Example Test Questions Chapter 6 Multiple choice 1. The disposal of a significant component of a business is called a.

A change in accounting principle b. An extraordinary item c. An other expense d. Discontinued operation Answer d

2. If year one sales equal $800,000, year two equal $840,000 and year three equals $896,000 thepercentage to be assigned for year two in a sales trend analysis, assuming that year 1 is thebase year, is a. 100% b. 89% c. 105% d. 112% Answer c 3. A measure of a company’s profitability is the a. Current ratio b. Current cash debt coverage ratio c. Return on assets ratio d. Debt to total assets ratio Answer c 4.Which of the following is not an economic consequence of financial reporting? a.Financial information can affect the distribution of wealth among investors. More informed investors, or investors employing security analysts, may be able to increset heir wealth at the expense of less informed investors. b.Financial information can affect the level of risk accepted by a firm. Focusing on short-term, less risky projects may have long-term detrimental effects. c.Financial information can affect the rate of capital formation in the economy and result ina reallocation of wealth between consumption and investment within the economy. d.Financial information can affects the allocation of psychic income among investors. Answer d 5.Which of the following is not an income statement element? a.Asset b.Gain c.Revenue d.Expense Answer a

Liquidity d.The accounts receivable turnover and inventory turnover ratios are used to analyze a. c.Gross profit percentage b.All inclusive c. Profitability c.Prior period adjustments Answer c 8.Which of the following is not an example of an error? a.Which of the following is not an accounting change? a.Extraordinary items d.Current operating performance d.Operating profit percentage Answer d 11.Mathematical mistakes. b. Long-term solvency b. Operating profit/Sales.6.Change in a reporting entity d.The statement. net income should reflect all items that affected the net increase or decrease in stockholders’ equity during the period is consistentwithwhich of the following concepts of income? a.Money Answer b 7.A change from an accounting practice that is not generally acceptable to a practice thatis generally acceptable.Changes in accounting principles b.Change in accounting principle b.A change from LIFO to FIFO inventory costing d.Economic b.The formula.Comprehensive income percentage d. Leverage Answer c .Prior period adjustments c.Change in accounting estimate c. is used to calculate a. The phrase events and transactions that are distinguished by both their unusual nature andtheir infrequency of occurrence describes: a.The incorrect classification of costs and expense Answer c 10.Change because of an error Answer d 9.Net profit percentage c.

A gain resulting from the state exercising its right of eminent domain on a piece of landused as a parking lot Answer d . Profit margin and free cash flow. dollar d.A large portion of the company’s sales are on credit c.Gains or losses from a fire Answer d 17.S. if material in amount would normally be considered anextraordinary item for reporting results of operations? a. when collection of thesales price has been and continues to be reasonably assured Answer d 15. d.A gain resulting from the devaluation of the U. The return on assets ratio is comprised of a.b.Which of the following is characteristic of a change in an accounting estimate? a. Times interest earned and debt to stockholders’ equity ratio.Adjustments of accruals on long-term contracts d.12.From the installment basis of recording sales to the accrual basis.The write-off of deferred research and development costs believed to have no futurebenefit c. b. Many customers are not paying their receivables in a timely manner d. Profit margin and debt to total assets ratio .Utilization of a net operating loss carryforward b.In the depletion rate.The company’s sales have increased Answer c 13. based on new engineering studies of recoverable mineralresources. Profit margin and asset turnover ratio c.An example of the correction of an error in previously issued financial statements is a change a.A loss incurred because of a strike by employees b.It does not affect the financial statements of prior periods c.Which of the following items.Which of the following is an example of an extraordinary item in reporting results of operations? a.It should be reported through the restatement of the financial statements d.From the sum-of-years-digits to the straight-line method of depreciation for all plantassets.Gains or losses on disposal of a segment of a business c. c.From the completed contract to the percentage-of-completion method of accounting for longterm construction-type contracts. Customers are making payments quickly b. Answer b 14. d.It usually need not be disclosed b.It makes necessary the reporting of pro forma amounts for prior periods Answer b 16.A high accounts receivable turnover ratio indicates a.

net of applicable income taxes d.After extraordinary items and cumulative effect of accounting changes d.Component of income from continuing operations.18.Applying retroactively the new method in restatements of prior years and appropriatefootnote disclosures Answer d 19.Extraordinary item. netof applicable income taxes. unusual in nature. first-out to first-in. Generally accepting accounting principles require that this change in accounting method be reported by: a.Before extraordinary items b.A transaction that is material in amount.After discontinued operations of a component of a business b. The correction of an error in the financial statements of a prior period should be reflected.Disclosing the reason for the change in the “significant accounting policies” footnote for the current year but not restating prior year financial statements d. net of applicable income taxes c. b.Before discontinued operations of a component of a business c.Retained earnings statement after net income but before dividends Answer c 22. buy not net of applicable income taxes Answer a 20.Prior period adjustment. but not net of applicable incometaxes b.A loss from the disposal of a component of a business enterprise should be reportedseparately as a component of income a.Income statement after income from continuing operations and after extraordinary items c.Component of income from continuing operations.Before extraordinary items and cumulative effect of accounting changes Answer a .Income statement after income from continuing operations and before extraordinaryitems b.Retained earnings statement as an adjustment of the opening balance d.A company changed its method of inventory pricing from last-in. first-out during the current year.After extraordinary items c.Showing the cumulative effect of the change in the current year’s financial statementsand pro forma effects on prior year’s financial statements in an appropriate footnote c.Accounting for the effects of the change in the current and future periods. After cumulative effect of accounting changes and before discontinued operations of acomponent of a business Answer b 21.After cumulative effect of accounting changes and after discontinued operations of acomponent of a business d. but not infrequent in occurrences hould be presented separately as a (an) a.An extraordinary item should be reported separately as a component of income a. in the current a.

A loss should be separately as a component of net income when it is unusual in nature andwhich of the following? Material Infrequent In Amount In Occurrence a.A prior period adjustment should be reflected. An accounting change that should be reported by restating the financial statements of allprior periods presented c.Income statement as part of the loss on disposal of the discontinued component c. N o N o c.An accounting change that should be reported in the period of change and futureperiods of change if the change affects both b.Income statement as part of the income (loss) from continuing operations d.Retained earnings statement after net income but before dividends b.No Yes c. Yes No d.Yes No Answer c 25. net of applicable income taxes.A correction of an error d.A change in the salvage value of an asset depreciated on a straight-line basis and arisingbecause additional information has been obtained is a.Retained earnings statement as an adjustment of the opening balance c. in the financialstatements of a business entity in the a.Not an accounting change Answer b 26. No Yes b.Income statement after income from continuing operations d.Income statement as part of the income (loss) from operations of the discontinuedcomponent b. Yes Yes Answer d 27.Antidilutive securities would generally be used in the calculation of Basic Diluted Earnings per share Earnings per share a.Income statement as part of income from continuing operations Answer b 24.No No d.23.Retained earnings statement as a direct decrease in retained earningsAnswer a .Yes Yes b.When a component of a business has been discontinued during the year. this s’ component s operating losses of the current period up to the measurement date should be included in the a.

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