Course Introduction
Accounting Theory Review
Questions
Accounting Theory explores the fundamental principles, concepts, and frameworks that underpin the practice of accounting. This course examines the development and application of various accounting theories and their relevance to real-world accounting issues, including financial reporting, measurement, disclosure, and the regulatory environment. Students will analyze the rationale behind accounting standards, investigate ethical considerations, and evaluate the impact of current trends and controversies on accounting practices. Emphasis will be placed on understanding how theoretical perspectives inform the development of accounting policies and influence decision-making processes within organizations.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Page 2
Chapter 1: The Demand for and Supply of Financial
Accounting Information
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Q1) When making decisions, equity investors are interested in assessing
A) the company's ability to generate cash flows.
B) management's ability to increase the capital providers' investments.
C) the company's ability to pay dividends.
D) All of these choices
Answer: D
Q2) The primary reason that financial accounting and managerial accounting have somewhat different objectives is because they
A) need information in different formats
B) provide information for different decisions
C) need information in different geographic locations
D) need information at different times
Answer: B
Q3) The need for relevant and reliable financial information stems from the needs of the internal and external stakeholder's.
A)True
B)False
Answer: True
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Chapter 2: Financial Reporting: Its Conceptual Framework
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Q1) According to the FASB hierarchy of fundamental qualitative characteristics, the two primary qualities making accounting information useful are
A) understandability and decision usefulness
B) relevance and faithful representation
C) verifiability and neutrality
D) predictive value and feedback value
Answer: B
Q2) A list of statements follows:
a._______are applications of______ and_____ to differing types of transactions.
b._________are specific implementation procedures.
c._________and______are broad and definitional
d.The ac counting projects for the conceptual framework project for financial accounting and reporting define the accounting______ how they should be______ and______ Required:
Fill in the words necessary to complete the statements.
Answer: a.Standards, concepts, principles
b.Rules
c.Concept statements, principles
d.elements, recognized, measured
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4
Chapter 3: Review of a Companys Accounting System
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Q1) Which of the following is a purchase return?
A) A company agrees to keep damaged inventory and receives a refund from the supplier.
B) A customer agrees to keep damaged inventory and receives a partial refund of the selling price.
C) A company returns inventory to the supplier and receives a refund of the purchase price.
D) A customer returns inventory to a company and receives a refund of the purchase price.
Answer: C
Q2) A trial balance does not identify all types of errors, which of the following are errors are not identified using the trial balance?
A) incorrectly recorded transaction amount, but debits still equal credits
B) incorrectly posted to the wrong account
C) transaction was not recorded
D) All of these choices
Answer: D
Q3) ........
Answer: ........
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Q1) Current liabilities are defined as obligations that will be paid
A) by refinancing through issuing new long-term liabilities
B) by using existing resources properly classified as current assets
C) out of a fund classified as a long-term investment
D) by using existing resources, regardless of their classification
Q2) With all of the turmoil in the financial markets in 2008, one of your friends has emailed you because she has been wondering about the financial disclosure requirements for the banks and brokerage firms affected by the market turbulence. Explain the general accounting requirements for financial instruments to your friend.
Q3) A friend comes to you with a set of financial statements that he thinks contains an error. The footnotes contain a note on a bond issue sold after the end of the reporting period. Your friend is sure this is an error because the transaction occurred after the cutoff date for the financial statements.
Required:
Explain to your friend why certain items that occur after the end of an accounting period are included in the financial statements and the manner in which they can be disclosed.
Q4) What is FASB's definition of fair value?
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Chapter 5: The Income Statement and the Statement of Cash Flows
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Q1) Information reported or disclosed about the profit or loss of reportable segments consists of
A) a measure of operating profit or loss
B) segment revenues (separated into sales to external customers and intersegment sales)
C) interest revenue and interest expense
D) all of these
Q2) Under which of the following conditions would hurricane damage be considered an extraordinary item for income reporting purposes?
A) only if hurricanes in the geographical area are unusual in nature and occur infrequently
B) only if hurricanes are normal in the geographical area but do not occur frequently
C) only if hurricanes occur frequently in the geographical area but can be covered by insurance policies
D) under any circumstances hurricane damage should be classified as an extraordinary item
Q3) What are the seven major components of a company's income statement?
Q4) List five purposes of the income statement.
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Chapter 6: Cash and Receivables
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Q1) Puzzle Company sold merchandise on credit with a list price of $75,000. Terms were 3/10, n/30. Given the indicated sales discounts methods in the responses, which entry is correct?
A) Gross Price Method
Accounts Receivable 72,750
Sales 72,750
B) Net Price Method
Accounts Receivable 72,750
Sales 72,750
C) Net Price Method
Accounts Receivable 75,000
Sales 75,000
D) Gross Price Method
Accounts Receivable 72,000
Sales 72,000
Q2) Describe the key elements for internal control of cash receipts and cash payments.
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Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Q1) Refer to Exhibit 7-5. The ending inventory at December 31, 2014, using the dollar-value LIFO method would be
A) $400,000
B) $402,000
C) $406,000
D) $424,000
Q2) A manufacturing firm would not normally have an account titled
A) goods in process inventory
B) raw materials inventory
C) merchandise inventory
D) finished goods inventory
Q3) When a company uses a perpetual inventory system,
A) there is no purchases account
B) the cost of goods sold account is used
C) two entries are required when inventory is sold
D) all of these
Q4) What three difficulties does dollar-value LIFO overcome compared to applying simple LIFO?
Q5) What is the LIFO conformity rule?
Page 9
Q6) What is the LIFO Valuation Allowance, also known as LIFO reserve?
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Chapter 8: Inventories: Special Valuation Issues
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Q1) A purchase on credit is omitted from the purchases account, but ending inventory is correct. What is the effect of this error on the balance sheet for the current year? What is the effect on the income statement for the current year?
Q2) The Jamison Company's inventory was destroyed on July 4, 2013, when its warehouse caught on fire early in the morning. Inventory was totally destroyed. The accounting records, which were located in a fireproof vault, contained the following information: \(\begin{array}{ll}
\$ 250,000 & \text { Sales }(1 / 1 / 13 \text { through } 7 / 3 / 13) \\
180,000 & \text { Purchases }(1 / 1 / 13 \text { through } 7 / 3 / 13) \\
45,000 & \text { Inventory }(1 / 1 / 13) \\
25 \% \text { of cost } & \text { Gross profit ratio } \end{array}\)
Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?
A) $17,500
B) $25,000
C) $30,000
D) $37,500
Q3) .....
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Chapter 9: Current Liabilities and Contingencies
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Q1) Feller, Inc. sells a certain machine for $35,000. Included in this price is an implied service contract of $950. Fifty machines were sold in 2014. Warranty claims incurred during 2014 amounted to $21,000. The company uses the sales warranty accrual method.
Required:
Prepare all 2014 journal entries required by the information above.
Q2) Compensated absences include vacation, holiday, sick, or other activities for which the company pays its employees.
A)True
B)False
Q3) A probable loss contingency is reasonably estimated within a range of possible amounts. No amount within the range is a better estimate than any other amount within the range. The amount that should be accrued should be
A) zero
B) the lower amount of the range
C) the upper amount of the range
D) the average amount within the range
Q4) Identify 5 liabilities that are based upon contingent obligations.
Q5) How are current liabilities valued?
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Chapter 10: Property, Plant, and Equipment: Acquisition and Subsequent Investments
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Q1) Which of the following is NOT an alternative term for property, plant, and equipment used in the normal operation of business?
A) fixed assets
B) operational assets
C) plant assets
D) capital investments
Q2) During 2014, the Tidel Company completed the following transactions related to its property, plant, and equipment accounts:
a.On March 18, Tidel paid $480,000 for land, buildings, and equipment in a lump-sum purchase. An appraisal that cost Tidel $10,000 revealed fair market values of $200,000 for the land, $150,000 for the buildings, and $150,000 for the equipment.
b.On August 11, Tidel issued 20,000 shares of its $10 par value common stock in exchange for some equipment. The equipment's fair market value is estimated at $360,000 by an outside appraisal. On the date of the exchange, the stock was being actively traded at $17 per share on a major stock exchange.
Required:
Prepare the necessary journal entry to properly record each transaction.
Q3) What is the successful-efforts method of capitalization?
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Sample Questions
Q1) Which of the following is not considered involuntary disposal?
A) expropriation by the government
B) fire
C) earthquake
D) exchange
Q2) Assets sold on or before the 15th are not considered owned for the month based on the nearest whole month convention.
A)True
B)False
Q3) Group depreciation is applied to heterogeneous assets.
A)True
B)False
Q4) A student is defending a certain depreciation method. She uses the argument that repairs and maintenance costs will probably increase as the asset gets older. She also argues that the asset will produce less as it gets older. What depreciation method is she probably defending?
A) straight-line method
B) sum-of-the-years'-digits method
C) sinking-fund method
D) activity method
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Chapter 12: Intangibles
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Q1) Which of the following is not a required disclosure regarding intangible assets in the period a company acquires intangible assets?
A) the cost of any intangible assets acquired, separated into assets subject to amortization, assets not subject to amortization, and goodwill
B) for assets subject to amortization, the residual value and the weighted-average amortization period
C) the cost of any research and development acquired and written off, and where it is included in the income statement
D) the rate of return used to estimate the value of goodwill purchased
Q2) Based on GAAP, most software development costs are likely to be
A) expensed as R&D costs
B) allocated to inventory and expensed to cost of goods sold when the software is sold
C) capitalized and amortized over a 40-year period
D) capitalized and amortized over a relatively short period, such as five years
Q3) What are the two methods that a company can amortize software developments costs and which one is more likely to be used?
Q4) List 5 activities that would be excluded from R &D.
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Page 15
Chapter 13: Investments and Long-Term Receivables
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Q1) A note receivable is considered impaired when A) the debtor misses an interest or principal payment
B) it is probable that the creditor will be unable to collect all amounts due
C) the market value of the note is less than its book value
D) the market value of interest exceeds the original contract interest rate
Q2) The Reba Company purchased 10%, $800,000 bonds of the Trading Up Company at par plus accrued interest on April 1, 2014, as an investment in trading securities. The bonds pay interest on June 30 and December 31 each year. The entry by Reba on April 1, 2014, would include a
A) debit to Investment in Trading Securities of $820,000
B) credit to Cash of $820,000
C) credit to Interest Income of $20,000
D) debit to Interest Expense of $20,000
Q3) ABC Company has been purchasing stock of XYZ Company for a few years. ABC has classified the XYZ Company stock as available-for-sale. ABC has just purchased an additional 10% of XYZ's stock so it now owns 25% and is the largest stockholder. How does this last purchase affect ABC's accounting for this stock?
Q4) What three steps are necessary to evaluate whether or not an investment is impaired?
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Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Q1) As a requirement of GAAP the interest expense associated with a note payable is recorded in the operating activities of the cash flow statement.
A)True
B)False
Q2) Refer to Exhibit 14-8. After a total of 4,000 warrants were exercised, the remaining warrants expired. The entry to record the expiration of the warrants would include a credit to Additional Paid-in Capital from Expired Warrants for
A) $26,000
B) $13,000
C) $52,000
D) $65,000
Q3) The portion of proceeds from the sale of bonds with detachable stock warrants attributable to the warrants is accounted for as a(n)
A) additional paid-in capital account
B) common stock account
C) contra-liability account
D) adjunct-liability account
Q4) .......
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17
Chapter 15: Contributed Capital
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Q1) Refer to Exhibit 15-9. The entry to record the retirement of 100 shares on 5/10/2013 would include a
A) credit to Additional Paid-in Capital from Treasury Stock for $200
B) debit to Treasury Stock for $1,000
C) debit to Additional Paid-in Capital on Common Stock for $1,200
D) debit to Common Stock for $1,200
Q2) In the United States, corporations account for A) 10% of all companies
B) 15% of all companies
C) 11% of all companies
D) 50% of all companies
Q3) What conditions must be met in order for a share purchase plan to be noncompensatory?
Q4) When accounting for a fixed compensatory share option plan, a company must make which of the following on the date of grant?
A) journal entry recognizing the common stock issued
B) journal entry recognizing the compensation expense
C) memorandum entry explaining the terms of the compensatory share option plan
D) memorandum entry of the expected annual compensation expense amount
Q5) .....
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) When the basic and diluted earnings per share amounts are disclosed on the income statement, additional disclosures are made in the footnotes.
Required:
Describe the information contained in the footnotes concerning the basic and diluted earnings per share.
Q2) Interest expense on convertible bonds that are dilutive is included in the numerator of the diluted earnings per share calculation at an amount equal to
A) interest expense
B) interest payable
C) interest expense times the tax rate
D) interest expense times one minus the tax rate
Q3) A small stock dividend is accounted for by transferring from retained earnings to contributed capital an amount equal to the par value of the additional shares issued. A)True
B)False
Q4) What are the steps necessary to compute diluted earnings per share?
Q5) Other Comprehensive Income or loss might include what four items?
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19
Chapter 17: Advanced Issues in Revenue Recognition
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Q1) Alternative methods of revenue recognition are used because these methods increase the
A) comparability of the financial statements
B) reliability of the financial statements
C) relevance of the financial statements
D) understandability of the financial statements
Q2) IFRS provide guidance that differs from GAAP regarding the procedures to use in construction contracts' future costs estimates. Discuss how the treatments differ.
Q3) If the consignment-in account has a credit balance, it is reported on the consignee's balance sheet as a(n)
A) contra-asset account
B) revenue account
C) liability account
D) equity account
Q4) Under GAAP, the franchisor recognizes the initial franchise fee as revenue when it has substantially performed all material services. What does substantial performance mean?
Q5) What conditions must be met in order to recognize revenue under SEC Staff Bulletin 104?
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Chapter 18: Accounting for Income Taxes
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Q1) Life insurance proceeds payable to a corporation upon the death of an insured employee are an example of
A) intraperiod tax allocation
B) interperiod tax allocation
C) a permanent difference
D) a temporary difference
Q2) Interperiod tax allocation is required for all of the following situations except A) warranty expenses that are expensed in the year of sale for accounting purposes but are deductible in the year of payment for tax purposes
B) percentage depletion that exceeds cost depletion for the current period
C) MACRS depreciation for tax purposes and straight-line method for accounting purposes
D) installment sales method for tax purposes and accrual method for accounting purposes
Q3) Under IFRS valuation allowances for deferred tax assets are not recorded.
A)True
B)False
Q4) What is intraperiod tax allocation?
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Chapter 19: Accounting for Postretirement Benefits
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Q1) The corridor is defined as 10% of the greater of the beginning of the year projected benefit obligation or the end of the year fair value of the plan.
A)True
B)False
Q2) The defined benefit plan is a type of plan in which the employer's contribution into the pension fund is based on a formula.
A)True
B)False
Q3) What five alternatives were examined by regulators to determine which best met the recognition-measurement criteria of a liability?
Q4) Under contributory plans the employees bear the majority of the costs of the plan and contribute towards the plan with deductions from their salaries.
A)True
B)False
Q5) What estimates are necessary to account for a defined benefit pension plan?
Q6) What are the advantages of qualified pension plans?
Q7) What five components comprise pension expense?
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Chapter 20: Accounting for Leases
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Q1) Which of the following statements regarding the calculation of the lessee's depreciation expense for a capital lease is true?
A) The bargain purchase option price is deducted from the original cost capitalized, and the difference is allocated over the estimated economic life of the asset.
B) The guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the estimated economic life of the asset.
C) The unguaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the term of the lease.
D) The guaranteed residual value is deducted from the original cost capitalized, and the difference is allocated over the term of the lease.
Q2) For a lease that contains a bargain purchase option, minimum lease payments include
A) any guarantee by the lessee of the residual value
B) any payments on failure to renew or extend the lease
C) executory costs
D) minimum periodic rental payments required by the lease over the lease term
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Chapter 21: The Statement of Cash Flows
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Q1) What is the primary purpose of a company's statement of cash flows?
A) to provide information about the company's operations
B) to provide information about the company's dividend policy
C) to provide information about the company's financing and investing activities
D) to provide information about the company's cash receipts and cash payments during the period
Q2) In a statement of cash flows prepared by the indirect method, an increase in accounts receivable should be
A) deducted from net income in the operating activities section
B) added to net income in the operating activities section
C) reported as an inflow in the investing activities section
D) reported as an inflow in the financing activities section
Q3) Current GAAP permits two methods of calculating and reporting a company's net cash flow from operating activities on its statement of cash flows.
Required:
Identify the two methods. Which method does the FASB prefer? Which method do most companies use and why?
Q4) How should the sale of depreciable asset be presented on the statement of cash flows?
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Chapter 22: Accounting for Changes and Errors
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Q1) Which of the following statements does not properly state a basic principle for reporting an accounting change?
A) retrospectively apply a change in accounting principle
B) prospectively account for a change in accounting estimate
C) retrospectively adjust for a change in reporting entity
D) retrospectively apply a change in accounting estimate
Q2) In Western reviewed their estimated warranty costs which at that time was 5% of sales. This estimated was based upon the warranty accrual method. In 2014 net sales were $3,250,000 they recorded warranty expense of $162,500. Due to some pending changes in product improvement and certain economic factors the company saw a drastic drop in their warranty claims for 2015. The company decided for 2015 to reduce the estimate to 3% of sales. In 2015 Western reported net sales of $3,500,000.
Required:
1) How should the company report the change and why?
2) Prepare any necessary journal entries for 2014 or 2015 to account for the change.
Q3) What is the GAAP requirement of accounting for a change in estimates?
Q4) What must be disclosed when making a retrospective adjustment?
Q5) ......
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Chapter 23: Time Value of Money Module
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Q1) FASB financial accounting concepts on using estimated future cash flow information in accounting measurements to value various assets and liabilities identified each of the following elements except
A) an estimate of the future cash flows and the timing of those cash flows
B) an increase in the interest for any expected risk
C) estimates about variations in the amount or timing of those cash flows
D) that estimated cash flows should reflect a single most likely minimum or maximum possible amount, rather than a range of possible cash flows
Q2) An ordinary annuity is if the cash flows occur on the first day of each period.
A)True
B)False
Q3) To determine the converted table factor for the present value of an annuity due, one must find the factor for the present value of an ordinary annuity for
A) n + 1 and then subtract 1
B) n - 1 and then subtract 1
C) n + 1 and then add 1
D) n - 1 and then add 1
Q4) What estimations are involved in present value measurements?
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