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FINANCIAL ACCOUNTING THEORY - TEST BANK
80102016 - 2
1. The objectives of financial reporting are based on
a. Generally accepted accounting principles
b. Reporting for regulators
c. The need for conservatism
d. The needs of the users of the information
2. The relevance of providing information in financial statements is subject to the constraint of
a. Comparability
b. Cost-benefit
c. Reliability
d. Faithful representation
3. Which of the following is an enhancing quality that relates to both relevance and faithful
representation?
a.
Comparability
b.
Confirmatory value
c. Predictive value
d. Freedom from error
4. What is the requirement for incorporating an item into the financial statements?
a. It meets the definition of relevance and faithful representation.
b. It meets the definition of an element and can be measured reliably
c. It satisfies the criteria of capital maintenance
d. It meets the requirement of comparability and consistency.
5. What is the purpose of reporting comprehensive income?
a. To report changes in equity due to transactions with owners.
b. To report a measure of overall entity performance.
c. To replace net income with a better measure.
d. To combine income from continuing operations with income from discontinued operations.
6. When a full set of general-purpose financial statements are presented, comprehensive income and
its components should
a. Appear as a part of discontinued operations.
b. Be reported net of related income tax should effect, in total and individually.
c. Appear in a supplemental schedule in the notes to financial statements. d.
d.
D Be displayed in a financial statement that has the same prominence as other financial
statements.
7. Which is an acceptable method for reporting comprehensive income under IFRS?
a. One comprehensive income statement.
b. Two statements, an income statement and a comprehensive income statement.
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c. In the statement of changes in equity. d.
One comprehensive income statement or two statements, an income statement and a
comprehensive income statement
8. Which of the following is true about financial statement requirements?
a. Prior year comparative financial statements are required.
b. Income statements for three years are required.
c. Statements of financial position for three years are required.
d. There are no specific requirements regarding comparative financial statements.
9. Which of the following items would cause earnings to differ from comprehensive income?
a. Unrealized loss on investment classified as available for sale
b. Unrealized loss on investment classified as trading
c. Loss on exchange of similar asset
d. Loss on exchange of dissimilar asset
10. Which of the following statements conforms to the realization concept?
a. Equipment depreciation was assigned to a production department and then to product unit
cost.
b. Depreciated equipment was sold in exchange for a note receivable.
c. Cash was collected on accounts receivable.
d. Product unit costs were assigned to cost of goods sold when the units were sold.
11. What is the underlying concept that supports estimating a fixed asset impairment charge?
a. Substance over form
b. Consistency
c. Matching
d. Faithful representation
12. What is the concept that supports the issuance of interim reports?
a. Relevance
b. Materiality
c. Consistency
d. Faithful representation
13. Which of the following is an essential characteristic of an asset?
a. The claims to an asset’s benefits are legally enforceable.
b. An asset is tangible.
c. An asset is obtained at a cost.
d. An asset provides future benefits.
14. The installment method of accounting may be used if the
a. Collection period extends over more than twelve months.
b. Installments are due in different years.
c. Ultimate amount collectible is indeterminate.
d. Percentage of completion method is inappropriate.
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15. Which statement best justifies the use of the cost recovery method of revenue recognition to
account for installment sales?
a. The sales contract provides that title to the equipment only passes to the purchaser when all
payments have been made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return.
d. There is no reasonable basis for estimating collectibility.
16. Which of the following is not one of the criteria for revenue recognition for sale of goods?
a. The significant risk and rewards of ownership of goods are transferred.
b. Payment has been received.
c. The entity does not retain a continuing managerial involvement or control over the goods
d. The costs incurred can be measured reliably
17. Which of the following is the first step within the hierarchy of guidance when selecting
accounting policies?
a. Consider the most recent pronouncements of other standard setting bodies.
b. Apply a standard from PFRS if it specifically relates to the transaction, other event or
condition.
c. Consider the applicability of the definitions, recognition criteria and measurement concepts in
the Conceptual Framework
d. Apply the requirements in PFRS dealing with similar and related issues.
18. The effect of a change in accounting policy that is inseparable from the effect of a change in
accounting estimate should be reported
a. By restating the financial statements of all prior periods presented.
b. As a correction of an error.
c. As a component of income from continuing operations, in the period of change and future
periods if the change affects both.
d. As a separate disclosure after income from continuing operations, in the period of change and
future periods if the change affects both.
19. If it is impracticable to determine the cumulative effect of an accounting change to any of the
prior periods, the accounting change should be accounted for
a. As a prior adjustment
b. On a prospective basis
c. As a cumulative effect change in the income statement
d. As an adjustment to retained earnings in the first period presented.
20. An entity that has included in consolidated financial statements this year a subsidiary acquired
years ago that was appropriately excluded from consolidation last year should report
a. An accounting change prospectively.
b. An accounting change retrospectively.
c. A correction of an error.
d. Neither an accounting change nor a correction of an error.
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21. A voluntary change in accounting method may only be made if
a. A new standard mandates the change in method
b. Management prefers the new method
c. The new method provides reliable and more relevant information
d. There is no prohibition for the change.
22. The loss on disposal of a discontinued component should
a. Exclude associated employee relocation cost
b. Exclude operating loss for the period.
c. Include associated employee termination cost
d. Exclude associated lease cancelation cost
23. An entity recently moved to a new building. The old building is being actively marketed for sale,
and the entity expects to complete the sale in four months. Each of the following statements is
correct regarding the old building, except
a. It will be reclassified as an asset held for sale.
b. It will be classified as a current asset.
c. It will no longer be depreciated.
d. It will be valued at historical cost.
24. Financial statements shall include disclosures of material transactions between related parties,
except
a. Nonmonetary exchanges by affiliates.
b. Sales of inventory by a subsidiary to the parent.
c. Expense allowances for executives which exceed normal business practice.
d. An entity’s agreement to act as surety for a loan to the chief executive officer.
25. What is the purpose of information presented in notes to financial statements?
a. To provide disclosures required by generally accepted accounting principles.
b. To correct improper presentation in the financial statements.
c. To provide recognition of amounts not included in the totals of the financial statements.
d. To present management response to auditor comments.
26. The summary of significant accounting policies should disclose the
a. Proforma effect of retroactive application of an accounting change.
b. Basis of profit recognition on long term construction contracts.
c. Adequacy of pension plan assets in relation to vested benefits.
d. Future minimum lease payments in the aggregate and for each of the succeeding fiscal years.
27. Which of the following is not true about the presentation of financial statements?
a. A separate statement of comprehensive income and separate statement of changes in equity
are required.
b. The LIFO cost flow assumption is not allowed for inventories.
c. Presentation of extraordinary items is required.
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d. Impairment losses may be reversed in future periods.
28. Which of the following items is required disclosure in the income statement?
a. Revenue, cost of goods sold and advertising expense
b. Finance cost, tax expense and income
c. Operating expenses, nonoperating expenses and extraordinary items
d. Gross profit, operating profit and net profit
29. Which of the following inventory is not valued at the lower of cost and net realizable value?
a. Manufactured inventory
b. Retail inventory
c. Biological inventory
d. Industrial inventory
30. The specific identification method of accounting for inventory is required for
a. All inventory items
b. Inventory items that are interchangeable
c. Inventory items that are not interchangeable and goods that are produced and segregated for
specific projects.
d. Agricultural inventories.
31. Which of the following is not true about accounting for inventory?
a. FIFO is allowed
b. Interest costs may not be capitalized when financing purchase of inventory
c. The weighted average method is acceptable
d. Inventories are always valued at net realizable value.
32. Which of the following attributes would not be used to measure inventory?
a. Historical cost
b. Replacement cost
c. Net realizable value
d. Present value of future cash flows
33. Which of the following statements is true about biological assets?
a. Biological assets are only found in Biotech entities.
b. Biological assets are living animals or plants and must be disclosed as a separate item in the
statement of financial position.
c. Biological assets must be valued at cost.
d. Biological assets do not generally have future economic benefits.
34. Impairment loss for asset to be held and used shall be reported
a. As an extraordinary item.
b. As a component of discontinued operations.
c. As a component of income from continuing operations.
d. As a change in accounting estimate.
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35. Long-lived assets are required to be reviewed for impairment
a. At the end of reporting period, every three years.
b. When the asset is fully depreciated.
c. When circumstances indicate that the carrying amount of an asset might not be recoverable.
d. At the end of reporting period, every year.
36. The impairment rules for long-lived assets apply to all of the following, except
a. Building currently used in the business
b. Financial instruments
c. Land
d. Minicomputers used to run a production process
37. What is required with respect to accounting for goodwill?
a. Goodwill should be amortized over a five year period
b. Goodwill should be amortized over the expected useful life.
c. Goodwill should be recorded and never adjusted
d. Goodwill should be recorded and periodically evaluated for impairment
38. Which is true about the revaluation model for valuing plant, property, and equipment?
a. Revaluation of assets must be made on the last day of the fiscal year.
b. Revaluation of assets must be made on the same date each year.
c. There is no rule for the frequency or date of revaluation
d. Revaluation of assets must be made every two years.
39. An entity uses the fair value model for reporting investment property. Which of the following
statements is true?
a. Changes in fair value are reported in profit or loss in the current period
b. Changes in fair value are reported in other comprehensive income for the period
c. Changes in fair value are reported as an extraordinary gain in the income statement
d. Changes in fair value are reported as deferred revenue for the period
40. When accounting for property, plant and equipment, an entity
a. Must use the cost model for presenting the assets
b. May elect to use the cost model or the revaluation model on any individual asset.
c. May elect to use the cost model or the revaluation model on any asset class.
d. Must use the cost model for land
41. An entity that acquires an intangible asset may use the revaluation model for subsequent
measurement only if
a. The useful life of the intangible asset can be reliably determined.
b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset.
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42. Which is a criterion that must be met in order for an item to be recognized as an intangible asset
other than goodwill?
a. The fair value can be measured reliably.
b. The item is part of the activities aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services
d. The item is identifiable and lacks physical substance.
43. Which of the following statements is true about accounting for development cost?
a. Development cost must be expensed
b. Development cost is always deferred and expensed against future revenue
c. Development cost may be capitalized as an intangible asset in very restrictive situations.
d. Development cost is recorded in other comprehensive income.
44. Which of the following is the proper treatment of the cost of equipment used in research and
development activities that will have alternative future use?
a. Expensed in the year in which the research and development project started.
b. Capitalized and depreciated over the term of the research and development project.
c. Capitalized and depreciated over the estimated useful life.
d. Either capitalized or expensed but not both, depending on the term of the research and
development project.
45. Intangible assets with indefinite life are tested for impairment
a. Quarterly at the quarterly reporting date
b. Annually at the annual reporting date
c. Biannually at the reporting date
d. There are no guidelines defining when intangible assets are tested for impairment
46. Any investment may be accounted for at fair value through profit and loss when
a. It is traded in an active market
b. It is an equity instrument
c. It is a debt instrument
d. The instrument matures within 2 years.
47. Investments are classified in any of the following different ways, except
a. Fair value through profit and loss
b. Amortized cost
c. Tradable
d. Fair value through other comprehensive income
48. An equity investment may be accounted for using the equity method if the investor has
significant influence over the investee. Significant influence is indicated by ownership of
a. At least 10%
b. From 20 to 50%
c. More than 50%
d. More than 70%
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49. Derivatives are financial instruments that derive their value from changes in a benchmark based
on any of the following, except
a. Stock price
b. Mortgage and currency rate
c. Commodity price
d. Discount on accounts receivable
50. Derivative instruments are financial instruments that must contain
a. One or more underlying, or one or more notional amount.
b. No initial net investment or small net investment.
c. Terms that do not require or permit net settlement.
d. All of these.
51. Which of the following statements is true regarding interim reporting?
a. The discrete view is required for interim financial statements.
b. Interim reports are required on a quarterly basis.
c. Interim reports are not required.
d. Interim reports require the preparation of only a statement of comprehensive income and a
statement of financial position.
52. In financial reporting for segment of a business, an entity shall disclose all of the following,
except
a. Types of products and services from which each reportable segment derives revenue.
b. The title of the chief operating decision maker of each reportable segment.
c. Factors used to identify the reportable segments.
d. The basis of measurement of segment profit or loss and segment assets.
53. For segment reporting purposes, which tests must be applied to determine if a component is a
reportable operating segment?
a. Revenue test and asset test
b. Revenue test, asset test and profit or loss test
c. Revenue test, asset test and expense test
d. Revenue test, asset test and cash flow test
54. The most relevant measurement of liabilities at initial recognition and fresh start measurement
should always reflect
a. The expectation of the management
b. Historical cost
c. The credit standing of the entity
d. The single most likely minimum or maximum possible amount
55. In calculating present value in a situation with a range of possible outcomes all discounted using
the same interest rate, the expected present value would be
a. The most-likely outcome
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b. The maximum outcome
c. The minimum outcome
d. The sum of probability-weighted present values
56. If an entity uses the modified cash basis of accounting, the modifications from the pure cash basis
should have substantial support which requires that
a. The financial statements have only minor modifications from GAAP.
b. The modifications must be the same as those required by tax law.
c. The modifications must be the same as GAAP and not illogical.
d. No modifications are allowed.
57. Prospective financial information is defined as
a. Any financial information about the past, present or future.
b. Any financial information about the present or future.
c. Any financial information about the future related to day-to-day operations.
d. Any financial information about the future.
58. To achieve a reasonably objective basis, financial forecasts and projections should be prepared
a. In accordance with GAAP.
b. Using information that is in accordance with the plans of the entity.
c. With due professional care.
d. In Accordance with GAAP, using information in accordance with plans of the entity and with
due professional care.
59. An entity must report finance costs in the statement of cash flows
a. In operating activities
b. Either in operating activities or financing activities
c. In financing activities
d. In investing activities or financing activities
60. An entity acquired equipment by issuing shares. How should this transaction be reported in the
statement of cash flows?
a. As an outflow of cash from investing activities and inflow of cash from financing activities
b. As an inflow of cash from financing activities and an outlflow of cash from operating
activities
c. At the bottom of the statement of cash flows as a significant noncash transaction
d. In the notes to financial statements as a significant noncash transaction.
61. Cash advances and loans from bank overdrafts should reported in the statement of cash flows as
a. Operating activities
b. Investing activities
c. Financing activities
d. Other significant noncash activities
62. Interest paid on a note payable should be reported in the statement of cash flows
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a.
b.
c.
d.
In operating activities
In financing activities
Either in operating activities or financing activities
Either in investing activities or financing activities
63. All of the following should be classified as investing activities, except
a. Cash outflows to purchase manufacturing equipment
b. Cash inflows from the sale of bonds of other entities
c. Cash outflows to lenders for interest
d. Cash inflows from the sale of manufacturing plant
64. An entity received notification of legal action against the entity. The attorneys determine that it is
probable the entity will lose the suit and the loss can be estimated reliably. How should the
estimated loss be reported?
a. As a loss recorded in other comprehensive income.
b. As a contingent liability reported in the statement of financial position and a loss in the
income statement
c. As a provision for loss reported in the statement of financial position and a loss in the income
statement
d. In the notes to financial statements as a contingency
65. If a long-term debt becomes callable due to the violation of a loan covenant
a. The debt may continue to be classified as long term if the entity believes the covenant can be
renegotiated.
b. The debt must be reclassified as current.
c. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted in the amount of the debt.
66. Which of the following would not be considered a “provision”?
a. Warranty liability
b. Bad debt
c. Tax payable
d. Note payable
67. A contingency is described as
a. An estimated liability
b. An event which is not recognized because it is not probable that an outflow will be required
or the amount cannot be reasonably estimated.
c. A potentially small liability
d. A potentially large liability
68. Which of the following is reported as interest expense?
a. Pension cost interest
b. Postretirement health-care benefits interest
c. Imputed interest on noninterest-bearing note
d. Interest incurred to finance construction of machinery for own use.
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69. The discount resulting from the determination of present value of a note payable should be
reported
a. Addition to the face amount of the note.
b. Deferred charge separate from the note.
c. Deferred credit separate from the note.
d. Direct deduction from the face amount of the note.
70. How should an entity calculate the net proceeds to be received from the bond issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest.
c. Discount the bonds at the stated rate of interest and deduct bond issuance cost.
d. Discount the bonds at the market rate of interest and deduct bond issuance cost.
71. Which is a true statement for electing the fair value option for valuing bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation value must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.
72. What method may be used to report the bonds payable at year-end?
a. Amortized cost
b. Fair value through other comprehensive income
c. Amortized cost and fair value through other comprehensive income
d. Amortized cost and fair value through profit or loss
73. Issued convertible bonds are
a. Separated into debt and equity components with the liability component recorded at fair value
and the residual assigned to the equity component
b. Always recorded using the fair value option
c. Recorded at face value for the liability along with the associated premium or discount
d. Recorded at face value without consideration of a premium or discount.
74. Which of the following methods is used in IFRS to account for defined benefit plans?
a. Projected unit credit method
b. Benefit-years-of-service method
c. Accumulated benefits method
d. Vested years of service method
75. An entity has several pension plans covering various classes of employees. When may the entity
net assets and liabilities of the various plans?
a. Assets and liabilities may always be netted.
b. Assets and liabilities may be netted when there is a legally enforceable right to use the assets
of one plan to settle the obligations of another plan.
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c. When the estimated cash inflows and outflows are similar in pattern.
d. When the assets and liabilities are both financial.
76. An entity signed a lease to rent equipment for ten years.. At the end of the lease term, the entity
may purchase the equipment for a nominal amount. The equipment is estimated to have a useful
life of 12 years. How should the entity classify this lease?
a. Operating lease
b. Capital lease
c. Finance lease
d. Sales type lease
e.
77. An entity signed an agreement to lease land and a building for 20 years. At the end of the lease,
the property will not transfer to the lessee. The life of the building is estimated to be 20 years.
How should the entity account for the lease?
a. The lease is recorded as a finance lease.
b. The lease is recorded as an operating lease.
c. The land is recorded as an operating lease and the building is recorded as a finance lease.
d. The land is recorded as a finance lease and the building is recorded as an operating lease.
78. What is the interest rate used by a lessee to capitalize a finance lease when the implicit rate
cannot be determined?
a. The prime rate
b. The lessor’s published rate
c. The lessee’s average borrowing rate
d. The lessee’s incremental borrowing rate
79. Initial direct costs incurred by the lessor under a sales type lease should be
a. Deferred and allocated over the economic life of the leased property.
b. Expensed in the period incurred.
c. Deferred and allocated over the term of the lease in proportion to the recognition of rental
income.
d. Added to the gross investment in the lease and amortized over the term of the lease as a yield
adjustment.
80. Which of the following statements is true about accounting for leases?
a. All leases are treated as finance lease
b. All leases are treated as operating lease
c. When land and building are leased, elements of the lease are considered separately in
accounting for the lease
d. Operating leases are never recorded in the statement of financial position
81. Which of the following statements is correct regarding the provisions for income taxes in the
financial statements of a sole proprietorship?
a. The provision for income taxes should be based on business income using individual tax
rates.
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b. The provisions for income taxes should be based on business income using corporate tax
rates.
c. The provision for income taxes should be based on the proprietor’s total taxable income.
d. No provision for income taxes is required.
82. Which is not subject to the application of intraperiod income tax allocation?
a. Discontinued operations
b. Income from continuing operations
c. Prior period errors
d. Operating income
83. Which is correct about the presentation of deferred tax assets and liabilities?
a. Current deferred tax assets are netted against current deferred tax liabilities
b. All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities
c. Deferred tax assets are never netted against deferred tax liabilities
d. Deferred tax assets are netted against deferred tax liabilities if they relate to the same taxing
authority.
84. Which of the following is true regarding reporting deferred taxes in financial statements prepared
in accordance with IFRS?
a. Deferred tax assets and liabilities are classified as current and noncurrent based on expiration
date.
b. Deferred tax assets and liabilities may only be classified as noncurrent.
c. Deferred tax assets are always netted against deferred tax liabilities.
d. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.
85. When collectibility is reasonably assured, the excess of the subscription price over the stated
value of the no par ordinary shares subscribed should be recorded as
a. No par ordinary shares
b. Share premium when the subscription is recorded.
c. Share premium capital when the subscription is collected.
d. Share premium capital when the ordinary shares are is issued.
86. A retained earnings appropriation can be used to
a. Absorb a fire loss when an entity is self-insured.
b. Provide for a contingent loss that is probable and reasonably estimable.
c. Smooth periodic income.
d. Restrict earnings available for dividends.
87. In accounting for share-based compensation, what interest rate is used to discount both the
exercise price of the option and the future dividend stream?
a. The entity’s known incremental borrowing rate.
b. The current market rate that entities in that particular industry use to discount cash flows.
c. The risk-free interest rate.
d. Any rate that entities can justify as being reasonable.
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88. In what circumstances is compensation expense immediately recognized?
a. In all circumstances
b. In circumstances when the options are exercisable within two years for services rendered over
the next two years.
c. In circumstances when options are granted for prior service and the options are immediately
exercisable.
d. In no circumstances is compensation expense immediately recognized.
89. Compensation cost for a share-based payment to employees that is classified as liability is
measured as
a. The change in fair value of the instrument for each reporting period.
b. The total fair value at grant date.
c. The present value of cash payments due over the life of the grant.
d. The actual cash outlay for the period.
90. What is the measurement date for a share-based payment to employees that is classified as a
liability?
a. The service inception date
b. The grant date
c. The settlement date
d. The end of the reporting period
91. In determining diluted earnings per share, dividends on nonconvertible cumulative preference
shares should be
a. Disregarded
b. Added back to net income whether declared or not.
c. Deducted from net income only if declared.
d. Deducted from net income whether declared or not.
92. In determining earnings per share, interest expense, net of income tax, on convertible debt that is
dilutive should be
a. Added back to weighted-average shares outstanding for diluted earnings per share.
b. Added back to net income for diluted earnings per share.
c. Deducted from net income for diluted earnings per share.
d. Deducted from weighted-average shares outstanding for diluted earnings per share.
93. In computing basic earnings per share, an entity would include which of the following?
a. Dividends on nonconvertible cumulative preference shares.
b. Dividends on ordinary shares.
c. Interest on convertible bonds.
d. Number of nonconvertible cumulative preference shares.
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94. The primary purpose of a quasi reorganization is to give an entity the opportunity to
a. Obtain relief from creditors.
b. Revalue understated assets to fair value.
c. Eliminate a deficit in retained earnings.
d. Distribute the shares of a newly created subsidiary to shareholders.
95. When an entity goes through a quasi reorganization, the carrying amounts are stated at
a. Original cost
b. Original carrying amount
c. Replacement value
d. Fair value
96. Which of the following is not a method that may be used to account for treasury shares?
a. Cost method
b. Par value method
c. Retained earnings method
d. Constructive retirement method
97. An entity has cosigned the mortgage note on the home of its president guaranteeing the
indebtedness in the event that the president should default. The entity considers the likelihood of
default to be remote. How should the guarantee be treated in the financial statements?
a. Disclosed only
b. Accrued only
c. Accrued and disclosed
d. Neither accrued nor disclosed
98. If the payment of employees’ compensation for future absences is probable, the amount can be
reasonably estimated and the obligation relates to rights that accumulate, the compensation
should be
a. Accrued if attributable to employees’ services not yet rendered.
b. Accrued if attributable to employees’ services already rendered.
c. Accrued if attributable to employees’ services whether already rendered or not.
d. Recognized when paid.
99. For a troubled debt restructuring involving only a modification of terms, which of the following
specified by the new terms would be compared to the carrying amount of the debt to determine if
the debtor should report a gain on extinguishment of debt?
a. The total future cash payments
b. The present value of the new debt at the original interest rate
c. The present value of the new debt at the modified interest rate
d. The amount of future cash payments designated as principal repayments.
100. The vested benefits of an employee in a pension plan represent
a. Benefits to be paid to the retired employee in the subsequent year.
b. Benefits accumulated in the hands of an dependent trustee
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c. Benefits to be paid to the retired employee in the current year.
d. Benefits that are not contingent on the employee’s continuing in service.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
D
B
A
B
B
D
D
A
A
B
D
A
D
C
D
B
B
C
B
B
C
C
D
B
A
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
B
C
B
C
C
D
D
B
C
C
B
D
C
A
C
B
D
C
C
B
A
C
B
D
B
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
C
B
B
C
D
C
D
D
B
D
A
C
C
C
B
D
B
C
D
D
C
D
A
A
B
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
C
C
D
B
C
D
D
D
B
B
D
C
C
A
C
D
B
A
C
D
C
A
B
B
D
END
MULTIPLE CHOICE
1.
A complete set of financial statements include all of the following except the
A. Statement of Financial Position.
C. Income Statement.
B. Statement of Cash Flows.
D. Statement of retained earnings.
2.
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.
3.
The overall objective of financial reporting is to provide information A.
That is useful for decision making.
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B. About an enterprise's assets, liabilities, and owners' equity.
C. About an enterprise's financial performance during a period.
D. That allows owners to assess management's performance.
4.
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.
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5.
Proper application of accounting principles is most dependent upon the
A. Existence of specific guidelines.
C. Oversight of regulatory bodies.
B. External audit function.
D. Professional judgment of the accountant.
6.
Conservatism is best described as selecting an accounting alternative that
A. Understates assets and/or net income.
B. Has the least favorable impact on owners' equity.
C. Overstates, as opposed to understates, liabilities.
D. Is least likely to mislead users of financial information.
7.
The financial statements that are prepared for the business are separate and distinct from the owners
according to the
A. Going concern principle.
C. Matching principle.
B. Economic entity assumption.
D. Full disclosure principle.
8.
Recording the purchase price of a chalkboard eraser (with an estimated useful life of 10 years) as an
expense of the current period is justified by the
A. Going concern assumption.
C. Materiality constraint.
B. Matching principle.
D. Comparability principle.
9.
According to the conceptual framework, the process of reporting an item in the financial statements of an
entity is
A. Realization.
C. Recognition.
B. Matching.
D. Allocation.
10. Which of the following elements of financial statements is not a component of profit or loss?
A. Revenues.
C. Expenses.
B. Losses.
D. Distributions to owners.
11. An item would be considered material and therefore would be disclosed in the financial statements if
A. The expected benefits of disclosure exceed the additional costs.
B. The impact on earnings is greater than 3 percent.
C. The IASB definition of materiality is met.
D. The amount is deemed large enough to make a difference to the users.
12. What accounting concept justifies the use of accruals and deferrals?
A. Going concern assumption.
C. Separate entity assumption
B. Timeliness assumption
D. Relevance
13. Which of the following is not a purpose of the conceptual framework of accounting?
A. To provide definitions of key terms and fundamental concepts.
B. To provide specific guidelines for resolving situations not covered by existing accounting standards.
C. To assist accountants and others in selecting among alternative accounting and reporting methods.
D. To assist the FRSC in the standard-setting process.
14. Which of the following is not an implication of the going-concern assumption?
A. The historical cost principle is credible.
B. Depreciation and amortization policies are justifiable and appropriate.
C. The current/noncurrent classification of assets and liabilities is justifiable and significant.
D. Amortizing research and development costs over multiple periods is justifiable and appropriate.
15. The overriding qualitative characteristic of accounting information is
A. Relevance.
C. Understandability.
B. Faithful representation.
D. Decision usefulness.
16. When financial reports from two different companies have been prepared and presented in a similar
manner, the information exhibits the characteristic of
A. Relevance.
C. Faithful representation
B. Comparability.
D. Consistency.
17. Accounting for inventories by applying the lower-of-cost-or-NRV is an example of the application
of A. Conservatism.
C. Comparability.
B. Consistency.
D. Materiality.
18. The Conceptual Framework
A. Sets out the concepts that underlie the preparation and presentation of financial statements for internal
users.
B. Is a Philippine Financial Reporting Standard that defines standards for a particular measurement or
disclosure issue.
C. Is concerned with special purpose reports, for example, prospectuses and computations prepared for
taxation purposes.
D. Applies to the financial statements of all commercial, industrial and business reporting enterprises,
whether in the public or private sector.
19. Which statement is incorrect concerning the recognition principles?
A. An asset is recognized when it is probable that future economic benefits will flow to the enterprise and
the asset has a cost or value that can be measured reliably.
B. A liability is recognized when it is possible that an outflow of resources embodying economic benefits
will result from the settlement of a present obligation that can measured reliably.
C. Income is recognized when an increase in future economic benefits related to an increase in asset or a
decrease in liability has arisen that can be measured reliably.
D. Expenses are recognized when a decrease in future economic benefits related to an decrease in asset or
an increase in liability has arisen that can be measured reliably.
20. Information about economic resources controlled by the enterprise and its capacity to modify these
resources is useful in predicting the
A. Ability of the enterprise to meet its financial commitments in the near term.
B. Ability of the enterprise to generate cash and cash equivalents in the future.
C. Ability of the enterprise to meet its financial commitments over a longer term.
D. Future borrowing needs and how future profits and cash flows will be distributed among interested
users.
21. In respect to information included in financial statements, the accounting concept of ‘prudence’ ensures
that:
A. The financial statements report what they purport to report.
B. A degree of caution in the exercise of judgements about estimates is made.
C. An appropriate balance is achieved between the relevance and the reliability of information that has been
included.
D. Information is provided to users within the time period in which it is most likely to bear on their
decisions.
22. Which statement is incorrect concerning financial statements?
A. Financial statements do not show the results of management’s stewardship of resources entrusted to it.
B. Financial statements are prepared at least annually and are directed toward the common information
needs of a wide range of users.
C. The objective of general-purpose financial statements is to provide information about the financial
position, performance and cash flows of an enterprise that is useful to a wide range of users in
making economic decisions.
D. The management of an enterprise has the primary responsibility for the preparation and presentation of
financial statements.
23. An item cannot be recognized in the statement of financial position or the income statement unless it meets
the two criteria of:
A. Materiality; Relevance to the users
B. Completeness; Measurement reliability
C. Neutrality; Representational faithfulness
D. Probable economic benefits; Measurement reliability
24. The operating cycle
A. Measure the time elapsed between cash disbursement for inventory and cash collections of the sales
price
B. Refers to the seasonal variations experienced by business enterprise
C. Should be used to classify assets and liabilities as current if it is less than one year
D. Cannot exceed one year
25. In classifying the elements of financial statements, the primary distinction between revenues and gains is
A. The materiality of the amounts involved
B. The likelihood that the transactions involved will recur in the future
C. The nature of the activities that gave rise to the transactions
involved
D. The costs versus the benefits of the alternative methods of disclosing the transaction
involved
26. Preparation of consolidated financial statements when a parent-subsidiary relationship exist is an example
of the
A. Economic entity assumption
C. Comparability characteristic
B. Relevance characteristic
D. Neutrality characteristic
27. Which is correct regarding the overall considerations in preparation and presentation of financial
statements?
A. Assets and liabilities, and income and expenses, when material should be offset against each other.
B. Financial statements should be prepared on liquidity concern basis.
C. Each material item should be presented separately in the financial statements. Immaterial amounts of
similar nature and function should be grouped or condensed as one line item in the financial statements.
D. The presentation and classification of financial statement items should not be uniform from one
accounting period to the next.
28. Which statement is incorrect concerning the Conceptual Framework?
A. Nothing in the framework overrides any specific Statement of Financial Accounting Standards.
B. The framework deals with the objectives of the financial statements, the qualitative characteristics that
determine the usefulness of the information in financial statements, the definition, recognition and
measurement of the elements of the financial statements and concepts of capital maintenance.
C. The framework sets out the concepts that underlie the preparation and presentation of financial
statements for internal and external users.
D. The framework is concerned with general purpose financial statements including consolidated financial
statements.
29. Financial information does not demonstrate comparability and consistency when
I.
II.
III.
Firms in the same industry use different accounting methods to account for the same type of
transaction
A company changes its estimate of the salvage value of a fixed assets
A company fails to adjust its financial statements for changes in value of the measuring unit.
A. I only
B. I and III only
C. I and II only
D. I, II and III
30. What is the primary difference in the treatment between the two concepts of capital
maintenance? A. The treatment of the effects of changes in the prices of assets and liabilities of
the entity
B. The treatment of the effects of changes in the prices of expense and revenue of the entity
C. The treatment of the effects of changes in foreign exchange rates
D. The treatment of the effect of changes in foreign subsidiary
31. Which is incorrect concerning the concept of materiality and aggregation?
A. Materiality depends on the size and nature of the item judged in the particular circumstances of its
omission or misstatement.
B. Materiality provides that the specific disclosure requirements of a PFRS must be met even if the
resulting information is not material.
C. Items of a dissimilar nature or function shall be presented separately unless they are immaterial.
D. Information is material if its nondisclosure could influence the economic decisions of users taken on the
basis of the financial statements.
32. Which of the following statements concerning equity is incorrect?
A. Although equity is defined as a residual, it may be sub-classified in the statement of financial position.
B. The creation of reserves is sometimes required by statute or other laws in order to give the entity and its
creditors an added measure of protection from the effects of losses.
C. The existence and size of legal, statutory and tax reserves are information that can be relevant to the
decision-making needs of users, transfer from reserves are expense rather than appropriation
of retained earnings.
D. The amount at which equity is shown in the balance sheet is dependent on the measurement of assets
and liabilities.
33. According to the conceptual framework, which of the following statements conforms to the realization
concept?
A. Cash was collected on accounts receivable.
B. Product unit costs were assigned to cost of goods sold when the units were
sold. C. An impaired asset was sold for cash.
D. Equipment depreciation was assigned to a production department and then to product unit
34. Per PAS 1, in the absence of a Standard or Interpretation that specifically applies to a transaction or event,
management shall develop and apply accounting policy that results in relevant and faithfully represented
information. Which of following is the least likely source of such alternative?
A. The requirements and guidance on Standards /Interpretations on similar and related issues
B. The definition, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Framework.
C. Most recent pronouncements of other standard setting bodies that use a similar conceptual framework to
develop accounting standards and accepted practice.
D. Textbooks and other accounting literature to the extent that these do not conflict with existing Standards
and Interpretations.
35. Which is not included in the category of comprehensive income of an accounting entity?
A. Net income for the period
B. Revaluation surplus
C. Gain on sale of treasury shares
D. Increase in value of financial instruments classified through fair value
36. Which of the following statements is/are true about equity?
I. Equity is defined as the difference between assets and liabilities
II. Increases and decreases in equity (other than from transactions with owners of the enterprise) represent
income and expenses.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
37. Decision makers vary widely in the types of decisions they make, the methods of decision making they
employ, the information they already possess or can obtain from other sources, and their ability to process
information. Consequently, for information to be useful there must be a linkage between these users and the
decisions they make. This link is
A. Relevance
C. Faithful Representation
B. Understandability
D. Materiality
38. Under a lease where the lessee acquires the benefits of ownership of an asset, the lessee often recognizes
the present value of future rentals as an asset even though legal title to the property is not acquired. This is
an example of
A. Form over substance
C. Verifiability
B. Substance over form
D. Conservatism
39. Information about the sources and uses of an enterprise’s cash and cash equivalents is provided in the:
A. Income statement
C. Statement of changes in equity
B. Cash flow statement
D. Statement of financial position
40. The measurement basis “net realizable value” is best described as:
A. Unamortized historical cost
B. An asset’s selling price or a liability’s settlement amount
C. Unadjusted initial cost
D. Time adjusted cash flow
PROBLEMS
1.
Pampanga Company’s December 31, 2014 statement of financial position reported the following current
assets:
Cash
Accounts receivable
Inventory
Prepaid expenses
Equipment used and held for resale
3,000,000
5,200,000
2,000,000
700,000
100,000
11,000,000
An analysis of the accounts receivable disclosed that accounts receivable
comprised the following: Trade accounts receivable 4,000,000
Allowance for doubtful accounts
(
300,000) Selling price of Pampanga Company’s unsold good
Sent to XYZ Company on consignment at 125% of cost and excluded
from Pampanga’s ending inventory
\
1,500,0
00
5,200,0
00
At December 31, 2014, the total current assets should be
A. P10,600,000
C. P10,700,000
B. P 9,800,000
D. P 9,900,000
2.
The trial balance of Arayat Company reflected the following liability account balances on December 31,
2014:
Accounts payable
Bonds payable, due 2015
Discount on bonds payable
Deferred tax liability
Dividends payable
Income tax payable
Note payable, due 1/15/2016
4,000,000
8,000,000
1,000,000
1,500,000
3,000,000
500,000
2,500,000
In its December 31, 2014 statement of financial position, Arayat should report current
liabilities at A. P16,000,000
C. P17,000,000
B. P14,500,000
D. P16,500,000
3.
Candaba Company was incorporated on January 1, 2014, with proceeds from the issuance of P15,000,000
in common stock and borrowed funds of P5,000,000. During the first year of operations, revenue from
sales and consulting amounted to P20,000,000, and operating costs and expenses totalled P12,000,000. On
December 15, Candaba declared a P2,000,000 cash dividend payable to stockholders on January 15, 2015.
No additional activities affected owners’ equity in 2014. Candaba’s liabilities increased to P7,000,000 by
December 31, 2014. On December 31, 2014 statement of financial position, total assets should be reported
at:
A. P30,000,000
B. P21,000,000
C. P22,000,000
D. P28,000,000
/
The office space is used equally by the sales and accounting departments. What amount
should be classified as general and administrative expenses?
A. P8,200,000
C. P6,200,000
B. P5,200,000
D. P5,000,000
4.
The following information pertains to Malolos Company’s 2014 cost of goods sold:
Inventory, January 1
Purchases
Writeoff of obsolete inventory
Inventory, December 31
10,000,000
40,000,000
5,000,000
3,000,000
What amount should Malolos report as cost of goods sold?
A. P42,000,000
C. P47,000,000
B. P45,000,000
D. P50,000,000
5.
The following information was taken from Hagonoy Company’s accounting records for the year ended
December 31, 2014:
Decrease in raw materials inventory
Increase in goods in process inventory
Increase in finished goods inventor
Raw materials purchased
Direct labor payroll
Factory overhead
1,000,000
3,000,000
2,000,000
40,000,000
10,000,000
6,000,000
Freight out
Freight in
4,000,000
5,000,000
The cost of goods sold is
A. P59,000,000
B. P57,000,000
6.
C. P61,000,000
D. P63,000,000
Clark Co.’s advertising expense account had a balance of P146,000 at December 31, 2014, before any
necessary year-end adjustment relating to the following:


Included in the P146,000 is the P15,000 cost of printing catalogs for a sales promotional campaign in
January 2015.
Ratio advertisements broadcast during December 2014 were billed to Clark on January 2, 2015. Clark
paid the P9,000 invoice on January 11, 2015.
What amount should Clark report as advertising expense in its income statement for the year
ended December 31, 2014?
A. P122,000
C. P140,000
B. P131,000
D. P155,000
7.
An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 2014, revealed the
following:



An opening balance of P1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an annual
premium of P3,000 on July 1, 2013.
A P3,200 annual insurance premium payment made July 1, 2014.
A P2,000 advance rental payment for a warehouse thrift leased for one year beginning January 1, 2015.
In its December 31, 2014 statement of financial position, what amount should Thrift report as
prepaid expenses?
A. P5,200
C. P2,000
B. P3,600
D. P1,600
8.
On October 1, 2014, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at P3 per gallon. Fifty
thousand gallons were delivered on December 15, 2014, and the remaining 50,000 gallons were delivered
on January 15, 2015. Payment terms were: 50% due on October 1, 2014, 25% due on first delivery, and the
remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale
during 2014?
A. P 75,000
B. P150,000
9.
C. P225,000
D. P300,000
The beginning of the year total equity for a firm was P40,000. During the year, the firm issued ordinary
shares for a total proceeds of P20,000, earned P20,000 net income, and paid P5,000 in cash dividends. If
ending total liabilities are P100,000, what is the ending total assets?
A. P165,000
B. P175,000
C. P45,000
D. P25,000
END
Choose the letter of the best answer.
1. The basic objective of accounting is
A. To provide the information that the managers of an economic entity need to
control its operations.
B. To provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
C. To measure the periodic income of the economic entity.
D. To provide quantitative financial information about an entity that is useful in
making rational economic decision.
2. The communicating process of accounting includes all of the following, except
A. Recording
B. Classifying
C. Summarizing
D. Interpreting
3. What is the law regulating the practice of accountancy in the Philippines?
A. R.A. No. 9298
B. R.A. No. 9198
C. R.A. No. 9928
D. R.A. No. 9892
4. It is the body authorized by law to promulgate rules and regulations affecting the
practice of the accountancy profession in the Philippines.
A. Board of Accountancy
B. Philippine Institute of Certified Public Accountants
C. Securities and Exchange Commission
D. Financial Reporting Standards Council
5. It is the accounting standard setting body in the Philippines at the present time.
A. Accounting Standards Council
B. Auditing and Assurance Standards Council
C. Philippine Accounting Standards Board
D. Financial Reporting Standards Council
6. Accountants employed in entities in various capacity as accounting staff,
chief accountant or controller are said to be engaged in
A. Public accounting
Page 1 of 13
B. Private accounting
C. Government accounting
D. Financial accounting
7. Financial accounting is concerned with
A. General-purpose reports on financial position and financial performance.
B. Specialized reports for inventory management and control.
C. Specialized reports for income tax computation and recognition.
D. General-purpose reports on changes in stock prices and future estimates of market
position.
8. Financial accounting is the area of accounting emphasizes reporting to
A. Management
B. Regulatory bodies
C. Internal auditors
D. Creditors and investors
9. Managerial accounting is the area of accounting that emphasizes
A. Reporting financial information to external users
B. Reporting to the Securities and Exchange Commission
C. Combining accounting knowledge with an expertise in data processing
D. Developing accounting information for use within an entity
10. Generally accepted accounting principles
A. Are accounting adaptations based on the laws of economic science.
B. Derive their credibility and authority from legal rulings and court precedents.
C. Derive their credibility and authority from the national government through the
Securities and Exchange Commission.
D. Derive their credibility and authority from general recognition and acceptance by
the accountancy profession.
11. Which of the following statements best describes generally accepted accounting
principles?
A. They have been formulated in the public sector.
B. They have been developed on the basis of such factors as usage and practical
necessity.
C. They are the same as laws within our legal system.
D. They do not apply to small entities.
12. Once an accounting standard has been established
A. The standard is continually reviewed to see if modification is necessary.
B. The standard is not reviewed unless the Securities and Exchange Commission
makes a complaint.
C. The task of reviewing the standard to see if modification is necessary is given to the
PICPA.
Page 2 of 13
D. The principle of consistency requires that no revisions ever be made to the
standard.
13. As independent or external auditors, CPAs are primarily responsible for
A. Preparing financial statements in conformity with GAAP
B. Certifying the accuracy of financial statements
C. Expressing an opinion as to the fairness of financial statements
D. Filing financial statements with the SEC
14. The purpose of the International Financial Reporting Standards is to
A. Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
B. Develop a uniform currency in which the financial transactions of entities
throughout the world would be measured.
C. Promote uniform accounting standards among countries of the world.
D. Arbitrate accounting disputes between auditors and international entities.
15. It is a "global phenomenon" intended to bring about transparency and a higher degree of
comparability in financial reporting in order to achieve the goal of one uniform and
globally accepted financial reporting standards.
A. IFRS
B. Borderless accounting
C. World trade
D. Information technology
16. What is the only underlying assumption mentioned in the Conceptual Framework for
Financial Reporting?
A. Going concern
B. Accounting entity
C. Time period
D. Monetary unit
17. The financial statements that are prepared for the business are separate and distinct
from the financial statements of the owners.
A. Going concern assumption
B. Matching principle
C. Economic entity assumption
D. Accounting period assumption
18. Which basic accounting assumption is threatened by the existence of severe inflation in
an economy?
A. Monetary unit assumption
B. Periodicity assumption
C. Going concern assumption
D. Economic entity assumption
Page 3 of 13
19. Which of the following is not an important characteristic of the financial statements
that accountants currently prepare?
A. The information in financial statements is expressed in units of money adjusted for
changing purchasing power.
B. Financial statements articulate with one another because measuring financial
position is related to measuring changes in financial position.
C. The information in financial statements is summarized and classified to help meet
users' needs.
D. Financial statements can be justified only if the benefits they provide exceed the
costs.
20. The concept of accounting entity is applicable
A. OnIy to the legal aspects of business organizations
B. OnIy to the economic aspects of business organizations
C. OnIy to business organizations
D. Whenever accounting is involved
21. The valuation of a promise to receive cash in the future at present value is valid
because of the accounting concept of
A. Entity
B. Time period
C. Going concern
D. Monetary unit
22. During the lifetime of an entity, accountants produce financial statements at arbitrary
points in time in accordance with what basic accounting concept?
A. Accrual
B. Periodicity
C. Unit of measure
D. Continuity
23. This is a complete, comprehensive and single document promulgated by IASB
establishing the concepts that underlie financial reporting.
A. Conceptual Framework for Financial Reporting
B. Conceptual Framework for Financial Statements
C. Conceptual Framework for Business Entities
D. Conceptual Framework
24. The Conceptual Framework is intended to establish
A. Generally accepted accounting principles in financial reporting by entities.
B. The meaning of present fairly in accordance with GAAP.
C. The objectives and concepts for use in developing standards of financial accounting
and reporting.
D. The hierarchy of sources of GAAP.
25. Which of the following statements is true concerning the Conceptual Framework?
Page 4 of 13
I.
II.
A.
B.
C.
D.
The Conceptual Framework is concerned with general purpose financial
statements including consolidated financial statements.
Special purpose financial reports, for example, prospectuses and
computations prepared for taxation purposes, are within the scope of
the Conceptual Framework.
I only
II only
I and II
Neither I nor II
26. In the Conceptual Framework for Financial Reporting, what provides the "why" of
accounting?
A. Measurement and recognition concept
B. Qualitative characteristic of accounting information
C. Element of financial statement
D. Objective of financial reporting
27. Which of the following is not true concerning the Conceptual Framework? :
I. The Conceptual Framework should be a basis for standard setting.
II. The Conceptual Framework should allow practical problems to be solved
more quickly.
III. The Conceptual Framework should be based on fundamental truths that are
derived from the laws of nature.
A. II only
B. III only
C. II and III only
D. I and II only
28. The "primary user" of financial information include
I. Existing and potential investors
II. Existing and potential lenders and other creditors
III. User group such as employees, customers, governments and their agencies,
and the public
A. I only
B. I and II only
C. I and III only
D. I, II and III
29. These users require information on risk and return on investment.
A. Investors
B. Employees
C. Lenders
D. Customers
Page 5 of 13
30. These users are interested in information about the profitability and stability of an
entity in order to assess the ability of the entity to provide remuneration, retirement
benefits and employment opportunities.
A. Customers
B. The public
C. Governments and their agencies
D. Employees
31. These users are interested in information about the continuance of an entity when they
have a long-term involvement with or are dependent on the entity.
A. Customers
B. Employees
C. Trade unions
D. Suppliers
32. These users need information on trends and recent developments where an entity
makes a substantial contribution to the local economy providing employment and
using local suppliers.
A. Customers
B. The public
C. Governments and their agencies
D. Employees
33. The accounting equation "assets = liabilities + equity'' is
A. Entity theory
B. Fund theory
C. Proprietary theory
D. Residual equity theory
34. The equation. "assets minus liabilities minus preference equity equals ordinary equity" is
A. Fund
B. Entity
C. Proprietary
D. Residual equity
35. The primary accounting objective is fair presentation of the financial performance of
the entity.
A. Entity
B. Proprietary
C. Residual equity
D. Fund
36. Which of the following statements best describes the term “financial position”?
A. The net income and expenses of an entity.
B. The net of financial assets less liabilities of an entity.
Page 6 of 13
C. The potential to contribute to the flow of cash and cash equivalents to the entity.
D. The assets, liabilities, and equity of an entity.
37. Which of the following best describes "financial performance" of an entity?
A. The revenue, expenses and net income or loss for a period of an entity
B. The assets, liabilities and equity of an entity
C. The total assets minus total liabilities
D. The total cash inflows minus cash outflows
38. The four phases of accounting are recording, classifying, summarizing and
interpreting. The phase whereby the liquidity, solvency and profitability of an entity
are significantly portrayed is known as
A. Summarizing
B. Classifying
C. Recording
D. Interpreting
39. What are qualitative characteristics of financial statements?
A. Qualitative characteristics are the attributes that make the information provided in
financial statements useful to users.
B. Qualitative characteristics are broad classes of financial effects of transactions and
other events.
C. Qualitative characteristics are nonqualitative aspects of an entity’s position and
performance and changes in financial position.
D. Qualitative characteristics measure the extent to which an entity has complied
with all relevant standards and interpretations.
40. The fundamental qualitative characteristics are
A. Relevance and faithful representation
B. Relevance, faithful representation and materiality
C. Relevance and reliability
D. Faithful representation and materiality
41. Accounting information is considered relevant when it
A. Can be depended upon to represent the economic conditions and events that it is
intended to represent.
B. Is capable of making a difference in a decision.
C. Is understandable by reasonably informed users of accounting information.
D. Is verifiable and neutral.
42. The ingredients of relevant financial information are
A. Predictive value and confirmatory value
B. Predictive value, confirmatory value, and timeliness
C. Predictive value, confirmatory value, and materiality
D. Predictive value, confirmatory value, timeliness, and materiality
Page 7 of 13
43. What is the quality of information that gives assurance that it is reasonably free from
error and bias?
A. Relevance
B. Faithful representation
C. Verifiability
D. Neutrality
44. The ingredients of faithful representation are
A. Completeness and neutrality
B. Completeness and free from error
C. Completeness, neutrality, and free from error
D. Completeness, neutrality, free from error, and conservatism
45. In the event of conflict between the economic substance of a transaction and the legal
form, the economic substance shall prevail. This concept is known as
A. Form over substance
B. Substance over form
C. Faithful representation
D. Completeness
46. The financial accounting information is directed toward the common needs of users
and is independent of presumptions about particular needs and desires of specific
users.
A. Relevance
B. Verifiability
C. Neutrality
D. Completeness
47. The enhancing qualitative characteristics of financial information are
A. Comparability and understandability
B. Verifiability and timeliness
C. Comparability, understandability, and verifiability
D. Comparability, understandability, verifiability, and timeliness
48. Financial information exhibits consistency when
A. Accounting procedures are adopted which smooth net income and make results
consistent between years
B. Gains and losses are shown separately in the income statement.
C. Accounting entities give similar events the same accounting treatment each period.
D. Expenditures are reported as expenses and netted against revenue in the period
when paid.
49. The characteristic that is demonstrated when a high degree of consensus can be
secured among independent measurers using the same measurement method is
A. Relevance
B. Understandability
Page 8 of 13
C. Verifiability
D. Neutrality
50. An entity issuing the annual financial reports within one month at the end of reporting
period is an example of which enhancing quality of accounting information?
A. Neutrality
B. Timeliness
C. Predictive value
D. Representational faithfulness
51. Which of the following statements is true in relation to the enhancing qualitative
characteristic of understandability of financial information?
A. Users have a reasonable knowledge of business and economic activities and review
the information with reasonable diligence.
B. Users are expected to have significant business knowledge.
C. Financial statements shall exclude complex matters.
D. Financial statements shall be free from material error.
52. Which of the following terms best describes information that influences the economic
decision of users?
A. Reliable
B. Prospective
C. Relevant
D. Understandable
53. Which of the following terms best describes information in financial statements that is
neutral?
A. Understandable
B. Comparable
C. Relevant
D. Unbiased
54. Conservatism is best described as selecting an accounting alternative that
A. Understates assets and net income
B. Has the least favorable impact on owners’ equity
C. Overstates liabilities
D. Is least likely to mislead users of financial information
55. An item would be considered material and therefore would be disclosed in the
financial statements if
A. The expected benefits of disclosure exceed the additional costs.
B. The impact on earnings is greater than 10%.
C. The standard definition of materiality is met.
D. The omission or misstatement of the amount would make a difference to the users.
56. What is meant by comparability when discussing financial accounting information?
Page 9 of 13
A.
B.
C.
D.
Information has predictive and confirmatory value.
Information is reasonably free from error.
Information is measured and reported in a similar fashion across entities.
Information is timely.
57. What is meant by consistency when discussing financial accounting information?
A. Information is measured and reported in a similar fashion across points in time.
B. Information is timely.
C. Information is measured similarly across the industry.
D. Information is verifiable.
58. An ingredient of the fundamental qualitative characteristic of faithful representation is
A. Neutrality
B. Understandability
C. Verifiability
D. Timeliness
59. Which of the following accounting concepts states that an accounting transaction shall
be supported by sufficient evidence to allow two or more qualified individuals to arrive
at essentially similar conclusions?
A. Conservatism
B. Objectivity
C. Periodicity
D. Stable monetary unit
60. The principle of objectivity includes the concept of
A. Summarization
B. Classification
C. Conservatism
D. Verifiability
61. Which of the following relates to both relevance and faithful representation?
A. Consistency
B. Feedback value
C. Verifiability
D. Timeliness
62. Which of the following situations violates the concept of faithful representation?
A. Financial statements were issued nine months late.
B. Data on segments having the same expected risks and growth rates are reported to
analysts estimating future profits.
C. Financial statements included an item of property, plant, and equipment with
carrying amount increased to management estimate of market value.
D. Management reports to shareholders regularly refer to new projects undertaken, but
the financial statements never report project results.
Page 10 of 13
63. The usefulness of providing information in financial statements is subject to the
constraint of
A. Consistency
B. Cost-benefit
C. Reliability
D. Representational faithfulness
64. Classifying, characterizing and presenting information clearly and concisely makes the
information
A. Understandable
B. Comparable
C. Verifiable
D. Timely
65. If there is undue delay in the reporting of information, it may lose its
A. Relevance
B. Relevance and faithful representation
C. Usefulness
D. Faithful representation
66. The underlying theme of the Conceptual Framework is
A. Decision usefulness
B. Understandability
C. Timeliness
D. Comparability
67. What is the objective of financial reporting?
A. To provide information about the financial position, financial performance and
changes in financial position of an entity.
B. To prepare and present a statement of financial position, an income statement, a
statement of comprehensive income, a statement of cash flows and a statement of
changes in equity
C. To provide financial information about an entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
D. To prepare financial statements in accordance with all applicable standards and
interpretations.
68. Which of the following statements in relation to financial reporting is incorrect?
A. General purpose financial reports do not and cannot provide all of the information
that primary users need.
B. General purpose financial reports are designed to show the value of the reporting
entity.
C. General purpose financial reports are intended to provide common information to
users.
Page 11 of 13
D. Financial reports are largely based on estimate and judgment rather than exact
depiction.
69. The objectives of financial reporting are based on
A. The need for conservatism
B. Reporting on management’s stewardship
C. Generally accepted accounting principles
D. The needs of the users of the information
70. External events include all of the following, except
A. Sale of merchandise
B. Borrowing from bank
C. Donation received from shareholder
D. Casualty loss caused by flood, earthquake or other natural disaster
1.
2.
3.
D
D
A
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
A
D
B
A
D
D
D
B
A
C
C
A
A
C
A
A
D
C
B
A
C
A
D
B
B
A
D
A
B
A
D
A
Suggested Key
36. D
37. A
38. D
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
A
A
B
A
B
C
B
C
D
C
C
B
A
C
D
B
D
C
A
A
B
D
A
C
B
A
A
A
C
B
D
D
Chapter 2—Financial Statements: An Overview
MULTIPLE CHOICE
1. The financial statement that reports resources owned, the obligations to transfer resources to other
organizations, and the claims by the entity's owners is known as the
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
2. Another name for the balance sheet is the
a. Statement of cash flows
b. Statement of earnings
c. Statement of financial position
d. Retained earnings statement
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
3. Which of the following types of accounts are NOT found on the balance sheet?
a. Revenues
b. Assets
c. Liabilities
d. Owners' equity
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
4. Economic resources that are owned or controlled by an enterprise are called
a. Assets
b. Liabilities
c. Revenues
d. Gains
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
5. Which of the following is generally considered to be an asset?
a. Notes payable
b. Mortgage payable
c. Accounts receivable
d. Unearned revenue
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
6. Which of the following accounts is NOT an asset account?
a. Equipment
b. Accounts Receivable
c. Accounts Payable
d. Supplies
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
7. Which of the following generally is NOT considered to be a liability?
a. Notes payable
b. Taxes payable
c. Inventory
d. Accounts payable
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
8. An enterprise's obligations to pay cash or other economic resources to others are called
a. Liabilities
b. Expenses
c. Losses
d. Assets
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
9. Which of the following is generally considered to be a liability?
a. Accounts receivable
b. Capital stock
c. Notes payable
d. Retained earnings
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
10. Which of the following types of accounts show how resources came into a firm?
a. Liabilities
b. Owners' equity
c. Assets
d. Both liabilities and owners’ equity
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
11. A business owned by one person is called a
a. Nonprofit organization
b. Partnership
c. Corporation
d. Sole proprietorship
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
12. A business owned by two or more individuals or entities is called a
a. Nonprofit organization
b. Partnership
c. Institution
d. Sole proprietorship
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
13. Owners of a corporation are referred to as
a. Debtors
b. Partners
c. Stockholders
d. Creditors
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
14. Distributions by a corporation to its stockholders are called
a. Dividends
b. Retained earnings
c. Income
d. Withdrawals
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
15. Which of the following usually is NOT considered to be an owners' equity account?
a. Capital stock
b. Retained earnings
c. Inventory
d. All these are owners' equity accounts
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
16. The total amount invested to acquire an ownership interest in a corporation is called
a. Retained earnings
b. Capital stock
c. Net assets
d. Owners' equity
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
17. Net assets are equal to
a. Total assets minus owners' equity
b. Total assets minus net income
c. Total assets minus dividends paid
d. Total assets minus total liabilities
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
18. Which of the following decreases owners’ equity?
a. Additional investments in the company are made by the owners
b. Operations generate a loss
c. Operations generate a profit that is retained in the company
d. None of these decreases owners’ equity
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
19. The basic accounting equation is
a. Assets = Liabilities + Owners' Equity
b. Assets + Liabilities = Owners' Equity
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
c. Assets + Owners' Equity = Liabilities
d. Liabilities - Owners' Equity = Assets
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
20. Which of the following is the reason that the accounting equation is true by definition?
a. Liabilities are the source that funds the purchase of assets
b. Assets are the source that funds the purchase of liabilities and owner’s equity
c. Liabilities and owner’s equity are the sources that fund the purchase of assets
d. None of these are true, the accounting equation is merely a coincidence
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
21. The idea that an increase or decrease on one side of the accounting equation must be offset exactly by an
increase or decrease on the other side of the accounting equation is called
a. Additive concept
b. Going concern assumption
c. Monetary measurement concept
d. Double-entry accounting
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
22. A transaction that causes an increase in an asset may also cause
a. A decrease in owners' equity
b. An increase in another asset
c. A decrease in a liability
d. An increase in a liability
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
23. If a corporation has total assets of $350,000, total liabilities of $150,000, and retained earnings of $100,000,
what is the amount of capital stock?
a. $150,000
b. $0
c. $100,000
d. $250,000
ANS: C
Capital stock: $350,000 – $150,000 – $100,000 = $100,000
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Analytic
The following data were taken from the records of Moss Corporation for the year ending December 31, 2012.
Assets
Liabilities
Owners' equity
24. Given the above information, owners' equity on January 1, 2012 was
a. $19,830
b. $2,670
01/01/12
$11,250
8,580
?
12/31/12
?
$10,365
6,465
c. $885
d. $7,695
ANS: B
Owners’ equity: $11,250 – $8,580 = $2,670
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Analytic
25. Given the above information, assets on December 31, 2012, were
a. $16,830
b. $5,025
c. $18,060
d. $11,250
ANS: A
Assets: $10,365 + $6,465 = $16,830
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Analytic
26. Current assets usually are listed on a balance sheet in
a. Decreasing order of liquidity
b. Increasing order of liquidity
c. A random fashion
d. Decreasing order of profitability
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
27. Which of the following would be classified as a current asset?
a. Accounts payable
b. Land
c. Capital stock
d. Accounts receivable
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
28. Which of the following would be classified as a long-term asset?
a. Accounts payable
b. Land
c. Inventory
d. Accounts receivable
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
29. Companies prepare classified and comparative financial statements because
a. They are required by international accounting principles
b. They provide financial statement readers with useful information about trends in financial
position and operating performance
c. They are required by the IRS
d. They show changes in a company's management policies
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
30. Which of the following is true of the balance sheet?
a. It includes revenue and expense accounts.
b. It identifies a company's assets and liabilities as of a specific date.
c. It shows the results of operations for an accounting period.
d. It discloses the amount of dividends paid.
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
31. Which of the following financial statements provides a picture of the enterprise at a particular point in time?
a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
32. Which of the following accounts is considered to be the most liquid?
a. Cash
b. Land
c. Accounts Receivable
d. Inventory
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
33. Which of the following distinguishes between current and long-term assets?
a. Comparative balance sheet
b. Income statement
c. Classified balance sheet
d. Liquidity balance sheet
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
34. Which of the following would be considered a long-term liability?
a. Mortgage payable
b. Notes payable
c. Accounts payable
d. Land
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
35. Which of the following includes a company’s financial position for both the current year and the preceding
year?
a. Comparative balance sheet
b. Income statement
c. Classified balance sheet
d. Liquidity balance sheet
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
36. What is the primary limitation of the balance sheet?
a.
b.
c.
d.
It does not reflect the net assets of a company
It does not reflect the current value of the company
It does not reflect the number of shares of capital stock issued
It does not reflect the undistributed earnings of a company
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
37. Which of these is an economic asset that is NOT found on the balance sheet?
a. Name recognition
b. Land
c. Inventory
d. Goodwill
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
38. The price that would be paid today for an asset is the
a. Book value
b. Market value
c. Purchase cost
d. Economic value
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 1
MSC: AICPA FN Measurement
39. Expense and revenue accounts appear on the
a. Balance sheet
b. Income statement
c. Retained earnings statement
d. Funds statement
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
40. Another name for the income statement is
a. Statement of cash flows
b. Statement of financial position
c. Statement of earnings
d. Retained earnings statement
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
41. Which of the following would be included on an income statement?
a. Cash
b. Accounts receivable
c. Land
d. Rent expense
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
42. The financial statement that presents a summary of the revenues and expenses of a business for a specific
period of time, such as a month or a year, is called a(n)
a. Statement of Cash Flows
b. Statement of Retained Earnings
c. Income Statement
d. Balance Sheet
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
43. Resource increases from the sale of goods or services are called
a. Net income
b. Assets
c. Gains
d. Revenues
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
44. Revenues cause
a. An increase in net assets
b. A decrease in net assets
c. No change in net assets
d. An increase in liabilities
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
45. Costs that are incurred during the normal operations of a business to generate revenues are called
a. Losses
b. Liabilities
c. Expenses
d. Assets
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
46. Expenses generally cause
a. An increase in net assets
b. A decrease in net assets
c. No change in net assets
d. An increase in liabilities
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
47. Which of the following is an overall measure of the performance of a business entity's activities?
a. Revenues
b. Net income (or net loss)
c. Assets
d. Owners' equity
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
48. Which of the following is a revenue generating activity?
a. Borrowing money from a bank
b. Paying rent
c. Selling a product
d. Selling capital stock
ANS: C
PTS: 1
DIF: Easy
OBJ: 2
TOP: AACSB Reflective Thinking
MSC: AICPA FN Measurement
49. The difference between sales and cost of goods sold is called
a. Gross profit
b. Intermediate profit
c. Net income
d. Gross income
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
50. Earnings per share is equal to
a. Net income divided by total number of shares of stock outstanding
b. Total revenues divided by total number of shares of stock outstanding
c. Total revenues divided by the number of shares of stock sold during the year
d. Net income divided by the number of shares of stock sold during the year
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
51. Which of the following is the correct way to date an income statement?
a. For the Year Ended December 31, 2012
b. At December 31, 2012
c. As of December 31, 2012
d. December 31, 2012
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
52. Which of the following is an example of a nonoperating expense?
a. Salary expense
b. Interest expense
c. Cost of goods sold
d. Advertising expense
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
53. If a company sells its equipment for more than it is valued on the balance sheet, the difference is called a(n)
a. Income
b. Revenue
c. Profit
d. Gain
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
54. If a company has $528,000 of sales revenue, pays $26,400 in dividends, and has net income of $158,400, how
much were the expenses for the year?
a. $343,200
b. $422,400
c. $396,000
d. $369,600
ANS: D
Expenses: $528,000 – $158,400 = $369,600
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
55. During the year, Rigby Corporation earned revenues of $114,000 and incurred $98,000 for various operating
expenses. There are 1,280 shares of stock outstanding. Earnings per share is
a. $12.80
b. $12.50
c. $8.80
d. $8.50
ANS: B
Net income: $114,000 – $98,000 = $16,000
Earnings per share: $16,000 ÷ 1,280 shares = $12.50
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
56. The following information was taken from the records of Merle Corporation for the period ending December
31, 2012:
Advertising expense
Equipment
Accounts receivable
Notes payable
Retained earnings
Utilities expense
Revenues
Dividends
Interest receivable
Rent expense
$1,200
800
1,500
6,000
8,420
1,385
4,620
975
125
655
Assuming that 3,450 shares of stock are outstanding, earnings per share is approximately
a. $1.40
b. $0.40
c. $0.27
d. $0.23
ANS: B
Net income: $4,620 – $1,200 – $1,385 – $655 = $1,380
Earnings per share: $1,380 ÷ 3,450 shares = $0.40
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
57. Eddy Corporation reported the following data for the period: Earnings per share, $3.00; Retained Earnings,
$27,000; Revenues, $75,000; Capital Stock, $15,000; Expenses, $64,500. With this information, determine
how many shares of stock are outstanding.
a. 9,000
b. 5,000
c. 4,000
d. 3,500
ANS: D
Net income: $75,000 – $64,500 = $10,500
Shares of stock outstanding: $10,500 ÷ $3.00 = 3,500
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
The following information was taken from the records of Tellers Corporation for the month ended December
31, 2012:
Advertising expense
Income tax expense
Accounts payable
Dividends paid
Retained earnings (12/1/12)
Consulting fees revenue
Rent expense
Supplies expense
$20,625
13,095
13,450
14,125
57,860
93,550
11,728
16,917
58. Given the above information, net income is
a. $45,110
b. $35,310
c. $31,185
d. $11,385
ANS: C
Net income: $93,550 – $20,625 – $13,095 – $11,728 – $16,917 = $31,185
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
59. If Tellers has 2,100 shares of stock outstanding, earnings per share is approximately
a. $46.51
b. $14.85
c. $16.81
d. $4.67
ANS: B
Net income: $93,550 – $20,625 – $13,095 – $11,728 – $16,917 = $31,185
Earnings per share: $31,185 ÷ 2,100 shares = $14.85
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
60. The following information was taken from the records of McDyce Corporation for the year ended December
31, 2013:
Dividends paid
Service revenue
Accounts payable
Capital stock
Total expenses
Retained earnings (1/1/13)
The net income at December 31, 2013 was
a. $23,500
b. $54,100
c. $43,400
d. $72,750
$ 12,800
90,500
139,750
378,750
67,000
43,400
ANS: A
Net income: $90,500 – $67,000 = $23,500
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
61. The beginning balance of retained earnings will be greater than the ending balance if
a. The company has a net income greater than dividends paid
b. The company issues additional shares of stock during the period
c. The company has a net income less than dividends paid
d. The revenues earned for the period are greater than the expenses incurred and dividends
paid
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
62. Which of the following is NOT included in the statement of retained earnings?
a. Dividends
b. Net income
c. Beginning of year retained earnings
d. Owner investment
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
63. Retained earnings are
a. The earnings of a company that have been distributed to the owners.
b. The earnings of a company that have been retained in the company.
c. The amount of cash that a company has.
d. The amount of cash required for company investments.
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 2
MSC: AICPA FN Measurement
64. During the year, Roger Company earned revenues of $114,000, incurred $98,000 for various operating
expenses, and distributed $5,600 in dividends. If retained earnings for the previous year was $34,600, what is
retained earnings for the current year?
a. $45,000
b. $24,200
c. $16,000
d. $34,600
ANS: A
Net income: $114,000 – $98,000 = $16,000
Retained earnings: $34,600 + $16,000 – $5,600 = $45,000
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
65. The following information was taken from the records of McDyce Corporation for the year ended December
31, 2013:
Dividends paid
Service revenue
Accounts payable
Capital stock
Total expenses
$ 6,400
45,250
69,875
189,375
33,500
Retained earnings (1/1/13)
21,700
The retained earnings balance at December 31, 2013 was
a. $216,425
b. $27,050
c. $146,550
d. $33,450
ANS: B
Net income: $45,250 – $33,500 = $11,750
Retained earnings balance: $21,700 + $11,750 – $6,400 = $27,050
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
66. The following information was taken from the records of Tellers Corporation for the year ended December 31,
2013
Advertising expense
Income tax expense
Accounts payable
Dividends paid
Retained earnings (12/31/13)
Consulting fees revenue
Rent expense
Supplies expense
$20,625
13,095
13,450
14,125
57,860
93,550
11,728
16,917
Given the above information, retained earnings on December 31, 2012 was
a. $45,110
b. $40,800
c. $31,185
d. $57,860
ANS: B
Net income: $93,550 – $20,625 – $13,095 – $11,728 – $16,917 = $31,185
Retained earnings 12/1/08: x + $31,185 – $14,125 = $57,860
x = $40,800
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
67. Rolf Corporation reported the following data for the period end: Earnings per share, $6.00; Retained Earnings,
$54,000; Revenues, $150,000; Capital Stock, $30,000; Expenses, $129,000; Dividends, $24,000. With this
information, determine retained earnings for the prior period.
a. $54,000
b. $51,000
c. $57,000
d. $180,000
ANS: C
Net income: $150,000 – $129,000 = $21,000
Retained earnings: x + $21,000 – $24,000 = $54,000
x = $57,000
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
68. The following information was taken from the records of Hart Corporation for the month ended December 31,
2013:
Advertising expense
Income tax expense
Accounts payable
Dividends paid
Retained earnings (12/1/13)
Consulting fees revenue
Rent expense
Supplies expense
$20,625
13,095
13,450
14,125
57,860
97,875
11,728
16,917
Given the above information, retained earnings as of December 31, 2013 is
a. $79,045
b. $79,245
c. $55,795
d. $33,895
ANS: B
Net income: $97,875 – $20,625 – $13,095 – $11,728 – $16,917 = $35,510
Retained earnings: $57,860 + $35,510 – $14,125 = $79,245
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
69. On April 1, Bonita Corporation's retained earnings account had a balance of $785,000. During April, Bonita
had revenues of $135,000 and expenses of $93,000. On April 30, retained earnings had a balance of $811,500.
What amount of dividends were paid during April?
a. $42,500
b. $30,750
c. $15,500
d. $13,250
ANS: C
Net income: $135,000 – $93,000 = $42,000
Dividends: $785,000 + $42,000 – = $811,500
= $15,500
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
70. A major source of cash from operating activities is
a. Receipts from sale of goods
b. Receipts from borrowing
c. Receipts from sale of building
d. Receipts from investment by owner
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
71. Which of the following is a primary use of cash?
a. Borrowing
b. Investment by owners
c. Operating expenses
d. Sale of equipment
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
72. Which of the following financial statements shows an entity's cash receipts and payments?
a. The statement of financial position
b. The statement of cash flows
c. The statement of earnings
d. The statement of changes in owners' equity
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
73. Which of the following classifications does NOT appear on the Statement of Cash Flows?
a. Investing
b. Operating
c. Borrowing
d. Financing
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
74. Which of the following classifications refers to those activities associated with buying and selling long-term
assets?
a. Investing
b. Operating
c. Borrowing
d. Financing
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
75. Which of the following classifications refers to those activities whereby cash is obtained or repaid to owners
and creditors?
a. Investing
b. Operating
c. Borrowing
d. Financing
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
76. Which of the following classifications refers to those activities that are part of the day-to-day business of a
company?
a. Investing
b. Operating
c. Borrowing
d. Financing
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
77. Which of the following activities would NOT be classified as an investing activity?
a. Purchase of land
b. Purchase of inventory
c. Sale of Land
d. Sale of equipment
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
78. Which of the following activities would be classified as a financing activity?
a. Selling goods
b. Payment of wages
c. Repayment of a loan
d. Purchase of equipment
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
During the month, Meridian Company had the following cash transactions:
Cash collected from customers
Cash received from a loan
Cash paid for wages payable
Cash paid for the purchase of a building
Cash received for the issuance of new shares of stock
Cash received from sale of land
Cash paid for rent
Cash paid for dividends
$12,500
8,000
(5,750)
(15,000)
2,600
6,400
(2,500)
(1,500)
79. Given the above information, compute cash flow from operating activities.
a. $4,250
b. $20,750
c. $15,750
d. $9,250
ANS: A
Operating activities: $12,500 – $5,750 – $2,500 = $4,250
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
80. Given the above information, compute cash flow from investing activities.
a. $4,250
b. ($4,250)
c. ($8,600)
d. $8,600
ANS: C
Investing activities: ($15,000) + $6,400 = ($8,600)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
81. Given the above information, compute cash flow from financing activities.
a. $6,900
b. $3,900
c. $12,100
d. $9,100
ANS: D
Financing activities: $8,000 + $2,600 – $1,500 = $9,100
PTS: 1
DIF: Medium
OBJ: 3
TOP: AACSB Analytic
MSC: AICPA FN Measurement
82. The idea that certain figures on an operating statement help to explain changes in figures on comparative
balance sheets is referred to as
a. Liquidity
b. Double entry
c. Articulation
d. Classification
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 3
MSC: AICPA FN Measurement
83. During 2013, Genoa Corporation had revenues of $198,000 and expenses of $156,000. Dividends of $28,000
were paid during the year and additional stock was issued for $21,400. If total assets and total liabilities on
January 1, 2013, were $130,000 and $56,000, respectively, how much is owners' equity on December 31,
2013?
a. $137,400
b. $109,400
c. $81,400
d. $65,400
ANS: B
Owners’ equity January 1, 2013: $130,000 – $56,000 = $74,000
Net Income 2013: $198,000 – $156,000 = $42,000
Owners’ equity December 31, 2013: $74,000 + $42,000 – $28,000 + $21,400 = $109,400
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
84. In 2012, Rodney Corporation’s balance sheet had the following balances: cash, $306,500; accounts receivable,
$471,400; and accounts payable, $390,800. During 2013, Rodney had a net increase in cash of $68,600 and net
income of $47,800. Given this information, what is the cash balance that will be reported on Rodney’s 2013
balance sheet?
a. $375,100
b. $237,900
c. $354,300
d. $258,700
ANS: A
Cash balance 2013: $306,500 + $68,600 = $375,100
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
85. The following data were taken from the records of Mendez Corporation for the year ended December 31, 2013:
Assets
Liabilities
Owners' Equity
Dividends Paid
01/01/13
$3,750
2,860
?
0
12/31/13
?
$3,455
3,455
1,230
Given the above information and assuming that no additional stock was added for the year, net income for the
year ended December 31, 2013, is
a. $1,675
b. $2,120
c. $2,905
d. $3,795
ANS: D
Owners’ equity January 1: $3,750 – $2,890 = $890
Net income: $890 + x – $1,230 = $3,455
x = $3,795
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
86. If a company has assets of $460,000, liabilities of $100,000, and capital stock of $210,000, what is the amount
of retained earnings?
a. $150,000
b. $210,000
c. $110,000
d. $310,000
ANS: A
Assets = Liabilities + (Capital Stock + Retained Earnings)
$460,000 = $100,000 + ($210,000 + x)
x = $150,000
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
87. The transactions carried out by Blue Waters Corporation during the year caused an increase in total assets of
$25,650 and a decrease in total liabilities of $12,250. If no additional stock was issued during the year and
dividends of $7,850 were paid, what was the net income for the year?
a. $53,600
b. $45,750
c. $29,100
d. $13,400
ANS: B
Owners’ equity = Assets – Liabilities
Owners’ equity: $25,650 – (-$12,250) = $37,900
Net income: $37,900 = x – $7,850
x = $45,750
PTS: 1
DIF: Challenging
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
88. Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's
a. Balance sheet
b. Notes to financial statements
c. Income statement
d. Statement of retained earnings
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 4
MSC: AICPA FN Measurement
89. Which of the following is NOT one of the four general types of financial statement notes?
a. Summary of significant accounting policies
b. Additional information about the summary totals found in the financial statements
c. Disclosure of important information that is not recognized in the financial statements
d. Supplementary information required by the Internal Revenue Service
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 4
MSC: AICPA FN Measurement
90. Which of the following is an example of a significant accounting policy that would be explained in the notes to
the financial statements?
a. The description of all the individual items that comprise notes payable
b. The disclosure of quarterly financial information
c. The method used to estimate depreciation on a piece of equipment
d. The disclosure of the uncertain, potential outcome of a lawsuit
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 4
MSC: AICPA FN Measurement
91. Which of the following is an example of a disclosure of information NOT recognized that would be explained
in the notes to the financial statements?
a. The description of all the individual items that comprise notes payable
b. The disclosure of quarterly financial information
c. The method used to estimate depreciation on a piece of equipment
d. The disclosure of the uncertain, potential outcome of a lawsuit
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 4
MSC: AICPA FN Measurement
92. Which of the following is an example of additional information about summary totals that would be explained
in the notes to the financial statements?
a. The description of all the individual items that comprise notes payable
b. The disclosure of quarterly financial information
c. The method used to estimate depreciation on a piece of equipment
d. The disclosure of the uncertain, potential outcome of a lawsuit
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 4
MSC: AICPA FN Measurement
93. An independent audit report is usually issued by
a. Management
b. A government accountant
c. A private detective
d. A certified public accountant
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 5
MSC: AICPA FN Reporting
94. In completing an audit of a company's financial statements, auditors
a. Guarantee that the financial statements are accurate
b. Examine every transaction underlying the financial statements
c. Assume responsibility for the accuracy of the financial statements
d. Provide some assurance that the financial statements are not misleading
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 5
MSC: AICPA FN Reporting
95. The accuracy of the information contained in the financial statements is the responsibility of the
a. Stockholders
b. Certified Public Accountant
c. Management
d. Securities and Exchange Commission
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 5
MSC: AICPA FN Reporting
96. Which of the following are the two economic factors that enable us to trust an independent auditor despite the
fact that the auditor was hired by the company being audited?
a. Reputation of auditor and government policy
b. Risk of lawsuits and integrity of auditor
c. Reputation of auditor and risk of lawsuits
d. Integrity of auditor and government policy
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 5
MSC: AICPA FN Reporting
97. The idea that the activities of the entity are to be separated from those of the individual owner is the
a. Separate entity concept
b. Arm's-length transaction assumption
c. Money measurement concept
d. Going concern assumption
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 6
MSC: AICPA FN Measurement
98. The idea that both parties to a transaction must be rational and free to act independently is the
a. Monetary measurement concept
b. Arm's-length transaction assumption
c. Going concern assumption
d. Cost principle
ANS: B
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 6
MSC: AICPA FN Measurement
99. The idea that transactions are recorded at their exchange prices at the transaction date is referred to as the
a. Arm's-length transaction assumption
b. Monetary measurement principle
c. Cost principle
d. Going concern assumption
ANS: C
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 6
MSC: AICPA FN Measurement
100. The accounting idea that only items quantifiable in terms of U.S. currency are recorded is the
a. Monetary measurement concept
b. Arm's-length transaction assumption
c. Going concern concept
d. Double-entry assumption
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 6
MSC: AICPA FN Measurement
101. The idea that businesses must be accounted for as though they will exist at least for the foreseeable future is the
a. Going concern concept
b. Entity concept
c. Monetary measurement concept
d. Arm's-length transaction assumption
ANS: A
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 6
MSC: AICPA FN Measurement
102. Which of the following is an essential characteristic of the traditional accounting model?
a. Going concern assumption
b. Cost principle
c. Entity concept
d. All of these are essential characteristics
ANS: D
PTS: 1
TOP: AACSB Reflective Thinking
DIF: Easy
OBJ: 6
MSC: AICPA FN Measurement
103. Suppose you decide to purchase a stereo and an independent store dealer offers to sell you a system that retails
for $4,000 for a price of $3,695. After some negotiation, you purchase the system for $3,400. The $3,400 is
considered the accounting measurement for the transaction because of the
a. Going concern assumption
b. Fair value assumption
c. Double-entry assumption
d. Arm's-length transaction assumption
ANS: D
PTS: 1
TOP: AACSB Analytic
DIF: Medium
OBJ: 6
MSC: AICPA FN Measurement
104. Markanich Company purchased land for $90,000 in 2010. In 2013, the land is valued at $115,000. The land
would appear on the company's books in 2013 at
a. $25,000
b. $90,000
c. $75,000
d. $115,000
ANS: B
PTS: 1
TOP: AACSB Analytic
DIF: Medium
OBJ: 6
MSC: AICPA FN Measurement
PROBLEM
1. The following financial statement was prepared by Schenck Corporation's accountant.
Schenck Corporation
Balance Sheet
December 31, 2012
Assets
Cash
Accounts Receivable
Inventory
Building
Total Assets
$
6,000
6,500
15,000
?
$165,000
Liabilities and Stockholders' Equity
Accounts Payable
$ 4,000
Notes Payable
?
Total Liabilities
$ 9,500
Capital Stock (10,000
shares @ $10 per share)
$120,000
Retained Earnings
?
Total Stockholders' Equity
?
Total Liabilities and
Stockholders' Equity
?
Based on the above Balance Sheet for Schenck Corporation, what are the correct balances for the accounts
listed below:
1.
2.
3.
Building
Notes Payable
Total Liabilities and Stockholders' Equity
4.
5.
Total Stockholders' Equity
Retained Earnings
ANS:
1. $137,500
2. $5,500
3. $165,000
4. $155,500
5. $35,500
($165,000 - $6,000 - $6,500 - $15,000)
($9,500 - $4,000)
(same as Total Assets)
($165,000 - $9,500)
($155,500 - $120,000)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Analytic
2. The comparative balance sheet for Earthwork Company is presented below.
Earthwork Company
Comparative Balance Sheet
December 31, 2013 and 2012
Assets
Cash
Supplies
Land
Equipment
12/31/13
$39,000
?
52,000
32,500
12/31/12
$32,500
9,100
52,000
26,000
Liabilities and Stockholders' Equity
Accounts payable
Notes payable
Capital stock
Retained earnings
$23,400
26,000
52,000
35,100
$19,500
28,600
52,000
?
Additional information for Earthwork's 2013 operations revealed that the company had revenues of $65,000
for the year and no dividends were paid. Based on this information, compute the account balances below.
1.
2.
3.
4.
Retained Earnings balance at 12/31/12
Supplies balance at 12/31/13
Total Current Assets as of 12/31/13
Total expenses incurred for 2013
ANS:
1. $19,500 = (Total Assets at 12/31/12 of $119,600 - [$19,500 + $28,600 + $52,000])
2. $13,000 = (Total Liabilities and Stockholders' Equity at 12/31/13 of $136,500 [$39,000 + $52,000 + $32,500])
3. $52,000 = ($39,000 + $13,000)
4. $49,400 = (R/E at 12/31/12 + revenue - income at 12/31/13) = ($19,500 + $65,000 - $35,100)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Analytic
3. List the three categories of the balance sheet. For each category, provide the definition and examples of two
types of accounts that are found in that particular category.
ANS:
Assets
Definition: economic resources that are owned or controlled by a company
Examples: Cash, Accounts Receivable, Inventory, Buildings (answers may vary)
Liabilities
Definition: obligations to pay cash, transfer other assets, or provide services to someone else
Examples: Accounts Payable, Taxes Payable, Mortgage Payable, Unearned Revenue (answers may vary)
Owners’ Equity
Definition: the ownership interest in the net assets of an entity
Examples: Capital Stock, Retained Earnings (answers may vary)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Reflective Thinking
4. On December 31, 2012, Pipe Company had the following account balances:
Mortgage payable
Taxes payable
Accounts receivable
Cash
Land
Capital stock
Inventory
Building
Accounts payable
Notes payable (due in 9 months)
Retained earnings
$150,000
15,000
35,000
25,000
125,000
75,000
75,000
200,000
50,000
45,000
125,000
Given the above information, compute the following items:
a. Current assets
b. Total assets
c. Current liabilities
d. Total liabilities
e. Total owners’ equity
ANS:
a. $135,000 = ($25,000 + $35,000 + $75,000)
b. $460,000 = ($25,000 + $35,000 + $75,000 + $125,000 + $200,000)
c. $110,000 = ($15,000 + $50,000 + $45,000)
d. $260,000 = ($15,000 + $50,000 + $45,000 + $150,000)
e. $200,000 = ($75,000 + $125,000)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 1
TOP: AACSB Analytic
5. The following information was taken from Hemp Corporation's books as of December 31, 2013:
Accounts receivable
Mortgage payable
Cash
Service revenue
Accumulated depreciation
Notes payable (due in 5
months)
$ 80,000
175,000
57,000
360,000
105,000
15,000
Salaries payable
Accounts payable
Inventory
Buildings
Retained earnings
Capital stock
Prepare a classified balance sheet for the year ended December 31, 2013.
$32,000
40,000
95,000
325,000
140,000
50,000
ANS:
Hemp Corporation
Balance Sheet
Year End December 31, 2013
Current assets:
Cash
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment:
Buildings
Less accumulated depreciation
Total property, plant, and equipment
Total assets
$ 57,000
80,000
95,000
232,000
325,000
(105,000)
220,000
$452,000
Current liabilities:
Accounts payable
Salaries payable
Notes payable
Total current liabilities
Long-term liabilities:
Mortgage payable
Total long-term liabilities
Total liabilities
Stockholders’ equity:
Capital stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
PTS: 1
DIF: Challenging
MSC: AICPA FN Measurement
$ 40,000
32,000
15,000
87,000
175,000
175,000
262,000
50,000
140,000
190,000
452,000
OBJ: 1
TOP: AACSB Analytic
6. The income statement for Highline Corporation is presented below:
Highline Corporation
Income Statement
For the Year Ended December 31, 2013
Sales revenue
Expenses:
Advertising expense
Salaries expense
Supplies expense
Utilities expense
Rent expense
Income before taxes
Income tax expense
Net income
Earnings per Share
$
$ 28,800
264,000
73,600
4,800
19,200
?
?
?
99,200
$230,400
$
?
Additional information for Highline's 2013 operations revealed that the company had beginning retained
earnings of $65,000 for the year, $60,000 dividends were paid, and 10,000 shares of capital stock were
outstanding. Based on this information, compute the items below.
1.
2.
3.
4.
Net income before taxes
Total expense
Sales revenue
Earnings per share
ANS:
a. $329,600 = ($230,400 + $99,200)
b. $390,400 = ($28,800 + $264,000 + $73,600 + $4,800 + 19,200)
c. $720,000 = ($329,600 + $390,400)
d. $23.04 = ($230,400/10,000 shares)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
7. For the year ended December 31, 2012, Southern Company had the following account balances:
Sales revenue
$ 445,000
Rent expense
60,000
Salary expense
200,000
Utility expense
45,000
Retained earnings (1/1/2012)
130,000
Dividends paid
75,000
Interest expense
25,000
Given the above information, compute the following items:
a. Total sales revenue
b. Total expenses
c. Net income
d. Retained earnings at 12/31/2012
ANS:
a. $445,000
b. $330,000 = ($60,000 + $200,000 + $45,000 + $25,000)
c. $115,000 = ($445,000 - $330,000)
d. $170,000 = ($130,000 + $115,000 - $75,000)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 2
TOP: AACSB Analytic
8. The following information was taken from the Hall Corporation's books:
Accounts receivable
Income tax expense
Retained earnings
Service revenue
Advertising expense
$ 78,400
49,600
201,600
360,000
14,400
Salaries expense
Accounts payable
Supplies expense
Utilities expense
Rent expense
$132,000
40,000
36,800
2,400
9,600
Prepare an income statement for the year ended December 31, 2013 (assume that 10,000 shares of stock are
outstanding).
ANS:
Hall Corporation
Income Statement
For the Year Ended December 31, 2013
Service revenue
Expenses:
Advertising expense
Salaries expense
Supplies expense
Utilities expense
Rent expense
Income before taxes
Income tax expense
Net income
$360,000
$ 14,400
132,000
36,800
2,400
9,600
195,200
164,800
49,600
$115,200
Earnings per Share ($115,200/10,000 shares)
PTS: 1
DIF: Challenging
MSC: AICPA FN Measurement
OBJ: 2
$11.52
TOP: AACSB Analytic
9. On January 1, 2013, Sorenson Company had a retained earnings balance of $780,000. During 2013, Sorenson
Company earned a net income of $145,000. Cash dividends of $50,000 were paid during the year. Using this
information, prepare a Statement of Retained Earnings, in good form, for the year 2013.
ANS:
Sorenson Company
Statement of Retained Earnings
For the Year Ended December 31, 2013
Retained earnings, January 1, 2013
Plus net income for the year
Less dividends
Retained earnings, December 31, 2013
PTS: 1
DIF: Challenging
MSC: AICPA FN Measurement
$ 780,000
145,000
(50,000)
$ 875,000
OBJ: 2
TOP: AACSB Analytic
10. For each of the following items, indicate whether it would be classified as an operating activity, an investing
activity, or a financing activity on the statement of cash flows.
_____ a.
Cash payments for taxes
_____ b.
Cash proceeds from the sale of land
_____ c.
Cash receipts from providing services
_____ d.
Cash proceeds from a long-term loan
_____ e.
Issuance of stock for cash
_____ f.
Cash payments for interest
_____ g.
Cash payments for the purchase of equipment
_____ h.
Cash payments for dividends paid to stockholders
ANS:
a. Operating
b. Investing
c. Operating
d. Financing
e. Financing
f. Operating
g. Investing
h. Financing
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
11. On December 31, 2013, Skidmore Company had the following cash flow data:
Cash paid for dividends
Cash collected from sale of building
Cash paid for wages
Cash received from issuing new shares of stock
Cash collected from customers
Cash paid to purchase inventory
Cash paid for income taxes
Cash paid for advertising
Cash paid for purchase of equipment
Cash paid on principal of loan
Cash paid for rent
$20,000
90,000
50,000
600,000
1,000,000
500,000
100,000
30,000
200,000
300,000
60,000
Skidmore Company had a cash balance of $750,000 on January 1, 2013. Given the above information,
compute the following items:
a. Net cash flow provided (used) by operating activities
b. Net cash flow provided (used) by investing activities
c. Net cash flow provided (used) by financing activities
d. Net increase (decrease) in cash during 2013
e. The cash balance at the end of 2013
ANS:
a. Operating activities:
Cash paid for wages
Cash collected from customers
Cash paid to purchase inventory
Cash paid for income taxes
Cash paid for advertising
Cash paid for rent
Net operating activities
$ (50,000)
1,000,000
(500,000)
(100,000)
(30,000)
(60,000)
$ 260,000
b. Investing activities:
Cash collected from sale of building
Cash paid for purchase of equipment
Net investing activities
$ 90,000
(200,000)
$ (110,000)
c. Financing activities:
Cash paid for dividends
$ (20,000)
Cash received from issuing new shares of stock
Cash paid on principal of loan
Net financing activities
d. Net change in cash:
Operating activities
Investing activities
Financing activities
Net increase in cash during 2013
$ 260,000
(110,000)
280,000
$ 430,000
5. Cash balance at end of 2013:
Beginning cash balance
Increase in cash during 2013
Ending cash balance
PTS: 1
DIF: Challenging
MSC: AICPA FN Measurement
OBJ: 3
600,000
(300,000)
$ 280,000
$ 750,000
430,000
$ 1,180,000
TOP: AACSB Analytic
12. On December 31, 2013, Halloway Company had the following financial information on its books:
Total assets
Net increase in operating activities
Total liabilities
Net decrease in financing activities
Sales revenue
Total expenses
Net decrease in investing activities
Capital stock
$365,000
425,000
185,000
250,000
680,000
605,000
135,000
30,000
Additional information for Halloway's 2013 operations revealed that the company had beginning retained
earnings of $120,000 for the year, a beginning cash balance of $35,000, and dividends paid of $45,000. Based
on this information, compute the following items at December 31, 2013:
a.
b.
c.
d.
e.
Net increase/decrease in cash
Total owner’s equity
Net income
Cash balance
Retained earnings
ANS:
a. $40,000 = ($425,000 - $135,000 - $250,000)
b. $180,000 = ($365,000 - $185,000)
c. $75,000 = ($680,000 - $605,000)
d. $75,000 = ($35,000 + $40,000)
e. $150,000 = ($120,000 + $75,000 - $45,000) or ($180,000 - $30,000)
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 3
TOP: AACSB Analytic
13. While the three financial statements contain a lot of information, they don't tell the readers everything they
may need to know about a company. Additional information can be found in the notes to the financial
statements. Identify the four types of notes (be specific).
ANS:
1.
2.
3.
4.
Summary of significant accounting policies.
Additional information about the summary totals found in the financial statements.
Disclosure of important information that is not recognized in the financial
statements.
Supplementary information required by the FASB or the SEC.
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 4
TOP: AACSB Reflective Thinking
14. Financial accounting is based on certain fundamental concepts and assumptions. The importance of these items
is that they allow the accountant to determine which events to account for and in what manner. Define the
following:
a. Separate entity concept
b. Arm's-length transactions
c. Cost principle
d. Monetary measurement concept
e. Going concern assumption
ANS:
a. The idea that the activities of an entity are to be separated from those of the
individual owners.
b. Business dealings between independent and rational parties who are looking out for
their own interests.
c. The idea that transactions are recorded at their historical costs or exchange prices at
the transaction date.
d. The idea that money is the accounting unit of measurement, and that only economic
activities measurable in monetary terms are included in the accounting model.
e. The idea that an accounting entity will have a continuing existence for the
foreseeable future.
PTS: 1
DIF: Medium
MSC: AICPA FN Measurement
OBJ: 6
TOP: AACSB Reflective Thinking
CPAR-CHAPTER 1
FINANCIAL ACCOUNTING AND
ACCOUNTING STANDARDS
TRUE-FALSE—Conceptual
Answer
F
T
T
T
F
F
F
F
T
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Description
Definition of financial accounting.
Purpose of financial statements.
Definition of financial accounting.
Capital allocation process.
Financial reports.
Fair value information.
Objectives of financial reporting.
Accrual accounting.
Generally accepted accounting principles.
T
F
F
T
T
F
T
F
T
T
F
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Users of financial statements.
Committee on Accounting Procedure.
Passage of FASB standards.
Financial Accounting Concepts.
Role of the SEC.
Definition of financial accounting.
Code of Professional Conduct.
Accounting standards.
International standards.
Expectations gap.
Ethical issues.
MULTIPLE CHOICE—Conceptual
Answer
a
d
d
a
b
d
d
c
c
b
c
c
b
c
c
No.
Description
21.
22.
23.
24.
P
25.
26.
27.
28.
29.
30.
P
31.
32.
33.
34.
35.
Financial accounting.
Users of financial reports.
Identify the major financial statements.
Financial reporting entity.
Managerial accounting.
Efficient use of resources.
Capital allocation process.
Financial statement information.
Objectives of financial reporting.
Accrual accounting.
Objectives of financial reporting.
Meaning of “generally accepted.”
Common set of standards and procedures.
Role of SEC.
Powers of the SEC.
MULTIPLE CHOICE—Conceptual
Answer
d
d
d
a
b
b
b
c
d
b
c
c
d
c
d
d
d
c
d
d
d
No.
Description
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
P
50.
P
51.
P
52.
53.
54.
55.
56.
SEC enforcement.
Creation of FASB.
Appointment of FASB members.
Purpose of the Financial Accounting Foundation.
Characteristics of FASB.
FASB and "due process" system.
Publications of FASB.
Purpose of FASB Technical Bulletins.
Purpose of Emerging Issues Task Force.
Purpose of GASB.
Domain of GASB.
Standard setting organizations.
Identification of standard setting organizations.
Statements of financial accounting concepts.
FASB members.
FASB statement process.
House of GAAP.
Hierarchy of GAAP.
Nature of GAAP.
Body which promulgates GAAP.
Authoritative category of GAAP.
(cont.)
d
d
a
c
P
57.
58.
59.
60.
Publications which are not GAAP.
Publications which are not GAAP.
Political environment of standard setting.
International Accounting Standards Committee.
Note: these questions also appear in the Problem-Solving Survival Guide.
EXERCISES
Item
Description
E1-61
E1-62
E1-63
E1-64
E1-65
Objectives of financial reporting.
Development of accounting principles.
Publications and organizations.
FASB.
Evolution of a statement of financial accounting standards.
CHAPTER LEARNING OBJECTIVES
1.
Identify the major financial statements and other means of financial reporting.
2.
Explain how accounting assists in the efficient use of scarce resources.
3.
Describe some of the challenges facing accounting.
4.
List the objectives of financial reporting.
5.
Explain the need for accounting standards.
6.
Identify the major policy-setting bodies and their role in the standard-setting process.
7.
Explain the meaning of generally accepted accounting principles.
8.
Describe the impact of user groups on the standard-setting process.
9.
Understand issues related to ethics and financial accounting.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Ite
m
Typ
e
Ite
m
Typ
e
Ite
m
1.
TF
2.
TF
21.
3.
TF
4.
TF
26.
5.
TF
6.
TF
28.
7.
TF
8.
TF
29.
9.
TF
10
TF
32.
11.
12.
13.
14.
TF
TF
TF
TF
34.
35.
36.
37.
MC
MC
MC
MC
38.
39.
40.
41.
15.
16.
TF
TF
52.
53.
MC
MC
54.
55.
17.
TF
18.
TF
19.
20.
TF
Note:
Typ
e
Ite
m
Typ
e
Ite
m
Learning Objective 1
MC
22. MC
23.
Learning Objective 2
MC
27. MC
Learning Objective 3
MC
Learning Objective 4
P
MC
30. MC
31.
Learning Objective 5
MC
33. MC
62.
Learning Objective 6
MC
42. MC
46.
MC
43. MC
47.
MC
44. MC
48.
MC
45. MC
49.
Learning Objective 7
MC
56. MC
58.
MC
57. MC
Learning Objective 8
TF
59. MC
60.
Learning Objective 9
Typ
e
Ite
m
Typ
e
MC
24.
MC
MC
61.
E
50.
51.
P
62.
63.
MC
MC
E
E
62.
E
Ite
m
P
Ty
pe
25.
MC
64.
65.
E
E
E
MC
MC
MC
MC
P
P
MC
MC
TF = True-False
MC = Multiple Choice
E = Exercise
TRUE-FALSE—Conceptual
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.
True-False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
F
T
T
T
F
Item
6.
7.
8.
9.
10.
Ans.
F
F
F
T
T
Item
11.
12.
13.
14.
15.
Ans.
F
F
T
T
F
Item
16.
17.
18.
19.
20.
Ans.
T
F
T
T
F
MULTIPLE CHOICE—Conceptual
21.
a.
General-purpose financial statements are the product of
financial accounting.
b.
managerial accounting.
c.
both financial and managerial accounting.
d.
neither financial nor managerial accounting.
22.
a.
Users of financial reports include all of the following except
creditors.
b.
government agencies.
c.
unions.
d.
All of these are users.
23.
a.
The financial statements most frequently provided include all of the following except the
balance sheet.
b.
income statement.
c.
statement of cash flows.
d.
statement of retained earnings.
24.
a.
The information provided by financial reporting pertains to
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.
a.
The process of identifying, measuring, analyzing, and communicating financial information needed by
management to plan, evaluate, and control an organization’s operations is called
financial accounting.
b.
managerial accounting.
c.
tax accounting.
d.
auditing.
26.
a.
Whether a business is successful and thrives is determined by
markets.
b.
free enterprise.
c.
competition.
d.
all of these.
27.
a.
An effective capital allocation process
promotes productivity.
b.
encourages innovation.
c.
provides an efficient market for buying and selling securities.
d.
all of these.
28.
a.
Financial statements in the early 2000s provide information related to
non-financial measurements.
b.
forward-looking data.
c.
hard assets (inventory and plant assets).
d.
none of these.
29.
a.
Which of the following statements is not an objective of financial reporting?
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.
a.
Accrual accounting is used because
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.
a.
One objective of financial reporting is to provide
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.
a.
Accounting principles are "generally accepted" only when
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.
A common set of accounting standards and procedures are called
financial accounting standards.
b.
generally accepted accounting principles.
c.
objectives of financial reporting.
d.
statements of financial accounting concepts.
34.
a.
The role of the Securities and Exchange Commission in the formulation of accounting principles can
be best described as
consistently primary.
b.
consistently secondary.
c.
sometimes primary and sometimes secondary.
d.
non-existent.
35.
a.
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
FASB.
b.
AICPA.
c.
SEC.
d.
APB.
36.
a.
Companies that are listed on a stock exchange are required to submit their financial statements to the
AICPA.
b.
APB
c.
FASB.
d.
SEC.
37.
a.
The Financial Accounting Standards Board (FASB) was proposed by the
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.
a.
The Financial Accounting Standards Board
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.
a.
The Financial Accounting Foundation
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.
a.
The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor,
the Accounting Principles Board (APB), is
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.
a.
The Financial Accounting Standards Board employs a "due process" system which
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.
a.
Which of the following is not a publication of the FASB?
Statements of Financial Accounting Concepts
b.
Accounting Research Bulletins
c.
Interpretations
d.
Technical Bulletins
43.
a.
FASB Technical Bulletins
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.
a.
The purpose of the Emerging Issues Task Force is to
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.
a.
The Governmental Accounting Standards Board
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.
a.
The Governmental Accounting Standards Board's main purpose is to develop standards for
the General Accounting Office.
b.
the Federal government.
c.
state and local government.
d.
the Internal Revenue Service.
47.
a.
Which of the following organizations has not been instrumental in the development of financial
accounting standards in the United States?
AICPA
b.
FASB
c.
IASB
d.
SEC
48.
a.
An organization that has not published accounting standards is the
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.
a.
The purpose of Statements of Financial Accounting Concepts is to
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.
a.
Members of the Financial Accounting Standards Board are
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
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:
51.
1. Exposure Draft
2. Statement of Financial Accounting Standards
3. Discussion Memorandum
a.
The chronological order in which these items are released is as follows:
1, 2, 3.
b.
1, 3, 2.
c.
2, 3, 1.
d.
3, 1, 2.
P
In the House of GAAP, is the following on the highest level of authoritative status (meaning among the
most authoritative)?
52.
FASB
FASB
Statement
of Financial
FASB
Statement
of Financial
a.
b.
c.
d.
53.
Technical
Bulletin
Yes
Yes
No
No
Accounting
Standards
Yes
Yes
Yes
Yes
FASB
Interpretation
Yes
Yes
No
Yes
Accounting
Concepts
Yes
No
No
No
a.
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:
1, 2, 3.
b.
1, 3, 2.
c.
2, 1, 3.
d.
2, 3, 1.
54.
a.
Generally accepted accounting principles
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.
a.
The most significant current source of generally accepted accounting principles is the
AICPA.
b.
SEC.
c.
APB.
d.
FASB.
56.
a.
The most authoritative category of generally accepted accounting principles includes all of the
following except
Accounting Research Bulletins.
b.
APB Opinions.
c.
FASB Standards.
d.
FASB Technical Bulletins.
57.
a.
Which of the following is not a part of generally accepted accounting principles?
FASB Interpretations
b.
CAP Accounting Research Bulletins
c.
APB Opinions
d.
All of these are part of generally accepted accounting principles.
58.
a.
Which of the following publications does not qualify as a statement of generally accepted accounting
principles?
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.
a.
Financial accounting standard-setting in the United States
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.
a.
The purpose of the International Accounting Standards Board is to
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.
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
26.
Ans.
a
d
d
a
b
d
Item
27.
28.
29.
30.
31.
32.
Ans.
d
c
c
b
c
c
Item
33.
34.
35.
36.
37.
38.
Ans.
b
c
c
d
d
d
Item
39.
40.
41.
42.
43.
44.
Ans.
Item
a
b
b
b
c
d
45.
46.
47.
48.
49.
50.
Ans.
b
c
c
d
c
d
Item
51.
52.
53.
54.
55.
56.
Ans.
Item
Ans.
d
d
c
d
d
d
57.
58.
59.
60.
d
d
a
c
EXERCISES
Ex. 1-61—Objectives of financial reporting.
What are the objectives of financial reporting by business enterprises?
Solution 1-61
The objectives of financial reporting are to provide information:
(a) that is useful to present and potential investors and creditors and other users in making rational
investment, credit, and similar decisions.
(b) to help users in assessing the amounts, timing, and uncertainty of prospective cash flows.
(c) clearly portraying the economic resources of an enterprise, the claims to those resources, and the effects
of transactions, events, and circumstances that change its resources and obligations.
Ex. 1-62—Development of accounting principles.
Presented below are four independent, unrelated statements regarding the formulation of generally accepted
accounting principles. Each statement contains some incorrect or debatable statement(s).
Statement I
The users of financial accounting statements have coinciding and conflicting needs for statements of various
types. To meet these needs, and to satisfy the financial reporting responsibility of management, accountants
prepare different sets of financial statements for different users.
Ex. 1-62 (cont.)
Statement II
The FASB should be responsive to the needs and viewpoints of the entire economic community, not just the
public accounting profession. The FASB therefore will succeed because it will deal effectively with all
interested groups.
Statement III
Due to some well-publicized instances of corporate fraud, domestic and foreign bribery, and sudden
bankruptcies, the Congress of the United States began in the mid-seventies to inquire into the structure and
practices of the accounting profession and the accounting and auditing standard-setting process. As a
consequence of these investigations and reports submitted by the committees, the government has now (1)
assumed full responsibility through the Securities and Exchange Commission (SEC) for the development and
enforcement of financial accounting and reporting standards and (2) assumed full responsibility through the
General Accounting Office (GAO) for the development and enforcement of auditing standards.
Statement IV
The Securities and Exchange Commission is very concerned about financial reporting and has formulated a
committee called the Accounting Standards Executive Committee (AcSEC) to provide input to the FASB. In
addition, after each FASB Statement is issued, the AcSEC issues Statements of Position stating its position on
the FASB statement.
Instructions
Evaluate each of the independent statements and identify the areas of fallacious reasoning in each. Explain why
the reasoning is incorrect. Complete your discussion of each statement before proceeding to the next
statement.
Solution 1-62
Statement I
It is true that users of financial accounting statements have coinciding and conflicting needs for
statements of various types. However, to meet these needs, accountants generally prepare a
single set of general-purpose financial statements, rather than a number of different types of
financial statements. It may be argued that accountants often do prepare special statements
for particular purposes, but in general the accounting profession has relied on general
purpose financial statements prepared in conformance with generally accepted accounting
principles.
Statement II
It is true that the FASB should be responsive to the needs of the entire economic community, not
just the public accounting profession. However, it is not clear whether the FASB will
succeed. The FASB will have the best chance of survival if it deals with problems promptly,
sets proper priorities, takes whatever action it thinks is right and in the public interest, and
handles pressures responsibly without overreacting to them.
Solution 1-62 (cont.)
Statement III
The first sentence of Statement III is correct in that during the mid-seventies Congress, through the Moss and
Metcalf Committees, did make inquiries into the accounting profession's practices and the accounting and
auditing standard-setting process. In fact, the reports submitted by these committees contained some incorrect
conclusions and some very strong remedies, but the government has not assumed responsibility for either
accounting or auditing standard-setting or their enforcement. Instead, the accounting profession has taken
significant steps to overcome the criticisms which emanated from the congressional inquiries and has retained
in the private sector both the accounting and auditing standards-setting functions. At the present time the
government appears willing to permit the accounting profession to develop its own standards and to regulate
itself with minimal intervention. The AICPA formed the Special Committee on Financial Reporting in 1991.
The Committee's charge was to recommend (1) the nature of information that should be made available to
others by management and (2) the extent to which auditors should report on the various elements of that
information. The Committee's report was made in October 1994.
Statement IV
The Accounting Standards Executive Committee (AcSEC) was established within the American Institute of
Certified Public Accountants, not the Securities and Exchange Commission, to respond to pronouncements of
the FASB. The AcSEC does issue Statements of Position, but issues them before the FASB sets standards on
the issue.
Ex. 1-63—Publications and organizations.
Significant accounting publications are listed below (1-9). Sources or sponsors of accounting publications are
identified next by alphabetical character (a-f). Match the publications with their sources.
Publications
_____ 1.
Accounting Research Bulletins (1953-1959)
_____ 2.
Statements on Auditing Standards
_____ 3.
Journal of Accountancy
_____ 4.
Emerging Issues Task Force Statements
_____ 5.
Opinions (1962-1973)
_____ 6.
Technical Bulletins
_____ 7.
Statements of Financial Accounting Standards
_____ 8.
Statements of Financial Accounting Concepts
_____ 9.
Statements of Position (SOPs)
Sources/Sponsors
a. Auditing Standards Board
b. Accounting Standards Executive Committee
c. The AICPA
Solution 1-63
1.
2.
3.
d
a
c
4.
5.
6.
f
e
f
7.
8.
9.
f
f
b
d. Committee on Accounting Procedure
e. Accounting Principles Board
f. Financial Accounting Standards Board
Ex. 1-64—FASB.
The Financial Accounting Standards Board was established because many groups interested in financial
reporting believed that the Accounting Principles Board was not effective. Discuss the apparent advantages that
the FASB should have over its earlier counterpart, the APB.
Solution 1-64
1. Smaller membership. The FASB is composed of seven members, replacing the relatively large 18-member
APB.
2. Full-time, remunerated membership. FASB members are well-paid, full-time members, appointed for
renewable five-year terms. The APB members were unpaid and part-time.
3. Greater autonomy. The APB was a senior committee of the AICPA, whereas the FASB is not an organ of
any single professional organization. It is appointed by and answerable only to the Financial Accounting
Foundation.
4. Increased independence. APB members retained their private positions with firms, companies, or
institutions. FASB members must sever all such ties.
5. Broader representation. All APB members were required to be CPAs and members of the AICPA.
Currently, it is not necessary to be a CPA to be a member of the FASB.
Ex. 1-65—Evolution of a statement of financial accounting standards.
In establishing financial accounting standards, two basic premises of the FASB are (1) The FASB should be
responsive to the needs and viewpoints of the entire economic community, not just the accounting profession.
(2) It should operate in full view of the public through a "due process" system that gives interested persons
ample opportunity to make their views known. To ensure achievement of these goals, what are the steps taken
in the evolution of an FASB Statement of Financial Accounting Standards?
Solution 1-65
The steps in the evolution of an FASB Statement of Financial Accounting Standards are:
a. Topics are identified and placed on the Board's agenda.
b. Research and analysis are conducted and a discussion memorandum of pros and cons is issued.
c. A public hearing on the proposed standard is held.
d. The Board evaluates the research and public response and issues an exposure draft.
e. The Board evaluates the responses and changes the exposure draft, if necessary. The final standard is then
issued.
CPAR-CHAPTER 2
CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL
ACCOUNTING
TRUE-FALSE—Conceptual
Answer
F
T
F
T
F
T
F
T
T
F
F
F
T
T
F
F
T
T
F
F
No.
Description
1.
2.
3.
4
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Nature of conceptual framework.
Conceptual framework definition.
Levels of conceptual framework.
International conceptual framework.
Statements of Financial Accounting Concepts.
Decision usefulness.
Financial statement users.
Relevance and reliability.
Consistency.
Relevance.
Reliability.
Basic elements.
Comprehensive income.
Going concern assumption.
Economic entity assumption.
Matching principle.
Realizable revenues.
Supplementary information.
Materiality factors
Conservatism.
MULTIPLE CHOICE—Conceptual
Answer
c
d
c
d
d
a
d
a
c
a
c
b
b
d
c
No.
21.
22.
23.
S
24.
25.
26.
27.
P
28.
29.
30.
31.
32.
33.
34.
35.
Description
GAAP defined.
Purpose of conceptual framework.
Conceptual framework.
Conceptual framework benefits.
Objectives of financial reporting.
Decision usefulness.
Objectives of financial reporting.
Financial repoting objectives.
Purpose of understandable information.
Decision-usefulness criterion.
Primary qualities of accounting information.
Definition of relevance.
Definition of reliability.
Relevance and reliability.
Timeliness characteristic.
MULTIPLE CHOICE—Conceptual
Answer
d
b
d
c
a
c
d
b
No.
Description
36.
37.
38.
39.
40.
41.
42.
43.
Verifiability characteristic.
Neutrality characteristic.
Neutrality characteristic.
Definition of verifiability.
Quality of predictive value.
Quality of representational faithfulness.
Consistency.
Consistency characteristic.
(cont.)
b
d
d
c
c
d
b
d
b
a
a
c
c
d
a
b
a
d
d
a
d
c
d
d
d
c
b
b
b
b
c
d
a
c
d
d
a
b
a
c
c
44.
45.
46.
47.
48.
49.
50.
P
51.
S
52.
S
53.
S
54.
S
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
P
84.
Comparability and consistency.
Comparability.
Elements of financial statements.
Distinction between revenues and gains.
Definition of a loss.
Definition of comprehensive income.
Components of comprehensive income.
Comprehensive income.
Earnings vs. comprehensive income.
Reporting financial statement elements.
Monetary unit assumption.
Periodicity assumption.
Monetary unit assumption.
Economic entity assumption.
Economic entity assumption.
Periodicity assumption.
Going concern assumption.
Going concern assumption.
Implications of going concern assumption.
Historical cost principle.
Historical cost principle.
Revenue recognition principle.
Revenue recognition principle.
Revenue recognition principle.
Timing of revenue recognition.
Realization concept.
Definition of realized.
Matching principle.
Matching principle.
Expense recognition.
Full-disclosure principle.
Constraints to limit the cost of reporting.
Cost-benefit constraint.
Materiality constraint.
Materiality.
Pervasive constraints.
Conservatism constraint.
Conservatism constraint.
Trade-offs between characteristics of accounting information.
Trade-offs between characteristics of accounting information.
Conservatism constraint.
MULTIPLE CHOICE—CPA Adapted
Answer
a
b
b
b
a
b
d
d
a
P
No.
Description
85.
86.
87.
88.
89.
90.
91.
92.
93.
Quality of predictive value.
Consistency characteristic.
Classification of gains and losses.
Earnings concept.
Components of comprehensive income.
Components of comprehensive income.
Components of comprehensive income.
Components of comprehensive income.
Definition of recognition.
Note: these questions also appear in the Problem-Solving Survival Guide.
S
Note: these questions also appear in the Study Guide.
EXERCISES
Item
Description
E2-94
E2-95
E2-96
E2-97
E2-98
E2-99
E2-100
E2-101
E2-102
Examination of the conceptual framework.
Accounting concepts—identification.
Accounting concepts—identification.
Accounting concepts—matching.
Accounting concepts—fill in the blanks.
Basic assumptions.
Revenue recognition.
Historical cost principle.
Matching concept.
CHAPTER LEARNING OBJECTIVES
1.
Describe the usefulness of a conceptual framework.
2.
Describe the FASB’s efforts to construct a conceptual framework.
3.
Understand the objectives of financial reporting.
4.
Identify the qualitative characteristics of accounting information.
5.
Define the basic elements of financial statements.
6.
Describe the basic assumptions of accounting.
7.
Explain the application of the basic principles of accounting.
8.
Describe the impact that constraints have on reporting accounting information.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Ite
m
Typ
e
Ite
m
Typ
e
Ite
m
1.
TF
2.
TF
21.
3.
TF
4.
TF
5.
6.
TF
7.
TF
26.
8.
9.
10.
11.
TF
TF
TF
TF
29.
30.
31.
32.
MC
MC
MC
MC
33.
34.
35.
36.
12.
13.
46.
TF
TF
MC
47.
48.
49.
MC
MC
MC
14.
15.
S
54.
TF
TF
MC
55.
56.
57.
MC
MC
MC
58.
59.
60.
16.
17.
18.
63.
TF
TF
TF
MC
64.
65.
66.
67.
MC
MC
MC
MC
68.
69.
70.
71.
19.
20.
TF
TF
75.
76.
MC
MC
77.
78.
Note:
S
TF = True-False
MC = Multiple Choice
E = Exercise
50.
51.
S
52.
P
Typ
e
Ite
m
Typ
e
Ite
m
Learning Objective 1
MC
22. MC
23.
Learning Objective 2
TF
25. MC
94.
Learning Objective 3
P
MC
27. MC
28.
Learning Objective 4
MC
37. MC
41.
MC
38. MC
42.
MC
39. MC
43.
MC
40. MC
44.
Learning Objective 5
S
MC
53. MC
89.
MC
87. MC
90.
MC
88. MC
91.
Learning Objective 6
MC
61. MC
98.
MC
62. MC
99.
MC
95.
E
100.
Learning Objective 7
MC
72. MC
95.
MC
73. MC
96.
MC
74. MC
97.
MC
93. MC
98.
Learning Objective 8
MC
79. MC
81.
MC
80. MC
82.
Typ
e
MC
Ite
m
S
Typ
e
24.
MC
MC
94.
E
MC
MC
MC
MC
45.
85.
86.
95.
MC
MC
MC
E
MC
MC
MC
92.
MC
E
E
E
101.
E
E
E
E
E
100.
101.
102.
E
E
E
83.
84.
MC
MC
Ite
m
Ty
pe
94.
E
96.
97.
98.
E
E
E
95.
96.
E
E
E
MC
MC
P
TRUE-FALSE—Conceptual
1. The conceptual framework for accounting has been discovered through empirical research.
2. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to
consistent standards.
3. The first level of the conceptual framework identifies the recognition and measurement concepts used in
establishing accounting standards.
4. The IASB has issued a conceptual framework that is broadly consistent with that of the United States.
5. Although the FASB intends to develop a conceptual framework, no Statements of Financial Accounting
Concepts have been issued to date.
6. Decision Usefulness is the underlying theme of the conceptual framework.
7. Users of financial statements are assumed to have no knowledge of business and financial accounting
matters by financial statement preparers.
8. Relevance and reliability are the two primary qualities that make accounting information useful for
decision making.
9. The idea of consistency does not mean that companies cannot switch from one accounting method to
another.
10. Timeliness and neutrality are two ingredients of relevance.
11. Verifiability and predictive value are two ingredients of reliability.
12. Revenues, gains, and distributions to owners all increase equity.
13. Comprehensive income includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
14. The historical cost principle would be of limited usefulness if not for the going concern assumption.
15. The economic entity assumption means that economic activity can be identified with a particular legal
entity.
16. The matching principle states that debits must equal credits in each transaction.
17. Revenues are realizable when assets received or held are readily convertible into cash or claims to cash.
18. Supplementary information may include details or amounts that present a different perspective from that
adopted in the financial statements.
19. Companies consider only quantitative factors in determining whether an item is material.
20. Conservatism in accounting means the accountant should attempt to understate assets and income when
possible.
True False Answers—Conceptual
Item
1.
Ans.
F
Item
6.
Ans.
T
Item
11.
Ans.
F
Item
16.
Ans.
F
2.
3.
4.
5.
T
F
T
F
7.
8.
9.
10.
F
T
T
F
12.
13.
14.
15.
F
T
T
F
17.
18.
19.
20.
T
T
F
F
MULTIPLE CHOICE—Conceptual
21.
a.
Generally accepted accounting principles
are fundamental truths or axioms that can be derived from laws of nature.
b.
derive their authority from legal court proceedings.
c.
derive their credibility and authority from general recognition and acceptance by the accounting
profession.
d.
have been specified in detail in the FASB conceptual framework.
22.
a.
A soundly developed conceptual framework of concepts and objectives should
increase financial statement users' understanding of and confidence in financial reporting.
b.
enhance comparability among companies' financial statements.
c.
allow new and emerging practical problems to be more quickly soluble.
d.
all of these.
23.
a.
Which of the following (a-c) are not true concerning a conceptual framework in account-ing?
It should be a basis for standard-setting.
b.
It should allow practical problems to be solved more quickly by reference to it.
c.
It should be based on fundamental truths that are derived from the laws of nature.
d.
All of the above (a-c) are true.
S
Which of the following is not a benefit associated with the FASB Conceptual Framework Project?
A conceptual framework should increase financial statement users' understanding of and confidence in
24.
a.
financial reporting.
b.
Practical problems should be more quickly solvable by reference to an existing conceptual framework.
c.
A coherent set of accounting standards and rules should result.
d.
Business entities will need far less assistance from accountants because the financial reporting process
will be quite easy to apply.
25.
a.
In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes
of accounting?
Measurement and recognition concepts such as assumptions, principles, and constraints
b.
Qualitative characteristics of accounting information
c.
Elements of financial statements
d.
Objectives of financial reporting
26.
a.
The underlying theme of the conceptual framework is
decision usefulness.
b.
understandability.
c.
reliability.
d.
comparability.
27.
a.
Which of the following is not an objective of financial reporting?
To provide information about economic resources, the claims to those resources, and the changes in
them.
b.
To provide information that is helpful to investors and creditors and other users in assessing the
amounts, timing, and uncertainty of future cash flows.
c.
To provide information that is useful to those making investment and credit decisions.
d.
All of these are objectives of financial reporting.
P
28.
a.
The objectives of financial reporting include all of the following except to provide information that
is useful to the Internal Revenue Service in allocating the tax burden to the business community.
b.
is useful to those making investment and credit decisions.
c.
is helpful in assessing future cash flows.
d.
identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in
those resources and claims.
29.
a.
Decision makers vary widely in the types of decisions they make, the methods of decision making they
employ, the information they already possess or can obtain from other sources, and their ability to
process information. Consequently, for information to be useful there must be a linkage between these
users and the decisions they make. This link is
relevance.
b.
reliability.
c.
understandability.
d.
materiality.
30.
a.
The overriding criterion by which accounting information can be judged is that of
usefulness for decision making.
b.
freedom from bias.
c.
timeliness.
d.
comparability.
31.
a.
The two primary qualities that make accounting information useful for decision making are
comparability and consistency.
b.
materiality and timeliness.
c.
relevance and reliability.
d.
reliability and comparability.
32.
a.
Accounting information is considered to be relevant when it
can be depended on to represent the economic conditions and events that it is intended to represent.
b.
is capable of making a difference in a decision.
c.
is understandable by reasonably informed users of accounting information.
d.
is verifiable and neutral.
33.
a.
The quality of information that gives assurance that it is reasonably free of error and bias and is a
faithful representation is
relevance.
b.
reliability.
c.
verifiability.
d.
neutrality.
34.
a.
According to Statement of Financial Accounting Concepts No. 2, which of the following relates to both
relevance and reliability?
Materiality
b.
Understandability
c.
Usefulness
d.
All of these
35.
According to Statement of Financial Accounting Concepts No. 2, timeliness is an ingredient of the
primary quality of
Relevance
Reliability
a.
Yes
Yes
b.
No
Yes
c.
Yes
No
d.
No
No
36.
According to Statement of Financial Accounting Concepts No. 2, verifiability is an ingredient of the
primary quality of
Relevance
Reliability
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
37.
According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the
primary quality of
Relevance
Reliability
a.
Yes
Yes
b.
No
Yes
c.
Yes
No
d.
No
No
38.
a.
Information is neutral if it
provides benefits which are at least equal to the costs of its preparation.
b.
can be compared with similar information about an enterprise at other points in time.
c.
would have no impact on a decision maker.
d.
is free from bias toward a predetermined result.
39.
a.
The characteristic that is demonstrated when a high degree of consensus can be secured among
independent measurers using the same measurement methods is
relevance.
b.
reliability.
c.
verifiability.
d.
neutrality.
40.
According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of
the primary quality of
Relevance
Reliability
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
41.
Under Statement of Financial Accounting Concepts No. 2, representational faithfulness is an ingredient
of the primary quality of
Reliability
Relevance
a.
Yes
Yes
b.
No
Yes
c.
Yes
No
d.
No
No
42.
a.
Financial information does not demonstrate consistency when
firms in the same industry use different accounting methods to account for the same type of
transaction.
b.
a company changes its estimate of the salvage value of a fixed asset.
c.
a company fails to adjust its financial statements for changes in the value of the measuring unit.
d.
none of these.
43.
Financial information exhibits the characteristic of consistency when
a. expenses are reported as charges against revenue in the period in which they are paid.
b. accounting entities give accountable events the same accounting treatment from period to period.
c. extraordinary gains and losses are not included on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.
44.
Information about different entities and about different periods of the same entity can be prepared and
presented in a similar manner. Comparability and consistency are related to which of these objectives?
Comparability
Consistency
a.
Entities
Entities
b.
Entities
Periods
c.
Periods
Entities
d.
Periods
Periods
45.
a.
When information about two different enterprises has been prepared and presented in a similar manner,
the information exhibits the characteristic of
relevance.
b.
reliability.
c.
consistency.
d.
none of these.
46.
a.
The elements of financial statements include investments by owners. These are increases in an entity's
net assets resulting from owners'
transfers of assets to the entity.
b.
rendering services to the entity.
c.
satisfaction of liabilities of the entity.
d.
all of these.
47.
a.
In classifying the elements of financial statements, the primary distinction between revenues and gains
is
the materiality of the amounts involved.
b.
the likelihood that the transactions involved will recur in the future.
c.
the nature of the activities that gave rise to the transactions involved.
d.
the costs versus the benefits of the alternative methods of disclosing the transactions involved.
48.
a.
A decrease in net assets arising from peripheral or incidental transactions is called a(n)
capital expenditure.
b.
cost.
c.
loss.
d.
expense.
49.
a.
One of the elements of financial statements is comprehensive income. As described in Statement of
Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is
equal to
revenues minus expenses plus gains minus losses.
b.
revenues minus expenses plus gains minus losses plus investments by owners minus distributions to
owners.
c.
revenues minus expenses plus gains minus losses plus investments by owners minus distributions to
owners plus assets minus liabilities.
d.
50.
none of these.
a.
Which of the following elements of financial statements is not a component of compre-hensive
income?
Revenues
b.
Distributions to owners
c.
Losses
d.
Expenses
P
51.
a.
Which of the following is false with regard to the element "comprehensive income"?
It is more inclusive than the traditional notion of net income.
b.
It includes net income and all other changes in equity exclusive of owners' invest-ments and
distributions to owners.
c.
This concept is not yet being applied in practice.
d.
It excludes prior period adjustments (transactions that relate to previous periods, such as corrections of
errors).
S
52.
a.
According to the FASB conceptual framework, earnings
are the same as comprehensive income.
b.
exclude certain gains and losses that are included in comprehensive income.
c.
include certain gains and losses that are excluded from comprehensive income.
d.
include certain losses that are excluded from comprehensive income.
S
According to the FASB Conceptual Framework, the elementsassets, liabilities, and equitydescribe
amounts of resources and claims to resources at/during a
53.
Moment in Time
Period of Time
a.
b.
c.
d.
S
54.
Yes
Yes
No
No
No
Yes
Yes
No
a.
Which of the following basic accounting assumptions is threatened by the existence of severe inflation
in the economy?
Monetary unit assumption.
b.
Periodicity assumption.
c.
Going-concern assumption.
d.
Economic entity assumption.
S
During the lifetime of an entity accountants produce financial statements at artificial points in time in
accordance with the concept of
55.
a.
b.
c.
d.
Objectivity
No
Yes
No
Yes
Periodicity
No
No
Yes
Yes
56.
a.
Under current GAAP, inflation is ignored in accounting due to the
economic entity assumption.
b.
going concern assumption.
c.
monetary unit assumption.
d.
periodicity assumption.
57.
a.
The economic entity assumption
is inapplicable to unincorporated businesses.
b.
recognizes the legal aspects of business organizations.
c.
requires periodic income measurement.
d.
is applicable to all forms of business organizations.
58.
a.
Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an
example of the
economic entity assumption.
b.
relevance characteristic.
c.
comparability characteristic.
d.
neutrality characteristic.
59.
a.
During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in
accordance with which basic accounting concept?
Cost/benefit constraint
b.
Periodicity assumption
c.
Conservatism constraint
d.
Matching principle
60.
a.
What accounting concept justifies the usage of accruals and deferrals?
Going concern assumption
b.
Materiality constraint
c.
Consistency characteristic
d.
Monetary unit assumption
61.
a.
The assumption that a business enterprise will not be sold or liquidated in the near future is known as
the
economic entity assumption.
b.
monetary unit assumption.
c.
conservatism assumption.
d.
none of these.
62.
a.
Which of the following is an implication of the going concern assumption?
The historical cost principle is credible.
b.
Depreciation and amortization policies are justifiable and appropriate.
c.
The current-noncurrent classification of assets and liabilities is justifiable and signify-cant.
d.
All of these.
63.
a.
Proponents of historical cost ordinarily maintain that in comparison with all other valuation
alternatives for general purpose financial reporting, statements prepared using historical costs are more
reliable.
b.
relevant.
c.
indicative of the entity's purchasing power.
d.
conservative.
64.
a.
Valuing assets at their liquidation values rather than their cost is inconsistent with the
periodicity assumption.
b.
matching principle.
c.
materiality constraint.
d.
historical cost principle.
65.
a.
Revenue is generally recognized when realized or realizable and earned. This statement describes the
consistency characteristic.
b.
matching principle.
c.
revenue recognition principle.
d.
relevance characteristic.
66.
Generally, revenue from sales should be recognized at a point when
a. management decides it is appropriate to do so.
b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer and there remains no further
warranty liability.
d. none of these.
67.
a.
Revenue generally should be recognized
at the end of production.
b.
at the time of cash collection.
c.
when realized.
d.
when realized or realizable and earned.
68.
a.
Which of the following is not a time when revenue may be recognized?
At time of sale
b.
At receipt of cash
c.
During production
d.
All of these are possible times of revenue recognition.
69.
a.
Under Statement of Financial Accounting Concepts No. 5, which of the following, in the most precise
sense, means the process of converting noncash resources and rights into cash or claims to cash?
Recognition
b.
Measurement
c.
Realization
d.
Allocation
70.
a.
"When products (goods or services), merchandise, or other assets are exchanged for cash or claims to
cash" is a definition of
allocated.
b.
realized.
c.
realizable.
d.
earned.
71.
a.
The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a
balance sheet and which is based on an estimate of bad debts, is an application of the
consistency characteristic.
b.
matching principle.
c.
materiality constraint.
d.
revenue recognition principle.
72.
a.
The accounting principle of matching is best demonstrated by
not recognizing any expense unless some revenue is realized.
b.
associating effort (expense) with accomplishment (revenue).
c.
recognizing prepaid rent received as revenue.
d.
establishing an Appropriation for Contingencies account.
73.
a.
Which of the following serves as the justification for the periodic recording of depreciation expense?
Association of efforts (expense) with accomplishments (revenue)
b.
Systematic and rational allocation of cost over the periods benefited
c.
Immediate recognition of an expense
d.
Minimization of income tax liability
74.
a.
Application of the full disclosure principle
is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b.
is violated when important financial information is buried in the notes to the financial statements.
c.
is demonstrated by the use of supplementary information presenting the effects of changing prices.
d.
requires that the financial statements be consistent and comparable.
75.
a.
Which of the following statements concerning the cost-benefit relationship is not true?
Business reporting should exclude information outside of management's expertise.
b.
Management should not be required to report information that would significantly harm the company's
competitive position.
c.
Management should not be required to provide forecasted financial information.
d.
If needed by financial statement users, management should gather information not included in the
financial statements that
76.
would not otherwise be gathered for internal use.
a.
Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both
relevance and reliability?
Cost-benefit constraint
b.
Predictive value
c.
Verifiability
d.
Representational faithfulness
77.
a.
Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the
period when purchased is an example of the application of the
consistency characteristic.
b.
matching principle.
c.
materiality constraint.
d.
historical cost principle.
78.
a.
Which of the following statements about materiality is not correct?
An item must make a difference or it need not be disclosed.
b.
Materiality is a matter of relative size or importance.
c.
An item is material if its inclusion or omission would influence or change the judgment of a reasonable
person.
d. All of these are correct statements about materiality.
79.
a.
Which of the following are considered pervasive constraints by Statement of Financial Accounting
Concepts No. 2?
Cost-benefit relationship and conservatism
b.
Timeliness and feedback value
c.
Conservatism and verifiability
d.
Materiality and cost-benefit relationship
80.
a.
The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor
of understating assets and revenues and overstating liabilities and expenses is known as the
conservatism constraint.
b.
materiality constraint.
c.
substance over form principle.
d.
industry practices constraint.
81.
Which of the following best illustrates the accounting concept of conservatism?
a. Use of the allowance method to recognize bad debt losses from credit sales
b. Use of the lower of cost or market approach in valuing inventories.
c. Use of the same accounting method from one period to the next in computing depreciation expense
d. Utilization of a policy of deliberate understatement of asset values in order to present a
conservative net income figure
82.
Trade-offs between the characteristics that make information useful may be necessary or beneficial.
Issuance of interim financial statements is an example of a trade-off between
relevance and reliability.
a.
b.
reliability and periodicity.
c.
timeliness and materiality.
d.
understandability and timeliness.
83.
a.
Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an
example of a trade-off between
verifiability and reliability.
b.
reliability and comparability.
c.
timeliness and verifiability.
d.
neutrality and consistency.
P
a.
In matters of doubt and great uncertainty, accounting issues should be resolved by choosing the
alternative that has the least favorable effect on net income, assets, and owners' equity. This guidance
comes from the
materiality constraint.
b.
industry practices constraint.
c.
conservatism constraint.
d.
full disclosure principle.
84.
Multiple Choice Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
c
d
c
d
d
a
d
a
c
a
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
c
b
b
d
c
d
b
d
c
a
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
c
d
b
b
d
d
c
c
d
b
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
d
b
a
a
c
c
d
a
b
a
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
d
d
a
d
c
d
d
d
c
b
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
b
b
b
c
d
a
c
d
d
a
81.
82.
83.
84.
b
a
c
c
Solutions to those Multiple Choice questions for which the answer is “none of these.”
42.
a company changes its inventory method every few years in order to maximize reported income (other
answers are possible).
45.
comparability.
49.
change in equity of an entity during a period from transactions and other events and circumstances
from nonowner sources.
61.
going concern assumption.
66.
an exchange has taken place and the earnings process is virtually complete.
MULTIPLE CHOICE—CPA Adapted
85.
According to the FASB's conceptual framework, predictive value is an ingredient of
Relevance
Reliability
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
86.
According to the FASB's conceptual framework, which of the following relates to both relevance and
reliability?
Consistency
Verifiability
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
87.
88.
a.
The FASB's conceptual framework classifies gains and losses based on whether they are related to an
entity's major ongoing or central operations. These gains or losses may be classified as
Nonoperating
Operating
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
According to the FASB's conceptual framework, earnings
is the same as comprehensive income.
b.
excludes certain gains and losses that are included in comprehensive income.
c.
includes certain gains and losses that are excluded from comprehensive income.
d.
includes certain losses that are excluded from comprehensive income.
89.
According to the FASB's conceptual framework, comprehensive income includes which of the
following?
Operating Income
Investments by Owners
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
90.
According to the FASB's conceptual framework, the calculation of comprehensive income includes
which of the following?
Income from
Distributions
Continuing Operations
to Owners
a.
No
No
b.
Yes
No
c.
Yes
Yes
d.
No
Yes
91.
According to the FASB's conceptual framework, comprehensive income includes which of the
following?
Gross Margin
Operating Income
a.
No
Yes
b.
No
No
c.
Yes
No
d.
Yes
Yes
92.
Under Statements of Financial Accounting Concepts, comprehensive income includes which of the
following?
Gains
Gross Margin
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes
93.
a.
According to the FASB's conceptual framework, the process of reporting an item in the financial
statements of an entity is
recognition.
b.
realization.
c.
allocation.
d.
matching.
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
85.
86.
a
b
87.
88.
b
b
89.
90.
a
b
91.
92.
d
d
93.
a
EXERCISES
Ex. 2-94—Examination of the conceptual framework.
At an FASB Concept Framework Symposium, a former member of the FASB discussed his views of a
conceptual framework. Some excerpts:
Standard Setting in the Private Sector
A framework of concepts comprises ideas that coordinate to form the fabric of a system: they determine its
bounds. In a system like financial reporting that serves a broad public purpose, the first plank in the
framework identifies the public role. The decision of the public sector in the 1930s to look at the private sector
for the principal thrust to standard setting was sound and extraordinarily enlightened.
The credence given financial reporting will determine whether the private sector's role in standard setting will
grow or shrink. An operable conceptual framework will go a long way in providing the necessary level of
credibility. Without an operable conceptual framework, continuation of standard setting by the private sector
would stand in considerable jeopardy.
Essence of the Conceptual Framework
The conceptual formulation starts with the broad role of financial reporting in society. It:

Identifies its unique competence, that is, its bounds.

States the objectives of the reporting.

Defines the things admissible to financial statements.

Identifies the circumstances triggering admission and qualities to be met for admission to financial
statements.

Selects useful measurements of things admitted.

Furnishes criteria for display.
Those are major pieces of the framework. There are others, of course. The various parts are in a
hierarchy ranging from highly abstract to reasonably concrete. They lend guidance—they
do not provide simple, no-think answers. They leave open a significant range for hard
thinking and deliberation about reporting standards. They furnish the reference point for the
thinking.
Instructions
1. What are the basic concepts of the conceptual framework?
2.
What are your views about the success of the conceptual framework?
Solution 2-94
1. The basic components of the conceptual framework are:
a. Objectives—present the goals and purposes of accounting.
b. Qualitative characteristics—the characteristics that make accounting information useful.
c. Elements—provide the definitions of the broad classifications of items found in financial statements.
d. Operational guidelines (recognition and measurement concepts)—recommend concepts to guide
decisions concerning the display and disclosure of information about income, cash flows, and financial
position. The operational guidelines are composed of three parts:
Solution 2-94 (cont.)
(1) Basic assumptions.
(2) Accounting principles.
(3) Constraints.
2. In general, the success of the conceptual framework will be determined by its acceptance in practice. The
acceptance in practice will be based in large part upon the FASB's solution of practical problems on a
timely basis.
It is a matter of opinion and yet to be seen whether or not the conceptual framework will bring about the
following benefits.
a. The FASB should be able to issue more useful and consistent standards in the future.
b. New practice problems should be solved more rapidly by reference to an existing framework.
c. Better understanding of and confidence in the financial reporting process by financial statement users
should result.
d. Enhanced comparability among companies' financial statements should result.
Ex. 2-95—Accounting concepts—identification.
State the accounting assumption, principle, information characteristic, or constraint that is most applicable in
the following cases.
1. All payments less than $25 are expensed as incurred. (Do not use conservatism.)
2. The company employs the same inventory valuation method from period to period.
3. A patent is capitalized and amortized over the periods benefited.
4. Assuming that dollars today will buy as much as ten years ago.
5. Rent paid in advance is recorded as prepaid rent.
6. Financial statements are prepared each year.
7. All significant post-balance sheet events are reported.
8. Personal transactions of the proprietor are distinguished from business transactions.
Solution 2-95
1.
2.
3.
4.
5.
6.
7.
8.
Materiality constraint.
Consistency characteristic.
Matching principle or going concern assumption.
Monetary unit assumption.
Matching principle or going concern assumption.
Periodicity assumption.
Full disclosure principle.
Economic entity assumption.
Ex. 2-96—Accounting concepts—identification.
Presented below are a number of accounting procedures and practices in Sanchez Corp. For each of these
items, list the assumption, principle, information characteristic, or modifying convention that is violated.
1. Because the company's income is low this year, a switch from accelerated depreciation to straight-line
depreciation is made this year.
2. The president of Sanchez Corp. believes it is foolish to report financial information on a yearly basis.
Instead, the president believes that financial information should be disclosed only when significant new
information is available related to the company's operations.
3. Sanchez Corp. decides to establish a large loss and related liability this year because of the possibility that
it may lose a pending patent infringement lawsuit. The possibility of loss is considered remote by its
attorneys.
4. An officer of Sanchez Corp. purchased a new home computer for personal use with company money,
charging miscellaneous expense.
5. A machine, that cost $40,000, is reported at its current market value of $45,000.
Solution 2-96
1. Consistency.
2. Periodicity.
3. Matching (also, conservatism).
4. Economic entity.
5. Historical cost (also, revenue recognition)*.
*Reporting the asset at FMV of $45,000 implies the following entry:
Machine...............................................................................................
Revenue..................................................................................
5,000
5,000
Ex. 2-97—Accounting concepts—matching.
Listed below are several information characteristics and accounting principles and assumptions. Match the
letter of each with the appropriate phrase that states its application. (Items a through k may be used more than
once or not at all.)
a.
b.
c.
d.
e.
f.
Economic entity assumption
Going concern assumption
Monetary unit assumption
Periodicity assumption
Historical cost principle
Revenue recognition principle
g.
h.
i.
j.
k.
Matching principle
Full disclosure principle
Relevance characteristic
Reliability characteristic
Consistency characteristic
_____ 1.
Stable-dollar assumption (do not use historical cost principle).
_____ 2.
Earning process completed and realized or realizable.
_____ 3.
Presentation of error-free information with representational faithfulness.
_____ 4.
Yearly financial reports.
_____ 5. Accruals and deferrals in adjusting and closing process. (Do not use going concern.)
Ex. 2-97 (cont.)
_____ 6.
Useful standard measuring unit for business transactions.
_____ 7.
Notes as part of necessary information to a fair presentation.
_____ 8.
Affairs of the business distinguished from those of its owners.
_____ 9.
Business enterprise assumed to have a long life.
_____10.
Valuing assets at amounts originally paid for them.
_____11.
Application of the same accounting principles as in the preceding year.
_____12.
Summarizing significant accounting policies.
_____13.
Presentation of timely information with predictive and feedback value.
Solution 2-97
1.
2.
3.
c
f
j
4.
5.
6.
d
g
c
7.
8.
9.
h
a
b
10.
11.
12.
e
k
h
13.
i
Ex. 2-98—Accounting concepts—fill in the blanks.
Fill in the blanks below with the accounting principle, assumption, or related item that best completes the
sentence.
1.
________________________ and _______________________ are the two primary qualities that make
accounting information useful for decision making.
2.
Information that helps users confirm or correct prior expectations has _________________
___________________.
3.
________________________ enables users to identify the real similarities and differences in economic
phenomena because the information has been measured and reported in a similar manner for different
enterprises.
4.
Some costs which give rise to future benefits cannot be directly associated with the revenues they
generate. Such costs are allocated in a __________________ and _________________ manner to the
periods expected to benefit from the cost.
5.
_______________________ would allow the expensing of all repair tools when purchased, even though
they have an estimated life of 3 years.
6.
The ________________________ characteristic requires that the same accounting method be used from
one accounting period to the next, unless it becomes evident that an alternative method will bring about a
better description of a firm's financial situation.
7.
____________________ guides accountants to select the accounting treatment that is least likely to
overstate income and assets.
Ex. 2-98 (cont.)
8.
Parenthetical balance sheet disclosure of the inventory method utilized by a particular company is an
application of the _______________________ principle.
9.
Corporations must prepare accounting reports at least yearly due to the _______________ assumption.
10.
Recording and reporting inflows at the end of production is an allowable exception to the
_________________ principle.
Solution 2-98
1.
2.
3.
4.
5.
Relevance; reliability
feedback value
Comparability
rational; systematic
The materiality convention
6.
7.
8.
9.
10.
consistency
Conservatism
full disclosure
periodicity
revenue recognition
Ex. 2-99—Basic assumptions.
Briefly explain the four basic assumptions that underlie financial accounting.
Solution 2-99
1. The economic entity assumption states that economic activity can be identified with a particular unit of
accountability.
2. The going concern assumption assumes that a business enterprise will have a long life.
3. The monetary unit assumption means that money is the common denominator of economic activity and
provides an appropriate basis for accounting measurement and analysis. In addition, the monetary unit
remains reasonably stable.
4. The periodicity assumption implies that the economic activities of an enterprise can be divided into
artificial time periods.
Ex. 2-100—Revenue recognition.
Revenue is generally recognized at the point of sale. There are three exceptions, however. Name the time for
each exception, give two qualifications or criteria for the use of each exception, and give an example for each
exception.
Solution 2-100
1. During production. The revenue is known (contract) or dependably estimable. Total costs are estimable or
other means are available to estimate progress toward completion. Examples are long-term construction
contracts and service-type transactions.
Solution 2-100 (cont.)
2. At completion. There are quoted prices. Units are interchangeable. There are no significant distribution
costs. Unit costs are not determinable. Examples are precious metals or agricultural products.
3. At collection. There is no reasonable basis for estimating the degree of collectibility. Costs of collection,
bad debts, and repossessions are not estimable. Examples are installment sales and cost recovery method.
Ex. 2-101—Historical cost principle.
Cost as a basis of accounting for assets has been severely criticized. What defense can you build for cost as the
basis for financial accounting?
Solution 2-101
Cost is definite and verifiable and not a matter for conjecture or opinion. Once established, cost is fixed as long
as the asset remains the property of the party that incurred the cost. Cost is based on fact; that is, it is the result
of an arm's length transaction. Cost is also measurable or determinable. Over the years, accountants have found
cost to be the most practical basis for record keeping. Financial statements prepared on a cost basis provide
business enterprise information having a common, accepted basis from which each reader can make inferences,
comparisons, and analyses.
Ex. 2-102—Matching concept.
A concept is a group of related ideas. Matching could be considered a concept because it includes ideas related
to both revenue recognition and expense recognition. Briefly explain the ideas in (a) revenue recognition and
(b) expense recognition.
Solution 2-102
(a) The ideas in revenue recognition include the "three R's" and "earned":
1. Revenues are inflows of net assets from delivering or producing goods or services or other earning
activities that are the major operations of an enterprise during a period.
2. Recognition is recording and reporting in the financial statements.
3. Revenues are realized when goods or services are exchanged for cash or claims to cash.
4. Revenues are earned when the earnings process is complete or virtually complete.
The revenue recognition principle is that revenue is recognized when it is realized and it is earned.
(b) The ideas in expense recognition include "expense" and "matching":
1. Expenses are outflows of net assets during a period from delivering or producing goods or services or
other activities that are the major operations of the entity.
2. Expenses are recognized when the goods or services (efforts) make their contribution to revenue.
Solution 2-102 (cont.)
The matching principle is that expenses are matched with revenues. Expenses are matched three ways:
1. When there is an association with revenue, expenses are matched with revenues in the period the
revenues are recognized.
2. When no association with revenue is evident, expenses are allocated on some systematic and rational
basis.
3. When no association with revenue is evident and no future benefits are expected, expenses are
recognized immediately.
CPAR-CHAPTER 3
THE ACCOUNTING INFORMATION SYSTEM
TRUE/FALSE
Answer
F
T
F
No.
1.
2.
3.
Description
Recording transactions.
Nominal accounts.
Liability and stockholders’ equity accounts.
F
T
T
F
T
F
T
4.
5.
6.
7.
8.
9.
10.
Steps in accounting cycle.
General journal.
Adjusting entries for prepayments.
Book value of depreciable assets.
Reporting ending retained earnings.
Closing entries and Income Summary.
Perpetual inventory system.
MULTIPLE CHOICE—Conceptual
Answer
d
d
d
c
c
a
d
d
c
d
a
d
d
d
b
a
d
a
b
c
d
a
a
a
b
a
a
d
c
a
d
c
d
c
d
d
d
b
c
b
b
c
No.
Description
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
Purpose of an accounting system.
Necessity of accounting records.
Purpose of an accounting system.
Meaning of debit.
Double-entry system.
Effect on stockholders’ equity.
Criteria for recording events.
Identification of a recordable event.
Identification of internal events.
Book of original entry.
Transaction analysis.
Purpose of trial balance.
Limitations of trial balance.
Identification of a real account.
Identification of a temporary account.
Temporary vs. permanent accounts.
External events.
General journal.
Journal entry.
Journal entry.
Journal entry.
Timing of adjustments.
Prepaid expense.
Expiration of prepaid expenses.
Effect of depreciation entry.
Unearned revenue relationships.
Computation of interest expense for adjusting entry.
Purpose of adjusting entries.
Matching principle.
Prepaid items.
Accrued items.
Definition of unearned revenue.
Definition of accrued expense.
Adjusting entry for accrued expense.
Factors to consider in estimating depreciation.
Adjusting entries.
Effect of adjusting entries.
Prepaid expense and the matching principle.
Accrued revenue and the matching principle.
Unearned revenue and the matching principle.
Adjusted trial balance.
Closing entry process.
c
c
d
c
c
c
d
d
53.
54.
*55.
*56.
*57.
*58.
*59.
*60.
Year-end inventory adjustment.
Effect of understanding ending inventory.
Cash basis revenue.
Convert cash receipts to service revenue.
Convert cash paid for operating expenses.
Purpose of reversing entries.
Identification of reversing entries.
Identification of reversing entries.
MULTIPLE CHOICE—Computational
Answer No.
Description
c
c
c
c
a
d
d
c
b
b
c
c
d
d
c
b
b
d
c
c
c
c
c
b
Effect of transactions on owners’ equity.
Effect of transactions on owners’ equity.
Unearned rent adjustment.
Unearned rent adjustment.
Determine adjusting entry.
Determine adjusting entry.
Determine adjusting entry.
Adjusting entry for bad debts.
Adjusting entry for bad debts.
Unearned rent adjustment.
Adjusting entry for interest receivable.
Subsequent period entry for interest.
Use of reversing entry.
Effect of closing entries.
Calculate commission expense for the year.
Calculate cash received for interest.
Calculate cash paid for salaries.
Calculate cash paid for insurance.
Calculate insurance expense.
Calculate interest revenue.
Calculate salary expense.
Reversing entries.
Calculate total purchases.
Calculate cost of goods sold.
61.
62.
63.
64.
*65.
*66.
67.
68.
69.
*70.
71.
72.
*73.
74.
*75.
*76.
*77.
*78.
*79.
*80.
*81.
*82.
*83.
*84.
MULTIPLE CHOICE—CPA Adapted
Answer
c
b
a
c
b
b
a
d
b
c
No.
85.
86.
87.
88.
89.
90.
91.
92.
*93.
*94.
Description
Determine accrued interest payable.
Determine balance of unearned revenues.
Calculate subscriptions revenue.
Determine interest receivable.
Calculate balance of accrued payable.
Calculate accrued salaries.
Calculate royalty revenue.
Calculate deferred revenue.
Difference between cash basis and accrual method.
Determine cash basis revenue.
b
a
*95.
*96.
Determine accrual basis revenue.
Calculate cost of goods sold.
*This topic is dealt with in an Appendix to the chapter.
EXERCISES
Item
Description
E3-97
E3-98
E3-99
E3-100
E3-101
E3-102
*E3-103
*E3-104
*E3-105
*E3-106
*E3-107
Definitions.
Terminology.
Accrued and deferred items.
Adjusting entries.
Adjusting entries.
Financial statements.
Cash basis vs. accrual basis accounting.
Accrual basis.
Accrual basis.
Accrual basis.
Cash basis.
PROBLEMS
Item
Description
P3-108
P3-109
P3-110
*P3-111
*P3-112
*P3-113
*P3-114
Adjusting entries and account classifications.
Adjusting entries.
Adjusting and closing entries.
Cash to accrual accounting.
Accrual accounting.
Accrual accounting.
Eight-column work sheet.
CHAPTER LEARNING OBJECTIVES
1.
Understand basic accounting terminology.
2.
Explain double-entry rules.
3.
Identify steps in the accounting cycle.
4.
Record transactions in journals, post to ledger accounts, and prepare a trial balance.
5.
Explain the reasons for preparing adjusting entries.
6.
Prepare financial statements from the adjusted trial balance.
7.
Prepare closing entries.
8.
Explain how to adjust inventory accounts at year-end.
*9.
Differentiate the cash basis of accounting from the accrual basis of accounting.
*10.
Identify adjusting entries that may be reversed.
*11.
Prepare a 10-column worksheet.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Ite
m
Typ
e
Ite
m
Typ
e
Ite
m
1.
2.
TF
TF
11.
12.
MC
MC
13.
20.
3.
TF
14.
MC
15.
4.
TF
17.
MC
18.
5.
TF
22.
23.
MC
MC
29.
6.
7.
32.
33.
34.
35.
36.
37.
38.
TF
TF
MC
MC
MC
MC
MC
MC
MC
8.
TF
9.
TF
10.
TF
55.
56.
57.
75.
MC
MC
MC
MC
58.
MC
114.
Note:
39.
40.
41.
42.
43.
44.
45.
46.
47.
MC
MC
MC
MC
MC
MC
MC
MC
MC
48.
49.
50.
63.
64.
67.
68.
69.
71.
MC
102.
MC
74.
MC
54.
76.
77.
78.
79.
MC
MC
MC
MC
80.
81.
83.
84.
59.
MC
60.
51.
52.
53.
Typ
e
Ite
m
Ite
m
Learning Objective 1
MC
22. MC
25.
MC
24. MC
98.
Learning Objective 2
MC
16. MC
21.
Learning Objective 3
MC
19. MC
26.
Learning Objective 4
MC
30. MC
31.
Learning Objective 5
MC
72. MC
97.
MC
85. MC
98.
MC
86. MC
99.
MC
87. MC
100.
MC
88. MC
101.
MC
89. MC
MC
90. MC
MC
91. MC
MC
92. MC
Learning Objective 6
E
Learning Objective 7
MC
110.
P
Learning Objective 8
MC
100.
E
108.
Learning Objective *9
MC
93. MC
103.
MC
94. MC
104.
MC
95. MC
105.
MC
96. MC
106.
Learning Objective *10
MC
65. MC
82.
66. MC
73. MC
Learning Objective *11
P
TF = True/False
MC = Multiple Choice
Typ
e
E = Exercise
P = Problem
Typ
e
Ite
m
Typ
e
Ite
m
Ty
pe
MC
E
MC
MC
27.
MC
28.
MC
MC
61.
MC
62.
MC
E
E
E
E
E
108.
109.
P
P
110.
P
P
110.
P
E
E
E
E
107.
111.
112.
113.
E
P
P
P
MC
101.
E
TRUE/FALSE
1.
A ledger is where the company initially records transactions and selected other events.
2.
Nominal (temporary) accounts are revenue, expense, and dividend accounts and are periodically
closed.
3.
All liability and stockholders’ equity accounts are increased on the credit side and decreased on the
debit side.
4.
The first step in the accounting cycle is the journalizing of transactions and selected other events.
5.
A general journal chronologically lists transactions and other events, expressed in terms of debits and
credits to accounts.
6.
Adjusting entries for prepayments record the portion of the prepayment that represents the expense
incurred or the revenue earned in the current accounting period.
7.
The book value of any depreciable asset is the difference between its cost and its salvage value.
8.
The ending retained earnings balance is reported on both the retained earnings statement and the
balance sheet.
9.
All revenues, expenses, and the dividends account are closed through the Income Summary account.
10.
With a perpetual inventory system, a company records purchases and sales directly in the Inventory
account as the purchases and sales occur.
MULTIPLE CHOICE—Conceptual
11.
Factors that shape an accounting information system include the
a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. all of these.
12.
Maintaining a set of accounting records is
a. optional.
b. required by the Internal Revenue Service.
c. required by the Foreign Corrupt Practices Act.
d. required by the Internal Revenue Service and the Foreign Corrupt Practices Act.
13.Debit always means
a. right side of an account.
b. increase.
c. decrease.
d. none of these.
14.
The double-entry accounting system means
a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. More than one of the above.
15.
When a corporation pays a note payable and interest,
a. the account notes payable will be increased.
b. the account interest expense will be decreased.
c. they will debit notes payable and interest expense.
d. they will debit cash.
16.
Stockholders’ equity is not affected by all
a. cash receipts.
b. dividends.
c. revenues.
d. expenses.
17.
Which of the following criteria must be met before an event or item should be recorded for accounting
purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.
18.
Which of the following is a recordable event or item?
a. Changes in managerial policy
b. The value of human resources
c. Changes in personnel
d. None of these
19.
Which of the following is not an internal event?
a. Depreciation
b. Using raw materials in the production process
c. Dividend declaration and subsequent payment
d. All of these are internal transactions.
20.
An accounting record into which the essential facts and figures in connection with all transactions are
initially recorded is called the
a. ledger.
b. account.
c. trial balance.
d. none of these.
21.
The debit and credit analysis of a transaction normally takes place
a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at some other point in the accounting cycle.
22.
A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing financial
statements.
c. is normally prepared three times in the accounting cycle.
d. all of these.
23.
A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. all of these.
24.Which of the following is a real (permanent) account?
a. Goodwill
b. Sales
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable
25.
Which of the following is a nominal (temporary) account?
a. Unearned Revenue
b. Salary Expense
c. Inventory
d. Retained Earnings
26.
Nominal accounts are also called
a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. none of these.
27.
External events do not include
a. interaction between an entity and its environment.
b. a change in the price of a good or service that an entity buys or sells, a flood or earthquake.
c. improvement in technology by a competitor.
d. using buildings and machinery in operations.
28.
A general journal
a. chronologically lists transactions and other events, expressed in terms of debits and credits.
b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and expense
accounts.
c. lists all the increases and decreases in each account in one place.
d. contains only adjusting entries.
29.
A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.
30.
A journal entry to record a payment on account will include a
a. debit to accounts receivable.
b. credit to accounts receivable.
c. debit to accounts payable.
d. credit to accounts payable.
31.
A journal entry to record a receipt of rent revenue in advance will include a
a. debit to rent revenue.
b. credit to rent revenue.
c. credit to cash.
d. credit to unearned rent.
32.
Adjustments are often prepared
a. after the balance sheet date, but dated as of the balance sheet date.
b. after the balance sheet date, and dated after the balance sheet date.
c. before the balance sheet date, but dated as of the balance sheet date.
d. before the balance sheet date, and dated after the balance sheet date.
33.
At the time a company prepays a cost
a. it debits an asset account to show the service or benefit it will receive in the future.
b. it debits an expense account to match the expense against revenues earned.
c. its credits a liability account to show the obligation to pay for the service in the future.
d. more than one of the above.
34.
How do these prepaid expenses expire?
Rent
a. With the passage of time
b. With the passage of time
c. Through use and consumption
d. Through use and consumption
Supplies
Through use and consumption
With the passage of time
Through use and consumption
With the passage of time
35.
Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for
a. an unearned revenue.
b. a prepaid expense.
c. an accrued revenue.
d. an accrued expense.
36.
Unearned revenue on the books of one company is likely to be
a. a prepaid expense on the books of the company that made the advance payment.
b. an unearned revenue on the books of the company that made the advance payment.
c. an accrued expense on the books of the company that made the advance payment.
d. an accrued revenue on the books of the company that made the advance payment.
37.
To compute interest expense for an adjusting entry, the formula is principal X rate X a fraction. The
numerator and denominator of the fraction are:
Numerator
Denomintor
a. Length of time note has been outstanding
12 months
b. Length of note
12 months
c. Length of time until note matures
Length of note
d. Length of time note has been outstanding
Length of note
38.
Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to their fair market value.
a. 1
b. 2
c. 3
d. 1 and 2
39.
Why are certain costs of doing business capitalized when incurred and then depreciated or amortized
over subsequent accounting cycles?
a. To reduce the federal income tax liability
b. To aid management in cash-flow analysis
c. To match the costs of production with revenues as earned
d. To adhere to the accounting constraint of conservatism
40.
When an item of expense is paid and recorded in advance, it is normally called a(n)
a. prepaid expense.
b. accrued expense.
c. estimated expense.
d. cash expense.
41.
When an item of revenue or expense has been earned or incurred but not yet collected or paid, it is
normally called a(n) ____________ revenue or expense.
a. prepaid
b. adjusted
c. estimated
d. none of these
42.
When an item of revenue is collected and recorded in advance, it is normally called a(n) ___________
revenue.
a. accrued
b. prepaid
c. unearned
d. cash
43.
An accrued expense can best be described as an amount
a. paid and currently matched with earnings.
b. paid and not currently matched with earnings.
c. not paid and not currently matched with earnings.
d. not paid and currently matched with earnings.
44.
If, during an accounting period, an expense item has been incurred and consumed but not yet paid for
or recorded, then the end-of-period adjusting entry would involve
a. a liability account and an asset account.
b. an asset or contra asset account and an expense account.
c. a liability account and an expense account.
d. a receivable account and a revenue account.
45.
Which of the following must be considered in estimating depreciation on an asset for an accounting
period?
a. The original cost of the asset
b. Its useful life
c. The decline of its fair market value
d. Both the original cost of the asset and its useful life.
46.
Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
47.
Year-end net assets would be overstated and current expenses would be understated as a result of
failure to record which of the following adjusting entries?
a. Expiration of prepaid insurance
b. Depreciation of fixed assets
c. Accrued wages payable
d. All of these
48.
A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.
49.
An accrued revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
50.
An unearned revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
51.
An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger accounts after all
adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.
52.
Which type of account is always debited during the closing process?
a. Dividends.
b. Expense.
c. Revenue.
d. Retained earnings.
53.
When a company uses a periodic inventory system, the year-end entry to adjust the inventory account
will debit and credit inventory as follows:
Beginning Inventory Amount
Ending Inventory Amount
a.
Debited
Credited
b.
Debited
Debited
c.
Credited
Debited
d.
Credited
Credited
54.
If the inventory account at the end of the year is understated, the effect will be to
a. overstate the gross profit on sales.
b. understate the net purchases.
c. overstate the cost of goods sold.
d. overstate the goods available for sale.
*55.
Under the cash basis of accounting, revenues are recorded
a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.
*56.
When converting from cash basis to accrual basis accounting, which of the following adjustments
should be made to cash receipts from customers to determine accrual basis service revenue?
a. Subtract ending accounts receivable.
b. Subtract beginning unearned service revenue.
c. Add ending accounts receivable.
d. Add cash sales.
*57.
When converting from cash basis to accrual basis accounting, which of the following adjustments
should be made to cash paid for operating expenses to determine accrual basis operating expenses?
a. Add beginning accrued liabilities.
b. Add beginning prepaid expense.
c. Subtract ending prepaid expense.
d. Subtract interest expense.
*58.
Reversing entries are
1. normally prepared for prepaid, accrued, and estimated items.
2. necessary to achieve a proper matching of revenue and expense.
3. desirable to exercise consistency and establish standardized procedures.
a. 1
b. 2
c. 3
d. 1 and 2
*59.
Adjusting entries that should be reversed include those for prepaid or unearned items that
a. create an asset or a liability account.
b. were originally entered in a revenue or expense account.
c. were originally entered in an asset or liability account.
d. create an asset or a liability account and were originally entered in a revenue or expense account.
*60.
Adjusting entries that should be reversed include
a. all accrued revenues.
b. all accrued expenses.
c. those that debit an asset or credit a liability.
d. all of these.
Multiple Choice Answers—Conceptual
Item
Ans.
11.
d
12. d
13.
d
14.
c
15.
c
16.
a
17.
d
18.
d
19.
c
Item
20.
21.
22.
23.
24.
25.
26.
27.
28.
Ans.
d
a
d
d
d
b
a
d
a
Item
29.
30.
31.
32.
33.
34.
35.
36.
37.
Ans.
b
c
d
a
a
a
b
a
a
Item
38.
39.
40.
41.
42.
43.
44.
45.
46.
Ans.
Item
Ans.
Item
Ans.
d
c
a
d
c
d
c
d
d
47.
48.
49.
50.
51.
52.
53.
54.
*55.
d
b
c
b
b
c
c
c
d
*56.
*57.
*58.
*59.
*60.
c
c
c
d
d
MULTIPLE CHOICE—Computational
61.
Maso Company recorded journal entries for the issuance of common stock for $40,000, the payment of
$13,000 on accounts payable, and the payment of salaries expense of $21,000. What net effect do these
entries have on owners’ equity?
a. Increase of $40,000.
b. Increase of $27,000.
c. Increase of $19,000.
d. Increase of $6,000.
62.
Mune Company recorded journal entries for the payment of $50,000 of dividends, the $32,000 increase
in accounts receivable for services rendered, and the purchase of equipment for $21,000. What net
effect do these entries have on owners’ equity?
a. Decrease of $71,000.
b. Decrease of $39,000.
c. Decrease of $18,000.
d. Increase of $11,000.
63.
Pappy Corporation received cash of $13,500 on September 1, 2007 for one year’s rent in advance and
recorded the transaction with a credit to Unearned Rent. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, $4,500.
b. debit Rent Revenue and credit Unearned Rent, $9,000.
c. debit Unearned Rent and credit Rent Revenue, $4,500.
d. debit Cash and credit Unearned Rent, $9,000.
64.
Panda Corporation paid cash of $18,000 on June 1, 2007 for one year’s rent in advance and recorded
the transaction with a debit to Prepaid Rent. The December 31, 2007 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, $7,500.
b. debit Prepaid Rent and credit Rent Expense, $10,500.
c. debit Rent Expense and credit Prepaid Rent, $10,500.
d. debit Prepaid Rent and credit Cash, $7,500.
Solutions to those Multiple Choice questions for which the answer is “none of these.”
13.
left or left-side.
18.
Many answers are possible.
20.
journal.
41.
accrued.
*65.
Lopez Company received $6,400 on April 1, 2007 for one year's rent in advance and recorded the
transaction with a credit to a nominal account. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, $1,600.
b. debit Rent Revenue and credit Unearned Rent, $4,800.
c. debit Unearned Rent and credit Rent Revenue, $1,600.
d. debit Unearned Rent and credit Rent Revenue, $4,800.
*66.
Gibson Company paid $3,600 on June 1, 2007 for a two-year insurance policy and recorded the entire
amount as Insurance Expense. The December 31, 2007 adjusting entry is
a. debit Insurance Expense and credit Prepaid Insurance, $1,050.
b. debit Insurance Expense and credit Prepaid Insurance, $2,550.
c. debit Prepaid Insurance and credit Insurance Expense, $1,050
d. debit Prepaid Insurance and credit Insurance Expense, $2,550.
67.
Tate Company purchased equipment on November 1, 2007 and gave a 3-month, 9% note with a face
value of $20,000. The December 31, 2007 adjusting entry is
a. debit Interest Expense and credit Interest Payable, $1,800.
b. debit Interest Expense and credit Interest Payable, $450.
c. debit Interest Expense and credit Cash, $300.
d. debit Interest Expense and credit Interest Payable, $300.
68.
Brown Company's account balances at December 31, 2007 for Accounts Receivable and the related
Allowance for Doubtful Accounts are $460,000 debit and $700 credit, respectively. From an aging of
accounts receivable, it is estimated that $12,500 of the December 31 receivables will be uncollectible.
The necessary adjusting entry would include a credit to the allowance account for
a. $12,500.
b. $13,200.
c. $11,800.
d. $700.
69.
Chen Company's account balances at December 31, 2007 for Accounts Receivable and the Allowance
for Doubtful Accounts are $320,000 debit and $600 credit. Sales during 2007 were $900,000. It is
estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the
allowance account for
a. $9,600.
b. $9,000.
c. $8,400.
d. $3,200.
*70.
Garcia Corporation received cash of $18,000 on August 1, 2007 for one year's rent in advance and
recorded the transaction with a credit to Rent Revenue. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, $7,500.
b. debit Rent Revenue and credit Unearned Rent, $10,500.
c. debit Unearned Rent and credit Rent Revenue, $7,500.
d. debit Cash and credit Unearned Rent, $10,500.
71.
Starr Corporation loaned $90,000 to another corporation on December 1, 2007 and received a 3-month,
8% interest-bearing note with a face value of $90,000. What adjusting entry should Starr make on
December 31, 2007?
a. Debit Interest Receivable and credit Interest Revenue, $1,800.
b. Debit Cash and credit Interest Revenue, $600.
c. Debit Interest Receivable and credit Interest Revenue, $600.
d. Debit Cash and credit Interest Receivable, $1,800.
Use the following information for questions 72 and 73:
A company receives interest on a $30,000, 8%, 5-year note receivable each April 1. At December 31,
2006, the following adjusting entry was made to accrue interest receivable:
Interest Receivable .......................................................................
1,800
Interest Revenue ..............................................................
1,800
72.
Assuming that the company does not use reversing entries, what entry should be made on April 1, 2007
when the annual interest payment is received?
a. Cash .......................................................................................600
Interest Revenue ..............................................................
600
b. Cash ....................................................................................1,800
Interest Receivable ..........................................................
1,800
c. Cash ....................................................................................2,400
Interest Receivable ..........................................................
1,800
Interest Revenue ..............................................................
600
d. Cash ....................................................................................2,400
Interest Revenue ..............................................................
2,400
*73.
Assuming that the company does use reversing entries, what entry should be made on April 1, 2007
when the annual interest payment is received?
a. Cash .......................................................................................600
Interest Revenue ..............................................................
600
b. Cash ....................................................................................1,800
Interest Receivable ..........................................................
1,800
c. Cash ...........................................................................................
2,400
Interest Receivable ..........................................................
1,800
Interest Revenue ..............................................................
600
d. Cash ....................................................................................2,400
Interest Revenue...............................................................
2,400
74.
Big-Mouth Frog Corporation had revenues of $200,000, expenses of $120,000, and dividends of
$30,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to
Retained Earnings is a
a. debit of $50,000.
b. debit of $80,000.
c. credit of $50,000.
d. credit of $80,000.
*75.
Lane Corporation has an incentive commission plan for its salesmen, entitling them to an additional
sales commission when actual quarterly sales exceed budgeted estimates. An analysis of the account
"incentive commission expense" for the year ended December 31, 2007, follows:
Amount
For Quarter Ended
Date Paid
$40,000
December 31, 2006
January 23, 2007
36,000
March 31, 2007
April 24, 2007
39,000
June 30, 2007
July 19, 2007
43,000
September 30, 2007
October 22, 2007
The incentive commission for the quarter ended December 31, 2007, was $42,000. This
amount was recorded and paid in January 2008. What amount should Lane report as
incentive commission expense for 2007?
a. $158,000.
b. $118,000.
c. $160,000.
d. $200,000.
Use the following information for questions 76 through 78:
The income statement of Dolan Corporation for 2007 included the following items:
Interest revenue
$65,500
Salaries expense
85,000
Insurance expense
7,600
The following balances have been excerpted from Dolan Corporation's balance sheets:
December 31, 2007
December 31, 2006
Accrued interest receivable
$9,100
$7,500
Accrued salaries payable
8,900
4,200
Prepaid insurance
1,100
1,500
*76.
The cash received for interest during 2007 was
a. $56,400.
b. $63,900.
c. $65,500.
d. $67,100.
*77.
The cash paid for salaries during 2007 was
a. $89,700.
b. $80,300.
c. $80,800.
d. $93,900.
*78.
The cash paid for insurance premiums during 2007 was
a. $6,500.
b. $6,100.
c. $8,000.
d. $7,200.
Use the following information for questions 79 through 81:
Olsen Company paid or collected during 2007 the following items:
Insurance premiums paid
Interest collected
Salaries paid
The following balances have been excerpted from Olsen's balance sheets:
December 31, 2007
Prepaid insurance
$ 1,200
Interest receivable
3,700
Salaries payable
12,300
*79.
The insurance expense on the income statement for 2007 was
a. $7,700.
b. $10,100.
c. $10,700.
d. $13,100.
*80.
The interest revenue on the income statement for 2007 was
a. $27,300.
b. $33,100.
c. $34,700.
d. $40,500.
*81.
The salary expense on the income statement for 2007 was
a. $97,300.
b. $118,500.
c. $121,900.
d. $143,100.
$ 10,400
33,900
120,200
December 31, 2006
$ 1,500
2,900
10,600
*82.
At the end of 2007, Drew Company made four adjusting entries for the following items:
1. Depreciation expense, $25,000.
2. Expired insurance, $2,200 (originally recorded as prepaid insurance).
3. Interest payable, $6,000.
4. Rental revenue receivable, $10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may
be reversed is (are)
a. Entry No. 3.
b. Entry No. 4.
c. Entries No. 3 and No. 4.
d. Entries No. 2, No. 3, and No. 4.
*83.
The following information is available concerning the accounts of Franz Company:
Accounts payable, January 1, 2007
$18,000
Cash payments on account during 2007
58,000
Purchase discounts taken during 2007 on 2007 purchases
1,200
Accounts payable, December 31, 2007
10,000
Assuming the company records purchases at the gross amounts, the total purchases for
2007 would be
a. $65,200.
b. $48,800.
c. $51,200.
d. $50,000.
*84.
The following information is available for Carr Company:
Payment for goods during 2007
Accounts payable, January 1, 2007
Inventory, January 1, 2007
Accounts payable, December 31, 2007
Inventory, December 31, 2007
$92,000
9,000
10,400
7,200
9,700
Cost of goods sold for 2007 is
a. $89,500.
b. $90,900.
c. $97,100.
d. $98,500.
Multiple Choice Answers—Computational
Item
61.
62.
63.
64.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
c
c
c
c
*65.
*66.
67.
68.
a
d
d
c
69.
*70.
71.
72.
b
b
c
c
73.
74.
*75.
*76.
d
d
c
b
*77.
*78.
*79.
*80.
b
d
c
c
*81.
*82.
*83.
*84.
c
c
c
b
Item
Ans.
MULTIPLE CHOICE—CPA Adapted
85.
On September 1, 2006, Lowe Co. issued a note payable to National Bank in the amount of $600,000,
bearing interest at 12%, and payable in three equal annual principal payments of $200,000. On this
date, the bank's prime rate was 11%. The first payment for interest and principal was made on
September 1, 2007. At December 31, 2007, Lowe should record accrued interest payable of
a. $24,000.
b. $22,000.
c. $16,000.
d. $14,667.
86.
Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a
one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service
Revenues. This account had a balance of $1,800,000 at December 31, 2007 before year-end
adjustment. Service contract costs are charged as incurred to the Service Contract Expense account,
which had a balance of $450,000 at December 31, 2007.
Service contracts still outstanding at December 31, 2007 expire as follows:
During 2008
$380,000
During 2009
570,000
During 2010
350,000
What amount should be reported as Unearned Service Revenues in Eaton's December 31, 2007 balance
sheet?
a. $1,350,000.
b. $1,300,000.
c. $850,000.
d. $500,000.
87.
In November and December 2007, Lane Co., a newly organized magazine publisher, received $90,000
for 1,000 three-year subscriptions at $30 per year, starting with the January 2008 issue. Lane included
the entire $90,000 in its 2007 income tax return. What amount should Lane report in its 2007 income
statement for subscriptions revenue?
a. $0.
b. $5,000.
c. $30,000.
d. $90,000.
88.
On June 1, 2007, Nott Corp. loaned Horn $400,000 on a 12% note, payable in five annual installments
of $80,000 beginning January 2, 2008. In connection with this loan, Horn was required to deposit
$5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn
after all principal and interest payments have been made. Interest on the note is payable on the first day
of each month beginning July 1, 2007. Horn made timely payments through November 1, 2007. On
January 2, 2008, Nott received payment of the first principal installment plus all interest due. At
December 31, 2007, Nott's interest receivable on the loan to Horn should be
a. $0.
b. $4,000.
c. $8,000.
d. $12,000.
89.
Allen Corp.'s liability account balances at June 30, 2007 included a 10% note payable in the amount of
$2,400,000. The note is dated October 1, 2005 and is payable in three equal annual payments of
$800,000 plus interest. The first interest and principal payment was made on October 1, 2006. In
Allen's June 30, 2007 balance sheet, what amount should be reported as accrued interest payable for
this note?
a. $180,000.
b. $120,000.
c. $60,000.
d. $40,000.
90.
Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in
the next biweekly period. Colaw accrues salaries expense only at its December 31 year end.
Data relating to salaries earned in December 2007 are as follows:
Last payroll was paid on 12/26/07, for the 2-week period ended 12/26/07.
Overtime pay earned in the 2-week period ended 12/26/07 was $10,000.
Remaining work days in 2007 were December 29, 30, 31, on which days there was no overtime.
The recurring biweekly salaries total $180,000.
Assuming a five-day work week, Colaw should record a liability at December 31, 2007 for
accrued salaries of
a. $54,000.
b. $64,000.
c. $108,000.
d. $118,000.
91.
Tolan Corp.'s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked
items. Royalties are payable semiannually on March 15 for sales in July through December of the
prior year, and on September 15 for sales in January through June of the same year. Tolan received the
following royalties from Eddy:
March 15
September 15
2006
$5,000
$7,500
2007
6,000
8,500
Eddy estimated that sales of the trademarked items would total $40,000 for July through
December 2007. In Tolan's 2007 income statement, the royalty revenue should be
a. $14,500.
b. $16,000.
c. $20,500.
d. $22,000.
92.
At December 31, 2007, Sue’s Boutique had 1,000 gift certificates outstanding, which had been sold to
customers during 2007 for $50 each. Sue’s operates on a gross margin of 60% of its sales. What
amount of revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December
31, 2007?
a. $0.
b. $20,000.
c. $30,000.
d. $50,000.
*93.
Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net
increase during the accounting period of the
Accounts Receivable
No
No
Yes
Yes
a.
b.
c.
d.
Accrued Expenses Payable
No
Yes
No
Yes
*94.
Gregg Corp. reported revenue of $1,100,000 in its accrual basis income statement for the year ended
June 30, 2007. Additional information was as follows:
Accounts receivable June 30, 2006
$350,000
Accounts receivable June 30, 2007
530,000
Uncollectible accounts written off during the fiscal year
13,000
Under the cash basis, Gregg should report revenue of
a. $687,000.
b. $700,000.
c. $907,000.
d. $933,000.
*95.
Jim Yount, M.D., keeps his accounting records on the cash basis. During 2007, Dr. Yount collected
$360,000 from his patients. At December 31, 2006, Dr. Yount had accounts receivable of $50,000. At
December 31, 2007, Dr. Yount had accounts receivable of $70,000 and unearned revenue of $10,000.
On the accrual basis, how much was Dr. Yount's patient service revenue for 2007?
a. $310,000.
b. $370,000.
c. $380,000.
d. $390,000.
*96.
The following information is available for Ace Company for 2007:
Disbursements for purchases
Increase in trade accounts payable
Decrease in merchandise inventory
$1,050,000
75,000
30,000
Costs of goods sold for 2007 was
a. $1,155,000.
b. $1,095,000.
c. $1,005,000.
d. $945,000.
Multiple Choice Answers—CPA Adapted
Item
85.
86.
Ans.
c
b
Item
87.
88.
Ans.
a
c
Item
89.
90.
Ans.
b
b
Item
91.
92.
Ans.
Item
Ans.
Item
Ans.
a
d
*93.
*94.
b
c
*95.
*96.
b
a
DERIVATIONS — Computational
No.
Answer
61.
c
Derivation
$40,000 - $21,000 = $19,000.
62.
c
$50,000 - $32,000 = $18,000.
63.
c
$13,500 x 4/12 = $4,500.
64.
c
$18,000 x 7/12 = $10,500.
*65.
a
3/12 x $6,400 = $1,600.
*66.
d
17/24 x $3,600 = $2,550.
67.
d
2/12 x 9% x $20,000 = $300.
68.
c
$12,500 – $700 = $11,800.
69.
b
$900,000 x 1% = $9,000.
*70.
b
7/12 x $18,000 = $10,500.
71.
c
1/12 x 8% x $90,000 = $600.
72.
c
$30,000 x 8% = $2,400.
*73.
d
*74.
d
$200,000 - $120,000 = $80,000.
*75.
c
$36,000 + $39,000 + $43,000 + $42,000 = $160,000.
*76.
b
$7,500 + $65,500 - $9,100 = $63,900.
*77.
b
$4,200 + $85,500 - $8,900 = $80,300.
*78.
d
$7,600 – $1,500 + $1,100 = $7,200.
*79.
c
$10,400 + $300 = $10,700.
*80.
c
$33,900 – $2,900 + $3,700 = $34,700.
*81.
c
$120,200 – $10,600 + $12,300 = $121,900.
*82.
c
*83.
c
$58,000 + $1,200 – $18,000 + $10,000 = $51,200.
*84.
b
$92,000 – $9,000 + $7,200 = $90,200 (purchases).
$10,400 + $90,200 – $9,700 = $90,900.
DERIVATIONS — CPA Adapted
No.
Answer
Derivation
85.
c
($600,000 – $200,000) × 12% × 4/12 = $16,000.
86.
b
$380,000 + $570,000 + $350,000 = $1,300,000.
87.
a
$0, none of the $90,000 is earned.
88.
c
$400,000 × 12% × 2/12 = $8,000.
89.
b
$1,600,000 × 9/12 × 10% = $120,000.
90.
b
$10,000 + ($180,000 ÷ 10 × 3) = $64,000.
91.
a
$8,500 + ($40,000 × 15%) = $14,500.
92.
d
1,000 × $50 = $50,000.
*93.
b
Conceptual.
*94.
c
$1,100,000 + $350,000 – $530,000 – $13,000 = $907,000.
*95.
b
$360,000 – $50,000 + $70,000 – $10,000 = $370,000.
*96.
a
$1,050,000 + $75,000 + $30,000 = $1,155,000.
EXERCISES
Ex. 3-97—Definitions.
Provide clear, concise answers for the following.
1. What is the accrual basis of accounting?
2. What is an accrued expense?
3. What is accrued revenue?
4. What is a prepaid expense?
5. What is unearned revenue?
*6. State the rule that indicates which adjusting entries for prepaid and unearned items should be
reversed.
Solution 3-97
1. The accrual basis of accounting recognizes revenue when earned and recognizes expenses in the period
incurred.
2. An accrued expense is incurred, but will be paid in the future.
3. Accrued revenue is earned, but will be collected in the future.
4. A prepaid expense is paid, but will be incurred in the future.
5. Unearned revenue is collected, but will be earned in the future.
*6. Adjusting entries that create an asset or a liability account should be reversed. This would include prepaid
and unearned items originally recorded in a revenue or expense account.
Ex. 3-98—Terminology.
In the space provided at the right, write the word or phrase that is defined or indicated.
1. Revenue and expense accounts.
1. ______________________________________________
2. An optional step in the accounting
2. ______________________________________________
cycle.
3. A revenue collected, but not earned.
3. ______________________________________________
4. A revenue earned, but not collected.
4. ______________________________________________
5. Asset, liability, and equity accounts.
5. ______________________________________________
6. An expense paid, but not incurred.
6. ______________________________________________
7. An expense incurred, but not paid.
7. ______________________________________________
Solution 3-98
1.
2.
3.
4.
Nominal (temporary) accounts.
Reversing entries.
Unearned revenue.
Accrued revenue.
5.
6.
7.
Real (permanent) accounts.
Prepaid expense.
Accrued expense.
Ex. 3-99—Accrued items and deferred (unearned or prepaid) items.
Generally accepted accounting principles require the use of accruals and deferrals in the determination of
income. How is income determined under the accrual basis of accounting? Include in your answer what
constitutes an accrued item and a deferred (prepaid) item, and give appropriate examples of each.
Solution 3-99
Accrual accounting recognizes and reports the effects of transactions and other events in the time periods to
which they relate rather than only when cash is received or paid. Accrual accounting attempts to match
revenues and the expenses associated with those revenues in order to determine net income for an accounting
period.
An accrued item is an item of revenue or expense that has been earned or incurred during the period, but has
not yet been collected or paid in cash. An example of an accrued revenue is rent for the last month of an
accounting period that has been earned by a landlord but not yet paid by the tenant. An example of an accrued
expense is salaries incurred for the last week of an accounting period that are not payable until the subsequent
accounting period.
A deferred (unearned or prepaid) item is an item of revenue or expense that has been received or paid in cash,
but has not yet been earned or consumed. An example of a deferred revenue is unearned subscription revenue
collected in advance of being earned. An example of a deferred expense is an insurance premium paid at the
end of an accounting period which will provide insurance coverage for the first six months of the subsequent
period.
Ex. 3-100—Adjusting entries.
Present, in journal form, the adjustments that would be made on July 31, 2007, the end of the fiscal year, for
each of the following.
1. The supplies inventory on August 1, 2006 was $7,350. Supplies costing $20,150 were acquired during the
year and charged to the supplies inventory. A count on July 31, 2007 indicated supplies on hand of $8,810.
2. On April 30, a ten-month, 9% note for $20,000 was received from a customer.
*3. On March 1, $12,000 was collected as rent for one year and a nominal account was credited.
Solution 3-100
1. Supplies Expense ...............................................................................
Supplies Inventory .................................................................
18,690
2. Interest Receivable .............................................................................
Interest Revenue ....................................................................
450
*3. Rent Revenue .....................................................................................
Unearned Revenue .................................................................
7,000
18,690
450
7,000
Ex. 3-101—Adjusting entries.
Reed Co. wishes to enter receipts and payments in such a manner that adjustments at the end of the period will
not require reversing entries at the beginning of the next period. Record the following transactions in the
desired manner and give the adjusting entry on December 31, 2007. (Two entries for each part.)
1. An insurance policy for two years was acquired on April 1, 2007 for $8,000.
2. Rent of $12,000 for six months for a portion of the building was received on November 1, 2007.
Solution 3-101
1. Prepaid Insurance ................................................................................
Cash .......................................................................................
Insurance Expense ..............................................................................
Prepaid Insurance ...................................................................
2. Cash
................................................................................................
Unearned Rent .......................................................................
Unearned Rent ....................................................................................
Rent Revenue .........................................................................
8,000
8,000
3,000
3,000
12,000
12,000
4,000
4,000
Ex. 3-102
The adjusted trial balance of Ryan Financial Planners appears below. Using the information from the adjusted
trial balance, you are to prepare for the month ending December 31:
1.
2.
3.
an income statement.
a statement of retained earnings.
a balance sheet.
RYAN FINANCIAL PLANNERS
Adjusted Trial Balance
December 31, 2007
Debit
Cash
...................$ 4,400
Accounts Receivable..................................................................................
Office Supplies...........................................................................................
Office Equipment.......................................................................................
Accumulated Depreciation—Office Equipment.........................................
Accounts Payable.......................................................................................
Unearned Revenue.....................................................................................
Common Stock...........................................................................................
Retained Earnings......................................................................................
Dividends ................................................................................................
Service Revenue.........................................................................................
Office Supplies Expense............................................................................
Depreciation Expense.................................................................................
Rent Expense..............................................................................................
$30,900
Solution 3-102 (20 min)
1.
Revenues
RYAN FINANCIAL PLANNERS
Income Statement
For the Month Ended December 31, 2007
Credit
2,200
1,800
15,000
$ 4,000
3,800
5,000
10,000
4,400
2,500
3,700
600
2,500
1,900
$30,900
______
Service revenue
................................
Expenses
Depreciation expense...........................................................................
Rent expense
.......................1,900
Office supplies expense.......................................................................
Total expenses
.............................
Net loss......................................................................................................
2.
$2,500
600
5,000
$(1,300)
RYAN FINANCIAL PLANNERS
Statement of Retained Earnings
For the Month Ended December 31, 2007
Retained earnings, December 1
................................
Less: Net loss.............................................................................................
Dividends.........................................................................................
Retained earnings, December 31................................................................
3.
$ 3,700
$ 4,400
$1,300
2,500
3,800
$600
RYAN FINANCIAL PLANNERS
Balance Sheet
December 31, 2007
Assets
Cash
................................
Accounts receivable...................................................................................
Office supplies
................................
Office equipment
............... $15,000
Less: Accumulated depreciation—office equipment ................... 4,000
Total assets..........................................................................................
$ 4,400
2,200
1,800
11,000
$19,400
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable
...................$ 3,800
Unearned revenue................................................................................
5,000
Total liabilities
................................ $ 8,800
Stockholders’ Equity
Common stock
.................... 10,000
Retained earnings
....................
600
10,600
Total liabilities and stockholders’ equity...................................
$19,400
*Ex. 3-103—Cash basis vs. accrual basis of accounting.
Contrast the cash basis of accounting with the accrual basis of accounting.
*Solution 3-103
The essential difference between the cash basis and the accrual basis of accounting relates to the timing of the
recognition of revenues and expenses. Under the cash basis of accounting, the effects of transactions and other
events are recognized and reported only when cash is received or paid. Under the accrual basis of accounting,
these effects are recognized and reported in the time periods to which they relate, regardless of the time of the
receipt or payment of cash. Because no attempt is made under the cash basis of accounting to match revenues
and the expenses associated with those revenues, cash basis financial statements are not in accordance with
generally accepted accounting principles.
*Ex. 3-104—Accrual basis.
Sales salaries paid during 2007 were $60,000. Advances to salesmen were $1,100 on January 1, 2007, and
$800 on December 31, 2007. Sales salaries accrued were $1,360 on January 1, 2007, and $1,380 on December
31, 2007. Show the computation of sales salaries on an accrual basis for 2007.
*Solution 3-104
$60,000 + $1,100 – $800 – $1,360 + $1,380 = $60,320.
*Ex. 3-105—Accrual basis.
The records for Todd Inc. showed the following for 2007:
Accrued expenses
Prepaid expenses
Cash paid during the year for expenses, $42,500
Jan. 1
$1,800
720
Dec. 31
$2,150
870
Show the computation of the amount of expense that should be reported on the income
statement.
*Solution 3-105
$42,500 – $1,800 + $2,150 + $720 – $870 = $42,700.
*Ex. 3-106—Accrual basis.
The records for Kiley Company showed the following for 2007:
Unearned revenue
Accrued revenue
Cash collected during the year for revenue, $70,000
Jan. 1
$1,600
1,260
Dec. 31
$2,160
920
Show the computation of the amount of revenue that should be reported on the income statement.
*Solution 3-106
$70,000 + $1,600 – $2,160 – $1,260 + $920 = $69,100.
*Ex. 3-107—Cash basis.
Revenue on the income statement was $125,800. Accounts receivable were $4,500 on January 1 and $3,540 on
December 31. Unearned revenue was $1,050 on January 1 and $1,670 on December 31.
Show the computation of revenue for the year on a cash basis.
*Solution 3-107
$125,800 + $4,500 – $3,540 – $1,050 + $1,670 = $127,380.
PROBLEMS
Pr. 3-108—Adjusting entries and account classification.
Selected amounts from Trent Company's trial balance of 12/31/07 appear below:
1. Accounts Payable
$ 160,000
2. Accounts Receivable
150,000
3. Accumulated Depreciation—Equipment
200,000
4. Allowance for Doubtful Accounts
20,000
5. Bonds Payable
500,000
6. Cash
150,000
7. Common Stock
60,000
8. Equipment
840,000
9. Insurance Expense
30,000
10. Interest Expense
10,000
11. Merchandise Inventory
300,000
12. Notes Payable (due 6/1/08)
200,000
13. Prepaid Rent
150,000
14. Retained Earnings
818,000
15. Salaries and Wages Expense
328,000
(All of the above accounts have their standard or normal debit or credit balance.)
Part A.
Prepare adjusting journal entries at year end, December 31, 2007, based on the following
supplemental information.
a. The equipment has a useful life of 15 years with no salvage value. (Straight-line method being
used.)
b. Interest accrued on the bonds payable is $15,000 as of 12/31/07.
c. Expired insurance at 12/31/07 is $20,000.
d. The rent payment of $150,000 covered the six months from November 30, 2007 through May 31, 2008.
e. Salaries and wages earned but unpaid at 12/31/07, $22,000.
Part B.
a.
b.
c.
d.
e.
Indicate the proper balance sheet classification of each of the 15 numbered accounts in the
12/31/07 trial balance before adjustments by placing appropriate numbers after each of the
following classifications. If the account title would appear on the income statement, do not put the
number in any of the classifications.
Current assets
Property, plant, and equipment
Current liabilities
Long-term liabilities
Stockholders' equity
Solution 3-108
Part A.
a. Depreciation Expense—Equipment ($840,000 – 0)  15 .........................
Accumulated Depreciation—Equipment ......................................
56,000
56,000
b. Interest Expense ........................................................................................
Interest Payable ............................................................................
15,000
c. Prepaid Insurance ......................................................................................
Insurance Expense ($30,000 - $20,000) .......................................
10,000
d. Rent Expense ($150,000  6)....................................................................
Prepaid Rent .................................................................................
25,000
e. Salaries and Wages Expense ......................................................................
Salaries and Wages Payable ..........................................................
22,000
Part B.
a. Current assets—2, 4, 6, 11, 13
b. Property, plant, and equipment—3, 8
c. Current liabilities—1, 12
d. Long-term liabilities—5
e. Stockholders' equity—7, 14
15,000
10,000
25,000
22,000
Pr. 3-109—Adjusting entries.
Data relating to the balances of various accounts affected by adjusting or closing entries appear below. (The
entries which caused the changes in the balances are not given.) You are asked to supply the missing journal
entries which would logically account for the changes in the account balances.
1. Interest receivable at 1/1/07 was $1,000. During 2007 cash received from debtors for interest on
outstanding notes receivable amounted to $5,000. The 2007 income statement showed interest revenue in
the amount of $5,400. You are to provide the missing adjusting entry that must have been made, assuming
reversing entries are not made.
2. Unearned rent at 1/1/07 was $5,300 and at 12/31/07 was $8,000. The records indicate cash receipts from
rental sources during 2007 amounted to $40,000, all of which was credited to the Unearned Rent Account.
You are to prepare the missing adjusting entry.
3. Accumulated depreciation—equipment at 1/1/07 was $230,000. At 12/31/07 the balance of the account
was $270,000. During 2007, one piece of equipment was sold. The equipment had an original cost of
$40,000 and was 3/4 depreciated when sold. You are to prepare the missing adjusting entry.
4. Allowance for doubtful accounts on 1/1/07 was $50,000. The balance in the allowance account on
12/31/07 after making the annual adjusting entry was $65,000 and during 2007 bad debts written off
amounted to $30,000. You are to provide the missing adjusting entry.
5. Prepaid rent at 1/1/07 was $9,000. During 2007 rent payments of $120,000 were made and charged to
"rent expense." The 2007 income statement shows as a general expense the item "rent expense" in the
amount of $125,000. You are to prepare the missing adjusting entry that must have been made, assuming
reversing entries are not made.
6. Retained earnings at 1/1/07 was $150,000 and at 12/31/07 it was $210,000. During 2007, cash dividends of
$50,000 were paid and a stock dividend of $40,000 was issued. Both dividends were properly charged to
retained earnings. You are to provide the missing closing entry.
Solution 3-109
1. Interest Receivable ..............................................................................
Interest Revenue ....................................................................
Interest revenue per books
$5,400
Interest revenue received related to 2007
($5,000 – $1,000)
4,000
Interest accrued
$1,400
1,400
2. Unearned Rent Revenue .....................................................................
Rent Revenue .........................................................................
Cash receipts
$40,000
Beginning balance
5,300
Ending balance
(8,000)
Rent revenue
$37,300
37,300
1,400
37,300
Solution 3-109 (cont.)
3.
Depreciation Expense ........................................................................
Accumulated Depreciation—Equipment ................................
Ending balance
$270,000
Beginning balance
230,000
Difference
40,000
Write-off at time of sale 3/4 × $40,000
30,000
$ 70,000
70,000
4. Bad Debt Expense ...............................................................................
Allowance for Doubtful Accounts ..........................................
Ending balance
$65,000
Beginning balance
50,000
Difference
15,000
Written off
30,000
$45,000
45,000
5. Rent Expense ......................................................................................
Prepaid Rent ...........................................................................
Rent expense
$125,000
Less cash paid
120,000
Reduction in prepaid rent account
$ 5,000
5,000
6. Income Summary ................................................................................
Retained Earnings ..................................................................
Ending balance
$210,000
Beginning balance
150,000
Difference
60,000
Cash dividends
$50,000
Stock dividends
40,000
90,000
$150,000
150,000
70,000
45,000
5,000
150,000
Pr. 3-110—Adjusting and closing entries.
The following trial balance was taken from the books of Fisk Corporation on December 31, 2007.
Account
Cash
Accounts Receivable
Note Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Prepaid Insurance
Furniture and Equipment
Accumulated Depreciation--F. & E.
Accounts Payable
Common Stock
Retained Earnings
Sales
Cost of Goods Sold
Salaries Expense
Rent Expense
Totals
Pr. 3-110 (cont.)
At year end, the following items have not yet been recorded.
a. Insurance expired during the year, $2,000.
Debit
$ 12,000
40,000
7,000
Credit
$ 1,800
44,000
4,800
125,000
15,000
10,800
44,000
55,000
280,000
111,000
50,000
12,800
$406,600
$406,600
b.
c.
d.
*e.
f.
Estimated bad debts, 1% of gross sales.
Depreciation on furniture and equipment, 10% per year.
Interest at 6% is receivable on the note for one full year.
Rent paid in advance at December 31, $5,400 (originally charged to expense).
Accrued salaries at December 31, $5,800.
Instructions
(a) Prepare the necessary adjusting entries.
(b) Prepare the necessary closing entries.
Solution 3-110
(a) Adjusting Entries
a. Insurance Expense
.............................2,000
Prepaid Insurance ...................................................................
b. Bad Debt Expense ...........................................................................
Allowance for Doubtful Accounts ..........................................
c. Depreciation Expense ......................................................................
Accumulated Depreciation--F. & E. .......................................
d. Interest Receivable ..........................................................................
Interest Revenue ....................................................................
*e. Prepaid Rent ..........................................................................5,400
Rent Expense .........................................................................
f. Salaries Expense ..............................................................................
Salaries Payable .....................................................................
(b) Closing Entries
Sales ......................................................................................................
Interest Revenue ......................................................................................
Income Summary .........................................................................
2,000
2,800
2,800
12,500
12,500
420
420
5,400
5,800
5,800
280,000
420
280,420
Income Summary .....................................................................................
Salaries Expense ...........................................................................
Rent Expense ................................................................................
Depreciation Expense ...................................................................
Bad Debt Expense ........................................................................
Insurance Expense ........................................................................
Cost of Goods Sold ......................................................................
191,500
Income Summary .....................................................................................
Retained Earnings ........................................................................
88,920
55,800
7,400
12,500
2,800
2,000
111,000
88,920
*Pr. 3-111—Cash to accrual accounting.
The following information is available for Renn Corporation's first year of operations:
Payment for merchandise purchases
Ending merchandise inventory
Accounts payable (balance at end of year)
Collections from customers
$250,000
110,000
60,000
210,000
The balance in accounts payable relates only to merchandise purchases. All merchandise items
were marked to sell at 40% above cost. What should be the ending balance in accounts
receivable, assuming all accounts are deemed collectible?
*Solution 3-111
Since this is the first year of operations and there were $210,000 of accounts receivable collected, one must
compute total sales to determine the ending balance in accounts receivable. Cost of goods sold is $200,000
assuming the accounts payable are for inventory (the $250,000 constitutes only payments made for purchases).
Since the markup is 40% on cost, the sales are $280,000 ($200,000 × 140%). Sales of $280,000 less collections
of $210,000 results in an ending accounts receivable balance of $70,000 as calculated below.
Cash purchases
A/P balance
Total purchases
Ending inventory
Cost of goods sold
$250,000
60,000
310,000
110,000
200,000
× 140%
280,000
210,000
$70,000
Sales
Less collections
Ending A/R
*Pr. 3-112—Accrual accounting.
Yates Company's records provide the following information concerning certain account balances and changes
in these account balances during the current year. Transaction information is missing from each item below.
Instructions
Prepare the entry to record the missing information for each account. (Consider each inde-pendently.)
1. Accounts Receivable: Jan. 1, balance $41,000, Dec. 31, balance $55,000, uncollectible accounts
written off during the year, $6,000; accounts receivable collected during the year, $134,000.
Prepare the entry to record sales.
2. Allowance for Doubtful Accounts: Jan. 1, balance $4,000, Dec. 31, balance $7,500, uncollectible accounts
written off during the year, $25,000. Prepare the entry to record bad debt expense.
3. Accounts Payable: Jan. 1, balance $25,000, Dec. 31, balance $44,000, purchases on account for the year,
$110,000. Prepare the entry to record payments on account.
4. Interest Receivable: Jan. 1 accrued, $3,000, Dec. 31 accrued, $2,100, earned for the year, $30,000. Prepare
the entry to record cash interest received.
*Solution 3-112
1. Ending balance
Beginning balance
Difference
Uncollectible accounts
Receivables collected
Sales for period
$ 55,000
41,000
14,000
6,000
134,000
$154,000
Ending balance
Plus: Rec. collected
Write-offs
OR
Less: Beginning balance
Sales for period
$ 55,000
134,000
6,000
195,000
41,000
$154,000
Accounts Receivable .................................................................................
Sales .............................................................................................
2. Ending balance
Beginning balance
Difference
Write-off
Adjusting entry
$ 7,500
4,000
3,500
25,000
$28,500
$ 44,000
25,000
19,000
110,000
$ 91,000
Cash
$30,000
(2,100)
3,000
$30,900
$ 7,500
25,000
32,500
4,000
$28,500
OR
Beginning balance
Adjusting entry
28,500
28,500
Beginning balance
Plus purchases
$ 25,000
110,000
135,000
44,000
$ 91,000
OR
Less ending balance
Payments
Accounts Payable.......................................................................................
Cash ..............................................................................................
4. Revenue Earned
Less: Dec. 31 accrual
Plus: Jan. 1 accrual
Cash received
154,000
Ending balance
Write-off
Bad Debt Expense .....................................................................................
Allowance for Doubtful Accounts ................................................
3. Ending balance
Beginning balance
Difference
Purchases
Payments
154,000
Beginning balance
Plus revenue earned
OR
Less ending balance
Cash received
...........................30,900
Interest Receivable.......................................................................
(This entry assumes that the $30,000 interest earned
was first recorded as a receivable.)
91,000
91,000
$ 3,000
30,000
33,000
2,100
$30,900
30,900
*Pr. 3-113—Accrual basis.
Grier & Associates maintains its records on the cash basis. You have been engaged to convert its cash basis
income statement to the accrual basis. The cash basis income statement, along with additional information,
follows:
Grier & Associates
Income Statement (Cash Basis)
For the Year Ended December 31, 2007
Cash receipts from customers
Cash payments:
Wages
Taxes
Insurance
Interest
Net income
$450,000
$150,000
65,000
40,000
25,000
$170,000
280,000
Additional information:
Balances at 12/31
2007
2006
$50,000
$30,000
10,000
20,000
14,000
19,000
8,000
4,000
90,000
75,000
3,000
9,000
Accounts receivable
Wages payable
Taxes payable
Prepaid insurance
Accumulated depreciation
Interest payable
No plant assets were sold during 2007.
*Solution 3-113
Grier & Associates
Income Statement (Accrual Basis)
For the Year Ended December 31, 2007
Revenue ($450,000 + $50,000 – $30,000)
Expenses
Wages ($150,000 + $10,000 – $20,000)
Taxes ($65,000 + $14,000 – $19,000)
Insurance ($40,000 + $4,000 – $8,000)
Depreciation ($95,000 – $75,000)
Interest ($25,000 + $3,000 – $9,000)
Total expenses
Net Income
$470,000
$140,000
60,000
36,000
15,000
19,000
270,000
$200,000
*Pr. 3-114—Eight-column work sheet.
The trial balance of Winsor Corporation is reproduced on the following page. The information below is
relevant to the preparation of adjusting entries needed to both properly match revenues and expenses for the
period and reflect the proper balances in the real and nominal accounts.
Instructions
As the accountant for Winsor Corporation, you are to prepare adjusting entries based on the following data,
entering the adjustments on the work sheet and completing the additional columns with respect to the income
statement and balance sheet. Carefully key your adjustments and label all items. (Due to time constraints, an
adjusted trial balance is not required.) Round all computations to the nearest dollar.
(a) Winsor determined that one percent of sales will become uncollectible.
(b) Depreciation is computed using the straight-line method, with an eight year life and $1,000 salvage value.
(c) Salesmen are paid commissions of 10% of sales. Commissions on sales for the last week of December
have not been paid.
(d) The note was issued on October 1, bearing interest at 8%, due Feb. 1, 2008.
(e) A physical inventory of supplies indicated $440 of supplies currently in stock.
(f)
Provisions of a lease contract specify payments must be made one month in advance, with monthly
payments at $800/mo. This provision has been complied with as of Dec. 31, 2007.
Winsor Corporation
Work Sheet
For the Year Ended December 31, 2007
Trial Balance
Accounts
Dr.
Cr.
Cash
12,400
Trading Sec.
4,050
Accounts Rec. 50,000
Allow. for D. A.
420
Mdse. Inventory 16,800
Supplies
1,040
Equipment
45,000
Accum. Depr.-Eq.
9,500
Accounts Payable
4,400
Notes Payable
5,000
Common Stock
40,000
Ret. Earnings
34,690
Cost of Goods Sold 225,520
Office Salaries Exp. 20,800
Sales Comm. Exp. 29,000
Rent Expense
7,200
Misc. Expense
2,200
Sales
320,000
Totals
414,010414,010
Adjustments
Dr.
Cr.
Income Statement Balance Sheet
Dr.
Cr.
Dr.
Cr.
Solution 3-114
Winsor Corporation
Work Sheet
For the Year Ended December 31, 2007
Trial Balance
Accounts
Dr.
Cr.
Cash
12,400
Trading Sec.
4,050
Accounts Rec. 50,000
Allow. for D. A.
420
Mdse. Inventory 16,800
Supplies
1,040
Equipment
45,000
Accum. Depr.-Eq.
9,500
Accounts Payable
4,400
Notes Payable
5,000
Common Stock
40,000
Ret. Earnings
34,690
Cost of Goods Sold 225,520
Office Salaries Exp. 20,800
Sales Comm. Exp. 29,000
(c)
Rent Expense
7,200
Misc. Expense
2,200
Sales
320,000
Totals
414,010414,010
Bad Debt Exp.
Depr. Exp.
Sales Com. Pay.
Interest Expense
Interest Payable
Supplies Expense
Prepaid Rent
Totals
Net Income
Totals
Adjustments
Dr.
Cr.
(a)
(e)
(b)
3,000
(f)
Income Statement Balance Sheet
Dr.
Cr.
Dr.
Cr.
12,400
4,050
50,000
3,200
3,620
16,800
600
440
45,000
5,500
15,000
4,400
5,000
40,000
34,690
225,520
20,800
32,000
800
6,400
2,200
320,000
(a)
(b)
3,200
3,200
5,500
5,500
(c) 3,000
3,000
(d)
100
100
(d)
100
100
(e)
600
600
(f)
800
800
13,200 13,200
296,320
320,000 129,490
105,810
23,680
23,680
320,000 320,000 129,490129,490
Adjusting entries and explanations
(a) Bad Debt Expense ($320,000 x 1%) ..........................................................
Allowance for Doubtful Accounts ................................................
3,200
(b) Depreciation Expense ................................................................................
Accumulated Depreciation—Equipment ......................................
($45,000 – $1,000 is $44,000. One-eighth of $44,000 is
$5,500.)
5,500
3,200
5,500
Solution 3-114 (cont.)
(c) Sales Commissions ....................................................................................
Sales Commissions Payable .........................................................
(10% of sales is 10% × $320,000, which is $32,000. The
balance in the Sales Commissions account is $29,000
before adjustment, indicating that $3,000 of commissions
are accrued but unpaid.)
3,000
(d) Interest Expense ........................................................................................
Interest Payable ............................................................................
($5,000 × .08 × 3/12 = $100)
100
(e) Supplies Expense ......................................................................................
Supplies ........................................................................................
(The balance of $1,040 in the Supplies account before
adjustment less the correct ending balance of $440 is
$600.)
600
(f) Prepaid Rent ..............................................................................................
Rent Expense ................................................................................
(Since the trial balance contains no account for prepaid
rent, the $800 lease payment has apparently been
debited to Rent Expense. An account must be set up for
the Prepaid Rent.)
800
3,000
100
600
800
CPAR-CHAPTER 5
BALANCE SHEET AND STATEMENT OF CASH FLOWS
TRUE-FALSE—Conceptual
Answer
F
T
T
T
F
F
T
F
F
T
F
F
F
F
T
T
T
F
No.
Description
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Liquidity and solvency.
Limitations of the balance sheet.
Definition of financial flexibility.
Long-term liability disclosures.
Definitions of the balance sheet.
Land held for speculation.
Balance sheet format.
Disclosure of fair values.
Disclosure of company operations and estimates.
Disclosure of pertinent information.
Use of the term reserve.
Adjunct account.
Purpose of statement of cash flows.
Statement of cash flows reporting.
Financial flexibility.
Collection of a loan.
Determining cash provided by operating activities.
Reporting significant financing and investing activities.
T
F
19.
20.
Current cash debt coverage ratio.
Reporting other comprehensive income.
MULTIPLE CHOICE—Conceptual
Answer
d
c
c
b
c
d
b
b
d
d
d
d
d
c
b
d
b
Answer
d
b
d
d
d
d
d
c
d
d
d
d
d
d
d
b
c
c
b
b
c
a
d
b
b
d
c
b
b
No.
21.
22.
S
23.
S
24.
P
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
No.
38.
39.
40.
41.
42.
43.
44.
45.
46.
P
47.
S
48.
49.
50.
51.
52.
53.
54.
S
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
S
65.
P
66.
Description
Limitation of the balance sheet.
Uses of the balance sheet.
Uses of the balance sheet.
Criticisms of the balance sheet.
Definition of liquidity.
Definition of net assets.
Current assets presentation.
Operating cycle.
Operating cycle.
Identification of current asset.
Identification of current asset.
Identification of current asset.
Classification of short-term investments.
Classification of inventory pledged as security.
Identification of long-term investments.
Identification of valuation methods.
Identification of current liabilities.
Description
Definition of working capital.
Identification of working capital items.
Identification of long-term liabilities.
Identification of long-term liabilities.
Classification of treasury stock.
Disclosures for common stock.
Classification of investment in affiliate.
Classification of owners' equity.
Classification of assets.
Identification of contra account.
Balance sheet supplementary disclosure.
Methods of disclosure.
Disclosure of significant accounting policies.
Disclosure of depreciation methods used.
Required notes to the financial statements.
Identification of generally accepted account titles.
Purpose of the statement of cash flows.
Statement of cash flows answers.
Classification of cash receipts.
Identify a financing activity.
Cash flow from operating activities.
Identify an investing activity.
Preparing the statement of cash flows.
Cash debt coverage ratio.
Current cash debt coverage ratio.
Financial flexibility measure.
Calculation of free cash flow.
Description of financial flexibility.
Cash debt coverage ratio.
P
S
Note: these questions also appear in the Problem-Solving Survival Guide.
Note: these questions also appear in the Study Guide.
MULTIPLE CHOICE—Computational
Answer
c
a
b
d
a
b
b
b
c
c
a
b
a
b
No.
Description
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
Classifying investments.
Identifying intangible assets
Calculate total stockholders’ equity.
Classifying investments.
Identifying intangible assets.
Calculate total stockholders’ equity.
Calculate ending cash balance.
Calculate ending cash balance.
Cash provided by operating activities.
Cash provided by operating activities.
Cash debt coverage ratio.
Free cash flow.
Cash debt coverage ratio.
Free cash flow.
MULTIPLE CHOICE—CPA Adapted
Answer
d
d
a
c
b
c
c
a
d
b
No.
Description
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
Calculate total current assets.
Calculate total current assets.
Calculate total current liabilities.
Calculate retained earnings balance.
Calculate current and long-term liabilities.
Summary of significant accounting policies.
Classification of investing activity.
Classification of operating activity.
Classification of financing activity.
Classification of investing activity.
EXERCISES
Item
Description
E5-91
E5-92
E5-93
E5-94
E5-95
E5-96
E5-97
E5-98
E5-99
E5-100
Definitions.
Terminology.
Current assets.
Account classification.
Valuation of balance sheet items.
Balance sheet classifications.
Balance sheet classifications.
Balance sheet classifications.
Statement of cash flows.
Statement of cash flows ratios.
PROBLEMS
Item
Description
P5-101
P5-102
Balance sheet format.
Balance sheet preparation.
CHAPTER LEARNING OBJECTIVES
1. Explain the uses and limitations of a balance sheet.
2. Identify the major classifications of the balance sheet.
3. Prepare a classified balance sheet using the report and account formats.
4. Determine which balance sheet information requires supplemental disclosure.
5. Determine the major disclosure techniques for the balance sheet.
6. Indicate the purpose of the statement of cash flows.
7. Identify the content of the statement of cash flows.
8. Prepare a statement of cash flows.
9. Understand the usefulness of the statement of cash flows.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Ite
m
Typ
e
Ite
m
Typ
e
1.
2.
TF
TF
3.
21.
TF
MC
4.
5.
6.
26.
27.
28.
29.
TF
TF
TF
MC
MC
MC
MC
30.
31.
32.
33.
34.
35.
36.
MC
MC
MC
MC
MC
MC
MC
7.
TF
P
47.
MC
8.
9.
TF
TF
S
10
11.
Ite
m
S
22.
23.
37.
38.
39.
40.
41.
42.
43.
48.
86.
MC
MC
91.
92.
TF
TF
12.
49.
TF
MC
50.
51.
13.
TF
14.
TF
54.
15.
16.
TF
TF
56.
57.
MC
MC
58.
59.
17.
TF
18.
TF
60.
19.
20.
TF
TF
61.
62.
MC
MC
63.
64.
Typ
e
Ite
m
Typ
e
Ite
m
Learning Objective 1
S
MC
24. MC
P
MC
25. MC
Learning Objective 2
MC
44. MC
71.
MC
45. MC
72.
MC
46. MC
81.
MC
67. MC
82.
MC
68. MC
83.
MC
69. MC
84.
MC
70. MC
85.
Learning Objective 3
Learning Objective 4
E
94.
E
98.
E
96.
E
101.
Learning Objective 5
MC
52. MC
MC
53. MC
Learning Objective 6
S
MC
55. MC
Learning Objective 7
MC
73. MC
87.
MC
74. MC
88.
Learning Objective 8
MC
75. MC
76.
Learning Objective 9
S
MC
65. MC
77.
P
MC
66. MC
78.
Typ
e
MC
MC
MC
MC
MC
MC
MC
Ite
m
Typ
e
Ite
m
Ty
pe
91.
92.
93.
94.
95.
96.
97.
E
E
E
E
E
E
E
98.
101.
102.
E
P
P
89.
90.
MC
MC
99.
E
79.
80.
MC
MC
100.
E
E
P
MC
MC
MC
MC
MC
Note:
TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem
TRUE FALSE—Conceptual
F 1. Liquidity refers to the ability of an enterprise to pay its debts as they mature.
T 2. The balance sheet omits many items that are of financial value to the business but cannot be recorded
objectively.
T 3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts
and timing of cash flows.
T 4. Companies frequently describe the terms of all long-term liability agreements in notes to the financial
statements.
F 5. An asset which is expected to be converted into cash, sold, or consumed within one year of the balance
sheet date is always reported as a current asset.
F 6. Land held for speculation is reported in the property, plant, and equipment section of the balance sheet.
T 7. The account form and the report form of the balance sheet are both acceptable under GAAP.
F 8. Because of the historical cost principle, fair values may not be disclosed in the balance sheet.
F 9. Companies have the option of disclosing information about the nature of their operations and the use of
estimates in preparing financial statements.
T 10. Companies may use parenthetical explanations, notes, cross references, and supporting schedules to
disclose pertinent information.
F 11. The accounting profession has recommended that companies use the word reserve only to describe
amounts deducted from assets.
F 12. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’ equity account.
F 13. The primary purpose of a statement of cash flows is to report the cash effects of operations during a
period.
F 14. The statement of cash flows reports only the cash effects of operations during a period and financing
transactions.
T 15. Financial flexibility is a company’s ability to respond and adapt to financial adversity and unexpected
needs and opportunities.
T 16. Collection of a loan is reported as an investing activity in the statement of cash flows.
T 17. Companies determine cash provided by operating activities by converting net income on an accrual basis
to a cash basis.
F 18. Significant financing and investing activities that do not affect cash are not reported in the statement of
cash flows or any other place.
T19. Financial statement readers often assess liquidity by using the current cash debt coverage ratio.
F 20. Free cash flow is net income less capital expenditures and dividends.
True False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
F
T
T
T
F
Item
6.
7.
8.
9.
10.
Ans.
F
T
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
F
F
F
F
T
Item
16.
17.
18.
19.
20.
Ans.
T
T
F
T
F
MULTIPLE CHOICE—Conceptual
21.
a.
Which of the following is a limitation of the balance sheet?
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.
a.
The balance sheet is useful for analyzing all of the following except
liquidity.
b.
solvency.
c.
profitability.
d.
financial flexibility.
S
23.
a.
The balance sheet contributes to financial reporting by providing a basis for all of the following except
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
One criticism not normally aimed at a balance sheet prepared using current accounting and reporting
standards is
failure to reflect current value information.
24.
a.
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
a.
The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash
is referred to as
solvency.
b.
financial flexibility.
c.
liquidity.
d.
exchangeability.
26.
a.
The net assets of a business are equal to
current assets minus current liabilities.
b.
total assets plus total liabilities.
c.
total assets minus total stockholders' equity.
d.
none of these.
27.
a.
The correct order to present current assets is
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.
a.
The basis for classifying assets as current or noncurrent is conversion to cash within
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.
25.
29.
a.
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
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.
a.
The current assets section of the balance sheet should include
machinery.
b.
patents.
c.
goodwill.
d.
inventory.
31.
a.
Which of the following is a current asset?
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.
a.
Which of the following should not be considered as a current asset in the balance sheet?
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.
a.
Equity or debt securities held to finance future construction of additional plants should be classified on
a balance sheet as
current assets.
b.
property, plant, and equipment.
c.
intangible assets.
d.
long-term investments.
34.
a.
When a portion of inventories has been pledged as security on a loan,
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.
a.
Which of the following is not a long-term investment?
Cash surrender value of life insurance
b.
Franchise
c.
Land held for speculation
d.
A sinking fund
36.
a.
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.
1
b.
2
c.
3
d.
1 and 2
37.
a.
Which item below is not a current liability?
Unearned revenue
b.
Stock dividends distributable
c.
The currently maturing portion of long-term debt
d.
Trade accounts payable
38.
a.
Working capital is CA-CL
capital which has been reinvested in the business.
b.
unappropriated retained earnings.
c.
cash and receivables less current liabilities.
d.
none of these.
39.
a.
An example of an item which is not an element of working capital is
accrued interest on notes receivable.
b.
goodwill.
c.
goods in process.
d.
temporary investments.
40.
a.
Long-term liabilities include
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.
a.
Which of the following should be excluded from long-term liabilities?
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.
a.
Treasury stock should be reported as a(n)
current asset.
b.
investment.
c.
other asset.
d.
reduction of stockholders' equity.
43.
a.
Which of the following should be reported for capital stock?
The shares authorized
b.
The shares issued
c.
The shares outstanding
d.
44.
All of these
a.
Which of the following would be classified in a different major section of a balance sheet from the
others?
Capital stock
b.
Common stock subscribed
c.
Stock dividend distributable
d.
Stock investment in affiliate
45.
a.
The stockholders' equity section is usually divided into what three parts?
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.
a.
Which of the following is not an acceptable major asset classification?
Current assets
b.
Long-term investments
c.
Property, plant, and equipment
d.
Deferred charges
P
47.
a.
Which of the following is a contra account?
Premium on bonds payable
b.
Unearned revenue
c.
Patents
d.
Accumulated depreciation
S
a.
Which of the following balance sheet classifications would normally require the greatest amount of
supplementary disclosure?
Current assets
b.
Current liabilities
c.
Plant assets
d.
Long-term liabilities
49.
a.
Which of the following is not a method of disclosing pertinent information?
Supporting schedules
b.
Parenthetical explanations
c.
Cross reference and contra items
d.
All of these are methods of disclosing pertinent information.
50.
a.
Significant accounting policies may not be
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.
A general description of the depreciation methods applicable to major classes of depreci-able assets
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.
48.
d.
52.
should be included in corporate financial statements or notes thereto.
a.
It is mandatory that the essential provisions of which of the following be clearly stated in the notes to
the financial statements?
Stock option plans
b.
Pension obligations
c.
Lease contracts
d.
All of these
53.
a.
A generally accepted account title is
Prepaid Revenue.
b.
Appropriation for Contingencies.
c
Earned Surplus.
d.
Reserve for Doubtful Accounts.
54.
a.
The financial statement which summarizes operating, investing, and financing activities of an entity for
a period of time is the
retained earnings statement.
b.
income statement.
c.
statement of cash flows.
d.
statement of financial position.
S
55.
a.
The statement of cash flows provides answers to all of the following questions except
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.
a.
Making and collecting loans and disposing of property, plant, and equipment are
operating activities.
b.
investing activities.
c.
financing activities.
d.
liquidity activities.
57.
a.
In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be
classified as a(n)
operating activity.
b.
financing activity.
c.
extraordinary activity.
d.
investing activity.
58.
a.
In preparing a statement of cash flows, cash flows from operating activities
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.
a.
In preparing a statement of cash flows, which of the following transactions would be considered an
investing activity?
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.
a.
Preparing the statement of cash flows involves all of the following except determining the
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.
a.
The cash debt coverage ratio is computed by dividing net cash provided by operating activities by
average long-term liabilities.
b.
average total liabilities.
c.
ending long-term liabilities.
d.
ending total liabilities.
62.
a.
The current cash debt coverage ratio is often used to assess
financial flexibility.
b.
liquidity.
c.
profitability.
d.
solvency.
63.
a.
A measure of a company’s financial flexibility is the
cash debt coverage ratio.
b.
current cash debt coverage ratio.
c.
free cash flow.
d.
cash debt coverage ratio and free cash flow.
64.
a.
Free cash flow is calculated as net cash provided by operating activities less
capital expenditures.
b.
dividends.
c.
capital expenditures and dividends.
d.
capital expenditures and depreciation.
S
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?
The nearness to cash of assets and liabilities.
65.
a.
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.
a.
Net cash provided by operating activities divided by average total liabilities equals the
current cash debt coverage ratio.
b.
cash debt coverage ratio.
c.
free cash flow.
d.
current ratio.
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
26.
27.
Ans.
d
c
c
b
c
d
b
Item
28.
29.
30.
31.
32.
33.
34.
Ans.
b
d
d
d
d
d
c
Item
35.
36.
37.
38.
39.
40.
41.
Ans.
b
d
b
d
b
d
d
Item
42.
43.
44.
45.
46.
47.
48.
Ans.
d
d
d
c
d
d
d
Item
49.
50.
51.
52.
53.
54.
55.
Ans.
d
d
d
d
b
c
c
Item
Ans.
56.
57.
58.
59.
60.
61.
62.
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.
b
b
c
a
d
b
b
Item
63.
64.
65.
66.
Ans.
d
c
b
b
MULTIPLE CHOICE—Computational
67.
Garret Company owns the following investments:
Trading securities (fair value)
Available-for-sale securities (fair value)
Held-to-maturity securities (amortized cost)
$60,000
35,000
47,000
a.
Garret will report investments in its current assets section of
$0.
b.
exactly $60,000.
c.
$60,000 or an amount greater than $60,000, depending on the circumstances.
d.
exactly $95,000.
68.
For Nicholson Company, the following information is available:
Capitalized leases
Trademarks
Long-term receivables
$200,000
65,000
75,000
a.
In Nicholson’s balance sheet, intangible assets should be reported at
$65,000.
b.
$75,000.
c.
$265,000.
d.
$275,000.
69.
a.
Sam Hurd Company has the following items: common stock, $720,000; treasury stock, $85,000;
deferred taxes, $100,000 and retained earnings, $313,000. What total amount should Sam Hurd
Company report as stockholders’ equity?
$848,000.
b.
$948,000.
c.
$1,048,000.
d.
$1,118,000.
70.
Horton Company owns the following investments:
Trading securities (fair value)
Available-for-sale securities (fair value)
Held-to-maturity securities (amortized cost)
$ 60,000
35,000
47,000
Horton will report securities in its long-term investments section of
a.
exactly $95,000.
b.
exactly $107,000.
c.
exactly $142,000.
d.
$82,000 or an amount less than $82,000, depending on the circumstances.
71.
For Mitchell Company, the following information is available:
Capitalized leases
Trademarks
Long-term receivables
$280,000
90,000
105,000
a.
In Mitchell’s balance sheet, intangible assets should be reported at
$90,000.
b.
$105,000.
c.
$370,000.
d.
$385,000.
72.
a.
Stanton Company has the following items: common stock, $720,000; treasury stock, $85,000; deferred
taxes, $100,000 and retained earnings, $363,000. What total amount should Stanton Company report
as stockholders’ equity?
$898,000.
b.
$998,000.
c.
$1,098,000.
d.
$1,198,000.
73.
Quince Holman Corporation reports:
Cash provided by operating activities
Cash used by investing activities
Cash provided by financing activities
Beginning cash balance
a.
What is Holman’s ending cash balance?
$280,000.
b.
$350,000.
c.
$500,000.
d.
$570,000.
$250,000
110,000
140,000
70,000
74.
Gordman Corporation reports:
Cash provided by operating activities
Cash used by investing activities
Cash provided by financing activities
Beginning cash balance
a.
What is Gordman’s ending cash balance?
$230,000.
b.
$300,000.
c.
$450,000.
d.
$520,000.
75.
$200,000
110,000
140,000
70,000
Craig Rusch Corporation reports the following information:
Net income
Depreciation expense
Increase in accounts receivable
$500,000
140,000
60,000
a.
Rusch should report cash provided by operating activities of
$300,000.
b.
$420,000.
c.
$580,000.
d.
$700,000.
76.
Porter Corporation reports the following information:
Net income
Depreciation expense
Increase in accounts receivable
$250,000
70,000
30,000
a.
Porter should report cash provided by operating activities of
$150,000.
b.
$210,000.
c.
$290,000.
d.
$350,000.
77.
Joe Novak Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
$215,000
150,000
100,000
Dividends declared
Capital expenditures
Payments of debt
a.
Joe Novak’s cash debt coverage ratio is
0.86.
b.
1.43.
c.
2.15.
d.
4.78.
78.
Joe Novak Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends paid
Capital expenditures
Payments of debt
a.
Joe Novak’s free cash flow is
$10,000.
b.
$45,000.
c.
$105,000.
d.
$155,000.
79.
60,000
110,000
35,000
$215,000
150,000
100,000
60,000
110,000
35,000
Lincoln Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends paid
Capital expenditures
Payments of debt
a.
Lincoln’s cash debt coverage ratio is
1.02.
b.
1.70.
c.
2.55.
d.
3.00.
$255,000
150,000
100,000
60,000
110,000
35,000
80.
Morgan Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends paid
Capital expenditures
Payments of debt
$255,000
150,000
100,000
60,000
110,000
35,000
a.
Morgan’s free cash flow is
$50,000.
b.
$85,000.
c.
$145,000.
d.
$195,000.
Multiple Choice Answers—Computational
Item
67.
68.
69.
Ans.
c
a
b
Item
70.
71.
72.
Ans.
d
a
b
Item
73.
74.
75.
Ans.
b
b
c
Item
76.
77.
78.
Ans.
c
a
b
Item
79.
80.
Ans.
a
b
MULTIPLE CHOICE—CPA Adapted
81.
Reese Corp.'s trial balance reflected the following account balances at December 31, 2007:
Accounts receivable (net)
$24,000
Trading securities
6,000
Accumulated depreciation on equipment and furniture
15,000
Cash
11,000
Inventory
30,000
Equipment
25,000
Patent
4,000
Prepaid expenses
2,000
Land held for future business site
18,000
In Reese's December 31, 2007 balance sheet, the current assets total is
a. $90,000.
b. $82,000.
c. $77,000.
d. $73,000.
Use the following information for questions 82 through 84.
The following trial balance of Scott Corp. at December 31, 2007 has been properly adjusted except for the
income tax expense adjustment.
Scott Corp.
Trial Balance
December 31, 2007
Cash
Accounts receivable (net)
Inventory
Property, plant, and equipment (net)
Accounts payable and accrued liabilities
Income taxes payable
Deferred income tax liability
Common stock
Additional paid-in capital
Retained earnings, 1/1/04
Net sales and other revenues
Costs and expenses
Income tax expenses
$
Dr.
775,000
2,695,000
2,085,000
7,366,000
Cr.
$ 1,701,000
654,000
85,000
2,350,000
3,680,000
3,450,000
13,360,000
11,180,000
1,179,000
$25,280,000
$25,280,000
Other financial data for the year ended December 31, 2007:
Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly installments of
$150,000. The last payment is due December 29, 2009.
The balance in the Deferred Income Tax Liability account pertains to a temporary difference that arose in a
prior year, of which $20,000 is classified as a current liability.
During the year, estimated tax payments of $525,000 were charged to income tax expense. The current and
future tax rate on all types of income is 30%.
In Scott's December 31, 2007 balance sheet,
82.
a.
The current assets total is
$6,080,000.
b.
$5,555,000.
c.
$5,405,000.
d.
$4,955,000.
83.
a.
The current liabilities total is
$1,850,000.
b.
$1,915,000.
c.
$2,375,000.
d.
$2,440,000.
84.
a.
The final retained earnings balance is
$4,451,000.
b.
$4,536,000.
c.
$4,976,000.
d.
$4,905,000.
85.
On January 4, 2007, Gregg Co. leased a building to Cole Corp. for a ten-year term at an annual rental
of $75,000. At inception of the lease, Gregg received $300,000 covering the first two years' rent of
$150,000 and a security deposit of $150,000. This deposit will not be returned to Cole upon expiration
of the lease but will be applied to payment of rent for the last two years of the lease. What portion of
the $300,000 should be shown as a current and long-term liability in Gregg's December 31, 2007
balance sheet?
a.
Current Liability
Long-term Liability
$0
$300,000
b.
$75,000 $150,000
c.
$150,000 $150,000
d.
$150,000 $75,000
86.
Which of the following facts concerning fixed assets should be included in the summary of significant
accounting policies?
a.
b.
c.
d.
87.
Depreciation Method
No
Yes
Yes
No
Composition
Yes
Yes
No
No
a.
In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive
assets should generally be classified as cash inflows from
operating activities.
b.
financing activities.
c.
investing activities.
d.
selling activities.
88.
a.
In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash outflows for
operating activities.
b.
borrowing activities.
c.
lending activities.
d.
financing activities.
89.
a.
In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash
inflows from
lending activities.
b.
operating activities.
c.
investing activities.
d.
financing activities.
90.
a.
In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash
equivalents) should be classified as cash outflows for
operating activities.
b.
investing activities.
c.
financing activities.
d.
lending activities.
Multiple Choice Answers—CPA Adapted
Item
81.
82.
Ans.
Item
d
d
83.
84.
Ans.
a
c
Item
85.
86.
Ans.
Item
b
c
87.
88.
Ans.
c
a
Item
89.
90.
Ans.
d
b
DERIVATIONS — Computational
No.
Answer
Derivation
67.
c
68.
a
69.
b
70.
d
71.
a
72.
b
$720,000 – $85,000 + $363,000 = $998,000.
73.
b
$70,000 + $250,000 – $110,000 + $140,000 = $350,000.
74.
b
$70,000 + $200,000 – $110,000 + $140,000 = $300,000.
75.
b
$500,000 + $140,000 – $60,000 = $580,000.
76.
c
$250,000 + $70,000 – $30,000 = $290,000.
77.
a
$215,000 ÷ ($150,000 + $100,000) = 0.86.
78.
b
$215,000 – $60,000 – $110,000 = $45,000.
79.
a
$255,000 ÷ ($150,000 + $100,000) = 1.02.
80.
b
$255,000 – $60,000 – $110,000 = $85,000.
$720,000 – $85,000 + $313,000 = $948,000.
DERIVATIONS — CPA Adapted
No.
Answer
Derivation
81.
d
$24,000 + $6,000 + $11,000 + $30,000 + $2,000 = $73,000.
82.
d
$775,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $4,955,000.
83.
a
$1,701,000 + ($654,000 – $525,000) + $20,000 = $1,850,000.
84.
c
$3,450,000 + $13,360,000 – $11,180,000 – ($1,179,000 – $525,000) = $4,976,000.
85.
b
Conceptual.
86.
c
Conceptual.
87.
c
Conceptual.
88.
a
Conceptual.
89.
d
Conceptual.
90.
b
Conceptual.
EXERCISES
Ex. 5-91—Definitions.
Provide clear, concise answers for the following.
1. What are assets?
2. What are liabilities?
3. What is equity?
4. What are current liabilities?
5. Explain what working capital is and how it is computed.
6. What are intangible assets?
7. What are current assets?
Solution 5-91
1. Assets are probable future economic benefits obtained or controlled by an entity as a result of past
transactions or events.
2. Liabilities are probable future sacrifices of economic benefits arising from present obligations of an entity
as a result of past transactions or events.
3. Equity is the residual interest in the net assets of an entity.
4. Current liabilities are obligations that are expected to be liquidated through the use of current assets or the
creation of other current liabilities.
5. Working capital is the net amount of a company’s relatively liquid resources. It is the excess of total
current assets over total current liabilities.
6. Intangible assets are economic resources or competitive advantages. They lack physical substance and
have a high degree of uncertainty about the future benefits to be received.
7. Current assets are resources (future economic benefits) expected to be converted to cash, sold, or
consumed in one year or the operating cycle, whichever is longer.
Ex. 5-92—Terminology.
In the space provided at right, write the word or phrase that is defined or indicated.
1. Obligations expected to be liquidated
through use of current assets.
1. Current Liabilities_________________________
2. Statement showing financial condition at a
point in time.
2. Statement of Financial Position_______________
3. Events that depend upon future outcomes.
3. Contingencies_____________________________
4. Probable future sacrifices of economic
benefits.
4. Liabilities________________________________
5. Resources expected to be converted to
cash in one year or the operating cycle,
whichever is longer.
5. Current Assets____________________________
6. Resources of a durable nature used in
operations.
6. Property Plant and Equipment _______________
7. Economic rights or competitive advantages
which lack physical substance.
7. Intangible Assets__________________________
8. Probable future economic benefits.
8. Assets___________________________________
9. Residual interest in the net assets of an
entity.
9. Equity___________________________________
Solution 5-92
1.
2.
3.
4.
5.
Current liabilities.
Balance sheet.
Contingencies.
Liabilities.
Current assets.
6.
7.
8.
9.
Property, plant, and equipment.
Intangible assets.
Assets.
Equity.
Ex. 5-93—Current assets.
Define current assets without using the word "asset."
Solution 5-93
Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in
one year or the operating cycle, whichever is longer.
Ex. 5-94—Account classification.
a.
b.
c.
d.
e.
ASSETS
Current assets
Investments
Plant and equipment
Intangibles
Other assets
LIABILITIES AND CAPITAL
f. Current liabilities
g. Long-term liabilities
h. Preferred stock
i. Common stock
j. Additional paid-in capital
k. Retained earnings
l. Items excluded from balance sheet
Using the letters above, classify the following accounts according to the preferred and ordinary
balance sheet presentation.
_____ 1.
Bond sinking fund
_____ 2.
Common stock distributable
_____ 3.
Appropriation for plant expansion
_____ 4.
Bank overdraft
_____ 5.
Bonds payable (due 2010)
_____ 6.
Premium on common stock
_____ 7.
Securities owned by another company which are collateral for that company's note
_____ 8.
Trading securities
_____ 9.
Inventory
_____10.
Unamortized discount on bonds payable
_____11.
Patents
_____12.
Unearned revenue
Solution 5-94
1.
2.
3.
4.
b
i
k
f
5.
6.
7.
8.
g
j
l
a
9.
10.
11.
12.
a
g
d
f
Ex. 5-95—Valuation of Balance Sheet Items.
Use the code letters listed below (a – l) to indicate, for each balance sheet item (1 – 13) listed
below the usual valuation reported on the balance sheet.
______ 1.
Common stock
______ 8.
Long-term bonds payable
______ 2.
Prepaid expenses
______ 9.
Land (in use)
______ 3.
Natural resources
______10.
Land (future plant site)
______ 4.
Property, plant, and equipment
______11.
Patents
______ 5.
Trade accounts receivable
______12.
Trading securities
______ 6.
Copyrights
______13.
Trade accounts payable
______ 7.
Merchandise inventory
a. Par value
b. Current cost of replacement
c. Amount payable when due, less unamortized discount or plus unamortized premium
d. Amount payable when due
e. Market value at balance sheet date
f.
Net realizable value
g. Lower of cost or market
h. Original cost less accumulated amortization
i.
Original cost less accumulated depletion
j.
Original cost less accumulated depreciation
k. Historical cost
l.
Unexpired or unconsumed cost
Solution 5-95
1.
2.
3.
4.
5.
a
l
i
j
f
6.
7.
8.
9.
10.
h
g
c
k
k
11.
12.
13.
h
e
d
Ex. 5-96—Balance sheet classifications.
Typical balance sheet classifications are as follows.
a. Current Assets
b. Investments
c. Plant Assets
d. Intangible Assets
e. Other Assets
f. Current Liabilities
g.
h.
i.
j.
k.
l.
Long-Term Liabilities
Capital Stock
Additional Paid-In Capital
Retained Earnings
Notes to Financial Statements
Not Reported on Balance Sheet
Indicate by use of the above letters how each of the following items would be classified on a balance sheet
prepared at December 31, 2007. If a contra account, or any amount that is negative or opposite the normal
balance, put parentheses around the letter selected. A letter may be used more than once or not at all.
______16.
Natural resource—timberlands
_____ 1.
Accrued salaries and wages
_____ 2.
Rental revenues for 3 months collected in ______17.
advance
_____ 3.
Land used as plant site
______18.
Goodwill
_____ 4.
Equity securities classified as trading
______19.
90 day notes payable
_____ 5.
Cash
______20.
_____ 6.
Accrued interest payable due in
days
Investment in bonds of another
company; will be held to 2010
maturity
______21.
Land held for speculation
______22.
Death of company president
30
Deficit (no net income earned since
beginning of company)
_____ 7.
Premium on preferred stock issued
_____ 8.
Dividends in arrears on preferred
stock
______23.
Current maturity of bonds payable
_____ 9.
Petty cash fund
______24.
Investment in subsidiary; no plans to
sell in near future
_____10.
Unamortized discount on bonds payable
due 2010
______25.
Trade accounts payable
_____11.
Common stock at par value
______26.
Preferred stock ($10 par)
_____12.
Bond indenture covenants
______27.
Prepaid rent for next 12 months
_____13.
Unamortized premium on bonds payable ______28.
due in 2013
______29.
Allowance for doubtful accounts
______30.
Accumulated depreciation
_____14.
_____15.
Copyright
Accumulated amortization, patents
Earnings not distributed to
stockholders
Solution 5-96
1.
2.
3.
4.
5.
f
f
c
a
a
6.
7.
8.
9.
10.
f
i
k
a
(g)
11.
12.
13.
14.
15.
h
k
g
(a)
(c)
16.
17.
18.
19.
20.
c
(j)
d
f
b
21.
22.
23.
24.
25.
b
l
f
b
f
26.
27.
28.
29.
30.
h
a
d
(d)
j
Ex. 5-97—Balance sheet classifications.
The various classifications listed below have been used in the past by Pyle Company on its balance sheet. It
asks your professional opinion concerning the appropriate classification of each of the items 1-14 below.
a.
b.
c.
d.
e.
Current Assets
Investments
Plant and Equipment
Intangible Assets
Other Assets
f.
g.
h.
i.
Current Liabilities
Long-Term Liabilities
Common Stock and Paid-in Capital in Excess of Par
Retained Earnings
Indicate by letter how each of the following items should be classified. If an item need not be reported on the
balance sheet, use the letter "X." A letter may be used more than once or not at all. If an item can be classified
in more than one category, choose the category most favored by the authors of your textbook.
_____ 1.
Employees' payroll deductions.
_____ 2.
Cash in sinking fund.
_____ 3.
Rent revenue collected in advance.
_____ 4.
Equipment retired from use and held for sale.
_____ 5.
Patents.
_____ 6.
Payroll cash fund.
_____ 7.
Goods held on consignment.
_____ 8.
Accrued revenue on temporary investments.
_____ 9.
Advances to salespersons.
_____10.
Premium on bonds payable due two years from date.
_____11.
Bank overdraft.
_____12.
Salaries which company budget shows will be paid to employees within the next year.
_____13.
Work in process.
_____14.
Appropriation for bonded indebtedness.
Solution 5-97
1.
2.
3.
4.
f
b
f
a or e
5.
6.
7.
8.
d
a
x
a
9.
10.
11.
12.
a
g
f
x
13.
14.
a
i
Ex. 5-98—Balance sheet classifications.
The various classifications listed below have been used in the past by Lowe Company on its balance sheet.
a.
b.
c.
d.
Current Assets
Investments
Plant and Equipment
Intangible Assets
e.
f.
g.
h.
Current Liabilities
Long-term Liabilities
Common Stock and Paid-in Capital in Excess of Par
Retained Earnings
Instructions
Indicate by letter how each of the items below should be classified at December 31, 2007. If an item is not
reported on the December 31, 2007 balance sheet, use the letter "X" for your answer. If the item is a contra
account within the particular classification, place parentheses around the letter. A letter may be used more than
once or not at all.
Sample question and answer:
(a)
Allowance for doubtful accounts.
_____ 1.
Customers' accounts with credit balances.
_____ 2.
Bond sinking fund.
_____ 3.
Salaries which the company's cash budget shows will be paid to employees in 2008.
_____ 4.
Accumulated depreciation.
_____ 5.
Appropriation for plant expansion.
_____ 6.
Amortization of patents for 2007.
_____ 7.
On December 31, 2007, Lowe signed a purchase commitment to buy all of its raw materials from
Delta Company for the next 2 years.
_____ 8.
Discount on bonds payable due March 31, 2010.
_____ 9.
Launching of Lowe’s Internet retailing division in February, 2008.
_____10.
Cash dividends declared on December 15, 2007 payable to stockholders on January 15, 2008.
Solution 5-98
1. e
2. b
3. x
4.
5.
6.
(c)
h
x
7.
8.
9.
x
(f)
x
10.
e
Ex. 5-99—Statement of cash flows.
For each event listed below, select the appropriate category which describes the effect of the event on a
statement of cash flows:
a. Cash provided/used by operating activities.
b. Cash provided/used by investing activities.
c. Cash provided/used by financing activities.
d. Not a cash flow.
_____ 1.
Payment on long-term debt
_____ 2.
Issuance of bonds at a premium
_____ 3.
Collection of accounts receivable
_____ 4.
Cash dividends declared
_____ 5.
Issuance of stock to acquire land
_____ 6.
Sale of available-for-sale securities (long-term)
_____ 7.
Payment of employees' wages
_____ 8.
Issuance of common stock for cash
_____ 9.
Payment of income taxes payable
_____10.
Purchase of equipment
_____11.
Purchase of treasury stock (common)
_____12.
Sale of real estate held as a long-term investment
Solution 5-99
1. c
2. c
3. a
4.
5.
6.
d
d
b
7.
8.
9.
a
c
a
10.
11.
12.
b
c
b
Ex. 5-100—Statement of cash flows ratios.
Financial statements for Olson Company are presented below:
Olson Company
Balance Sheet
December 31, 2007
Assets
Cash
Accounts receivable
Buildings and equipment
Accumulated depreciation—
buildings and equipment
Patents
$ 40,000
35,000
150,000
(50,000)
20,000
$195,000
Liabilities & Stockholders’ Equity
Accounts payable
$ 20,000
Bonds payable
50,000
Common stock
Retained earnings
65,000
60,000
$195,000
Olson Company
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable
Increase in accounts payable
Depreciation—buildings and equipment
Gain on sale of equipment
Amortization of patents
Net cash provided by operating activities
$50,000
$(16,000)
8,000
15,000
(6,000)
2,000
Cash flows from investing activities
Sale of equipment
Purchase of land
Purchase of buildings and equipment
Net cash used by investing activities
12,000
(25,000)
(48,000)
Cash flows from financing activities
Payment of cash dividend
Sale of bonds
Net cash provided by financing activities
(15,000)
40,000
3,000
53,000
(61,000)
25,000
Net increase in cash
Cash, January 1, 2007
Cash, December 31, 2007
17,000
23,000
$40,000
At the beginning of 2007, Accounts Payable amounted to $12,000 and Bonds Payable was $10,000.
Instructions
Calculate the following for Olson Company:
a. Current cash debt coverage ratio
b. Cash debt coverage ratio
c. Free cash flow
Solution 5-100
a. Current cash debt coverage ratio
Net cash provided by operating activities
= ——————————————————
Average current liabilities
$53,000
$53,000
= ——————————— = ———— = 3.3 : 1
($12,000 + $20,000) ÷ 2
$16,000
b. Cash debt coverage ratio
Net cash provided by operating activities
= ——————————————————
Average total liabilities
$53,000
$53,000
= ——————————— = ———— = 1.2 : 1
($22,000 + $70,000) ÷ 2
$46,000
c. Free cash flow
= Net cash provided by operating activities –
capital expenditures and dividends
= $53,000 – *$73,000 – $15,000 = $(35,000)
*$25,000 + $48,000
PROBLEMS
Pr. 5-101—Balance sheet format.
The following balance sheet has been submitted to you by an inexperienced bookkeeper. List your suggestions
for improvements in the format of the balance sheet. Consider both terminology deficiencies as well as
classification inaccuracies.
Densen Industries, Inc.
Balance Sheet
For the Period Ended 12/31/07
Assets
Fixed Assets—Tangible
Equipment
$110,000
Less: reserve for depreciation
(40,000)
$ 70,000
Factory supplies
22,000
Land and buildings
400,000
Less: reserve for depreciation
(150,000)
250,000
Plant site held for future use
90,000
$ 432,000
Current Assets
Accounts receivable
175,000
Cash
80,000
Inventory
220,000
Treasury stock (at cost)
20,000
495,000
Fixed Assets--Intangible
Goodwill
80,000
Notes receivable
40,000
Patents
26,000
146,000
Deferred Charges
Advances to salespersons
60,000
Prepaid rent
27,000
Returnable containers
75,000
162,000
TOTAL ASSETS
$1,235,000
Liabilities
Current Liabilities
Accounts payable
$140,000
Allowance for doubtful accounts
8,000
Common stock dividend distributable
35,000
Income taxes payable
42,000
Sales taxes payable
17,000
$ 242,000
Long-Term Liabilities, 5% debenture bonds, due 2010
500,000
Reserve for contingencies
150,000
650,000
TOTAL LIABILITIES
892,000
Equity
Capital stock, $10.00 par value, issued 12,000 shares with
60 shares held as treasury stock
$150,000
Capital surplus
90,000
Dividends paid
(20,000)
Earned surplus
123,000
TOTAL EQUITY
343,000
TOTAL LIABILITIES AND EQUITY
$1,235,000
Note 1.
The reserve for contingencies has been created by charges to earned surplus and has been established
to provide a cushion for future uncertainties.
Note 2.
The inventory account includes only items physically present at the main plant and warehouse. Items
located at the company's branch sales office amounting to $40,000 are excluded since the company
has consistently followed this procedure for many years.
Solution 5-101
1. The heading should be as of a specific date rather than for a period of time.
2. Reserve for Depreciation is poor terminology; the title Accumulated Depreciation is more appropriate.
3. Land and buildings should be segregated into two accounts. The Accumulated Depreciation account
should only be reported for the buildings.
4. Plant site held for future use should be shown in the Investments section.
5. Current assets should be shown on the balance sheet first in most situations; current assets are listed
usually in order of liquidity; factory supplies should be shown as a current asset.
6. Treasury stock is not an asset, but a contra account to stockholders' equity in most situations.
7. Notes receivable should be reported as a current asset or an investment.
8. The deferred charge items should be reclassified as follows in most situations:
Advances to salespersons—current asset
Prepaid rent—current asset
Returnable containers—current asset
9. Allowance for doubtful accounts should be shown as a contra account to accounts receivable.
10. Common stock dividend distributable should be shown in stockholders' equity.
11. 5% debenture bonds should be shown on a separate line.
12. Reserve for Contingencies should be shown as an appropriation of retained earnings. The authors prefer
the term "appropriation" to the term "reserve."
13. Capital stock should be shown at the par value of the shares issued, $120,000. Any excess should be
included in a paid-in capital account.
14. Capital surplus and earned surplus are poor terminology. The terms "additional paid-in capital" and
"retained earnings" are more appropriate.
15. The dividends paid title is a misnomer. It probably is a dividends declared item that should be closed to
retained earnings.
16. No reference in the body of the statement is made to the notes. The order of the notes is wrong.
17. Note 2 indicates that the inventory account is understated by $40,000.
18. Specific identification and description of all significant accounting principles and methods that involve
selection from among alternatives and/or those that are peculiar to a given industry should be disclosed
in the annual report.
Pr. 5-102—Balance sheet presentation.
The following balance sheet was prepared by the bookkeeper for Perry Company as of December 31, 2007.
Perry Company
Balance Sheet
as of December 31, 2007
Cash
$ 80,000
Accounts payable
$ 75,000
Accounts receivable (net)
Inventories
Investments
Equipment (net)
Patents
52,200
57,000
76,300
96,000
32,000
$393,500
Long-term liabilities
Stockholders' equity
100,000
218,500
$393,500
The following additional information is provided:
1. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank overdraft of $2,500
has been deducted.
2.
The net accounts receivable balance includes:
(a) accounts receivable—debit balances $60,000;
(b) accounts receivable—credit balances $4,000;
(c) allowance for doubtful accounts $3,800.
3. Inventories do not include goods costing $3,000 shipped out on consignment. Receivables of $3,000 were
recorded on these goods.
4. Investments include investments in common stock, trading $19,000 and available-for-sale $48,300, and
franchises $9,000.
5. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is held for sale.
Accumulated depreciation on the other equipment is $40,000.
Instructions
Prepare a balance sheet in good form (stockholders' equity details can be omitted.)
Solution 5-102
Perry Company
Balance Sheet
As of December 31, 2007
Assets
Current assets
Cash
Trading securities
Accounts receivable
Less: Allowance for doubtful accounts
Inventories
*Equipment held for sale
Total current assets
Investments
Available-for-sale securities
Cash surrender value
$ 73,100
19,000
$ 57,000
3,800
(2)
53,200
60,000
1,000
206,300
48,300
9,400
Property, plant, and equipment
Equipment
Less accumulated depreciation
Intangible assets
Patents
Franchises
Total assets
135,000
40,000
(1)
(3)
(4)
57,700
(5)
32,000
9,000
95,000
41,000
$400,000
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Bank overdraft
Total current liabilities
Long-term liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
(1)
(2)
(3)
(4)
(5)
(6)
($80,000 – $9,400 + $2,500)
($60,000 – $3,000)
($57,000 + $3,000)
($5,000 – $4,000)
($96,000 + $40,000 – $5,000 + $4,000)
($75,000 + $4,000)
*An alternative is to show it as an other asset.
1. Which of the following statements best describes the term “going concern”
a. When current liabilities of an entity to continue in operation for assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The expenses of an entity exceed its income
$ 79,000
2,500
81,500
100,000
181,500
218,500
$400,000
(6)
2. It is the accounting standard setting body created by PRC upon recommendations of the Board of Accountancy
to assist the Board of Accountancy in carrying out its powers and functions under R.A. No. 9298
a. Accounting Standards Council
b. Auditing and Assurance Standard Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standard Council
3. Financial accounting is the area of accounting that emphasizes reporting to
a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors
4. It is a “global phenomenon” intended to bring about transparency and a higher degree of comparability in
financial reporting, both of which will benefit the investors and are essential to achieve the goal of one
uniform and globally accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology
5. This accounting concept justifies the usage of accruals and deferrals
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit
6. The conceptual framework is intended to establish
a. Generally accepted accounting principles in financial reporting entities.
b. The meaning of “present fairly in accordance with GAAP”
c. The objectives and concepts for use in developing standards of financial accounting and
reporting.
d. The hierarchy of sources of GAAP.
7. As independent or external auditors, CPAs are primarily responsible for
a. Preparing financial statements in conformity with GAAP
b. Certifying the accuracy of financial statements
c. Expressing an opinion as to the fairness of financial statements
d. Filing financial statements with the SEC
8. The purpose of the International Financial Reporting Standards is to
a. Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
b. Develop a uniform currency in which the financial transactions of entities throughout the
world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
9. The conceptual framework specifically mentions two underlying assumptions, namely
a. Accrual and going concern
b. Accrual and accounting entity
c. Going concern and time period
d. Time period and monetary unit
10. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
11.These users are interested in information about the continuance of an entity, especially when they have a longterm involvement with or are dependent on the entity.
a. Customers
b. Employees
c. Trade unions
d. Suppliers
12. A conceptual framework of accounting should
a. Lead to uniformity of financial statements among entities within the same industry.
b. Eliminate alternative accounting principles and methods.
c. Guide the PICPA in developing generally accepted auditing standards.
d. Define the basic objectives, terms, and concepts of accounting.
13. Generally accepted accounting principles
a. Are accounting adaptations based on the laws of economic science.
b. Derive their credibility and authority from legal ruling and court precedents.
c. Derive their credibility and authority from the national government through the SEC.
d. Derive their credibility and authority from general recognition and acceptance by the
accountancy profession.
14. Which of the following items is not listed as a major objective of financial reporting?
a. Financial reporting shall provide information about entity resources, claims to those resources and
changes in them.
b. Financial reporting shall provide information useful in evaluating management’s stewardship.
c. Financial reporting shall provide information useful in investment, credit and similar decisions.
d. Financial reporting shall provide information useful in in assessing cash flow projects.
15. Many accountants are employed in entities in various capacity as accounting staff, chief accountant or
controller. These accountants are said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
16. The theory of accounting which best describes the accounting equation expressed “asset = liabilities + equity”
is the
a. Entity theory
b. Fund theory
c. Proprietary theory
d. Residual equity theory
17. Which of the following is listed in the Framework as underlying assumptions regarding financial statements?
a. The financial statement are reliable.
b. Any changes in accouting policy are neutral.
c. The financial statements are prepared under the accrual basis.
d. The entity can be viewed as a liquidating concern.
18. The International Accounting Standards Board was formed to
a. Enforce IFRS in foreign countries
b. Develop worldwide accounting standards
c. Establish accounting standards for multinational entities
d. Develop accounting standards for countries that do not have their own standard-setting
bodies
19. Fiduciary accounting is an application of
a. Entity theory
b. Proprietary theory
c. Residual equity theory
d. Fund theory
20. These users require information on risk and return on investment and hence an entity’s ability to pay
dividends.
a. Investors
b. Employees
c. Lenders
d. Customers
21. What theory of ownership equity is enumerated by the following equation: assets minus liabilities minus
preference share equity equals ordinary share equity?
a. Fund
b. Entity
c. Proprietary
d. Residual equity
22. The principles which constitute the ground rules for financial reporting are termed “generally accepted
accounting principles”. To qualify as “generally accepted,” an accounting principle must
a. Usually guide corporate managers in preparing financial statements, which will be
understood by widely scattered shareholders.
b. Guide corporate managers in preparing financial statements, which will be used, for
collective bargaining agreement with trade unions
c. Guide an entrepreneur of the choice of an accounting entity like single proprietorship,
partnership or corporation.
d. Receive substantial authoritative support.
23. Managerial accounting is the area of accounting that emphasizes
a. Reporting financial information to external users
b. Reporting to the SEC
c. Combining accounting knowledge with an expertise in data processing
d. Developing accounting information for use within an entity
24. These users are interested in information in order to regulate the activities of an entity, determine taxation
policies and provide a basis for national statistics.
a. Government and their agencies
b. Major organization of users
c. Bureau of Internal Revenue
d. Department of Finance
25. Which of the following IS NOT a purpose of the conceptual framework of accounting?
a. To provide definitions of key terms and fundamental concepts
b. To provide specific guidelines for resolving situations not covered by existing accounting standards
c. To assist accountants and other in selecting among alternative accounting and reporting methods
d. To assist the FRSC in the standard-setting process.
26. Once an accounting standard has been established
a. The standard is CONTINUALLY REVIEWED to see if modification is necessary.
b. The standard is not reviewed unless the SEC makes a compliant.
c. The task of reviewing the standard to see if modification is necessary is given to the
PICPA.
d. The principle of consistency requires that no revisions ever be made to the standard.
27. The accrual basis of accounting is based primarily on
a. Conservatism and revenue realization
b. Conservatism and matching
c. Consistency and matching
d. Revenue realization and matching
28. Under generally accepted accounting principles
a. Income and expenses, assets and liabilities are measured based on the occurrence of
changes in the economic resources and obligations.
b. Assets and liabilities are measured on the basis of their liquidation value.
c. Income and expenses are recognized on the basis of cash receipts and payments, including
depreciation of property, plant and equipment.
d. Financial position and financial performance are measured on the basis of cash received
and cash paid.
29. Which of the following statements concerning the objectives of financial reporting IS CORRECT?
a. The objectives are intended to be specific in nature.
b. The objectives are directed primarily toward the needs of the internal users of accounting information
c. The objectives are the end result of the conceptual framework project.
d. The objectives encompass not only financial statement disclosures but other information as well.
30. The financial statements that are prepared for the entity are separate and distinct from the owners according to
the
a. Going concern principle
b. Matching principle
c. Economic entity assumption
d. Accounting period assumption
31. The providers of risk capital and their advisers
I.
Are concerned with the risk inherent in and return provided by their investments
II.
Need information to help them determine whether they should buy or sell.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
32. The basic purpose of accounting is
a. To provide the information that the managers of an economic entity need to control its
operation.
b. To provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making
rational economic decision.
33. The objectives of financial reporting for entities are based on
a. The need for conservatism
b. Reporting on management’s stewardship
c. Generally accepted accounting principles
d. The needs of the users of the information
34. Financial accounting is concerned with
a. General- purpose reports on financial position and financial performance.
b. Specialized reports for inventory management and control.
c. Specialized reports for income tax computation and recognition.
d. General- purpose reports on changes in stock prices and future estimates of market
position.
35. The primary focus of financial accounting has been on meeting the needs of which of the following groups?
a. Managers of an entity
b. Present and potential creditors of an entity
c. National and local taxing authorities
d. Independent auditors
36. Which of the following terms best describes financial statements whose basis of accounting recognizes
transactions and other events when they occur?
a. Accrual basis of accounting
b. Going concern basis of accounting
c. Cash basis of accounting
d. Invoice basis of accounting
37. Which underlying concept serves as the basis for preparing financial statements at regular intervals?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit
38. These users are interested in information that enables them to determine whether amounts owing to them will
be paid when due.
a. Suppliers and trade creditors
b. Lenders
c. Banks
d. Finance entities
39. The overall objective of financial reporting is to provide information
a. That is useful for decision making
b. About an entity’s assets, liabilities and owners’ equity
c. About an entity’s financial reporting performance during a period
d. That allows owners to assess management’s performance
40. These users are interested in information about the profitability and stability of an entity in order to assess the
ability of the entity to provide remuneration, retirement benefits and employment opportunities.
a. Customers
b. The public
c. Government and their agencies
d. Employees
41. It is the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy
professions in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountant
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
PROBLEMS
42. Prior years income statements are not restated for
a. Changes in accounting principle
b. Changes in estimates
c. Corrections of errors
d. Any of the above
43. Which of the following would appear first in a statement of retained earnings?
a. Net income
b. Prior period adjustment
c. Cash dividends
d. Share dividends
44. Preparing the statement of cash flows, using the indirect method, 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.
45. Information in the income statement helps users to
a. Evaluate the past performance of the enterprise.
b. Provide a basis of predicting future performance
c. Help assess the risk or uncertainty of achieving future cash flows
d. All of these
46. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows
from
a. Lending activities
b. Operating activities
c. Investing activities
d. Financing activities
47. The earnings per share computation is not required for
a. Net income
b. Gain on disposal of discontinued operation, net of tax.
c. Income from continuing operations
d. Income from operations
48. Undeclared dividends are deducted from net income in the earnings per share computation for which type of
preference shares?
a. Non-cumulative only
b. Cumulative only
c. Neither non-cumulative nor cumulative
d. Both non-cumulative and cumulative.
49. A change in accounting principle requires that the cumulative effect of the change for prior periods be shown
as an adjustment to
a. Beginning retained earnings for the earliest period presented.
b. Net income for the period in which the change occurred.
c. Comprehensive income for the earliest period presented.
d. Stockholder’s equity for the period in which the change occurred.
50. If a company prepares a consolidated income statement, IFRS requires that net income be reported for
a. The majority interest only.
b. The minority interest only.
c. Both the majority interest and the minority interest.
d. As a single amount only.
51. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from
investing activities equals the carrying amount of the equipment
a. Plus the gain.
b. Plus the gain and less the amount of tax attributable to gain.
c. Plus both the gain and the amount of tax attributable to gain.
d. With no addition or subtraction.
52. Statement of financial position information is useful for all of the following except:
a. Assessing a company’s risk.
b. Evaluating company’s liquidity.
c. Evaluating company’s financial flexibility.
d. Determining free cash flows.
53. The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings is the
definition of
a. Quality of earnings.
b. Earnings management.
c. Smoothing of earnings.
d. Earnings averaging.
54. 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. Receivable back into cash, or 12 months, whichever is longer.
C. Tangible fixed asset back into cash, or 12 months, whichever is longer.
D. Inventory back into cash, or 12 months, whichever is longer.
55. 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
56. 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.
57. A company’s wages payable increased from the beginning to the end of the year. In the company’s
statement of cash flows in which the operating activities section is prepared under the direct method, the cash
paid for wages would be,
A. Salary expense plus wages payable at the beginning of the year
B. Salary expense plus the increase in wages payable from the beginning to the end of the year.
C. Salary expense less the increase in wages payable from the beginning to the end of the year.
D. The same as salary expense.
58. Which of the following does not appear on a statement of retained earnings?
A. Net loss
B. Prior period adjustments
C. Preference share dividends.
D. Other comprehensive income.
59. Investors and creditors use income statement information for each of the following except to,
A. Evaluate the future performance of the company.
B. Provide a basis for predicting future performance
C. Help assess the risk and uncertainty of achieving future cash flows.
D. All of the above.
60. Which method of income measurement is used in the preparation of the income statement?
A. Capital maintenance approach
B. Transaction approach
C. Cash-flow approach
D. Income components approach.
61. Under IFRS, other comprehensive income must be displayed (reported) in
A. The equity section of the statement of financial position.
B. A second income statement.
C. The income statement.
D. Retained earnings the statement.
62. Which of the following is not a selling expense?
A. Advertising expense
B. Office salaries expense
C. Freight out.
D. Store supplies consumed
63. Share dividends distributable should be classified on the,
A. Income statement as expense
B. Statement of financial position as an asset.
C. Statement of financial position as a liability
D. Statement of financial position as an item of equity.
64. Which of the following is not considered a characteristic of a liability?
A. Present obligation
B. Arises from past events.
C. Result in an outflow of resources.
D. Liquidation is reasonable expected to require use of existing resources classified as current asset.
65. A change in accounting principles requires what kind of adjustment to the financial statements?
A. Current period adjustment
B. Prospective adjustment
C. Retrospective adjustment
D. Current and prospective adjustment
66. 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
67. The non-controlling interest section of the income statement is shown,
A. Below net income
B. Below income from operations
C. Above other income and expenses
D. Above income tax
68. The current cash debt coverage ratio is often used to assess
A. Financial flexibility
B. Liquidity
C. Profitability
D. Solvency
69. When a portion of inventories has been pledged for security in a loan,
A. The value of the portion pledge 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.
70. 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
71. In a statement of cash flows, interest payments to lender and other creditors should be classified as cash
outflows for,
A. Operating activities
B. Borrowing Activities
C. Lending activities
D. Financing activities
72. In which section of the income statement is interest expense reported?
A. Gross profit
B. Income from operations
C. Income before income taxes
D. Non-controlling interest.
73. Making and collecting loans and disposing of property, plant and equipment are,
A. Operating activities
B. Investing activities
C. Financing activities
D. Liquidity activities
74. Which of the following is not an acceptable way of displaying the components of the comprehensive
income?
A. Combined statement of retained earnings
B. Second income statement
C. Combined statement of comprehensive income
D. All of the above are acceptable.
75. Among the short-term obligation of Lance Company as of December 31, the statement of financial position
date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable
for another 90- day period. These notes should be classified on the statement of financial position of Lance
Company as,
A. Current liabilities
B. Deferred charges
C. Non-current liabilities
D. Intermediate debt
76. 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
77. Liabilities are,
A. Any accounts having credit balances after closing entries are made
B. Deferred credits that are recognize and measured in conformity with generally accepted accounting
principles.
C. Obligations to transfer ownership shares to other entities in the future.
D. Present obligations arising from past events and results in an outflow of resources.
78. When a company discontinues an operation and disposes a 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. Another income and expense item
C. An amount after continuing operations and before net income
D. A bulk sale of plant asset included in income from continuing operations.
79. The income statement information would help in which of the following tasks?
A. Evaluate the liquidity of the company
B. Evaluate the solvency of the company
C. Estimate future cash flows
D. Estimate future financial flexibility.
80. On September 1, year 1, Canary Co. sold used equipment for cash amount equaling its carrying amount for
both book and tax purposes. On September 15, year 1, Canary replaced the equipment by paying cash and
signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash received for
the old equipment. How should these equipment transactions be reported Canary’s year 1 statement of cash
flows?
A. Cash outflow equal to the cash paid less the cash received.
B. Cash outflow equal to the cash paid and note payable less the cash received.
C. Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note payable.
D. Cash inflow equal to the cash received and a cash outflow equal to the cash paid.
81. Mend Co. purchased a three-month US Treasury bill. Mend’s policy is to treat as cash equivalents all
highly liquid investments with an original maturity of three months or less than when purchased. How should
this purchase be reported in Mend’s statement of cash flows?
A. As an outflow from operating activities
B. As an outflow from investing activities
C. As an outflow from financing activities
D. Not reported.
82. Treasury shares should be reported as a(n),
A. Current Asset
B. Investment
C. Other asset
D. Reduction of shareholder’s equity
83. Which of the following is the current asset?
A. Cash surrender value of a life insurance policy of which the company is the beneficiary.
B. Investment in equity securities for the purpose of controlling the issuing company.
C. Cash designated for the purchase of tangible fixed asset.
D. Trade installment receivable normally collectible in 18 months.
84. The accountant for the Lintz Sales Company is preparing the income statement for 2020 and the statement
of financial position at December 31, 2020. January 1, 2020 merchandise inventory balance will appear,
A. Only as an asset on the statement of financial position.
B. Only in the cost of goods sold 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 statement of financial position.
D. As an addition in the cost of goods sold section of the income statement and as a current asset on
the statement of financial position.
85. 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 of cash to assets and liabilities.
B. The firm’s ability to respond and adapt to financial adversity and unexpected need and
opportunities.
C. The firm’s ability to pay its debt as they mature.
D. The firm’s ability to invest in a number of projects with different objectives and cost.
86. A correction of 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
87. Which of the following is not an acceptable major asset classification?
A. Current assets
B. Investments
C. Property, Plant and Equipment
D. Deferred Charges
88. The definition of expenses includes,
A. Losses only
B. Expenses and losses
C. Expenses only
D. Expenses, losses and unrealized losses on available-for-sale securities.
89. Comprehensive income includes all of the following except,
A. Dividend revenue
B. Losses on disposal of assets
C. Investment by owners
D. Unrealized holding gains
90. The primary purpose of statement of cash flows is to provide relevant information about,
A. Differences between net income and associated cash receipts and disbursements.
B. An enterprise’s ability to generate future positive net cash flows
C. The cash receipts and cash disbursements of an enterprise during a period
D. An enterprise’s ability to meet cash operating needs.
91. The major elements of the income statement are
A. Revenue, cost of goods sold, selling expenses and general expenses.
B. Operating section, non-operating section, discontinued operations and cumulative effect.
C. Revenues, expenses, gains and losses.
D. All of the above
92. Income taxes are allocated to,
A. Continuing operations
B. Discontinued operations
C. Prior period adjustments
D. All of these
93. In preparing statement of cash flows, sale of treasury stock at an amount greater than cost would be
classified as an,
A. Operating Activities
B. Financing activities
C. Extraordinary activities
D. Investing activities
94. Earnings per share relate to
A. Preference shares only
B. Ordinary shares only
C. Both preference and ordinary shares
D. Neither preference nor ordinary shares.
95. The income statement reveals
A. Resources and equities of a firm at a point and time
B. Resources and equities of a firm at a period and time
C. Net earnings (net income) of a firm at a point and time
D. Net earnings (net income) of a firm at a period and time
96. Changes in estimates affect reported amounts
A. Retrospectively only
B. Prospectively only
C. Currently and prospectively
D. Currently and retrospectively.
97. The income statement provides investors and creditors information that helps them predict
A. The amounts of future cash floes
B. The timing of future cash flows
C. The uncertainty of future cash flows.
D. All of the above.
98. Comprehensive income includes all of the following, except
A. Revenues and gains
B. Expenses and losses
C. Preference share dividends
D. Unrealized gains and losses on available-for-sale securities
99. Which of the following is included in comprehensive income?
A. Investment by owners.
B. Unrealized gains on available-for-sale securities
C. Distribution to owners
D. Changes in accounting principles
100. 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
Chapter 1—Financial Reporting
MULTIPLE CHOICE
1. The following is NOT a major component of the financial statements:
b. annual report
2. The following are users of accounting information:
a. stakeholders
b. creditors
c. investors
d. all of the above
3. Interested parties receive information about a company’s past performance from:
c. financial reporting
4. The overall objective of financial reporting is to provide information
a. that is useful for decision making.
5. Which of the following is NOT normally an objective of financial reporting?
d. To provide information about an entity's liquidation value
6. __________ accounting focuses on the development and communication of financial information for external
users.
d. financial
7. The area of accounting that emphasizes developing accounting information for use within a company is known
as __________ accounting.
a. management
8. The responsibility to review the work of the accountants and issue opinions as to the fairness of the financial
statements rests with
a. the external auditor.
9. As independent (or external) auditors, CPAs are primarily responsible for
c. expressing an opinion as to the fairness of financial statements.
10. Which of the following is an internal user of a company's financial information?
a. Board of directors
11. In 1973, the following private-sector body was organized to set accounting standards in the United States:
c. the FASB
12. The members of the __________ are appointed by the Financial Accounting Foundation.
b. Financial Accounting Standards Board
13. Operations of the FASB are overseen by the:
b. Financial Accounting Foundation
14. A major difference between the Financial Accounting Standards Board (FASB) and its predecessor, the
Accounting Principles Board (APB), is
a. all members of the FASB serve full time, are paid a salary, and are independent of any
public or private enterprises.
15. Which of the following is a characteristic of the Financial Accounting Standards Board?
a. The FASB is composed of five members.
16. Documents issued by the FASB include all of the following except
d. Financial Reporting Releases.
17. Primary responsibility for GAAP and public reporting currently rests with the
a. SEC.
18. The responsibility of the Emerging Issues Task Force (EITF) is to
a. issue statements which reflect a consensus of the EITF on how to account for new
financial reporting issues where guidance is needed quickly.
19. The normal order followed by the FASB in publishing its standards is
d. discussion memorandum, exposure draft, statement.
20. Proper application of accounting principles is most dependent upon the
d. professional judgment of the accountant.
21. The Governmental Accounting Standards Board
c. addresses the financial reporting issues related to state and local governments.
22. The primary current source of generally accepted accounting principles for governmental operations is the
c. Governmental Accounting Standards Board.
23. The process of establishing financial accounting standards is
d. a social process which incorporates political actions of various interested user groups as
well as professional research and logic.
24. The SEC was given the power to establish accounting principles including setting requirements for details
shown on financial statements by the:
c. Congress
25. Once the FASB has established an accounting standard, the
a. standard is continually reviewed to see if modification is necessary.
26. The __________ of a firm is primarily responsible for the preparation of financial statements in accordance
with GAAP.
b. management.
27. Accounting standards help accountants meet the information demands of interested parties by providing:
b. limits and guidance for financial reporting
28. The primary current source of generally accepted accounting principles for nongovernmental operations is the
c. Financial Accounting Standards Board.
29. How many board members serve on the FASB?
a. 5
30. When the FASB deliberates about an accounting standard, firms whose financial statements would be affected
by that standard
d. are free to lobby for or against the standard.
31. The staff interpretations statements issued by the SEC are called:
d. Staff Accounting Bulletins
32. The primary purpose of the Securities and Exchange Commission is to
a. regulate the issuance and trading of securities.
33. Form 10-K is submitted to the
d. SEC.
34. The following private-sector organization was created by the Sarbanes-Oxley Act of 2002 to perform required
audits on U. S. publicly traded companies:
b. Public Company Accounting Oversight Board
35. The International Accounting Standards Board was formed to
b. develop worldwide accepted accounting standards.
36. Which of the following items is not a modifying convention?
a. Matching
37. Generally accepted accounting principles
d. derive their credibility and authority from general recognition and acceptance by the
accounting profession.
38. A conceptual framework of accounting should
d. define the basic objectives, terms, and concepts of accounting.
39. Accountants prepare financial statements at arbitrary points in time during a company's lifetime in accordance
with the accounting concept of
c. accounting periods.
40. The assumed continuation of a business entity in the absence of evidence to the contrary is an example of the
accounting concept of
d. going concern.
41. Important constraints underlying the qualitative characteristics of accounting information are
b. materiality, conservatism, and cost-effectiveness.
42. When a large number of individuals, using the same measurement method, demonstrate that a high degree of
consensus can be secured among independent measurers, then the result exhibits the characteristic of
a. verifiability.
43. Which of the following measurement attributes is not currently used in practice?
d. Inflation-adjusted cost
44. Financial information exhibits the characteristic of consistency when
c. accounting entities give similar events the same accounting treatment each period.
45. Historical cost has been the valuation basis most commonly used in accounting because of its
c. reliability.
46. When financial reports from two different companies have been prepared and presented in a similar manner,
the information exhibits the characteristic of
c. comparability.
47. Accounting for inventories by applying the lower-of-cost-or-market is an example of the application of
a. conservatism.
48. The secondary qualitative characteristics of accounting information are
b. comparability and consistency.
49. Which of the following elements of financial statements is not a component of comprehensive income?
d. Distributions to owners
50. An item would be considered material and therefore would be disclosed in the financial statements if the
d. omission of misstatement of the amount would make a difference to the users.
51. What accounting concept justifies the use of accruals and deferrals?
a. Going-concern assumption
52. Which of the following is NOT a purpose of the conceptual framework of accounting?
b. To provide specific guidelines for resolving situations not covered by existing accounting
standards
53. Which of the following is NOT an implication of the going-concern assumption?
d. Amortizing research and development costs over multiple periods is justifiable and
appropriate.
54. The following is a qualitative characteristic of accounting information:
d. decision usefulness.
55. Which of the following statements concerning the objectives of financial reporting is correct?
d. The objectives encompass not only financial statement disclosures, but other information
as well.
56. Recording the purchase price of a paper shredder (with an estimated useful life of 10 years) as an expense of
the current period is justified by the
b. materiality constraint.
57. The following is NOT one of the fundamental criteria for recognition?
a. Timeliness
58. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of
an entity is
b. recognition.
59. Conservatism is best described as selecting an accounting alternative that
b. has the least favorable impact on owners' equity.
60. The financial statements that are prepared for the business are separate and distinct from the owners according
to the
c. economic entity assumption.
61. Enron’s problem with related-party transactions breached the assumption of:
b. arm’s-length transactions
62. Under Statement of Financial Accounting Concepts No. 2, representational faithfulness is an ingredient of
d.
Relevance
No
Reliability
Yes
63. In an effort to improve the conceptual framework, the FASB, in conjunction with the IASB has been moving
towards more __________ standards.
b. principles approach
64. According to the FASB's conceptual framework, which of the following relates to both relevance and
reliability?
Consistency
b.
Yes
Verifiability
No
65. The accrual basis of accounting is based primarily on
d. revenue realization and matching.
66. Internal users are provided information by the following branch of accounting:
b. managerial accounting.
67. Large business enterprises employ financial accountants who are primarily concerned with__________
financial reporting.
c. external
68. The branch of accounting that is concerned with providing information to present and potential creditors of an
enterprise is
c. financial accounting.
69. Which of the following is true about international accounting standards?
a. Significant differences exist between U.S. GAAP and GAAP of other countries.
70. The United States Securities and Exchange Commission
b. requires foreign companies listing their shares on U.S. stock exchanges to restate their
financial statements to U.S. GAAP.
71. For which of the following reporting issues has the FASB adopted substantially the same approach as the
IASB?
b. Earnings per share
72. The journal Accounting Horizons is published by which of the following organizations?
b. American Accounting Association (AAA)
73. Financial statements issued for the use of parties external to the enterprise are the primary responsibility of the
a. management of the enterprise.
74. Which of the following is true?
c. Form 8-K is a quarterly report of significant events required by the SEC.
75. Which of the following is not included in the highest authoritative level of GAAP?
b. AICPA Statements of Position
76. Financial disclosure statements are strictest in
c. the United States.
77. Which of the following qualitative characteristics of financial information requires that information NOT be
biased in favor of one group of users to the detriment of others?
d. Neutrality
78. The primary measurement basis currently used to value assets in external financial statements of an enterprise
is the
d. market price of the assets held by an enterprise at the date the assets were acquired
(although some assets may be valued at their current selling price or net realizable value).
MODULE # 1 Post-test
FINANCIAL REPORTING AND ACCOUNTING STANDARDS
Multiple Choice
Identify the choice that best completes the statement or answers the question.
a.
b.
c.
d.
1.
Financial accounting is concerned with
General- purpose reports on financial position and financial performance.
Specialized reports for inventory management and control.
Specialized reports for income tax computation and recognition.
General- purpose reports on changes in stock prices and future estimates of market position.
2.
groups?
The primary focus of financial accounting has been on meeting the needs of which of the following
a.
b.
c.
d.
Managers of an entity
Present and potential creditors of an entity
National and local taxing authorities
Independent auditors
3.
It is a “global phenomenon” intended to bring about transparency and a higher degree of
comparability in financial reporting, both of which will benefit the investors and are essential to achieve the goal of
one uniform and globally accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology
4.
Accounting is a service activity and its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic decision. This
accounting definition is given by
a.
b.
c.
d.
Financial Reporting Standards Council
AICPA Committee on Accounting Terminology
American Accounting Association
Board of Accountancy
a.
b.
c.
d.
5.
Once an accounting standard has been established
The standard is continually reviewed to see if modification is necessary.
The standard is not reviewed unless the SEC makes a compliant.
The task of reviewing the standard to see if modification is necessary is given to the PICPA.
The principle of consistency requires that no revisions ever be made to the standard.
6.
The process of establishing financial accounting standards
Is a democratic process in that a majority of practicing accountants must agree with a standard
before it becomes implemented.
b. Is a legislative process based on rules promulgated by government agencies.
c. Is based solely on economic analysis of the effects each standard will have if it is
implemented.
d. Is a social process which incorporates political actions of various interested users groups as
well as professional research and logic.
a.
7.
Which accounting process is the recognition or non-recognition of business activities as
accountable events?
a.
b.
c.
d.
Identifying
Measuring
Recording
Communicating
8.
It is the body authorized by law to promulgate rules and regulations affecting the practice of the
accountancy professions in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountant
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
9.
The basic purpose of accounting is
To provide the information that the managers of an economic entity need to control its
operation.
b. To provide information that the creditors of an economic entity can use in deciding whether to
make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making rational
economic decision.
a.
10.
Financial accounting can be broadly defined as the area of accounting that prepares
a. General purpose financial statements to be used by parties internal to the entity only.
b. Financial statements to be used by investors only.
c. General purpose financial statements to be used by parties both internal and external to the
entity.
d. Financial statements to be used primarily by management.
11.
The purpose of the International Financial Reporting Standards is to
Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
b. Develop a uniform currency in which the financial transactions of entities throughout the
world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
a.
a.
b.
c.
d.
12.
The International Accounting Standards Board was formed to
Enforce IFRS in foreign countries
Develop worldwide accounting standards
Establish accounting standards for multinational entities
Develop accounting standards for countries that do not have their own standard-setting bodies
a.
b.
c.
d.
13.
What is the law regulating the practice of accountancy in the Philippines?
R.A. No. 9298
R.A. No. 9198
R.A. No. 9928
R.A. No. 9892
14.
It is the accounting standard setting body created by PRC upon recommendations of the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and functions under R.A. No. 9298
a. Accounting Standards Council
b. Auditing and Assurance Standard Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standard Council
a.
b.
c.
d.
15.
The “communicating” process of accounting includes all of the following, except
Recording
Classifying
Summarizing
Interpreting
MODULE 2 Post-test
Conceptual Framework for Financial Reporting
Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before AUGUST 14, 2020 (Friday)
1.
a.
b.
c.
d.
Which of the following is not one of the fundamental criteria for recognition?
Timeliness
Measurability
Relevance
Reliability
2. When a large number of individuals, using the same measurement method, demonstrate that a high degree of
consensus can be secured among independent measurers, then the result exhibits the characteristic of
a. Verifiability
b. Neutrality
c. Relevance
d. Reliability
3. The assumed continuation of a business entity in the absence of evidence to the contrary is an example of the
accounting concept of
a. Accrual
b. Consistency
c. Comparability
d. Going concern
4.
a.
b.
c.
d.
Accounting for inventories by applying the lower-of-cost-or- market is an example of the application of
Conservatism
Comparability
Consistency
Materiality
5.
a.
b.
c.
d.
Important constraints underlying the qualitative characteristics of accounting information are
historical cost and going concern
materiality, conservatism, and cost-effectiveness
consistency, comparability, and conservatism
verifiability, neutrality, and representational faithfulness
6.
a.
b.
c.
d.
The secondary qualitative characteristics of accounting information are
relevance and reliability
comparability and consistency
understandability and decision usefulness
materiality and conservatism
7.
a.
b.
c.
d.
The branch of accounting that is concerned primarily with providing information for internal users is called
Auditing
managerial accounting
financial accounting
income tax accounting
8. Financial information exhibits the characteristic of consistency when
a. accounting procedures are adopted which smooth net income and make results consistent
between years
b. extraordinary gains and losses are shown separately on the income statement
c. accounting entities give similar events the same accounting treatment each period
d. expenditures are reported as expenses and netted against revenue in the period in which they
are paid
9.
a.
b.
c.
d.
The primary current source of generally accepted accounting principles for nongovernmental operations is the
American Institute of Certified Public Accountants
Securities and Exchange Commission
Financial Accounting Standards Board
Governmental Accounting Standards Board
10. Accountants prepare financial statements at arbitrary points in time during a company's lifetime in accordance
with the accounting concept of
a. Matching
b. Comparability
c. Accounting periods
d. Materiality
11. When financial reports from two different companies have been prepared and presented in a similar manner, the
information exhibits the characteristic of
a. Relevance
b. Reliability
c. Comparability
d. Consistency
12. A conceptual framework of accounting should
a. lead to uniformity of financial statements among companies within the same industry
b. eliminate alternative accounting principles and methods
c. guide the AICPA in developing generally accepted auditing standards
d. define the basic objectives, terms, and concepts of accounting
13. Historical cost has been the valuation basis most commonly used in accounting because of its
a. Timelessness
b. Conservatism
c. Reliability
d. Accuracy
14. The financial statements that are prepared for the business are separate and distinct from the owners according
to the
a. going-concern principle
b. matching principle
c. economic entity assumption
d. full disclosure principle
15. Which of the following statements concerning the objectives of financial reporting is correct?
a. The objectives are intended to be specific in nature.
b. The objectives are directed primarily toward the needs of internal users of accounting
information.
c. The objectives were the end result of the FASB's conceptual framework project.
d. The objectives encompass not only financial statement disclosures, but other information as
well.
16. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of
an entity is
a. Realization
b. Recognition
c. Matching
d. Allocation
17. The overriding qualitative characteristic of accounting information is
a. Relevance
b. Understandability
c. Reliability
d. Decision usefulness
18. Recording the purchase price of a chalkboard eraser (with an estimated useful life of 10 years) as an expense of
the current period is justified by the
a. going-concern assumption
b. materiality constraint
c. matching principle
d. comparability principle
19. What accounting concept justifies the use of accruals and deferrals?
a. Going concern assumption
b. Corporate form of organization
c. Consistency characteristic
d. Arm's-length transactions
20. The process of establishing financial accounting standards
a. is a democratic process in that a majority of practicing accountants must agree with a standard
before it becomes implemented.
b. is a legislative process based on rules promulgated by government agencies.
c. is based solely on economic analysis of the effects each standard will have if it is implemented.
d. is a social process which incorporates political actions of various interested user groups as well
as professional research and logic.
Module 3 – Post test
Basis for the Preparation of FS
Problem
1.
An entity can rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material.
a. True
b. False
c. Maybe True
d. Maybe False
2.
Which statement is correct about the types of comparability?
I. Intra-comparability is the comparability of Financial Statements of the same entity.
II. Inter-comparability is the comparability of Financial Statements between different entities.
a.
b.
c.
d.
I only
II only
Both I and II
Neither I nor II
3.
a.
b.
c.
d.
The following are considered as identifiable intangible assets in the balance sheet except
Computer Software
Franchise
Goodwill
Trademark
4.
a.
b.
c.
d.
Under PAS 1, paragraph 7, the holders of instruments classified as equity are simply known as
Owners
Entity
Proprietor
Shareholders
5.
Which of these classifications are needed for a liability to be considered under current liability?
I. Expected to be settled beyond the entity’s normal operating cycle
II. Held for purpose of trading
III. Due to be settled after 12 months
IV. For which the entity does not have an unconditional right to defer settlement beyond 12 months
(settlement by the issue of equity instrument does not impact classification).
a.
b.
c.
d.
I and II only
I and III only
II and IV only
I, II and III only
6.
Which of the following does not comprise a set of financial statements?
a. Statement of Financial Position at the end of the period
b. Statement of Profit or Loss and Other Comprehensive Income, changes in equity and cash flow
for the period
c. Report of the entity’s sources of funding
d. Comparative information in respect of the preceding period and notes, comprising significant
accounting policies and other explanatory information
7.
The information which must be provided so as to properly identify each component of a set of
Financial Statements does not include:
a.
b.
c.
d.
The country in which the entity operates
The presentation currency used
The name of the reporting entity
The level of rounding used
8.
a.
b.
c.
d.
To show how each component of an entity’s equity has altered during an accounting period
To show an entity’s total equity at the end of an accounting period
To show an entity’s assets, liabilities and equity at the end of an accounting period
To show an entity’s income, expenses and profit for an accounting period
9.
a.
b.
c.
d.
The main purpose of the statement of changes in equity is:
The notes to the financial statements should provide information:
As required by international standards, if not presented elsewhere in the financial statements
Which is relevant to an understanding of the financial statements
About the entity's accounting policies
All of the above
10.
a.
b.
c.
d.
The statement of financial position
The statement of changes in equity
The statement of profit or loss and other comprehensive income
The statement of cash flows
11.
a.
b.
c.
d.
Reimbursement of provisions should be:
Netted against the provision in the Statement of Profit or Loss
Shown as an asset in Statement of Financial Position
Shown as separate lines in the Statement of Profit or Loss
None of the above
13.
1.
2.
3.
4.
a.
b.
c.
d.
Gains and losses on foreign currencies are reported:
On two-separate lines
Net – in a separate line
Within revenue
Within expense
12.
a.
b.
c.
d.
The main financial performance statement is:
The judgement on whether additional items are presented separately is based on an assessment of:
The nature and liquidity of assets
The function of assets
The amounts, nature and timing of liabilities
The space available in the financial statements
1, 2 and 3 only
1, 2 and 4 only
1 and 2 only
2, 3 and 4 only
14.
As a minimum, the face of the Statement of profit or loss shall include line items that present the
following amounts for the period:
1.
Revenue
2.
Finance Cost
3.
Share of the income of associates, and joint ventures accounted for using equity
method
4.
Pre-tax gain(or loss) recorded on the disposals of assets, or settlement of liabilities
attributable to discontinuing operations
5.
Tax expense
6.
Profit or Loss
a.
b.
c.
d.
1, 2, 4, 5, and 6 only
1 to 6 all inclusive
1, 2, 5 and 6 only
1, 2, 3, 5 and 6 only
15.
Environmental reports and value-added statements are:
a. Outside the scope of IFRS
b. Never provided with financial statement
c. An integral part of financial statements
d. None of the above
16.
a.
b.
c.
d.
Users’ knowledge of business and accounting is assumed to be:
Negligible
Comprehensive
Reasonable
Understanding
17.
A fair presentation also requires an undertaking to:
I. Select policies in accordance with IAS 8
II. Provides relevant, reliable, comparable and understandable information
III. Provide additional disclosures
IV. Provide an audit report
a.
b.
c.
d.
I, and II only
I, III, and IV only
I, II, and III only
II only
18.
a.
b.
c.
d.
A return to the Standard is required
This must be disclosed in each period
A deferred tax asset is created
All of the above
19.
a.
b.
c.
d.
Accounts produced on a going-concern basis suggest the business will continue in operation for:
One decade
Six months
One year
The foreseeable future
20.
a.
b.
c.
d.
When the departure from a Standard creates a continuing impact:
Consistency entails:
No new standard is being produced
No changes in accounting policies
No changes in accounting estimates
The ability to compare the figures of different periods
MODULE # 4 Post-test
STATEMENT OF FINANCIAL POSITION
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1.
Which of the following should be disclosed in the financial statements as contingent liability?
a. The entity has accepted liability prior to year-end for unfair dismissal of an employee and is to pay damages.
b. The entity has received a letter from a supplier complaining about an old unpaid invoice.
c. The entity is involved in a legal; case which it may possibly lose, although this is not probable.
d. The entity has not yet paid claims under sales warranties.
2.
A retail store received cash and issued a gift certificate that is redeemable in merchandise. When
the gift certificate was issued, a
a. Deferred revenue account should be decrease
b. Deferred revenue account should be increase
c. Revenue account should be decreased
d. Revenue account should be increase
3.
Which of the following must be included on the face of statement of financial position?
a. Number of shares authorized
b. Contingent Asset
c. Contingent Liability
d. Investment Property
a.
b.
c.
d.
4.
Appropriation for plant expansion is reported under
Plant, Property, and Equipment
Current assets
Retained Earnings
Intangible Assets
5.
Which of the following statements is true?
I. Financial flexibility is a company’s ability to respond and adapt to financial adversity and unexpected needs and
opportunities.
II. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’ equity account.
a. Statement A is true and Statement B is false.
b. Statement A is false and Statement B is true.
c. Both Statements are true.
d. Both Statements are false.
6.
It refers to the availability of cash over the longer term to meet maturing obligations?
a. Liquidity
b. Solvency
c. Profitability
d. Both a and b
7.
a. Profitability
b. Solvency
c. Liquidity
d. Maturity
It is the ability of the entity to meet currently maturing obligations
8.
The following are considered as characteristics of an asset, except
a. The cost of the asset can be measured reliably
b. The asset provides future economic benefits
c. The asset is the result of the future events
d. The asset is controlled by the entity
9.
These are probable future
economic benefits obtained or controlled by an entity as a result of past transactions or events.
a. Liabilities
b. Assets
c. Equity
d. None of the above
10.
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.
11.
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
12.
What is the appropriate treatment for a contingent asset in the financial statements of an
entity?
a. Disclosure of information in the notes but not recognized in the financial
statements.
b. Recognition in the financial statements and a note disclosure.
c. Recognition in the financial statements but no further disclosure in the notes.
d. Not recognized in the financial statements and neither disclosed in notes.
13.
If an entity expects and has the discretion to refinance on a long-term basis, the notes payable
should be reclassified as
a. Current Liabilities
b. Noncurrent Asset
c. Non-current Liabilities
d. Current liabilities
14.
Which of the following is not an acceptable presentation of current liabilities?
a. Listing current liabilities in the order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their
liquidation
d. Showing current liabilities in the order of liquidation preference
15.
Non-current liabilities often referred to as:
a. Other long-term provisions
b. Long-terms debts
c. Other long-term financial liabilities
d. Other non-current non-financial liabilities
16.
All are classified as current liabilities, except:
a. Deferred tax liability
b. Short-term borrowing
c. Current provisions
d. Trade and other payables
17.
Which of the following is not a component of contributed capital under equity section?
a. Ordinary shares
b. Treasury shares
c. Preference share
d. Share premium
18.
The trading securities and other investments in quoted equity instrument is an example of
what line item under current assets?
a. Financial assets at fair value
b. Financial assets at book value
c. Other current assets
d. Noncurrent assets
19.
Which is not true about the Statement of Financial Position in the given choices?
a. Biological Assets should be reported in the statement of financial position
b. The number of shares authorized for issue should be reported in the statement of
financial position or the statement of changes in equity or in the notes
c. Provision should be recognized in the statement of financial position
d. A revaluation surplus on a noncurrent asset in the current year should be recognized in
the income statement
20.
The analysis of the statement of financial position is useful in assessing the liquidity, which is
the ability to
a. Satisfy short-term obligations.
b. Maintain profitable operations.
c. Maintain past levels of preferred and ordinary dividends
d. Survive major economic downturn.
Module 4 Post-test Set B
BALANCE SHEET
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1.
Angel Company provided the following account balances at year-end:
Accounts receivable
Financial assets at fair value through profit or loss
Financial assets at amortized cost
Cash
Inventory
Equipment and furniture
Accumulated Depreciation
Patent
Prepaid Expenses
Equipment held for sale
1,600,000
500,000
1,300,000
1,100,000
3,000,000
2,500,000
1,500,000
400,000
100,000
1,800,000
What total amount should be reported as current assets at year-end?
a. 8,100,000
b. 6,300,000
c. 8,000,000
d. 7,600,000
Solution:
Accounts receivable
1,600,000
Financial assets at fair value 500,000
Cash
1,100,000
Prepaid Expenses
100,000
Equipment held for sale
1,800,000
current assets at year-end 8,100,000
2. The following data pertains to Jerome Company on December 31, 2021:
Cash, including sinking fund of P500,000 with trustee
Notes receivable (P200,000 pledged)
Accounts receivable – unassigned
Accounts receivable – assigned
Notes receivable discounted(without recourse)
Equity of assignee in accounts receivable assigned
Inventory, including P600,000 cost of goods in transit purchased FOB destination.
The goods were received on January 3, 2022
2,800,000
100,000
Allowance for doubtful accounts
How much current assets should be shown in the
balance sheet on December 31, 2021?
a. 7,900,000
b. 8,000,000
c. 7,400,000
d. 7,700,000
2,000,000
1,200,000
3,000,000
800,000
700,000
500,000
Solution:
Cash (2M-500k)
1,500,000
Notes receivable
1,200,000
Notes receivable discounted 700,000 500,000
Accounts receivable – unassigned 3,000,000
Accounts receivable – assigned
800,000
Inventory (2,800,000-600k)
2,200,000
Allowance for doubtful accounts
(100,000)
Current assets, Dec 31
7,900,000
3.
At year-end, the current assets of Hazel Company revealed cash and cash equivalents of P700,000,
accounts receivable of P1,200,000 and inventories of P600,000. The examination of accounts receivable
disclosed the following:
Trade accounts
Allowance for doubtful accounts
Claim against shipper for goods lost in transit
Selling price of unsold goods sent by Hazel
On consignment at 130% of cost and not
Included in ending inventory
Total accounts receivable
930,000
( 20,000)
30,000
260,000
1,200,000
What total amount should be reported as current assets at year-end?
a.
2,412,000
b.
b. 2,440,000
c. 2,240,000
d. 2,500,000
Solution:
CCE
700,000
Trade Accounts
940,000
Inventory
800,000
Current assets at year-end 2,440,000
4.
Kaila Company trial balance reflected the following account balances at December 31, 2021:
Accounts receivable
1,600,000
Trading securities
500,000
Accumulated depreciation on equipment and furniture
1,500,000
Cash
1,100,000
Inventory of merchandise
3,000,000
Equipment and furniture
2,500,000
Patent
400,000
Prepaid expenses
100,000
Land held for future business site
1,800,000
In Kaila Company’s December 31, 2021 balance sheet, the current assets total is
a. 8,100,000
b. 7,300,000
c. 6,700,000
d. 6,300,000
Solution:
Accounts receivable
Trading securities
1,600,000
500,000
Cash
1,100,000
Inventory of merchandise3,000,000
Prepaid expenses
Current assets
100,000
6,300,000
5.
The following is Kaila Company’s June 30, 2021, trial balance:
Cash overdraft
100,000
Accounts receivable, net
350,000
Inventory
580,000
Prepaid expenses
120,000
Land classified as “held for sale”
1,000,000
Property, plant and equipment, net
950,000
Accounts payable and accrued expenses
320,000
Common stock
250,000
Additional paid-in capital
1,500,000
Retained earnings
830,000
3,000,000
3,000,000
Checks amounting to P300,000 were written to vendors and recorded on June 29, 2021, resulting in cash
overdraft of P100,000. The checks were mailed on July 9, 2021. Land classified as held for sale was sold for
cash on July 15, 2021. Kaila issued its financial statements on July 31, 2021.
In its June 30, 2021 balance sheet, what amount should Kaila report as current assets?
a. 2,250,000
b. 2,050,000
c. 1,950,000
d.
Solution:
Cash (300k-100k)
200,000
Accounts receivable, net
350,000
Inventory
580,000
Prepaid
expenses
Land classified as “held for sale” 1,000,000
Current assets
2,250,000
1,250,000
120,000
6. Presented below are account balances and related information on December 31, 2021 for Jerome
Company:
Cash and cash equivalents
3,700,000
Accounts receivable
1,500,000
Allowance for doubtful accounts
( 200,000)
Inventory
2,000,000
Prepaid insurance
300,000
7,300,000

The cash and cash equivalents include the following:
Cash in bank, net of bank overdraft of P300,000
Maintained in a separate bank
1,000,000
Cash set aside by the Board of Directors for the
Purchase of a plant site
2,000,000
Petty cash
10,000
Cash withheld from wages for income tax of employees 190,000
General cash
500,000
3,700,000
========

The accounts receivable balance includes past due account in the amount of P100,000 on which a loss of
50% is anticipated. The account should be written off.

The merchandise inventory includes goods held on consignment amounting to P150,000 and goods of
P200,000 purchased and received on December 31, 2021. Neither of these items have been recorded as a
purchase.

The prepaid-insurance includes cash surrender value of life insurance of P50,000.
The adjusted balance of current assets should be
a. 5,400,000
b. 5,100,000
c. 5,300,000
d. 5,200,000
CCE
2,000,000
A/R
1,400,000
AFDA (150,000) 1,300,000
Inventories (2M-150k) 1,850,000
Prepaid Exp
250,000
Current assets
5,400,000
7.
Jerome Company’s December 31, 2021 balance sheet reported the following current assets:
Cash
4,000,000
Accounts receivable
7,500,000
Inventory
4,000,000
Deferred tax asset
1,200,000
Equipment used and held for resale
300,00
17,000,000
An analysis of the accounts receivable disclosed the accounts receivable comprised the following
Trade accounts receivable
5,000,000
Allowance for doubtful accounts
(500,000)
Selling price of Jerome Company’s unsold goods sent to Tar Company on
consignment at 150% of cost and excluded from Jerome’s ending
inventory
3,000,000
7,500,000
At December 31, 2021, the total current assets should be
a. 16,000,000
b. 15,700,000
c. 14,500,000
d. 14,800,000
Solution:
Cash
4,000,000
Accounts receivable
4,500,000 (3M on consignment not included)
Inventory (2M+ (3M/150%))
6,000,000
Equipment used and held for resale
300,000
Current assets
14,800,000
8.
The following trial balance of Jerome Company at December 31, 2021 has been adjusted
except for income tax expense:
Cash
Accounts receivable, net
Prepaid taxes
Inventory
Property, plant & equipment
Accounts payable
Common stock
Retained earnings
Foreign currency translation adjustment
Revenues
Expenses
2,000,000
20,000,000
4,000,000
12,000,000
35,000,000
20,000,000
30,000,000
18,000,000
5,000,000
40,000,000
30,000,000
108,000,000
108,000,000
During 2021, estimated tax payments of P4,000,000 were charged to prepaid ta7xes. Jerome has not yet
recorded income tax expense. The tax rate is 35%. Included in accounts receivable is P6,000,000 due from a
customer. Special terms granted to this customer require payment in equal semiannual installments of
P1,000,000 every June 1 and December 1.
In the December 31, 2021 balance sheet, what amount should be reported as total current assets?
a. 34,500,000
b. 28,500,000
c. 35,500,000
d. 30,500,000
Solution:
Cash
A/R (20M-4M non current)
16,000,000
Prepaid taxes (4M - 3.5M tax exp) 500,000
Inventory
Current assets
30,500,000
9.
2,000,000
12,000,000
An analysis of Joshtine Company’s liabilities disclosed the following
Accounts payable, after deducting debit balances
In suppliers’ accounts amounting to P100,000
Accrued expenses
Credit balances of customers’ accounts
Stock dividend payable
Claims for increase in wages and allowance by
Employees of the company, covered in a
pending lawsuit
Estimated expenses in redeeming prize coupons
Presented by customers
4,400,000
1,500,000
500,000
1,000,000
400,000
600,000
How much should be presented as total current liabilities on the balance sheet?
a. 6,700,000
b. 6,600,000
c. 7,100,000
d. 7,700,000
Solution:
Accounts payable (4.4M + 100k)
4,500,000
Accrued expenses
1,500,000
Credit balances of customers’ accounts
500,000
Estimated expenses
600,000
Current Liabilities
7,1000,000
10.
The trial balance of Joshtine Company reflected the following liability account balances at
December 31, 2021:
Accounts payable
1,900,000
Bonds payable
3,400,000
Deferred tax liability
400,000
Dividends payable
500,000
Income tax payable
900,000
Note payable, due January 31, 2022
600,000
Discount on bonds payable
200,000
The deferred tax liability is based on temporary differences that will reverse equally in 2022 and 2023.
In Joshtine’s December 31, 2021 balance sheet, the current liabilities total was
a. 7,100,000
b. 4,300,000
c. 3,900,000
d. 4,100,000
Solution:
Accounts payable
1,900,000
Dividends payable
500,000
Income tax payable
900,000
Note payable, due January 31, 2022
600,000
Current liabilities
3,900,000
11.
The trial balance of Angel Company reflected the following liability account balances on
December 31, 2021:
Accounts payable
5,000,000
Bonds payable, due December 30, 2022
10,000,000
Premium on bonds payable
500,000
Deferred tax liability
2,500,000
Dividends payable
4,500,000
Income tax payable
1,500,000
Note payable – bank
4,000,000
The bank note payable matures on June 30, 2022. On March 1, 2022, the entire balance of the bank payable
was refinanced on a long-term basis. Angel’s financial statements were issued on March 31, 2022.
In its December 31, 2021, Angel Company should report current liabilities at
a. 21,500,000
b. 24,000,000
c. 25,500,000
d. 28,000,000
Solution:
Accounts payable
5,000,000
Bonds payable, due December 30, 2022
10,000,000
Premium on bonds payable
500,000
Dividends payable
4,500,000
Income tax payable
1,500,000
Note payable – bank
4,000,000
Current Liabilities
25,500,000
12.
The following information about Manchester Company is available at December 31, 2021:
Employee income taxes withheld
900,000
Cash balance at first state Bank
2,500,000
Cash overdraft at Harbor Bank
1,300,000
Accounts receivable with credit balance
750,000
Estimated expenses of meeting warranties on merchandise previously sold
The
500,000
Estimated damages as a result of unsatisfactory performance on a contact
1,500,000
Accounts payable
3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%, payable in
semiannual installments of P500,000 due April 1 and October 1 of each year,
the last bond to be paid on October 1, 2027. Interest is also paid
semiannually.
Stock dividend payable
December
31,
2021
balance
sheet
should
report
5,000,000
2,000,000
current
liabilities
at
A. 8,100,000
b. 7,950,000
c. 9,100,000
d. 7,350,000
Solution:
Employee income taxes withheld
Cash overdraft at Harbor Bank
Accounts receivable with credit balance
900,000
1,300,000
750,000
Estimated expenses of meeting warranties on merchandise previously sold
500,000
Estimated damages as a result of unsatisfactory performance on a contact
1,500,000
Accounts payable
Accrued Interest (5,000,000 x 12% x 3/12)
Current Liabilities
150,000
8,100,000
3,000,000
13.
Joshtine Company had the following liabilities at December 31, 2021:
Account payable
550,000
Unsecured note, 8%, due July 1, 2022
4,000,000
Accrued expenses
350,000
Contingent liability
450,000
Deferred tax liability
250,000
Senior bonds, 7%, due March 31, 2022
5,000,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against Joshtine. Joshtine’s
legal council expects the suit to be settled in 2022 and has estimated that Joshtine will be liable for damages in
the amount of 450,000
The deferred tax liability is not related to an asset for financial reporting and is expected to reverse in 2022
What amount should Joshtine report in its December 31, 2021 balance sheet for current liabilities?
a. 10,350,000
b. 10,150,000
c. 9,900,000
d. 4,900,000
Solution
Account payable
Unsecured note, 8%, due July 1, 2022
Accrued expenses
Senior bonds, 7%, due March 31, 2022
Current Liabilities
14.
550,000
4,000,000
350,000
5,000,000
9,900,000
Tricia Company provided the following data at year-end:
Accounts payable, including cost of goods
Received on consignment of P150,000
Accrued taxes payable
Customers’s deposit
Manila Company as guarantor
Bank overdraft
Accrued electric and power bills
Reserve for contingencies
1,350,000
125,000
100,000
200,000
55,000
60,000
150,000
What total amount should be reported as current liabilities?
a. 1,840,000
b. 1,740,000
c. 1,650,000
d. 1,540,000
Solution
Accounts payable (1350-150on consignment)
Accrued taxes payable
Customers’ deposit
1,200,000
125,000
100,000
Bank overdraft
Accrued electric and power bills
Current Liabilities
55,000
60,000
1540000
15.
The following information pertains to Kaila Company on December 31 of the current year:
Property, plant and equipment
35,000,000
Accounts receivable
20,000,000
Prepaid insurance
2,500,000
Short-term note payable
3,000,000
Cash
5,000,000
Bonds payable
40,000,000
Total assets
101,500,000
Land
20,000,000
Accounts payable
8,000,000
Allowance for doubtful accounts
1,000,000
Merchandise inventory
13,000,000
Available for sale securities – to be held indefinitely
7,000,000
Wages payable
2,000,000
Total liabilities
56,000,000
Premium on bonds payable
3,000,000
The December 31 working capital is
a. 46,500,000
b. 33,500,000
c. 26,500,000
d. 35,500,000
Solution
Accounts receivable
Prepaid insurance
Short-term note payable
Cash
Accounts payable
Allowance for doubtful accounts
Merchandise inventory
Wages payable
20,000,000
2,500,000
3,000,000
5,000,000
8,000,000
(1,000,000)
13,000,000
2,000,000
39,500,000
13,000,000
16.
Rosalie Corporation is located in London but does business throughout Europe. The company
builds and sells equipment used in manufacturing pharmaceuticals. On December 31, 2021, Rosalie has
trading securities valued at £42,000; goodwill valued at £300,000; prepaid insurance valued at £24,000; patents
valued at £140,000; and a customer list valued at £260,000. On Rosalie Corporation’s statement of financial
position at December 31, 2021, what amount should be reported as intangible assets?
a. 742,000
b. 766,000
c. 700,000
d. 440,000
Solution
GW 300k
Pantents 140k
CList 260k
700k
17. The accounts and balances shown below were taken from Kaila Company’s trial balance on December
31, 2021. All adjusting entries have been made.
Wages Payable, P250,000; Cash, P175,000; Bonds Payable, P600,000; Dividends Payable, P140,000; Prepaid
rent, P136,000; Inventory, P820,000; Sinking Fund Assets, P525,000; Trading securities, P153,000; Premium
on Bonds Payable, P48,000; Stock Investment in Subsidiary, P1,020,000; Taxes Payable, P228,000; Accounts
Payable, P248,000; Accounts Receivable, P366,000; Property Plant & Equipment, P1,200,000; Patents- net,
P150,000; Accumulated Depreciation-PPE, P400,000; Land held for future business site, P900,000.
How much should be reported in Kaila’s December 31, 2021 balance sheet as current and non-current assets,
respectively?
a. 1,650,000 and 2,375,000
b. 1,650,000 and 3,395,000
c. 1,800,000 and 2,225,000
d. 1,800,000 and 3,795,000
Cash
Prepaid Rent
Inventory
T.
Sec.
A/R
Current A.
175000
136000
820000
153000
366000
1650000
PPE
Land
Sinking Fund
SI in Subsidiary
Patent
Accum Dep’n
Non Current A.
1200000
900000
525000
1020000
150000
(400000)
3395000
18. Jostin Company’s adjusted trial balance at December 31, 2021 includes the following accounts
balances:
Ordinary share capital, P3 par
P3,000,000
Subscription Receivable due 2022
300,000
Share premium
4,000,000
Treasury shares, at cost
250,000
Net unrealized loss on available for sale securities
100,000
Reserve for uninsured earthquake losses
Accumulated profits
Ordinary shares subscribed
Reserve for treasury share
750,000
1,000,000
500,000
250,000
What amount should Jostin report as total owners’ equity in its December 31, 2021 balance sheet?
a. 8,400,000
b. 8,900,000
c. 9,150,000
d. 9,200,000
Solution:
OSC
3000000
OSS
500,000
SP
4,000,000
Reserve for uninsured earthquake losses
750,000
Reserve for treasury share
250,000
Accumulated profits
1,000,000
Net unrealized loss on available for sale securities 100,000
Treasury shares, at cost
(250,000)
9150000
19.
Facundo Corporation’s post-closing trial balance at December 31, 2021 was as follows:
Facundo Corporation
Post-Closing Trial Balance
December 31, 2021
Debit
Accounts payable
Accounts receivable
Reserve for depreciation
Reserve for doubtful accounts
Premium on ordinary shares
Gain on sale of treasury shares
Bonds payable
Building and equipment
Cash
Dividends payable on preference shares
Ordinary share capital (P1 par value)
Inventories
Land
Available-for-sale securities at fair value
Trading securities at fair value
Net unrealized loss on available-for-sale
securities
Preference share capital (P50 par value)
Prepaid expenses
Donated capital
Share warrants outstanding
Retained earnings
Treasury shares – ordinary, at cost
Totals
Credit
P 495,000
P 963,000
360,000
54,000
1,800,000
450,000
720,000
1,980,000
396,000
7,200
270,000
1,116,000
684,000
513,000
387,000
45,000
900,000
72,000
800,000
208,000
415,800
324,000
P6,480,000
P6,480,000
At December 31, 2021, Facundo had the following number of ordinary and preference shares:
Ordinary
Preference
Authorized
900,000
90,000
Issued
270,000
18,000
Outstanding
252,000
18,000
The dividends on preference shares are P0.40 cumulative. In addition, the preference share has a preference in
liquidation of P50 per share.
Based on the above and the result of your audit, determine the following as of December 31, 2021:
1. Share premium/Additional paid-in capital
a. P3,213,000
c. P3,050,000
b. P3,258,000
d. P2,600,000
Prem
OS
Gain OSOPS 400000
Donated C. 800000
SWOutstanding 208000
3258000
2. Total contributed capital
a. P4,428,000
b. P4,220,000
1800000
c. P3,770,000
d. P1,170,000
PS 900000
OS 270000
SP 3258000
4428000
3. Unappropriated retained earnings
a. P415,800
b. P739,800
c. P91,800
d. P37,800
Total RE
415800
App for TS
(324000)
Unappropriated 91800
4. Total equity
a. P4,266,800
b. P4,519,800
c. P4,888,800
d. P4,474,800
Total CC 4428000
Total RE 415800
Less: TS (324000)
NULoAFS (45000)
4474800
20.
Tricia Industries provided the following balances on December 31, 2021
Accounts payable
Accrued taxes
Ordinary share capital
Dividends – ordinary share
1,400,000
55,000
7,700,000
4,400,000
Dividends – preference share
Mortgage payable ( 500,000 due in 6 months)
Notes payable, due on January 14, 2023
Preference share capital
Premium on notes payable
Income summary – credit balance
Retained earnings – January 1
Unamortized issue cost on note payable
Unearned rent income
1,600,000
6,000,000
2,300,000
3,250,000
125,000
9,090,000
8,080,000
65,000
35,000
What is the amount of retained earnings for the year ended?
a. 2,080,000
b. 11,170,000
c. 17,170,000
d. 22,120,000
Beg RE 8080000
Et Income 9090000
Div OS (4400000)
Div PS (1600000)
11170000
Conceptual Framework
QUIZ #1
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. The financial statements that are prepared for the entity are separate and distinct from the owners according
to the
a. Going concern principle
b. Matching principle
c. Economic entity assumption
d. Accounting period assumption
2. It is a “global phenomenon” intended to bring about transparency and a higher degree of comparability in
financial
reporting, both of which will benefit the investors and are essential to achieve the goal of one uniform and
globally
accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology
3. The purpose of the International Financial Reporting Standards is to
a. Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
b. Develop a uniform currency in which the financial transactions of entities throughout the
world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
4. Financial accounting is the area of accounting that emphasizes reporting to
a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors
5. The theory of accounting which best describes the accounting equation expressed “asset = liabilities +
equity” is
the
a. Entity theory
b. Fund theory
c. Proprietary theory
d. Residual equity theory
6. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
7. The primary focus of financial accounting has been on meeting the needs of which of the following groups?
a. Managers of an entity
b. Present and potential creditors of an entity
c. National and local taxing authorities
d. Independent auditors
8. Many accountants are employed in entities in various capacity as accounting staff, chief accountant or
controller.
These accountants are said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
9. The conceptual framework specifically mentions two underlying assumptions, namely
a. Accrual and going concern
b. Accrual and accounting entity
c. Going concern and time period
d. Time period and monetary unit
10. These users are interested in information about the profitability and stability of an entity in order to assess
the
ability of the entity to provide remuneration, retirement benefits and employment opportunities.
a. Customers
b. The public
c. Government and their agencies
d. Employees
11. These users require information on risk and return on investment and hence an entity’s ability to pay
dividends.
a. Investors
b. Employees
c. Lenders
d. Customers
12. This accounting concept justifies the usage of accruals and deferrals
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit
13. Once an accounting standard has been established
a. The standard is continually reviewed to see if modification is necessary.
b. The standard is not reviewed unless the SEC makes a compliant.
c. The task of reviewing the standard to see if modification is necessary is given to the
PICPA.
c.
The principle of consistency requires that no revisions ever be made to the standard.
14. As independent or external auditors, CPAs are primarily responsible for
a. Preparing financial statements in conformity with GAAP
b. Certifying the accuracy of financial statements
c. Expressing an opinion as to the fairness of financial statements
d. Filing financial statements with the SEC
15. Which of the following terms best describes financial statements whose basis of accounting recognizes
transactions
and other events when they occur?
a. Accrual basis of accounting
b. Going concern basis of accounting
c. Cash basis of accounting
d. Invoice basis of accounting
16. These users are interested in information that enables them to determine whether amounts owing to them
will be
paid when due.
a. Suppliers and trade creditors
b. Lenders
c. Banks
d. Finance entities
17. The process of establishing financial accounting standards
a. Is a democratic process in that a majority of practicing accountants must agree with a
standard before it becomes implemented.
b. Is a legislative process based on rules promulgated by government agencies.
c. Is based solely on economic analysis of the effects each standard will have if it is
implemented.
d. Is a social process which incorporates political actions of various interested users groups
as well as professional research and logic.
18. It is the accounting standard setting body created by PRC upon recommendations of the Board of
Accountancy to
assist the Board of Accountancy in carrying out its powers and functions under R.A. No. 9298
a. Accounting Standards Council
b. Auditing and Assurance Standard Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standard Council
19. The accrual basis of accounting is based primarily on
a. Conservatism and revenue realization
b. Conservatism and matching
c. Consistency and matching
d. Revenue realization and matching
20. The basic purpose of accounting is
a. To provide the information that the managers of an economic entity need to control its
operation.
b. To provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making
rational economic decision.
21. The primary measurement basis currently used to value assets in external financial statements of an entity
is
a. The current market price if the assets currently held by an entity were sold on the open
market.
b. The current market price if the asset held by an entity were purchased on the open market.
c. The present value of the cash flows the assets are expected to generate over their
remaining useful lives.
d.
The market price of the assets held by an entity at the date the assets were acquired.
22. Which underlying concept serves as the basis for preparing financial statements at regular intervals?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit
23. Which of the following statements best describes the term “going concern”
a. When current liabilities of an entity to continue in operation for assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The expenses of an entity exceed its income
24. The overall objective of financial reporting is to provide information
a. That is useful for decision making
b. About an entity’s assets, liabilities and owners’ equity
c. About an entity’s financial reporting performance during a period
d. That allows owners to assess management’s performance
25. The International Accounting Standards Board was formed to
a. Enforce IFRS in foreign countries
b. Develop worldwide accounting standards
c. Establish accounting standards for multinational entities
d. Develop accounting standards for countries that do not have their own standard-setting
Bodies
26. Under generally accepted accounting principles
a. Income and expenses, assets and liabilities are measured based on the occurrence of
changes in the economic resources and obligations.
b. Assets and liabilities are measured on the basis of their liquidation value.
c. Income and expenses are recognized on the basis of cash receipts and payments, including
depreciation of property, plant and equipment.
d. Financial position and financial performance are measured on the basis of cash received
and cash paid.
27. Financial accounting is concerned with
a. General- purpose reports on financial position and financial performance.
b. Specialized reports for inventory management and control.
c. Specialized reports for income tax computation and recognition.
d. General- purpose reports on changes in stock prices and future estimates of market
position.
28. These users are interested in information in order to regulate the activities of an entity, determine taxation
policies
and provide a basis for national statistics.
a. Government and their agencies
b. Major organization of users
c. Bureau of Internal Revenue
d. Department of Finance
29. Which of the following is listed in the Framework as underlying assumptions regarding financial
statements?
a. The financial statement are reliable.
b. Any changes in accouting policy are neutral.
c. The financial statements are prepared under the accrual basis.
d. The entity can be viewed as a liquidating concern.
30. The conceptual framework is intended to establish
a. Generally accepted accounting principles in financial reporting entities.
b. The meaning of “present fairly in accordance with GAAP”
c. The objectives and concepts for use in developing standards of financial accounting and
reporting.
d. The hierarchy of sources of GAAP.
31. A conceptual framework of accounting should
a. Lead to uniformity of financial statements among entities within the same industry.
b. Eliminate alternative accounting principles and methods.
c. Guide the PICPA in developing generally accepted auditing standards.
d. Define the basic objectives, terms, and concepts of accounting.
32. It is the body authorized by law to promulgate rules and regulations affecting the practice of the
accountancy
professions in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountant
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
33. The principles which constitute the ground rules for financial reporting are termed “generally accepted
accounting
principles”. To qualify as “generally accepted,” an accounting principle must
a. Usually guide corporate managers in preparing financial statements, which will be
understood by widely scattered shareholders.
b. Guide corporate managers in preparing financial statements, which will be used, for
collective bargaining agreement with trade unions
c. Guide an entrepreneur of the choice of an accounting entity like single proprietorship,
partnership or corporation.
D.
Receive substantial authoritative support.
34. Managerial accounting is the area of accounting that emphasizes
a. Reporting financial information to external users
b. Reporting to the SEC
c. Combining accounting knowledge with an expertise in data processing
d. Developing accounting information for use within an entity
35. Which of the following best describes “financial performance” of an entity?
a. The revenue, expenses and net income or loss for a period of an entity.
b. The assets, liabilities and equity of an entity
c. The total assets minus total liabilities
d. The total cash inflows minus cash outflows
36. Generally accepted accounting principles
a. Are accounting adaptations based on the laws of economic science.
b. Derive their credibility and authority from legal ruling and court precedents.
c. Derive their credibility and authority from the national government through the SEC.
d. Derive their credibility and authority from general recognition and acceptance by the
accountancy profession.
37. During the lifetime of an entity accountants produce financial statements at arbitrary points in time in
accordance
with which basic accounting concept.
a. Accrual
b. Periodicity
c. Unit of measure
d. Continuity
38. These users are interested in information about the continuance of an entity, especially when they have a
longterm involvement with or are dependent on the entity.
a. Customers
b. Employees
c. Trade unions
d. Suppliers
39. Continuation of an accounting entity in the absence of evidence to the contrary is the basic concept of
a. Accounting entity
b. Time period
c. Going concern
d. Accrual
40. Proper application of accounting principles is most dependent upon the
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
Quiz - Balance Sheet
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. Unearned rent would normally appear on the balance sheet as a
a. plant asset.
b. current liability.
c. long-term liability.
d. current asset.
2. The accounts and balances shown below were gathered from Paynter Corporation's trial
balance on December 31, 2021. All adjusting entries have been made.
Wages Payable ........................................... 25,600
Cash .................................................... 17,700
Mortgage Payable ........................................ 151,600
Dividends Payable ....................................... 14,000
Prepaid Rent ............................................ 13,600
Inventory ............................................... 81,800
Sinking Fund Assets ..................................... 52,400
Short-Term Investments .................................. 15,200
Premium on Bonds Payable ................................ 4,600
Stock Investment in Subsidiary .......................... 102,400
Taxes Payable ........................................... 22,800
Accounts Payable ........................................ 24,800
Accounts Receivable ..................................... 36,600
The amount that should be reported as current liabilities on Paynter Corporation's balance sheet
is
a. 87,200.
b. 91,800.
c. 73,200.
d. 238,800.
Solution:
Wages payable
25600
Dividends Payable
14000
Taxes Payable
A/P
22800
24800
Current Liabilities
87200
3. Balance sheet analysis is useful in assessing a firm's liquidity, which is the ability to
a. satisfy short-term obligations.
b. main profitable operations.
c. maintain past levels of preferred and common dividends.
d. survive a major economic downturn.
4. Neptune Corporation's trial balance contained the following account balances at December 31,
2021:
Accumulated Depreciation--Equipment ..................... 45,000
Short-Term Investments .................................. 15,000
Prepaid Insurance ....................................... 3,000
Cash .................................................... 33,000
Inventory of Merchandise ................................ 90,000
Equipment and Furniture ................................. 54,000
Patent .................................................. 12,000
Accounts Receivable (net) ............................... 48,000
Land Held for Future Business Site ...................... 75,000
On Neptune's December 31, 2021, balance sheet, the current assets total should be
a. 189,000.
b. 201,000.
c. 219,000.
d. 243,000.
Cash
33000
Short term Investments
15000
Prepaid insurance
3000
Inventory of Merchandise
A/R
90000
48000
Current Assets
189000
5. Baggins Company prepared a draft of its 2021 balance sheet. The draft statement reported total
assets of 437,500. Included in this total assets figure were the following items:
Treasury stock of Baggins Company at cost, which approximates
market value on December 31 ................
12,000
Unamortized patents ..................................... 5,600
Cash surrender value of life insurance on corporate executives
.............................................. 6,850
Unrealized holding losses on available-for-sale
securities ............................................ 4,200
At which amount should Baggins' total assets be correctly reported in the December 31, 2021,
balance sheet?
a. 420,850
b. 421,300
c. 425,050
d. 425,500
Assets
437500
Treasury at cost (13000)
Total asset
424500
6. Which of the following would not be reported in the stockholders' equity section of the balance
sheet?
a. Retained earnings appropriated for future plant expansion
b. Dividends declared on preferred stock
c. Paid-in capital in excess of par value
d. Deficit in retained earnings
7. Blues Corporation's trial balance included the following account balances at December 31,
2021:
Accounts Payable ........................................ 45,000
Bonds Payable, due 2022 ................................. 75,000
Discount on Bonds Payable, due 2022 ..................... 9,000
Dividends Payable January 31, 2022 ...................... 24,000
Notes Payable, due January 31, 2025 ..................... 60,000
What amount should be included in the current liability section of Blues' December 31, 2021,
balance sheet?
a. 135,000
b. 153,000
c. 195,000
d. 234,000
Solution:
A/P
45000
Bonds payable
75000
Discount on bonds payable
-9000
Dividends payable
24000
Current Liabilities
135000
8. Which of the following best describes contributed capital?
a. The amount that would be distributed to the stockholders in a liquidation of the
corporation.
b. The amount of capital provided by stockholders' investments.
c. The amount of capital provided by stockholders' investments and undistributed
earnings.
d. The value of the common and preferred stock.
9. Which of the following would not be classified as a current liability on a classified balance
sheet?
a. Unearned revenue.
b. Deferred income tax liability.
c. The currently maturing portion of long-term debt.
d. Accrued salaries payable to management.
10. Seahawk Company's adjusted trial balance at December 31, 2021, includes the following
account balances:
Common Stock, 3 par .................................... 300,000
Additional Paid-In Capital .............................. 400,000
Treasury Stock, at cost ................................. 25,000
Net Unrealized Holding Loss on Available-For-Sale
Securities ............................................ 10,000
Retained Earnings--Appropriated for Uninsured Earthquake
Losses ................................................ 75,000
Retained Earnings--Unappropriated ....................... 100,000
What amount should Seahawk report as total owners' equity in its December 31, 2021, balance
sheet?
a. 840,000
b. 860,000
c. 890,000
d. 910,000
Solution:
Common stock
300000
Addl Paid in capital
400000
Treasury Stock
-25000
NUHL on AFS
-10000
RE appropriated
75000
RE Unappropriated
Total owners’ equity
100000
840000
11. Martin Corporation was organized on January 3, 2021. Martin was authorized to issue 50,000
shares of common stock with a par value of 10 per share. On January 4, Martin issued 30,000
shares of common stock at 25 per share. On July 15, Martin issued an additional 10,000 shares
at 20 per share. Martin reported income of 33,000 during 2021. In addition, Martin declared a
dividend of .50 per share on December 31, 2021. The
amount reported on Martin Corporation's December 31, 2021, balance sheet as stockholders'
equity was
a. 400,000.
b. 550,000.
c. 950,000.
d. 963,000.
Common stock30000 @25
750000
Addl paid in capital10000 @ 20
200000
Income
33000
Div Declared
(20000)
stockholders equity
963000
12. Which of the following is not a long-term investment?
a. Stock held to exert influence on another company.
b. Land held for speculation.
c. Trademarks.
d. Cash surrender value of life insurance.
13. Pending litigation would generally be considered a(n)
a. nonmonetary liability.
b. contingent liability.
c. estimated liability.
d. current liability.
14. The accounts and balances shown below were gathered from Paynter Corporation's trial
balance on December 31, 2021. All adjusting entries have been made.
Wages Payable ........................................... 25,600
Cash .................................................... 17,700
Mortgage Payable ........................................ 151,600
Dividends Payable ....................................... 14,000
Prepaid Rent ............................................ 13,600
Inventory ............................................... 81,800
Sinking Fund Assets ..................................... 52,400
Short-Term Investments .................................. 15,200
Premium on Bonds Payable ................................ 4,600
Stock Investment in Subsidiary .......................... 102,400
Taxes Payable ........................................... 22,800
Accounts Payable ........................................ 24,800
Accounts Receivable ..................................... 36,600
The amount that should be reported as current assets on Paynter Corporation's balance sheet
is
a. 151,300.
b. 164,900.
c. 217,300.
d. 267,300.
Cash
17700
Prepaid rent
13600
Inventory
81800
Short term investments
A/R
15200
36600
Current Assets
164900
15. The December 31, 2021, balance sheet of Madden Inc., reported total assets of 1,050,000 and
total liabilities of 680,000. The following information relates to the year 2022:
• Madden Inc. issued an additional 5,000 shares of common stock at 25 per
share on July 1, 2022.
• Madden Inc. paid dividends totaling 80,000.
• Net income for 2022 was 110,000.
• No other changes occurred in stockholders' equity during 2022.
The stockholders' equity section of the December 31, 2022, balance sheet would report a
balance of
a. 400,000.
b. 525,000.
c. 685,000.
d. 835,000.
Solution:
equity
370000
contributed (addl)
Income
125000
110000
dividends Payable
-80000
Stockholders equity
525000
16. Which of the following characteristics may result in the classification of a liability being changed
from current to noncurrent?
a. Violation of a subjective acceleration clause.
b. Violation of an objective acceleration clause.
c. A demand provision for payment.
d. Refinancing on or before the balance sheet date.
17. Eagle Co. prepared a draft of its 2021 balance sheet. The draft statement reported current
liabilities totaling 200,000. However, none of the following items were included in this
preliminary total at December 31, 2021:
Accounts payable ........................................ 30,000
Bonds payable, due 2022 ................................. 50,000
Discount on bonds payable, due 2022 ..................... 6,000
Dividends payable on January 31, 2022 ................... 16,000
Notes payable, due 2023 ................................. 40,000
At which amount should Eagle's current liabilities be correctly reported in the December 31,
2021, balance sheet?
a. 230,000
b. 290,000
c. 296,000
d. 302,000
Solution:
Reported Liab
A/p
200000
30000
Bonds payable
50000
Disocunt on bonds payable
(6000)
Dividends Payable
16000
Current Liabilities
290000
18. Accrued revenues would normally appear on the balance sheet as
a. plant assets.
b. current liabilities.
c. long-term liabilities.
d. current assets.
19. Mejarus Co.'s adjusted trial balance at December 31, 2021, includes the following account
balances:
Common Stock, 3 par .................................... 360,000
Additional Paid-In Capital .............................. 480,000
Treasury Stock, at cost ................................. 30,000
Net Unrealized Loss on Available-for-Sale Securities .... 12,000
Retained Earnings: Appropriated for Uninsured Earthquake
Losses ................................................ 90,000
Retained Earnings: Unappropriated ....................... 120,000
What amount should Mejarus report as total stockholders' equity in its December 31, 2021,
balance sheet?
a. 1,008,000
b. 1,032,000
c. 1,068,000
d. 1,092,000
Solution:
Common Stock
360000
Addl paid in capital
480000
Treasury Stock
-30000
UL on AFSS
-12000
RE: AFUEL
90000
RE: UA
120000
Total stockholders equity
1008000
20. Which of the following would not be classified as a current asset on a classified balance sheet?
a. Investment securities (trading).
b. Short-term investments.
c. Prepaid expenses.
d. Intangible assets.
21. Maryk Electronics Inc. reported the following items on its December 31, 2021, trial balance:
Accounts Payable ........................................ 108,900
Advances to Employees ................................... 4,500
Unearned Rent Revenue ................................... 28,800
Estimated Liability Under Warranties .................... 25,800
Cash Surrender Value of Officers' Life Insurance ........ 7,500
Bonds Payable ........................................... 555,000
Discount on Bonds Payable ............................... 22,500
Trademarks .............................................. 3,900
The amount that should be recorded on Maryk's balance sheet as total liabilities is
a. 696,000.
b. 700,500.
c. 703,500.
d. 741,000.
22. The accounts and balances shown below were gathered from Paynter Corporation's trial
balance on December 31, 2021. All adjusting entries have been made.
Wages Payable ........................................... 25,600
Cash .................................................... 17,700
Mortgage Payable ........................................ 151,600
Dividends Payable ....................................... 14,000
Prepaid Rent ............................................ 13,600
Inventory ............................................... 81,800
Sinking Fund Assets ..................................... 52,400
Short-Term Investments .................................. 15,200
Premium on Bonds Payable ................................ 4,600
Stock Investment in Subsidiary .......................... 102,400
Taxes Payable ........................................... 22,800
Accounts Payable ........................................ 24,800
Accounts Receivable ..................................... 36,600
Paynter Corporation's working capital is
a. 62,500.
b. 73,100.
c. 77,700.
d. 125,700.
Solution:
Total Current Asset:
Cash
17,700
Prepaid Rent
Inventory
13,600
81,800
Short-Term Investments 15,200
Accounts Receivable 36,600
Total Current Liabilities.:
Wages Payable
-25,600
Dividends Payable
Taxes Payable
-14,000
-22,800
Accounts Payable -24,800
Working Capital
77,700
23. Which of the following would not be considered an element of working capital?
a. Investment securities (current)
b. Organization costs
c. Accrued interest on notes payable
d. Work in process inventories
24. Daria Company reported the following accounts at year-end;
Inventory, including inventory expected in the
Ordinary course of operations to be sold
Beyond 12 months amounting to P700,000 1,000,000
Accounts receivable 1,200,000
Prepaid insurance 100,000
Financial asset held for trading
200,000
Equity investment at fair value through other
Comprehensive income
800,000
Cash 300,000
Deferred tax asset 150,000
What total amount should be reported as current assets at year-end?
a. 2,800,000
b. 2,550,000
c. 3,600,000
d. 2,100,000
Solution:
Inventory
1,000,000
Trade receivables
1,200,000
Prepaid insurance 100,000
Financial assets held for trading 200,000
Cash
300,000
Total current assets 2,800,000
25. At year-end, the current assets of Hazel Company revealed cash and cash equivalents of
P700,000, accounts receivable of P1,200,000 and inventories of P600,000. The examination of
accounts receivable disclosed the following:
Trade accounts 930,000
Allowance for doubtful accounts ( 20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Hazel
On consignment at 130% of cost and not
Included in ending inventory 260,000
Total accounts receivable 1,200,000
What total amount should be reported as current assets at year-end?
a. 2,412,000
b. 2,440,000
c. 2,240,000
d. 2,500,000
Solution:
Cash and cash equivalent
700,000
Trade and other receivables (1,200,000 minus 260,000) 940,000
Inventories (600,000 + 200,000)
Total current assets
2,440,000
800,000
Adjustments
1. Sales
260,000
Accounts Receivable 260,000
2. Inventory (260,000 / 130%) 200,000
Cost of goods sold
200,000
26. Jewel Company reported the following current assets at year-end:
Cash and cash equivalents 3,200,000
Accounts receivable 1,420,000
Allowance for doubtful accounts ( 120,000)
Inventory 2,800,000
Deferred charges 200,000
Employees’ account – current 240,000
Advances to subsidiary 260,000
Claim against shipper for goods lost in transit 200,000
Total current assets 8,200,000
What total amount should be reported as current assets?
a. 7,740,000
b. 7,780,000
c. 7,940,000
d. 8,200,000
Solution:
Cash
3,200,000
Accounts receivable
1,420,000
Allowance for uncollectible accounts ( 120,000)
Receivable from employees
Claim receivable
Inventory
Total current assets
240,000
200,000
2,800,000
7,740,000
27. Gumamela Company provided the following data at year-end:
Accounts payable, including cost of goods
Received on consignment of P150,000 1,350,000
Accrued taxes payable 125,000
Customers’s deposit 100,000
Manila Company as guarantor 200,000
Bank overdraft 55,000
Accrued electric and power bills 60,000
Reserve for contingencies 150,000
What total amount should be reported as current liabilities?
a. 1,840,000
b. 1,740,000
c. 1,650,000
d. 1,540,000
Solution:
Accounts payable (1,350,000 – 150,000) 1,200,000
Accrued taxes payable
125,000
Customers’ deposit
100,000
Bank overdraft
55,000
Accrued electric and power bills 60,000
Total current liabilities
1,540,000
28. Burma Company disclosed the following liabilities:
Accounts payable, after deducting debit balances
In suppliers’ accounts amounting to P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers’ accounts 500,000
Stock dividend payable 1,000,000
Claims for increase in wages and allowance by
Employees, covered in a pending lawsuit 400,000
Estimated expenses in redeeming prize coupons 600,000
What total amount should be reported as current liabilities?
a. 6,700,000
b. 6,600,000
c. 7,100,000
d. 7,700,000
Solution
Accounts payable (4,000,000 + 100,000) 4,100,000
Accrued expenses
1,500,000
Credit balances in customers’ accounts 500,000
Estimated liability for coupons
Total current liabilities
600,000
6,700,000
29. Gracia Company reported the following current assets at year-end:
Cash including sinking fund of P500,000 with trustees 1,500,000
Accounts receivable 2,500,000
Inventory, including P200,000 cost of goods in transit
Purchased FOB point of destination 2,000,000
Advances to officers collectible currently 400,000
Dividend receivable 100,000
Total current assets 6,500,000
What total amount should be reported as current assets?
a. 5,400,000
b. 5,300,000
c. 5,800,000
d. 5,900,000
Cash (1,500,000-500,000)
Trade and other receivables
1,000,000
3,000,000
Inventory (2,000,000-200,000) 1,800,000
Total current assets
5,800,000
30. Caticlan Company provided the following data on December 31, 2020:
Cash, including sinking fund of P500,000 for bond
Payable due on June 30, 2021
2,000,000
Notes receivable 1,200,000
Note receivable discounted 700,000
Accounts receivable – unassigned 3,000,000
Accounts receivable – assigned 800,000
Equity of assignee in accounts receivable assigned 500,000
Inventory, including P600,000 cost of goods in transit
Purchased FOB destination. The goods were
Receive on January 3, 2021 2,800,000
Allowance for doubtful accounts 100,000
What total amount of current assets should be reported on December 31, 2020?
a. 7,900,000
b. 8,400,000
c. 7,400,000
d. 7,700,000
Solution:
Cash
2,000,000
Notes receivable
1,200,000
Notes receivable discounted ( 700,000)
Accounts receivable – unassigned 3,000,000
Accounts receivable – assigned 800,000
Allowance for doubtful accounts ( 100,000)
Inventory (2,800,000 – 600,000) 2,200,000
Total current assets
8,400,000