Accounting Theory Practice Questions
Course Introduction
Accounting Theory explores the conceptual foundations and frameworks that underpin the practice of accounting. This course examines the development, significance, and application of accounting principles, standards, and regulations, emphasizing their theoretical justifications and practical implications. Topics include the evolution of accounting thought, the role of accounting in society, normative and positive accounting theories, standard-setting processes, ethical considerations, and contemporary issues in accounting practice. Through analysis and critical discussion, students gain a deeper understanding of how accounting information is created, interpreted, and used for decision making in a variety of organizational and societal contexts.
Recommended Textbook
Intermediate Accounting 1st Edition by
Elizabeth A. Gordon
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Page 2
Chapter 1: The Financial Reporting Environment
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Sample Questions
Q1) The FASB gives the SEC authority to regulate accounting for publicly traded companies.
A)True
B)False
Answer: False
Q2) In recent years,the FASB standards that have been set indicate they believe the income statement is deemed to dominate the balance sheet.
A)True
B)False
Answer: False
Q3) Rules-based standards result in inconsistencies between standards. A)True
B)False Answer: True
Q4) Standard setters develop accounting standards based on natural economic laws. A)True
B)False
Answer: False
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Chapter 2: Financial Reporting Theory
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Sample Questions
Q1) ________ elements appear on the balance sheet.
A)Period-of-time
B)Point-in-time
C)Piece-of-time
D)Phase-in-time
Answer: B
Q2) ________ are restatements or revaluations of reported amounts of assets and liabilities that companies usually report in comprehensive income.
A)Financial maintenance entries
B)Capital maintenance adjustments
C)Physical maintenance entries
D)Comprehensive maintenance adjustments
Answer: B
Q3) Recognition is the process of reporting an economic event in the financial statements.
A)True
B)False Answer: True
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Chapter 3: Judgment and Applied Financial Accounting Research
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Q1) IFRS and U.S.GAAP have the same disclosure requirements regarding the estimates made at the end of the accounting period.
A)True
B)False
Answer: False
Q2) The accounting policies footnote is ________.
A)optional
B)required by U.S.GAAP
C)required by auditors
D)an internal management document
Answer: B
Q3) The Codification subtopics are generally distinguished by accounting area or scope.
A)True
B)False
Answer: True
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Chapter 4: Review of the Accounting Cycle
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Sample Questions
Q1) Helmsley Corporation received one year's rent in advance on a warehouse.This transaction is a(n)________.
A)expense
B)liability
C)asset
D)revenue
Q2) To be recorded in the general journal,a transaction must be an economic event.
A)True
B)False
Q3) Reversing entries change the amounts reported in previously issued financial statements.
A)True
B)False
Q4) Deferred expenses may be initially recorded as assets or expenses.
A)True
B)False
Q5) Unearned revenues may be initially recorded as liabilities or revenues.
A)True
B)False
Q6) List the steps required to close temporary accounts.
Page 6
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Chapter 5: Statements of Net Income and Comprehensive
Net Income
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Sample Questions
Q1) List the five component accounts included in stockholders' equity.
Q2) IFRS requires,but U.S.GAAP does not require,a statement of stockholders' equity.
A)True
B)False
Q3) Companies presenting comprehensive income in two statements will include the statement of comprehensive income in the notes somewhere after the statement of net income.
A)True
B)False
Q4) What items are included in a company's results from discontinued operations? For this purpose,how is a component defined?
Q5) Operating income is gross profit less all operating expenses and income taxes. A)True B)False
Q6) IFRS allows companies to include in Other Comprehensive Income the increase in fair value of long-lived assets such as buildings. A)True
B)False
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Q7) How are revenues similar to gains and how are they different?
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Chapter 6: Statements of Financial Position and Cash Flows and
the Annual Report
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Sample Questions
Q1) What is working capital for San Marcos Corporation?
A)$85
B)$123
C)$238
D)$548
Q2) The debt to equity ratio for Matthews Corporation is ________.
A).495
B).992
C)2.05
D)2.28
Q3) Which of the following would be disclosed in the Summary of Significant Accounting Policies?
A)composition of inventories
B)details of a related party transaction
C)definition of cash equivalents
D)maturity dates of long-term debt
Q4) List three areas in which the balance sheet provides important information to financial statement users.
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Q5) Define the term subsequent event,explain the two types of subsequent events and provide an example of each.
Chapter 7: Accounting and the Time Value of Money
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Sample Questions
Q1) The value of a bond is equal to the present value of the interest payments plus the present value of the maturity value.
A)True
B)False
Q2) Describe how a risk-free rate of return might be determined and provide an example.
Q3) The relationship between a future value and its corresponding present value is determined by two variables.What are those two variables?
A)discount rate; length of compounding periods
B)discount rate; number of compounding periods
C)conversion rate; length of compounding periods
D)conversion rate; number of compounding periods
Q4) You have discovered an investment opportunity that earns a 8% rate of interest compounded quarterly.Which of the following amounts is most nearly equal to the amount you should deposit today to have $7,000 in five years?
A)$5,300
B)$5,240
C)$4,760
D)$4,710
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Chapter 8: Revenue Recognition
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Sample Questions
Q1) Judgment may be involved in the determination of whether the promise to deliver the good or services or service is separate from other promises.
A)True
B)False
Q2) ABC Company enters into a contract with Edmond Library to help them streamline their purchasing process.The contract specifies that Edmond Library will pay ABC $50,000 in the form of a fixed fee plus an additional $20,000 if the library achieves $200,000 in cost savings.ABC estimates a 55% chance that the library will achieve a $200,000 savings.Assuming ABC estimates that the transaction price is the expected value transaction price.The transaction price is recorded as ________.
A)$50,000
B)$61,000
C)$70,000
D)$75,000
Q3) If the seller does not meet the three criteria for revenue recognition,then it assumes that goods or services are transferred over time.
A)True
B)False
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Chapter 9: OL: Revenue Recognition
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Sample Questions
Q1) Gleason Construction enters into a long-term fixed price contract to build an office building for $20,000,000.In the first year of the contract Camey incurs $6,000,000 of cost and the engineers determined that the remaining costs to complete are $10,000,000.How much gross profit or loss should Gleason recognize in Year 1 assuming the use of the completed-contract method?
A)$0
B)$4,000,000 profit
C)$4,000,000 loss
D)$375,000 profit
Q2) Under the completed-contract method,the firm only reports profit in the final year of the contract.
A)True
B)False
Q3) A seller recognizes the right to return sales as a/an ________.
A)liability
B)asset
C)revenue
D)expense
Q4) What conditions are necessary for a company to use the percentage-of-completion method?
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Chapter 10: Short-Term Operating Assets: Cash and Receivables
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Sample Questions
Q1) Securitization of receivables involves taking many separate receivables and bundling them into a single investment pool.
A)True
B)False
Q2) Which method of estimating bad debt expense focuses on balance sheet relationships?
A)net method
B)allowance method
C)aging method
D)percentage-of-sales method
Q3) The cash operating cycle can be computed as ________.
A)days accounts payable outstanding + days sales outstanding + days inventory on hand
B)days accounts payable outstanding - days sales outstanding - days inventory on hand
C)days accounts payable outstanding + days sales outstanding - days inventory on hand
D)days accounts payable outstanding - days sales outstanding + days inventory on hand
Q4) What disclosures are required concerning accounts receivable?
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Chapter 11: Short-Term Operating Assets: Inventory
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Sample Questions
Q1) A periodic inventory system is used by most companies today due to the proliferation of computers.
A)True
B)False
Q2) The retail inventory method that estimates the lower-of-cost-or-market of ending inventory is the ________.
A)basic retail inventory method
B)gross profit inventory method
C)the LCM extract method
D)conventional retail inventory method
Q3) How do inventory disclosures following IFRS differ from those following U.S.GAAP?
A)Firms using IFRS are required to report the amount of reversals of inventory write-downs.
B)Firms using IFRS disclose the amount of write-downs recognized as expenses or losses.
C)Firms using IFRS do not disclose the market value of inventory.
D)Firms using IFRS do not disclose inventory financing agreements.
Q4) Explain the difference between the basic retail method and the conventional retail method.
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Chapter 12: Long-Term Operating Assets: Acquisition, cost
Allocation, and Derecognition
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Q1) A copyright is an exclusive right to reproduce and sell an original work for the creator's life plus 20 years.
A)True
B)False
Q2) Under what circumstances,if any,may R&D costs be capitalized instead of expensed?
Q3) The amount of capitalizable interest for a constructed asset is the lesser of actual interest incurred and avoidable interest.
A)True
B)False
Q4) How do IFRS disclosure requirements of property,plant,and equipment differ from U.S.GAAP disclosure requirements?
Q5) Both U.S.GAAP and IFRS requires disclosure of the gross value of goodwill and related accumulated amortization.
A)True
B)False
Q6) What is meant by a bargain purchase and how is it recorded?
Q7) How is derecognition of an asset recognized in the financial statements?
Page 14
Q8) Briefly explain the half-year convention for recognizing depreciation.
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Chapter 13: Long-Term Operating Assets: Departures From
Historical Cost
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Q1) U.S.GAAP requires that firms combine indefinite-life intangibles into an asset grouping if they are operated as a single asset.
A)True
B)False
Q2) Devo Co.has an indefinite-life intangible asset with a carrying value of $782,000.The undiscounted cash flows expected to be realized from that asset total $827,000; the discounted cash flows are $574,000; and the fair value of the asset has been determined to be $646,000.What is the new carrying value of the asset after impairment loss has been recorded?
A)$827,000
B)$646,000
C)$574,000
D)$136,000
Q3) Under IFRS,firms report a reversal of an impairment loss as other comprehensive income.
A)True
B)False
Q4) List four impairment indicators.
Q5) Explain how gains or losses on impaired assets should be reported in income.
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Chapter 14: Operating Liabilities and Contingencies
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Sample Questions
Q1) Onopea Inc.considered two contingencies at the end of 2016: ** a probable loss in the range of $300,000 to $500,000 ** a reasonably possible loss of $150,000
Under U.S.GAAP,what is the balance for contingent liabilities at the end of 2016?
A)$300,000
B)$400,000
C)$450,000
D)$550,000
Q2) Lifeline Biofuels built an oil rig at a cost of $4.5 million.The company estimates the oil rig will have a useful life of 20 years (with no salvage value),after which Federal regulations require that the oil rig must be dismantled and the land area restored.The present value of these asset retirement costs is $1.4 million based on the 6% after-tax discount rate.
a.Prepare the journal entry prepared at the completion of construction to value the oil rig.
b.Prepare the journal entry to record the annual increase in the carrying value of the liability.
Q3) What are compensated absences? How does a company account for them?
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Chapter 15: OL: Operating Liabilities and Contingencies
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Q1) Which of the following best describes the accounting for base warranty costs?
A)expensed when paid
B)expensed when obligations are probable and estimable
C)expensed based on estimate in year of sale
D)expensed when warranty claims are certain
Q2) Accounting for product warranty costs under an base warranty ________.
A)is required for income tax purposes
B)charges an expense account when the seller performs in compliance with the warranty
C)is frequently justified on the basis of expediency when warranty costs are immaterial
D)should be used whenever the warranty is an integral and inseparable part of the sale
Q3) In an extended warranty,warranty revenue is ________.
A)not recognized
B)recognized equally over the warranty period
C)recognized only in the last year of the warranty period
D)recognized in the year of sale
Q4) Describe how to account for warranty costs if the warranty is determined to be a extended warranty? A base warranty?
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Chapter 16: Financing Liabilities
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Sample
Questions
Q1) Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars.The press had no known market value.Hornet agreed to pay $300,000 at the end of three years and asked for a 3% interest rate.At the time,Hornet's incremental borrowing rate was 7%.How should the seller and buyer record the transaction?
A)Each should record the sale/purchase at $300,000.
B)The seller should record the sale at $300,000 and Hornet at the present value of $300,000.
C)Each should record the transaction at the present value of the note payable.
D)Hornet should record the sale at $300,000 and the seller at the present value of $300,000.
Q2) When a company issues bonds,there is typically one debtor and one creditor that transact directly.
A)True
B)False
Q3) Bonds that do not pay cash interest are referred to as zero-coupon bonds.
A)True
B)False
Q4) Under what circumstances would an early extinguishment of a bond issue result in a gain or a loss?
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Chapter 17: Accounting for Stockholders Equity
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Q1) Syd's Co.reported comprehensive income of $7,600 for the current year.It had unrealized losses on available-for-sale securities of $1,700 after tax,and a foreign currency translation gain of $1,500 after tax.What is net income for the current year?
A)$7,800
B)$7,600
C)$7,400
D)$7,200
Q2) When a company purchases and sells treasury shares for amounts above and below cost,it reports these "gains" and "losses" on the ________.
A)income statement
B)balance sheet
C)income statement and balance sheet
D)only in a footnote
Q3) Large stock dividends are valued at the market price at the date of declaration.
A)True
B)False
Q4) Discuss how stock is valued when issued in exchange for noncash consideration.
Q5) Why would a company issue a stock split?
Q6) Why would a company repurchase shares of its own common stock?
Page 19
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Chapter 18: Investing Assets
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Q1) If a company deems an asset to be impaired,it still may not record an impairment loss.
A)True
B)False
Q2) Which of the following is the primary effect of amortizing a discount on notes receivable?
A)It increases the interest revenue so that the corporation's effective rate of return is brought up to the higher market rate.
B)It reduces the discount and increases the carrying value of the note receivable until the carrying value is equal to the face value of the note.
C)Both A and B are the primary effects of amortizing a discount.
D)None of the above are accurate.
Q3) Available-for-sale debt securities are reported at fair value,with unrealized gains or losses reported in other comprehensive income.
A)True
B)False
Q4) For securities classified as held-to-maturity,what do companies disclose in the notes to the financial statements?
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Chapter 19: Accounting for Income Taxes
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Q1) Under GAAP,the balance sheet presentation for deferred taxes is to report them as either current or non-current.
A)True
B)False
Q2) Lyon Ltd.,a U.S.GAAP reporter,provides the following information:
Sales on account $800,000
Associated warranty expense/liability $200,000
No warranty repairs made to date; under law - Lyon cannot deduct warranty expense for tax purposes until repairs are made.
Management estimates that it is more likely than not that the firm will not realize 25% of the deferred tax asset.
Tax rate of 35%
Prepare a simplified income statement,including the effective tax rate,both with and without the valuation allowance.
Q3) Gallagher Corporation's book income before taxes is $600,000 and its tax rate is 35%.Included in the income before taxes is $50,000 in fines and penalties.There are no other book-tax differences.Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate.
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Chapter 20: Accounting for Employee Compensation and Benefits
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Q1) A higher than expected return on plan assets increases pension costs.
A)True
B)False
Q2) In what ways must an accountant exercise judgment in relation to stock-based compensation plans?
Q3) The accumulated benefit obligation reflects only current salary levels.
A)True
B)False
Q4) What is the primary difference in defined-benefit pension disclosures between U.S.GAAP and IFRS?
Q5) If a pension plan is overfunded,it means that the ________.
A)ABO exceeds plan assets
B)PBO is less than plan assets
C)ABO is less than plan assets
D)PBO exceeds plan assets
Q6) Restricted stock plans are less dilutive than stock option plans.
A)True
B)False
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Q7) List and describe the five components of annual pension expense.
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Chapter 21: Earnings Per Share
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Q1) George Manufacturing had net income of $200,000 and declared preferred dividends of $25,000 during the current year.George began the year with 20,000 common shares outstanding.It issued 30,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1.Compute George's weighted-average common shares outstanding for the year.
A)22,000
B)34,000
C)44,000
D)50,000
Q2) Which one of the following does not require the computation of diluted earnings per share?
A)convertible bonds
B)stock warrants
C)preferred stock
D)stock options
Q3) A security is antidilutive if decreases the diluted EPS below basic EPS.
A)True
B)False
Q4) Describe how users utilize the EPS ratios.
Q5) When is a potentially dilutive antidilutive?
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Chapter 22: Accounting Corrections and Error Analysis
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Q1) Which of the following is not a component of a minimum lease payment?
A)an unguaranteed residual value
B)minimum rental payments
C)a bargain purchase option
D)a penalty for failure to extend or renew the lease
Q2) In determining net cash flow from operating activities,an increase in merchandise inventory during a period ________.
A)requires a subtraction adjustment to financing cash flows under the indirect method
B)requires a subtraction adjustment to sales to customers under the direct method
C)requires an addition adjustment to net income under the indirect method
D)requires an addition adjustment to payments to suppliers under the direct method
Q3) Which of the following includes cash flows that relate to the production and delivery of goods and services?
A)financing activities section
B)operating activities section
C)funding activities section
D)investing activities section
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