TRUE-FALSE—Conceptual
1. FASB standards directly affect financial statements, notes to the financial statements, and management’s discussion and analysis.
2. The SEC requires that companies report to it certain substantive information that is not found in their annual reports.
3. Accounting policies are the specific accounting principles and methods a company uses and considers most appropriate to present fairly its financial statements.
4. In order to make adequate disclosure of related party transactions, companies should report the legal form, rather than the economic substance, of these transactions.
5. If the loss on an account receivable results from a customer’s bankruptcy after the balance sheet date, but before issuance of the financial statements the company only discloses this information in the notes to the financial statements.
6. GAAP requires that general purpose financial statements include selected information on a single basis of segmentation.
7. The FASB requires allocations of joint, common, or company-wide costs for external reporting purposes.
8. If 10 percent or more of company revenue is derived from a single customer, the company must disclose the total amount of revenue from each such customer by segment.
9. Companies should report accounting transactions as they occur, and expense recognition should not change with the period of time covered under the integral approach.
10. Companies should generally use the same accounting principles for interim reports and for annual reports.
11. Companies report income taxes in interim reports by prorating them over the four quarters.
12. To compute the year-to-date tax, companies apply the estimated annual effective tax rate to the year-to-date ordinary income at the end of each interim period.
13. In most situations, an auditor issues a qualified opinion or disclaims an opinion.
14. A qualified opinion is issued when the exception to the standard opinion is not of sufficient magnitude to invalidate the statements as a whole.
15. The management discussion and analysis (MD&A) section presents aspects of an enterprise’s business-liquidity, profitability, and solvency.
16. The MD&A section must provide information about the effects of inflation and changing prices, if they are material to the financial statements.
17. A financial projection is a set of prospective financial statements that present a company’s expected financial position and results of operations.
18. The difference between a financial forecast and a financial projection is that a forecast provides information on what is expected to happen, while a projection provides information on what might take place.
19. Fraudulent financial reporting is intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements.
20. Influences in a company’s internal environment may relate to industry conditions, poor internal control systems, or legal and regulatory considerations.
MULTIPLE CHOICE—Conceptual
21. Which of the following should be disclosed in a Summary of Significant Accounting Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in accounting principle
c. Claims of equity holders
d. Depreciation method followed
22. An example of an inventory accounting policy that should be disclosed in a Summary of Significant Accounting Policies is the
a. amount of income resulting from the involuntary liquidation of LIFO.
b. major backlogs of inventory orders.
c. method used for pricing inventory.
d. separation of inventory into raw materials, work-in-process, and finished goods.
23. Which of the following is true regarding whether errors and irregularities are distortions of facts?
Errors Irregularities
a. Yes Yes
b. Yes No
c. No Yes
d. No No
S24. The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
a. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
c. Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
S25. The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This information is important to financial statement readers in determining
a. net income for the year.
b. whether accounting policies are consistently applied from year to year.
c. the value of obsolete items included in ending inventory.
d. whether the working capital position is adequate for future operations.
S26. If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the
a. nature of the relationship between the parties to the transactions.
b. nature of any future transactions planned between the parties and the terms involved.
c. dollar amount of the transactions for each of the periods for which an income state-ment is presented.
d. amounts due from or to related parties as of the date of each balance sheet presented.
P27. Events that occur after the December 31, 2018 balance sheet date, but before the balance sheet is issued, and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be
a. discussed only in the MD&A (Management's Discussion and Analysis) section of the annual report.
b. disclosed only in the Notes to the Financial Statements.
c. used to record an adjustment to Bad Debt Expense for the year ending December 31, 2018
d. used to record an adjustment directly to the Retained Earnings account
28. Which of the following post-balance-sheet events would generally require disclosure, but no adjustment of the financial statements?
a. Retirement of the company president
b. Settlement of litigation that existed prior to the balance sheet date.
c. Employee strikes
d. Issue of a large amount of capital stock
29. Which of the following post-balance-sheet events would require adjustment of the accounts before issuance of the financial statements?
a. Loss of plant as a result of fire
b. Changes in the quoted market prices of securities held as an investment
c. Loss on an uncollectible account receivable resulting from a customer’s major flood loss
d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.
30. Revenue of a segment includes
a. only sales to unaffiliated customers.
b. sales to unaffiliated customers and intersegment sales.
c. sales to unaffiliated customers and interest revenue.
d. sales to unaffiliated customers and other revenue and gains.
31. An operating segment is a reportable segment if
a. its operating profit is 10% or more of the combined operating profit of profitable segments.
b. its operating loss is 10% or more of the combined operating losses of segments that incurred an operating loss.
c. the absolute amount of its operating profit or loss is 10% or more of the company's combined operating profit or loss.
d. None of these answers are correct.
32. A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the
a. total combined revenues of all segments reporting profits.
b. total revenues of all the enterprise's industry segments.
c. total export and foreign sales.
d. combined net income of all segments reporting profits.
33. All of the following information about each operating segment must be reported except
a. unusual items.
b. interest revenue.
c. cost of goods sold.
d. depreciation and amortization expense.
34. The accounting profession requires disaggregated information in all of the following ways except:
a. products or services.
b. geographic areas.
c. major customers.
d. All of these answers are correct.
S35. In presenting segment information, which of the following items must be reconciled to the entity's consolidated financial statements?
Operating Identifiable
Revenues Profit (Loss) Assets
a. Yes Yes Yes
b. No Yes Yes
c. Yes No Yes
d. Yes Yes No
S36. APB Opinion No. 28 indicates that
a. all companies that issue an annual report should issue interim financial reports.
b. the discrete view is the most appropriate approach to take in preparing interim financial reports.
c. the three basic financial statements should be presented each time an interim period is reported upon.
d. the same accounting principles used for the annual report should be employed for interim reports.
P37. Rondelli Manufacturing Company employs a standard cost system. A planned volume variance in the first quarter of 2018, which is expected to be absorbed by the end of the fiscal year, ordinarily should
a. be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable.
b. never be deferred beyond the quarter in which it occurs.
c. be deferred at the end of the first quarter if it is favorable; unfavorable variances are to be recognized in the period incurred.
d. be deferred at the end of the first quarter if it is unfavorable; favorable variances are to be recognized in the period incurred.
38. How does the accounting profession view interim financial reports?
a. As a "special" type of reporting that need not follow generally accepted accounting principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are unnecessary.
c. As reporting for a discrete accounting period.
d. As reporting for an integral part of an annual period.
39. Accounting principles are modified for the following at interim dates.
Revenue Losses
a. Yes Yes
b. Yes No
c. No Yes
d. No No
40. The following methods of estimating inventory can be used at interim dates for inventory pricing. Which of these methods can also be used at year end?
Gross Profit Method Retail Inventory Method
a. No No
b. No Yes
c. Yes No
d. Yes Yes
41. A company that uses the last-in, first-out (LIFO) method of inventory pricing finds at an interim reporting date that there has been a partial liquidation of the base period inventory layer. The decline is considered temporary and the partial liquidation is expected to be recovered prior to year end. The amount shown as inventory at the interim reporting date should
a. be shown at the actual level, and cost of sales for the interim reporting period should include the expected cost of replacement of the liquidated LIFO base.
b. be shown at the actual level, and cost of sales for the interim reporting period should reflect the historical cost of the liquidated LIFO base.
c. not give effect to the LIFO liquidation, and cost of sales for the interim reporting period should reflect the historical cost of the liquidated LIFO base.
d. be shown at the actual level, and the decrease in inventory level should not be reflected in the cost of sales for the interim reporting period.
42. Companies should disclose all of the following in interim reports except
a. basic and diluted earnings per share.
b. changes in accounting principles.
c. post-balance-sheet events.
d. seasonal revenue, cost, or expenses.
43. The general approach for handling advertising costs which benefit future quarters in interim reports is to
a. prorate them over all four quarters.
b. charge the expenses in the quarter incurred.
c. prorate them over the current and remaining quarters.
d. disclose them only in the notes.
S44. If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be
a. unqualified.
b. qualified.
c. adverse.
d. exceptional.
P45. The MD&A section of a company's annual report is to cover the following three items:
a. income statement, balance sheet, and statement of owners' equity.
b. income statement, balance sheet, and statement of cash flows.
c. liquidity, capital resources, and results of operations.
d. changes in the stock price, mergers, and acquisitions.
S46. Which of the following best characterizes the difference between a financial forecast and a financial projection?
a. Forecasts include a complete set of financial statements, while projections include only summary financial data.
b. A forecast is normally for a full year or more and a projection presents data for less than a year.
c. A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on hypothetical assumptions.
d. A forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification.
47. A financial forecast presents to the best of the responsible party's knowledge and belief,
a. an entity's expected financial position, results of operations, and cash flows.
b. an assessment of the company's ability to be successful in the future.
c. given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows.
d. a subjective assessment of the company's ability to be successful in the future under a number of different assumptions.
*48. Cash, short-term investments, and net receivables are the numerator for
Acid-Test Ratio Current Ratio
a. Yes No
b. Yes Yes
c. No No
d No Yes
*49. The numerator of the accounts receivable turnover should include
a. net sales.
b. net credit sales.
c. total sales.
d. total credit sales.
*50. The return on common stockholders’ equity is calculated by dividing
a. net income by average common stockholders’ equity.
b. net income less preferred dividends by average common stockholders’ equity.
c. net income by ending common stockholders’ equity.
d. net income less preferred dividends by ending common stockholders’ equity.
*51. The payout ratio is calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income plus preferred dividends.
c. cash dividends by market price per share.
d. cash dividends by net income less preferred dividends.
*52. Which of the following ratios measures long-term solvency?
a. Acid-test ratio
b. Accounts receivable turnover
c. Debt to assets
d. Current ratio
*53. The calculation of the times interest earned involves dividing
a. net income by annual interest expense.
b. net income plus income taxes by annual interest expense.
c. net income plus income taxes and interest expense by annual interest expense.
d. None of these answers are correct.
*54. When should an average amount be used for the numerator or denominator?
a. When the numerator is a balance sheet item or items
b. When the denominator is a balance sheet item or items
c. When a ratio consists of an income statement item and a balance sheet item
d. When the numerator is an income statement item or items
*55. Which of the following is a basic limitation associated with ratio analysis
a. The lack of comparability among firms in a given industry.
b. The use of future-oriented data items in accounting.
c. The use of fair value accounting costs.
d. The usefulness of a single ratio by itself.
31. The absolute amount of its profit or loss is 10% or more of the greater, in absolute amount, of (a) the combined profit of all operating segments that did not incur a loss, or (b) the combined loss of all operating segments that did incur a loss.
MULTIPLE CHOICE—Computational
56. Presented below are four segments that have been identified by Haley Productions:
Operating
Segments Total Revenue Profit (Loss) Identifiable Assets
A $255,000 $30,000 $900,000
B 600,000 (55,000) 800,000
C 225,000 6,000 450,000
D 90,000 4,000 225,000
For which of the segments would information have to be disclosed in accordance with professional pronouncements?
a. Segments A, B, C, and D
b. Segments A, B, and C
c. Segments A and B
d. Segments A and D
57. In January 2018, Post, Inc. estimated that its year-end bonus to executives would be $960,000 for 2018. The actual amount paid for the year-end bonus for 2017 was $880,000. The estimate for 2018 is subject to year-end adjustment. What amount, if any, of expense should be reflected in Post's quarterly income statement for the three months ended March 31, 2018?
a. $ -0-.
b. $220,000.
c. $240,000.
d. $960,000.
58. On January 15, 2018, Vancey Company paid property taxes on its factory building for the calendar year 2018 in the amount of $1,080,000. In the first week of April 2018, Vancey made unanticipated major repairs to its plant equipment at a cost of $2,700,000. These repairs will benefit operations for the remainder of the calendar year. How should these expenses be reflected in Vancey's quarterly income statements?
Three Months Ended
3/31/18 6/30/18 9/30/18 12/31/18
a. $270,000 $1,170,000 $1,170,000 $1,170,000
b. $270,000 $2,640,000 $270,000 $270,000
c. $1,080,000 $1,800,000 $ -0- $ -0-
d. $945,000 $945,000 $945,000 $945,000
59. An inventory loss from market decline of $1,800,000 occurred in May 2018, after its March 31, 2018 quarterly report was issued. None of this loss was recovered by the end of the year. How should this loss be reflected in the company's quarterly income statements?
Three Months Ended
3/31/18 6/30/18 9/30/18 12/31/18
a. $ -0- $ -0- $ -0- $1,800,000
b. $ -0- $600,000 $600,000 $600,000
c. $ -0- $1,800,000 $ -0- $ -0-
d. $450,000 $450,000 $450,000 $450,000
Information for Ramirez Corp. is given below:
Ramirez Corp.
Balance Sheet
December 31, 2018
Assets Equities
Cash $ 300,000 Accounts payable $ 630,000
Accounts receivable (net) 1,950,000 Income taxes payable 189,000
Inventories 2,439,000 Miscellaneous accrued payables 225,000
Plant and equipment, Bonds payable (8%, due 2020) 1,875,000
net of depreciation 1,983,000 Preferred stock ($100 par, 6%
Patents 261,000 cumulative nonparticipating) 750,000
Other intangible assets 75,000 Common stock (no par, 60,000
Total Assets $7,008,000 shares authorized, issued
and outstanding) 1,125,000
Retained earnings 2,439,000
Treasury stock—1,500 shares
of preferred (225,000)
Total Equities $7,008,000
Ramirez Corp.
Income Statement
Year Ended December 31, 2018
Net sales $9,000,000
Cost of goods sold 6,000,000
Gross profit 3,000,000
Operating expenses (including bond interest expense) 1,500,000
Income before income taxes 1,500,000
Income tax 450,000
Net income $ 1,050,000
Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2018, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2018. Assume that preferred dividends for the current year have not been declared.
Information for Ramirez Corp. is given below:
Ramirez Corp.
Balance Sheet
December 31, 2018
Assets Equities
Cash $ 300,000 Accounts payable $ 630,000
Accounts receivable (net) 1,950,000 Income taxes payable 189,000
Inventories 2,439,000 Miscellaneous accrued payables 225,000
Plant and equipment, Bonds payable (8%, due 2020) 1,875,000
net of depreciation 1,983,000 Preferred stock ($100 par, 6%
Patents 261,000 cumulative nonparticipating) 750,000
Other intangible assets 75,000 Common stock (no par, 60,000
Total Assets $7,008,000 shares authorized, issued
and outstanding) 1,125,000
Retained earnings 2,439,000
Treasury stock—1,500 shares
of preferred (225,000)
Total Equities $7,008,000
Ramirez Corp.
Income Statement
Year Ended December 31, 2018
Net sales $9,000,000
Cost of goods sold 6,000,000
Gross profit 3,000,000
Operating expenses (including bond interest expense) 1,500,000
Income before income taxes 1,500,000
Income tax 450,000
Net income $ 1,050,000
Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2018, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2018. Assume that preferred dividends for the current year have not been declared.
*60. At December 31, 2018, the current ratio was
a. 2,250 ÷ 630.
b. 6,675 ÷ 819.
c. 4,689 ÷ 819.
d. 4,689 ÷ 1,044.
Information for Ramirez Corp. is given below:
Ramirez Corp.
Balance Sheet
December 31, 2018
Assets Equities
Cash $ 300,000 Accounts payable $ 630,000
Accounts receivable (net) 1,950,000 Income taxes payable 189,000
Inventories 2,439,000 Miscellaneous accrued payables 225,000
Plant and equipment, Bonds payable (8%, due 2020) 1,875,000
net of depreciation 1,983,000 Preferred stock ($100 par, 6%
Patents 261,000 cumulative nonparticipating) 750,000
Other intangible assets 75,000 Common stock (no par, 60,000
Total Assets $7,008,000 shares authorized, issued
and outstanding) 1,125,000
Retained earnings 2,439,000
Treasury stock—1,500 shares
of preferred (225,000)
Total Equities $7,008,000
Ramirez Corp.
Income Statement
Year Ended December 31, 2018
Net sales $9,000,000
Cost of goods sold 6,000,000
Gross profit 3,000,000
Operating expenses (including bond interest expense) 1,500,000
Income before income taxes 1,500,000
Income tax 450,000
Net income $ 1,050,000
Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2018, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2018. Assume that preferred dividends for the current year have not been declared.
