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1
Q

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

a. Reliability
b. Materiality
c. Legal Entity
d. Economic Entity

A

d. Economic Entity

2
Q

According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:

a. Allocation
b. Matching
c. Realization
d. Recognition

A

d. Recognition

3
Q

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

a. Replacement cost
b. Current market value
c. Historical cost
d. Net realizable vale

A

a. Replacement cost

4
Q

On December 31, 20X2, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 20X2, the net realizable value of the equipment was below historical cost.

What is the appropriate measurement basis for equipment included in Brooks’ December 31, 20X2, Balance Sheet?

a. Historical cost
b. Current reproduction cost
c. Net realizable value
d. Current replacement cost

A

c. Net realizable value

5
Q

Reporting inventory at the lower of cost or market is a departure from the accounting principle of :

a. Historical cost
b. Consistency
c. Conservatism
d. Full disclosure

A

a. Historical Cost

6
Q

Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?

a. Going Concern
b. Periodicity
c. Monetary unit
d. Economic Unit

A

c. Monetary unit

7
Q

Fundamental qualities on FASB Conceptual Framework

A

Relevance and Faithful Representation

8
Q

Ingredients of Relevance fundamental qualities in FASB Conceptual Framework

A

Predictive value
Confirmatory value
Materiality

9
Q

Ingredients of Faithful Representation fundamental qualities in FASB Conceptual Framework

A

Completeness
Neutrality
Free from Error

10
Q

Enhancing Qualities of FASB Conceptual Framework

A

Comparability
Verifiability
Timeliness
Understandability

11
Q

Predictive Value

A

Information has predictive value if it assists capital providers in forming expectations about future events.

12
Q

Confirmatory Value

A

Information has confirmatory value if it confirms or changes past (or present) expectations based on previous evaluations.

13
Q

Materiality

A

Information that is material will impact a user’s decision. Materiality is somewhat pervasive throughout the objectives of financial reporting in the sense that the financial statments should present material information because it is decision useful. Materiality is an attribute of relevance.

14
Q

Relevance

A

Information is relevant if it makes a difference to decision makers in their role as capital providers. Information is relevant when it has predictive value, confirmatory value, or both.

15
Q

Faithful Representation

A

Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that faithfully represents an economic phenomenon portrays the economic substance of the phenomenon. Information is representationally faithful when it is complete, neutral, and free from material error. Faithful representation replaces reliability as a primary qualitative characteristic.

16
Q

Completeness

A

Information is complete if it includes all data necessary to be faithfully representative.

17
Q

Neutrality

A

Information is neutral when it is free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior.

18
Q

Free from Error

A

Information is free from error if there are no omissions or errors.

19
Q

Comparability

A

The quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances comparability.

20
Q

Verifiability

A

Information is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the information.

21
Q

Timeliness

A

Information is timely if it is received in time to make a difference to the decision maker. Timeliness can also enhance the faithful representation of information.

22
Q

Understandability

A

Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have reasonable understanding of business and accounting and are willing to study the information with reasonable diligence.

23
Q

Conservatism

A

Reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when GAAP provides a choice from among recognition or measurement methods. Guideline that is used to limit the reporting of aggressive accounting information. Used to avoid misleading internal and external users of the financial statments. Also called prudence.

24
Q

What is the underlying concept governing the GAAP pertaining to recording Gain contingencies?

a. Conservatism
b. Relevance
c. Consistency
d. Faithful Representation

A

a. Conservatism

25
Q

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:

a. Consistency
b. Cost-benefit
c. Relevance
d. Representational Faithfulness

A

b. Cost-benefit

26
Q

Fair Value

A

Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

27
Q

Which of the following statements is correct regarding fair value measurement?

a. Fair value is a market-based measurement
b. Fair value is an entity-specific measurement
c. Fair value measurement does not consider risk
d. Fair value measurement does not consider restrictions

A

a. Fair value is a market-based measurement

28
Q

A company owns land and a building that houses its manufacturing operations. When the company purchased the manufacturing facility 10 years ago, the purchase price allocated to the land account was $120,000. The manufacturing facility is located in an area that was once the site of many factories. The owners of many of the neighboring factories have recently sold their facilities to residential real estate developers. The company’s land is also suitable for residential development. The estimated current value of the land as part of the manufacturing facility is $150,000. The estimated current value of the land as an undeveloped investment is $130,000, and the current value of the land as part of a residential development would be $180,000. What is the fair value of the land?

a. $120,000
b. $130,000
c. $150,000
d. $180,000

A

d. $180,000

29
Q

For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, “Fair Value Measurement,” least likely to apply?

a. Determination of the fair value to be assigned to land acquired in a business combination
b. Determination of the fair value of a bond liability for applying the fair value option
c. Determination of the fair value of legal services received in exchange for an entity’s common stock
d. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred

A

c. Determination of the fair value of legal services received in exchange for an entity’s common stock.

30
Q

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?

a. $76
b. $80
c. $81
d. $82

A

c. $81

When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. The second market is more advantageous because it has the higher selling price. In addition, fair value excludes transaction cost; therefore, the valuation of the asset would be $81. The response of $80 is incorrect because it includes transaction costs.

31
Q

Income Statement

A

Entity performance for the period

32
Q

Statement of Comprehensive Income

A

Reports all non-owner changes in equity for the period; includes net income (or loss) and items included in comprehensive income that are not part of net income

33
Q

Balance Sheet

A

Financial position at reporting date

34
Q

Statement of Stockholders’ Equity

A

Changes in the owners’ equity for the period

35
Q

Statement of Cash Flows

A

Describes major changes in cash (including restricted cash) by meaningful category

36
Q

What is included in External Financial Report

A

Income statement, statement of comprehensive income, balance sheet, statement of stockholders’ equity, statement of cash flows, footnote disclosures and supplementary schedules, and auditor’s opinion

37
Q

Fair Value Hierarchy Level 1

A

Observable inputs for the exact same item

38
Q

Fair Value Hierarchy Level 2

A

Observable inputs for a similar item

39
Q

Fair Value Hierarchy Level 3

A

Unobservable inputs for items that cannot be validated

40
Q

Observable Inputs

A

Inputs used in pricing an asset, liability, or equity item that are developed based on market data obtained from sources independent of the reporting entity

41
Q

Unobservable Inputs

A

Inputs that reflect the reporting entity’s own assumptions used in pricing the asset, liability, or equity item that are developed based on the best information available in the circumstances.

42
Q

Which of the following is a level three input to valuation technique used to measure the fair value of an asset?

a. Quoted prices in active markets for identical assets.
b. Quoted prices for similar assets in active markets.
c. Unobservable inputs for the asset.
d. Inputs other than quoted prices that are observable for the asset.

A

c. Unobservable inputs for the asset.

43
Q

A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company’s internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1?

a. $400,000
b. $410,000
c. $430,000
d. $500,000

A

a. $400,000

44
Q

Which of the following statements concerning inputs used in ascertaining fair value is/are correct?

I. Only observable inputs can be used.

II. Inputs that incorporate the entity’s assumptions may be used.

a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.

A

b. II only

45
Q

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?

I. Quoted market prices should be adjusted for a “blockage factor” when a firm holds a sizable portion of the asset being valued.

II. Quoted market prices in markets that are not active, because there are few relevant transactions, cannot be used.

a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.

A

d. Neither I nor II

Quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value. Such prices would be considered level 2 factors, observable inputs but not in active markets.

46
Q

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

a. Discounted cash flow of Favre’s operations.
b. Quoted market prices available from a business broker for a similar asset.
c. Quoted market prices on a stock exchange for an identical asset.
d. Historical performance and return on Driver’s investment in Favre.

A

c. Quoted market prices on a stock exchange for an identical asset.

47
Q

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except

a. Quoted prices for identical assets and liabilities in markets that are not active.
b. Quoted prices for similar assets and liabilities in markets that are active.
c. Internally generated cash flow projections for a related asset or liability.
d. Interest rates that are observable at commonly quoted intervals.

A

c. Internally generated cash flow projections for a related asset or liability.

48
Q

Approaches to Determine Fair Value

A

Market Approach, Income Approach, and Cost Approach

49
Q

For a firm that elects to measure certain of its financial assets and financial liabilities at fair value, required financial statement disclosures are intended to facilitate which of the following comparisons?

I. Comparisons between entities that use different measurement methods for similar assets and liabilities.
II. Comparisons between assets and liabilities of a single entity that uses different measurement methods for similar assets and liabilities.
a. Neither I nor II.
b. I only.
c. II only.
d. Both I and II.

A

d. Both I and II

50
Q

Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct?

I. The fair value hierarchy level within which fair value measurements fall must be disclosed.
II. Quantitative fair value measurement disclosures must be in tabular format.
la. Both I and II are correct.
b. I only.
c. II only.
d. Neither I nor II are correct.

A

a. Both I and II are correct

51
Q

When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is not an expected outcome of the disclosures required of that entity?

a. Users being able to understand management’s reasons for using the fair value option
b. Users being able to understand how changes in fair value affect net income
c. Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value
d. Users being able to understand the difference between fair value and cash flows

A

c. Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value

52
Q

Under U.S. GAAP, the disclosure requirements when fair value measurement is used are differentiated by which of the following classifications?

a. Between assets measured at fair value and liabilities measured at fair value
b. Between fair value measurements that result in gains and fair value measurements that result in losses
c. Between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis
d. Between items for which fair value measurement is required and items for which fair value measurement is elected

A

c. Between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis

53
Q

Which one of the following is not a required disclosure in annual financial reports for an entity that uses fair value measurement?

a. The level of the fair value hierarchy within which fair value measurements fall
b. The valuation techniques used to measure fair value
c. Combined disclosures about fair value measurements required by all pronouncements
d. A discussion of any change from the prior period in valuation techniques used to measure fair value

A

c. Combined disclosures about fair value measurements required by all pronouncements

54
Q

When referring to IFRS, which of the following are NOT included?

a. IASs.
b. SEC.
c. IFRICs.
d. IFRS Interpretations.

A

b. SEC

55
Q

According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes

a. Timeliness, predictive value, and feedback value.
b. Neutrality, completeness, and free from error.
c. Predictive value, confirmatory value, and materiality.
d. Comparability and consistency.

A

b. Neutrality, completeness, and free from error.

56
Q

According to the IASB Framework, the process of reporting an item in the financial statements of an entity is:

a. Recognition.
b. Statement of Financial Position.
c. Disclosure.
d. Presentation.

A

a. Recognition

57
Q

When should an item that meets the definition of an element be recognized?

a. The item has a cost or value that can be measured reliably.
b. It is highly unlikely that any future economic benefit associated with the item will flow to the entity.
c. Both A and B.
d. Neither A nor B.

A

a. The item has a cost or value that can be measured reliably.

58
Q

Which of the following is a fundamental (primary) qualitative characteristic of useful financial information included in IASB’s Framework?

a. Comparability.
b. Timeliness.
c. Relevance.
d. Understandability.

A

c. Relevance

59
Q

According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is

a. Revenue.
b. Income.
c. Profits.
d. Gains.

A

b. Income

60
Q

Under IFRS for SMEs, which cost flow assumptions can be used for inventory valuation purposes?

A

FIFO and Weighted Average Cost

NO LIFO

61
Q

Which one of the following is not an other comprehensive basis of accounting (OCBOA)?

a. Cash basis.
b. Modified cash basis.
c. Income tax basis.
d. IFRS for SMEs.

A

d. IFRS for SMEs

62
Q

Name two items that do not have to be disclosed in financial statements under IFRS for SMEs

A

Earnings per Share and Information by Segment

63
Q

Which of the following statements, if any, concerning IFRS for SMEs is/are correct?

I. IFRS for SMEs is based on accrual basis accounting.

II. Generally, IFRS for SMEs may be used as an alternative to using OCBOA.

a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.

A

c. Both I and II

64
Q

Which one of the following is a characteristic of accounting under IFRS for SMEs?

a. Interest incurred during construction must be capitalized.
b. Earnings per share must be provided in the financial statements.
c. Goodwill must be amortized.
d. The LIFO cost flow assumption can be used in valuing inventories.

A

c. Goodwill must be amortized

65
Q

Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence?
Cost Method
Equity Method

A

Under IFRS for SMEs, both the cost and equity method may be used by an investor to account for an investment in another entity (called an “associate” in IFRS for SMEs) over which the investor has significant influence. Under U.S. GAAP, the cost method may not be used; the equity method is required.

66
Q

A company is working on a direct response advertising campaign that will likely provide the company future benefits in the form of increased sales over the next two years. The company identified the following costs associated with the advertising campaign:

Catalogs on hand to be mailed to potential customers $100,000
Coupons printed to be mailed to existing customers 50,000
Employee salaries for call center support 45,000
Postage to be paid to mail the catalogs and coupons 25,000
What cost, if any, should be capitalized under IFRS?

a. $220,000
b. $150,000
c. $100,000
d. 0

A

d. 0

This is an example of a question where you would rely on logic and reasoning to think through the viability of capitalizing costs. Since these costs are associated with an advertising campaign, and advertising occurs on a continual basis, the costs should be expensed as incurred. In addition, it is difficult to measure the benefit from any advertising campaign. Even though the company believes there is a “likely” future benefit, there is not enough evidence to justify capitalization over a two-year period.

67
Q

IFRS requires a classified Statement of Financial Position. What are the required classifications?

a. Cash; trade receivables and payables; property, plant and equipment; long-term assets and liabilities; and other assets and liabilities.
b. Cash; trade receivables and payables; property, plant and equipment; and other assets and liabilities.
c. Current, long-term, and other assets and liabilities.
d. Current and non-current assets and liabilities.

A

d. Current and non-current assets and liabilities.

68
Q

Which of the following items would not appear on the Income Statement prepared using IFRS?

a. Discontinued operations.
b. Gross Profit.
c. Depreciation and amortization.
d. All items would appear on the Income Statement when using IFRS.

A

d. All items would appear on the Income Statement when using IFRS.

69
Q

Which of the following is true regarding the comparison between managerial and financial accounting?

a. Managerial accounting is generally more precise.
b. Managerial accounting has a past focus and financial accounting has a future focus.
c. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.
d. Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.

A

d. Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.

70
Q

Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Year 5, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense.

What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the three months ended March 31, Year 5?

A

Prepaid Insurance $700

Insurance Expense $500

71
Q

In analyzing a company’s financial statements, which financial statement would a potential investor use primarily to assess the company’s liquidity and financial flexibility?

a. Balance Sheet.
b. Income Statement.
c. Statement of retained earnings.
d. Statement of Cash Flows.

A

a. Balance Sheet

72
Q

Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni’s cash-basis pretax income is:

a. Higher by $4,000.
b. Lower by $4,000.
c. Higher by $36,000.
d. Lower by $36,000.

A

c. Higher by $36,000

The $20,000 AR decrease implies that cash received on account was $20,000 greater than accrual sales. Cash-basis income is, therefore, $20,000 greater than accrual income for this difference. The $16,000 accounts payable increase implies that more inventory was purchased and included in accrual cost of goods sold than was paid. Cash-basis income is, therefore, $16,000 more than accrual income for this difference. In total, cash-basis income is $36,000 greater than accrual income.

73
Q

The following information pertains to Eagle Co.’s Year 5 sales:

Cash Sales	
Gross	$ 80,000
Returns and allowances	4,000
Credit sales	
Gross	120,000
Discounts	6,000
On January 1, Year 5, customers owed Eagle $40,000. On December 31, Year 5, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in Year 5. Under the cash basis of accounting, what amount of net revenue should Eagle report for Year 5?

a. $76,000
b. $170,000
c. $190,000
d. $200,000

A

d. $200,000

74
Q

On February 12, Year 5, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 in Year 5.

In its Year 5 Income Statement, what amount should VIP report as royalty expense?

a. $60,000
b. $75,000
c. $80,000
d. $95,000

A

c. $80,000

75
Q

An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, Year 4, revealed the following:

Thrift had an opening balance of $1,500 for its comprehensive insurance policy. Thrift had paid an annual premium of $3,000 on July 1, Year 3.

A $3,200 annual insurance premium payment made July 1, Year 4 was unadjusted.

A $2,000 advance rental payment for a warehouse Thrift leased for one year beginning January 1, Year 5 was included.

In its December 31, Year 4, Balance Sheet, what amount should Thrift report as prepaid expenses?

a. $5,200
b. $3,600
c. $2,000
d. $1,600

A

b. $3,600

76
Q

On October 31, year 1, a company with a calendar year end paid $90,000 for services that will be performed evenly over a six-month period from November 1, year 1, through April 30, year 2. The company expensed the $90,000 cash payment in October, year 1, to its services expense general ledger account. The company did not record any additional journal entries in year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its year 1 financial statements?

a. Debit prepaid services and credit services expense for $30,000.
b. Debit prepaid services and credit services expense for $60,000.
c. Debit services expense and credit prepaid services for $30,000.
d. Debit services expense and credit prepaid services for $60,000.

A

b. Debit prepaid services and credit services expense for $60,000.

77
Q

According to the conceptual framework, neutrality is an ingredient of:

A

Faithful representation

78
Q

The fair value for an asset or liability is measured as

a. The appraised value of the asset or liability.
b. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.
c. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
d. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

A

c. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

79
Q

The use of fair value measurement is required for some items in financial statements and is optional for other items. Is the framework for determining fair value measurement, as set forth in ASC 820, “Fair Value Measurement,” generally required to be followed in circumstances where fair value measurement is required and/or in circumstances where fair value measurement is elected by a firm?

A

Fair Value Required and Fair Value Elected

The framework for determining (measuring) fair value provided in ASC 820, “Fair Value Measurement,” must be followed (with very limited exceptions) whenever fair value measurement is used, either as required by GAAP or permitted by GAAP as an alternative that is elected by an entity.

80
Q

Which one of the following financial items may not be measured and reported at fair value at the election of an entity?

a. Accounts receivable
b. Investment in debt securities to be held to maturity
c. Investment in a subsidiary that is to be consolidated
d. Accounts payable

A

c. Investment in a subsidiary that is to be consolidated

A firm may elect to use fair value to measure and report the financial asset “Investment in debt securities to be held to maturity,” instead of using the traditionally required amortized cost method.

81
Q

Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:

Front Market Side Market
Selling Price $52/sh $50/sh
Transaction Cost $ 6/sh $ 1/sh
If neither Front market nor Side market is a principal market for the security for Marco, using the market approach which one of the following would be the per share amount used for measuring the investment at fair value?

a. $52/sh
b. $50/sh
c. $49/sh
d. $46/sh

A

b. $50/sh

Since neither market is the principal market for the security, Marco must determine the most advantageous market, which is the market in which the asset could be sold at a price that maximizes the amount that would be received. Marco would receive $52/sh − $6/sh = $46/sh in Front market and would receive $50/sh − $1/sh = $49/sh in Side market. Therefore, Side market is its most advantageous market, and fair value would be determined in that market as the price at which the security could be sold, or $50/sh. The market selling price would not be adjusted for the related direct transaction cost, even though it enters into determining the most advantageous market.

82
Q

Multico is a securities dealer whose principal market is with other securities dealers. To take advantage of a perceived opportunity, on December 31, the end of its fiscal year, Multico acquired a financial asset in a market other than its principal market for $50,000. At that date, the identical instrument could be sold in Multico’s principal market for $50,100 with a $200 transaction cost. Which of the following amounts would constitute fair value to Multico for the financial asset at December 31?

a. $49,800
b. $49,900
c. $50,000
d. $50,100

A

d. $50,100

83
Q

Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by Alphaco. Alphaco and Betaco have elected to measure their respective debt investments held-to-maturity at fair value. Charlieco measures its debt investments held-to-maturity using amortized cost. In its consolidated financial statements, for which companies, if any, may Alphaco elect to report debt investment held-to-maturity at fair value?

a. Alphaco only
b. Alphaco and Betaco only
c. Alphaco, Betaco, and Charlieco
d. None of the companies; all debt investments held-to-maturity must be measured and reported at amortized cost.

A

c. Alphaco, Betaco, and Charlieco

As the parent, Alphaco may elect to report not just its own debt investments held-to-maturity at fair value, but all of the debt investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes

84
Q

If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?

a. As a change in accounting principle
b. As an adjustment to beginning retained earnings of the period of change in approach
c. As a change in accounting estimate
d. As gain on the income statement for the period of change in approach

A

c. As a change in accounting estimate

85
Q

In the determination of fair value for GAAP purposes, which one of the following is not a valuation technique or approach specified in ASC 820, Fair Value Measurement?

a. Income approach
b. Cost approach
c. Expense approach
d. Market approach

A

c. Expense approach

86
Q

What valuation methods may be used to measure debt investments classified as held-to-maturity?

A

Amortized Cost and Fair Value

Both amortized cost and fair value may be used to measure and report investments classified as held-to-maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value, which is permitted by the fair value option.

87
Q

Component of relevance

A

(Predictive Value) SFAC 5 states that “Relevance is a primary qualitative characteristic. To be relevant, information about an item must have feedback value or predictive value (or both) for users and must be timely.”

88
Q

Increases in net assets from incidental or peripheral transactions affecting an entity.

A

(Gains) SFAC 6 states that “Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.”

89
Q

The process of converting noncash resources and rights into cash or claims to cash.

A

(Realization) SFAC 5 states that “Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash.”

90
Q

Enhancing qualitative characteristic of relevance and faithful representation.

A

(Comparability) SFAC 8 states that “Comparability, including consistency, is an enhancing quality that interacts with relevance and faithful representation to contribute to the usefulness of information.”

91
Q

The process of formally recording an item in the financial statements of an entity after it has met existing criteria and been subject to cost-benefit constraints and materiality thresholds.

A

(Recognition) SFAC 5 states that “Recognition is the process of formally recording or incorporating an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like.” SFAC 5 continues the recognition concept by stating, “An item and information about it should meet four fundamental recognition criteria to be recognized and should be recognized when the criteria are met, subject to a cost-benefit constraint and a materiality threshold.”

92
Q

All changes in net assets of an entity during a period except those resulting from investments by owners and distributions to owners.

A

(Comprehensive Income) SFAC 5 states that “Comprehensive income is a broad measure of the effects of transactions and other events on an entity, comprising all recognized changes in equity (net assets) of the entity during a period from transactions and other events and circumstances except those resulting from investments by owners and distributions to owners.”

93
Q

Inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing operations.

A

(Revenues) SFAC 6 defines revenues as “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.”

94
Q

The amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation.

A

(Current Market Value) SFAC 5 defines current market value as “the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation.”

95
Q

The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events.

A

(Predictive Value) Predictive value is the quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events (SFAC 8).

96
Q

A performance measure concerned primarily with cash-to-cash cycles.

A

(Earnings) SFAC 5 states that “Earnings is a measure of performance during a period that is concerned primarily with the extent to which asset inflows associated with cash-to-cash cycles substantially completed (or completed) during the period exceed (or are less than) asset outflows associated, directly or indirectly, with the same cycles.”

97
Q

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?

a. Current asset
b. Current liability
c. Long-term asset
d. Long-term liability

A

b. Current liability

98
Q

A company’s year-end comparative statement of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000, and all other assets decreased by $65,000. Which of the following statements is correct regarding the current-year change in the company’s stockholders’ equity?

a. It increased by $25,000.
b. It increased by $105,000.
c. It decreased by $32,000.
d. It decreased by $57,000.

A

d. It decreased by $57,000

99
Q

In Dart Co.’s year two single-step Income Statement, as prepared by Dart’s controller, the section titled “Revenues” consisted of the following:

Sales	$250,000
Purchase discounts	3,000
Recovery of accounts written off	10,000
Total revenues	$263,000
In its year two single-step Income Statement, what amount should Dart report as total revenues?

a. $250,000
b. $253,000
c. $260,000
d. $263,000

A

a. $250,000

100
Q

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

a. Collection of proceeds from a note payable.
b. Collection of a note receivable from a related party.
c. Collection of an overdue account receivable from a customer.
d. Collection of a tax refund from the government.

A

b. Collection of a note receivable from a related party.

Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.

101
Q

A partial listing of a company’s accounts is presented below:

Revenues $80,000
Operating expenses 50,000
Foreign currency translation adjustment gain, net of tax 4,000
Income tax expense 10,000
What amount should the company report as net income?

a. $20,000
b. $24,000
c. $30,000
d. $34,000

A

a. $20,000

Net income is revenues less expenses, or $80,000 – 50,000 – 10,000 = $20,000. The foreign currency translation adjustment is part of comprehensive income.

102
Q

Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 20x5 included the following expense and loss accounts:

Accounting and legal fees	$120,000
Advertising	150,000
Freight-out	80,000
Interest	70,000
Loss on the sale of long-term investments	30,000
Officers' salaries	225,000
Rent for office space	220,000
Sales salaries and commissions	140,000
One-half of the rented premises is occupied by the sales department.

Brock’s total selling expenses for 20x5 are:

a. $480,000
b. $400,000
c. $370,000
d. $360,000

A

a. $480,000

103
Q

Should Interest and/or Advertising be included in general and administrative expenses?

A

Neither should be included in general and administrative expenses.

Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified. Interest is identified with specific financing activities, and advertising with specific promotional activities (selling expenses).

104
Q

In Baer Food Co.’s 20x5 single-step Income Statement, the section titled “Revenues” consisted of the following:

Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of the segment (net of $1,200 tax effect) $(2,400)
Gain on the disposal of segment (net of $7,200 tax effect) 14,400 12,000
Interest revenue 10,200
Gain on the sale of equipment 4,700
Total revenues $213,900
In the revenues section of the 20x5 Income Statement, Baer Food should have reported total revenues of:

a. $216,300
b. $215,400
c. $203,700
d. $201,900

A

d. $201,900

Net sales $187,000
Interest revenue 10,200
Gain on equipment 4,700
Total revenues $201,900

This answer includes the gain on the sale of equipment. It is the best answer from among the four because this answer less the gain is not represented. However, many would argue that the gain is not a revenue. Discontinued operations is not a revenue; rather, it is a special item of disclosure found below income from continuing operations in the Income Statement.

105
Q

A company’s activities for year two included the following:

Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of amortization expense 59,000
Sales returns 34,000
Gain on sale of stock portfolio securities 8,000
Gain on disposal of a discontinued business segment 4,000
Unrealized gain on AFS debt portfolio securities 2,000
The company has a 30% effective income tax rate. What is the company’s net income for year two?

a. $1,267,700
b. $1,273,300
c. $1,314,600
d. $1,316,000

A

c. $1,314,600

All items are included in net income except the prior year adjustment to amortization expense and the unrealized gain on the AFS debt portfolio securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.

106
Q

The following costs were incurred by Griff Co., a manufacturer, during 20x4:

Accounting and legal fees	$ 25,000
Freight-in	175,000
Freight-out	160,000
Officers' salaries	150,000
Insurance	85,000
Sales representatives' salaries	215,000
What amount of these costs should be reported as general and administrative expenses for 20x4?

a. $260,000
b. $550,000
c. $635,000
d. $810,000

A

a. $260,000

107
Q

Andro Co. has a $10 million note payable that is due three months after year end. The note payable was refinanced when long-term bonds were issued one month after year end for $11 million. The December 31 financial statements were issued two months after year end.

How should Andro classify and disclose the note?

A

Noncurrent liability with note disclosure

108
Q

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:

a. Conservatism.
b. Fair value.
c. Market value.
d. Historical cost.

A

d. Historical cost

109
Q

The following trial balance of JB Company at December 31, Year five, has been adjusted except for income taxes. The income tax rate is 30%.

DR	CR
Accounts receivable, net	$725,000	
Accounts payable		250,000
Accumulated depreciation		125,000
Cash	185,000	
Contributed capital		650,000
Expenses	3,750,000	
Goodwill	140,000	
Prepaid taxes	225,000	
Property, plant, and equipment	850,000	
Retained earnings, 1/1/year five		350,000
Revenues	          	4,500,000
5,875,000	5,875,000
During year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.

Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.

In JB Company’s December 31, year five Balance Sheet, what amount should be reported as current assets?

a. 710,000
b. 910,000
c. 935,000
d. 1,135,000

A

a. $710,000

Current assets are calculated as follows:

Cash 185,000
Accounts receivable, net 725,000
Reclassification of o/s receivable (200,000)
Total current assets 710,000

110
Q

The following trial balance of JB Company at December 31, year five, has been adjusted except for income taxes. The income tax rate is 30%.

DR	CR
Accounts receivable, net	725,000	
Accounts payable		250,000
Accumulated depreciation		125,000
Cash	185,000	
Contributed capital		650,000
Expenses	3,750,000	
Goodwill	140,000	
Prepaid taxes	225,000	
Property, plant and equipment	850,000	
Retained earnings, 1/1/Yr. 5		350,000
Revenues	        	4,500,000
5,875,000	5,875,000
During year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.

Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.

In JB Company’s December 31, year five Balance Sheet, what amount should be reported as total retained earnings?

a. 225,000
b. 525,000
c. 750,000
d. Some other amount.

A

d. Some other amount

Retained earnings are calculated as follows:

Revenue [4,500,000] - Expenses [3,750,000]	750,000
Income taxes = 0.30 * 750,000	(225,000)
Net income	525,000
Retained earnings, 1/1/Yr. 5	350,000
Retained earnings, 12/31/Yr. 5	875,000
111
Q

Which of the following accounts is a contra account?

a. Accumulated depreciation, equipment.
b. Depreciation expense, office equipment.
c. Dividends.
d. Unearned revenue.

A

a. Accumulated depreciation, equipment.

112
Q

The premium on a three-year insurance policy expiring on December 31, 20X4 was paid in total on January 2, 20X2. If the company has a six-month operating cycle, then on December 31, 20X2, the prepaid insurance reported as a current asset would be for:

a. six months.
b. 12 months.
c. 18 months.
d. 24 months.

A

b. 12 months

At the end of 20X2, two years of coverage remains. The cost of coverage for 20X3 is a current asset because it will be consumed within a year of the 20X2 Balance Sheet. The definition of a current asset uses the period “operating cycle or one year, whichever is longer.” An operating cycle of any length, not exceeding one year, would yield the same answer to this question. The fact that the operating cycle is only six months versus, for example eight months, has no effect on the classification of the prepaid insurance into a current component (to expire within a year of the 20X2 Balance Sheet) and a long-term component (the portion to expire after 20X3).

113
Q

Rock Co.’s financial statements had the following balances at December 31:

Gain on the sale of equipment $ 50,000
Foreign currency translation gain $100,000
Net income $400,000
Unrealized gain on the available-for-sale debt securities $ 20,000
What amount should Rock report as comprehensive income for the year ended December 31?

a. $400,000
b. $420,000
c. $520,000
d. $570,000

A

c. $520,000

The gain on the sale of equipment ($50,000) is already included in net income ($400,000) and would be included in comprehensive income as part of net income.

114
Q

A company reports the following information as of December 31:

Sales revenue $800,000
Cost of goods sold 600,000
Operating expenses 90,000
Unrealized holding gain on the available-for-sale debt securities, net of tax 30,000
What amount should the company report as comprehensive income as of December 31?

a. $30,000
b. $110,000
c. $140,000
d. $200,000

A

c. $140,000

Comprehensive income (CI) is the sum of net income (NI) and other comprehensive income (OCI). In this case, NI = $110,000 ($800,000 sales − $600,000 CGS − $90,000 expenses). The unrealized holding gain is an item of OCI. There are four types of OCI items in all. This firm has only one of them. Thus, CI = $110,000 NI + $30,000 OCI = $140,000.

115
Q

What is the purpose of reporting comprehensive income?

a. To summarize all changes in equity from nonowner sources
b. To reconcile the difference between net income and cash flows provided from operating activities
c. To provide a consolidation of the income of the firm’s segments
d. To provide information for each segment of the business

A

a. To summarize all changes in equity from nonowner sources

116
Q

Which of the following is a component of other comprehensive income?

a. Minimum accrual of vacation pay
b. Currency-translation adjustments
c. Changes in market value of inventory
d. Unrealized gain or loss on equity securities carried at fair value

A

b. Currency-translation adjustments

117
Q

Burns Corp. had the following items:

Sales revenue $45,000
Loss on early extinguishment of bonds 36,000
Realized gain on sale of available-for-sale debt securities 28,000
Unrealized holding loss on available-for-sale debt securities 17,000
Loss on write-down of inventory 3,100
Which of the following amounts would the statement of comprehensive income report as other comprehensive income or loss?

a. $11,000 other comprehensive income
b. $16,900 other comprehensive income
c. $17,000 other comprehensive loss
d. $28,100 other comprehensive loss

A

c. $17,000 other comprehensive loss

Other comprehensive income is comprised of unrealized gains/losses on available-for-sale debt securities, minimum pension liability adjustment, foreign currency translation adjustment, and unrealized gains/losses on cash flow hedges. The only other comprehensive income item listed is the $17,000 unrealized gains/losses on available-for-sale debt securities

118
Q

Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale debt securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. What amount is Palmyra’s comprehensive income?

a. $4,000
b. $10,000
c. $11,000
d. $17,000

A

b. $10,000

The components of comprehensive income are: Net Income, Unrealized gain/loss on AFS debt securities, foreign currency translation adjustment, unrecognized gain/loss on pension benefits, and deferred gain/loss on certain hedging transactions. Therefore, the Comprehensive income of Palmyra Co is $11,000 − 3,000 + 2,000 = $10,000.

119
Q

Under FASB U.S. GAAP, which of the following items would cause net earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?

a. Unrealized loss on debt investments classified as available-for-sale
b. Unrealized loss on equity investments classified as current
c. Loss on exchange of similar assets.
d. Loss on exchange of dissimilar assets.

A

a. Unrealized loss on debt investments classified as available-for-sale.

120
Q

Statement of Changes in Equity

A
Provides beginning balances, changes during the year, and ending balances for:
Stock (common and preferred)
Additional paid-in-capital (APIC)
Retained Earnings
Treasury stock
Accumulated other comprehensive income
121
Q

The Statement of Changes in Equity:

a. Is one of the required financial statements under U.S. GAAP
b. Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items.
c. Is used only if a corporation frequently issues common shares
d. Reconciles all of the beginning and ending balances in the equity accounts.

A

d. Reconciles all of the beginning and ending balances in the equity accounts.

122
Q
Which of the following would appear on the Statement of Owner's Equity?
Notes Payable
Treasury Stock
Advertising Expense
Retained Earnings
A

Treasury Stock and Retained Earnings

123
Q

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

a. $2
b. $5
c. $10
d. $12

A

If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

124
Q

Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?

a. Income Statement, Balance Sheet, Statement of Cash Flows
b. Income Statement, Statement of Cash Flows
c. Statement of Cash Flows
d. Balance Sheet and Statement of Cash Flows

A

c. Statement of Cash Flows

125
Q

Which of the following is not disclosed on the Statement of Cash Flows, either on the face of the statement or in a separate schedule, when prepared under the direct method?

a. The major classes of gross cash receipts and gross cash payments
b. The amount of income taxes paid
c. A reconciliation of net income to net cash flow from operations
d. A reconciliation of ending retained earnings to net cash flow from operations

A

d. A reconciliation of ending retained earnings to net cash flow from operations

126
Q

New England Co. had net cash provided by operating activities of $351,000; net cash used by investing activities of $420,000; and cash provided by financing activities of $250,000.

New England’s cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale.

What was New England’s cash balance at the end of the year?

a. $ 27,000
b. $ 40,000
c. $208,000
d. $248,000

A

c. $208,000

127
Q

Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available:

Mortgage repayment $20,000
Available-for-sale debt securities purchased 10,000 increase
Bonds payable–issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease
What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year?

a. $0
b. $10,000
c. $20,000
d. $30,000

A

c. $20,000

128
Q

Should cash flow per share and/or conversion of debt equity be disclosed as supplemental information in the statement of cash flows?

A

Cash flow per share should not, but conversion of debt to equity should be disclosed as supplemental information in the statement of cash flows.

129
Q

The primary purpose of a statement of cash flows is to provide relevant information about

a. Differences between net income and associated cash receipts and disbursements.
b. An enterprise’s ability to generate future positive net cash flows.
c. The cash receipts and cash disbursements of an enterprise during a period.
d. An enterprise’s ability to meet cash operating needs.

A

c. The cash receipts and cash disbursements of an enterprise during a period.

130
Q

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay’s Statement of Cash Flows, this purchase would

a. Have no effect.
b. Be treated as an outflow from financing activities.
c. Be treated as an outflow from investing activities.
d. Be treated as an outflow from lending activities.

A

a. Have no effect

The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

131
Q

Mend Co. purchased a three-month U.S. Treasury bill. Mend’s policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. How should this purchase be reported in Mend’s Statement of Cash Flows?

a. As an outflow from operating activities
b. As an outflow from investing activities
c. As an outflow from financing activities
d. Not reported

A

d. Not reported

The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.

132
Q

On December 31, 20X1, Deal, Inc. failed to accrue the December 20X1 sales salaries that were payable on January 6, 20X2.

What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal’s 20X1 financial statements?

A

Working capital will be overstate and there is no effect on cash flows from operating activities.

Failure to accrue salaries at the end of 20X1 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated.

The accrued salaries at the end of 20X1 would not have been paid in 20X1, even if they had been accrued correctly. Therefore, 20X1 operating cash flows are not affected by the failure to accrue the salaries.

133
Q

A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:

Dividends paid $300
Proceeds from the issuance of common stock $250
Borrowings under a line of credit $200
Proceeds from the issuance of convertible bonds $100
Proceeds from the sale of a building $150
What is the company’s increase in cash flows provided by financing activities for the year?

a. $50
b. $150
c. $250
d. $550

A

c. $250

Cash flows from financing activities are those associated with how the company is financed, such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock (250), convertible bonds (100), and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 − 300 = 250.

134
Q

Abbott Co. is preparing its Statement of Cash Flows for the year. Abbott’s cash disbursements during the year included the following:

Payment of interest on bonds payable $500,000
Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of Marks Co. common stock 100,000
What should Abbott report as total cash outflows for financing activities in its Statement of Cash Flows?

a. $0
b. $300,000
c. $800,000
d. $900,000

A

b. $300,000

Dividends paid to shareholders are a financing activity. The payment of interest on bonds is an operating activity, and payments to acquire shares of Marks Co. stock are investing activities.

135
Q

A company calculated the following data for the period:

Cash received from customers $25,000
Cash received from sale of equipment 1,000
Interest paid to bank on note 3,000
Cash paid to employees 8,000
What amount should the company report as net cash provided by operating activities in its Statement of Cash Flows?

a. $14,000
b. $15,000
c. $18,000
d. $26,000

A

a. $14,000

Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000 − 3,000 − 8,000 = $14,000.

136
Q

Which of the following items is included in the Financing Activities section of the Statement of Cash Flows?

a. Cash effects of transactions involving making and collecting loans
b. Cash effects of acquiring and disposing of investments and property, plant, and equipment
c. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment
d. Cash effects of transactions that enter into the determination of net income

A

c. Cash effects of transactions obtaining resources from owners and providing them with a return on their investments.

Financing cash flows are those between the firm and the parties providing it with debt and equity financing. Financing cash flows are the major sources of nonoperating cash inflows and repayments of those amounts to the providers. For example, borrowings and proceeds from stock issuance, retirements of debt, treasury stock purchases, and dividends paid are all financing cash flows. Interest paid, however, is an operating cash flow.

137
Q

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

a. Gain on sale of plant asset
b. Sale of property, plant and equipment
c. Payment of cash dividend to the shareholders
d. Issuance of common stock to the shareholders

A

a. Gain on sale of plant asset

The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

138
Q

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance.

In a statement of cash flows, what amount is included in investing activities for the above transaction?

a. Cash payment
b. Acquisition price
c. Zero
d. Mortgage amount

A

a. Cash payment

The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, only the cash amount paid is disclosed in the statement of cash flows. The noncash activity schedule would disclose the acquisition price and amount financed with the mortgage.

139
Q

In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities?

I. Payments to retire mortgage notes

II. Interest payments on mortgage notes

III. Dividend payments

a. I, II, and III.
b. II and III.
c. I only.
d. I and III.

A

d. I and III

Both I and III are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.

The dividends are a return to shareholders who have provided a considerable portion of total firm financing.

140
Q

U.S. GAAP includes a very large set of accounting guidance. Choose the correct statement.

a. The FASB Accounting Standards Codification includes guidance about items that are not under the purview of the Generally Accepted Accounting Principles, such as the income tax basis of accounting.
b. Authoritative guidance from FASB Statements adopted before the FASB Accounting Standards Codification does not appear in the Codification.
c. There is an implied hierarchy within the FASB Accounting Standards Codification, with FASB Statements assuming the top level.
d. International accounting standards are not included in the FASB Accounting Standards Codification.

A

d. International accounting standards are not included in the FASB Accounting Standards Codification.

IFRS are not U.S. GAAP and thus are not included in the Codification.

141
Q

Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

a. A proposed statement of position.
b. A proposed accounting standards update.
c. A proposed accounting research bulletin.
d. A proposed staff accounting bulletin.

A

b. A proposed accounting standards update.

Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).

142
Q

What is the primary objective of financial reporting?
a. To provide economic information that is comprehensible to all users.
b. To provide management with an accurate evaluation of their financial performance.
c. To provide forecasts for future cash flows and financial performance.
d. To provide information that is useful for economic decision making.
You Answered Correctly!
Correct! The primary objective of financial reporting is to provide decision-useful information to the financial statement user.

A

d. To provide information that is useful for economic decision making.

143
Q

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?

a. Reliability.
b. Timeliness.
c. Neutrality.
d. Relevance.

A

d. Relevance

The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.

144
Q

During the period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:

a. Both enterprise performance and management performance.
b. Management performance but does not directly provide information about enterprise performance.
c. Enterprise performance but not directly provide information about management performance.
d. Neither enterprise performance nor management performance.

A

c. Enterprise performance but not directly provide information about management performance.

145
Q

Conceptually, interim financial statements can be described as emphasizing:

a. Timeliness over faithful representation.
b. Faithful representation over relevance.
c. Relevance over comparability.
d. Comparability over neutrality.

A

a. Timeliness over faithful representation.

146
Q

Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic?

a. Relevance
b. Timeliness
c. Comparability
d. Confirmatory value

A

a. Relevance

147
Q

According to the conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:

a. Confirmatory value.
b. Predictive Value.
c. Representational faithfulness.
d. Faithful representation.

A

b. Predictive Value

148
Q

Which of the following characteristics relates to both accounting relevance and faithful representation?

a. Free from error.
b. Completeness.
c. Neutrality.
d. Comparability.

A

d. Comparability

Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and faithfully represented.

149
Q

What is the conceptual framework intended to establish?

a. Generally Accepted Accounting Principles in financial reporting by business enterprises.
b. The meaning of “present fairly in accordance with Generally Accepted Accounting Principles.”
c. The objectives and concepts for use in developing standards of financial accounting and reporting.
d. The hierarchy of sources of Generally Accepted Accounting Principles.

A

c. The objectives and concepts for use in developing standards of financial accounting and reporting.

The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a “constitution” for developing specific accounting principles. The concepts statements are not GAAP, however.

150
Q

The following information pertains to Ash Co., which prepares its statement of cash flows using the indirect method:

Interest payable at beginning of year: $15,000

Interest expense during the year: $20,000

Interest payable at end of year: $5,000

What amount of interest should Ash report as a supplemental disclosure of cash flow information?

a. $10,000
b. $20,000
c. $30,000
d. $35,000

A

c. $30,000

The disclosure requires cash paid in interest during the period. The best way to answer this type of question is with a T-account:
Interest Payable
15,000 Beginning balance (given)
Interest paid (solve for) 30,000 20,000 Interest expense (given)
5,000 Ending balance (given)

151
Q

During the year, Granite Co. sold a building for $100,000 resulting in a gain of $20,000. The building has a net book value of $80,000 at the time of the sale. Granite uses the indirect method when preparing its statement of cash flows. What is the amount that would be included in Granite’s financing activities section because of the building sale?

a. $0
b. $20,000
c. $80,000
d. $100,000

A

a. $0

The sale of a building is not a financing activity, so zero would be included in the financing section. The gain of $20,000 would be a reconciling item in the operating section and the cash received of $100,000 would be in the investing section, but nothing would be reported in the financing section as it relates to this transaction.

152
Q

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows:
Accrued interest payable $17,000 decrease
Prepaid interest 23,000 decrease
What amount of interest expense for the current year will Ness report in its income statement?
a. $ 30,000
b. $ 64,000
c. $ 76,000
d. $110,000

A

c. $76,000

A summary journal entry is helpful to sort out what happened with interest during the period:
Interest expense 76,000
Accrued interest payable 17,000
Prepaid interest 23,000
Cash 70,000
The interest expense amount for the year is the derived amount in the entry. Also, a more verbal approach works:

(1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and
(2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense.

The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 − accrued payable decrease of $17,000 + prepaid interest decrease $23,000.

153
Q

Payne Co. prepares its Statement of Cash Flows using the indirect method. Payne’s unamortized bond discount account decreased by $25,000 during the year.

How should Payne report the change in the unamortized bond discount in its Statement of Cash Flows?

a. As a financing cash inflow
b. As a financing cash outflow
c. As an addition to net income in the operating activities section
d. As a subtraction from net income in the operating activities section

A

c. As an addition to net income in the operating activities section

Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account.

The semiannual journal entry is: dr. Interest expense; cr. Discount; cr. Cash.

Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount).

Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow.

Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

154
Q

How should the amortization of a bond discount on long-term debt be reported in a Statement of Cash Flows prepared using the indirect method?

a. As a financing activities inflow
b. As a financing activities outflow
c. In operating activities as a deduction from income
d. In operating activities as an addition to income

A

d. In operating activities as an addition to income

When bond discount is amortized, a portion of the discount is recognized as expense. The result is that interest expense exceeds the amount of cash paid with each interest payment. The discount is gradually amortized over the bond term as additional interest expense because the firm received less than the amount due at maturity. The operating activity section of the indirect method begins with net income and ends with net cash flow from operations. Income is reduced by the interest expense that exceeds the cash interest paid by the amount of discount amortization. Therefore, the discount amortization is added back, yielding a reduction in net cash flow from operations equal to the amount of cash interest paid.

155
Q

Baker Co. began its operations during the current year. The following is Baker’s Balance Sheet at December 31:

Baker Co. Balance Sheet
Assets	
Cash	$192,000
Accounts receivable	82,000
Total Assets	$274,000
Liabilities and stockholders' equity	
Accounts payable	$ 24,000
Common stock	200,000
Retained earnings	50,000
Total liabilities and stockholders' equity	$274,000
Baker's net income for the current year was $78,000, and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its Statement of Cash Flows for the current year?

a. $20,000
b. $50,000
c. $192,000
d. $250,000

A

a. $20,000

The accounts receivable increase represents sales included in net income but not yet collected and is subtracted because income was increased by an amount exceeding cash collections. The accounts payable increase represents purchases of inventory included in cost of goods sold not yet paid for. This amount is added because income was reduced by an amount exceeding cash payments.

156
Q

During 20X1, Teb, Inc. had the following activities related to its financial operations:
Payment for the early retirement of long-term bonds payable (carrying value $740,000) $750,000
Distribution in 20X1 of cash dividends declared in 20X0 to preferred shareholders 62,000
Carrying value of convertible preferred stock in Teb, converted into common shares 120,000
Proceeds from the sale of treasury stock (carrying value at cost, $86,000) 95,000
In Teb’s 20X1 Statement of Cash Flows, net cash used in financing activities should be
a. $717,000.
b. $716,000.
c. $597,000.
d. $535,000.

A

a. $717,000

Payment for the early retirement of long-term bonds payable ($750,000)
Distribution in 20X1 of cash dividend declared in 20X0 to preferred shareholders (62,000)
Proceeds from the sale of treasury stock 95,000
Net cash used in financing activities ($717,000)
The conversion of preferred stock is a non-cash activity, not a cash flow.

157
Q

The differences in Beal Inc.’s Balance Sheet accounts at December 31, 20X4 and 20X3, are presented below:

Assets	Increase (Decrease)
Cash and cash equivalents	$ 120,000
Short-term investments	300,000
Account receivable, net	-
Inventory	80,000
Long-term investments	(100,000)
Plant assets	700,000
Accumulated depreciation	-
$1,100,000
Liabilities and Stockholders' Equity	
Accounts payable and accrued liabilities	$ (5,000)
Dividends payable	160,000
Short-term bank debt	325,000
Long-term debt	110,000
Common Stock, $10 par	100,000
Additional paid-in capital	120,000
Retained Earnings	290,000
$1,100,000
The following additional information relates to 20X4:

Net income was $790,000.
Cash dividends of $500,000 were declared.
Building costing $600,000, with a carrying amount of $350,000, was sold for $350,000.
Equipment costing $110,000 was acquired through issuance of long-term debt.
A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. These investments are categorized as available for sale.
10,000 shares of common stock were issued for $22 a share.
The short-term investments are classified as trading securities.
In Beal’s 20X4 Statement of Cash Flows, net cash provided by operating activities was

a. $1,160,000.
b. $1,040,000.
c. $620,000.
d. $705,000.

A

c. $620,000

Net income $790,000
Increase in inventory (80,000)
Decrease in AP/accrued liabilities ( 5,000)
Gain on sale of long-term investments ($135,000 − $100,000) (35,000)
Increase in short-term investments (from purchase) (300,000)
Depreciation expense 250,000
Equals net operating cash inflow $620,000
The accumulated depreciation account did not change during the year. Therefore, depreciation expense equals $250,000, which offsets the decrease in the account due to the sale of the equipment.

158
Q

The differences in some of Beal Inc.’s Balance Sheet accounts at December 31, 20X4 and 20X3, are presented below:

Assets	Increase (Decrease)
Cash and cash equivalents	$ 120,000
Investments in debt classified as trading securities	300,000
Accounts receivable, net	-
Inventory	80,000
Long-term investments	(100,000)
Plant assets (gross)	700,000
Liabilities and stockholders' equity	
Accounts payable and accrued liabilities	$ (5,000)
Dividends payable	160,000
Short-term bank debt	325,000
Long-term debt	110,000
Common Stock, $10 par	100,000
Additional paid-in capital	120,000
Retained earnings	290,000 The following additional information relates to 20X4: net income was $790,000; cash dividends of $500,000 were declared; building costing $600,000, with a carrying amount of $350,000, was sold for $350,000; equipment costing $110,000 was acquired through the issuance of long-term debt; and a long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. 10,000 shares of common stock were issued for $22 a share. In Beal's 20X4 Statement of Cash Flows, net cash used in investing activities was
a. $705,000.
b. $1,190,000.
c. $1,005,000.
d. $165,000.
A

a. $705,000

Proceeds from sale of securities $ 135,000
Proceeds from sale of building 350,000
Purchase of other plant assets (1,190,000)
Net cash used in investing activities $( 705,000)
The plant assets (gross) account increased $700,000. $700,000 increase = -$600,000 (sale of building) + $110,000 (equipment purchase) + X. X = additional purchases of plant assets. X = $1,190,000. The long-term investments were sold at a gain. That is why the change in the account ($100,000) does not equal the cash inflow from the sale. The equipment purchased with long-term debt is not listed in the investing section because no cash was used on the purchase (it is disclosed in the supplemental information). The purchase of debt securities classified as trading are classified as operating cash flow.

159
Q

How should a gain from the sale of used equipment for cash be reported in a Statement of Cash Flows using the indirect method?

a. In investment activities as a reduction of the cash inflow from the sale
b. In investment activities as a cash outflow
c. In operating activities as a deduction from income
d. In operating activities as an addition to income

A

c. In operating activities as a deduction from income

The operating section of the indirect method Statement of Cash Flows is the reconciliation of net income and net cash flow from operations. The gain on the sale of equipment increased income but did not provide any operating cash inflow. Therefore, it is subtracted from net income in the reconciliation.

160
Q

In preparing its cash flow statement for the year ended December 31, 20X4, Reve Co. collected the following data:
Gain on the sale of equipment $ (6,000)
Proceeds from the sale of equipment 10,000
Purchase of A.S., Inc. bonds (par value $200,000) (180,000)
Amortization of bond discounts 2,000
Dividends declared (45,000)
Dividends paid (38,000)
Proceeds from the sale of treasury stock (carrying amount $65,000) 75,000
In its December 31, 20X4, Statement of Cash Flows, what amount should Reve report as net cash provided by financing activities?
a. $20,000
b. $27,000
c. $30,000
d. $37,000

A

d. $37,000

Only the last two items are financing cash flows. The treasury stock sale of $75,000 less the dividends paid of $38,000 result in a net financing cash inflow of $37,000.

161
Q

Which of the following information should be included in Melay, Inc.’s 20x4 summary of significant accounting policies?

a. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.
b. During 20x4, the Delay Segment was sold.
c. Business segment 20x4 sales are Alay $1M, Belay $2M, and Celay $3M.
d. Future common share dividends are expected to approximate 60% of earnings.

A

a. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.

The accounting policy footnote describes significant accounting methods and practices used by the company. The accounting policy footnote primarily discusses the accounting practices followed by the firm so that users can better understand the financial statements and other disclosures.

Recording property at cost and using a specific depreciation method are examples of two significant accounting policies. The other answers indicate information that might possibly be disclosed in other footnotes.

162
Q

Should depreciation method and composition of fixed assets be included in the summary of significant accounting policies?

A

The depreciation method should be included in the summary of significant accounting policies, but composition should not.

The summary of significant accounting policies requires that the methods of depreciation used by a firm be disclosed.

The composition of plant assets must also be disclosed, but not in the summary of significant accounting policies. The composition information typically is disclosed in another footnote.

163
Q

The summary of significant accounting policies should disclose the

a. Pro forma effect of retroactive application of an accounting change.
b. Basis of profit recognition on long-term construction contracts.
c. Adequacy of pension plan assets in relation to vested benefits.
d. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

A

b. Basis of profit recognition on long-term construction contracts.

The summary of significant accounting policies conveys information regarding the important accounting methods and policies chosen by the firm, when a choice is available.

Knowledge of the methods is critical to an understanding of the amounts disclosed in the financial statements. The method of accounting for long-term contracts may be the percentage of completion or completed contract method. Disclosure of this method assists the user in understanding the meaning of reported revenue and gross profit.

The other answer alternatives give data on specific accounts or the result of applying specific accounting principles. They do not indicate what choices the firm has made for accounting and reporting.

164
Q

The summary of significant accounting policies should disclose the

a. Maturity dates of noncurrent debts.
b. Terms for convertible debt to be exchanged for common stock.
c. Concentration of credit risk of all financial instruments by geographical region.
d. Criteria for determining which investments are treated as cash equivalents.

A

d. Criteria for determining which investments are treated as cash equivalents.

The accounting policy footnote discloses both the methods of accounting used by the firm and other information useful for understanding the bases under which the financial statements were prepared. How the firm classifies investments as cash equivalents is one such basis; it is disclosed in the policy footnote. The other answer alternatives are disclosures about specific aspects of particular accounts.

165
Q

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of

a. Concentration of credit risk.
b. Concentration of market risk.
c. Risk of measurement uncertainty.
d. Off-balance sheet risk of accounting loss.

A

a. Concentration of credit risk.

This disclosure will give the financial statement reader information about concentration of credit risk related to the receivables that are all in the same industry.

166
Q

Which of the following must be included in the notes to the financial statements in a company’s summary of significant accounting policies?

a. Description of current year equity transactions.
b. Summary of long-term debt outstanding.
c. Schedule of fixed assets.
d. Revenue recognition policies.

A

d. Revenue recognition policies.

The summary of significant accounting policies footnote describes the important accounting choices made by the firm for financial reporting purposes. Such policies affect recognition, measurement, and disclosure.

For example, in some areas of revenue recognition, GAAP allows a choice from among several methods of recognition and measurement. This footnote discloses the choices made by the firm to help users understand the reported amounts of revenue and affected accounts in the Income Statement and Balance Sheet.

Different methods produce different reported amounts.

167
Q

Which of the following should be disclosed in a summary of significant accounting policies?

a. Basis of profit recognition on long-term construction contracts.
b. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
c. Depreciation expense.
d. Composition of sales by segment.

A

a. Basis of profit recognition on long-term construction contracts.

The summary of significant accounting policies footnote presents information that helps assist users in understanding the recognition, measurement, and disclosure decisions made by the firm.

GAAP allows many choices. In the long-term construction contracts area, GAAP allows both the completed contract and percentage of completion methods. The result of applying each method significantly affects both the Income Statement and Balance Sheet.

A user is much better equipped to evaluate the firm’s financial performance and position with the knowledge of the revenue recognition method used by the firm.

168
Q

Which of the following information should be disclosed in the summary of significant accounting policies?

a. Refinancing of debt subsequent to the balance sheet date.
b. Guarantees of indebtedness of others.
c. Criteria for determining which investments are treated as cash equivalents.
d. Adequacy of pension plan assets relative to vested benefits.

A

c. Criteria for determining which investments are treated as cash equivalents.

All four answers reflect information that should be disclosed in the footnotes, but only information about general accounting policies (measurement and recognition) should appear in the footnote referred to in the question. The policy concerning which investments are treated as cash equivalents is an accounting policy.