Intermediate accounting multiple choice

(L.O. 2) One of the main reasons for separating liabilities into current and longterm is: A. to provide decision makers with information regarding currently maturing debts. B. to separate large and small debts. C. to separate capital into its component parts. D. to separate total equity into its two basic parts.

(A) Alternative (B) is incorrect because dividing liabilities between current and long-term has nothing to do with the amount of the debt. Alternative (C) is incorrect because the term "capital" is not a correct term to use in describing debt. Alternative (D) is incorrect because total equity includes six components, none of which are liabilities.

. (L.O. 7) If the following journal entry was made for the purchase of a three-year insurance policy in February of the first year, would an adjusting entry and/or a reversing entry be appropriate at the end of the first year? Unexpired Insurance 3,000 Cash 3,000 Adjusting Entry Reversing Entry A. Yes No B. No Yes C. Yes Yes D. No No

(A) An adjusting entry is necessary because a portion of the insurance has expired as of the end of the first year. However, because this prepaid item was originally entered in an asset account a reversing entry would be inappropriate.

(L.O. 1) The accounting equation (A = L + SE) must remain in balance: A. throughout each step in the accounting cycle. B. only when journal entries are recorded. C. only at the time the trial balance is prepared. D. only when formal financial statements are prepared.

(A) If the accounting equation is out of balance at any time during the accounting cycle, then an error has been made.

Ingredients of faithful representation are Completeness Neutrality Free from Error A. Yes Yes Yes B. Yes No Yes C. No No No D. No Yes No

(A) Ingredients of faithful representation are completeness, neutrality, and free from error.

(L.O.4) Under the revenue recognition principle, revenue is generally recognized when: A. a company satisfies its performance obligations. B. the merchandise has been ordered. C. all expenses have been identified. D. the accounting process is virtually complete.

(A) Revenue is generally recognized when a company satisfies its performance obligations.

(L.O. 1) Solvency refers to: A. the ability of an enterprise to pay its debts as they mature. B. the amount of time that is expected to elapse until an asset is realized. C. the amount of time that is expected to elapse until a liability has to be paid. D. the amount of time that is expected to elapse until an asset is converted into cash.

(A) Solvency refers to the ability of an enterprise to pay its debts as they mature. Alternatives (B), (C) and (D) are all part of the definition of liquidity.

(L.O. 2) According to the FASB Conceptual Framework, the elements —assets, liabilities, and equity—describe amounts of resources and claims to resources at/during a Moment in Time Period of Time A. Yes No B. Yes Yes C. No Yes D. No No

(A) The FASB classifies the elements of financial statements into two distinct groups. The first group of three elements—assets, liabilities, and equity—describes amounts of resources and claims to resources at a moment in time. The other seven financial statement elements describe transactions, events, and circumstances that affect an enterprise during a period of time. Thus, alternatives B, C, and D are incorrect.

(L.O. 4) What is the constraint that supports considering that the benefits of the information outweigh the sacrifices to provide the information? A. Cost. B. Prudence. C. Consistency. D. Conservatism.

(A) The cost constraint requires weighing the costs of providing the information with the benefits derived from using it. Conservatism or prudence reflects a general tendency toward early recognition of unfavorable events.

(L.O. 3) Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? A. Monetary unit assumption. B. Periodicity assumption. C. Going-concern assumption. D. Economic entity assumption.

(A) The monetary unit assumption holds that the unit of measure remains reasonably stable. Severe inflation would cause this assumption to lose its relevance.

(L.O. 2) If $1,240 cash and a $4,760 note are given in exchange for a delivery truck to be used in a business: A. assets and liabilities will change by the same amount. B. owners' equity will be increased. C. assets will increase and liabilities decrease. D. assets and liabilities will increase but by different amounts

(A) This transaction causes assets to increase by $4,760. The asset account truck increases by $6,000 (the purchase price), but assets also decrease by $1,240 due to the cash payment. Liabilities increase by $4,760 as a result of the issuance of the note.

(L.O. 3) A prepaid expense can best be described as an amount: A. Paid and currently matched with earnings. B. Paid and not currently matched with earnings. C. Not paid and not currently matched with earnings. D. Not paid and currently matched with earnings

(B) A prepaid expense can best be described as an amount paid and not currently matched with earnings. The journal entry to record a prepaid expense involves an asset account and crediting cash. The asset is deferred to and expensed in future years. Answer (A) is incorrect because it is not matched with earnings until it is expensed in future years. Answers (C) and (D) are incorrect because a prepaid expense is one that has been paid.

Which of the following violates the concept of faithful representation? A. The management report refers to new discoveries and inventions made, but the financial statements never report the results. B. Financial statements included buildings with a carrying amount estimated by management. C. Financial statements were issued one year late. D. All of the choices violate faithful representation.

(B) Accounting information is a faithful representation to the extent that it is complete, neutral, and is reasonably free of error and bias. An estimate of carrying amount of buildings is deemed unreliable, the buildings should be recorded at their cost at the date of purchase and subsequent depreciated.

(L.O. 3) An adjusting entry should never include: A. a debit to expense and a credit to a liability. B. a debit to expense and a credit to revenue. C. a debit to a liability and a credit to revenue. D. a debit to revenue and a credit to a liability

(B) All adjusting entries include one balance sheet account (asset or liability) and one income statement account (revenue or expense). Thus, all alternatives other than alternative B represent possible adjusting entry descriptions.

(L.O. 3) An accrued expense can best be described as an amount: A. Paid and not currently matched with earnings. B. Not paid and currently matched with earnings. C. Not paid and not currently matched with earnings. D. Paid and currently matched with earnings.

(B) An accrued expense can best be described as an amount not paid and currently matched with earnings. The journal entry to record an accrued expense involves debiting an expense account which is deducted from revenues in determining income and crediting a liability account. Accrued expenses are generally incurred as a result of passage of time (e.g., interest, rent, salaries, etc.). Answers (A) and (D) are incorrect because by definition an accrued expense is one that has been incurred but not yet paid. Answer (C) is incorrect because the purpose of accruing an expense is to match it currently with earnings.

(L.O. 3) Which of the following is an example of an accrued liability? A. Supplies purchased at the beginning of the year and debited to an expense account. B. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. C. Depreciation expense. D. Rent, provided as a service during the period, cash to be received next year.

(B) An accrued liability is an item of expense that has been incurred during the period, but has not been recorded or paid. The property taxes fits this definition, as they are an expense of the period in which they were incurred and represent a liability until they are paid in the subsequent period. The office supplies are a prepaid expense, depreciation is an estimated item, and the rent is an accrued revenue item.

(L.O. 2) The major objective of the quality of comparability is to: A. provide timely financial information for statement users. B. promote comparability between financial statements of different accounting periods. C. enable users to identify the real similarities and differences in economic events between companies. D. be sure the same information is disclosed in each accounting period.

(B) Comparability between financial statements of different accounting periods presumes consistent application of GAAP.

(L.O. 2) Comprehensive income includes all changes in equity during a period except: A. sale of assets other than inventory. B. those resulting from investments by or distribution to owners. C. sales to a particular entity where ultimate payment by the entity is doubtful. D. those resulting from revenue generated by a totally owned subsidiary.

(B) Comprehensive income includes net income and all other changes in equity, exclusive of owners' investments and distributions. Items A, C, and D fit into this broad definition.

(L.O. 3) The payment of cash dividends to the common shareholders would be reported on a company's statement of cash flows under the classification of A. Operating Activities. B. Financing Activities. C. Investing Activities. D. Significant Transactions.

(B) Financing activities involve liability and owners' equity items. They include (1) obtaining capital from owners and providing them with a return on (and a return of) their investment and (b) borrowing money from creditors and repaying the amounts borrowed.

(L.O. 2) Which of the following is a characteristic describing the primary quality of relevance? A. Materiality. B. Predictive value. C. Verifiability. D. Understandability.

(B) For information to be relevant, it should have predictive or confirmatory value. Answer (A), materiality is a constraint which relates to the magnitude of an omission or misstatement that in light of the circumstances, may change or influence the decision of a person relying on the information. Answer (C) is incorrect because verifiability is an enhancing quality. Answer (D) is incorrect because understandability is an enhancing quality.

(L.O. 2) Which of the following is not a current asset? A. Prepaid property taxes that relate to the next operating period. B. The cash surrender value of a life insurance policy carried by a corporation on its president. C. Marketable securities purchased as a temporary investment of cash. D. Installment notes receivable due over 15 months in accordance with normal trade practices

(B) Generally, the rule is that if an asset is to be turned into cash, sold, or consumed either in one year or the operating cycle, whichever is longer, it is classified as current. The cash surrender value of a life insurance policy is not expected to be turned into cash, etc. within a year or the operating cycle. This item is normally shown in the long-term investments section of the balance sheet.

(L.O. 2) Prepaid expenses are included in the current assets section of the balance sheet because A. they will be converted into cash within one year or the operating cycle, whichever is longer. B. if they had not been already paid they would require the use of cash during the next year or operating cycle. C. they were already included in operating expenses on the income statement in the year cash was expended. D. they reflect payments that were made in a prior period that will not be charged to expense in the current period.

(B) Prepaid expenses are expenditures already made for benefits to be received within one year or the operating cycle, whichever is longer. The cash has already been expended, but its inclusion on the income statement will not occur until the benefit has been received by the company

(L.O. 3) During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,540 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will: A. increase net income $4,390. B. increase expenses by $4,390. C. decrease store supplies by $6,540. D. debit accounts payable for $2,150

(B) Purchased .................................................... $6,540 Year-end inventory ....................................... 2,150 Used during year.......................................... $4,390 Adjusting entry: Supplies Expense 4,390 Supplies 4,390

(L.O. 1) One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is: A. failure to reflect current value information. B. the extensive use of separate classifications. C. an extensive use of estimates. D. failure to include items of financial value that cannot be recorded objectively.

(B) The balance sheet is criticized for its failure to reflect current value (A), the extensive use of estimates in its preparation (C), and its failure to include items of financial value that cannot be measured objectively (D). The balance sheet is rarely, if ever, criticized for its division of items into separate classifications

(L.O. 1) The primary purpose of the balance sheet is to reflect A. the firm's potential for growth in stock values in the stock market. B. items of value, debts, and net worth. C. the value of items owned by the firm. D. the status of the firm's assets in case of forced liquidation of the firm.

(B) The primary purpose of the balance sheet is to reflect items of value, debts, and net worth. The three classes of items that appear on the balance sheet are assets (items of value measured by historical costs or net realizable values), liabilities (debts and obligations of the firm which represent creditor claims to the assets of the firm), and owners' equity (the net worth of the owners as represented by their claims to the firm's assets). The balance sheet reflects these items as of a particular date.

(L.O. 7) When a company makes reversing entries A. it credits all cash payments of expenses to the related expense account. B. it debits all cash payments of expenses to the related expense account. C. it debits all cash receipts to the related revenue account. D. all subsequent cash receipts and cash payments are credited to Income Summary.

(B) When a company makes reversing entries, all cash payments of expenses are debited to the related expense account. This simplifies the recording process in an accounting system.

(L.O. 2) A characteristic of all assets and liabilities comprising working capital is that they are A. monetary. B. marketable. C. current. D. cash equivalents.

(C) A characteristic of all assets and liabilities comprising working capital is that they are current. The accounting profession defines working capital as the excess of current assets over current liabilities. Answers (A), (B), and (D) are incorrect because not all working capital assets and liabilities are monetary (e.g., inventory), marketable (e.g., federal income taxes payable), or cash equivalents (e.g., prepaid expenses).

(L.O. 3) Which of the following journal entries is appropriate when a company receives payment in advance for goods or services? A. Debit cash and credit an expense account. B. Credit cash and debit a revenue account. C. Debit cash and credit a liability account. D. Credit cash and debit a liability or revenue account

(C) An advance payment for goods or services requires a debit to cash and a credit to a liability account. When the goods or services are delivered to the customer, the revenue is recognized by debiting the liability and crediting a revenue account.

(L.O. 4) Which of the following statements best describes the purpose of closing entries? A. To facilitate posting and preparing a trial balance. B. To determine the amount of gain or loss for the period. C. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. D. To complete the record of various transactions that were started in a prior period.

(C) Closing entries represent the formal process by which all nominal accounts (revenue and expense) are reduced to zero and the net income or net loss is determined and transferred to owners' equity

(L.O. 2) If a company converted a short-term note payable into a long-term note payable, this transaction would A. increase both working capital and net income. B. decrease only working capital. C. increase only working capital. D. decrease both working capital and owners' equity.

(C) Conversion of a short-term note payable (current liability) into a long-term note payable (noncurrent liability) would increase working capital. Working capital is the difference between current assets and current liabilities. Conversion of the shortterm note payable reduces current liabilities and does not affect current assets. Answers (A) and (D) are incorrect because there is no effect on net income or owners' equity.

(L.O. 4) In complying with the full disclosure principle, an accountant must determine the amount of disclosure necessary. How much disclosure is enough? A. Information sufficient for a person without any knowledge of accounting to understand the statements. B. All information that might be of interest to an owner of a business enterprise. C. Information that is of sufficient importance to influence the judgment and decisions of an informed user. D. Information sufficient to permit most persons coming in contact with the statements to reach an accurate decision about the financial condition of the enterprise.

(C) In deciding what information to report, accountants follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user. Alternatives A and D are wrong because they do not assume an informed user. Alternative B would result in disclosing a significant amount of extraneous information.

(L.O. 2) A trial balance prepared at year end showed Puccineli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by: A. the balance of $47,000 in accounts receivable being entered in the trial balance as $40,700. B. an error in adding the Sales Journal. C. the balance of $700 in the Equipment account being entered as a debit of $7,000. D. a net loss of $6,300.

(C) Recorded debit amount ................................... $7,000 Actual debit balance ........................................ 700 Excess debit total ............................................ $6,300

(L.O. 1) The balance sheet contributes to financial reporting by providing a basis for all of the following except A. computing rates of return. B. evaluating the capital structure of the enterprise. C. determining the increase in cash due to operations. D. assessing the liquidity and financial flexibility of the enterprise.

(C) The balance sheet provides a basis for computing rates of return based on asset growth. The balance sheet also includes information used in evaluating capital structure (equity section) and assessing the liquidity and financial flexibility (assets and liabilities) of the enterprise. However, to determine the increase in cash due to operations one should refer to the statement of cash flows.

(L.O. 3) During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of: Objectivity Periodicity A. No No B. Yes No C. No Yes D. Yes Yes

(C) The concept of periodicity implies that economic activity can be divided into artificial time periods—months, quarters, and years for example.

(L.O. 1) Which of the following is correct regarding double-entry accounting? A. Each transaction is recorded twice, once in the general journal and once in a specialized journal. B. Each transaction must involve two entries, either two debits, two credits, or one debit and one credit. C. Each transaction must result in equal amounts of debits and credits. D. Each transaction appears in at least two of the financial statements.

(C) The double-entry system records the dual effect of each transaction and every transaction must be recorded with equal debits and credits.

(L.O. 3) The economic entity assumption in accounting is best reflected by which of the following statements? A. When a parent and subsidiary company are merged for accounting and reporting purposes the economic entity assumption is violated. B. The best way to truly measure the results of enterprise activity is to measure them at the time the enterprise is liquidated. C. The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. D. A business

(C) The economic entity assumption holds that economic activity can be identified with a particular unit of accountability. Alternative A represents the essence of the economic entity assumption not a violation. Alternative B is related to the periodicity assumption and alternative D is not a basic accounting assumption.

(L.O. 3) Continuation of an accounting entity in the absence of evidence to the contrary is an example of the basic concept of Consistency Going Concern A. No No B. Yes No C. No Yes D. Yes Yes

(C) The going concern assumption in accounting implies that unless there is evidence to the contrary, an entity will continue to exist in order to carry out its objectives and fulfill its commitments. Consistency describes when an entity applies the same accounting treatment to similar events from period to period.

(L.O. 3) The statement of cash flows provides answers to all of the following questions except: A. Where did the cash come from during the period? B. What was the cash used for during the period? C. What is the impact of inflation on the cash balance at the end of the year? D. What was the change in the cash balance during the period?

(C) The statement of cash flows does not adjust the cash balance for the effects of inflation or deflation during the period. Such an amount can be determined by the use of certain indices, but this is not a function of the statement of cash flows.

. (L.O. 2) A liability to be paid next year would not be included in the current liability section of the balance sheet if the debt is expected to be refinanced through another long-term issue, or A. the operating cycle is less than one year. B. the liability will be paid with cash that the company earns during the next year. C. when the debt is retired out of noncurrent assets. D. the liability is a nonoperating debt instrument due within the next year.

(C) When the operating cycle is less than one year and/or the debt will be paid with cash (alternatives A & B) the item is properly classified as a current liability. Also, operating or nonoperating debt due within the next year can be a current liability. However, when the debt is retired out of noncurrent assets it should not be classified as current even if it meets the operating cycle/one year criteria.

(L.O. 2) Which of the following items should never be included in the current section of the balance sheet? A. Receivable from a customer outstanding for more than a year. B. Deferred income taxes resulting from interperiod tax allocation. C. Three-year premium for fire insurance on plant and equipment. D. A pension fund.

(D) A pension fund is an investment made by a company for the retirement benefits of its employees. These funds will not be converted to cash for use in the business nor will they be used to liquidate current liabilities. The other three alternatives (A, B, and C) include items that, although somewhat unusual, could be classified as current.

(L.O. 8) A worksheet A. can be used in place of financial statements. B. is a formal device for accumulating, sorting, and recording information in the general ledger. C. is used to record and post the closing entries. D. provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

(D) A worksheet provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

(L.O. 3) In accounting an economic entity may be defined as: A. a business enterprise. B. an individual. C. a division within a business enterprise. D. all of the above.

(D) All of the alternatives (A, B, and C) are economic entities for accounting purposes.

(L.O. 4) With regard to the accounting cycle, which of the following pairings of activities provides a correct chronology? A. The financial statements are prepared and later an adjusted trial balance is prepared. B. Reversing entries are prepared and later a post-closing trial balance is prepared. C. Closing entries are prepared and later financial statements a are prepared. D. Transactions are journalized and later posted to the ledger.

(D) Alternatives A, B, and C provide an incorrect chronology in the accounting cycle. Alternative D provides a correct chronology

(L.O. 2) Of the following statements, which best illustrates the fact that the formal distinction made between current and noncurrent assets is somewhat arbitrary? A. Cash in a checking account is a current asset, while cash in a savings account is more permanent and is normally classified as noncurrent. B. Inventory that may be sold next year, or in the subsequent year as demand dictates may be classified as current or noncurrent. C. Accounts receivable due in less than one year or the operating cycle are classified as current assets, while accounts receivable due in longer than one year or the operating cycle are classified as noncurrent. D. An amount equal to the current depreciation charge on buildings should be placed in the current assets section at the beginning of the year, because it will be consumed in the next operating cycle.

(D) Cash is a current asset whether it is in a checking or savings account. Inventory is a current asset at the time the balance sheet is prepared even though it may not all be sold in the subsequent year, as it is held for sale in the normal course of business. The accounts receivable that are not collectible in the coming year should be classified as a noncurrent asset. However, while the theoretical treatment of next year's depreciation should be shown as a current asset, common practice is to ignore the formal distinction in this case.

(L.O. 4) If expenses are greater than revenues, the Income Summary account will be closed by a debit to: A. Income Summary and a credit to Cash. B. Income Summary and a credit to Retained Earnings. C. Cash and a credit to Income Summary. D. Retained Earnings and a credit to Income Summary

(D) If expenses are greater than revenues, then the Income Summary account will have a debit balance after closing entries have been made. Thus, to close the Income Summary account the journal entry would include a debit to Retained Earnings and a credit to Income Summary.

(L.O. 3) The Murphy Company sublet a portion of its warehouse for five years at an annual rental of $24,000, beginning on May 1, 2020. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to unearned rental income. Murphy reports on a calendar-year basis. The adjustment on December 31, 2020 for Murphy should be: Dr. Cr. A. No entry B. Unearned rental income 8,000 Rental income 8,000 C. Rental income 8,000 Unearned rental income 8,000 D. Unearned rental income 16,000 Rental income 16,000

(D) Murphy Company should make an adjusting entry to recognize that two-thirds of the performance obligation has been satisfied (8 months of an annual rental of $24,000) should be recognized as rental income in 2020. The journal entry that should be made is: Unearned rental income 16,000 Rental income ($24,000 × 2/3) 16,000

(L.O. 3) Rent collected in advance by a landlord is a (an): A. Accrued liability. B. Deferred asset. C. Accrued revenue. D. Unearned revenue.

(D) Rent collected in advance by a landlord is an unearned revenue. Cash received in advance should not be recognized as revenue until the performance obligation has been satisfied. Answer (A) is incorrect because an accrued liability is the result of an expense which has been incurred but not yet paid. Answer (B) is incorrect because a deferred asset is a cost which has been incurred but the benefits will be received in the future. Answer (C) is incorrect because an accrued revenue is revenue for which the

(L.O.4) Which of the following is a correct statement regarding the expense recognition principle? A. Expenses are recognized when they make a contribution to revenue. B. Costs can be charged to the current period as an expense simply because no connection with revenue can be determined. C. In recognizing expenses, accountants attempt to follow the approach of let the expense follow the revenue. D. All of the choices are correct

(D) The expense recognition principle allows for letting the expense follow the revenue (expense is recognized when it makes a contribution to income); however, immediate expensing is appropriate when there's no apparent association between an expense and a revenue.

(L.O. 4) The concept referred to by the "expense recognition" principle is A. that current liabilities have the same period of existence as the current assets. B. that all cash disbursements for a period be matched to cash receipts for the period. C. that net income should be reported on a quarterly basis. D. that where possible the expenses to be included in the income statement were incurred to produce the revenues.

(D) The expense recognition principle is the process of relating expenses with revenues on a cause and effect basis. Answer (A) is incorrect because the expense recognition principle is not related to the period of existence of current assets and current liabilities. Answer (B) is incorrect because the the expense recognition principle is not concerned with the timing of cash flows. Answer (C) is incorrect because the expense recognition principle is not concerned with a particular reporting period interval.

Which of the following is not a benefit associated with the FASB Conceptual Framework Project A. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. B. Practical problems should be more quickly solvable by reference to an existing conceptual framework. C. A coherent set of accounting standards and rules should result. D. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

(D) The financial reporting process will always require the expertise of a person trained in accounting. The development of a conceptual framework will aid the accountant because new and emerging practical problems should be more quickly solvable by reference to an existing framework. Alternatives A, B, and C are benefits of the Conceptual Framework Project.

(L.O. 2) Which of the following is not a principal purpose of an unadjusted trial balance? A. It proves that debits and credits of equal amounts are in the ledger. B. It is the basis for any adjustments to the account balances. C. It supplies a listing of open accounts and their balances. D. It proves that debits and credits were properly entered in the ledger accounts.

(D) The trial balance accomplishes the things listed in the first three alternatives. However, the purpose of the trail balance is not to prove that the debits and credits were properly entered in the ledger accounts. The fact that the trial balance is in balance proves that an equal amount of debits and credits were made, but there is no assurance that the postings were made to the correct accounts.

(L.O. 3) How would the two items shown below be handled in arriving at cash provided by operations in the statement of cash flows? Increase in Accounts Receivable Increase inAccounts Payable A. Add to net income Add to net income B. Deduct from net income Deduct from net income C. Add to net income Deduct from net income D. Deduct from net income Add to net income

(D) To arrive at cash provided by operation, the increase in accounts receivable must be deducted from net income, and the increase in accounts payable must be added back to net income.

(L.O. 2) If accounting information is complete, free from error, and neutral, it can be considered: A. relevant B. timely. C. comparable. D. a faithful representation

(D) To be a faithful representation, accounting information must possess three key characteristics: completeness, neutrality, and free from error.

. (L.O. 2) Of the following items, the one which should be classified as a current asset is A. trade installment receivables normally collectible in 20 months. B. a deposit on equipment ordered, delivery of which will be made within 7 months. C. cash designated for the redemption of callable bonds. D. cash surrender value of a life insurance policy of which the company is a beneficiary.

A) A current asset is either cash, something that will be converted into cash or consumed in one year or the operating cycle, whichever is longer. If installment sales are a normal part of operations, they may be classified as current assets because they will be converted into cash within the company's normal operating cycle. Answer (B) is incorrect because the cash deposit is a part of the cost of the machinery ordered and should be classified as a noncurrent asset. Answer (C) is incorrect because cash that is restricted for an indefinite period of time should be classified as a noncurrent asset. Answer (D) is incorrect because a life insurance policy is not likely to be canceled in the near future; therefore, its cash surrender value would be most appropriately reported in the long-term investment section of the balance sheet.

(L.O.4) Although many objections have been raised about the "cost" principle, it is still widely supported for financial reporting because it A. is an objectively determinable amount. B. is a good measure of current value. C. facilitates comparisons between years. D. takes into account price-level adjusted information

A) Cost is still widely supported for financial reporting because it is an objectively determinable amount. Answer (B) is incorrect because cost and current value are generally not the same amount subsequent to the date of acquisition. Answers (C) and (D) are incorrect because it does not facilitate comparisons between years, nor does it take into account price-level adjusted information.

(L.O. 2) According to the FASB conceptual framework, equity A. is the residual interest in the assets of an entity that remains after deducting its liabilities. B. is the same thing as comprehensive income. C. is the net gains less the net loses for a period of time. D. is the net revenues and expenses for a period of time.

A) Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.

(L.O. 3) One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility? A. The nearness to cash of assets and liabilities. B. The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. C. The firm's ability to pay its debts as they mature. D. The firm's ability to invest in a number of projects with different objectives and costs

B) Financial flexibility refers to a firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. Alternative "D" is an indication of flexibility, but does not take into account adversity and unexpected needs. The nearness to cash of assets and liabilities is a firm's liquidity, and the firm's ability to pay its debts refers to solvency.

(L.O. 3) Which of the following would not be considered a basic source of information useful in preparing a statement of cash flows? A. Selected transaction data. B. Comparative balance sheets. C. An analysis of sales by territory. D. The current income statement.

C) A statement of cash flows deals with gross inflows and outflows of cash. An analysis of sales by territory would generate no information about the cash flow from the sales.

(L.O. 2) For accounting purposes the "operating cycle concept" A. has become obsolete. B. affects the income statement but not the balance sheet. C. permits some assets to be classified as current even though they are more than one year removed from becoming cash. D. causes the distinction between current and noncurrent items to depend on whether they will affect cash within one year.

C) The operating cycle concept is used as a basis for classifying current items. The operating cycle of a firm is the length of time elapsed from the time cash is expended for such items as inventory to the time it converts the inventory back to cash. When the operating cycle is longer than 12 months, the longer period should be used. Therefore, the operating cycle concept does allow some assets to be classified as current even though their conversion into cash will not take place within one year.

(L.O. 2) How are the following items handled in computing the total stockholders' equity section of the balance sheet? Treasury Stock Additional Paid-in Capital A. Added Added B. Added Subtracted C. Subtracted Added D. Subtracted Subtracted

C) Treasury stock (the company's own stock reacquired and not canceled) is shown as a reduction of stockholders' equity, while additional paid-in capital is added to the stockholders' equity section of the balance sheet.

(L.O. 4) Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure? A. Current assets. B. Current liabilities. C. Plant assets. D. Long-term liabilities

D) Long-term liabilities normally require the greatest amount of supplementary disclosure. This is because the terms of all long-term liability agreements, including maturity date or dates, rate of interest, nature of obligation, and any security pledged to support the debt, should be disclosed. The other classifications do require supplementary disclosure, but rarely is it as extensive as that required for long-term liabilities.

(L.O. 4) Which of the following reflects proper use of the term "reserve" in the preparation of financial statements? A. The term used to describe amounts deducted from assets, such as "reserve for depreciation." B. The initial term used in connection with an estimated liability, such as "estimated reserve for product warranty." C. The term used to describe the setting aside of funds for the subsequent payment of an existing liability, such as "reserve for bonds payable." D. The term used to describe an appropriation of retained earnings in the stockholders' equity section of the balance sheet.

D) Long-term liabilities normally require the greatest amount of supplementary disclosure. This is because the terms of all long-term liability agreements, including maturity date or dates, rate of interest, nature of obligation, and any security pledged to support the debt, should be disclosed. The other classifications do require supplementary disclosure, but rarely is it as extensive as that required for long-term liabilities.