Accounting for Business Decision Making
Exam Answer Key
Course Introduction
Accounting for Business Decision Making explores the fundamental principles and practices of accounting as they relate to managerial decision-making processes. This course covers key topics such as financial statement analysis, cost behavior, budgeting, performance evaluation, and internal controls. Students learn how to interpret and utilize accounting information to support strategic planning, operational efficiency, and evidence-based decisions in various business contexts. Emphasis is placed on developing analytical skills necessary to assess financial data, evaluate business alternatives, and communicate recommendations effectively to stakeholders.
Recommended Textbook
Intermediate Accounting 8th Edition by J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) The most political issue in the FASB's most recent deliberations and amendments to GAAP on business combinations was:
A)The negative effects on subsequent earnings of amortizing goodwill if firms were required to use the purchase method of accounting for the combination.
B)The negative effects on subsequent earnings of amortizing goodwill if firms were required to use the pooling method of accounting for the combination.
C)The unrealistic balance sheet assets that would be created if firms were required to use the purchase method of accounting for the combination.
D)The unrealistic balance sheet assets that would be created if firms were required to use the pooling method of accounting for the combination.
Answer: A
Q2) The primary function of financial accounting is to provide relevant financial information to parties external to business enterprises.
A)True
B)False
Answer: True
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3
Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Which of the following accounts has a normal debit balance?
A)Accounts payable.
B)Accrued taxes.
C)Accumulated depreciation.
D)Advertising expense.
Answer: D
Q2) Interest revenue
Answer: 11ea906f_564c_450d_a7a0_af9af21ed8be_TB2444_00
Q3) On December 31,2016,the end of Larry's Used Cars' first year of operations,the accounts receivable was $53,600.The company estimates that $1,200 of the year-end receivables will not be collected.Accounts receivable in the 2016 balance sheet will be valued at:
A)$53,600.
B)$54,800.
C)$52,400.
D)$ 1,200.
Answer: C
Q4) Cost of goods sold
Answer: 11ea906f_564b_cfd7_a7a0_89e25dd6d609_TB2444_00
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Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Altoid Co.'s acid-test ratio.Round your answer to two decimal places.
Answer: ($150 + 200 + 300)/$450 = 1.44 Acid-test ratio
Q2) The balance sheet reports:
A)Net income at a point in time.
B)Cash flows for a period of time.
C)Assets and equities at a point in time.
D)Assets and liabilities for a period of time.
Answer: C
Q3) The principal concern with accounting for related-party transactions is:
A)The size of the transactions.
B)Differences between economic substance and legal form.
C)The absence of legally binding contracts.
D)The lack of accurate data to record transactions.
Answer: B
Q4) Accrued salaries and wages in a balance sheet represent salaries and wages that have been earned by employees but not yet paid.
A)True
B)False
Answer: True
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Chapter
and the Statement of Cash Flows
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Q1) The principal benefit of separately reporting discontinued operations is to enhance:
A)Predictive ability of future profitability.
B)Consistency in reporting.
C)Intraperiod continuity.
D)Comprehensive reporting.
Q2) In the operating activities section of the statement of cash flows,we start with net income:
A)In the direct method.
B)In the indirect method.
C)In both the direct and the indirect methods.
D)In neither the direct nor the indirect methods.
Q3) Briefly define discontinued operations and explain how they are reported according to U.S.GAAP.
Q4) Rowdy's would report net cash inflows (outflows)from investing activities in the amount of:
A)$(4,000).
B)$ 100.
C)$(3,900).
D)$(1,900).
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Chapter 5: Income Measurement
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Q1) Contract liability,deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.
A)True
B)False
Q2) After Sweeney has transferred a painting to a barbershop,the painting:
A)Should be counted in Sweeney's inventory until the barbershop sells it.
B)Should be counted in the barbershop's inventory,as the barbershop now possesses it.
C)Should be counted in either Sweeney's or the barbershop's inventory,depending on which incurred the cost of preparing the painting for display.
D)We lack sufficient information to know who should carry the painting in inventory.
Q3) If a license is acquired to use intellectual property for a 5-year period,revenue always is recognized at the point in time the customer begins to benefit from the license. A)True
B)False
Q4) Required: Compute the receivables turnover ratio for 2016.
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) Provide two examples of the use of present value techniques in accounting.
Q2) GHI Company will issue $2,000,000 in 8%,10-year bonds when the market rate of interest is 6%.Interest is paid semiannually.
Required: Determine how much cash GHI Company should realize from the bond issue.
Q3) Column 4 is an interest table for the:
A)Present value of an ordinary annuity of 1.
B)Future value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.
Q4) With an ordinary annuity,a payment is made or received on the date the agreement begins.
A)True
B)False
Q5) When interest is compounded,the stated rate of interest exceeds the effective rate of interest.
A)True
B)False
Q6) Briefly describe the difference between simple interest and compound interest.
Q7) The total cash interest payments in 2016 for these notes.
Page 8
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Chapter 7: Cash and Receivables
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Q1) Define what it is meant by internal control.
Q2) Using a T-account for the allowance for doubtful accounts,identify the changes in the account during fiscal year 2013.
Q3) If a company adopts an accounts receivable factoring program,and accounts for the factoring as a sale of receivables,which of the following is true in the period the company starts the program (all else equal)?
A)The accounts receivable balance will increase.
B)Cash flow from operations may increase.
C)A retroactive restatement is necessary due to a change in accounting principle.
D)The factoring arrangement needs to be with a consolidated entity to qualify for sale accounting.
Q4) The journal entry to establish the petty cash fund includes:
A)A credit to petty cash and a debit to cash for $150.
B)A debit to petty cash and a credit to cash for $150.
C)A credit to cash and a debit to various expenses for $126.
D)A credit to petty cash and a debit to various expenses for $126.
Q5) A company's investment in receivables is affected by several related variables.Give an example of this interrelationship.
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Chapter 8: Inventories: Measurement
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Sample Questions
Q1) The LIFO Conformity Rule states that if LIFO is used for:
A)One class of inventory,it must be used for all classes of inventory.
B)Tax purposes,it must be used for financial reporting.
C)One company in an affiliated group,it must be used by all companies in an affiliated group.
D)Domestic companies,it must be used by foreign partners.
Q2) The choice of cost flow assumption (FIFO,LIFO,or average)does not depend on the actual physical flow of the product.
A)True
B)False
Q3) Inventory does not include:
A)Materials used in the production of goods to be sold.
B)Assets intended to be sold in the normal course of business.
C)The cost of office equipment.
D)Assets currently in production for normal sales.
Q4) LIFO liquidation profits occur when inventory quantity declines and costs are rising.
A)True
B)False
Q5) Briefly explain the advantages of dollar-value LIFO (DVL).
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Chapter 9: Inventories: Additional Issues
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Q1) Under the dollar-value LIFO retail method,to determine the value of a LIFO layer:
A)Divide the LIFO layer by the layer-year price index and multiply by the layer-year cost-to-retail percentage.
B)Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage.
C)Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail percentage.
D)Divide the LIFO layer by the layer-year cost-to-retail percentage and multiply by the layer-year price index.
Q2) Under the retail method,the denominator in the cost-to-retail percentage does not include:
A)Purchases.
B)Purchase returns.
C)Abnormal shortages.
D)Freight-in.
Q3) Required: Determine the reported inventory value assuming the lower of cost and net realizable value rule is applied to classes of trees.
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Chapter 10: Property, plant, and Equipment and Intangible
Assets: Acquisition and Disposition
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Sample Questions
Q1) Show the journal entry to record Plank's disposal of the fixed assets during 2016.
Q2) In Case B,Pensacola would record a gain/(loss)of:
A)$ 4,000.
B)$ (4,000).
C)$ (10,000).
D)None of these answer choices are correct.
Q3) Productive assets that are physically consumed in operations are:
A)Equipment.
B)Land.
C)Land improvements.
D)Natural resources.
Q4) Briefly explain the differences between U.S.GAAP and International Financial Reporting Standards in accounting for research and development expenditures other than software development costs.
Q5) The relative fair values are used to determine the valuation of individual assets acquired in a lump-sum purchase.
A)True
B)False
Q6) Briefly explain how R&D is reported in financial statements.
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Chapter 11: Property, plant, and Equipment and Intangible
Assets: Utilization and Impairment
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Sample Questions
Q1) Using the straight-line method,depreciation for 2016 and book value at December 31,2016,would be:
A)$10,000 and $30,000.
B)$11,250 and $28,750.
C)$10,000 and $35,000.
D)$11,250 and $33,750.
Q2) Ellen's Antiques reported the following in its December 31,2016,balance sheet:
Equipment $4,000,000
Accumulated depreciation-equipment $3,150,000
In a disclosure note,Ellen's indicates that it uses straight-line depreciation over eight years and estimates salvage value at 10% of cost. Required: Compute the average age of Ellen's equipment at 12/31/2015.
Q3) Briefly explain the following statement.Depreciation is a process of cost allocation,not valuation.
Q4) Biological assets are valued at fair value less estimated costs to sell under International Financial Reporting Standards (IFRS).
A)True
B)False
Q5) Briefly explain how to account for a change in depreciation method.
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Chapter 12: Investments
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Q1) Under IFRS No.9,which is not a category for accounting for investments?
A)Fair value through profit and loss.
B)Fair value through other comprehensive income.
C)Held-to-maturity.
D)Amortized cost.
Q2) When available-for-sale securities are sold,the amount of gain or loss realized from the date of purchase is included in before-tax net income.
A)True
B)False
Q3) If an investment is accounted for under the equity method,the investor reduces investment income and the investment account for amortization of goodwill acquired in the investment.
A)True
B)False
Q4) Prepare the journal entry (in thousands)that Kirby made at the end of 2016 to record the information disclosed above.
Q5) Prepare appropriate entry(s)at December 31,2018,and indicate how the scenario will affect net income,OCI,and comprehensive income.
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Chapter 13: Current Liabilities and Contingencies
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Q1) A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated.
A)True
B)False
Q2) Some liabilities are not contractual obligations and may not be payable in cash.
A)True
B)False
Q3) Accounting for costs of incentive programs for customer purchases:
A)Requires probability estimation.
B)Follows the matching principle.
C)Is a loss contingency situation.
D)All of these answer choices are correct.
Q4) When a material gain contingency is probable and the amount of gain can be reasonably estimated,the gain should be:
A)Reported in the income statement and disclosed.
B)Offset against shareholders' equity.
C)Disclosed but not recognized in the income statement.
D)Neither recognized in the income statement nor disclosed.
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Chapter 14: Bonds and Long-Term Notes
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Q1) Patrick Rach International issued 5% bonds convertible into shares of the company's common stock.Rach applies International Financial Reporting Standards (IFRS).Upon issuance,Patrick Rach International should record:
A)The proceeds of the bond issue as part debt and part equity.
B)The proceeds of the bond issue entirely as debt.
C)The proceeds of the bond issue entirely as equity.
D)The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
Q2) Required: What amount of interest expense on these bonds would Morton Sales Co.report in its 2016 income statement?
Q3) To evaluate the risk and quality of an individual bond issue,savvy investors rely heavily on:
A)Bond ratings provided by financial investment services such as Moody's.
B)Newspaper articles.
C)Bond interest payments.
D)The company's audit report.
Q4) How are bonds and notes the same? How do they differ?
Q5) Why do companies find the issuance of convertible bonds to be an attractive form of financing?
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Chapter 15: Leases
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Q1) Discuss the interest rates used by the lessee and the lessor for determining the present value of a capital lease.
Q2) Describe the use of depreciation for an asset leased under a capital lease.Include a discussion of the depreciation period.
Q3) In a sale-leaseback arrangement,the lessee is also:
A)The new owner of the property.
B)The buyer.
C)A third-party guarantor.
D)The seller.
Q4) Hamilton Security leased equipment to American Parcel Service for a 16-year period,at which time possession of the leased asset will revert back to Hamilton.The equipment cost Hamilton $16 million and has an expected useful life of 22 years.Its normal sales price is $23 million.The present value of the minimum lease payments for both the lessor and lessee is $20 million.The first payment was made at the inception of the lease.
Required:
How would American Parcel Service classify this lease if it prepares its financial statements using U.S.GAAP? IFRS? Why?
Q5) Discuss the economic advantages of leasing.
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Chapter 16: Accounting for Income Taxes
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Q1) Identify three examples of permanent differences between accounting income and taxable income.
Q2) What should Hobson report as net income?
A)$70 million.
B)$72 million.
C)$75 million.
D)$88 million.
Q3) Which of the following causes a permanent difference between taxable income and pretax accounting income?
A)The installment method used for sales of property.
B)MACRS depreciation method used for equipment.
C)Interest income on municipal bonds.
D)Percentage-of-completion method for long-term construction contracts.
Q4) Future taxable amounts result in deferred tax assets.
A)True
B)False
Q5) Explain why LMC has a $209.4 million valuation allowance for its deferred tax assets.
Q6) What is a valuation allowance for deferred tax assets and when is it used?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) The attribution period for postretirement health care plans does not include:
A)The first five years of service.
B)The year of hire.
C)The employee probation period.
D)The years of service beyond the full eligibility date.
Q2) Which of the following is not usually part of the pension formula under a defined benefit plan?
A)Age at retirement.
B)Number of years of service.
C)Seniority at time of retirement.
D)Compensation level.
Q3) The difference between pension plan assets and the PBO is equal to the funded status of the plan.
A)True
B)False
Q4) What was FRC's pension expense for the year?
A)$44.
B)$47.
C)$49.
D)$107.
Page 19
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Chapter 18: Shareholders Equity
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Q1) Corporations are formed in accordance with:
A)The Model Business Corporation Act.
B)Federal statutes.
C)The laws of individual states.
D)Federal trade commission regulations.
Q2) Under IFRS,components of other comprehensive income:
A)Can be reported as part of a single statement of comprehensive income.
B)Are not permitted to be reported.
C)Must be reported in a separate statement of comprehensive income.
D)Can be reported as part of a statement of shareholders' equity.
Q3) How many of Levi's common shares were outstanding on 12/31/2015?
A)14 million.
B)9 million.
C)5 million.
D)None of these answer choices is correct.
Q4) Paid-in capital must consist solely of amounts invested by shareholders.
A)True
B)False
Q5) The balance sheet reports the balances of shareholders' equity accounts.What additional information is provided by the statement of shareholders' equity?
Page 20
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Nagy Industries reported a net income of $619,369 on December 31,2016.At the beginning of the year,the company had 500,000 common shares outstanding.On April 1,the company sold 27,000 shares for cash.On August 31,the company issued 48,000 additional shares as part of a merger.On December 1,2016,the company declared and issued a 10% stock dividend.
Required:
Compute Nagy's net income that would produce a basic EPS of $2.00 per share for 2016.
Q2) Dilutive convertible bonds affect both the numerator and the denominator in computing diluted EPS.
A)True
B)False
Q3) A simple capital structure might include:
A)Stock rights.
B)Convertible bonds.
C)Nonconvertible preferred stock.
D)Stock purchase warrants.
Q4) GAAP requires using intrinsic value accounting for employee stock options.
A)True
B)False
Page 21
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Chapter 20: Accounting Changes
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Q1) Gore Inc.recorded a liability in 2016 for probable litigation losses of $2 million.Ultimately,$5 million in legitimate warranty claims were filed by Gore's customers.
A)Gore has made a change in accounting principle,requiring retrospective adjustment.
B)Gore needs to correct an accounting error.
C)Gore is required to adjust a change in accounting estimate prospectively.
D)Gore is not required to make any accounting adjustments.
Q2) A change in accounting estimate and a change in reporting entity are types of changes in accounting principle.
A)True
B)False
Q3) Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S.GAAP than with International Financial Reporting Standards (IFRS)?
A)Change in estimated useful life of depreciable assets.
B)Change from the FIFO method of costing inventories to the LIFO method.
C)Change in depreciation method.
D)Change in reporting entity.
Q4) Describe the approaches of reporting changes in accounting principles.
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Chapter 21: The Statement of Cash Flows
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Q1) When a transfer is made between cash and cash equivalents with no gain or loss,how is the transaction treated in the statement of cash flows?
A)It is included as an operating activity.
B)It is included as a noncash financing activity.
C)It is included as an investing activity.
D)It is not reported.
Q2) In its 2016 income statement,WME reported $440,000 for the cost of goods sold.WME paid inventory suppliers $380,000 in 2016,and its inventory balance decreased by $41,000 during the year.In its reconciliation schedule,WME should:
A)Show a $19,000 positive adjustment to net income under the indirect method for the increase in accounts payable.
B)Show a $19,000 positive adjustment to net income under the indirect method for the decrease in accounts payable.
C)Show a $19,000 negative adjustment to net income under the indirect method for the increase in accounts payable.
D)Show a $19,000 negative adjustment to net income under the indirect method for the decrease in accounts payable.
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