Mulitple Choice 28.

Financial statements in the early 2000s provide information related to

a. non-financial measurements.
I. FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS b. forward-looking data.
c. hard assets (inventory and plant assets).
21.General-purpose financial statements are the product of d. none of these.
a. financial accounting.
b. managerial accounting. 29. Which of the following statements is not an objective of financial reporting?
c. both financial and managerial accounting. a. Provide information that is useful in investment and credit decisions.
d. neither financial nor managerial accounting. b. Provide information about enterprise resources, claims to those
resources, and changes to them.
22. Users of financial reports include all of the following except c. Provide information on the liquidation value of an enterprise.
a. creditors. d. Provide information that is useful in assessing cash flow prospects.
b. government agencies.
c. unions. 30. Accrual accounting is used because
d. All of these are users. a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the
23. The financial statements most frequently provided include all of the following cash basis.
except the c. it recognizes revenues when cash is received and expenses when cash
a. balance sheet. is paid.
b. income statement. d. none of the above.
c. statement of cash flows.
d. statement of retained earnings. 31. One objective of financial reporting is to provide
a. information about the investors in the business entity.
24. The information provided by financial reporting pertains to b. information about the liquidation values of the resources held by the
a. individual business enterprises, rather than to industries or an economy enterprise.
as a whole or to members of society as consumers. c. information that is useful in assessing cash flow prospects.
b. business industries, rather than to individual enterprises or an economy d. information that will attract new investors.
as a whole or to members of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, 32. Accounting principles are "generally accepted" only when
rather than to members of society as consumers. a. an authoritative accounting rule-making body has established it in an
d. an economy as a whole and to members of society as consumers, official pro-nouncement.
rather than to individual enterprises or industries. b. it has been accepted as appropriate because of its universal application.
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25. The process of identifying, measuring, analyzing, and communicating c. both a and b.
financial information needed by management to plan, evaluate, and control d. neither a nor b.
an organizations operations is called
a. financial accounting. 33. A common set of accounting standards and procedures are called
b. managerial accounting. a. financial accounting standards.
c. tax accounting. b. generally accepted accounting principles.
d. auditing. c. objectives of financial reporting.
d. statements of financial accounting concepts.
26. Whether a business is successful and thrives is determined by
a. markets. 34. The role of the Securities and Exchange Commission in the formulation of
b. free enterprise. accounting principles can be best described as
c. competition. a. consistently primary.
d. all of these. b. consistently secondary.
c. sometimes primary and sometimes secondary.
27. An effective capital allocation process d. non-existent.
a. promotes productivity.
b. encourages innovation. 35. The body that has the power to prescribe the accounting practices and
c. provides an efficient market for buying and selling securities. standards to be employed by companies that fall under its jurisdiction is the
d. all of these. a. FASB.
b. AICPA.
 c. SEC. a. Statements of Financial Accounting Concepts
d. APB. b. Accounting Research Bulletins
c. Interpretations
36. Companies that are listed on a stock exchange are required to submit their d. Technical Bulletins
financial statements to the
a. AICPA. 43. FASB Technical Bulletins
b. APB a. are similar to FASB Interpretations in that they establish enforceable
c. FASB. standards under the AICPA's Code of Professional Ethics.
d. SEC. b. are issued monthly by the FASB to deal with current topics.
c. are not expected to have a significant impact on financial reporting in
37. The Financial Accounting Standards Board (FASB) was proposed by the general and provide guidance when it does not conflict with any broad
a. American Institute of Certified Public Accountants. fundamental accounting principle.
b. Accounting Principles Board. d. were recently discontinued by the FASB because they dealt with
c. Study Group on the Objectives of Financial Statements. specialized topics having little impact on financial reporting in general.
d. Special Study Group on establishment of Accounting Principles (Wheat
Committee).
44. The purpose of the Emerging Issues Task Force is to
38. The Financial Accounting Standards Board a. develop a conceptual framework as a frame of reference for the solution
a. has issued a series of pronouncements entitled Statements on Auditing of future problems.
Standards. b. lobby the FASB on issues that affect a particular industry.
b. was the forerunner of the current Accounting Principles Board. c. do research on issues that relate to long-term accounting problems.
c. is the arm of the Securities and Exchange Commission responsible for d. issue statements which reflect a consensus on how to account for new
setting financial accounting standards. and unusual financial transactions that need to be resolved quickly.
d. is appointed by the Financial Accounting Foundation.
45. The Governmental Accounting Standards Board
39. The Financial Accounting Foundation a. oversees the activities of the SEC.
a. oversees the operations of the FASB. b. is a private-sector body, which addresses state and local governmental
b. oversees the operations of the AICPA. reporting issues.
c. provides information to interested parties on financial reporting issues. c. is a division of the Securities and Exchange Commission, which
d. works with the Financial Accounting Standards Advisory Council to oversees the corpo-rate accounting in annual reports.
provide informa-tion to interested parties on financial reporting issues. d. was terminated when the Financial Accounting Standards Board was
created.
40. The major distinction between the Financial Accounting Standards Board
(FASB) and its predecessor, the Accounting Principles Board (APB), is 46. The Governmental Accounting Standards Board's main purpose is to develop
a. the FASB issues exposure drafts of proposed standards. standards for
b. all members of the FASB are fully remunerated, serve full time, and are a. the General Accounting Office.
independent of any companies or institutions. b. the Federal government.
c. all members of the FASB possess extensive experience in financial c. state and local government.
reporting. d. the Internal Revenue Service.
d. a majority of the members of the FASB are CPAs drawn from public
practice. 47. Which of the following organizations has not been instrumental in the
development of financial accounting standards in the United States?
41. The Financial Accounting Standards Board employs a "due process" system a. AICPA
which b. FASB
a. is an efficient system for collecting dues from members. c. IASB
b. enables interested parties to express their views on issues under d. SEC
consideration.
c. identifies the accounting issues that are the most important. 48. An organization that has not published accounting standards is the
d. requires that all accountants must receive a copy of financial standards. a. American Institute of Certified Public Accountants.
b. Securities and Exchange Commission.
c. Financial Accounting Standards Board.
42. Which of the following is not a publication of the FASB?
 d. All of these have published accounting standards. 54. Generally accepted accounting principles
a. include detailed practices and procedures as well as broad guidelines of
49. The purpose of Statements of Financial Accounting Concepts is to general application.
a. establish GAAP. b. are influenced by pronouncements of the SEC and IRS.
b. modify or extend the existing FASB Standards Statement. c. change over time as the nature of the business environment changes.
c. form a conceptual framework for solving existing and emerging d. all of these.
problems.
d. determine the need for FASB involvement in an emerging issue. 55. The most significant current source of generally accepted accounting
principles is the
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50. Members of the Financial Accounting Standards Board are a. AICPA.
a. employed by the American Institute of Certified Public Accountants b. SEC.
(AICPA). c. APB.
b. part-time employees. d. FASB.
c. required to hold a CPA certificate.
d. independent of any other organization. 56. The most authoritative category of generally accepted accounting principles
includes all of the following except
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51. The following published documents are part of the "due process" system a. Accounting Research Bulletins.
used by the FASB in the evolution of a typical FASB Statement of Financial b. APB Opinions.
Accounting Standards: c. FASB Standards.
d. FASB Technical Bulletins.
1. Exposure Draft
2. Statement of Financial Accounting Standards 57. Which of the following is not a part of generally accepted accounting
3. Discussion Memorandum principles?
The chronological order in which these items are released is as follows: a. FASB Interpretations
a. 1, 2, 3. b. CAP Accounting Research Bulletins
b. 1, 3, 2. c. APB Opinions
c. 2, 3, 1. d. All of these are part of generally accepted accounting principles.
d. 3, 1, 2.
58. Which of the following publications does not qualify as a statement of
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52. In the House of GAAP, is the following on the highest level of authoritative generally accepted accounting principles?
status (meaning among the most authoritative)? a. Statements of financial standards issued by the FASB
b. Accounting interpretations issued by the FASB
FASB FASB c. APB Opinions
Statement Statement d. Accounting research studies issued by the AICPA
FASB of Financial of Financial
Technical Accounting FASB Accounting 59. Financial accounting standard-setting in the United States
Bulletin Standards Interpretation a. can be described as a social process which reflects political actions of
Concepts various interested user groups as well as a product of research and
a. Yes Yes Yes Yes logic.
b. Yes Yes Yes No b. is based solely on research and empirical findings.
c. No Yes No No c. is a legalistic process based on rules promulgated by governmental
d. No Yes Yes No agencies.
d. is democratic in the sense that a majority of accountants must agree
53. Generally Accepted Accounting Principles include: 1) FASB Technical with a standard before it becomes enforceable.
Bulletins, 2) APB Opinions, and 3) Widely-accepted industry practices.
These three items rank from most authoritative to least authoritative as 60.The purpose of the International Accounting Standards Board is to
follows: a. issue enforceable standards which regulate the financial accounting and
a. 1, 2, 3. reporting of multinational corporations.
b. 1, 3, 2. b. develop a uniform currency in which the financial transactions of
c. 2, 1, 3. companies through-out the world would be measured.
d. 2, 3, 1. c. promote uniform accounting standards among countries of the world.
 d. arbitrate accounting disputes between auditors and international a. decision usefulness.
companies. b. understandability.
c. reliability.
d. comparability.
Multiple Choice AnswersConceptual
27. Which of the following is not an objective of financial reporting?
II. CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING a. To provide information about economic resources, the claims to those
resources, and the changes in them.
21. Generally accepted accounting principles b. To provide information that is helpful to investors and creditors and other
a. are fundamental truths or axioms that can be derived from laws of users in assessing the amounts, timing, and uncertainty of future cash
nature. flows.
b. derive their authority from legal court proceedings. c. To provide information that is useful to those making investment and
c. derive their credibility and authority from general recognition and credit decisions.
acceptance by the accounting profession. d. All of these are objectives of financial reporting.
d. have been specified in detail in the FASB conceptual framework.
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28. The objectives of financial reporting include all of the following except to
22. A soundly developed conceptual framework of concepts and objectives provide information that
should a. is useful to the Internal Revenue Service in allocating the tax burden to
a. increase financial statement users' understanding of and confidence in the business community.
financial reporting. b. is useful to those making investment and credit decisions.
b. enhance comparability among companies' financial statements. c. is helpful in assessing future cash flows.
c. allow new and emerging practical problems to be more quickly soluble. d. identifies the economic resources (assets), the claims to those
d. all of these. resources (liabilities), and the changes in those resources and claims.

23. Which of the following (a-c) are not true concerning a conceptual framework 29. Decision makers vary widely in the types of decisions they make, the
in account-ing? methods of decision making they employ, the information they already
a. It should be a basis for standard-setting. possess or can obtain from other sources, and their ability to process
b. It should allow practical problems to be solved more quickly by information. Consequently, for information to be useful there must be a
reference to it. linkage between these users and the decisions they make. This link is
c. It should be based on fundamental truths that are derived from the laws a. relevance.
of nature. b. reliability.
d. All of the above (a-c) are true. c. understandability.
d. materiality.
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24. Which of the following is not a benefit associated with the FASB Conceptual
Framework Project? 30. The overriding criterion by which accounting information can be judged is
a. A conceptual framework should increase financial statement users' that of
understanding of and confidence in financial reporting. a. usefulness for decision making.
b. Practical problems should be more quickly solvable by reference to an b. freedom from bias.
existing conceptual framework. c. timeliness.
c. A coherent set of accounting standards and rules should result. d. comparability.
d. Business entities will need far less assistance from accountants
because the financial reporting process will be quite easy to apply. 31. The two primary qualities that make accounting information useful for
decision making are
25. In the conceptual framework for financial reporting, what provides "the a. comparability and consistency.
why"--the goals and purposes of accounting? b. materiality and timeliness.
a. Measurement and recognition concepts such as assumptions, c. relevance and reliability.
principles, and constraints d. reliability and comparability.
b. Qualitative characteristics of accounting information 32. Accounting information is considered to be relevant when it
c. Elements of financial statements a. can be depended on to represent the economic conditions and events
d. Objectives of financial reporting that it is intended to represent.
b. is capable of making a difference in a decision.
26. The underlying theme of the conceptual framework is
 c. is understandable by reasonably informed users of accounting a. relevance.
information. b. reliability.
d. is verifiable and neutral. c. verifiability.
d. neutrality.
33. The quality of information that gives assurance that it is reasonably free of
error and bias and is a faithful representation is 40. According to Statement of Financial Accounting Concepts No. 2, predictive
a. relevance. value is an ingredient of the primary quality of
b. reliability. Relevance Reliability
c. verifiability. a. Yes No
d. neutrality. b. Yes Yes
c. No No
34. According to Statement of Financial Accounting Concepts No. 2, which of d. No Yes
the following relates to both relevance and reliability?
a. Materiality 41. Under Statement of Financial Accounting Concepts No. 2, representational
b. Understandability faithfulness is an ingredient of the primary quality of
c. Usefulness Reliability Relevance
d. All of these a. Yes Yes
b. No Yes
35. According to Statement of Financial Accounting Concepts No. 2, timeliness c. Yes No
is an ingredient of the primary quality of d. No No
Relevance Reliability
a. Yes Yes 42. Financial information does not demonstrate consistency when
b. No Yes a. firms in the same industry use different accounting methods to account
c. Yes No for the same type of transaction.
d. No No b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the
36. According to Statement of Financial Accounting Concepts No. 2, verifiability value of the measuring unit.
is an ingredient of the primary quality of d. none of these.
Relevance Reliability
a. Yes No 43. Financial information exhibits the characteristic of consistency when
b. Yes Yes a. expenses are reported as charges against revenue in the period in
c. No No which they are paid.
d. No Yes b. accounting entities give accountable events the same accounting
treatment from period to period.
37. According to Statement of Financial Accounting Concepts No. 2, neutrality is c. extraordinary gains and losses are not included on the income
an ingredient of the primary quality of statement.
Relevance Reliability d. accounting procedures are adopted which give a consistent rate of net
a. Yes Yes income.
b. No Yes
c. Yes No 44. Information about different entities and about different periods of the same
d. No No entity can be prepared and presented in a similar manner. Comparability and
consistency are related to which of these objectives?
38. Information is neutral if it
Comparability Consistency
a. provides benefits which are at least equal to the costs of its preparation.
a. Entities Entities
b. can be compared with similar information about an enterprise at other
b. Entities Periods
points in time.
c. Periods Entities
c. would have no impact on a decision maker.
d. Periods Periods
d. is free from bias toward a predetermined result.
45. When information about two different enterprises has been prepared and
39. The characteristic that is demonstrated when a high degree of consensus
presented in a similar manner, the information exhibits the characteristic of
can be secured among independent measurers using the same
a. relevance.
measurement methods is
 b. reliability. a. are the same as comprehensive income.
c. consistency. b. exclude certain gains and losses that are included in comprehensive
d. none of these. income.
c. include certain gains and losses that are excluded from comprehensive
46. The elements of financial statements include investments by owners. These income.
are increases in an entity's net assets resulting from owners' d. include certain losses that are excluded from comprehensive income.
a. transfers of assets to the entity.
b. rendering services to the entity. S
53. According to the FASB Conceptual Framework, the elements assets,
c. satisfaction of liabilities of the entity. liabilities, and equity describe amounts of resources and claims to
d. all of these. resources at/during a
47. In classifying the elements of financial statements, the primary distinction Moment in Time Period of Time
between revenues and gains is a. Yes No
a. the materiality of the amounts involved. b. Yes Yes
b. the likelihood that the transactions involved will recur in the future. c. No Yes
c. the nature of the activities that gave rise to the transactions involved. d. No No
d. the costs versus the benefits of the alternative methods of disclosing the
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transactions involved. 54. Which of the following basic accounting assumptions is threatened by the
existence of severe inflation in the economy?
48. A decrease in net assets arising from peripheral or incidental transactions is a. Monetary unit assumption.
called a(n) b. Periodicity assumption.
a. capital expenditure. c. Going-concern assumption.
b. cost. d. Economic entity assumption.
c. loss.
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d. expense. 55. During the lifetime of an entity accountants produce financial statements at
artificial points in time in accordance with the concept of
49. One of the elements of financial statements is comprehensive income. As Objectivity Periodicity
described in Statement of Financial Accounting Concepts No. 6, "Elements a. No No
of Financial Statements," comprehensive income is equal to b. Yes No
a. revenues minus expenses plus gains minus losses. c. No Yes
b. revenues minus expenses plus gains minus losses plus investments by d. Yes Yes
owners minus distributions to owners.
c. revenues minus expenses plus gains minus losses plus investments by 56. Under current GAAP, inflation is ignored in accounting due to the
owners minus distributions to owners plus assets minus liabilities. a. economic entity assumption.
d. none of these. b. going concern assumption.
c. monetary unit assumption.
50. Which of the following elements of financial statements is not a component d. periodicity assumption.
of compre-hensive income?
a. Revenues 57. The economic entity assumption
b. Distributions to owners a. is inapplicable to unincorporated businesses.
c. Losses b. recognizes the legal aspects of business organizations.
d. Expenses c. requires periodic income measurement.
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51. Which of the following is false with regard to the element "comprehensive
income"? 58. Preparation of consolidated financial statements when a parent-subsidiary
a. It is more inclusive than the traditional notion of net income.
relationship exists is an example of the
b. It includes net income and all other changes in equity exclusive of a. economic entity assumption.
owners' invest-ments and distributions to owners. b. relevance characteristic.
c. This concept is not yet being applied in practice. c. comparability characteristic.
d. It excludes prior period adjustments (transactions that relate to previous d. neutrality characteristic.
periods, such as corrections of errors).
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52. According to the FASB conceptual framework, earnings
59.During the lifetime of an entity, accountants produce financial statements at c. the entire amount receivable has been collected from the customer and
arbitrary points in time in accordance with which basic accounting concept? there remains no further warranty liability.
a. Cost/benefit constraint d. none of these.
b. Periodicity assumption
c. Conservatism constraint 67. Revenue generally should be recognized
d. Matching principle a. at the end of production.
b. at the time of cash collection.
60. What accounting concept justifies the usage of accruals and deferrals? c. when realized.
a. Going concern assumption d. when realized or realizable and earned.
b. Materiality constraint
c. Consistency characteristic 68. Which of the following is not a time when revenue may be recognized?
d. Monetary unit assumption a. At time of sale
b. At receipt of cash
61. The assumption that a business enterprise will not be sold or liquidated in c. During production
the near future is known as the d. All of these are possible times of revenue recognition.
a. economic entity assumption.
b. monetary unit assumption. 69. Under Statement of Financial Accounting Concepts No. 5, which of the
c. conservatism assumption. following, in the most precise sense, means the process of converting
d. none of these. noncash resources and rights into cash or claims to cash?
a. Recognition
62. Which of the following is an implication of the going concern assumption? b. Measurement
a. The historical cost principle is credible. c. Realization
b. Depreciation and amortization policies are justifiable and appropriate. d. Allocation
c. The current-noncurrent classification of assets and liabilities is justifiable
and signify-cant. 70. "When products (goods or services), merchandise, or other assets are
d. All of these. exchanged for cash or claims to cash" is a definition of
a. allocated.
63. Proponents of historical cost ordinarily maintain that in comparison with all b. realized.
other valuation alternatives for general purpose financial reporting, c. realizable.
statements prepared using historical costs are more d. earned.
a. reliable.
b. relevant. 71. The allowance for doubtful accounts, which appears as a deduction from
c. indicative of the entity's purchasing power. accounts receivable on a balance sheet and which is based on an estimate
d. conservative. of bad debts, is an application of the
a. consistency characteristic.
64. Valuing assets at their liquidation values rather than their cost is inconsistent b. matching principle.
with the c. materiality constraint.
a. periodicity assumption. d. revenue recognition principle.
b. matching principle.
c. materiality constraint. 72. The accounting principle of matching is best demonstrated by
d. historical cost principle. a. not recognizing any expense unless some revenue is realized.
b. associating effort (expense) with accomplishment (revenue).
65. Revenue is generally recognized when realized or realizable and earned. c. recognizing prepaid rent received as revenue.
This statement describes the d. establishing an Appropriation for Contingencies account.
a. consistency characteristic.
b. matching principle. 73. Which of the following serves as the justification for the periodic recording of
c. revenue recognition principle. depreciation expense?
d. relevance characteristic. a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
66. Generally, revenue from sales should be recognized at a point when c. Immediate recognition of an expense
a. management decides it is appropriate to do so. d. Minimization of income tax liability
b. the product is available for sale to the ultimate consumer.
74. Application of the full disclosure principle a. conservatism constraint.
a. is theoretically desirable but not practical because the costs of complete b. materiality constraint.
disclosure exceed the benefits. c. substance over form principle.
b. is violated when important financial information is buried in the notes to d. industry practices constraint.
the financial statements.
c. is demonstrated by the use of supplementary information presenting the 81. Which of the following best illustrates the accounting concept of
effects of changing prices. conservatism?
d. requires that the financial statements be consistent and comparable. a. Use of the allowance method to recognize bad debt losses from credit
sales
75. Which of the following statements concerning the cost-benefit relationship is b. Use of the lower of cost or market approach in valuing inventories.
not true? c. Use of the same accounting method from one period to the next in
a. Business reporting should exclude information outside of management's computing depreciation expense
expertise. d. Utilization of a policy of deliberate understatement of asset values in
b. Management should not be required to report information that would order to present a conservative net income figure
significantly harm the company's competitive position.
c. Management should not be required to provide forecasted financial 82. Trade-offs between the characteristics that make information useful may be
information. necessary or beneficial. Issuance of interim financial statements is an
d. If needed by financial statement users, management should gather example of a trade-off between
information not included in the financial statements that would not a. relevance and reliability.
otherwise be gathered for internal use. b. reliability and periodicity.
c. timeliness and materiality.
76. Under Statement of Financial Accounting Concepts No. 2, which of the d. understandability and timeliness.
following relates to both relevance and reliability?
a. Cost-benefit constraint
83. Allowing firms to estimate rather than physically count inventory at interim
b. Predictive value
(quarterly) periods is an example of a trade-off between
c. Verifiability
a. verifiability and reliability.
d. Representational faithfulness
b. reliability and comparability.
c. timeliness and verifiability.
77. Charging off the cost of a wastebasket with an estimated useful life of 10
d. neutrality and consistency.
years as an expense of the period when purchased is an example of the
application of the P
84. In matters of doubt and great uncertainty, accounting issues should be
a. consistency characteristic.
resolved by choosing the alternative that has the least favorable effect on
b. matching principle.
net income, assets, and owners' equity. This guidance comes from the
c. materiality constraint.
a. materiality constraint.
d. historical cost principle.
b. industry practices constraint.
c. conservatism constraint.
78. Which of the following statements about materiality is not correct?
d. full disclosure principle.
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
Solutions to those Multiple Choice questions for which the answer is none of these.
c. An item is material if its inclusion or omission would influence or change
42. a company changes its inventory method every few years in order to
the judgment of a reasonable person.
maximize reported income (other answers are possible).
d. All of these are correct statements about materiality.
45. comparability.
49. change in equity of an entity during a period from transactions and other
79. Which of the following are considered pervasive constraints by Statement of
events and circumstances from nonowner sources.
Financial Accounting Concepts No. 2?
61. going concern assumption.
a. Cost-benefit relationship and conservatism
66. an exchange has taken place and the earnings process is virtually complete.
b. Timeliness and feedback value
MULTIPLE CHOICECPA Adapted
c. Conservatism and verifiability
d. Materiality and cost-benefit relationship
85. According to the FASB's conceptual framework, predictive value is an
80. The basic accounting concept that refers to the tendency of accountants to
ingredient of
resolve uncertainty in favor of understating assets and revenues and
overstating liabilities and expenses is known as the Relevance Reliability
 a. Yes No a. No Yes
b. Yes Yes b. No No
c. No Yes c. Yes No
d. No No d. Yes Yes

86. According to the FASB's conceptual framework, which of the following 92. Under Statements of Financial Accounting Concepts, comprehensive income
relates to both relevance and reliability? includes which of the following?
Consistency Verifiability Gains Gross Margin
a. Yes Yes a. No No
b. Yes No b. No Yes
c. No Yes c. Yes No
d. No No d. Yes Yes

87. The FASB's conceptual framework classifies gains and losses based on 93. According to the FASB's conceptual framework, the process of reporting an
whether they are related to an entity's major ongoing or central operations. item in the financial statements of an entity is
These gains or losses may be classified as a. recognition.
b. realization.
Nonoperating Operating
c. allocation.
a. Yes No
d. matching.
b. Yes Yes
c. No Yes
Multiple Choice AnswersCPA Adapted
d. No No
88. According to the FASB's conceptual framework, earnings Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a. is the same as comprehensive income. 85. a 87. b 89. a 91. d 93. a
b. excludes certain gains and losses that are included in comprehensive
income. 86. b 88. b 90. b 92. d
c. includes certain gains and losses that are excluded from comprehensive
income. III. THE ACCOUNTING INFORMATION SYSTEM
d. includes certain losses that are excluded from comprehensive income.
11.Factors that shape an accounting information system include the
89. According to the FASB's conceptual framework, comprehensive income a. nature of the business.
includes which of the following? b. size of the firm.
Operating Income Investments by Owners c. volume of data to be handled.
a. Yes No d. all of these.
b. Yes Yes
c. No Yes 12. Maintaining a set of accounting records is
d. No No a. optional.
b. required by the Internal Revenue Service.
90. According to the FASB's conceptual framework, the calculation of c. required by the Foreign Corrupt Practices Act.
comprehensive income includes which of the following? d. required by the Internal Revenue Service and the Foreign Corrupt
Practices Act.
Income from Distributions
Continuing Operations to Owners 13.Debit always means
a. No No a. right side of an account.
b. Yes No b. increase.
c. Yes Yes c. decrease.
d. No Yes d. none of these.
91. According to the FASB's conceptual framework, comprehensive income 14. The double-entry accounting system means
includes which of the following? a. Each transaction is recorded with two journal entries.
Gross Margin Operating Income
 b. Each item is recorded in a journal entry, then in a general ledger b. supplies a listing of open accounts and their balances that are used in
account. preparing financial statements.
c. The dual effect of each transaction is recorded with a debit and a credit. c. is normally prepared three times in the accounting cycle.
d. More than one of the above.
d. all of these.
15. When a corporation pays a note payable and interest,
a. the account notes payable will be increased. 23. A trial balance may prove that debits and credits are equal, but
b. the account interest expense will be decreased. a. an amount could be entered in the wrong account.
c. they will debit notes payable and interest expense. b. a transaction could have been entered twice.
d. they will debit cash. c. a transaction could have been omitted.
d. all of these.
16. Stockholders equity is not affected by all
a. cash receipts. 24.Which of the following is a real (permanent) account?
b. dividends. a. Goodwill
c. revenues. b. Sales
d. expenses. c. Accounts Receivable
d. Both Goodwill and Accounts Receivable
17. Which of the following criteria must be met before an event or item should be
recorded for accounting purposes? 25. Which of the following is a nominal (temporary) account?
a. The event or item can be measured objectively in financial terms. a. Unearned Revenue
b. The event or item is relevant and reliable. b. Salary Expense
c. The event or item is an element. c. Inventory
d. All of these must be met. d. Retained Earnings

18. Which of the following is a recordable event or item? 26. Nominal accounts are also called
a. Changes in managerial policy a. temporary accounts.
b. The value of human resources b. permanent accounts.
c. Changes in personnel c. real accounts.
d. None of these d. none of these.

19. Which of the following is not an internal event? 27. External events do not include
a. Depreciation a. interaction between an entity and its environment.
b. Using raw materials in the production process b. a change in the price of a good or service that an entity buys or sells, a
c. Dividend declaration and subsequent payment flood or earthquake.
d. All of these are internal transactions. c. improvement in technology by a competitor.
d. using buildings and machinery in operations.
20. An accounting record into which the essential facts and figures in connection
with all transactions are initially recorded is called the
28. A general journal
a. ledger.
a. chronologically lists transactions and other events, expressed in terms
b. account.
of debits and credits.
c. trial balance.
b. contains one record for each of the asset, liability, stockholders equity,
d. none of these.
revenue, and expense accounts.
21.The debit and credit analysis of a transaction normally takes place
c. lists all the increases and decreases in each account in one place.
a. before an entry is recorded in a journal.
d. contains only adjusting entries.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at some other point in the accounting cycle. 29. A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
22. A trial balance
c. debit to sales.
a. proves that debits and credits are equal in the ledger. d. credit to cost of goods sold.
30. A journal entry to record a payment on account will include a c. an accrued expense on the books of the company that made the
a. debit to accounts receivable. advance payment.
b. credit to accounts receivable. d. an accrued revenue on the books of the company that made the
c. debit to accounts payable. advance payment.
d. credit to accounts payable.
37.To compute interest expense for an adjusting entry, the formula is principal X rate
31. A journal entry to record a receipt of rent revenue in advance will include a X a fraction. The numerator and denominator of the fraction are:
a. debit to rent revenue. Numerator
b. credit to rent revenue. Denomintor
c. credit to cash. a. Length of time note has been outstanding 12
d. credit to unearned rent. months
b. Length of note 12
32. Adjustments are often prepared months
a. after the balance sheet date, but dated as of the balance sheet date. c. Length of time until note matures Length of
b. after the balance sheet date, and dated after the balance sheet date. note
c. before the balance sheet date, but dated as of the balance sheet date. d. Length of time note has been outstanding Length of
d. before the balance sheet date, and dated after the balance sheet date. note

33. At the time a company prepays a cost 38. Adjusting entries are necessary to
a. it debits an asset account to show the service or benefit it will receive in 1. obtain a proper matching of revenue and expense.
the future. 2. achieve an accurate statement of assets and equities.
b. it debits an expense account to match the expense against revenues 3. adjust assets and liabilities to their fair market value.
earned.
a. 1
c. its credits a liability account to show the obligation to pay for the service
in the future. b. 2
d. more than one of the above. c. 3
d. 1 and 2
34. How do these prepaid expenses expire?
Rent Supplies 39. Why are certain costs of doing business capitalized when incurred and then
a. With the passage of time Through use and depreciated or amortized over subsequent accounting cycles?
consumption a. To reduce the federal income tax liability
b. With the passage of time With the passage of b. To aid management in cash-flow analysis
time c. To match the costs of production with revenues as earned
c. Through use and consumption Through use and
d. To adhere to the accounting constraint of conservatism
consumption
d. Through use and consumption With the passage of
time 40. When an item of expense is paid and recorded in advance, it is normally
called a(n)
35. Recording the adjusting entry for depreciation has the same effect as a. prepaid expense.
recording the adjusting entry for b. accrued expense.
a. an unearned revenue. c. estimated expense.
b. a prepaid expense. d. cash expense.
c. an accrued revenue.
d. an accrued expense. 41. When an item of revenue or expense has been earned or incurred but not
yet collected or paid, it is normally called a(n) ____________ revenue or
36. Unearned revenue on the books of one company is likely to be expense.
a. a prepaid expense on the books of the company that made the advance
a. prepaid
payment.
b. an unearned revenue on the books of the company that made the b. adjusted
advance payment. c. estimated
d. none of these
 c. not collected and currently matched with expenses.
42. When an item of revenue is collected and recorded in advance, it is normally d. not collected and not currently matched with expenses.
called a(n) ___________ revenue.
a. accrued 50. An unearned revenue can best be described as an amount
b. prepaid a. collected and currently matched with expenses.
c. unearned b. collected and not currently matched with expenses.
d. cash c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
43. An accrued expense can best be described as an amount
a. paid and currently matched with earnings. 51. An adjusted trial balance
b. paid and not currently matched with earnings. a. is prepared after the financial statements are completed.
c. not paid and not currently matched with earnings. b. proves the equality of the total debit balances and total credit balances
d. not paid and currently matched with earnings. of ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting
44. If, during an accounting period, an expense item has been incurred and principles.
consumed but not yet paid for or recorded, then the end-of-period adjusting entry d. cannot be used to prepare financial statements.
would involve
a. a liability account and an asset account. 52. Which type of account is always debited during the closing process?
b. an asset or contra asset account and an expense account. a. Dividends.
c. a liability account and an expense account. b. Expense.
d. a receivable account and a revenue account. c. Revenue.
d. Retained earnings.
45. Which of the following must be considered in estimating depreciation on an
asset for an accounting period? 53. When a company uses a periodic inventory system, the year-end entry to
a. The original cost of the asset adjust the inventory account will debit and credit inventory as follows:
b. Its useful life Beginning Inventory Amount Ending
c. The decline of its fair market value Inventory Amount
d. Both the original cost of the asset and its useful life. a. Debited
Credited
46. Which of the following would not be a correct form for an adjusting entry? b. Debited
a. A debit to a revenue and a credit to a liability Debited
b. A debit to an expense and a credit to a liability c. Credited
c. A debit to a liability and a credit to a revenue Debited
d. A debit to an asset and a credit to a liability d. Credited
Credited
47. Year-end net assets would be overstated and current expenses would be
understated as a result of failure to record which of the following adjusting 54. If the inventory account at the end of the year is understated, the effect will
entries? be to
a. Expiration of prepaid insurance a. overstate the gross profit on sales.
b. Depreciation of fixed assets b. understate the net purchases.
c. Accrued wages payable c. overstate the cost of goods sold.
d. All of these d. overstate the goods available for sale.

48. A prepaid expense can best be described as an amount *55. Under the cash basis of accounting, revenues are recorded
a. paid and currently matched with revenues. a. when they are earned and realized.
b. paid and not currently matched with revenues. b. when they are earned and realizable.
c. not paid and currently matched with revenues. c. when they are earned.
d. not paid and not currently matched with revenues. d. when they are realized.

49. An accrued revenue can best be described as an amount

a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
 *56. When converting from cash basis to accrual basis accounting, which of the d. all of these.
following adjustments should be made to cash receipts from customers to
determine accrual basis service revenue? 22. Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
a. Subtract ending accounts receivable.
b. provide a basis for predicting future performance.
b. Subtract beginning unearned service revenue. c. help assess the risk or uncertainty of achieving future cash flows.
c. Add ending accounts receivable. d. all of these.
d. Add cash sales.
23. Limitations of the income statement include all of the following except
*57. When converting from cash basis to accrual basis accounting, which of the a. items that cannot be measured reliably are not reported.
following adjustments should be made to cash paid for operating expenses b. only actual amounts are reported in determining net income.
to determine accrual basis operating expenses? c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.
a. Add beginning accrued liabilities.
b. Add beginning prepaid expense. S
24. Which of the following would represent the least likely use of an income
c. Subtract ending prepaid expense. statement prepared for a business enterprise?
d. Subtract interest expense. a. Use by customers to determine a company's ability to provide needed
goods and services.
b. Use by labor unions to examine earnings closely as a basis for salary
*58. Reversing entries are discussions.
1. normally prepared for prepaid, accrued, and estimated c. Use by government agencies to formulate tax and economic policy.
items. d. Use by investors interested in the financial position of the entity.
2. necessary to achieve a proper matching of revenue and S
25. The income statement reveals
expense. a. resources and equities of a firm at a point in time.
3. desirable to exercise consistency and establish b. resources and equities of a firm for a period of time.
standardized procedures. c. net earnings (net income) of a firm at a point in time.
a. 1 d. net earnings (net income) of a firm for a period of time.
b. 2
c. 3 26. The single-step income statement emphasizes
d. 1 and 2 a. the gross profit figure.
b. total revenues and total expenses.
*59. Adjusting entries that should be reversed include those for prepaid or c. extraordinary items and accounting changes more than these are
unearned items that emphasized in the multiple-step income statement.
a. create an asset or a liability account. d. the various components of income from continuing operations.
b. were originally entered in a revenue or expense account.
c. were originally entered in an asset or liability account. 27. Which of the following is an acceptable method of presenting the income
d. create an asset or a liability account and were originally entered in a statement?
revenue or expense account. a. A single-step income statement
b. A multiple-step income statement
*60. Adjusting entries that should be reversed include c. A consolidated statement of income
a. all accrued revenues. d. All of these
b. all accrued expenses.
c. those that debit an asset or credit a liability. 28. Which of the following is not a generally practiced method of presenting the
d. all of these. income statement?
a. Including prior period adjustments in determining net income
IV. INCOME STATEMENT AND RELATED INFORMATION b. The single-step income statement
c. The consolidated statement of income
21.The major elements of the income statement are d. Including gains and losses from discontinued operations of a
a. revenue, cost of goods sold, selling expenses, and general expense. component of a business in determining net income
b. operating section, nonoperating section, discontinued operations,
extraordinary items, and cumulative effect. 29. The occurrence which most likely would have no effect on 2007 net income
c. revenues, expenses, gains, and losses. (assuming that all amounts involved are material) is the
 a. sale in 2007 of an office building contributed by a stockholder in 1983.
b. collection in 2007 of a receivable from a customer whose account was
written off in 2006 by a charge to the allowance account.
c. settlement based on litigation in 2007 of previously unrecognized
damages from a serious accident which occurred in 2005.
d. worthlessness determined in 2007 of stock purchased on a speculative
basis in 2003.
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30. The occurrence that most likely would have no effect on 2007 net income is
the
a. sale in 2007 of an office building contributed by a stockholder in 1961.
b. collection in 2007 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period
discovered subsequent to their issuance.
d. stock purchased in 1993 deemed worthless in 2007.
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31. Which of the following is not a selling expense?
a. Advertising expense
b. Office salaries expense
c. Freight-out
d. Store supplies consumed
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32. The accountant for the Orion Sales Company is preparing the income
statement for 2007 and the balance sheet at December 31, 2007. The
January 1, 2007 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement
and as a current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement
and as a current asset on the balance sheet.
33. In order to be classified as an extraordinary item in the income statement, an
event or transaction should be
a. unusual in nature, infrequent, and material in amount.
b. unusual in nature and infrequent, but it need not be material.
c. infrequent and material in amount, but it need not be unusual in nature.
d. unusual in nature and material, but it need not be infrequent.
34. Classification as an extraordinary item on the income statement would be
appropriate for the
a. gain or loss on disposal of a component of the business.
b. substantial write-off of obsolete inventories.
c. loss from a strike.
d. none of these.
35. Which of these is generally an example of an extraordinary item?
a. Loss incurred because of a strike by employees.
b. Write-off of deferred marketing costs believed to have no future benefit.
c. Gain resulting from the devaluation of the U.S. dollar.
d. Gain resulting from the state exercising its right of eminent domain on a
piece of land used as a parking lot.
36. Under which of the following conditions would material flood damage be
considered an extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur
infrequently.
b. Only if the flood damage is material in amount and could have been
reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.
37. An item that should be classified as an extraordinary item is
a. write-off of goodwill.
b. gains from transactions involving foreign currencies.
c. losses from moving a plant to another city.
d. gains from a company selling the only investment it has ever owned.
38. How should an unusual event not meeting the criteria for an extraordinary
item be disclosed in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material
and supple-mented by a footnote if deemed appropriate.
b. Shown in operating revenues or expenses if material but not shown as a
separate item.
c. Shown net of income tax after ordinary net earnings but before
extraordinary items.
d. Shown net of income tax after extraordinary items but before net
earnings.
39. Which of the following is a change in accounting principle?
a. A change in the estimated service life of machinery
b. A change from FIFO to LIFO
c. A change from straight-line to double-declining-balance
d. A change from FIFO to LIFO and a change from straight-line to double-
declining- balance
40. Which of the following is never classified as an extraordinary item?
a. Losses from a major casualty.
b. Losses from an expropriation of assets.
c. Gain on a sale of the only security investment a company has ever
owned.
d. Losses from exchange or translation of foreign currencies.
41. Which of the following is a required disclosure in the income statement when
reporting the disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary
item.
b. Results of operations of a discontinued component should be disclosed
immediately below extraordinary items.
c. Earnings per share from both continuing operations and net income
should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be
reported together with the results of continuing operations.
 b. Prior period adjustment
42. When a company discontinues an operation and disposes of the c. Discontinued operations
discontinued operation (component), the transaction should be included in d. Dividends
the income statement as a gain or loss on disposal reported as
a. a prior period adjustment. 49. Which one of the following types of losses is excluded from the
b. an extraordinary item. determination of net income in income statements?
c. an amount after continuing operations and before extraordinary items. a. Material losses resulting from transactions in the company's
d. a bulk sale of plant assets included in income from continuing investments account.
operations. b. Material losses resulting from unusual sales of assets not acquired for
resale.
43. Income taxes are allocated to c. Material losses resulting from the write-off of intangibles.
a. extraordinary items. d. Material losses resulting from correction of errors related to prior
b. discontinued operations. periods.
c. prior period adjustments.
d. all of these. 50. Shank Corporation made a very large arithmetical error in the preparation of
its year-end financial statements by improper placement of a decimal point in
44. Which of the following is true about intraperiod tax allocation? the calculation of depreciation. The error caused the net income to be
a. It arises because certain revenue and expense items appear in the reported at almost double the proper amount. Correction of the error when
income statement either before or after they are included in the tax discovered in the next year should be treated as
return. a. an increase in depreciation expense for the year in which the error is
b. It is required for extraordinary items and cumulative effect of accounting discovered.
changes but not for prior period adjustments. b. a component of income for the year in which the error is discovered, but
c. Its purpose is to allocate income tax expense evenly over a number of separately listed on the income statement and fully explained in a note
accounting periods. to the financial statements.
d. Its purpose is to relate the income tax expense to the items which affect c. an extraordinary item for the year in which the error was made.
the amount of tax. d. a prior period adjustment.
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45. A material item which is unusual in nature or infrequent in occurrence, but 51. Comprehensive income includes all of the following except
not both should be shown in the income statement a. dividend revenue.
b. losses on disposal of assets.
Net of Tax Disclosed Separately c. investments by owners.
a. No No d. unrealized holding gains.
b. Yes Yes
c. No Yes 52. The approach most companies use to provide information related to the
d. Yes No components of other comprehensive income is a
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46. Earnings per share should always be shown separately for b. combined income statement of comprehensive income.
a. net income and gross margin. c. separate column in the statement of changes in stockholders equity.
b. net income and pretax income. d. footnote disclosure.
c. income before extraordinary items.
d. extraordinary items and prior period adjustments.
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47. A correction of an error in prior periods' income will be reported Solution to Multiple Choice question for which the answer is none of these.
34. Many answers are possible.
In the income statement Net of tax
a. Yes Yes V. BALANCE SHEET AND STATEMENT OF CASH FLOWS
b. No No
c. Yes No 21. Which of the following is a limitation of the balance sheet?
d. No Yes a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
48. Which of the following items will not appear in the retained earnings c. Current fair value is not reported.
statement? d. All of these
a. Net loss
 a. inventory back into cash, or 12 months, whichever is shorter.
22. The balance sheet is useful for analyzing all of the following except b. receivables back into cash, or 12 months, whichever is longer.
a. liquidity. c. tangible fixed assets back into cash, or 12 months, whichever is longer.
b. solvency. d. inventory back into cash, or 12 months, whichever is longer.
c. profitability.
d. financial flexibility. 30. The current assets section of the balance sheet should include
a. machinery.
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23. The balance sheet contributes to financial reporting by providing a basis for b. patents.
all of the following except c. goodwill.
a. computing rates of return. d. inventory.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations. 31. Which of the following is a current asset?
d. assessing the liquidity and financial flexibility of the enterprise. a. Cash surrender value of a life insurance policy of which the company is
the bene-ficiary.
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24. One criticism not normally aimed at a balance sheet prepared using current b. Investment in equity securities for the purpose of controlling the issuing
accounting and reporting standards is company.
a. failure to reflect current value information. c. Cash designated for the purchase of tangible fixed assets.
b. the extensive use of separate classifications. d. Trade installment receivables normally collectible in 18 months.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded 32.Which of the following should not be considered as a current asset in the balance
objectively. sheet?
a. Installment notes receivable due over 18 months in accordance with
normal trade practice.
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25. The amount of time that is expected to elapse until an asset is realized or b. Prepaid taxes which cover assessments of the following operating cycle
otherwise converted into cash is referred to as of the business.
a. solvency. c. Equity or debt securities purchased with cash available for current
b. financial flexibility. operations.
c. liquidity. d. The cash surrender value of a life insurance policy carried by a
d. exchangeability. corporation, the beneficiary, on its president.

26. The net assets of a business are equal to 33. Equity or debt securities held to finance future construction of additional
a. current assets minus current liabilities. plants should be classified on a balance sheet as
b. total assets plus total liabilities. a. current assets.
c. total assets minus total stockholders' equity. b. property, plant, and equipment.
d. none of these. c. intangible assets.
d. long-term investments.
27. The correct order to present current assets is
a. Cash, accounts receivable, prepaid items, inventories. 34. When a portion of inventories has been pledged as security on a loan,
b. Cash, accounts receivable, inventories, prepaid items. a. the value of the portion pledged should be subtracted from the debt.
c. Cash, inventories, accounts receivable, prepaid items. b. an equal amount of retained earnings should be appropriated.
d. Cash, inventories, prepaid items, accounts receivable. c. the fact should be disclosed but the amount of current assets should not
be affected.
28. The basis for classifying assets as current or noncurrent is conversion to d. the cost of the pledged inventories should be transferred from current
cash within assets to noncurrent assets.
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer. 35. Which of the following is not a long-term investment?
c. the accounting cycle or one year, whichever is longer. a. Cash surrender value of life insurance
d. the operating cycle or one year, whichever is shorter. b. Franchise
c. Land held for speculation
29. The basis for classifying assets as current or noncurrent is the period of time d. A sinking fund
normally required by the accounting entity to convert cash invested in
36. A generally accepted method of valuation is
 1. trading securities at market value. 44. Which of the following would be classified in a different major section of a
2. accounts receivable at net realizable value. balance sheet from the others?
3. inventories at current cost. a. Capital stock
a. 1 b. Common stock subscribed
b. 2 c. Stock dividend distributable
c. 3 d. Stock investment in affiliate
d. 1 and 2
45. The stockholders' equity section is usually divided into what three parts?
37. Which item below is not a current liability? a. Preferred stock, common stock, treasury stock
a. Unearned revenue b. Preferred stock, common stock, retained earnings
b. Stock dividends distributable c. Capital stock, additional paid-in capital, retained earnings
c. The currently maturing portion of long-term debt d. Capital stock, appropriated retained earnings, unappropriated retained
d. Trade accounts payable earnings

38. Working capital is 46. Which of the following is not an acceptable major asset classification?
a. capital which has been reinvested in the business. a. Current assets
b. unappropriated retained earnings. b. Long-term investments
c. cash and receivables less current liabilities. c. Property, plant, and equipment
d. none of these. d. Deferred charges
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39.An example of an item which is not an element of working capital is 47. Which of the following is a contra account?
a. accrued interest on notes receivable. a. Premium on bonds payable
b. goodwill. b. Unearned revenue
c. goods in process. c. Patents
d. temporary investments. d. Accumulated depreciation
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40. Long-term liabilities include 48. Which of the following balance sheet classifications would normally require
a. obligations not expected to be liquidated within the operating cycle. the greatest amount of supplementary disclosure?
b. obligations payable at some date beyond the operating cycle. a. Current assets
c. deferred income taxes and most lease obligations. b. Current liabilities
d. all of these. c. Plant assets
d. Long-term liabilities
41. Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle 49. Which of the following is not a method of disclosing pertinent information?
b. Most pension obligations a. Supporting schedules
c. Long-term liabilities that mature within the operating cycle and will be b. Parenthetical explanations
paid from a sinking fund c. Cross reference and contra items
d. None of these d. All of these are methods of disclosing pertinent information.

42. Treasury stock should be reported as a(n) 50. Significant accounting policies may not be
a. current asset. a. selected on the basis of judgment.
b. investment. b. selected from existing acceptable alternatives.
c. other asset. c. unusual or innovative in application.
d. reduction of stockholders' equity. d. omitted from financial-statement disclosure.

43. Which of the following should be reported for capital stock? 51. A general description of the depreciation methods applicable to major
a. The shares authorized classes of depreci-able assets
b. The shares issued a. is not a current practice in financial reporting.
c. The shares outstanding b. is not essential to a fair presentation of financial position.
d. All of these c. is needed in financial reporting when company policy differs from
income tax policy.
d. should be included in corporate financial statements or notes thereto.
 59. In preparing a statement of cash flows, which of the following transactions
52. It is mandatory that the essential provisions of which of the following be would be considered an investing activity?
clearly stated in the notes to the financial statements? a. Sale of equipment at book value
a. Stock option plans b. Sale of merchandise on credit
b. Pension obligations c. Declaration of a cash dividend
c. Lease contracts d. Issuance of bonds payable at a discount
d. All of these
60. Preparing the statement of cash flows involves all of the following except
53. A generally accepted account title is determining the
a. Prepaid Revenue. a. cash provided by operations.
b. Appropriation for Contingencies. b. cash provided by or used in investing and financing activities.
c Earned Surplus. c. change in cash during the period.
d. Reserve for Doubtful Accounts. d. cash collections from customers during the period.

54. The financial statement which summarizes operating, investing, and 61. The cash debt coverage ratio is computed by dividing net cash provided by
financing activities of an entity for a period of time is the operating activities by
a. retained earnings statement. a. average long-term liabilities.
b. income statement. b. average total liabilities.
c. statement of cash flows. c. ending long-term liabilities.
d. statement of financial position. d. ending total liabilities.
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55. The statement of cash flows provides answers to all of the following 62. The current cash debt coverage ratio is often used to assess
questions except a. financial flexibility.
a. Where did the cash come from during the period? b. liquidity.
b. What was the cash used for during the period? c. profitability.
c. What is the impact of inflation on the cash balance at the end of the d. solvency.
year? 63. A measure of a companys financial flexibility is the
d. What was the change in the cash balance during the period? a. cash debt coverage ratio.
b. current cash debt coverage ratio.
56. Making and collecting loans and disposing of property, plant, and equipment c. free cash flow.
are d. cash debt coverage ratio and free cash flow.
a. operating activities.
b. investing activities. 64. Free cash flow is calculated as net cash provided by operating activities less
c. financing activities. a. capital expenditures.
d. liquidity activities. b. dividends.
c. capital expenditures and dividends.
57. In preparing a statement of cash flows, sale of treasury stock at an amount d. capital expenditures and depreciation.
greater than cost would be classified as a(n)
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a. operating activity. 65. One of the benefits of the statement of cash flows is that it helps users
b. financing activity. evaluate financial flexibility. Which of the following explanations is a
c. extraordinary activity. description of financial flexibility?
d. investing activity. a. The nearness to cash of assets and liabilities.
b. The firm's ability to respond and adapt to financial adversity and
58. In preparing a statement of cash flows, cash flows from operating activities unexpected needs and opportunities.
a. are always equal to accrual accounting income. c. The firm's ability to pay its debts as they mature.
b. are calculated as the difference between revenues and expenses. d. The firm's ability to invest in a number of projects with different
c. can be calculated by appropriately adding to or deducting from net objectives and costs.
income those items in the income statement that do not affect cash.
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d. can be calculated by appropriately adding to or deducting from net 66. Net cash provided by operating activities divided by average total liabilities
income those items in the income statement that do affect cash. equals the
a. current cash debt coverage ratio.
b. cash debt coverage ratio.
 c. free cash flow. a. Future value of an ordinary annuity of 1
d. current ratio. b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. None of these
Multiple Choice AnswersConceptual
25. Which table has a factor of 1.00000 for 1 period at every interest rate?
Solutions to those Multiple Choice questions for which the answer is none of these. a. Future value of 1
26. Total assets minus total liabilities. b. Present value of 1
38. Current assets less current liabilities. c. Future value of an ordinary annuity of 1
41. Many answers are possible. d. Present value of an ordinary annuity of 1

26. Which table would show the largest factor for an interest rate of 8% for five
periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
VI. ACCOUNTING AND THE TIME VALUE OF MONEY d. Present value of an annuity due of 1

MULTIPLE CHOICEConceptual 27. Which of the following tables would show the smallest factor for an interest
rate of 10% for six periods?
21. Which of the following transactions would require the use of the present a. Future value of an ordinary annuity of 1
value of an annuity due concept in order to calculate the present value of the b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
asset obtained or liability owed at the date of incurrence?
d. Present value of an annuity due of 1
a. A capital lease is entered into with the initial lease payment due upon
the signing of the lease agreement. 28. The figure .94232 is taken from the column marked 2% and the row marked
b. A capital lease is entered into with the initial lease payment due one three periods in a certain interest table. From what interest table is this
month subse-quent to the signing of the lease agreement. figure taken?
c. A ten-year 8% bond is issued on January 2 with interest payable a. Future value of 1
semiannually on July 1 and January 1 yielding 7%. b. Future value of annuity of 1
d. A ten-year 8% bond is issued on January 2 with interest payable c. Present value of 1
semiannually on July 1 and January 1 yielding 9%. d. Present value of annuity of 1
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22. Which of the following tables would show the smallest value for an interest 29. Which of the following tables would show the largest value for an interest
rate of 5% for six periods? rate of 10% for 8 periods?
a. Future value of 1 a. Future amount of 1 table.
b. Present value of 1 b. Present value of 1 table.
c. Future value of an ordinary annuity of 1 c. Future amount of an ordinary annuity of 1 table.
d. Present value of an ordinary annuity of 1 d. Present value of an ordinary annuity of 1 table.
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23. Which table would you use to determine how much you would need to have 30. On June 1, 2006, Walsh Company sold some equipment to Fischer
deposited three years ago at 10% compounded annually in order to have Company. The two companies entered into an installment sales contract at
$1,000 today? a rate of 8%. The contract required 8 equal annual payments with the first
a. Future value of 1 or present value of 1 payment due on June 1, 2006. What type of compound interest table is
b. Future value of an annuity due of 1 appropriate for this situation?
c. Future value of an ordinary annuity of 1 a. Present value of an annuity due of 1 table.
d. Present value of an ordinary annuity of 1 b. Present value of an ordinary annuity of 1 table.
c. Future amount of an ordinary annuity of 1 table.
24. Which table would you use to determine how much must be deposited now d. Future amount of 1 table.
in order to provide for 5 annual withdrawals at the beginning of each year,
starting one year hence?
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31. Which of the following transactions would best use the present value of an c. 8% for 32 periods.
annuity due of 1 table? d. 2% for 32 periods.
a. Diamond Bar, Inc. rents a truck for 5 years with annual rental payments
of $20,000 to be made at the beginning of each year. 36.If the number of periods is known, the interest rate is determined by
b. Michener Co. rents a warehouse for 7 years with annual rental a. dividing the future value by the present value and looking for the
payments of $120,000 to be made at the end of each year. quotient in the future value of 1 table.
c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal b. dividing the future value by the present value and looking for the
plus interest in three years. quotient in the present value of 1 table.
d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the c. dividing the present value by the future value and looking for the
construction of a new parking lot in 4 years. quotient in the future value of 1 table.
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d. multiplying the present value by the future value and looking for the
32. A series of equal receipts at equal intervals of time when each receipt is product in the present value of 1 table.
received at the beginning of each time period is called an
a. ordinary annuity.
b. annuity in arrears. 37. Present value is
c. annuity due. a. the value now of a future amount.
d. unearned receipt. b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.
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38. Which of the following statements is true?
P a. The higher the discount rate, the higher the present value.
33. In the time diagram below, which concept is being depicted? b. The process of accumulating interest on interest is referred to as
discounting.
c. If money is worth 10% compounded annually, $1,100 due one year from
today is equivalent to $1,000 today.
d. If a single sum is due on December 31, 2010, the present value of that
0 1 2 3 4 sum decreases as the date draws closer to December 31, 2010.
$1 $1 $1 $1
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PV 39 If the interest rate is 10%, the factor for the future value of annuity due of 1
for n = 5, i = 10% is equal to the factor for the future value of an ordinary
annuity of 1 for n = 5, i = 10%
a. Present value of an ordinary annuity a. plus 1.10.
b. Present value of an annuity due b. minus 1.10.
c. Future value of an ordinary annuity c. multiplied by 1.10.
d. Future value of an annuity due d. divided by 1.10.

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34. On December 1, 2007, Michael Hess Company sold some machinery to
Shawn Keling Company. The two companies entered into an installment
sales contract at a predetermined interest rate. The contract required four
equal annual payments with the first payment due on December 1, 2007, the
date of the sale. What present value concept is appropriate for this situation?
a. Future amount of an annuity of 1 for four periods
b. Future amount of 1 for four periods
c. Present value of an ordinary annuity of 1 for four periods
d. Present value of an annuity due of 1 for four periods.
35. An amount is deposited for eight years at 8%. If compounding occurs
quarterly, then the table value is found at
a. 8% for eight periods.
b. 2% for eight periods.
40. Which of the following is true?
a. Rents occur at the beginning of each period of an ordinary annuity.
b. Rents occur at the end of each period of an annuity due.
c. Rents occur at the beginning of each period of an annuity due.
d. None of these.
41. Which statement is false?
a. The factor for the future value of an annuity due is found by multiplying
the ordinary annuity table value by one plus the interest rate.
b. The factor for the present value of an annuity due is found by multiplying
the ordinary annuity table value by one minus the interest rate.
c. The factor for the future value of an annuity due is found by subtracting
1.00000 from the ordinary annuity table value for one more period.
 d. The factor for the present value of an annuity due is found by adding a. The future value of a deferred annuity is the same as the future value of
1.00000 to the ordinary annuity table value for one less period. an annuity not deferred.
b. A deferred annuity is an annuity in which the rents begin after a specified
42. Ed Sloan wants to withdraw $20,000 (including principal) from an investment number of periods.
fund at the end of each year for five years. How should he compute his c. To compute the present value of a deferred annuity, we compute the
required initial investment at the beginning of the first year if the fund earns present value of an ordinary annuity of 1 for the entire period and
subtract the present value of the rents which were not received during
10% compounded annually? the deferral period.
a. $20,000 times the future value of a 5-year, 10% ordinary annuity of d. If the first rent is received at the end of the sixth period, it means the
1. ordinary annuity is deferred for six periods.
b. $20,000 divided by the future value of a 5-year, 10% ordinary annuity of
1. Multiple Choice AnswersConceptual
c. $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
d. $20,000 divided by the present value of a 5-year, 10% ordinary annuity Solution to Multiple Choice question for which the answer is none of these.
of 1. 24. Present value of an Ordinary Annuity of 1.

43. Ann Ruth wants to invest a certain sum of money at the end of each year for VII. CASH AND RECEIVABLES
five years. The investment will earn 6% compounded annually. At the end of 21. Which of the following is not considered cash for financial reporting
five years, she will need a total of $40,000 accumulated. How should she purposes?
compute her required annual invest-ment? a. Petty cash funds and change funds
a. $40,000 times the future value of a 5-year, 6% ordinary annuity of 1. b. Money orders, certified checks, and personal checks
b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of c. Coin, currency, and available funds
1. d. Postdated checks and I.O.U.'s
c. $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
d. $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 22. Which of the following is considered cash?
1. a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
44. An accountant wishes to find the present value of an annuity of $1 payable
d. Postdated checks
at the beginning of each period at 10% for eight periods. The accountant
has only one present value table which shows the present value of an
23. Travel advances should be reported as
annuity of $1 payable at the end of each period. To compute the present
a. supplies.
value, the accountant would use the present value factor in the 10% column
b. cash because they represent the equivalent of money.
for
c. investments.
a. seven periods.
d. none of these.
b. eight periods and multiply by (1 + .10).
c. eight periods. P
24. Which of the following items should not be included in the Cash caption on
d. nine periods and multiply by (1 .10).
the balance sheet?
a. Coins and currency in the cash register
45. If an annuity due and an ordinary annuity have the same number of equal
b. Checks from other parties presently in the cash register
payments and the same interest rates, then
c. Amounts on deposit in checking account at the bank
a. the present value of the annuity due is less than the present value of the
d. Postage stamps on hand
ordinary annuity.
b. the present value of the annuity due is greater than the present value of S
25. A cash equivalent is a short-term, highly liquid investment that is readily
the ordinary annuity.
convertible into known amounts of cash and
c. the future value of the annuity due is equal to the future value of the
a. is acceptable as a means to pay current liabilities.
ordinary annuity.
b. has a current market value that is greater than its original cost
d. the future value of the annuity due is less than the future value of the
c. bears an interest rate that is at least equal to the prime rate of interest at
ordinary annuity.
the date of liquidation.
d. is so near its maturity that it presents insignificant risk of changes in
46. Which of the following is false?
interest rates.
26. Bank overdrafts, if material, should be b. an item of "other expense" in the income statement.
a. reported as a deduction from the current asset section. c. a deduction from accounts receivable in determining the net realizable
b. reported as a deduction from cash. value of accounts receivable.
c. netted against cash and a net cash amount reported. d. sales discounts forfeited in the cost of goods sold section of the income
d. reported as a current liability. statement.
34. Assuming that the ideal measure of short-term receivables in the balance
27. Deposits held as compensating balances sheet is the discounted value of the cash to be received in the future, failure
a. usually do not earn interest. to follow this practice usually does not make the balance sheet misleading
b. if legally restricted and held against short-term credit may be included because
as cash. a. most short-term receivables are not interest-bearing.
c. if legally restricted and held against long-term credit may be included b. the allowance for uncollectible accounts includes a discount element.
among current assets. c. the amount of the discount is not material.
d. none of these. d. most receivables can be sold to a bank or factor.

28. The category "trade receivables" includes 35. Which of the following methods of determining bad debt expense does not
a. advances to officers and employees. properly match expense and revenue?
b. income tax refunds receivable. a. Charging bad debts with a percentage of sales under the allowance
c. claims against insurance companies for casualties sustained. method.
d. none of these. b. Charging bad debts with an amount derived from a percentage of
accounts receivable under the allowance method.
29. Which of the following should be recorded in Accounts Receivable? c. Charging bad debts with an amount derived from aging accounts
a. Receivables from officers receivable under the allowance method.
b. Receivables from subsidiaries d. Charging bad debts as accounts are written off as uncollectible.
c. Dividends receivable
d. None of these 36. Which of the following methods of determining annual bad debt expense
best achieves the matching concept?
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30. What is the preferable presentation of accounts receivable from officers, a. Percentage of sales
employees, or affiliated companies on a balance sheet? b. Percentage of ending accounts receivable
a. As offsets to capital. c. Percentage of average accounts receivable
b. By means of footnotes only. d. Direct write-off
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as 37. Which of the following is a generally accepted method of determining the
current assets. amount of the adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
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31. When a customer purchases merchandise inventory from a business b. A percentage of sales not adjusted for the balance in the allowance
organization, she may be given a discount which is designed to induce c. A percentage of accounts receivable not adjusted for the balance in the
prompt payment. Such a discount is called a(n) allowance
a. trade discount. d. An amount derived from aging accounts receivable and not adjusted for
b. nominal discount. the balance in the allowance
c. enhancement discount.
d. cash discount. 38. The advantage of relating a company's bad debt expense to its outstanding
accounts receivable is that this approach
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32. Trade discounts are a. gives a reasonably correct statement of receivables in the balance
a. not recorded in the accounts; rather they are a means of computing a sheet.
price. b. best relates bad debt expense to the period of sale.
b. used to avoid frequent changes in catalogues. c. is the only generally accepted method for valuing accounts receivable.
c. used to quote different prices for different quantities purchased. d. makes estimates of uncollectible accounts unnecessary.
d. all of the above.
39. At the beginning of 2006, Finney Company received a three-year zero-
33. If a company employs the gross method of recording accounts receivable interest-bearing $1,000 trade note. The market rate for equivalent notes was
from customers, then sales discounts taken should be reported as 8% at that time. Finney reported this note as a $1,000 trade note receivable
a. a deduction from sales in the income statement. on its 2006 year-end statement of financial position and $1,000 as sales
 revenue for 2006. What effect did this accounting for the note have on c. net sales by ending net receivables.
Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the d. net sales by average net receivables.
end of 2008, respectively?
a. Overstate, overstate, understate, zero *45. Which of the following is not true?
b. Overstate, understate, understate, understate a. The imprest petty cash system in effect adheres to the rule of
c. Overstate, overstate, overstate, overstate disbursement by check.
d. None of these b. Entries are made to the Petty Cash account only to increase or
decrease the size of the fund or to adjust the balance if not replenished
40. Which of the following is true when accounts receivable are factored without at year-end.
recourse? c. The Petty Cash account is debited when the fund is replenished.
a. The transaction may be accounted for either as a secured borrowing or d. All of these are not true.
as a sale, depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to *46. A Cash Over and Short account
the factor by the owner of the receivables. a. is not generally accepted.
c. The factor assumes the risk of collectibility and absorbs any credit b. is debited when the petty cash fund proves out over.
losses in collecting the receivables. c. is debited when the petty cash fund proves out short.
d. The financing cost (interest expense) should be recognized ratably over d. is a contra account to Cash.
the collection period of the receivables.
*47. The journal entries for a bank reconciliation
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41. Which of the following statements is incorrect regarding the classification of a. are taken from the "balance per bank" section only.
accounts and notes receivable? b. may include a debit to Office Expense for bank service charges.
a. Segregation of the different types of receivables is required if they are c. may include a credit to Accounts Receivable for an NSF check.
material. d. may include a debit to Accounts Payable for an NSF check.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present *48. When preparing a bank reconciliation, bank credits are
value in notes receivable transactions is an asset or liability respectively. a. added to the bank statement balance.
d. Valuation accounts should be appropriately offset against the proper b. deducted from the bank statement balance.
receivable accounts. c. added to the balance per books.
d. deducted from the balance per books
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42. Of the following conditions, which is the only one that is not required if the
transfer of receivables with recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify those Solutions to those Multiple Choice questions for which the answer is none of these.
receivables that are uncollectible. 23. As receivables.
b. The transferor surrenders control of the future economic benefits of the 27. Many answers are possible.
receivables. 28. Open accounts resulting from short-term extensions of credit to customers.
c. The transferee cannot require the transferor to repurchase the 29. Open accounts resulting from short-term extensions of credit to customers.
receivables. 39. Overstate, understate, understate, zero.
d. The transferor's obligation under the recourse provisions can be
reasonably estimated. VIII. VALUATION OF INVENTORIES: A COST-BASIS APPROACH
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43. The accounts receivable turnover ratio measures the 21. When using a perpetual inventory system,
a. number of times the average balance of accounts receivable is collected a. no Purchases account is used.
during the period. b. a Cost of Goods Sold account is used.
b. percentage of accounts receivable turned over to a collection agency c. two entries are required to record a sale.
during the period. d. all of these.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the 22. Goods in transit which are shipped f.o.b. shipping point should be
period. a. included in the inventory of the seller.
b. included in the inventory of the buyer.
44. The accounts receivable turnover ratio is computed by dividing c. included in the inventory of the shipping company.
a. gross sales by ending net receivables. d. none of these.
b. gross sales by average net receivables.
 23. Goods in transit which are shipped f.o.b. destination should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.
24. Which of the following items should be included in a company's inventory at
the balance sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call
for at his or her convenience.
d. None of these.
Use the following information for questions 25 and 26.
During 2007 Foley Corporation transferred inventory to Kline Corporation and agreed
to repurchase the merchandise early in 2008. Kline then used the inventory as
collateral to borrow from Norwalk Bank, remitting the proceeds to Foley. In 2008 when
Foley repurchased the inventory, Kline used the proceeds to repay its bank loan.
25. This transaction is known as a(n)
a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.
26. On whose books should the cost of the inventory appear at the December
31, 2007 balance sheet date?
a. Foley Corporation
b. Kline Corporation
c. Norwalk Bank
d. Kline Corporation, with Foley making appropriate note disclosure of the
transaction
27. Goods on consignment are
a. included in the consignee's inventory.
b. recorded in a Consignment Out account which is an inventory account.
c. recorded in a Consignment In account which is an inventory account.
d. all of these
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28. Valuation of inventories requires the determination of all of the following
except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.
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29. The accountant for the Orion Sales Company is preparing the income
statement for 2007 and the balance sheet at December 31, 2007. Orion
uses the periodic inventory system. The January 1, 2007 merchandise
inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement
and as a current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement
and as a current asset on the balance sheet.
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30. If the beginning inventory for 2006 is overstated, the effects of this error on
cost of goods sold for 2006, net income for 2006, and assets at December
31, 2007, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
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31. The failure to record a purchase of merchandise on account even though the
goods are properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an
overstatement of assets.
d. an understatement of liabilities and an overstatement of owners' equity.
32. Belle Co. received merchandise on consignment. As of March 31, Belle had
recorded the transaction as a purchase and included the goods in inventory.
The effect of this on its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were
overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
33. Eller Co. received merchandise on consignment. As of January 31, Eller
included the goods in inventory, but did not record the transaction. The effect
of this on its financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities
were understated.
d. net income, current assets, and retained earnings were understated.
34. Cross Co. accepted delivery of merchandise which it purchased on account.
As of December 31, Cross had recorded the transaction, but did not include
the merchandise in its inventory. The effect of this on its financial statements
for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
d. net income was overstated and current assets were understated.
35. On June 15, 2007, Tolon Corporation accepted delivery of merchandise
which it pur-chased on account. As of June 30, Tolon had not recorded the
 transaction or included the merchandise in its inventory. The effect of this on made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for
its balance sheet for June 30, 2007 would be within 10 days of purchase. All of the goods available had been sold at year end.
a. assets and stockholders' equity were overstated but liabilities were not
affected. 41. Which of the following recording procedures would result in the highest cost
b. stockholders' equity was the only item affected by the omission. of goods sold for 2007?
c. assets, liabilities, and stockholders' equity were understated.
d. none of these. 1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of
36. Which of the following is correct? discounts not taken shown under "other expenses" in the
a. Selling costs are product costs. income statement
b. Manufacturing overhead costs are product costs. a. 1
c. Interest costs for routine inventories are product costs. b. 2
d. All of these. c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
37. All of the following costs should be charged against revenue in the period in
which costs are incurred except for 42. Which of the following recording procedures would result in the highest net
a. manufacturing overhead costs for a product manufactured and sold in income for 2007?
the same accounting period.
1. Recording purchases at gross amounts
b. costs which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected 2. Recording purchases at net amounts, with the amount of
plant shutdown. discounts not taken shown under "other expenses" in the
d. costs of normal shrinkage and scrap incurred for the manufacture of a income statement
product in ending inventory. a. 1
b. 2
38. Which of the following types of interest cost incurred in connection with the c. Either 1 or 2 will result in the same net income.
purchase or manufacture of inventory should be capitalized as a product cost? d. Cannot be determined from the information provided.
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships 43. When using the periodic inventory system, which of the following generally
or real estate projects would not be separately accounted for in the computation of cost of goods sold?
c. Interest incurred on notes payable to vendors for routine purchases a. Trade discounts applicable to purchases during the period
made on a repetitive basis b. Cash (purchase) discounts taken during the period
d. All of these should be capitalized. c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
39. The use of a Discounts Lost account implies that the recorded cost of a
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purchased inventory item is its 44. Costs which are inventoriable include all of the following except
a. invoice price. a. costs that are directly connected with the bringing of goods to the place
b. invoice price plus the purchase discount lost. of business of the buyer.
c. invoice price less the purchase discount taken. b. costs that are directly connected with the converting of goods to a
d. invoice price less the purchase discount allowable whether taken or not. salable condition.
c. buying costs of a purchasing department.
40. The use of a Purchase Discounts account implies that the recorded cost of a d. selling costs of a sales department.
purchased inventory item is its
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a. invoice price. 45. Which inventory costing method most closely approximates current cost for
b. invoice price plus any purchase discount lost. each of the following:
c. invoice price less the purchase discount taken. Ending Inventory Cost of Goods Sold
d. invoice price less the purchase discount allowable whether taken or not. a. FIFO FIFO
b. FIFO LIFO
Use the following information for questions 41 and 42. c. LIFO FIFO
d. LIFO LIFO
During 2007, which was the first year of operations, Luther Company had
merchandise purchases of $985,000 before cash discounts. All purchases were 46. In situations where there is a rapid turnover, an inventory method which
produces a balance sheet valuation similar to the first-in, first-out method is
 a. average cost. beginning inventory, in what direction did the cost of purchases move during
b. base stock. the period?
c. joint cost. a. Up
d. prime cost. b. Down
c. Steady
47. The pricing of issues from inventory must be deferred until the end of the d. Cannot be determined
accounting period under the following method of inventory valuation:
a. moving average. 54. In a period of rising prices, the inventory method which tends to give the
b. weighted-average. highest reported cost of goods sold is
c. LIFO perpetual. a. FIFO.
d. FIFO. b. average cost.
c. LIFO.
48. An inventory pricing procedure in which the oldest costs incurred rarely have d. none of these.
an effect on the ending inventory valuation is
a. FIFO. 55. Which of the following statements is not valid as it applies to inventory
b. LIFO. costing methods?
c. base stock. a. If inventory quantities are to be maintained, part of the earnings must be
d. weighted-average. invested (plowed back) in inventories when FIFO is used during a
period of rising prices.
49. Which method of inventory pricing best approximates specific identification b. LIFO tends to smooth out the net income pattern by matching current
of the actual flow of costs and units in most manufacturing situations? cost of goods sold with current revenue, when inventories remain at
a. Average cost constant quantities.
b. First-in, first-out c. When a firm using the LIFO method fails to maintain its usual inventory
c. Last-in, first-out position (reduces stock on hand below customary levels), there may be
d. Base stock a matching of old costs with current revenue.
d. The use of FIFO permits some control by management over the amount
50. Assuming no beginning inventory, what can be said about the trend of of net income for a period through controlled purchases, which is not
inventory prices if cost of goods sold computed when inventory is valued true with LIFO.
using the FIFO method exceeds cost of goods sold when inventory is valued
using the LIFO method? 56. The acquisition cost of a certain raw material changes frequently. The book
a. Prices decreased. value of the inventory of this material at year end will be the same if perpetual records
b. Prices remained unchanged. are kept as it would be under a periodic inventory method only if the book value is
c. Prices increased. computed under the
d. Price trend cannot be determined from information given. a. weighted-average method.
b. moving average method.
51. In a period of rising prices, the inventory method which tends to give the c. LIFO method.
highest reported net income is d. FIFO method.
a. base stock.
b. first-in, first-out. 57. When a company uses LIFO for external reporting purposes and FIFO for
c. last-in, first-out. internal reporting purposes, an Allowance to Reduce Inventory to LIFO
d. weighted-average. account is used. This account should be reported
a. on the income statement in the Other Revenues and Gains section.
52. In a period of rising prices, the inventory method which tends to give the b. on the income statement in the Cost of Goods Sold section.
highest reported inventory is c. on the income statement in the Other Expenses and Losses section.
a. FIFO. d. on the balance sheet in the Current Assets section.
b. moving average.
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c. LIFO. 58. Which of the following statements is not true as it relates to the dollar-value
d. weighted-average. LIFO inventory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than
53. Quayle Corporation's inventory cost on its balance sheet was lower using it is with specific goods pooled LIFO.
first-in, first-out than it would have been using last-in, first-out. Assuming no b. Under the dollar-value LIFO method, it is possible to have the entire
inventory in only one pool.
 c. Several pools are commonly employed in using the dollar-value LIFO 22. The primary basis of accounting for inventories is cost. A departure from the
inventory method. cost basis of pricing the inventory is required where there is evidence that
d. Under dollar-value LIFO, increases and decreases in a pool are when the goods are sold in the ordinary course of business their
determined and measured in terms of total dollar value, not physical a. selling price will be less than their replacement cost.
quantity. b. replacement cost will be more than their net realizable value.
c. cost will be less than their replacement cost.
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59. Which of the following is not considered an advantage of LIFO when prices d. future utility will be less than their cost.
are rising?
a. The inventory will be overstated. 23. When valuing raw materials inventory at lower-of-cost-or-market, what is the
b. The more recent costs are matched against current revenues. meaning of the term "market"?
c. There will be a deferral of income tax. a. Net realizable value
d. A company's future reported earnings will not be affected substantially b. Net realizable value less a normal profit margin
by future price declines. c. Current replacement cost
d. Discounted present value
60. Which of the following is true regarding the use of LIFO for inventory
valuation? 24. In no case can "market" in the lower-of-cost-or-market rule be more than
a. If LIFO is used for external financial reporting, then it must also be used a. estimated selling price in the ordinary course of business.
for internal reports. b. estimated selling price in the ordinary course of business less
b. For purposes of external financial reporting, LIFO may not be used with reasonably predictable costs of completion and disposal.
the lower of cost or market approach. c. estimated selling price in the ordinary course of business less
c. If LIFO is used for external financial reporting, then it cannot be used for reasonably predictable costs of completion and disposal and an
tax purposes. allowance for an approximately normal profit margin.
d. None of these. d. estimated selling price in the ordinary course of business less
reasonably predictable costs of completion and disposal, an allowance
61. If inventory levels are stable or increasing, an argument which is not an for an approximately normal profit margin, and an adequate reserve for
advantage of the LIFO method as compared to FIFO is possible future losses.
a. income taxes tend to be reduced in periods of rising prices. 25. Designated market value
b. cost of goods sold tends to be stated at approximately current cost on a. is always the middle value of replacement cost, net realizable value,
the income statement. and net realizable value less a normal profit margin.
c. cost assignments typically parallel the physical flow of goods. b. should always be equal to net realizable value.
d. income tends to be smoothed as prices change over time. c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit
margin.

Multiple Choice AnswersConceptual 26. Lower-of-cost-or-market

a. is most conservative if applied to the total inventory.
Solutions to those Multiple Choice questions for which the answer is none of these. b. is most conservative if applied to major categories of inventory.
24. Goods in transit which were purchased f.o.b. shipping point. c. is most conservative if applied to individual items of inventory.
35. Assets and liabilities were understated but stockholders equity was not d. must be applied to major categories for taxes.
affected.
60. If LIFO is used for tax purposes, then it must also be used for external 27. An item of inventory purchased this period for $15.00 has been incorrectly
financial reporting. written down to its current replacement cost of $10.00. It sells during the
following period for $30.00, its normal selling price, with disposal costs of
IX. INVENTORIES: ADDITIONAL VALUATION ISSUES $3.00 and normal profit of $12.00. Which of the following statements is not
true?
21.Which of the following is true about lower-of-cost-or-market? a. The cost of sales of the following year will be understated.
a. It is inconsistent because losses are recognized but not gains. b. The current year's income is understated.
b. It usually understates assets. c. The closing inventory of the current year is understated.
c. It can increase future income. d. Income of the following year will be understated.
d. All of these.
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28. When the direct method is used to record inventory at market
 a. there is a direct reduction in the selling price of the product that results
in a loss being recorded on the income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory
and debiting loss on inventory decline.
c. only the portion of the loss attributable to inventory sold during the
period is recorded in the financial statements.
d. the market value figure for ending inventory is substituted for cost and
the loss is buried in cost of goods sold.
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29. Recording inventory at net realizable value is permitted, even if it is above
cost, when there are no significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all
quantities.
d. the internal revenue service is assured that the practice is not used only
to distort reported net income.
30. When inventory declines in value below original (historical) cost, and this
decline is considered other than temporary, what is the maximum amount
that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin
31. Net realizable value is
a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.
32. If a unit of inventory has declined in value below original cost, but the market
value exceeds net realizable value, the amount to be used for purposes of
inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.
33. Inventory may be recorded at net realizable value if
a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.
34. If a material amount of inventory has been ordered through a formal
purchase contract at the balance sheet date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the
order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.
35. The credit balance that arises when a net loss on a purchase commitment is
recognized should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.
36. In 2006, Lucas Manufacturing signed a contract with a supplier to purchase
raw materials in 2007 for $700,000. Before the December 31, 2006 balance
sheet date, the market price for these materials dropped to $510,000. The
journal entry to record this situation at December 31, 2006 will result in a
credit that should be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
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37. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be
accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the
opening inventory plus purchases, the result is the amount of inventory
on hand.
d. The total amount of purchases and the total amount of sales remain
relatively unchanged from the comparable previous period.
38. The gross profit method of inventory valuation is invalid when
a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.
39. Which statement is not true about the gross profit method of inventory
valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.
40. A major advantage of the retail inventory method is that it
a. provides reliable results in cases where the distribution of items in the
inventory is different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of
the periodic inventory for certain types of companies.
41. An inventory method which is designed to approximate inventory valuation at
the lower of cost or market is
 a. last-in, first-out. d. Total sales for the period.
b. first-in, first-out.
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c. conventional retail method. 48. Which of the following is not a reason the retail inventory method is used
d. specific identification. widely?
a. As a control measure in determining inventory shortages
42. The retail inventory method is based on the assumption that the b. For insurance information
a. final inventory and the total of goods available for sale contain the same c. To permit the computation of net income without a physical count of
proportion of high-cost and low-cost ratio goods. inventory
b. ratio of gross margin to sales is approximately the same each period. d. To defer income tax liability
c. ratio of cost to retail changes at a constant rate.
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d. proportions of markups and markdowns to selling price are the same. 49. Which of the following statements is false regarding an assumption of
inventory cost flow?
43. Which statement is true about the retail inventory method? a. The cost flow assumption need not correspond to the actual physical
a. It may not be used to estimate inventories for interim statements. flow of goods.
b. It may not be used to estimate inventories for annual statements. b. The assumption selected may be changed each accounting period.
c. It may not be used by auditors. c. The FIFO assumption uses the earliest acquired prices to cost the items
d. None of these. sold during a period.
d. The LIFO assumption uses the earliest acquired prices to cost the items
44. When the conventional retail inventory method is used, markdowns are on hand at the end of an accounting period.
commonly ignored in the computation of the cost to retail ratio because
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a. there may be no markdowns in a given year. 50. The average days to sell inventory is computed by dividing
b. this tends to give a better approximation of the lower of cost or market. a. 365 days by the inventory turnover ratio.
c. markups are also ignored. b. the inventory turnover ratio by 365 days.
d. this tends to result in the showing of a normal profit margin in a period c. net sales by the inventory turnover ratio.
when no markdown goods have been sold. d. 365 days by cost of goods sold.

45. To produce an inventory valuation which approximates the lower of cost or 51. The inventory turnover ratio is computed by dividing the cost of goods sold
market using the conventional retail inventory method, the computation of the ratio of by
cost to retail should a. beginning inventory.
a. include markups but not markdowns. b. ending inventory.
b. include markups and markdowns. c. average inventory.
c. ignore both markups and markdowns. d. number of days in the year.
d. include markdowns but not markups.
*52. When using dollar-value LIFO, if the incremental layer was added last year,
*46. When calculating the cost ratio for the retail inventory method, it should be multiplied by
a. if it is the conventional method, the beginning inventory is included and a. last year's cost ratio and this year's index.
markdowns are deducted. b. this year's cost ratio and this year's index.
b. if it is the LIFO method, the beginning inventory is excluded and c. last year's cost ratio and last year's index.
markdowns are deducted. d. this year's cost ratio and last year's index.
c. if it is the LIFO method, the beginning inventory is included and
markdowns are not deducted.
d. if it is the conventional method, the beginning inventory is excluded and Multiple Choice AnswersConceptual
markdowns are not deducted.
Solutions to those Multiple Choice questions for which the answer is none of these.
38. The gross profit percentage applicable to the goods in ending inventory is
different from the percentage applicable to the goods sold during the period.
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47. Which of the following is not required when using the retail inventory
43. Many answers are possible.
method?
a. All inventory items must be categorized according to the retail markup
X. ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT
percentage which reflects the item's selling price.
b. A record of the total cost and retail value of goods purchased.
21. Plant assets may properly include
c. A record of the total cost and retail value of the goods available for sale.
 a. deposits on machinery not yet received. b. a separate deferred charge account.
b. idle equipment awaiting sale. c. miscellaneous tax expense (which includes all taxes other than those on
c. land held for possible use as a future plant site. income).
d. none of these. d. accumulated depreciation--machinery.

22. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years
23. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
24. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on
which it is located with the plan to tear down the Holiday Hotel and build a
new luxury hotel on the site. The cost of the Holiday Hotel should be
a. depreciated over the period from acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
25. The cost of land does not include
a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
26. The cost of land typically includes the purchase price and all of the following
costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
27. If a corporation purchases a lot and building and subsequently tears down
the building and uses the property as a parking lot, the proper accounting
treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the
combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was
acquired.
29. Fences and parking lots are reported on the balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
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30. Historical cost is the basis advocated for recording the acquisition of
property, plant, and equipment for all of the following reasons except
a. at the date of acquisition, cost reflects fair market value.
b. property, plant, and equipment items are always acquired at their
original historical cost.
c. historical cost involves actual transactions and, as such, is the most
reliable basis.
d. gains and losses should not be anticipated but should be recognized
when the asset is sold.
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31. To be consistent with the historical cost principle, overhead costs incurred by
an enterprise constructing its own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.
32. Which of the following costs are capitalized for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
33. Which of the following assets do not qualify for capitalization of interest costs
incurred during construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare
them for their intended use.
34. Assets that qualify for interest cost capitalization include
a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the
company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.

28. The debit for a sales tax properly levied and paid on the purchase of 35. When computing the amount of interest cost to be capitalized, the concept of
machinery preferably would be a charge to "avoidable interest" refers to
a. the machinery account. a. the total interest cost actually incurred.
 b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if
expenditures for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest
cost was incurred.
36. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended
use have begun.
37. Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be
used as a building site should be debited to the land account and not to
the building account.
b. The amount of interest cost capitalized during the period should not
exceed the actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction
are temporarily invested, any interest earned should be offset against
interest cost incurred when determining the amount of interest cost to
be capitalized.
d. The minimum amount of interest to be capitalized is determined by
multiplying a weighted average interest rate by the amount of average
accumulated expenditures on qualifying assets during the period.
38. Construction of a qualifying asset is started on April 1 and finished on
December 1. The fraction used to multiply an expenditure made on April 1 to find
weighted-average accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
39. When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds not needed to pay for construction
may be temporarily invested in interest-bearing securities. Interest earned
on these temporary investments should be
a. offset against interest cost incurred during construction.
b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of
interest to be capitalized.
d. recognized as revenue of the period.
40. Interest cost that is capitalized should
a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off
equally over a 40-year period.
c. not be written off until the related asset is fully depreciated or disposed
of.
d. none of these.
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41. Which of the following is not a condition that must be satisfied before interest
capitalization can begin on a qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the company's cost of
capital.
d. Activities that are necessary to get the asset ready for its intended use
are in progress.
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42. The cost of a nonmonetary asset acquired in exchange for another
nonmonetary asset and the exchange has commercial substance is usually
recorded at
a. the fair value of the asset given up, and a gain or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be
recognized.
c. the fair value of the asset received if it is equally reliable as the fair
value of the asset given up.
d. either the fair value of the asset given up or the asset received,
whichever one results in the largest gain (smallest loss) to the company.
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43. The King-Kong Corporation exchanges one plant asset for a similar plant
asset and gives cash in the exchange. The exchange is not expected to
cause a material change in the future cash flows for either entity. If a gain
on the disposal of the old asset is indicated, the gain will
a. be reported in the Other Revenues and Gains section of the income
statement.
b. effectively reduce the amount to be recorded as the cost of the new
asset.
c. effectively increase the amount to be recorded as the cost of the new
asset.
d. be credited directly to the owner's capital account.
44.Plant assets purchased on long-term credit contracts should be accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
45. When a plant asset is acquired by issuance of common stock, the cost of the
plant asset is properly measured by the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. market value of the stock.
46. When a closely held corporation issues preferred stock for land, the land
should be recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
47. Accounting recognition should be given to some or all of the gain realized on 54. Which of the following is not a capital expenditure?
a nonmonetary exchange of plant assets except when the exchange has a. Repairs that maintain an asset in operating condition
a. no commercial substance and additional cash is paid. b. An addition
b. no commercial substance and additional cash is received. c. A betterment
c. commercial substance and additional cash is paid. d. A replacement
d. commercial substance and additional cash is received.
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55. In accounting for plant assets, which of the following outlays made
48. For a nonmonetary exchange of plant assets, accounting recognition should subsequent to acquisition should be fully expensed in the period the
not be given to expenditure is made?
a. a loss when the exchange has no commercial substance. a. Expenditure made to increase the efficiency or effectiveness of an
b. a gain when the exchange has commercial substance. existing asset
c. part of a gain when the exchange has no commercial substance and b. Expenditure made to extend the useful life of an existing asset beyond
cash is paid. the time frame originally anticipated
d. part of a gain when the exchange has no commercial substance and c. Expenditure made to maintain an existing asset so that it can function in
cash is received. the manner intended
d. Expenditure made to add new asset services
49. When an enterprise is the recipient of a donated asset, the account credited
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may be a 56. An expenditure made in connection with a machine being used by an
a. paid-in capital account. enterprise should be
b. revenue account. a. expensed immediately if it merely extends the useful life but does not
c. deferred revenue account. improve the quality.
d. all of these. b. expensed immediately if it merely improves the quality but does not
extend the useful life.
50. A plant site donated by a township to a manufacturer that plans to open a c. capitalized if it maintains the machine in normal operating condition.
new factory should be recorded on the manufacturer's books at d. capitalized if it increases the quantity of units produced by the machine.
a. the nominal cost of taking title to it.
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b. its market value. 57. When a plant asset is disposed of, a gain or loss may result. The gain or
c. one dollar (since the site cost nothing but should be included in the loss would be classified as an extraordinary item on the income statement if
balance sheet). it resulted from
d. the value assigned to it by the company's directors. a. an involuntary conversion and the conditions of the disposition are
unusual and infrequent in nature.
51. In order for a cost to be capitalized (capital expenditure), the following must b. a sale prior to the completion of the estimated useful life of the asset.
be present: c. the sale of a fully depreciated asset.
a. The useful life of an asset must be increased. d. an abandonment of the asset.
b. The quantity of assets must be increased.
c. The quality of assets must be increased. 58. The sale of a depreciable asset resulting in a loss indicates that the
d. Any one of these. proceeds from the sale were
a. less than current market value.
52. An improvement made to a machine increased its fair market value and its b. greater than cost.
production capacity by 25% without extending the machine's useful life. The c. greater than book value.
cost of the improvement should be d. less than book value.
a. expensed.
b. debited to accumulated depreciation. 59. Which of the following statements about involuntary conversions is false?
c. capitalized in the machine account. a. An involuntary conversion may result from condemnation or fire.
d. allocated between accumulated depreciation and the machine account. b. The gain or loss from an involuntary conversion may be reported as an
extraordinary item.
53. Which of the following is a capital expenditure? c. The gain or loss from an involuntary conversion should not be
a. Payment of an account payable recognized when the enterprise reinvests in replacement assets.
b. Retirement of bonds payable d. All of these.
c. Payment of Federal income taxes
d. None of these
 b. physical life is the life of an asset without consideration of salvage value
and service life requires the use of salvage value.
Multiple Choice AnswersConceptual c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original
Solutions to those Multiple Choice questions for which the answer is none of these. owner, while physical life refers to how long the asset will be used by all
21. Long-lived tangible assets used in the enterprises operations. owners.
40. Capitalized interest is depreciated over the related assets useful life. P
26. The term "depreciable cost," or "depreciable base," as it is used in
53. Capital expenditures include additions, betterments, improvements, and accounting, refers to
extraordinary repairs. a. the total amount to be charged (debited) to expense over an asset's
useful life.
b. the cost of the asset less the related depreciation recorded to date.
XI. DEPRECIATION, IMPAIRMENTS, AND DEPLETION
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.
21. The following is true of depreciation accounting.
a. It is not a matter of valuation.
27. Economic factors that shorten the service life of an asset include
b. It is part of the matching of revenues and expenses.
a. obsolescence.
c. It retains funds by reducing income taxes and dividends.
b. supersession.
d. All of these.
c. inadequacy.
d. all of these.
22. Which of the following principles best describes the conceptual rationale for
the methods of matching depreciation expense with revenues?
28. The activity method of depreciation
a. Associating cause and effect
a. is a variable charge approach.
b. Systematic and rational allocation
b. assumes that depreciation is a function of the passage of time.
c. Immediate recognition
c. conceptually associates cost in terms of input measures.
d. Partial recognition
d. all of these.
23. Depreciation accounting
29. For income statement purposes, depreciation is a variable expense if the
a. provides funds.
depreciation method used is
b. funds replacements.
a. units-of-production.
c. retains funds.
b. straight-line.
d. all of these.
c. sum-of-the-years'-digits.
S d. declining-balance.
24. Which of the following most accurately reflects the concept of depreciation
as used in accounting?
30. If an industrial firm uses the units-of-production method for computing
a. The process of charging the decline in value of an economic resource to
depreciation on its only plant asset, factory machinery, the credit to
income in the period in which the benefit occurred.
accumulated depreciation from period to period during the life of the firm will
b. The process of allocating the cost of tangible assets to expense in a
a. be constant.
systematic and rational manner to those periods expected to benefit
b. vary with unit sales.
from the use of the asset.
c. vary with sales revenue.
c. A method of allocating asset cost to an expense account in a manner
d. vary with production.
which closely matches the physical deterioration of the tangible asset
involved.
31. Use of the double-declining balance method
d. An accounting concept that allocates the portion of an asset used up
a. results in a decreasing charge to depreciation expense.
during the year to the contra asset account for the purpose of properly
b. means salvage value is not deducted in computing the depreciation
recording the fair market value of tangible assets.
base.
S c. means the book value should not be reduced below salvage value.
25. The major difference between the service life of an asset and its physical life
d. all of these.
is that
a. service life refers to the time an asset will be used by a company and
32. Use of the sum-of-the-years'-digits method
physical life refers to how long the asset will last.
a. results in salvage value being ignored.

b. means the denominator is the years remaining at the beginning of the
year.
c. means the book value should not be reduced below salvage value.
d. all of these.
33. A graph is set up with "yearly depreciation expense" on the vertical axis and
"time" on the horizontal axis. Assuming linear relationships, how would the
graphs for straight-line and sum-of-the-years'-digits depreciation,
respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right
39.Depreciation is normally computed on the basis of the nearest
34. A principal objection to the straight-line method of depreciation is that it
a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment
base.
d. gives smaller periodic write-offs than decreasing charge methods.
35. Each year a company has been investing an increasingly greater amount in
machinery. Since there is a large number of small items with relatively
similar useful lives, the company has been applying straight-line depreciation
at a uniform rate to the machinery as a group. The ratio of this group's total
accumulated depreciation to the total cost of the machinery has been
steadily increasing and now stands at .75 to 1.00. The most likely
explanation for this increasing ratio is the
a. company should have been using one of the accelerated methods of
depreciation.
b. estimated average life of the machinery is less than the actual average
useful life.
c. estimated average life of the machinery is greater than the actual
average useful life.
d. company has been retiring fully depreciated machinery that should have
remained in service.
36. For the composite method, the composite
a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable
cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.
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37. Roberts Truck Rental uses the group depreciation method for its fleet of
trucks. When it retires one of its trucks and receives cash from a salvage
company, the carrying value of property, plant, and equipment will be
decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.
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38. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added
together and the total divided by the number of items.
b. the cost of individual units within an asset group is charged to expense
in the year a unit is retired from service.
c. a straight-line rate is computed by dividing the total of the annual
depreciation expense for all assets in the group by the total cost of the
assets.
d. the original cost of all items in a given group or class of assets is
retained in the asset account and the cost of replacements is charged to
expense when they are acquired.
a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.
40. Quayle Company acquired machinery on January 1, 2002 which it
depreciated under the straight-line method with an estimated life of fifteen
years and no salvage value. On January 1, 2007, Quayle estimated that the
remaining life of this machinery was six years with no salvage value. How
should this change be accounted for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2007
c. By setting future annual depreciation equal to one-sixth of the book
value on January 1, 2007
d. By continuing to depreciate the machinery over the original fifteen year
life
41. A change in estimate should
a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.
42. White Printing Company determines that a printing press used in its
operations has suffered a permanent impairment in value because of
technological changes. An entry to record the impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
43. Dividends representing a return of capital to stockholders are not uncommon
among companies which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these.
44. Depletion expense
 a. is usually part of cost of goods sold. d. should be included in corporate financial statements or notes thereto.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base. 51. The asset turnover ratio is computed by dividing
d. excludes restoration costs from the depletion base. a. net income by ending total assets.
b. net income by average total assets.
45. The most common method of recording depletion for accounting purposes is c. net sales by ending total assets.
the d. net sales by average total assets.
a. percentage depletion method.
b. decreasing charge method. *52. A major objective of MACRS for tax depreciation is to
c. straight-line method. a. reduce the amount of depreciation deduction on business firms' tax
d. units-of-production method. returns.
b. assure that the amount of depreciation for tax and book purposes will be
46. Reserve recognition accounting the same.
a. is presently the generally accepted accounting method for financial c. help companies achieve a faster write-off of their capital assets.
reporting of oil and gas reserves. d. require companies to use the actual economic lives of assets in
b. is a historical cost method similar to the full cost approach and the calculating tax depreciation.
successful efforts approach.
c. is used for reporting of oil and gas reserves for federal income tax *53. Under MACRS, which one of the following is not considered in determining
purposes. depreciation for tax purposes?
d. requires estimates of future production costs, the appropriate discount a. Cost of asset
rate, and the expected selling price of oil and gas reserves. b. Property recovery class
c. Half-year convention
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47. Of the following costs related to the development of natural resources, which d. Salvage value
one is not a part of depletion cost?
a. Acquisition cost of the natural resource deposit *54. If income tax effects are ignored, accelerated depreciation methods
b. Exploration costs a. provide funds for the earlier replacement of fixed assets.
c. Tangible equipment costs associated with machinery used to extract the b. increase funds provided by operations.
natural resource c. tend to offset the effect of steadily increasing repair and maintenance
d. Intangible development costs such as drilling costs, tunnels, and shafts costs on the income statement.
d. tend to decrease the fixed asset turnover ratio.
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48. Which of the following disclosures is not required in the financial statements
regarding depreciation?
a. Accumulated depreciation, either by major classes of depreciable Solutions to those Multiple Choice questions for which the answer is none of these.
assets or in total. 43. do not expect to purchase additional property after depleting existing
b. Details demonstrating how depreciation was calculated. property.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and XII. INTANGIBLE ASSETS
function.
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21.Costs incurred internally to create intangibles are
49. The book value of a plant asset is a. capitalized.
a. the fair market value of the asset at a balance sheet date. b. capitalized if they have an indefinite life.
b. the asset's acquisition cost less the total related depreciation recorded c. expensed as incurred.
to date. d. expensed only if they have a limited life.
c. equal to the balance of the related accumulated depreciation account.
d. the assessed value of the asset for property tax purposes.
22. Which of the following methods of amortization is normally used for
50. A general description of the depreciation methods applicable to major intangible assets?
classes of depreciable assets a. Sum-of-the-years'-digits
a. is not a current practice in financial reporting. b. Straight-line
b. is not essential to a fair presentation of financial position. c. Units of production
c. is needed in financial reporting when company policy differs from d. Double-declining-balance
income tax policy.
23. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.
24. Factors considered in determining an intangible assets useful life include all 30.
of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the assets legal life
d. the amortization method used.
31.
25. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.
32.
26. The cost of purchasing patent rights for a product that might otherwise have
seriously competed with one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the
purchaser's product.
d. amortized over the remaining estimated life of the original patent
33.
covering the product whose market would have been impaired by
competition from the newly patented product.
27. Riser Corporation was granted a patent on a product on January 1, 1998. To
protect its patent, the corporation purchased on January 1, 2007 a patent on
a competing product which was originally issued on January 10, 2003.
Because of its unique plant, Riser Corporation does not feel the competing
patent can be used in producing a product. The cost of the competing patent
should be
a. amortized over a maximum period of 20 years.
34.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2007.
28. Wriglee, Inc. went to court this year and successfully defended its patent
from infringe-ment by a competitor. The cost of this defense should be
charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent. 35.
29. Which of the following is not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights
Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.
When a patent is amortized, the credit is usually made to
a. the Patent account.
b. an Accumulated Amortization account.
c. a Deferred Credit account.
d. an expense account.
Goodwill
a. generated internally should not be capitalized unless it is measured by
an individual independent of the enterprise involved.
b. is easily computed by assigning a value to the individual attributes that
comprise its existence.
c. represents a unique asset in that its value can be identified only with the
business as a whole.
d. exists in any company that has earnings that differ from those of a
competitor.
The reason goodwill is sometimes referred to as a master valuation account
is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair market value of the net tangible and
identifiable intangible assets as compared with the purchase price of the
acquired business.
c. the value of a business is computed without consideration of goodwill
and then goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value,
all other accounts are recorded at an amount other than their value.
Easton Company and Lofton Company were combined in a purchase
transaction. Easton was able to acquire Lofton at a bargain price. The sum
of the market or appraised values of identifiable assets acquired less the fair
value of liabilities assumed exceeded the cost to Easton. After revaluing
noncurrent assets to zero, there was still some "negative goodwill." Proper
accounting treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
Purchased goodwill should
a. be written off as soon as possible against retained earnings.
 b. be written off as soon as possible as an extraordinary item. a. Must be capitalized when incurred and then amortized over their
c. be written off by systematic charges as a regular operating expense estimated useful lives.
over the period benefited. b. Must be expensed in the period incurred.
d. not be amortized. c. May be either capitalized or expensed when incurred, depending upon
the materiality of the amounts involved.
36. The intangible asset goodwill may be d. Must be expensed in the period incurred unless it can be clearly
a. capitalized only when purchased. demonstrated that the expenditure will have alternative future uses or
b. capitalized either when purchased or created internally. unless contractually reimbursable.
c. capitalized only when created internally.
d. written off directly to retained earnings. 43. Which of the following costs should be excluded from research and
development expense?
37. A loss on impairment of an intangible asset is the difference between the a. Modification of the design of a product
assets b. Acquisition of R & D equipment for use on a current project only
a. carrying amount and the expected future net cash flows. c. Cost of marketing research for a new product
b. carrying amount and its fair value. d. Engineering activity required to advance the design of a product to the
c. fair value and the expected future net cash flows. manufacturing stage
d. book value and its fair value.
44. If a company constructs a laboratory building to be used as a research and
38. Weaver Boxing Company needs to determine if its indefinite-life intangibles development facility, the cost of the laboratory building is matched against
other than goodwill have been impaired and should be reduced or written off earnings as
on its balance sheet. The impairment test(s) to be used is (are) a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
Recoverability Test Fair Value Test c. depreciation or immediate write-off depending on company policy.
a. Yes Yes d. an expense at such time as productive research and development has
b. Yes No been obtained from the facility.
c No Yes
d. No No 45. Operating losses incurred during the start-up years of a new business
should be
39. The carrying amount of an intangible is a. accounted for and reported like the operating losses of any other
a. the fair market value of the asset at a balance sheet date. business.
b. the asset's acquisition cost less the total related amortization recorded b. written off directly against retained earnings.
to date. c. capitalized as a deferred charge and amortized over five years.
c. equal to the balance of the related accumulated amortization account. d. capitalized as an intangible asset and amortized over a period not to
d. the assessed value of the asset for intangible tax purposes. exceed 20 years.
40. Which of the following research and development related costs should be
capitalized and amortized over current and future periods? 46. The costs of organizing a corporation include legal fees, fees paid to the
a. Research and development general laboratory building which can be state of incorporation, fees paid to promoters, and the costs of meetings for
put to alternative uses in the future organizing the promoters. These costs are said to benefit the corporation for
b. Inventory used for a specific research project the entity's entire life. These costs should be
c. Administrative salaries allocated to research and development a. capitalized and never amortized.
d. Research findings purchased from another company to aid a particular b. capitalized and amortized over 40 years.
research project currently in process c. capitalized and amortized over 5 years.
d. expensed as incurred.
41. Which of the following principles best describes the current method of
accounting for research and development costs? 47. Which of the following would not be considered an R & D activity?
a. Associating cause and effect a. Adaptation of an existing capability to a particular requirement or
b. Systematic and rational allocation customer's need.
c. Income tax minimization b. Searching for applications of new research findings.
d. Immediate recognition as an expense c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process
42. How should research and development costs be accounted for, according to alternatives.
a Financial Accounting Standards Board Statement?
 48. The total amount of patent cost amortized to date is usually 25. Which of the following is not true about the discount on short-term notes
a. shown in a separate Accumulated Patent Amortization account which is payable?
shown contra to the Patent account. a. The Discount on Notes Payable account has a debit balance.
b. shown in the current income statement. b. The Discount on Notes Payable account should be reported as an asset
c. reflected as credits in the Patent account. on the balance sheet.
d. reflected as a contra property, plant and equipment item. c. When there is a discount on a note payable, the effective interest rate is
higher than the stated discount rate.
d. All of these are true.
Multiple Choice AnswersConceptual
26. Which of the following may be a current liability?
XIII. CURRENT LIABILITIES AND CONTINGENCIES a. Withheld Income Taxes
b. Deposits Received from Customers
21. Liabilities are c. Deferred Revenue
a. any accounts having credit balances after closing entries are made. d. All of these
b. deferred credits that are recognized and measured in conformity with
generally accepted accounting principles. 27. Which of the following items is a current liability?
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or a. Bonds (for which there is an adequate sinking fund properly classified
services in the future. as a long-term investment) due in three months.
b. Bonds due in three years.
22. Which of the following is a current liability? c. Bonds (for which there is an adequate appropriation of retained
a. A long-term debt maturing currently, which is to be paid with cash in a earnings) due in eleven months.
sinking fund d. Bonds to be refunded when due in eight months, there being no doubt
b. A long-term debt maturing currently, which is to be retired with proceeds
about the marketability of the refunding issue.
from a new debt issue
c. A long-term debt maturing currently, which is to be converted into
28. Which of the following should not be included in the current liabilities section
common stock
of the balance sheet?
d. None of these
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
23. Which of the following is true about accounts payable?
c. The discount on short-term notes payable
1. Accounts payable should not be reported at their present d. All of these are included
value.
2. When accounts payable are recorded at the net amount, a 29. Which of the following is a current liability?
Purchase Discounts account will be used. a. Preferred dividends in arrears
3. When accounts payable are recorded at the gross amount, a b. A dividend payable in the form of additional shares of stock
Purchase Discounts Lost account will be used. c. A cash dividend payable to preferred stockholders
a. 1 d. All of these
b. 2
c. 3 30. Stock dividends distributable should be classified on the
d. Both 2 and 3 are true. a. income statement as an expense.
b. balance sheet as an asset.
24. Among the short-term obligations of Lance Company as of December 31, c. balance sheet as a liability.
the balance sheet date, are notes payable totaling $250,000 with the d. balance sheet as an item of stockholders' equity.
Madison National Bank. These are 90-day notes, renewable for another 90-
day period. These notes should be classified on the balance sheet of Lance 31. Of the following items, the only one which should not be classified as a
Company as current liability is
a. current liabilities. a. current maturities of long-term debt.
b. deferred charges. b. sales taxes payable.
c. long-term liabilities. c. short-term obligations expected to be refinanced.
d. intermediate debt. d. unearned revenues.
32. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payabledebit balances.
c. losses expected to be incurred within the next twelve months in excess
of the company's insurance coverage.
d. none of these.
33. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if
the firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if
the firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if
it is paid off after the balance sheet date and subsequently replaced by
long-term debt before the balance sheet is issued.
d. None of these.
34. The ability to consummate the refinancing of a short-term obligation
may be demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after
the date of the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to
refinance the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the
date of the balance sheet but before it is issued.
d. all of these.
35. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if
the firm intends to refinance the obligation on a long-term basis and
demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared
by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as
they are paid.
d. FICA taxes withheld from employees' payroll checks should never be
recorded as a liability since the employer will eventually remit the
amounts withheld to the appropriate taxing authority.
36. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the
amount of sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
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37. If a short-term obligation is excluded from current liabilities because of
refinancing, the footnote to the financial statements describing this event
should include all of the following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if
any.
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38. In accounting for compensated absences, the difference between vested
rights and accumulated rights is
a. vested rights are normally for a longer period of employment than are
accumulated rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company,
whereas accumulated rights expire at the end of the accounting period
in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the
employee; accumulated rights do not represent monetary
compensation.
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39. An employee's net (or take-home) pay is determined by gross earnings
minus amounts for income tax withholdings and the employee's
a. portion of FICA taxes, and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary
deductions.
d. portion of FICA taxes, and any voluntary deductions.
40. Which of these is not included in an employer's payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes
41. Which of the following is a condition for accruing a liability for the cost of
compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
42. A liability for compensated absences such as vacations, for which it is
expected that employees will be paid, should
a. be accrued during the period when the compensated time is expected to
be used by employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
43. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the
right to compensated absences.
 2. the future rates of pay expected to be paid when 49. A contingent liability
employees use compensated time. a. definitely exists as a liability but its amount and due date are
3. the present value of the amount expected to be paid in indeterminable.
future periods. b. is accrued even though not reasonably estimated.
a. 1. c. is not disclosed in the financial statements.
b. 2. d. is the result of a loss contingency.
c. 3.
d. Either 1 or 2 is acceptable. 50. To record an asset retirement obligation (ARO), the cost associated with the
ARO is
44. Which of the following is the proper way to report a gain contingency? a. expensed.
a. As an accrued amount. b. included in the carrying amount of the related long-lived asset.
b. As deferred revenue. c. included in a separate account.
c. As an account receivable with additional disclosure explaining the d. none of these.
nature of the contingency.
d. As a disclosure only. 51. A company is legally obligated for the costs associated with the retirement of
a long-lived asset
45. Which of the following contingencies need not be disclosed in the financial a. only when it hires another party to perform the retirement activities.
statements or the notes thereto? b. only if it performs the activities with its own workforce and equipment.
a. Probable losses not reasonably estimable c. whether it hires another party to perform the retirement activities or
b. Environmental liabilities that cannot be reasonably estimated performs the activities itself.
c. Guarantees of indebtedness of others d. when it is probable the asset will be retired.
d. All of these must be disclosed.
52. Assume that a manufacturing corporation has (1) good quality control, (2) a
46. Which of the following sets of conditions would give rise to the accrual of a one-year operating cycle, (3) a relatively stable pattern of annual sales, and
contingency under current generally accepted accounting principles? (4) a continuing policy of guaranteeing new products against defects for
a. Amount of loss is reasonably estimable and event occurs infrequently. three years that has resulted in material but rather stable warranty repair and
b. Amount of loss is reasonably estimable and occurrence of event is replacement costs. Any liability for the warranty
probable. a. should be reported as long-term.
c. Event is unusual in nature and occurrence of event is probable. b. should be reported as current.
d. Event is unusual in nature and event occurs infrequently. c. should be reported as part current and part long-term.
d. need not be disclosed.
47. Mark Ward is a farmer who owns land which borders on the right-of-way of
the Northern Railroad. On August 10, 2007, due to the admitted negligence 53. Lopez Corporation, a manufacturer of household paints, is preparing annual
of the Railroad, hay on the farm was set on fire and burned. Ward had had a financial statements at December 31, 2007. Because of a recently proven
dispute with the Railroad for several years concerning the ownership of a health hazard in one of its paints, the government has clearly indicated its
small parcel of land. The representative of the Railroad has offered to assign intention of having Lopez recall all cans of this paint sold in the last six
any rights which the Railroad may have in the land to Ward in exchange for months. The management of Lopez estimates that this recall would cost
a release of his right to reimbursement for the loss he has sustained from $800,000. What accounting recognition, if any, should be accorded this
the fire. Ward appears inclined to accept the Railroad's offer. The Railroad's situation?
2007 financial statements should include the following related to the incident: a. No recognition
a. recognition of a loss and creation of a liability for the value of the land. b. Note disclosure only
b. recognition of a loss only. c. Operating expense of $800,000 and liability of $800,000
c. creation of a liability only. d. Appropriation of retained earnings of $800,000
d. disclosure in note form only.
54. Information available prior to the issuance of the financial statements indicates
48. A contingency can be accrued when that it is probable that, at the date of the financial statements, a liability has
a. it is certain that funds are available to settle the disputed amount. been incurred for obligations related to product warranties. The amount of the
b. an asset may have been impaired. loss involved can be reasonably estimated. Based on the above facts, an
c. the amount of the loss can be reasonably estimated and it is probable estimated loss contingency should be
that an asset has been impaired or a liability incurred. a. accrued.
d. it is probable that an asset has been impaired or a liability incurred even b. disclosed but not accrued.
though the amount of the loss cannot be reasonably estimated. c. neither accrued nor disclosed.
 d. classified as an appropriation of retained earnings. 61. The numerator of the acid-test ratio consists of
a. total current assets.
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55. Mayberry Co. has a loss contingency to accrue. The loss amount can only b. cash and marketable securities.
be reasonably estimated within a range of outcomes. No single amount within the c. cash and net receivables.
range is a better estimate than any other amount. The amount of loss accrual should d. cash, marketable securities, and net receivables.
be
a. zero. *62. Which of the following is not a permissible method of calculating a bonus to
b. the minimum of the range. an employee?
c. the mean of the range. a. The bonus is based on income before deductions for the bonus and
d. the maximum of the range. income taxes.
b. The bonus is based on income after deduction of the bonus but before
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56. Marx Company becomes aware of a lawsuit after the date of the financial deduction of income taxes.
statements, but before they are issued. A loss and related liability should be c. The bonus is based on income after deductions for the bonus and
reported in the financial statements if the amount can be reasonably income taxes.
estimated, an unfavorable outcome is highly probable, and d. All of these are permissible.
a. the Marx Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material. Multiple Choice AnswersConceptual
d. the cause for action occurred during the accounting period covered by
the financial statements. Solutions to those Multiple Choice questions for which the answer is none of these.
22. A long-term debt maturing currently to be paid with current assets is a
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57. Use of the accrual method in accounting for product warranty costs current liability.
a. is required for federal income tax purposes. 32. Accounts Payable, Wages Payable, etc., would be examples of current
b. is frequently justified on the basis of expediency when warranty costs liabilities.
are immaterial.
c. finds the expense account being charged when the seller performs in 33. The company must both intend to refinance the obligation on a long-term
basis and demonstrate the ability to consummate the refinancing to exclude
compliance with the warranty.
d. represents accepted practice and should be used whenever the a short-term obligation from current liabilities.
warranty is an integral and inseparable part of the sale.
XIV. LONG-TERM LIABILITIES
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58. Which of the following is not acceptable treatment for the presentation of
current liabilities? 21. An example of an item which is not a liability is
a. dividends payable in stock.
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount b. advances from customers on contracts.
c. accrued estimated warranty costs.
c. Offsetting current liabilities against assets that are to be applied to their
liquidation d. the portion of long-term debt due within one year.
d. Showing current liabilities immediately below current assets to obtain a
presentation of working capital 22. The covenants and other terms of the agreement between the issuer of
bonds and the lender are set forth in the
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59. The ratio of current assets to current liabilities is called the a. bond indenture.
b. bond debenture.
a. current ratio.
b. acid-test ratio. c. registered bond.
d. bond coupon.
c. current asset turnover ratio.
d. current liability turnover ratio.
23. The term used for bonds that are unsecured as to principal is
60. Accrued liabilities are disclosed in financial statements by a. junk bonds.
b. debenture bonds.
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the c. indebenture bonds.
d. callable bonds.
liability total.
c. an appropriation of retained earnings. P
24. Bonds for which the owners' names are not registered with the issuing
d. appropriately classifying them as regular liabilities in the balance sheet.
corporation are called
 a. bearer bonds. 31. Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity
b. term bonds. ten years from date of issue. If the bonds were issued at a premium, this
c. debenture bonds. indicates that
d. secured bonds. a. the effective yield or market rate of interest exceeded the stated
(nominal) rate.
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25. Bonds that pay no interest unless the issuing company is profitable are b. the nominal rate of interest exceeded the market rate.
called c. the market and nominal rates coincided.
a. collateral trust bonds. d. no necessary relationship exists between the two rates.
b. debenture bonds.
c. revenue bonds. 32. If bonds are initially sold at a discount and the straight-line method of
d. income bonds. amortization is used, interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of
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26. If bonds are issued initially at a premium and the effective-interest method of amortization been used.
amortization is used, interest expense in the earlier years will be b. be less than what it would have been had the effective-interest method
a. greater than if the straight-line method were used. of amortization been used.
b. greater than the amount of the interest payments. c. be the same as what it would have been had the effective-interest
c the same as if the straight-line method were used. method of amortiza-tion been used.
d. less than if the straight-line method were used. d. be less than the stated (nominal) rate of interest.

27. The interest rate written in the terms of the bond indenture is known as the 33. Under the effective-interest method of bond discount or premium
a. coupon rate. amortization, the periodic interest expense is equal to
b. nominal rate. a. the stated (nominal) rate of interest multiplied by the face value of the
c. stated rate. bonds.
d. coupon rate, nominal rate, or stated rate. b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of
28. The rate of interest actually earned by bondholders is called the the bonds.
a. stated rate. d. the market rate multiplied by the beginning-of-period carrying amount of
b. yield rate. the bonds.
c. effective rate.
d. effective, yield, or market rate. 34. When the effective-interest method is used to amortize bond premium or
discount, the periodic amortization will
Use the following information for questions 29 and 30: a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
Cox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The c. increase if the bonds were issued at a premium.
bonds are sold to yield 8%. d. increase if the bonds were issued at either a discount or a premium.
29. One step in calculating the issue price of the bonds is to multiply the 35. If bonds are issued between interest dates, the entry on the books of the
principal by the table value for issuing corporation could include a
a. 10 periods and 10% from the present value of 1 table. a. debit to Interest Payable.
b. 20 periods and 5% from the present value of 1 table. b. credit to Interest Receivable.
c. 10 periods and 8% from the present value of 1 table. c. credit to Interest Expense.
d. 20 periods and 4% from the present value of 1 table. d. credit to Unearned Interest.
30. Another step in calculating the issue price of the bonds is to 36. When the interest payment dates of a bond are May 1 and November 1, and
a. multiply $10,000 by the table value for 10 periods and 10% from the a bond issue is sold on June 1, the amount of cash received by the issuer
present value of an annuity table. will be
b. multiply $10,000 by the table value for 20 periods and 5% from the a. decreased by accrued interest from June 1 to November 1.
present value of an annuity table. b. decreased by accrued interest from May 1 to June 1.
c. multiply $10,000 by the table value for 20 periods and 4% from the c. increased by accrued interest from June 1 to November 1.
present value of an annuity table. d. increased by accrued interest from May 1 to June 1.
d. none of these.
37. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the
bonds.
d. any of these.
38. The printing costs and legal fees associated with the issuance of bonds
should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the
life of the bonds.
d. not be reported as an expense until the period the bonds mature or are
retired.
39. Treasury bonds should be shown on the balance sheet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable
and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
40. An early extinguishment of bonds payable, which were originally issued at a
premium, is made by purchase of the bonds between interest dates. At the
time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase
date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase
date.
d. all of these.
41. The generally accepted method of accounting for gains or losses from the
early extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of
any other debt issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as
such, should be amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying
amount of the debt which should be recognized in the period of
redemption.
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42. "In-substance defeasance" is a term used to refer to an arrangement
whereby
a. a company gets another company to cover its payments due on long-
term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by
placing purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.
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43. A corporation borrowed money from a bank to build a building. The long-
term note signed by the corporation is secured by a mortgage that pledges
title to the building as security for the loan. The corporation is to pay the
bank $80,000 each year for 10 years to repay the loan. Which of the
following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be
reported as a long-term liability.
b. The balance of mortgage payable will remain a constant amount over
the 10-year period.
c. The amount of interest expense will decrease each period the loan is
outstanding, while the portion of the annual payment applied to the loan
principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year
period.
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44. A debt instrument with no ready market is exchanged for property whose fair
market value is currently indeterminable. When such a transaction takes
place
a. the present value of the debt instrument must be approximated using an
imputed interest rate.
b. it should not be recorded on the books of either party until the fair
market value of the property becomes evident.
c. the board of directors of the entity receiving the property should
estimate a value for the property that will serve as a basis for the
transaction.
d. the directors of both entities involved in the transaction should negotiate
a value to be assigned to the property.
45. When a note payable is issued for property, goods, or services, the present
value of the note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the
note.
d. any of these.
46. When a note payable is exchanged for property, goods, or services, the
stated interest rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current
cash sales price for similar items or from current market value of the
note.
d. any of these.
47. Discount on Notes Payable is charged to interest expense
a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.
48. Which of the following is an example of "off-balance-sheet financing"?
 1. Non-consolidated subsidiary. b. long-term liabilities by total assets.
2. Special purpose entity. c. total liabilities by total assets.
3. Operating leases. d. total assets by total liabilities.
a. 1
b. 2 *55. In a troubled debt restructuring in which the debt is continued with modified
c. 3 terms and the carrying amount of the debt is less than the total future cash
d. All of these are examples of "off-balance-sheet financing." flows,
a. a loss should be recognized by the debtor.
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49. When a business enterprise enters into what is referred to as off-balance- b. a gain should be recognized by the debtor.
sheet financing, the company c. a new effective-interest rate must be computed.
a. is attempting to conceal the debt from shareholders by having no d. no interest expense or revenue should be recognized in the future.
information about the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income *56. A troubled debt restructuring will generally result in a
statement and the statement of cash flow. a. loss by the debtor and a gain by the creditor.
c. can enhance the quality of its financial position and perhaps permit b. loss by both the debtor and the creditor.
credit to be obtained more readily and at less cost. c. gain by both the debtor and the creditor.
d. is in violation of generally accepted accounting principles. d. gain by the debtor and a loss by the creditor.
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50. Long-term debt that matures within one year and is to be converted into *57. In a troubled debt restructuring in which the debt is settled by a transfer of
stock should be reported assets with a fair market value less than the carrying amount of the debt, the
a. as a current liability. debtor would recognize
b. in a special section between liabilities and stockholders equity. a. no gain or loss on the settlement.
c. as noncurrent. b. a gain on the settlement.
d. as noncurrent and accompanied with a note explaining the method to be c. a loss on the settlement.
used in its liquidation. d. none of these.

51. Which of the following must be disclosed relative to long-term debt maturities
and sinking fund requirements?
a. The present value of future payments for sinking fund requirements and
long-term debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt
during each of the next five years.
c. The amount of scheduled interest payments on long-term debt during
each of the next five years.
d. The amount of future payments for sinking fund requirements and long-
term debt maturities during each of the next five years.
52. Note disclosures for long-term debt generally include all of the following
except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
53. The times interest earned ratio is computed by dividing
a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.
*58. In a troubled debt restructuring in which the debt is continued with modified
terms, a gain should be recognized at the date of restructure, but no interest expense
should be recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future
cash flows.
b. carrying amount of the pre-restructure debt is greater than the total
future cash flows.
c. present value of the pre-restructure debt is less than the present value
of the future cash flows.
d. present value of the pre-restructure debt is greater than the present
value of the future cash flows.
*59. In a troubled debt restructuring in which the debt is continued with modified
terms and the carrying amount of the debt is less than the total future cash
flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
Multiple Choice AnswersConceptual

54. The debt to total assets ratio is computed by dividing Solutions to those Multiple Choice questions for which the answer is none of these.
a. current liabilities by total assets.
 30. multiply $5,000 by the table value for 20 periods and 4% from the present 27. A primary source of stockholders' equity is
value of an annuity table. a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
XV. STOCKHOLDERS EQUITY d. both income retained by the corporation and contributions by
stockholders.
MULTIPLE CHOICEConceptual
21. The residual interest in a corporation belongs to the 28. Stockholders' equity is generally classified into two major categories:
a. management. a. contributed capital and appropriated capital.
b. creditors. b. appropriated capital and retained earnings.
c. common stockholders. c. retained earnings and unappropriated capital.
d. preferred stockholders. d. earned capital and contributed capital.

22. The pre-emptive right of a common stockholder is the right to 29. The accounting problem in a lump sum issuance is the allocation of
a. share proportionately in corporate assets upon liquidation. proceeds between the classes of securities. An acceptable method of
b. share proportionately in any new issues of stock of the same class. allocation is the
c. receive cash dividends before they are distributed to preferred a. pro forma method.
stockholders. b. proportional method.
d. exclude preferred stockholders from voting rights. c. incremental method.
d. either the proportional method or the incremental method.
23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
30. When a corporation issues its capital stock in payment for services, the least
b. receive cash dividends before other classes of stock without the pre-
emptive right. appropriate basis for recording the transaction is the
c. sell capital stock back to the corporation at the option of the stockholder. a. market value of the services received.
d. receive the same amount of dividends on a percentage basis as the b. par value of the shares issued.
preferred stockholders. c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
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24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to 31. Direct costs incurred to sell stock such as underwriting costs should be
accumulate over its existence. accounted for as
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to 1. a reduction of additional paid-in capital.
generate. 2. an expense of the period in which the stock is issued.
d. the total capital raised by a corporation within the limits set by the 3. an intangible asset.
Securities and Exchange Commission. a. 1
b. 2
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25. Stockholders of a business enterprise are said to be the residual owners. c. 3
The term residual owner means that shareholders d. 1 or 3
a. are entitled to a dividend every year in which the business earns a
profit. 32. A "secret reserve" will be created if
b. have the rights to specific assets of the business. a. inadequate depreciation is charged to income.
c. bear the ultimate risks and uncertainties and receive the benefits of b. a capital expenditure is charged to expense.
enterprise ownership. c. liabilities are understated.
d. can negotiate individual contracts on behalf of the enterprise. d. stockholders' equity is overstated.

26. Total stockholders' equity represents P

33. Which of the following represents the total number of shares that a
a. a claim to specific assets contributed by the owners. corporation may issue under the terms of its charter?
b. the maximum amount that can be borrowed by the enterprise. a. authorized shares
c. a claim against a portion of the total assets of an enterprise. b. issued shares
d. only the amount of earnings that have been retained in the business. c. unissued shares
d. outstanding shares
 stock was subsequently sold for $12,000. The $8,000 difference between
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34. Stock that has a fixed per-share amount printed on each stock certificate is the cost and sales price should be recorded as a deduction from
called a. additional paid-in capital to the extent that previous net "gains" from
a. stated value stock. sales of the same class of stock are included therein; otherwise, from
b. fixed value stock. retained earnings.
c. uniform value stock. b. additional paid-in capital without regard as to whether or not there have
d. par value stock. been previous net "gains" from sales of the same class of stock
included therein.
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35. Which of the following is not a legal restriction related to profit distributions c. retained earnings.
by a corporation? d. net income.
a. The amount distributed to owners must be in compliance with the state
laws governing corporations. 41. How should a "gain" from the sale of treasury stock be reflected when using
b. The amount distributed in any one year can never exceed the net the cost method of recording treasury stock transactions?
income reported for that year. a. As ordinary earnings shown on the income statement.
c. Profit distributions must be formally approved by the board of directors. b. As paid-in capital from treasury stock transactions.
d. Dividends must be in full agreement with the capital stock contracts as c. As an increase in the amount shown for common stock.
to preferences and participation. d. As an extraordinary item shown on the income statement.
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36. In January 2007, Castro Corporation, a newly formed company, issued 42. Which of the following best describes a possible result of treasury stock
10,000 shares of its $10 par common stock for $15 per share. On July 1, transactions by a corporation?
2007, Castro Corporation reacquired 1,000 shares of its outstanding stock a. May increase but not decrease retained earnings.
for $12 per share. The acquisition of these treasury shares b. May increase net income if the cost method is used.
a. decreased total stockholders' equity. c. May decrease but not increase retained earnings.
b. increased total stockholders' equity. d. May decrease but not increase net income.
c. did not change total stockholders' equity.
d. decreased the number of issued shares. 43. Which of the following features of preferred stock makes the security more
like debt than an equity instrument?
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37. Treasury shares are a. Participating
a. shares held as an investment by the treasurer of the corporation. b. Voting
b. shares held as an investment of the corporation. c. Redeemable
c. issued and outstanding shares. d. Noncumulative
d. issued but not outstanding shares.
44. The cumulative feature of preferred stock
38. When treasury stock is purchased for more than the par value of the stock a. limits the amount of cumulative dividends to the par value of the
preferred stock.
and the cost method is used to account for treasury stock, what account(s)
b. requires that dividends not paid in any year must be made up in a later
should be debited? year before dividends are distributed to common shareholders.
a. Treasury stock for the par value and paid-in capital in excess of par for c. means that the shareholder can accumulate preferred stock until it is
the excess of the purchase price over the par value. equal to the par value of common stock at which time it can be
b. Paid-in capital in excess of par for the purchase price. converted into common stock.
c. Treasury stock for the purchase price. d. enables a preferred stockholder to accumulate dividends until they
d. Treasury stock for the par value and retained earnings for the excess of equal the par value of the stock and receive the stock in place of the
the purchase price over the par value. cash dividends.
39. Gains" on sales of treasury stock (using the cost method) should be
credited to P
45. According to the FASB, redeemable preferred stock should be
a. paid-in capital from treasury stock. a. included with common stock.
b. capital stock. b. included as a liability.
c. retained earnings. c. excluded from the stockholders equity heading.
d. other income. d. included as a contra item in stockholders' equity.
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46. Cumulative preferred dividends in arrears should be shown in a
40. Wilson Corp. purchased its own par value stock on January 1, 2007 for corporation's balance sheet as
$20,000 and debited the treasury stock account for the purchase price. The a. an increase in current liabilities.
 b. an increase in stockholders' equity. b. a paid-in capital account.
c. a footnote. c. Accumulated Depletion.
d. an increase in current liabilities for the current portion and long-term d. Accumulated Depreciation.
liabilities for the long-term portion.
54. If management wishes to "capitalize" part of the earnings, it may issue a
47. At the date of the financial statements, common stock shares issued would a. cash dividend.
exceed common stock shares outstanding as a result of the b. stock dividend.
a. declaration of a stock split. c. property dividend.
b. declaration of a stock dividend. d. liquidating dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock. 55. Which dividends do not reduce stockholders' equity?
a. Cash dividends
48. An entry is not made on the b. Stock dividends
a. date of declaration. c. Property dividends
b. date of record. d. Liquidating dividends
c. date of payment.
d. An entry is made on all of these dates. 56. The declaration and issuance of a stock dividend larger than 25% of the
shares previously outstanding
49. Cash dividends are paid on the basis of the number of shares a. increases common stock outstanding and increases total stockholders'
a. authorized. equity.
b. issued. b. decreases retained earnings but does not change total stockholders'
c. outstanding. equity.
d. outstanding less the number of treasury shares. c. may increase or decrease paid-in capital in excess of par but does not
change total stockholders' equity.
50. Which of the following statements about property dividends is not true? d. increases retained earnings and increases total stockholders' equity.
a. A property dividend is usually in the form of securities of other
companies. 57. Pryor Corporation issued a 100% stock dividend of its common stock which
b. A property dividend is also called a dividend in kind. had a par value of $10 before and after the dividend. At what amount should
c. The accounting for a property dividend should be based on the carrying retained earnings be capitalized for the additional shares issued?
value (book value) of the nonmonetary assets transferred. a. There should be no capitalization of retained earnings.
d. All of these statements are true. b. Par value
c. Market value on the declaration date
51. Farmer Corporation owns 4,000,000 shares of stock in Baha Corporation. d. Market value on the payment date
On December 31, 2007, Farmer distributed these shares of stock as a
dividend to its stockholders. This is an example of a 58. The issuer of a 5% common stock dividend to common stockholders
a. property dividend. preferably should transfer from retained earnings to contributed capital an
b. stock dividend. amount equal to the
c. liquidating dividend. a. market value of the shares issued.
d. cash dividend. b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
52. A dividend which is a return to stockholders of a portion of their original
investments is a 59. At the date of declaration of a small common stock dividend, the entry
a. liquidating dividend. should not include
b. property dividend. a. a credit to Common Stock Dividend Payable.
c. liability dividend. b. a credit to Paid-in Capital in Excess of Par.
d. participating dividend. c. a debit to Retained Earnings.
d. All of these are acceptable.
53. A mining company declared a liquidating dividend. The journal entry to
record the declaration must include a debit to 60.The balance in Common Stock Dividend Distributable should be reported as a(n)
a. Retained Earnings. a. deduction from common stock issued.
 b. addition to capital stock. d. a 2-for-1 split of the common stock.
c. current liability.
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d. contra current asset. 67. Assume common stock is the only class of stock outstanding in the B-Bar-B
Corporation. Total stockholders' equity divided by the number of common
61. A feature common to both stock splits and stock dividends is stock shares outstanding is called
a. a transfer to earned capital of a corporation. a. book value per share.
b. that there is no effect on total stockholders' equity. b. par value per share.
c. an increase in total liabilities of a corporation. c. stated value per share.
d. a reduction in the contributed capital of a corporation. d. market value per share.

62. What effect does the issuance of a 2-for-1 stock split have on each of the *68. Dividends are not paid on
following? a. noncumulative preferred stock.
b. nonparticipating preferred stock.
Par Value per Share Retained Earnings c. treasury common stock.
a. No effect No effect d. Dividends are paid on all of these.
b. Increase No effect
c. Decrease No effect *69. Noncumulative preferred dividends in arrears
d. Decrease Decrease a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
63. Which one of the following disclosures should be made in the equity section c. are disclosed as a liability until paid.
of the balance sheet, rather than in the notes to the financial statements? d. are paid to preferred stockholders if sufficient funds remain after
a. Dividend preferences payment of the current preferred dividend.
b. Liquidation preferences
c. Call prices *70. How should cumulative preferred dividends in arrears be shown in a
d. Conversion or exercise prices corporation's statement of financial position?
a. Note disclosure
64. The rate of return on common stock equity is calculated by dividing b. Increase in stockholders' equity
a. net income less preferred dividends by average common stockholders c. Increase in current liabilities
equity. d. Increase in current liabilities for the amount expected to be declared
b. net income by average common stockholders equity. within the year or operating cycle, and increase in long-term liabilities for
c. net income less preferred dividends by ending common stockholders the balance
equity.
d. net income by ending common stockholders equity.

65. The payout ratio can be calculated by dividing Multiple Choice AnswersConceptual
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share. XVI. DILUTIVE SECURITIES AND EARNINGS PER SHARE
d. dividends per share by earnings per share and dividing cash dividends
by net income less preferred dividends. 21. Convertible bonds
a. have priority over other indebtedness.
66. Windsor Company has outstanding both common stock and b. are usually secured by a first or second mortgage.
nonparticipating, non-cumulative preferred stock. The liquidation value of the c. pay interest only in the event earnings are sufficient to cover the
preferred is equal to its par value. The book value per share of the common interest.
stock is unaffected by d. may be exchanged for equity securities.
a. the declaration of a stock dividend on preferred payable in preferred
stock when the market price of the preferred is equal to its par value. 22. The conversion of bonds is most commonly recorded by the
b. the declaration of a stock dividend on common stock payable in a. incremental method.
common stock when the market price of the common is equal to its par b. proportional method.
value. c. market value method.
c. the payment of a previously declared cash dividend on the common d. book value method.
stock.
23. When a bond issuer offers some form of additional consideration (a d. the warrants issued with the debt securities are nondetachable.
sweetener) to induce conversion, the sweetener is accounted for as a(n)
a. extraordinary item. 30. Stock warrants outstanding should be classified as
b. expense. a. liabilities.
c. loss. b. reductions of capital contributed in excess of par value.
d. none of these. c. assets.
d. none of these.
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24. Corporations issue convertible debt for two main reasons. One is the desire
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to raise equity capital that, assuming conversion, will arise when the original 31. A corporation issues bonds with detachable warrants. The amount to be
debt is converted. The other is recorded as paid-in capital is preferably
a. the ease with which convertible debt is sold even if the company has a a. zero.
poor credit rating. b. calculated by the excess of the proceeds over the face amount of the
b. the fact that equity capital has issue costs that convertible debt does bonds.
not. c. equal to the market value of the warrants.
c. that many corporations can obtain financing at lower rates. d. based on the relative market values of the two securities involved.
d. that convertible bonds will always sell at a premium.
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25. When convertible debt is retired by the issuer, any material difference 32. The distribution of stock rights to existing common stockholders will increase
between the cash acquisition price and the carrying amount of the debt paid-in capital at the
should be
a. reflected currently in income, but not as an extraordinary item. Date of Issuance Date of Exercise
b. reflected currently in income as an extraordinary item. of the Rights of the Rights
c. treated as a prior period adjustment. a. Yes Yes
d. treated as an adjustment of additional paid-in capital. b. Yes No
c. No Yes
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26. The conversion of preferred stock into common requires that any excess of d. No No
the par value of the common shares issued over the carrying amount of the S
preferred being converted should be 33. The major difference between convertible debt and stock warrants is that
a. reflected currently in income, but not as an extraordinary item. upon exercise of the warrants
b. reflected currently in income as an extraordinary item. a. the stock is held by the company for a defined period of time before they
c. treated as a prior period adjustment. are issued to the warrant holder.
d. treated as a direct reduction of retained earnings. b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient
27. The conversion of preferred stock may be recorded by the after a set period of time.
a. incremental method. d. no paid-in capital in excess of par can be a part of the transaction.
b. book value method. S
c. market value method. 34. Which of the following is not a characteristic of a noncompensatory stock
d. par value method. option plan?
a. Substantially all full-time employees may participate on an equitable
28. When the cash proceeds from a bond issued with detachable stock warrants basis.
exceed the sum of the par value of the bonds and the fair market value of b. The plan offers no substantive option feature.
the warrants, the excess should be credited to c. Unlimited time period permitted for exercise of an option as long as the
a. additional paid-in capital from stock warrants. holder is still employed by the company.
b. retained earnings. d. Discount from the market price of the stock no greater than would be
c. a liability account. reasonable in an offer of stock to stockholders or others.
d. premium on bonds payable.
35. The date on which to measure the compensation element in a stock option
29. Proceeds from an issue of debt securities having stock warrants should not granted to a corporate employee ordinarily is the date on which the
be allocated between debt and equity features when employee
a. the market value of the warrants is not readily available. a. is granted the option.
b. exercise of the warrants within the next few fiscal periods seems b. has performed all conditions precedent to exercising the option.
remote. c. may first exercise the option.
c. the allocation would result in a discount on the debt security. d. exercises the option.
 Multiple Choice AnswersDilutive Securities, Conceptual
36. Compensation expense resulting from a compensatory stock option plan is
generally Solutions to those Multiple Choice questions for which the answer is none of these.
a. recognized in the period of exercise. 30. additions to contributed capital.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service. XVII. INVESTMENTS
d. allocated over the periods of the employee's service life to retirement.
21. Which of the following is not a debt security?
37. The date on which total compensation expense is computed in a stock option a. Convertible bonds
plan is the date b. Commercial paper
a. of grant. c. Loans receivable
b. of exercise. d. All of these are debt securities.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price. 22. A correct valuation is
a. available-for-sale at amortized cost.
38. Which of the following is not a characteristic of a noncompensatory stock b. held-to-maturity at amortized cost.
purchase plan? c. held-to-maturity at fair value.
a. It is open to almost all full-time employees. d. none of these.
b. The discount from market price is small.
c. The plan offers no substantive option feature. 23. Securities which could be classified as held-to-maturity are
d. All of these are characteristics. a. redeemable preferred stock.
b. warrants.
*39. Under the intrinsic value method, compensation expense resulting from an c. municipal bonds.
incentive stock option is generally d. treasury stock.
a. not recognized because no excess of market price over the option price
exists at the date of grant. 24. Unrealized holding gains or losses which are recognized in income are from
b. recognized in the period of the grant. securities classified as
c. allocated to the periods benefited by the employee's required service. a. held-to-maturity.
d. recognized in the period of exercise. b. available-for-sale.
c. trading.
*40. An executive compensation plan in which the executive may receive d. none of these.
compensation in cash, shares of stock, or a combination of both, is known
as ______________ plan. P
25. When an investor's accounting period ends on a date that does not coincide
a. a nonqualified stock option with an interest receipt date for bonds held as an investment, the investor must
b. a performance-type a. make an adjusting entry to debit Interest Receivable and to credit
c. a stock appreciation rights Interest Revenue for the amount of interest accrued since the last
d. both a performance-type and a stock appreciation rights interest receipt date.
b. notify the issuer and request that a special payment be made for the
*41. A corporation should record no compensation expense for which of the appropriate portion of the interest period.
following types of executive compensation plans? c. make an adjusting entry to debit Interest Receivable and to credit
a. Stock appreciation rights Interest Revenue for the total amount of interest to be received at the
b. Nonqualified stock option plans next interest receipt date.
c. Incentive stock option plans d. do nothing special and ignore the fact that the accounting period does
d. Compensation expense should be recorded for all of these. not coincide with the bond's interest period.

*42. The payment to executives from a performance-type plan is never based on S

26. Debt securities that are accounted for at amortized cost, not fair value, are
the a. held-to-maturity debt securities.
a. market price of the common stock. b. trading debt securities.
b. return on assets (investment). c. available-for-sale debt securities.
c. return on common stockholders' equity. d. never-sell debt securities.
d. sales.
S
27. Debt securities acquired by a corporation which are accounted for by
recognizing unrealized holding gains or losses and are included as other
comprehensive income and as a separate component of stockholders' equity
are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S
28. Use of the effective-interest method in amortizing bond premiums and
discounts results in
a. a greater amount of interest income over the life of the bond issue than
would result from use of the straight-line method.
b. a varying amount being recorded as interest income from period to
period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than
would result from use of the straight-line method.
S c. 20 periods and 5% from the present value of 1 table.
29. Equity securities acquired by a corporation which are accounted for by
recognizing unrealized holding gains or losses as other comprehensive
income and as a separate component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than
20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
31. Held-to-maturity securities are reported at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
32. Solo Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold
the securities to maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. none of these.
33. Which of the following is not correct in regard to trading securities?
a. They are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
34. In accounting for investments in debt securities that are classified as trading
securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
35. Investments in debt securities are generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or premium account.
36. Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually.
The bonds are sold to yield 8%. One step in calculating the issue price of the
bonds is to multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
37. Investments in debt securities should be recorded on the date of acquisition
at
a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the
purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
38. An available-for-sale debt security is purchased at a discount. The entry to
record the amortization of the discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
39. APB Opinion No. 21 specifies that, regarding the amortization of a premium
or discount on a debt security, the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods
can be applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is
necessary.
40. Which of the following is correct about the effective-interest method of
amortization?
a. The effective interest method applied to investments in debt securities is
different from that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
 c. Amortization of a premium decreases from period to period. b. The investor should use the equity method to account for its investment
d. The effective-interest method produces a constant rate of return on the unless circum-stances indicate that it is unable to exercise "significant
influence" over the investee.
book value of the investment from period to period.
c. The investor must use the fair value method unless it can clearly
demonstrate the ability to exercise "significant influence" over the
41. When investments in debt securities are purchased between interest investee.
payment dates, preferably the d. The investor should always use the fair value method to account for its
a. securities account should include accrued interest. investment.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue. 47. If the parent company owns 90% of the subsidiary company's outstanding
d. accrued interest is debited to Interest Receivable. common stock, the company should generally account for the income of the
subsidiary under the
42. Which of the following is not generally correct about recording a sale of a a. cost method.
debt security before maturity date? b. fair value method.
a. Accrued interest will be received by the seller even though it is not an c. divesture method.
interest payment date. d. equity method.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to 48. Byner Corporation accounts for its investment in the common stock of Yount
the Premium on Investments in Debt Securities. Company under the equity method. Byner Corporation should ordinarily
d. A gain or loss on the sale is not extraordinary. record a cash dividend received from Yount as
a. a reduction of the carrying value of the investment.
S
43. When a company has acquired a "passive interest" in another corporation, b. additional paid-in capital.
the acquiring company should account for the investment c. an addition to the carrying value of the investment.
a. by using the equity method. d. dividend income.
b. by using the fair value method.
c. by using the effective interest method. 49. Under the equity method of accounting for investments, an investor
d. by consolidation. recognizes its share of the earnings in the period in which the
a. investor sells the investment.
S
44. Bista Corporation declares and distributes a cash dividend that is a result of b. investee declares a dividend.
current earnings. How will the receipt of those dividends affect the c. investee pays a dividend.
investment account of the investor under each of the following accounting d. earnings are reported by the investee in its financial statements.
methods?
50. Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007,
Fair Value Method Equity Method
Marin had net earnings of $300,000 and paid dividends of $30,000. Dane
a. No Effect Decrease
mistakenly recorded these transactions using the fair value method rather
b. Increase Decrease
than the equity method of accounting. What effect would this have on the
c. No Effect No Effect
investment account, net income, and retained earnings, respectively?
d. Decrease No Effect
a. Understate, overstate, overstate
P b. Overstate, understate, understate
45. An investor has a long-term investment in stocks. Regular cash dividends
c. Overstate, overstate, overstate
received by the investor are recorded as
d. Understate, understate, understate
Fair Value Method Equity Method
a. Income Income 51. An unrealized holding loss on a company's available-for-sale securities
b. A reduction of the investment A reduction of the investment should be reflected in the current financial statements as
c. Income A reduction of the investment a. an extraordinary item shown as a direct reduction from retained
d. A reduction of the investment Income earnings.
b. a current loss resulting from holding securities.
46.When a company holds between 20% and 50% of the outstanding stock of an c. a note or parenthetical disclosure only.
investee, which of the following statements applies? d. other comprehensive income and deducted in the equity section of the
a. The investor should always use the equity method to account for its balance sheet.
investment.
 52. An unrealized holding gain on a company's available-for-sale securities a. they should be recognized in the financial statements as assets and
should be reflected in the current financial statements as liabilities.
a. an extraordinary item shown as a direct increase to retained earnings. b. they should be reported at fair value.
b. a current gain resulting from holding securities. c. gains and losses resulting from speculation should be deferred.
c. a note or parenthetical disclosure only. d. gains and losses resulting from hedge transactions are reported in
d. other comprehensive income and included in the equity section of the different ways, depending upon the type of hedge.
balance sheet. *59. All of the following are characteristics of a derivative financial instrument
except the instrument
53. A reclassification adjustment is reported in the a. has one or more underlyings and an identified payment provision.
a. income statement as an Other Revenue or Expense. b. requires a large investment at the inception of the contract.
b. stockholders equity section of the balance sheet. c. requires or permits net settlement.
c. statement of comprehensive income as other comprehensive income. d. All of these are characteristics.
d. statement of stockholders equity.
*60. The accounting for fair value hedges records the derivative at its
54. When an investment in a held-to-maturity security is transferred to an a. amortized cost.
available-for-sale security, the carrying value assigned to the available-for- b. carrying value.
sale security should be c. fair value.
a. its original cost. d. historical cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer. *61. Gains or losses on cash flow hedges are
d. the higher of its original cost or its fair value at the date of the transfer. a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
55. When an investment in an available-for-sale security is transferred to trading c. reported directly in net income.
because the company anticipates selling the stock in the near future, the d. reported directly in retained earnings.
carrying value assigned to the investment upon entering it in the trading
portfolio should be *62. An option to convert a convertible bond into shares of common stock is a(n)
a. its original cost. a. embedded derivative.
b. its fair value at the date of the transfer. b. host security.
c. the higher of its original cost or its fair value at the date of the transfer. c. hybrid security.
d. the lower of its original cost or its fair value at the date of the transfer. d. fair value hedge.
P
56. A debt security is transferred from one category to another. Generally *63. All of the following are requirements for disclosures related to financial
acceptable accounting principles require that for this particular instruments except
reclassification (1) the security be transferred at fair value at the date of a. disclosing the fair value and related carrying value of the instruments.
transfer, and (2) the unrealized gain or loss at the date of transfer currently b. distinguishing between financial instruments held or issued for purposes
carried as a separate component of stockholders' equity be amortized over other than trading.
the remaining life of the security. What type of transfer is being described? c. combining or netting the fair value of separate financial instruments.
a. Transfer from trading to available-for-sale d. displaying as a separate classification of other comprehensive income
b. Transfer from available-for-sale to trading the net gain/loss on derivative instruments designated in cash flow
c. Transfer from held-to-maturity to available-for-sale hedges.
d. Transfer from available-for-sale to held-to-maturity

*57. Companies that attempt to exploit inefficiencies in various derivative markets Multiple Choice AnswersConceptual
by attempting to lock in profits by simultaneously entering into transactions in
two or more markets are called
a. arbitrageurs. REVENUE RECOGNITION
b. gamblers. 21. The revenue recognition principle provides that revenue is recognized when
c. hedgers. a. it is realized.
d. speculators. b. it is realizable.
c. it is realized or realizable and it is earned.
*58. All of the following statements regarding accounting for derivatives are d. none of these.
correct except that
 a. recording the sale, and accounting for returns as they occur in future
22. When goods or services are exchanged for cash or claims to cash periods.
(receivables), revenues are b. not recording a sale until all return privileges have expired.
a. earned. c. recording the sale, but reducing sales by an estimate of future returns.
b. realized. d. all of these.
c. recognized.
d. all of these. 29. A sale should not be recognized as revenue by the seller at the time of sale
if
23. When the entity has substantially accomplished what it must do to be a. payment was made by check.
entitled to the benefits represented by the revenues, revenues are b. the selling price is less than the normal selling price.
a. earned. c. the buyer has a right to return the product and the amount of future
b. realized. returns cannot be reasonably estimated.
c. recognized. d. none of these.
d. all of these.
30. The FASB concluded that if a company sells its product but gives the buyer
S
24. Which of the following is not an accurate representation concerning revenue the right to return the product, revenue from the sales transaction shall be
recognition? recognized at the time of sale only if all of six conditions have been met.
a. Revenue from selling products is recognized at the date of sale, usually Which of the following is not one of these six conditions?
interpreted to mean the date of delivery to customers. a. The amount of future returns can be reasonably estimated.
b. Revenue from services rendered is recognized when cash is received or b. The seller's price is substantially fixed or determinable at time of sale.
when services have been performed. c. The buyer's obligation to the seller would not be changed in the event of
c. Revenue from permitting others to use enterprise assets is recognized theft or damage of the product.
as time passes or as the assets are used. d. The buyer is obligated to pay the seller upon resale of the product.
d. Revenue from disposing of assets other than products is recognized at
the date of sale. 31. In selecting an accounting method for a newly contracted long-term
construction project, the principal factor to be considered should be
P
25. The process of formally recording or incorporating an item in the financial a. the terms of payment in the contract.
statements of an entity is b. the degree to which a reliable estimate of the costs to complete and
a. allocation. extent of progress toward completion is practicable.
b. articulation. c. the method commonly used by the contractor to account for other long-
c. realization. term construc-tion contracts.
d. recognition. d. the inherent nature of the contractor's technical facilities used in
construction.
P
26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year
service contract on each appliance sold. Although Dot Point sells the 32. The percentage-of-completion method must be used when certain conditions
appliances on an installment basis, all service contracts are cash sales at exist. Which of the following is not one of those necessary conditions?
the time of purchase by the buyer. Collections received for service contracts a. Estimates of progress toward completion, revenues, and costs are
should be recorded as reasonably dependable.
a. service revenue. b. The contractor can be expected to perform the contractual obligation.
b. deferred service revenue. c. The buyer can be expected to satisfy some of the obligations under the
c. a reduction in installment accounts receivable. contract.
d. a direct addition to retained earnings. d. The contract clearly specifies the enforceable rights of the parties, the
consideration to be exchanged, and the manner and terms of
27. Which of the following is not a reason why revenue is recognized at time of settlement.
sale?
a. Realization has occurred. 33. When work to be done and costs to be incurred on a long-term contract can
b. The sale is the critical event. be estimated dependably, which of the following methods of revenue
c. Title legally passes from seller to buyer. recognition is preferable?
d. All of these are reasons to recognize revenue at time of sale. a. Installment-sales method
b. Percentage-of-completion method
28. An alternative available when the seller is exposed to continued risks of c. Completed-contract method
ownership through return of the product is d. None of these
 b. it reflects current performance when the period of a contract extends
34. How should the balances of progress billings and construction in process be into more than one accounting period.
shown at reporting dates prior to the completion of a long-term contract? c. it is not necessary to recognize revenue at the point of sale.
a. Progress billings as deferred income, construction in progress as a d. a greater amount of gross profit and net income is reported than is the
deferred expense. case when the percentage-of-completion method is used.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit 40. Under the completed-contract method
balance. a. revenue, cost, and gross profit are recognized during the production
d. Net, as income from construction if credit balance, and loss from cycle.
construction if debit balance. b. revenue and cost are recognized during the production cycle, but gross
profit recognition is deferred until the contract is completed.
35. In accounting for a long-term construction-type contract using the c. revenue, cost, and gross profit are recognized at the time the contract is
percentage-of-completion method, the gross profit recognized during the first completed.
year would be the estimated total gross profit from the contract, multiplied by d. none of these.
the percentage of the costs incurred during the year to the
a. total costs incurred to date. 41. Cost estimates on a long-term contract may indicate that a loss will result on
b. total estimated cost.
c. unbilled portion of the contract price. completion of the entire contract. In this case, the entire expected loss
d. total contract price. should be
a. recognized in the current period, regardless of whether the percentage-
36. How should earned but unbilled revenues at the balance sheet date on a of-completion or completed-contract method is employed.
long-term construction contract be disclosed if the percentage-of-completion b. recognized in the current period under the percentage-of-completion
method of revenue recognition is used? method, but the completed-contract method should defer recognition of
a. As construction in process in the current asset section of the balance the loss to the time when the contract is completed.
sheet. c. recognized in the current period under the completed-contract method,
b. As construction in process in the noncurrent asset section of the but the percentage-of-completion method should defer the loss until the
balance sheet. contract is completed.
c. As a receivable in the noncurrent asset section of the balance sheet. d. deferred and recognized when the contract is completed, regardless of
d. In a note to the financial statements until the customer is formally billed whether the percentage-of-completion or completed-contract method is
for the portion of work completed. employed.

37. The principal disadvantage of using the percentage-of-completion method of 42.Cost estimates at the end of the second year indicate a loss will result on
recognizing revenue from long-term contracts is that it completion of the entire contract. Which of the following statements is correct?
a. is unacceptable for income tax purposes. a. Under the completed-contract method, the loss is not recognized until
b. gives results based upon estimates which may be subject to the year the construction is completed.
considerable uncertainty. b. Under the percentage-of-completion method, the gross profit recognized
c. is likely to assign a small amount of revenue to a period during which in the first year must not be changed.
much revenue was actually earned. c. Under the completed-contract method, when the billings exceed the
d. none of these. accumulated costs, the amount of the estimated loss is reported as a
current liability.
S
38. One of the more popular input measures used to determine the progress d. Under the completed-contract method, when the Construction in
toward completion in the percentage-of-completion method is Process balance exceeds the billings, the estimated loss is added to the
a. revenue-percentage basis. accumulated costs.
b. cost-percentage basis.
c. progress completion basis. 43. The criteria for recognition of revenue at the completion of production of
d. cost-to-cost basis. precious metals and farm products include
a. an established market with quoted prices.
S
39. The principal advantage of the completed-contract method is that b. low additional costs of completion and selling.
a. reported revenue is based on final results rather than estimates of c. units are interchangeable.
unperformed work. d. all of these.
 44. In certain cases, revenue is recognized at the completion of production even 50. Under the installment-sales method,
though no sale has been made. Which of the following statements is not a. revenue, costs, and gross profit are recognized proportionate to the
cash that is received from the sale of the product.
true?
b. gross profit is deferred proportionate to cash uncollected from sale of
a. Examples involve precious metals or farm equipment.
the product, but total revenues and costs are recognized at the point of
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product. sale.
c. gross profit is not recognized until the amount of cash received exceeds
d. All of these statements are true.
the cost of the item sold.
S d. revenues and costs are recognized proportionate to the cash received
45. For which of the following products is it appropriate to recognize revenue at
from the sale of the product, but gross profit is deferred until all cash is
the completion of production even though no sale has been made?
received.
a. Automobiles
b. Large appliances S
51. The realization of income on installment sales transactions involves
c. Single family residential units
a. recognition of the difference between the cash collected on installment
d. Precious metals
sales and the cash expenses incurred.
S b. deferring the net income related to installment sales and recognizing the
46. When there is a significant increase in the estimated total contract costs but
income as cash is collected.
the increase does not eliminate all profit on the contract, which of the
c. deferring gross profit while recognizing operating or financial expenses
following is correct?
in the period incurred.
a. Under both the percentage-of-completion and the completed-contract
d. deferring gross profit and all additional expenses related to installment
methods, the estimated cost increase requires a current period
sales until cash is ultimately collected.
adjustment of excess gross profit recognized on the project in prior
periods. P
52. A manufacturer of large equipment sells on an installment basis to
b. Under the percentage-of-completion method only, the estimated cost
customers with questionable credit ratings. Which of the following methods
increase requires a current period adjustment of excess gross profit
of revenue recognition is least likely to overstate the amount of gross profit
recognized on the project in prior periods.
reported?
c. Under the completed-contract method only, the estimated cost increase
a. At the time of completion of the equipment (completion of production
requires a current period adjustment of excess gross profit recognized
method)
on the project in prior periods.
b. At the date of delivery (sales method)
d. No current period adjustment is required.
c. The installment-sales method
d. The costrecovery method
47. Deferred gross profit on installment sales is generally treated as a(n)
a. deduction from installment accounts receivable.
53. A seller is properly using the cost-recovery method for a sale. Interest will be
b. deduction from installment sales.
earned on the future payments. Which of the following statements is not
c. unearned revenue and classified as a current liability.
correct?
d. deduction from gross profit on sales.
a. After all costs have been recovered, any additional cash collections are
included in income.
48. The installment-sales method of recognizing profit for accounting purposes
b. Interest revenue may be recognized before all costs have been
is acceptable if
recovered.
a. collections in the year of sale do not exceed 30% of the total sales price.
c. The deferred gross profit is offset against the related receivable on the
b. an unrealized profit account is credited.
balance sheet.
c. collection of the sales price is not reasonably assured.
d. Subsequent income statements report the gross profit as a separate
d. the method is consistently used for all sales of similar merchandise.
item of revenue when it is recognized as earned.
49. The method most commonly used to report defaults and repossessions is
54. Under the cost-recovery method of revenue recognition,
a. provide no basis for the repossessed asset thereby recognizing a loss.
a. income is recognized on a proportionate basis as the cash is received
b. record the repossessed merchandise at fair value, recording a gain or loss if
on the sale of the product.
appropriate.
b. income is recognized when the cash received from the sale of the
c. record the repossessed merchandise at book value, recording no gain
product is greater than the cost of the product.
or loss.
c. income is recognized immediately.
d. none of these.
d. none of these.
55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon c. consignor receives an advance from the consignee.
discovery of water, Winser does not recognize any revenue from water sales d. consignor receives an account sales from the consignee.
until the sales exceed the costs of exploration, the basis of revenue
recognition being employed is the
a. production basis. ACCOUNTING FOR INCOME TAXES
b. cash (or collection) basis. 21.Taxable income of a corporation
c. sales (or accrual) basis. a. differs from accounting income due to differences in intraperiod
d. cost recovery basis. allocation between the two methods of income determination.
b. differs from accounting income due to differences in interperiod
*56. Some of the initial franchise fee may be allocated to allocation and permanent differences between the two methods of
a. continuing franchise fees. income determination.
b. interest revenue on the future installments. c. is based on generally accepted accounting principles.
c. options to purchase the franchisee's business. d. is reported on the corporation's income statement.
d. All of these may reduce the amount of the initial franchise fee that is
recognized as revenue. 22 Taxable income of a corporation differs from pretax financial income
because of
*57. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee. Permanent Temporary
b. as revenue when received. Differences Differences
c. in accordance with the accounting procedures specified in the franchise a. No No
agreement. b. No Yes
d. as revenue only after the balance of the initial franchise fee has been c. Yes Yes
collected. d. Yes No

*58. Occasionally a franchise agreement grants the franchisee the right to make
future bargain purchases of equipment or supplies. When recording the
initial franchise fee, the franchisor should
a. increase revenue recognized from the initial franchise fee by the amount
of the expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which
will increase the selling price when the franchisee subsequently makes
the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the
bargain purchases are made.
d. None of these.
*59. A franchise agreement grants the franchisor an option to purchase the
franchisee's business. It is probable that the option will be exercised. When
recording the initial franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will
reduce the franchisor's investment in the purchased outlet when the
option is exercised.
b. record the entire initial franchise fee as unearned revenue which will
reduce the amount of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the
bargain purchase option as a reduction of the future amounts receivable
from the franchisee.
d. None of these.
*60. Revenue is recognized by the consignor when the
a. goods are shipped to the consignee.
b. consignee receives the goods.
23. Interperiod income tax allocation causes
a. tax expense shown on the income statement to equal the amount of
income taxes payable for the current year plus or minus the change in
the deferred tax asset or liability balances for the year.
b. tax expense shown in the income statement to bear a normal relation to
the tax liability.
c. tax liability shown in the balance sheet to bear a normal relation to the
income before tax reported in the income statement.
d. tax expense in the income statement to be presented with the specific
revenues causing the tax.
24. The deferred tax expense is the
a. increase in balance of deferred tax asset minus the increase in balance
of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in
balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of
deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance
of deferred tax liability.
25. The rationale for interperiod income tax allocation is to
a. recognize a tax asset or liability for the tax consequences of temporary
differences that exist at the balance sheet date.
b. recognize a distribution of earnings to the taxing agency.
c. reconcile the tax consequences of permanent and temporary
differences appearing on the current year's financial statements.
 d. adjust income tax expense on the income statement to be in agreement b. Yes No
with income taxes payable on the balance sheet. c. No Yes
d. No No
26. Interperiod tax allocation results in a deferred tax liability from P
a. an income item partially recognized for financial purposes but fully 31. A temporary difference arises when a revenue item is reported for tax
recognized for tax purposes in any one year. purposes in a period
b. the amount of deferred tax consequences attributed to temporary After it is reported Before it is reported
differences that result in net deductible amounts in future years. in financial income in financial income
c. an income item fully recognized for tax and financial purposes in any a. Yes Yes
one year. b. Yes No
d. the amount of deferred tax consequences attributed to temporary c. No Yes
differences that result in net taxable amounts in future years. d. No No
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32. At the December 31, 2007 balance sheet date, Garth Brooks Corporation
27. Which of the following situations would require interperiod income tax reports an accrued receivable for financial reporting purposes but not for tax
allocation procedures? purposes. When this asset is recovered in 2008, a future taxable amount will
a. An excess of percentage depletion over cost depletion occur and
b. Interest received on municipal bonds a. pretax financial income will exceed taxable income in 2008.
c. A temporary difference exists at the balance sheet date because the tax b. Garth will record a decrease in a deferred tax liability in 2008.
basis of an asset or liability and its reported amount in the financial c. total income tax expense for 2008 will exceed current tax expense for
statements differ 2008.
d. Proceeds from a life insurance policy on an officer d. Garth will record an increase in a deferred tax asset in 2008.
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28. Interperiod income tax allocation procedures are appropriate when 33. Assuming a 40% statutory tax rate applies to all years involved, which of the
a. an extraordinary loss will cause the amount of income tax expense to be following situations will give rise to reporting a deferred tax liability on the
less than the tax on ordinary net income. balance sheet?
b. an extraordinary gain will cause the amount of income tax expense to
I. A revenue is deferred for financial reporting purposes but not for
be greater than the tax on ordinary net income.
tax purposes.
c. differences between net income for tax purposes and financial reporting
II. A revenue is deferred for tax purposes but not for financial
occur because tax laws and financial accounting principles do not
reporting purposes.
concur on the items to be recognized as revenue and expense.
III. An expense is deferred for financial reporting purposes but not for
d. differences between net income for tax purposes and financial reporting
tax purposes.
occur because, even though financial accounting principles and tax laws
IV. An expense is deferred for tax purposes but not for financial
concur on the item to be recognized as revenues and expenses, they
reporting purposes.
don't concur on the timing of the recognition.
a. item II only
29. Interperiod tax allocation would not be required when b. items I and II only
a. costs are written off in the year of the expenditure for tax purposes but c. items II and III only
capitalized for accounting purposes. d. items I and IV only
b. statutory (or percentage) depletion exceeds cost depletion for the
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period. 34. A major distinction between temporary and permanent differences is
c. different methods of revenue recognition arise for tax purposes and a. permanent differences are not representative of acceptable accounting
accounting purposes. practice.
d. different depreciable lives are used for machinery for tax and accounting b. temporary differences occur frequently, whereas permanent differences
purposes. occur only once.
c. once an item is determined to be a temporary difference, it maintains
30. Machinery was acquired at the beginning of the year. Depreciation recorded that status; however, a permanent difference can change in status with
during the life of the machinery could result in the passage of time.
d. temporary differences reverse themselves in subsequent accounting
Future Future periods, whereas permanent differences do not reverse.
Taxable Amounts Deductible Amounts
a. Yes Yes
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35. Which of the following are temporary differences that are normally classified b. Permanent Liability
as expenses or losses that are deductible after they are recognized in c. Temporary Asset
financial income? d. Temporary Liability
a. Advance rental receipts.
b. Product warranty liabilities. 42. A company records an unrealized loss on short-term securities. This would
c. Depreciable property. result in what type of difference and in what type of deferred income tax?
d. Fines and expenses resulting from a violation of law.
Type of Difference Deferred Tax
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36. Which of the following is a temporary difference classified as a revenue or a. Temporary Liability
gain that is taxable after it is recognized in financial income? b. Temporary Asset
a. Subscriptions received in advance. c. Permanent Liability
b. Prepaid royalty received in advance. d. Permanent Asset
c. An installment sale accounted for on the accrual basis for financial S
reporting purposes and on the installment (cash) basis for tax purposes. 43. When a change in the tax rate is enacted into law, its effect on existing
d. Interest received on a municipal obligation. deferred income tax accounts should be
a. handled retroactively in accordance with the guidance related to
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37. Which of the following differences would result in future taxable amounts? changes in accounting principles.
a. Expenses or losses that are tax deductible after they are recognized in b. considered, but it should only be recorded in the accounts if it reduces a
financial income. deferred tax liability or increases a deferred tax asset.
b. Revenues or gains that are taxable before they are recognized in c. reported as an adjustment to tax expense in the period of change.
financial income. d. applied to all temporary or permanent differences that arise prior to the
c. Revenues or gains that are recognized in financial income but are never date of the enactment of the tax rate change, but not subsequent to the
included in taxable income. date of the change.
d. Expenses or losses that are tax deductible before they are recognized
in financial income. 44. Tax rates other than the current tax rate may be used to calculate the
deferred income tax amount on the balance sheet if
a. it is probable that a future tax rate change will occur.
38. Renner Corporation's taxable income differed from its accounting income b. it appears likely that a future tax rate will be greater than the current tax
computed for this past year. An item that would create a permanent rate.
difference in accounting and taxable incomes for Renner would be c. the future tax rates have been enacted into law.
a. a balance in the Unearned Rent account at year end. d. it appears likely that a future tax rate will be less than the current tax
b. using accelerated depreciation for tax purposes and straight-line rate.
depreciation for book purposes.
45. Recognition of tax benefits in the loss year due to a loss carryforward
c. a fine resulting from violations of OSHA regulations.
requires
d. making installment sales during the year. a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
39. An example of a permanent difference is c. the establishment of an income tax refund receivable.
a. proceeds from life insurance on officers. d. only a note to the financial statements.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers. 46. Major reasons for disclosure of deferred income tax information is (are)
d. all of these. a. better assessment of quality of earnings.
b. better predictions of future cash flows.
40. Which of the following will not result in a temporary difference? c. that it may be helpful in setting government policy.
a. Product warranty liabilities d. all of these.
b. Advance rental receipts
c. Installment sales 47. Accounting for income taxes can result in the reporting of deferred taxes as
d. All of these will result in a temporary difference. any of the following except
41. A company uses the equity method to account for an investment. This would a. a current or long-term asset.
result in what type of difference and in what type of deferred income tax? b. a current or long-term liability.
c. a contra-asset account.
Type of Difference Deferred Tax
d. All of these are acceptable methods of reporting deferred taxes.
a. Permanent Asset
 48. Deferred taxes should be presented on the balance sheet
a. as one net debit or credit amount.
b. in two amounts: one for the net current amount and one for the net
noncurrent amount.
c. in two amounts: one for the net debit amount and one for the net credit
amount.
d. as reductions of the related asset or liability accounts.
49. Deferred tax amounts that are related to specific assets or liabilities should
be classified as current or noncurrent based on
a. their expected reversal dates.
b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax
deferral benefits.
d. the classification of the related asset or liability.
50. Tanner, Inc. incurred a financial and taxable loss for 2007. Tanner therefore
decided to use the carryback provisions as it had been profitable up to this
year. How should the amounts related to the carryback be reported in the
2007 financial statements?
a. The reduction of the loss should be reported as a prior period
adjustment.
b. The refund claimed should be reported as a deferred charge and
amortized over five years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2007.
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51. A deferred tax liability is classified on the balance sheet as either a current or
a noncurrent liability. The current amount of a deferred tax liability should
generally be
a. the net deferred tax consequences of temporary differences that will
result in net taxable amounts during the next year.
b. totally eliminated from the financial statements if the amount is related
to a noncurrent asset.
c. based on the classification of the related asset or liability for financial
reporting purposes.
d. the total of all deferred tax consequences that are not expected to
reverse in the operating period or one year, whichever is greater.
52. All of the following are procedures for the computation of deferred income
taxes except to
a. identify the types and amounts of existing temporary differences.
b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary
differences and operating loss carrybacks.
d. All of these are procedures in computing deferred income taxes.
Multiple Choice AnswersConceptual
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
21.In determining the present value of the prospective benefits (often referred to as
the projected benefit obligation), the following are considered by the actuary:
a. retirement and mortality rate.
b. interest rates.
c. benefit provisions of the plan.
d. all of these factors.
22. In a defined-benefit plan, the process of funding refers to
a. determining the projected benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that
funds are available to meet retirees' claims.
d. determining the amount that might be reported for pension expense.
23. In all pension plans, the accounting problems include all the following except
a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.
24. In a defined-contribution plan, a formula is used that
a. defines the benefits that the employee will receive at the time of
retirement.
b. ensures that pension expense and the cash funding amount will be
different.
c. requires an employer to contribute a certain sum each period based on
the formula.
d. ensures that employers are at risk to make sure funds are available at
retirement.
25. In a defined-benefit plan, a formula is used that
a. requires that the benefit of gain or the risk of loss from the assets
contributed to the pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of
retirement.
c. requires that pension expense and the cash funding amount be the
same.
d. defines the contribution the employer is to make; no promise is made
concerning the ultimate benefits to be paid out to the employees.
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26. Which of the following is not a characteristic of a defined-contribution
pension plan?
a. The employer's contribution each period is based on a formula.
b. The benefits to be received by employees are defined by the terms of
the plan.
c. The accounting for a defined-contribution plan is straightforward and
uncomplicated.
d. The benefit of gain or the risk of loss from the assets contributed to the
pension fund are borne by the employee.
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27. In accounting for a defined-benefit pension plan
 a. an appropriate funding pattern must be established to ensure that
enough monies will be available at retirement to meet the benefits
promised.
b. the employer's responsibility is simply to make a contribution each year
based on the formula established in the plan.
c. the expense recognized each period is equal to the cash contribution.
d. the liability is determined based upon known variables that reflect future
salary levels promised to employees.
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28. Alternative methods exist for the measurement of the pension obligation
(liability). Which measure requires the use of future salaries in its
computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation
29. The accumulated benefit obligation measures
a. the pension obligation on the basis of the plan formula applied to years
of service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years
of service to date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost
that will be sufficient, together with interest expected to accumulate at
the assumed rate, to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.
30. The projected benefit obligation is the measure of pension obligation that
a. is required to be used for reporting the service cost component of
pension expense.
b. requires pension expense to be determined solely on the basis of the
plan formula applied to years of service to date and based on existing
salary levels.
c. requires the longest possible period for funding to maximize the tax
deduction.
d. is not sanctioned under generally accepted accounting principles for
reporting the service cost component of pension expense.
31. Differing measures of the pension obligation can be based on
a. all years of serviceboth vested and nonvestedusing current salary
levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. all of these.
32. Vested benefits
a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these.
33. The relationship between the amount funded and the amount reported for
pension expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount
funded.
34. The computation of pension expense includes all the following except
a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.
35. In computing the service cost component of pension expense, the FASB
concluded that
a. the accumulated benefit obligation provides a more realistic measure of
the pension obligation on a going concern basis.
b. a company should employ an actuarial funding method to report
pension expense that best reflects the cost of benefits to employees.
c. the projected benefit obligation using future compensation levels
provides a realistic measure of present pension obligation and expense.
d. all of these.
36. The interest on the projected benefit obligation component of pension
expense
a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.
37. One component of pension expense is expected return on plan assets. Plan
assets include
a. contributions made by the employer and contributions made by the
employee when a contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid
pension cost.
d. none of these.
38. The actual return on plan assets
a. is equal to the change in the fair value of the plan assets during the
year.
b. includes interest, dividends, and changes in the market value of the
fund assets.
c. is equal to the actual rate of return times the fair value of the plan assets
at the beginning of the period.
d. all of these.
39. In accounting for a pension plan, any difference between the pension cost
charged to expense and the payments into the fund should be reported as
a. an offset to the liability for prior service cost.
 b. accrued or prepaid pension cost. b. both the accumulated benefit obligation and the projected benefit
c. an accrued actuarial liability. obligation are usually less than before.
d. a charge or credit to unrealized appreciation and depreciation. c. the expense and the liability should be recognized at the time of the
plan change.
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40. Which of the following items should be included in the net pension cost d. the expense should be recognized immediately, but the liability may be
calculated by an employer who sponsors a defined-benefit pension plan for deferred until a reasonable basis for its determination has been
its employees? identified.
Amortization of S
46. The unexpected gains or losses that result from changes in the projected
Fair value unrecognized prior benefit obligation are called
of plan assets service cost
a. Yes Yes Asset Liability
b. Yes No Gains & Losses Gains & Losses
c. No Yes a. Yes Yes
d. No No b. No No
c. Yes No
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41. A corporation has a defined-benefit plan. An accrued pension cost will result d. No Yes
at the end of the first year if the
a. accumulated benefit obligation exceeds the fair value of the plan assets. 47. Unrecognized gains and losses that relate to the computation of pension
b. fair value of the plan assets exceeds the accumulated benefit obligation. expense should be
c. amount of employer contributions exceeds the net periodic pension a. recorded currently as an adjustment to pension expense in the period
cost. incurred.
d. amount of net periodic pension cost exceeds the amount of employer b. recorded currently and in the future by applying the corridor method
contributions. which provides the amount to be amortized.
c. amortized over a 15-year period.
42. When a company adopts a pension plan, prior service costs should be d. recorded only if a loss is determined.
charged to
a. operations of current and future periods. 48. Market-related asset value is used to determine the corridor and to calculate
b. operations of prior periods. the expected return on plan assets.
c. operations of the current period.
Expected Return
d. retained earnings.
Corridor on Plan Assets
a. Yes Yes
43. When a company amends a pension plan, for accounting purposes, prior
b. Yes No
service costs should be
c. No Yes
a. treated as a prior period adjustment because no future periods are
d. No No
benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. amortized under accrual accounting to current and future periods 49. A pension fund gain or loss that is caused by a plant closing should be
benefited. a. recognized immediately as a gain or loss on the plant closing.
d. treated as an expense of the period during which the funding occurs. b. spread over the current year and future years.
c. charged or credited to the current pension expense.
44. Prior service cost is amortized on a d. recognized as a prior period adjustment.
a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average 50. When a company switches from a defined-benefit to a defined-contribution
remaining service life of active employees. plan, any gain arising must generally be reported
c. straight-line basis over 15 years. a. in the current and prospective periods on a straight-line basis.
d. straight-line basis over the average remaining service life of active b. as a prior period adjustment.
employees or 15 years, whichever is longer. c. currently as a gain.
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45. Whenever a defined-benefit plan is amended and credit is given to d. in the current and prospective periods on a declining-balance method
employees for years of service provided before the date of amendment over the average remaining service life of existing employees.
a. both the accumulated benefit obligation and the projected benefit
obligation are usually greater than before. 51.A minimum liability for pension expense is reported when
 a. the projected benefit obligation exceeds the fair value of pension plan b. require plan administrators to publish a comprehensive description and
assets. summary of their plans.
b. the accumulated benefit obligation exceeds the fair value of pension c. administer terminated plans and to impose liens on the employer's
plan assets. assets for certain unfunded pension liabilities.
c. the pension expense reported for the period is greater than the funding d. all of these.
amount for the same period.
d. vested benefits exceed the fair value of pension plan assets. *57. Which of the following statements is true about postretirement health care
benefits?
52. An intangible asset (deferred pension cost) is created when a. They are generally funded.
a. the accumulated benefit obligation exceeds the fair value of pension b. The benefits are well-defined and level in dollar amount.
plan assets, but accrued pension cost and unrecognized prior service c. The beneficiary is the retiree, spouse, and other dependents.
cost is greater than this excess. d. The benefit is payable monthly.
b. the accumulated benefit obligation exceeds the fair value of pension
plan assets, but accrued pension cost is less than this excess, and *58. Which of the following disclosures of postretirement benefits would not be
unrecognized prior service cost exists. required by professional pronouncements?
c. pension plan assets at fair value exceed the accumulated benefit a. Postretirement expense for the period
obligation. b. A schedule showing changes in postretirement benefits and plan assets
d. pension plan assets at book value exceed the projected benefit during the year
obligation. c. The amount of the actuarial liability for postretirement benefits
d. The assumptions and rates used in computing the EPBO and APBO
53. Which of the following statements is correct?
*59. At the beginning of the year of adoption of Statement of Financial
a. There is an account titled Additional Pension Liability.
Accounting Standards No. 106, a transition amount is computed as the
b. There is an account titled Minimum Pension Liability.
excess of the
c. Accrued pension cost and additional pension liability should be reported
a. expected postretirement benefit obligation over the fair value of plan
separately on the balance sheet.
assets or vice versa.
d. None of these.
b. accumulated postretirement benefit obligation over the fair value of plan
S assets or vice versa.
54. According to the FASB, immediate recognition of a liability (referred to as the
c. expected postretirement benefit obligation over the fair value of plan
minimum liability) is required when the accumulated benefit obligation
assets, but not vice versa.
exceeds the fair value of plan assets. Conversely, when the fair value of plan
d. accumulated postretirement benefit obligation over the fair value of plan
assets exceeds the accumulated benefit obligation, the Board
assets, but not vice versa.
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets
*60. Postretirement benefits may include all of the following except
exceeds the corridor amount.
a. severance pay to laid-off employees.
c. recommends recognition of an asset but does not require such
b. dental care.
recognition.
c. legal and tax services.
d. does not permit recognition of an asset.
d. tuition assistance.
55. Which of the following disclosures of pension plan information would not *61. Which of the following statements is correct?
normally be required by Statement of Financial Accounting Standards No. a. The period over which postretirement benefits are accrued is called the
132, "Employers' Disclosure about Pensions and Other Postretirement attribution period.
Benefits? b. The accrual period generally begins when an employee is hired.
a. The major components of pension expense c. The accrual period generally ends on the date the employee is eligible
b. The amount paid from the pension fund to retirees during the period to receive the benefits and ceases to earn additional benefits.
c. The funded status of the plan and the amounts recognized in the d. All of these.
financial statements
d. The rates used in measuring the benefit amounts *62. Which of the following statements about the expected postretirement benefit
obligation (EPBO) is not correct?
56. The main purpose of the Pension Benefit Guaranty Corporation is to a. The EPBO is an actuarial present value.
a. require minimum funding of pensions. b. The EPBO is recorded in the accounts.
c. The EPBO is used in measuring periodic expense.
 d. All of these are correct. d. during the life of the lease the lessee can effectively treat the property
as if it were owned by the lessee.
*63. Which of the following statements about the immediate recognition of a
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transition amount is not correct? 25. An essential element of a lease conveyance is that the
a. The transition amount is recognized in the income statement as the a. lessor conveys less than his or her total interest in the property.
effect of a change in accounting principle. b. lessee provides a sinking fund equal to one year's lease payments.
b. The transition amount is recognized in the income statement net of tax. c. property that is the subject of the lease agreement must be held for sale
c. Restatement of previously issued annual financial statements is by the lessor prior to the drafting of the lease agreement.
permitted. d. term of the lease is substantially equal to the economic life of the leased
d. The transition amount is recognized in the balance sheet as a long-term property.
liability.
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*64. Which of the following is a significant item not recognized in the accounts 26. What impact does a bargain purchase option have on the present value of
and in the financial statements? the minimum lease payments computed by the lessee?
a. Accumulated postretirement benefit obligation a. No impact as the option does not enter into the transaction until the end
b. Postretirement benefit plan assets of the lease term.
c. Expected postretirement benefit obligation b. The lessee must increase the present value of the minimum lease
d. All of these. payments by the present value of the option price.
c. The lessee must decrease the present value of the minimum lease
payments by the present value of the option price.
Multiple Choice AnswersConceptual d. The minimum lease payments would be increased by the present value
ACCOUNTING FOR LEASES of the option price if, at the time of the lease agreement, it appeared
certain that the lessee would exercise the option at the end of the lease
21. Major reasons why a company may become involved in leasing to other and purchase the asset at the option price.
companies is (are)
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a. interest revenue. 27. The amount to be recorded as the cost of an asset under capital lease is
b. high residual values. equal to the
c. tax incentives. a. present value of the minimum lease payments.
d. all of these. b. present value of the minimum lease payments or the fair value of the
asset, whichever is lower.
22. Which of the following is an advantage of leasing? c. present value of the minimum lease payments plus the present value of
a. Off-balance-sheet financing any unguaranteed residual value.
b. Less costly financing d. carrying value of the asset on the lessor's books.
c. 100% financing at fixed rates
d. All of these 28. The methods of accounting for a lease by the lessee are
a. operating and capital lease methods.
23. Which of the following best describes current practice in accounting for b. operating, sales, and capital lease methods.
leases? c. operating and leveraged lease methods.
a. Leases are not capitalized. d. none of these.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized. 29. Which of the following is a correct statement of one of the capitalization
d. All leases are capitalized. criteria?
a. The lease transfers ownership of the property to the lessor.
24. While only certain leases are currently accounted for as a sale or purchase, b. The lease contains a purchase option.
there is theoretic justification for considering all leases to be sales or c. The lease term is equal to or more than 75% of the estimated economic
purchases. The principal reason that supports this idea is that life of the leased property.
a. all leases are generally for the economic life of the property and the d. The minimum lease payments (excluding executory costs) equal or
residual value of the property at the end of the lease is minimal. exceed 90% of the fair value of the leased property.
b. at the end of the lease the property usually can be purchased by the
lessee. 30. Minimum lease payments may include a
c. a lease reflects the purchase or sale of a quantifiable right to the use of a. penalty for failure to renew.
property. b. bargain purchase option.
c. guaranteed residual value.
 d. any of these. b. Yes No NoNo
c. Yes No No
31. Executory costs include Yes
a. maintenance. d. No Yes Yes
b. property taxes. Yes
c. insurance.
d. all of these. 37. Which of the following would not be included in the Lease Receivable
32. In computing the present value of the minimum lease payments, the lessee account?
should a. Guaranteed residual value
a. use its incremental borrowing rate in all cases. b. Unguaranteed residual value
b. use either its incremental borrowing rate or the implicit rate of the lessor, c. A bargain purchase option
whichever is higher, assuming that the implicit rate is known to the d. All would be included
lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor, 38. In a lease that is appropriately recorded as a direct-financing lease by the
whichever is lower, assuming that the implicit rate is known to the lessor, unearned income
lessee. a. should be amortized over the period of the lease using the interest
d. none of these. method.
b. should be amortized over the period of the lease using the straight-line
33. In computing depreciation of a leased asset, the lessee should subtract method.
a. a guaranteed residual value and depreciate over the term of the lease. c. does not arise.
b. an unguaranteed residual value and depreciate over the term of the d. should be recognized at the lease's expiration.
lease.
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c. a guaranteed residual value and depreciate over the life of the asset. 39. In order to properly record a direct-financing lease, the lessor needs to know
d. an unguaranteed residual value and depreciate over the life of the how to calculate the lease receivable. The lease receivable in a direct-financing lease
asset. is best defined as
a. the amount of funds the lessor has tied up in the asset which is the
34. In the earlier years of a lease, from the lessee's perspective, the use of the subject of the direct-financing lease.
a. capital method will enable the lessee to report higher income, compared b. the difference between the lease payments receivable and the fair
to the operating method. market value of the leased property.
b. capital method will cause debt to increase, compared to the operating c. the present value of minimum lease payments.
method. d. the total book value of the asset less any accumulated depreciation
c. operating method will cause income to decrease, compared to the recorded by the lessor prior to the lease agreement.
capital method.
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d. operating method will cause debt to increase, compared to the capital 40. If the residual value of a leased asset is guaranteed by a third party
method. a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the
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35. A lessee with a capital lease containing a bargain purchase option should lessee.
depreciate the leased asset over the c. the net investment to be recovered by the lessor is reduced.
a. asset's remaining economic life. d. it is treated by the lessee as an additional payment and by the lessor as
b. term of the lease. realized at the end of the lease term.
c. life of the asset or the term of the lease, whichever is shorter.
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d. life of the asset or the term of the lease, whichever is longer. 41. The primary difference between a direct-financing lease and a sales-type
lease is the
36. Based solely upon the following sets of circumstances indicated below, a. manner in which rental receipts are recorded as rental income.
which set gives rise to a sales-type or direct-financing lease of a lessor? b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at the inception of the
Transfers Ownership Contains Bargain Collectibility of Lease
lease.
Any Important d. allocation of initial direct costs by the lessor to periods benefited by the
By End Of Lease? Purchase Option? Payments Assured? lease arrangements.
Uncertainties?
a. No Yes Yes
No
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42. A lessor with a sales-type lease involving an unguaranteed residual value d. objectivity.
available to the lessor at the end of the lease term will report sales revenue
in the period of inception of the lease at which of the following amounts? 22. Which of the following is not treated as a change in accounting principle?
a. The minimum lease payments plus the unguaranteed residual value. a. A change from LIFO to FIFO for inventory valuation
b. The present value of the minimum lease payments. b. A change to a different method of depreciation for plant assets
c. The cost of the asset to the lessor, less the present value of any c. A change from full-cost to successful efforts in the extractive industry
unguaranteed residual value. d. A change from completed-contract to percentage-of-completion
d. The present value of the minimum lease payments plus the present
value of the unguaranteed residual value. 23. Which of the following is not a retrospective-type accounting change?
a. Completed-contract method to the percentage-of-completion method for
43. For a sales-type lease, long-term contracts
a. the sales price includes the present value of the unguaranteed residual b. LIFO method to the FIFO method for inventory valuation
value. c. Sum-of-the-years'-digits method to the straight-line method
b. the present value of the guaranteed residual value is deducted to d. "Full cost" method to another method in the extractive industry
determine the cost of goods sold.
c. the gross profit will be the same whether the residual value is 24. Which of the following is accounted for as a change in accounting principle?
guaranteed or unguaranteed. a. A change in the estimated useful life of plant assets.
d. none of these. b. A change from the cash basis of accounting to the accrual basis of
accounting.
44. Which of the following statements is correct? c. A change from expensing immaterial expenditures to deferring and
a. In a direct-financing lease, initial direct costs are added to the net amortizing them as they become material.
investment in the lease. d. A change in inventory valuation from average cost to FIFO.
b. In a sales-type lease, initial direct costs are expensed in the year of 25. A company changes from straight-line to an accelerated method of
incurrence. calculating depreciation, which will be similar to the method used for tax
c. For operating leases, initial direct costs are deferred and allocated over purposes. The entry to record this change should include a
the lease term. a. credit to Accumulated Depreciation.
d. All of these. b. debit to Retained Earnings in the amount of the difference on prior
years.
45. The Lease Liability account should be disclosed as c. debit to Deferred Tax Asset.
a. all current liabilities. d. credit to Deferred Tax Liability.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent 26. Which of the following disclosures is required for a change from sum-of-the-
liabilities. years-digits to straight-line?
d. deferred credits. a. The cumulative effect on prior years, net of tax, in the current retained
earnings statement
*46. When a company sells property and then leases it back, any gain on the b. Restatement of prior years income statements
sale should usually be c. Recomputation of current and future years depreciation
a. recognized in the current year. d. All of these are required.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease. 27. A company changes from percentage-of-completion to completed-contract,
d. deferred and recognized as income over the term of the lease. which is the method used for tax purposes. The entry to record this change
should include a
a. debit to Construction in Process.
Multiple Choice AnswersConceptual b. debit to Loss on Long-term Contracts in the amount of the difference on
prior years, net of tax.
ACCOUNTING CHANGES AND ERROR ANALYSIS c. debit to Retained Earnings in the amount of the difference on prior
21.Accounting changes are often made and the monetary impact is reflected in the years, net of tax.
financial statements of a company even though, in theory, this may be a d. credit to Deferred Tax Liability.
violation of the accounting concept of
a. materiality. 28. Which of the following disclosures is required for a change from LIFO to
b. consistency. FIFO?
c. conservatism.
 a. The cumulative effect on prior years, net of tax, in the current retained
earnings statement 34. Which of the following statements is correct?
b. The justification for the change a. Changes in accounting principle are always handled in the current or
c. Restated prior year income statements prospective period.
d. All of these are required. b. Prior statements should be restated for changes in accounting
estimates.
29. Stone Company changed its method of pricing inventories from FIFO to c. A change from expensing certain costs to capitalizing these costs due to
LIFO. What type of accounting change does this represent? a change in the period benefited, should be handled as a change in
a. A change in accounting estimate for which the financial statements for accounting estimate.
prior periods included for comparative purposes should be presented as d. Correction of an error related to a prior period should be considered as
previously reported. an adjustment to current year net income.
b. A change in accounting principle for which the financial statements for
prior periods included for comparative purposes should be presented as 35. Which of the following describes a change in reporting entity?
previously reported. a. A company acquires a subsidiary that is to be accounted for as a
c. A change in accounting estimate for which the financial statements for purchase.
prior periods included for comparative purposes should be restated. b. A manufacturing company expands its market from regional to
d. A change in accounting principle for which the financial statements for nationwide.
prior periods included for comparative purposes should be restated. c. A company divests itself of a European branch sales office.
d. Changing the companies included in combined financial statements.
30. Which type of accounting change should always be accounted for in current
and future periods? 36. Presenting consolidated financial statements this year when statements of
a. Change in accounting principle individual companies were presented last year is
b. Change in reporting entity a. a correction of an error.
c. Change in accounting estimate b. an accounting change that should be reported prospectively.
d. Correction of an error c. an accounting change that should be reported by restating the financial
statements of all prior periods presented.
31. Which of the following is (are) the proper time period(s) to record the effects d. not an accounting change.
of a change in accounting estimate?
a. Current period and prospectively 37. An example of a correction of an error in previously issued financial
b. Current period and retrospectively statements is a change
c. Retrospectively only a. from the FIFO method of inventory valuation to the LIFO method.
d. Current period only b. in the service life of plant assets, based on changes in the economic
environment.
32. When a company decides to switch from the double-declining balance c. from the cash basis of accounting to the accrual basis of accounting.
method to the straight-line method, this change should be handled as a d. in the tax assessment related to a prior period.
a. change in accounting principle.
b. change in accounting estimate. 38. Counterbalancing errors do not include
c. prior period adjustment. a. errors that correct themselves in two years.
d. correction of an error. b. errors that correct themselves in three years.
c. an understatement of purchases.
33. The estimated life of a building that has been depreciated 30 years of an d. an overstatement of unearned revenue.
originally estimated life of 50 years has been revised to a remaining life of 10
years. Based on this information, the accountant should 39. A company using a perpetual inventory system neglected to record a
a. continue to depreciate the building over the original 50-year life. purchase of merchandise on account at year end. This merchandise was
b. depreciate the remaining book value over the remaining life of the asset. omitted from the year-end physical count. How will these errors affect
c. adjust accumulated depreciation to its appropriate balance, through net assets, liabilities, and stockholders' equity at year end and net income for
income, based on a 40-year life, and then depreciate the adjusted book the year?
value as though the estimated life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through Assets Liabilities Stockholders' Equity
retained earnings, based on a 40-year life, and then depreciate the Net Income
adjusted book value as though the estimated life had always been 40 a. No effect Understate Overstate
years. Overstate.
 b. No effect Overstate Understate a. treasury bills, commercial paper, and money market funds purchased
Understate. with excess cash.
c. Understate Understate No effect No b. investments with original maturities of three months or less.
effect. c. readily convertible into known amounts of cash.
d. Understate No effect Understate d. all of these.
Understate.
26. A company borrows $10,000 and signs a 90-day nontrade note payable. In
40. If, at the end of a period, a company erroneously excluded some goods from preparing a statement of cash flows (indirect method), this event would be
its ending inventory and also erroneously did not record the purchase of reflected as a(n)
these goods in its accounting records, these errors would cause a. addition adjustment to net income in the cash flows from operating
a. the ending inventory and retained earnings to be understated. activities section.
b. the ending inventory, cost of goods sold, and retained earnings to be b. cash outflow from investing activities.
understated. c. cash inflow from investing activities.
c. no effect on net income, working capital, and retained earnings. d. cash inflow from financing activities.
d. cost of goods sold and net income to be understated.
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27. To arrive at net cash provided by operating activities, it is necessary to report
revenues and expenses on a cash basis. This is done by
Multiple Choice AnswersConceptual a. re-recording all income statement transactions that directly affect cash
in a separate cash flow journal.
STATEMENT OF CASH FLOWS b. estimating the percentage of income statement transactions that were
originally reported on a cash basis and projecting this amount to the
21.It is an objective of the statement of cash flows to entire array of income statement transactions.
a. disclose changes during the period in all asset and all equity accounts. c. eliminating the effects of income statement transactions that did not
b. disclose the change in working capital during the period. result in a corresponding increase or decrease in cash.
c. provide information about the operating, investing, and financing d. eliminating all transactions that have no current or future effect on cash,
activities of an entity during a period. such as depreciation, from the net income computation.
d. none of these.
28. An increase in inventory balance would be reported in a statement of cash
22. The primary purpose of the statement of cash flows is to provide information flows using the indirect method (reconciliation method) as a(n)
a. about the operating, investing, and financing activities of an entity during a. addition to net income in arriving at net cash flow from operating
a period. activities.
b. that is useful in assessing cash flow prospects. b. deduction from net income in arriving at net cash flow from operating
c. about the cash receipts and cash payments of an entity during a period. activities.
d. about the entity's ability to meet its obligations, its ability to pay c. cash outflow from investing activities.
dividends, and its needs for external financing. d. cash outflow from financing activities.
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23. Of the following questions, which one would not be answered by the 29. A statement of cash flows typically would not disclose the effects of
statement of cash flows? a. capital stock issued at an amount greater than par value.
a. Where did the cash come from during the period? b. stock dividends declared.
b. What was the cash used for during the period? c. cash dividends paid.
c. Were all the cash expenditures of benefit to the company during the d. a purchase and immediate retirement of treasury stock.
period?
d. What was the change in the cash balance during the period? 30. When preparing a statement of cash flows (indirect method), which of the
following is not an adjustment to reconcile net income to net cash provided
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24. The first step in the preparation of the statement of cash flows requires the by operating activities?
use of information included in which comparative financial statements? a. A change in interest payable
a. Statements of cash flows b. A change in dividends payable
b. Balance sheets c. A change in income taxes payable
c. Income statements d. All of these are adjustments.
d. Statements of retained earnings
25. Cash equivalents are 31. Declaration of a cash dividend on common stock affects cash flows from
operating activities under the direct and indirect methods as follows:
 Direct Method Indirect Method Depreciation Prepaid Expenses
a. Outflow Inflow a. Deducted From Deducted From
b. Inflow Inflow
b. Added To Added To
c. Outflow Outflow
d. No effect No effect c. Deducted From Added To
d. Added To Deducted From
32. In a statement of cash flows, the cash flows from investing activities section
should report 37. When preparing a statement of cash flows (indirect method), an increase in
a. the issuance of common stock in exchange for a factory building. ending inventory over beginning inventory will result in an adjustment to
b. stock dividends received. reported net earnings because
c. a major repair to machinery charged to accumulated depreciation. a. cash was increased while cost of goods sold was decreased.
d. the assignment of accounts receivable. b. cost of goods sold on an accrual basis is lower than on a cash basis.
c. acquisition of inventory is an investment activity.
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33. Xanthe Corporation had the following transactions occur in the current year: d. inventory purchased during the period was less than inventory sold
resulting in a net cash increase.
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value. 38. When preparing a statement of cash flows, a decrease in accounts
3. Sale of Xanthe common stock for cash. receivable during a period would cause which one of the following
4. Issuance of a note payable to a bank for cash. adjustments in determining cash flow from operating activities?
5. Sale of a security held as an available-for-sale investment. Direct Method Indirect Method
6. Collection of loan receivable. a. Increase Decrease
b. Decrease Increase
How many of the above items will appear as a cash inflow from investing c. Increase Increase
activities on a statement of cash flows for the current year? d. Decrease Decrease
a. Five items
b. Four items 39. In determining net cash flow from operating activities, a decrease in
c. Three items accounts payable during a period
d. Two items a. means that income on an accrual basis is less than income on a cash
basis.
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34. Which of the following would be classified as a financing activity on a b. requires an addition adjustment to net income under the indirect
statement of cash flows? method.
a. Declaration and distribution of a stock dividend c. requires an increase adjustment to cost of goods sold under the direct
b. Deposit to a bond sinking fund method.
c. Sale of a loan receivable d. requires a decrease adjustment to cost of goods sold under the direct
d. Payment of interest to a creditor method.
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35. The amortization of bond premium on long-term debt should be presented in 40. When preparing a statement of cash flows, an increase in accounts payable
a statement of cash flows (using the indirect method for operating activities) during a period would require which of the following adjustments in
as a(n) determining cash flows from operating activities?
a. addition to net income.
b. deduction from net income. Indirect Method Direct Method
c. investing activity. a. Increase Decrease
d. financing activity. b. Decrease Increase
c. Increase Increase
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36. Crabbe Company reported $80,000 of selling and administrative expenses d. Decrease Decrease
on its income statement for the past year. The company had depreciation
expense and an increase in prepaid expenses associated with the selling 41. When preparing a statement of cash flows, a decrease in prepaid insurance
and administrative expenses for the year. Assuming use of the direct during a period would require which of the following adjustments in
method, how would these items be handled in converting the accrual based determining cash flows from operating activities?
selling and administrative expenses to the cash basis? Indirect Method Direct Method
Increase in a. Increase Decrease
 b. Decrease Increase b. Such transactions should be incorporated in the section (operating,
c. Increase Increase financing, or investing) that is most representative of the major
d. Decrease Decrease component of the transaction.
c. These noncash transactions are not to be incorporated in the statement
42. When preparing a statement of cash flows, the following are used for which of cash flows. They may be summarized in a separate schedule at the
method in determining cash flows from operating activities? bottom of the statement or appear in a separate supplementary
schedule to the financials.
Gross Accounts Receivable Net Accounts Receivable d. They should be handled in a manner consistent with the transactions
a. Indirect Direct that affect cash flows.
b. Direct Indirect
c. Direct Direct
d. Neither Indirect
Multiple Choice AnswersConceptual
43. Which of the following statements is correct?
a. The indirect method starts with income before extraordinary items. FULL DISCLOSURE IN FINANCIAL REPORTING
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the 21. Which of the following should be disclosed in a Summary of Significant
statement of cash flows. Accounting Policies?
d. All of these. a. Types of executory contracts
b. Amount for cumulative effect of change in accounting principle
44. Riley Company reports its income from investments under the equity method c. Claims of equity holders
and recognized income of $25,000 from its investment in Wood Co. during d. Depreciation method followed
the current year, even though no dividends were declared or paid by Wood
during the year. On Riley's statement of cash flows (indirect method), the 22. An example of an inventory accounting policy that should be disclosed in a
$25,000 should Summary of Significant Accounting Policies is the
a. not be shown. a. amount of income resulting from the involuntary liquidation of LIFO.
b. be shown as cash inflow from investing activities. b. major backlogs of inventory orders.
c. be shown as cash outflow from financing activities. c. method used for pricing inventory.
d. be shown as a deduction from net income in the cash flows from d. composition of inventory into raw materials, work-in-process, and
operating activities section. finished goods.
45. In reporting extraordinary transactions on a statement of cash flows (indirect
method), the 23. Errors and irregularities are defined as intentional distortions of facts.
a. gross amount of an extraordinary gain should be deducted from net Errors Irregularities
income. a. Yes Yes
b. net of tax amount of an extraordinary gain should be added to net
b. Yes No
income.
c. net of tax amount of an extraordinary gain should be deducted from net c. No Yes
income. d. No No
d. gross amount of an extraordinary gain should be added to net income.
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24. The full disclosure principle, as adopted by the accounting profession, is
46. Which of the following is shown on a statement of cash flows? best described by which of the following?
a. A stock dividend a. All information related to an entity's business and operating objectives is
b. A stock split required to be disclosed in the financial statements.
c. An appropriation of retained earnings b. Information about each account balance appearing in the financial
d. None of these statements is to be included in the notes to the financial statements.
c. Enough information should be disclosed in the financial statements so a
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47. How should significant noncash transactions be reported in the statement of person wishing to invest in the stock of the company can make a
cash flows according to FASB Statement No. 95? profitable decision.
a. They should be incorporated in the statement of cash flows in a section d. Disclosure of any financial facts significant enough to influence
labeled, "Significant Noncash Transactions." the judgment of an informed reader.
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25. The focus of APB Opinion No. 22 is on the disclosure of accounting policies.
This information is important to financial statement readers in determining
a. net income for the year.
b. whether accounting policies are consistently applied from year to
year.
c. the value of obsolete items included in ending inventory.
d. whether the working capital position is adequate for future operations.
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26. If a business entity entered into certain related party transactions, it would be
required to disclose all of the following information except the
a. nature of the relationship between the parties to the transactions.
b. nature of any future transactions planned between the parties and the
terms involved.
c. dollar amount of the transactions for each of the periods for which an
income state-ment is presented.
d. amounts due from or to related parties as of the date of each balance
sheet presented.
31. An operating segment is a reportable segment if
a. its operating profit is 10% or more of the combined operating profit of
profitable segments.
b. its operating loss is 10% or more of the combined operating losses of
segments that incurred an operating loss.
c. the absolute amount of its operating profit or loss is 10% or more of the
company's combined operating profit or loss.
d. none of these.
32. A segment of a business enterprise is to be reported separately when the
revenues of the segment exceed 10 percent of the
a. total combined revenues of all segments reporting profits.
b. total revenues of all the enterprise's industry segments.
c. total export and foreign sales.
d. combined net income of all segments reporting profits.

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27. Events that occur after the December 31, 2008 balance sheet date (but 33. All of the following information about each operating segment must be
before the balance sheet is issued) and provide additional evidence about reported except
conditions that existed at the balance sheet date and affect the realizability a. unusual items.
of accounts receivable should be b. interest revenue.
a. discussed only in the MD&A (Management's Discussion and Analysis) c. cost of goods sold.
section of the annual report. d. depreciation and amortization expense.
b. disclosed only in the Notes to the Financial Statements.
c. used to record an adjustment to Bad Debt Expense for the year 34. The profession requires disaggregated information in the following ways:
ending December 31, 2008. a. products or services.
d. used to record an adjustment directly to the Retained Earnings account b. geographic areas.
c. major customers.
28. Which of the following post-balance-sheet events would generally require d. all of these.
disclosure, but no adjustment of the financial statements?
a. Retirement of the company president S
35. In presenting segment information, which of the following items must be
b. Settlement of litigation when the event that gave rise to the litigation reconciled to the entity's consolidated financial statements?
occurred prior to the balance sheet date.
c. Employee strikes Operating Identifiable
d. Issue of a large amount of capital stock Revenues Profit (Loss) Assets
a. Yes Yes Yes
29. Which of the following subsequent events (post-balance-sheet events) would b. No Yes Yes
require adjustment of the accounts before issuance of the financial c. Yes No Yes
statements? d. Yes Yes No
a. Loss of plant as a result of fire
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b. Changes in the quoted market prices of securities held as an investment 36. APB Opinion No. 28 indicates that
c. Loss on an uncollectible account receivable resulting from a customers a. all companies that issue an annual report should issue interim financial
major flood loss reports.
d. Loss on a lawsuit, the outcome of which was deemed uncertain at b. the discrete view is the most appropriate approach to take in preparing
year end. interim financial reports.
c. the three basic financial statements should be presented each time an
30. Revenue of a segment includes interim period is reported upon.
a. only sales to unaffiliated customers. d. the same accounting principles used for the annual report should be
b. sales to unaffiliated customers and intersegment sales. employed for interim reports.
c. sales to unaffiliated customers and interest revenue.
d. sales to unaffiliated customers and other revenue and gains.
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37. Donnegan Manufacturing Company employs a standard cost system. A 42.Companies should disclose all of the following in interim reports except
planned volume variance in the first quarter of 2008, which is expected to be a. basic and diluted earnings per share.
absorbed by the end of the fiscal year, ordinarily should b. changes in accounting principles.
a. be deferred at the end of the first quarter, regardless of whether it is c. post-balance-sheet events.
favorable or unfavorable. d. seasonal revenue, cost, or expenses.
b. never be deferred beyond the quarter in which it occurs.
c. be deferred at the end of the first quarter if it is favorable; unfavorable 43. The required approach for handling extraordinary items in interim reports is
variances are to be recognized in the period incurred. to
d. be deferred at the end of the first quarter if it is unfavorable; favorable a. prorate them over all four quarters.
variances are to be recognized in the period incurred. b. prorate them over the current and remaining quarters.
c. charge or credit the loss or gain in the quarter that it occurs.
38. In considering interim financial reporting, how does the profession conclude d. disclose them only in the notes.
that such reporting should be viewed?
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a. As a "special" type of reporting that need not follow generally accepted 44. If the financial statements examined by an auditor lead the auditor to issue
accounting principles. an opinion that contains an exception that is not of sufficient magnitude to
b. As useful only if activity is evenly spread throughout the year so that invalidate the statement as a whole, the opinion is said to be
estimates are unnecessary. a. unqualified.
c. As reporting for a basic accounting period. b. qualified.
d. As reporting for an integral part of an annual period. c. adverse.
d. exceptional.
39. Accounting principles are modified for the following at interim dates.
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45. The MD&A section of an enterprise's annual report is to cover the following
Revenue Losses three items:
a. Yes Yes a. income statement, balance sheet, and statement of owners' equity.
b. Yes No b. income statement, balance sheet, and statement of cash flows.
c. No Yes c. liquidity, capital resources, and results of operations.
d. No No d. changes in the stock price, mergers, and acquisitions.
40. The following methods of estimating inventory can be used at interim dates S
46. Which of the following best characterizes the difference between a financial
for inventory pricing. May they also be used at year end? forecast and a financial projection?
Gross Profit Method Retail Inventory Method a. Forecasts include a complete set of financial statements, while
a. No No projections include only summary financial data.
b. No Yes b. A forecast is normally for a full year or more and a projection presents
c. Yes No data for less than a year.
d. Yes Yes c. A forecast attempts to provide information on what is expected to
happen, whereas a projection may provide information on what is not
41. A company that uses the last-in, first-out (LIFO) method of inventory pricing necessarily expected to happen.
finds at an interim reporting date that there has been a partial liquidation of d. A forecast includes data which can be verified about future
the base period inventory level. The decline is considered temporary and the expectations, while the data in a projection is not susceptible to
partial liquidation is expected to be replaced prior to year end. The amount verification.
shown as inventory at the interim reporting date should
a. be shown at the actual level, and cost of sales for the interim reporting 47. A financial forecast per professional pronouncements presents to the best of
period should include the expected cost of replacement of the liquidated the responsible party's knowledge and belief,
LIFO base. a. an entity's expected financial position, results of operations, and cash
b. be shown at the actual level, and cost of sales for the interim reporting flows.
period should reflect the historical cost of the liquidated LIFO base. b. an assessment of the company's ability to be successful in the future.
c. not give effect to the LIFO liquidation, and cost of sales for the interim c. given one or more hypothetical assumptions, an entity's expected
reporting period should reflect the historical cost of the liquidated LIFO financial position, results of operations, and cash flows.
base. d. an assessment of the company's ability to be successful in the future
d. be shown at the actual level, and the decrease in inventory level should under a number of different assumptions.
not be reflected in the cost of sales for the interim reporting period.
*48. Cash, short-term investments, and net receivables are the numerator for
 b. net income plus income taxes by annual interest expense.
Acid-Test Ratio Current Ratio
c. net income plus income taxes and interest expense by annual interest
a. Yes No
expense.
b. Yes Yes
d. none of these.
c. No No
d No Yes
*54. When should an average amount be used for the numerator or
*49. Theoretically, in computing the receivables turnover, the numerator should
denominator?
include
a. When the numerator is a balance sheet item or items
a. net sales.
b. When the denominator is a balance sheet item or items
b. net credit sales.
c. When a ratio consists of an income statement item and a balance sheet
c. sales.
item
d. credit sales.
d. When the numerator is an income statement item or items
*50. The rate of return on common stock equity is calculated by dividing
*55. The basic limitations associated with ratio analysis include
a. net income by average common stockholders equity.
a. the lack of comparability among firms in a given industry.
b. net income less preferred dividends by average common stockholders
b. the use of estimated items in accounting.
equity.
c. the use of historical costs in accounting.
c. net income by ending common stockholders equity.
d. all of these.
d. net income less preferred dividends by ending common stockholders
equity.
Multiple Choice AnswersConceptual
*51. The payout ratio is calculated by dividing
a. dividends per share by earnings per share.
Solutions to those multiple choice questions for which the answer is none of these:
b. cash dividends by net income plus preferred dividends.
c. cash dividends by market price per share.
31. The absolute amount of its profit or loss is 10% or more of the greater, in
d. cash dividends by net income less preferred dividends.
absolute amount, of (a) the combined profit of all operating segments that did
not incur a loss, or (b) the combined loss of all operating segments that did
*52. Which of the following ratios measures long-term solvency?
incur a loss.
a. Acid-test ratio
b. Receivables turnover
c. Debt to total assets
d. Current ratio

*53. The calculation of the number of times interest is earned involves dividing
a. net income by annual interest expense.