Intermediate Acct II, Exam 3

The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.

False

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

False

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

True

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

False

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

False

When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities? a. A change in interest payable b. A change in dividends payable c. A change in income taxes payable d. All of these are adjustments.

B. A change in dividends payable

The primary purpose of the statement of cash flows is to provide information a. about the operating, investing, and financing activities of an entity during a period. b. that is useful in assessing cash flow prospects. c. about the cash receipts and cash payments of an entity during a period. d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.

C. About the cash receipts and cash payments of an entity during a period

Cash equivalents are a. treasury bills, commercial paper, and money market funds purchased with excess cash. b. investments with original maturities of three months or less. c. readily convertible into known amounts of cash. d. all of these.

D. All of these

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

True

Which of the following is shown on a statement of cash flows? a. A stock dividend b. A stock split c. An appropriation of retained earnings d. None of these

D. None of these

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

False

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

False

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

Ture

Balance sheet errors affect only the presentation of an asset or liability account.

False

Dolan Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Moss Co. during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cash flows (indirect method), the $25,000 should a. not be shown. b. be shown as cash inflow from investing activities. c. be shown as cash outflow from financing activities. d. be shown as a deduction from net income in the cash flows from operating activities section.

D. Be shown as a deduction from net income in the cash flows from operating activities section

Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows: Direct Method Indirect Method a. Outflow Inflow b. Inflow Inflow c. Outflow Outflow d. No effect No effect

D. No Effect, No Effect

A capitalized leased asset is always depreciated over the term of the lease by the lessee.

False

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

False

A lease that contains a purchase option must be capitalized by the lessee.

False

A lessee records interest expense in both a capital lease and an operating lease.

False

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

False This is not an accounting change !

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

True

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

True

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

True

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

True

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

True

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

True

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

True

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

True

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

False Accounting errors include: a change in an accounting principal that is not generally accepted to an accounting policy that is acceptable Mathematical mistakes Changes due to company no preparing the estimates in good faith Failure to accrue or defer certain expenses or revenues Misuse Facts Incorrect classifications

Companies report changes in accounting estimates retrospectively.

False Changes in accounting estimates are recorded Prospectively

Counterbalancing errors are those that will be offset and that take longer than two periods to correct themselves.

False Counterbalancing errors are those that will be offset and that take longer than two periods: If the company has closed books.....

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

False It is called Changes in a Reporting Entity

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

False Records cash receipts and cash payments

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

False The primary purpose of the statement of cash flows is to provide information about a company cash receipts and cash payments during a period

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

False This is change in estimates

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

False. The first step in the preparation of the statement of cash flows is to determine the change in cash

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

True

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

True

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

True

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

True

Direct-financing leases are in substance the financing of an asset purchase by the lessee

True

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

True

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

True

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

True

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

True

Leasing equipment reduces the risk of obsolescence to the lessee, and passes the risk of residual value to the lessor.

True

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

True

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

True

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

True

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

True

Which of the following is accounted for as a change in accounting principle? a. A change in the estimated useful life of plant assets. b. A change from the cash basis of accounting to the accrual basis of accounting. c. A change from expensing immaterial expenditures to deferring and amortizing them as they become material. d. A change in inventory valuation from average cost to FIFO.

D. A change in inventory valuation from average cost to FIFO

A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as a(n) a. addition adjustment to net income in the cash flows from operating activities section. b. cash outflow from investing activities. c. cash inflow from investing activities. d. cash inflow from financing activities.

D. Cash inflow from financing activities

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

False

In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair market value of a leased asset.

False

Lessors classify and account for all leases that don't qualify as sales-type leases as operating leases.

False

The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.

False

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

False

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

False

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

False Is a change that occurs from one accepted accounting policy to another. Examples include: Average Cost to LIFO Completed-Contract to Percentage of Completion Method

A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a a. credit to Accumulated Depreciation. b. debit to Retained Earnings in the amount of the difference on prior years. c. debit to Deferred Tax Asset. d. credit to Deferred Tax Liability.

A. Credit to Accumulated Depreciation

Napier Co. provided the following information on selected transactions during 2011: Purchase of land by issuing bonds $250,000 Proceeds from issuing bonds 500,000 Purchases of inventory 950,000 Purchases of treasury stock 150,000 Loans made to affiliated corporations 350,000 Dividends paid to preferred stockholders 100,000 Proceeds from issuing preferred stock 400,000 Proceeds from sale of equipment 50,000 The net cash provided by financing activities during 2011 is a. $550,000. b. $650,000. c. $800,000. d. $900,000.

B. 650,000 Proceeds from issuing preferred stock 400,000 Proceeds from issuing Bond 500,000 Dividends paid to preferred stockholders (100,000) Purchases of Treasury Stock (150,000)

Which of the following is not treated as a change in accounting principle? a. A change from LIFO to FIFO for inventory valuation b. A change to a different method of depreciation for plant assets c. A change from full-cost to successful efforts in the extractive industry d. A change from completed-contract to percentage-of-completion

B. A change to a different method of depreciation for plant assets

The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial statements? a. Statements of cash flows b. Balance sheets c. Income statements d. Statements of retained earnings

B. Balance Sheet

Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of a. materiality. b. consistency. c. conservatism. d. objectivity.

B. Consistency

In a statement of cash flows, the cash flows from investing activities section should report a. the issuance of common stock in exchange for a factory building. b. stock dividends received. c. a major repair to machinery charged to accumulated depreciation. d. the assignment of accounts receivable.

C. A major repair to a machinery charged to accumulated depreciation

A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a a. debit to Construction in Process. b. debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax. c. debit to Retained Earnings in the amount of the difference on prior years, net of tax. d. credit to Deferred Tax Liability.

C. Debit to Retained Earnings in the amount of the difference on prior years, net of tax

To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by a. re-recording all income statement transactions that directly affect cash in a separate cash flow journal. b. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions. c. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash. d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

C. Eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash

It is an objective of the statement of cash flows to a. disclose changes during the period in all asset and all equity accounts. b. disclose the change in working capital during the period. c. provide information about the operating, investing, and financing activities of an entity during a period. d. none of these.

C. Provide information about the operating, investing, and financing activities of an entity during a period

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line? a. The cumulative effect on prior years, net of tax, in the current retained earnings statement b. Restatement of prior years' income statements c. Recomputation of current and future years' depreciation d. All of these are required.

C. Re computation of current and future years depreciation

In reporting extraordinary transactions on a statement of cash flows (indirect method), the a. gross amount of an extraordinary gain should be deducted from net income. b. net of tax amount of an extraordinary gain should be added to net income. c. net of tax amount of an extraordinary gain should be deducted from net income. d. gross amount of an extraordinary gain should be added to net income.

A. Gross amount of an extraordinary gain should be deducted from the net income

Napier Co. provided the following information on selected transactions during 2011: Purchase of land by issuing bonds $250,000 Proceeds from issuing bonds 500,000 Purchases of inventory 950,000 Purchases of treasury stock 150,000 Loans made to affiliated corporations 350,000 Dividends paid to preferred stockholders 100,000 Proceeds from issuing preferred stock 400,000 Proceeds from sale of equipment 50,000 The net cash provided (used) by investing activities during 2011 is a. $50,000. b. $(300,000). c. $(550,000). d. $(1,250,000).

B. ($300,000) Loans Made to affiliated Corporations (350,000) Proceeds from sale of equipment 50,000 50,000 + (350,000) = (300,000)

An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n) a. addition to net income in arriving at net cash flow from operating activities. b. deduction from net income in arriving at net cash flow from operating activities. c. cash outflow from investing activities. d. cash outflow from financing activities.

B. Deduction from net income in arriving at net cash flow from operating activities

Which of the following would be classified as a financing activity on a statement of cash flows? a. Declaration and distribution of a stock dividend b. Deposit to a bond sinking fund c. Sale of a loan receivable d. Payment of interest to a creditor

B. Deposit to a bond sinking fund

A statement of cash flows typically would not disclose the effects of a. capital stock issued at an amount greater than par value. b. stock dividends declared. c. cash dividends paid. d. a purchase and immediate retirement of treasury stock.

B. Stock dividends declared

Which of the following is false concerning the statement of cash flows? a. When pension expense exceeds cash funding, the difference is deducted from investing activities on the statement of cash flows. b. The FASB requires companies to classify all income taxes paid as operating cash outflows. c. Under U.S. GAAP, the purchase of land by issuing stock will be shown as a cash outflow under investing activities and a cash inflow under financing activities. d. All of the above are true concerning the statement of cash flows.

B. The FASB requires companies to classify all income taxes paid as operating cash outflows

Which of the following is not a retrospective-type accounting change? a. Completed-contract method to the percentage-of-completion method for long-term contracts b. LIFO method to the FIFO method for inventory valuation c. Sum-of-the-years'-digits method to the straight-line method d. "Full cost" method to another method in the extractive industry

C. Sum-of-the-years digits methods to the straight-line method

How should significant noncash transactions be reported in the statement of cash flows according to FASB Statement No. 95? a. They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions." b. Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major component of the transaction. c. These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials. d. They should be handled in a manner consistent with the transactions that affect cash flows.

C. These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials

Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory. 2. Sale of delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of a security held as an available-for-sale investment. 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year? a. Five items b. Four items c. Three items d. Two items

C. Three

Of the following questions, which one would not be answered by the statement of cash flows? a. Where did the cash come from during the period? b. What was the cash used for during the period? c. Were all the cash expenditures of benefit to the company during the period? d. What was the change in the cash balance during the period?

C. Were all the cash expenditures of benefit to the company during the period ?