Financial Reporting and Analysis Lawrence Revsine 7th Edition-Test Bank

Description

Financial Reporting and Analysis Lawrence Revsine 7th Edition-Test Bank

 Sample Questions

Instant Download With Answers

Chapter 2   Accrual Accounting and Net Income Determination

 

1) Accrual accounting decouples measured earnings from operating cash inflows and outflows.

 

2) Cash-basis accounting provides the most useful measure of future operating performance.

 

3) Net asset valuation and net income determination are inextricably intertwined.

 

4) While the earnings process is the result of many separate activities, it is generally acknowledged that there is usually one critical event or key stage considered to be absolutely essential to the ultimate increase in net asset value of the firm.

 

5) The matching principle says that expenses are matched to the revenue recognized during the period, not that revenue is matched to the period’s expenses.

 

6) Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.

 

7) Traditional financial reporting presents forecasted cash flow information.

 

8) Gains and losses from continuing operations that are not typical recurring costs are presented as a separate line in the income from continuing operations section of the income statement.

 

9) Each set of EPS numbers includes separately reported numbers for income from continuing operations and the items that appear below it on the income statement.

 

10) The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.

 

11) Selected unrealized gains (or losses) sometimes bypass the income statement and are reported as direct adjustments to a stockholders’ equity account.

 

12) The basic accounting equation may be expressed as assets = liabilities – owners’ equity.

 

13) To get revenue and expense account balances to zero an adjusting entry is made.

 

14) For each transaction, the dollar total of the debits must equal the dollar total of the credits.

 

15) U. S. GAAP permits companies to report components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity.

16) The point within the operating cycle when the company’s net assets have increased is the point when revenue should be recognized.

 

 

 

17) Which of the following statements best describes expenses?

1. A) They are recorded in the accounting period when they are “earned” and become “measurable.”
2. B) They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
3. C) They are the expired costs or assets “used up” during the accounting period.
4. D) They consist of cash payments to employees during the period for services rendered.

 

18) The expense matching principle states that:

1. A) Expenses are recognized when paid.
2. B) All expenses are recognized when the corresponding revenue is recorded.
3. C) Some expenses are recognized when the corresponding revenue is recognized and some are spread over time.
4. D) Expenses are recognized when the invoice is received.

 

19) The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

 

Under the cash basis, how much revenue should Canon recognize in October?

1. A) $0
2. B) $16,000
3. C) $24,000
4. D) $40,000

 

20) The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

 

Under the accrual basis, how much revenue should Canon recognize in November?

1. A) $0
2. B) $16,000
3. C) $24,000
4. D) $40,000

21) The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.

 

 

 

Using the accrual basis, which one of the following entries would properly record Canon’s revenue recognition for October?

A)

DR  Cash	40,000
CR  Copier sales		40,000

 

B)

DR  Cash	16,000
CR  Copier sales		16,000

 

C)

DR  Cash	16,000
DR  Accounts receivable	24,000
CR  Copier sales		40,000

 

D)

DR  Accounts receivable	40,000
CR  Copier sales		40,000

 

 

22) Hickory Furniture Company paid for the following costs during the month of May:

Inventory purchases	$	40,000
Advertising costs		8,000
Delivery costs		2,000

 

Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

 

What is the amount of Hickory’s cash-basis expenses for the month of May?

1. A) $33,600
2. B) $42,400
3. C) $50,000
4. D) $51,600

 

 

23) Hickory Furniture Company paid for the following costs during the month of May:

Inventory purchases	$	40,000
Advertising costs		8,000
Delivery costs		2,000

 

Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

 

What is the amount of Hickory’s May expenses when applying the matching principle?

1. A) $33,600
2. B) $42,400
3. C) $43,600
4. D) $50,000

 

24) Which statement below best describes when to record an expense?

1. A) When the expense is paid.
2. B) When the resource paid for is consumed.
3. C) Always taken in one period only.
4. D) Never is recognized before revenue is recognized.

 

25) Which of the following causes basic EPS to differ from fully diluted EPS?

1. A) Convertible preferred stock.
2. B) Warrants.
3. C) Management stock options.
4. D) All of these answer choices are correct.

 

26) Which of the following is not correct with respect to accrual accounting?

1. A) Accrual accounting can produce large discrepancies between the firm’s reported profit performance and the amount of cash generated from operations.
2. B) The principles that govern revenue and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting.
3. C) Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance.
4. D) Accrual accounting does not decouple measured earnings from operating cash inflows and outflows.

 

 

27) Hickory Furniture Company paid for the following costs during the month of May:

Inventory purchases	$	40,000
Advertising costs		8,000
Delivery costs		2,000

Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

 

What type of cost is the advertising expense?

1. A) Product cost
2. B) Traceable cost
3. C) Inventory cost
4. D) Period cost

 

28) Revenue is recognized when:

1. A) a contract is signed by both parties.
2. B) the seller completes performance required by an agreement.
3. C) the buyer completes payment required under an agreement.
4. D) the buyer accepts delivery and completes required payments.

 

29) Net income recognition always increases:

1. A) assets.
2. B) net assets.
3. C) liabilities.
4. D) net liabilities.

 

30) The real accounting issue in net income recognition is the:

1. A) quantity of income recognized.
2. B) type of income recognized.
3. C) timing of the recognition.
4. D) basis of net income recognition.

 

31) Which of the following is not a change in reporting entity?

1. A) When combined statements replace statements of individual entities.
2. B) When there is a change in the subsidiaries to be consolidated or combined.
3. C) When a business combination is accounted for under the acquisition method.
4. D) All of these answer choices are correct.

 

 

32) Which of the following does not properly state the reporting requirements when a change in reporting entity occurs?

1. A) Comparative financial statements for prior years must be restated to reflect the new reporting entity as if it had been inexistence during all the years presented.
2. B) Comparative financial statements for the prior year only must be restated to reflect the new reporting entity.
3. C) The effect of the change on income before extraordinary items, net income and other comprehensive income must be restated.
4. D) Per share amounts must be disclosed for all periods presented.

 

33) Accounting errors or irregularities can occur for which reasons?

1. A) simple oversight.
2. B) misapplication of GAAP.
3. C) management exploitation of the flexibility in GAAP.
4. D) all of these answer choices are correct.

 

34) Which of the following parties are responsible for the detection of errors and accounting irregularities in a company’s financial statements?

1. A) external auditors.
2. B) the SEC staff during their review process.
3. C) internal audit staff and audit committee of the board of directors.
4. D) all of these answer choices are correct.

 

35) Restatements occur for a number of reasons. Which of the following is the most common type of restatement?

1. A) those related to revenue recognition.
2. B) items related to core expense issues.
3. C) items related to non-core expense issues.
4. D) reclassification and disclosure issues.

 

36) Misstatements of tax expense, improper restructuring charges, asset impairment charges and gains/losses related to acquisitions are which type of restatement?

1. A) those related to revenue recognition
2. B) items related to core expense issues
3. C) items related to non-core expense issues
4. D) reclassification and disclosure issues

 

37) The matching principle requires that expenses be recognized:

1. A) in the same period in which all the assets are used up.
2. B) in the same period in which the revenue generated by these expenses is recognized.
3. C) when the costs are paid by the entity.
4. D) in the same period in which the revenue generated by these expenses is received.

 

 

38) Traceable costs are also called:

1. A) period costs.
2. B) expired costs.
3. C) product costs.
4. D) administrative costs.

 

39) The statement, “linkage between these costs and individual sales is difficult to establish,” refers to:

1. A) period costs.
2. B) expired costs.
3. C) product costs.
4. D) traceable costs.

 

40) Income statements are classified into sections to:

1. A) separate revenue recognized from deferred revenue.
2. B) distinguish between sustainable and transitory income.
3. C) separate real income from book income.
4. D) distinguish between book income and taxable income.

 

41) Which item is not correct with respect to the treatment of sustainable and transitory items and a company’s income statement?

1. A) Financial reporting assists statement users in forecasting future cash flows by providing an income statement format that segregates components of net income.
2. B) Income statements prepared in accordance with GAAP differentiate between income components that are believed to be sustainable and those that are transitory.
3. C) The income statement isolates a key figure called “income from sustainable operations.”
4. D) Transitory items are disclosed separately on the income statement so that statement users can place less weight on these earnings components when forecasting future profitability.

 

42) The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:

1. A) cash flows.
2. B) forecasting.
3. C) tax return preparation.
4. D) audits.

 

43) The best measure of a firm’s sustainable income is:

1. A) income from continuing operations.
2. B) income before income tax.
3. C) income before unusual items and change in accounting principle.
4. D) net income.

44) On the income statement, income from discontinued operations is shown:

1. A) as a separate section of income from continuing operations.
2. B) as an accounting principle change.
3. C) without any income tax effect.
4. D) net of taxes after income from continuing operations.

 

45) When transitory earnings are present, which of the following correctly depicts the order used on the income statement?

1. A) Income from continuing operations, unusual items, income tax expense, discontinued operations, net income.
2. B) Income from continuing operations, discontinued operations, income tax expense, net income.
3. C) Income from continuing operations, income tax expense, discontinued operations, net income.
4. D) Income tax expense, income from continuing operations, unusual items, discontinued operations, net income.

 

46) Black and Decker decides to discontinue producing toasters in lieu of more versatile toaster ovens. In the process of discontinuing this line, the company disposes of the old production equipment and buys new equipment. The disposal of the old equipment would be reported in the income statement as:

1. A) gain or loss on the sale of equipment as part of continuing operations.
2. B) gain or loss on the sale of production equipment as part of cost of goods manufactured and sold.
3. C) gain or loss on the disposal of discontinued business component.
4. D) income from operation of a discontinued business component.

 

47) When reporting unusual or infrequent items in the income statement which of the following is not correct?

1. A) If a material event is either unusual in nature or an infrequent occurrence it is classified on the income statement as a special or unusual item in continuing operations.
2. B) If a material event is either unusual in nature or an infrequent occurrence—such as a one-time charge resulting from a major restructuring—it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company’s last major restructuring.
3. C) Firms that use early debt retirement on a recurring basis as part of their ongoing risk management practices will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.
4. D) The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.

48) A component of an entity may be a/an:

1. A) reportable or operating segment.
2. B) subsidiary.
3. C) asset group.
4. D) reportable or operating segment, subsidiary, or asset group.

 

 

 

49) Which of the following best describes the reporting for discontinued operations?

1. A) Discontinued operations will not generate future cash flows and thus the results of transactions related to operations the firm intends to discontinue, or has already discontinued, must be reported separately from other income items on the income statement.
2. B) Discontinued operations presentation is used only when a component of an entity has been sold.
3. C) There are 4 criteria that must be met to classify a disposal group as held for sale.
4. D) Discontinued operations may generate future cash flows and thus there will be results of transactions related to operations the firm intends to discontinue. If the firm does generate future transactions before disposing of the disposal group, it will report that revenue in continuing operations revenue.

 

50) The discontinued operations section of the income statement is comprised of which one of the following?

1. A) Income from the operation of a discontinued business component and gain or loss from the disposal of the discontinued component.
2. B) Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component, net of tax.
3. C) Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component.
4. D) Gain or loss from the disposal of the discontinued component, net of tax.

 

51) Which of the following is not considered an unusual or infrequently occurring item on an income statement?

1. A) Corporate restructuring charges.
2. B) Gains and losses from sales of investments.
3. C) Operating income or loss from discontinued operations.
4. D) Foreign currency transaction gains and losses.

 

52) For a disposal group to be considered held for sale, which of the following conditions are required to be met?

1. A) Management has committed to a plan to see the component.
2. B) The sale is probable and is expected to be completed within one year.
3. C) The component is available for immediate sale in its present condition subject only to usual and customary terms for such sales.
4. D) All of these conditions must be met.

53) Which one of the following events would be considered an unusual or infrequent event?

1. A) a tornado in Kansas.
2. B) an earthquake in New York.
3. C) a flood in St. Louis near the Mississippi River.
4. D) an earthquake in southern California.

 

 

 

54) A special one-time charge resulting from corporate restructurings would be reported on the income statement as a/an:

1. A) operating item before gross profit.
2. B) special item in continuing operations.
3. C) special item in continuing operations, shown net of tax.
4. D) special item in discontinued operations, shown net of tax.

 

55) When reporting a change in an accounting principle, the general rule requires that the current year’s income from continuing operations reflect:

1. A) use of the newly adopted principle for the current year recognition.
2. B) use of the old principle for the current year recognition.
3. C) management’s choice of either the old or newly adopted principle for the current year recognition.
4. D) FASB’s designation of either the old or newly-adopted principle based on the item being changed.

 

56) Accounting treatment for changes in accounting principle are best described as:

1. A)  Changes in accounting principle that are only permitted when FASB issues a standard that revises GAAP.
2. B) Changes in accounting principle that are always accounted for using the retrospective approach which requires only a restatement of prior years’ presented financial information.
3. C) Changes in accounting principle that may require both a restatement of prior years’ financial information and the recording of a cumulative adjustment to retained earnings.
4. D) Tax effects are ignored when reporting changes in accounting principles.

57) A cumulative effect of a change in an accounting principle is measured as:

1. A) the difference between prior periods’ net income under the old method and what would have been reported if the new method had been used in the prior years.
2. B) the after-tax difference between prior periods’ net income under the old method and what would have been reported if the new method had been used in the prior years.
3. C) the difference between prior periods’ net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.
4. D) the after-tax difference between prior periods’ net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.

 

58) When using the retrospective approach for a change in accounting principle, disclosure rules require that:

1. A) prior years’ income statements presented for comparative purposes be restated to reflect use of the new principle unless it is impractical to do so.
2. B) all prior years’ income statements be restated to reflect use of the new principle, and include a pro forma net income figure of the previously reported income.
3. C) no prior years’ income statements be restated, but a pro forma net income figure be provided to reflect use of the new principle for each year presented.
4. D) no prior years’ income statements be restated, and no pro forma net income figures be provided.

 

59) Which of the following items is not a type of accounting change?

1. A) Change in accounting principles used; for example, a change from LIFO to FIFO.
2. B) Change in the majority owner of the company.
3. C) Change in accounting estimate; for example, a change in the useful life or salvage value of a depreciable asset.
4. D) Change to consolidated financial statements from individual financial statements.

 

60) When a company changes from LIFO to another inventory method, the change is reported

1. A) prospectively because it is impractical to determine the effects of this change on prior years’ net income.
2. B) as an error correction.
3. C) as a change in an accounting estimate.
4. D) using the retrospective approach.

61) When a company changes from straight-line depreciation to double-declining-balance depreciation, the change is reported

1. A) prospectively because it is impractical to determine the effects of this change on prior years’ net income.
2. B) as an error correction.
3. C) as a change in an accounting estimate.
4. D) using the retrospective approach.

 

62) When a company changes from any inventory method to LIFO, the change is reported

1. A) prospectively because it is usually impractical to determine the effects of this change on prior years’ net income.
2. B) as an error correction.
3. C) as a change in an accounting estimate.
4. D) using the retrospective approach.

 

63) Royal, Inc. discovered that equipment purchased on January 1, 2018 for $300,000 will not last as long as originally estimated. The firm was depreciating the equipment at the rate of $40,000 per year with an estimated salvage value of $20,000. New estimates on January 1, 2021 indicate that the equipment will last a total of five years with no salvage value. How much should Royal, Inc. record as depreciation in 2021?

1. A) $40,000
2. B) $60,000
3. C) $90,000
4. D) $120,000

 

64) For what reasons does management have incentive to meet analysts’ expectations?

1. A) To build credibility with capital markets.
2. B) To convey future earnings prospects to investors.
3. C) To increase stock price.
4. D) All of these answer choices are correct.

 

 

 

65) Which statement below is not correct with respect to earnings management?

1. A) It is increasingly common because of the pressure to meet analysts’ expectations.
2. B) More firms just beat rather than just miss the analyst expectations.
3. C) More than 80%  of CEOs surveyed indicated that reporting a profit is an important benchmark.
4. D) More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.

66) GAAP requires that each set of EPS numbers includes separately reported numbers for all of the following except:

1. A) special or unusual items.
2. B) income from continuing operations.
3. C) discontinued operations.
4. D) net income.

 

67) When analysts provide basic EPS for income from continuing operations that exclude the effects of special (i.e., nonrecurring) gains or losses and certain other non-cash charges, such earnings are frequently referred to as:

1. A) normal earnings.
2. B) pro forma earnings.
3. C) sustainable earnings.
4. D) real earnings.

 

68) The change in equity of an entity during a period from transactions and other events from non-owner sources is known as:

1. A) net income.
2. B) net operating income.
3. C) comprehensive income.
4. D) net change in assets.

 

69) Which one of the following is part of other comprehensive income (OCI)?

1. A) Unrealized gains resulting from translating foreign currency financial statements of majority-owned subsidiaries to U.S. dollar amounts.
2. B) Gains on sales of treasury stock.
3. C) Receipt of land donated by a governmental unit.
4. D) Sale of common stock above par.

 

70) GAAP requires firms to report comprehensive income:

1. A) at the end of the income statement.
2. B) as one separate statement of comprehensive income.
3. C) in the statement of changes in stockholders’ equity.
4. D) in a statement that is displayed with the same prominence as other financial statements.

 

 

 

71) Current U.S. GAAP permits firms to display the components of other comprehensive income in which of the following formats?

1. A) as a schedule appearing in the notes to the financial statements.
2. B) in a two-statement approach, one in which net income comprises one statement and a second, which presents a separate statement of comprehensive income.
3. C) as part of the statement of changes in stockholders’ equity.
4. D) as a part of the statement of cash flows.

72) Other Comprehensive Income (OCI) is used both in U.S. GAAP and IFRS. Which of the following statements is correct?

1. A) As a general rule, U.S. GAAP allows more opportunities for managers to change balance sheet valuations of certain assets even when management has no intention to sell these assets.
2. B) Changes in the valuation of property, plant, and equipment create a Revaluation Surplus used in both IFRS and U.S. GAAP.
3. C) Both IFRS and U.S. GAAP require companies to report in other comprehensive income each period the valuation changes from changes in actuarial estimates affecting defined benefit pension plans.
4. D) U.S. GAAP requires a separate statement of OCI to immediately follow the income statement in the financial reporting statement.

 

73) The basic accounting equation may be expressed as:

1. A) assets = liabilities – owners’ equity
2. B) liabilities = assets + owners’ equity
3. C) owners’ equity = assets – liabilities
4. D) assets = owners’ equity – liabilities

 

74) Any increase in an asset may be offset by:

1. A) a corresponding decrease in a liability.
2. B) a decrease in some other asset account.
3. C) a corresponding decrease in owner’ equity.
4. D) an increase in another asset account.

 

75) Which of the following statements is correct regarding revenue and expense accounts?

1. A) These are really owners’ equity accounts.
2. B) These are really contributed capital accounts.
3. C) They have no impact on the balance sheet.
4. D) These are balance sheet accounts.

 

76) A debit:

1. A) increases Accounts Payable.
2. B) increases Cost of Goods Sold.
3. C) decreases Accounts Receivable.
4. D) decreases Equipment.

 

 

 

77) Adjusting entries must be made:

1. A) to correct errors in the accounts.
2. B) to reconcile the accounts to the budget.
3. C) because auditing standards require them.
4. D) because certain types of events will otherwise not be recorded in the accounts.

78) Accumulated depreciation is a/an:

1. A) expense account.
2. B) liability account.
3. C) contra-asset account.
4. D) owners’ equity account.

 

79) Entering the DR or CR amount in the appropriate left or right side of the affected T-account is called:

1. A) posting.
2. B) cross-referencing.
3. C) journalizing.
4. D) recording.

 

80) Which of the following situations may create an accounting error?

1. A) Simple oversight.
2. B) Parties disagree on accounting for a transaction resulting in a misapplication of GAAP.
3. C) Management exploits the flexibility in GAAP to inflate earnings.
4. D) All of these answer choices are correct.

 

81) A debit does which of the following?

1. A) Increases the value in an asset account.
2. B) Increased the value in a contra-asset account.
3. C) Decreases the value in a liability account.
4. D) Increases the value in an asset account and also decreases the value in a liability account.

 

82) Which of the following is a true statement?

1. A) Revenue decreases owners’ equity and increases liabilities.
2. B) Expenses increase owners’ equity and decrease liabilities.
3. C) Revenue increases owners’ equity and expenses decrease owners’ equity.
4. D) Revenue decreases owners’ equity and expenses increase owners’ equity.

 

83) To get revenue and expense account balances to zero requires a/an:

1. A) adjusting entry.
2. B) closing entry.
3. C) operating entry.
4. D) reversing entry.

 

 

 

84) T-account analysis can be used to gain insights into why accrual basis earnings and cash basis earnings differ and to:

1. A) journalize future transactions.
2. B) reconstruct transactions that have occurred during a given reporting period.
3. C) post transactions that have occurred during a given reporting period.
4. D) determine the current market price of common stock.

85) Working capital accounts include:

1. A) all assets.
2. B) all assets and liabilities.
3. C) current assets and all liabilities.
4. D) current assets and current liabilities.

 

86) Adjusting entries are used in all but which of the following situations?

1. A) Prepayments.
2. B) Deferred Revenue and Expenses.
3. C) Accrued Revenue and Expenses.
4. D) Prepayments, Deferred Revenue, Accrued Expenses, Accrued Revenue.

 

87) Recent changes in ________ accounting standards require companies to group items within OCI based on ________:

1. A) U.S. GAAP; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
2. B) IFRS; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
3. C) U.S. GAAP; their expected future categorization on the income statement into income from continuing operations and discontinued operations.
4. D) IFRS; their expected future categorization on the income statement into income from continuing operations and discontinued operations.

 

88) When actuarial estimates related to defined benefit pension plans are adjusted:

1. A) Both U.S. GAAP and IFRS require companies to report these valuation changes in OCI each period.
2. B) Only U.S. GAAP requires companies to report these valuation changes in OCI each period.
3. C) Only IFRS requires companies to report these valuation changes in OCI each period.
4. D) Neither U.S. GAAP nor IFRS requires companies to report these valuation changes in the financial statements.

 

89) Earnings management can occur through a variety of manipulations including:

1. A) Manipulating accrual estimates to impact expenses.
2. B) Misapplications of GAAP deemed immaterial on an account by account basis.
3. C) Big bath restructuring charges.
4. D) All of these answer choices are correct.

 

 

90) Which of the following would not be considered a revenue recognition abuse?

1. A) Recording goods on consignment as part of inventory when there is a right of return.
2. B) Recording goods on layaway for a customer as a final sale.
3. C) Recording revenue on a large shipment to a customer whose ability to pay is not reasonably assured.
4. D) Recording revenue on goods ready for delivery to the customers, segregated in the company warehouse without a bill-and-hold arrangement in the contract.

 

91) In its accrual-basis income statement for the year ended December 31, 2018, Ralph Company reported revenue of $2,565,000. Additional information was as follows:

 

Accounts receivable 12/31/17	$	418,500
Uncollectible accounts written off during 2018		17,200
Accounts receivable 12/31/18		391,700

 

Required:

Under the cash basis of net income determination, how much should Ralph report as revenue for 2018?

 

92) John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2018 Dr. Hamilton collected $220,000 in fees from his patients.  At December 31, 2017, Dr. Hamilton had accounts receivable of $30,000. At December 31, 2018 Dr. Hamilton had accounts receivable of $35,000 and had collected deferred fee revenue of $8,000.

 

Required:

On the accrual basis, what was Dr. Hamilton’s patient service revenue for 2018?

 

93) Under Bart Company’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim reports, Bart makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, 2018 is as follows:

 

Prepaid insurance at December 31, 2017	$	310,000
Charges to insurance expense during 2018, including a year-end adjustment of $50,000		975,000
Unexpired insurance premiums at December 31, 2018		265,000

 

Required:

What was the total amount of insurance premiums paid by Bart during 2018?

 

 

94) Schlegel Department Store sells gift certificates—redeemable for store merchandise—that expire one year after their issuance. Schlegel has the following information pertaining to its gift certificates sales and redemptions:

 

Unredeemed certificates at 12/31/17	$	90,000
2018 sales		400,000
2018 redemptions of prior year sales		60,000
2018 redemptions of current year sales		325,000

 

Schlegel’s experience indicates that 10% of gift certificates will not be redeemed.  The company’s policy is to record revenue on gift certificates when they are redeemed or expire.

 

Required:

In its 2018 income statement, what amount should Schlegel report as gift certificate revenue?

 

95) Lazer Industries, Inc. manufactures medical equipment parts and accessories. Assume all amounts are pre-tax and a 30% tax rate for 2018.

 

Net sales	$	1,200,000
Interest expense	$	150,000
Gain on sale of discontinued operations	$	400,000
Cost of goods sold	$	300,000
Selling, general and administrative expenses	$	170,000
Gain on sale of investments	$	30,000
Restructuring charges	$	20,000

 

Required:

Prepare a multiple-step income statement for Lazer Industries, Inc. based on the available information for the year ended December 31, 2018. Indicate all negative numbers using parentheses, and include all subtotals, appropriately labeled, to present your income statement in good form.

 

 

96) Berg, Inc. provides exotic wedding planning services. Berg’s facilities are located in an elevated area with a dry climate. Assume all amounts are pre-tax and a 30% tax rate for 2018.

 

Interest expense	$	30,000
Cost of goods sold		900,000
Flood damage to facilities		60,000
Revenue		2,100,000
Office salaries expense		150,000
Advertising expense		180,000
Rent expense		100,000
Restructuring charges		80,000

 

Required:

Based on the available information, provide a multiple-step income statement for Berg, Inc. for the year ended December 31, 2018. Indicate all negative numbers using parentheses, and include all subtotals, appropriately labeled, to present your income statement in good form.

 

97) On August 1, 2018, Alpha Co. approved a plan to dispose of an unprofitable segment of its business. Alpha expected that the sale would occur on April 30, 2019, at an estimated gain of $250,000. The segment had actual and estimated operating profits (losses) as follows:

 

Realized loss from 1/1/18 to 7/31/18	$	(400,000	)
Realized loss from 8/1/18 to 12/31/18		(250,000	)
Expected loss from 1/1/19 to 4/30/19		(300,000	)
Assume Alpha’s tax rate is 30%.

 

Required:

In its 2018 income statement, what should Alpha report as profit or loss from discontinued operations (net of tax effects)?

 

98) On November 15, 2018, Jones Co. sold a segment of its business for $2,750,000. The net book value of the segment at the time of its disposal was $2,900,000. Jones had pretax income from operations of $1,750,000 for 2018 which included $360,000 recognized by the discontinued segment prior to its disposal. Assume Jones’ tax rate is 30%.

 

Required:

Prepare a partial income statement for Jones Co. for 2018, beginning with pretax income from continuing operations.

 

 

99) Delta Co. began operations on January 1, 2018. During 2018 and 2019, the company used the weighted-average method for its inventory costing. In 2020, the company changed its method of inventory costing to FIFO so that its financial statements would be more comparable to those of other firms in its industry. If the FIFO method had been used, Delta’s cost of goods sold would have been $45,000 less in 2018 and $35,000 less in 2019. Delta’s income statements, as originally presented, appear below. Delta’s tax rate is 30%.

 

	2018					2019						2020
Sales	$	1,000,000					$	1,100,000					$	1,210,000
Cost of goods sold		645,000						695,000						726,000
Gross profit		355,000						405,000						484,000
Selling, general and administrative expenses		250,000						255,000						265,000
Depreciation expense		55,000						55,000						55,000
Income before tax		50,000						95,000						164,000
Income tax expense		15,000						28,500						49,200
Net income	$	35,000					$	66,500					$	114,800

 

Required:

Assume that for comparison purposes Delta presents 2018 and 2019 income statements in its 2020 annual report. Revise Delta’s 2018 and 2019 income statements to appear as they should in the 2020 annual report.

 

100) An analyst gathered the following information about a company whose fiscal year end is December 31, 2018.

 

Net income for the year was $23.7 million.

Preferred stock dividends of $3 million were paid for the year.

Common stock dividends of $6 million were paid for the year.

There were 10 million shares of common stock outstanding on January 1, 2018.

The company issued 6 million new shares of common stock on July 1, 2018.

The capital structure does not include any potentially dilutive securities.

 

Required:

Calculate the company’s basic earnings per share for 2018.

 

 

 

101) Primo Landscaping commenced its business on January 1, 2018. On December 31, 2018, Primo Landscaping did not record any adjusting entries with respect to the following transactions:

 

• During the first year of its operations, Primo purchased supplies in the amount of $10,000 (debited to “Supplies expense”), and of this amount, $3,000 were unused as of December 31, 2018.
• On March 15, 2018 Primo received $36,000 for landscape maintenance services to be rendered for 24 months (beginning July 1, 2018). This amount was credited to “Landscaping revenue.”
• The company’s fuel bill for $1,300 for the month of December 2018 was not received until January 15, 2019.
• The company borrowed $100,000 from First Bank on April 1, 2018 at an interest rate of 12% per year. The principal, along with all of the interest, is due on March 30, 2019.
• On January 17, 2018 the company purchased a backhoe for $65,000. The backhoe is expected to last for 10,000 hours and have no salvage value. During 2018, Primo operated the backhoe for 500 hours.

 

Required:

Prepare a table in below format, showing the effect of the omission of each year-end adjusting entry on assets, liabilities, and net income.  Use “OS” for overstated, “US” for understated, and “NE” for no effect.

 

Item Number	Effect of Omission	Assets	Liabilities	Net Income
a.	Direction of effect Dollar amount of effect
b.	Direction of effect Dollar amount of effect
c.	Direction of effect Dollar amount of effect
d.	Direction of effect Dollar amount of effect
e.	Direction of effect Dollar amount of effect

Financial Reporting and Analysis, 7e (Revsine)

Chapter 4   Structure of the Balance Sheet and Statement of Cash Flows

 

1) Liquidity refers to how quickly noncurrent assets will be converted into cash to pay liabilities.

 

2) A common-size balance sheet presents each item as a percentage of total assets.

 

3) Companies having cash denominated in foreign currency units will not translate those units into U.S. dollars because cash has the same value in all currencies.

 

4) Inventory and accounts receivable are both carried at net realizable value.

 

5) Deferred income taxes will be reported as either a noncurrent asset or noncurrent liability.

 

6) It is permissible for a firm that reports in accordance with IFRS to emphasize its liquidity by placing current assets and current liabilities in close proximity to one another on the balance sheet.

 

7) A related party transaction occurs when a company enters a transaction with individuals or other companies that are connected in some way with it or its management.

 

8) Events that occur after the financial statements are issued are referred to as subsequent events.

 

9) The statement of cash flows shows the user why a firm’s investments and financial structure have changed between two balance sheets dates.

 

10) The cash flow statement explains why a firm’s cash position has changed between successive balance sheet dates while simultaneously explaining the changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same period.

 

11) Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.

 

12) Depreciation is added back to net income to determine cash from operating activities under the indirect method.

 

13) Under the direct method for cash flow statement preparation, net cash flows from operating activities is calculated by adjusting net income for the differences between accrual-basis revenues and expenses and cash inflows and outflows during the period.

14) Under U.S. GAAP, cash interest from investments is reported on the statement of cash flows as part of investing activities whereas under IFRS, cash interest from investments is reported as part of financing activities.

 

15) When adjusting accrual earnings to obtain cash flows from operations, an increase in Prepaid Rent Expense is subtracted to arrive at cash flow from operations.

 

16) Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events defines:

1. A) assets.
2. B) liabilities.
3. C) equity.
4. D) retained earnings.

 

17) The residual interest in the resources of an entity that remains after deducting its debts to third parties defines:

1. A) assets.
2. B) liabilities.
3. C) equity.
4. D) retained earnings.

 

18) Probable future sacrifices of economic benefits arising from an entity’s present obligations to transfer resources or provide services to other entities in the future as a result of past transactions or events defines:

1. A) assets.
2. B) liabilities.
3. C) equity.
4. D) retained earnings.

 

19) The balance sheet provides information on all of the following except:

1. A) how management invested its money.
2. B) where the money came from.
3. C) assessing rates of return.
4. D) the market price of the company’s stock.

 

20) Contributed capital might be a negative dollar amount because:

1. A) net losses exceeded net income over the years.
2. B) excess liabilities reduced contributed capital.
3. C) treasury stock was in excess of stock originally issued.
4. D) dividends paid were in excess of net income accumulated in retained earnings.

21) Accrued liabilities represent:

1. A) income that has not yet been recognized on the income statement.
2. B) expenses that have not yet been recognized on the income statement.
3. C) expenses that have been recognized on the income statement but not yet been paid.
4. D) income that has been recognized on the income statement but not yet collected.

 

22) Balance sheet amounts would not be measured as:

1. A) effective value.
2. B) fair value.
3. C) present value.
4. D) historical cost value.

 

 

 

23) Goodwill arising from a business combination is reported on the balance sheet as a(n):

1. A) current asset.
2. B) fair value asset.
3. C) impaired asset.
4. D) intangible asset.

 

24) Balance sheets prepared in other countries using international accounting standards (IFRS) might use different account titles than are allowed for US. GAAP, such as:

1. A) Capital reserve.
2. B) Share premium.
3. C) Hedging reserve.
4. D) all of these answer choices might be used in balance sheets prepared using IFRS.

 

25) Balance sheets prepared in compliance with U.S. GAAP reflect a mixture of:

1. A) historical cost and future cash values.
2. B) current value and discounted future cash flows.
3. C) discounted cash flows and future values.
4. D) historical cost, fair value, net realizable value, and discounted present values.

 

26) Current assets are assets expected to:

1. A) be converted to cash within twelve months.
2. B) be converted to cash within twelve months or one operating cycle if the operating cycle is longer than twelve months.
3. C) remain on the books for at least twelve months.
4. D) remain on the books for at least twelve months or one operating cycle if the operating cycle is longer than twelve months.

27) Cash is always measured for the balance sheet at:

1. A) future transaction value.
2. B) current market value.
3. C) realizable future value.
4. D) net transaction value.

 

28) Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. He notices that the Retained Earnings account increased from the beginning of the year. This information is used to:

1. A) increase cash flow from financing as it indicates receipt of payments from customers.
2. B) decrease cash flow from investing as it indicates payment of debt.
3. C) increase cash flow from operations as it signifies a net income.
4. D) decrease cash flow from operations as it indicates a net loss.

 

 

 

29) Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. Joe would use an increase in Accumulated Depreciation to:

1. A) increase cash flow from operating activities.
2. B) increase cash flow from investing activities.
3. C) decrease cash flow from investing activities.
4. D) decrease cash flow from operating activities.

 

30) Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. An increase in the Computer Equipment account would:

1. A) decrease cash flow from financing activities.
2. B) decrease cash flow from investing activities.
3. C) increase cash flow from operating activities.
4. D) increase cash flow from investing activities.

 

31) Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. A decrease in the balance of the Accounts Receivable account would:

1. A) decrease cash flow from financing activities.
2. B) increase cash flow from investing activities.
3. C) decrease cash flow from operating activities.
4. D) increase cash flow from operating activities.

 

32) Net property, plant and equipment are reported on the balance sheet at:

1. A) current market value.
2. B) historical cost.
3. C) historical cost minus accumulated depreciation.
4. D) net realizable value.

33) Current liabilities are reported on the balance sheet at:

1. A) current market value.
2. B) historical cost.
3. C) discounted present value.
4. D) future value.

 

34) Long-term debt is reported on the balance sheet at:

1. A) current market value.
2. B) net realizable value.
3. C) present value.
4. D) future value.

 

 

 

35) Cash interest from investments is recorded as ________ in statements of cash flows for U.S. GAAP, but can be recorded as ________ when using IFRS.

1. A) cash flows from investing activities / cash flows from financing activities
2. B) cash flows from financing activities / cash flows from operating activities
3. C) cash flows from operating activities / cash flows from financing activities
4. D) cash flows from operating activities / cash flows from investing activities

 

36) Balance sheets developed under US GAAP:

1. A) may, but are not required to, list assets from most liquid to least liquid.
2. B) must list assets from most liquid to least liquid.
3. C) must list assets from least liquid to most liquid.
4. D) must list assets in alphabetical order.

 

37) Balance sheets prepared under IFRS:

1. A) may list assets and liabilities from least liquid to most liquid.
2. B) must list assets, but not liabilities in order of liquidity.
3. C) must list assets and liabilities from least liquid to most liquid.
4. D) must list liabilities, but not assets, from most to least liquid.

 

38) The Common Stock account is reported on the balance sheet at the:

1. A) par value of the stock.
2. B) current market value of the stock.
3. C) net realizable value of the stock.
4. D) discounted present value of the future dividends.

 

39) The Additional Paid-In Capital account is reported on the balance sheet at the:

1. A) current market value of the stock minus par value.
2. B) original sales price of the stock minus the par value.
3. C) net realizable value of the stock minus par value.
4. D) discounted present value of the future dividends minus par value.

40) The Retained Earnings account is comprised of:

1. A) cash retained in the business.
2. B) cash reinvested in the business by shareholders.
3. C) the cumulative earnings less dividends since the inception of the corporation.
4. D) the earnings of the corporation for the current year.

 

41) Retained earnings are reported on the balance sheet at:

1. A) historical cost.
2. B) current market value.
3. C) net realizable value.
4. D) a mixture of different measurement bases.

 

 

 

42) In a common-size balance sheet, each balance sheet account is expressed as a percentage of total:

1. A) liabilities.
2. B) assets.
3. C) shareholders’ equity.
4. D) assets plus shareholders’ equity.

 

43) Common-size balance sheets may be used for all the following except:

1. A) gaining insights into the nature of a company’s operations.
2. B) analyzing a company’s asset and financial structure.
3. C) determining how management assesses the risks a company faces.
4. D) learning about the underlying economics of an industry.

 

44) Under U.S. GAAP, assets are presented in decreasing order of liquidity. Under IFRS,

1. A) tangible assets may be presented first followed by the current assets displayed in increasing order of liquidity.
2. B) the current assets are displayed in increasing order of liquidity.
3. C) investments are listed first in descending order of maturity.
4. D) a company may present its assets in alphabetical order if it so desires.

 

45) The term “consolidated” is used in financial statements under U.S. GAAP to refer to the financial reporting for a parent and its subsidiaries. The equivalent term used on balance sheets in the United Kingdom is:

1. A) cooperative.
2. B) satellite.
3. C) consolidated.
4. D) group.

46) All the following disclosures would appear in the Summary of Significant Accounting Policies except:

1. A) inventory method.
2. B) depreciation method.
3. C) revenue recognition method.
4. D) financing method.

 

47) Notes to the financial statements typically contain all the following except:

1. A) a summary of significant accounting policies.
2. B) disclosure of important subsequent events.
3. C) management’s discussion and analysis.
4. D) related-party transactions.

 

48) Which one of the following equations explains why successive balance sheets can be used to prepare a firm’s cash flow statement?

1. A) Assets = Liabilities – Equity
2. B) Cash – Noncash assets = Liabilities – Equity
3. C) Δ Cash = Δ Liabilities – Δ Noncash assets + Δ Stockholders’ equity
4. D) Δ Cash = Δ Liabilities + Δ Stockholders’ equity

49) The change in a firm’s cash position between successive balance sheet dates will not equal the reported net income for that period for all the following reasons except:

1. A) Reported net income usually will not equal cash flow from operating activities because noncash revenues and expenses are often recognized as part of accrual income.
2. B) Reported net income usually will not equal cash flow from operating activities because certain operating cash inflows and outflows are not recorded as revenues or expenses under accrual accounting in the same period the cash flows occur.
3. C) Changes in cash are also caused by nonoperating investing activities like the purchase of treasury stock.
4. D) Additional changes in cash are caused by financing activities like the repayment of a bank loan.

 

50) Operating activities result from the cash effects of:

1. A) producing and delivering goods and services.
2. B) purchasing and disposing of fixed assets used in production of revenue.
3. C) borrowing and repaying loans used in the production of revenue.
4. D) selling stocks and bonds to raise capital for the generation of revenue.

 

51) Investing activities include the cash effects of:

1. A) producing and delivering goods and services.
2. B) purchasing and disposing of productive assets used in production of revenue.
3. C) borrowing and repaying loans used to purchase equipment.
4. D) selling stocks and bonds to raise capital to purchase land.

52) Financing activities include the cash effects of:

1. A) producing and delivering goods and services.
2. B) purchasing and disposing of productive assets used in production of revenue.
3. C) purchasing and disposing of debt securities of other companies.
4. D) selling stocks and bonds to raise capital used to produce revenue.

 

53) Cash flows from operating activities include:

1. A) cash payments received from customers.
2. B) increases in Accumulated Depreciation.
3. C) deferred income taxes.
4. D) All of these would be included in cash flows from operating activities.

 

 

 

54) Selected data for Kris  Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

 

					Year 1						Year 2
Assets
Cash			$	100,000				$	(50,000			)
Accounts receivable (net)				50,000					100,000
Inventory				100,000					250,000
Equipment (net)				300,000					350,000
Total assets			$	550,000				$	650,000
Liabilities and Equity
Accounts payable			$	150,000					100,000
Income taxes payable				80,000					30,000
Bonds payable				100,000					80,000
Common stock				100,000					200,000
Retained earnings				120,000					240,000
Total liabilities and Equity			$	550,000				$	650,000

 

Using the indirect method to create the operating activities section of the statement of cash flows, the cash flow from accounts receivable would be recorded as:

1. A) an increase of $50,000
2. B) an increase of $150,000
3. C) a decrease of $50,000
4. D) a decrease of $150,000

 

 

55) Selected data for Kris  Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

 

					Year 1						Year 2
Assets
Cash			$	100,000				$	(50,000			)
Accounts receivable (net)				50,000					100,000
Inventory				100,000					250,000
Equipment (net)				300,000					350,000
Total assets			$	550,000				$	650,000
Liabilities and Equity
Accounts payable			$	150,000					100,000
Income taxes payable				80,000					30,000
Bonds payable				100,000					80,000
Common stock				100,000					200,000
Retained earnings				120,000					240,000
Total liabilities and Equity			$	550,000				$	650,000

 

Using the indirect method to create the operating activities section of the statement of cash flows, the cash flow recorded based on the change in inventory would be:

1. A) a decrease of $400,000
2. B) an increase of $400,000
3. C) an increase of $150,000
4. D) a decrease of $150,000.

 

 

56) Selected data for Kris  Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

 

					Year 1						Year 2
Assets
Cash			$	100,000				$	(50,000			)
Accounts receivable (net)				50,000					100,000
Inventory				100,000					250,000
Equipment (net)				300,000					350,000
Total assets			$	550,000				$	650,000
Liabilities and Equity
Accounts payable			$	150,000					100,000
Income taxes payable				80,000					30,000
Bonds payable				100,000					80,000
Common stock				100,000					200,000
Retained earnings				120,000					240,000
Total liabilities and Equity			$	550,000				$	650,000

 

The change in the balance of the common stock account would be recorded on the statement of cash flows as:

1. A) an increase of $100,000 under financing activities.
2. B) an increase of $100,000 under investing activities.
3. C) an increase of $100,000 under operating activities.
4. D) an increase of $300,000 under financing activities.

 

 

57) Selected data for Kris  Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

 

					Year 1						Year 2
Assets
Cash			$	100,000				$	(50,000			)
Accounts receivable (net)				50,000					100,000
Inventory				100,000					250,000
Equipment (net)				300,000					350,000
Total assets			$	550,000				$	650,000
Liabilities and Equity
Accounts payable			$	150,000					100,000
Income taxes payable				80,000					30,000
Bonds payable				100,000					80,000
Common stock				100,000					200,000
Retained earnings				120,000					240,000
Total liabilities and Equity			$	550,000				$	650,000

 

The changes in the Accounts Payable balance would be recorded on the statement of cash flows as:

1. A) an increase of $50,000 under financing activities.
2. B) a decrease of $50,000 under financing activities.
3. C) an increase of $50,000 under operating activities.
4. D) an decrease of $50,000 under operating activities.

 

 

58) Selected data for Kris  Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

 

					Year 1						Year 2
Assets
Cash			$	100,000				$	(50,000			)
Accounts receivable (net)				50,000					100,000
Inventory				100,000					250,000
Equipment (net)				300,000					350,000
Total assets			$	550,000				$	650,000
Liabilities and Equity
Accounts payable			$	150,000					100,000
Income taxes payable				80,000					30,000
Bonds payable				100,000					80,000
Common stock				100,000					200,000
Retained earnings				120,000					240,000
Total liabilities and Equity			$	550,000				$	650,000

 

The change in the equipment balance would be recorded on the statement of cash flows as:

1. A) a decrease of $50,000 under investing activities.
2. B) an increase of $50,000 under investing activities.
3. C) a decrease of $150,000 under investing activities.
4. D) an increase of $150,000 under operating activities.

 

 

59) Selected data for Kris  Corporation’s comparative balance sheets for Year 1 and Year 2 are as follows:

 

					Year 1						Year 2
Assets
Cash			$	100,000				$	(50,000			)
Accounts receivable (net)				50,000					100,000
Inventory				100,000					250,000
Equipment (net)				300,000					350,000
Total assets			$	550,000				$	650,000
Liabilities and Equity
Accounts payable			$	150,000					100,000
Income taxes payable				80,000					30,000
Bonds payable				100,000					80,000
Common stock				100,000					200,000
Retained earnings				120,000					240,000
Total liabilities and Equity			$	550,000				$	650,000

 

The change in the balance of the Bonds Payable account would be recorded on the statement of cash flows as:

1. A) an increase of $20,000 under financing activities.
2. B) an increase of $80,000 under investing activities.
3. C) a decrease of $20,000 under financing activities.
4. D) a decrease of $80,000 under operating activities.

 

60) Which of the following statements is not true?

1. A) The indirect method begins with net income.
2. B) Cash flows from operating activities will differ between the direct and indirect methods.
3. C) Most firms use the indirect method to prepare the statement of cash flows.
4. D) The direct method presents cash inflows and outflows.

 

 

61) The Barden Company provides the following trial balance as of December 31, 2018.

 

	Debit	Credit
Cash and cash equivalents Accounts receivable	$345,000 115,000
Inventory	120,000
Prepaid insurance	7,500
Prepaid rent Equipment Accumulated depreciation — Equipment	40,000 265,000	65,000
Accounts payable Accrued liabilities Notes payable, due in 2020 Common stock Additional paid-in capital Retained earnings Total	$892,500	45,000 10,000 135,000 300,000 87,500 250,000 $892,500

 

What would Barden report as current assets on its balance sheet?

1. A) $460,000
2. B) $580,000
3. C) $892,500
4. D) $627,500

62) The Barden Company provides the following trial balance as of December 31, 2018.

 

	Debit	Credit
Cash and cash equivalents Accounts receivable	$345,000 115,000
Inventory	120,000
Prepaid insurance	7,500
Prepaid rent Equipment Accumulated depreciation — Equipment	40,000 265,000	65,000
Accounts payable Accrued liabilities Notes payable, due in 2020 Common stock Additional paid-in capital Retained earnings Total	$892,500	45,000 10,000 135,000 300,000 87,500 250,000 $892,500

 

What would Barden report as total stockholders’ equity on its balance sheet?

1. A) $300,000
2. B) $387,500
3. C) $637,500
4. D) $87,500

 

63) A consolidated balance sheet:

1. A) includes the net assets of the parent company and all of its subsidiaries.
2. B) reports separately the net assets of the parent company and its subsidiaries.
3. C) includes the net assets of the parent company and all components in which it owns more than 75% of the outstanding voting stock.
4. D) includes the net assets of only the subsidiary companies.

 

64) Which of the following statements about retained earnings is not true?

1. A) Retained earnings reflect the net income of previous accounting periods only.
2. B) Retained earnings measures the cumulative earnings of the company since inception, minus dividends distributed.
3. C) Retained earnings represents cumulative earnings that have been reinvested in the business.
4. D) Retained earnings may represent a large portion of stockholders’ equity.

 

65) Information found on a company’s balance sheet can tell a story about:

1. A) the company and its strategies.
2. B) the company’s industry.
3. C) the company’s performance.
4. D) All of these can be derived from the information on the balance sheet.

66) The U.K. Equity account “Share premium” is reported on U.S. GAAP balance sheets as:

1. A) capital reserve.
2. B) revaluation reserve.
3. C) capital in excess of par.
4. D) an accumulated other comprehensive income account.

 

67) The U.K. Equity account “Hedging reserve” is reported on a U.S. GAAP balance sheet as:

1. A) capital reserve.
2. B) revaluation reserve.
3. C) capital in excess of par.
4. D) an accumulated other comprehensive income account.

 

68) When adjusting accrual earnings to obtain cash flows from operations,

1. A) an increase in Accounts Payable is added to determine cash flow from operations.
2. B) a decrease in Accounts Payable is added to determine cash flow from operations.
3. C) an increase in Accounts Payable is deducted to determine cash flows from operations.
4. D) it is not necessary to consider any changes to Accounts Payable.

 

69) Cash collected from customers can be derived:

1. A) by analyzing changes in the Accounts Payable balance.
2. B) by appropriately adjusting revenue for changes in accounts receivable.
3. C) by appropriately adjusting revenue for changes in accounts payable.
4. D) by analyzing changes to the reserve for doubtful accounts.

 

 

 

70) The sale of productive assets:

1. A) does not impact the period cash flows.
2. B) is always considered a related party transaction.
3. C) represents an investing activity.
4. D) represents an operating activity.

 

71) Paying dividends to stockholders:

1. A) represents an investing activity.
2. B) does not impact the period cash flows.
3. C) represents an operating activity.
4. D) represents a financing activity.

72) Operating activities result from the cash effects of:

1. A) paying dividends to shareholders.
2. B) producing and delivering goods.
3. C) selling equipment.
4. D) issuing long-term debt.

 

73) The Summary of Significant Accounting Policies:

1. A) explains the important accounting choices the reporting entity uses to account for selected transactions and accounts.
2. B) does not contain an explanation of the company’s revenue recognition policies.
3. C) is generally a part of the equity section of the balance sheet.
4. D) is only required as part of a prospectus for the sale of new shares of stock.

 

74) Subsequent events:

1. A) are those significant events that occur after the financial statements are issued.
2. B) are subject to optional disclosure based on a recommendation from top management.
3. C) are required to be disclosed if they are material and likely to influence investors’ appraisal of the risk and return prospects of the reporting entity.
4. D) are those significant events that occur in the last quarter of the reporting period.

 

75) The cash flow from operating activities:

1. A) is required to be presented using the direct method by U.S. GAAP and IFRS.
2. B) can be presented by using either the direct method or the indirect method.
3. C) comprises only the increase in cash arising from the firm’s profit-making activities.
4. D) can vary depending on whether the presentation is done under the direct method or the indirect method.

 

76) The balance sheet:

1. A) provides a summary of a firm’s assets, liabilities, equity and cash flows as of a specific date.
2. B) classifies assets as current if they are expected to be converted into cash within 24 months.
3. C) is an expression of the accounting equation.
4. D) is comprised of items shown only at historical costs.

 

 

77) The following information is available from Moran Industries’ accounting system for the year ended December 31, 2018.

 

Cash received from customers	$	750,000
Cash paid to suppliers	$	300,000
Cash paid to employees	$	150,000
Taxes paid	$	25,000
Cash dividends paid	$	50,000

 

What would the company’s statement of cash flows report as cash flow from operations?

1. A) $225,000
2. B) $275,000
3. C) $300,000
4. D) $250,000

 

78) Liabilities represent amounts that are:

1. A) probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
2. B) always classified as current on the balance sheet.
3. C) never shown on the balance sheet at historical cost.
4. D) netted against assets on the balance sheet.

 

79) On balance sheets prepared in accordance with U.S. GAAP:

1. A) assets are generally listed from least liquid to most liquid.
2. B) liabilities are generally netted against assets.
3. C) assets are generally listed from most liquid to least liquid.
4. D) both tangible and intangible long-lived assets can be revalued upward periodically.

 

80) A balance sheet prepared in accordance with U.S. GAAP typically:

1. A) includes both “noncurrent liability” and “long-term obligation” sections.
2. B) reports inventory at historical costs.
3. C) reports cash at its current market value.
4. D) reports retained earnings comprised of the cumulative earnings less dividends since the inception of the entity.

 

81) A balance sheet prepared in accordance with U.S. GAAP typically:

1. A) reports common stock at the current market price of the stock.
2. B) provides critical information for understanding a firm’s capital structure.
3. C) helps to determine the proper mix of debt and equity financing.
4. D) provides critical information for understanding a firm’s profitability.

82) Atemporary differenceis the result of:

1. A) a revenue or expense item reported in different periods for book purposes and tax purposes.
2. B) fluctuations in the exchange rate.
3. C) adjustments between the trial balance and general ledger.
4. D) delays between the sale of a product and the recording of the account receivable.

 

83) The indirect method of presenting cash flow from operating activities:

1. A) is strongly recommended by both U.S. GAAP and IFRS.
2. B) focuses on how cash flows deviate from a natural benchmark – net income.
3. C) presents cash transactions related to the determination of net income.
4. D) is more difficult than the direct method to incorporate working capital changes into a financial model.

 

84) A related-party transaction:

1. A) is assumed to be an arms-length transaction.
2. B) can take place between subsidiaries of a common parent.
3. C) does not need to be disclosed in financial statements prepared under U.S. GAAP.
4. D) presents less risk than a similar transaction with a third party.

 

85) Properly prepared statements of cash flows:

1. A) include stock issued for cash as an investing activity.
2. B) present depreciation as a subtraction from net income to arrive at a firm’s cash flow from operations under the indirect method.
3. C) are frequently used by investment analysts to cash flows from operations across two or more companies.
4. D) will show the change in cash during a period to be equal to the net income for the period.

 

86) On a balance sheet prepared under U.S. GAAP:

1. A) accounts receivable is presented at net realizable value.
2. B) inventories are presented at current market price.
3. C) any cash denominated in a foreign currency is disclosed in a footnote.
4. D) most short-term investments are presented at historical cost.

 

87) Long-term debt:

1. A) consists of monetary obligations that fall due beyond two years from the balance sheet date.
2. B) when issued, is carried at an amount based on the proceeds received.
3. C) usually has an effective yield that is much different than the cost of borrowing.
4. D) never has any portion classified as a current liability.

88) Goodwill:

1. A) is a tangible asset recognized as part of a business combination.
2. B) is not subject to impairment.
3. C) is initially measured as the difference between the consideration given in an acquisition and the fair value of the separately identifiable net assets acquired on the acquisition date.
4. D) is classified on the balance sheet as a current asset.

 

89) Other comprehensive income:

1. A) consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.
2. B) is never adjusted for tax effects.
3. C) does not include foreign currency gains and losses.
4. D) is consistently defined in international balance sheet presentation.

 

90) Which of the following is not true regarding the tax note to the financial statements?

1. A) The tax note is never required to include any information on foreign tax rate implications.
2. B) The tax note can describe how financial reporting differs from tax accounting.
3. C) The tax note can describe how tax disputes may affect future tax payments.
4. D) The tax note can explain how foreign tax rates affect income tax expense.

 

91) The rules used for determining taxable income in various countries:

1. A) have the same objective as the rules used for determining income for financial reporting purposes.
2. B) have an objective designed to provide a basis for funding government operations.
3. C) are not the result of a political process.
4. D) measure changes in a firm’s underlying economic condition.

 

92) Which of the following statements is not true regarding cash flow from operating activities?

1. A) Most firms use the indirect method for presentation.
2. B) Each line item in a direct method cash flow statement is actually a cash flow.
3. C) The direct method begins with net income and then shows the differences between operating cash flow and net income.
4. D) There are two methods for presenting cash flow from operating activities.

 

93) A balance sheet prepared under U.S. GAAP includes the following elements except:

1. A) an asset section
2. B) a liabilities section
3. C) an equity section
4. D) a cash flow section

94) The summary of significant accounting policies does not help explain:

1. A) the cost flow assumptions for valuing inventory.
2. B) management’s assessment of the financial condition of the firm.
3. C) the method used for determining depreciation expense.
4. D) whether certain investments are accounted for using the equity method.

 

95) A balance sheet prepared under U.S. GAAP can have amounts presented in the following measurement bases except:

1. A) foreign currency
2. B) historical costs
3. C) discounted present values
4. D) current replacement costs

 

 

 

96) Which of the following statements is not true regarding the cash flow statement?

1. A) The cash flow statement provides information about changes in all the balance sheet accounts.
2. B) The change in cash is classified into cash flow from three categories: operating activities, investing activities and financing activities.
3. C) The cash flow statement generally shows that cash flows and accrual earnings are substantially the same.
4. D) The cash flow statement explains the causes for year-to-year changes in cash and cash equivalents.

 

 

 

97) Blimpy’s Doughnuts, Inc.’s adjusted trial balance appears below.

 

Required:

Prepare a classified balance sheet at December 31, 2018 for Blimpy’s. Hint: Account categories for several of the items listed are found in parentheses.

 

Blimpy’s Doughnuts, Inc.
Adjusted Trial Balance (alphabetical order)
December 31, 2018
	Debits					Credits
Accounts and notes receivable	$	27,603
Accounts payable						$	7,874
Accrued litigation settlement (current liability)							86,772
Accumulated deficit		191,010
Accumulated other comprehensive income							1,266
Cash and cash equivalents		36,242
Common stock							310,942
Current maturities of long-term debt							1,730
Deferred income taxes (noncurrent asset)		20
Deferred income taxes (current liability)							20
Depreciation and amortization		21,046
Direct operating expenses		389,379
Equity in (losses) of equity method franchisees		842
General and administrative expenses		48,860
Goodwill and other intangible assets		28,934
Impairment charges and lease termination costs		12,519
Insurance recovery receivable (current asset)		34,967
Interest expense		20,334
Interest income							1,627
Inventories		21,006
Investments in equity method franchisees		3,224
Long-term debt, less current maturities							105,966
Other accrued liabilities							38,474
Other assets		16,842
Other current assets		12,000
Other income							5,105
Other long-term obligations							29,694
Property and equipment		168,654
Provision for income taxes		1,211
Revenues							461,195
Settlement of litigation (expense)		15,972
Totals	$	1,050,665				$	1,050,665

 

 

 

98) Harry’s Clothing, Inc. used the following headings on the company’s December 31, 2018 balance sheet:

 

(A)  Current assets

(B)  Long-term investments

(C)  Property and equipment

(D)  Intangible assets

(E)  Other assets

(F)  Current liabilities

(G)  Long-term debt

(H)  Shareholders’ equity

 

Required:

For each of the following items, indicate its normal balance sheet classification category.  Use (NA) for items that would not appear on the face of the balance sheet, but would be discussed in the notes to the financial statements.

 

________ 1.  Accounts receivable

________ 2.  Accrued interest on notes payable (2019 maturity)

________ 3.  Accumulated depreciation

________ 4.  Goodwill

________ 5.  Preferred stock

________ 6.  Common stock

________ 7.  Customer deposits on products to be shipped in a few months

________ 8.  Depreciation methods and estimated lives of equipment

________ 9.  Prepaid insurance

________ 10.  Assets (surplus production equipment) held for sale

 

 

99) Below are the condensed balance sheets and income statement for the Beltway Company, Inc. Reformat the balance sheet as a common-size balance sheet and evaluate the company’s performance by responding to the questions provided.

 

Condensed balance sheet December 31, 2018
	2017					2018
Assets:
Current assets
Cash	$	8					$	15
Accounts receivable		53						58
Inventory		52						40
Prepaid insurance		5						3
Property plant and equipment		140						150
Accumulated depreciation		(45	)					(55	)
Net PP&E		95						95
Total assets	$	213					$	211
Liabilities:
Accounts payable	$	35					$	21
Wages payable		12						16
Interest payable		5						2
Taxes payable		3						4
Long-term debt		92						92
Equity:
Common stock		50						50
Retained earnings		16						26
Total liabilities and equity	$	213					$	211

 

Required:

• Reformat the balance sheet to be a common-sized balance sheet
• Respond to the following question:

a.What does the common-size balance sheet suggest about the company’s performance? [Hint: Review items that show a significant difference—as a percentage—from 2017 to 2018.]

 

 

100) Below are the condensed balance sheet and income statement for the Beltway Company, Inc.  Assuming there were no disposals of fixed assets during the year 2018, provide a statement of cash flows using the indirect method for the year ended December 31, 2018.

 

Condensed balance sheet December 31, 2018

	2017	2018
Assets:
Current assets
Cash	$8	$15
Accounts receivable	53	58
Inventory	52	40
Prepaid insurance	5	3
Property plant and equipment	$140	$150
Accumulated depreciation	(45)	(55)
Net PP&E	95	95
Total assets	$213	$211
Liabilities:
Accounts payable	$35	$21
Wages payable	12	16
Interest payable	5	2
Taxes payable	3	4
Long-term debt	92	92
Equity:
Common stock	50	50
Retained earnings	16	26
Total liabilities and equity	$213	$211

 

Condensed income statement for year ended December 31, 2018

Sales	$480
COGS	328
Operating expenses:
Wages	103
Utilities	11
Insurance	3
Depreciation	10
Operating income	25
Interest	12
Income before tax	13
Tax	3
Net income	$10