Accounting Theory
Study Guide Questions
Course Introduction
Accounting Theory explores the conceptual foundations and frameworks underlying accounting practices and procedures. The course examines how accounting policies are formulated, the principles that guide accounting choices, and the development of accounting standards. Students will investigate the roles of financial reporting, ethical considerations, and regulatory environments in shaping accounting theory, as well as analyze contemporary issues such as fair value measurement, sustainability reporting, and the impact of globalization on accounting standards. This course aims to provide students with a deeper understanding of the rationale behind accounting methods and the theoretical concepts that influence decision-making in the accounting profession.
Recommended Textbook
Financial Reporting and Analysis Revsine 6th Edition by Collins Johnson Mittelstaedt Soffer
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2231 Flashcards
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Chapter 1: The Economic and Institutional Setting for Financial Reporting
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Sample Questions
Q1) A firm's financial statements contain trends that give users insight into the firm's A)future market share.
B)position within its industry.
C)profitability,productivity,and liquidity.
D)current market price for common and preferred stock.
Answer: C
Q2) Contracts often contain language that refers to financial statement numbers.
A)True
B)False
Answer: True
Q3) A company's financial statements reflect information about A)future projections of sales,expenses,and other future economic events.
B)product information and competitive positions.
C)the general economy of the industry in which the company operates.
D)economic events that affect a company that can be translated into accounting numbers.
Answer: D
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Chapter 2: Accrual Accounting and Income Determination
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Sample Questions
Q1) Using the accrual basis,which one of the following entries would properly record Canon's revenue recognition for October?
A) DR Cash\(\quad\)\(\quad\)40,000
CR Copier sales\(\quad\)\(\quad\)40,000
B) DR Cash\(\quad\)16,000
CR Copier sales\(\quad\)16,000
C) DR Cash\(\quad\)\(\quad\)16,000
DR Accounts receivable\(\quad\)\(\quad\)24,000
CR Copier sales\(\quad\)\(\quad\)40,000
D) DR Accounts receivable\(\quad\)40,000
CR Copier sales\(\quad\)40,000
Answer: C
Q2) Under the cash basis,how much revenue should Canon recognize in October?
A)$0
B)$16,000
C)$24,000
D)$40,000
Answer: B
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Chapter 3: Additional Topics in Income Determination
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Sample Questions
Q1) Research indicates that few managers would engage in real transaction management (e.g.,delaying research and development or advertising)in order to meet earnings targets.
A)True
B)False Answer: False
Q2) Selling,general,and administrative expenses relating to installment sales are deferred until the revenue is recognized.
A)True
B)False Answer: False
Q3) The installment sales method of recognizing profit for accounting purposes is acceptable if collection of the sales price is not reasonably assured.
A)True
B)False
Answer: True
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Chapter 4: Structure of the Balance Sheet and Statement
of Cash Flows
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Sample Questions
Q1) Which of the following measures how readily assets can be converted to cash relative to how soon liabilities will have to be paid in cash?
A)capital structure.
B)maturity structure.
C)solvency.
D)liquidity.
Q2) How much cash did Barden pay for insurance during Year 4?
A)$6,000
B)$9,000
C)$12,000
D)$18,000
Q3) A firm with most of its assets invested in manufacturing facilities has considerable operating flexibility.
A)True
B)False
Q4) Investment analysts often compare cash flows from operations across two or more companies.
A)True
B)False
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Chapter 5: Essentials of Financial Statement Analysis
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Sample Questions
Q1) Profit margin can be decomposed into its individual factors including COGS/Sales and Taxes/Sales.
A)True
B)False
Q2) Earnings Before Interest (EBI)adjusts net income for which one of the following groups of items?
A)Nonrecurring items,interest,and distortions related to accounting quality concerns.
B)Nonoperating items,after-tax interest,and distortions related to accounting quality concerns.
C)Nonoperating items,nonrecurring items,and after-tax interest.
D)Nonrecurring items,after-tax interest,and distortions related to accounting quality concerns.
Q3) Established growth companies require substantial investments in property,plant,and equipment at a stage when operating cash flows are typically negative.
A)True
B)False
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Chapter 6: The Role of Financial Information in Valuation and
Credit Risk Assessment
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Sample Questions
Q1) An earnings surprise results from incorrect estimates of future earnings.
A)True
B)False
Q2) Much of the information needed for assessing the quality and value-relevance of a company's reported accounting numbers cannot be found in the company's Form 10-K.
A)True
B)False
Q3) Fair value of an asset must reflect its "highest and best use" by others and not how it is used by the company.
A)True
B)False
Q4) Today's GAAP balance sheet contains a mixture of historical cost and other measurements to include fair value measurements.
A)True
B)False
Q5) Give at least three examples of low-quality earnings items.
Q6) Briefly define "free cash flows" and describe the key features of the free cash flow approach to valuation.
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Chapter 7: The Role of Financial Information in Contracting
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Sample Questions
Q1) Research shows that managers sometimes use accounting flexibility to evade contract constraints in order to gain bonus benefits.
A)True
B)False
Q2) Loan provisions that are specifically designed to restrict asset substitution are called
A)debt covenants.
B)debt obligations.
C)credit covenants.
D)credit agreements.
Q3) Affirmative covenants generally would not include which of the following stipulations?
A)The lender has the right to inspect business assets and business contracts.
B)Limits on the borrower's total indebtedness.
C)The borrower must maintain insurance on business properties.
D)Specific financial covenants and reporting requirements.
Q4) RAP sometimes shows up in a company's GAAP financial statements.
A)True
B)False
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Chapter 8: Receivables
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Sample Questions
Q1) Subprime loans can be securitized as part of a general portfolio of loans.
A)True
B)False
Q2) Research evidence suggests that
A)companies increase bad debt expense when earnings are otherwise low and then decrease the expense when earnings are high.
B)companies reduce bad debt expense when earnings are otherwise low and then increase the expense when earnings are high.
C)there is no correlation between bad debt expense and earnings levels.
D)a company's ratio of allowance for uncollectibles to gross receivables should always be close to the average for its industry.
Q3) Factoring without recourse means that the company must buy back any bad receivables from the factor.
A)True
B)False
Q4) The sales returns and allowances account is a contra-asset account.
A)True
B)False
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Chapter 9: Inventories
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Sample Questions
Q1) The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is
A)cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO
B)cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO
C)cost of goods sold LIFO - decrease in LIFO reserve = cost of goods sold FIFO
D)cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO
Q2) FIFO charges the newest costs against revenues on the income statement thus matching the current cost of replacing the units with current revenues.
A)True
B)False
Q3) The lower of cost or market for product N-05 is
A)$20.
B)$22.
C)$24.
D)$28.
Q4) International accounting standards permit the use of either the FIFO or weighted average cost flow assumption,but prohibit the use of LIFO.
A)True B)False
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Chapter 10: Long-Lived Assets
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Sample Questions
Q1) Under IFRS,acquired intangibles are always carried at amortized cost even when an active market is available for the intangible.
A)True
B)False
Q2) How much is the depreciation expense in 2014 if sum-of-years digits depreciation is used?
A)$6,000
B)$9,000
C)$12,000
D)$15,000
Q3) That a causal relationship between current R&D and future revenue has not been demonstrated was among the FASB's justifications for expensing all R&D.
A)True B)False
Q4) Expenditures included in the cost of a long-lived asset are capitalized. A)True B)False
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Chapter 11: Financial Instruments As Liabilities
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Sample Questions
Q1) The intent of covenants in debt agreements is to discourage lender fraud.
A)True
B)False
Q2) Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The amount of bond interest expense for 2015 is
A)$16,000.
B)$17,696.
C)$18,458.
D)$19,280.
Q3) The annual amortization of both discount on bonds payable (bond discount)and premium on bonds payable (bond premium)increases as the bond matures.
A)True
B)False
Q4) When the market rate of interest is below the nominal rate,a bond sells at stated value.
A)True
B)False
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Chapter 12: Financial Reporting for Leases
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Sample Questions
Q1) GAAP defines lessors' treatment of leases according to Type I and Type II characteristics.Type II characteristics are linked to
A)the critical event criteria for expense recognition.
B)the critical event criteria for revenue recognition.
C)measurement of collectibility for revenue recognition.
D)measurement of historical cost.
Q2) The lessor recognizes both interest income and a manufacturer's or dealer's profit during the first year of the lease term when the lease is classified as a sales-type lease.
A)True
B)False
Q3) On Ray's books,this lease is treated as a/an
A)operating lease.
B)ordinary capital lease.
C)direct financing capital lease.
D)sales-type capital lease.
Q4) Operating leases are financial statement examples of off-balance sheet financing.
A)True
B)False
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14
Chapter 13: Income Tax Reporting
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Sample Questions
Q1) An expense that enters into the determination of book income but never affects taxable income is referred to as a permanent difference.
A)True
B)False
Q2) A corporation which incurs a net operating loss may carry the loss back 2 years and forward
A)10 years.
B)12 years.
C)20 years.
D)25 years.
Q3) What amount of deferred income tax liability should Stone report in its December 31,2015,balance sheet?
A)$5,000
B)$9,000
C)$20,000
D)$27,000
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Chapter 14: Pensions and Postretirement Benefits
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Sample Questions
Q1) The smoothing of pension expense is
A)unethical and not allowed by GAAP.
B)allowed through amortization and deferral to prevent volatility in earnings.
C)not allowed by GAAP if the sole purpose is to prevent earnings volatility.
D)illegal and prohibited by SEC.
Q2) The service cost component of a defined benefit pension plan is computed as the
A)present value of the change in the accrued pension liability.
B)actual value of the change in the accrued pension liability.
C)present value of the change in pension liability from additional employee service.
D)undiscounted change in pension liability from additional employee service.
Q3) The ending balance of plan assets is
A)$1,770,000.
B)$1,845,000.
C)$1,920,000.
D)$1,955,000.
Q4) The difference between the actual and expected return on plan assets during year two is a component of pension expense for year two.
A)True
B)False
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Chapter 15: Financial Reporting for Owners Equity
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Sample Questions
Q1) The Dunlop Corporation reported basic EPS of $3.50 for the year ended December 31,2014;the denominator used in the basic EPS calculation was 360,000 shares.Dunlop's marginal income tax rate is 40%.Dunlap had the following convertible securities outstanding during the entire year:
8% convertible preferred stock with a total par value of $1,000,000;the preferred stock is convertible into 22,000 shares of common stock.
10% convertible bonds with a total par value of $6,000,000;the convertible bonds are convertible into 120,000 shares of common stock. What is the diluted EPS? (Hint: First test each security separately for dilution.)
Q2) How much compensation expense will be recorded for the year ending December 31,2017 using the fair value approach?
A)$75,000
B)$175,000
C)$50,000
D)$25,000
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Chapter 16: Intercorporate Equity Investments
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Sample Questions
Q1) Ramsey's share of Vapor's income for 2015 is
A)$14,000.
B)$28,000.
C)$42,000.
D)$40,000.
Q2) When using purchase accounting to account for a business combination,the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values at the date of purchase regardless of whether there is a noncontrolling interest.
A)True
B)False
Q3) When consolidating foreign subsidiaries,the foreign subsidiary's financial numbers must be translated into the parents' currency unit.Under U.S.GAAP if the foreign subsidiary is a self-contained unit the
A)current rate method is used.
B)temporal method is used.
C)present value method is used.
D)historical cost method is useD.
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18
Chapter 17: Statement of Cash Flows
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Sample Questions
Q1) Cash flows arising from the purchase or sale of marketable securities are cash flows from
A)investing activities.
B)operating activities.
C)financing activities.
D)research activities.
Q2) For a firm using the indirect method,an increase in a deferred tax liability should be added back to net income to arrive at cash flow from operating activities.
A)True
B)False
Q3) The direct method is easier for firms to implement because it relies excluÂsively on data already available in the accrual accounts.
A)True
B)False
Q4) The indirect method for cash flow from operating activities begins with accrual-basis operating income.
A)True
B)False
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