Part 1
1) An accrued expense can best be described as an amount
A. paid and currently matched with earnings.
B. not paid and not currently matched with earnings.
C. not paid and currently matched with earnings.
D. paid and not currently matched with earnings.
2) When an item of revenue is collected and recorded in advance, it is normally called a(n) ___________ revenue.
A. unearned
B. prepaid
C. accrued
D. cash
3) When an item of expense is paid and recorded in advance, it is normally called a(n)
A. estimated expense.
B. accrued expense.
C. prepaid expense.
D. cash expense.
4) A common set of accounting standards and procedures are called
A. objectives of financial reporting.
B. generally accepted accounting principles.
C. financial accounting standards.
D. statements of financial accounting concepts.
5) One objective of financial reporting is to provide
A. information that is useful in assessing cash flow prospects.
B. information about the liquidation values of the resources held by the enterprise.
C. information about the investors in the business entity.
D. information that will attract new investors.
6) The information provided by financial reporting pertains to
A. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.
B. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers.
C. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.
D. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.
7) The Financial Accounting Foundation
A. provides information to interested parties on financial reporting issues.
B. oversees the operations of the AICPA.
C. oversees the operations of the FASB.
D. works with the Financial Accounting Standards Advisory Council to provide informa-tion to interested parties on financial reporting issues.
8) The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is
A. all members of the FASB possess extensive experience in financial reporting.
B. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.
C. the FASB issues exposure drafts of proposed standards.
D. a majority of the members of the FASB are CPAs drawn from public practice.
9) The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the
A. FASB.
B. SEC.
C. APB.
D. AICPA.
10) Limitations of the income statement include all of the following except
A. items that cannot be measured reliably are not reported.
B. income measurement involves judgment.
C. income numbers are affected by the accounting methods employed.
D. only actual amounts are reported in determining net income.
11) The income statement reveals
A. resources and equities of a firm at a point in time.
B. net earnings (net income) of a firm at a point in time.
C. net earnings (net income) of a firm for a period of time.
D. resources and equities of a firm for a period of time.
12) Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
A. Use by customers to determine a company's ability to provide needed goods and services.
B. Use by government agencies to formulate tax and economic policy.
C. Use by investors interested in the financial position of the entity.
D. Use by labor unions to examine earnings closely as a basis for salary discussions.
13) The process of formally recording or incorporating an item in the financial statements of an entity is
A. allocation.
B. realization.
C. recognition.
D. articulation.
14) Which of the following is not a reason why revenue is recognized at time of sale?
A. Realization has occurred.
B. Title legally passes from seller to buyer.
C. All of these are reasons to recognize revenue at time of sale.
D. The sale is the critical event.
15) Which of the following is not an accurate representation concerning revenue recognition?
A. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.
B. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.
C. Revenue from disposing of assets other than products is recognized at the date of sale.
D. Revenue from services rendered is recognized when cash is received or when services have been performed.
16) One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is
A. an extensive use of estimates.
B. the extensive use of separate classifications.
C. failure to reflect current value information.
D. failure to include items of financial value that cannot be recorded objectively.
17) The basis for classifying assets as current or noncurrent is conversion to cash within
A. the accounting cycle or one year, whichever is longer.
B. the operating cycle or one year, whichever is longer.
C. the accounting cycle or one year, whichever is shorter.
D. the operating cycle or one year, whichever is shorter.
18) The correct order to present current assets is
A. Cash, inventories, accounts receivable, prepaid items.
B. Cash, accounts receivable, inventories, prepaid items.
C. Cash, accounts receivable, prepaid items, inventories.
D. Cash, inventories, prepaid items, accounts receivable.
19) If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the
A. dollar amount of the transactions for each of the periods for which an income state-ment is presented.
B. nature of any future transactions planned between the parties and the terms involved.
C. nature of the relationship between the parties to the transactions.
D. amounts due from or to related parties as of the date of each balance sheet presented.
20) Events that occur after the December 31, 2008 balance sheet date (but before the balance sheet is issued) and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be
A. used to record an adjustment to Bad Debt Expense for the year ending December 31, 2008.
B. disclosed only in the Notes to the Financial Statements.
C. discussed only in the MD&A (Management's Discussion and Analysis) section of the annual report.
D. used to record an adjustment directly to the Retained Earnings account
21) The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
A. Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.
B. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
C. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements.
D. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
22) The MD&A section of an enterprise's annual report is to cover the following three items:
A. liquidity, capital resources, and results of operations.
B. income statement, balance sheet, and statement of cash flows.
C. income statement, balance sheet, and statement of owners' equity.
D. changes in the stock price, mergers, and acquisitions.
23) If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be
A. unqualified.
B. adverse.
C. qualified.
D. exceptional.
24) Which of the following best characterizes the difference between a financial forecast and a financial projection?
A. Forecasts include a complete set of financial statements, while projections include only summary financial data.
B. A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen.
C. A forecast is normally for a full year or more and a projection presents data for less than a year.
D. A forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification.
25) Theoretically, in computing the receivables turnover, the numerator should include
A. net sales.
B. sales.
C. net credit sales.
D. credit sales.
26) Which of the following ratios measures long-term solvency?
A. Acid-test ratio
B. Debt to total assets
C. Receivables turnover
D. Current ratio
27) The rate of return on common stock equity is calculated by dividing
A. net income by average common stockholders' equity.
B. net income by ending common stockholders' equity.
C. net income less preferred dividends by average common stockholders' equity.
D. net income less preferred dividends by ending common stockholders' equity.
28) The primary purpose of the statement of cash flows is to provide information
A. about the operating, investing, and financing activities of an entity during a period.
B. about the cash receipts and cash payments of an entity during a period.
C. that is useful in assessing cash flow prospects.
D. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.
29) The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial statements?
A. Statements of cash flows
B. Income statements
C. Balance sheets
D. Statements of retained earnings
30) To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by
A. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.
B. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions.
C. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.
D. re-recording all income statement transactions that directly affect cash in a separate cash flow journal.
31) The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as a(n)
A. investing activity.
B. deduction from net income.
C. financing activity.
D. addition to net income.
32) In determining net cash flow from operating activities, a decrease in accounts payable during a period
A. requires an increase adjustment to cost of goods sold under the direct method.
B. requires an addition adjustment to net income under the indirect method.
C. requires a decrease adjustment to cost of goods sold under the direct method.
D. means that income on an accrual basis is less than income on a cash basis.
33) In reporting extraordinary transactions on a statement of cash flows (indirect method), the
A. net of tax amount of an extraordinary gain should be deducted from net income.
B. net of tax amount of an extraordinary gain should be added to net income.
C. gross amount of an extraordinary gain should be added to net income.
D. gross amount of an extraordinary gain should be deducted from net income.
34) Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?
A. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.
B. A capital lease is entered into with the initial lease payment due one month subse-quent to the signing of the lease agreement.
C. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.
D. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
35) Which of the following tables would show the smallest value for an interest rate of 5% for six periods?
A. Future value of an ordinary annuity of 1
B. Present value of 1
C. Present value of an ordinary annuity of 1
D. Future value of 1
36) Which table would show the largest factor for an interest rate of 8% for five periods?
A. Future value of an annuity due of 1
B. Present value of an ordinary annuity of 1
C. Present value of an annuity due of 1
D. Future value of an ordinary annuity of 1
Part 2
1 General-purpose financial statements are the product of
a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting
2 . Users of financial reports include all of the following except
a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
3 . Which of the following statements is not an objective of financial reporting?
a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.
4 . Accrual accounting is used because
a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.
5 . Which of the following (a-c) are not true concerning a conceptual framework in accounting?
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of nature.
d. All of the above (a-c) are true.
6 . In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting?
a. Measurement and recognition concepts such as assumptions, principles, and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objectives of financial reporting
7 . Accounting information is considered to be relevant when it
a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
8 . According to Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability?
a. Materiality
b. Understandability
c. Usefulness
d. All of these
9 . Factors that shape an accounting information system include the
a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. all of these.
10 . A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.
11 . At the time a company prepays a cost
a. it debits an asset account to show the service or benefit it will receive in the future.
b. it debits an expense account to match the expense against revenues earned.
c. its credits a liability account to show the obligation to pay for the service in the future.
d. more than one of the above.
12 . Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
13 . The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. all of these.
14 . Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business in determining net income
15 . 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.
16 . Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
17 . The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.
18 . 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 appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.
19 . The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.
20 . The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
d. none of these.
21 . Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these
22 . The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders' equity.
d. none of these.
23 . The current assets section of the balance sheet should include
a. machinery.
b. patents.
c. goodwill.
d. inventory.
24 . Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
25 . An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.
26 . Which of the following should be disclosed in a Summary of Significant Accounting Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in accounting principle
c. Claims of equity holders
d. Depreciation method followed
27 . Which of the following subsequent events (post-balance-sheet events) would require adjustment of the accounts before issuance of the financial statements?
a. Loss of plant as a result of fire
b. Changes in the quoted market prices of securities held as an investment
c. Loss on an uncollectible account receivable resulting from a customer's major flood loss
d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.
28 . The basic limitations associated with ratio analysis include
a. the lack of comparability among firms in a given industry.
b. the use of estimated items in accounting.
c. the use of historical costs in accounting.
d. all of these.
29 . Cash equivalents are
a. treasury bills, commercial paper, and money market funds purchased with excess cash.
b. investments with original maturities of three months or less.
c. readily convertible into known amounts of cash.
d. all of these.
30 . An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
31 . Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items
32 . A series of equal receipts at equal intervals of time when each receipt is received at the beginning of each time period is called an
a. ordinary annuity.
b. annuity in arrears.
c. annuity due.
d. unearned receipt
33 . Which of the following statements is true?
a. The higher the discount rate, the higher the present value.
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 sum decreases as the date draws closer to December 31, 2010.
34 . Present value is
a. the value now of a future amount.
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.
35 . If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then
a. the present value of the annuity due is less than the present value of the ordinary annuity.
b. the present value of the annuity due is greater than the present value of the ordinary annuity.
c. the future value of the annuity due is equal to the future value of the ordinary annuity.
d. the future value of the annuity due is less than the future value of the ordinary annuity.
Part 3
1. A strength of the income statement as compared to the balance sheet is that items that cannot be measured reliably can be reported in the income statement.
True
False
2. A company that reports a discontinued operation or an extraordinary item has the option of reporting per share amounts for these items. True
False
3. Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed
4. Carpino Corporation has an extraordinary loss of $200,000, an unusual gain of $140,000, and a tax rate of 40%. At what amount should Carpino report each item?
Extraordinary loss Unusual gain
a. $(200,000) $140,000
b. (200,000) 84,000
c. (120,000) 140,000
d. (120,000) 84,000
5. The following items were among those that were reported on Nen Co.'s income statement for the year ended December 31, 2007:
a. Legal and audit fees $130,000
b. Rent for office space 180,000
c. Interest on inventory floor plan 210,000
d. Loss on abandoned equipment used in operations 35,000
e. The office space is used equally by Nen's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Nen's multiple-step income statement?
a. $220,000.
b. $255,000.
c. $310,000.
d. $430,000.
$130,000 + $90,000 = $220,000
6. 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.
7. The most popular input measure used to determine the progress toward completion is the cost-to-cost basis.
True
False
8. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term construc-tion contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
9. In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
10) Limitations of the income statement include all of the following except
A. items that cannot be measured reliably are not reported.
B. only actual amounts are reported in determining net income.
C. income measurement involves judgment.
D. income numbers are affected by the accounting methods employed.
11) Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
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 discussions.
C. Use by government agencies to formulate tax and economic policy.
D. Use by investors interested in the financial position of the entity.
12) Which of the following is not a generally practiced method of presenting the income statement?
A. Including prior period adjustments in determining net income
B. The single-step income statement
C. The consolidated statement of income
D. Including gains and losses from discontinued operations of a component of a business in determining net income
13) Which of the following is not a reason why revenue is recognized at time of sale?
A. Title legally passes from seller to buyer.
B. Realization has occurred.
C. All of these are reasons to recognize revenue at time of sale.
D. The sale is the critical event.
14) In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
A. the method commonly used by the contractor to account for other long-term construc-tion contracts.
B. the terms of payment in the contract.
C. the inherent nature of the contractor's technical facilities used in construction.
D. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
15) Which of the following is not an accurate representation concerning revenue recognition?
A. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.
B. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.
C. Revenue from disposing of assets other than products is recognized at the date of sale.
D. Revenue from services rendered is recognized when cash is received or when services have been performed.
16) The balance sheet contributes to financial reporting by providing a basis for all of the following except
A. determining the increase in cash due to operations.
B. computing rates of return.
C. assessing the liquidity and financial flexibility of the enterprise.
D. evaluating the capital structure of the enterprise.
17) The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as
A. liquidity.
B. solvency.
C. exchangeability.
D. financial flexibility.
18) One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is
A. an extensive use of estimates.
B. failure to reflect current value information.
C. failure to include items of financial value that cannot be recorded objectively.
D. the extensive use of separate classifications.
19) Which of the following should be disclosed in a Summary of Significant Accounting Policies?
A. Claims of equity holders
B. Types of executory contracts
C. Depreciation method followed
D. Amount for cumulative effect of change in accounting principle
20) 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. the value of obsolete items included in ending inventory.
B. net income for the year.
C. whether the working capital position is adequate for future operations.
D. whether accounting policies are consistently applied from year to year.
21) Events that occur after the December 31, 2008 balance sheet date (but before the balance sheet is issued) and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be
A. used to record an adjustment to Bad Debt Expense for the year ending December 31, 2008.
B. discussed only in the MD&A (Management's Discussion and Analysis) section of the annual report.
C. used to record an adjustment directly to the Retained Earnings account
D. disclosed only in the Notes to the Financial Statements.
22) If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be
A. adverse.
B. unqualified.
C. exceptional.
D. qualified.
23) The MD&A section of an enterprise's annual report is to cover the following three items:
A. liquidity, capital resources, and results of operations.
B. income statement, balance sheet, and statement of owners' equity.
C. changes in the stock price, mergers, and acquisitions.
D. income statement, balance sheet, and statement of cash flows.
24) The required approach for handling extraordinary items in interim reports is to
A. charge or credit the loss or gain in the quarter that it occurs.
B. prorate them over all four quarters.
C. disclose them only in the notes.
D. prorate them over the current and remaining quarters.
25) The payout ratio is calculated by dividing
A. cash dividends by market price per share.
B. dividends per share by earnings per share.
C. cash dividends by net income less preferred dividends.
D. cash dividends by net income plus preferred dividends.
26) Which of the following ratios measures long-term solvency?
A. Debt to total assets
B. Acid-test ratio
C. Current ratio
D. Receivables turnover
27) The calculation of the number of times interest is earned involves dividing
A. net income plus income taxes and interest expense by annual interest expense.
B. net income by annual interest expense.
C. none of these.
D. net income plus income taxes by annual interest expense.
28) An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
A. cash outflow from investing activities.
B. addition to net income in arriving at net cash flow from operating activities.
C. cash outflow from financing activities.
D. deduction from net income in arriving at net cash flow from operating activities.
29) Of the following questions, which one would not be answered by the statement of cash flows?
A. Where did the cash come from during the period?
B. What was the change in the cash balance during the period?
C. What was the cash used for during the period?
D. Were all the cash expenditures of benefit to the company during the period?
30) To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by
A. re-recording all income statement transactions that directly affect cash in a separate cash flow journal.
B. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.
C. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions.
D. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.
31) In determining net cash flow from operating activities, a decrease in accounts payable during a period
A. means that income on an accrual basis is less than income on a cash basis.
B. requires a decrease adjustment to cost of goods sold under the direct method.
C. requires an addition adjustment to net income under the indirect method.
D. requires an increase adjustment to cost of goods sold under the direct method.
32) In a statement of cash flows, the cash flows from investing activities section should report
A. the issuance of common stock in exchange for a factory building.
B. the assignment of accounts receivable.
C. stock dividends received.
D. a major repair to machinery charged to accumulated depreciation.
33) Riley Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Wood Co. during 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 $25,000 should
A. not be shown.
B. be shown as a deduction from net income in the cash flows from operating activities section.
C. be shown as cash inflow from investing activities.
D. be shown as cash outflow from financing activities.
34) Which of the following tables would show the smallest factor for an interest rate of 10% for six periods?
A. Future value of an ordinary annuity of 1
B. Present value of an annuity due of 1
C. Present value of an ordinary annuity of 1
D. Future value of an annuity due of 1
35) Which table has a factor of 1.00000 for 1 period at every interest rate?
A. Future value of 1
B. Present value of an ordinary annuity of 1
C. Present value of 1
D. Future value of an ordinary annuity of 1
36) Which of the following tables would show the smallest value for an interest rate of 5% for six periods?
A. Future value of 1
B. Present value of an ordinary annuity of 1
C. Present value of 1
D. Future value of an ordinary annuity of 1
37) Reese Construction Corporation contracted to construct a building for $1,500,000. Construction began in 2007 and was completed in 2008. Data relating to the contract are summarized below:
Year ended
December 31,
2007 2008
Costs incurred $600,000 $450,000
Estimated costs to complete 400,000 -
Reese uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2007, and 2008, respectively, Reese should report gross profit of
a. $270,000 and $180,000.
b. $900,000 and $600,000.
c. $300,000 and $150,000.
d. $0 and $450,000.
$600,000
---------- ×($1,500,000 - $1,000,000) = $300,000
$600,000 + $400,000
($1,500,000 - $1,050,000) - $300,000 = $150,000.
38) Maris, Inc. appropriately used the installment method of accounting to recognize income in its financial statement. Some pertinent data relating to this method of accounting include:
2007 2008
Installment sales $750,000 $900,000
Cost of sales 450,000 630,000
Gross profit $300,000 $270,000
Collections during year:
On 2007 sales 250,000 250,000
On 2008 sales 300,000
What amount to be realized gross profit should be reported on Maris's income statement for 2008?
a. $165,000
b. $190,000
c. $220,000
d. $270,000
($300,000 ÷ $750,000) × $250,000 = $100,000
[($270,000 ÷ $900,000) × $300,000] + $100,000 = $190,000.
39. Penny Farms produced 800,000 pounds of cotton during the 2007 season. Penny sells all of its cotton to Bye Co., which has agreed to purchase Penny's entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $.70 per pound during the next two years. Penny's costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Penny reports its inventory at expected exit value. During 2007, Penny sold and delivered to Bye 600,000 pounds at the market price of $.70. Penny sold the remaining 200,000 pounds during 2008 at the market price of $.72. What amount of revenue should Penny recognize in 2007?
a. $420,000
b. $432,000
c. $560,000
d. $576,000
800,000 lbs. ×$.70 = $560,000
40. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is
a. recognition.
b. realization.
c. allocation.
d. matching.
41. The following items were among those that were reported on Nen Co.'s income statement for the year ended December 31, 2007:
Legal and audit fees $130,000
Rent for office space 180,000
Interest on inventory floor plan 210,000
Loss on abandoned equipment used in operations 35,000
The office space is used equally by Nen's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Nen's multiple-step income statement?
a. $220,000.
b. $255,000.
c. $310,000.
d. $430,000.
$130,000 + $90,000 = $220,000
42. _B_____ Balance sheet information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows