Course Introduction
Accounting Theory Study
Guide Questions
Accounting Theory explores the fundamental concepts, principles, and frameworks that underpin the practice and evolution of accounting. This course examines various theoretical perspectives, including positive and normative theories, and discusses their implications on accounting standards, policy making, and financial reporting. Students will analyze the historical development of accounting thought, contemporary issues such as ethics and regulation, and the conceptual frameworks that guide standard setting bodies. By integrating research literature and real-world cases, learners gain a deeper understanding of how accounting information impacts business decisions, corporate governance, and stakeholder communication.
Recommended Textbook
Intermediate Accounting 1st Edition by Elizabeth
A. Gordon
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3032 Verified Questions
3032 Flashcards
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Page 2
Chapter 1: The Financial Reporting Environment
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Sample Questions
Q1) Which organization prepares and grades the Uniform CPA Examination?
A)Financial Accounting Standards Board
B)Public Company Accounting Oversight Board
C)American Institute of Certified Public Accountants
D)International Accounting Standards Board
Answer: C
Q2) Which of the following is a characteristic of rules-based standards?
A)involve few,if any,exceptions
B)result in inconsistencies between standards
C)contain no bright-line tests
D)provide insufficient guidance
Answer: B
Q3) Principles-based standards are more consistent with the asset/liability approach and rules-based standards are more consistent with the income statement approach.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Reporting Theory
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Q1) Discuss how standard setters use the conceptual framework in developing new standards.
Answer: Standard setters will:- Determine if the proposed standard meets the objective of financial reporting.
- Establish that the information provided by the new standard possesses qualitative characteristics that make accounting information useful.
- Consider the elements of the financial statements affected and the recognition and measurement concepts used to support the new standard.
- Weigh constraints such as the cost and benefit of issuing the new standard,which may deter requiring the new standard.
Q2) ________ characteristics distinguish useful financial information from information that is not useful.
A)Representative
B)Relevant
C)Fundamental
D)Quantitative
Answer: C
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Chapter 3: Judgment and Applied Financial Accounting Research
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Sample Questions
Q1) Depreciation Expense is based on estimates of ________.
A)the value of the asset
B)the use and purpose of the asset
C)the life and pattern of the asset's use
D)the warranty that comes with the asset
Answer: C
Q2) Why would an accountant engage in financial accounting research?
A)When they need to determine the appropriate reporting treatment for a transaction.
B)When a given transaction requires judgment.
C)Both A & B
D)Neither A nor B
Answer: C
Q3) The final step in the accounting research process is to develop conclusions.
A)True
B)False
Answer: False
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Chapter 4: Review of the Accounting Cycle
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Sample Questions
Q1) The post-closing trial balance proves the accuracy of the accounts.
A)True
B)False
Q2) Which of the following accounts has a normal debit balance?
A)Accounts Payable
B)Advertising Expense
C)Gain on Sale of Assets
D)Retained Earnings
Q3) The amounts on a company's unadjusted trial balance are taken from the general ledger.
A)True
B)False
Q4) The final step in the accounting cycle is the preparation of a post-closing trial balance.
A)True
B)False
Q5) Expense accounts are temporary accounts.
A)True
B)False
Q6) What are the common errors that a trial balance will not reveal?
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Chapter 5: Statements of Net Income and Comprehensive
Net Income
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Sample Questions
Q1) IFRS requires,but U.S.GAAP does not require,a statement of stockholders' equity.
A)True
B)False
Q2) Which of the following is not typically included in the determination of income from continuing operations?
A)other comprehensive income
B)income tax provision
C)non-operating items
D)earnings before interest and taxes
Q3) Which of the following income statement items is considered to be transitory?
A)promotional costs for a new product
B)sales revenue from the general public
C)interest expense on short-term loans
D)income from discontinued operations
Q4) In what ways do the accounting standards allow companies to present their report about comprehensive income in the financial statements?
Q5) Operating income is gross profit less all operating expenses and income taxes.
A)True
B)False
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Chapter 6: Statements of Financial Position and Cash Flows
and the Annual Report
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Q1) Which of the following items are not required to be presented in management's report on internal control?
A)an assertion of management's responsibility for establishing and maintaining internal control
B)management's assertion of the effectiveness of internal control
C)the extent to which internal auditors assisted management
D)identification of the framework used to assess the effectiveness of internal control
Q2) If there is concern that a company might not continue in existence,but the auditor has concluded that the financial statements are fairly presented,the opinion that will be issued is a(n)________.
A)disclaimer of opinion
B)unqualified opinion
C)adverse opinion
D)qualified opinion
Q3) If an auditor is unable to form an opinion on the fair presentation of the financial statements,a disclaimer of opinion will be issued.
A)True
B)False
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Chapter 7: Accounting and the Time Value of Money
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Sample Questions
Q1) The expected cash flow approach encompasses all of the following features in determining a present value except ________.
A)the risk-free rate of return
B)a range of estimated future cash flows
C)the fair value of the asset or liability
D)the probabilities of various cash-flow outcomes
Q2) What is the market price of a $500,000,ten-year,12% bond issue sold to yield an effective rate of 10% if interest is paid semiannually?
A)$566,635
B)$562,312
C)$442,650
D)$425,306
Q3) The expected cash flow approach values an asset or liability using a range of estimated future cash flows times the probability of their occurrence discounted at the risk-free rate of return.
A)True
B)False
Q4) Why do accountants need to be familiar with present value concepts?
Q5) List the variables in a single-sum problem.
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Chapter 8: Revenue Recognition
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Sample Questions
Q1) The final step in the revenue recognition process is the allocation of the transaction price to the performance obligation.
A)True
B)False
Q2) Refer to Pemco Enterprises.How much revenue should Pemco recognize on January 1?
A)$0
B)$480,000
C)$240,000
D)$40,000
Q3) Under the completed-contract method the firm only reports profit in the final year of the contract.
A)True
B)False
Q4) Another name for channel stuffing is ________.
A)trade stuffing
B)trade loading
C)channel loading
D)trade disclosure
Q5) When may companies use the completed-contract method?
Q6) What are the required disclosures for revenue contracts with customers?
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Chapter 9: OL: Revenue Recognition
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Sample Questions
Q1) Under IFRS,if a firm cannot reliably estimate the outcome of a construction contract,it uses the zero-gross profit approach.
A)True
B)False
Q2) What is a consignment sale?
Q3) The completed-contract method recognizes gross profit over the life of the contract.
A)True
B)False
Q4) Refer to Thompson Industries.Assume that Thompson Industries uses the installment sales method.The buyer of the land defaulted on the sales agreement after making the down payment and the first installment.At the time of repossession,the land was worth $700,000.
Required:
Prepare the journal entry to record the repossession.
Q5) Another name for channel stuffing is ________.
A)trade stuffing
B)trade loading
C)channel loading
D)trade disclosure
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Chapter 10: Short-Term Operating Assets: Cash and Receivables
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Q1) Securitization of receivables eliminates the risk of non-collection.
A)True
B)False
Q2) Under the allowance method,the write-off of an uncollectible account ________.
A)has no effect on the allowance for uncollectible accounts
B)has no effect on net income
C)increases expenses
D)decreases total assets
Q3) How long is the company's operating cycle?
A)75 days
B)60 days
C)40 days
D)10 days
Q4) Net realizable value (NRV)describes the estimated amount of a company's expected cost of uncollectible accounts.
A)True
B)False
Q5) Under what circumstances may cash in a bank account be classified as a non-current asset?
Q6) What disclosures are required concerning accounts receivable? Page 12
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Chapter 11: Short-Term Operating Assets: Inventory
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Sample Questions
Q1) What is a LIFO liquidation? In a period of rising costs,why is a LIFO liquidation feared?
Q2) At December 31,the Selig Company has ending inventory with a historical cost of $630,000.Assume the company uses the perpetual inventory system.The current replacement cost of the inventory is $608,000.The net realizable value is $650,000.The normal profit on this inventory is $50,000.Before any adjustments at the end of the period,the cost of goods sold account has a balance of $900,000.Following U.S.GAAP,which journal entry is required on December 31 to adjust the ending balance of inventory if the direct method is used?
A)Debit Cost of Goods Sold for $20,000 and credit Inventory for $20,000.
B)Debit Inventory for $20,000 and credit Cost of Goods Sold for $20,000.
C)Debit Cost of Goods Sold for $22,000 and credit Inventory for $22,000.
D)Debit Inventory for $22,000 and credit Cost of Goods Sold for $22,000.
Q3) An increase in the LIFO reserve is recorded as ________.
A)a credit to Cost of Goods Sold
B)a debit to Cost of Goods Sold
C)debit to the LIFO Reserve
D)credit to the Inventory account
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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Sample Questions
Q1) Property,plant,and equipment include both tangible and intangible fixed assets.
A)True
B)False
Q2) IFRS requires that firms must expense all R&D costs as incurred.
A)True
B)False
Q3) Over what period of time should goodwill be amortized?
A)40 years
B)its useful economic life
C)40 years or its useful economic life,whichever is shorter
D)Goodwill is never amortized.
Q4) A company will never recognize a gain on abandonment of a fixed asset.
A)True
B)False
Q5) Finite-life assets include patents and trademarks.
A)True
B)False
Q7) What are IFRS disclosure requirements for intangible assets? Page 15
Q6) How does a firm determine the appropriate period of time over which an intangible asset should be amortized?
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Page 16
Chapter 13: Long-Term Operating Assets: Departures From
Historical Cost
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Q1) A company selling or disposing of an asset measures the asset at the lower of cost or net realizable value.
A)True
B)False
Q2) In 2009,Cilla Company acquired production machinery at a cost of $410,000,which now has a accumulated depreciation of $240,000.The undiscounted cash flows from use of the machinery is $190,000 and it's fair value is $145,000.What amount should Cilla recognize as a loss on impairment?
A)$20,000
B)$35,000
C)$70,000
D)-0-
Q3) Companies must disclose the current market value of long-term operating assets held for sale or disposal.
A)True
B)False
Q4) The first step of the impairment test is assessing asset recoverability.
A)True
B)False
17
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Chapter 14: Operating Liabilities and Contingencies
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Sample Questions
Q1) A provision for a contingent loss is considered to be probable if the probability of its occurrence is ________.
A)slight
B)more likely than not
C)virtually certain
D)reasonably possible
Q2) What are compensated absences?
A)paid time off
B)unpaid time off
C)payroll deductions
D)healthcare benefits
Q3) Provisions for contingent losses are accrued because the likelihood of an unfavorable outcome is ________.
A)virtually certain
B)more likely than not
C)reasonably possible
D)more than remote
Q4) Under IFRS,asset retirement obligations are considered loss contingencies.
A)True
B)False
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Chapter 15: OL: Operating Liabilities and Contingencies
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Sample Questions
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) If the warranty is required by law,it is more likely to be an base warranty.
A)True
B)False
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) Warranties that cover longer time periods are more likely to be base warranties.
A)True
B)False
Q5) 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) A company records interest expense by debiting the expense account and crediting notes payable.
A)True
B)False
Q2) Muir,lad.measures its trading securities at fair value.It has liabilities that it also measures using the fair value option.Muir has bonds outstanding (originally sold for $2,400,000)in the amount of $2,000,000 with a current bond premium of $340,000.The bonds were selling at 101 on the market at its year end.At what value should it report these bonds on its balance sheet at year end?
A)$2,000,000
B)$2,200,000
C)$2,340,000
D)$2,400,000
Q3) When allocating proceeds from the issuance of bonds with stock warrants,U.S.GAAP allocates the proceeds between the debt and equity components using the proportional method when detachable stock warrants have a determinable market value.
A)True
B)False
Q4) Discuss what causes bonds to sell at par,a premium,or a discount.
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Chapter 17: Accounting for Stockholders Equity
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Q1) Retained earnings are amounts invested by the equity holders of the company.
A)True
B)False
Q2) Stinson Corporation has 7% participating preferred shares.In 2015 the company pays common shareholders dividends that are 9% of common par value.What,if any,additional dividend will preferred shareholders receive?
A)2%
B)9%
C)100%
D)none
Q3) Price Co.reported net income of $12,000 for the current year.It had unrealized losses on available-for-sale securities of $1,200 after tax,and a foreign currency translation loss of $500 after tax.What is the comprehensive income for the current year?
A)$12,500
B)$11,300
C)$10,300
D)$11,500
Q4) Why would a company issue a stock split?
Q5) Discuss how stock is valued when issued in exchange for noncash consideration.
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Chapter 18: Investing Assets
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Q1) On January 1 of the current year,Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock.These securities were classified as trading securities.Beta owns 10% of Gamma Company.Gamma reported net income of $65,000 for December 31 of the current year.The fair value of the Gamma stock on that date was $27.What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31?
A)$206,500
B)$265,000
C)$270,000
D)$276,500
Q2) Which of the following statements regarding trading debt securities is false?
A)If a trading debt security is purchased at a premium,the premium must be amortized on a periodic basis.
B)Fair value adjustments are treated as adjustments to net income.
C)If the fair value of trading debt securities is less than the historical cost the fait value adjustment account will have a credit balance.
D)Fair value adjustments are treated as as adjustments to other comprehensive income.
Q3) What are the primary effects of amortizing a discount on notes receivable?
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Chapter 19: Accounting for Income Taxes
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Q1) U.S.GAAP requires companies to reconcile the federal statutory income tax rate to the effective tax rate.
A)True
B)False
Q2) Refer to Kraviz Corporation.What is the net amount of Kravitz' book-tax difference?
A)Book income that is $50,000 greater than taxable income
B)Book income that is $60,000 greater than taxable income
C)Taxable income that is $10,000 greater than book income
D)Taxable income that is $50,000 greater than book income
Q3) Woods Company reports income before taxes in the amount of $975,000.The current tax expense is $375,375 and the effective tax rate is 37%.What is the conservatism ratio for Woods Company?
A).96
B).69
C).93
D).39
Q4) Discuss the relationship between temporary differences,the statutory and effective tax rate.
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23
Chapter 20: Accounting for Employee Compensation and Benefits
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Q1) The first step in measuring compensation expense from granting employee stock options is to determine the fair value on the date of grant.
A)True
B)False
Q2) Restricted stock plans are less dilutive than stock option plans.
A)True
B)False
Q3) Equity classified awards should be reported as compensation expense ________.
A)using the book value method
B)at the date of grant
C)using the fair value method
D)at the date of exercise
Q4) The difference between pension plan assets and the PBO is equal to the funded status of the plan.
A)True
B)False
Q5) In what ways must an accountant exercise judgment in relation to stock-based compensation plans?
Q6) List and describe the five components of annual pension expense.
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Chapter 21: Earnings Per Share
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Q1) Kansas Instruments reported $7,000,000 in net income for the current year.The company had $7,000,000 of 9% cumulative,non-convertible preferred stock outstanding all year,and issued,$5,000,000 of 7% convertible bonds issued on May 1.Each bond is convertible into 40 shares of common stock.Common shares outstanding all year were 2,000,000.Compute both basic and diluted EPS when the tax rate is 40%.
Instructions: Write the EPS formula.Show all computations used in your solution.
Q2) Describe how managers can manipulate EPS to increase they own compensation and give at least three examples.
Q3) When applying the if-converted assumption for potentially diluted securities,conversions are assumed to occur at the ________.
A)end of the prior year for hypothetical conversions
B)beginning of the year for hypothetical conversions
C)middle of the current year for actual conversions
D)at the beginning of the current year or on the issue date of the dilutive security if issued during the year
Q4) Describe which potentially dilutive securities require after-tax adjustments to the numerator or denominator of the EPS formula.
Q5) How does IFRS differ from GAAP with diluted earnings per share?
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Chapter 22: Accounting Corrections and Error Analysis
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Q1) The lessor capitalizes initial direct costs associated with an operating lease and amortizes them over the life of the lease.
A)True
B)False
Q2) Which of the following is not a cash inflow from financing activities?
A)issuance of stock
B)purchase of treasury stock
C)purchase of bonds
D)payment of dividends
A)True
B)False
Q3) Which of the following is not included in the operating activities section of the cash flow statement?
A)payments of income taxes
B)payments of dividends
C)payments of interest
D)payments of executive salaries
Q4) Explain why comparability and consistency are considerations for accounting changes.
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