Course Introduction
Accounting Theory
Pre-Test Questions
Accounting Theory explores the fundamental concepts, principles, and frameworks that underpin modern accounting practices. The course examines the development and evolution of accounting thought, the normative and positive approaches to accounting, and the regulatory environment that shapes financial reporting. Students will analyze various accounting theories, assess their relevance in practical scenarios, and critically evaluate the role of accounting standards. Emphasis is placed on understanding the ethical, social, and economic implications of accounting decisions, and on discussing emerging issues and research in the field.
Recommended Textbook
Intermediate Accounting IFRS 6th Edition by
J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) SFAC No.1 focuses on:
A)Objectives of financial reporting.
B)Qualitative characteristics of accounting information.
C)Recognition and measurement concepts in accounting.
D)Elements of financial statements.
Answer: A
Q2) One of the elements that many believe distinguishes a profession from other occupations is the acceptance by its members of a responsibility for the interests of those it serves, often articulated in:
A)Its conceptual framework.
B)Its code of ethics.
C)Federal laws.
D)State laws.
Answer: B
Q3) Which of the following is not an identified valuation technique in SFAS No. 157?
A)Cost approach.
B)Market approach.
C)Cost-benefit approach.
D)Income approach.
Answer: C
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Eve's Apples opened business on January 1, 2009, and paid for two insurance policies effective that date. The liability policy was $36,000 for eighteen-months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's prepaid insurance as of December 31, 2009?
A)$ 9,000.
B)$18,000.
C)$30,000.
D)$48,000.
Answer: B
Q2) What is an accrued liability?
Answer: An accrued liability results from an expense being incurred prior to cash payment. Examples include interest and wages payable.
Q3) Collected cash on account from customers.
Answer: \(\begin{array}{lccc}
\text { TRANSACTION }&\text { Account(s) } & \text { Account(s) } & \text { Transaction } \\
&\text { debited } & \text { credited } & \text { type } \\ \text { Collected cash on account from customers. }&1111&1132&1 \end{array}\)
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Compute the acid-test ratio for Marjoram Company.
Answer: ($19,000 + 35,000 + 48,400) /$108,400 = .94 Acid-test ratio
Q2) The principal concern with accounting for related party transactions is:
A)The size of the transactions.
B)Differences between economic substance and legal form.
C)The absence of legally binding contracts.
D)The lack of accurate data to record transactions.
Answer: B
Q3) The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies.
A)True
B)False
Answer: True
Q4) A subsequent event for an entity with a December 31, 2009, year-end would not include:
A)A change in the estimated useful lives of equipment in January 2010.
B)An issuance of bonds in January 2010.
C)An acquisition of another company in January 2010.
D)A major uncertainty at December 31, resolved in January 2010.
Answer: A
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Chapter 4: The Income Statement and Statement of Cash
Flows
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Q1) Each of the following would be reported as items of other comprehensive income except:
A)Foreign currency translation gains.
B)Unrealized gains on investments accounted for as securities available for sale.
C)Deferred gains from derivatives.
D)Gains from the sale of equipment.
Q2) In the operating activities section of the statement of cash flows, we start with net income:
A)In the direct method.
B)In the indirect method.
C)In both the direct and the indirect methods.
D)In neither the direct nor the indirect methods.
Q3) The difference between single-step and multiple-step income statements is primarily an issue of:
A)Consistency.
B)Presentation.
C)Measurement.
D)Valuation.
Q4) Briefly explain when and why intraperiod tax allocation is necessary.
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Chapter 5: Income Measurement
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Q1) A company is effectively leveraging when:
A)The return on assets exceeds the return on shareholders' equity.
B)The return on shareholders' equity exceeds the return on assets.
C)The return on shareholders' equity is increasing.
D)The return on assets is increasing.
Q2) Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:
A)Point of sale.
B)Installment sales.
C)Cost recovery.
D)Answer B or C is correct.
Q3) Its asset turnover ratio for 2009.
Q4) Its profit margin on sales for 2009.
Q5) What limitations exist in drawing meaningful comparisons about the performance of Uncle Joe's from the data above?
Q6) Using the information provided above, use the DuPont framework to briefly summarize the operating performance of McDonalds's relative to its benchmark competitors.
Page 7
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Chapter 6: Time Value of Money Concepts
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Q1) First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:
A)Multiply $10,500 by the present value of 1.
B)Divide $10,500 by the future value of an ordinary annuity of 1.
C)Divide $10,500 by the present value of an annuity due of 1.
D)Multiply $10,500 by the present value of an ordinary annuity of 1.
Q2) Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. Interest is at 10%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Required: Determine if Baird should purchase the machine.
Q3) Monetary assets include only cash and cash equivalents.
A)True B)False
Q4) Two banks each have annual CD rates of twelve percent. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD.
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) In a good system of internal control, the person who initiates a transaction should be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records.
A)True
B)False
Q2) On December 1, 2009, General Mole borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivable as collateral. Additionally, General Mole was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest.
Required:
Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.
Q3) Cash equivalents would include investments in marketable equity securities as long as management intends to sell the securities in the next three months.
A)True
B)False
Q4) Briefly explain the accounting treatment for sales returns.
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Chapter 8: Inventories: Measurement
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Sample Questions
Q1) The LIFO Conformity Rule states that if LIFO is used for:
A)One class of inventory, it must be used for all classes of inventory.
B)Tax purposes, it must be used for financial reporting.
C)One company in an affiliated group, it must be used by all companies in an affiliated group.
D)Domestic companies, it must be used by foreign partners.
Q2) Costs and prices regularly fall every year in the microcomputer industry. Briefly indicate your recommendation and rationale for an inventory method for a firm about to enter this industry.
Q3) The ending inventory assuming FIFO is:
A)$5,140.
B)$5,080.
C)$5,060.
D)$5,050.Ending inventory is assumed to consist of 600 gallons from Mar.23 purchase:
600 $7.35 = $4,410 + 100 from the Mar.16 purchase:
100 $7.30 = $730;
Total = $5,140.
Q4) Required: Compute the ending inventory and cost of goods sold assuming Denver uses FIFO.
Page 10
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Chapter 9: Inventories: Additional Issues
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Q1) In determining lower-of-cost-or-market, market is the expected selling price under normal operations.
A)True
B)False
Q2) In applying the LCM rule, the inventory of boots would be valued at:
A)$135,000.
B)$133,000.
C)$130,000.
D)$105,000.$130,000 designated market value is less than $133,000 cost.
Q3) For a purchase commitment contained within a single fiscal year, if the market price is less than the contract price, the purchase is recorded at the contract price.
A)True
B)False
Q4) In applying the LCM rule, the inventory of apparel would be valued at:
A)$108,000.
B)$ 90,000.
C)$110,000.
D)$115,000.$90,000 designated market value is less than $108,000 cost.
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) It's not unusual for one company to buy another company in order to obtain technology that the acquired company has developed or is in the process of developing.
Required:
Explain the accounting treatment of purchased technology.
Q2) Research and development costs for projects other than software development should be:
A)Expensed in the period incurred.
B)Expensed in the period they are determined to be unsuccessful.
C)Deferred pending determination of success.
D)Expensed if unsuccessful, capitalized if successful.
Q3) Productive assets that are physically consumed in operations are:
A)Equipment.
B)Land.
C)Land improvements.
D)Natural resources.
Q4) When is interest capitalized? Briefly describe how the amount to be capitalized is computed.
Q5) Explain the appropriate accounting method used to account for lump sum purchases of a group of operational assets.
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) Depreciation:
A)Is always considered a period cost.
B)Could be a product cost or a period cost depending on the use of the asset.
C)Is usually based on the declining-balance method.
D)Per books is usually higher than MACRS in the early years of an asset's life.
Q2) Briefly explain how a change in depreciation method is accounted for.
Q3) Prego would report depreciation in 2010 of:
A)$135,230.
B)$126,000.
C)$108,000.
D)$105,000.Depreciation in 2010 = [($450,000 36,000) (70,000 + 160,000)] = $1.80 per unit 70,000 = $126,000
Q4) Using the sum-of-the years'-digits method, depreciation for 2010 and book value at December 31, 2010, would be
A)$13,500 and $13,500.
B)$13,500 and $8,500.
C)$12,000 and $17,000.
D)$12,000 and $12,000.Depreciation in 2010 = ($45,000 5,000) 3/10 = $12,000 Book value, 12/31/10 = $45,000 16,000 12,000 = $17,000
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Chapter 12: Investments
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Sample Questions
Q1) The amount of purchased goodwill is:
A)$18 million.
B)$30 million.
C)$60 million.
D)None of these is correct.(in millions)
Q2) On January 2, 2008, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2008 and 2009, were $10,000 and $50,000, respectively. During 2009, Ranger declared and paid a dividend of $60,000. There were no dividends in 2008. On December 31, 2008, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2009 income statement as income from this investment?
A)$26,000.
B)$ 7,200.
C)$20,000.
D)$27,200.Investment revenue from dividends: $60,000 12% = $7,200
Any change in fair value during 2009 would be reflected in shareholders' equity but would not affect net income.
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Page 14
Chapter 13: Current Liabilities and Contingencies
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Q1) The key accounting considerations relating to accounts payable are:
A)Determining their existence and ensuring that they are recorded in the appropriate accounting period.
B)Determining their present value and ensuring that they are recorded in the appropriate accounting period.
C)Determining their existence and determining the correct amount.
D)Determining the present value of the principal and the amount of the interest.
Q2) Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January, 2009, the first month of BMS's fiscal year. The journal entry to record payroll for the January 2009 pay period will include a debit to payroll tax expense of
A)$ 6,120
B)$ 4,960
C)$11,080
D)$57,880
Q3) Which of the following is a contingency that would most likely require accrual?
A)Potential losses from extended warranties.
B)Customer premium offers.
C)Potential liability on a product where none have yet been sold.
D)Sales tax payable.
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Chapter 14: Bonds and Long-Term Notes
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Q1) On January 1, 2009, Whittington Stoves issued $800 million of its 8% bonds for $736 million. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Whittington records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2009, the fair value of the bonds was $752 million as determined by their market value on the NYSE.
Required:
1. Prepare the journal entry to record interest on June 30, 2009 (the first interest payment).
2. Prepare the journal entry to record interest on December 31, 2009 (the second interest payment).
3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2009, balance sheet.
Q2) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to accounting for convertible debt?
Q3) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to debt and equity for preferred stock?
Q4) How are bonds and notes the same? How do they differ?
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Chapter 15: Leases
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Q1) The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the risks and rewards of ownership occur during the first 75% of an asset's life.
A)True
B)False
Q2) Required:
1. Calculate the amount to be recorded as a leased asset and the associated lease liability.
2. Prepare Rumsfeld's journal entries for this lease for 2009 and 2010.
Q3) Additional lessor conditions for classification as a nonoperating lease are consistent with the criteria of the:
A)Matching principle.
B)Cause and effect principle.
C)Materiality concept.
D)Realization principle.
Q4) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to leases of land and buildings?
Q5) Discuss the three major types of leases that may apply to the lessor. How do they differ?
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Chapter 16: Accounting for Income Taxes
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Q1) SFAS 109 requires the following procedure.
A)Computation of deferred tax assets and liabilities based on temporary differences.
B)Computation of deferred income tax based on permanent differences.
C)Computation of income tax expense based on taxable income.
D)Computation of deferred income tax based on temporary and permanent differences.
Q2) A deferred tax asset represents the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.
A)True
B)False
Q3) Estimated employee compensation expenses earned during the current period but expected to be paid in the next period causes:
A)An increase in a deferred tax asset.
B)A decrease in a deferred tax asset.
C)An increase in a deferred tax liability.
D)A decrease in a deferred tax liability.
Q4) How are deferred tax assets and deferred tax liabilities reported in a classified balance sheet?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) The accounting for defined contribution pension plans is easy because each year:
A)The employer records pension expense equal to the amount paid out to retirees.
B)The employer records pension expense based on an amount provided by the actuary.
C)The employer records pension expense equal to the annual contribution.
D)The employer records pension expense based on the earnings of the plan assets.
Q2) Patey Technologies calculated pension expense for its underfunded pension plan as follows:
Required:
What is the effect of the components of pension expense on Patey's statement of comprehensive income?
\(\begin{array}{lc}
& \text { (\$ in millions) } \\
\text { Service cost } & \$ 672 \\
\text { Interest cost } & 450 \\
\text { Expected retum on the plan assets (\$300 actual, less \$30 gain) } & (270) \\
\text { Amortization of prior service cost } & 24 \\
\text { Amortization of net loss } & 6\\\text { Pension expense }&\$882 \end{array}\)
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Chapter 18: Shareholders Equity
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Q1) Cal Cookie Company (CCC) has 100 million shares of $1 par common stock authorized. The transactions below caused changes in CCC's outstanding shares.
January 4, 2009: Repurchased and retired 1 million shares at $8 per share.
June 25, 2009: Repurchased and retired 2 million shares at $2 per share.
Prior to the transactions, CCC's shareholders' equity included the following: Required:
Record entries for the above transactions.
\[\begin{array} { l r }
\text { Common stock, } 80 \text { million shares at } \$ 1 \text { par } & \$ 80,000,000 \\
\text { Paid-in capital excess of par } & 160,000,000 \\
\text { Retained earnings } & 120,000,000 \end{array}\]
Q2) Preferred stock is called preferred because it usually has two preferences. These preferences relate to:
A)Dividends and voting rights.
B)Par value and dividends.
C)The preemptive right and voting rights.
D)Assets at liquidation and dividends.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) No time-weighting of contingently issuable shares is required when computing basic EPS.
A)True
B)False
Q2) Stock options will be dilutive and included in the calculation of dilutive EPS if the exercise price is greater than the average market value of the stock.
A)True
B)False
Q3) The compensation associated with a share of restricted stock under a stock award plan is:
A)The market price of a share of similar fixed income securities.
B)The market price of an unrestricted share of the same stock.
C)The book value of an unrestricted share of the same stock.
D)The book value of a share of similar stock.
Q4) Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.
A)True
B)False
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Q5) Why are preferred dividends deducted from net income when calculating EPS?
Chapter 20: Accounting Changes
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Q1) A company uses the aging method to estimate bad debt expense. Its tax rate is 30%. After issuing its 2009 financial statements, the firm discovered that it failed to write off $50,000 in receivables that were determined to be uncollectible in 2009. As a result of this error, net income was:
A)Overstated by $35,000.
B)Overstated by an undetermined amount.
C)Understated by an undetermined amount.
D)Unaffected.Receivables were overstated, so bad debt expense calculated as a percentage of receivables was also overstated.Therefore, net income was understated.The actual write-off would not have affected net income.
Q2) JFS Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes:
A)A credit to accumulated depreciation.
B)A debit to accumulated depreciation.
C)A debit to a depreciable asset.
D)The change does not require a journal entry.
Q3) If inventory is understated at the end of 2008 and the error is not discovered, how will net income be affected in 2009?
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Chapter 21: The Statement of Cash Flows
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Q1) Which one of the following financial statements does not report amounts primarily on an accrual basis?
A)Income statement.
B)Balance sheet.
C)Statement of cash flows.
D)Statement of shareholders' equity.
Q2) On December 31, 2009, Tiras Company reported net income of $50,000 and sales of $200,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Tiras will report cash collected from customers in its 2009 statement of cash flows (indirect method) in the amount of:
A)$0.
B)$245,000.
C)$205,000.
D)$195,000.When using the indirect method to determine cash flows from operating activities, cash collected from customers is not calculated or reported.
Q3) Kinney reported cost of goods sold of $168,114,150 in its fiscal 2008 income statement. Compute its net inventory purchases during the year.
Q4) Did accounts receivable increase or decrease during 2009?
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Chapter 22: Appendix a Derivatives
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Q1) A futures contract to hedge possible future price changes of a forecasted sale of copper:
A)Represents a cash flow hedge.
B)Represents a fair value hedge.
C)Represents a foreign currency hedge.
D)Does not qualify as a hedge.
Q2) The key criterion for qualifying as a hedge is that the hedging relationship:
A)Must be highly effective in achieving offsetting changes in fair values or cash flows.
B)Must have predictable results.
C)Must have fixed outcomes.
D)None of these.
Q3) Hedging is used to deal with exposure to:
A)Fair value risk.
B)Cash flow risk.
C)Foreign exchange risk.
D)All of these are correct.
Q4) The seller in a futures contract derives a loss when interest rates rise.
A)True
B)False
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