Course Introduction
Accounting Theory Test
Preparation
Accounting Theory explores the conceptual foundations and frameworks underlying accounting practices and standards. This course examines the development and application of accounting principles, the role of accounting in society, and various theoretical perspectives that influence financial reporting and disclosure. Topics include the formulation of accounting standards, measurement issues, ethical considerations, and the impact of economic, social, and political factors on accounting theory. Through analysis of contemporary research and real-world case studies, students gain a deeper understanding of the rationale behind accounting practices and the evolving nature of the discipline.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Page 2
Chapter 1: The Demand for and Supply of Financial
Accounting Information
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Sample Questions
Q1) The FASB Emerging Issues Task Force issues which of the following?
A) Statements of Position to influence the development of principles
B) Consensus Positions on the implementation of standards
C) Financial Reporting Releases on guidelines for reporting issues
D) Technical Bulletins on accounting and reporting problems
Answer: B
Q2) Define:
1) What are revenues?
2) What are expenses?
3) What is net income?
4) What financial statement would one find revenues, expenses, and net income?
Answer: 1) Revenue is the inflow of assets resulting in the selling goods and services to customers.
2) Expenses are the outflow of assets resulting in the process of generating revenue.
3) Net income is the bottom line or profit. It represents the wealth gained by the company for the shareholders during the period.
4) Income Statement
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3
Chapter 2: Financial Reporting: Its Conceptual Framework
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Sample Questions
Q1) The IASB and FASB boards have agreed that the objective of general purpose financial reporting is to provide
A) financial information about a company that is useful to investors, lenders and other creditors
B) mainly cash flow information about a company that is useful to external users in making decisions in their capacity as capital providers
C) financial information about a company that is useful to internal users in making decisions in their capacity as capital custodians
D) financial information about a company that is used by government regulators for taxation
Answer: A
Q2) Relevance and faithful representation are the ultimate objectives of accounting information.
A)True
B)False
Answer: False
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Chapter 3: Review of a Companys Accounting System
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Sample Questions
Q1) The primary purpose of an accounting system is to record how the business activities change the company's balance sheet.
A)True
B)False
Answer: True
Q2) Which of the following is a contra account?
A) Unearned Rental Revenue
B) Sales Discounts Taken
C) Bad Debts Expense
D) Depreciation Expense
Answer: B
Q3) Accrued revenues
A) have been earned and collected, but not yet recorded
B) have been collected, but not yet earned or recorded
C) have been collected and recorded
D) have been earned, but not yet collected or recorded
Answer: D
Q4) ........
Answer: ........
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Sample Questions
Q1) With all of the turmoil in the financial markets in 2008, one of your friends has emailed you because she has been wondering about the financial disclosure requirements for the banks and brokerage firms affected by the market turbulence. Explain the general accounting requirements for financial instruments to your friend.
Q2) Refer to Exhibit 4-1. Blue Bell's accounts receivable turnover for 2014 was
A) 2.2 times
B) 26.0 times
C) 27.4 times
D) 28.9 times
Q3) The valuation method primarily used in the balance sheets of business entities is A) current exit value
B) historical cost
C) present value
D) net realizable value
Q4) Trademarks or acquired brand names are not amortized but are reviewed annually for impairment.
A)True
B)False
Page 6
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Chapter 5: The Income Statement and the Statement of Cash Flows
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Sample Questions
Q1) Which of the following is not part of other comprehensive income?
A) unrealized changes in the value of trading securities
B) certain pension plan gains, losses, and prior service cost adjustments
C) certain gains and losses in derivatives
D) currency translation adjustments
Q2) A company is not required to follow a specific format in making the disclosures for its segments but FASB encourages the most useful format for its specific circumstances.
A)True
B)False
Q3) Together with the cash flow statement, the income statement enables the investors to determine the rate of return the company is generating relative to the amount of capital invested.
A)True
B)False
Q4) In accrual accounting, net income is defined as
A) Revenues - Expenses + Gains + Losses
B) Revenues - Expenses
C) Revenues - Expenses + Gains - Losses
D) increase in net assets from nonowner transactions
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Chapter 6: Cash and Receivables
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Q1) A compensating balance used to secure a short term loan should be recorded against its short term borrowing in current assets separate from cash.
A)True
B)False
Q2) When accounting for uncollectible accounts,
A) if the percentage of sales method is in use, any existing balance in the Allowance for Doubtful Accounts is the amount used in the adjusting entry
B) in current accounting practice, the most frequently used method of recognizing bad debts is the direct write-off method
C) writing off a specific receivable does not reduce the current ratio if the percentage of ending accounts receivable method is in use
D) an aging analysis results in reporting accounts receivable at their historical cost on the balance sheet
Q3) At all times the amount of funds less the expenditure vouchers should be equal to the original amount in the petty cash fund.
A)True
B)False
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8
Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Sample Questions
Q1) Morton uses the moving average flow assumption. On January 1, there were 180 units on hand and the total inventory cost was $900. On January 10, 40 more units were purchased at a cost of $6 per unit. Sales included 20 units on January 3 and 60 units on January 17. What was the total cost of goods sold recorded for the units sold on January 17?
A) $728
B) $330
C) $100
D) $312
Q2) The costs of operating a purchasing department are necessary to the purchasing of inventory therefore those costs incurred should be allocated to inventory.
A)True
B)False
Q3) The use of inventory pools with dollar-value LIFO overcomes the issues associated with keeping numerous detailed records of individual quantities of each item.
A)True
B)False
Q4) What are the differences between the perpetual and periodic inventory systems?
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Chapter 8: Inventories: Special Valuation Issues
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Sample Questions
Q1) Lower of cost or market rule can be applied to periodic inventory. What are the two methods? Which one requires an entry to the loss due to market valuation account?
Q2) If in the current year a purchase was not recorded but the purchased item was included in ending physical inventory, which one of the following situations occurs for the current year?
A) Working capital is understated, and net income is overstated.
B) Working capital and net income are understated.
C) Working capital is overstated, and net income is understated.
D) Working capital and net income are overstated.
Q3) What are the four alternative valuations used in the application of the Retail Inventory Method?
Q4) Under special circumstances GAAP allows a company to report its inventory above cost. How must this exception be justified?
Q5) The purpose of dollar-value LIFO retail method is to eliminate the effects of price changes during a period.
A)True
B)False
Q6) ......
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Chapter 9: Current Liabilities and Contingencies
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Sample Questions
Q1) Which journal entry would probably be made if the modified cash basis of accounting for warranties is in use for a sale made in 2014?
A) 2014
Warranty Expense \(\quad \)\(\quad \)\(\quad \)\(\quad \)XX
Estimated Liability under Warranties\(\quad \) XX
B) 2015
Estimated Liability under Warranties \(\quad \)\(\quad \)XX
Cash \(\quad \)\(\quad \)\(\quad \)\(\quad \)\(\quad \)XX
C) 2014
Cash \(\quad \)\(\quad \)XX
Sales \(\quad \)\(\quad \)XX
Unearned Warranty Revenue \(\quad \)XX
D) 2015
Warranty Expense \(\quad \)\(\quad \)XX
Cash\(\quad \)\(\quad \)\(\quad \) XX
Q2) Under what conditions can a short-term obligation be classified as a long-term liability?
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Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent
Investments
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Sample Questions
Q1) Christopher Company borrowed $6 million at 11% on January 1, 2014, to build a new building. The building is expected to take 18 months to complete. Christopher invests the money from the project until it is needed for construction. He is currently earning 10%. The following is the expenditures as they relate to the construction of the building.
January 1 $1,500,000
April 1 $1,850,000
October 1 $1,100,000
December 31 $1,000,000
Required:
1) Compute the amount of interest expense Christopher would capitalize.
2) Compute the amount of interest revenue Christopher would recognize.
Q2) According to GAAP, interest cost incurred to finance construction of an asset must be capitalized in which of the following situations?
A) when the asset is inventory that is routinely manufactured in large quantities on a repetitive basis
B) when an asset is used in other than the earning activities of the firm
C) when an asset is ready for its intended use
D) when an asset is being constructed for a firm's own use
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Sample Questions
Q1) On January 1, 2014, Travis Company purchased machinery costing $3,000,000. The company uses straight-line depreciation and estimated the machinery's useful life to be 10 years and its residual value to be $600,000. At the end of 2017, the company felt that technological advances had caused an impairment of its machinery and that its remaining useful life was only four years. The company estimates the machinery will generate cash inflows of $850,000 and cash outflows of $100,000 each of the next four years. The company uses a 15% rate of return to evaluate capital budgeting projects.
Required:
a.Determine if an impairment loss has occurred. (Show all calculations).
b.Calculate the amount of any impairment loss to be recognized. The present value of an annuity is 2.85498; present value of $1 is 0.57175; and future value of annuity is 4.99338.
Q2) Refer to Exhibit 11-1. How much depreciation should Hills record on the asset in year 2?
A) $16,000
B) $24,000
C) $56,000
D) $48,000
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Chapter 12: Intangibles
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Q1) Purchased intangible assets are generally expensed at their acquisition costs because the future economic benefits associate with them are difficult to measure.
A)True
B)False
Q2) If intangible assets are acquired during the period, what does GAAP require company's to disclose?
Q3) The Chambers Company was formed in early 2017. At the time of formation, Chamber spent the following amounts: accounting fees, $4,000; legal fees, $8,000; stock certificate costs, $3,000; initial franchise fee, $10,000; initial lease payment, $5,000; promotional fees, $3,000. Chamber intends to capitalize and amortize intangibles over the maximum allowable period in accordance with generally accepted accounting principles. Based on this strategy, what is Chambers's expense associated with organization costs in 2017?
A) $ 6,000
B) $18,000
C) $28,000
D) $33,000
Q4) What factors should a company consider when estimating the useful life of an intangible asset?
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Chapter 13: Investments and Long-Term Receivables
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Sample Questions
Q1) Which of the following regarding trading securities is correct?
A) Trading securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B) Trading securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C) Trading securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D) Trading securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
Q2) Significant influence of another company generally occurs when the investor owns between 25% to 45%, due to this relationship the investor is required to issue consolidated financial statements.
A)True
B)False
Q3) What is a derivative financial instrument, provide two examples and list one concept involving derivative?
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Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Q1) A theoretical difference between the effective interest method and the straight-line amortization method is that
A) the effective interest method is easier to use
B) the effective interest method can be used if there is a material difference in the computation when compared to the straight-line method
C) the effective interest method produces a result that is based on a constant rate of interest
D) the effective interest method produces a result that is based on a constant interest expense
Q2) Refer to Exhibit 14-12. What total amounts of extraordinary gains should be recorded by Sharon on this troubled debt restructuring?
A) $ 0
B) $2,200
C) $3,800
D) $6,000
Q3) What are some advantages and disadvantages of issuing long term debt?
Q4) List the different characteristics of bonds.
Q5) How can a company restructure their debt in the event of financial difficulties?
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Chapter 15: Contributed Capital
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Sample Questions
Q1) There is disagreement among accountants as to how subscriptions receivable should be reported on the balance sheet.
Required:
Describe three different ways in which subscriptions receivable can be reflected on the balance sheet and provide a justification for each alternative.
Q2) There are three criteria that must be met in order for a share purchase plan to be considered noncompensatory. If the three criteria are not met then the plan is considered compensatory.
A)True
B)False
Q3) Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2016?
A) $ 0
B) $ 8,000
C) $11,500
D) $15,333
Q4) What variables must be considered when a corporation uses the option pricing model?
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) Robertson Company had 40,000 shares of common stock outstanding during 2014 and compensatory share options to purchase 5,000 shares of common stock at $10 a share plus a $3 a share unrecognized compensation cost (net of tax). The average market price is $20 a share. The company also had 7% convertible preferred stock on which dividends of $9,000 were declared. Each preferred share is convertible into 6,000 common shares. Robertson's after-tax net income was $88,000, and the tax rate was 40%.
Required:
Compute 2014 diluted earnings per share for Robertson Company.
Q2) The most common "potential common shares" that may be included in computing DEPS are share options, warrants, and convertible preferred stock and bonds.
A)True
B)False
Q3) A prior period adjustment can arise from an error found that occurred in a prior period, a change is accounting entity, or a change in accounting principle.
A)True
B)False
Q4) Other Comprehensive Income or loss might include what four items?
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Page 18
Chapter 17: Advanced Issues in Revenue Recognition
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Q1) A Provision for Loss on Contract is reported in the financial statements as a(n)
A) contra-asset account
B) asset account
C) liability account
D) contra-liability account
Q2) Under the completed-contract method of revenue recognition, the partial billings account is closed out against the
A) construction in progress account
B) construction revenue account
C) income summary account
D) construction expense account
Q3) What conditions must be met in order to recognize revenue under SEC Staff Bulletin 104?
Q4) The installment method is usually associated with
A) revenue recognition in the period of sale
B) revenue recognition prior to the period of sale
C) revenue recognition after the period of sale
D) revenue recognition delayed until a future event occurs
Q5) At what point would using the cost recovery method over the installment method be appropriate?
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Chapter 18: Accounting for Income Taxes
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Q1) In 2014, the Puerto Rios Company received insurance proceeds of $300,000 payable upon the death of its previous top executive officer. For financial reporting purposes, Puerto Rios included the $300,000 in pretax accounting income. The life insurance proceeds are exempt from income taxes. Assuming an income tax rate of 35%, what should be reported as deferred income taxes in the 2014 income statement of Puerto Rios for this event?
A) $ 0
B) $105,000 deferred tax asset
C) $105,000 deferred tax liability
D) $195,000 deferred tax liability
Q2) Revenue from installment sales is recognized in the period received for tax purposes and recognized in the period earned for accounting purposes. If these periods are different, this is an example of a
A) permanent difference that gives rise to interperiod tax allocation
B) permanent difference that does not give rise to interperiod tax allocation
C) temporary difference that gives rise to interperiod tax allocation
D) temporary difference that does not give rise to interperiod tax allocation
Q3) What are the three types of permanent differences between a corporation's pretax financial income and taxable income?
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Page 20
Chapter 19: Accounting for Postretirement Benefits
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Q1) Which of the following statements is true regarding a defined contribution pension plan?
A) The pension benefits to be received by the employee during retirement are defined in the plan.
B) Defined contribution plans have the more complex accounting issues than defined benefit plans.
C) Defined contribution plans do not define the required benefits that must be paid to retired employees.
D) Employers that use defined contribution plans are assuming more risks than employers that use defined benefit plans.
Q2) Refer to Exhibit 19-1. The balance in Prepaid/Accrued Pension Cost at December 31, 2015, should be
A) $30,000 debit
B) $30,000 credit
C) $ 8,000 credit
D) $10,000 credit
Q3) What are the three major differences between the accounting for pensions and Other Postretirement benefit's (OPRB's)?
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Chapter 20: Accounting for Leases
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Q1) Executory costs
A) are included in the minimum lease payments by the lessee
B) should normally be borne by the party that is, in substance, the owner of the asset
C) are the costs incurred by the lessor that are directly associated with negotiating and completing the lease transaction
D) are always paid by the lessee
Q2) An operating lease should be recorded in the lessee's accounts at the inception of the lease at an amount equal to
A) the present value of the minimum lease payments less the executory costs included in the minimum lease payments
B) the total value of the future rental payments less any estimated contingent payments
C) the total value of the future rental payments less any executory payments included in the future payments
D) none of these
Q3) What are the two components of net receivables for leases?
Q4) What is included in the calculation of the minimum lease payment?
Q5) What are the disclosure requirements of direct financing and sales-type leases?
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Page 22
Chapter 21: The Statement of Cash Flows
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Q1) In a statement of cash flows, increases or decreases in noncurrent assets are most closely associated with
A) operating activities
B) investing activities
C) financing activities.
D) investing or financing activities
Q2) According to current GAAP, cash flow per share statistics
A) should be disclosed only if EPS information is disclosed
B) should not be disclosed
C) should not be disclosed if EPS information is disclosed
D) should be disclosed in all situations
Q3) In a statement of cash flows, which of the following events would not be classified as an operating activity?
A) purchase of a trading security
B) receipt of a cash dividend
C) payment of interest on a bond issue
D) proceeds from the sale, at a gain, of an available-for-sale security
Q4) Why do companies use the spreadsheet method to prepare the statements of cash flows?
Q5) According to GAAP, what must a company's statement of cash flows show?
Page 23
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Chapter 22: Accounting for Changes and Errors
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Q1) On January 1, 2014, Roy Company acquired equipment at a cost of $500,000. Roy used the double-declining-balance method to depreciate the equipment with a ten-year life and no salvage value. On January 1, 2016, Roy changed to straight-line depreciation for this equipment, and the IRS accepted this change as being eligible as a change in accounting estimate with prospective treatment. Assuming an income tax rate of 30%, the restatement of January 1, 2016 retained earnings is
A) $ 0
B) $54,800
C) $62,640
D) $82,100
Q2) A change in accounting principle from one that is not generally accepted to one that is generally accepted should be treated as A) an error and corrected by prior period adjustment
B) a change in accounting principle and the cumulative effect included in net income C) a change in accounting principle and prior period financial statements are restated D) a change in accounting principle and adjustments made prospectively
Q3) ......
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Chapter 23: Time Value of Money Module
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Q1) Tessa won the lottery for $2,500,000 but due to a change in state laws she will not be able to collect it for three years. Ralph is willing to give her a lump sum today in return for the payment in three years. If current interest rates are 14% per year, how much will Tessa receive today?
A) $1,687,430
B) $5,804,080
C) $2,500,000
D) $3,703,860
Q2) The formula for the present value of an annuity due is
A) \(C \times \left[ \left( p _ { 0 _ { r _ { 1 } } } \right) \left( p _ { k , t } \right) \right]\)
B) \(C \times \left[ \frac { 1 - \frac { 1
\right]\)
C) \(C \times \left[ \frac { 1 - \frac { 1 } { ( 1 + i ) ^ { n - 1 } } } { i } + 1 \right]\)
D) \(C \times \left[ \frac { ( 1 + i ) ^ { n } - 1 } { i } \right]\)
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