Accounting Principles
Test Preparation
Course Introduction
Accounting Principles provides a comprehensive introduction to the fundamental concepts and techniques used in the field of accounting. This course covers the accounting cycle, including recording financial transactions, preparing journal entries, and compiling financial statements such as the balance sheet, income statement, and cash flow statement. Emphasis is placed on understanding generally accepted accounting principles (GAAP), the principles of accrual accounting, and the analysis and interpretation of financial information for decision-making purposes. Students will develop a solid foundation in bookkeeping, internal controls, and the ethical responsibilities of accountants, preparing them for further study or entry-level positions in accounting and finance.
Recommended Textbook
Intermediate Accounting IFRS 6th Edition by J. David Spiceland
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Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) Determining fair value by calculating the present value of future cash flows is a level 1 type of input.
A)True
B)False
Answer: False
Q2) The matching principle is:
A)A valuation method.
B)An expense recognition accounting principle.
C)A cash basis reporting principle.
D)An asset classification procedure.
Answer: B
Q3) Four different competent accountants independently agree on the amount and method of reporting an economic event. The concept demonstrated is:
A)Reliability.
B)Comparability.
C)Representational faithfulness.
D)Verifiability.
Answer: D
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Chapter 2: Review of the Accounting Process
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Q1) Permanent accounts would not include:
A)Interest expense.
B)Wages payable.
C)Prepaid rent.
D)Unearned revenues.
Answer: A
Q2) Hughes Aircraft sold a four passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. The journal entry to record this sale would include a:
A)Credit to cash.
B)Debit to cash discount.
C)Debit to note receivable.
D)Credit to note receivable.
Answer: C
Q3) Unearned revenues
Answer: \(\begin{array}{ccc} & \text { Effect } & \text { Classification } \\ \text { Unearned revenues } & 2 & 3 \end{array}\)
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Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) An example of fraud would be:
A)Issuing a purchase order without first securing bids.
B)Buying raw materials from an affiliated company.
C)Knowingly classifying a material non-current receivable as a current receivable.
D)Forgetting to accrue salaries and wages payable.
Answer: C
Q2) Red Onion Restaurant classifies a six-month prepaid insurance policy as a current asset. Its rationale is based on:
A)Materiality.
B)Operating cycle.
C)Definition.
D)Liquidity.
Answer: C
Q3) Notes payable:
A)Is a current liability account.
B)Usually has a debit balance.
C)Is a non-current liability account.
D)Cannot determine its classification without additional information.
Answer: D
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Chapter 4: The Income Statement and Statement of Cash
Flows
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Q1) Cal's Cookies reported 2009 before-tax income before extraordinary items of $152,000 and a before-tax extraordinary loss of $32,000. All tax items are subject to a 30% tax rate. In its 2009 income statement, Cal's would report the following amounts as separate line items for net income and income tax expense:
A)$120,000 and $36,000.
B)$ 84,000 and $45,600.
C)$ 84,000 and $36,000.
D)$120,000 and $45,600.
Q2) Operating cash outflows would include:
A)Purchase of investments.
B)Purchase of equipment.
C)Payment of cash dividends.
D)Purchases of inventory.
Q3) Earnings quality refers to the ability of reported earnings (income) to predict future earnings.
A)True
B)False
Q4) List at least four operating activities that would be reported in the statement of cash flows for Wal-Mart. Assume the use of the direct method.
Page 6
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Chapter 5: Income Measurement
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Q1) In 2009, Reliable would recognize gross profit of:
A)$ 0.
B)$ 6,000.
C)$ 5,000.
D)$10,000.
Q2) When accounting for multiple-deliverable arrangements, EITF 00-21 indicates that sellers can separately record revenue for a part of an arrangement even if the part does not have value to the customer on a stand-alone basis.
A)True
B)False
Q3) Merchandise sold FOB destination indicates that:
A)The seller holds title until the merchandise is received at the buyer's location.
B)The buyer is responsible for delivery of the merchandise to the destination.
C)The full order is back ordered to its destination.
D)The buyer pays the freight to the destination.
Q4) Initial franchise fees are always recognized on the date they are received.
A)True
B)False
Q5) Required: Compute the return on shareholders' equity for 2008.
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Chapter 6: Time Value of Money Concepts
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Q1) How much must be invested now at 9% interest to accumulate to $10,000 in five years?
A)$9,176.
B)$6,499.
C)$5,500.
D)$5,960.PV = $10,000 x .64993* = $6,499 *PV of $1: n=5; i=9%
Q2) Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?
A)$15,783,077.
B)$17,045,650.
C)$23,190,400.
D)Cannot be determined from the given information.This is the amount in the future value of an annuity due formula, where $100 million = investment amount x factor from Table 5 where n=5 and i=8%.Thus, Investment amount = $100 million 6.3359 = $15,783,077.
Q3) Most, but not all, liabilities are monetary liabilities.
A)True
B)False
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Chapter 7: Cash and Receivables
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Q1) COSO defines internal control as a process, affected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in:
A)Effectiveness and efficiency of operations.
B)Reliability of financial advice.
C)Compliance with local ordinances.
D)All of these are correct.
Q2) What is the balance in the allowance for sales returns account at the end of 2009?
A)$11,000.
B)$39,000.
C)$43,000.
D)$ 4,000.$32,000 + 39,000 ($650,000 6%) 28,000 = $43,000
Q3) Cash equivalents do not include:
A)Money market funds.
B)High grade marketable equity securities.
C)U.S.treasury bills.
D)Commercial paper.
Q4) Explain the transactions that typically would affect the discount on notes receivable account.
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Chapter 8: Inventories: Measurement
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Q1) Net purchases are reduced for discounts taken whether the net method is used or the gross method is used.
A)True
B)False
Q2) In a periodic inventory system, the cost of inventories sold is:
A)Debited to accounts receivable.
B)Credited to cost of goods sold.
C)Debited to cost of goods sold.
D)Not recorded at the time of sale.
Q3) Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.
Q4) In a period when costs are rising and inventory quantities are stable, the inventory method that would result in the highest ending inventory is:
A)Weighted average.
B)Moving average.
C)FIFO.
D)LIFO.
Q5) Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses LIFO and a periodic inventory system.
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Chapter 9: Inventories: Additional Issues
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Q1) In applying LCM, market cannot be:
A)Less than net realizable value.
B)Greater than the normal profit.
C)Less than the normal profit margin.
D)Greater than net realizable value.
Q2) Under the retail inventory method:
A)A company measures inventory on its balance sheet by converting retail prices to cost.
B)A company measures inventory on its balance sheet at current selling prices.
C)A company measures inventory on its balance sheet on a LIFO basis.
D)None of these is correct.
Q3) To the nearest thousand, estimated ending inventory using the conventional retail method is:
A)$36,000.
B)$32,000.
C)$33,000.
D)$29,000.29,000
Q4) Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of trees.
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) Average accumulated expenditures for 2009 was:
A)$300,000.
B)$350,000.
C)$500,000.
D)$400,000.
Q2) Beacon Inc. received a gift of land and building in Twin Pines Park as an inducement to relocate. The land and buildings have fair values of $45,000 and $455,000. Required: Prepare journal entries to record the above transactions.
Q3) The FASB's required accounting treatment for research and development costs often understates both net income and assets.
A)True
B)False
Q4) What disclosures are required relative to interest costs incurred during the year?
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) How are assets valued when they are acquired by issuing stock?
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) Briefly differentiate between activity-based and time-based allocation methods.
Q2) Granite Enterprises acquired a patent from Southern Research Corporation on 1/1/09 for $4 million. The patent will be used for five years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite's patent amortization for 2009, assuming the straight-line method is used.
A)$380,000
B)$400,000
C)$760,000
D)$800,000 The $200,000 purchase commitment is treated as the residual value of the patent.Amortization is as follows:
($4,000,000 200,000) 5 years = $760,000
Q3) In the first year of an asset's life, which of the following methods has the smallest depreciation?
A)Straight-line.
B)Declining balance.
C)Sum-of-the-years' digits.
D)Composite or group.
Q4) Briefly explain how a change in depreciation method is accounted for.
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Chapter 12: Investments
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Q1) The equity method of accounting for investments in voting common stock is appropriate when:
A)The investor can significantly influence the investee.
B)The investor has voting control over the investee.
C)The investor intends to hold the common stock indefinitely.
D)The investor is assured of a continued supply of a valuable raw material.
Q2) If Dizbert Company concluded that an investment originally classified as available for sale would now more appropriately be classified as held to maturity, Dizbert would:
A)not reclassify the investment, as original classifications are irrevocable.
B)reclassify the investment as held to maturity and immediately recognize in net income any unrealized gain or loss on the reclassification date.
C)reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the investment's amortized cost basis for future amortization.
D)need to restate earnings, as the original classification was in error.
Q3) Prepare the journal entry (in thousands) that Kirby made at the end of 2008 to record the information disclosed above.
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Chapter 13: Current Liabilities and Contingencies
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Q1) On November 1, 2009, a $216,000, 9-month, noninterest-bearing note is discounted at the bank at a 10% discount rate.
Required:
1. Prepare the appropriate journal entry to record the issuance of the note.
2. Determine the effective interest rate.
3. Prepare the appropriate journal entry on December 31, 2009, to record interest on the note for the 2009 financial statements.
4. Prepare the appropriate journal entry(s) on July 31, 2010, to record interest and the payment of the note.
Q2) Short-term obligations can be reported as long-term liabilities if:
A)The firm has a long-term line of credit.
B)The firm has tentative plans to issue long-term bonds.
C)The firm intends to and has the ability to refinance as long-term.
D)The firm has the ability to refinance on a long-term basis.
Q3) Swift Drug Company is being sued this year for a wrongful death due to violation of FDA rules. There is no doubt that Swift is guilty and the settlement is reasonably estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain how Swift would address this in its current year financial statements.
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Chapter 14: Bonds and Long-Term Notes
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Q1) Zero-coupon bonds
A)offer a return in the form of a deep discount off the face value.
B)result in zero interest expense for the issuer.
C)result in zero interest revenue for the investor.
D)are reported as shareholders' equity by the issuer.
Q2) Bonds were issued at a discount. In the bond amortization schedule:
A)The interest expense is less with each successive interest payment.
B)The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.
C)The outstanding balance (book value) of the bonds declines eventually to face value.
D)The reduction in the discount is less with each successive interest payment.
Q3) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to debt and equity for preferred stock?
Q4) The rate of return on assets indicates
A)the margin of safety provided to creditors.
B)the extent of "trading on the equity" or financial leverage.
C)profitability without regard to how resources are financed .
D)the effectiveness of employing resources provided by owners.
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Chapter 15: Leases
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Q1) On February 1, 2009, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is 8 years. The fair market value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least
A)$600,000.
B)$540,000.
C)$450,000.
D)$405,000.$600,000 90% = $540,000
Q2) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to recognizing a gain on a sale and leaseback transaction?
Q3) Differentiate between guaranteed and unguaranteed residual value of leased property. Does the difference affect the lessor's accounting for the lease?
Q4) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to leases of land and buildings?
Q5) Discuss the economic advantages of leasing.
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Chapter 16: Accounting for Income Taxes
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Q1) What would Kent's income tax expense be in the year 2009?
A)$61,200.
B)$48,200.
C)$71,200.
D)None of these is correct.
Q2) Future taxable amounts result in deferred tax assets.
A)True
B)False
Q3) At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A footnote reveals that the entire $400,000 will be earned in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:
A)Noncurrent deferred tax liability.
B)Noncurrent deferred tax asset.
C)Current deferred tax liability.
D)Current deferred tax asset.
Q4) Will LMC report $819.9 million as a liability in its balance sheet at December 31, 2009? Explain.
Q5) 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) Defined contribution pension plans that link the amount of contributions to company performance are often called:
A)Incentive savings plans.
B)Thrift plans.
C)Savings plans.
D)None of these.
Q2) The pension expense includes periodic changes that occur:
A)In the PBO.
B)In the PBO and the plan assets.
C)In the plan assets.
D)In the PBO and the ABO.
Q3) Which of the following is not included among the assumptions needed to estimate postretirement health care benefits?
A)Employee turnover.
B)Expected retirement age of plan participants.
C)Life expectancy of plan participants.
D)Return on plan assets.
Q4) The components of postretirement benefit expense are similar to the components of pension expense. How does the service cost component differ between the two expenses?
19
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Chapter 18: Shareholders Equity
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Q1) F Co. declares a 5% stock dividend. If the market price at declaration is $12 per share, a shareholder with 110 shares likely would receive:
A)5 additional shares.
B)fractional share rights for 5 ½ shares.
C)5 additional shares and $6 in cash.
D)5 additional shares and a fractional share right for 2 ½ shares.110 shares 5% = 5.5 shares; one-half share $12 = $6
Q2) Accumulated other comprehensive income is reported:
A)In the balance sheet as an asset.
B)In the balance sheet as a liability.
C)In the balance sheet as a component of shareholders' equity.
D)In the statement of comprehensive income.
Q3) Which of the following statements is true when dividends are not declared or paid on cumulative preferred stock?
A)The shareholders must be allowed to convert their shares to common stock.
B)The unpaid dividends are accrued as a liability.
C)The unpaid dividends are reported in a note to the financial statements.
D)The unpaid dividends accrue interest until paid.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Nonconvertible bonds affect the calculation of:
A)Basic earnings per share.
B)Diluted earnings per share.
C)Both a and b.
D)None of these is correct.
Q2) When a company's only potential common shares are convertible bonds:
A)Diluted EPS will be greater if the bonds are actually converted than if they are not converted.
B)Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted.
C)Diluted EPS will be the same whether or not the bonds are converted.
D)The effect of conversion on diluted EPS cannot be determined without additional information.
Q3) Morrison Corporation had the following common stock record during the current calendar year: What is the number of shares to be used in computing basic EPS?
A)2,000,000.
B)2,200,000.
C)2,307,500.
D)2,310,000.
Page 21
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Chapter 20: Accounting Changes
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Q1) A company failed to report the $600,000 additional liability for its underfunded pension plan. Its tax rate is 30%. As result of this error, retained earnings would be:
A)Unaffected.
B)Overstated by $600,000.
C)Overstated by $420,000.
D)Overstated by $180,000.Recording the additional liability creates an intangible asset and has no effect on net income.
Q2) Cooper Inc. took physical inventory at the end of 2008. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.
A)Cooper needs to correct an accounting error.
B)Cooper has made a change in accounting principle, requiring retrospective adjustment.
C)Cooper is required to adjust a change in accounting estimate prospectively.
D)Cooper is not required to make any accounting adjustments.This inventory should be excluded because it had not yet reached its destination, where title passes.
Q3) How are accounting errors treated?
Q4) How may accounting changes detract from accounting information?
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Chapter 21: The Statement of Cash Flows
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Q1) When preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities, depreciation is added to net income because:
A)It was deducted as an expense on the income statement, but does not require cash.
B)It was deducted as an expense on the income statement and affects the amount of cash.
C)It is a significant portion of the year's expenses.
D)It represents a source or inflow of cash.
Q2) Do the statement of cash flows and its related disclosure note report only transactions that cause an increase or decrease in cash? Explain.
Q3) Charlene Company sold a printer with a cost of $68,000 and accumulated depreciation of $23,000 for $20,000 cash. This transaction would be reported as:
A)An operating activity.
B)An investing activity.
C)A financing activity.
D)None of these.
Q4) Did accounts receivable increase or decrease during 2009?
Q5) Is depreciation a source of cash? Explain.
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Chapter 22: Appendix a Derivatives
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Q1) The key criterion for qualifying as a hedge is that the hedging relationship:
A)Must be highly effective in achieving offsetting changes in fair values or cash flows.
B)Must have predictable results.
C)Must have fixed outcomes.
D)None of these.
Q2) The financial futures market exists to provide a mechanism to buy and sell the underlying financial instruments.
A)True
B)False
Q3) In an annual report to shareholders, Merck & Co., Inc. disclosed the following in regard to its financial instruments:
Q4) An option on a financial instrument-say a Treasury note-gives its holder the right either to buy or to sell the Treasury note at a specified price and within a given time period.
A)True
B)False
Q5) How are derivatives reported on the balance sheet? Why?
Q6) Explain why a stock option is a type of derivative instrument.
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