123JEMBOTD12345

Te s t B a n k f o r F i n a n c i a l A c c o u n t i n g 9 t h E d i t i o n b y W e y g a n d t
TRUE-FALSE STATEMENTS
1.Owners of business firms are the only people who need accounting information.
2.Transactions that can be measured in dollars and cents are recorded in the financial information system.
3.The hiring of a new company president is an economic event recorded by the financial information
system.
4.Management of a business enterprise is the major external user of information.
5.Accounting communicates financial information about a business enterprise to both internal and external
users.
6.Accounting information is used only by external users with a financial interest in a business enterprise.
7.Financial statements are the major means of communicating accounting information to interested parties.
8.Bookkeeping and accounting are one and the same because the bookkeeping function includes the
accounting process.
9.The origins of accounting are attributed to Luca Pacioli, a famous mathematician.
10.The study of accounting will be useful only if a student is interested in working for a profit-oriented
business firm.
11.Private accountants are accountants who are not employees of business enterprises.
12.The study of accounting is not useful for a business career unless your career objective is to become an
accountant.
13.A working knowledge of accounting is not relevant to a lawyer or an architect.
14.Expressing an opinion as to the fairness of the information presented in financial statements is a service
performed by CPAs.
15.Accountants rely on a fundamental business concept—ethical behavior—in reporting financial
information.
16.The primary accounting standard-setting body in the United States is the International Accounting
Standards Board.
17.The Financial Accounting Standards Board is a part of the Securities and Exchange Commission.
18.The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-
setting bodies.
19.The cost and fair value of an asset are the same at the time of acquisition and in all subsequent periods.
20.Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs
should be kept separate from the personal activities of the owners.
21.A partnership must have more than one owner.
22.The economic entity assumption requires that the activities of an entity be kept separate and distinct
from the activities of its owner and all other economic entities.
23.The monetary unit assumption states that transactions that can be measured in terms of money should
be recorded in the accounting records.
24.In order to possess future service potential, an asset must have physical substance.
25.Owners' claims to total business assets take precedence over the claims of creditors because owners
invest assets in the business and are liable for losses.
26. The basic accounting equation states that Assets = Liabilities.
27. Accountants record both internal and external transactions.
28. Internal transactions do not affect the basic accounting equation because they are economic
events that occur entirely within one company.
29. The purchase of store equipment for cash reduces stockholders’ equity by an equal amount.
30. The purchase of office equipment on credit increases total assets and total liabilities.
31. The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company during a period.
32. Net income for the period is determined by subtracting total expenses and drawings from total
revenues.
33. The income statement is sometimes referred to as the statement of operations.
34. A balance sheet reports the assets and liabilities of a company for a specific period of time.
35. The ending retained earnings balance is reported on both the retained earnings statement and the
balance sheet.
36. Identifying is the process of keeping a chronological diary of events measured in dollars and cents.
1-2 Test Bank for Financial Accounting, Ninth Edition
37. Management consulting includes examining the financial statements of companies and expressing
an opinion as to the fairness of their presentation.
38. Accountants do not have to worry about issues of ethics.
39. At the time an asset is acquired, cost and fair value should be the same.
40. The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.
41. The basic accounting equation is in balance when the creditor and ownership claims against the
business equal the assets.
42. External transactions involve economic events between the company and some other enterprise or
party.
43. In the retained earnings statement, revenues are listed first, followed by expenses, and net income
(or net loss).
Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 8. F 15. T 22. T 29. F 36. F 43. F
2. T 9. T 16. F 23. T 30. T 37. F
3. F 10. F 17. F 24. F 31. T 38. F
4. F 11. F 18. T 25. F 32. F 39. T
5. T 12. F 19. F 26. F 33. T 40. F
6. F 13. F 20. T 27. T 34. F 41. T
7. T 14. T 21. T 28. F 35. T 42. T
MULTIPLE CHOICE QUESTIONS
44. Accountants refer to an economic event as a

a. purchase.
b. sale.
c. transaction.
d. change in ownership.
45. The process of recording transactions has become more efficient because
a. fewer events can be quantified in financial terms.
b. computers are used in processing business events.
c. more people have been hired to record business transactions.
d. business events are recorded only at the end of the year.
46. Communication of economic events is the part of the accounting process that involves
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.
47. Which of the following events cannot be quantified into dollars and cents and recorded as an
accounting transaction?
a. The appointment of a new CPA firm to perform an audit.
b. The purchase of a new computer.
c. The sale of store equipment.
d. Payment of income taxes.
48. The use of computers in recording business events
a. has made the recording process more efficient.
b. does not use the same principles as manual accounting systems.
c. has greatly impacted the identification stage of the accounting process.
d. is economical only for large businesses.
49.The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording nonquantifiable economic events.
d. analyzing and interpreting financial reports.
50. The accounting process is correctly sequenced as
FOR INSTRUCTOR USE ONLY

a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.
51. Which of the following techniques are not used by accountants to interpret and report financial
information?
a. Graphs.
b. Special memos for each class of external users.
c. Charts.
d. Ratios.
52. Accounting consists of three basic activities which are related to economic events of an
organization. These include
a. identifying, recording, and communicating
b. identifying, calculating, and responding
c. classifying, numbering, and reporting
d. issuing, reporting, and classifying
53. All of the following statements are correct except
a. Good decision-making depends on good information.
b. A vital element in communicating economic events is the accountant's ability to analyze and
interpret reported information.
c. The origins of accounting are generally attributed to Socrates, a classical Greek philosopher,
who promoted accounting as a social contract.
d. The information that a user of financial information needs depends upon the kinds of decisions
the user makes.
54. Which of the following would not be considered an internal user of accounting data for the GHI
Company?
a. President of the company.
b. Production manager.
c. Merchandise inventory clerk.
d. President of the employees' labor union.
55. Which of the following would not be considered an external user of accounting data for the GHI
Company?
a. Internal Revenue Service Agent.
b. Management.
c. Creditors.
d. Customers.
56. Which of the following would not be considered internal users of accounting data for a company?
a. The president of a company.
b. The controller of a company.
c. Creditors of a company.
d. Salesmen of the company.
57. Which of the following is an external user of accounting information?
a. Labor unions.
b. Finance directors.
c. Company officers.
d. Managers.
58. Which one of the following is not an external user of accounting information?
a. Regulatory agencies.
b. Customers.
c. Investors.
d. All of these are external users.
59. Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the
accounting process?
a. Identification.
b. Communication.
c. Recording.
d. Analysis.

60. The origins of accounting are generally attributed to the work of

a. Christopher Columbus.
b. Abner Doubleday.
c. Luca Pacioli.
d. Leonardo da Vinci.
61. Financial accounting provides economic and financial information for all of the following except
a. creditors.
b. investors.
c. managers.
d. other external users.
62. The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.
63. The first step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved.
d. weigh the impact of each alternative on various stakeholders.
64. Ethics are the standards of conduct by which one's actions are judged as
a. right or wrong.
b. honest or dishonest.
c. fair or unfair.
d. All of these answers are correct.
65. All of the following are steps in analyzing ethics cases in financial reporting except
a. identify and analyze the principle elements in the situation.
b. contact law enforcement regarding any violations of corporate ethics codes
c. identify the alternatives and weigh the impact of each alternative on various stakeholders.
d. recognize an ethical situation and the ethical issues involved.
66. In order to increase comparability, in recent years, the FASB and IASB have made efforts to reduce
the differences between U.S.GAAP and IFRS through a process known as
a. convergence
b. monetary unit assumption
c. the cost principle
d. the fair value principle
67. Martin Corporation purchased land in 2007 for $290,000. In 2015, it purchased a nearly identical
parcel of land for $460,000. In its 2015 balance sheet, Martin valued these two parcels of land at a
combined value of $920,000. By reporting the land in this manner, Martin Corp. has violated the
a. historical cost principle
b. convergence
c. economic entity assumption
d. monetary unit assumption
68. Andre Dickinson, owner of Andre's Fine Wines, also owns a personal residence that costs
$475,000. The market value of his residence is $625,000. During preparation of the financial
statements for Andre's Fine Wines, the accounting concept most relevant to the presentation of
Andre's home is
a. the economic entity assumption.
b. the fair value principle.
c. the monetary unit assumption.
d. convergence.
69. Generally accepted accounting principles are
a. income tax regulations of the Internal Revenue Service.
b. standards that indicate how to report economic events.
c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.

70. The historical cost principle requires that when assets are acquired, they be recorded at
a. appraisal value.
b. cost.
c. market price.
d. book value.
71. The cost of an asset and its fair value are
a. never the same.
b. the same when the asset is sold.
c. irrelevant when the asset is used by the business in its operations.
d. the same on the date of acquisition.
72. The body of theory underlying accounting is not based on
a. physical laws of nature.
b. concepts.
c. principles.
d. definitions.
73.The private sector organization involved in developing accounting principles is the
a. Feasible Accounting Standards Body.
b. Financial Accounting Studies Board.
c. Financial Accounting Standards Board.
d. Financial Auditors' Standards Body.
74. The SEC and FASB are two organizations that are primarily responsible for establishing generally
accepted accounting principles. It is true that
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist.
d. the SEC and FASB rarely cooperate in developing accounting standards.
75. GAAP stands for
a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.
76. Financial information that is capable of making a difference in a decision is
a. faithfully representative.
b. relevant.
c. convergent.
d. generally accepted.
77. The Duce Company has five plants nationwide that cost a total of $100 million. The current fair
value of the plants is $500 million. The plants will be recorded and reported as assets at
a. $100 million.
b. $600 million.
c. $400 million.
d. $500 million.
78. The fair value principle is applied for
a. all assets.
b. current assets.
c. buildings.
d. investment securities.
79.The proprietorship form of business organization
a. must have at least three owners in most states.
b. represents the largest number of businesses in the United States.
c. combines the records of the business with the personal records of the owner.
d. is characterized by a legal distinction between the business as an economic unit and the
owner.
80. The economic entity assumption requires that the activities
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its
owners.

d. of an entity be kept separate from the activities of its owner.

81. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. terminates when one of its original stockholders dies.
82. The partnership form of business organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.
83. Which of the following is not an advantage of the corporate form of business organization?
a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders
d. Unlimited life
84. A small neighborhood barber shop that is operated by its owner would likely be organized as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
85.John and Sam met at law school and decide to start a small law practice after graduation. They agree to
split revenues and expenses evenly. The most common form of business organization for a business such
as this would be a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
86. Which of the following is true regarding the corporate form of business organization?
a. Corporations are the most prevalent form of business organization.
b. Corporate businesses are generally smaller in size than partnerships and proprietor-ships.
c. The revenues of corporations are greater than the combined revenues of partnerships and
proprietorships.
d. Corporations are separate legal entities organized exclusively under federal law.
87. A basic assumption of accounting that requires activities of an entity be kept separate from the
activities of its owner is referred to as the
a. stand alone concept.
b. monetary unit assumption.
c. corporate form of ownership.
d. economic entity assumption.
88. Ted Leo is the proprietor (owner) of Ted's, a retailer of golf apparel. When recording the financial
transactions of Ted's, Ted does not record an entry for a car he purchased for personal use. Ted
took out a personal loan to pay for the car. What accounting concept guides Ted's behavior in this
situation?
a. Pay back concept
b. Economic entity assumption
c. Cash basis concept
d. Monetary unit assumption
89. A basic assumption of accounting assumes that the dollar is
a. unrelated to business transactions.
b. a poor measure of economic activities.
c. the common unit of measure for all business transactions.
d. useless in measuring an economic event.
90. The assumption that the unit of measure remains sufficiently constant over time is part of the
a. economic entity assumption.
b. cost principle.

c. historical cost principle.
d. monetary unit assumption.
91. Owners enjoy limited liability in a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
92. A problem with the monetary unit assumption is that
a. the dollar has not been stable over time.
b. the dollar has been stable over time.
c. the dollar is a common medium of exchange.
d. it is impossible to account for international transactions.
93. The common characteristic possessed by all assets is
a. long life.
b. great monetary value.
c. tangible nature.
d. future economic benefit.
94. Owner's equity is best depicted by the following:
a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets.
d. Assets – Liabilities.
95. The basic accounting equation may be expressed as
a. Assets = Equities.
b. Assets – Liabilities = Stockholders' Equity.
c. Assets = Liabilities + Stockholders' Equity.
d. All of these answers are correct.
96. Liabilities
a. are future economic benefits.
b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.
Liabilities of a company would not include
a. notes payable.
b. accounts payable.
c. salaries and wages payable.
d. cash.
98. Liabilities of a company are owed to
a. debtors.
b. benefactors.
c. creditors.
d. underwriters.
99. Stockholders' equity can be described as
a. creditorship claim on total assets.
b. ownership claim on total assets.
c. benefactor's claim on total assets.
d. debtor claim on total assets.
100. Stockholders' equity is often referred to as
a. residual equity.
b. leftovers.
c. spoils.
d. second equity.
101. When assets are distributed to the owners of a corporation, these distributions are termed
a. depletions.
b. consumptions.
c. dividends.
d. a credit line.
102. A dividend is

a. a distribution of the company's earnings to its stockholders.

b. equal to liabilities minus stockholders' equity.
c. equal to assets minus stockholders' equity.
d. equal to revenues less expenses
103. Revenues would not result from
a. sale of merchandise.
b. issuance of common stock.
c. performance of services.
d. rental of property.
104. Sources of increases to stockholder's equity are
a. additional investments by owners.
b. purchases of merchandise.
c. dividends.
d. expenses.
105. The basic accounting equation cannot be restated as
a. Assets – Liabilities = Stockholders' Equity.
b. Assets – Stockholders' Equity = Liabilities.
c. Stockholders' Equity + Liabilities = Assets.
d. Assets + Liabilities = Stockholders' Equity.
106. Stockholders' equity is decreased by all of the following except
a. sales of stock.
b. net losses.
c. expenses.
d. dividends.
107. A net loss will result during a time period when
a. liabilities exceed assets.
b. dividends exceed investments.
c. expenses exceed revenues.
d. revenues exceed expenses.
114. Which of the following will not cause a change in the stockholders' equity of a business?
a. An increase in prepaid expenses.
b. An increase in retained earnings.
c. The sale of common stock.
115. The amount of stockholders' equity in a business is not affected by
a. The percentage of total assets held in cash.
b. Assets consumed in the process of earning revenues.
c. The profitability of the business.
116. If the transaction causes an asset account to decrease, which of the following related effects may
occur?
a. An increase of equal amount in the common stock account.
b. An increase in a liability account.
c. An increase of equal amount in another asset account.
d. An increase in the combined total of liabilities and stockholders' equity.
117. The accounting equation for Quattro Enterprises is as follows:
Assets Liabilities Stockholders' Equity
$120,000 = $60,000 + $60,000
If Quattro purchases office equipment on account for $25,000, the accounting equation will change
to
Assets Liabilties Stockholders' Equity
a. $120,000 = $60,000 + $60,000
b. $145,000 = $60,000 + $85,000
c. $145,000 = $72,500 + $72,500
d. $145,000 = $85,000 + $60,000
118. As of June 30, 2015, Actual Tigers Company has assets of $100,000 and stockholders' equity of
$40,000. What are the liabilities for Actual Tigers Company as of June 30, 2015?

a. $40,000
b. $60,000
c. $100,000
d. $140,000
119. Stockholders' equity is increased by
a. dividends.
b. revenues.
c. expenses.
d. liabilities.
120. Stockholders' equity is decreased by
a. assets.
b. revenues.
c. expenses.
d. liabilities.
121. If total liabilities increased by $8,000, then
a. assets must have decreased by $8,000.
b. stockholders' equity must have increased by $8,000.
c. assets must have increased by $8,000, or stockholders' equity must have decreased by
$8,000.
d. assets and stockholders' equity each increased by $4,000.
122. Collection of a $1,000 Accounts Receivable
a. increases an asset $1,000; decreases an asset $1,000.
b. increases an asset $1,000; decreases a liability $1,000.
c. decreases a liability $1,000; increases stockholders' equity $1,000.
d. decreases an asset $1,000; decreases a liability $1,000.
123. Revenues are
a. the cost of assets consumed during the period.
b. gross increases in stockholders' equity resulting from business activities.
c. the cost of services used during the period.
d. actual or expected cash outflows.
124. If an individual asset is increased, then
a. there must be an equal decrease in a specific liability.
b. there must be an equal decrease in stockholders' equity.
c. there must be an equal decrease in another asset.
d. All of these answers are possible.
125. If services are rendered for credit, then
a. assets will decrease.
b. liabilities will increase.
c. stockholders' equity will increase.
d. liabilities will decrease.
126. If expenses are paid in cash, then
a. assets will increase.
b. liabilities will decrease.
c. stockholders' equity will increase.
d. assets will decrease.
127. If a corporation distributes cash to its stockholders, then
a. there has been a violation of accounting principles.
b. stockholders' equity will increase.
c. stockholders' equity will decrease.
d. there will be a new liability showing the stockholders owes money to the business.
128. If supplies that have been purchased are used in the course of business, then
a. a liability will increase.
b. an asset will increase.
c. stockholders' equity will decrease.
d. stockholders' equity will increase.
130. Which of the following events is not a business transaction?
a. Issuance of stock in exchange for cash.
b. Hired employees.

1 - 10 Test Bank for Financial Accounting, Ninth Edition
c. Incurred utility expenses for the month.

d. Earned revenue for services provided.
131. Net income results when
a. Assets > Liabilities.
b. Revenues = Expenses.
c. Revenues > Expenses.
d. Revenues < Expenses.
132. Retained earnings at the end of the period is equal to
a. retained earnings at the beginning of the period plus net income minus liabilities.
b. retained earnings at the beginning of the period plus net income minus dividends.
c. net income.
d. assets plus liabilities.
133. A balance sheet shows
a. revenues, liabilities, and stockholders' equity.
b. expenses, dividends, and stockholders' equity.
c. revenues, expenses, and dividends.
134. An income statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders' equity over a period of time.
c. reports the assets, liabilities, and stockholders' equity at a specific date.
d. presents the revenues and expenses for a specific period of time.
135. If the retained earnings account increases from the beginning of the year to the end of the year,
then
a. net income is less than dividends.
b. a net loss is less than dividends.
c. the company must have sold stock.
d. net income is greater than dividends.
139. The balance sheet is frequently referred to as
a. an operating statement.
b. the statement of financial position.
c. the statement of cash flows.
d. the statement of retained earnings.
140. The primary purpose of the statement of cash flows is to report
a. a company's investing transactions.
b. a company's financing transactions.
c. information about cash receipts and cash payments of a company.
d. the net increase or decrease in cash.
141. All of the financial statements are for a period of time except the
a. income statement.
b. retained earnings statement.
c. balance sheet.
d. statement of cash flows.
142. The ending retained earnings amount is shown on
a. the balance sheet only.
b. the retained earnings statement only.
c. both the income statement and the retained earnings statement.
161. All of the following are services offered by public accountants except
a. budgeting.
b. auditing.
c. tax planning.
d. consulting.
162. Which list below best describes the major services performed by public accountants?
a. Bookkeeping, mergers, budgets.
b. Employee training, auditing, bookkeeping.
c. Auditing, taxation, management consulting.
d. Cost accounting, production scheduling, recruiting.
a
163. Preparing tax returns and engaging in tax planning is performed by

a. public accountants only.
b. private accountants only.
c. both public and private accountants.
d. IRS accountants only.
a
164. A private accountant can perform many activities in a business organization but would not work in
a. budgeting.
b. accounting information systems.
c. external auditing.
d. tax accounting.
165. Which of the following is not part of the accounting process?
a. Recording
b. Identifying
c. Financial decision making
d. Communicating
166. The first part of the accounting process is
a. communicating.
b. identifying.
c. processing.
d. recording.
167. Keeping a systematic, chronological diary of events that are measured in dollars and cents is called
a. communicating.
b. identifying.
c. processing.
d. recording.
168. Auditing is
a. the examination of financial statements by a CPA in order to express an opinion on their
fairness.
b. a part of accounting that involves only recording of economic events.
c. an area of accounting that involves such activities as cost accounting, budgeting, and
accounting information systems.
d. conducted by the Securities and Exchange Commission to ensure that registered financial
statements are presented fairly.
169.Internal users of accounting information include all of the following except
a. company officers.
b. investors.
c. marketing managers.
d. production supervisors.
170. The organization(s) primarily responsible for establishing generally accepted accounting principles
is(are) the
FASB SEC
a. no no
b. yes no
c. no yes
d. yes yes
171. The primary accounting standard-setting body in the United States is the
a. Financial Accounting Standards Board.
b. International Accounting Standards Board.
c. Internal Revenue Service.
d. Securities and Exchange Commission.
172. A proprietorship is a business
a. owned by one person.
b. owned by two or more persons.
c. organized as a separate legal entity under state corporation law.
d. owned by a governmental agency.
173. A net loss will result during a time period when
a. assets exceed liabilities.
b. assets exceed stockholders' equity.

c. expenses exceed revenues.

d. revenues exceed expenses.
174. Bright Eyes Downtown Diner received a bill of $600 from the Jronand Wine Advertising Agency.
The owner, A. A. Bondy, is postponing payment of the bill until a later date. The effect on specific
items in the basic accounting equation is
a. a decrease in Cash and an increase in Accounts Payable.
b. a decrease in Cash and an increase in Retained Earnings.
c. an increase in Accounts Payable and a decrease in Retained Earnings.
d. a decrease in Accounts Payable and an increase in Retained Earnings.
175. Matador Company purchases $1,300 of equipment from Danger Mouse Inc. for cash. The effect on
the components of the basic accounting equation of Matador Company is
a. an increase in assets and liabilities.
b. a decrease in assets and liabilities.
c. no change in total assets.
d. an increase in assets and a decrease in liabilities.
176. Druganaut Company buys a $21,000 van on credit. The transaction will affect the
a. income statement only.
b. balance sheet only.
c. income statement and retained earnings statement only.
d. income statement, retained earnings statement, and balance sheet.
177. The financial statement that summarizes the financial position of a company is the
a. income statement.
b. balance sheet.
c. operating statement.
d. retained earnings statement.
178. Which of the following is not a reason one set of international accounting standards are needed?
a. multinational corporations.
b. mergers and acquisitions.
c. information technology.
d. all of these answer choices are correct.
179. Which of the following is not a reason one set of international accounting standards are needed?
a. multinational corporations.
b. financial markets.
c. information technology.
d. all of the above are reasons one set of international accounting standards are needed.
180. International standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
181.U.S. standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
182. International standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
183. U.S. standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

184. The United States and the international standard-setting environment are primarily driven by
meeting the needs of
a. investors and creditors.
b. tax authorities.
c. central government planners.
d. academic researchers.
185. The internal control standards applicable to Sarbanes-Oxley apply to
a. all U.S. and international companies.
b. U.S. and international companies listed on U.S. exchanges.
c. International companies listed on U.S. exchanges.
d. U.S. companies listed on U.S. exchanges.
186. The concern about international companies adopting SOX-type standards centers on
a. cost-benefit analysis.
b. ethics issues.
c. the governing authorities.
d. comparability.
187. Financial accounting ethics violations are
a. not a problem in the U.S. or internationally.
b. much more common in the U.S. than internationally.
c. much more common internationally than in the U.S.
d. a major problem both in the U.S. and internationally.
188. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.
189. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosure requirements.
190. Proprietorships, partnerships, and corporations
a. are the three most common forms of business organizations in the U.S.
b. are the three most common forms of business organizations internationally.
c. are used in different proportions in different countries.
d. all of these answers are correct.
191. The conceptual framework that underlies IFRS
a. is very similar to that used to develop GAAP.
b. does not define assets or liabilities.
c. does not define equity.
d. does not define income or expenses.
Answers to Multiple Choice Questions

44. c 66. a 88. b 110. b 132. b 154. c 176. b
45. b 67. a 89. c 111. a 133. d 155. c 177. b
46. c 68. a 90. d 112. c 134. d 156. d 178. d
47. a 69. b 91. c 113. b 135. d 157. c 179. d
48. a 70. b 92. a 114. a 136. c 158. a 180. a
49. c 71. d 93. d 115. a 137. c 159. c 181. b
50. c 72. a 94. d 116. c 138. b 160. c 182. c
a
51. b 73. c 95. d 117. d 139. b 161. a 183. d
a
52. a 74. c 96. b 118. b 140. c 162. c 184. a
a
53. c 75. b 97. d 119. b 141. c 163. c 185. d
a
54. d 76. b 98. c 120. c 142. d 164. c 186. a
55. b 77. a 99. b 121. c 143. b 165. c 187. d

56. c 78. d 100. a 122. a 144. b 166. b 188. c

57. a 79. b 101. c 123. b 145. b 167. d 189. b
58. d 80. d 102. a 124. c 146. b 168. a 190. d
59. c 81. c 103. b 125. c 147. b 169. b 191. a
60. c 82. b 104. a 126. d 148. b 170. d
61. c 83. c 105. d 127. c 149. b 171. a
62. c 84. d 106. a 128. c 150. c 172. a
63. c 85. b 107. c 129. a 151. d 173. c
64. d 86. c 108. d 130. b 152. d 174. c
65. b 87. d 109. b 131. c 153. c 175. c
Test Bank for Financial Reporting and Analysis Using Financial Accounting Information 12th Edition by
Gibson
MULTIPLE CHOICE
1. Charging off equipment that cost less than $20 would be an example of the application of:
a. going concern
b. cost
c. matching
d. materiality
e. realization
ANS: D
2. The going concern assumption:
a. is applicable to all financial statements
b. primarily involves periodic income measurement
c. allows for the statements to be prepared under generally accepted accounting principles
d. requires that accounting procedures be the same from period to period
e. none of the answers are correct
ANS: C
3. Understating assets and revenues is justified based on:
a. realization assumption
b. matching
c. consistency
d. realization
ANS: E
4. The assumption that enables us to prepare periodic statements between the time that a business
commences operations and the time it goes out of business is:
a. time period
b. business entity
c. historical cost
d. transaction
ANS: A
5. Valuing assets at their liquidation values is not consistent with:
a. conservatism
b. materiality
c. going concern
d. time period
ANS: C
6. The business being separate and distinct from the owners is an in tegral part of the:
a. time period assumption

b. going concern assumption
c. business entity assumption

d. realization assumption
ANS: C
7. The principle that assumes the reader of the financial statements is not interested in the liquidation values
is:
a. conservatism
b. matching
c. time period
d. realization
ANS: E
8. An accounting period that ends when operations are at a low ebb is:
a. a calendar year
b. a fiscal year
c. the natural business year
d. an operating year
ANS: C
9. The accounting principle that assumes that inflation will not take place or will be immaterial is:
a. monetary unit
b. historical cost
c. realization
d. going concern
ANS: A
10. Valuing inventory at the lower of cost or market is an application of the:
b. realization principle
c. going concern principle
d. conservatism principle
ANS: D
11. The realization principle leads accountants to usually recognize revenue at:
a. the end of production
b. during production
c. the receipt of cash
d. the point of sale
ANS: D
12. The comment that “items that are not material may be recorded in the financial statements in the most
economical and expedient manner possible” is representative of:
a. matching
b. conservatism
c. realization
d. materiality
ANS: D
13. The assumption that deals with when to recognize the costs that are associated with the revenue that is
being recognized is:
a. matching
b. going concern
c. consistency
d. materiality


ANS: A
14. The most significant current source of generally accepted accounting principles is the:
a. New York Stock Exchange
b. Accounting Principles Board
c. Accounting Research Studies
d. AICPA committee on Accounting Procedure
e. Financial Accounting Standards Board
ANS: E
15. All but one of the following statements indicates a difference between the Financial Accounting Standards
Board (FASB) and prior approaches. Select the one that is not a difference.
a. The FASB is independent of the AICPA.
b. The size of the board is much smaller.
c. The FASB has broader representation.
d. The FASB is the primary board for the development of generally accepted accounting
principles.
e. Members of the FASB serve on a full-time basis.
ANS: D
16. The Accounting Principles Board issued Opinions between:
a. 1959-1973
b. 1939-1959
c. 1973-present
d. 1966-1976
ANS: A
17. The Financial Accounting Standards Board has issued statements between:
a. 1960-1973
b. 1939-1959
c. 1973-present
d. 1966-1976
ANS: C
18. Accountants face a problem of when to recognize revenue. Which of the following methods of recognizing
revenue is not used in practice?
a. point of sale
b. point of order acceptance
c. end of production
d. receipt of cash
e. revenue recognized during production
ANS: B
19. The organization that has by federal law the responsibility to adopt auditing standards is the:
a. New York Stock Exchange
b. Public Company Accounting Oversight Board
c. Accounting Principles Board
d. Financial Accounting Standards Board
e. AICPA Committee on Accounting Procedure
ANS: B
20. By law, the setting of accounting standards is the responsibility of the:
a. AICPA Committee on Accounting Procedure
b. New York Stock Exchange
c. Accounting Principles Board
d. Securities and Exchange Commission
e. Financial Accounting Standards Board

ANS: D
21. The assumption that allows accountants to accept some inaccuracy, because of incomplete information
about the future, in exchange for more timely reporting is:
a. conservatism
b. time period
c. business entity
d. materiality
e. realization
ANS: B
22. Which of the following does not relate to The Public Company Accounting Oversight Board
(PCAOB)?
a. Two members of the board must be CPAs
b. In addition to appointing the five members of the PCAOB, the SEC is responsible for the
oversight and enforcement authority over the Board
c. The PCAOB consists of five members appointed by the SEC
d. The PCAOB is to adopt auditing standards
e. The PCAOB is to adopt accounting standards
ANS: E
23. Understating expenses is justified based on:
b. conservatism assumption
c. materiality assumption
d. matching assumption
ANS: E
24. At the end of the fiscal year, an adjusting entry is made that increases salaries payable and increases
salaries expense. This entry is an application of which accounting principle?
a. full disclosure
b. materiality
c. matching
d. realization
e. historical cost
ANS: C
25. Accountants provide for inflation using which of the following accounting principles?
a. going concern
b. time period
c. conservatism
d. materiality
ANS: E
26. Which of these measurement attributes is not currently used in practice?
a. historical cost
b. relevant cost
c. current market value
d. current cost
e. present value
ANS: B
TRUE/FALSE
1. In order to determine the economic success of a grocery store, we should view it as separate from the
other resources that are owned by this individual.
ANS: T
2. Many of our present financial statement figures would be misleading if it were not for the going concern
assumption.
ANS: T

3. The going concern assumption does not influence the classification of assets and liabilities.
ANS: F
4. The most accurate way to account for the success or failure of an entity is to accumulate all transactions
from the opening of business until the business eventually liquidates.
ANS: T
5. An entity usually cannot reasonably account for the profits related to inventory until that inventory is sold in
the normal course of business.
ANS: T
6. To the extent that money does not remain stable, it loses its usefulness as the standard for measuring
financial transactions.
ANS: T
7. A loss in value of money is called inflation.
ANS: T
8. At the time of originally recording a transaction, historical cost also represents the fair market value.
ANS: T
9. It would always be conservative to value inventory at market.
ANS: F
10. Accountants normally recognize revenue when cash is received.
ANS: F
11. The 1933 and 1934 U.S. federal securities laws virtually gave the Securities and Exchange Commission
(SEC) authority and responsibility for the development of generally accepted accounting principles.
ANS: T
12. The Statements of Financial Accounting Concepts are intended to provide the Financial Accounting
Standards Board with a common foundation and the basic underlying reasoning on which to consider the
merits of various alternative accounting principles.
ANS: T
13. Eventually, the Financial Accounting Standards Board intends to evaluate current principles in terms of the
concepts established in the Financial Accounting Concepts.
ANS: T
14. Financial Accounting Concepts establish generally accepted accounting principles.
ANS: F
15. According to the second Financial Accounting Concept, those characteristics of information that make it a
desirable commodity can be viewed as a hierarchy of qualities, with understandability and usefulness for
decision making of most importance.
ANS: T
16. Performance indicators for nonbusiness organizations are usually formal budgets and donor restrictions.
ANS: T
17. Reasonable inaccuracies of accounting for an entity, short of its complete life span, are accepted.
ANS: T
18. Using the business entity assumption, the financial statements are prepared separate and distinct from the
owners of the entity.
ANS: T
19. The time period assumption indicates that the entity will remain in business for an indefinite period time.
ANS: F
20. Timeliness is a pervasive constraint imposed upon financial accounting information.
ANS: F
21. Relevance and reliability are two primary qualities that make accounting information useful for decision
making.
ANS: T
22. Predictive value, feedback value, and timeliness are ingredients needed to ensure that the information is
reliable.
ANS: F
23. Decision usefulness is a pervasive constraint imposed upon financial accounting information.
ANS: F
24. Relevance is a quality requiring that the information be timely and that it also have predictive value or
feedback value or both.
ANS: T

25. The SEC has the authority to determine generally accepted accounting principles and to regulate the
accounting profession.
ANS: T
26. Some industry practices lead to accounting reports that do not conform to the general theory that underlies
accounting.
ANS: T
27. All important events that influence the prospects for the entity are recorded and therefore are reflected in
the financial statements.
ANS: F
28. The accrual basis of accounting recognizes revenue when realized (realization concept) and expenses
when incurred (matching concept).
ANS: T
29. The cash basis recognizes revenue when cash is received and expenses when cash is paid.
ANS: T
30. The accountant records only the events that affect the financial position of the entity and that can be
reasonably determined in monetary terms.
ANS: T
31. The Sarbanes-Oxley Act has far-reaching consequences for financial reporting and the CPA profession.
ANS: T
32. Among the many responsibilities of the PCAOB is to adopt accounting standards.
ANS: F
33. For a public company, the SEC requires that a report be filed annually on its internal control systems.
ANS: T
34. The Sarbanes-Oxley Act has had an insignificant effect on the relationship between the company and the
internal auditor.
ANS: F
35. Reporting under Sarbanes-Oxley revealed that very few companies had material weaknesses in their
controls and processes.
ANS: F
36. Private companies are required to report under Sarbanes-Oxley.
ANS: F
37. Some firms question the costs/benefits of implementing Sarbanes-Oxley.
ANS: T
38. For many companies that use December 31 for the year-end, we cannot tell if December 31 was selected
because it represents a natural business year or if it was selected to represent a calendar year.
ANS: T
39. Accounting Trends & Techniques is a compilation of data obtained by a survey of 600 annual reports to
stockholders undertaken for the purpose of analyzing the accounting information disclosed in such reports.
ANS: T
40. Many companies are on a 51-52 week fiscal year.
ANS: F
41. The Sarbanes-Oxley Act has materiality implications.
ANS: T
42. Web sites are not very useful when performing analysis.
ANS: F
43. Accounting standards codification TM reorganizes the accounting pronouncements into approximately 90
accounting topics.
ANS: T
44. Accounting standards codification TM addresses U.S. GAAP for nongovernmental entities.
ANS: T
PROBLEMS
1. Required:
Listed below are several accounting principles and assumptions. Match the letter of each with the
appropriate statement.
a. Business entity e. Historical cost i. Full disclosure

b. Going concern f. Conservatism j. Verifiability
c. Time period g. Realization k. Materiality

d. Monetary unit h. Consistency l. Industry practices
1. Some industry practices lead to accounting reports that do not conform to the general theory
that underlies accounting.
2. Requires the accountant to adhere as closely as possible to verifiable data.
3. Requires the entity to give the same treatment to comparable transactions.
4. Directs that the measurement that has the least favorable effect on net income and financial
position in the current period be selected.
5. The decision is made to accept some inaccuracy because of incomplete information about
the future in exchange for more timely reporting.
6. Involves the relative size and importance of an item to a firm.
7. A reasonable summarization of financial information is required.
8. Deals with the problem of when to recognize revenue.
9. The primary value that is used for financial statements.
10. Standard of measure for financial statements.
11. The assumption that the entity being accounted for will remain in business for an indefinite
period of time.
12. Assumption that a business's financial statements are separate and distinct from the
personal transactions of the owners.
ANS: 4. f 9. e
5. c 10. d
1. l 6. k 11. b
2. j 7. i 12. a
3. h 8. g
2. Required:
State the accounting principle or assumption that is most applicable:
a. The company uses the same accounting principle from period to period.
b. Financial statements are prepared periodically.
c. Subscriptions paid in advance are recorded as unearned subscription income.
d. All significant financial transactions are reported.
e. Personal transactions of the stockholders are not recorded on the company's financial
statements.
f. Land is recorded at $10,000, which was the amount paid. Current value of the land is
$25,000.
g. The accountants determine that the company is in danger of going bankrupt and therefore
refuse to certify the statements as prepared according to generally accepted accounting
principles.
h. The company loses a major customer and does not record a loss.
b. time period f. historical cost
ANS: c. realization g. going concern
a. consistency d. full disclosure h. transaction approach
e. business entity
3. Listed below are ten interrelated elements that are directly related to measuring performance and
status of an enterprise according to SFAC No. 6, "Elements of Financial Statements."
a. Assets f. Comprehensive income
b. Liabilities g. Revenues
c. Equity h. Expenses
d. Investments by owners i. Gains
e. Distribution to owners j. Losses
Required:
Match the letter with the appropriate definition.

1. Probable future sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the future as a result
of past transactions or events.
2. Increases in the equity of a particular business enterprise resulting from transfers to the
enterprise from other entities of something of value to obtain or increase ownership interests
(or equity) in it. Assets are most commonly received as investments by owners, but that
which is received may also include services or satisfaction or conversion of liabilities of the
enterprise.
3. A decrease in the equity of a particular business enterprise resulting from transferring
assets, rendering services, or incurring liabilities by the enterprise to owners. Decreases
ownership interest (or equity) in an enterprise.
4. Decreases in the equity (net assets) from peripheral or incidental transactions of an entity
and from all other transactions and other events and circumstances affecting the entity
during a period, except those that result from expenses or distributions to owners.
5. Outflows or other consumption or using up of assets or incurrences of liabilities (or a
combination of both) from delivering or producing goods, rendering services, or carrying out
other activities that constitute the entity's ongoing major or central operations.
6. The change in equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It includes all changes in
equity during a period, except those resulting from investments by owners and distributions
to owners.
7. Probable future economic benefits obtained or controlled by a particular entity as a result of
past transactions or events.
8. The residual interest in the assets of an entity after deducting its liabilities.
9. Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a
combination of both) from delivering or producing goods, rendering services, or engaging in
other activities that constitute the entity's ongoing major or central operations.
10. Increases in the equity (net assets) from peripheral or incidental transactions of an entity
and from all other transactions and other events and circumstances from revenues or
investments by owners.
ANS: 3. e 7. a
4. j 8. c
1. b 5. h 9. g
2. d 6. f 10. i
4. Listed below are several qualitative characteristics.

a. understandability
b. usefulness for decision making
c. relevance
d. reliability
e. predictive
f. feedback value
g. timely
h. verifiable
i. representational faithfulness
j. neutrality
k. comparability
l. materiality
m. benefits of information should exceed its cost
Required:
Match the letter (or letters) that goes with each statement.
1. Two constraints included in the hierarchy.

2. For this quality, the information needs to have predictive and feedback value and be timely.
3. These are the qualitative characteristics that are viewed as having the most importance.

4. SFAC No. 2 indicates that to be reliable, the information needs to have these characteristics.
5. Interacts with relevance and reliability to contribute to the usefulness of information.
6. Two primary qualities that make accounting information useful for decision making.
7. For this quality, the information must be verifiable, subject to representational faithfulness,
and neutral.
8. SFAC No. 2 indicates that to be relevant, the information needs to have these characteristics.
ANS: 3. a, b 7. d
4. h, i, j 8. e, f, g
1. l, m 5. k
2. c 6. c, d
5. Listed below are ten phrases with the appropriate abbreviation.
a. Generally Accepted Accounting Principles (GAAP)

b. Securities and Exchange Commission (SEC)
c. American Institute of Certified Public Accountants (AICPA)
d. Accounting Principles Board (APB)
e. Financial Accounting Standards Board (FASB)
f. Statements of Financial Standards (SFAS)
g. Discussion Memorandum (DM)
h. Statements of Position (SOP)
i. Emerging Issues Task Force (EITF)
j. Financial Reporting Releases (FRRs)
k. The Public Company Accounting Oversight Board (PCAOB)
Required:
Match the letter with the appropriate definition.
1. Issued by the SEC and give the SEC's official position on matters relating to financial
reports.
2. Accounting principles that have substantial authoritative support.
3. A task force of representatives from the accounting profession created by the FASB to deal
with emerging issues of financial reporting.
4. Created by the Securities Exchange Act of 1934.
5. Issued by the Accounting Standards Division of the AICPA to influence the development of
accounting standards.
6. A professional accounting organization whose members are certified public accountants
(CPAs).
7. Issued official opinion on accounting standards between 1959-1973.
8. This board issues four types of pronouncements: (1) Statements of Financial Accounting
Standards (SFAS), (2) Interpretations, (3) Technical Bulletins, and (4) Statements of
Financial Accounting Concepts (SFAC).
9. Presents all known facts and points of view on a topic; issued by the FASB.
10. Issued by the Financial Accounting Standards Board (FASB) and establish GAAP for specific
accounting issues.
11. Responsible for adopting auditing standards.
ANS: 4. b 9. g
5. h 10. f
1. j 6. c 11. k
2. a 7. d
3. i 8. e
6. Listed below are Concept Statements.
a.Statement of Financial Accounting Concepts No. 1

b.Statement of Financial Accounting Concepts c. Statement of Financial Accounting Concepts
No. 2 No. 3

d.Statement of Financial Accounting Concepts f. Statement of Financial Accounting Concepts

No. 4 No. 6
e.Statement of Financial Accounting Concepts g.Statement of Financial Accounting Concepts
No. 5 No. 7
Required:
Match the letter that goes with each Concept Statement title.
1. Objectives of Financial Reporting by nonbusiness

2. Elements of Financial Statements of Business Enterprises
3. Qualitative Characteristics of Accounting Information
4. Elements of Financial Statements (a replacement of No. 3)
5. Objective of Financial Reporting by Business Enterprises
6. Recognition and Measurement in Financial Statements of Business Enterprise
7. Using Cash Flow Information in Accounting Measurements
1. d 5. a
ANS: 2. c 6. e
3. b 7. g
4. f
CHAPTER 24
FULL DISCLOSURE IN FINANCIAL REPORTING
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, the company only discloses this information in the notes to the financial statements.
6. FASB Statement 131 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 extraordinary items 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. Management’s discussion and analysis section covers three financial 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 financial statement trends.
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 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.
True-False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. F 16. T
2. T 7. F 12. T 17. F
3. T 8. T 13. F 18. T
4. F 9. F 14. T 19. T
5. F 10. T 15. F 20. F
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. composition of inventory into raw materials, work-in-process, and finished goods.
23. Errors and irregularities are defined as intentional distortions of facts.
Errors Irregularities
a. Yes Yes
b. Yes No
c. No Yes
d. No No
S
24.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.
S
25. 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.
S
26. 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.

P
27. Events that occur after the December 31, 2008 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, 2008.
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 when the event that gave rise to the litigation occurred prior to the
balance sheet date.
c. Employee strikes
d. Issue of a large amount of capital stock
29. Which of the following subsequent events (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.
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 profession requires disaggregated information in the following ways:
a. products or services.
b. geographic areas.
c. major customers.
d. all of these.
S
35. 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
S
36. 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.
P
37. Donnegan Manufacturing Company employs a standard cost system. A planned volume variance in
the first quarter of 2008, 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. In considering interim financial reporting, how does the profession conclude that such reporting
should be viewed?
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 basic 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.
May they 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 level. The
decline is considered temporary and the partial liquidation is expected to be replaced 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 required approach for handling extraordinary items in interim reports is to
a. prorate them over all four quarters.
b. prorate them over the current and remaining quarters.

c. charge or credit the loss or gain in the quarter that it occurs.

d. disclose them only in the notes.
S
44. 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.
P
45. The MD&A section of an enterprise'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.
S
46. 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 what is not necessarily expected to happen.
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 per professional pronouncements 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. an 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. Theoretically, in computing the receivables turnover, the numerator should include
a. net sales.
b. net credit sales.
c. sales.
d. credit sales.
*50. The rate of return on common stock 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. Receivables turnover
c. Debt to total assets

d. Current ratio
*53. The calculation of the number of times interest is 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.
*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. The basic limitations associated with ratio analysis include
a. the lack of comparability among firms in a given industry.
b. the use of estimated items in accounting.
c. the use of historical costs in accounting.
d. all of these.
Multiple Choice Answers—Conceptual
21. d 26. b 31. d 36. d 41. a 46. c *51. d
22. c 27. c 32. b 37. a 42. c 47. a *52. c
23. c 28. d 33. c 38. d 43. c *48. a *53. c
24. d 29. d 34. d 39. d 44. b *49. b *54 c
25. b 30. b 35. a 40. b 45. c *50. b *55. d
Ex. 24-87—Interim reports.

A few years ago, a publishing company in the fourth quarter had a net profit figure that exceeded sales for
that quarter. Such a situation as this suggests that some difficult accounting issues are involved in interim
reporting.
Instructions
(a) What are the major accounting problems related to interim reports?
(b) What problem exists with income taxes in interim reports and how does APB Opinion No. 28
recommend that taxes should be reported? What does FASB Interpretation No. 18 require?
(c) Many academicians have attempted to predict the year's net income after the first quarter's income is
reported. These attempts are generally unsuccessful, no matter how sophisticated the prediction
model. What might be the reason for this inability to predict?
Solution 24-87
(a) The major accounting issues related to interim reporting are the treatment of (1) extraordinary items,
(2) annually determined items such as income taxes, pension costs, executive compensation based
on annual net income, and (3) the problem of seasonality.
(b) The basic question with income taxes is whether in the preparation of interim income statements the
provision for taxes should reflect the anticipated effective tax rate for the year or be computed on the
basis of actual results for that interim period. APB Opinion No. 28 recommends that at the end of
each interim period the company should make its best estimate of the effective tax rate expected to
be applicable for the full fiscal year. The rate so determined should be used in providing for income
taxes on a current year-to-date basis.
FASB Interpretation No. 18 requires that the estimated annual effective tax rate be applied to the
year-to-date "ordinary" income at the end of each interim period to compute the year-to-date tax.
Further, the interim period tax related to ordinary income shall be the difference between the amount
so computed and the amounts reported for previous interim periods of the fiscal period.
(c) The prediction models are probably unsuccessful because accountants have not treated the problem
of seasonality correctly in their interim reports. The problem with the conventional approach is that

fixed nonmanufacturing costs are not charged in proportion to sales. Rather, these costs are charged
as incurred, or spread evenly over the four quarters. As a result, it is extremely difficult to make
accurate predictions because some artificial concepts are used for matching purposes.
Ex. 24-88—Inventory and cost of goods sold at interim dates.
Discuss how inventory and cost of goods sold may be afforded special accounting treatment at interim
dates.
Solution 24-88
The following exceptions are appropriate at interim reporting dates:
a. Companies may use the gross profit method for interim inventory pricing.
b. When LIFO inventories are liquidated at an interim date and are expected to be replaced by year end,
cost of goods sold should be based on expected replacement cost of the liquidated LIFO base rather
than historical cost.
c. Inventory market declines should not be deferred beyond the interim period unless they are
temporary and no loss is expected for the fiscal period. Recoveries of such losses on the same
inventory in later interim periods shall be recognized as gains.
d. Planned variances under a standard cost system which are expected to be absorbed by year end
may be deferred.
TRUE FALSE—Conceptual
1. The primary purpose of the statement of cash flows is to provide cash-basis information about the company’s
operating, investing, and financing activities.
2. The statement of cash flows provides information to help investors and creditors assess the cash and
noncash investing and financing transactions during the period.
3. Companies classify some cash flows relating to investing or financing activities as operating activities.
4. The first step in the preparation of the statement of cash flows is to determine the net cash flow from operating
activities.
5. The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning
and ending cash balances reported in the comparative balance sheets.
6. Under the accrual basis of accounting, net income is usually the same as net cash flow from operating
activities.
7. A company can convert net income to net cash flow from operating activities through either the direct method
or the indirect method.
8. The direct method, also called the reconciliation method, reports cash receipts and cash disbursements from
operating activities.
9. The indirect method adjusts net income for items that affected reported net income but did not affect cash.
10. The FASB encourages the use of the indirect method over the direct method.
11. When accounts receivable decrease during a period, cash-basis revenues are higher than revenues reported
on an accrual basis.
12.When prepaid expenses decrease during a period, expenses on the accrual-basis are lower than they are on
a cash-basis.
13. Income from an investment in common stock using the equity method is added to net income in computing net
cash provided from operating activities.
14. Cash receipts from customers are computed by adding a decrease in accounts receivable to revenue from
sales.
15. Cash payments for operating expenses are computed by subtracting an increase in prepaid expenses and a
decrease in accrued expenses payable from operating expenses.
16. A company should add back bond premium amortization to net income to arrive at net cash flow from
operating activities.
17. Companies report the cash flows from purchases and sales of trading securities as cash flows from operating
activities.
18. Noncash investing and financing activities are disclosed either in a separate schedule or in a separate note to
the financial statements.
19. When numerous adjustments are necessary, companies often use a cash flow worksheet instead of preparing
a statement of cash flows.
20. The issuance of stock dividends is entered on the cash flow worksheet, but is not reported in the statement of
cash flows.

1. F 6. F 11. T 16. F
2. T 7. T 12. F 17. T
3. T 8. F 13. F 18. T
4. F 9. T 14. T 19. F
5. T 10. F 15. F 20. T
21. It is an objective of the statement of cash flows to
a. disclose changes during the period in all asset and all equity accounts.
b. disclose the change in working capital during the period.
c. provide information about the operating, investing, and financing activities of an entity during a period.
d. none of these.
22. The primary purpose of the statement of cash flows is to provide information
a. about the operating, investing, and financing activities of an entity during a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of an entity during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external
financing.
S
23. Of the following questions, which one would not be answered by the statement of cash flows?
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. Were all the cash expenditures of benefit to the company during the period?
d. What was the change in the cash balance during the period.
S
24. The first step in the preparation of the statement of cash flows requires the use of information included in
which comparative financial statements?
a. Statements of cash flows
b. Balance sheets
c. Income statements
d. Statements of retained earnings
25. Cash equivalents are
a. treasury bills, commercial paper, and money market funds purchased with excess cash.
b. investments with original maturities of three months or less.
c. readily convertible into known amounts of cash.
d. all of these.
26. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash
flows (indirect method), this event would be reflected as a(n)
a. addition adjustment to net income in the cash flows from operating activities section.
b. cash outflow from investing activities.
c. cash inflow from investing activities.
d. cash inflow from financing activities.
S
27. To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a
cash basis. This is done by
a. re-recording all income statement transactions that directly affect cash in a separate cash flow journal.
b. estimating the percentage of income statement transactions that were originally reported on a cash basis
and projecting this amount to the entire array of income statement transactions.
c. eliminating the effects of income statement transactions that did not result in a corresponding increase or
decrease in cash.
d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the
net income computation.
28. An increase in inventory balance would be reported in a statement of cash flows using the indirect method
(reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
29. A statement of cash flows typically would not disclose the effects of
a. capital stock issued at an amount greater than par value.
b. stock dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury stock.

30. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to
reconcile net income to net cash provided by operating activities?
a. A change in interest payable
b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.
31. Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct
and indirect methods as follows:
Direct Method Indirect Method
a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect
32. In a statement of cash flows, the cash flows from investing activities section should report
a. the issuance of common stock in exchange for a factory building.
b. stock dividends received.
c. a major repair to machinery charged to accumulated depreciation.
d. the assignment of accounts receivable.
P
33. Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.

2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a statement of cash
flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items
P
34. Which of the following would be classified as a financing activity on a statement of cash flows?
a. Declaration and distribution of a stock dividend
b. Deposit to a bond sinking fund
c. Sale of a loan receivable
d. Payment of interest to a creditor
S
35. The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using
the indirect method for operating activities) as a(n)
a. addition to net income.
b. deduction from net income.
c. investing activity.
d. financing activity.
S
36. Crabbe Company reported $80,000 of selling and administrative expenses on its income statement for the
past year. The company had depreciation expense and an increase in prepaid expenses associated with the
selling and administrative expenses for the year. Assuming use of the direct method, how would these items
be handled in converting the accrual based selling and administrative expenses to the cash basis?
Increase in
Depreciation Prepaid Expenses
a. Deducted From Deducted From
b. Added To Added To
c. Deducted From Added To
d. Added To Deducted From
37. When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning
inventory will result in an adjustment to reported net earnings because
a. cash was increased while cost of goods sold was decreased.
b. cost of goods sold on an accrual basis is lower than on a cash basis.
c. acquisition of inventory is an investment activity.
d. inventory purchased during the period was less than inventory sold resulting in a net cash increase.
38. When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause
which one of the following adjustments in determining cash flow from operating activities?

Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
39. In determining net cash flow from operating activities, a decrease in accounts payable during a period
a. means that income on an accrual basis is less than income on a cash basis.
b. requires an addition adjustment to net income under the indirect method.
c. requires an increase adjustment to cost of goods sold under the direct method.
d. requires a decrease adjustment to cost of goods sold under the direct method.
40. When preparing a statement of cash flows, an increase in accounts payable during a period would require
which of the following adjustments in determining cash flows from operating activities?
Indirect Method Direct Method
41. When preparing a statement of cash flows, a decrease in prepaid insurance during a period would require
which of the following adjustments in determining cash flows from operating activities?
Indirect Method Direct Method
42. When preparing a statement of cash flows, the following are used for which method in determining cash flows
from operating activities?
Gross Accounts Receivable Net Accounts Receivable
a. Indirect Direct
b. Direct Indirect
c. Direct Direct
d. Neither Indirect
43. Which of the following statements is correct?
a. The indirect method starts with income before extraordinary items.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of cash flows.
d. All of these.
44. Riley Company reports its income from investments under the equity method and recognized income of
$25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or
paid by Wood during the year. On Riley's statement of cash flows (indirect method), the $25,000 should
a. not be shown.
b. be shown as cash inflow from investing activities.
c. be shown as cash outflow from financing activities.
d. be shown as a deduction from net income in the cash flows from operating activities section.
45. In reporting extraordinary transactions on a statement of cash flows (indirect method), the
a. gross amount of an extraordinary gain should be deducted from net income.
b. net of tax amount of an extraordinary gain should be added to net income.
c. net of tax amount of an extraordinary gain should be deducted from net income.
d. gross amount of an extraordinary gain should be added to net income.
46. Which of the following is shown on a statement of cash flows?
a. A stock dividend
b. A stock split
c. An appropriation of retained earnings
d. None of these
S
47. How should significant noncash transactions be reported in the statement of cash flows according to FASB
Statement No. 95?
a. They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash
Transactions."
b. Such transactions should be incorporated in the section (operating, financing, or investing) that is most
representative of the major component of the transaction.

c. These noncash transactions are not to be incorporated in the statement of cash flows. They may be
summarized in a separate schedule at the bottom of the statement or appear in a separate
supplementary schedule to the financials.
d. They should be handled in a manner consistent with the transactions that affect cash flows.

21. c 25. d 29. b 33. c 37. b 41. a 45. a
22. c 26. d 30. b 34. b 38. c 42. b 46. d
23. c 27. c 31. d 35. b 39. c 43. c 47. c
24. b 28. b 32. c 36. c 40. a 44. d
MULTIPLE CHOICE—CPA Adapted
Use the following information for questions 91 and 92.
A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to
the seller for the balance.
91. In a statement of cash flows, what amount is included in investing activities for the above transaction?
a. Cash payment
b. Acquisition price
c. Zero
d. Mortgage amount
92. In a statement of cash flows, what amount is included in financing activities for the above transaction?
a. Cash payment
b. Acquisition price
c. Zero
d. Mortgage amount
1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial
information needed by management to plan, evaluate, and control an organiza-tion's operations.
2. Financial statements are the principal means through which financial information is communicated to
those outside an enterprise.
3. Users of the financial information provided by a company use that information to make capital
allocation decisions.
4. An effective process of capital allocation promotes productivity and provides an efficient market for
buying and selling securities and obtaining and granting credit.
5. Financial reports in the early 21st century did not provide any information about a company’s soft
assets.
6. Accounting standards are now less likely to require the recording or disclosure of fair value
information due to its inherent subjectivity.
7. While objectives for financial reporting exist on an informal basis, no formal objectives have been
adopted.
8. One weakness of accrual accounting is that it does not provide a good indication of the enterprise's
present and continuing ability to generate favorable cash flows.
9. Some generally accepted accounting principles have simply been accepted as appropriate because
of their universal application rather than due to the action of an authoritative accounting rule-making
body.
10. Users of financial accounting statements have both coinciding and conflicting needs for information of
various types.
11. The Securities and Exchange Commission appointed the Committee on Accounting Procedure.
12. The passage of a new FASB Standards Statement requires the support of five of the seven board
members.
13. Financial Accounting Concepts set forth fundamental objectives and concepts that are used in
developing future standards of financial accounting and reporting.
14. The SEC relies on the AICPA and FASB to regulate the accounting profession and develop and
enforce accounting standards.
15. FASB Technical Bulletins are more authoritative than FASB Standards and Interpretations.

16. The AICPA’s Code of Professional Conduct requires that members prepare financial statements in
accordance with generally accepted accounting principles.
17. Accounting standards are a product of careful logic or empirical findings and are not influenced by
political action.
18. Currently, both U.S. GAAP and the International Financial Reporting Standards are acceptable for
international use.
19. The expectations gap is caused by what the public thinks accountants should be doing and what
accountants think they can do.
20. Ethical issues in financial accounting are governed by the AICPA.
1. F 6. F 11. F 16. T
2. T 7. F 12. F 17. F
3. T 8. F 13. T 18. T
4. T 9. T 14. T 19. T
5. F 10. T 15. F 20. F
21. General-purpose financial statements are the product of
a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.
22. Users of financial reports include all of the following except
a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
23. The financial statements most frequently provided include all of the following except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
24. The information provided by financial reporting pertains to
a. individual business enterprises, rather than to industries or an economy as a whole or to members
of society as consumers.
b. business industries, rather than to individual enterprises or an economy as a whole or to members
of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, rather than to members of
society as consumers.
d. an economy as a whole and to members of society as consumers, rather than to individual
enterprises or industries.
P
25. The process of identifying, measuring, analyzing, and communicating financial information
needed by management to plan, evaluate, and control an organization’s operations is
called
a. financial accounting.
b. managerial accounting.

c. tax accounting.
d. auditing.
26. Whether a business is successful and thrives is determined by
a. markets.
b. free enterprise.
c. competition.
d. all of these.
27. An effective capital allocation process
a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. all of these.
28. Financial statements in the early 2000s provide information related to
a. non-financial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. none of these.
29. Which of the following statements is not an objective of financial reporting?
a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.
30. Accrual accounting is used because
a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.
31. One objective of financial reporting is to provide
a. information about the investors in the business entity.
b. information about the liquidation values of the resources held by the enterprise.
c. information that is useful in assessing cash flow prospects.
d. information that will attract new investors.
32. Accounting principles are "generally accepted" only when
a. an authoritative accounting rule-making body has established it in an official pro-nouncement.
b. it has been accepted as appropriate because of its universal application.
c. both a and b.
d. neither a nor b.
33. A common set of accounting standards and procedures are called
a. financial accounting standards.
b. generally accepted accounting principles.

c. objectives of financial reporting.
d. statements of financial accounting concepts.
34. The role of the Securities and Exchange Commission in the formulation of accounting
principles can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
35. The body that has the power to prescribe the accounting practices and standards to be
employed by companies that fall under its jurisdiction is the
a. FASB.
b. AICPA.
c. SEC.
d. APB.
36. Companies that are listed on a stock exchange are required to submit their financial
statements to the
a. AICPA.
b. APB
c. FASB.
d. SEC.
37. The Financial Accounting Standards Board (FASB) was proposed by the
a. American Institute of Certified Public Accountants.
b. Accounting Principles Board.
c. Study Group on the Objectives of Financial Statements.
d. Special Study Group on establishment of Accounting Principles (Wheat Committee).
38. The Financial Accounting Standards Board
a. has issued a series of pronouncements entitled Statements on Auditing Standards.
b. was the forerunner of the current Accounting Principles Board.
c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting
standards.
d. is appointed by the Financial Accounting Foundation.
39. The Financial Accounting Foundation
a. oversees the operations of the FASB.
b. oversees the operations of the AICPA.
c. provides information to interested parties on financial reporting issues.
d. works with the Financial Accounting Standards Advisory Council to provide informa-tion to
interested parties on financial reporting issues.
40.The major distinction between the Financial Accounting Standards Board (FASB) and its
predecessor, the Accounting Principles Board (APB), is
a. the FASB issues exposure drafts of proposed standards.
b. all members of the FASB are fully remunerated, serve full time, and are independent of any
companies or institutions.

c. all members of the FASB possess extensive experience in financial reporting.

d. a majority of the members of the FASB are CPAs drawn from public practice.
41. The Financial Accounting Standards Board employs a "due process" system which
a. is an efficient system for collecting dues from members.
b. enables interested parties to express their views on issues under consideration.
c. identifies the accounting issues that are the most important.
d. requires that all accountants must receive a copy of financial standards.
42. Which of the following is not a publication of the FASB?
a. Statements of Financial Accounting Concepts
b. Accounting Research Bulletins
c. Interpretations
d. Technical Bulletins
43. FASB Technical Bulletins
a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's
Code of Professional Ethics.
b. are issued monthly by the FASB to deal with current topics.
c. are not expected to have a significant impact on financial reporting in general and provide guidance
when it does not conflict with any broad fundamental accounting principle.
d. were recently discontinued by the FASB because they dealt with specialized topics having little
impact on financial reporting in general.
44. The purpose of the Emerging Issues Task Force is to
a. develop a conceptual framework as a frame of reference for the solution of future problems.
b. lobby the FASB on issues that affect a particular industry.
c. do research on issues that relate to long-term accounting problems.
d. issue statements which reflect a consensus on how to account for new and unusual financial
transactions that need to be resolved quickly.
45. The Governmental Accounting Standards Board
a. oversees the activities of the SEC.
b. is a private-sector body, which addresses state and local governmental reporting issues.
c. is a division of the Securities and Exchange Commission, which oversees the corpo-rate
accounting in annual reports.
d. was terminated when the Financial Accounting Standards Board was created.
46. The Governmental Accounting Standards Board's main purpose is to develop standards for
a. the General Accounting Office.
b. the Federal government.
c. state and local government.
d. the Internal Revenue Service.
47. Which of the following organizations has not been instrumental in the development of financial
accounting standards in the United States?
a. AICPA
b. FASB
c. IASB

d. SEC
48. An organization that has not published accounting standards is the
a. American Institute of Certified Public Accountants.
b. Securities and Exchange Commission.
c. Financial Accounting Standards Board.
d. All of these have published accounting standards.
49. The purpose of Statements of Financial Accounting Concepts is to
a. establish GAAP.
b. modify or extend the existing FASB Standards Statement.
c. form a conceptual framework for solving existing and emerging problems.
d. determine the need for FASB involvement in an emerging issue.
P
50. Members of the Financial Accounting Standards Board are
a. employed by the American Institute of Certified Public Accountants (AICPA).
b. part-time employees.
c. required to hold a CPA certificate.
d. independent of any other organization.
P
51. The following published documents are part of the "due process" system used by the FASB in the
evolution of a typical FASB Statement of Financial Accounting Standards:
1. Exposure Draft
2. Statement of Financial Accounting Standards
3. Discussion Memorandum
The chronological order in which these items are released is as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 3, 1.
d. 3, 1, 2.
P
52. In the House of GAAP, is the following on the highest level of authoritative status (meaning among
the most authoritative)?
FASB FASB
Statement Statement
FASB of Financial of Financial
Technical Accounting FASB Accounting
Bulletin Standards Interpretation Concepts
a. Yes Yes Yes Yes
b. Yes Yes Yes No
c. No Yes No No
d. No Yes Yes No
53. Generally Accepted Accounting Principles include: 1) FASB Technical Bulletins, 2) APB Opinions,
and 3) Widely-accepted industry practices. These three items rank from most authoritative to least
authoritative as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 1, 3.
d. 2, 3, 1.
54. Generally accepted accounting principles

a. include detailed practices and procedures as well as broad guidelines of general application.
b. are influenced by pronouncements of the SEC and IRS.
c. change over time as the nature of the business environment changes.
d. all of these.
55. The most significant current source of generally accepted accounting principles is the
a. AICPA.
b. SEC.
c. APB.
d. FASB
56. The most authoritative category of generally accepted accounting principles includes all of
the following except
a. Accounting Research Bulletins.
b. APB Opinions.
c. FASB Standards.
d. FASB Technical Bulletins.
57. Which of the following is not a part of generally accepted accounting principles?
a. FASB Interpretations
b. CAP Accounting Research Bulletins
c. APB Opinions
d. All of these are part of generally accepted accounting principles.
58. Which of the following publications does not qualify as a statement of generally accepted
accounting principles?
a. Statements of financial standards issued by the FASB
b. Accounting interpretations issued by the FASB
c. APB Opinions
d. Accounting research studies issued by the AICPA
59. Financial accounting standard-setting in the United States
a. can be described as a social process which reflects political actions of various interested user
groups as well as a product of research and logic.
b. is based solely on research and empirical findings.
c. is a legalistic process based on rules promulgated by governmental agencies.
d. is democratic in the sense that a majority of accountants must agree with a standard before it
becomes enforceable.

60. The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting and reporting of multinational
corporations.
b. develop a uniform currency in which the financial transactions of companies through-out the world
would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international companies.
21. a 27. d 33. b 39. a 45. b 51. d 57. d
22. d 28. c 34. c 40. b 46. c 52. d 58. d
23. d 29. c 35. c 41. b 47. c 53. c 59. a
24. a 30. b 36. d 42. b 48. d 54. d 60. c
25. b 31. c 37. d 43. c 49. c 55. d
26. d 32. c 38. d 44. d 50. d 56. d
21. Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these
22. The balance sheet is useful for analyzing all of the following
except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
S
23. The balance sheet contributes to financial reporting by providing
a basis for all of the following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.
S
24. One criticism not normally aimed at a balance sheet prepared using
current accounting and reporting standards is
a. failure to reflect current value information.
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded
objectively.
P
25. The amount of time that is expected to elapse until an asset is
realized or otherwise converted into cash is referred to as
a. solvency.
b. financial flexibility.

c. liquidity.
d. exchangeability.
26. The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders' equity.
d. none of these.
27. The correct order to present current assets is
a. Cash, accounts receivable, prepaid items, inventories.
b. Cash, accounts receivable, inventories, prepaid items.
c. Cash, inventories, accounts receivable, prepaid items.
d. Cash, inventories, prepaid items, accounts receivable.
28. The basis for classifying assets as current or noncurrent is
conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
29. The basis for classifying assets as current or noncurrent is the
period of time normally required by the accounting entity to
convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.
30. The current assets section of the balance sheet should include
a. machinery.
b. patents.
c. goodwill.
d. inventory.
31. Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is
the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the
issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
32. Which of the following should not be considered as a current asset
in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal
trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of

the business.
c. Equity or debt securities purchased with cash available for current
operations.
d. The cash surrender value of a life insurance policy carried by a
corporation, the beneficiary, on its president.
33. Equity or debt securities held to finance future construction of
additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.
34. When a portion of inventories has been pledged as security on a
loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not
be affected.
d. the cost of the pledged inventories should be transferred from current
assets to noncurrent assets.
35. Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund
36. A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2
37. Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable
38. Working capital is

a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these.

39. An example of an item which is not an element of working capital

is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.
40. Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.
41. Which of the following should be excluded from long-term
liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be
paid from a sinking fund
d. None of these.
42. Treasury stock should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders' equity.
43. Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these
44. Which of the following would be classified in a different major
section of a balance sheet from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate
45. The stockholders' equity section is usually divided into what

three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained
earnings

46. Which of the following is not an acceptable major asset
classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred chargeS
47. Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation
S
48. Which of the following balance sheet classifications would
normally require the greatest amount of supplementary disclosure?
a. Current assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities
49. Which of the following is not a method of disclosing pertinent
information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.
50. Significant accounting policies may not be
a. selected on the basis of judgment.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.
51. A general description of the depreciation methods applicable to
major classes of depreci-able assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income
tax policy.
d. should be included in corporate financial statements or notes thereto.
52. It is mandatory that the essential provisions of which of the

following be clearly stated in the notes to the financial
statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these

53. A generally accepted account title is

a. Prepaid Revenue.
b. Appropriation for Contingencies.
c Earned Surplus.
d. Reserve for Doubtful Accounts.
54. The financial statement which summarizes operating, investing, and
financing activities of an entity for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.
S
55. The statement of cash flows provides answers to all of the
following questions except
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. What is the impact of inflation on the cash balance at the end of the
year?
d. What was the change in the cash balance during the period?
56. Making and collecting loans and disposing of property, plant, and
equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.
57. In preparing a statement of cash flows, sale of treasury stock at
an amount greater than cost would be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.
58. In preparing a statement of cash flows, cash flows from operating
activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income
those items in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income
those items in the income statement that do affect cash.
59. In preparing a statement of cash flows, which of the following
transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend

d. Issuance of bonds payable at a discount
60. Preparing the statement of cash flows involves all of the
following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.
61. The cash debt coverage ratio is computed by dividing net cash
provided by operating activities by
a. average long-term liabilities.
b. average total liabilities.
c. ending long-term liabilities.
d. ending total liabilities.
62. The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
63. A measure of a company’s financial flexibility is the
a. cash debt coverage ratio.
b. current cash debt coverage ratio.
c. free cash flow.
d. cash debt coverage ratio and free cash flow.
64. Free cash flow is calculated as net cash provided by operating
activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.
S
65. One of the benefits of the statement of cash flows is that it
helps users evaluate financial flexibility. Which of the
following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm's ability to respond and adapt to financial adversity and
unexpected needs and opportunities.
c. The firm's ability to pay its debts as they mature.
d. The firm's ability to invest in a number of projects with different
objectives and costs.
P
66. Net cash provided by operating activities divided by average total
liabilities equals the
a. current cash debt coverage ratio.
b. cash debt coverage ratio.
c. free cash flow.

d. current ratio.
21. d 28. b 35. b 42. d 49. d 56. b 63. d
22. c 29. d 36. d 43. d 50. d 57. b 64. c
23. c 30. d 37. b 44. d 51. d 58. c 65. b
24. b 31. d 38. d 45. c 52. d 59. a 66. b
25. c 32. d 39. b 46. d 53. b 60. d
26. d 33. d 40. d 47. d 54. c 61. b
27. b 34. c 41. d 48. d 55. c 62. b
Solutions to those Multiple Choice questions for which the answer is “none of these.”
26. Total assets minus total liabilities.
38. Current assets less current liabilities.
41. Many answers are possible.
1. Depreciation is a means of cost allocation, not a matter of valuation.
2. Depreciation is based on the decline in the fair market value of the asset.
3. Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset
to expense.
4. The cost of an asset less its salvage value is its depreciation base.
5. The three factors involved in the depreciation process are the depreciation base, the useful life,
and the risk of obsolescence.
6. Inadequacy is the replacement of one asset with another more efficient and economical asset.
7. The major objection to the straight-line method is that it assumes the asset’s economic usefulness
and repair expense is the same each year.
8. The units-of-production approach to depreciation is appropriate when depreciation is a function of
time instead of activity.
9. An accelerated depreciation method is appropriate when the asset’s economic usefulness is the
same each year.
10. The declining-balance method does not deduct the salvage value in computing the depreciation
base.
11. Gains or losses on disposals of assets do not distort periodic income when the group or composite
method is used to compute depreciation.
12. Companies frequently use the composite approach when the assets are similar in nature and have
approximately the same useful lives.
13. Changes in estimates are handled prospectively by dividing the asset’s book value less any
salvage value by the remaining estimated life.
14. An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of
the expected future net cash flows from the use of that asset.
15. The first step in determining whether an impairment has occurred is to estimate the future net cash
flows expected from the use of that asset and its eventual disposition.
16. Impaired assets held for disposal should be reported at the lower of cost or net realizable value.
17. Normally, companies compute depletion on a straight-line basis.
18. Intangible development costs and restoration costs are part of the depletion base.
19. The asset turnover ratio is computed by dividing net sales by ending total assets.
20. The profit margin on sales ratio is a measure for analyzing the use of property, plant, and
equipment.
True False Answers—Conceptual
1. T 6. F 11. T 16. T
2. F 7. T 12. F 17. F
3. T 8. F 13. T 18. T

4. T 9. F 14. F 19. F
5. F 10. T 15. T 20. T
21. The following is true of depreciation accounting.
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these.
22. Which of the following principles best describes the conceptual rationale for the methods of
matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
23. Depreciation accounting
a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.
S
24. Which of the following most accurately reflects the concept of depreciation as used in accounting?
a. The process of charging the decline in value of an economic resource to income in the period
in which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely matches
the physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the year to the
contra asset account for the purpose of properly recording the fair market value of tangible
assets.
25.The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life refers to how
long the asset will last.
b. physical life is the life of an asset without consideration of salvage value and service life
requires the use of salvage value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while physical life
refers to how long the asset will be used by all owners.
P
26. The term "depreciable cost," or "depreciable base," as it is used in accounting, refers to
a. the total amount to be charged (debited) to expense over an asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.
27. Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. all of these.
28. The activity method of depreciation
a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.
29. For income statement purposes, depreciation is a variable expense if the depreciation method
used is
a. units-of-production.
b. straight-line.

c. sum-of-the-years'-digits.
d. declining-balance.
30. If an industrial firm uses the units-of-production method for computing depreciation on its only plant
asset, factory machinery, the credit to accumulated depreciation from period to period during the
life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.
31. Use of the double-declining balance method
a. results in a decreasing charge to depreciation expense.
b. means salvage value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below salvage value.
d. all of these.
32. Use of the sum-of-the-years'-digits method
a. results in salvage value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below salvage value.
d. all of these.
33. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the
horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-
the-years'-digits depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right
34. A principal objection to the straight-line method of depreciation is that it
a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.
35. Each year a company has been investing an increasingly greater amount in machinery. Since
there is a large number of small items with relatively similar useful lives, the company has been
applying straight-line depreciation at a uniform rate to the machinery as a group. The ratio of this
group's total accumulated depreciation to the total cost of the machinery has been steadily
increasing and now stands at .75 to 1.00. The most likely explanation for this increasing ratio is the
a. company should have been using one of the accelerated methods of depreciation.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful life.
d. company has been retiring fully depreciated machinery that should have remained in service.
36. For the composite method, the composite
a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.
P
37. Roberts Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one
of its trucks and receives cash from a salvage company, the carrying value of property, plant, and
equipment will be decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.
S
38. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added together and the total
divided by the number of items.
b. the cost of individual units within an asset group is charged to expense in the year a unit is
retired from service.

c. a straight-line rate is computed by dividing the total of the annual depreciation expense for all
assets in the group by the total cost of the assets.
d. the original cost of all items in a given group or class of assets is retained in the asset account
and the cost of replacements is charged to expense when they are acquired.
39. Depreciation is normally computed on the basis of the nearest
a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.
40. Quayle Company acquired machinery on January 1, 2002 which it depreciated under the straight-
line method with an estimated life of fifteen years and no salvage value. On January 1, 2007,
Quayle estimated that the remaining life of this machinery was six years with no salvage value.
How should this change be accounted for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2007
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2007
d. By continuing to depreciate the machinery over the original fifteen year life
41. A change in estimate should
a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.
42. White Printing Company determines that a printing press used in its operations has suffered a
permanent impairment in value because of technological changes. An entry to record the
impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
43. Dividends representing a return of capital to stockholders are not uncommon among companies
which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these.
44. Depletion expense
a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.
45. The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. decreasing charge method.
c. straight-line method.
d. units-of-production method.
46.Reserve recognition accounting
a. is presently the generally accepted accounting method for financial reporting of oil and gas
reserves.
b. is a historical cost method similar to the full cost approach and the successful efforts approach.
c. is used for reporting of oil and gas reserves for federal income tax purposes.
d. requires estimates of future production costs, the appropriate discount rate, and the expected
selling price of oil and gas reserves.
S
47. Of the following costs related to the development of natural resources, which one is not a part of
depletion cost?
a. Acquisition cost of the natural resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the natural resource
d. Intangible development costs such as drilling costs, tunnels, and shafts

S
48. Which of the following disclosures is not required in the financial statements regarding
depreciation?
a. Accumulated depreciation, either by major classes of depreciable assets or in total.
b. Details demonstrating how depreciation was calculated.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and function.
P
49. The book value of a plant asset is
a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related depreciation recorded to date.
c. equal to the balance of the related accumulated depreciation account.
d. the assessed value of the asset for property tax purposes.
50. A general description of the depreciation methods applicable to major classes of depreciable
assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.
51. The asset turnover ratio is computed by dividing
a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.
*52. A major objective of MACRS for tax depreciation is to
a. reduce the amount of depreciation deduction on business firms' tax returns.
b. assure that the amount of depreciation for tax and book purposes will be the same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating tax depreciation.
53.Under MACRS, which one of the following is not considered in determining depreciation for tax
purposes?
a. Cost of asset
b. Property recovery class
c. Half-year convention
d. Salvage value
*54. If income tax effects are ignored, accelerated depreciation methods
a. provide funds for the earlier replacement of fixed assets.
b. increase funds provided by operations.
c. tend to offset the effect of steadily increasing repair and maintenance costs on the income
statement.
d. tend to decrease the fixed asset turnover ratio.
21. d 26. a 31. d 36. d 41. b 46. d 51. d
22. b 27. d 32. c 37. c 42. b 47. c 52. c
23. c 28. a 33. c 38. c 43. d 48. b *53. d
24. b 29. a 34. b 39. b 44. a 49. b *54. c
25. a 30. d 35. b 40. c 45. d 50. d
43. do not expect to purchase additional property after depleting existing property.
1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash
flows.
2. A strength of the income statement as compared to the balance sheet is that items that cannot be
measured reliably can be reported in the income statement.

3. Earnings management generally makes income statement information more useful for predicting
future earnings and cash flows.
4. The transaction approach of income measurement focuses on the income-related activities that have
occurred during the period.
5. Companies frequently report income tax expense as the last item before net income on a single-step
income statement.
6. Both revenues and gains increase both net income and owners’ equity.
7. Use of a multiple-step income statement will result in the company reporting a higher net income than
if they used a single-step income statement.
8. The primary advantage of the multiple-step format lies in the simplicity of presentation and the
absence of any implication that one type of revenue or expense item has priority over another.
9. Gross profit and income from operations are reported on a multiple-step but not a single-step income
statement.
10. The accounting profession has adopted a current operating performance approach to income
reporting.
11. Companies report the results of operations of a component of a business that will be disposed of
separately from continuing operations.
12. Gains or losses from exchange or translation of foreign currencies are reported as extraordinary
items.
13. Discontinued operations, extraordinary items, and unusual gains and losses are all reported net of
tax in the income statement.
14. Intraperiod tax allocation relates the income tax expense of the period to the specific items that give
rise to the amount of the tax provision.
15. A company that reports a discontinued operation or an extraordinary item has the option of reporting
per share amounts for these items.
16. Dividends declared on common and preferred stock are subtracted from net income in the
computation of earnings per share.
17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.
18. Companies only restrict retained earnings to comply with contractual requirements or current
necessity.
19. Comprehensive income includes all changes in equity during a period except those resulting from
distributions to owners.
20. The components of other comprehensive income can be reported in a statement of stockholders’
equity.
True False Answers—Conceptual
1. T 6. T 11. T 16. F
2. F 7. F 12. F 17. T
3. F 8. F 13. F 18. F
4. T 9. T 14. T 19. F
5. T 10. F 15. F 20. T
21. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. all of these.
22. Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. all of these.

23. Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.
S
24. Which of the following would represent the least likely use of an income statement prepared for a business
enterprise?
a. Use by customers to determine a company's ability to provide needed goods and services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.
S
25. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
26. The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items and accounting changes more than these are emphasized in the multiple-step income
statement.
d. the various components of income from continuing operations.
27. Which of the following is an acceptable method of presenting the income statement?
a. A single-step income statement
b. A multiple-step income statement
c. A consolidated statement of income
d. All of these
28. Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business in determining net
incom
29. The occurrence which most likely would have no effect on 2007 net income (assuming that all amounts
involved are material) is the
a. sale in 2007 of an office building contributed by a stockholder in 1983.
b. collection in 2007 of a receivable from a customer whose account was written off in 2006 by a charge to the
allowance account.
c. settlement based on litigation in 2007 of previously unrecognized damages from a serious accident which
occurred in 2005.
d. worthlessness determined in 2007 of stock purchased on a speculative basis in 2003.
S
30. The occurrence that most likely would have no effect on 2007 net income is the
a. sale in 2007 of an office building contributed by a stockholder in 1961.
b. collection in 2007 of a dividend from an investment.

c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d. stock purchased in 1993 deemed worthless in 2007.
P
31. Which of the following is not a selling expense?
a. Advertising expense
b. Office salaries expense
c. Freight-out
d. Store supplies consumed
P
32. The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance
sheet at December 31, 2007. The January 1, 2007 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance
sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance
sheet.
33. In order to be classified as an extraordinary item in the income statement, an event or transaction should be
a. unusual in nature, infrequent, and material in amount.
b. unusual in nature and infrequent, but it need not be material.
c. infrequent and material in amount, but it need not be unusual in nature.
d. unusual in nature and material, but it need not be infrequent.
34. Classification as an extraordinary item on the income statement would be appropriate for the
a. gain or loss on disposal of a component of the business.
b. substantial write-off of obsolete inventories.
c. loss from a strike.
d. none of these.
35. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.
b. Write-off of deferred marketing costs believed to have no future benefit.
c. Gain resulting from the devaluation of the U.S. dollar.
d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.
36. Under which of the following conditions would material flood damage be considered an extraordinary item for
financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.
37. An item that should be classified as an extraordinary item is
a. write-off of goodwill.
b. gains from transactions involving foreign currencies.
c. losses from moving a plant to another city.
d. gains from a company selling the only investment it has ever owned.

38. How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial
statements?
a. Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if
deemed appropriate.
b. Shown in operating revenues or expenses if material but not shown as a separate item.
c. Shown net of income tax after ordinary net earnings but before extraordinary items.
d. Shown net of income tax after extraordinary items but before net earnings.
39. Which of the following is a change in accounting principle?
a. A change in the estimated service life of machinery
b. A change from FIFO to LIFO
c. A change from straight-line to double-declining-balance
d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance
40. Which of the following is never classified as an extraordinary item?
a. Losses from a major casualty.
b. Losses from an expropriation of assets.
c. Gain on a sale of the only security investment a company has ever owned.
d. Losses from exchange or translation of foreign currencies.
41. Which of the following is a required disclosure in the income statement when reporting the disposal of a
component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.
b. Results of operations of a discontinued component should be disclosed immediately below extraordinary
items.
c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income
statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing
operations.
42. When a company discontinues an operation and disposes of the discontinued operation (component), the
transaction should be included in the income statement as a gain or loss on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing operations and before extraordinary items.
d. a bulk sale of plant assets included in income from continuing operations.
43. Income taxes are allocated to
a. extraordinary items.
b. discontinued operations.
c. prior period adjustments.
d. all of these.
44. Which of the following is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income statement either before or after they
are included in the tax return.
b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period
adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.
45.A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in
the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No
S
46. Earnings per share should always be shown separately for
a. net income and gross margin.
b. net income and pretax income.
c. income before extraordinary items.
d. extraordinary items and prior period adjustments.
P
47. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
b. No No
c. Yes No
d. No Yes
48. Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
49. Which one of the following types of losses is excluded from the determination of net income in
income statements?
a. Material losses resulting from transactions in the company's investments account.
b. Material losses resulting from unusual sales of assets not acquired for resale.
c. Material losses resulting from the write-off of intangibles.
d. Material losses resulting from correction of errors related to prior periods.
50. Shank Corporation made a very large arithmetical error in the preparation of its year-end financial
statements by improper placement of a decimal point in the calculation of depreciation. The error
caused the net income to be reported at almost double the proper amount. Correction of the error
when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately listed on the income
statement and fully explained in a note to the financial statements.
c. an extraordinary item for the year in which the error was made.
d. a prior period adjustment.
51. Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
52. The approach most companies use to provide information related to the components of other
comprehensive income is a

a. second separate income statement.

b. combined income statement of comprehensive income.
c. separate column in the statement of changes in stockholders’ equity.
d. footnote disclosure.
21. c 26. b 31. b 36. a 41. c 46. c 51. c
22. d 27. d 32. b 37. d 42. c 47. d 52. c
23. d 28. a 33. a 38. a 43. d 48. c
24. d 29. b 34. d 39. d 44. d 49. d
25. d 30. c 35. d 40. d 45. c 50. d
Solution to Multiple Choice question for which the answer is “none of these.”
34. Many answers are possible.
1. A corporation is incorporated in only one state regardless of the number of states in which it
operates.
2, The preemptive right allows stockholders the right to vote for directors of the company.
3. Common stock is the residual corporate interest that bears the ultimate risks of loss.
4. Earned capital consists of additional paid-in capital and retained earnings.
5. True no-par stock should be carried in the accounts at issue price without any additional paid-in
capital reported.
6. Companies allocate the proceeds received from a lump-sum sale of securities based on the
securities’ par values.
7. Companies should record stock issued for services or noncash property at either the fair value of
the stock issued or the fair value of the consideration received.
8. Treasury stock is a company’s own stock that has been reacquired and retired.
9. The cost method records all transactions in treasury shares at their cost and reports the treasury
stock as a deduction from capital stock.
10. When a corporation sells treasury stock below its cost, it usually debits the difference between cost
and selling price to Paid-in Capital from Treasury Stock.
11. Participating preferred stock requires that if a company fails to pay a dividend in any year, it must
make it up in a later year before paying any common dividends.
12. Callable preferred stock permits the corporation at its option to redeem the outstanding preferred
shares at stipulated prices.
13. The laws of some states require that corporations restrict their legal capital from distribution to
stockholders.
14. The SEC requires companies to disclose their dividend policy in their annual report.
15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a corporation.
16. Dividends payable in assets of the corporation other than cash are called property dividends or
dividends in kind.
17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a company is
required to transfer the fair market value of the stock issued from retained earnings.
18. Stock splits and large stock dividends have the same effect on a company’s retained earnings and
total stockholders’ equity.
19. The rate of return on common stock equity is computed by dividing net income by the average
common stockholders’ equity.
20. The payout ratio is determined by dividing cash dividends paid to common stockholders by net
income available to common stockholders.
1. T 6. F 11. F 16. T

2. F 7. T 12. T 17. T
3. T 8. F 13. T 18. F
4. F 9. F 14. F 19. F
5. T 10. T 15. F 20. T
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred stockholders.
S
24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate over its
existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and Exchange
Commission.
25.Stockholders of a business enterprise are said to be the residual owners. The term residual owner
means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
d. can negotiate individual contracts on behalf of the enterprise.
26. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.
27. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
28. Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
29. The accounting problem in a lump sum issuance is the allocation of proceeds between the classes
of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.
30. When a corporation issues its capital stock in payment for services, the least appropriate basis for
recording the transaction is the

a. market value of the services received.

b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3
32.A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
P
33. Which of the following represents the total number of shares that a corporation may issue under
the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
S
34. Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
S
35. Which of the following is not a legal restriction related to profit distributions by a corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported for that
year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences and
participation.
S
36. In January 2007, Castro Corporation, a newly formed company, issued 10,000 shares of its $10 par
common stock for $15 per share. On July 1, 2007, Castro Corporation reacquired 1,000 shares of
its outstanding stock for $12 per share. The acquisition of these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
P
37. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
38. When treasury stock is purchased for more than the par value of the stock and the cost method is
used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the
purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.

d. Treasury stock for the par value and retained earnings for the excess of the purchase price
over the par value.
39. “Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40. Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000 and debited the
treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The
$8,000 difference between the cost and sales price should be recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the same class of
stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous net
"gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
41. How should a "gain" from the sale of treasury stock be reflected when using the cost method of
recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
42. Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
43. Which of the following features of preferred stock makes the security more like debt than an equity
instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before dividends
are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par value of
common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value of the
stock and receive the stock in place of the cash dividends.
P
45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders' equity.
S
46. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the long-term
portion.
47. At the date of the financial statements, common stock shares issued would exceed common stock
shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.

d. payment in full of subscribed stock

48. An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.
49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.
50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book value) of
the nonmonetary assets transferred.
d. All of these statements are true.
51. Farmer Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2007,
Farmer distributed these shares of stock as a dividend to its stockholders. This is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.
52. A dividend which is a return to stockholders of a portion of their original investments is a
a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.
53.A mining company declared a liquidating dividend. The journal entry to record the declaration must
include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.
54. If management wishes to "capitalize" part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.
55. Which dividends do not reduce stockholders' equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends
56. The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.
57. Pryor Corporation issued a 100% stock dividend of its common stock which had a par value of $10
before and after the dividend. At what amount should retained earnings be capitalized for the
additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Market value on the declaration date

d. Market value on the payment date
58. The issuer of a 5% common stock dividend to common stockholders preferably should transfer
from retained earnings to contributed capital an amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
59. At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.
60.The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset
61. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.
62. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
63. Which one of the following disclosures should be made in the equity section of the balance sheet,
rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices
64. The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income by ending common stockholders’ equity.
65. The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income less
preferred dividends.
66. Windsor Company has outstanding both common stock and nonparticipating, non-cumulative
preferred stock. The liquidation value of the preferred is equal to its par value. The book value per
share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the market
price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when the
market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.
P
67. Assume common stock is the only class of stock outstanding in the B-Bar-B Corporation. Total
stockholders' equity divided by the number of common stock shares outstanding is called
a. book value per share.

b. par value per share.

c. stated value per share.
d. market value per share.
*68. Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.
*69. Noncumulative preferred dividends in arrears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of the current
preferred dividend.
*70. How should cumulative preferred dividends in arrears be shown in a corporation's statement of
financial position?
a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance
21. c 29. d 37. d 45. b 53. b 61. b *69. a
22. b 30. b 38. c 46. c 54. b 62. c *70. a
23. a 31. a 39. a 47. c 55. b 63. b
24. b 32. b 40. a 48. b 56. b 64. a
25. c 33. a 41. b 49. c 57. b 65. b
26. c 34. d 42. c 50. c 58. a 66. c
27. d 35. b 43. c 51. a 59. a 67. a
28. d 36. a 44. b 52. a 60. b *68. c
1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt
issues.
2. Companies recognize the gain or loss on retiring convertible debt as an extraordinary item.
3. The FASB states that when an issuer makes an additional payment to encourage conversion, the
payment should be reported as an expense.
4. The market value method is used to account for the exercise of convertible preferred stock.
5.Companies recognize a gain or loss when stockholders exercise convertible preferred stock.
6. A company should allocate the proceeds from the sale of debt with detachable stock warrants
between the two securities based on their market values.
7. Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds
between the bonds and the warrants.
8. The intrinsic value of a stock option is the difference between the market price of the stock and the
exercise price of the options at the grant date.
9. Under the fair value method, companies compute total compensation expense based on the fair
value of options on the date of exercise.
10. The service period in stock option plans is the time between the grant date and the vesting date.
11. If an employee fails to exercise a stock option before its expiration date, the company should
decrease compensation expense.
12. If an employee forfeits a stock option because of failure to satisfy a service requirement, the
company should record paid-in capital from expired options.

13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current
year preferred dividend in computing earnings per share.
14. When stock dividends or stock splits occur, companies must restate the shares outstand-ing after
the stock dividend or split, in order to compute the weighted-average number of shares.
15. If a stock dividend occurs after year-end, but before issuing the financial statements, a company
must restate the weighted-average number of shares outstanding for the year.
16. Preferred dividends are subtracted from net income but not income before extraordinary items in
computing earnings per share.
17. When a company has a complex capital structure, it must report both basic and diluted earnings
per share.
18. In computing diluted earnings per share, stock options are considered dilutive when their option
price is greater than the market price.
19. In a contingent issue agreement, the contingent shares are considered outstanding for computing
diluted EPS when the earnings or market price level is met by the end of the year.
20. A company should report per share amounts for income before extraordinary items, but not for
income from continuing operations.
1. T 6. T 11. F 16. F
2. F 7. F 12. F 17. T
3. T 8. T 13. T 18. F
4. F 9. F 14. F 19. T
5. F 10. T 15. T 20. F
MULTIPLE CHOICE—Dilutive Securities, Conceptual

21. Convertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.
22. The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. market value method.
d. book value method.
23. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce
conversion, the sweetener is accounted for as a(n)
a. extraordinary item.
b. expense.
c. loss.
d. none of these.
S
24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital
that, assuming conversion, will arise when the original debt is converted. The other is
a. the ease with which convertible debt is sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.
S
25. When convertible debt is retired by the issuer, any material difference between the cash acquisition
price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital
S
26. The conversion of preferred stock into common requires that any excess of the par value of the
common shares issued over the carrying amount of the preferred being converted should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.

c. treated as a prior period adjustment.

d. treated as a direct reduction of retained earnings.
27. The conversion of preferred stock may be recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.
28. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the
par value of the bonds and the fair market value of the warrants, the excess should be credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.
29. Proceeds from an issue of debt securities having stock warrants should not be allocated between
debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.
30. Stock warrants outstanding should be classified as
a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. none of these.
P
31. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital
is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.
32.The distribution of stock rights to existing common stockholders will increase paid-in capital at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No
S
33. The major difference between convertible debt and stock warrants is that upon exercise of the
warrants
a. the stock is held by the company for a defined period of time before they are issued to the
warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period of time.
d. no paid-in capital in excess of par can be a part of the transaction.
S
34. Which of the following is not a characteristic of a noncompensatory stock option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still employed
by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an offer of
stock to stockholders or others.
35. The date on which to measure the compensation element in a stock option granted to a corporate
employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.

d. exercises the option.
36. Compensation expense resulting from a compensatory stock option plan is generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.
37. The date on which total compensation expense is computed in a stock option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price.
38. Which of the following is not a characteristic of a noncompensatory stock purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.
*39. Under the intrinsic value method, compensation expense resulting from an incentive stock option is
generally
a. not recognized because no excess of market price over the option price exists at the date of
grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. recognized in the period of exercise.
*40. An executive compensation plan in which the executive may receive compensation in cash, shares
of stock, or a combination of both, is known as ______________ plan.
a. a nonqualified stock option
b. a performance-type
c. a stock appreciation rights
d. both a performance-type and a stock appreciation rights
*41. A corporation should record no compensation expense for which of the following types of executive
compensation plans?
a. Stock appreciation rights
b. Nonqualified stock option plans
c. Incentive stock option plans
d. Compensation expense should be recorded for all of these.
*42. The payment to executives from a performance-type plan is never based on the
a. market price of the common stock.
b. return on assets (investment).
c. return on common stockholders' equity.
d. sales.
Multiple Choice Answers—Dilutive Securities, Conceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. d 25. a 29. d 33. b 37. a *41. b
22. d 26. d 30. d 34. c 38. d *42 b
23. b 27. b 31. d 35. a *39. c
24. c 28. d 32. c 36. c *40. b
1. Companies should recognize revenue when it is realized and when cash is received.
2. Revenues are realized when a company exchanges goods and services for cash or claims to cash.
3. Delayed recognition of revenue is appropriate if the sale does not represent substantial completion
of the earnings process.
4. If a company sells its product but gives the buyer the right to return it, the company should not
recognize revenue until the sale is collected.

5. Companies can recognize revenue prior to completion and delivery of the product under certain
circumstances.
6. Companies must use the percentage-of-completion method when estimates of progress toward
completion are reasonably dependable.
7. The most popular input measure used to determine the progress toward completion is the cost-to-
cost basis.
8. If the difference between the Construction in Process and the Billings on Construction in Process
account balances is a debit, the difference is reported as a current asset.
9. The Construction in Process account includes only construction costs under the percentage-of-
completion method.
10. Under the completed-contract method, companies recognize revenue and costs only when the
contract is completed.
11. The principal advantage of the completed-contract method is that reported revenue reflects final
results rather than estimates.
12. Companies must recognize a loss on an unprofitable contract under the percentage-of-completion
method but not the completed-contract method.
13. A loss in the current period on a profitable contract must be recognized under both the percentage-
of-completion and completed-contract method.
14. Under the completion-of-production basis, companies recognize revenue when agricul-tural crops
are harvested since the sales price is reasonably assured and no significant costs are involved in
product distribution.
15. The provision for a loss on an unprofitable contract may be combined with the Construction in
Process account balance under percentage-of-completion but not completed-contract.
16. Under the installment-sales method, companies defer revenue and income recognition until the
period of cash collection.
17. The installment-sales method defers only the gross profit instead of both the sales price and cost of
goods sold.
18. Deferred gross profit is generally treated as an unearned revenue and classified as a current
liability.
19. Under the cost-recovery method, a company recognizes no revenue or profit until cash payments
by the buyer exceed the cost of the merchandise sold.
20. Companies recognize profit under the cost-recovery method only when cash collections exceed the
total cost of the goods sold.
1. F 6. F 11. T 16. F
2. T 7. T 12. F 17. T
3. T 8. T 13. F 18. T
4. F 9. F 14. T 19. F
5. T 10. F 15. F 20. T
21. The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.
22. When goods or services are exchanged for cash or claims to cash (receivables), revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.
23. When the entity has substantially accomplished what it must do to be entitled to the benefits
represented by the revenues, revenues are
a. earned.
b. realized.

c. recognized.
d. all of these.
24.Which of the following is not an accurate representation concerning revenue recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean
the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when services have
been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time passes or as
the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of sale.
P
25. The process of formally recording or incorporating an item in the financial statements of an entity is
a. allocation.
b. articulation.
c. realization.
d. recognition.
P
26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each
appliance sold. Although Dot Point sells the appliances on an installment basis, all service
contracts are cash sales at the time of purchase by the buyer. Collections received for service
contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.
27. Which of the following is not a reason why revenue is recognized at time of sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.
28. An alternative available when the seller is exposed to continued risks of ownership through return
of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.
29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated.
d. none of these.
30. The FASB concluded that if a company sells its product but gives the buyer the right to return the
product, revenue from the sales transaction shall be recognized at the time of sale only if all of six
conditions have been met. Which of the following is not one of these six conditions?
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the
product.
d. The buyer is obligated to pay the seller upon resale of the product.
31. In selecting an accounting method for a newly contracted long-term construction project, the
principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress toward
completion is practicable.
c. the method commonly used by the contractor to account for other long-term construc-tion
contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
32. The percentage-of-completion method must be used when certain conditions exist. Which of the
following is not one of those necessary conditions?

a. Estimates of progress toward completion, revenues, and costs are reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to be
exchanged, and the manner and terms of settlement.
33. When work to be done and costs to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
34. How should the balances of progress billings and construction in process be shown at reporting
dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit balance.
35. In accounting for a long-term construction-type contract using the percentage-of-completion
method, the gross profit recognized during the first year would be the estimated total gross profit
from the contract, multiplied by the percentage of the costs incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
36. How should earned but unbilled revenues at the balance sheet date on a long-term construction
contract be disclosed if the percentage-of-completion method of revenue recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion of work
completed.
37. The principal disadvantage of using the percentage-of-completion method of recognizing revenue
from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue was
actually earned.
d. none of these.
S
38. One of the more popular input measures used to determine the progress toward completion in the
percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
S
39. The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than one
accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the
percentage-of-completion method is used.
40. Under the completed-contract method
a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit recognition is
deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. none of these.

41. Cost estimates on a long-term contract may indicate that a loss will result on completion of the
entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the contract is
completed.
c. recognized in the current period under the completed-contract method, but the percentage-of-
completion method should defer the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.
42.Cost estimates at the end of the second year indicate a loss will result on completion of the entire
contract. Which of the following statements is correct?
a. Under the completed-contract method, the loss is not recognized until the year the construction
is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first year must
not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated costs, the
amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance exceeds the
billings, the estimated loss is added to the accumulated costs.
43. The criteria for recognition of revenue at the completion of production of precious metals and farm
products include
a. an established market with quoted prices.
b. low additional costs of completion and selling.
c. units are interchangeable.
d. all of these.
44. In certain cases, revenue is recognized at the completion of production even though no sale has
been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
S
45. For which of the following products is it appropriate to recognize revenue at the completion of
production even though no sale has been made?
a. Automobiles
b. Large appliances
c. Single family residential units
d. Precious metals
S
46. When there is a significant increase in the estimated total contract costs but the increase does not
eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the completed-contract methods, the estimated
cost increase requires a current period adjustment of excess gross profit recognized on the
project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior periods.
c. Under the completed-contract method only, the estimated cost increase requires a current
period adjustment of excess gross profit recognized on the project in prior periods.
d. No current period adjustment is required.
47. Deferred gross profit on installment sales is generally treated as a(n)
a. deduction from installment accounts receivable.
b. deduction from installment sales.
c. unearned revenue and classified as a current liability.
d. deduction from gross profit on sales.
48.The installment-sales method of recognizing profit for accounting purposes is acceptable if
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.

c. collection of the sales price is not reasonably assured.

d. the method is consistently used for all sales of similar merchandise.
49. The method most commonly used to report defaults and repossessions is
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these.
50. Under the installment-sales method,
a. revenue, costs, and gross profit are recognized proportionate to the cash that is received from
the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the product, but total
revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the cost of the item
sold.
d. revenues and costs are recognized proportionate to the cash received from the sale of the
product, but gross profit is deferred until all cash is received.
S
51. The realization of income on installment sales transactions involves
a. recognition of the difference between the cash collected on installment sales and the cash
expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as cash is
collected.
c. deferring gross profit while recognizing operating or financial expenses in the period incurred.
d. deferring gross profit and all additional expenses related to installment sales until cash is
ultimately collected.
P
52. A manufacturer of large equipment sells on an installment basis to customers with questionable
credit ratings. Which of the following methods of revenue recognition is least likely to overstate the
amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The cost–recovery method
53. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future
payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue when it is
recognized as earned.
54.Under the cost-recovery method of revenue recognition,
a. income is recognized on a proportionate basis as the cash is received on the sale of the
product.
b. income is recognized when the cash received from the sale of the product is greater than the
cost of the product.
c. income is recognized immediately.
d. none of these.
55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water,
Winser does not recognize any revenue from water sales until the sales exceed the costs of
exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
*56. Some of the initial franchise fee may be allocated to
a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as revenue.

*57. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
*58. Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the expected future
purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the selling
price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain purchases are
made.
d. None of these.
*59. A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is
probable that the option will be exercised. When recording the initial franchise fee, the franchisor
should
a. record the entire initial franchise fee as a deferred credit which will reduce the franchisor's
investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the amount of
cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain purchase option
as a reduction of the future amounts receivable from the franchisee.
d. None of these.
*60.Revenue is recognized by the consignor when the
a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.
21. c 27. d 33. b 39. a 45. d 51. c *57. a
22. b 28. d 34. c 40. c 46. b 52. d *58. b
23. a 29. c 35. b 41. a 47. c 53. b *59. a
24. b 30. d 36. a 42. c 48. c 54. b *60. d
25. d 31. b 37. b 43. d 49. b 55. d
26. b 32. c 38. d 44. a 50. b *56. d


123JEMBOTD12345

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

123JEMBOTD12345

Uploaded by

Copyright:

Available Formats

Te s t B a n k f o r F i n a n c i a l A c c o u n t i n g 9 t h E d i t i o n b y W e y g a n d t

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

44. Accountants refer to an economic event as a

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

60. The origins of accounting are generally attributed to the work of

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

d. of an entity be kept separate from the activities of its owner.

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

a. a distribution of the company's earnings to its stockholders.

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

c. Incurred utility expenses for the month.

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

c. expenses exceed revenues.

FOR INSTRUCTOR USE ONLY

Answers to Multiple Choice Questions

FOR INSTRUCTOR USE ONLY

56. c 78. d 100. a 122. a 144. b 166. b 188. c

a. time period assumption

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

e. none of the answers are correct

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

a. Business entity e. Historical cost i. Full disclosure

FOR INSTRUCTOR USE ONLY

d. Monetary unit h. Consistency l. Industry practices

FOR INSTRUCTOR USE ONLY

4. Listed below are several qualitative characteristics.

1. Two constraints included in the hierarchy.

FOR INSTRUCTOR USE ONLY

5. Listed below are ten phrases with the appropriate abbreviation.

a. Generally Accepted Accounting Principles (GAAP)

6. Listed below are Concept Statements.

a.Statement of Financial Accounting Concepts No. 1

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

d.Statement of Financial Accounting Concepts f. Statement of Financial Accounting Concepts

1. Objectives of Financial Reporting by nonbusiness

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

c. charge or credit the loss or gain in the quarter that it occurs.

FOR INSTRUCTOR USE ONLY

Ex. 24-87—Interim reports.

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

1. Cash sale of merchandise inventory.

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Multiple Choice Answers—Conceptual

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

c. all members of the FASB possess extensive experience in financial reporting.