ACCT-361 Exam 2
Which financial statement provides information for a point in time only? A) Statement of cash flows. B) Income statement. C) Statement of shareholders' equity. D) Balance sheet.
D
A company may compare the amount of receivables in the current year to the amount of receivables in the previous year to estimate a trend in the company's ability to collect cash from customers. This type of analysis is known as: A) Horizontal analysis. B) Time analysis. C) Vertical analysis. D) Turnover analysis.
A
A primary advantage of the multiple-step format of the income statement over the single-step format is that the multiple-step format: A) classifies expenses by function. B) results in a higher amount of net income. C) separately lists income tax expense. D) lists revenues and expenses in order of their dollar amount.
A
A subsequent event for an entity with a December 31, 2021, year-end would not include: A) A change in the estimated useful lives of equipment in January 2022. B) An issuance of bonds in January 2022. C) An acquisition of another company in January 2022. D) A major uncertainty at December 31, resolved in January 2022.
A
An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer, is: A) Building. B) Accounts receivable. C) Inventory. D) Supplies.
A
Cash equivalents would include: A) Highly liquid investments that can be quickly converted to cash. B) Accounts receivable from customers. C) Cash restricted for special purposes such as to repay debt in the future. D) Prepaid expenses that were purchased with cash.
A
Cash equivalents would not include: A) Cash not available for current operations. B) Money market funds. C) U.S. treasury bills. D) Bank drafts.
A
Cash flows from investing activities do not include: A) proceeds from issuing bonds. B) payment for the purchase of equipment. C) proceeds from the sale of marketable securities. D) cash outflows from acquiring land.
A
Changes in estimates are accounted for using which approach? A) Prospective. B) Retrospective. C) Modified retrospective. D) Modified prospective.
A
Classification shifting by managers has the effects of increasing which level of profitability? A) Operating income. B) Net income. C) Income before taxes. D) All of the other answers are correct.
A
Howard Co.'s 2021 income from continuing operations before income taxes was $280,000. Howard Co. reported before-tax income on discontinued operations of $60,000. All tax items are subject to a 25% tax rate. In its income statement for 2021, Howard Co. would show the following line-item amounts for income tax expense and net income: A) $70,000 and $255,000 respectively. B) $55,000 and $220,000 respectively. C) $85,000 and $340,000 respectively. D) $85,000 and $255,000 respectively.
A
In comparing the direct method with the indirect method of preparing the statement of cash flows: A) only operating activities are presented differently. B) only investing activities are presented differently. C) only financing activities are presented differently. D) all activities are presented differently.
A
Lack of long-term solvency refers to: A) Risk of nonpayment of both current and long-term liabilities. B) The length of time before long-term debt becomes due. C) The ability to refinance long-term debt when it becomes due. D) Long-term assets.
A
Non-GAAP earnings: A) could be considered management's view of permanent earnings. B) are needed for the correction of errors. C) are standardized under generally accepted accounting principles. D) are useful to compare two different firms' performance.
A
On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement? A) $2,000,000 loss. B) $2,500,000 loss. C) No loss would be reported. D) $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations.
A
Reporting comprehensive income according to International Financial Reporting Standards (IFRS) can be accomplished by each of the following methods except: A) in the statement of shareholders' equity. B) a combined statement of income and comprehensive income. C) in two separate statements. D) the entity may choose either a combined statement of income and comprehensive income or two separate statements.
A
Reporting comprehensive income can be accomplished by each of the following methods except: A) in the statement of shareholders' equity. B) a single, continuous statement of comprehensive income. C) in two separate, but consecutive statements. D) all of these answer choices are acceptable methods.
A
Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2020 and 2021, respectively. During 2021, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2021 were: A) $590,000. B) $620,000. C) $650,000. D) $530,000.
A
The principal benefit of separately reporting discontinued operations is to enhance: A) predictive ability of future profitability. B) consistency in reporting. C) intraperiod continuity. D) comprehensive reporting.
A
To accomplish income smoothing, managers could do which of the following? A) In a year net income is particularly high, estimate future bad debts for a higher amount. B) Report all revenues on a cash basis. C) In a year net income is particularly low, estimate future warranty costs for a lower amount. D) Report all expenses on a cash basis.
A
When a company pays its bill from a lawyer for previous services on account: A) Its debt to equity ratio always decreases. B) Its acid-test ratio always remains unchanged. C) Its current ratio always remains unchanged. D) Its working capital decreases.
A
When a material error is discovered in prior financial statements: A) prior financial statements are restated to their correct amounts. B) assets and liabilities in the current period are restated to their appropriate levels. C) prior income effects are adjusted to the current period's beginning balance of retained earnings. D) all of these answer choices are correct.
A
A change in accounting principle that is implemented using the modified retrospective approach includes: A) implementing the change in the current period only and not adjusting for the cumulative effects on prior periods. B) applying the new standard to the adoption period only, and recording the cumulative adjustment for prior periods to the current period's beginning balance of retained earnings. C) restating financial statements of all periods presented as if the new standard had been used in those periods. D) not accounting for the change in the current period or prior periods.
B
A company has decided to discontinue a component of its business but, when the reporting period ends, the component has not yet been sold. The amount that the company would report as income from discontinued operations is (ignore tax effects): A) income from operations for the year and the amount by which the component's fair value less cost to sell is greater than book value. B) income from operations for the year and the amount by which the component's fair value less cost to sell is less than book value. C) only the amount by which the component's fair value less cost to sell is less than book value. D) only the component's income from operations for the year.
B
A company is effectively leveraging when: A) the return on assets exceeds the return on equity. B) the return on equity exceeds the return on assets. C) the return on equity is increasing. D) the return on assets is increasing.
B
A likely method that managers use for classification shifting is to report certain operating expenses as: A) revenues. B) nonoperating expenses. C) income tax expense. D) assets.
B
An example of an error would be: A) Purchasing inventory from a related party. B) Counting an inventory item twice when taking a physical inventory. C) Holding back invoices so that accounts payable are understated. D) Receiving kickbacks in exchange for issuing a purchase order to a vendor.
B
Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase: A) Its current ratio decreases. B) Its quick ratio decreases. C) Its current ratio remains unchanged. D) Its quick ratio remains unchanged.
B
Comprehensive income is the change in equity from: A) Owner transactions. B) Nonowner transactions. C) Owner and nonowner transactions. D) Capital transactions.
B
Consider the following items: Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue BuildingsNotes Payable (due in six months) Equipment How many of the items listed above are generally long-term assets? A) Two. B) Three. C) Four. D) Five.
B
Financial statement users typically begin their assessment of permanent earnings with: A) sales revenue. B) income from continuing operations. C) net income. D) gross profit.
B
In the operating activities section of the statement of cash flows, we start with net income: A) in the direct method. B) in the indirect method. C) in both the direct and the indirect methods. D) in neither the direct nor the indirect methods.
B
Income smoothing refers to: A) the ability of management to report an earnings amount in each period less than actual earnings. B) the ability of management to use accruals to reduce the volatility of reported earnings over time. C) the ability of management to maintain sales to its current customers for several years. D) the ability of management to report an earnings amount in each period greater than actual earnings.
B
Liquidity refers to: A) The amount of cash on hand at a given time. B) The readiness of an asset to be converted to cash. C) The period until cash is used and refinancing becomes necessary. D) Financial leverage.
B
Management's Report on Internal Control Over Financial Reporting: A) Provides the auditor's opinion on the fairness of the financial statements. B) Contains personal certification of the financial statements by the company's executives. C) Contains a detailed description of compensation of the company's executives for the year. D) Provides a summary of significant accounting policies used to prepare financial statements.
B
New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is: A) Twelve months. B) Thirty months. C) Six months. D) Three months.
B
On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement? A) $2,000,000 loss. B) $2,500,000 loss. C) No loss would be reported. D) $500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations.
B
Rent collected in advance is: A) An asset account in the balance sheet. B) A liability account in the balance sheet. C) A shareholders' equity account in the balance sheet. D) A temporary account, not in the balance sheet at all.
B
The FASB's stated preference for reporting operating cash flows is the: A) Indirect method. B) Direct method. C) Working capital method. D) All financial resources method.
B
The difference between single-step and multiple-step income statements is primarily an issue of: A) Consistency. B) Presentation. C) Measurement. D) Valuation.
B
The distinction between operating and nonoperating income relates to: A) continuity of income. B) primary activities of the reporting entity. C) consistency of income stream. D) reliability of measurements.
B
The principal concern with accounting for related-party transactions is: A) The size of the transactions. B) Differences between economic substance and legal form. C) The absence of legally binding contracts. D) The lack of accurate data to record transactions.
B
The relationship between revenue from selling inventory and the cost of that inventory is measured as: A) Net income. B) Gross profit. C) Income before taxes. D) Operating income.
B
Which is a shareholders' equity account in the balance sheet? A) Accumulated depreciation. B) Paid-in capital. C) Salaries payable. D) Accounts receivable.
B
Which of the following best explains why the taxes on discontinued operations are reported separately from taxes on continuing operations? A) The tax rate applied to discontinued operations typically is lower than that applied to continuing operations. B) The taxes on discontinued operations are not expected to recur in future years. C) The tax rate applied to discontinued operations typically is higher than that applied to continuing operations. D) Companies are allowed to delay tax payments for discontinued operations for up to five years.
B
Which of the following is a primary reason a company's book value is less than its market value? A) Management recording errors. B) Many valuable resources of the company are not recorded as assets. C) Land and buildings are valued at their fair value. D) Investors tend to be too optimistic about a company's growth opportunities.
B
Which of the following is most likely to be classified as discontinued operations? A) Sale of a small equity method investment in another company. B) Sale of a group of assets that represents a strategic shift in operations. C) Sale of undeveloped land due to lack of customer demand for additional store locations. D) All of the other answers would be classified as discontinued operations.
B
Which of the following most likely would be classified as restructuring costs? A) Advertising costs to sell a product recently developed by a company. B) Severance pay for employee layoffs associated with facility closings. C) Brokerage fees from the issuance of additional shares of stock. D) Acquisition fees associated with the purchase of land and buildings.
B
Which of the following would be an amount computed using horizontal analysis? A) The ratio of cost of goods sold to total sales for the current year. B) The percentage change in the cash balance from last year to this year. C) The difference between current assets and current liabilities at the end of the year. D) The ratio of inventory to total assets at the end of the year.
B
Expenses in an income statement prepared under International Financial Reporting Standards (IFRS): A) Must be classified by function. B) Must be classified by natural description. C) Can be classified either by function or by natural description. D) None of these answer choices are correct.
C
A change in accounting principle that is implemented using the retrospective approach includes: A) implementing the change in the current period only and not adjusting for the cumulative effects on prior periods. B) applying the new standard to the adoption period only and recording the cumulative adjustment for prior periods to the beginning balance of retained earnings. C) restating financial statements of all periods presented as if the new standard had been used in those periods. D) not accounting for the change in the current period or prior periods.
C
A company would classify a six-month prepaid insurance policy as: A) Property, plant, and equipment. B) Investment. C) Current asset. D) Goodwill.
C
Accrued liabilities: A) Are generally paid in services rather than cash. B) Result from payment before services are received. C) Result from services received before payment is made. D) Are deferred charges to expense.
C
An example of fraud would be: A) Issuing a purchase order without first securing bids. B) Buying raw materials from an affiliated company. C) Knowingly classifying a material long-term receivable as a current receivable. D) Forgetting to accrue salaries payable.
C
An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in: A) A disclaimer. B) An unqualified opinion. C) An adverse opinion. D) A consistency exception.
C
Assets do not include: A) Property, plant, and equipment. B) Investments. C) Paid-in capital. D) Nontrade receivables.
C
Cash flows from investing do not include cash flows from: A) lending money to another corporation. B) the sale of equipment. C) borrowing. D) the purchase of other corporation's securities.
C
Consider the following two separate events for a company during the year: 1. Loss on sale of investments = $20. 2. Unrealized gain on investment from increase in fair value = $30. The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect the balance of retained earnings, ignoring tax effects? A) Increase of $30. B) Increase of $10. C) Decrease of $20. D) Decrease of $10.
C
During the year, a company's investment in debt securities increases in fair value, resulting in an unrealized gain on the investment. The investment is not sold by the end of the year. The company is considering whether to report the unrealized gain as a component of net income or as a component of other comprehensive income. Under which reporting requirement would the company have a higher ending balance of total shareholders' equity? A) As a component of net income. B) As a component of other comprehensive income. C) Total shareholders' equity would be the same with either reporting requirement. D) None of the other answers are correct.
C
Financial statements that report changes over time include: A) statement of shareholders' equity, balance sheet, and statement of cash flows. B) balance sheet, statement of cash flows, and income statement. C) statement of cash flows, income statement, and statement of shareholders' equity. D) statement of shareholders' equity, balance sheet, and income statement.
C
If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine.
C
Managers may engage in classification shifting by: A) reporting sales to fictitious customers to inflate reported revenues. B) reduce estimates of accrued expenses to inflate reported net income. C) reporting operating expenses as nonoperating expenses to inflate reported operating income. D) increasing estimates of accrued expenses to inflate reported net income.
C
Notes payable that are due in two years are: A) Current liabilities. B) Long-term intangible assets. C) Long-term liabilities. D) Long-term investments.
C
Operating cash flows would not include: A) Interest received. B) Interest paid. C) Dividends paid. D) Dividends received.
C
Patents, copyrights, franchises, and trademarks are examples of: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant and equipment.
C
Popson Inc. incurred a material loss that was unusual in character. This loss should be reported as: A) a discontinued operation. B) a line item between income from continuing operations and income from discontinued operations. C) a line item within income from continuing operations. D) a line item in the retained earnings statement.
C
Restructuring costs typically can be defined as: A) costs of external financing through issuance of debt or equity securities. B) costs associated safeguarding a company's assets and ensuring accuracy of financial reporting. C) costs associated with management's plans to materially change the scope of business operations or the manner in which they are conducted. D) costs of expenditures made on capital projects and executive compensation.
C
The Claxton Company manufactures children's toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP. How should Claxton report the sale in its income statement? A) Report it as restructuring costs. B) Report it as a discontinued operation. C) Report the income or loss from operations of the division in discontinued operations. D) Report it as a gain on sale of investments included in income from continuing operations.
C
The Maytag Corporation's income statement includes income from continuing operations and a loss on discontinued operations. Earnings per share information would be provided for: A) net income only. B) income from continuing operations and net income only. C) income from continuing operations, loss on discontinued operations, and net income only. D) none of these answer choices are correct.
C
The balance sheet reports: A) Net income at a point in time. B) Cash flows for a period of time. C) Assets and equities at a point in time. D) Assets and liabilities for a period of time.
C
The current ratio is calculated as: A) Current assets divided by long-term assets. B) Current assets divided by total assets. C) Current assets divided by current liabilities. D) Current assets divided by total liabilities.
C
The quick ratio is typically computed as: A) The liquidity ratio divided by the equity ratio. B) Current assets minus inventory divided by current liabilities minus accounts payable. C) Current assets minus inventory and prepaid items divided by current liabilities. D) Cash divided by accounts payable.
C
The statement of cash flows reports cash flows from the activities of: A) operating, purchasing, and investing. B) borrowing, paying, and investing. C) financing, investing, and operating. D) using, investing, and financing.
C
When a company sells land for cash and recognizes a $25,000 gain: A) Its acid-test ratio decreases. B) Its current ratio decreases. C) Its debt to equity ratio decreases. D) Cannot determine from the given information.
C
Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Salaries payable decrease. B) Gain on the sale of land. C) Loss on the sale of equipment. D) Accounts receivable increase.
C
Which of the following is not a current liability account? A) Accrued payroll. B) Dividends payable. C) Prepaid rent. D) Subscriptions collected in advance from customers.
C
Which of the following is not a required segment reporting disclosure according to U.S. GAAP? A) Segment profit or loss. B) Segment assets. C) Segment liabilities. D) General information about the operating segment
C
Which of the following is not true about EPS? A) It must be reported by all corporations whose stock is publicly traded. B) It must be reported separately for discontinued operations. C) It must be reported on operating income. D) None of these answer choices are correct.
C
Which of the following is not used when analyzing long-term solvency? A) Times interest earned ratio. B) Debt to equity ratio. C) Acid-test ratio. D) Total liabilities.
C
Which of the following profit amounts usually will be listed in both the single-step and multiple-step formats of the income statement? A) Gross profit. B) Operating income. C) Income before taxes. D) Net nonoperating income.
C
A common component of income excluded from the calculation of non-GAAP earnings is: A) Interest expense. B) Income tax expense. C) Cost of goods sold. D) Restructuring costs.
D
When a company accrues salaries at the end of the accounting period: A) Its acid-test ratio increases. B) Its current ratio increases. C) Its debt to equity ratio decreases. D) Its debt to equity ratio increases.
D
A classified balance sheet _______________: A) Shows only current assets and current liabilities. B) Shows changes in assets, liabilities, revenues and expenses. C) Contains confidential information. D) Shows subtotals for current assets and current liabilities.
D
A company has decided to discontinue a component of its business and sells the component by the end of the year. The amount that the company would report as income from discontinued operations is (ignore tax effects): A) only income from operations for the year. B) only the gain or loss on the disposal of the component's assets. C) income from operations for the year and only a loss on the disposal of the component's assets. D) income from operations for the year and either a gain or loss on the disposal of the component's assets.
D
A company that borrows funds at 6% and then generates a return on those funds of 9% typically has: A) Greater default risk. B) Favorable financial leverage. C) Higher return on equity. D) All of the other answers are true.
D
Cash flows from financing activities include: A) Interest received. B) Interest paid. C) Dividends received. D) Dividends paid.
D
Cash flows from investing do not include cash flows from: A) lending money to another corporation. B) the purchase of equipment. C) the sale of a building. D) the purchase of a corporation's own securities.
D
Current assets include cash and all other assets expected to become cash or be consumed: A) Within one year. B) Within one operating cycle. C) Within one year or one operating cycle, whichever is shorter. D) Within one year or one operating cycle, whichever is longer.
D
Disclosure notes would not include: A) Depreciation methods used and estimated useful life. B) Definition of cash equivalents. C) Details of pension plans. D) Data to adjust the financial statements so that they are not misleading.
D
Each of the following would be reported as items of other comprehensive income except: A) foreign currency translation adjustment. B) gain on projected pension benefit obligation. C) deferred gain from derivatives. D) gain from the sale of equipment.
D
Earnings quality refers to: A) the ability of management to budget for expenditures in the following year. B) the ability of management to sell its inventory for a profit. C) the ability of management to quickly collect cash from customers. D) the ability of reported earnings to predict a company's future earnings.
D
For the statement of cash flows, investments in Treasury bills with very short maturity period would normally be included as: A) Operating activities. B) Investing activities. C) Financing activities. D) Cash equivalents.
D
In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), each of the following items is typically classified as a financing cash flow except: A) Interest paid. B) Dividends paid. C) Proceeds from the issuance of long-term debt. D) Dividends received.
D
In the DuPont formula, return on assets equals: A) Gross margin on sales × Inventory turnover. B) Profit margin on sales × Inventory turnover. C) Gross margin on sales × Asset turnover. D) Profit margin on sales × Asset turnover.
D
Intraperiod income tax presentation is primarily a matter of: A) Valuation. B) Going concern. C) Periodicity. D) Allocation.
D
Long-term assets generally include: A) Inventory held for sale. B) Prepaid rent. C) Accounts receivable. D) Land held for a possible future plant site.
D
Long-term productive assets used in the normal course of business are typically classified as: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant and equipment.
D
Long-term solvency refers to: A) The efficiency with which a company manages its resources. B) The profitability of a company over a long-term period of time. C) The amount of current assets relative to long-term assets. D) The risk that a company will not be able to pay its long-term debt.
D
Most real-world income statements are presented using which format? A) Income-step. B) Single-step. C) Magnitude-step. D) Multiple-step.
D
Operating cash outflows would include: A) Purchase of investments. B) Purchase of equipment. C) Payment of cash dividends. D) Purchases of inventory.
D
Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report: A) Operating cash inflows of $18,000. B) Operating cash inflows of $8,000. C) Financing cash inflows of $18,000. D) Investing cash inflows of $18,000.
D
Temporary earnings are best characterized as: A) earnings that do not have corresponding cash flows. B) earnings from nonoperating activities. C) earnings that do not conform to Generally Accepted Accounting Principles (GAAP). D) earnings that arise from events that are not likely to recur in the foreseeable future.
D
The Management's Discussion and Analysis section of the annual report can best be described as: A) Frank but objective. B) Independent but precise. C) Legalistic and lengthy. D) Biased but informative.
D
The acid-test ratio is also known as the: A) Current ratio. B) Debt to equity ratio. C) Times interest earned ratio. D) Quick ratio.
D
The measure of profit reported on a multiple-step income statement that represents the primary-revenue generating activities of the company is: A) Net income. B) Gross profit. C) Income before taxes. D) Operating income.
D
The usual difference between accounts payable and notes payable is: A) Legally enforceable debt. B) Current-Long-term classification. C) Known payment terms. D) Explicitly stated interest.
D
To understand the components of a company's profitability, an analyst may compute the ratio of each major expense classification to total sales. This type of analysis is known as: A) Cost analysis. B) Horizontal analysis. C) Comparative analysis. D) Vertical analysis.
D
Which of the following is not a characteristic that defines a reportable operating segment according to U.S. GAAP? A) Operating results are regularly reviewed by the enterprise's chief operating officer. B) Discrete financial information is available. C) Engages in business activities from which it may recognize revenues and incur expenses. D) Represents more than 20% of total company revenues, assets, or net income.
D
Which of the following is not a required disclosure for related-party transactions? A) The nature of the relationship. B) A description of the transactions. C) The amounts due from or to related parties. D) The impact of the transactions on current year's income.
D
Which of the following potentially limit the usefulness of the balance sheet? A) Many valuable resources of the company are not recorded as assets. B) Many items in the balance sheet reflect estimates and judgments of management. C) Property, plant, and equipment are recorded at their book values rather than fair values. D) All of the other answers represent potential limitations.
D
Working capital is equal to: A) Current assets. B) Current liabilities. C) Current assets plus current liabilities. D) Current assets minus current liabilities.
D
