Accounting Theory Test
Preparation
Course Introduction
Accounting Theory explores the fundamental principles and conceptual frameworks underlying the practice of accounting. The course examines the origins and evolution of accounting thought, the development of accounting standards, and the philosophical, economic, and ethical considerations that influence accounting policy decisions. Students will analyze various theoretical approaches, such as positive and normative theories, and critically evaluate current issues in financial reporting and disclosure. Emphasis is also placed on the role of regulation, the impact of globalization on accounting practices, and the relevance of accounting information for decision-making by various stakeholders.
Recommended Textbook
Financial Reporting and Analysis Revsine 6th Edition by Collins Johnson Mittelstaedt Soffer
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17 Chapters
2231 Verified Questions
2231 Flashcards
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Chapter 1: The Economic and Institutional Setting for Financial Reporting
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158 Verified Questions
158 Flashcards
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Sample Questions
Q1) The IASB and FASB are working together to develop a single set of high-quality,compatible accounting standards that can be used for both domestic and cross-border financial reporting.
A)True
B)False
Answer: True
Q2) Business enterprises enter into many different types of contracts.Examples of such contracts that often contain language that refers to verifiable financial statement numbers include all of the following except A)royalty contracts with inventors.
B)sales contracts with customers.
C)compensation contracts with managers.
D)debt contracts with bankers.
Answer: B
Q3) Investors are uncertain about the quality of each company's debt or equity offerings because the ultimate return from the security depends on future events.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Accrual Accounting and Income Determination
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141 Verified Questions
141 Flashcards
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Sample Questions
Q1) A component of an entity may be a/an
A)reportable or operating segment.
B)subsidiary.
C)asset group.
D)reportable or operating segment,subsidiary,or asset group.
Answer: D
Q2) Under the cash basis,how much revenue should Canon recognize in October?
A)$0
B)$16,000
C)$24,000
D)$40,000
Answer: B
Q3) To be reported as an extraordinary item on the income statement,an event must be either unusual in nature or an infrequent occurrence.
A)True
B)False
Answer: False
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Chapter 3: Additional Topics in Income Determination
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) The installment sales method recognizes revenue and income proportionately as cash is collected.
A)True
B)False
Answer: True
Q2) The installment sales method is considered more conservative than the cost recovery method because when using the installment sales method,a portion of gross profit is recognized on each dollar collected.
A)True
B)False Answer: False
Q3) Revenue recognition irregularities constitute the most frequently cited reason for restating financial statements during the past few years.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Structure of the Balance Sheet and Statement
of Cash Flows
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) Cash is always measured for the balance sheet at A)future transaction value.
B)current market value.
C)realizable future value.
D)net transaction value.
Q2) Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.
A)True
B)False
Q3) The Additional Paid-In Capital account is reported on the balance sheet at the A)current market value of the stock minus par value.
B)historical sales price of the stock minus the par value.
C)net realizable value of the stock minus par value.
D)discounted present value of the future dividends minus par value.
Q4) In a common-size balance sheet,each balance sheet account is expressed as a percentage of total A)liabilities.
B)assets.
C)shareholders' equity.
D)assets plus shareholders' equity.
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Chapter 5: Essentials of Financial Statement Analysis
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139 Verified Questions
139 Flashcards
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Sample Questions
Q1) Cross-sectional analysis helps identify similarities and differences across companies over time.
A)True
B)False
Q2) According to most observers,there are numerous strategies for achieving superior performance in any business.
A)True
B)False
Q3) The long-term asset turnover ratio helps the analyst identify efficiency gains from improved accounts receivable and inventory management.
A)True
B)False
Q4) When operating earnings and cash flows from operations are dissimilar,which of the following ratios is a better measure of long-term solvency?
A)Interest coverage
B)Long-term debt to asset
C)Long-term debt to tangible assets
D)Operating cash flow to total liabilities
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Chapter 6: The Role of Financial Information in Valuation and
Credit Risk Assessment
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153 Verified Questions
153 Flashcards
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Sample Questions
Q1) Business valuation involves estimating the intrinsic value of a company,or one of its operating units.
A)True
B)False
Q2) Riskier firms have a lower risk-adjusted cost of capital resulting in lower share prices for those companies.
A)True
B)False
Q3) An adjustment to income due to an extraordinary item is regarded as A)permanent earnings.
B)transitory earnings.
C)value-irrelevant earnings.
D)quiet.
Q4) If securities markets are rational and efficient in the sense that they fully and correctly impound all available information into a company's stock price,then the price will reflect investors' unbiased expectations about the company's future earnings and cash flows.
A)True
B)False
Q5) What is meant by sustainable earnings?
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Chapter 7: The Role of Financial Information in Contracting
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) Executives often prefer taking "real actions" as opposed to "accounting actions" to hit earnings targets because auditors cannot as readily challenge real economic actions.
A)True
B)False
Q2) Managers wishing to avoid loan covenant violations may resort to making accounting changes that increase reported earnings.
A)True
B)False
Q3) Debt covenants benefit
A)lenders.
B)borrowers.
C)both lenders and borrowers.
D)neither borrowers nor lenders,but are required by the SEC as a condition of issuing debt securities.
Q4) Stock options provide a set of "golden handcuffs" for retaining executives during the restriction period.
A)True
B)False
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Chapter 8: Receivables
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143 Verified Questions
143 Flashcards
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Sample Questions
Q1) When a company factors its receivables with recourse,the company cannot be required to pay the factor if a customer's account proves uncollectible.
A)True
B)False
Q2) When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans,it is recorded at
A)present value based on the stated interest rate.
B)present value based on the prevailing rate of interest.
C)maturity value.
D)net realizable value.
Q3) XYZ Co.'s 2015 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2014.To evaluate whether the reduction in XYZ's ratio is reasonable,an analyst should
A)compare the ratio to other firms in XYZ's industry.
B)look for additional discussion in XYZ's annual report.
C)listen to the analyst earnings briefing.
D)do all of these.
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Chapter 9: Inventories
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161 Verified Questions
161 Flashcards
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Sample Questions
Q1) Both U.S.GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory.
A)True
B)False
Q2) In the perpetual inventory system inventory losses must be recorded in the accounts.
A)True
B)False
Q3) In a periodic inventory system the ending inventory must be determined by
A)external auditors.
B)physical count.
C)a certification of inventory.
D)reference to a running inventory balance.
Q4) Inventory shipped on consignment is owned by the consignee.
A)True B)False
Q5) The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions.
A)True
B)False
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Chapter 10: Long-Lived Assets
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161 Verified Questions
161 Flashcards
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Sample Questions
Q1) Which one of the following factors makes it difficult for financial analysts to use trend analysis?
A)Decreasing costs and prices.
B)Deflation.
C)An aging asset base.
D)A relatively new asset base.
Q2) Impairment losses are reported as a component of income from continuing operations.
A)True
B)False
Q3) The accounting model IFRS permits for long-lived tangible assets is
A)the cost method.
B)the revaluation method.
C)either the cost method or the revaluation method under certain circumstances.
D)the same method prescribed by U.S.GAAP.
Q4) The depreciation rate for the double declining balance method is double the straight-line rate.
A)True
B)False
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Chapter 11: Financial Instruments As Liabilities
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) When the market rate of interest is below the nominal rate,a bond sells at A)par.
B)a premium.
C)a discount.
D)stated value.
Q2) Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value option?
A)Firms may elect the fair value option for a single eligible instrument without electing it for other identical instruments.
B)Once the choice is made to adopt the fair value option,the decision is irrevocable.
C)Financial statement disclosures must include management's rationale for electing the fair value option.
D)The fair value option is not available for security investments that are accounted for using the equity methoD.
Q3) Bonds are required by GAAP to be reported on the balance sheet at market value.
A)True B)False
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Chapter 12: Financial Reporting for Leases
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) Under IFRS,a lessee may classify some assets held under leases as investment property which allows the lessee to
A)Avoid recording depreciation expense for the assets.
B)Account for the assets using either historical cost or fair value.
C)Use the higher of the implicit or the incremental borrowing rate when computing the present value of the minimum lease payments.
D)All of the choices are correct.
Q2) If Hatfield's incremental borrowing rate is 11% and the implicit rate is not known to the lessee,what interest rate will Hatfield use to account for this lease?
A)9%
B)10%
C)11%
D)Cannot be determined from information given.
Q3) Under IFRS,an indicator that could lead to a lease being classified as a finance lease is if the lessee cancels the lease,the lessor's losses will be borne by the lessee.
A)True
B)False
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Page 14
Chapter 13: Income Tax Reporting
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) The accrual of wages expense for book purposes at year-end creates a deferred tax asset on the year-end balance sheet.
A)True
B)False
Q2) At December 31,2015,the Floyd Company reported a $29,600 deferred tax asset pertaining to a $80,000 temporary difference which will reverse equally during the next four years;Floyd also reported a $7,400 deferred tax liability pertaining to a $20,000 temporary difference which will reverse during 2016.After determining the deferred tax asset and liability on December 31,2015,Floyd's management was informed that the income tax rate for years subsequent to 2015 had been changed to 35%.As a result of the tax rate change,Floyd's 2015 income tax expense will
A)increase $1,200.
B)decrease $1,200.
C)decrease $444.
D)increase $444.
Q3) The payment of life insurance premiums on company executives is an example of a permanent difference.
A)True
B)False
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Page 15
Chapter 14: Pensions and Postretirement Benefits
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) The amount of the cumulative gain or loss in excess of the corridor threshold is amortized to the pension expense over the average remaining service period of the employees.
A)True
B)False
Q2) U.S.tax laws limit the deductibility of contributions to pension plans for firms whose plans are underfunded.
A)True
B)False
Q3) Recognized prior service cost amortization causes reported pension expense to increase for defined benefit plans.
A)True
B)False
Q4) The interest cost component of a defined benefit pension plan is the portion of expense due to the passage of time.
A)True
B)False
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Chapter 15: Financial Reporting for Owners Equity
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) The comparability of earnings per share across firms is influenced by the relative amount of capital raised by the various firms and by the ability of the firms to manage their reported earnings per share.
A)True
B)False
Q2) A stock's par value does not necessarily have any relationship with a stock's market value.
A)True
B)False
Q3) Current GAAP requires that share-based compensation be expensed at the grant date of the stock options award.
A)True
B)False
Q4) According to current GAAP,the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the
A)vesting date.
B)grant date.
C)exercise date.
D)payment date.
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Chapter 16: Intercorporate Equity Investments
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130 Verified Questions
130 Flashcards
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Sample Questions
Q1) On November 1,2014,a U.S.company sold merchandise to a foreign company for 375,000 francs.The payment in francs is due on January 31,2015.The spot rate was as follows: $.20 per franc on November 1,2014;$.21 per franc on December 31,2014;and $.19 per franc on January 31,2015 when the payment was received.Which of the following incorrectly describes the accounting for this foreign currency transaction?
A)The receivable was recorded at $75,000 on November 1,2014.
B)The receivable was recorded at $78,750 on December 31,2014 balance sheet.
C)The foreign currency transaction gain included on the income statement for the year ending December 31,2014 was $3,750.
D)The foreign currency transaction loss included on the income statement for the year ending December 31,2015 was $3,750.
Q2) Assume that the Roy Company stock was sold during 2017 for $31,000.The proper accounting recognition at the date of sale was
A)an unrealized loss of $1,000.
B)a realized gain of $7,000.
C)a realized gain of $6,000.
D)a realized loss of $1,000.
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Chapter 17: Statement of Cash Flows
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) For a firm using the direct method,amortization of bond premium should be added back to net income when determining cash payments for interest.
A)True
B)False
Q2) Treasury stock costing $89,050 was sold for $94,375 cash.Which of the following statements accurately describes the reporting of this transaction within the cash flow statement assuming that the indirect method is used to determine net cash flows from operating activities?
A)A gain of $5,325 is deducted from net income and a $94,375 cash inflow is reported within the investing activities section of the cash flow statement.
B)A gain of $5,325 is deducted from net income and a $94,375 cash inflow is reported within the financing activities section of the cash flow statement.
C)There is no adjustment necessary to net income but a $94,375 cash inflow is reported within the financing activities section of the cash flow statement.
D)There is no adjustment necessary to net income but a $94,375 cash inflow is reported within the investing activities section of the cash flow statement.
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Page 19