Accounting Principles II
Exam Preparation Guide
Course Introduction
Accounting Principles II builds upon the foundational knowledge acquired in introductory accounting courses, with a deeper focus on the theory and application of accounting practices for corporate entities. The course explores topics such as inventory accounting, long-term assets, liabilities, stockholders equity, and the statement of cash flows. Students will learn to analyze and interpret financial information, prepare essential financial statements, and understand the regulatory and ethical environment affecting accounting decisions. By the end of the course, students should be equipped with the skills necessary to participate in more advanced accounting studies and apply their knowledge in real-world business scenarios.
Recommended Textbook
Intermediate Accounting 18th Edition by Earl K. Stice
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Page 2
Chapter 1: Financial Reporting
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Q1) Primary responsibility for GAAP and public reporting currently rests with the A)SEC.
B)FASB.
C)Congress.
D)AICPA.
Answer: A
Q2) As independent (or external)auditors,CPAs are primarily responsible for
A)preparing financial statements in conformity with GAAP.
B)certifying the accuracy of financial statements.
C)expressing an opinion as to the fairness of financial statements.
D)filing financial statements with the SEC.
Answer: C
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Page 3
Chapter 2: A Review of the Accounting Cycle
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Q1) On March 1,2012,Forest Co.borrowed cash and signed a 36-month,interest-bearing note on which both the principal and interest are payable on February 28,2015.At December 31,2014,the liability for accrued interest should be
A)10 months' interest.
B)22 months' interest.
C)34 months' interest.
D)36 months' interest.
Answer: C
Q2) Under the cash basis of accounting,
A)revenues are recorded when they are earned.
B)accounts receivable would appear on the balance sheet.
C)depreciation of assets having an economic life of more than one year is recognized. D)the matching principle is ignored.
Answer: D
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Chapter 3: The Balance Sheet and Notes to the Financial Statements
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Q1) A contingent liability should be recorded when
A)any lawsuit is actually filed against a company.
B)it is certain that funds are available to pay the amount of the claim.
C)it is probable that a liability has been incurred even though the amount of the loss cannot be reasonably estimated.
D)the amount of the loss can be reasonably estimated and it is probable prior to issuance of financial statements that a liability has been incurred.
Answer: D
Q2) Which of the following is an appropriate computation for return on investment?
A)Net income divided by sales
B)Net income divided by total assets
C)Sales divided by total assets
D)Sales divided by stockholders' equity
Answer: B
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Chapter 4: The Income Statement
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Q1) Under which of the following conditions would hurricane damage be considered an extraordinary item for financial reporting purposes?
A)Under any circumstances hurricane damage should be classified as an extraordinary item.
B)Only if hurricanes are unusual in nature and infrequent in occurrence in the geographic area
C)Only if hurricanes are normal in the geographic area but do not occur frequently
D)Only if hurricanes occur frequently in the geographic area but have been insured against
Q2) The amount of income reported for tax purposes
A)is normally greater than the net income reported to stockholders.
B)must be computed according to GAAP.
C)is used to compute earnings per share.
D)may differ from the amount of income determined for financial reporting purposes.
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6
Chapter 5: Statement of Cash Flows and Articulation
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Q1) In a statement of cash flows,proceeds from the sale of a company's own bonds or mortgages should be classified as cash inflows from
A)leveraging activities.
B)operating activities.
C)investing activities.
D)financing activities.
Q2) In preparing a statement of cash flows (indirect method),cash flows from operating activities
A)is calculated as the difference between revenues and expenses plus the beginning cash balance.
B)is always equal to the sum of cash flows from investing activities and cash flows from financing activities.
C)can be calculated by appropriately adding to or deducting from net income those items in the income statement that affect cash and accruals for current assets and current liabilities.
D)can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
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Chapter 6: Earnings Management
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Q1) Which of the following is true?
A)Companies can raise common equity only by issuing new shares of common stock.
B)There is no opportunity cost associated with use of retained earnings as a source of common equity.
C)Most large mature firms issue new shares of common stock on a regular basis.
D)Companies can raise common equity by issuing new shares of common stock and through retained earnings.
Q2) Recent accounting scandals suggest the need for care on the part of an independent auditor in accepting new clients.The independent auditor needs to know both the business of and the personnel employed by a prospective client.All other control procedures are fruitless if a CPA chooses to serve an undesirable client.The damage suffered as a result of associating with an undesirable client can be irreparable. Discuss some key issues an independent auditor should consider in the client acceptance decision.
Q3) Excessive earnings management typically begins as a result of
A)a regulatory investigation.
B)pressure to meet the expectations of stakeholders.
C)a downturn in business.
D)a violation of generally accepted accounting principles.
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Page 8
Chapter 7: The Revenuereceivablescash Cycle
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Q1) If the balance shown on a company's bank statement is less than the correct cash balance,and neither the company nor the bank has made any errors,there must be
A)deposits credited by the bank but not yet recorded by the company.
B)outstanding checks.
C)bank charges not yet recorded by the company.
D)deposits in transit.
Q2) When the direct write-off method of recognizing bad debt expense is used,the entry to write off a specific customer account would
A)increase net income.
B)have no effect on net income.
C)increase the accounts receivable balance and increase net income.
D)decrease the accounts receivable balance and decrease net income.
Q3) Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the depositor's records and to identify bank errors.Adjustments should be recorded for
A)bank errors, outstanding checks, and deposits in transit.
B)all items except bank errors, outstanding checks, and deposits in transit.
C)book errors, bank errors, deposits in transit, and outstanding checks.
D)outstanding checks and deposits in transit.
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Page 9
Chapter 8: Revenue Recognition
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Q1) You are an accounting major who recently completed your masters degree in accounting and began working in public accounting as of September 1,2014.Your younger sister currently is enrolled in a principles of accounting course.Your sister calls you at your firm's offices one day to congratulate you on the purchase of your new stereo system for your apartment.In the course of the conversation,your sister tells you that her accounting instructor discussed the installment sales method of recognition in class recently.Since your sister knows that you are paying for the stereo by making monthly payments,your sister (in an attempt to impress with her new-found knowledge)begins to describe the process for accounting under the installment sales method of revenue recognition.Your sister finds it particularly curious that the store that sold you the stereo system will be deferring revenue on the sale until cash is collected. Required:
How would you respond to your younger sister's comments?
Q2) The cost recovery method is
A)used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
B)the most common method of accounting for real estate sales.
C)similar to percentage-of-completion accounting.
D)never acceptable under generally accepted accounting principles.
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Page 10
Chapter 9: Inventory and Cost of Goods Sold
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Q1) The inventory write-down rule under IAS 2 can best be labeled
A)lower of cost or market.
B)lower of cost or net realizable value.
C)lower of net realizable value or market
D)lower of ceiling or floor.
Q2) When valuing raw materials inventory at lower of cost or market,what is the general meaning of the term "market"?
A)Net realizable value
B)Net realizable value less a normal profit margin
C)Current replacement cost
D)Discounted present value
Q3) Which of the following will result if the current year's ending inventory amount is understated in the cost of goods sold calculation?
A)Cost of goods sold will be overstated.
B)Total assets will be overstated.
C)Net income will be overstated.
D)Both cost of goods sold and net income will be overstated.
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11
Chapter 10: Investments in Noncurrent Operating
Assets-Acquisition
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Q1) The term "intangible assets" is used in accounting to denote
A)current or noncurrent property items without physical characteristics.
B)assets with lesser economic significance because of the nature of such assets.
C)such items as patents, copyrights, and claims against customers which can be valued on a monetary basis.
D)properties without physical characteristics that have long-term effects on a business enterprise.
Q2) During 2014,Brent Industries,Inc.constructed a new manufacturing facility at a cost of $12,000,000.The weighted average accumulated expenditures for 2014 were calculated to be $5,400,000.The company had the following debt outstanding at December 31,2014:
(a)10 percent,five-year note to finance construction of the manufacturing facility,dated January 1,2014,$3,600,000.
(b)12 percent,20-year bonds issued at par on April 30,2013,$8,400,000.
(c)8 percent,six-year note payable,dated March 1,2013,$1,800,000.
Determine the amount of interest to be capitalized by Brent Industries for 2014.
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Page 12
Chapter 11: Investments in Noncurrent Operating
Assets-Utilization and Retirement
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Q1) On January 1,2014,Jameson Company purchased equipment at a cost of $420,000.The equipment was estimated to have a useful life of five years and a salvage value of $60,000.Jameson uses the sum-of-the-years'-digits method of depreciation.What should the accumulated depreciation be at December 31,2017?
A)$240,000
B)$288,000
C)$336,000
D)$360,000
Q2) Stanley Company purchased a machine that was installed and placed in service on January 2,2013,at a total cost of $680,000.Residual value was estimated at $70,000.The machine is being depreciated over ten years by the double-declining-balance method.For the year 2014,Stanley should record depreciation expense of
A)$108,800
B)$97,600
C)$68,000
D)$61,000
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Page 13
Chapter 12: Debt Financing
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Q1) Debt securities frequently are issued with a convertible feature that permits the holder to convert the bond certificates into a determinable number of shares of common stock at any time before the conversion privilege expires.The conversion feature offers many advantages and some disadvantages both to the issuer and the investor,however.
Required:
Identify the advantages of convertible debt both to the issuer and the investor.
Q2) Gunther Inc.purchased $400,000 of Malone Corp.ten-year bonds with a stated interest rate of 8 percent payable quarterly.At the time the bonds were purchased,the market interest rate was 12 percent.Determine the amount of premium or discount on the purchase of the bonds.
A)$92,442 premium
B)$92,442 discount
C)$81,143 premium
D)$81,143 discount
Q3) For a liability to exist,
A)the identity of the party owed must be known.
B)the exact amount must be known.
C)a past transaction or event must have occurred.
D)an obligation to pay cash in the future must exist.
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Chapter 13: Equity Financing
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Q1) On June 30,2014,Lynch Co.declared and issued a 15 percent stock dividend.Prior to this dividend,Lynch had 50,000 shares of $10 par value common stock issued and outstanding.The market value of Lynch Co.'s common stock on June 30,2014,was $24 per share.As a result of this stock dividend,by what amount would Lynch's total stockholders' equity increase (decrease)?
A)$0
B)$75,000
C)$70,000
D)$(70,000)
Q2) A company declared a cash dividend on its common stock in December 2013,payable in January 2014.Retained Earnings would
A)increase on the date of declaration.
B)not be affected on the date of declaration.
C)not be affected on the date of payment.
D)decrease on the date of payment.
Q3) Prepare a statement of comprehensive income in a one-statement format.
Q4) Prepare a statement of comprehensive income in a two-statement format.
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Chapter 14: Investments in Debt and Equity Securities
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Q1) The equity method of accounting should be applied by an investor to an investment in the voting stock of an investee of 20% or more of the voting stock of the investee.An investment of 20% or more of the voting stock of an investee should lead to the presumption (absent evidence to the contrary)that an investor has the ability to exercise significant influence over an investor.The presumption in applying the equity method is that an investor has significant influence over the operating and financial policies of an investee even though the investor holds 50% or less of the voting stock of the investee.
Required:
Identify events or circumstances that suggest that an investor may be unable to exercise significant influence over an investee.
Q2) When an investor uses the cost method to account for investments in common stock,cash dividends received by the investor from the investee should normally be recorded as
A)a deduction from the investment account.
B)dividend revenue.
C)an addition to the investor's share of the investee's profit.
D)a deduction from the investor's share of the investee's profit.
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Page 16
Chapter 15: Leases
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Q1) NPR leased a special crane to WLRN that cost NPR $40,000.The lease term was six years and the annual rentals were $10,000 per year,payable at the end of each year.The implicit interest rate was 10 percent.NPR recognized a gross margin of
A)$3,553.
B)$4,000.
C)$20,000.
D)$24,000.
Q2) The lessee's balance sheet liability for a capital lease would be periodically reduced by the
A)minimum lease payment.
B)minimum lease payment plus the amortization of the related asset.
C)minimum lease payment less the amortization of the related asset.
D)minimum lease payment less the portion of the minimum lease payment allocable to interest.
Q3) Which of the following would be considered an executory cost?
A)Minimum lease payments
B)Interest expense incurred
C)Bargain purchase option
D)Maintenance costs
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Page 17
Chapter 16: Income Taxes
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Q1) When enacted tax rates change,the asset and liability method of interperiod tax allocation recognizes the rate change as
A)a cumulative effect adjustment.
B)an adjustment to be netted against the current income tax expense.
C)a separate charge to the current year's net income.
D)a separate charge or benefit to income tax expense.
Q2) The Racing Company had taxable income of $12,000 during 2014.Racing used accelerated depreciation for tax purposes ($3,400)and straight-line depreciation for accounting purposes ($2,000).Assuming Racing had no other temporary differences,what would the company's pretax accounting income be for 2014?
A)$1,400
B)$6,600
C)$13,400
D)$17,400
Q3) Which of the following could never be subject to interperiod tax allocation?
A)Interest revenue on municipal bonds
B)Depreciation expense on operational assets
C)Estimated warranty expense
D)Rent revenue
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Page 18
Chapter 17: Employee Compensation-Payroll,pensions, Other Compissues
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Q1) Employers use a discount rate to compute the actuarial present value of benefits,pension expense,and the obligation of the employer under the pension plan.The choice of the discount rate can have a great effect on measures of pension cost and benefit obligations.Assumptions regarding discount rates must be made carefully in order to ensure that differences in pension plans are properly reflected in the annual reports of companies sponsoring such plans. Identify factors employers should consider when choosing the discount rate to be used in accounting for pension plans of the enterprise.
Q2) Using the information above,what amount is the check,net of all deductions,that Gabe received for the week's pay?
A)$243.05
B)$259.60
C)$274.60
D)$277.00
Q3) Using the information above,service cost for the year would be
A)$390,000.
B)$129,000.
C)$94,000.
D)$59,000.
Page 19
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Chapter 18: Earnings Per Share
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Q1) Using the information above,what is the number of shares that should be used in computing diluted earnings per share for 2014?
A)735,000
B)780,000
C)885,000
D)910,000
Q2) During its fiscal year,Deerborn Distributing had net income of $100,000 (no extraordinary items)and 50,000 shares of common stock and 10,000 shares of preferred stock outstanding.Deerborn declared and paid dividends of $.50 per share to common and $6.00 per share to preferred.The preferred stock is convertible into common stock on a share-for-share basis.For the year,Deerborn Distributing should report diluted earnings (loss)per share of
A)$(0.80).
B)$1.00.
C)$1.67.
D)$2.67.
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20
Chapter 19: Derivatives, contingencies, business Segments, and Interim Reports
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Q1) A truck owned and operated by Roadhog Company was involved in an accident with an auto driven by M.Sore on January 12,2014.Roadhog received notice on April 24,2014,of a lawsuit for $750,000 damages for a personal injury suffered by M.Sore.Roadhog's counsel believes it is reasonably possible that M.Sore will be successful against the company for an estimated amount in the range between $200,000 and $500,000.No amount within this range is a better estimate of potential damages than any other amount.It is expected that the lawsuit will be adjudicated in the latter part of 2015.What amount of loss should Roadhog accrue at December 31,2014?
A)$400,000
B)$250,000
C)$100,000
D)$0
Q2) When a company with reportable segments issues interim condensed financial statements,current GAAP requires that the interim reports provide all of the following for each reportable segment except
A)revenues for external customers.
B)intersegment revenues.
C)total assets.
D)a measure of segment profit or loss.
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Chapter 20: Accounting Changes and Error Corrections
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Q1) The ending inventory for Wyeth Company was overstated by $6,000 in 2014.The overstatement will cause Wyeth Company's
A)retained earnings to be understated on the 2014 balance sheet.
B)2015 balance sheet not to be misstated
C)cost of goods sold to be overstated on the 2014 income statement.
D)cost of goods sold to be understated on the 2015 income statement.
Q2) On January 1,2011,Mardi Gras Shipping bought a machine for $1,500,000.At that time,this machine had an estimated useful life of six years,with no salvage value.As a result of additional information,Mardi Gras determined on January 1,2014,that the machine had an estimated useful life of eight years from the date it was acquired,with no salvage value.Accordingly,the appropriate accounting change was made in 2014.How much depreciation expense for this machine should Mardi Gras record for the year ended December 31,2014,assuming Mardi Gras uses the straight-line method of depreciation?
A)$125,000
B)$150,000
C)$187,500
D)$250,000
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22
Chapter 21: Statement of Cash Flows Revisited
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Q1) Which of the following transactions would not be reported on the statement of cash flows?
A)Purchase of treasury stock
B)Declaration of a cash dividend which has not yet been paid
C)Patent amortization
D)Purchase of an operational asset by issuing common stock
Q2) Amortization of the premium on bonds payable is subtracted from net income in the reconciliation of net income to cash flows from operations because A)interest expense understates the cash paid for interest by the amount of the premium amortization.
B)it reduces income without causing a cash outflow.
C)it increases income without causing a cash flow.
D)it is a financing cash outflow.
Q3) On a reconciliation of net income to cash from operations,depreciation is added back to net income as depreciation
A)is a direct outflow of cash.
B)reduces net income but does not involve an outflow of cash.
C)reduces net income and involves an outflow of cash.
D)is an outflow of cash to a fund established for the replacement of assets.
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Page 23
Chapter 22: Accounting in a Global Market
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Q1) Which of the following statements is correct?
A)Capital stock of a foreign subsidiary is translated at the historical rate, that is, the rate prevailing on the date the subsidiary was acquired.
B)Dividends are translated at the average exchange rate for the year.
C)Retained earnings are translated at the average exchange rate for the year.
D)Assets and liabilities are translated at the historical rate prevailing when the subsidiary was acquired.
Q2) Which of the following is true regarding the accounting for property,plant,and equipment under international accounting standards?
A)Upward revaluations of property, plant, and equipment are not allowed.
B)The option is available for an entity to adjust upward the carrying value of property, plant, and equipment to fair value.
C)All entities must adjust upward the carrying value of property, plant, and equipment to fair value.
D)An entity has the option to adjust upward the carrying value of property, plant, and equipment to fair value, with gains and losses being shown in other comprehensive income.
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Chapter 23: Analysis of Financial Statements
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Q1) Ringer Corporation had a current ratio of 3.1 at the end of 2013.Current assets and current liabilities increased by equal amounts during 2014.The effects on net working capital and on the current ratio,respectively,were
A)no effect; increase.
B)no effect; decrease.
C)increase; increase.
D)decrease; decrease.
Q2) Refer to the Sculley Corporation information above.Sculley's quick (acid test)ratio as December 31,2014,is
A)1.44 to 1.
B)1.50 to 1.
C)1.67 to 1.
D)1.66 to 1.
Q3) The inventory of Regatta Company averages $1,315,500 at cost.During 2014,sales of $6,995,990 were made at 35 percent above cost.
Using the given data,compute the following:
(1)Inventory turnover rate for 2014.
(2)Number of days' sales in inventory.
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