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Review Sheet

If a company receives an unqualified audit opinion it means the auditors:

A. did not complete a full audit and therefore do not feel qualified to give an opinion on financial
statements.
B. are providing assurance that the company will remain financially viable for at least the next
year.
C. are providing assurance that the company's financial statements fairly present company's
financial performance and position.
D. are providing assurance that the company's financial statements are free from misstatement,
fraudulent accounting and fairly indicate future performance.

The Management Discussion and Analysis Section of an annual report:

A. is required by the SEC.


B. is optional but normally included in the annual report.
C. is required by the SEC only if the company has suffered from unfavorable trends or there
are significant uncertainty concerning liquidity of the company.
D. is required by the SEC only if they have a qualified audit opinion.

A common-size income statement would typically be prepared by dividing:

A. all items on income statement in Year t by their corresponding value in Year t-1.
B. all items on income statement in Year t by their corresponding balance sheet accounts in
Year t.
C. all items on income statement in Year t by net income in Year t-1.
D. all items on income statement in Year t by sales in Year t.

You have been provided the following information about Wert Inc.

Return on assets for 2006 is:

A.
B.
C.
D.

13.71%.
12.68%.
10.77%.
13.21%.
You have been provided the following information about High Inc.

Working capital for 2005 is:

A.
B.
C.
D.

$56,000.
$20,000.
$151,000.
$207,000.

Owner's equity for 2006 is:

A.
B.
C.
D.

$20,000.
$154,000.
$174,000.
$207,000.

Current ratio for 2005 is:

A.
B.
C.
D.

1.55.
1.51.
1.50.
1.14.

Return on common equity for 2006 is:

A.
B.
C.
D.

15.46%.
24.14%.
16.79%.
22.04%.

Which of the following ratios would be considered useful in assessing operating profitability?

A.
B.
C.
D.

Total debt to equity ratio


Acid-test ratio
Gross profit margin
Profit to equity ratio

Which of the following would require the filing of Form 8-K?


I. Major acquisition
II. Audited financial statements
III. Bankruptcy
IV. Change in management control

A.
B.
C.
D.

I and III
II and IV
I, III, and IV
I, II, III, and IV

Which of the following is an example of judgments made in the accounting reporting process?
I. Useful life of machinery
II. Allowance for doubtful accounts
III. Obsolescence of assets
IV. Interest payment on bonds

A.
B.
C.
D.

I, II, III, and IV


I, II, and III
II and III
I and III

Accounting standards are:

A.
B.
C.
D.

the result of a political process among groups with diverse interests.


presentation standards mandated by the Securities and Exchange Commission.
the state-of-the-art presentation of the science of accounting.
standards measuring the quality of safeguarding assets.

The matching principle requires that:

A. revenues earned and expenses incurred in generating those revenues should be reported in
the same income statement.
B. non-operating gains and losses should be netted against each other.
C. a proportion of each dollar collected will be assumed to be a recovery of cost.
D. assets will be matched to the liabilities incurred to purchase them.
For a going concern, company value can be expressed by:

A.
B.
C.
D.

dividing permanent income by the cost of capital.


multiplying permanent income by the cost of capital.
dividing permanent income by the market value per share.
multiplying permanent income by the market value per share.

What are the financing sources for most companies?


A. Shareholders and creditors
B. Customers and creditors
C. Customers and shareholders
D. Managers and shareholders

Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee
will cause the following ratios to be:

A.
B.
C.
D.

Option A
Option B
Option C
Option D

If a company that leases equipment from another company records these leases as operating
leases rather than capital leases, its:
I. recorded liabilities will be lower.
II. recorded assets will be higher.
III. total cash flows will be higher.
IV. leverage ratios will be higher.

A.
B.
C.
D.

I and III
II and IV
I only
II, III, and IV

If a company engages in off-balance sheet financing, generally the effect is:


I. to cause assets to be understated.
II. to increase leverage ratios.
III. to increase cash flows.
IV. to cause liabilities to be understated.

A.
B.
C.
D.

I, II, III, and IV


I, III, and IV
I only
IV only

What is treasury stock?

Which of the following statements concerning contingencies is correct?


I. Gain contingencies are recorded if they are probable and reasonably estimable.
II. Unredeemed frequent flyer mileage is an example of a loss contingency.
III. A loss contingency is a form of off-balance sheet financing.
IV. Loss contingencies are not recognized unless there is a greater than 95% chance they will be
realized.

A.
B.
C.
D.

I, II, III, and IV


II, III, and IV
II and III
II only

One way for a company to increase its book value per share is to:

A.
B.
C.
D.

issue long-term debt.


retire long-term debt.
increase dividend payout ratio.
buy back shares at market prices below their book value.

A plan is said to be underfunded, if:

A.
B.
C.
D.

the pension obligation is more than the asset value.


the pension obligation is less than the asset value.
the pension obligation is equal to the asset value.
None of the above

What are the account on Balance Sheet? Such as cash, account receivables, account
payables, debt, common stock . What is on income statement, such as sales / revenue,
cost of goods sold, expense, net income. You need to at least know these basic concepts.
For example Which of the following would rarely be classified as a current asset?
A.
B.
C.
D.

Prepaid insurance
Goodwill
Marketable securities
Work-in-process

The use of LIFO rather than FIFO for inventory costing under normal economic conditions results
in:
I. lower net income.
II. higher total assets.
III. higher retained earnings.
IV. unchanged retained earnings.

A.
B.
C.
D.

II and III
I, II, and IV
I only
I and IV

Financial Statements of ABC Corp. indicates that ending inventory levels in 2005 and 2006 were
$200,000 and $350,000 respectively. Cost of goods sold for 2005 and 2006 were $1,900,000 and
$2,200,000 respectively. Purchases in 2006 were:

A.
B.
C.
D.

$1,950,000
$2,150,000
$2,350,000
$1,850,000

One advantage of LIFO over FIFO under normal conditions is that:

A.
B.
C.
D.

it reports higher retained earnings.


it results in higher cash flows.
it results in higher current ratios.
it results in higher gross margins.

Which of the following is incorrect with respect to recognized goodwill on the balance sheet?

A.
B.
C.
D.

It should not be amortized.


It arises when another company is purchased or when internally generated.
It should be written-down if the future benefits no longer exist.
It may be negative.

Under current US GAAP, goodwill is:


I. amortized over a period not to exceed 40 years.
II. tested annually for impairment.
III. exclusive of separately identifiable intangible assets.
IV. recorded only upon purchase of another entity.

A.
B.
C.
D.

I, II, III, and IV


II, III, and IV
I, II, and III
II and IV
The following information can be found in Manufacturer Company's financial statements.

If Manufacturer used FIFO, its retained earnings as of the end of fiscal 2006 would be:

A.
B.
C.
D.

$540,000.
$440,000.
$524,000.
$506,000.

If Manufacturer used FIFO, its net income for fiscal 2006 would be:

A.
B.
C.
D.

$165,000.
$149,000.
$135,000.
$131,000.

Which of the following statements about inventories is true?

A. U.S. generally accepted accounting principles (GAAP) require the use of lower of cost or
market valuation basis for inventories.
B. Last-In, First-Out (LIFO) inventory accounting makes management of income more difficult
than First-In, First-Out (FIFO) accounting.
C. During inflation, LIFO inventory accounting tends to overstate the current ratio.
D. FIFO inventory balances generally contain old and outdated costs that have little or no
relationship to current costs.
A firm has a current ratio greater than 1.0. During the course of the year the firm sells $60 million
of accounts receivable with limited recourse. If it had not sold the receivables it would have taken
out a short-term loan. The effect of selling the receivables is:

A.
B.
C.
D.

Option A
Option B
Option C
Option D

Which of the following is not an analysis issue arising with impairment?

A.
B.
C.
D.

Evaluating the appropriateness of the amount of the impairment


Evaluating the appropriateness of the timing of the impairment
Analyzing the effect of the impairment on asset
Analyzing the effect of the impairment on income

The classification of marketable equity securities as trading or available-for-sale is determined:

A.
B.
C.
D.

by management's intent regarding the disposition of the securities.


when the securities mature.
whether the current assets are greater or less than the current liabilities.
whether management wants to mark them to market or not.

The equity method of accounting for investments requires:

A.
B.
C.
D.

investment should be marked to market each accounting period.


proportionate share of investee's earnings should be recorded as investment income.
company should not have significant influence over investee.
goodwill related to purchase of investee stock to be recorded separately on balance sheet.

Determine the amount Guido Inc. will record as investment income in its income statement under
the three scenarios: Weiner is considered trading marketable equity security (MES), available-forsale (AFS) MES, or using cost method.

A.
B.
C.
D.

Option A
Option B
Option C
Option D

Company A acquires 40% of Company B in a stock-for-stock exchange. With respect to preparing


financial statements, which of the following statements is correct?

A.
B.
C.
D.

Company A will most likely use pooling-of-interest accounting for consolidation purposes.
Company A will most likely use purchase accounting.
Company A will most likely use the cost method.
Company A will most likely use the equity method.

If a company uses the purchase method to account for a merger, which of the following is true?
I. Prior year's statements must be restated as if merged companies had always been one
company.
II. Net income of combined companies will probably be lower than net income of two separate
companies added together.
III. Goodwill is never recorded.
IV. Assets of acquired company will be recorded on acquirer's books at their fair value.

A.
B.
C.
D.

II, III, and IV


I, II, and III
II and IV
I and III

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10
million. On 12/31/06, XYZ financial statements reported the following:

At the time of acquisition, the fair value of XYZ's assets equals its book values, except for
property, plant and equipment which has a fair value $2 million higher than its book value.
Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is
10 years. If ABC uses purchase accounting to record the acquisition, the amount of goodwill that
will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

A.
B.
C.
D.

$0.
$2 million.
$4 million.
$6 million.

Undie Inc. has many foreign operations and uses the U.S. dollar as its functional currency
worldwide. Which of the following statements is true with respect to foreign operations?

A.
B.
C.
D.

All assets and liabilities are translated at current exchange rates.


Monetary assets and liabilities are translated at current exchange rates.
Translation gains and losses are reported in equity section of balance sheet.
Non-monetary assets and liabilities are translated at average exchange rates for the year.

Which exchange rates are used for foreign subsidiaries with different functional currencies? Using
the following abbreviations identify which of the below are correct methods for converting
accounts receivable.
Year-end rates: YE
Average rates: AR
Historical rates: HR

A.
B.
C.
D.

Option A
Option B
Option C
Option D

Assume Xena uses the current rate method for translating Zeta's financial statements from the
yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?
A.
B.
C.
D.

Xena will record a foreign currency translation gain on the income statement.
Xena will record a foreign currency translation loss on the income statement.
Xena will record a foreign currency translation gain in the equity section of the balance sheet.
Xena will record a foreign currency translation loss in the equity section of the balance sheet.

A U.S. company has a subsidiary located in Great Britain. If the British pound is the functional
currency and is appreciating relative to the dollar, what will happen to the following ratios after
translation?

A.
B.
C.
D.

Option A
Option B
Option C
Option D

What is the difference between current rate method, temporal method, and transition
method?