Test Bank for Intermediate Accounting, 10th Edition David Spiceland by TBtutors

Type:

Test Bank

Resource:

Intermediate Accounting

Edition:

10th Edition

Author(s):

David Spiceland Mark W. Nelson Wayne M. Thomas

Intermediate Accounting, 10e (Spiceland) Chapter 1 Environment and Theoretical Structure of Financial Accounting 1) The primary function of financial accounting is to provide relevant financial information to parties external to business enterprises. 2) Accrual accounting attempts to measure revenues and expenses that occurred during accounting periods so they equal net operating cash flow. 3) The FASB is currently the public-sector organization responsible for setting accounting standards in the United States. 4) The FASB's due process invites various interested parties to indicate their opinions about whether financial accounting standards should be changed. 5) Accounting for stock-based compensation is an area in which the FASB has received little political interference. 6) The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity responsible for setting standards for auditing public companies in the United States. 7) A rules-based approach to standard-setting stresses professional judgment as opposed to following a list of rules. 8) Under federal securities laws, the SEC has the authority to set accounting standards in the United States.

9) The primary responsibility for properly applying GAAP when communicating with investors and creditors through financial statements lies with a firm's auditors. 10) Auditors play an important role in the resource allocation process by adding credibility to financial statements. 11) The purpose of the conceptual framework is to provide a structure and framework for a consistent set of GAAP. 12) In the United States, the conceptual framework indicates GAAP when a more specific accounting standard does not apply. 13) Materiality can be affected by the dollar amount of an item, the nature of the item, or both. 14) According to the FASB's Statements of Financial Accounting Concepts, conservatism is a desired qualitative characteristic of accounting information. 15) Equity is a residual amount representing the owner's interest in the assets of the business. 1 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16) Revenues are inflows of assets or settlements of liabilities from activities that constitute the entity's ongoing operations. 17) Gains or losses result, respectively, from the disposition of business assets for greater than, or less than, their book values. 18) Comprehensive income is another term for net income. 19) The FASB's conceptual framework lists relevance and timeliness as the two fundamental qualitative characteristics of decision-useful information. 20) The monetary unit assumption requires that items in financial statements be measured in a particular monetary unit. 21) The periodicity assumption requires that present value calculations take into account the number of compounding periods in each year. 22) Determining fair value by calculating the present value of future cash flows is a level 1 type of input. 23) The FASB's framework for measuring fair value doesn't change the situations in which fair value is used under current GAAP. 24) The revenue/expense approach emphasizes determining the appropriate amounts of revenue and expense in each reporting period. 25) The asset/liability approach emphasizes matching to determine what assets and liabilities should be reflected on the balance sheet. 26) In IFRS, the conceptual framework indicates appropriate accounting when a more specific accounting standard does not apply. 27) Political pressure never affects the IFRS standard-setting process. 28) External decision makers would not look primarily to financial accounting information to assist them in making decisions on: A) Granting credit. B) Capital budgeting. C) Selecting stocks. D) Mergers and acquisitions.

29) The primary focus for financial accounting information is to provide information useful for:

a. b. c. d.

Investing decisions Yes Yes No No

Credit decisions Yes No Yes No

A) Option a. B) Option b. C) Option c. D) Option d. 30) Which of the following groups is not among the external users for whom financial statements are prepared? A) Customers. B) Suppliers. C) Employees. D) Customers, suppliers, and employees are all external users of financial statements. 31) Which of the following is not true about net operating cash flow? A) It is the difference between cash receipts and cash disbursements from providing goods and services. B) It is a measure used in accrual accounting and is recognized as the best predictor of future operating cash flows. C) Over short periods, it may not be indicative of long-run cash-generating ability. D) It is easy to understand and all information required to measure it is factual. 32) Which of the following groups is not among financial intermediaries? A) Mutual fund managers. B) Financial analysts. C) CPAs. D) Credit rating organizations. 33) Which of the following was the first private-sector entity that set accounting standards in the United States? A) Accounting Principles Board. B) Committee on Accounting Procedure. C) Financial Accounting Standards Board. D) AICPA.

34) Which of the following does not provide guidance about GAAP for companies that are publicly listed on a stock exchange? A) FASB B) IASB C) GASB D) EITF 35) Porite Company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Porite's practice is an example of: A) Cash basis accounting. B) Accrual accounting. C) The matching principle. D) Economic entity. 36) Which of the following is not a potential benefit of accrual accounting, compared to cash-basis accounting? A) Timeliness. B) Better reflecting economic activity. C) Periodicity. D) Better matching of revenues and expenses. 37) In a recent annual report, Apple Computer reported the following in one of its disclosure notes: "Warranty Expense: The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized." This note exemplifies Apple's use of: A) Conservatism. B) Matching. C) Revenue recognition. D) Economic entity. 38) GAAP is an abbreviation for: A) Generally authorized accounting procedures. B) Generally applied accounting procedures. C) Generally accepted auditing practices. D) Generally accepted accounting principles. 39) The FASB issues accounting standards in the form of: A) Accounting Research Bulletins. B) Accounting Standards Updates. C) Financial Accounting Standards. D) Financial Technical Bulletins.

40) Pronouncements issued by the Committee on Accounting Procedures: A) Dealt with specific accounting and reporting problems. B) Were based on exposure drafts and public comment letters. C) Originated from congressional studies and SEC directives. D) Were the outcome of research studies and a theoretical framework. 41) The FASB's standard-setting process includes, in the correct order: A) Exposure draft, research, discussion paper, Accounting Standards Update. B) Research, exposure draft, discussion paper, Accounting Standards Update. C) Research, discussion paper, exposure draft, Accounting Standards Update. D) Discussion paper, research, exposure draft, Accounting Standards Update. 42) Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act: A) Changed the entity responsible for setting auditing standards. B) Increased corporate executive responsibility for financial statements. C) Limited nonaudit services that can be performed by auditors for audit clients. D) Changed the entity responsible for setting accounting standards. 43) CPAs are licensed by: A) The AICPA. B) The SEC. C) The federal government. D) State governments. 44) Which of the following has the statutory authority to set accounting standards in the United States? A) FASB. B) IRS. C) SEC. D) AICPA. 45) When a registrant company submits its annual filing to the SEC, it uses: A) Form 10-A. B) Form 10-K. C) Form 10-Q. D) Form S-1. 46) The most likely important flaw leading to the demise of the APB was the perceived lack of: A) Confidence. B) Competence. C) Independence. D) Importance.

47) Accounting standard-setting has been characterized as: A) A political process. B) Using the scientific method. C) Pure deductive reasoning. D) Pure inductive reasoning. 48) The International Accounting Standards Board: A) Was the predecessor to the IASC. B) Can overrule the FASB when their policies disagree. C) Promotes the use of high-quality, understandable global accounting standards. D) Has its headquarters in Geneva. 49) Which of the following is a provision of the Public Company Accounting Reform and investor Protection Act of 2002? A) Corporate executive accountability. B) Auditor rotation. C) Retention of work papers. D) All of these answer choices are correct. 50) The primary professional organization for those accountants working in industry is the: A) AAA. B) AICPA. C) IIA. D) IMA. 51) Regarding convergence of accounting standards, the FASB and IASB: A) Have agreed to combine their organizations to form the BUSYB. B) Have achieved full convergence with respect to financial instruments. C) Do not intend to work together to achieve convergence where possible. D) Are not likely to achieve full convergence of accounting standards in the near future. 52) Which of the following is not a concern regarding IFRS adoption by the U.S.? A) Need for the U.S. to have strong influence on the standard-setting process and ensure that standards meet U.S. needs. B) Geographic dispersion of standard setters make it unlikely that boards can interact to achieve consensus. C) The high costs to companies of converting to IFRS. D) The fact that many laws, regulations and private contracts reference U.S. GAAP. 53) The most political issue in the FASB's most recent deliberations and amendments to GAAP on stock options was: A) The negative effects on earnings of companies in the tech industry if they had to recognize expenses associated with stock compensation. B) The negative effects on assets of recognizing stock options in equity. C) The disclosure of stock compensation expense in the notes. D) Accounting for stock options that have not yet been granted to employees. 6 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

54) An important historical reason for the FASB reversing its positions when political pressures occur is: A) The cost of gathering data was prohibitive. B) The difficulties in measurement were too great. C) Companies withdraw financial support for the FASB. D) The SEC did not support the FASB position. 55) The most recent example of the political process at work in standard-setting is the heated debate that occurred on the issue of: A) Creation of the FASB. B) Accounting for stock compensation. C) Establishing the SEC. D) Accounting for fair values. 56) Independent auditors express an opinion on the: A) Fairness of financial statements. B) Ongoing access to capital markets for additional financing. C) Soundness of a company's future. D) Quality of a company's management. 57) The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of: A) An ethical dilemma. B) An accounting theory issue. C) A technical accounting issue. D) An auditor's responsibility to inform the SEC. 58) One of the elements that many believe distinguishes a profession from other occupations is the acceptance of responsibility by its members for the interests of those it serves, which is often articulated in: A) Its conceptual framework. B) Its code of ethics. C) Federal laws. D) State laws. 59) SFAC 8 of the conceptual framework focuses on: A) Objective and qualitative characteristics. B) Presentation and disclosure. C) Recognition and measurement. D) Elements of financial statements.

60) The FASB's conceptual framework's qualitative characteristics of accounting information include: A) Historical cost. B) Realization. C) Faithful representation. D) Full disclosure. 61) The FASB's conceptual framework's qualitative characteristics of accounting information include: A) Full disclosure. B) Relevance. C) Going concern. D) Historical cost. 62) The conceptual framework's qualitative characteristic of relevance includes: A) Predictive value. B) Verifiability. C) Completeness. D) Neutrality. 63) The conceptual framework's qualitative characteristic of faithful representation includes: A) Predictive value. B) Neutrality. C) Confirmatory value. D) Timeliness. 64) SFAC No.5 focuses on: A) Objectives of financial reporting. B) Qualitative characteristics of accounting information. C) Recognition and measurement concepts in accounting. D) Elements of financial statements. 65) The main issue in the debate over accounting for employee stock options was: A) Which employees should receive options. B) The amount of compensation expense that a company should recognize. C) How many options should be granted to key executives. D) The tax consequences of employee stock options. 66) Confirmatory value is central to the concept of "earnings quality" because A) It helps investors predict a company's future earnings. B) It allows investors to verify or change their prior assessments of a company's performance. C) It helps investors predict a company's future cash flows. D) It allows investors to compare the performance of a company over time.

67) A firm's comprehensive income always: A) Is the same as its net income. B) Is greater than its net income. C) Is less than its net income. D) Could be greater than or less than net income. 68) Net income equals: A) Assets minus liabilities. B) Revenues minus cost of goods sold. C) Revenues minus expenses. D) Cash receipts minus cash payments. 69) Enhancing qualitative characteristics of accounting information include each of the following except: A) Timeliness. B) Materiality. C) Comparability. D) Verifiability. 70) The enhancing qualitative characteristic of understandability means that information should be understood by: A) Those who are experts in the interpretation of financial information. B) Those who have a reasonable understanding of business and economic activities. C) Financial analysts. D) CPAs. 71) Fundamental qualitative characteristics of accounting information are: A) Relevance and comparability. B) Comparability and consistency. C) Faithful representation and relevance. D) Neutrality and consistency. 72) Enhancing qualitative characteristics of accounting information include: A) Relevance and comparability. B) Comparability and timeliness. C) Understandability and relevance. D) Neutrality and consistency. 73) Gains are: A) Inflows from selling a product or service to a customer. B) Increases in equity resulting from transfers of assets to the company from owners. C) Increases in equity from peripheral transactions of an entity. D) None of these answer choices are correct.

74) When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic? A) Verifiability. B) Predictive value. C) Faithful representation. D) Timeliness. 75) Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change? A) Comparability. B) Representational faithfulness. C) Consistency. D) Feedback value. 76) Elements of financial statements do not include: A) Monetary unit. B) Investments by owners. C) Comprehensive income. D) Losses. 77) Which of the following is true regarding equity? A) It represents how much the owner profits from the business. B) It represents the owner's residual interest in the assets of the business. C) It represents the owner's return for investing in the business. D) It represents the accumulated earnings of the business over time. 78) Cash dividends are an example of which of the following elements? A) Distribution to owners B) Expenses C) Equity D) Investment by owners 79) The primary objective of financial accounting information is to provide useful information to: A) Management. B) Capital providers. C) Regulators. D) Academicians. 80) Of the following, the most important objective for financial reporting is to provide information useful for: A) Making decisions. B) Determining taxable income. C) Providing accountability. D) Increasing future profits.

81) Management has decided to change the estimated useful life of a machinery but fails to disclose this change in the financial statements. This violation of GAAP can cause the information to be misleading because it lacks A) Neutrality B) Timeliness C) Completeness D) Confirmatory value 82) Management has recently purchased new equipment but is uncertain about its useful life. For the initial year, management estimated a useful life of 10 years. However, due to a major accident during the first year, management is now uncertain about the equipment's functionality and has revised its estimate to 5 years and included a description of their uncertainty and of this change in estimated useful life in financial statement disclosures. Which of the following is an accurate statement regarding this approach? A) Information contains error because management changed its estimates on the useful life of the equipment. B) Information contains error because the useful life of the equipment is uncertain. C) Information is free from error because management has provided enough disclosure regarding the uncertain estimate. D) Information is free from error because management made the correct decision in revising the estimated useful life of the equipment. 83) Roy Wilton is a CPA who recently made a poor investment. When researching the investment, Roy examined the financial statements of the firm, but did not read the accompanying footnotes, and therefore didn't comprehend the broader context underlying those financial statements. Which of the following is true with respect to the enhancing qualitative characteristic of understandability in this case? A) This demonstrates a violation of understandability, given that Roy did not comprehend all relevant information. B) This does not demonstrate a violation of understandability, as Roy did not bother to read the footnotes but could have understood them if he did so. C) This does not demonstrate a violation of understandability, but rather completeness, as Roy's understanding was incomplete. D) This demonstrates a violation of understandability, as CPAs should be able to rely on the financial statements alone. 84) A constraint on qualitative characteristics of accounting information is: A) Timeliness. B) Going concern. C) Neutrality. D) Cost-effectiveness.

85) According to the conceptual framework, verifiability implies: A) Legal evidence. B) Logic. C) Consensus. D) Legal verdict. 86) Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by 10 days the time to get information to investors and creditors. The qualitative concept improved is: A) Comparability. B) Consistency. C) Timeliness. D) Faithful representation. 87) Recognizing expected losses immediately, but deferring expected gains, is an example of: A) Materiality. B) Conservatism. C) Cost-effectiveness. D) Timeliness. 88) Change in equity from nonowner sources is: A) Comprehensive income. B) Revenues. C) Expenses. D) Gains and losses. 89) Which of the following Statements of Financial Accounting Concepts defines the 10 elements of financial statements? A) SFAC 4. B) SFAC 3. C) SFAC 5. D) SFAC 6. 90) Primecoat Corporation could disseminate its annual financial statements two days earlier if it shifted substantial human resources from other operations to the annual report project. Management decided the value of the earlier report was not worth the added commitment of resources. The concept demonstrated is: A) Timeliness. B) Materiality. C) Relevance. D) Cost-effectiveness.

91) Mega Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debt expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The concept demonstrated is: A) Comparability. B) Faithful representation. C) Cost-effectiveness. D) Materiality. 92) Four different competent accountants independently agree on the amount and method of reporting an economic event. The concept demonstrated is: A) Reliability. B) Comparability. C) Completeness. D) Verifiability. 93) An important argument in support of historical cost information is: A) Relevance. B) Predictive quality for future cash flows. C) Materiality. D) Verifiability. 94) The conceptual framework's recognition and measurement concepts recognize which one of the following as an assumption? A) Going concern. B) Historical cost. C) Full disclosure. D) Realization. 95) The assumption that in the absence of contrary information a business entity will continue indefinitely is the: A) Periodicity assumption. B) Entity assumption. C) Going concern assumption. D) Historical cost assumption. 96) If a company has declared bankruptcy, its financial statements likely violate: A) The fair value measurement approach. B) The present value measurement approach. C) The stable monetary unit assumption. D) The going concern assumption.

97) Which of the following is typically characterized as a principle, rather than an assumption? A) Periodicity. B) Monetary unit. C) Conservatism. D) Full disclosure. 98) Which of the following is not an identified valuation technique in GAAP regarding fair value measurement? A) Cost approach. B) Market approach. C) Cost-benefit approach. D) Income approach. 99) Disclosure notes to a company's financial statements: A) Are relatively unimportant facts that don't belong in the basic financial statements. B) Document the source of financial statement facts, like literary footnotes. C) Are an integral part of a company's financial statements. D) Are irrelevant facts that are immaterial in amount. 100) A cause-and-effect relationship is implicit in: A) Realization. B) Historical cost. C) Matching. D) The going concern assumption. 101) The full disclosure principle requires a balance between: A) Comparability and consistency. B) Relevance and cost-effectiveness. C) Reliability and neutrality. D) Timeliness and predictive value. 102) The recognition of which of the following expenses exemplifies the application of matching expenses with the revenues they produced? A) President's salary. B) Research and development. C) Cost of goods sold. D) Advertising. 103) Land was acquired in 2021 for a future building site at a cost of $40,000. The assessed valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a recent firm offer for the land was for a cash payment of $46,000. The land should be reported in the financial statements at: A) $40,000. B) $27,000. C) $46,000. D) $48,000. 14 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

104) Revenue should not be recognized until: A) The seller has transferred goods or services to a customer. B) Contracts have been signed and payment has been received. C) Work has been performed and customer has been billed. D) Collection has been made and warrantees have expired. 105) Which of the following best demonstrates the full disclosure principle? A) The multi-step income statement. B) The auditors' report. C) The company's tax return. D) Disclosure notes to financial statements. 106) Matching is: A) A valuation method. B) A result of recognizing revenues and expenses that arise from the same transaction. C) A cash basis reporting principle. D) An asset classification procedure. 107) Which of the following best describes the additional information that companies use to meet the requirements of full disclosure in financial statements? A) Parenthetical comments or modifying comments placed on the face of the financial statements. B) Disclosure notes conveying additional insights about company operations, accounting principles, contractual agreements, and pending litigation. C) Supplemental schedules and tables that report more detailed information than is shown in the primary financial statements. D) Comments on the face of the financial statements, and schedules, tables, and narrative disclosures in notes to the financial statements. 108) Ford Motor Company purchases services from suppliers on account and sells its products to distributors on short-term credit. As a result, do each of these events affect net income faster than they affect net operating cash flows?

a. b. c. d.

Purchase Services Yes Yes No No

Sell Products Yes No Yes No

A) Option a. B) Option b. C) Option c. D) Option d.

109) The revenue/expense approach emphasizes: A) Recognition of revenues. B) Recognition of expenses. C) The income statement. D) All of these answer choices are correct. 110) The asset/liability approach emphasizes: A) Whether amounts on the balance sheet meet the definitions of assets and liabilities. B) A close relation between the balance sheet and the statement of cash flows. C) The distinction between net assets and gross assets. D) All of these answer choices are correct. 111) Under IFRS, the role of the conceptual framework: A) Primarily involves guiding standard setters to make sure that standards are consistent with each other. B) Includes serving as a guide for practitioners when a specific standard does not apply. C) Is less important than in U.S. GAAP. D) Has resulted primarily from a convergence with U.S. GAAP. 112) Under IFRS, the conceptual framework: A) Emphasizes the overarching concept of the financial statements providing a "true and fair representation" of the company. B) Is not designed to provide guidance to standard setters, but rather only to practitioners. C) Is not designed to provide guidance to practitioners, but rather only to standard setters. D) Specifies a set of rules that determine what constitutes a true IFRS standard. 113) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM

PHRASE

1. Predictive value Information is useful in projecting cash flows. 2. Relevance Pertinent to the decision at hand. 3. Distribution to owners Information is available prior to the decision. 4. Confirmatory value Decrease in equity due to transfers to owners. 5. Timeliness Information confirms expectations.

Term number that matches the phrase. ____ ____ ____ ____ ____

114) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM

PHRASE 1. Gain Along with relevance, a fundamental decision-specific quality. 2. Materiality Results if an asset is sold for more than book value. 3. Completeness Contains all information necessary for faithful representation. 4. Comprehensive income The change in equity from nonowner transactions. 5. Faithful representation Concerns the decision-making impact of both the amount and nature of an item.

Term number that matches the phrase. ____ ____ ____ ____ ____

115) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Neutrality 2. Comparability 3. Consistency 4. Cost-effectiveness 5. Recognition

Term number that matches PHRASE the phrase. Important in analysis between firms. ____ Accounting information should be unbiased. ____ The decision to include an amount in the financial ____ statements. Applying the same accounting practices over ____ time. Considers the value of using information relative ____ to cost of providing it.

116) Listed below are five terms are followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct number code for the term.

TERM 1. Monetary unit assumption

PHRASE Implies consensus among different observers. 2. Verifiability Assumes all transactions can be identified with a particular entity. 3. Economic entity assumption Assumes an entity will continue to operate indefinitely. 4. Going concern assumption Requires reporting the financial life of an entity in discrete time frames. 5. Periodicity assumption Ignores the possibility of inflation.

Term number that matches the phrase. ____ ____ ____ ____ ____

117) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Historical cost 2. Materiality 3. Revenue recognition 4. Full disclosure 5. Present value

Term number that matches PHRASE the phrase. Basis of measurement for fixed assets. ____ Discounts future cash flows. ____ Occurs when goods or services are transferred ____ to the customer. Reporting of all information that could affect ____ decisions. Application of GAAP sometimes avoided under ____ this constraint.

118) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Financial Accounting Standards Board 2. Accounting Principles Board 3. Conservatism 4. American Institute of CPAs (AICPA) 5. Securities and Exchange Commission

PHRASE

Term number that matches the phrase.

Undermines representational faithfulness by being inconsistent with neutrality. It established GAAP before the FASB.

____

Its EITF Issues are GAAP when entered in the Accounting Standards Codification. It has the authority to set U.S. accounting standards. It is the national organization for CPAs in the United States.

____

____ ____

119) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Expenses 2. Equity 3. Distributions to owners 4. Investments by owners 5. Liabilities

PHRASE Net assets. Outflows of resources to generate revenues. Cash dividends. Claims of creditors against the assets of a business. Transfers of resources in exchange for common and preferred stock.

Term number that matches the phrase. ____ ____ ____ ____ ____

120) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Losses 2. Assets 3. Revenues 4. Comprehensive income 5. Gains

Term number that matches PHRASE the phrase. Net outflows from peripheral transactions. ____ Increases in equity from the sale of goods and/or ____ services. Results if an asset is sold for more than book ____ value. All changes in equity except owner transactions. ____ Probable future economic benefits controlled by an entity.

____

Term number that matches TERM PHRASE the phrase. 1. SEC Establishes auditing standards in the U.S for public companies. ____ 2. FASB Primary national organization of accountants working in ____ industry. 3. IASB Sets accounting standards in the United States. ____ 4. AICPA Provides timely responses to financial reporting issues. ____ 5. EITF The FASB's parent organization. ____ 6. PCAOB Advises the FASB. ____ 7. IMA FASB's predecessor. ____ 8. FASAC Regulates the financial reporting for public companies. ____ 9. APB National organization of certified public accountants. ____ 10. FAF Sets global accounting standards. ____

Use this information to answer the following questions: Alpaca Corporation had revenues of $200,000 in its first year of operations. The company has not collected on $20,000 of its sales and still owes $25,000 on $70,000 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $15,000 in salaries. Owners invested $20,000 in the business and $20,000 was borrowed on a five-year note. The company paid $2,000 in interest that was the amount owed for the year, and paid $6,000 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. 122) Compute net income for the first year for Alpaca Corporation. 123) Compute the cash balance at the end of the first year for Alpaca Corporation. Use this information to answer the following questions: Tri Fecta, a partnership, had revenues of $360,000 in its first year of operations. The partnership has not collected on $35,000 of its sales and still owes $40,000 on $150,000 of merchandise it purchased. There was no inventory on hand at the end of the year. The partnership paid $25,000 in salaries. The partners invested $40,000 in the business and $25,000 was borrowed on a five-year note. The partnership paid $3,000 in interest that was the amount owed for the year and paid $8,000 for a two-year insurance policy on the first day of business. 124) Compute net income for the first year for Tri Fecta. 125) Compute the cash balance at the end of the first year for Tri Fecta. Use this information to answer the following questions: The following information ($ in millions) comes from a recent annual report of Amazon.com, Inc.: Net sales Total assets End of year balance in cash Total stockholders' equity Gross profit (Sales — Cost of Sales) Net increase in cash for the year Operating expenses Net operating cash flow Other income (expense), net

$10,711 4,363 1,022 431 2,456 9 2,067 702 (12)

126) Compute Amazon's balance in cash at the beginning of the year. 127) Compute Amazon's total liabilities at the end of the year. 128) Compute Amazon's cost of goods sold for the year. 21 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

129) Compute the income before income tax for Amazon. 130) Compare net income (loss) for the year to net cash flow from operating activities. Why are these amounts different? Briefly explain. 131) For each of the following situations, state whether you agree or disagree with the financial reporting practice employed, and briefly explain the reason for your answer. 1. Cantor Corporation's accountant increased the book value of a patent from its original cost of $1 million to its recently appraised value of $6 million. 2. Stanton Corporation paid for the personal travel of its chief financial officer and charged travel expense. 3. At the end of its 2021 fiscal year, Dower, Inc., received an order from a customer for $60,000. The merchandise will ship early in 2022. Because the sale was made to a long-time customer and the invoice was paid in 2021, the controller recorded the sale in 2021. 4. In the middle of its 2021 fiscal year, Sanguinetti, Inc. paid $12,000 to its insurance company for one-year comprehensive insurance coverage. Sanguinetti recorded the entire expenditure as an expense in 2021. 5. The Churchill Pharmaceutical Company included a note in its financial statements that described a pending lawsuit against the company. 6. The Daily Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements. 132) Identify or define the following terms: economic entity, going concern. 133) List the four financial statements most frequently provided to external users. 134) Explain and show an example of how the FASB's conceptual framework is needed in formulating standards on controversial topics. 135) What is the SEC and how is it involved with accounting standard-setting? 136) What is the EITF and what is its purpose? 137) Accounting standard-setting has been characterized as a political process. Discuss this proposition giving an example. 138) What are the key provisions of the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002? 139) What is the value of a company having financial statements audited by an independent auditor?

140) What provisions did the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002 make for performance of nonaudit services by an audit firm? 141) Briefly describe how materiality is featured in the conceptual framework. 142) Give an example of a violation of the stable monetary unit assumption. How would it affect the quality of financial statement information? 143) Identify or define the following terms: periodicity, monetary unit. 144) Identify or define the following term: historical cost. 145) How does GAAP define fair value? 146) Over time, accounting standards have developed to reflect changes in the business world as well as changes in our ability to account for such changes. Using the example of marking assets and liabilities to their fair value, explain why you would expect accounting standards to change. 147) List and briefly describe the five measurement attributes used commonly in current GAAP. 148) List and briefly describe the three levels of inputs described in the fair-value measurement hierarchy. 149) Contrast the asset/liability and revenue/expense approaches to accounting standard setting. 150) Contrast the role of the conceptual framework in U.S. GAAP and IFRS.

Intermediate Accounting, 10e (Spiceland) Chapter 1 Environment and Theoretical Structure of Financial Accounting 1) The primary function of financial accounting is to provide relevant financial information to parties external to business enterprises. Answer: TRUE Difficulty: 1 Easy Topic: Environment of financial accounting and reporting Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 2) Accrual accounting attempts to measure revenues and expenses that occurred during accounting periods so they equal net operating cash flow. Answer: FALSE Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement / Keyboard Navigation 3) The FASB is currently the public-sector organization responsible for setting accounting standards in the United States. Answer: FALSE Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation

4) The FASB's due process invites various interested parties to indicate their opinions about whether financial accounting standards should be changed. Answer: TRUE Difficulty: 1 Easy Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 5) Accounting for stock-based compensation is an area in which the FASB has received little political interference. Answer: FALSE Difficulty: 1 Easy Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 6) The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity responsible for setting standards for auditing public companies in the United States. Answer: TRUE Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 7) A rules-based approach to standard-setting stresses professional judgment as opposed to following a list of rules. Answer: FALSE Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 2 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8) Under federal securities laws, the SEC has the authority to set accounting standards in the United States. Answer: TRUE Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 9) The primary responsibility for properly applying GAAP when communicating with investors and creditors through financial statements lies with a firm's auditors. Answer: FALSE Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 10) Auditors play an important role in the resource allocation process by adding credibility to financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 11) The purpose of the conceptual framework is to provide a structure and framework for a consistent set of GAAP. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual framework―Purpose Learning Objective: 01-06 Explain the purpose of the conceptual framework. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 3 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12) In the United States, the conceptual framework indicates GAAP when a more specific accounting standard does not apply. Answer: FALSE Difficulty: 1 Easy Topic: Conceptual framework―Purpose Learning Objective: 01-06 Explain the purpose of the conceptual framework. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 13) Materiality can be affected by the dollar amount of an item, the nature of the item, or both. Answer: TRUE Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 14) According to the FASB's Statements of Financial Accounting Concepts, conservatism is a desired qualitative characteristic of accounting information. Answer: FALSE Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 15) Equity is a residual amount representing the owner's interest in the assets of the business. Answer: TRUE Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

16) Revenues are inflows of assets or settlements of liabilities from activities that constitute the entity's ongoing operations. Answer: TRUE Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 17) Gains or losses result, respectively, from the disposition of business assets for greater than, or less than, their book values. Answer: TRUE Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 18) Comprehensive income is another term for net income. Answer: FALSE Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 19) The FASB's conceptual framework lists relevance and timeliness as the two fundamental qualitative characteristics of decision-useful information. Answer: FALSE Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 5 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20) The monetary unit assumption requires that items in financial statements be measured in a particular monetary unit. Answer: TRUE Difficulty: 1 Easy Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 21) The periodicity assumption requires that present value calculations take into account the number of compounding periods in each year. Answer: FALSE Difficulty: 1 Easy Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 22) Determining fair value by calculating the present value of future cash flows is a level 1 type of input. Answer: FALSE Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 23) The FASB's framework for measuring fair value doesn't change the situations in which fair value is used under current GAAP. Answer: TRUE Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 6 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24) The revenue/expense approach emphasizes determining the appropriate amounts of revenue and expense in each reporting period. Answer: TRUE Difficulty: 1 Easy Topic: Evolving GAAP Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 25) The asset/liability approach emphasizes matching to determine what assets and liabilities should be reflected on the balance sheet. Answer: FALSE Difficulty: 1 Easy Topic: Evolving GAAP Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 26) In IFRS, the conceptual framework indicates appropriate accounting when a more specific accounting standard does not apply. Answer: TRUE Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Diversity AICPA/Accessibility: BB Global / Keyboard Navigation

27) Political pressure never affects the IFRS standard-setting process. Answer: FALSE Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Diversity AICPA/Accessibility: BB Global; BB Legal / Keyboard Navigation 28) External decision makers would not look primarily to financial accounting information to assist them in making decisions on: A) Granting credit. B) Capital budgeting. C) Selecting stocks. D) Mergers and acquisitions. Answer: B Difficulty: 1 Easy Topic: Environment of financial accounting and reporting Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management / Keyboard Navigation

29) The primary focus for financial accounting information is to provide information useful for:

a. b. c. d.

Investing decisions Yes Yes No No

Credit decisions Yes No Yes No

A) Option a. B) Option b. C) Option c. D) Option d. Answer: A Difficulty: 1 Easy Topic: Environment of financial accounting and reporting Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 30) Which of the following groups is not among the external users for whom financial statements are prepared? A) Customers. B) Suppliers. C) Employees. D) Customers, suppliers, and employees are all external users of financial statements. Answer: D Difficulty: 1 Easy Topic: Environment of financial accounting and reporting Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

31) Which of the following is not true about net operating cash flow? A) It is the difference between cash receipts and cash disbursements from providing goods and services. B) It is a measure used in accrual accounting and is recognized as the best predictor of future operating cash flows. C) Over short periods, it may not be indicative of long-run cash-generating ability. D) It is easy to understand and all information required to measure it is factual. Answer: B Difficulty: 2 Medium Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 32) Which of the following groups is not among financial intermediaries? A) Mutual fund managers. B) Financial analysts. C) CPAs. D) Credit rating organizations. Answer: C Difficulty: 2 Medium Topic: Environment of financial accounting and reporting Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 33) Which of the following was the first private-sector entity that set accounting standards in the United States? A) Accounting Principles Board. B) Committee on Accounting Procedure. C) Financial Accounting Standards Board. D) AICPA. Answer: B Difficulty: 2 Medium Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 10 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

34) Which of the following does not provide guidance about GAAP for companies that are publicly listed on a stock exchange? A) FASB B) IASB C) GASB D) EITF Answer: C Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 35) Porite Company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Porite's practice is an example of: A) Cash basis accounting. B) Accrual accounting. C) The matching principle. D) Economic entity. Answer: B Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement / Keyboard Navigation

36) Which of the following is not a potential benefit of accrual accounting, compared to cashbasis accounting? A) Timeliness. B) Better reflecting economic activity. C) Periodicity. D) Better matching of revenues and expenses. Answer: C Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 37) In a recent annual report, Apple Computer reported the following in one of its disclosure notes: "Warranty Expense: The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized." This note exemplifies Apple's use of: A) Conservatism. B) Matching. C) Revenue recognition. D) Economic entity. Answer: B Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

38) GAAP is an abbreviation for: A) Generally authorized accounting procedures. B) Generally applied accounting procedures. C) Generally accepted auditing practices. D) Generally accepted accounting principles. Answer: D Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 39) The FASB issues accounting standards in the form of: A) Accounting Research Bulletins. B) Accounting Standards Updates. C) Financial Accounting Standards. D) Financial Technical Bulletins. Answer: B Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation

40) Pronouncements issued by the Committee on Accounting Procedures: A) Dealt with specific accounting and reporting problems. B) Were based on exposure drafts and public comment letters. C) Originated from congressional studies and SEC directives. D) Were the outcome of research studies and a theoretical framework. Answer: A Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 41) The FASB's standard-setting process includes, in the correct order: A) Exposure draft, research, discussion paper, Accounting Standards Update. B) Research, exposure draft, discussion paper, Accounting Standards Update. C) Research, discussion paper, exposure draft, Accounting Standards Update. D) Discussion paper, research, exposure draft, Accounting Standards Update. Answer: C Difficulty: 1 Easy Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 42) Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act: A) Changed the entity responsible for setting auditing standards. B) Increased corporate executive responsibility for financial statements. C) Limited nonaudit services that can be performed by auditors for audit clients. D) Changed the entity responsible for setting accounting standards. Answer: D Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 14 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43) CPAs are licensed by: A) The AICPA. B) The SEC. C) The federal government. D) State governments. Answer: D Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 44) Which of the following has the statutory authority to set accounting standards in the United States? A) FASB. B) IRS. C) SEC. D) AICPA. Answer: C Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 45) When a registrant company submits its annual filing to the SEC, it uses: A) Form 10-A. B) Form 10-K. C) Form 10-Q. D) Form S-1. Answer: B Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 15 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

46) The most likely important flaw leading to the demise of the APB was the perceived lack of: A) Confidence. B) Competence. C) Independence. D) Importance. Answer: C Difficulty: 2 Medium Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 47) Accounting standard-setting has been characterized as: A) A political process. B) Using the scientific method. C) Pure deductive reasoning. D) Pure inductive reasoning. Answer: A Difficulty: 1 Easy Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

48) The International Accounting Standards Board: A) Was the predecessor to the IASC. B) Can overrule the FASB when their policies disagree. C) Promotes the use of high-quality, understandable global accounting standards. D) Has its headquarters in Geneva. Answer: C Difficulty: 1 Easy Topic: Development of accounting and reporting standards; International Financial Reporting Standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards.; 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Reflective Thinking; Diversity AICPA/Accessibility: BB Global; BB Legal / Keyboard Navigation 49) Which of the following is a provision of the Public Company Accounting Reform and investor Protection Act of 2002? A) Corporate executive accountability. B) Auditor rotation. C) Retention of work papers. D) All of these answer choices are correct. Answer: D Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation

50) The primary professional organization for those accountants working in industry is the: A) AAA. B) AICPA. C) IIA. D) IMA. Answer: D Difficulty: 1 Easy Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 51) Regarding convergence of accounting standards, the FASB and IASB: A) Have agreed to combine their organizations to form the BUSYB. B) Have achieved full convergence with respect to financial instruments. C) Do not intend to work together to achieve convergence where possible. D) Are not likely to achieve full convergence of accounting standards in the near future. Answer: D Difficulty: 1 Easy Topic: Development of accounting and reporting standards; International Financial Reporting Standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards.; 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Diversity AICPA/Accessibility: BB Global / Keyboard Navigation

52) Which of the following is not a concern regarding IFRS adoption by the U.S.? A) Need for the U.S. to have strong influence on the standard-setting process and ensure that standards meet U.S. needs. B) Geographic dispersion of standard setters make it unlikely that boards can interact to achieve consensus. C) The high costs to companies of converting to IFRS. D) The fact that many laws, regulations and private contracts reference U.S. GAAP. Answer: B Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Diversity AICPA/Accessibility: BB Global / Keyboard Navigation 53) The most political issue in the FASB's most recent deliberations and amendments to GAAP on stock options was: A) The negative effects on earnings of companies in the tech industry if they had to recognize expenses associated with stock compensation. B) The negative effects on assets of recognizing stock options in equity. C) The disclosure of stock compensation expense in the notes. D) Accounting for stock options that have not yet been granted to employees. Answer: A Difficulty: 3 Hard Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

54) An important historical reason for the FASB reversing its positions when political pressures occur is: A) The cost of gathering data was prohibitive. B) The difficulties in measurement were too great. C) Companies withdraw financial support for the FASB. D) The SEC did not support the FASB position. Answer: D Difficulty: 2 Medium Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 55) The most recent example of the political process at work in standard-setting is the heated debate that occurred on the issue of: A) Creation of the FASB. B) Accounting for stock compensation. C) Establishing the SEC. D) Accounting for fair values. Answer: D Difficulty: 2 Medium Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 56) Independent auditors express an opinion on the: A) Fairness of financial statements. B) Ongoing access to capital markets for additional financing. C) Soundness of a company's future. D) Quality of a company's management. Answer: A Difficulty: 2 Medium Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting / Keyboard Navigation 20 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

57) The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of: A) An ethical dilemma. B) An accounting theory issue. C) A technical accounting issue. D) An auditor's responsibility to inform the SEC. Answer: A Difficulty: 2 Medium Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Evaluate AACSB: Analytical Thinking; Ethics AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 58) One of the elements that many believe distinguishes a profession from other occupations is the acceptance of responsibility by its members for the interests of those it serves, which is often articulated in: A) Its conceptual framework. B) Its code of ethics. C) Federal laws. D) State laws. Answer: B Difficulty: 2 Medium Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Ethics AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 59) SFAC 8 of the conceptual framework focuses on: A) Objective and qualitative characteristics. B) Presentation and disclosure. C) Recognition and measurement. D) Elements of financial statements. Answer: A Difficulty: 1 Easy Topic: Conceptual framework―Purpose Learning Objective: 01-06 Explain the purpose of the conceptual framework. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 21 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

60) The FASB's conceptual framework's qualitative characteristics of accounting information include: A) Historical cost. B) Realization. C) Faithful representation. D) Full disclosure. Answer: C Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 61) The FASB's conceptual framework's qualitative characteristics of accounting information include: A) Full disclosure. B) Relevance. C) Going concern. D) Historical cost. Answer: B Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 62) The conceptual framework's qualitative characteristic of relevance includes: A) Predictive value. B) Verifiability. C) Completeness. D) Neutrality. Answer: A Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 22 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

63) The conceptual framework's qualitative characteristic of faithful representation includes: A) Predictive value. B) Neutrality. C) Confirmatory value. D) Timeliness. Answer: B Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 64) SFAC No.5 focuses on: A) Objectives of financial reporting. B) Qualitative characteristics of accounting information. C) Recognition and measurement concepts in accounting. D) Elements of financial statements. Answer: C Difficulty: 2 Medium Topic: Conceptual framework―Purpose Learning Objective: 01-06 Explain the purpose of the conceptual framework. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 65) The main issue in the debate over accounting for employee stock options was: A) Which employees should receive options. B) The amount of compensation expense that a company should recognize. C) How many options should be granted to key executives. D) The tax consequences of employee stock options. Answer: B Difficulty: 2 Medium Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

66) Confirmatory value is central to the concept of "earnings quality" because A) It helps investors predict a company's future earnings. B) It allows investors to verify or change their prior assessments of a company's performance. C) It helps investors predict a company's future cash flows. D) It allows investors to compare the performance of a company over time. Answer: B Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 67) A firm's comprehensive income always: A) Is the same as its net income. B) Is greater than its net income. C) Is less than its net income. D) Could be greater than or less than net income. Answer: D Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 68) Net income equals: A) Assets minus liabilities. B) Revenues minus cost of goods sold. C) Revenues minus expenses. D) Cash receipts minus cash payments. Answer: C Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement / Keyboard Navigation

69) Enhancing qualitative characteristics of accounting information include each of the following except: A) Timeliness. B) Materiality. C) Comparability. D) Verifiability. Answer: B Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 70) The enhancing qualitative characteristic of understandability means that information should be understood by: A) Those who are experts in the interpretation of financial information. B) Those who have a reasonable understanding of business and economic activities. C) Financial analysts. D) CPAs. Answer: B Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 71) Fundamental qualitative characteristics of accounting information are: A) Relevance and comparability. B) Comparability and consistency. C) Faithful representation and relevance. D) Neutrality and consistency. Answer: C Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 25 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

72) Enhancing qualitative characteristics of accounting information include: A) Relevance and comparability. B) Comparability and timeliness. C) Understandability and relevance. D) Neutrality and consistency. Answer: B Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 73) Gains are: A) Inflows from selling a product or service to a customer. B) Increases in equity resulting from transfers of assets to the company from owners. C) Increases in equity from peripheral transactions of an entity. D) None of these answer choices are correct. Answer: C Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 74) When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic? A) Verifiability. B) Predictive value. C) Faithful representation. D) Timeliness. Answer: C Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 26 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

75) Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change? A) Comparability. B) Representational faithfulness. C) Consistency. D) Feedback value. Answer: C Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 76) Elements of financial statements do not include: A) Monetary unit. B) Investments by owners. C) Comprehensive income. D) Losses. Answer: A Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 77) Which of the following is true regarding equity? A) It represents how much the owner profits from the business. B) It represents the owner's residual interest in the assets of the business. C) It represents the owner's return for investing in the business. D) It represents the accumulated earnings of the business over time. Answer: B Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 27 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

78) Cash dividends are an example of which of the following elements? A) Distribution to owners B) Expenses C) Equity D) Investment by owners Answer: A Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 79) The primary objective of financial accounting information is to provide useful information to: A) Management. B) Capital providers. C) Regulators. D) Academicians. Answer: B Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 80) Of the following, the most important objective for financial reporting is to provide information useful for: A) Making decisions. B) Determining taxable income. C) Providing accountability. D) Increasing future profits. Answer: A Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 28 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

81) Management has decided to change the estimated useful life of a machinery but fails to disclose this change in the financial statements. This violation of GAAP can cause the information to be misleading because it lacks A) Neutrality B) Timeliness C) Completeness D) Confirmatory value Answer: C Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 82) Management has recently purchased new equipment but is uncertain about its useful life. For the initial year, management estimated a useful life of 10 years. However, due to a major accident during the first year, management is now uncertain about the equipment's functionality and has revised its estimate to 5 years and included a description of their uncertainty and of this change in estimated useful life in financial statement disclosures. Which of the following is an accurate statement regarding this approach? A) Information contains error because management changed its estimates on the useful life of the equipment. B) Information contains error because the useful life of the equipment is uncertain. C) Information is free from error because management has provided enough disclosure regarding the uncertain estimate. D) Information is free from error because management made the correct decision in revising the estimated useful life of the equipment. Answer: C Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

83) Roy Wilton is a CPA who recently made a poor investment. When researching the investment, Roy examined the financial statements of the firm, but did not read the accompanying footnotes, and therefore didn't comprehend the broader context underlying those financial statements. Which of the following is true with respect to the enhancing qualitative characteristic of understandability in this case? A) This demonstrates a violation of understandability, given that Roy did not comprehend all relevant information. B) This does not demonstrate a violation of understandability, as Roy did not bother to read the footnotes but could have understood them if he did so. C) This does not demonstrate a violation of understandability, but rather completeness, as Roy's understanding was incomplete. D) This demonstrates a violation of understandability, as CPAs should be able to rely on the financial statements alone. Answer: B Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 84) A constraint on qualitative characteristics of accounting information is: A) Timeliness. B) Going concern. C) Neutrality. D) Cost-effectiveness. Answer: D Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

85) According to the conceptual framework, verifiability implies: A) Legal evidence. B) Logic. C) Consensus. D) Legal verdict. Answer: C Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 86) Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by 10 days the time to get information to investors and creditors. The qualitative concept improved is: A) Comparability. B) Consistency. C) Timeliness. D) Faithful representation. Answer: C Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 87) Recognizing expected losses immediately, but deferring expected gains, is an example of: A) Materiality. B) Conservatism. C) Cost-effectiveness. D) Timeliness. Answer: B Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 31 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

88) Change in equity from nonowner sources is: A) Comprehensive income. B) Revenues. C) Expenses. D) Gains and losses. Answer: A Difficulty: 2 Medium Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 89) Which of the following Statements of Financial Accounting Concepts defines the 10 elements of financial statements? A) SFAC 4. B) SFAC 3. C) SFAC 5. D) SFAC 6. Answer: D Difficulty: 2 Medium Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

90) Primecoat Corporation could disseminate its annual financial statements two days earlier if it shifted substantial human resources from other operations to the annual report project. Management decided the value of the earlier report was not worth the added commitment of resources. The concept demonstrated is: A) Timeliness. B) Materiality. C) Relevance. D) Cost-effectiveness. Answer: D Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management / Keyboard Navigation 91) Mega Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debt expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The concept demonstrated is: A) Comparability. B) Faithful representation. C) Cost-effectiveness. D) Materiality. Answer: D Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

92) Four different competent accountants independently agree on the amount and method of reporting an economic event. The concept demonstrated is: A) Reliability. B) Comparability. C) Completeness. D) Verifiability. Answer: D Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 93) An important argument in support of historical cost information is: A) Relevance. B) Predictive quality for future cash flows. C) Materiality. D) Verifiability. Answer: D Difficulty: 1 Easy Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 94) The conceptual framework's recognition and measurement concepts recognize which one of the following as an assumption? A) Going concern. B) Historical cost. C) Full disclosure. D) Realization. Answer: A Difficulty: 1 Easy Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 34 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

95) The assumption that in the absence of contrary information a business entity will continue indefinitely is the: A) Periodicity assumption. B) Entity assumption. C) Going concern assumption. D) Historical cost assumption. Answer: C Difficulty: 2 Medium Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 96) If a company has declared bankruptcy, its financial statements likely violate: A) The fair value measurement approach. B) The present value measurement approach. C) The stable monetary unit assumption. D) The going concern assumption. Answer: D Difficulty: 2 Medium Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Create AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 97) Which of the following is typically characterized as a principle, rather than an assumption? A) Periodicity. B) Monetary unit. C) Conservatism. D) Full disclosure. Answer: D Difficulty: 1 Easy Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

98) Which of the following is not an identified valuation technique in GAAP regarding fair value measurement? A) Cost approach. B) Market approach. C) Cost-benefit approach. D) Income approach. Answer: C Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 99) Disclosure notes to a company's financial statements: A) Are relatively unimportant facts that don't belong in the basic financial statements. B) Document the source of financial statement facts, like literary footnotes. C) Are an integral part of a company's financial statements. D) Are irrelevant facts that are immaterial in amount. Answer: C Difficulty: 1 Easy Topic: Concepts―Qualitative characteristics Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 100) A cause-and-effect relationship is implicit in: A) Realization. B) Historical cost. C) Matching. D) The going concern assumption. Answer: C Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 36 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

101) The full disclosure principle requires a balance between: A) Comparability and consistency. B) Relevance and cost-effectiveness. C) Reliability and neutrality. D) Timeliness and predictive value. Answer: B Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 102) The recognition of which of the following expenses exemplifies the application of matching expenses with the revenues they produced? A) President's salary. B) Research and development. C) Cost of goods sold. D) Advertising. Answer: C Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

103) Land was acquired in 2021 for a future building site at a cost of $40,000. The assessed valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a recent firm offer for the land was for a cash payment of $46,000. The land should be reported in the financial statements at: A) $40,000. B) $27,000. C) $46,000. D) $48,000. Answer: A Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 104) Revenue should not be recognized until: A) The seller has transferred goods or services to a customer. B) Contracts have been signed and payment has been received. C) Work has been performed and customer has been billed. D) Collection has been made and warrantees have expired. Answer: A Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

105) Which of the following best demonstrates the full disclosure principle? A) The multi-step income statement. B) The auditors' report. C) The company's tax return. D) Disclosure notes to financial statements. Answer: D Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Create AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 106) Matching is: A) A valuation method. B) A result of recognizing revenues and expenses that arise from the same transaction. C) A cash basis reporting principle. D) An asset classification procedure. Answer: B Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

107) Which of the following best describes the additional information that companies use to meet the requirements of full disclosure in financial statements? A) Parenthetical comments or modifying comments placed on the face of the financial statements. B) Disclosure notes conveying additional insights about company operations, accounting principles, contractual agreements, and pending litigation. C) Supplemental schedules and tables that report more detailed information than is shown in the primary financial statements. D) Comments on the face of the financial statements, and schedules, tables, and narrative disclosures in notes to the financial statements. Answer: D Difficulty: 2 Medium Topic: Concepts―Recognition-Measurement-Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement / Keyboard Navigation 108) Ford Motor Company purchases services from suppliers on account and sells its products to distributors on short-term credit. As a result, do each of these events affect net income faster than they affect net operating cash flows?

a. b. c. d.

Purchase Services Yes Yes No No

Sell Products Yes No Yes No

A) Option a. B) Option b. C) Option c. D) Option d. Answer: A Difficulty: 3 Hard Topic: Cash versus accrual accounting; Concepts–Recognition-Measurement-Disclosure Learning Objective: 01-02 Explain the difference between cash and accrual accounting.; 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement / Keyboard Navigation

109) The revenue/expense approach emphasizes: A) Recognition of revenues. B) Recognition of expenses. C) The income statement. D) All of these answer choices are correct. Answer: D Difficulty: 1 Easy Topic: Evolving GAAP Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 110) The asset/liability approach emphasizes: A) Whether amounts on the balance sheet meet the definitions of assets and liabilities. B) A close relation between the balance sheet and the statement of cash flows. C) The distinction between net assets and gross assets. D) All of these answer choices are correct. Answer: A Difficulty: 1 Easy Topic: Evolving GAAP Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 111) Under IFRS, the role of the conceptual framework: A) Primarily involves guiding standard setters to make sure that standards are consistent with each other. B) Includes serving as a guide for practitioners when a specific standard does not apply. C) Is less important than in U.S. GAAP. D) Has resulted primarily from a convergence with U.S. GAAP. Answer: B Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Diversity AICPA/Accessibility: BB Global / Keyboard Navigation 41 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

112) Under IFRS, the conceptual framework: A) Emphasizes the overarching concept of the financial statements providing a "true and fair representation" of the company. B) Is not designed to provide guidance to standard setters, but rather only to practitioners. C) Is not designed to provide guidance to practitioners, but rather only to standard setters. D) Specifies a set of rules that determine what constitutes a true IFRS standard. Answer: A Difficulty: 2 Medium Topic: International Financial Reporting Standards Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Diversity AICPA/Accessibility: BB Global / Keyboard Navigation

113) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM

PHRASE

Term number that matches the phrase. ____ ____ ____ ____ ____

Answer: TERM

1. Predictive value

PHRASE

Information is useful in projecting cash flows. 2. Relevance Pertinent to the decision at hand. 3. Distribution to Information is available prior to the owners decision. 4. Confirmatory value Decrease in equity due to transfers to owners. 5. Timeliness Information confirms expectations.

Term number that matches the phrase. 1 2 5 3 4

Difficulty: 2 Medium Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements; GAAP―Underlying assumptions Learning Objective: 01-06 Explain the purpose of the conceptual framework.; 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements.; 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

114) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term. Term number that matches the TERM PHRASE phrase. 1. Gain Along with relevance, a fundamental decision____ specific quality. 2. Materiality Results if an asset is sold for more than book ____ value. 3. Completeness Contains all information necessary for faithful ____ representation. 4. Comprehensive income The change in equity from nonowner ____ transactions. 5. Faithful representation Concerns the decision-making impact of both ____ the amount and nature of an item.

Answer:

TERM 1. Gain 2. Materiality 3. Completeness 4. Comprehensive income 5. Faithful representation

PHRASE Along with relevance, a fundamental decision-specific quality. Results if an asset is sold for more than book value. Contains all information necessary for faithful representation. The change in equity from nonowner transactions. Concerns the decision-making impact of both the amount and nature of an item.

Term number that matches the phrase. 5 1 3 4 2

Difficulty: 2 Medium Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements Learning Objective: 01-06 Explain the purpose of the conceptual framework.; 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 44 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

115) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Neutrality 2. Comparability 3. Consistency 4. Cost-effectiveness 5. Recognition

PHRASE Important in analysis between firms. Accounting information should be unbiased. The decision to include an amount in the financial statements. Applying the same accounting practices over time. Considers the value of using information relative to cost of providing it.

Term number that matches the phrase. ____ ____ ____ ____ ____

Answer:

TERM 1. Neutrality 2. Comparability 3. Consistency 4. Cost-effectiveness 5. Recognition

Term number that matches the phrase. 2 1 5 3 4

Difficulty: 2 Medium Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition—Measurement—Disclosure Learning Objective: 01-06 Explain the purpose of the conceptual framework.; 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements.; 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

116) Listed below are five terms are followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct number code for the term.

TERM 1. Monetary unit assumption

Term number that matches the phrase. ____ ____ ____ ____ ____

Answer:

TERM 1. Monetary unit assumption 2. Verifiability 3. Economic entity assumption 4. Going concern assumption 5. Periodicity assumption

PHRASE Implies consensus among different observers. Assumes all transactions can be identified with a particular entity. Assumes an entity will continue to operate indefinitely. Requires reporting the financial life of an entity in discrete time frames. Ignores the possibility of inflation.

Term number that matches the phrase. 2 3 4 5 1

Difficulty: 2 Medium Topic: Concepts―Qualitative characteristics; GAAP―Underlying assumptions Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements.; 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

117) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Historical cost 2. Materiality 3. Revenue recognition 4. Full disclosure 5. Present value

Term number that matches the PHRASE phrase. Basis of measurement for fixed assets. ____ Discounts future cash flows. ____ Occurs when goods or services are transferred ____ to the customer. Reporting of all information that could affect ____ decisions. Application of GAAP sometimes avoided ____ under this constraint.

Answer:

TERM 1. Historical cost 2. Materiality 3. Revenue recognition 4. Full disclosure 5. Present value

PHRASE Basis of measurement for fixed assets. Discounts future cash flows. Occurs when goods or services are transferred to the customer. Reporting of all information that could affect decisions. Application of GAAP sometimes avoided under this constraint.

Term number that matches the phrase. 1 5 3 4 2

118) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Financial Accounting Standards Board 2. Accounting Principles Board 3. Conservatism 4. American Institute of CPAs (AICPA) 5. Securities and Exchange Commission

PHRASE

Term number that matches the phrase.

Undermines representational faithfulness by being inconsistent with neutrality. It established GAAP before the FASB.

____

Its EITF Issues are GAAP when entered in the Accounting Standards Codification. It has the authority to set U.S. accounting standards. It is the national organization for CPAs in the United States.

____

____ ____

Answer:

TERM 1. Financial Accounting Standards Board 2. Accounting Principle Board 3. Conservatism

4. American Institute of CPAs (AICPA) 5. Securities and Exchange Commission

PHRASE

Term number that matches the phrase.

Undermines representational faithfulness by being inconsistent with neutrality. It established GAAP before the FASB.

Its EITF Issues are GAAP when entered in the Accounting Standards Codification. It has the authority to set U.S. accounting standards. It is the national organization for CPAs in the United States.

5 4

Difficulty: 2 Medium Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting; Concepts―Qualitative characteristics Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards.; 01-05 Explain factors that encourage high-quality financial reporting.; 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; BB Legal

119) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Expenses 2. Equity 3. Distributions to owners 4. Investments by owners 5. Liabilities

Term number that matches the phrase. ____ ____ ____ ____

PHRASE Net assets. Outflows of resources to generate revenues. Cash dividends. Claims of creditors against the assets of a business. Transfers of resources in exchange for common and preferred stock.

____

Answer:

TERM 1. Expenses 2. Equity 3. Distributions to owners 4. Investments by owners 5. Liabilities

PHRASE Net assets. Outflows of resources to generate revenues. Cash dividends. Claims of creditors against the assets of a business. Transfers of resources in exchange for common and preferred stock.

Term number that matches the phrase. 2 1 3 5 4

Difficulty: 1 Easy Topic: Concepts―Elements of financial statements Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

120) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct number code for the term.

TERM 1. Losses 2. Assets 3. Revenues 4. Comprehensive income 5. Gains

PHRASE Net outflows from peripheral transactions. Increases in equity from the sale of goods and/or services. Results if an asset is sold for more than book value. All changes in equity except owner transactions.

Term number that matches the phrase. ____ ____ ____ ____

Probable future economic benefits controlled by an entity.

____

Answer:

TERM 1. Losses 2. Assets 3. Revenues 4. Comprehensive income 5. Gains

Term number that matches the phrase. 1 3 5 4 2

121) Listed below are 10 organizations followed by a list of phrases that describe or characterize the organizations. Match each phrase with the correct organization by placing the number designating the best term in the space provided by the phrase. Term number that matches the TERM PHRASE phrase. 1. SEC Establishes auditing standards in the U.S for public companies. ____ 2. FASB Primary national organization of accountants working in ____ industry. 3. IASB Sets accounting standards in the United States. ____ 4. AICPA Provides timely responses to financial reporting issues. ____ 5. EITF The FASB's parent organization. ____ 6. PCAOB Advises the FASB. ____ 7. IMA FASB's predecessor. ____ 8. FASAC Regulates the financial reporting for public companies. ____ 9. APB National organization of certified public accountants. ____ 10. FAF Sets global accounting standards. ____

Answer:

TERM 1. SEC

PHRASE Establishes auditing standards in the U.S for public companies. 2. FASB Primary national organization of accountants working in industry. 3. IASB Sets accounting standards in the United States. 4. AICPA Provides timely responses to financial reporting issues. 5. EITF The FASB's parent organization. 6. PCAOB Advises the FASB. 7. IMA FASB's predecessor. 8. FASAC Regulates the financial reporting for public companies. 9. APB National organization of certified public accountants. 10. FAF Sets global accounting standards.

Term number that matches the phrase. 6 7 2 5 10 8 9 1 4 3

Difficulty: 2 Medium Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards.; 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; BB Legal

123) Compute the cash balance at the end of the first year for Alpaca Corporation. Answer: Cash receipts: Sales revenue $200,000 Less: Accounts receivable 20,000 $180,000 Owners' investments 20,000 Note payable 20,000 Total receipts 220,000 Cash disbursements: Purchases 70,000 Less: Accounts payable 25,000 $ 45,000 Salaries paid 15,000 Interest paid 2,000 Insurance paid 6,000 Estimated taxes paid 44,000 Total cash disbursements 112,000 Ending cash balance $108,000 Difficulty: 2 Medium Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

Use this information to answer the following questions: Tri Fecta, a partnership, had revenues of $360,000 in its first year of operations. The partnership has not collected on $35,000 of its sales and still owes $40,000 on $150,000 of merchandise it purchased. There was no inventory on hand at the end of the year. The partnership paid $25,000 in salaries. The partners invested $40,000 in the business and $25,000 was borrowed on a fiveyear note. The partnership paid $3,000 in interest that was the amount owed for the year and paid $8,000 for a two-year insurance policy on the first day of business. 124) Compute net income for the first year for Tri Fecta. Answer: Revenues $360,000 Expenses: Cost of goods sold $150,000 Salaries expense 25,000 Interest expense 3,000 Insurance expense 4,000 182,000 Net income $178,000 Difficulty: 3 Hard Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

125) Compute the cash balance at the end of the first year for Tri Fecta. Answer: Cash receipts: Sales revenue $360,000 Less: Accounts receivable 35,000 $325,000 Owners' investments 40,000 Notes payable 25,000 Total receipts 390,000 Cash disbursements: Purchases 150,000 Less: Accounts payable 40,000 110,000 Salaries paid 25,000 Interest paid 3,000 Insurance paid 8,000 Total cash disbursements 146,000 Ending cash balance $244,000 Difficulty: 2 Medium Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

Use this information to answer the following questions: The following information ($ in millions) comes from a recent annual report of Amazon.com, Inc.: Net sales Total assets End of year balance in cash Total stockholders' equity Gross profit (Sales — Cost of Sales) Net increase in cash for the year Operating expenses Net operating cash flow Other income (expense), net

$10,711 4,363 1,022 431 2,456 9 2,067 702 (12)

126) Compute Amazon's balance in cash at the beginning of the year. Answer: Beginning balance in Cash + Net increase in Cash = Ending balance in Cash Therefore, Beginning balance in Cash = Ending balance in Cash — Net increase in Cash = $1,022 — 9 = $1,013 Difficulty: 2 Medium Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement 127) Compute Amazon's total liabilities at the end of the year. Answer: Total assets = Total liabilities + Total stockholders' equity Therefore, Total liabilities = Total assets — Total stockholders' equity = $4,363 — 431 = $3,932 Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

128) Compute Amazon's cost of goods sold for the year. Answer: Gross profit = Net sales — Cost of goods sold Therefore, Cost of goods sold = Net sales — Gross profit = $10,711 — 2,456 = $8,255 Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement 129) Compute the income before income tax for Amazon. Answer: Net income = Gross profit — Operating expenses + Other income (expense), net = $2,456 — 2,067 + (12) = $377 Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Apply AICPA/Accessibility: BB Critical Thinking; FN Measurement 130) Compare net income (loss) for the year to net cash flow from operating activities. Why are these amounts different? Briefly explain. Answer: These amounts are different because of the differences between cash and accrual accounting. As opposed to cash flows from operations, net income includes both revenues and expenses the timing of which differs from the timing of certain cash receipts and payments. Examples would be credit sales in which the revenues are recorded before the collection of cash and cost of goods sold in which the expense often is recorded later than the cash payment to the supplier for the merchandise. Difficulty: 2 Medium Topic: Cash versus accrual accounting Learning Objective: 01-02 Explain the difference between cash and accrual accounting. Bloom's: Understand AACSB: Reflective Thinking; Communication AICPA/Accessibility: FN Measurement

131) For each of the following situations, state whether you agree or disagree with the financial reporting practice employed, and briefly explain the reason for your answer. 1. Cantor Corporation's accountant increased the book value of a patent from its original cost of $1 million to its recently appraised value of $6 million. 2. Stanton Corporation paid for the personal travel of its chief financial officer and charged travel expense. 3. At the end of its 2021 fiscal year, Dower, Inc., received an order from a customer for $60,000. The merchandise will ship early in 2022. Because the sale was made to a long-time customer and the invoice was paid in 2021, the controller recorded the sale in 2021. 4. In the middle of its 2021 fiscal year, Sanguinetti, Inc. paid $12,000 to its insurance company for one-year comprehensive insurance coverage. Sanguinetti recorded the entire expenditure as an expense in 2021. 5. The Churchill Pharmaceutical Company included a note in its financial statements that described a pending lawsuit against the company. 6. The Daily Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements. Answer: 1. Disagree. This is a violation of the historical cost (original transaction value) principle. 2. Disagree. This is a violation of the economic entity assumption. 3. Disagree. The seller has not satisfied its obligation to deliver goods. 4. Disagree. This is a violation of matching. 5. Agree. The company is conforming to the full disclosure principle. 6. Disagree. This is a violation of the periodicity assumption. Difficulty: 2 Medium Topic: Concepts―Recognition - Measurement - Disclosure Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 132) Identify or define the following terms: economic entity, going concern. Answer: Economic entity: All economic events can be identified with a particular economic entity. Going concern: In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely. Difficulty: 2 Medium Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 60 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

133) List the four financial statements most frequently provided to external users. Answer: Balance sheet, Income statement, Statement of cash flows, Statement of shareholders' equity. Difficulty: 1 Easy Topic: Cash versus accrual accounting Learning Objective: 01-01 Describe the function and primary focus of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 134) Explain and show an example of how the FASB's conceptual framework is needed in formulating standards on controversial topics. Answer: In order to provide consistency, a conceptual framework (a map clearly defining beliefs or structure) must be provided. This is the foundation for a strong, logical, and fair system. For example, in debating accounting for stock-based compensation, the FASB's conceptual framework explains the rationale for treating stock options as an expense. By relating the accounting for such compensation to the purpose of financial statements and their qualitative characteristics, the FASB can defend its positions without the bias inherent in such controversial issues. Difficulty: 3 Hard Topic: Conceptual framework―Purpose Learning Objective: 01-06 Explain the purpose of the conceptual framework. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking 135) What is the SEC and how is it involved with accounting standard-setting? Answer: The Securities and Exchange Commission is a federal agency that has the authority to set accounting standards. However, the SEC has always relied on a private-sector body, such as the current FASB, to accomplish that task. Difficulty: 1 Easy Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal

136) What is the EITF and what is its purpose? Answer: The Emerging Issues Task Force (EITF) acts as a filter for the FASB. It includes 15 individuals from public accounting and private industry along with a representative from the FASB and an SEC observer. The task force focuses on emerging issues and attempts to reach a consensus, speeding up the standard-setting process. Difficulty: 2 Medium Topic: Development of accounting and reporting standards Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 137) Accounting standard-setting has been characterized as a political process. Discuss this proposition giving an example. Answer: Changes in GAAP can have significant differential effects on companies, investors, creditors, and other interest groups. The FASB must gauge the economic consequences of a change in accounting standards. The process by which financial accounting standards are created includes public comment and sometimes hearings. Ultimately, a vote must be taken to pass a proposed change in GAAP. Accounting for stock-based compensations (options) and postretirement health care benefits are examples where accounting practices have been affected by political influences on GAAP. Difficulty: 2 Medium Topic: GAAP―Standard-setting process Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking

138) What are the key provisions of the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002? Answer: The Act requires the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for auditors and securities analysts, and requires that companies document and assess their internal controls. It also requires auditors to express an opinion on management's assessment of internal controls, and the auditors must also express their own opinion on company internal controls. Difficulty: 2 Medium Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Communication AICPA/Accessibility: BB Legal 139) What is the value of a company having financial statements audited by an independent auditor? Answer: Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations. Difficulty: 2 Medium Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 140) What provisions did the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002 make for performance of nonaudit services by an audit firm? Answer: The law makes it unlawful for the auditors of public companies to perform a variety of nonaudit services for audit clients. Prohibited services include bookkeeping, internal audit outsourcing, appraisal or valuation services, and various other consulting services. Other nonaudit services, including tax services, require preapproval by the audit committee of the company being audited. Difficulty: 2 Medium Topic: Encouraging high-quality financial reporting Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting. Bloom's: Remember AACSB: Ethics AICPA/Accessibility: BB Legal

141) Briefly describe how materiality is featured in the conceptual framework. Answer: Materiality—Information is material if it can have an effect on a decision made by a user. Thus, materiality is an aspect of relevance. If an item is not material, GAAP need not be followed. For example, if a large corporation purchased a water cooler for one of its common areas for $120, the amount could be expensed rather than recorded as an asset even though the cooler will be useful for several years. Materiality is a judgment call. Materiality is concerned with both the dollar amount of an item and/or the nature of an item. It would probably be material if Microsoft received $1,000,000 in bribes from a Chinese company for its technology. A $1,000,000 write-off of old equipment would probably be immaterial for Microsoft. Difficulty: 3 Hard Topic: Concepts―Qualitative characteristics Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking; FN Measurement 142) Give an example of a violation of the stable monetary unit assumption. How would it affect the quality of financial statement information? Answer: If a country experiences severe inflation, this would violate the assumption that dollar amounts are constantly valued. This would limit the usefulness of adding numbers in financial statements, because (for instance) costs at different times are not comparable without adjusting for changes in purchasing power. Difficulty: 2 Medium Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 143) Identify or define the following terms: periodicity, monetary unit. Answer: Periodicity—The life of a company can be divided into artificial periods to provide timely information to external users. Monetary unit—In the United States, financial statement elements should be measured in terms of the U.S. dollar. It assumes that the value of a dollar is stable over time. Difficulty: 1 Easy Topic: GAAP―Underlying assumptions Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 64 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

144) Identify or define the following term: historical cost. Answer: Historical cost—A measurement attribute under which asset and liability measurements are based on the amount given or received in an exchange transaction. Difficulty: 1 Easy Topic: Concepts―Recognition - Measurement - Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 145) How does GAAP define fair value? Answer: Fair value is defined as the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Difficulty: 2 Medium Topic: Concepts―Recognition - Measurement - Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 146) Over time, accounting standards have developed to reflect changes in the business world as well as changes in our ability to account for such changes. Using the example of marking assets and liabilities to their fair value, explain why you would expect accounting standards to change. Answer: Historically, financial accounting relied on transaction amounts (historical cost) as the fundamental measurement approach for reporting assets and liabilities. As markets have matured, it is more relevant and feasible to report some assets and liabilities at their fair values, particularly if such items have a ready market that is active. Difficulty: 2 Medium Topic: Concepts―Recognition - Measurement - Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

147) List and briefly describe the five measurement attributes used commonly in current GAAP. Answer: a. Historical cost: the amount given or received in an exchange transaction. b. Net realizable value: the net amount of cash into which an asset is expected to be converted in the ordinary course of business. c. Current cost: the cost that would be incurred to purchase or reproduce an asset. d. Present value: the sum of future cash flows discounted for the time value of money. e. Fair value: the price that would be received to sell assets or transfer liabilities in an orderly market transaction. Difficulty: 3 Hard Topic: Concepts―Recognition - Measurement - Disclosure Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 148) List and briefly describe the three levels of inputs described in the fair-value measurement hierarchy. Answer: a. Quoted market prices in active markets for identical assets or liabilities. b. Inputs other than quoted prices that can be observed for the asset or liability. These inputs include quoted prices for similar assets or liabilities in active or inactive markets and inputs that are derived principally from or corroborated by market data that can be observed. c. Inputs that cannot be observed that reflect the entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Difficulty: 3 Hard Topic: Concepts―Qualitative characteristics Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

149) Contrast the asset/liability and revenue/expense approaches to accounting standard setting. Answer: Under the revenue/expense approach, we emphasize principles for recognizing revenues and expenses, with some assets and liabilities recognized as necessary to make the balance sheet reconcile with the income statement. Much of our accounting for revenues and expenses follows this revenue/expense approach. Under the asset/liability approach, on the other hand, we first recognize and measure the assets and liabilities that exist at a balance sheet date and, secondly, recognize and measure the revenues, expenses, gains and losses needed to account for the changes in these assets and liabilities from the previous measurement date. Therefore, we should try to recognize and measure assets and liabilities appropriately, and as a result will also capture their inflows and outflows in a manner that provides relevant and representationally faithful information about revenues and expenses. Difficulty: 3 Hard Topic: Evolving GAAP Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting. Bloom's: Remember AACSB: Communication AICPA/Accessibility: BB Critical Thinking; FN Measurement 150) Contrast the role of the conceptual framework in U.S. GAAP and IFRS. Answer: The conceptual frameworks in U.S. GAAP and IFRS are very similar and are converging even more with ongoing efforts by the FASB and IASB. However, in U.S. GAAP, the conceptual framework primarily provides guidance to standard setters to help them develop high-quality standards. In IFRS the conceptual framework guides standard setting, but in addition it is supposed to provide a basis for practitioners to make accounting judgments when another IFRS standard does not apply. Also, IFRS emphasizes the overarching concept of the financial statements providing a "true and fair representation" of the company. U.S. GAAP does not include a similar requirement, but U.S. auditing standards require this consideration. Difficulty: 3 Hard Topic: International Financial Reporting Standards―IFRS Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Bloom's: Remember AACSB: Communication AICPA/Accessibility: BB Critical Thinking

Intermediate Accounting, 10e (Spiceland) Chapter 2 Review of the Accounting Process 1) Owners' equity can be expressed as assets minus liabilities. 2) Debits increase asset accounts and decrease liability accounts. 3) Balance sheet accounts are referred to as temporary accounts because their balances are always changing. 4) After an unadjusted trial balance is prepared, the next step in the accounting processing cycle is the preparation of financial statements. 5) Adjusting journal entries are recorded at the end of any period when financial statements are prepared. 6) Accruals occur when the cash flow precedes either revenue or expense recognition. 7) The adjusted trial balance contains only permanent accounts. 8) The income statement summarizes the operating activity of a company at a particular point in time. 9) The balance sheet can be considered a change or flow statement. 10) The statement of cash flows summarizes transactions that caused cash to change during a reporting period. 11) The statement of shareholders' equity discloses the changes in the temporary shareholders' equity accounts. 12) The post-closing trial balance contains only permanent accounts. 13) The closing process brings all temporary accounts to a zero balance and updates the balance in the retained earnings account. 14) A reversing entry at the beginning of a period for salaries would include a debit to salaries expense. 15) The sale of merchandise on account would be recorded in a sales journal. 16) The payment of cash to a supplier would be recorded in a purchases journal.

17) The accounting equation can be stated as: A) A + L − OE = 0. B) A − L + OE = 0. C) −A + L − OE = 0. D) A − L − OE = 0. 18) Examples of external transactions include all of the following except: A) Paying employee salaries. B) Purchasing equipment. C) Depreciating equipment. D) Collecting a receivable. 19) Examples of internal transactions include all of the following except: A) Writing off an uncollectible account. B) Recording the expiration of prepaid insurance. C) Recording unpaid salaries. D) Paying salaries to company employees. 20) XYZ Corporation receives $100,000 from investors for issuing them shares of its stock. XYZ's journal entry to record this transaction would include a: A) Debit to investments. B) Credit to retained earnings. C) Credit to common stock. D) Credit to revenue. 21) Incurring an expense for advertising on account would be recorded by: A) Debiting liabilities. B) Crediting assets. C) Debiting an expense. D) Debiting assets. 22) A sale on account would be recorded by: A) Debiting revenue. B) Crediting assets. C) Crediting liabilities. D) Debiting assets.

23) The entry to record a sale on account would include: A) Debit Sales revenue No Cash Yes

Credit Yes No

B) Accounts receivable Sales revenue

Debit Yes Yes

Credit No No

Debit No Yes

Credit No No

Debit Yes No

Credit No Yes

C) Cash Accounts receivable D) Cash Sales revenue

24) Super Corporation receives $4,000,000 from investors when issuing them shares of its stock. Super's entry to record this transaction would include which of the following? A) Debit Credit Sales revenue No Yes Cash Yes No B) Cash Investments

Debit Yes No

Credit No Yes

Debit Yes No

Credit No Yes

Debit Yes No

Credit No Yes

C) Cash Common stock D) Cash Retained earnings

27) Boing Aircraft sold a four-passenger airplane for $2,800,000, receiving a $500,000 down payment and a 7% note for the balance. The entry to record this sale would include which of the following? A) Debit Credit Cash Yes No Cash discount Yes No B) Notes receivable Sales revenue

Debit No Yes

Credit Yes No

Debit Yes Yes

Credit No No

Debit Yes No

Credit No Yes

C) Cash Notes receivable D) Cash Cash discount

28) Somerset Leasing received $12,000 for 12 months' rent in advance. How should Somerset record this transaction? A) Prepaid rent 12,000 Rent expense 12,000 B) Cash

12,000 Deferred rent revenue

12,000

C) Interest expense Interest payable

12,000

D) Salaries expense Salaries payable

12,000

29) Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of merchandise, costing $620, and sold on account for $960? A) Inventory 620 Accounts receivable 620 Sales 960 Sales revenue 960 B) Accounts receivable Sales revenue Cost of goods sold Inventory C) Inventory Gain on sale Sales revenue D) Accounts receivable Sales revenue Gain on sale

960 960 620 620

620 340 960

960 620 340

30) Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase? A) Inventory 2,000 Accounts payable 2,000 B) Cost of goods sold Deferred sales revenue Sales in advance

2,000 1,000

C) Cost of goods sold Inventory payable

2,000

D) Cost of goods sold Profit Sales payable

2,000 1,000

3,000

2,000

3,000

31) Which of the following accounts has a balance whereby debits normally exceed credits? A) Accounts payable. B) Accrued salaries. C) Accumulated depreciation. D) Advertising expense. 32) An example of a contra account is: A) Depreciation expense. B) Accounts receivable. C) Sales revenue. D) Accumulated depreciation. 33) Making insurance payments in advance is an example of: A) An accrued receivable transaction. B) An accrued liability transaction. C) A deferred revenue transaction. D) A prepaid expense transaction. 34) Recording revenue before it is collected is an example of: A) A prepaid expense transaction. B) A deferred revenue transaction. C) An accrued liability transaction. D) An accrued receivable transaction. 7 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

35) When a magazine company collects cash for selling a subscription, it is an example of: A) An accrued liability transaction. B) An accrued receivable transaction. C) A prepaid expense transaction. D) A deferred revenue transaction. 36) On December 31, 2020, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2021, $86,000 was paid for insurance. At the end of 2021, after adjusting entries were recorded, the balance in the prepaid insurance account was $42,000. Insurance expense for 2021 was: A) $6,400. B) $134,400. C) $86,000. D) $92,400. 37) Adjusting entries are needed primarily for: A) Cash basis accounting. B) Accrual accounting. C) Current value accounting. D) Manual accounting systems. 38) Prepayments occur when: A) Cash flow precedes expense recognition. B) Sales are delayed pending credit approval. C) Customers are unable to pay the full amount due when goods are delivered. D) Manufactured goods await quality control inspections. 39) Accruals occur when cash flows: A) Occur before expense recognition. B) Occur after revenue or expense recognition. C) Are uncertain. D) May be substituted for goods or services. 40) On December 31, 2021, the end of Larry's Used Cars' first year of operations, the accounts receivable was $53,600. The company estimates that $1,200 of the year-end receivables will not be collected. Accounts receivable in the 2021 balance sheet will be valued at: A) $53,600. B) $54,800. C) $52,400. D) $1,200.

41) Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies the Cal Farms purchased during the year? A) $1,600,000. B) $1,800,000. C) $2,200,000. D) $2,400,000. 42) Which of the following is not an adjusting entry? A) Prepaid rent Rent expense B) Cash Deferred sales revenue C) Interest expense Interest payable D) Salaries expense Salaries payable

43) The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes: A) A debit to a liability. B) A debit to an asset. C) A credit to a liability. D) A credit to an asset. 44) Which of the following accounts has a balance whereby credits normally exceed debits? A) Salaries expense. B) Interest payable. C) Land. D) Prepaid rent. 45) When a tenant makes an end-of-period adjusting entry credit to the "Prepaid rent" account: A) (S)he usually debits cash. B) (S)he usually debits an expense account. C) (S)he debits a liability account. D) (S)he credits an owners' equity account. 9 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

46) When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to: A) Accounts payable. B) Supplies. C) Cash. D) Retained earnings. 47) The adjusting entry required to record accrued expenses includes: A) A credit to cash. B) A debit to an asset. C) A credit to an asset. D) A credit to liability. 48) Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year? A) $300,000. B) $280,000. C) $260,000. D) $240,000. 49) Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,200 premium to Insurance expense. At its December 31, 2021, year-end, Yummy Foods would record which of the following adjusting entries? A) Insurance expense 875 Prepaid insurance 875 B) Prepaid insurance Insurance expense

875

C) Insurance expense Prepaid insurance Insurance payable

875 3,325

D) Prepaid insurance Insurance expense

3,325

875

4,200

3,325

50) Tummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,200 premium to Prepaid insurance. At its December 31, 2021, year-end, Tummy Foods would record which of the following adjusting entries? A) Insurance expense 875 Prepaid insurance 875 B) Prepaid insurance Insurance expense

875

C) Insurance expense Prepaid insurance Insurance payable

875 3,325

D) Prepaid insurance Insurance expense

3,325

875

4,200

3,325

51) ILP Services purchased a three-year fire insurance policy on September 1, 2021, and charged the $72,000 premium to Prepaid insurance. At its December 31, 2021, year-end, ILP Services would record an adjusting entry that includes which of the following? A) Debit Credit Insurance expense Yes No Prepaid insurance No Yes B) Insurance expense Prepaid insurance

Debit No Yes

Credit Yes No

Debit Yes Yes

Credit No No

Debit No No

Credit Yes Yes

C) Insurance expense Prepaid insurance D) Insurance expense Prepaid insurance

52) The employees of Persoff Publications work Monday through Friday. Every other Friday the company issues payroll checks totaling $640,000. The current pay period ends on Friday, July 3. Persoff Publications is now preparing financial statements for the fiscal year ended June 30. What is the adjusting entry to record accrued salaries at the end of June? A) Debit Credit Prepaid salaries No Yes Salaries payable Yes No B) Salaries expense Prepaid salaries Salaries payable

Debit Yes Yes No

Credit No No Yes

Debit Yes No

Credit No Yes

Debit Yes No

Credit No Yes

C) Prepaid salaries Salaries payable D) Salaries expense Salaries payable

53) The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, July 3. Neat Clothes is now preparing quarterly financial statements for the three months ended June 30. What is the adjusting entry to record accrued salaries at the end of June? A) Salaries expense 22,400 Prepaid salaries 9,600 Salaries payable 32,000 B) Salaries expense Salaries payable

6,400

C) Prepaid salaries Salaries payable

9,600

D) Salaries expense Salaries payable

22,400

6,400

9,600

22,400

54) On September 1, 2021, Fortune Magazine sold 600 one-year subscriptions for $81 each. The total amount received was credited to Deferred subscription revenue. What is the required adjusting entry at December 31, 2021? A) Deferred subscription revenue 48,600 Subscription revenue 16,200 Prepaid subscriptions 32,400 B) Deferred subscription revenue Subscription revenue

16,200

C) Deferred subscription revenue Subscription payable

16,200

D) Deferred subscription revenue Subscription revenue

32,400

16,200

32,400

55) Mama's Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2021, with principal and interest due on October 31, 2022. The company's fiscal year ends June 30, 2021. What adjusting entry is necessary on June 30, 2021? A) No entry. B) Interest expense 240 Interest payable 240 C) Interest expense Interest payable

120

D) Prepaid interest Interest payable

120

56) On September 15, 2021, Oliver's Mortuary received a $6,000, nine-month note bearing interest at an annual rate of 10% from the estate of Jay Hendrix for services rendered. Oliver's has a December 31 year-end. What adjusting entry will the company record on December 31, 2021? A) Interest receivable 175 Interest revenue 175 B) Interest receivable Interest revenue

230

C) Interest receivable Notes receivable

175

D) Interest receivable Interest revenue Cash

230

175

600 175 425

57) The debits and credits from the journal entries are posted to the general ledger accounts only for: A) transactions occurring during the reporting period. B) closing entries. C) adjusting entries and closing entries. D) all journal entries. 58) Eve's Apples opened its business on January 1, 2021, and paid for two insurance policies effective that date. The policy for equipment damage was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2021? A) $9,000. B) $18,000. C) $30,000. D) $48,000. 59) Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Deferred premiums revenue account increased from $6 million to $8 million dollars during the year. What is Fink's revenue from insurance premiums recognized for the current year? A) $10,000,000. B) $16,000,000. C) $18,000,000. D) $20,000,000. 60) On November 1, 2021, Tim's Toys borrows $30,000,000 at 9% to finance the holiday sales season. The note is for a six-month term and both principal and interest are payable at maturity. What is the balance of interest payable for the loan as of December 31, 2021? A) $112,500. B) $225,000. C) $450,000. D) $1,350,000. 61) An economic resource of an entity is: A) A revenue. B) An asset. C) A liability. D) A contra asset until used. 62) Cost of goods sold is: A) An asset account. B) A revenue account. C) An expense account. D) A permanent equity account.

63) The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year: A) Plus revenues, minus liabilities. B) Plus accruals, minus deferrals. C) Plus net income, minus dividends. D) Plus assets, minus liabilities. 64) The purpose of "posting" journal entries is A) provide a chronological record of all economic events affecting the firm. B) ensure that all accounts are up to date prior to preparing financial statements. C) ensure that debits equal credits in the trial balance. D) reflect the information in journal entries in ledger accounts. 65) Dave's Duds reported cost of goods sold of $2,000,000 this year. The inventory account increased by $200,000 during the year to an ending balance of $400,000. What was the cost of merchandise that Dave's purchased during the year? A) $1,600,000. B) $1,800,000. C) $2,200,000. D) $2,400,000. 66) Permanent accounts do not include: A) Interest expense. B) Salaries payable. C) Prepaid rent. D) Deferred sales revenue. 67) Permanent accounts do not include: A) Cost of goods sold. B) Inventory. C) Current liabilities. D) Accumulated depreciation. 68) The purpose of closing entries is to transfer: A) Accounts receivable to retained earnings when an account is fully paid. B) Balances in temporary accounts to a permanent account. C) Inventory to cost of goods sold when merchandise is sold. D) Assets and liabilities when operations are discontinued. 69) Temporary accounts do not include: A) Salaries payable. B) Depreciation expense. C) Supplies expense. D) Cost of goods sold.

70) When converting an income statement from a cash basis to an accrual basis, expenses: A) Exceed cash payments to suppliers. B) Equal cash payments to suppliers. C) Are less than cash payments to suppliers. D) May exceed or be less than cash payments to suppliers. 71) When the amount of revenue collected in advance decreases during an accounting period: A) Accrual-basis revenues exceed cash collections from customers. B) Accrual-basis net income exceeds cash-basis net income. C) Accrual-basis revenues are less than cash collections from customers. D) Accrual-basis net income is less than cash-basis net income. 72) When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect? A) An adjustment for depreciation reduces net income. B) A decrease in salaries payable decreases net income. C) A reduction in prepaid expenses decreases net income. D) An increase in accrued payables decreases net income. 73) Molly's Auto Detailers maintains its records on the cash basis. During 2021, Molly's collected $72,000 from customers and paid $21,000 in expenses. Depreciation expense of $5,000 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $4,000, prepaid expenses decreased $2,000, and accrued liabilities decreased $1,000. Molly's accrual-basis net income was: A) $38,000. B) $54,000. C) $49,000. D) $42,000. 74) Pat's Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat's collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000, and accrued liabilities increased $2,500. Pat's accrual-basis net income was: A) $18,000. B) $34,000. C) $23,000. D) $29,000. 75) The Hamada Company sales for 2021 totaled $150,000 and purchases totaled $95,000. Selected January 1, 2021, balances were: accounts receivable, $18,000; inventory, $14,000; and accounts payable, $12,000. December 31, 2021, balances were: accounts receivable, $16,000; inventory, $15,000; and accounts payable, $13,000. Net cash flows from these activities were: A) $45,000. B) $55,000. C) $58,000. D) $74,000. 18 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

a. b. c. d.

Accounts Receivable Yes No Yes No

Accrued Liabilities No Yes Yes No

A) Option a B) Option b C) Option c D) Option d 79) On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $2,000,000. The company provided $6,400,000 of services in June and received full payment in July. Royal also incurred expenses of $3,000,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $1,000,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting?

a. b. c. d.

$ $ $ $

Cash Basis 3,400,000 5,400,000 6,400,000 6,400,000

Accrual Basis $ 3,400,000 $ 2,400,000 $ 3,400,000 $ 2,400,000

A) Option a B) Option b C) Option c D) Option d 19 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

80) When Castle Corporation pays insurance premiums, the transaction is recorded as a debit to prepaid insurance. Additional information for the year ended December 31 is as follows: Prepaid insurance at January 1 Insurance expense recognized during the year Prepaid insurance at December 31

52,500 218,750 61,250

What was the total amount of cash paid by Castle for insurance premiums during the year? A) $218,750 B) $166,250 C) $210,000 D) $227,500 81) The accounting processing cycle: A) Is a three-wheeled vehicle used to deliver audit papers to clients. B) deals only with internal transactions. C) Is the process of bringing the company's financial information up to date before preparing the financial statements. D) Is the process used to identify, analyze, record, and summarize transactions and prepare financial statements. 82) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM 1. Prepayments 2. Post-closing trial balance 3. Accruals

4. Unadjusted trial balance 5. Adjusted trial balance

PHRASE Assets or liabilities created when recognition precedes cash flows. Assets or liabilities created when cash flows precede recognition. A list of accounts and balances containing the source data for preparation of financial statements. A list of accounts and their balances prepared before the effects of internal transactions are recorded. A list of only permanent accounts and their balances prepared to show that the accounting equation is in balance.

Number for term that matches the phrase. ____ ____ ____

____

83) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM 1. Balance sheet 2. Adjusting entries 3. Expenses 4. Statement of cash flows 5. Post-closing trial balance

PHRASE Reports operating, investing, and financing activities. Records internal transactions not previously reported. Portrays financial position at a point in time. Represents outflows of resources incurred to generate revenues. The last step in the accounting processing cycle.

Number for term that matches the phrase. ____ ____ ____ ____ ____

84) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

1. Periodic system

Recorded when there are dispositions of assets for consideration in excess of book values. Recorded when there are dispositions of assets for consideration less than book values. Requires adjusting entries to update the inventory account. Requires entries to cost of goods sold account when merchandise is sold. When cash flow precedes either expense or revenue recognition.

2. Prepayments 3. Perpetual system 4. Losses 5. Gains

Number for term that matches the phrase. ____

____ ____ ____ ____

85) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

1. General ledger 2. Credit

Refers to the right side of an account. Asset and expense accounts normally have this type of balance. Used to record any type of transaction in chronological order. Contains all the accounts of an entity. Used to reset temporary accounts to a zero balance.

3. General journal 4. Debit 5. Closing entries

Number for term that matches the phrase. ____ ____ ____ ____ ____

86) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

1. Liabilities Transfer balances from journals to ledgers. 2. Retained earnings Record chronologically the effects of transactions in debit/credit form. 3. Journalize Refers to nonowner claims against the assets of a firm. 4. Post Represents the cumulative amount of net income, less distributions to shareholders. 5. Special journals Used to record repetitive types of transactions

Number for term that matches the phrase. ____ ____ ____ ____ ____

87) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

Number for term that matches the phrase.

1. Source documents Refers to inflows of assets from the sale of goods and services. 2. Revenues Used to identify external transactions 3. Transaction Used to record repetitive types of transactions. analysis 4. Deferred revenues Liabilities created by a customer's prepayment. 5. Special journals Determines the effects of an event in terms of the accounting equation.

____ ____ ____ ____ ____

88) Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.

TERM

PHRASE

1. Unadjusted trial balance 2. Accrued receivables 3. Deferred revenues

Refers to inflows of assets from the sale of goods and services. Records the effects of internal transactions. Cash received from a customer in advance of providing a good or service. Last step in the accounting processing cycle. Changes in the retained earnings component of shareholders' equity. Collection of storage areas, called accounts. Asset recorded when an expense is paid for in advance. Revenue recognized before cash is received. A list of the general ledger accounts and their balances. Expenses incurred but not yet paid.

4. Temporary accounts 5. Accrued liabilities 6. Adjusting entries 7. Prepaid expense 8. General ledger 9. Revenues 10. Post-closing trial balance

Number for term that matches the phrase. ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Use this information to answer the following questions: The account titles to be responded to are provided in no particular order. Assume that all accounts have normal balances according to whether the account is increased by a debit or increased by a credit. Required: In column A, indicate whether a debit will: 1. Increase the account balance, or 2. Decrease the account balance. In column B, classify each account according to the following scheme. For contra accounts, indicate the classification of the account to which it relates. 1. A current asset in the balance sheet. 2. A noncurrent asset in the balance sheet. 3. A current liability in the balance sheet. 4. A long-term liability in the balance sheet. 5. A permanent equity account in the balance sheet. 6. A revenue account in the income statement. 7. An expense account shown in the income statement. 8. Account does not appear in either the balance sheet or the income statement.

EXAMPLE: Advertising expense

A Effect of a debit on account

B Classification

89) Office equipment 90) Notes payable (short-term) 91) Cost of goods sold 92) Accounts receivable 93) Inventory 94) Deferred rent revenue 95) Salaries payable 96) Retained earnings 24 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

97) Interest revenue 98) Supplies expense 99) Prepaid rent 100) Common stock

Use this information to answer the following questions: 1100 1120 1130 1140 1145 1150 1160 1200 1250 1260 1320 1325 2110 2120 2130 2140 2150 2160

Cash Short-term investments Notes receivable Accounts receivable Loan receivable Interest receivable Other accrued receivables Inventory Supplies Prepaid rent Buildings and equipment (B&E) Accumulated depreciation-B&E Notes payable (short-term) Interest payable Accounts payable Deferred service revenue Salaries payable Dividends payable

2170 2180 2200 3100 3200 5000 5300 6000 6200 6210 6220 6230 6240 6250 6260 6270 6400 6999

Property taxes payable Rent payable Notes payable (long-term) Common stock Retained earnings Sales revenue Interest revenue Cost of goods sold Advertising expense Miscellaneous expense Depreciation expense Insurance expense Property tax expense Rent expense Supplies expense Salaries expense Interest expense Dividends

Required: Using the chart of accounts provided, indicate by account number the account or accounts that would be debited and credited in the following transactions. Also enter the number 1, 2, or 3 to indicate the type of transaction as: (1) an external transaction, (2) an internal transaction recorded as an adjusting journal entry, or (3) a closing entry. The company uses a perpetual inventory system. All prepayments are initially recorded in permanent accounts. TRANSACTION

Account(s) debited

Account(s) credited

Transaction type

EXAMPLE: Sold $110,000,000 in common stock for cash.

1100

3100

101) Purchased building and equipment for $10,000,000, paying 20% cash and issuing a 30-year note for the balance. 102) Invested idle cash in short-term money market funds. 103) Purchased inventory on account. 104) Sold inventory on account. 105) Sold merchandise to a customer in exchange for a promissory note. 106) Accrued the interest recognized but not collected on notes receivable. 26 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

107) Collected a note receivable at maturity, including the interest that had already been accrued. 108) Collected cash on account from customers. 109) Sold inventory for cash. 110) Received payment for services to be performed next year. 111) Salaries have been recognized but are unpaid at the end of an accounting period. 112) Closed the dividends account. 113) Accrued property taxes were paid. 114) Declared cash dividends on common stock that will be paid in the next month. 115) Paid rent for the next three months. 116) Rite Shoes was involved in the transactions described below. Required: Prepare the appropriate journal entry for each transaction. If an entry is not required, state "No Entry." 1. Purchased $8,200 of inventory on account. 2. Paid weekly salaries, $920. 3. Recorded sales for the first week: Cash: $7,100; On account: $5,300. 4. Paid for inventory purchased in event (1). 5. Placed an order for $6,200 of inventory. 117) Prepare journal entries to record the following transactions of Daisy King Ice Cream Company. If an entry is not required, state "No Entry." 1. Started business by issuing 10,000 shares of common stock for $20,000. 2. Leased a building for three years at $500 per month and paid six months' rent in advance. 3. Purchased equipment for $5,400, signing a two-year, 10% note. 4. Purchased $1,800 of supplies on account. 5. Recorded cash sales of $800 for the first week. 6. Paid weekly salaries, $320. 7. Paid for supplies purchased in item (5). 8. Recorded depreciation on equipment, $50.

Retained earnings, January 1 Net income Dividends declared and paid Common stock

2020 $53,000 37,000 15,000 70,000

2021 ? 42,000 18,000 ?

Kay issued 2,000 shares of additional common stock in 2021 for $20,000. There were no other shareholder transactions. Required: Prepare a statement of shareholders' equity for D. Kay Dental Laboratories for the year ended December 31, 2021.

120) The Yankel Corporation's controller prepares adjusting entries only at the end of the fiscal year. The following adjusting entries were prepared on December 31, 2021:

Interest expense Interest payable

Debit 1,800

Credit 1,800

Insurance expense Prepaid insurance

60,000

Interest receivable Interest revenue

3,000

60,000

3,000

Additional information: 1. The company borrowed $30,000 on June 30, 2021. Principal and interest are due on June 30, 2022. This note is the company's only interest-bearing debt. 2. Insurance for the year on the company's office buildings is $90,000. The insurance is paid in advance. 3. On August 31, 2021, Yankel lent money to a customer. The customer signed a note with principal and interest at 9% due in one year. Required: Determine the following: 1. What is the interest rate on the company's note payable? 2. The 2021 insurance payment was made at the beginning of which month? 3. How much did Yankel lend its customer on August 31?

Use this information to answer the following questions: Suppose that Laramie Company's adjusted trial balance ignored the following information. For each item of information, indicate what effects, if any, these omissions would have on the stated components of Laramie Company's 2021 Income Statement and 12/31/2021 Balance Sheet. Assume no income taxes. Use the following code for your answers and be sure to include the dollar amounts of the effects next to the letter O or U: N = No Effect O = Overstated U = Understated 121) Additional Information $2,000 interest on a loan was not yet paid or recorded

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Additional 12/31/2021 Information Assets The estimated uncollectible accounts receivable is now zero and should be $25,000.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

122)

123) Additional Information $10,000 of the paid and recorded rent expense pertains to the year 2022.

12/31/2021 Assets

124) Additional Information $20,000 in depreciation on some equipment was still unrecorded.

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Additional 12/31/2021 Information Assets $4,000 in cash dividends declared and paid in December 2021 were unrecorded.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

125)

Use this information to answer the following questions: You are reviewing O'Brian Co.'s adjusted trial balance for the year ended 12/31/2021. You notice several omissions and incorrect items during your review, some of which are noted below. For each one, you are to determine what effect, if any, these items would have on the stated components of O'Brian Co.'s 2021 Income Statement and 12/31/2021 Balance Sheet if they are not corrected or updated. Assume no income taxes. Use the following code for your answers. Don't include dollar amounts. N = No Effect O = Overstated U = Understated 126) Additional 12/31/2021 Information Assets Uncollectible accounts of $7,000, as a percentage of sales, are estimated at the end of the year. The entry has not been recorded.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

127) Additional Information The journal entry for depreciation on equipment for 2021 was recorded for $48,000. The amount should have been $66,000.

128) Additional Information Cash dividends declared and paid on December 15, 2021, were not recorded.

129) Additional 12/31/2021 Information Assets $10,000 of the rent revenue collected and recorded as revenue this year pertains to 2022.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Additional 12/31/2021 Information Assets Supplies purchased during the year for $1,000 cash were recorded by a debit to Supplies Expense and a credit to Cash. Only $200 of supplies remain at the end of the year, but no further entries have been recorded.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

130) Additional Information Interest recognized during the year on a note receivable was not yet collected or recorded.

131)

Use this information to answer the following questions: The adjusted trial balance for China Tea Company at December 31, 2021, is presented below:

Cash Accounts receivable Prepaid rent Inventory Equipment Accumulated depreciation–equipment Accounts payable Notes payable–due in three months Salaries payable Interest payable Common stock Retained earnings Dividends Sales revenue Costs of goods sold Salaries expense Rent expense Depreciation expense Interest expense Advertising expense Totals

Debit 10,500 150,000 5,000 25,000 300,000

Credit

125,000 30,000 30,000 4,000 9,000 200,000 50,000 8,000 400,000 180,000 120,000 15,000 30,000 2,000 2,500 848,000

_______ 848,000

132) Prepare the closing entries for China Tea Company for the year ended December 31, 2021. 133) Prepare an income statement for China Tea Company for the year ended December 31, 2021. 134) Prepare a classified balance sheet for China Tea Company as of December 31, 2021.

Use this information to answer the following questions: The following information, based on the 12/31/2021 Annual Report to Shareholders of Krafty Foods ($ in millions): Accounts payable Accounts receivable (net) Accrued liabilities Cash and cash equivalents Cost of goods sold Other current payables Current portion of long-term debt Other long-term liabilities Retained earnings as of 12/31/2021 Goodwill and other intangible assets (net) Salaries expense Interest and other debt expense, net Inventories Long-term debt Long-term notes payable Marketing, general and administration expenses Operating revenues Other current assets Other noncurrent assets Other shareholders' equity Common stock Property, plant and equipment (net) Short-term borrowings

1,897 3,131 4,105 162 17,531 1,652 540 10,311 2,391 35,957 1,565 1,437 3,026 8,134 5,000 11,460 33,875 687 3,726 (2,568) 23,655 9,109 681

135) Based on the information presented above, prepare the Income Statement for Krafty Foods for the year ended December 31, 2021. 136) Based on the information presented above, prepare the 12/31/2021 Balance Sheet for Krafty Foods.

Use this information to answer the following questions: The December 31, 2021 (pre-closing) adjusted trial balance for Kline Enterprises was as follows: Account Title Accounts payable Accounts receivable Accumulated depreciation – equipment Common stock Cash Cost of goods sold Depreciation expense Equipment Interest expense Inventory Note payable (due in six months) Rent expense Retained earnings Salaries payable Sales revenue Salaries expense TOTALS

Debits

Credits 90,000

170,000 260,000 490,000 26,000 480,000 60,000 700,000 4,000 150,000 60,000 30,000 62,000 8,000 770,000 120,000 1,740,000

1,740,000

137) Assuming no income taxes, compute the following, and place your answer in the space provided: Kline's 2021 net income (or loss). 138) Assuming no income taxes, compute the following, and place your answer in the space provided: Kline's 12/31/2021 total current assets. 139) Assuming no income taxes, compute the following, and place your answer in the space provided. Kline's 12/31/2021 total current liabilities: 140) Assuming no income taxes, compute the following, and place your answer in the space provided: Kline's 12/31/2021 total shareholders' equity.

141) Presented below is income statement and dividend information of the Nebraska Corporation for the year ended December 31, 2021. Sales revenue Salaries expense Dividend revenue Miscellaneous expense Loss on sale of investments Dividends

$620,000 90,000 3,000 12,000 8,000 5,000

Cost of goods sold Insurance expense Depreciation expense Administrative expense Rent expense

$355,000 20,000 18,000 35,000 10,000

Required: Prepare the necessary closing entries at December 31, 2021.

142) Raintree Corporation maintains its records on a cash basis. At the end of each year the company's accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2021: Cash receipts: From customers Interest on note Issue of common stock Total cash receipts

$450,000 3,000 50,000 $503,000

Cash disbursements: Purchase of merchandise Annual insurance payment Payment of salaries Dividends paid to shareholders Annual rent payment Total cash disbursements

$220,000 9,000 180,000 6,000 12,000 $427,000

Selected balance sheet information:

Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Interest receivable Note receivable Equipment Accumulated depreciation–equipment Accounts payable (for merchandise) Salaries payable Common stock Dividends

12/31/2020 12/31/2021 $25,000 $101,000 42,000 70,000 60,000 82,000 2,000 ? 7,000 ? 1,500 ? 50,000 50,000 150,000 150,000 (40,000) (55,000) 50,000 62,000 20,000 28,000 200,000 250,000 0 6,000

Additional information: 1. On June 30, 2020, Raintree lent a customer $50,000. Interest at 6% is payable annually on each June 30. Principal is due in 2024. 2. The annual insurance payment is made in advance on March 31. 3. Annual rent on the company's facilities is paid in advance on September 30.

Required: 1. Prepare an accrual basis income statement for 2021 (ignore income taxes). 2. Determine the following balance sheet amounts on December 31, 2021: a. Interest receivable b. Prepaid insurance c. Prepaid rent 143) Silicon Chip Company's fiscal year-end is December 31. At the end of 2021, it owed employees $22,000 in salaries that will be paid on January 7, 2022. Required: 1. Prepare an adjusting entry to record accrued salaries, a reversing entry on January 1, 2022, and an entry to record the payment of salaries on January 7, 2022. 2. Prepare journal entries to record the accrued salaries on December 31, 2021 and the payment of salaries on January 7, 2022, assuming a reversing entry is not recorded. 144) Describe the difference between external events and internal events, and provide two examples of each. 145) Describe what is meant by deferred revenue and provide two examples. 146) Describe what is meant by prepaid expenses and provide two examples. 147) What is an accrued liability? 148) What is the difference between permanent accounts and temporary accounts, and why does an accounting system have both types of accounts? 149) What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category. 150) What is the purpose of the closing process?

151) Claymore Corporation maintains its book on a cash basis. During 2021, the company collected $825,000 in fees from its clients and paid $512,000 in expenses. You are able to determine the following information about accounts receivable, supplies, prepaid rent, salaries payable, and interest payable:

Accounts receivable Supplies Prepaid rent Salaries payable Interest payable

January 1, 2021 December 31, 2021 $110,000 $120,000 15,000 18,000 12,000 11,000 16,500 14,200 4,000 5,500

In addition, 2021 depreciation expense on office equipment is $55,000. Required: Determine accrual-basis net income for 2021. 152) The accounting system of Carlton and Sons consists of a general journal (GJ), a cash receipts journal (CR), a cash disbursements journal (CD), a sales journal (SJ), and a purchases journal (PJ). For each of the following, indicate which journal should be used to record the transaction. Transaction 1. Received interest on a loan. 2. Received cash for services to be provided next month. 3. Purchased equipment for cash. 4. Purchased merchandise on account. 5. Sold merchandise on credit (the sale only, not the cost of the merchandise). 6. Sold merchandise for cash (the sale only, not the cost of the merchandise). 7. Paid advertising bill. 8. Recorded accrued salaries payable. 9. Paid bill for utilities usage. 10. Recorded depreciation expense. 11. Sold equipment for cash. 12. Collected cash from customers on account. 13. Paid employee salaries. 14. Paid interest on a loan.

Journal ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

Intermediate Accounting, 10e (Spiceland) Chapter 2 Review of the Accounting Process 1) Owners' equity can be expressed as assets minus liabilities. Answer: TRUE Difficulty: 1 Easy Topic: Accounting equation Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 2) Debits increase asset accounts and decrease liability accounts. Answer: TRUE Difficulty: 1 Easy Topic: Account relationships and records Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 3) Balance sheet accounts are referred to as temporary accounts because their balances are always changing. Answer: FALSE Difficulty: 1 Easy Topic: Account relationships and records Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

4) After an unadjusted trial balance is prepared, the next step in the accounting processing cycle is the preparation of financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Accounting processing cycle steps Learning Objective: 02-02 Describe the steps in the accounting processing cycle. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 5) Adjusting journal entries are recorded at the end of any period when financial statements are prepared. Answer: TRUE Difficulty: 1 Easy Topic: Accounting processing cycle steps Learning Objective: 02-02 Describe the steps in the accounting processing cycle. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 6) Accruals occur when the cash flow precedes either revenue or expense recognition. Answer: FALSE Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 7) The adjusted trial balance contains only permanent accounts. Answer: FALSE Difficulty: 1 Easy Topic: Trial balance―Adjusted Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

8) The income statement summarizes the operating activity of a company at a particular point in time. Answer: FALSE Difficulty: 1 Easy Topic: Financial statement―Income Statement Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 9) The balance sheet can be considered a change or flow statement. Answer: FALSE Difficulty: 1 Easy Topic: Financial statement―Balance sheet Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 10) The statement of cash flows summarizes transactions that caused cash to change during a reporting period. Answer: TRUE Difficulty: 1 Easy Topic: Financial statement―Cash flow Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 11) The statement of shareholders' equity discloses the changes in the temporary shareholders' equity accounts. Answer: FALSE Difficulty: 2 Medium Topic: Financial statement―Shareholders equity Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

12) The post-closing trial balance contains only permanent accounts. Answer: TRUE Difficulty: 1 Easy Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 13) The closing process brings all temporary accounts to a zero balance and updates the balance in the retained earnings account. Answer: TRUE Difficulty: 1 Easy Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 14) A reversing entry at the beginning of a period for salaries would include a debit to salaries expense. Answer: FALSE Difficulty: 2 Medium Topic: Reversing entries Learning Objective: Appendix 2B Reversing Entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 15) The sale of merchandise on account would be recorded in a sales journal. Answer: TRUE Difficulty: 1 Easy Topic: Subsidiary ledgers and Special journals Learning Objective: Appendix 2C Subsidiary Ledgers and Special Journals. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

16) The payment of cash to a supplier would be recorded in a purchases journal. Answer: FALSE Difficulty: 1 Easy Topic: Subsidiary ledgers and Special journals Learning Objective: Appendix 2C Subsidiary Ledgers and Special Journals. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 17) The accounting equation can be stated as: A) A + L − OE = 0. B) A − L + OE = 0. C) −A + L − OE = 0. D) A − L − OE = 0. Answer: D Difficulty: 2 Medium Topic: Accounting equation Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 18) Examples of external transactions include all of the following except: A) Paying employee salaries. B) Purchasing equipment. C) Depreciating equipment. D) Collecting a receivable. Answer: C Difficulty: 2 Medium Topic: Account relationships and records; Analyze transaction-Record journal entry Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-03 Analyze and record transactions using journal entries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

19) Examples of internal transactions include all of the following except: A) Writing off an uncollectible account. B) Recording the expiration of prepaid insurance. C) Recording unpaid salaries. D) Paying salaries to company employees. Answer: D Difficulty: 2 Medium Topic: Account relationships and records; Analyze updating-Record adjusting entry Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 20) XYZ Corporation receives $100,000 from investors for issuing them shares of its stock. XYZ's journal entry to record this transaction would include a: A) Debit to investments. B) Credit to retained earnings. C) Credit to common stock. D) Credit to revenue. Answer: C Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 21) Incurring an expense for advertising on account would be recorded by: A) Debiting liabilities. B) Crediting assets. C) Debiting an expense. D) Debiting assets. Answer: C Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

22) A sale on account would be recorded by: A) Debiting revenue. B) Crediting assets. C) Crediting liabilities. D) Debiting assets. Answer: D Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

23) The entry to record a sale on account would include: A) Debit Sales revenue No Cash Yes

Credit Yes No

B) Accounts receivable Sales revenue

Debit Yes Yes

Credit No No

Debit No Yes

Credit No No

Debit Yes No

Credit No Yes

C) Cash Accounts receivable D) Cash Sales revenue

Answer: C Explanation: Accounts receivable Sales revenue

xxx xxx

Difficulty: 3 Hard Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

Debit Yes No

Credit No Yes

Debit Yes No

Credit No Yes

Debit Yes No

Credit No Yes

C) Cash Common stock D) Cash Retained earnings

Answer: C Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

25) Mary Parker Co. invested $15,000 in ABC Corporation and received common stock in exchange. Mary Parker Co.'s journal entry to record this transaction would include a: A) Debit to investments. B) Credit to retained earnings. C) Credit to common stock. D) Debit to expense. Answer: A Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 26) Hughes Aircraft sold a four-passenger airplane for $980,000, receiving a 12% note receivable. The journal entry to record this sale would include a: A) Credit to cash. B) Credit to interest revenue. C) Debit to notes receivable. D) Credit to notes receivable. Answer: C Difficulty: 3 Hard Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

Debit No Yes

Credit Yes No

Debit Yes Yes

Credit No No

Debit Yes No

Credit No Yes

C) Cash Notes receivable D) Cash Cash discount

Answer: C Explanation: Cash Notes receivable Sales revenue

500,000 2,300,000 2,800,000

28) Somerset Leasing received $12,000 for 12 months' rent in advance. How should Somerset record this transaction? A) Prepaid rent 12,000 Rent expense 12,000 B) Cash Deferred rent revenue

12,000

C) Interest expense Interest payable

12,000

D) Salaries expense Salaries payable

12,000

Answer: B Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

960 960 620 620

620 340 960

960 620 340

Answer: B Difficulty: 3 Hard Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

2,000 1,000

C) Cost of goods sold Inventory payable

2,000

D) Cost of goods sold Profit Sales payable

2,000 1,000

3,000

2,000

3,000

Answer: A Difficulty: 3 Hard Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

31) Which of the following accounts has a balance whereby debits normally exceed credits? A) Accounts payable. B) Accrued salaries. C) Accumulated depreciation. D) Advertising expense. Answer: D Difficulty: 1 Easy Topic: Account relationships and records; Determine account balance-Analyze entries Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 0204 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 32) An example of a contra account is: A) Depreciation expense. B) Accounts receivable. C) Sales revenue. D) Accumulated depreciation. Answer: D Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 33) Making insurance payments in advance is an example of: A) An accrued receivable transaction. B) An accrued liability transaction. C) A deferred revenue transaction. D) A prepaid expense transaction. Answer: D Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment; Analyze transaction-Record journal entry Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries.; 02-03 Analyze and record transactions using journal entries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 15 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

34) Recording revenue before it is collected is an example of: A) A prepaid expense transaction. B) A deferred revenue transaction. C) An accrued liability transaction. D) An accrued receivable transaction. Answer: D Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 35) When a magazine company collects cash for selling a subscription, it is an example of: A) An accrued liability transaction. B) An accrued receivable transaction. C) A prepaid expense transaction. D) A deferred revenue transaction. Answer: D Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment; Analyze transaction-Record journal entry Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries.; 02-03 Analyze and record transactions using journal entries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

36) On December 31, 2020, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2021, $86,000 was paid for insurance. At the end of 2021, after adjusting entries were recorded, the balance in the prepaid insurance account was $42,000. Insurance expense for 2021 was: A) $6,400. B) $134,400. C) $86,000. D) $92,400. Answer: D Explanation: Insurance expense = $48,400 + $86,000 − $42,000 = $92,400 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry; Determine account balance-Analyze entries Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 37) Adjusting entries are needed primarily for: A) Cash basis accounting. B) Accrual accounting. C) Current value accounting. D) Manual accounting systems. Answer: B Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

38) Prepayments occur when: A) Cash flow precedes expense recognition. B) Sales are delayed pending credit approval. C) Customers are unable to pay the full amount due when goods are delivered. D) Manufactured goods await quality control inspections. Answer: A Difficulty: 2 Medium Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 39) Accruals occur when cash flows: A) Occur before expense recognition. B) Occur after revenue or expense recognition. C) Are uncertain. D) May be substituted for goods or services. Answer: B Difficulty: 2 Medium Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 40) On December 31, 2021, the end of Larry's Used Cars' first year of operations, the accounts receivable was $53,600. The company estimates that $1,200 of the year-end receivables will not be collected. Accounts receivable in the 2021 balance sheet will be valued at: A) $53,600. B) $54,800. C) $52,400. D) $1,200. Answer: C Explanation: Accounts receivable = $53,600 − $1,200 = $52,400 Difficulty: 2 Medium Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

Supplies 600,000 ? 400,000

2,000,000

Supplies purchases: $400,000 + $2,000,000 − $600,000 = $1,800,000 Difficulty: 2 Medium Topic: Determine account balance-Analyze entries Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

42) Which of the following is not an adjusting entry? A) Prepaid rent Rent expense B) Cash Deferred sales revenue C) Interest expense Interest payable D) Salaries expense Salaries payable

Answer: B Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 43) The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes: A) A debit to a liability. B) A debit to an asset. C) A credit to a liability. D) A credit to an asset. Answer: A Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

44) Which of the following accounts has a balance whereby credits normally exceed debits? A) Salaries expense. B) Interest payable. C) Land. D) Prepaid rent. Answer: B Difficulty: 1 Easy Topic: Account relationships and records; Determine account balance-Analyze entries Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 0204 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 45) When a tenant makes an end-of-period adjusting entry credit to the "Prepaid rent" account: A) (S)he usually debits cash. B) (S)he usually debits an expense account. C) (S)he debits a liability account. D) (S)he credits an owners' equity account. Answer: B Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

46) When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to: A) Accounts payable. B) Supplies. C) Cash. D) Retained earnings. Answer: B Difficulty: 1 Easy Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 47) The adjusting entry required to record accrued expenses includes: A) A credit to cash. B) A debit to an asset. C) A credit to an asset. D) A credit to liability. Answer: D Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

48) Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year? A) $300,000. B) $280,000. C) $260,000. D) $240,000. Answer: C Explanation: Bal. Bal.

Supplies 56,000 270,000 66,000

Supplies expense = $56,000 + $270,000 – $66,000 = $260,000 Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Convert cash basis to accrual basis Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

49) Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,200 premium to Insurance expense. At its December 31, 2021, yearend, Yummy Foods would record which of the following adjusting entries? A) Insurance expense 875 Prepaid insurance 875 B) Prepaid insurance Insurance expense

875

C) Insurance expense Prepaid insurance Insurance payable

875 3,325

D) Prepaid insurance Insurance expense

3,325

Answer: D Explanation: Entry on 8/1:

Insurance expense Cash

875

4,200

3,325

4,200 4,200

Unexpired at 12/31: $4,200 × 19/24 = $3,325 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry; Convert cash basis to accrual basis Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

50) Tummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,200 premium to Prepaid insurance. At its December 31, 2021, yearend, Tummy Foods would record which of the following adjusting entries? A) Insurance expense 875 Prepaid insurance 875 B) Prepaid insurance Insurance expense

875

C) Insurance expense Prepaid insurance Insurance payable

875 3,325

D) Prepaid insurance Insurance expense

3,325

Answer: A Explanation: Entry on 8/1:

Prepaid insurance Cash

875

4,200

3,325

4,200 4,200

Expired at 12/31: $4,200 × 5/24 = $875 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry; Convert cash basis to accrual basis Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

Debit No Yes

Credit Yes No

Debit Yes Yes

Credit No No

Debit No No

Credit Yes Yes

C) Insurance expense Prepaid insurance D) Insurance expense Prepaid insurance

Answer: A Explanation: Expired at 12/31: $72,000 × 4/36 = $8,000 Adjusting Entry on 12/31: Insurance expense Prepaid insurance

8,000 8,000

Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry; Convert cash basis to accrual basis Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

Debit Yes Yes No

Credit No No Yes

Debit Yes No

Credit No Yes

Debit Yes No

Credit No Yes

C) Prepaid salaries Salaries payable D) Salaries expense Salaries payable

Answer: D Explanation: Amount accrued: $640,000 × 7/10 (7 days of 10 days to be paid) = $448,000 Adjusting Entry on 6/30:

Salaries expense Salaries payable

448,000 448,000

Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

6,400

C) Prepaid salaries Salaries payable

9,600

D) Salaries expense Salaries payable

22,400

6,400

9,600

22,400

Answer: D Explanation: Amount accrued: $32,000 × 7/10 (7 days of 10 days to be paid) = $22,400 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

16,200

C) Deferred subscription revenue Subscription payable

16,200

D) Deferred subscription revenue Subscription revenue

32,400

Answer: B Explanation: Entry on 9/1: Cash Deferred subscription revenue

16,200

32,400

48,600 48,600

Amount recorded as revenue: $48,600 × 4/12 (4 months expired) = $16,200 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

120

D) Prepaid interest Interest payable

120

Answer: C Explanation: Accrued interest expense: $8,000 × 9% × 2/12 = $120 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

230

C) Interest receivable Notes receivable

175

D) Interest receivable Interest revenue Cash

230

175

600 175 425

Answer: A Explanation: Accrued interest revenue: $6,000 × 10% × 3.5/12 = $175 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

57) The debits and credits from the journal entries are posted to the general ledger accounts only for: A) transactions occurring during the reporting period. B) closing entries. C) adjusting entries and closing entries. D) all journal entries. Answer: D Difficulty: 1 Easy Topic: Post entries to ledger Learning Objective: 02-04 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 58) Eve's Apples opened its business on January 1, 2021, and paid for two insurance policies effective that date. The policy for equipment damage was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2021? A) $9,000. B) $18,000. C) $30,000. D) $48,000. Answer: B Explanation: For remaining months on the policies: Prepaid equipment insurance: $36,000 × 6/18 Prepaid crop damage insurance: $12,000 × 12/24 Total prepaid insurance at 12/31/2021

$ 12,000 6,000 $ 18,000

Difficulty: 3 Hard Topic: Determine account balance-Analyze entries; Convert cash basis to accrual basis Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

59) Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Deferred premiums revenue account increased from $6 million to $8 million dollars during the year. What is Fink's revenue from insurance premiums recognized for the current year? A) $10,000,000. B) $16,000,000. C) $18,000,000. D) $20,000,000. Answer: B Explanation: Cash collections Deduct increase in deferred premiums revenue Insurance premium revenue

$ 18,000,000 (2,000,000) $ 16,000,000

Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Convert cash basis to accrual basis Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 60) On November 1, 2021, Tim's Toys borrows $30,000,000 at 9% to finance the holiday sales season. The note is for a six-month term and both principal and interest are payable at maturity. What is the balance of interest payable for the loan as of December 31, 2021? A) $112,500. B) $225,000. C) $450,000. D) $1,350,000. Answer: C Explanation: Interest payable = $30,000,000 × 9% × 2/12 = $450,000 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry; Determine account balance-Analyze entries Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

61) An economic resource of an entity is: A) A revenue. B) An asset. C) A liability. D) A contra asset until used. Answer: B Difficulty: 1 Easy Topic: Account relationships and records Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 62) Cost of goods sold is: A) An asset account. B) A revenue account. C) An expense account. D) A permanent equity account. Answer: C Difficulty: 1 Easy Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 63) The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year: A) Plus revenues, minus liabilities. B) Plus accruals, minus deferrals. C) Plus net income, minus dividends. D) Plus assets, minus liabilities. Answer: C Difficulty: 1 Easy Topic: Accounting equation; Financial statement–Shareholders equity Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-07 Describe the four basic financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 34 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

64) The purpose of "posting" journal entries is A) provide a chronological record of all economic events affecting the firm. B) ensure that all accounts are up to date prior to preparing financial statements. C) ensure that debits equal credits in the trial balance. D) reflect the information in journal entries in ledger accounts. Answer: D Difficulty: 1 Easy Topic: Post entries to ledger Learning Objective: 02-04 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 65) Dave's Duds reported cost of goods sold of $2,000,000 this year. The inventory account increased by $200,000 during the year to an ending balance of $400,000. What was the cost of merchandise that Dave's purchased during the year? A) $1,600,000. B) $1,800,000. C) $2,200,000. D) $2,400,000. Answer: C Explanation: Opening Bal. Purchases Ending Bal.

Inventory 200,000 2,000,000To cost of goods sold ? 400,000

Purchases = $2,000,000 – $200,000 + $400,000 = $2,200,000 Difficulty: 2 Medium Topic: Determine account balance-Analyze entries Learning Objective: 02-03 Analyze and record transactions using journal entries.; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

66) Permanent accounts do not include: A) Interest expense. B) Salaries payable. C) Prepaid rent. D) Deferred sales revenue. Answer: A Difficulty: 2 Medium Topic: Account relationships and records; The closing process Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-08 Explain the closing process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 67) Permanent accounts do not include: A) Cost of goods sold. B) Inventory. C) Current liabilities. D) Accumulated depreciation. Answer: A Difficulty: 2 Medium Topic: Account relationships and records; The closing process Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-08 Explain the closing process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 68) The purpose of closing entries is to transfer: A) Accounts receivable to retained earnings when an account is fully paid. B) Balances in temporary accounts to a permanent account. C) Inventory to cost of goods sold when merchandise is sold. D) Assets and liabilities when operations are discontinued. Answer: B Difficulty: 2 Medium Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 36 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

69) Temporary accounts do not include: A) Salaries payable. B) Depreciation expense. C) Supplies expense. D) Cost of goods sold. Answer: A Difficulty: 2 Medium Topic: Account relationships and records; The closing process Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-08 Explain the closing process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 70) When converting an income statement from a cash basis to an accrual basis, expenses: A) Exceed cash payments to suppliers. B) Equal cash payments to suppliers. C) Are less than cash payments to suppliers. D) May exceed or be less than cash payments to suppliers. Answer: D Difficulty: 2 Medium Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 71) When the amount of revenue collected in advance decreases during an accounting period: A) Accrual-basis revenues exceed cash collections from customers. B) Accrual-basis net income exceeds cash-basis net income. C) Accrual-basis revenues are less than cash collections from customers. D) Accrual-basis net income is less than cash-basis net income. Answer: A Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

72) When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect? A) An adjustment for depreciation reduces net income. B) A decrease in salaries payable decreases net income. C) A reduction in prepaid expenses decreases net income. D) An increase in accrued payables decreases net income. Answer: B Difficulty: 2 Medium Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 73) Molly's Auto Detailers maintains its records on the cash basis. During 2021, Molly's collected $72,000 from customers and paid $21,000 in expenses. Depreciation expense of $5,000 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $4,000, prepaid expenses decreased $2,000, and accrued liabilities decreased $1,000. Molly's accrual-basis net income was: A) $38,000. B) $54,000. C) $49,000. D) $42,000. Answer: C Explanation: Collections $ 72,000 Payments for expenses (21,000) Add: Increase in assets (accounts receivable) 4,000 Deduct: Decrease in assets (accumulated depreciation) (5,000) Decrease in assets (prepaid expenses) (2,000) Add: Decrease in liabilities (accrued liabilities) 1,000 Accrual-basis net income $ 49,000 Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

74) Pat's Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat's collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000, and accrued liabilities increased $2,500. Pat's accrual-basis net income was: A) $18,000. B) $34,000. C) $23,000. D) $29,000. Answer: D Explanation: Collections Payments for expenses Add: Increase in assets (accounts receivable) Increase in assets (supplies) Deduct: Decrease in assets (accumulated depreciation) Deduct: Increase in liabilities (accrued liabilities) Accrual-basis net income

42,000 (14,000) 1,500 4,000 (2,000) (2,500) $ 29,000

Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 75) The Hamada Company sales for 2021 totaled $150,000 and purchases totaled $95,000. Selected January 1, 2021, balances were: accounts receivable, $18,000; inventory, $14,000; and accounts payable, $12,000. December 31, 2021, balances were: accounts receivable, $16,000; inventory, $15,000; and accounts payable, $13,000. Net cash flows from these activities were: A) $45,000. B) $55,000. C) $58,000. D) $74,000. Answer: C Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

76) When the amount of interest receivable decreases during an accounting period: A) Accrual-basis interest revenue exceeds cash collection from borrowers. B) Accrual-basis net income exceeds cash-basis net income. C) Accrual-basis interest revenue is less than cash collection from borrowers. D) Accrual-basis net income is less than cash-basis net income. Answer: C Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 77) When converting an income statement from a cash basis to an accrual basis, cash received for services: A) Exceeds service revenue. B) May exceed or be less than service revenue. C) Is less than service revenue. D) Equals service revenue. Answer: B Difficulty: 2 Medium Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

78) Compared to the accrual basis of accounting, the cash basis of accounting produces a higher amount of income by the net decrease during the accounting period of:

a. b. c. d.

Accounts Receivable Yes No Yes No

Accrued Liabilities No Yes Yes No

A) Option a B) Option b C) Option c D) Option d Answer: A Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

79) On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $2,000,000. The company provided $6,400,000 of services in June and received full payment in July. Royal also incurred expenses of $3,000,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $1,000,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting?

a. b. c. d.

$ $ $ $

Cash Basis 3,400,000 5,400,000 6,400,000 6,400,000

Accrual Basis $ 3,400,000 $ 2,400,000 $ 3,400,000 $ 2,400,000

A) Option a B) Option b C) Option c D) Option d Answer: C Explanation: Collections Expenses incurred but not paid Accrual basis net income

$ 6,400,000 (Cash basis income) (3,000,000) $ 3,400,000

Investment by shareholders and dividends to shareholders do not affect net income for either basis of accounting. Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

52,500 218,750 61,250

What was the total amount of cash paid by Castle for insurance premiums during the year? A) $218,750 B) $166,250 C) $210,000 D) $227,500 Answer: D Explanation: Beg. Bal. Cash paid Bal.

Prepaid Insurance 52,500 218,750Insurance expense ? 61,250

Cash paid for insurance = $218,750 – $52,500 + $ 61,250 = $ 227,500 Difficulty: 2 Medium Topic: Determine account balance-Analyze entries Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 81) The accounting processing cycle: A) Is a three-wheeled vehicle used to deliver audit papers to clients. B) deals only with internal transactions. C) Is the process of bringing the company's financial information up to date before preparing the financial statements. D) Is the process used to identify, analyze, record, and summarize transactions and prepare financial statements. Answer: D Difficulty: 1 Easy Topic: Accounting processing cycle steps Learning Objective: 02-02 Describe the steps in the accounting processing cycle. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement / Keyboard Navigation

82) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM 1. Prepayments 2. Post-closing trial balance 3. Accruals

4. Unadjusted trial balance 5. Adjusted trial balance

Number for term that matches the phrase. ____ ____ ____

____

Answer:

TERM 1. Prepayments 2. Post-closing trial balance 3. Accruals

4. Unadjusted trial balance 5. Adjusted trial balance

Number for term that matches the phrase. 3 1 5

Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment; Trial balance―Adjusted; Trial balance―Unadjusted; The closing process Learning Objective: 02-04 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance.; 02-05 Identify and describe the different types of adjusting journal entries.; 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance.; 02-08 Explain the closing process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

83) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM 1. Balance sheet 2. Adjusting entries 3. Expenses 4. Statement of cash flows 5. Post-closing trial balance

Number for term that matches the phrase. ____ ____ ____ ____ ____

Answer:

TERM 1. Balance sheet 2. Adjusting entries 3. Expenses 4. Statement of cash flows 5. Post-closing trial balance

Number for term that matches the phrase. 4 2 1 3 5

Difficulty: 1 Easy Topic: Analyze updating-Identify type of adjustment; Accounting processing cycle steps; Financial statement―Cash flow; Financial statement―Balance sheet; Accounting equation; The closing process Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-02 Describe the steps in the accounting processing cycle.; 02-05 Identify and describe the different types of adjusting journal entries.; 02-07 Describe the four basic financial statements.; 02-08 Explain the closing process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 46 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

84) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. TERM

PHRASE

1. Periodic system

2. Prepayments 3. Perpetual system 4. Losses 5. Gains

Number for term that matches the phrase. ____

____ ____ ____ ____

Answer: TERM

PHRASE

1. Periodic system

2. Prepayments 3. Perpetual system 4. Losses 5. Gains

Number for term that matches the phrase. 5

4 1 3 2

Difficulty: 2 Medium Topic: Accounting equation; Analyze transaction-Record journal entry; Analyze updatingIdentify type of adjustment Learning Objective: 02-03 Analyze and record transactions using journal entries.; 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

85) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

1. General ledger 2. Credit

3. General journal 4. Debit 5. Closing entries

Number for term that matches the phrase. ____ ____ ____ ____ ____

Answer: TERM

PHRASE

1. General ledger 2. Credit

3. General journal 4. Debit 5. Closing entries

Number for term that matches the phrase. 2 4 3 1 5

Difficulty: 1 Easy Topic: Account relationships and records; Accounting processing cycle steps; The closing process Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-02 Describe the steps in the accounting processing cycle.; 02-08 Explain the closing process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

86) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

Number for term that matches the phrase. ____ ____ ____ ____ ____

Answer: TERM

PHRASE

Number for term that matches the phrase. 4 3 1 2 5

Difficulty: 1 Easy Topic: Accounting processing cycle steps; Subsidiary ledger-Special journal—App C; Accounting equation Learning Objective: 02-02 Describe the steps in the accounting processing cycle.; 02-Appendix 2C Subsidiary Ledgers and Special Journals. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

87) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.

TERM

PHRASE

1. Source documents

Refers to inflows of assets from the sale of goods and services. Used to identify external transactions Used to record repetitive types of transactions.

____

Liabilities created by a customer's prepayment. Determines the effects of an event in terms of the accounting equation.

____

2. Revenues 3. Transaction analysis 4. Deferred revenues 5. Special journals

Number for term that matches the phrase.

____ ____

____

Answer: TERM

PHRASE

1. Source documents

Refers to inflows of assets from the sale of goods and services. Used to identify external transactions Used to record repetitive types of transactions.

Liabilities created by a customer's prepayment. Determines the effects of an event in terms of the accounting equation.

2. Revenues 3. Transaction analysis 4. Deferred revenues 5. Special journals

Number for term that matches the phrase.

1 5

Difficulty: 1 Easy Topic: Accounting processing cycle steps; Subsidiary ledger-Special journal—App C; Account relationships and records; Accounting equation Learning Objective: 02-02 Describe the steps in the accounting processing cycle.; 02-Appendix 2C Subsidiary Ledgers and Special Journals. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 51 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

88) Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.

TERM

PHRASE

1. Unadjusted trial balance 2. Accrued receivables 3. Deferred revenues

4. Temporary accounts 5. Accrued liabilities 6. Adjusting entries 7. Prepaid expense 8. General ledger 9. Revenues 10. Post-closing trial balance

Number for term that matches the phrase. ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Answer:

TERM

PHRASE

1. Unadjusted trial balance 2. Accrued receivables 3. Deferred revenues

4. Temporary accounts 5. Accrued liabilities 6. Adjusting entries 7. Prepaid expense 8. General ledger 9. Revenues 10. Post-closing trial balance

Number for term that matches the phrase. 9 6 3 10 4 8 7 2 1 5

Difficulty: 2 Medium Topic: Analyze updating-Identify type of adjustment; Trial balance―Unadjusted; Accounting processing; cycle steps; Accounting equation; Account relationships and records; The closing process Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-02 Describe the steps in the accounting processing cycle.; 02-04 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance.; 02-05 Identify and describe the different types of adjusting journal entries.; 02-08 Explain the closing process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

EXAMPLE: Advertising expense

A Effect of a debit on account

B Classification

89) Office equipment Answer: Office equipment

Effect 1

Classification 2

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry; Accounting equation; Distinguish among financial statements Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts.; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 54 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

90) Notes payable (short-term) Answer: Notes payable (short-term)

Effect 2

Classification 3

Effect 1

Classification 7

92) Accounts receivable Answer: Accounts receivable

Effect 1

Classification 1

Effect 1

Classification 1

94) Deferred rent revenue Answer: Deferred rent revenue

Effect 2

Classification 3

Effect 2

Classification 3

96) Retained earnings Answer: Retained earnings

Effect 2

Classification 5

Effect 2

Classification 6

98) Supplies expense Answer: Supplies expense

Effect 1

Classification 7

Effect 1

Classification 1

100) Common stock Answer: Common stock

Effect 2

Classification 5

Use this information to answer the following questions: 1100 1120 1130 1140 1145 1150 1160 1200 1250 1260 1320 1325 2110 2120 2130 2140 2150 2160

2170 2180 2200 3100 3200 5000 5300 6000 6200 6210 6220 6230 6240 6250 6260 6270 6400 6999

Account(s) debited

Account(s) credited

Transaction type

EXAMPLE: Sold $110,000,000 in common stock for cash.

1100

3100

101) Purchased building and equipment for $10,000,000, paying 20% cash and issuing a 30-year note for the balance. Answer: TRANSACTION Purchased building and equipment for $10,000,000, paying 20% cash and issuing a 30-year note for the balance.

Account(s) debited 1320

Account(s) credited 1100, 2200

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 102) Invested idle cash in short-term money market funds. Answer: TRANSACTION Invested idle cash in short-term investments.

Account(s) debited 1120

Account(s) credited 1100

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 103) Purchased inventory on account. Answer: TRANSACTION Purchased inventory on account.

Account(s) debited 1200

Account(s) credited 2130

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 62 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

104) Sold inventory on account. Answer: TRANSACTION Sold inventory on account.

Account(s) debited 1140, 6000

Account(s) credited 5000, 1200

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 105) Sold merchandise to a customer in exchange for a promissory note. Answer: TRANSACTION Sold merchandise to a customer in exchange for a promissory note.

Account(s) debited 1130, 6000

Account(s) credited 5000, 1200

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 106) Accrued the interest recognized but not collected on notes receivable. Answer: TRANSACTION Accrued the interest recognized but not collected on notes receivable.

Account(s) debited 1150

Account(s) credited 5300

Transaction type 2

107) Collected a note receivable at maturity, including the interest that had already been accrued. Answer: TRANSACTION Collected a note receivable at maturity, including the interest that had already been accrued.

Account(s) debited 1100

Account(s) credited 1130, 1150

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 108) Collected cash on account from customers. Answer: TRANSACTION Collected cash on account from customers.

Account(s) debited 1100

Account(s) credited 1140

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 109) Sold inventory for cash. Answer: TRANSACTION Sold inventory for cash.

Account(s) debited 1100, 6000

Account(s) credited 5000, 1200

Transaction type 1

110) Received payment for services to be performed next year. Answer: TRANSACTION Received payment for services to be performed next year.

Account(s) debited 1100

Account(s) credited 2140

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 111) Salaries have been recognized but are unpaid at the end of an accounting period. Answer: TRANSACTION Accrued salaries remaining unpaid at the end of an accounting period.

Account(s) debited 6270

Account(s) credited 2150

Transaction type 2

Account(s) credited 6999

Transaction type 3

Difficulty: 2 Medium Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 65 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

113) Accrued property taxes were paid. Answer: TRANSACTION Accrued property taxes were paid.

Account(s) debited 2170

Account(s) credited 1100

Transaction type 1

Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 114) Declared cash dividends on common stock that will be paid in the next month. Answer: TRANSACTION Declared cash dividends on common stock that will be paid in the next month.

Account(s) debited 6999

Account(s) credited 2160

Transaction type 1

Account(s) debited 1260

Account(s) credited 1100

Transaction type 1

116) Rite Shoes was involved in the transactions described below. Required: Prepare the appropriate journal entry for each transaction. If an entry is not required, state "No Entry." 1. Purchased $8,200 of inventory on account. 2. Paid weekly salaries, $920. 3. Recorded sales for the first week: Cash: $7,100; On account: $5,300. 4. Paid for inventory purchased in event (1). 5. Placed an order for $6,200 of inventory. Answer: 1. Inventory 8,200 Accounts payable 8,200 2. Salaries expense 920 Cash 920 3. Cash 7,100 Accounts receivable 5,300 Sales revenue 12,400 4. Accounts payable 8,200 Cash 8,200 5. No Entry. Difficulty: 1 Easy Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

117) Prepare journal entries to record the following transactions of Daisy King Ice Cream Company. If an entry is not required, state "No Entry." 1. Started business by issuing 10,000 shares of common stock for $20,000. 2. Leased a building for three years at $500 per month and paid six months' rent in advance. 3. Purchased equipment for $5,400, signing a two-year, 10% note. 4. Purchased $1,800 of supplies on account. 5. Recorded cash sales of $800 for the first week. 6. Paid weekly salaries, $320. 7. Paid for supplies purchased in item (5). 8. Recorded depreciation on equipment, $50. Answer: 1. Cash 20,000 Common stock 20,000 2. Prepaid rent 3,000 Cash 3,000 3. Equipment 5,400 Notes payable 5,400 4. Supplies inventory 1,800 Accounts payable 1,800 5. Cash 800 Sales revenue 800 6. Salaries expense 320 Cash 320 7. Accounts payable 1,800 Cash 1,800 8. Depreciation expense 50 Accumulated depreciation 50 Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry Learning Objective: 02-03 Analyze and record transactions using journal entries. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

118) Flint Hills, Inc. has prepared a year-end 2021 trial balance. Certain accounts in the trial balance do not reflect all activities that have occurred. Required: Prepare adjusting journal entries, as needed, for the following items. 1. The Supplies account shows a balance of $540, but a count of supplies reveals only $210 on hand. 2. Flint Hills initially records the payments of all insurance premiums as expenses. The trial balance shows a balance of $420 in Insurance expense. A review of insurance policies reveals that $125 of insurance is unexpired. 3. Flint Hills employees work Monday through Friday, and salaries of $2,400 per week are paid each Friday. Flint Hills' year-end falls on Tuesday. 4. On December 31, 2021, Flint Hills received a utility bill for December electricity usage of $190 that will be paid in early January of 2022. Answer: 1. Supplies expense 330 Supplies 330 2. Prepaid insurance 125 Insurance expense 125 3. Salaries expense 960 Salaries payable 960 4. Utilities expense 190 Utilities payable 190 Difficulty: 2 Medium Topic: Analyze updating-Record adjusting entry Learning Objective: 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

119) The following is selected financial information for D. Kay Dental Laboratories for 2020 and 2021:

Retained earnings, January 1 Net income Dividends declared and paid Common stock

2020 $53,000 37,000 15,000 70,000

2021 ? 42,000 18,000 ?

Balance, January 1, 2021 Issue of common stock Net income for 2021 Less: Dividends Balance, December 31, 2021

D. Kay Dental Laboratories Statement of Shareholders' Equity For the Year Ended December 31, 2021 Total Common Retained Shareholders' Stock Earnings Equity $70,000 $75,000* $145,000 20,000 20,000 42,000 _______ − 18,000 − 18,000 $ 90,000 $ 99,000 $189,000

* Beginning balance, Retained Earnings = Ending balance at December 31, 2020: $53,000 + $37,000 − $15,000 = $75,000 Difficulty: 3 Hard Topic: Financial statement―Shareholders equity Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

120) The Yankel Corporation's controller prepares adjusting entries only at the end of the fiscal year. The following adjusting entries were prepared on December 31, 2021:

Interest expense Interest payable

Debit 1,800

Credit 1,800

Insurance expense Prepaid insurance

60,000

Interest receivable Interest revenue

3,000

60,000

3,000

Answer: 1. $1,800 represents six months of interest on a $30,000 note, or 50% of annual interest. $1,800 ÷ .50 = $3,600 in annual interest $3,600 ÷ $30,000 = 12% interest rate Or, Principal × Rate × Time = Interest $30,000 × Rate × 6/12 = $1,800 $1,800 ÷ $30,000 = .06 six-month rate To annualize the nine month rate: .06 × 12/6 =.12 or 12% 2. $90,000 ÷ 12 months = $7,500 per month in insurance $60,000 ÷ $7,500 = 8 months expired. The insurance was paid on May 1, eight months ago. 3. Principal × Rate × Time = Interest Principal × 9% × (4/12) = $3,000 Principal × 3% = $3,000 Principal = $100,000 Or $3,000 represents four months (September through December) in accrued interest, or $750 per month. $750 × 12 months = $9,000 in annual interest Principal × 9% = $9,000 Principal = $9,000 ÷ .09 = $100,000 note Difficulty: 3 Hard Topic: Analyze updating-Record adjusting entry; Determine account balance-Analyze entries Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries.; 02-06 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income $2,000 interest on a N U2,000 O2,000 O2,000 loan was not yet paid or recorded Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

122) Additional 12/31/2021 Information Assets The estimated uncollectible accounts receivable is now zero and should be $25,000.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income The estimated O25,000 N O25,000 O25,000 uncollectible accounts receivable is now zero and should be $25,000. Difficulty: 2 Medium Topic: Distinguish among financial statements; Determine account balance-Analyze entries Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

123) Additional Information $10,000 of the paid and recorded rent expense pertains to the year 2022.

Answer: Additional Information $10,000 of the paid and recorded rent expense pertains to the year 2022.

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 12/31/2021 12/31/2021 2021 Assets Liabilities Owners' Equity Net Income U10,000 N U10,000 U10,000

Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

124) Additional Information $20,000 in depreciation on some equipment was still unrecorded.

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income $20,000 in O20,000 N O20,000 O20,000 depreciation on some equipment was still unrecorded. Difficulty: 2 Medium Topic: Distinguish among financial statements; Determine account balance-Analyze entries Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

125) Additional 12/31/2021 Information Assets $4,000 in cash dividends declared and paid in December 2021 were unrecorded.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income $4,000 in cash O4,000 N O4,000 N dividends declared and paid in December 2021 were unrecorded. Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income Uncollectible O N O O accounts of $7,000, as a percentage of sales, are estimated at the end of the year. The entry has not been recorded. Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

127) Additional Information The journal entry for depreciation on equipment for 2021 was recorded for $48,000. The amount should have been $66,000.

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income The journal entry for O N O O depreciation on equipment for 2021 was recorded for $48,000. The amount should have been $66,000. Difficulty: 2 Medium Topic: Distinguish among financial statements; Determine account balance-Analyze entries Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

128) Additional Information Cash dividends declared and paid on December 15, 2021, were not recorded.

Answer: Additional Information Cash dividends declared and paid on December 15, 2021, were not recorded.

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 12/31/2021 12/31/2021 2021 Assets Liabilities Owners' Equity Net Income O N O N

Difficulty: 3 Hard Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

129) Additional 12/31/2021 Information Assets $10,000 of the rent revenue collected and recorded as revenue this year pertains to 2022.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income $10,000 of the rent N U O O revenue collected and recorded as revenue this year pertains to 2022. Difficulty: 2 Medium Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

130) Additional Information Interest recognized during the year on a note receivable was not yet collected or recorded.

Answer: Additional Information Interest recognized during the year on a note receivable was not yet collected or recorded.

12/31/2021 Assets

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

12/31/2021 12/31/2021 12/31/2021 2021 Assets Liabilities Owners' Equity Net Income U N U U

131) Additional 12/31/2021 Information Assets Supplies purchased during the year for $1,000 cash were recorded by a debit to Supplies Expense and a credit to Cash. Only $200 of supplies remain at the end of the year, but no further entries have been recorded.

12/31/2021 Liabilities

12/31/2021 2021 Owners' Equity Net Income

Answer: Additional 12/31/2021 12/31/2021 12/31/2021 2021 Information Assets Liabilities Owners' Equity Net Income Supplies purchased U N U U during the year for $1,000 cash were recorded by a debit to Supplies Expense and a credit to Cash. Only $200 of supplies remain at the end of the year, but no further entries have been recorded. Difficulty: 3 Hard Topic: Determine account balance-Analyze entries; Distinguish among financial statements Learning Objective: 02-06 Record adjusting journal entries in general journal format; post entries; and prepare an adjusted trial balance; 02-07 Describe the four basic financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

Use this information to answer the following questions: The adjusted trial balance for China Tea Company at December 31, 2021, is presented below:

Debit 10,500 150,000 5,000 25,000 300,000

Credit

125,000 30,000 30,000 4,000 9,000 200,000 50,000 8,000 400,000 180,000 120,000 15,000 30,000 2,000 2,500 848,000

_______ 848,000

132) Prepare the closing entries for China Tea Company for the year ended December 31, 2021. Answer: 1. Sales revenue Retained earnings 2. Retained earnings Cost of goods sold Salaries expense Rent expense Depreciation expense Interest expense Advertising expense 3. Retained earnings Dividends

400,000 400,000 349,500 180,000 120,000 15,000 30,000 2,000 2,500 8,000 8,000

Difficulty: 2 Medium Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

133) Prepare an income statement for China Tea Company for the year ended December 31, 2021. Answer: China Tea Company Income Statement For the Year Ended December 31, 2021 Sales revenue $400,000 Cost of goods sold 180,000 Gross profit 220,000 Operating expenses: Salaries expense $120,000 Rent expense 15,000 Depreciation expense 30,000 Advertising expense 2,500 Total operating expenses 167,500 Operating income 52,500 Other expense: Interest expense (2,000) Net income $ 50,500 Difficulty: 2 Medium Topic: Financial statement―Income Statement Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

134) Prepare a classified balance sheet for China Tea Company as of December 31, 2021. Answer: China Tea Company Balance Sheet At December 31, 2021 Assets Current assets: Cash Accounts receivable Inventory Prepaid rent Total current assets Property and equipment: Equipment Less: Accumulated depreciation Total assets Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable Salaries payable Interest payable Total current liabilities Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$ 10,500 150,000 25,000 5,000 190,500 300,000 125,000

175,000 $365,500

$ 30,000 30,000 4,000 9,000 73,000 $200,000 92,500 292,500 $365,500

Difficulty: 2 Medium Topic: Financial statement―Balance sheet Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

1,897 3,131 4,105 162 17,531 1,652 540 10,311 2,391 35,957 1,565 1,437 3,026 8,134 5,000 11,460 33,875 687 3,726 (2,568) 23,655 9,109 681

135) Based on the information presented above, prepare the Income Statement for Krafty Foods for the year ended December 31, 2021. Answer: Krafty Foods Income Statement For the Year Ended December 31, 2021 ($ in millions) Operating revenues Cost of goods sold Gross profit Salaries expense Marketing, general and administration expenses Operating income Interest and other debt expense, net Net income

$33,875 17,531 16,344 1,565 11,460 3,319 1,437 $ 1,882

Difficulty: 2 Medium Topic: Financial statement―Income Statement Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement

136) Based on the information presented above, prepare the 12/31/2021 Balance Sheet for Krafty Foods. Answer: Krafty Foods Balance Sheet At December 31, 2021 ($ in millions) Assets Current assets: Cash and cash equivalents Accounts receivable (net) Inventories Other current assets Total current assets Property, plant and equipment (net) Goodwill and other intangible assets (net) Other noncurrent assets Total assets Liabilities and Shareholders' Equity Accounts payable Accrued liabilities Short-term borrowings Other current payables Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Long-term notes payable Total liabilities Common stock Retained earnings Other shareholders' equity Total shareholders' equity Total liabilities and shareholders' equity

$162 3,131 3,026 687 7,006 9,109 35,957 3,726 $55,798

$ 1,897 4,105 681 1,652 540 8,875 8,134 10,311 5,000 32,320 $23,655 2,391 (2,568) 23,478 $55,798

Difficulty: 3 Hard Topic: Financial statement―Balance sheet Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement 90 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Debits

Credits 90,000

170,000 260,000 490,000 26,000 480,000 60,000 700,000 4,000 150,000 60,000 30,000 62,000 8,000 770,000 120,000 1,740,000

1,740,000

137) Assuming no income taxes, compute the following, and place your answer in the space provided: Kline's 2021 net income (or loss). Answer: Kline's 2021 net income (or loss) = $76,000 Computation: 770,000 − $480,000 − $60,000 − $4,000 − $30,000 − $120,000 Difficulty: 2 Medium Topic: Financial statement―Income Statement Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement

138) Assuming no income taxes, compute the following, and place your answer in the space provided: Kline's 12/31/2021 total current assets. Answer: Kline's 12/31/2021 total current assets = $346,000 Computation: $26,000 + $170,000 + $150,000 Difficulty: 2 Medium Topic: Financial statement―Balance sheet Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement 139) Assuming no income taxes, compute the following, and place your answer in the space provided. Kline's 12/31/2021 total current liabilities: Answer: Kline's 12/31/2021 total current liabilities = $158,000 Computation: $90,000 + $60,000 + $8,000 Difficulty: 2 Medium Topic: Financial statement―Balance sheet Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement 140) Assuming no income taxes, compute the following, and place your answer in the space provided: Kline's 12/31/2021 total shareholders' equity. Answer: Kline's 12/31/2021 total owners' equity = $628,000 Computation: $490,000 + $62,000 + $76,000 (Net Income), (or Total Assets − Total Liabilities) Difficulty: 2 Medium Topic: Financial statement―Balance sheet Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement

$620,000 90,000 3,000 12,000 8,000 5,000

Cost of goods sold Insurance expense Depreciation expense Administrative expense Rent expense

$355,000 20,000 18,000 35,000 10,000

Required: Prepare the necessary closing entries at December 31, 2021. Answer: December 31, 2021 Sales revenue Dividend revenue Retained earnings

620,000 3,000

Retained earnings Loss on sale of investments Salaries expense Miscellaneous expense Cost of goods sold Insurance expense Depreciation expense Administrative expense Rent expense

548,000

Retained earnings Dividends

623,000

8,000 90,000 12,000 355,000 20,000 18,000 35,000 10,000 5,000 5,000

Difficulty: 2 Medium Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement

$450,000 3,000 50,000 $503,000

Cash disbursements: Purchase of merchandise Annual insurance payment Payment of salaries Dividends paid to shareholders Annual rent payment Total cash disbursements

$220,000 9,000 180,000 6,000 12,000 $427,000

Selected balance sheet information:

12/31/2020 12/31/2021 $25,000 $101,000 42,000 70,000 60,000 82,000 2,000 ? 7,000 ? 1,500 ? 50,000 50,000 150,000 150,000 (40,000) (55,000) 50,000 62,000 20,000 28,000 200,000 250,000 0 6,000

Required: 1. Prepare an accrual basis income statement for 2021 (ignore income taxes). 2. Determine the following balance sheet amounts on December 31, 2021: a. Interest receivable b. Prepaid insurance c. Prepaid rent Answer: 1. Sales revenue: Cash collected from customers Add: Increase in accounts receivable Sales revenue Interest revenue: Cash received Add: Amount accrued at the end of 2021 ($50,000 × .06 × 6/12) Deduct: Amount accrued at the end of 2020 Interest revenue Cost of goods sold: Cash paid for merchandise Add: Increase in accounts payable Purchases during 2021 Deduct: Increase in inventory Cost of goods sold Insurance expense: Cash paid Add: Prepaid insurance expired during 2021 Deduct: Prepaid insurance on 12/31/2021 ($9,000 × 3/12) Insurance expense Salaries expense: Cash paid Add: Increase in salaries payable Salaries expense Rent expense: Amount paid Add: Prepaid rent on 12/31/2020 expired during 2021 Deduct: Prepaid rent on 12/31/2021 ($12,000 × 9/12) Rent expense Depreciation expense: Increase in accumulated depreciation

$450,000 28,000 $478,000 $3,000 1,500 (1,500) $3,000

(a)

$220,000 12,000 232,000 (22,000) $210,000 $9,000 2,000 (2,250) $8,750

(b)

$180,000 8,000 $188,000 $12,000 7,000 (9,000) $10,000 $15,000

(c)

Raintree Corporation Income statement For the Year Ended December 31, 2021 Sales revenue Cost of goods sold Gross profit Operating expenses: Insurance Salaries Rent Depreciation Total operating expenses Operating income Other income (expense): Interest revenue Net income 2. a. b. c.

Interest receivable (1/2 year × 3,000) Prepaid insurance (1/4 year × 9,000) Prepaid rent (3/4 year × 12,000)

$478,000 210,000 268,000 $8,750 188,000 10,000 15,000 221,750 46,250 3,000 $49,250

$ 1,500 2,250 9,000

Difficulty: 3 Hard Topic: Convert cash basis to accrual basis; Determine account balance―Analyze entries; Financial statement―Income Statement Learning Objective: 02-07 Describe the four basic financial statements; 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze; Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

143) Silicon Chip Company's fiscal year-end is December 31. At the end of 2021, it owed employees $22,000 in salaries that will be paid on January 7, 2022. Required: 1. Prepare an adjusting entry to record accrued salaries, a reversing entry on January 1, 2022, and an entry to record the payment of salaries on January 7, 2022. 2. Prepare journal entries to record the accrued salaries on December 31, 2021 and the payment of salaries on January 7, 2022, assuming a reversing entry is not recorded. Answer: 1. December 31–adjusting entry Salaries expense Salaries payable

22,000 22,000

January 1–reversing entry Salaries payable Salaries expense

22,000

January 7–payment of salaries Salaries expense Cash

22,000

2. December 31–adjusting entry Salaries expense Salaries payable January 7–payment of salaries Salaries payable Cash

22,000

22,000 22,000

Difficulty: 3 Hard Topic: Reversing entries―Appendix B Learning Objective: Appendix 2B Reversing Entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement

144) Describe the difference between external events and internal events, and provide two examples of each. Answer: External events involve an exchange between the company and a separate economic entity. Examples include purchasing inventory on account or borrowing money from a bank. Internal events directly affect the financial position of the company but do not involve exchange transactions with another entity. Examples include depreciation of equipment or use of supplies. Difficulty: 2 Medium Topic: Account relationships and records Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking 145) Describe what is meant by deferred revenue and provide two examples. Answer: Deferred revenue is created when a company receives cash from a customer for goods or services that will be provided in a future period. Examples include magazine subscriptions received in advance by a publishing company or rent received in advance by a property leasing company. A liability exists because of the obligation to provide the service. Difficulty: 2 Medium Topic: Analyze updating-Identify type of adjustment; Analyze transaction-Record journal entry Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts; 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking 146) Describe what is meant by prepaid expenses and provide two examples. Answer: Prepaid expenses represent assets recorded when a cash disbursement creates benefits beyond the current period. Examples include insurance or rent paid in advance of use. Difficulty: 2 Medium Topic: Analyze transaction-Record journal entry; Analyze updating-Identify type of adjustment Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts; 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

147) What is an accrued liability? Answer: An accrued liability results from an expense being incurred prior to cash payment. Examples include interest payable and salaries payable. Difficulty: 2 Medium Topic: Analyze updating-Identify type of adjustment Learning Objective: 02-05 Identify and describe the different types of adjusting journal entries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 148) What is the difference between permanent accounts and temporary accounts, and why does an accounting system have both types of accounts? Answer: Permanent accounts represent assets, liabilities, and shareholders' equity at a point in time. Temporary accounts represent changes in retained earnings caused by dividend, revenue, expense, and gain and loss accounts. The temporary accounts are closed out annually to facilitate measuring income on an annual basis. Temporary accounts are a convenience to aid the preparation of financial statements by recording revenues and expenses in these accounts rather than directly into retained earnings. Difficulty: 2 Medium Topic: Account relationships and records Learning Objective: 02-01 Understand routine economic events-transactions-and determine their effects on a company's financial position and on specific accounts. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking 149) What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category. Answer: The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for purchases, and other receipts, such as interest and dividends. Investing activities include purchasing and selling equipment or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends. Difficulty: 3 Hard Topic: Financial statement―Cash flow Learning Objective: 02-07 Describe the four basic financial statements. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking 99 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

150) What is the purpose of the closing process? Answer: The closing process serves a dual purpose: (1) the temporary accounts are reduced to a zero balance, ready to measure activity in the next accounting period, and (2) the balances of these temporary accounts are transferred to retained earnings to reflect the changes that have occurred in that account during the period. Difficulty: 2 Medium Topic: The closing process Learning Objective: 02-08 Explain the closing process. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking

Accounts receivable Supplies Prepaid rent Salaries payable Interest payable

January 1, 2021 December 31, 2021 $110,000 $120,000 15,000 18,000 12,000 11,000 16,500 14,200 4,000 5,500

In addition, 2021 depreciation expense on office equipment is $55,000. Required: Determine accrual-basis net income for 2021. Answer: Cash basis net income ($825,000 – 512,000) Add: Increase in accounts receivable ($120,000 – 110,000) Increase in supplies ($18,000 – 15,000) Decrease in salaries payable ($16,500 – 14,200) Deduct: Depreciation expense Decrease in prepaid rent ($12,000 – 11,000) Increase in interest payable ($5,500 – 4,000) Accrual-basis net income

$313,000 10,000 3,000 2,300 (55,000) (1,000) (1,500) $270,800

Difficulty: 3 Hard Topic: Convert cash basis to accrual basis Learning Objective: 02-09 Convert from cash-basis net income to accrual-basis net income. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

152) The accounting system of Carlton and Sons consists of a general journal (GJ), a cash receipts journal (CR), a cash disbursements journal (CD), a sales journal (SJ), and a purchases journal (PJ). For each of the following, indicate which journal should be used to record the transaction. Transaction 1. Received interest on a loan. 2. Received cash for services to be provided next month. 3. Purchased equipment for cash. 4. Purchased merchandise on account. 5. Sold merchandise on credit (the sale only, not the cost of the merchandise). 6. Sold merchandise for cash (the sale only, not the cost of the merchandise). 7. Paid advertising bill. 8. Recorded accrued salaries payable. 9. Paid bill for utilities usage. 10. Recorded depreciation expense. 11. Sold equipment for cash. 12. Collected cash from customers on account. 13. Paid employee salaries. 14. Paid interest on a loan.

Journal ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

Answer: Transaction 1.Received interest on a loan. 2.Received cash for services to be provided next month. 3.Purchased equipment for cash. 4.Purchased merchandise on account. 5.Sold merchandise on credit (the sale only, not the cost of the merchandise). 6.Sold merchandise for cash (the sale only, not the cost of the merchandise). 7. Paid advertising bill. 8. Recorded accrued salaries payable. 9. Paid bill for utilities usage. 10. Recorded depreciation expense. 11. Sold equipment for cash. 12. Collected cash from customers on account. 13. Paid employee salaries. 14. Paid interest on a loan.

Journal CR CR CD PJ SJ CR CD GJ CD GJ CR CR CD CD

Difficulty: 2 Medium Topic: Subsidiary ledgers―Special journals―Appendix C Learning Objective: Appendix 2C Subsidiary Ledgers and Special Journals. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement

Intermediate Accounting, 10e (Spiceland)

Chapter 3

The Balance Sheet and Financial Disclosures

1) The balance sheet reports a company's financial position at a point in time. 2) A company's market value is generally less than its book value. 3) All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer. 4) The balance of net receivables represents the amount expected to be collected. 5) Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer. 6) Assets classified as property, plant, and equipment include machinery, equipment, and inventory. 7) Intangible assets usually are reported in the balance sheet as current assets. 8) Accrued salaries and wages in a balance sheet represent salaries that have been earned by employees but not yet paid. 9) The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies. 10) Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes. 11) Subsequent events are significant developments that take place after a company's year-end, and after the financial statements are issued or available to be issued. 12) The details of transactions between the company and its owners' family members do not need to be disclosed separately in the notes to the financial statements. 13) The ultimate responsibility for the financial statements lies with the auditors. 14) The compensation of top executives is disclosed in the proxy statement. 15) Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year. 16) Vertical analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year.

17) An example of vertical analysis would be comparing inventory this year to inventory last year to calculate the percentage change in inventory. 18) An example of vertical analysis would be stating each individual asset as a percentage of total assets. 19) Liquidity refers to the riskiness of a company with regard to the amount of total assets in its capital structure. 20) A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0. 21) Balance sheets prepared under IFRS often report long-term items before current items. 22) Balance sheets prepared under IFRS often exclude a shareholders' equity section. 23) Segment reporting requires disclosure of each customer that accounts for more than 5% of total enterprise revenue. 24) The balance sheet reports: A) Net income at a point in time. B) Cash flows for a period of time. C) Assets and equities at a point in time. D) Assets and liabilities for a period of time. 25) Which financial statement provides information for a point in time only? A) Statement of cash flows. B) Income statement. C) Statement of shareholders' equity. D) Balance sheet. 26) A classified balance sheet: A) Shows only current assets and current liabilities. B) Shows changes in assets, liabilities, revenues and expenses. C) Contains confidential information. D) Shows subtotals for current assets and current liabilities. 27) Which of the following is a primary reason a company's book value is less than its market value? A) Management recording errors. B) Many valuable resources of the company are not recorded as assets. C) Land and buildings are valued at their fair value. D) Investors tend to be too optimistic about a company's growth opportunities.

28) Which of the following potentially limit the usefulness of the balance sheet? A) Many valuable resources of the company are not recorded as assets. B) Many items in the balance sheet reflect estimates and judgments of management. C) Property, plant, and equipment are recorded at their book values rather than fair values. D) All of the other answers represent potential limitations. 29) Current assets include cash and all other assets expected to become cash or be consumed: A) Within one year. B) Within one operating cycle. C) Within one year or one operating cycle, whichever is shorter. D) Within one year or one operating cycle, whichever is longer. 30) A company would classify a six-month prepaid insurance policy as: A) Property, plant, and equipment. B) Investment. C) Current asset. D) Goodwill. 31) An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer, is: A) Building. B) Accounts receivable. C) Inventory. D) Supplies. 32) Long-term solvency refers to: A) The efficiency with which a company manages its resources. B) The profitability of a company over a long-term period of time. C) The amount of current assets relative to long-term assets. D) The risk that a company will not be able to pay its long-term debt. 33) Which is a shareholders' equity account in the balance sheet? A) Accumulated depreciation. B) Paid-in capital. C) Salaries payable. D) Accounts receivable. 34) Rent collected in advance is: A) An asset account in the balance sheet. B) A liability account in the balance sheet. C) A shareholders' equity account in the balance sheet. D) A temporary account, not in the balance sheet at all.

35) Notes payable that are due in two years are: A) Current liabilities. B) Long-term intangible assets. C) Long-term liabilities. D) Long-term investments. 36) Which of the following is not a current liability account? A) Accrued payroll. B) Dividends payable. C) Prepaid rent. D) Subscriptions collected in advance from customers. 37) New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is: A) Twelve months. B) Thirty months. C) Six months. D) Three months. 38) Long-term assets generally include: A) Inventory held for sale. B) Prepaid rent. C) Accounts receivable. D) Land held for a possible future plant site. 39) Long-term productive assets used in the normal course of business are typically classified as: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant and equipment. 40) Patents, copyrights, franchises, and trademarks are examples of: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant and equipment.

41) The following information is provided for a company.

Accounts payable Buildings Cash Accounts receivable Salaries payable Retained earnings Supplies Notes payable (due in 18 months) Interest payable Common stock

$ 15,000 80,000 10,500 9,500 4,500 47,500 40,000 35,000 3,000 35,000

What is the amount of current assets, assuming the accounts above reflect normal activity? A) $20,000. B) $60,000. C) $140,000. D) $175,000. 42) The following information is provided for a company. All liabilities are due to be satisfied within one year unless stated otherwise.

Retained earnings Supplies Equipment Accounts receivable Deferred revenue Accounts payable Common stock Notes payable (due in 18 months) Interest payable Cash

$ 52,000 37,000 72,000 9,000 6,000 15,000 25,000 35,000 7,000 22,000

What is the amount of current liabilities? A) $63,000. B) $28,000. C) $46,000. D) $22,000.

43) The following information is provided for Sacks Company.

Cash Supplies Prepaid rent Salaries expense Equipment Service revenue Miscellaneous expenses Dividends Accounts payable Common stock Retained earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of total assets? A) $81,500. B) $82,500. C) $68,500. D) $83,500. 44) The following information is provided for Sacks Company.

Cash Supplies Prepaid rent Salaries expense Equipment Service revenue Miscellaneous expenses Dividends Accounts payable Common stock Retained earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of total liabilities? A) $5,000. B) $78,500. C) $68,500. D) $83,500.

45) The following information is provided for Sacks Company before closing entries.

Cash Supplies Prepaid rent Salaries expense Equipment Service revenue Miscellaneous expenses Dividends Accounts payable Common stock Retained earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of total shareholders' equity? A) $5,000. B) $78,500. C) $68,500. D) $83,500. 46) Consider the following items: • • • • • • • • • •

Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue Buildings Notes Payable (due in six months) Equipment

How many of the items listed above are generally long-term assets? A) Two. B) Three. C) Four. D) Five.

47) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Accounts receivable Building and equipment Cash Interest receivable Inventory Land Notes receivable (long-term) Prepaid rent Supplies Trademark Accounts payable Accumulated depreciation Additional paid-in capital Dividends payable Common stock (at par) Income tax payable Notes payable (long-term) Retained earnings Deferred revenue TOTALS

Debit 710 920 39 30 16 150 450 20 8 40

2,383

Credit

560 80 485 30 15 65 800 308 40 2,383

What would Symphony report as total current assets? A) $823 million. B) $838 million. C) $863 million. D) $1,696 million.

48) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

2,383

Credit

560 80 485 30 15 65 800 308 40 2,383

What would Symphony report as total assets? A) $2,463 million. B) $2,383 million. C) $2,318 million. D) $2,303 million.

49) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

Credit

2,383

560 80 485 30 15 65 800 308 40 2,383

What would Symphony report as total shareholders' equity? A) $323 million. B) $808 million. C) $838 million. D) $928 million.

50) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

2,383

Credit

560 80 485 30 15 65 800 308 40 2,383

What is the amount of working capital for Symphony? A) $148 million. B) $158 million. C) $128 million. D) $113 million. 51) Assets do not include: A) Property, plant, and equipment. B) Investments. C) Paid-in capital. D) Nontrade receivables. 52) Cash equivalents would not include: A) Cash not available for current operations. B) Money market funds. C) U.S. treasury bills. D) Commercial paper.

53) Cash equivalents would include: A) Highly liquid investments that can be quickly converted to cash. B) Accounts receivable from customers. C) Cash restricted for special purposes such as to repay debt in the future. D) Prepaid expenses that were purchased with cash. 54) Accrued liabilities: A) Are generally paid in services rather than cash. B) Result from payment before services are received. C) Result from services received before payment is made. D) Are deferred charges to expense. 55) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine. 56) Janson Corporation Co.'s trial balance included the following account balances at December 31, 2021: Accounts receivable Inventory Patent Investments Prepaid insurance Notes receivable, due 2024

$ 12,000 40,000 12,000 30,000 6,000 50,000

57) Lanson Corporation Co.'s trial balance included the following account balances at December 31, 2021: Accounts payable Bonds payable, due 2030 Salaries payable Notes payable, due 2022 Notes payable, due 2026

$ 25,000 22,000 16,000 20,000 40,000

What amount should be included in the current liabilities section of Lanson's December 31, 2021, balance sheet? A) $63,000. B) $41,000. C) $61,000. D) $101,000. 58) The usual difference between accounts payable and notes payable is: A) Legally enforceable debt. B) Current–Long-term classification. C) Known payment terms. D) Explicitly stated interest. 59) Which of the following would be disclosed in the summary of significant accounting policies disclosure note?

a. b. c. d.

Composition of Long-term debt No Yes Yes No

Depreciation Method Yes No Yes No

A) Option a B) Option b C) Option c D) Option d 60) Which of the following is not a required disclosure for related-party transactions? A) The nature of the relationship. B) A description of the transactions. C) The amounts due from or to related parties. D) The impact of the transactions on current year's income.

61) Disclosure notes would not include: A) Depreciation methods used and estimated useful life. B) Definition of cash equivalents. C) Details of pension plans. D) Data to adjust the financial statements so that they are not misleading. 62) The principal concern with accounting for related-party transactions is: A) The size of the transactions. B) Differences between economic substance and legal form. C) The absence of legally binding contracts. D) The lack of accurate data to record transactions. 63) A subsequent event for an entity with a December 31, 2021, year-end would not include: A) A change in the estimated useful lives of equipment in January 2022. B) An issuance of bonds in January 2022. C) An acquisition of another company in January 2022. D) A major uncertainty at December 31, resolved in January 2022. 64) How are management's responsibility and the auditor's opinion on internal controls represented in the unqualified auditor's report?

a. b. c. d.

Management's Responsibility Not stated Stated Not stated Stated

Auditors' Responsibility Stated Stated Not stated Not stated

A) Option a B) Option b C) Option c D) Option d 65) Management's Report on Internal Control Over Financial Reporting: A) Provides the auditor's opinion on the fairness of the financial statements. B) Contains personal certification of the financial statements by the company's executives. C) Contains a detailed description of compensation of the company's executives for the year. D) Provides a summary of significant accounting policies used to prepare financial statements. 66) The Management's Discussion and Analysis section of the annual report can best be described as: A) Frank but objective. B) Independent but precise. C) Legalistic and lengthy. D) Biased but informative. 14 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

67) An example of fraud would be: A) Issuing a purchase order without first securing bids. B) Buying raw materials from an affiliated company. C) Knowingly classifying a material long-term receivable as a current receivable. D) Forgetting to accrue salaries payable. 68) An example of an error would be: A) Purchasing inventory from a related party. B) Counting an inventory item twice when taking a physical inventory. C) Holding back invoices so that accounts payable are understated. D) Receiving kickbacks in exchange for issuing a purchase order to a vendor. 69) An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in: A) A disclaimer. B) An unqualified opinion. C) An adverse opinion. D) A consistency exception. 70) A company may compare the amount of receivables in the current year to the amount of receivables in the previous year to estimate a trend in the company's ability to collect cash from customers. This type of analysis is known as: A) Horizontal analysis. B) Time analysis. C) Vertical analysis. D) Turnover analysis. 71) To understand the components of a company's profitability, an analyst may compute the ratio of each major expense classification to total sales. This type of analysis is known as: A) Cost analysis. B) Horizontal analysis. C) Comparative analysis. D) Vertical analysis. 72) Which of the following would be an amount computed using horizontal analysis? A) The ratio of cost of goods sold to total sales for the current year. B) The percentage change in the cash balance from last year to this year. C) The difference between current assets and current liabilities at the end of the year. D) The ratio of inventory to total assets at the end of the year. 73) Liquidity refers to: A) The amount of cash on hand at a given time. B) The readiness of an asset to be converted to cash. C) The period until cash is used and refinancing becomes necessary. D) Financial leverage. 15 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

74) Lack of long-term solvency refers to: A) Risk of nonpayment of both current and long-term liabilities. B) The length of time before long-term debt becomes due. C) The ability to refinance long-term debt when it becomes due. D) Long-term assets. 75) The current ratio is calculated as: A) Current assets divided by long-term assets. B) Current assets divided by total assets. C) Current assets divided by current liabilities. D) Current assets divided by total liabilities. 76) The acid-test ratio is also known as the: A) Current ratio. B) Debt to equity ratio. C) Times interest earned ratio. D) Quick ratio. 77) The quick ratio is typically computed as: A) The liquidity ratio divided by the equity ratio. B) Current assets minus inventory divided by current liabilities minus accounts payable. C) Current assets minus inventory and prepaid items divided by current liabilities. D) Cash divided by accounts payable. 78) Working capital is equal to: A) Current assets. B) Current liabilities. C) Current assets plus current liabilities. D) Current assets minus current liabilities. 79) Which of the following is not used when analyzing long-term solvency? A) Times interest earned ratio. B) Debt to equity ratio. C) Acid-test ratio. D) Total liabilities. 80) When a company pays its bill from a lawyer for previous services on account: A) Its debt to equity ratio always decreases. B) Its acid-test ratio always remains unchanged. C) Its current ratio always remains unchanged. D) Its working capital decreases.

81) When a company accrues salaries at the end of the accounting period: A) Its acid-test ratio increases. B) Its current ratio increases. C) Its debt to equity ratio decreases. D) Its debt to equity ratio increases. 82) Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase: A) Its current ratio decreases. B) Its quick ratio decreases. C) Its current ratio remains unchanged. D) Its quick ratio remains unchanged. 83) When a company sells land for cash and recognizes a $25,000 gain: A) Its acid-test ratio decreases. B) Its current ratio decreases. C) Its debt to equity ratio decreases. D) Cannot determine from the given information. 84) The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Current assets: Cash Accounts receivable (net) Notes receivable Inventory Prepaid expenses Total current assets Equipment (net)

Total assets

60 170 50 200 25 505 255

$ 760

Liabilities and Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term liabilities Total liabilities Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and equity

$ 240 80 320 110 430 150 180 330 $ 760

The current ratio is (Round your answer to 2 decimal places.): A) 1.98. B) 1.58. C) 1.17. D) 0.66.

85) The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Current assets: Cash Accounts receivable (net) Notes receivable Inventory Prepaid expenses Total current assets Equipment (net)

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

Working capital is: A) $505 thousand. B) $265 thousand. C) $185 thousand. D) $75 thousand. 86) The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Current assets: Cash Accounts receivable (net) Notes receivable Inventory Prepaid expenses Total current assets Equipment (net)

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

Quick assets total: A) $60 thousand. B) $230 thousand. C) $280 thousand. D) $305 thousand.

87) The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Current assets: Cash Accounts receivable (net) Notes receivable Inventory Prepaid expenses Total current assets Equipment (net)

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

The acid-test ratio is (Round your answer to 2 decimal places.): A) 0.25. B) 0.88. C) 1.17. D) 1.58. 88) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities 10% Bonds, long-term Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's debt to equity ratio is (Round your answer to 2 decimal places.): A) 0.75. B) 1.13. C) 0.53. D) 1.80.

89) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities 10% Bonds, long-term Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's times interest earned ratio is (Round your answer to 2 decimal places.): A) 3.47. B) 1.73. C) 2.47. D) 10.0. 90) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities 10% Bonds, long-term Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's long-term debt to equity ratio equity is: A) 133.3%. B) 75%. C) 180%. D) 0%. 91) Using borrowed funds to generate additional profits for shareholders is referred to as: A) Liquidity management. B) Operational expansion. C) Capital budgeting. D) Financial leverage.

92) A company that borrows funds at 6% and then generates a return on those funds of 9% typically has: A) Greater default risk. B) Favorable financial leverage. C) Higher return on equity. D) All of the other answers are true. 93) Which of the following features is typical of a balance sheet prepared under IFRS? A) A shareholders' equity section often is not included. B) Assets often are listed after liabilities. C) Long-term items often are listed before current items. D) Assets sometimes do not equal liabilities plus shareholders' equity. 94) For a balance sheet prepared under IFRS, long-term liabilities typically are listed: A) Just before the current assets section. B) In the shareholders' equity section. C) In the long-term asset section. D) Just before the current liabilities section. 95) Which of the following is not a required segment reporting disclosure according to U.S. GAAP? A) Segment profit or loss. B) Segment assets. C) Segment liabilities. D) General information about the operating segment. 96) Which of the following is not a required segment reporting disclosure according to International Financial Reporting Standards (IFRS)? A) Segment profit or loss. B) Segment assets. C) Segment liabilities. D) All are required disclosures. 97) Which of the following is not a characteristic that defines a reportable operating segment according to U.S. GAAP? A) Operating results are regularly reviewed by the enterprise's chief operating officer. B) Discrete financial information is available. C) Engages in business activities from which it may recognize revenues and incur expenses. D) Represents more than 20% of total company revenues, assets, or net income.

98) Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Unqualified opinion _____ 2. Disclaimer _____ 3. Auditor's report _____ 4. Qualified opinion

_____ 5. Adverse opinion

a. Independent and professional report about the fairness of the financial statements. b. Given by an auditor when there is a limitation of audit procedures or a departure from GAAP. c. Given by an auditor when financial statements are presented fairly in conformity with GAAP. d. Given by an auditor when there are substantial reporting errors and a qualified opinion is not appropriate. e. Given by an auditor when information is insufficient to express an opinion.

99) Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Current ratio _____ 2. Acid-test ratio _____ 3. Long-term solvency _____ 4. Liquidity _____ 5. Debt to equity ratio

a. Also known as the quick ratio. b. Refers to riskiness of a company with regard to the amount of liabilities in its capital structure. c. Relates to the amount of time before an asset is converted to cash or a liability is paid. d. If four to one, 80% of assets are debt-financed. e. Current assets divided by current liabilities.

100) Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Long-term liabilities _____ 2. Current liabilities _____ 3. Intangible asset _____ 4. Current assets _____ 5. Property, plant, and equipment

a. Obligations payable in more than one year or longer than the operating cycle. b. Ownership of an exclusive right. c. Items expected to be converted to cash or consumed within one year or the operating cycle. d. Obligations payable within one year or the operating cycle. e. Includes buildings and land used in operations.

101) Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Notes receivable _____ 2. Short-term investments _____ 3. Inventory _____ 4. Accounts receivable _____ 5. Prepaid expenses

a. Insurance premiums paid in advance. b. Goods to be sold in the ordinary course of business. c. Due from customers in the ordinary course of business. d. Formal agreement that specifies customer's payment terms. e. Liquid investments not classified as cash equivalents.

102) Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Subsequent events _____ 2. Proxy statement _____ 3. MD&A _____ 4. Auditor's report _____ 5. Summary of significant accounting policies

a. Management's views on its operations, liquidity, and capital resources. b. Includes disclosures of executive compensation. c. Independent and professional opinion about the fairness of the financial statements. d. Occurs after the fiscal year-end, but before the statements are issued. e. Information about the company's choices from among various alternative accounting methods.

103) Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Paid-in capital _____ 2. Prepaid expense _____ 3. Deferred revenue _____ 4. Operating cycle _____ 5. Retained earnings

a. Accumulated net income less dividends since the inception of the corporation. b. Cash received from a customer for goods or services to be provided in a future period. c. Converting cash to inventory to receivables to cash. d. Cash paid in advance for a cost of the company. e. Amounts invested by shareholders in the corporation.

104) Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Related-party transactions _____ 2. Deferred revenues _____ 3. Accounts receivable _____ 4. Inventory _____ 5. Accounts payable _____ 6. Prepaid expense _____ 7. Retained earnings _____ 8. Subsequent events _____ 9. MD&A _____ 10. Franchise

a. Material events that occur after the end of the fiscal year and before the statements are issued. b. Obligations to suppliers of merchandise or of services purchased on account. c. Transactions with owners, managers, and affiliated companies. d. Net income less dividends since inception of the corporation. e. Management's views on significant events. f. Amounts due from customers. g. Goods to be sold in the ordinary course of business. h. Asset recorded when an expense is paid for in advance. i. Cash received from a customer in advance of providing a good or service. j. An intangible asset.

105) Listed below are 4 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Default risk _____ 2. Operational risk

_____ 3. Horizontal analysis

_____ 4. Vertical analysis

a. An indication of whether a company won't be able to pay its obligations when they come due. b. Each item in a financial statement is expressed as a percentage of that same item in the financial statements of another year (base amount). c. Each item in the financial statements is expressed as a percentage of an appropriate corresponding total, or base amount, but within the same year. d. An indication of how adept a company is at withstanding various events and circumstances that might impair its ability to earn profits.

107) As controller for Henderson, you are attempting to reconstruct and revise the following balance sheet prepared by a staff accountant. Henderson Manufacturing Company Balance Sheet At December 31, 2021 ($ in 000s) Assets Current assets: Cash Accounts receivable Allowance for uncollectible accounts Finished goods inventory Prepaid expenses Total current assets Long-term assets: Investments Raw materials and work in process inventory Equipment Accumulated depreciation–equipment Franchise Total assets

$ 1,600 4,300 (500) 5,000 2,400 12,800 2,000 3,200 18,000 (8,000) ________ ? $ ?

Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable Interest payable–note Deferred revenue Total current liabilities Long-term liabilities: Bonds payable Interest payable–bonds Shareholders' equity: Common stock Retained earnings Total liabilities and shareholders' equity

$6,200 8,000 200 2,400 16,800 7,000 200 $ $

? ? ?

Additional information ($ in 000s): 1. Certain records that included the account balances for the franchise and shareholders' equity items were lost. However, a complete, preliminary balance sheet prepared before the records were lost showed a debt to equity ratio of 1.5. That is, total liabilities are 150% of total shareholders' equity. Retained earnings at the beginning of the year was $4,300. Net income for 2021 was $2,500, and $800 in cash dividends were declared and paid to shareholders. 2. The investments represent treasury bills purchased in December 2021 that mature in January 2022. These are considered cash equivalents. 3. Interest on both the notes and the bonds is payable annually. 4. The notes payable account contains one note that is due in annual installments of $800 for each payment due. 5. Deferred revenue will be recognized equally over the next 18 months. 6. The common stock represents 500,000 shares of no par stock authorized, of which 300,000 shares are issued and outstanding. Required: Prepare a complete, corrected, classified balance sheet.

108) You recently joined the internal auditing department of Kaitlyn Sportswear Corporation. As one of your first assignments, you are examining a balance sheet prepared by a staff accountant. Kaitlyn Sportswear Corporation Balance Sheet At December 31, 2021 Assets Current assets: Cash Accounts receivable, net Notes receivable Inventory Prepaid expenses Total current assets Other assets: Land Buildings, net Equipment, net Investments Patent Total other assets Total assets Liabilities and Shareholders' Equity Current liabilities: Accounts payable Salaries payable Interest payable Total current liabilities Long-term liabilities: Notes payable Bonds payable Deferred revenue Total long-term liabilities Total liabilities Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$ 220,000 340,000 80,000 600,000 40,000 1,280,000 $ 500,000 2,200,000 400,000 50,000 60,000 3,156,000 $4,346,000

$ 165,000 75,000 45,000 285,000 $300,000 500,000 80,000 880,000 1,165,000 $2,000,000 1,181,000 3,181,000 $4,346,000

In the course of your examination you uncover the following information pertaining to the balance sheet: 1. The land and buildings represent the corporate headquarters and manufacturing facilities. 2. The notes receivable are due in 2023. The balance of $80,000 includes $5,000 of accrued interest. The next interest payment is due in July 2022. 3. The notes payable account is due in installments of $50,000 per year. Interest on both the notes and bonds is payable annually. 4. The company's investments consist of equity securities of other corporations. Management does not intend to liquidate any investments in the coming year. 5. Deferred revenue will be recognized ratably (equally) over the next two years. Required: Identify and explain the deficiencies in the statement prepared by the company's accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.

109) Presented below is a partial trial balance for the Messenger Corporation at December 31, 2021. Account Title Cash and cash equivalents Accounts receivable Raw materials inventory Notes receivable Interest receivable Interest payable Investments Land Buildings Accumulated depreciation–buildings Work in process inventory Finished goods inventory Equipment Accumulated depreciation–equipment Franchise (net of amortization) Prepaid insurance (for the next year) Deferred revenue Accounts payable Notes payable Salaries payable Allowance for uncollectible accounts Sales revenue Cost of goods sold Salaries expense

Debits 30,000 195,000 36,000 120,000 4,000

Credits

7,000 48,000 100,000 1,500,000 740,000 38,000 98,000 400,000 230,000 120,000 60,000 48,000 240,000 500,000 6,000 24,000 900,000 500,000 48,000

Additional information: 1. The notes receivable, along with any accrued interest, are due on November 1, 2022. 2. The notes payable are due in 2026. Interest is payable annually. 3. The investments consist of equity securities of other corporations. Management does not intend to sell any of the securities in the next year. 4. Deferred revenue will be recognized equally over the next 18 months. Required: Determine the company's working capital at December 31, 2021.

110) The December 31, 2021, post-closing trial balance ($ in thousands) for Libby Corporation is presented below:

Cash Investments (long-term) Accounts receivable Allowance for uncollectible accounts Prepaid insurance Inventory Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Patents (unamortized balance) Accounts payable Notes payable, due 2022 Interest payable Bonds payable, due 2031 Common stock (no par), 20,000 shares authorized, issued, and outstanding Retained earnings Totals

Debits 22,500 55,000 30,000

Credits

7,500 4,500 100,000 45,000 140,000 50,000 132,500 30,000 5,000 37,500 65,000 10,000 120,000

________ 534,500

150,000 64,500 534,500

Required: Prepare a classified balance sheet for Libby Corporation at December 31, 2021.

Use this information to answer the following questions: The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2021 Cash Notes receivable (due August 15, 2022) Accounts receivable (net) Inventory Property, plant, and equipment (net) Intangible assets Total Assets

$ 19,000 35,000 48,400 70,600 250,000 12,400 $435,400

Current liabilities Bonds payable (11%) (long-term) Common stock Retained earnings Total liabilities and equity

$108,400 100,000 70,000 157,000 $435,400

Marjoram Company Income Statement For the Year ended December 31, 2021 Sales Cost of goods sold Gross profit Operating expenses Operating income Interest expense Income before income tax Income tax expense Net income

$704,000 422,400 $281,600 166,200 $115,400 11,000 $104,400 31,320 $ 73,080

111) Compute the current ratio for Marjoram Company. Round your answer to two decimal places. 112) Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal places. 113) Compute the debt to equity ratio for Marjoram Company. Round your answer to two decimal places. 114) Compute the times interest earned ratio for Marjoram Company. Round your answer to two decimal places. 32 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

115) Compute the return on shareholders' equity ratio for Marjoram Company. Round your answer to two decimal places. Use this information to answer the following questions: The balance sheet for Altoid Co. is shown below. Altoid Co. Balance Sheet At December 31, 2021 Cash Short-term investments Accounts receivable (net) Inventory Property, plant, and equipment (net) Total assets

Assets: $ 150 200 300 450 1,100 $2,200

Liabilities and shareholders' equity: Current liabilities Long-term liabilities Common stock Retained earnings Total liabilities and shareholders' equity

$ 450 600 150 1,000 $2,200

Selected 2021 income statement information for Altoid Co. includes: Net sales Operating expenses Income before interest and tax Interest expense Income tax expense Net income

$7,700 7,110 590 90 150 350

Required: Compute the following financial statement ratios for 2021: 116) Altoid Co.'s current ratio. Round your answer to two decimal places. 117) Altoid Co.'s acid-test ratio. Round your answer to two decimal places. 118) Altoid Co.'s debt to equity ratio. Round your answer to two decimal places. 119) Altoid Co.'s times interest earned ratio. Round your answer to two decimal places. 120) Altoid Co.'s long term debt to equity ratio. Round your answer to two decimal places. 33 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Use this information to answer the following questions: Bronco Electronics' current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement: Inventory Total assets Current ratio Acid-test ratio Debt to equity ratio

$150,000 $1,400,000 3 2.25 1.5

Required: Compute the following for Bronco: 121) Current assets 122) Shareholders' equity 123) Long-term assets 124) Long-term liabilities Use this information to answer the following questions: Spartan Sportswear's current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement: Inventory Total assets Current ratio Acid-test ratio Debt to equity ratio

$180,000 $720,000 2.75 1.5 1.4

Required: Compute the following for Spartan: 125) Current assets 126) Shareholders' equity 127) Long-term assets 128) Long-term liabilities

129) The following balance sheet information (in $ millions) comes from the Annual Report to Shareholders of Merry International Inc. for the 2021 fiscal year. Certain amounts have been replaced with question marks to test your understanding of balance sheets. In addition, you are provided with the following information from an analysis of Merry's financial position at the same date: Current ratio = 1.352259; Acid-test ratio = 0.5769692; Debt to equity ratio = 1.505718. Required: Compute the missing amounts (rounded to the nearest $ in millions) in the balance sheet. Assets Current assets Cash and cash equivalents Accounts and notes receivable Inventory Other Total current assets Property and equipment, net $1,307 Intangible assets, net ? Investments 250 Notes and other receivables, net 1,264 Other assets 1,137 Total long-term assets Total assets Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Other payables Total current liabilities Long-term debt Other long-term liabilities Total long-term liabilities Total liabilities Shareholders' equity Common stock Additional paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$505 ? ? 450 ?

____? ?

$ 634 692 1,175 2,501 ? 2,206 _____? ? 500 1,244 1,841 1,585 $8,983

Use this information to answer the following questions: Indicate whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken. 130) Current ratio Acid-test ratio Total debt to equity ratio Prepay rent for 3 months

131) Current ratio Acid-test ratio Total debt to equity ratio Cash sale of land for a gain

132) Current ratio Acid-test ratio Total debt to equity ratio Purchase of inventory on account

133) Current ratio Acid-test ratio Total debt to equity ratio Collection of an Account Receivable

134) Current ratio Acid-test ratio Total debt to equity ratio Refinancing currently maturing debt for five more years

135) Current ratio Acid-test ratio Total debt to equity ratio Purchasing advertising on 30-day credit

136) Current ratio Acid-test ratio Total debt to equity ratio Payment of recently accrued income taxes

137) Current ratio Acid-test ratio Total debt to equity ratio Cash sale of inventory for a profit

138) Current ratio Acid-test ratio Total debt to equity ratio Purchase of a warehouse with a 6-month note

139) Current ratio Acid-test ratio Total debt to equity ratio Issuance of long-term debt for cash

140) Current ratio Acid-test ratio

Total debt to equity ratio

Record annual depreciation on office equipment

141) You are reviewing the December 31, 2021, financial statements of Ellie's Antiques. Ellie's management is considering an initial public offering of shares of its common stock. The following items come to your attention: a. Included in long-term investments are 10-year U.S. Treasury bonds that mature March 31, 2022. The bonds were purchased November 20, 2021. b. The property, plant, and equipment account is stated at cost, except that it includes a parcel of land purchased for investment purposes at a cost of $40,000. Because of rising land prices, the value of the land has been written up to $60,000. The company has an independent appraisal that attests to this amount. c. The accounts receivable account includes $20,000 due in three years from officers and employees, as well as a two-year, 8% note for $25,000 due from a customer. The loan enabled the customer to buy equipment needed to process materials purchased from Ellie's Antiques. Required: Determine the proper balance sheet presentation and amounts for the above items. 142) List the circumstances under which land would be classified under the following balance sheet classifications: 1. Current assets. 2. Investments (long-term). 3. Property, plant, and equipment. 4. Other long-term assets. 37 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

143) You are the independent accountant assigned to the audit of Neophyte Company. The company's accountant, a graduate of Rival State University, has prepared financial statements that contained the following questionable items: a. The balance sheet reports land at $100,000. Included in this amount is a property held for speculation at a cost of $30,000. b. Current liabilities include $50,000 for long-term debt that is due in three months. The company has received a suitable firm commitment to refinance the debt for five years and intends to do so. c. Investments include $20,000 in short-term, high-grade commercial paper, which is a cash equivalent. Required. Describe the appropriate balance sheet presentation for the above items. 144) Provide an example of a liability that would not require the payment of cash. 145) Briefly explain the purpose of the disclosure note on significant accounting policies. Provide two examples of what might be found in this note. 146) Briefly explain what is meant by a subsequent event. Give two examples of subsequent events. 147) Explain how management's discussion and analysis of its operations and liquidity may be helpful to investors.

148) The following is the 2021 report of the independent registered public accounting firm that audited The Great Food Company, Inc., a large supermarket chain: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' deficit and comprehensive loss, and cash flows present fairly, in all material respects, the financial position of The Great Food Company, Inc. and its subsidiaries (debtor-in-possession) at December 31, 2021, and December 31, 2020, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company is currently operating pursuant to a Chapter 11 bankruptcy filing which, together with the uncertain outcomes of the matters discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share lending arrangements during fiscal 2020.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Required. Interpret the main points indicated in this report by Great Food’s auditors. 149) Using an example, discuss the techniques that analysts use to transform accounting numbers into more useful forms. 150) The current asset section of Seifert & Seifert, CPAs' balance sheet consists of cash, accounts receivable, investments, and prepaid expenses. The 2021 balance sheet reported the following: cash, $110,000; investments, $22,000; prepaid expenses, $18,000; long-term assets, $422,000; and shareholders' equity, $350,000. The current ratio at the end of the year was 1.6 and the debt to equity ratio was .8. Required: Determine the following 2021 amounts and ratios: 1. Current liabilities. 2. Long-term liabilities. 3. Accounts receivable. 4. The acid-test ratio. 151) The balance sheets of Callaway Foods list current assets followed by long-term assets and current liabilities before long-term liabilities. If Callaway Foods prepared its financial statements according to International Financial Reporting Standards, what other approach might it take in preparing its balance sheet?

Intermediate Accounting, 10e (Spiceland) Chapter 3 The Balance Sheet and Financial Disclosures 1) The balance sheet reports a company's financial position at a point in time. Answer: TRUE Difficulty: 1 Easy Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 2) A company's market value is generally less than its book value. Answer: FALSE Difficulty: 1 Easy Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 3) All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer. Answer: TRUE Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 4) The balance of net receivables represents the amount expected to be collected. Answer: TRUE Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 1 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer. Answer: TRUE Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 6) Assets classified as property, plant, and equipment include machinery, equipment, and inventory. Answer: FALSE Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 7) Intangible assets usually are reported in the balance sheet as current assets. Answer: FALSE Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 8) Accrued salaries and wages in a balance sheet represent salaries that have been earned by employees but not yet paid. Answer: TRUE Difficulty: 1 Easy Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

9) The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies. Answer: TRUE Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 10) Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes. Answer: TRUE Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 11) Subsequent events are significant developments that take place after a company's year-end, and after the financial statements are issued or available to be issued. Answer: FALSE Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 12) The details of transactions between the company and its owners' family members do not need to be disclosed separately in the notes to the financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

13) The ultimate responsibility for the financial statements lies with the auditors. Answer: FALSE Difficulty: 1 Easy Topic: Audit and Auditor's report; Disclosure--Management - Directors - Executives Learning Objective: 03-06 Explain the purpose of an audit and describe the content of the audit report.; 03-05 Describe disclosures related to management's discussion and analysis, responsibilities, and compensation. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal; FN Reporting / Keyboard Navigation 14) The compensation of top executives is disclosed in the proxy statement. Answer: TRUE Difficulty: 1 Easy Topic: Disclosure―Management - Directors - Executives Learning Objective: 03-05 Describe disclosures related to management's discussion and analysis, responsibilities, and compensation. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal / Keyboard Navigation 15) Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year. Answer: FALSE Difficulty: 1 Easy Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 16) Vertical analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year. Answer: TRUE Difficulty: 1 Easy Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 4 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17) An example of vertical analysis would be comparing inventory this year to inventory last year to calculate the percentage change in inventory. Answer: FALSE Difficulty: 2 Medium Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 18) An example of vertical analysis would be stating each individual asset as a percentage of total assets. Answer: TRUE Difficulty: 1 Easy Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 19) Liquidity refers to the riskiness of a company with regard to the amount of total assets in its capital structure. Answer: FALSE Difficulty: 2 Medium Topic: Balance sheet―Usefulness - Limits - Elements; Using information―Liquidity ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

20) A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0. Answer: TRUE Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 21) Balance sheets prepared under IFRS often report long-term items before current items. Answer: TRUE Difficulty: 1 Easy Topic: IFRS―Balance sheet presentation Learning Objective: 03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting. Bloom's: Remember AACSB: Reflective Thinking; Diversity AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation 22) Balance sheets prepared under IFRS often exclude a shareholders' equity section. Answer: FALSE Difficulty: 1 Easy Topic: IFRS―Balance sheet presentation Learning Objective: 03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting. Bloom's: Remember AACSB: Reflective Thinking; Diversity AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation 23) Segment reporting requires disclosure of each customer that accounts for more than 5% of total enterprise revenue. Answer: FALSE Difficulty: 1 Easy Topic: Segment reporting - Appendix Learning Objective: 03-Appendix 3: Reporting Segment Information. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

24) The balance sheet reports: A) Net income at a point in time. B) Cash flows for a period of time. C) Assets and equities at a point in time. D) Assets and liabilities for a period of time. Answer: C Difficulty: 2 Medium Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 25) Which financial statement provides information for a point in time only? A) Statement of cash flows. B) Income statement. C) Statement of shareholders' equity. D) Balance sheet. Answer: D Difficulty: 1 Easy Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 26) A classified balance sheet: A) Shows only current assets and current liabilities. B) Shows changes in assets, liabilities, revenues and expenses. C) Contains confidential information. D) Shows subtotals for current assets and current liabilities. Answer: D Difficulty: 1 Easy Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

27) Which of the following is a primary reason a company's book value is less than its market value? A) Management recording errors. B) Many valuable resources of the company are not recorded as assets. C) Land and buildings are valued at their fair value. D) Investors tend to be too optimistic about a company's growth opportunities. Answer: B Difficulty: 2 Medium Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 28) Which of the following potentially limit the usefulness of the balance sheet? A) Many valuable resources of the company are not recorded as assets. B) Many items in the balance sheet reflect estimates and judgments of management. C) Property, plant, and equipment are recorded at their book values rather than fair values. D) All of the other answers represent potential limitations. Answer: D Difficulty: 2 Medium Topic: Balance sheet―Usefulness - Limits - Elements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 29) Current assets include cash and all other assets expected to become cash or be consumed: A) Within one year. B) Within one operating cycle. C) Within one year or one operating cycle, whichever is shorter. D) Within one year or one operating cycle, whichever is longer. Answer: D Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

30) A company would classify a six-month prepaid insurance policy as: A) Property, plant, and equipment. B) Investment. C) Current asset. D) Goodwill. Answer: C Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 31) An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer, is: A) Building. B) Accounts receivable. C) Inventory. D) Supplies. Answer: A Difficulty: 1 Easy Topic: Classify assets―Long-term assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 32) Long-term solvency refers to: A) The efficiency with which a company manages its resources. B) The profitability of a company over a long-term period of time. C) The amount of current assets relative to long-term assets. D) The risk that a company will not be able to pay its long-term debt. Answer: D Difficulty: 1 Easy Topic: Balance sheet―Usefulness - Limits - Elements; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

33) Which is a shareholders' equity account in the balance sheet? A) Accumulated depreciation. B) Paid-in capital. C) Salaries payable. D) Accounts receivable. Answer: B Difficulty: 1 Easy Topic: Classify shareholders' equity Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 34) Rent collected in advance is: A) An asset account in the balance sheet. B) A liability account in the balance sheet. C) A shareholders' equity account in the balance sheet. D) A temporary account, not in the balance sheet at all. Answer: B Difficulty: 1 Easy Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 35) Notes payable that are due in two years are: A) Current liabilities. B) Long-term intangible assets. C) Long-term liabilities. D) Long-term investments. Answer: C Difficulty: 1 Easy Topic: Classify liabilities―Long-term liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

36) Which of the following is not a current liability account? A) Accrued payroll. B) Dividends payable. C) Prepaid rent. D) Subscriptions collected in advance from customers. Answer: C Difficulty: 1 Easy Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 37) New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is: A) Twelve months. B) Thirty months. C) Six months. D) Three months. Answer: B Difficulty: 2 Medium Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 38) Long-term assets generally include: A) Inventory held for sale. B) Prepaid rent. C) Accounts receivable. D) Land held for a possible future plant site. Answer: D Difficulty: 2 Medium Topic: Classify assets―Long-term assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

39) Long-term productive assets used in the normal course of business are typically classified as: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant and equipment. Answer: D Difficulty: 1 Easy Topic: Classify assets―Long-term assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 40) Patents, copyrights, franchises, and trademarks are examples of: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant and equipment. Answer: C Difficulty: 1 Easy Topic: Classify assets―Long-term assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

41) The following information is provided for a company.

Accounts payable Buildings Cash Accounts receivable Salaries payable Retained earnings Supplies Notes payable (due in 18 months) Interest payable Common stock

$ 15,000 80,000 10,500 9,500 4,500 47,500 40,000 35,000 3,000 35,000

What is the amount of current assets, assuming the accounts above reflect normal activity? A) $20,000. B) $60,000. C) $140,000. D) $175,000. Answer: B Explanation: Total current assets: $10,500 + $9,500 + $40,000 = $60,000 Difficulty: 3 Hard Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

42) The following information is provided for a company. All liabilities are due to be satisfied within one year unless stated otherwise.

Retained earnings Supplies Equipment Accounts receivable Deferred revenue Accounts payable Common stock Notes payable (due in 18 months) Interest payable Cash

$ 52,000 37,000 72,000 9,000 6,000 15,000 25,000 35,000 7,000 22,000

What is the amount of current liabilities? A) $63,000. B) $28,000. C) $46,000. D) $22,000. Answer: B Explanation: Total current liabilities: $6,000 + $15,000 + $7,000 = $28,000 Difficulty: 3 Hard Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

43) The following information is provided for Sacks Company.

Cash Supplies Prepaid rent Salaries expense Equipment Service revenue Miscellaneous expenses Dividends Accounts payable Common stock Retained earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of total assets? A) $81,500. B) $82,500. C) $68,500. D) $83,500. Answer: D Explanation: Total assets: $12,000 + $4,500 + $2,000 + $65,000 = $83,500 Difficulty: 2 Medium Topic: Total assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

44) The following information is provided for Sacks Company.

Cash Supplies Prepaid rent Salaries expense Equipment Service revenue Miscellaneous expenses Dividends Accounts payable Common stock Retained earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of total liabilities? A) $5,000. B) $78,500. C) $68,500. D) $83,500. Answer: A Explanation: Total liabilities: $5,000 (Accounts Payable) Difficulty: 2 Medium Topic: Total liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

45) The following information is provided for Sacks Company before closing entries.

Cash Supplies Prepaid rent Salaries expense Equipment Service revenue Miscellaneous expenses Dividends Accounts payable Common stock Retained earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of total shareholders' equity? A) $5,000. B) $78,500. C) $68,500. D) $83,500. Answer: B Explanation: Total shareholders' equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500. Total shareholders' equity = $68,000 + $10,500 = $78,500. Alternatively, total stockholders' equity = total assets ($83,500) – total liabilities ($5,000). Difficulty: 3 Hard Topic: Classify shareholders' equity Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

46) Consider the following items: • • • • • • • • • •

Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue Buildings Notes Payable (due in six months) Equipment

How many of the items listed above are generally long-term assets? A) Two. B) Three. C) Four. D) Five. Answer: B Explanation: Land, Buildings, and Equipment Difficulty: 2 Medium Topic: Classify assets―Long-term assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

47) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

2,383

Credit

560 80 485 30 15 65 800 308 40 2,383

What would Symphony report as total current assets? A) $823 million. B) $838 million. C) $863 million. D) $1,696 million. Answer: A Explanation: Total current assets: $710 + $39 + $30 + $16 + $20 + $8 = $823 Difficulty: 3 Hard Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

48) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

2,383

Credit

560 80 485 30 15 65 800 308 40 2,383

What would Symphony report as total assets? A) $2,463 million. B) $2,383 million. C) $2,318 million. D) $2,303 million. Answer: D Explanation: Total assets: $710 + ($920 − $80) + $39 + $30 + $16 + $150 + $450 + $20 + $8 + $40 = $2,303 Difficulty: 3 Hard Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

49) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

Credit

2,383

560 80 485 30 15 65 800 308 40 2,383

What would Symphony report as total shareholders' equity? A) $323 million. B) $808 million. C) $838 million. D) $928 million. Answer: B Explanation: Total shareholders' equity: $485 + $15 + $308 = $808 Difficulty: 2 Medium Topic: Classify shareholders' equity Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

50) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit 710 920 39 30 16 150 450 20 8 40

2,383

Credit

560 80 485 30 15 65 800 308 40 2,383

What is the amount of working capital for Symphony? A) $148 million. B) $158 million. C) $128 million. D) $113 million. Answer: C Explanation: Current assets: $710 + $39 + $30 + $16 + $20 + $8 = Current liabilities: $560 + $30 + $65 + $40 = Working capital

$ 823 695 $ 128

Difficulty: 3 Hard Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

51) Assets do not include: A) Property, plant, and equipment. B) Investments. C) Paid-in capital. D) Nontrade receivables. Answer: C Difficulty: 1 Easy Topic: Total assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 52) Cash equivalents would not include: A) Cash not available for current operations. B) Money market funds. C) U.S. treasury bills. D) Commercial paper. Answer: A Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 53) Cash equivalents would include: A) Highly liquid investments that can be quickly converted to cash. B) Accounts receivable from customers. C) Cash restricted for special purposes such as to repay debt in the future. D) Prepaid expenses that were purchased with cash. Answer: A Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

54) Accrued liabilities: A) Are generally paid in services rather than cash. B) Result from payment before services are received. C) Result from services received before payment is made. D) Are deferred charges to expense. Answer: C Difficulty: 2 Medium Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 55) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine. Answer: C Difficulty: 2 Medium Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

56) Janson Corporation Co.'s trial balance included the following account balances at December 31, 2021: Accounts receivable Inventory Patent Investments Prepaid insurance Notes receivable, due 2024

$ 12,000 40,000 12,000 30,000 6,000 50,000

Investments consist of treasury bills that were purchased in November, 2021, and mature in January, 2022. Prepaid insurance is for two years. What amount should be included in the current assets section of Janson's December 31, 2021, balance sheet? A) $88,000. B) $85,000. C) $55,000. D) $135,000. Answer: B Explanation: $12,000 + $40,000 + $30,000 + $3,000 (1/2 of prepaid insurance) = $85,000. Difficulty: 2 Medium Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

$ 25,000 22,000 16,000 20,000 40,000

What amount should be included in the current liabilities section of Lanson's December 31, 2021, balance sheet? A) $63,000. B) $41,000. C) $61,000. D) $101,000. Answer: C Explanation: $25,000 + $16,000 + $20,000 = $61,000. Difficulty: 2 Medium Topic: Classify liabilities―Current liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 58) The usual difference between accounts payable and notes payable is: A) Legally enforceable debt. B) Current–Long-term classification. C) Known payment terms. D) Explicitly stated interest. Answer: D Difficulty: 2 Medium Topic: Classify liabilities―Long-term liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

59) Which of the following would be disclosed in the summary of significant accounting policies disclosure note?

a. b. c. d.

Composition of Long-term debt No Yes Yes No

Depreciation Method Yes No Yes No

A) Option a B) Option b C) Option c D) Option d Answer: A Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 60) Which of the following is not a required disclosure for related-party transactions? A) The nature of the relationship. B) A description of the transactions. C) The amounts due from or to related parties. D) The impact of the transactions on current year's income. Answer: D Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

61) Disclosure notes would not include: A) Depreciation methods used and estimated useful life. B) Definition of cash equivalents. C) Details of pension plans. D) Data to adjust the financial statements so that they are not misleading. Answer: D Difficulty: 1 Easy Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 62) The principal concern with accounting for related-party transactions is: A) The size of the transactions. B) Differences between economic substance and legal form. C) The absence of legally binding contracts. D) The lack of accurate data to record transactions. Answer: B Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 63) A subsequent event for an entity with a December 31, 2021, year-end would not include: A) A change in the estimated useful lives of equipment in January 2022. B) An issuance of bonds in January 2022. C) An acquisition of another company in January 2022. D) A major uncertainty at December 31, resolved in January 2022. Answer: A Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

64) How are management's responsibility and the auditor's opinion on internal controls represented in the unqualified auditor's report?

a. b. c. d.

Management's Responsibility Not stated Stated Not stated Stated

Auditors' Responsibility Stated Stated Not stated Not stated

A) Option a B) Option b C) Option c D) Option d Answer: B Difficulty: 1 Easy Topic: Audit and Auditor's report Learning Objective: 03-06 Explain the purpose of an audit and describe the content of the audit report. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Reporting / Keyboard Navigation 65) Management's Report on Internal Control Over Financial Reporting: A) Provides the auditor's opinion on the fairness of the financial statements. B) Contains personal certification of the financial statements by the company's executives. C) Contains a detailed description of compensation of the company's executives for the year. D) Provides a summary of significant accounting policies used to prepare financial statements. Answer: B Difficulty: 1 Easy Topic: Disclosure―Management - Directors - Executives Learning Objective: 03-06 Explain the purpose of an audit and describe the content of the audit report. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Legal; FN Reporting / Keyboard Navigation

66) The Management's Discussion and Analysis section of the annual report can best be described as: A) Frank but objective. B) Independent but precise. C) Legalistic and lengthy. D) Biased but informative. Answer: D Difficulty: 2 Medium Topic: Disclosure―Management - Directors - Executives Learning Objective: 03-05 Describe disclosures related to management's discussion and analysis, responsibilities, and compensation. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation 67) An example of fraud would be: A) Issuing a purchase order without first securing bids. B) Buying raw materials from an affiliated company. C) Knowingly classifying a material long-term receivable as a current receivable. D) Forgetting to accrue salaries payable. Answer: C Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Analyze AACSB: Analytical Thinking; Ethics AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis / Keyboard Navigation 68) An example of an error would be: A) Purchasing inventory from a related party. B) Counting an inventory item twice when taking a physical inventory. C) Holding back invoices so that accounts payable are understated. D) Receiving kickbacks in exchange for issuing a purchase order to a vendor. Answer: B Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

69) An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in: A) A disclaimer. B) An unqualified opinion. C) An adverse opinion. D) A consistency exception. Answer: C Difficulty: 2 Medium Topic: Audit and Auditor's report Learning Objective: 03-06 Explain the purpose of an audit and describe the content of the audit report. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting / Keyboard Navigation 70) A company may compare the amount of receivables in the current year to the amount of receivables in the previous year to estimate a trend in the company's ability to collect cash from customers. This type of analysis is known as: A) Horizontal analysis. B) Time analysis. C) Vertical analysis. D) Turnover analysis. Answer: A Difficulty: 1 Easy Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

71) To understand the components of a company's profitability, an analyst may compute the ratio of each major expense classification to total sales. This type of analysis is known as: A) Cost analysis. B) Horizontal analysis. C) Comparative analysis. D) Vertical analysis. Answer: D Difficulty: 1 Easy Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 72) Which of the following would be an amount computed using horizontal analysis? A) The ratio of cost of goods sold to total sales for the current year. B) The percentage change in the cash balance from last year to this year. C) The difference between current assets and current liabilities at the end of the year. D) The ratio of inventory to total assets at the end of the year. Answer: B Difficulty: 2 Medium Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 73) Liquidity refers to: A) The amount of cash on hand at a given time. B) The readiness of an asset to be converted to cash. C) The period until cash is used and refinancing becomes necessary. D) Financial leverage. Answer: B Difficulty: 1 Easy Topic: Balance sheet―Usefulness - Limits - Elements; Using information―Liquidity ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 32 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

74) Lack of long-term solvency refers to: A) Risk of nonpayment of both current and long-term liabilities. B) The length of time before long-term debt becomes due. C) The ability to refinance long-term debt when it becomes due. D) Long-term assets. Answer: A Difficulty: 2 Medium Topic: Balance sheet―Usefulness - Limits - Elements; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 75) The current ratio is calculated as: A) Current assets divided by long-term assets. B) Current assets divided by total assets. C) Current assets divided by current liabilities. D) Current assets divided by total liabilities. Answer: C Difficulty: 1 Easy Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 76) The acid-test ratio is also known as the: A) Current ratio. B) Debt to equity ratio. C) Times interest earned ratio. D) Quick ratio. Answer: D Difficulty: 1 Easy Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 33 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

77) The quick ratio is typically computed as: A) The liquidity ratio divided by the equity ratio. B) Current assets minus inventory divided by current liabilities minus accounts payable. C) Current assets minus inventory and prepaid items divided by current liabilities. D) Cash divided by accounts payable. Answer: C Difficulty: 1 Easy Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 78) Working capital is equal to: A) Current assets. B) Current liabilities. C) Current assets plus current liabilities. D) Current assets minus current liabilities. Answer: D Difficulty: 1 Easy Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 79) Which of the following is not used when analyzing long-term solvency? A) Times interest earned ratio. B) Debt to equity ratio. C) Acid-test ratio. D) Total liabilities. Answer: C Difficulty: 2 Medium Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

80) When a company pays its bill from a lawyer for previous services on account: A) Its debt to equity ratio always decreases. B) Its acid-test ratio always remains unchanged. C) Its current ratio always remains unchanged. D) Its working capital decreases. Answer: A Difficulty: 3 Hard Topic: Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; BB Resource Management; FN Risk Analysis / Keyboard Navigation 81) When a company accrues salaries at the end of the accounting period: A) Its acid-test ratio increases. B) Its current ratio increases. C) Its debt to equity ratio decreases. D) Its debt to equity ratio increases. Answer: D Difficulty: 2 Medium Topic: Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 82) Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase: A) Its current ratio decreases. B) Its quick ratio decreases. C) Its current ratio remains unchanged. D) Its quick ratio remains unchanged. Answer: B Difficulty: 3 Hard Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 35 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

83) When a company sells land for cash and recognizes a $25,000 gain: A) Its acid-test ratio decreases. B) Its current ratio decreases. C) Its debt to equity ratio decreases. D) Cannot determine from the given information. Answer: C Difficulty: 3 Hard Topic: Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

84) The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Current assets: Cash Accounts receivable (net) Notes receivable Inventory Prepaid expenses Total current assets Equipment (net)

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

The current ratio is (Round your answer to 2 decimal places.): A) 1.98. B) 1.58. C) 1.17. D) 0.66. Answer: B Explanation: Current ratio: $505/$320 = 1.58 Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

Working capital is: A) $505 thousand. B) $265 thousand. C) $185 thousand. D) $75 thousand. Answer: C Explanation: Working capital: $505 − $320 = $185 Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

86) The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Current assets: Cash Accounts receivable (net) Notes receivable Inventory Prepaid expenses Total current assets Equipment (net)

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

Quick assets total: A) $60 thousand. B) $230 thousand. C) $280 thousand. D) $305 thousand. Answer: C Explanation: Quick assets: $505 − $200 − $25 = $280 Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

Total assets

60 170 50 200 25 505 255

$ 760

$ 240 80 320 110 430 150 180 330 $ 760

The acid-test ratio is (Round your answer to 2 decimal places.): A) 0.25. B) 0.88. C) 1.17. D) 1.58. Answer: B Explanation: Acid-test ratio: ($505 − $200 − $25)/$320 = 0.88 Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

88) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities 10% Bonds, long-term Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's debt to equity ratio is (Round your answer to 2 decimal places.): A) 0.75. B) 1.13. C) 0.53. D) 1.80. Answer: B Explanation: Debt to equity ratio: $540/$480 = 1.13 Difficulty: 2 Medium Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's times interest earned ratio is (Round your answer to 2 decimal places.): A) 3.47. B) 1.73. C) 2.47. D) 10.0. Answer: A Explanation: Times interest earned ratio: ($62 + $27 + $36) = $125 for numerator. $125/$36 = 3.47 Difficulty: 3 Hard Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

90) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities 10% Bonds, long-term Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's long-term debt to equity ratio equity is: A) 133.3%. B) 75%. C) 180%. D) 0%. Answer: B Explanation: Long-term debt to equity ratio: $360/$480 = 75% Difficulty: 2 Medium Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 91) Using borrowed funds to generate additional profits for shareholders is referred to as: A) Liquidity management. B) Operational expansion. C) Capital budgeting. D) Financial leverage. Answer: D Difficulty: 1 Easy Topic: Using information―Return on equity Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

92) A company that borrows funds at 6% and then generates a return on those funds of 9% typically has: A) Greater default risk. B) Favorable financial leverage. C) Higher return on equity. D) All of the other answers are true. Answer: D Difficulty: 2 Medium Topic: Using information―Return on equity Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation 93) Which of the following features is typical of a balance sheet prepared under IFRS? A) A shareholders' equity section often is not included. B) Assets often are listed after liabilities. C) Long-term items often are listed before current items. D) Assets sometimes do not equal liabilities plus shareholders' equity. Answer: C Difficulty: 1 Easy Topic: IFRS―Balance sheet presentation Learning Objective: 03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation 94) For a balance sheet prepared under IFRS, long-term liabilities typically are listed: A) Just before the current assets section. B) In the shareholders' equity section. C) In the long-term asset section. D) Just before the current liabilities section. Answer: D Difficulty: 1 Easy Topic: IFRS―Balance sheet presentation Learning Objective: 03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation 44 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

95) Which of the following is not a required segment reporting disclosure according to U.S. GAAP? A) Segment profit or loss. B) Segment assets. C) Segment liabilities. D) General information about the operating segment. Answer: C Difficulty: 1 Easy Topic: Segment reporting - Appendix Learning Objective: 03-Appendix 3: Reporting Segment Information. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 96) Which of the following is not a required segment reporting disclosure according to International Financial Reporting Standards (IFRS)? A) Segment profit or loss. B) Segment assets. C) Segment liabilities. D) All are required disclosures. Answer: D Difficulty: 1 Easy Topic: IFRS―Segment Reporting - Appendix Learning Objective: 03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting.; 03-Appendix 3: Reporting Segment Information. Bloom's: Remember AACSB: Reflective Thinking; Diversity AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation 97) Which of the following is not a characteristic that defines a reportable operating segment according to U.S. GAAP? A) Operating results are regularly reviewed by the enterprise's chief operating officer. B) Discrete financial information is available. C) Engages in business activities from which it may recognize revenues and incur expenses. D) Represents more than 20% of total company revenues, assets, or net income. Answer: D Difficulty: 1 Easy Topic: Segment reporting - Appendix Learning Objective: 03-Appendix 3: Reporting Segment Information. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation 45 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

_____ 5. Adverse opinion

Answer: _c_ 1. Unqualified opinion _e_ 2. Disclaimer _a_ 3. Auditor's report

_b_ 4. Qualified opinion

_d_ 5. Adverse opinion

Difficulty: 2 Medium Topic: Audit and Auditor's report Learning Objective: 03-06 Explain the purpose of an audit and describe the content of the audit report. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting

Answer: _e_ 1. Current ratio _a_ 2. Acid-test ratio

_b_ 3. Long-term solvency _c_ 4. Liquidity _d_ 5. Debt to equity ratio

Difficulty: 2 Medium Topic: Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Resource Management; FN Risk Analysis

Answer: _a_ 1. Long-term liabilities _d_ 2. Current liabilities _b_ 3. Intangible asset

_c_ 4. Current assets _e_ 5. Property, plant, and equipment

Difficulty: 1 Easy Topic: Classify assets―Current assets; Classify assets―Long-term assets; Classify liabilities―Current liabilities; Classify liabilities―Long-term liabilities Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

Answer: _d_ 1. Notes receivable _e_ 2. Short-term investments _b_ 3. Inventory _c_ 4. Accounts receivable _a_ 5. Prepaid expenses

Difficulty: 1 Easy Topic: Classify assets―Current assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

Answer: _d_ 1. Subsequent events _b_ 2. Proxy statement _a_ 3. MD&A _c_ 4. Auditor's report _e_ 5. Summary of significant accounting policies

Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements; Disclosure—Management-Directors-Executives; Audit and Auditor's report Learning Objective: 03-04 Explain the purpose of financial statement disclosures.; 03-05 Describe disclosures related to management's discussion and analysis, responsibilities, and compensation.; 03-06 Explain the purpose of an audit and describe the content of the audit report. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; BB Legal; FN Reporting; FN Measurement

Answer: _e_ 1. Paid-in capital _d_ 2. Prepaid expense _b_ 3. Deferred revenue _c_ 4. Operating cycle _a_ 5. Retained earnings

Difficulty: 2 Medium Topic: Classify assets―Current assets; Classify liabilities―Current liabilities; Classify shareholders' equity Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

Answer: _c_ 1. Related-party transactions _i_ 2. Deferred revenues _f_ 3. Accounts receivable _g_ 4. Inventory _b_ 5. Accounts payable _h_ 6. Prepaid expense _d_ 7. Retained earnings _a_ 8. Subsequent events _e_ 9. MD&A _j_ 10. Franchise

Difficulty: 2 Medium Topic: Classify assets―Current assets; Classify assets―Long-term assets; Classify liabilities―Current liabilities; Classify shareholders' equity; Disclosure―Notes to financial statements; Disclosure—Management-Directors-Executives Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-04 Explain the purpose of financial statement disclosures.; 03-05 Describe disclosures related to management's discussion and analysis, responsibilities, and compensation. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

105) Listed below are 4 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. _____ 1. Default risk _____ 2. Operational risk

_____ 3. Horizontal analysis

_____ 4. Vertical analysis

Answer: _a_ 1. Default risk _d_ 2. Operational risk

_b_ 3. Horizontal analysis

_c_ 4. Vertical analysis

Difficulty: 2 Medium Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

106) Carter Appliances is preparing its annual report for the current fiscal year. The company's controller has asked for your help in determining how best to disclose information about the following items: 1. A subsequent event. 2. Inventory costing method. 3. Composition of accrued liabilities. 4. Useful lives of depreciable assets. 5. Information on long-term leases. 6. Allowance for uncollectible accounts. 7. Revenue recognition policy. 8. Pension plans. Required: Indicate whether the above items should be disclosed (a) in the summary of significant accounting policies note, (b) in a separate disclosure note, or (c) on the face of the balance sheet Answer: 1. (b) in a separate disclosure note. 2. (a) in the summary of significant policies note. 3. (c) in a separate disclosure note or (a) on the face of the balance sheet. 4. (a) in the summary of significant policies note. 5. (b) in a separate disclosure note. 6. (a) on the face of the balance sheet. 7. (a) in the summary of significant policies note. 8. (b) in a separate disclosure note. Difficulty: 3 Hard Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement

$ 1,600 4,300 (500) 5,000 2,400 12,800

2,000 3,200 18,000 (8,000) ________ ? ?

$6,200 8,000 200 2,400 16,800 7,000 200 $ $

? ? ?

2. The investments represent treasury bills purchased in December 2021 that mature in January 2022. These are considered cash equivalents. 3. Interest on both the notes and the bonds is payable annually. 4. The notes payable account contains one note that is due in annual installments of $800 for each payment due. 5. Deferred revenue will be recognized equally over the next 18 months. 6. The common stock represents 500,000 shares of no par stock authorized, of which 300,000 shares are issued and outstanding. Required: Prepare a complete, corrected, classified balance sheet. Answer: Solve for missing amounts: Liabilities ÷ Equity = 1.5 $24,000 ÷ Equity = 1.5 Equity = $24,000 ÷ 1.5 = $16,000 Beginning retained earnings + net income - dividends = Ending retained earnings $4,300 + $2,500 - $800 = $6,000 Total equity - retained earnings = Common stock $16,000 $6,000 = $10,000 Assets = Liabilities + equity Assets = $24,000 + $16,000

$40,000

$40,000 - all other assets = Franchise $40,000 $28,000 = $12,000

Henderson Manufacturing Company Balance Sheet At December 31, 2021 ($ in 000s, except share data) Assets Current assets: Cash and cash equivalents* Accounts receivable, net of $500 allowance for uncollectible accounts Inventory: Raw materials and work in process Finished goods Prepaid expenses Total current assets Property, plant, and equipment: Equipment Less: Accumulated depreciation Net property, plant, and equipment

$ 3,600 3,800 $ 3,200 5,000

8,200 2,400 18,000

18,000 (8,000)

Intangibles: Franchise Total assets

10,000

12,000 $40,000 Liabilities and Shareholders' Equity

Current liabilities: Accounts payable Interest payable Deferred revenue** Current maturities of long-term debt Total current liabilities Long-term liabilities: Deferred revenue 800 Notes payable 7,200 Bonds payable 7,000 Total liabilities Shareholders' equity: Common stock (no par), 500,000 shares authorized, 300,000 shares issued and outstanding 10,000 Retained earnings 6,000 Total shareholders' equity Total liabilities and shareholders' equity

$ 6,200 400 1,600 800 9,000

15,000 24,000

16,000 $40,000

* Cash of $1,600 + treasury bills of $2,000 (cash equivalents) **($2,400 ÷ 18 months) × 12 months = $1,600 = current portion 58 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 3 Hard Topic: Balance sheet―Usefulness-Limits-Elements; Total assets; Total liabilities; Classify shareholders' equity; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

$ 220,000 340,000 80,000 600,000 40,000 1,280,000 $ 500,000 2,200,000 400,000 50,000 60,000 3,156,000 $4,346,000 Liabilities and Shareholders' Equity

Current liabilities: Accounts payable Salaries payable Interest payable Total current liabilities Long-term liabilities: Notes payable Bonds payable Deferred revenue Total long-term liabilities Total liabilities Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$ 165,000 75,000 45,000 285,000 $300,000 500,000 80,000 880,000 1,165,000 $2,000,000 1,181,000 3,181,000 $4,346,000

In the course of your examination you uncover the following information pertaining to the balance sheet: 1. The land and buildings represent the corporate headquarters and manufacturing facilities. 60 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. The notes receivable are due in 2023. The balance of $80,000 includes $5,000 of accrued interest. The next interest payment is due in July 2022. 3. The notes payable account is due in installments of $50,000 per year. Interest on both the notes and bonds is payable annually. 4. The company's investments consist of equity securities of other corporations. Management does not intend to liquidate any investments in the coming year. 5. Deferred revenue will be recognized ratably (equally) over the next two years. Required: Identify and explain the deficiencies in the statement prepared by the company's accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note. Answer: 1. Accounts receivable – if material, the allowance for uncollectible accounts should be disclosed, usually parenthetically on the face of the statement. 2. Notes receivable – only the interest receivable of $5,000 should be classified as a current asset. The $75,000 balance of notes receivable should be classified in the long-term investments category. 3. Inventory – the method used to measure inventory should be disclosed in a note. 4. Land, buildings, and equipment – should be classified in the long-term property, plant, and equipment category 5. Buildings and equipment, net – Original cost should be disclosed along with the accumulated depreciation to arrive at the net amount. Also, the method used to compute depreciation should be disclosed in a note. 6. Investments – should be classified in the long-term investments category. A description of the types of investments should be disclosed in a note. 7. Patent – should be classified in the intangibles category of long-term assets. 8. Notes payable – $50,000, the next installment, should be classified as a current liability as current maturities of long-term debt. Also, note disclosure is required for the notes and bonds payable that provides information such as payment terms, interest rates, and collateral pledged as security for the debt. 9. Deferred revenue – half of the balance, $40,000, should be classified as a current liability. 10. Common stock – the par value, if any, and the number of shares authorized, issued, and outstanding should be disclosed, usually on the face of the statement. Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Total assets; Total liabilities; Classify shareholders' equity; Disclosure―Notes to financial statements Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-04 Explain the purpose of financial statement disclosures. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 61 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Debits 30,000 195,000 36,000 120,000 4,000

Credits

7,000 48,000 100,000 1,500,000 740,000 38,000 98,000 400,000 230,000 120,000 60,000 48,000 240,000 500,000 6,000 24,000 900,000 500,000 48,000

Answer: Current assets: Cash and cash equivalents Accounts receivable Less: allowance for uncollectible accounts Notes receivable Interest receivable Raw materials inventory Work in process inventory Finished goods inventory Prepaid insurance Total current assets Current liabilities: Deferred revenue (2/3 of $48,000) Accounts payable Salaries payable Interest payable Total current liabilities

$30,000 $195,000 (24,000)

171,000 120,000 4,000 36,000 38,000 98,000 60,000 $557,000

32,000 240,000 6,000 7,000 (285,000)

Working capital $272,000 Difficulty: 3 Hard Topic: Classify assets―Current assets; Classify liabilities―Current liabilities; Using information―Liquidity ratios Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

110) The December 31, 2021, post-closing trial balance ($ in thousands) for Libby Corporation is presented below:

Debits 22,500 55,000 30,000

Credits

7,500 4,500 100,000 45,000 140,000 50,000 132,500 30,000 5,000 37,500 65,000 10,000 120,000

________ 534,500

150,000 64,500 534,500

Required: Prepare a classified balance sheet for Libby Corporation at December 31, 2021.

Answer:

Libby Corporation Balance Sheet At December 31, 2021 ($ in thousands) Assets

Cash Accounts receivable Less: Allowance for uncollectible accounts Inventory Prepaid insurance Total current assets Investments Property, plant, and equipment: Land Buildings Equipment Less: Accumulated depreciation Net Property, plant, and equipment Intangibles: Patents Total assets

$22,500 $30,000 7,500

22,500 100,000 4,500 149,500 55,000

45,000 140,000 132,500 317,500 80,000 237,500 5,000 $447,000

Liabilities and Shareholders' Equity Current liabilities: Accounts payable $37,500 Notes payable, due 2022 65,000 Interest payable 10,000 Total current liabilities 112,500 Long-term liabilities: Bonds payable, due 2031 120,000 Total liabilities 232,500 Shareholders' equity: Common stock (no par), 20,000 shares authorized, issued, and outstanding $150,000 Retained earnings 64,500 Total shareholders' equity $214,500 Total liabilities and shareholders' equity $447,000 Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Total assets; Total liabilities; Classify shareholders' equity Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

$ 19,000 35,000 48,400 70,600 250,000 12,400 $435,400

Current liabilities Bonds payable (11%) (long-term) Common stock Retained earnings Total liabilities and equity

$108,400 100,000 70,000 157,000 $435,400

$704,000 422,400 $281,600 166,200 $115,400 11,000 $104,400 31,320 $ 73,080

111) Compute the current ratio for Marjoram Company. Round your answer to two decimal places. Answer: ($19,000 + $35,000 + $48,400 + $70,600) /$108,400 = 1.60 Current ratio Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis 67 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

112) Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal places. Answer: ($19,000 + $35,000 + $48,400) /$108,400 = .94 Acid-test ratio Difficulty: 3 Hard Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Knowledge Application AICPA/Accessibility: FN Risk Analysis 113) Compute the debt to equity ratio for Marjoram Company. Round your answer to two decimal places. Answer: ($108,400 + $100,000) / ($70,000 + $157,000) = .92 Debt to equity ratio Difficulty: 3 Hard Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis 114) Compute the times interest earned ratio for Marjoram Company. Round your answer to two decimal places. Answer: ($73,080 + $31,320 + $11,000) /$11,000 = 10.49 Times interest earned ratio Difficulty: 3 Hard Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis

115) Compute the return on shareholders' equity ratio for Marjoram Company. Round your answer to two decimal places. Answer: $73,080 / ($70,000 + $157,000) = 32% Return on shareholders' equity Difficulty: 3 Hard Topic: Using information―Return on equity Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis

Use this information to answer the following questions: The balance sheet for Altoid Co. is shown below. Altoid Co. Balance Sheet At December 31, 2021 Cash Short-term investments Accounts receivable (net) Inventory Property, plant, and equipment (net) Total assets

Assets: $ 150 200 300 450 1,100 $2,200

Liabilities and shareholders' equity: Current liabilities Long-term liabilities Common stock Retained earnings Total liabilities and shareholders' equity

$ 450 600 150 1,000 $2,200

Selected 2021 income statement information for Altoid Co. includes: Net sales Operating expenses Income before interest and tax Interest expense Income tax expense Net income

$7,700 7,110 590 90 150 350

Required: Compute the following financial statement ratios for 2021: 116) Altoid Co.'s current ratio. Round your answer to two decimal places. Answer: ($150 + $200 + $300 + $450) /$450 = 2.44 Current ratio Difficulty: 2 Medium Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis

117) Altoid Co.'s acid-test ratio. Round your answer to two decimal places. Answer: ($150 + $200 + $300) /$450 = 1.44 Acid-test ratio Difficulty: 3 Hard Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis 118) Altoid Co.'s debt to equity ratio. Round your answer to two decimal places. Answer: ($450 + $600) /$(150 + $1,000) = .91 Debt to equity ratio Difficulty: 2 Medium Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis 119) Altoid Co.'s times interest earned ratio. Round your answer to two decimal places. Answer: ($350 + $150 + $90) /$90 = 6.56 Times interest earned ratio Difficulty: 3 Hard Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis 120) Altoid Co.'s long term debt to equity ratio. Round your answer to two decimal places. Answer: $600/$1,150 = .52 Long-term debt to equity Difficulty: 2 Medium Topic: Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Resource Management; FN Risk Analysis

$150,000 $1,400,000 3 2.25 1.5

Required: Compute the following for Bronco: 121) Current assets Answer: Current assets (CA/Current Liabilities (CL)) = 3; therefore, CA = 3CL Quick assets (QA/Current Liabilities) = 2.25; therefore, QA = 2.25CL QA = CA − Inventory = CA − $150,000 2.25CL = 3CL − $150,000 .75CL = $150,000 CL = $200,000 CA = 3CL = $600,000 Difficulty: 3 Hard Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis 122) Shareholders' equity Answer: Total debt + Total equity = Total assets = $1,400,000 Debt/Equity = 1.5; therefore, Total debt = 1.5 Equity 1.5 Equity + 1 Equity = $1,400,000 2.5 Equity = $1,400,000; Shareholders' equity = $560,000 Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis

123) Long-term assets Answer: Total assets = Current assets + Long-term assets Current assets (CA/Current Liabilities (CL)) = 3; therefore, CA = 3CL Quick assets (QA/Current Liabilities) = 2.25; therefore, QA = 2.25CL QA = CA − Inventory = CA − $150,000 2.25CL = 3CL − $150,000 .75CL = $150,000 CL = $200,000 CA = 3CL = $600,000 Total assets = $1,400,000 (given) $1,400,000 = $600,000 + Long-term assets Long-term assets = $800,000 Difficulty: 3 Hard Topic: Total assets; Using information―Liquidity ratios Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis

124) Long-term liabilities Answer: Total debt and equity (1) Total equity (2) Total debt Current liabilities (3) Long-term liabilities

$1,400,000 560,000 $840,000 200,000 $640,000

(1) Total debt + Total equity = Total assets (given) = $1,400,000 (2) Debt/Equity = 1.5; therefore, Total debt = 1.5 Equity 1.5 Equity + 1 Equity = $1,400,000 2.5 Equity = $1,400,000; Total equity = $560,000 (3) Current assets (CA/Current Liabilities (CL)) = 3; therefore, CA = 3CL Quick assets (QA/Current Liabilities) = 2.25; therefore, QA = 2.25CL QA = CA − Inventory = CA − $150,000 2.25CL = 3CL − $150,000 .75CL = $150,000 CL = $200,000 Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Total assets; Total liabilities; Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis

Use this information to answer the following questions: Spartan Sportswear's current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement: Inventory Total assets Current ratio Acid-test ratio Debt to equity ratio

$180,000 $720,000 2.75 1.5 1.4

Required: Compute the following for Spartan: 125) Current assets Answer: Current assets (CA/Current Liabilities (CL)) = 2.75; therefore, CA = 2.75CL Quick assets (QA/Current Liabilities) = 1.5; therefore, QA = 1.5CL QA = CA − Inventory = CA − $180,000 1.5CL = 2.75CL − $180,000 1.25CL = $180,000 CL = $144,000 CA = $396,000 Difficulty: 3 Hard Topic: Using information―Liquidity ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis 126) Shareholders' equity Answer: Total debt + Total equity = Total assets = $720,000 Debt/Equity = 1.4; therefore, Total debt = 1.4 Equity 1.4 Equity + 1 Equity = $720,000 2.4 Equity = $720,000; Shareholders' equity = $300,000 Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis 75 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

127) Long-term assets Answer: Total assets = Current assets + Long-term assets Current assets (CA/Current Liabilities (CL)) = 2.75; therefore, CA = 2.75CL Quick assets (QA/Current Liabilities) = 1.5; therefore, QA = 1.5CL QA = CA — Inventory = CA − $180,000 1.5CL = 2.75CL — $180,000 1.25CL = $180,000 CL = $144,000 CA = $396,000 $720,000 (given) = $396,000 + Long-term assets Long-term assets = $324,000 Difficulty: 2 Medium Topic: Total assets; Using information―Liquidity ratios Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis

128) Long-term liabilities Answer: Total debt and equity (1) Total equity (2) Total debt Current liabilities (3) Long-term liabilities

$720,000 300,000 $420,000 144,000 $276,000

(1) Total debt + Total equity = Total assets (given) = $720,000 (2) Debt/Equity = 1.4; therefore, Total debt = 1.4 Equity 1.4 Equity + 1 Equity = $720,000 2.4 Equity = $720,000; Shareholders' equity = $300,000 (3) Current assets (CA/Current Liabilities (CL)) = 2.75; therefore, CA = 2.75CL Quick assets (QA/Current Liabilities) = 1.5; therefore, QA = 1.5CL QA = CA — Inventory = CA − $180,000 1.5CL = 2.75CL — $180,000 (inventory) 1.25CL = $180,000 CL = $144,000 Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Total assets; Total liabilities; Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis

$505 ? ? 450 ?

____? ?

$ 634 692 1,175 2,501 ? 2,206 _____? ? 500 1,244 1,841 1,585 $8,983

Answer: The completed balance sheet is shown below. To solve the problem, students can start by using the debt to equity ratio to solve for total liabilities ($3,585 × 1.505718 = $5,398 in total liabilities). Then they can determine the other missing data in the bottom half of the balance sheet by subtraction. With total liabilities and shareholders' equity known, so are the total assets. The current assets can be computed by the current ratio ($2,501 × 1. 352259 = $3,382 in current assets). The quick assets can be found from the acid-test ratio ($2,501 × 0.5769692 = $1,443 in quick assets less $ 505 in cash and cash equivalents = $938 in accounts and notes receivable). With that known, students can compute the inventory balance ($3,382 − $505 − $938 − $450 = $1,489). Finally, with current and total assets determined, the long-term assets can be found, leading to the missing balance in intangible assets. Assets Current assets Cash and cash equivalents Accounts and notes receivable Inventory Other Total current assets Property and equipment, net Intangible assets, net Investments Notes and other receivables, net Other assets Total long-term assets Total assets

$505 938 1,489 450 3,382 $1,307 1,643 250 1,264 1,137 5,601 $8,983

Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 634 Salaries payable 692 Other payables 1,175 Total current liabilities 2,501 Long-term debt $2,091 Other long-term liabilities 806 Total long-term liabilities 2,897 Total liabilities 5,398 Shareholders' equity Common stock 500 Additional paid-in capital 1,244 Retained earnings 1,841 Total shareholders' equity 3,585 Total liabilities and shareholders' equity $8,983 Difficulty: 3 Hard Topic: Balance sheet―Usefulness - Limits - Elements; Total assets; Total liabilities; Classify shareholders' equity; Using information―Liquidity ratios; Using information―Solvency ratios 79 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze; Apply AACSB: Analytical Thinking; Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis Use this information to answer the following questions: Indicate whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken. 130) Current ratio Acid-test ratio Total debt to equity ratio Prepay rent for 3 months

Answer:

Prepay rent for 3 months

Current ratio Acid-test ratio N D

Total debt to equity ratio N

Difficulty: 3 Hard Topic: Using information―Liquidity ratios; Using information―Solvency ratios Learning Objective: 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis

131) Current ratio Acid-test ratio Total debt to equity ratio Cash sale of land for a gain

Answer:

Cash sale of land for a gain

Current ratio Acid-test ratio I I

Total debt to equity ratio D

Answer: Current ratio Acid-test ratio Purchase of inventory on account

Total debt to equity ratio I

133) Current ratio Acid-test ratio Total debt to equity ratio Collection of an Account Receivable

Answer: Current ratio Acid-test ratio Collection of an Account Receivable

Total debt to equity ratio N

Answer: Total debt to equity Current ratio Acid-test ratio ratio Refinancing currently maturing debt for five more years

135) Current ratio Acid-test ratio Total debt to equity ratio Purchasing advertising on 30-day credit

Answer: Current ratio Acid-test ratio Purchasing advertising on 30-day credit

Total debt to equity ratio I

Answer: Current ratio Acid-test ratio Payment of recently accrued income taxes

Total debt to equity ratio D

137) Current ratio Acid-test ratio Total debt to equity ratio Cash sale of inventory for a profit

Answer: Current ratio Acid-test ratio Cash sale of inventory for a profit

Total debt to equity ratio D

Answer: Current ratio Acid-test ratio Purchase of a warehouse with a 6-month note

Total debt to equity ratio I

139) Current ratio Acid-test ratio Total debt to equity ratio Issuance of long-term debt for cash

Answer: Current ratio Acid-test ratio Issuance of long-term debt for cash

Total debt to equity ratio I

Total debt to equity ratio

Current ratio Acid-test ratio

Total debt to equity ratio

Record annual depreciation on office equipment

Answer:

Record annual depreciation on office equipment

141) You are reviewing the December 31, 2021, financial statements of Ellie's Antiques. Ellie's management is considering an initial public offering of shares of its common stock. The following items come to your attention: a. Included in long-term investments are 10-year U.S. Treasury bonds that mature March 31, 2022. The bonds were purchased November 20, 2021. b. The property, plant, and equipment account is stated at cost, except that it includes a parcel of land purchased for investment purposes at a cost of $40,000. Because of rising land prices, the value of the land has been written up to $60,000. The company has an independent appraisal that attests to this amount. c. The accounts receivable account includes $20,000 due in three years from officers and employees, as well as a two-year, 8% note for $25,000 due from a customer. The loan enabled the customer to buy equipment needed to process materials purchased from Ellie's Antiques. Required: Determine the proper balance sheet presentation and amounts for the above items. Answer: a. These treasury bonds would typically be classified in current assets as short-term investments. If purchased within three months of their maturity, they could be classified as cash equivalents. b. The land should be reported in the long-term investments category at the original cost of $40,000. c. These receivables should be classified as nontrade receivables in the long-term investments category. Receivables from officers and employees require separate disclosure, if material. Difficulty: 2 Medium Topic: Total assets; Disclosure―Notes to financial statements Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-04 Explain the purpose of financial statement disclosures. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement

142) List the circumstances under which land would be classified under the following balance sheet classifications: 1. Current assets. 2. Investments (long-term). 3. Property, plant, and equipment. 4. Other long-term assets. Answer: 1. Land held for short-term speculation would be a short-term investment. Land could also be held as inventory by, for example, a real estate developer. 2. Land held for long-term speculation would be a long-term investment. 3. The most common use of land would be under this category when it is actively used in operations. 4. Land in idle use or held as a future building site could be included in this category. Difficulty: 2 Medium Topic: Total assets Learning Objective: 03-02 Identify and describe the various asset classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 143) You are the independent accountant assigned to the audit of Neophyte Company. The company's accountant, a graduate of Rival State University, has prepared financial statements that contained the following questionable items: a. The balance sheet reports land at $100,000. Included in this amount is a property held for speculation at a cost of $30,000. b. Current liabilities include $50,000 for long-term debt that is due in three months. The company has received a suitable firm commitment to refinance the debt for five years and intends to do so. c. Investments include $20,000 in short-term, high-grade commercial paper, which is a cash equivalent. Required. Describe the appropriate balance sheet presentation for the above items. Answer: a. Land held for speculation should be listed under long-term investments. b. Debt to be refinanced under these circumstances should be classified as long-term liabilities. c. These items should be reported with cash under the category of cash and cash equivalents. Difficulty: 2 Medium Topic: Total assets; Total liabilities Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking; FN Measurement 87 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

144) Provide an example of a liability that would not require the payment of cash. Answer: One type of current liability that would not require the payment of cash is the deferred revenue liability created when payment is received before services are provided. Examples of deferred revenue include deferred airline fares, deferred subscription revenue, etc. Difficulty: 2 Medium Topic: Total liabilities Learning Objective: 03-03 Identify and describe the various liability and shareholders' equity classifications. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement 145) Briefly explain the purpose of the disclosure note on significant accounting policies. Provide two examples of what might be found in this note. Answer: There are many areas where management chooses from among equally acceptable alternative accounting methods. The summary of significant accounting policies conveys valuable information about the company's choices, which can significantly impact earnings and financial position. Examples include depreciation methods, inventory valuation methods, and revenue recognition methods. Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking; FN Measurement 146) Briefly explain what is meant by a subsequent event. Give two examples of subsequent events. Answer: A subsequent event is a significant event that takes place after an entity's fiscal year-end but before the financial statements have been issued or are available to be issued. Examples include issuance of debt or equity securities, mergers, discontinued operations, and the resolution of uncertainties that existed at the balance sheet date. Difficulty: 2 Medium Topic: Disclosure―Notes to financial statements Learning Objective: 03-04 Explain the purpose of financial statement disclosures. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Critical Thinking; FN Measurement

147) Explain how management's discussion and analysis of its operations and liquidity may be helpful to investors. Answer: Although the financial statement numbers give a partial picture of how well the company has been performing its operations and how liquid it is, management is in a better position to describe key factors that influence these measures and what risks and opportunities exist that may affect future operations and liquidity. Difficulty: 2 Medium Topic: Disclosure―Management - Directors - Executives Learning Objective: 03-05 Describe disclosures related to management's discussion and analysis, responsibilities, and compensation. Bloom's: Understand AACSB: Communication AICPA/Accessibility: BB Resource Management

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Required. Interpret the main points indicated in this report by Great Food’s auditors. Answer: 1. The accounting firm has conducted an audit of The Great Food Company's financial statements, using typical auditing standards and procedures. There is no limitation indicated in what they examined. Therefore, the auditor expressed a reasonable basis for forming the opinion on these statements. 2. The statements were judged to be fairly presented, meaning that they were within a material range of accuracy relative to generally accepted accounting principles in the United States. 3. The Company is currently operating pursuant to a Chapter 11 bankruptcy filing, which, together with the uncertain outcomes of the matters, raise substantial doubt about the Company's ability to continue as a going concern. Therefore, the going concern assumption on which the financial statements are based is subject to substantial doubt in this situation. 4. The Great Food Company made a change in its accounting method for share lending arrangements. 5. The audit also has examined the effectiveness of Great Food's internal controls over financial reporting, in accordance with the Public Company Accounting Oversight Board standards, and expressed an unqualified opinion about that effectiveness. Difficulty: 3 Hard Topic: Audit and Auditor's report Learning Objective: 03-06 Explain the purpose of an audit and describe the content of the audit report. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Reporting; FN Risk Analysis

149) Using an example, discuss the techniques that analysts use to transform accounting numbers into more useful forms. Answer: Analysts convert accounting numbers into ratios in order to control for size differences over time and among companies. In addition, they use horizontal analysis, comparing changes in certain metrics over time, and vertical analysis, comparing each financial statement item to a base total, such as sales revenue. Difficulty: 2 Medium Topic: Using information―Analysis and methods Learning Objective: 03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Industry

150) The current asset section of Seifert & Seifert, CPAs' balance sheet consists of cash, accounts receivable, investments, and prepaid expenses. The 2021 balance sheet reported the following: cash, $110,000; investments, $22,000; prepaid expenses, $18,000; long-term assets, $422,000; and shareholders' equity, $350,000. The current ratio at the end of the year was 1.6 and the debt to equity ratio was .8. Required: Determine the following 2021 amounts and ratios: 1. Current liabilities. 2. Long-term liabilities. 3. Accounts receivable. 4. The acid-test ratio. Answer: 1. Debt to equity ratio = Total liabilities ÷ Shareholders' equity = .8 Total liabilities ÷ $350,000 = .8 Shareholders' equity × .8 = total liabilities $350,000 × .8 = $280,000 = total liabilities Total liabilities + equity = total assets $280,000 + $350,000 = $630,000 = total assets Total assets — long-term assets = current assets $630,000 — $422,000 = $208,000 = current assets Current ratio = Current assets ÷ current liabilities 1.6 = $208,000 ÷ current liabilities Current liabilities = $208,000 ÷ 1.6 = $130,000 2. Total assets = total liabilities + shareholders' equity Total assets = current liabilities + long-term liabilities + shareholders' equity $630,000 = $130,000 + long-term liabilities + $350,000 Long-term liabilities = $150,000 3. Current assets = Cash + investments + accounts receivable + prepaid expenses $208,000 = $110,000 + $22,000 + accounts receivable + $18,000 Accounts receivable = $58,000 4. Acid-test ratio = Quick assets ÷ Current liabilities Quick assets = Cash + investments + accounts receivable Quick assets = $110,000 + $22,000 + $58,000 = 190,000 Acid-test ratio = $190,000 ÷ $130,000 = 1.46 Difficulty: 3 Hard Topic: Liquidity ratios Learning Objective: 03-02 Identify and describe the various asset classifications.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk. 93 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Bloom's: Apply AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis 151) The balance sheets of Callaway Foods list current assets followed by long-term assets and current liabilities before long-term liabilities. If Callaway Foods prepared its financial statements according to International Financial Reporting Standards, what other approach might it take in preparing its balance sheet? Answer: Under U.S. GAAP, we present current assets and liabilities before long-term assets and liabilities. IAS No. 1 doesn't prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report long-term items first. Difficulty: 2 Medium Topic: IFRS―Balance sheet presentation Learning Objective: 03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting. Bloom's: Remember AACSB: Reflective Thinking; Diversity AICPA/Accessibility: BB Global; FN Measurement

Intermediate Accounting, 10e (Spiceland) Chapter 4 The Income Statement, Comprehensive Income, and the Statement of Cash Flows 1) Income from continuing operations sometimes includes gains from nonoperating activities. 2) Unlike the balance sheet, the income statement measures activity over a period of time. 3) The single-step format of the income statement first lists all the revenues and gains included in income from continuing operations. 4) The single-step format of the income statement does not separately report nonoperating gains in the revenues section of the income statement. 5) The multiple-step format of the income statement reports a series of intermediate subtotals such as gross profit, operating income, and income before taxes. 6) Revenues and expenses typically occur as a result of normal operating activity. 7) Gains and losses typically occur as a result of normal operating activity. 8) Income from continuing operations consists only of those items expected to be permanent components of earnings. 9) Interest expense typically is considered a temporary component of earnings. 10) One meaning of earnings quality is the ability of reported earnings to predict a company's future earnings. 11) Managers' income smoothing behavior results in reported earnings being manipulated higher in each year. 12) Classification shifting by managers leads to under-reporting of total expenses and over-statement of bottom-line net income. 13) Material restructuring costs are reported as an element of income from continuing operations. 14) Restructuring costs most often refer to costs associated with management's plans to materially change the scope of business operations or the manner in which they are conducted. 15) Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects. 16) Gains, but not losses, from discontinued operations must be separately reported in an income statement. 1 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17) A change in accounting principle that is implemented using the retrospective approach includes restating financial statements of all periods presented as if the new standard had been used in those periods. 18) A change in accounting principle that is implemented using the modified retrospective approach includes implementing the change in the current period only and not adjusting for the cumulative effects on prior periods. 19) Changes in estimates are accounted for using the prospective approach. 20) Material errors in prior periods' income statements are corrected by making an adjustment to the beginning balance of the current period's retained earnings. 21) Earnings per share disclosure is required only for income from continuing operations. 22) Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements. 23) Comprehensive income is the total change in shareholders' equity that occurred during the period. 24) The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities. 25) Income statements prepared according to either U.S. GAAP or International Financial Reporting Standards (IFRS) require the separate reporting of discontinued operations. 26) International Financial Reporting Standards (IFRS) require a company to classify expenses in an income statement by function. 27) In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest received is most often classified as an operating cash flow. 28) In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest paid is most often classified as a financing cash flow. 29) A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection. 30) The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high. 31) A company could improve its return on assets by increasing its income or by increasing its total assets.

32) Return on equity is increased if a firm can maintain its return on assets but increase its leverage. 33) The difference between single-step and multiple-step income statements is primarily an issue of: A) Consistency. B) Presentation. C) Measurement. D) Valuation. 34) Most real-world income statements are presented using which format? A) Income-step. B) Single-step. C) Magnitude-step. D) Multiple-step. 35) A primary advantage of the multiple-step format of the income statement over the single-step format is that the multiple-step format: A) classifies expenses by function. B) results in a higher amount of net income. C) separately lists income tax expense. D) lists revenues and expenses in order of their dollar amount. 36) Which of the following profit amounts usually will be listed in both the single-step and multiple-step formats of the income statement? A) Gross profit. B) Operating income. C) Income before taxes. D) Net nonoperating income. 37) The relationship between revenue from selling inventory and the cost of that inventory is measured as: A) Net income. B) Gross profit. C) Income before taxes. D) Operating income. 38) The measure of profit reported on a multiple-step income statement that represents the primary-revenue generating activities of the company is: A) Net income. B) Gross profit. C) Income before taxes. D) Operating income.

39) Popson Inc. incurred a material loss that was unusual in character. This loss should be reported as: A) a discontinued operation. B) a line item between income from continuing operations and income from discontinued operations. C) a line item within income from continuing operations. D) a line item in the retained earnings statement. 40) Provincial Inc. reported the following before-tax income statement items: Operating income Nonoperating losses

700,000 (100,000)

Provincial has a 25% income tax rate. Provincial would report the following amount of income tax expense as a separately stated line item in the income statement: A) $200,000. B) $150,000. C) $175,000. D) $160,000. 41) Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2021: Operating income Income on discontinued operations

$ 200,000 80,000

All income statement items are subject to a 25% income tax rate. In its 2021 income statement, Freda's separately stated income tax expense and total income tax expense would be: A) $70,000 and $70,000, respectively. B) $70,000 and $50,000, respectively. C) $50,000 and $70,000, respectively. D) $50,000 and $50,000, respectively. 42) Earnings quality refers to: A) the ability of management to budget for expenditures in the following year. B) the ability of management to sell its inventory for a profit. C) the ability of management to quickly collect cash from customers. D) the ability of reported earnings to predict a company's future earnings.

43) Income smoothing refers to: A) the ability of management to report an earnings amount in each period less than actual earnings. B) the ability of management to use accruals to reduce the volatility of reported earnings over time. C) the ability of management to maintain sales to its current customers for several years. D) the ability of management to report an earnings amount in each period greater than actual earnings. 44) To accomplish income smoothing, managers could do which of the following? A) In a year net income is particularly high, estimate future bad debts for a higher amount. B) Report all revenues on a cash basis. C) In a year net income is particularly low, estimate future warranty costs for a higher amount. D) Report all expenses on a cash basis. 45) Managers may engage in classification shifting by: A) reporting sales to fictitious customers to inflate reported revenues. B) reducing estimates of accrued expenses to inflate reported net income. C) reporting operating expenses as nonoperating expenses to inflate reported operating income. D) increasing estimates of accrued expenses to inflate reported net income. 46) A likely method that managers use for classification shifting is to report certain operating expenses as: A) revenues. B) nonoperating expenses. C) income tax expense. D) assets. 47) Classification shifting by managers has the effects of increasing which level of profitability? A) Operating income. B) Net income. C) Income before taxes. D) All of the other answers are correct. 48) Financial statement users typically begin their assessment of permanent earnings with: A) sales revenue. B) income from continuing operations. C) net income. D) gross profit. 49) Temporary earnings are best characterized as: A) earnings that do not have corresponding cash flows. B) earnings from nonoperating activities. C) earnings that do not conform to Generally Accepted Accounting Principles (GAAP). D) earnings that arise from events that are not likely to recur in the foreseeable future.

50) Which of the following most likely would be classified as restructuring costs? A) Advertising costs to sell a product recently developed by a company. B) Severance pay for employee layoffs associated with facility closings. C) Brokerage fees from the issuance of additional shares of stock. D) Acquisition fees associated with the purchase of land and buildings. 51) Restructuring costs typically can be defined as: A) costs of external financing through issuance of debt or equity securities. B) costs associated safeguarding a company's assets and ensuring accuracy of financial reporting. C) costs associated with management's plans to materially change the scope of business operations or the manner in which they are conducted. D) costs of expenditures made on capital projects and executive compensation. 52) Non-GAAP earnings: A) could be considered management's view of permanent earnings. B) are needed for the correction of errors. C) are standardized under generally accepted accounting principles D) are useful to compare two different firms' performance. 53) A common component of income excluded from the calculation of non-GAAP earnings is: A) Interest expense. B) Income tax expense. C) Cost of goods sold. D) Restructuring costs. 54) The distinction between operating and nonoperating income relates to: A) continuity of income. B) primary activities of the reporting entity. C) consistency of income stream. D) reliability of measurements. 55) A company reports the following amounts at the end of the current year: Sales revenue Selling expense Gain on sale of investments Interest expense Cost of goods sold

$ 860,000 250,000 30,000 10,000 520,000

Under normal circumstances (ignoring tax effects), permanent earnings would be computed as: A) $90,000. B) $110,000. C) $80,000. D) $50,000.

56) Which of the following is most likely to be classified as discontinued operations? A) Sale of a small equity method investment in another company. B) Sale of a group of assets that represents a strategic shift in operations. C) Sale of undeveloped land due to lack of customer demand for additional store locations. D) All of the other answers would be classified as discontinued operations. 57) A company has decided to discontinue a component of its business and sells the component by the end of the year. The amount that the company would report as income from discontinued operations is (ignore tax effects): A) only income from operations for the year. B) only the gain or loss on the disposal of the component's assets. C) income from operations for the year and only a loss on the disposal of the component's assets. D) income from operations for the year and either a gain or loss on the disposal of the component's assets. 58) A company has decided to discontinue a component of its business but, when the reporting period ends, the component has not yet been sold. The amount that the company would report as income from discontinued operations is (ignore tax effects): A) income from operations for the year and the amount by which the component's fair value less cost to sell is greater than book value. B) income from operations for the year and the amount by which the component's fair value less cost to sell is less than book value. C) only the amount by which the component's fair value less cost to sell is less than book value. D) only the component's income from operations for the year. 59) The principal benefit of separately reporting discontinued operations is to enhance: A) predictive ability of future profitability. B) consistency in reporting. C) intraperiod continuity. D) comprehensive reporting. 60) Which of the following best explains why the taxes on discontinued operations are reported separately from taxes on continuing operations? A) The tax rate applied to discontinued operations typically is lower than that applied to continuing operations. B) The taxes on discontinued operations are not expected to recur in future years. C) The tax rate applied to discontinued operations typically is higher than that applied to continuing operations. D) Companies are allowed to delay tax payments for discontinued operations for up to five years. 61) Intraperiod income tax presentation is primarily a matter of: A) Valuation. B) Going concern. C) Periodicity. D) Allocation. 7 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

62) The Claxton Company manufactures children's toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP. How should Claxton report the sale in its income statement? A) Report it as restructuring costs. B) Report it as a discontinued operation. C) Report the income or loss from operations of the division in discontinued operations. D) Report it as a gain on sale of investments included in income from continuing operations. 63) On August 1, 2021, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2022. On January 31, 2022, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: Operating loss Feb. 1, 2021–Jan. 31, 2022 Estimated operating losses, Feb. 1–June 30, 2022 Impairment of division assets at Jan. 31, 2022

$ 115,000 80,000 10,000

In its income statement for the year ended January 31, 2022, Rocket would report a before-tax loss on discontinued operations of: A) $(115,000). B) $(195,000). C) $(65,000). D) $(125,000). 64) On November 1, 2021, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2022. On December 31, 2021, the company's year-end, the following information relative to the discontinued division was accumulated: Operating loss Jan. 1–Dec. 31, 2021 Estimated operating losses, Jan. 1 to April 30, 2022 Excess of fair value, less costs to sell, over book value at Dec. 31, 2021

$ 65 million 80 million 15 million

In its income statement for the year ended December 31, 2021, Jamison would report a before-tax loss on discontinued operations of: A) $65 million. B) $50 million. C) $130 million. D) $145 million.

65) On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement? A) $2,000,000 loss. B) $2,500,000 loss. C) No loss would be reported. D) $500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations. 66) On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement? A) $2,000,000 loss. B) $2,500,000 loss. C) No loss would be reported. D) $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations. 67) On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021. The following additional facts pertain to the transaction: • • • •

The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations. The book value of Footwear's assets totaled $48 million on the date of the sale. Footwear's operating income was a pre-tax loss of $10 million in 2021. Foxtrot's income tax rate is 25%.

In the income statement for the year ended December 31, 2021, Foxtrot Co. would report: A) Income (loss) on its total operations for the year without separation. B) Income (loss) on its continuing operation only. C) Income (loss) from its continuing and discontinued operations separately. D) Income and gains separately from losses.

68) On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021. The following additional facts pertain to the transaction: • The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations. • The book value of Footwear's assets totaled $48 million on the date of the sale. • Footwear's operating income was a pre-tax loss of $10 million in 2021. • Foxtrot's income tax rate is 25%. In the income statement for the year ended December 31, 2021, Foxtrot Co. would report: A) All income taxes combined into one line item. B) Income taxes separated for continuing and discontinued operations. C) Income taxes reported for income and gains only. D) None of these answer choices are correct. 69) On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021. The following additional facts pertain to the transaction: • The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations. • The book value of Footwear's assets totaled $48 million on the date of the sale. • Footwear's operating income was a pre-tax loss of $10 million in 2021. • Foxtrot's income tax rate is 25%. In the income statement for the year ended December 31, 2021, Foxtrot Co. would report income from discontinued operations of: A) $14.0 million. B) $16.5 million. C) $22.0 million. D) $24.5 million.

70) On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc. The following additional facts pertain to the transaction: • • • •

The Formal Wear Division qualifies as a component of the entity according to GAAP regarding discontinued operations. The book value of Formal Wear's assets totaled $48 million on December 31, 2021. Formal Wear's operating income was a pre-tax loss of $10 million in 2021. Tango's income tax rate is 25%.

Suppose that the Formal Wear Division's assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $40 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co. would report discontinued operations of: A) $7.5 million loss. B) $10.0 million loss. C) $13.5 million loss. D) $18.0 million loss. 71) On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc. The following additional facts pertain to the transaction: • • • •

Suppose that the Formal Wear Division's assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $80 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co., would report discontinued operations of a: A) $7.5 million loss. B) $10.0 million loss. C) $16.5 million income. D) None of these answer choices are correct. 72) Major Co. reported 2021 income of $300,000 from continuing operations before income taxes and a before-tax loss on discontinued operations of $80,000. All income is subject to a 25% tax rate. In the income statement for the year ended December 31, 2021, Major Co. would show the following line-item amounts for income tax expense and net income: A) $55,000 and $165,000 respectively. B) $75,000 and $165,000 respectively. C) $75,000 and $145,000 respectively. D) $55,000 and $220,000 respectively. 11 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

73) Howard Co.'s 2021 income from continuing operations before income taxes was $280,000. Howard Co. reported before-tax income on discontinued operations of $60,000. All tax items are subject to a 25% tax rate. In its income statement for 2021, Howard Co. would show the following line-item amounts for income tax expense and net income: A) $70,000 and $255,000 respectively. B) $55,000 and $220,000 respectively. C) $85,000 and $340,000 respectively. D) $85,000 and $255,000 respectively. 74) Misty Company reported the following before-tax items during the current year: Sales revenue Selling and administrative expenses Restructuring charges Loss on discontinued operations

$ 600 260 20 40

Misty's effective tax rate is 25%. What is Misty's income from continuing operations? A) $240. B) $255. C) $320. D) $450. 75) Misty Company reported the following before-tax items during the current year: Sales revenue Selling and administrative expenses Restructuring charges Loss on discontinued operations

$ 600 260 20 40

Misty's effective tax rate is 25%. What is Misty's net income for the current year? A) $280. B) $210. C) $240. D) $200.

76) Cendant Corporation's results for the year ended December 31, 2021, include the following material items: Sales revenue Cost of goods sold Selling and administrative expenses Loss on sale of investments Loss on discontinued operations Loss on impairment from continuing operations

$ 6,200,000 3,800,000 1,300,000 200,000 500,000 80,000

Cendant Corporation's income from continuing operations before income taxes for 2021 is: A) $900,000. B) $880,000. C) $820,000 D) $320,000. 77) A change in accounting principle that is implemented using the retrospective approach includes: A) implementing the change in the current period only and not adjusting for the cumulative effects on prior periods. B) applying the new standard to the adoption period only and recording the cumulative adjustment for prior periods to the beginning balance of retained earnings. C) restating financial statements of all periods presented as if the new standard had been used in those periods. D) not accounting for the change in the current period or prior periods. 78) A change in accounting principle that is implemented using the modified retrospective approach includes: A) implementing the change in the current period only and not adjusting for the cumulative effects on prior periods. B) applying the new standard to the adoption period only, and recording the cumulative adjustment for prior periods to the current period's beginning balance of retained earnings. C) restating financial statements of all periods presented as if the new standard had been used in those periods. D) not accounting for the change in the current period or prior periods. 79) Changes in estimates are accounted for using which approach? A) Prospective. B) Retrospective. C) Modified retrospective. D) Modified prospective.

80) When a material error is discovered in prior financial statements: A) prior financial statements are restated to their correct amounts. B) assets and liabilities in the current period are restated to their appropriate levels. C) prior income effects are adjusted to the current period's beginning balance of retained earnings. D) all of these answer choices are correct. 81) Which of the following is not true about EPS? A) It must be reported by all corporations whose stock is publicly traded. B) It must be reported separately for discontinued operations. C) It must be reported on operating income. D) None of these answer choices are correct. 82) The Maytag Corporation's income statement includes income from continuing operations and a loss on discontinued operations. Earnings per share information would be provided for: A) net income only. B) income from continuing operations and net income only. C) income from continuing operations, loss on discontinued operations, and net income only. D) none of these answer choices are correct. 83) Each of the following would be reported as items of other comprehensive income except: A) foreign currency translation adjustment. B) gain on projected pension benefit obligation. C) deferred gain from derivatives. D) gain from the sale of equipment. 84) Reporting comprehensive income can be accomplished by each of the following methods except: A) in the statement of shareholders' equity. B) a single, continuous statement of comprehensive income. C) in two separate, but consecutive statements. D) All of these answer choices are acceptable methods. 85) During the year, a company's investment in debt securities increases in fair value, resulting in an unrealized gain on the investment. The investment is not sold by the end of the year. The company is considering whether to report the unrealized gain as a component of net income or as a component of other comprehensive income. Under which reporting requirement would the company have a higher ending balance of total shareholders' equity? A) As a component of net income. B) As a component of other comprehensive income. C) Total shareholders' equity would be the same with either reporting requirement. D) None of the other answers are correct.

86) Consider the following two separate events for a company during the year: 1. Gain on sale of investments = $10. 2. Unrealized gain on investment from increase in fair value = $20. The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events increase net income and comprehensive income, ignoring tax effects? A) Net income = $10; Comprehensive income = $20. B) Net income = $10; Comprehensive income = $30. C) Net income = $30; Comprehensive income = $30. D) Net income = $30; Comprehensive income = $20. 87) Consider the following two separate events for a company during the year: 1. Loss on sale of investments = $30. 2. Unrealized gain on investment from increase in fair value = $20. The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect net income and comprehensive income, ignoring tax effects? A) Net income = $(30); Comprehensive income = $(10). B) Net income = $(30); Comprehensive income = $20. C) Net income = $0; Comprehensive income = $(10). D) Net income = $(10); Comprehensive income = $20. 88) Consider the following two separate events for a company during the year: 1. Loss on sale of investments = $20. 2. Unrealized gain on investment from increase in fair value = $30. The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect the balance of retained earnings, ignoring tax effects? A) Increase of $30. B) Increase of $10. C) Decrease of $20. D) Decrease of $10. 89) Reporting comprehensive income according to International Financial Reporting Standards (IFRS) can be accomplished by each of the following methods except: A) in the statement of shareholders' equity. B) a combined statement of income and comprehensive income. C) in two separate statements. D) the entity may choose either a combined statement of income and comprehensive income or two separate statements.