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Chapter 1 Multiple Choice:

1. Which of the following bodies has the ultimate authority to issue accounting pronouncements in the United States? a. Securities and Exchange Commission b. Financial Accounting Standards Board c. International Accounting Standards Committee d. Internal Revenue Service Answer

2. What historical evidence of the business operations of the private estate of Apollonius was discovered early inthe20th century? a. The Iliad b. Plato's Republic c. The Zenon papyri d. Pacioli’s work, Summa de Arithmetica Geometria Proportioni et Proportionalita, Answer

3. Who has been given credit or developing the double-entry system of bookkeeping? a. Francis Wheat b. Fra Luca Pacioli c. A. C. Littleton d. William Paton Answer

4. Which of the following was not a criticism of the development of accounting

standards by the Accounting Principles Board? a. The independence of the members of the APB. The individuals serving on the board had full-time responsibilities elsewhere that might influence their views of certain issues. b. The structure of the board. The largest eight public accounting firms (at that time) were automatically awarded one member, and there were usually five or six other public accountants on the APB.


c. Harmonization. The accounting standards developed were dissimilar to those developed by the International Accounting Standards Committee.

d. Response time. The emerging accounting problems were not being investigated and solved quickly enough by the part-time members.

Answer

5. Which of the following is the professional organization of university accounting professors? a. American Accounting Association b. American Institute of Certified Public Accountants c. American Institute of Accountants d. Financial Executives Institute Answer

6. What controversy originally highlighted the need for standard setting groups to have more authority? a. Accounting for stock options b. Accounting for derivatives c. Accounting for marketable securities d. Accounting for the investment tax credit Answer

7. Which of the following committees recommended abolishing the Accounting Principles Board and replacing it with the Financial Accounting Board ? a. Wheat b. Cohen c. Trueblood d. Anderson Answer

8. Which of the following is a public sector accounting standard setter? a. FASB b. SEC c. APB d. CAP Answer

9. Which of the following types of pronouncements now establishes generally accepted accounting principles? a. Statements of Concepts b. Statements of Financial Accounting Standards c. APB Opinions d. Accounting Standards Updates Answer


10. Which of the following types of pronouncements are intended to establish the

objectives and concepts that the FASB will use in developing standards of financial accounting and reporting? a. Statements of Concepts b. Statements of Financial Accounting Standards c. APB Opinions d. Accounting Standards Updates Answer

11. Which of the following is not a consequence of the standards overload problem to small businesses?

a. If a small business omits a GAAP requirement from audited financial

statements, a qualified or adverse opinion may be rendered. b. Small businesses do not need to keep financial records c. The cost of complying with GAAP requirements may cause a small business to forgo the development of other, more relevant information. d. Small CPA firms that audit smaller companies must keep up to date on all the same requirements as large international firms, but they cannot afford the specialists that are available on a centralized basis in the large firms. Answer

12. Some accountants maintain that accounting standards are as much a product of political action as they are of careful logic or empirical findings. This belief is an example of the concept of a. Standard setting as apolitical process b. Standards overload c. Economic consequences d. The role of ethics in accounting Answer

13. T he impact of accounting reports on various segments of our economic society is the definition of the concept of a. Standard setting as apolitical process b. Standards overload c. Economic consequences d. The role of ethics in accounting Answer 14.

Considering and understanding how business decisions affect the financial statements is a. The sole responsibility of the Securities and Exchange Commission.


b. Provided in the auditor’s report. c. Referred to as an economic consequence perspective. d. Interpreted strictly by the company’s suppliers. Answer

15.

Which of the following is a source of nonauthoritative accounting guidance and literature? a. Financial Accounting Standards Board Statements b.Financial Accounting Standards Board Interpretations c. Financial Accounting Standards Board Technical Bulletins d.Practices that are widely recognized and prevalent either generally or in the industry

Answer

16. Which of the following companies was involved in an accounting failure that caused the public accounting firm Arthur Andersen to gout of business? a. Goldman Sachs b. Wachovia c. Enron d. AIG

Answer Essay 1. What is the difference between normative and positive theory?

2. Why is the development of a general theory of accounting important 3. Discuss the evolution of accounting during the 1930s.

4. Discuss the evolution of the three private sector accenting standard setting organizations. 5. What were the purposes of the Wheat and Trueblood committees? 6. What was the purpose of the GAAP Hierarchy?

7. What were the four types of pronouncements issued by the FASB?

8. Discuss why standard setting may be viewed as a political process.


9. Define the following terms

10. Discuss the evolution of the phrase “generally accepted accounting principles.

11. What controversy caused the AICPA to issue Rule 203 that requires companies to use GAAP when issuing financial statements?

12. Discuss the FASB ASC including the reasons for its adoption and the FASB’s goals in developing it..

13. Discuss the role of ethics in accounting.

14. What is a special purpose entity and how do they work?

15. How did the Sarbanes-Oxley Act change the way the FASB is funded?

16. Discuss the objectives of the International Accounting Standards Board.

Chapter 2

Multiple Choice

1. Which early accounting theorist was among the first to express the view that all changes in the value of assets and liabilities should be reflected in the financial statements ?\ a. A. C. Littleton b. John Canning c. William Paton d. DR Scott


Answer

2.

Which of the following economists most influenced the views of DR Scott? a. Thorstein Veblen b. John Hicks c. Karl Marx d. John Smith

Answer

3. Which of the following is not one of DR Scott’s hierarchy of accounting postulates and principles? a. Orientation postulate. b. The principles of truth and fairness. c. The materiality principle d. The principles of adaptability and consistency. Answer

4.

Which of the following organizations published the monograph titled A Tentative Statement of Accounting Principles Affecting Annual Corporate Reports a. SEC b. AAA c. AIA d. NAA Answer

5.

Which of the following organizations published the monograph titled A Statement of Accounting Principles? a. SEC b. AAA c. AIA d. NAA Answer

6.

Who was the author of Accounting Research Study No. 1, The Basic Postulates of Accounting? a. Robert Sprouse b. Maurice Moonitz


c. d.

Alvin Jennings\ Thomas Hatfield

Answer

7.

Which of the following is not an approaches to accounting theory AS categorized by Statement on Accounting Theory and Theory Acceptance? a. Classical, b. Neoclassical c. Decision usefulness d. Information economics. Answer

8.

Under Statement of Financial Accounting Concepts No. 2, feedback value is an ingredient of the primary quality o Relevance Reliability No b.

No

No

Yes

c.

Yes

Yes

d.

Yes

No

Answer

9. Under Statement of Financial Accounting Concepts No. 2, which of the following interacts with both relevance and reliability to contribute to the usefulness of information? a. Comparability b. Timeliness c. Neutrality d. Predictive value

Answer

10. Which of the following hierarchy of qualities did Statement of Financial Accounting Concepts No. 2 indicate as being most important? a. Relevance


b. Reliability c. Verifiability d. Decision usefulness

Answer

11. Which of the following is considered a pervasive constraint by Statement of Financial Accounting Concepts No. 2 a. Benefits>costs b. Conservatism c. Timeliness d. Verifiability

Answer

12. Under Statement of Financial Accounting Concepts No. 2, which of the following is an ingredient of the primary quality of relevance? a. Predictive value b. Materiality c. Understandability d. Verifiability

Answer

13. Under Statement of Financial Accounting Concepts No. 2, which of the following is an ingredient of the primary quality of reliability? a. Understandability b. Verifiability c. Predictive value


d. Materiality

Answer

14. Under Statement of Financial Accounting Concepts No. 2, the ability through consensus of measures to ensure that information represents what it purports to represent is an example of the concept of a. Relevance b. Verifiability c. Representational faithfulness d. Feedback value

Answer

15. Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability? a. Timeliness b. Materiality c. Verifiability d. Neutrality

Answer 16. Which of the following is not a qualitative characteristic associated with reliability? a. Verifiable b. Conservatism c. Neutral d. Faithful representation Answer 17. An item is considered material if a. It doesn’t costs a lot of money. b. It is of a tangible good. c. It is likely to influence the decision of an investor or creditor. d. The cost of reporting the item is greater than its benefits


Answer

Essay 1. Discuss the contributions of Paton and Canning to the development of accounting theory.

2. Discuss DR Scott’s hierarchy of postulates and principles.

3.

Discuss the contributions of the works by Sanders Hatfield and More, and Paton and Littleton to accounting theory.

4. Discuss accounting Research Study No. 1.

5. Discuss the objectives of accounting as outlined by the T rueblood Committee.

6. What were the approaches to accounting theory identified by SATTA?

7. According to Kuhn, how dies scientific progress occur?

8. What is the purpose of the conceptual framework?

9. List the objectives of financial accounting as outlined in SFAC No 1: “Objective of Financial Reporting by Business Enterprises.

10. What quality of information is viewed as the most important in SFAC No. 2: Qualitative Characteristics of Accounting Information?


11. Define the following terms:

a. Relevance . b. Reliability

12. According to SFAC No. 5, what should a full set of financial statements for a period show?

13. What is the purpose of SFAC No. 7: “Using Cash Flow Information and Present Value in Accounting Measurements?

14. What two approaches to present value were discussed in SFAS No. 7? 15. Discuss the issue of principles based vs. rule based accounting standards. 16. Discuss how the FASB and the IASC acted to improve comparability under the Norwalk Agreement.

Chapter 3

Multiple Choice

1. Which of the following is not an environmental actor that could impact on the development of a country’s accounting system? a.

Level of education\

b.

Political system

c.

Geographic location

d.

Legal system


Answer

2. What is the current acronym for the body most responsible for issuing international accounting standards? a.

IASB

b.

SEC

c.

FASB

d.

IASC

Answer

3. How many trustees serve on the IASC Foundation? a.

14

b.

18

c.

20

d.

22

Answer

4. How many members serve on the IASB? a.

14

b.

18

c.

20

d.

22

Answer

5. Which of the following bodies has the responsibility to issue international financial reporting standards (IFRS)


a. b. c. d.

The International Financial Reporting Interpretations Committee The International Standards Advisory Council The IASC Foundation The International Accounting Standards Board

Answer 6. Which of the following is not a use of international accounting standards? As national requirements. As standards to be violated to improve intercountry comparability.. c. As an international benchmark for those countries that develop their own requirements. d. By regulatory authorities for domestic and foreign companies a. b.

Answer

7. a. b. c. d.

How does the IASC enforce its standards? Through , the International Organization of Securities Commission Through the concept of best endeavors Through the Securities and Exchange Commission Through the Financial Accounting Standards Board

Answer

8.

What is the name given to the agreement between the FASB and IASC to harmonize accounting standards? a. The Norwalk Agreement b. The London agreement c. The Washing ton D C agreement d. The Paris Accords

Answer

9. What is the title of the form that foreign companies have used to reconcile their financial statements to U. S. GAAP? a. Form 10-K b. Form 10-Q c. Form SX d. Form20-F Answer

10.

Which of the following is not a qualitative characteristic contained in the IASB’s Framework for the Preparation of Financial Statements? a. Understandability b. Timeliness c. Relevance d. Reliability

Answer


11.

Which of the following is not an element of financial statements contained in the IASB’s Framework for the Preparation of Financial Statements? a. Gain b. Income c. Expense d. Asset

Answer

12.

Which of the following is seen as a pervasive difference between IASB’s

and FASB’s Conceptual Frameworks? a. Definition of elements b. Number of qualitative characteristics c. Scope of authority d. Level of detail

Answer

13.

Which of the following concepts is contained in the FASB’s conceptual framework but not in the IASC’s a. Expense b. Comprehensive income c. Asset d. Liability

Answer Essay

1.Discuss the environmental factors that impact on the development of a country’s accounting system.

2. Discuss the approaches a company might take when issuing financial reports to users in foreign countries.

3. What is the purpose of the International Accounting Standards Board?

4. Discuss the factors that have contributed to the need for new approaches to international standard setting.


5.

Discuss the IASB’s annual improvements project..

6.

Discuss the composition and role of The International Accounting Standards Board..

7.

8.

Discuss the role of The International Financial Reporting Interpretations Committee

How are IASB standards used by various countries? 9.

Discuss the Short-term International Convergence Project

10.

Discuss the IASB-FASB Norwalk agreement.

11. List the milestones contained in the FASB-IASB Roadmap Convergence Project.

12. 14.

What is the objective of the joint FASB-IASB Convergence Project?

Under rules enacted prior to 2007, how could a foreign company list its securities for sale in U. S. capital markets? How did this rule change?

15. Discuss the objectives of accounting as defined by the IASB’s Framework for the Preparation of Financial Statements

16. Discuss the qualitative characteristics of accounting information as defined by the IASB’s 17. Discuss the elements of financial statements defined by the IASB’s Framework for the Preparation of Financial Statements.


18. Discuss the concepts of capital and capital maintenance discussed in the Framework for the Preparation of Financial Statements.

19. Discuss IFRS No. 1, “First Time Adoption of International Reporting Standards.

Chapter 4

Multiple Choice

1. Which of the following research approaches emphasizes going from the specific to the general? a.Deductive b.Behavioral c. Inductive d.Pragmatic

Answer

2. Which of the following research approaches is based on the concept of utility or usefulness? a.

Deductive

b.

Behavioral

c.

Inductive

d.

Pragmatic

Answer

3. Which of the following research approaches is attributed to DR Scott? a.

Deductive


b.

Ethical

c.

Inductive

d.

Pragmatic

Answer

4. Which of the following outcomes of providing accounting information is an attempt to identify individual securities that are mispriced by reviewing all available financial information? a.

Agency theory

b.

Efficient markets

c.

Fundamental analysis

d.

Capital asset pricing model

Answer

5. Which of the following outcomes of providing accounting information is an attempt to deal with both risks and returns?

a.

Agency theory

b.

Efficient markets

c.

Fundamental analysis

d.

Capital asset pricing model

Answer

6. Which of the following outcomes of providing accounting information is based on the supply and demand model a.

Agency theory

b.

Efficient markets


c.

Fundamental analysis

d.

Capital asset pricing model

Answer

7. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as knowledge of past security prices? a.

Weak

b.

Semi-weak

c.

Semi-strong

d.

Strong

Answer

8. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as all publicly available information including past stock prices? a. Weak b. Semi-weak c. Semi-strong d. Strong

Answer

9. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as information, including security price trends, publicly available information, and insider information?


a.

Weak

b.

Semi-weak

c.

Semi-strong

d.

Strong

Answer

10. What theory on the outcomes of providing accounting information attempts to answer the question: What is an individual’s expected benefit from a particular course of action? a.

Agency theory

b.

Efficient markets

c.

Fundamental analysis

d.

Capital asset pricing model

Answer

11. Which of the following is not viewed as a cost to the principal in an agency relationship? a. Monitoring expenditures by the principal b. Monitoring expenditures by the agent c. Bonding expenditures by the agent d. The residual loss

Answer

12. What theory on the outcomes of providing accounting information attempts to assess an individual’s ability to use information? a.

Agency theory

b.

Efficient markets


c.

Human information processing

d.

Capital asset pricing model

Answer

13. Which of the following is not a conclusion that has been drawn from human information processing research? a. An individual’s perception of information is quite selective. That is, since individuals are capable of comprehending only a small part of their environment, their anticipation of what they expect to perceive about a particular situation will determine to a large extent what they do perceive. b. Since individuals make decisions on the basis of a small part of the total information available, they do not have the capacity to make optimal decisions c. Individuals are able to process and integrate large amounts of information simultaneously d. Since individuals are incapable of integrating a great deal of information, they process information in a sequential fashion.

Answer

14. What theory on the outcomes of providing accounting information rejects the view that knowledge of accounting is grounded in objective principles a.

Agency theory

b.

Critical perspective

c.

Fundamental analysis

d.

Capital asset pricing model

Answer

Essay


1. Briefly describe the following research approaches:

2. What is fundamental analysis and what is its goal?

3. Describe the efficient market hypothesis and its three forms.

4. Discuss the capital asset pricing model including the concepts of unsystematic risk, systematic risk and beta.

5. Discuss the difference between normative and positive accounting theory.

6. What is the basic assumption of agency theory? Why is the relationship between shareholders and management an agency relationship?

7. What is the goal of human information processing studies? What are the genera findings of these studies and what is the implication for accounting?

8. Discuss the concept of critical perspectives research in accounting.

9. Discuss the relationship among research, education, and practice in accounting.

Chapter 5

Multiple Choice


1. One concept of income suggests that income be measured by determining the net change over time in the discounted present value of net cash flow expected to be received by the firm. Under this concept of income, which of the following, ignoring income taxes would not affect the amount of income for a period? a. Providing services to outsiders and investments of the funds received b. Production of goods or services not yet sold not yet delivered to customers or clients. c. Windfall gains and losses due to external causes. d. The method used to depreciate property, plant and equipment.

Answer

2.

The term revenue recognition conventionally refers to a. The process of identifying transactions to be recorded as revenue in an accounting period. b. The process of measuring and relating revenue and expenses of an enterprise for an accounting period. c. The earning process that gives rise to revenue realization. d. The process of identifying those transactions that result in an inflow of assets from customers.

Answer

3.

In the transactions approach to income determination, income is measured by subtracting the expenses resulting from specific transactions during the period from revenues of the period also resulting from transactions. Under a strict transactions approach to income measurement, which of the following would not be considered a transaction? a. Sale of goods on account at 20 percent markup b. Exchange of inventory at a regular selling price for equipment c. Adjustment of inventory in lower of cost or market inventory valuations when market is below cost. d. Payment of salaries


Answer

4. Conventionally accountants measure income a. By applying a value added concept b. By using a transactions approach c. As a change in the value of owners’ equity d. As a change in the purchasing power of owners’ equity

Answer

5. Arid Lands, Inc., is engaged in extensive exploration for water in the Caprock Desert. If upon discovery of water the corporation does not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition being employed is the a. Production basis b. Cash (or collection) basis c. Sales (or accrual) basis d. Sunk cost (or cost recovery) basis

Answer

6. The installment method of recognizing revenue is not acceptable for financial reporting if a. The collectability of the sales price is reasonably assured b. The installment period is less than 12 months c. The method is applied to only a portion of the total d. Collection expenses can be reasonably predicted

Answer


7. The principal disadvantage of using the percentage of completion method of recognizing revenue from long-term contracts is that it a. Is unacceptable for income tax purposes b. May require that intraperiod tax allocation procedures be used c. Gives results bases upon estimates that may be subject to considerable uncertainty d. Is likely to assign a small amount of revenue to a period during which much revenue was actually earned

Answer

8. One of the basic features of financing accounting is the a. Direct measurement of economic resources and obligations and changes in them in terms of money and sociological and psychological impact b. Direct measurement of economic resources and obligations and changes in them in terms of money c. Direct measurement of economic resources and obligations and changes in them in terms of money and sociological impact d. Direct measurement of economic resources and obligations and changes in them in terms of money and psychological impact

Answer

9. Uncertainty and risks inherent in business situations should be adequately considered in financial reporting. This statement is an example of the concept of a. Conservatism b. Completeness c. Neutrality d. Representational faithfulness


Answer

10. Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to a. Disclosure b. Accrual accounting c. Materiality d. The matching concept

Answer

11. Under what condition is it proper to recognize revenues prior to the sale of the merchandise? a. When the ultimate sale of the goods is at an assured sales price b. When the revenue is to be reported as an installment sale c. When the concept of internal consistency (of amounts of revenue) must be complied with d. When management has a long-established policy to do so

Answer

12.

Which of the following is not a concept of income identified by Bedford?

Answer

a.

Psychic

b.

Real

c.

Investment

d.

Money


13. The definition of the economic concept ofincomeis usually attributed towhich of the following economists? a.

J. R. Hicks

b.

Paul Samuelson

c.

Ben Bernanke

d.

Adam Smith

Answer

14.

Which of the following is not an approach to determining current value? a.

Replacement cost

b.

Thrift value

c.

Selling price

d.

Discounting present value

Answer

15.

Each asset—inventory, plant, equipment, and so on—would be valued based on the selling price that would be realized if the firm chose to dispose of it is the definition of which of the following current value concepts?

Answer

a.

Replacement cost

b.

Entry price

c.

Exit value

d.

Discounted present value


16.

The cost to replace assets with similar assets in a similar condition is the definition of which of the following current value concepts? a.

Replacement cost

b.

Selling price

c.

Exit value

d.

Discounted present value

Answer

17.

Income is equal to the difference between the present value of the net assets at the end of the period and their present value at the beginning of the period, excluding the effects of investments by owners and distributions to owners is the definition of which of the following current value concepts? a.

Replacement cost

b.

Selling price

c.

Exit value

d.

Discounted present value

Answer

18.

Which of the following is not a criteria outlined in SEC Staff Accounting Bulletin No. 101 for the recognition of revenue?

Answer

a.

Persuasive evidence of an arrangement exists.

b.

Delivery has not occurred.

c.

The vendor’s fee is fixed or determinable.

d.

Collectability is probable.


19.

Which of the following accounting theorists called of conservatism the most influential principle of valuation in accounting? a.

Henry Sweeney

b.

Robert Sprouse

c.

Robert Sterling

d.

Edgar Edwards

Answer

20.

The one-time overstatement of restructuring charges to reduce assets, which reduces future expenses, is the definition of which of the following earnings management techniques? a.Taking a bath b.Creative acquisition accounting c. Creasing “cookie jar” reserves d.Abusing the materiality concept

Answer

21.

Deliberately recording errors or ignoring mistakes in the financial statements under the assumption that their impact is not significant, is the definition of which of the following earnings management techniques? a. Taking a bath b. Creative acquisition accounting c. Creasing “cookie jar” reserves d. Abusing the materiality concept

Answer

22.

Overstating sales returns or warranty costs in good times and using these overstatements in bad times to reduce similar charges, is the definition of which of the following earnings management techniques? a. Taking a bath b.

Creative acquisition accounting


c.

Creasing “cookie jar� reserves

d.

Abusing the materiality concept

Answer Essay

1. our economic society.

List and three reasons why income reporting is important to

2. Discuss the differences between the economic and accounting concepts of income.

3. Bedford.

Discuss the three basic concepts of income as defined by

4. Discuss the difference between financial capital maintenance and physical capital maintenance.

5.

Define the following terms:

a. Entry price b. Exit price

c. Discounted present value

6.

Discuss the four types of income defined by Edwards and Bell.


7. What conditions must be satisfied in order to recognize revenue according to Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements?

8.

Discuss how revenue might be recognized at various points in a company’s production - sale cycle. 9.

Discuss the matching concept.

10.

Define the following terms: a. Holding gains b. Materiality

c. Conservatism

11. Discuss the concepts of earnings quality and earnings management including:

Chapter 6

Multiple choice 1. The disposal of a significant component of a business is called a.

A change in accounting principle

b.

An extraordinary item

c.

An other expense

d.

Discontinued operation

Answer 2. If year one sales equal $800,000, year two equal $840,000 and year three equals


$896,000 the percentage to be assigned for year two in a sales trend analysis, assuming that year 1 is the base year, is a. 100% b. 89% c. 105% d. 112% Answer 3. A measure of a company’s profitability is the a. Current ratio b. Current cash debt coverage ratio c. Return on assets ratio d. Debt to total assets ratio Answer

4. Which of the following is not an economic consequence of financial

reporting? a. Financial information can affect the distribution of wealth among investors. More informed investors, or investors employing security analysts, may be able to increase their wealth at the expense of less informed investors. b. Financial information can affect the level of risk accepted by a firm. Focusing on short-term, less risky projects may have long-term detrimental effects. c. Financial information can affect the rate of capital formation in the economy and result in a reallocation of wealth between consumption and investment within the economy. d. Financial information can affects the allocation of psychic income among investors. Answer

5. a. b. c. d.

Which of the following is not an income statement element? Asset Gain Revenue Expense

Answer

6. The statement, net income should reflect all items that affected the net increase or decrease in stockholders’ equity during the period is consistentwithwhich of the following concepts of income? a. Economic b. All inclusive c. Current operating performance d. Money


Answer

7. The phrase events and transactions that are distinguished by both their unusual nature and their infrequency of occurrence describes: a. Changes in accounting principles b. Prior period adjustments c. Extraordinary items d. Prior period adjustments Answer

8. Which of the following is not an accounting change? a. Change in accounting principle b. Change in accounting estimate c. Change in a reporting entity d. Change because of an error Answer

9. Which of the following is not an example of an error? a. A change from an accounting practice that is not generally acceptable to a practice that is generally acceptable. b. Mathematical mistakes. c. A change from LIFO to FIFO inventory costing d. The incorrect classification of costs and expense

Answer

10. The formula, Operating profit/Sales, is used to calculate a. Gross profit percentage b. Net profit percentage c. Comprehensive income percentage d. Operating profit percentage Answer

11. The accounts receivable turnover and inventory turnover ratios are used to analyze a. Long-term solvency b. Profitability c. Liquidity d. Leverage Answer


12. A high accounts receivable turnover ratio indicates a. b. c. d.

Customers are making payments quickly A large portion of the company’s sales are on credit Many customers are not paying their receivables in a timely manner The company’s sales have increased

Answer 13. The return on assets ratio is comprised of a. Profit margin and debt to total assets ratio. b. Profit margin and asset turnover ratio. c. Times interest earned and debt to stockholders’ equity ratio. d. Profit margin and free cash flow. Answer 14. An example of the correction of an error in previously issued financial statements is a change a. From the completed contract to the percentage-of-completion method of accounting for long-term construction-type contracts. b. In the depletion rate, based on new engineering studies of recoverable mineral resources. c. From the sum-of-years-digits to the straight-line method of depreciation for all plant assets. d. From the installment basis of recording sales to the accrual basis, when collection of the sales price has been and continues to be reasonably assured

Answer

15. Which of the following is characteristic of a change in an accounting estimate? a.

It usually need not be disclosed

b.

It does not affect the financial statements of prior periods

c. It should be reported through the restatement of the financial statements d. It makes necessary the reporting of pro forma amounts for prior periods


Answer

16. Which of the following items, if material in amount would normally be considered an extraordinary item for reporting results of operations? a.

Utilization of a net operating loss carryforward

b.

Gains or losses on disposal of a segment of a business

c.

Adjustments of accruals on long-term contracts

d.

Gains or losses from a fire

Answer

17. Which of the following is an example of an extraordinary item in reporting results of operations? a.

A loss incurred because of a strike by employees

b. The write-off of deferred research and development costs believed to have no future benefit c.

A gain resulting from the devaluation of the U.S. dollar

d. A gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot

Answer

18. A company changed its method of inventory pricing from last-in, first-out to first-in, first-out during the current year. Generally accepting accounting principles require that this change in accounting method be reported by: a. Accounting for the effects of the change in the current and future periods. b. Showing the cumulative effect of the change in the current year’s financial statements and pro forma effects on prior year’s financial statements in an appropriate footnote


c. Disclosing the reason for the change in the “significant accounting policies� footnote for the current year but not restating prior year financial statements d. Applying retroactively the new method in restatements of prior years and appropriate footnote disclosures

Answer

19. A transaction that is material in amount, unusual in nature, but not infrequent in occurrence should be presented separately as a (an) a. Component of income from continuing operations, but not net of applicable income taxes b. Component of income from continuing operations, net of applicable income taxes c.

Extraordinary item, net of applicable income taxes

d.

Prior period adjustment, but not net of applicable income taxes

Answer

20. An extraordinary item should be reported separately as a component of income a.

After discontinued operations of a component of a business

b.

Before discontinued operations of a component of a business

c. After cumulative effect of accounting changes and after discontinued operations of a component of a business d. After cumulative effect of accounting changes and before discontinued operations of a component of a business

Answer

21. The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current


a. Income statement after income from continuing operations and before extraordinary items b. Income statement after income from continuing operations and after extraordinary items c.

Retained earnings statement as an adjustment of the opening balance

d.

Retained earnings statement after net income but before dividends

Answer

22. A loss from the disposal of a component of a business enterprise should be reported separately as a component of income a.

Before extraordinary items

b.

After extraordinary items

c. After extraordinary items and cumulative effect of accounting changes d. Before extraordinary items and cumulative effect of accounting changes

Answer

23. A prior period adjustment should be reflected, net of applicable income taxes, in the financial statements of a business entity in the a.

Retained earnings statement after net income but before dividends

b.

Retained earnings statement as an adjustment of the opening balance

c.

Income statement after income from continuing operations

d.

Income statement as part of income from continuing operations

Answer

24. Antidilutive securities would generally be used in the calculation of


Basic Earnings per share a.

Yes

b.

Diluted Earnings per share Yes

No

Yes

c.

No

No

d.

Yes

No

Answer

25. A change in the salvage value of an asset depreciated on a straight-line basis and arising because additional information has been obtained is a. An accounting change that should be reported in the period of change and future periods of change if the change affects both b. An accounting change that should be reported by restating the financial statements of all prior periods presented c.

A correction of an error

d.

Not an accounting change

Answer

26. A loss should be separately as a component of net income when it is unusual in nature and which of the following? Material

Infrequent

In Amount

Answer

In Occurrence

a.

No

Yes

b.

No

No

c.

Yes

No

d.

Yes

Yes


27. When a component of a business has been discontinued during the year, this s’ component s operating losses of the current period up to the measurement date should be included in the a. Income statement as part of the income (loss) from operations of the discontinued component b. Income statement as part of the loss on disposal of the discontinued component c. Income statement as part of the income (loss) from continuing operations d. Retained earnings statement as a direct decrease in retained earnings

Answer Essay

1. Discuss the economic consequences of financial reporting.

2. Discuss the four income statements elements defined by SFAC No. 2. 3. Discuss the all inclusive vs. current operating performance views of income.

4. Define and discuss the accounting treatment for discontinued operations.

5. Define and discuss the accounting treatment for extraordinary items.

6. What are accounting changes and why is it an issue. List and define the three types of accounting changes.

7. Discuss the concept of simple vs. complex capital structures and how it relates to the reporting of earnings per share.


8. Define and discuss the accounting treatment for prior period adjustments.

9. Define comprehensive income. What is the purpose of reporting comprehensive income?

10. Obtain a company’s income statement and ask the students to compute the following: .

11. Discuss the sources of guidance for recording accounting transactions outlined by IAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Chapter 7

Multiple Choice

1. On a balance sheet, what is the preferable presentation of notes or accounts receivable from officers, employees, or affiliated companies? a. As trade notes and accounts receivable if they otherwise qualify as current assets b.

As assets but separately from other receivables

c.

As offsets to capital

d.

By means of notes or footnotes

Answer

2. The basis for classifying assets as current or noncurrent is the period of time normally elapsed from the time the accounting entity expends cash to the time it converts


a.

Inventory back to cash or 12 months, whichever is shorter

b.

Receivable s back into cash or 12 months, whichever is longer

c. Tangible fixed assets back into cash or 12 months, whichever is longer d.

Inventory back to cash or 12 month, whichever is longer

Answer

3. The valuation basis used in conventional financial statements is a.

Replacement cost

b.

Market value

c.

Original cost

d.

A mixture of costs and values

Answer

4. A transaction that would appear as an application of funds on a conventional funds statement using the all-financial-resources concept, but not on a statement using the traditional working capital concept would be the a.

Acquisition of property, plant, and equipment for cash

b.

Reacquisition of bonds issued by the reporting entity

c. Acquisition of property, plant, and equipment with an issue of common stock d.

Declaration and payment of dividends

Answer

5. There would probably be a major difference between a statement of source and application of working capital and a cash flow statement in the treatment of a.

Dividends declared and paid


b.

Sales of noninventory assets for cash at a loss

c.

Payment of long-term debt

d.

A change during the period in the accounts payable balance

Answer

6. A basic objective of the statement of cash flows is to a.

Supplant the income statement and balance sheet

b. Disclose changes during the period in all asset and all liability accounts c.

Disclose the change in working capital during the period

d. Provide essential information for financial statements users in making economic decisions

Answer

7. A statement of cash flows should be issued by a profit-oriented business a. As an alternative to the statement of income and retained earnings b. Only if the business classifies its assets and liabilities as current and noncurrent c. Only when two-year comparative balance sheets are not issued d. Whenever a balance sheet and a statement of income and retained earnings are issued

Answer

8. When preparing a statement of changes in financial position using the cash basis for defining funds, an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because a. Funds were increased since inventory is a current asset


b. The net increase in inventory reduced cost of goods sold but represents an assumed use of cash c. Inventory is an expense deducted in computing net earnings, but is not a use of funds d. All changes in noncash accounts must be disclosed under the all financial resources concept

Answer

9. Which of the following should theoretically be presented in a statement of changes in financial position only because of the all-financial-resources concept? a. Conversion of preferred stock to common stock b. Purchase of treasury stock c. Sale of common stock d. Declaration of cash dividend

Answer

10. When preparing a funds statement using the all financial resources concept, the retirement of long-term debt by the issuance of common stock should be presented in a statement of changes in financial position as a

Source of Funds

Use of Funds

a.

No

No

b.

No

Yes

c.

Yes

No

d.

Yes

Yes

Answer


11. The working capital format is one possible format for presenting a statement of changes in financial position. Which of the following formats is (are) also theoretically acceptable?

Cash

Quick Assets

a.

Acceptable

Not acceptable

b.

Not acceptable

Not acceptable

c.

Not acceptable

Acceptable

d.

Acceptable

Acceptable

Answer

12. A gain on the sale of plant assets in the ordinary course of business should be presented in a statement of cash flows as a (an) a. Source and use of cash b. Use of cash c. Addition to income from continuing operations d. Deduction from income from continuing operations

Answer

13. Which of the following should be presented nn a statement of cash flows? Conversion of

Conversion of

Long-term debt

preferred stock

to common stock

to common stock

a.

No

No

b.

No

Yes

Yes

Yes

Yes

No

c. d.


Answer

14. a. b. c. d.

The balance sheet discloses Stocks Flows Both stocks andf lows Neither stocks nor flows

a. b. c. d.

Which of the following is not a balance sheet element? Assets Liabilities Gains Equities

a. b. c. d.

Which of the following is nota component of equity? Common stock Treasury stock Retained earnings Unearned revenue

Answer

15.

Answer

16.

Answer

17.

Which of the following is not an important aspects of SFAS

No. 157(FASB ASC 820)?

a. b.

A new definition of fair value. A requirement that all assets and liabilities are to be measured at their fair value. c. A fair value hierarchy used to classify the source of information used in fair value measurements (for example, market based or nonmarket based). d. New disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. Answer

18. is

Answer

The definition of fair value in SFAS No 157(FASB ASC 820)

a. b. c. d.

Entry price based Exit price based Replacement cost based Historical cost based


19.

The SFAS No 157 (FASB ASC 820) fair value hierarchy

contains

a. b. c. d.

Two level Three levels Four levels Five levels

Answer

20.

Which of the following s the lowest level of the SFAS 157 (FASB ASC 820) fair value hierarchy? a. Unobservable inputs (that are corroborated by observable market data) b. Unobservable inputs (that are not corroborated by observable market data) c. Observable market-based inputs (or unobservable inputs that are corroborated by market data) d. Quoted market prices for identical assets or liabilities in active markets Answer

21.

The calculation net income/sales is the formula for which of the following ratios a. Return on assets b. Profit margin c. Asset turnover d. Asset usage Answer

22.

The calculation sales/average total assets is the formula for which of the following ratios a. Return on assets b. Profit margin c. Asset turnover d. Asset usage Answer

23.

The calculation net income/average total assets is the formula for which of the following ratios a. Return on assets b. Profit margin c. Asset turnover d. Asset usage Answer

24.

The firm’s ability to use its financial resources to adapt to change is the definition of


a. b. c. d.

Liquidity Solvency Financial flexibility Working capital

Answer

25.

A firm’s ability to obtain cash for business operations change is the definition of a. Liquidity b. Solvency c. Financial flexibility d. Working capital Answer

26. The firm’s ability to convert an asset to cash or to pay a current liability change is the definition of

a. b. c. d.

Liquidity Solvency Financial flexibility Working capital

Answer

27. Net cash provided (used) by operating activities − net cash used in acquiring property, plant, and equipment − cash dividends paid is the calculation for a. Free cash flow b. Cash flow f rom investing activities c. Working capital d. Current ratio Answer

28. Which of the following is a difference between IAS No. 7 and SFAS No. 95 (FASB ASC 230)? a. IAS No. 7 requires the use of the direct method b. IAS No. 7 required the use of the indirect method c. IAS No 7 requires the use of the all financial resources concept of funds d. IAS No. 7 requires extraordinary items be disclosed separately as operating, investing, or financing activities Answer 29. Investments in equity securities are disclosed as current assets on a company’s balance sheet if a. Management intends to sell them within a year and they have a ready market exists. b. The fair market value cannot be determined. c. Management intends to convert them into common stock within one year.


d.

Management owns less than 50% of the outstanding stock.

Answer

30. What is reported on the statement of cash flows? a.Operating, investing, and financing activities of an entity for a period of

time b.All revenues and expense listed by operating, financing, and operating actitivity c. Operating, investing, and financing activities of an entity at the balance sheet date d. A detail of all incoming and outgoing cash flows of a business Answer Essay 1. Discuss the following balance sheet elements as defined by SFAC No. 2: a. Assets

b. Liabilities

c. Equity

2. List three valuation techniques currently used on the balance sheet and discuss how each are used (What accounts?).

3. Define the following terms: a.

Current assets

b.

Investments

c.

Property, plant and equipment

d.

Current liabilities


e.

Treasury stock

4. How is fair value defined in SFAS No. 157 (FASB ASC 820)?

5. Describe the fair value hierarchy as defined in SFAS No.157.

6. Obtain a company’s financial statements and ask the students to compute the following: a.Return on investment b.Adjusted return on investment c. Profit margin ratio d.Asset turnover ratio e.Free cash flow

7. What question does the statement of cash flows enable financial statement users to answer?

8. Define the following terms: a. Liquidity b.

Solvency

c.

Financial flexibility

9. Discuss the direct vs. indirect methods of preparing the statement of cash flows.

10. Define and discuss the three major sections of the statement of cash flows.


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