community utility company. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.

Level 2

TravelCo Company made three investments during 2017. Where will TravelCo report these investments in the fair value hierarchy? (2) The company purchased 500 shares of Anthony Technical Company, a start-up company. TravelCo used an internally developed model to evaluate the amount of the investment.

Level 3

For each item below, indicate to which category of elements of financial statements it belongs. (g) Accounts payable

Liabilities

Unearned revenues are: - Revenues. - Liabilities. - Accruals. - All of these answer choices are correct.

Liabilities (Unearned revenues are liabilities because the firm owes the customer goods or services.)

When a dividend is declared: - Assets decrease. - Liabilities increase. - Stockholders' equity increases. - All of these answer choices are correct.

Liabilities Increase (When a dividend is paid assets decrease and liabilities decrease. When a dividend is declared, liabilities increase and stockholders' equity decreases.)

Which of the following is not among the ingredients of the fundamental quality of faithful representation? - Free from error. - Completeness. - Materiality. - Neutrality.

Materiality (The ingredients of faithful representation include completeness, neutrality, and free from error. The ingredients of the fundamental quality of faithful representation do not include materiality.)

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (b) Brokerage firms use fair value for purposes of valuing investments.

Measurement (fair value) Principal

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (l) An allowance for doubtful accounts is established.

Measurement (fair value) Principal

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (e) Fair value changes of fixed assets are not recognized in the accounting records.

Measurement (historical cost) Principal

In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting? - Qualitative characteristics of accounting information. - Elements of financial statements. - Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints. - Objective of financial reporting.

Measurement, recognition and disclosure concepts such as assumptions, principles, and constraints.

True or False. The Codification creates one level of GAAP which is considered authoritative.

True

Earnings per share is computed as net income: - Minus preferred dividends divided by the ending common shares outstanding. - Divided by the weighted average of common shares outstanding. - Minus preferred dividends divided by the weighted average of common shares outstanding. - Divided by the ending common shares outstanding.

Minus preferred dividends divided by the weighted average of common shares outstanding. (Net income minus preferred dividends is divided by the weighted average of common shares outstanding to compute earnings per share.)

Income reporting follows which of the following approaches? - Modified all-inclusive. - All-inclusive. - Current operating performance. - Modified current operating performance.

Modified all-inclusive. (The accounting profession has adopted a modified all-inclusive concept for income reporting and requires application of this approach in practice.)

Identify which basic accounting assumption is best described in each item below. (a) Target Corporation prepares its financial statements in U.S. dollars.

Monetary Unit

In the United States, inflation/deflation is ignored in accounting under which of the following assumptions? - Monetary unit assumption. - Going concern assumption. - Periodicity assumption. - Time period assumption.

Monetary unit assumption. (Inflation/deflation is ignored under the monetary unit assumption.)

Return on assets is computed as: - Dividends divided by Average total assets. - Net cash provided by operating activities divided by Average total assets. - Net sales divided by Average total assets. - Net income divided by Average total assets.

Net income divided by Average total assets. (Return on assets is computed as Net income divided by Average total assets.)

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (b) Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

Neutrality

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (c)The chairman of the SEC at one time noted, "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

Neutrality

All of the following are ingredients of relevance except: - Neutrality. - Confirmatory value. - Materiality. - Predictive value.

Neutrality (Neutrality is an ingredient of faithful representation, not relevance.)

Enhancing qualities of accounting information include all of the following except: - Neutrality. - Understandability. - Comparability. - Timeliness.

Neutrality (The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability. Neutrality is not an enhancing quality of accounting information. It is an ingredient of the fundamental quality of faithful representation.)

Presented below are three different transactions related to materiality. Do you classify these transactions as material? (Yes or No) (b) Linsmeier Co. expenses all capital equipment under $18,000 on the basis that it is immaterial. The company has followed this practice for a number of years.

Major limitations of the balance sheet include all of the following except: - It necessarily omits many items that are of financial value but cannot be recorded objectively. - Only amounts known with absolute certainty are reported. - Most assets and liabilities are reported at historical cost. - Judgments and estimates are used to determine many of the items reported.

Only amounts known with absolute certainty are reported. (All of the options are major limitations of the balance sheet except only amounts known with absolute certainty are reported.)

Which of the following statements related to noncontrolling interest is INCORRECT? - Noncontrolling interest in net income is reported as an expense on the income statement. - Consolidated net income is allocated to the parent and to the noncontrolling interest in proportion to their appropriate percentages of ownership. - Noncontrolling interest is sometimes called minority interest. - Noncontrolling interest is the portion of equity interest in a subsidiary not attributable to the parent company.

Noncontrolling interest in net income is reported as an expense on the income statement. (Noncontrolling interest is reported as a separate item below net income or loss as an allocation of the net income or loss. It is not reported as an item of income or expense.)

Assets include all of the following subclassifications except - Long-term investments. - Intangibles. - Other - Noncontrolling interest.

Noncontrolling interest. (Assets include 5 subclassifications: current, long-term investments, property, plant & equipment, intangibles, and other. Noncontrolling interest is a section in the stockholders' equity section of the balance sheet.)

Which of the following is included in an owners' equity section reported in the balance sheet? - Dividends. - Working capital. - Accumulated capital. - Noncontrolling interest.

Noncontrolling interest. (Classifications included in owners' equity include capital stock, retained earnings, additional paid-in capital (not accumulated capital), and noncontrolling interest (minority interest).)

With regard to fair value, which of the following measurements is considered the least subjective? - Inputs that are observable either directly or through corroboration with observable data. - Observable inputs that reflect quoted prices for identical assets or liabilities. - For purposes of fair value, all of the measures are considered equally subjective. - Unobservable inputs.

Observable inputs that reflect quoted prices for identical assets or liabilities. (Observable inputs that reflect quoted prices for identical assets or liabilities are considered the least subjective measurements.)

Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections: - Stock activities. - Operating activities. - Investing activities. - Financing activities.

Operating Activities (Operating activities involve the cash effects of transactions that enter into the determination of net income, including the cash effects of interest revenue.)

Gains and losses that bypass net income but affect stockholders' equity are referred to as: - Prior period income. - Prior period adjustments. - Unusual gains and losses. - Other comprehensive income.

Other comprehensive income. (Other comprehensive income includes gains and losses that bypass net income.)

Which of the following describes an expense? - Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. - Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners. - Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners. - Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. (Expenses are defined as outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.)

The gain or loss from disposal of a component of a business is shown as a (an): - Unusual gain or loss. - Part of discontinued operations. - Prior period adjustment. - Noncontrolling interest.

Part of discontinued operations. (Discontinued operations include the gain or loss from disposal of a component of a business.)

Cash dividends divided by Net income describes which of the following ratios? - Profit margin on sales. - Payout ratio. - Rate of return on common stock equity. - Asset turnover.

Payout ratio. (The payout ratio is computed as Cash dividends divided by Net income.)

Generally, revenues are recognized when the: - Product is produced. - Performance obligation is satisfied. - Cash is received. - All of these answer choices are correct.

Performance obligation is satisfied. (When a company satisfies the performance obligation to perform services or sell a product, revenue is recognized.)

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (k) Reporting must be done at defined time intervals.

Periodicity Assumption

_________ is the process of transferring the accounts and amounts from the book of original entry to the ledger accounts. - Journalizing - Closing - Posting - Ledgerizing

Posting (Posting is the process of transferring the accounts and amounts from the book of original entry to the ledger accounts.)

The balance sheet is useful for analyzing all of the following except - Financial flexibility. - Solvency. - Liquidity. - Profitability.

Profitability. (The balance sheet is not used in analyzing profitability.)

A trial balance - Proves that debits and credits are equal in the ledger. - Chronologically lists transactions and other events. - Proves that a company recorded all transactions. - All of these answer choices are correct.

Proves that debits and credits are equal in the ledger. (A trial balance proves that debits and credits are equal in the ledger.)

Which of the following pairings of an item and a basis of valuation is incorrect? - Short-term investments - Generally Fair value. - Cash - Fair value. - Prepaid expenses - Cost. - Receivables - Lower-of-cost-or-market.

Receivables - Lower-of-cost-or-market. (Receivables are valued at estimated amount collectible (not lower-of-cost-or-market), and inventories are valued at lower-of-cost-or-market. The other pairings are all correct.)

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (g) Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?

Relevance

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (d) What are the two fundamental qualities that make accounting information useful for decision-making?

Relevance and Faithful Representation

Which of the following are acceptable balance sheet formats? - Multiple step form and account form. - Condensed form and multiple step form. - Condensed form and report form. - Report form and account form.

Report form and account form. (The acceptable formats for the balance sheet are the account form and the report form.)

The statement of stockholders' equity - Need not be presented if a company is reporting comprehensive income using the two statement approach. - Is dated using "As of December 31, 20x7". - Reports the change in each stockholders' equity account and in total stockholders' equity during the year. - All of these answer choices are correct.

Reports the change in each stockholders' equity account and in total stockholders' equity during the year. (Companies present a statement of stockholders' equity regardless of the format used to report comprehensive income and the statement is dated "For the period ending December 31, 20x7". The statement of stockholders' equity does report the change in each stockholders' equity account and in total stockholders' equity during the year.)

If the entry to close Income Summary to Retained Earnings includes a debit to Income Summary: - Retained Earnings will be increased by the current period's net income. - Dividends paid exceed the net income earned for the period. - The company has incurred a net loss. - Expenses exceed revenues.

Retained Earnings will be increased by the current period's net income. (If the Income Summary has a credit balance, the company has net income because revenues exceeded expenses. To close the account, Income Summary is debited and the current period's net income is transferred to Retained Earnings with a credit entry.)

Revenue Recognition Principal

The major elements of the income statement are - Revenue, cost of goods sold, operating expenses, non-operating section. - Operating section, non-operating section, discontinued operations, and extraordinary items. - Revenue, cost of goods sold, selling expenses, and general expense. - Revenues, expenses, gains, and losses.

Revenues, expenses, gains, and losses. (The major elements of the income statement are revenues, expenses, gains, and losses.)

Which of the following was established by the federal government to help develop and standardize financial information presented to stockholders? - FASB (Financial Accounting Standards Board). - SEC (Securities and Exchange Commission). - AICPA (American Institute of Certified Public Accountants). - CAP (Committee on Accounting Procedure).

SEC (Securities and Exchange Commission). (As a result of the call for greater regulation after the stock market crash of 1929, the federal government established the SEC to help develop and standardize financial information for stockholders.)

The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time is the - Income statement. - Retained earnings statement. - Statement of financial position. - Statement of cash flows.

Statement of cash flows. (The statement of cash flows summarizes the operating, investing, and financing activities of an entity.)

Which of the following statements shows the amount of cash used to pay dividends or purchase treasury stock? - Statement of financial position. - Income statement. - Statement of stockholders' equity. - All of these answer choices are correct.

Statement of stockholders' equity. (The statement of stockholders' equity shows the amount of cash used to pay dividends or purchase treasury stock.)

Which of the following publications is not considered a GAAP document? - FASB Standards - Statements of Financial Accounting Concepts - AICPA Research Bulletins - APB Opinions

Statements of Financial Accounting Concepts

Typical loss contingencies include all of the following except: - Tax operating-loss carryforwards. - Government investigations. - Environmental issues. - Possible tax assessments.

Tax operating-loss carryforwards. (Typical loss contingencies include possible tax assessments, government investigations, environmental issues, and litigation. Examples of gain contingencies include tax operating-loss carryforwards.)

The proper sequence of financial statement preparation is: - The Retained Earnings Statement, the Balance Sheet, the Income Statement, and then the Statement of Cash Flows. - The Income Statement, the Retained Earnings Statement, the Balance Sheet, and then the Statement of Cash Flows. - The Statement of Cash Flows, the Income Statement, the Retained Earnings Statement, and then the Balance Sheet. - The Balance Sheet, the Retained Earnings Statement, the Income Statement, and then the Statement of Cash Flows.

The Income Statement, the Retained Earnings Statement, the Balance Sheet, and then the Statement of Cash Flows. (The proper sequence of financial statement preparation is the Income Statement, the Retained Earnings Statement, the Balance Sheet, and then the Statement of Cash Flows.)

When a corporation purchases a computer for cash, - Liabilities increase. - The account Cash will be credited. - Stockholders' equity decreases. - Assets increase.

The account Cash will be credited. (When a corporation purchases a computer for cash, total assets are unchanged (because one asset is exchanged for another) and there are no changes to liabilities or stockholders' equity. When a purchase is made for cash, the cash account is credited.)

If the balances in both accounts receivable and accounts payable decrease during the year - The decrease in the accounts payable balance would result in an increase in cash for the period. - The decrease in both the accounts receivable and accounts payable balances will result in an increase in cash for the period. - The decrease in both the accounts receivable and accounts payable balances will result in a decrease in cash for the period. - The decrease in the accounts receivable balance would result in an increase in cash for the period.

The decrease in the accounts receivable balance would result in an increase in cash for the period. (If the balances in both accounts receivable and accounts payable have decreased during the year the decrease in the accounts receivable balance would result in an increase in cash for the period while the decrease in the accounts payable balance would result in a decrease in cash for the period.)

The double-entry accounting system means - Each item is recorded in a journal entry, then in a general ledger account. - Each journal entry must have one debit and one credit, or two debits and two credits. - The dual effect of each transaction is recorded with a debit and a credit. - Each transaction is recorded with two journal entries.

The dual effect of each transaction is recorded with a debit and a credit. (The double-entry accounting system means the dual effect of each transaction is recorded with a debit and a credit.)

Companies are not required to disclose information about: - The use of estimates. - The identity of all stockholders. - Inventory cost flow methods. - Depreciation methods.

The identity of all stockholders. (Companies are required to disclose information about all of the options except the identity of all stockholders.)

In 2010, the FASB and IASB agreed on - A common set of elements for financial statements. - The objective of financial reporting and a common set of desired qualitative characteristics. - The constraints of financial reporting. - All of these answer choices are correct.

The objective of financial reporting and a common set of desired qualitative characteristics. (In 2010, the FASB and IASB agreed on the objective of financial reporting and a common set of desired qualitative characteristics.)

True or False. A contract is an agreement between two parties that creates enforceable rights or obligations.

True (A contract is an agreement between two parties that creates enforceable rights or obligations.)

All of the following are true regarding the FASB Codification except: - The Codification was created to simplify user access. - The purpose of the Codification is to create new GAAP. - The goal of the Codification was to provide one place where all authoritative literature about a particular topic could be found. - The Codification changes the way GAAP is documented, presented, and updated.

The purpose of the Codification is to create new GAAP. (The Codification's purpose is to integrate and synthesize existing GAAP-not to create new GAAP.)

Other assets include all of the following except: - Timberlands. - Restricted cash. - Assets in special funds. - Property held for sale.

Timberlands. (Other assets include restricted cash, property held for sale, and assets in special funds. Timberlands are reported as part of property, plant, and equipment.) This really scuffs my Tims

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (e) Davidson Inc. does not issue its first-quarter report until after the second quarter's results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

Timeliness

Which of the following is a coverage ratio? - Profit margin on sales. - Payout ratio. - Times interest earned. - Asset turnover.

Times Interest Earned (Coverage ratios include debt to total assets, times interest earned, cash debt coverage ratio, book value per share, and free cash flow.)

True or False. A liability that is payable within the next year is sometimes included in long-term debt.

True (A liability that is payable within the next year is sometimes included in long-term debt if the company expects to refinance the debt through another long-term issue or to retire the debt out of non-current assets.)

True or False. Indicators of poor financial flexibility include a low debt coverage ratio and negative free cash flow.

True (A lower debt coverage ratio and negative free cash flow are indicators of poor financial flexibility.)

The first step taken in the establishment of a typical FASB statement is: - A public hearing on the proposed standard is held. - Topics are identified and placed on the board's agenda. - The board evaluates the research and public response and issues an exposure draft. - The board Evaluates responses and changes exposure draft if necessary. Final standard is issued.

Topics are identified and placed on the board's agenda.

The single-step income statement emphasizes - The various components of income from continuing operations. - The gross profit and income from operations. - Discontinued operations more than these are emphasized in the multiple-step income statement. - Total revenues and total expenses.

Total revenues and total expenses. (The single-step income statement emphasizes total revenues and total expenses.)

Which of the following investments should always be reported as current assets? - Available-for-sale securities. - Held-to-maturity securities. - Long-term investments. - Trading securities.

Trading securities. (Trading securities should always be reported as current assets. Available-for-sale securities and held-to-maturity securities would be classified as current or noncurrent depending on the circumstances and long-term investments would be classified as noncurrent.)

The ________ approach focuses on the income-related activities that have occurred during the period. - Earnings quality - Classification - Capital maintenance - Transaction

Transaction (The transaction approach focuses on the income-related activities that have occurred during the period. These activities include the following major elements of the income statement: revenue and expense transactions, and gain and loss transactions.)

Indicate whether the following statements about the conceptual framework are true or false. (a) In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

True

Indicate whether the following statements about the conceptual framework are true or false. (e) 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.

True

True or False. Companies frequently use judgments and estimates in valuing items on the balance sheet.

True (Companies use judgments and estimates to determine many of the items reported on the balance sheet.)

True or False. Earnings per share (EPS) is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding.

True (EPS is calculated by dividing income available to common stockholders by the weighted average of common shares outstanding.)

True or False. Financial Accounting Concepts are a major type of pronouncement issued by the FASB (Financial Accounting Standards Board).

True (Financial Accounting Concepts are one of the two major types of pronouncements issued by the FASB.)

True or False. The excess of current assets over current liabilities is referred to a net working capital.

True (Net working capital is the excess of total current assets over total current liabilities.)

True or False. Simple adherence to GAAP and technical competence are not enough when encountering ethical decisions.

True (Simple adherence to GAAP or following the rules of the profession cannot always provide the answers to ethical dilemmas. Technical competence is not enough when encountering ethical decisions.)

True or False. The cash debt coverage ratio is equal to net cash provided by operating activities divided by average total liabilities.

True (The cash debt coverage ratio is computed as net cash provided by operating activities divided by average total liabilities.)

True or False. The operating section is the first section of the statement of cash flows.

True (The operating section is the first section of the statement of cash flows.)

True or False. When a merchandiser prepares closing entries, Cost of Goods Sold is credited and Income Summary is debited.

True (When a merchandiser prepares closing entries, Cost of Goods Sold is credited and Income Summary is debited.)

The Financial Accounting Standards Advisory Council (FASAC) consults with the FASB on major policy and technical issues and helps select task force members.

True (remember TASK FORCE members)

True or False. The European Union requires publicly traded member country companies to use IFRS (International Financial Reporting Standards).

True (IFRS is used by many foreign countries including the European union and many countries in Asia)

True or False. After journalizing and posting all adjusting entries, a company prepares an adjusted trial balance that is the primary basis for preparation of the financial statements.

True (An adjusted trial balance is prepared after all adjusting entries have been posted and is the primary basis for preparing the financial statements.)

True or False. Companies may prepare a trial balance at any time.

True (Companies may prepare a trial balance at any point in time, including after adjusting entries and after closing entries.)

True or False. Depreciation allocates the cost of long-lived assets to expense over the periods which benefit from their use (useful life).

True (Depreciation allocates the cost of long-lived assets to expense over the periods which benefit from their use (useful life) in a rational and systematic manner.)

True or False. Financial statements can be prepared directly from the adjusted trial balance.

True (Financial statements can be prepared directly from the adjusted trial balance.)

True or False. Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid.

True (Liquidity describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.)

True or False. Revenue, equity and liability accounts have normal credit balances.

True (Revenue, equity and liability accounts all have normal credit balances and are increased by credits.)

True or False. The accounting cycle for a merchandiser is the same as the accounting cycle for a service firm.

True (The accounting cycle is performed in the same fashion by both a service firm and a merchandiser.)

True or False. Transactions are initially recorded in the general journal.

True (Transactions are initially recorded in the general journal.)

True or False. When a company makes reversing entries, it debits all cash payments of expenses to the related expense account.

True (When a company makes reversing entries, it debits all cash payments of expenses to the related expense account.)

Which of the following is an internal event? - A flood. - A transaction with another entity. - A change in the price of a good that an entity buys or sells. - Using machinery in operations.

Using machinery in operations. (Using machinery in operations is an internal event; all the other events listed are external events.)

The role of the Securities and Exchange Commission (SEC) in the formulation of accounting standards can be best described as - It develops all accounting standards by itself. - It allows the FASB to develop all accounting standards by itself. - Non-existent. - Varied - the SEC relies on FASB to develop standards but gives advice and recommendations to the private sector as needed.

Varied - the SEC relies on FASB to develop standards but gives advice and recommendations to the private sector as needed.

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (j) 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? (Do not use relevance or faithful representation.)

Verifiability

Jackson, Inc. has the following information is available: Cost of goods sold $148,500 Dividend revenue 3,750 Income tax expense 3,000 Operating expenses 79,500 Sales 255,000 In Jackson's multiple-step income statement, gross profit - Will be reported at $24,000. - Will be reported at $106,500. - Will be reported at $27,000. - Will not be reported.

Will be reported at $106,500. (Gross profit, $106,500 = Sales, $255,000 - Cost of goods sold, $148,500.)

Which of the following is not a major disclosure technique for the balance sheet? - Parenthetical explanations. - Worksheets. - Supporting schedules. - Notes.

Worksheets. (Worksheets are not a major disclosure technique for the balance sheet.)

Presented below are three different transactions related to materiality. Do you classify these transactions as material? (Yes or No) (a) Polley Co. has reported a positive trend in earnings over the last 4 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 2% of net income.

Yes

Presented below are three different transactions related to materiality. Do you classify these transactions as material? (Yes or No) (c) Carnall Co. has a gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Carnall's income for the current year was $10 million.

Yes

A conceptual framework establishes the concepts that provide guidance on - how transactions, events and circumstances should be recognized and measured. - selecting the transactions, other events, and circumstances to be represented, - all of these answer choices are correct. - identifying the boundaries of financial reporting.

all of these answer choices are correct. (A conceptual framework establishes the concepts that provide guidance on 1) identifying the boundaries of financial reporting; 2) selecting the transactions, other events, and circumstances to be represented; 3) how they should be recognized and measured and 4) how they should be summarized and reported.)

Income Measurement & Asset Valuation Exam 1

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