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Financial Accounting Study

STUDY
PLAY
A cause-and-effect relationship is implicit in the
matching principle
Which of the following groups is not among the external users for whom financial statements are prepared?
All of the above
A firm's comprehensive income always:
Could be greater than or less than net income
The FASB's conceptual framework's qualitative characteristics of accounting information include:
Relevance
The recognition of which of the following expenses exemplifies the application of the matching principle?
Cost of goods sold
The matching principle is
An expense recognition accounting principle
Constraints on qualitative characteristics of accounting information include
Cost-effectiveness
Which of the following best demonstrates the full disclosure principle?
Disclosure notes to financial statements.
The primary objective of financial accounting information is to provide useful information to
Capital providers
The enhancing qualitative characteristic of understandability means that information should be understood by:
Those who have a reasonable understanding of business and economic activities
Recognizing expected losses immediately, but deferring expected gains, is an example of:
Conservatism.
Under IFRS, the role of the conceptual framework:
Includes serving as a guide for practitioners when a specific standard does not apply.
Under IFRS, the conceptual framework
Emphasizes the overarching concept of the financial statements providing a "true and fair representation" of the company.
An important argument in support of historical cost information is
Verifiability.
Land was acquired in 2013 for a future building site at a cost of $40,000. The assessed valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a recent firm offer for the land was for a cash payment of $46,000. The land should be reported in the financial statements a
$40,000
Which of the following is not true about net operating cash flow
It is a measure used in accrual accounting and is recognized as the best predictor of future operating cash flows
Porite Company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Porite's practice is an example of:
Accrual accounting.
Which of the following is not a potential benefit of accrual accounting, compared to cash-basis accounting?
Periodicity
In a recent annual report, Apple Computer reported the following in one of its disclosure notes: "Warranty Expense: The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized." This note exemplifies Apple's use of:
The matching principle.
Fundamental qualitative characteristics of accounting information are:
Faithful representation and relevance.
Elements of financial statements do not include:
Monetary unit.
Of the following, the most important objective for financial reporting is to provide information useful for:
Making decisions.
Primecoat Corporation could disseminate its annual financial statements two days earlier if it shifted substantial human resources from other operations to the annual report project. Management decided the value of the earlier report was not worth the added commitment of resources. The concept demonstrated is:
Cost-effectiveness.
Mega Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debt expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The concept demonstrated is:
Materiality
The assumption that in the absence of contrary information a business entity will continue indefinitely is the:
Going concern assumption.
The full disclosure principle requires a balance between:
Relevance and cost-effectiveness.
To meet the needs of full disclosure, companies use supplemental information, including:
All of the above are correct.
Under IFRS, the conceptual framework:
Emphasizes the overarching concept of the financial statements providing a "true and fair representation" of the company.
Four different competent accountants independently agree on the amount and method of reporting an economic event. The concept demonstrated is:
Verifiability
Which of the following is typically characterized as a principle, rather than an assumption?
Full disclosure.
Phase A of the new conceptual framework focuses on:
Objective and qualitative characteristics.
The FASB's conceptual framework's qualitative characteristics of accounting information include:
Faithful representation.
SFAC No.5 focuses on:
Recognition and measurement concepts in accounting.
Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change?
Consistency
According to the conceptual framework, verifiability implies:
Consensus
An important argument in support of historical cost information is:
Verifiability
The matching principle is:
An expense recognition accounting principle.
Enhancing qualitative characteristics of accounting information include each of the following except:
Materiality.
Enhancing qualitative characteristics of accounting information include:
Comparability and timeliness.
Gains are:
Increases in equity from peripheral transactions of an entity.
Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by 10 days the time to get information to investors and creditors. The qualitative concept improved is:
Timeliness
The conceptual framework's recognition and measurement concepts recognize which of the following as an assumption, rather than a principle?
Going concern.
Which of the following is not an identified valuation technique in GAAP regarding fair value measurement?
Cost-benefit approach.
Revenue should not be recognized until:
The earnings process is complete and collection is reasonably assured.
Somerset Leasing received $12,000 for 24 months rent in advance. How should Somerset record this transaction?
Cash 12000
Unearned Revenue 12000
Which of the following accounts has a debit balance?
Advertising expense.
An example of a contra account is:
Accumulated depreciation.
Making insurance payments in advance is an example of:
A prepaid expense transaction.
Recording revenue that is earned, but not yet collected, is an example of:
An accrued receivable transaction.
Prepayments occur when:
Cash flow precedes expense recognition.
Accruals occur when cash flows:
Occur after revenue or expense recognition.
Which of the following is not an adjusting entry?
Cash
Unearned Revenue
Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year?
260,000
Cost of goods sold is:
An expense account.
The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year:
Plus net income, minus dividends.
Dave's Duds reported cost of goods sold of $2,000,000 this year. The inventory account increased by $200,000 during the year to an ending balance of $400,000. What was the cost of merchandise that Dave's purchased during the year?
1,600,000
Permanent accounts would not include:
Interest expense.
The purpose of closing entries is to transfer:
Balances in temporary accounts to a permanent account.
Temporary accounts would not include:
Salaries payable.
Incurring an expense for advertising on account would be recorded by:
Debiting an expense.
Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase?
Inventory 2000
Accounts Payable 2000
Adjusting entries are primarily needed for:
Accrual accounting.
Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies the Cal Farms purchased during the year?
$1,800,000.
When a tenant makes an end-of-period adjusting entry credit to the "Prepaid rent" account:
(S)he usually debits an expense account.
On September 1, 2013, Fortune Magazine sold 600 one-year subscriptions for $81 each. The total amount received was credited to unearned subscriptions revenue. What is the required adjusting entry at December 31, 2013?
Unearned subscription revenue 16200
Subscription revenue 16200
Mama's Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2013, with principal and interest due on October 31, 2014. The company's fiscal year ends June 30, 2013. What adjusting entry is necessary on June 30, 2013?
Interest expense 120
Interest payable 120
Eve's Apples opened business on January 1, 2013, and paid for two insurance policies effective that date. The liability policy was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2013?
18,000
On November 1, 2013, Tim's Toys borrows $30,000,000 at 9% to finance the holiday sales season. The note is for a six-month term and both principal and interest are payable at maturity. What is the balance of interest payable for the loan as of December 31, 2013?
450,000
The accounting equation can be stated as:
A - L - OE = 0.
Examples of external transactions include all of the following except:
Depreciating equipment.
Examples of internal transactions include all of the following except:
Paying wages to company employees.
Mary Parker Co. invested $15,000 in ABC Corporation and received capital stock in exchange. Mary Parker Co.'s journal entry to record this transaction would include a:
Debit to investments.
The adjusting entry required when amounts previously recorded as unearned revenues are earned includes:
A debit to a liability.
The adjusting entry required to record accrued expenses includes:
A credit to liability.
The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, July 3. Neat Clothes is now preparing quarterly financial statements for the three months ended June 30. What is the adjusting entry to record accrued salaries at the end of June?
Salaries expense 22400
Salaries payable 22400
Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Unearned premiums account increased from $6 million to $8 million dollars during the year. What is Fink's revenue from earned insurance premiums for the current year?
$16,000,000.
In its first year of operations Best Corp. had income before tax of $500,000. Best made income tax payments totaling $210,000 during the year and has an income tax rate of 40%. What was Best's net income for the year?
$300,000.
On December 31, 2013, the end of Larry's Used Cars' first year of operations, the accounts receivable was $53,600. The company estimates that $1,200 of the year-end receivables will not be collected. Accounts receivable in the 2013 balance sheet will be valued at:
52,400
In its first year of operations Acme Corp. had income before tax of $400,000. Acme made income tax payments totaling $150,000 during the year and has an income tax rate of 40%. What is the balance in income tax payable at the end of the year?
$10,000 credit.
A future economic benefit owned or controlled by an entity is:
An asset.
In its first year of operations Best Corp. had income before tax of $500,000. Best made income tax payments totaling $210,000 during the year and has an income tax rate of 40%. What was Best's net income for the year?
300,000
A sale on account would be recorded by:
Debiting assets.
When a magazine company collects cash for selling a subscription, it is an example of:
An unearned revenue transaction.
On September 15, 2013, Oliver's Mortuary received a $6,000, nine-month note bearing interest at an annual rate of 10% from the estate of Jay Hendrix for services rendered. Oliver's has a December 31 year-end. What adjusting entry will the company record on December 31, 2013?
Interest receivable 175
Interest revenue 175
Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. The journal entry to record this sale would include a:
Debit to note receivable.
In its first year of operations Best Corp. had income before tax of $500,000. Best made income tax payments totaling $210,000 during the year and has an income tax rate of 40%. What was Best's net income for the year?
300,000
Permanent accounts would not include:
Cost of goods sold.
When a magazine company collects cash for selling a subscription, it is an example of:
An unearned revenue transaction.
XYZ Corporation receives $100,000 from investors for issuing them shares of its stock. XYZ's journal entry to record this transaction would include a:
Credit to capital stock.
Which of the following accounts has a credit balance?
Accrued income taxes payable.
On December 31, 2012, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2013, $86,000 was paid for insurance. At the end of 2013, after adjusting entries were recorded, the balance in the prepaid insurance account was 42,000. Insurance expense for 2013 would be:
$92,400.
When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to:
Supplies
Goodwill is:
The excess of the fair value of a business over the fair value of all net identifiable assets.
An exclusive 20-year right to manufacture a product or use a process is a:
Trademark
Assets acquired under multi-year deferred payment contracts are:
Valued at the present value of the payments required by the contract.
Assets acquired by the issuance of equity securities are valued based on:
Their fair values or the fair value of the equity securities, whichever is more reasonably determinable.
Interest may be capitalized:
Whether or not there is specific borrowing for the construction.
Interest is eligible to be capitalized as part of an asset's cost, rather than being expensed immediately, when:
All of the above are correct.
In computing capitalized interest, average accumulated expenditures:
Is determined by time-weighting individual expenditures made during the asset construction period.
Interest is not capitalized for:
Inventories routinely and repetitively produced in large quantities.
Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year?
$40,000.
Research and development (R&D) costs:
Generally pertain to activities that occur prior to the start of production.
Under International Financial Reporting Standards, research expenditures are:
Expensed in the period incurred.
Under International Financial Reporting Standards, development expenditures are:
Capitalized if certain criteria are met.
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively.Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:
$8,000.
Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance.In Case B, Grand Forks would record a gain/(loss) of:
$(5,000).
Below is information relative to an exchange of equipment by Pensacola Inc. Assume the exchange has In Case B, Pensacola would record a gain/(loss) of:
substance.
$(4,000).
On January 1, 2013, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2014. Expenditures on the project were as follows:Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2013. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2013 and 2014.Average accumulated expenditures for 2013 was:
300,000
Interest capitalized for 2013 was:
$36,000.
On January 1, 2013, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2014. Expenditures on the project were as follows:Dreamworld's average accumulated expenditures for 2013 was:
450,000
Dreamworld's capitalized interest in 2013 was:
$54,000.
Property, plant, and equipment and intangible assets are:
Long-term revenue-producing assets.
The exclusive right to benefit from a creative work, such as a film, is a:
Copyright
The exclusive right to display a symbol of product identification is a:
Trademark
Asset retirement obligations:
All of the above are correct.
On July 1, 2013, Larkin Co. purchased a $400,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2013 as follows:What would be the balance in the land account as of December 31, 2013?
$477,000.
Research and development expense for a given period includes:
Depreciation on a research and development facility.
The acquisition costs of property, plant, and equipment do not include:
Maintenance costs during the first 30 days of use.
Productive assets that are physically consumed in operations are:
Natural resources.
The basic principle used to value an asset acquired in a nonmonetary exchange is to value it at:
Fair value of the asset(s) given up.
Average accumulated expenditures:
Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.
The cost of self-constructed fixed assets should:
Include allocated indirect costs just as they are for production of products.
Amortization of capitalized computer software costs is:
The greater of the percentage-of-revenue method or the straight-line method.
Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:
$455,000.
If a company incurs disposition obligations as a result of acquiring an asset:
The company recognizes the obligation at fair value when the asset is acquired.
Assets acquired in a lump-sum purchase are valued based on:
Their relative fair values.
In a nonmonetary exchange of equipment, if the exchange has commercial substance, a gain is recognized if:
The fair value of the equipment surrendered exceeds the book value of the equipment given up.
Cromartie Ltd. prepares its financial statements according to International Financial Reporting Standards. During 2013 the company incurred $1,245,000 in research expenditures to develop a new product. An additional $756,000 in development expenditures were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new product was patented before the end of the 2013 fiscal year. Sale of the product began in 2012. What amount of the above expenditures would Cromartie expense in its 2013 income statement?
1,245,000
Which of the following does not pertain to accounting for asset retirement obligations?
All of the above pertain to accounting for asset retirement obligations.
Donated assets are recorded at:
Fair value.
Research and development costs for projects other than software development should be:
Expensed in the period incurred.
The capitalized cost of equipment excludes:
Maintenance
One of the advantages of group and composite methods is that gains and losses on the disposal of individual assets need not be computed.
True
A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements.
False
Changes in the estimates involved in depreciation, depletion, and amortization require retroactive restatement of financial statements.
False
Property, plant, and equipment and finite-life intangible assets must be tested for impairment at least once a year.
False
Component depreciation, required under International Financial Reporting Standards, is allowed but rarely used by U.S. companies.
True
According to International Financial Reporting Standards, the impairment loss for an indefinite-life intangible asset other than goodwill is the difference between book value and the recoverable amount.
True
According to International Financial Reporting Standards, the costs to successfully defend an intangible right normally are capitalized and amortized.
False
The factors that need to be determined to compute depreciation are an asset's:
Cost, residual value, and service life.
Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?
Double-declining balance.
In the first year of an asset's life, which of the following methods has the smallest depreciation?
Straight-line.
Recognition of impairment for property, plant, and equipment is required if book value exceeds:
Undiscounted expected cash flows.
The amount of impairment loss is the excess of book value over:
Fair value.
At the end of its 2013 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available:
Impaired because its book value exceeds undiscounted future cash flows.
A major expenditure increased a truck's life beyond the original estimate of life. GAAP permits the expenditure to be debited to:
Accumulated depreciation.
According to International Financial Reporting Standards, the level of testing for goodwill impairment is the:
Cash-generating unit.
International Financial Reporting Standards require goodwill to be tested for impairment at least annually.
True
According to International Financial Reporting Standards, property, plant, and equipment must be valued at cost less accumulated depreciation.
False
Biological assets are valued at fair value less estimated costs to sell under International Financial Reporting Standards.
True
Accounting for impairment losses:
Involves a two-step process for recoverability and measurement.
Which of the following types of subsequent expenditures normally is capitalized?
All of the above are normally capitalized.
According to International Financial Reporting Standards, biological assets are valued at:
Fair value less estimated costs to sell.
According to International Financial Reporting Standards, the impairment loss for property, plant, and equipment is the difference between book value and:
The higher of the present value of estimated future cash flows and the fair value less costs to sell.
The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method.
True
Any method of depreciation should be both systematic and rational.
True
Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP.
False
The depreciable base for an asset is:
The excess of its cost over residual value.
Gains on the cash sales of fixed assets:
Are the excess of the cash proceeds over the book value of the assets sold.
The overriding principle for all depreciation methods is that the method must be:
Systematic and rational.
Accounting for a change in the estimated service life of equipment:
Is handled prospectively.
A change from the straight-line method to the sum-of-years'-digits method of depreciation is handled as:
A prospective change from the current year through the remainder of its useful life.
The normal treatment of litigation costs to successfully defend an intangible right under U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:
GAAP- Capitalize
IFRS- Expense
The physical life of a depreciable asset sets the lower limit of its service life.
False
Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.
True
According to International Financial Reporting Standards, an impairment loss for property, plant, and equipment is required only when an asset's book value exceeds the undiscounted sum of the asset's estimated future cash flows.
False
Total depreciation is the same over the life of an asset regardless of the method of depreciation used.
True
Once selected for existing assets, a company must consistently use the same method of depreciation for all subsequent fixed asset acquisitions.
False
In testing for recoverability of property, plant, and equipment, an impairment loss is required if the:
Asset's book value exceeds the undiscounted sum of expected future cash flows.
According to International Financial Reporting Standards, the revaluation of equipment when fair value exceeds book value, results in:
An increase in other comprehensive income.
Depreciation, depletion, and amortization:
All refer to the process of allocating the cost of long-term assets used in the business over future periods.
Depreciation:
Could be a product cost or a period cost depending on the use of the asset.
An asset should be written down if there has been an impairment of value that is:
Significant.
The replacement of a major component increased the productive capacity of production equipment from 10 units per hour to 18 units per hour. The expenditure should be debited to:
Equipment
According to International Financial Reporting Standards, the revaluation of equipment when fair value exceeds book value, results in:
An increase in other comprehensive income.
A change in the estimated useful life and residual value of machinery in the current year is handled as:
A prospective change from the current year through the remainder of its useful life, using the new estimates.
Red Onion Restaurant classifies a six-month prepaid insurance policy as a current asset. Its rationale is based on:
Definition.
Which of the following accounts are closed at the end of the accounting period?
Income tax expense.
Which is a shareholders' equity account in the balance sheet?
Paid-in capital.
Notes payable:
Cannot determine its classification without additional information.
Cash equivalents would include:
Debt instruments with maturity dates of less than three months from the date of the purchase.
Accrued expenses:
Result from services received before payment.
Janson Corporation Co.'s trial balance included the following account balances at December 31, 2013:What amount should be included in the current liability section of Janson's December 31, 2013, balance sheet?
$61,000.
The final paragraph of the audit report:
Provides the auditor's opinion on the effectiveness of internal control.
An example of fraud would be:
Knowingly classifying a material noncurrent receivable as a current receivable.
An example of an error would be:
Counting an inventory item twice when taking a physical inventory.
An asset that is not expected to be converted to cash or consumed within one year or the operating cycle is:
Goodwill
Noncurrent assets include:
Land held for a possible future plant site.
Assets do not include:
Paid-in capital.
Janson Corporation Co.'s trial balance included the following account balances at December 31, 2013:Investments consist of treasury bills that were purchased in November and mature in January. Prepaid insurance is for the next two years. What amount should be included in the current asset section of Janson's December 31, 2013, balance sheet?
$85,000.
The usual difference between accounts payable and notes payable is:
Explicitly stated interest.
Which of the following is never a current liability account?
Prepaid rent
New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:
Thirty months.
Disclosure notes would not include:
Data to adjust the financial statements so that they are not misleading.
An exception that is so serious that even a qualified opinion is not justified would result in:
An adverse opinion.
Rent collected in advance is:
A liability account in the balance sheet.
Cash equivalents would not include:
Cash not available for current operations.
Current assets include cash and all other assets expected to become cash or be consumed:
Within one year or one operating cycle, whichever is longer.
A subsequent event for an entity with a December 31, 2013, year-end would not include:
A change in the estimated useful lives of equipment in January 2014.