Question 1.Which of the following statements is not an objective of financial reporting?
a.Provide information that is useful in investment and credit decisions.
b.Provide information about enterprise resources, claims to those resources, and changes to them.
c.Provide information on the liquidation value of an enterprise.
d.Provide information that is useful in assessing cash flow prospects.
Question 2.The purpose of the International Accounting Standards Board is to
a.issue enforceable standards which regulate the financial accounting and reporting of multinational corporations.
b.develop a uniform currency in which the financial transactions of companies throughout the world would be measured.
c.promote uniform accounting standards among countries of the world.
d.arbitrate accounting disputes between auditors and international companies.
Question 3.The two primary qualities that make accounting information useful for decision making are
a.comparability and consistency.
b.materiality and timeliness.
c.relevance and reliability.
d.reliability and comparability.
Question 4.Financial information exhibits the characteristic of consistency when
a.expenses are reported as charges against revenue in the period in which they are paid.
b.accounting entities give accountable events the same accounting treatment from period to period.
c.extraordinary gains and losses are not included on the income statement.
d.accounting procedures are adopted which give a consistent rate of net income.
Question 5.Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more
a.reliable.
b.relevant.
c.indicative of the entity's purchasing power.
d.conservative.
Question 6.The accounting principle of matching is best demonstrated by
a.not recognizing any expense unless some revenue is realized.
b.associating effort (expense) with accomplishment (revenue).
c.recognizing prepaid rent received as revenue.
d.establishing an Appropriation for Contingencies account.
Question 7.Which of the following best illustrates the accounting concept of conservatism?
a.Use of the allowance method to recognize bad debt losses from credit sales
b.Use of the lower of cost or market approach in valuing inventories.
c.Use of the same accounting method from one period to the next in computing depreciation expense
d.Utilization of a policy of deliberate understatement of asset values in order to present a conservative net income figure
Question 8.An accrued expense can best be described as an amount
a.paid and currently matched with earnings.
b.paid and not currently matched with earnings.
c.not paid and not currently matched with earnings.
d.not paid and currently matched with earnings.
Question 9. Forbes Company paid $7,200 on June 1, 2007 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2007 adjusting entry is
a.debit Insurance Expense and credit Prepaid Insurance, $2,100.
b.debit Insurance Expense and credit Prepaid Insurance, $5,100.
c.debit Prepaid Insurance and credit Insurance Expense, $2,100
d.debit Prepaid Insurance and credit Insurance Expense, $5,100.
Question 10. Chen Company's account balances at December 31, 2007 for Accounts Receivable and the Allowance for Doubtful Accounts are $640,000 debit and $1,200 credit. Sales during 2007 were $1,800,000. It is estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for
a.$19,200.
b.$18,000.
c.$16,800.
d.$6,400.
Question 11.In order to be classified as an extraordinary item in the income statement, an event or transaction should be
a.unusual in nature, infrequent, and material in amount.
b.unusual in nature and infrequent, but it need not be material.
c.infrequent and material in amount, but it need not be unusual in nature.
d.unusual in nature and material, but it need not be infrequent.
Question 12. Shank Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
a.an increase in depreciation expense for the year in which the error is discovered.
b.a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
c.an extraordinary item for the year in which the error was made.
d.a prior period adjustment.
Question 13.The following information was extracted from the accounts of Colaw Corporation at December 31, 2007:
CR(DR)
Total reported income since incorporation $750,000
Total cash dividends paid (400,000)
Cumulative effect of changes in accounting principle (60,000)
Total stock dividends distributed (100,000)
Prior period adjustment, recorded January 1, 2007 33,000
What should be the balance of retained earnings at December 31, 2007?
a.$223,000.
b.$250,000.
c.$190,000.
d. $283,000.
Use the following information for questions 14 through 16.
Falley Corp.'s trial balance of income statement accounts for the year ended December 31, 2007 included the following:
Debit Credit
Sales $280,000
Cost of sales $120,000
Administrative expenses 50,000
Loss on sale of equipment 18,000
Commissions to salespersons 20,000
Interest revenue 10,000
Freight-out 6,000
Loss due to fire damage 30,000
Bad debt expense 6,000____________
Totals $250,000 $290,000
Other information:
Falley's income tax rate is 30%. Finished goods inventory:
January 1, 2007 $160,000
December 31, 2007 140,000
On Falley 's multiple-step income statement for 2007,
Question 14.Cost of goods manufactured is
a.$146,000.
b.$140,000.
c.$106,000.
d.$100,000.
Question 15.Income before extraordinary item is
a.$70,000.
b.$40,000.
c.$49,000.
d.$28,000.
Question 16.Extraordinary loss is
a.$21,000.
b.$30,000.
c.$33,600.
d.$48,000.
Question 17.The revenue recognition principle provides that revenue is recognized when
a.it is realized.
b.it is realizable.
c.it is realized or realizable and it is earned.
d.none of these.
Question 18.When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable?
a.Installment-sales method
b.Percentage-of-completion method
c.Completed-contract method
d.None of these
Question 19.Under the installment-sales method,
a.revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product.
b.gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale.
c.gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.
d.revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.
Question 20. Doyle Construction Co. uses the percentage-of-completion method. In 2007, Doyle began work on a contract for $2,750,000 and it was completed in 2008. Data on the costs are:
Year Ended December 31
2007 2008
Costs incurred $975,000 $700,000
Estimated costs to complete 650,000 —
For the years 2007 and 2008, Doyle should recognize gross profit of
2007 2008
a.$0$1,075,000
b.$645,000$430,000
c.$675,000$400,000
d.$675,000$1,075,000
Question 21. On January 1, 2007, Carr Co. sold land that cost $150,000 for $200,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $80,425 starting on December 31, 2007. Because collection of the note is very uncertain, Carr will use the cost recovery method. How much revenue from this sale should Carr recognize in 2007?
a.$0.
b.$15,000.
c.$20,000.
d.$50,000.
Question 22. Milner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2007, Milner started work on a $14,000,000 construction contract that was completed in 2008. The following information was taken from Milner's 2007 accounting records:
Progress billings $4,400,000
Costs incurred 4,200,000
Collections 2,800,000
Estimated costs to complete 8,400,000
What amount of gross profit should Milner have recognized in 2007 on this contract?
a.$1,400,000.
b.$933,334.
c.$700,000.
d.$466,667.
Question 23.Which of the following is a limitation of the balance sheet?
a.Many items that are of financial value are omitted.
b.Judgments and estimates are used.
c.Current fair value is not reported.
d.All of these
Question 24.The correct order to present current assets is
a.Cash, accounts receivable, prepaid items, inventories.
b.Cash, accounts receivable, inventories, prepaid items.
c.Cash, inventories, accounts receivable, prepaid items.
d.Cash, inventories, prepaid items, accounts receivable.
Question 25.Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b.obligations payable at some date beyond the operating cycle.
c.deferred income taxes and most lease obligations.
d.all of these.
Use the following information for questions 26 through 27.
The following trial balance of Rosen Corp. at December 31, 2007 has been properly adjusted except for the income tax expense adjustment.
Rosen Corp.
Trial Balance
December 31, 2007
Dr. Cr.
Cash $875,000
Accounts receivable (net) 2,695,000
Inventory 2,085,000
Property, plant, and equipment (net) 7,366,000
Accounts payable and accrued liabilities $1,501,000
Income taxes payable 654,000
Deferred income tax liability 85,000
Common stock 2,350,000
Additional paid-in capital 3,680,000
Retained earnings, 1/1/04 3,650,000
Net sales and other revenues 13,360,000
Costs and expenses 11,080,000
Income tax expenses 1,179,000
$25,280,000 $25,280,000
Other financial data for the year ended December 31, 2007:
• Included in accounts receivable is $800,000 due from a customer and payable in quarterly installments of $100,000. The last payment is due December 29, 2009.
• The balance in the Deferred Income Tax Liability account pertains to a temporary difference that arose in a prior year, of which $30,000 is classified as a current liability.
• During the year, estimated tax payments of $325,000 were charged to income tax expense. The current and future tax rate on all types of income is 30%.
In Rosen's December 31, 2007 balance sheet,
Question 26.The current assets total is
a.$6,455,000.
b.$5,655,000.
c.$5,555,000.
d.$5,255,000.
Question 27.The current liabilities total is
a.$1,860,000.
b.$1,915,000.
c.$2,185,000.
d.$2,240,000.
Question 28.Which of the following should be disclosed in a Summary of Significant Accounting Policies?
a.Types of executory contracts
b.Amount for cumulative effect of change in accounting principle
c.Claims of equity holders
d.Depreciation method followed
Use the following information for questions 29 through 30.
Information for Garcia Corp. is given below:
Garcia Corp.
Balance Sheet
December 31, 2007
Assets Equities
Cash $ 60,000 Accounts payable $ 126,000
Accounts receivable (net) 390,000 Federal income tax payable 38,000
Inventories 488,000 Miscellaneous accrued payables 45,000
Plant and equipment, Bonds payable (10%, due 2009) 375,000
net of depreciation 397,000 Preferred stock ($100 par, 6%
Patents 52,000 cumulative nonparticipating) 150,000
Other intangible assets 15,000 Common stock (no par, 20,000
Total Assets $1,402,000 shares authorized, issued
and outstanding) 225,000
Retained earnings 488,000
Treasury stock-500 shares
of preferred (45,000)
Total Equities $1,402,000
Garcia Corp.
Income Statement
Year Ended December 31, 2007
Net sales $1,800,000
Cost of goods sold 1,200,000
Gross profit 600,000
Operating expenses (including bond interest expense) 300,000
Income before income taxes 300,000
Income tax 90,000
Net income $210,000
Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2007, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2007. Assume that preferred dividends for the current year have not been declared.
Question 29. At December 31, 2007, the current ratio was
a.450 ÷ 126.
b.1,335 ÷ 164.
c.938 ÷ 164.
d.938 ÷ 209.
Question 30. The number of times interest was earned during 2007 was
a.210 ÷ 37.5.
b.300 ÷ 37.5.
c.337.5 ÷ 37.5.
d.262.5 ÷ 37.5.
Use the following information for questions 31 through 32.
The following data are provided:
December 31
2007 2006
Cash $ 300,000 $ 200,000
Accounts receivable (net) 320,000 240,000
Inventories 520,000 440,000
Plant assets (net) 1,600,000 1,300,000
Accounts payable 220,000 160,000
Taxes payable 40,000 20,000
Bonds payable 280,000 280,000
10% Preferred stock, $50 par 400,000 400,000
Common stock, $10 par 480,000 360,000
Paid-in capital 320,000 260,000
Retained earnings 800,000 700,000
Net credit sales 2,560,000
Cost of goods sold 1,680,000
Operating expenses 580,000
Net income 300,000
Additional information:
Depreciation included in cost of goods sold and operating expenses is $244,000. On May 1, 2007, 12,000 shares of common stock were issued. The preferred stock is cumulative and the liquidation value is $56. The preferred dividends were not declared during 2007.
Question 31. The receivables turnover for 2007 is
a.2,560 ÷ 320.
b.1,680 ÷ 320.
c.2,560 ÷ 280.
d.1,680 ÷ 280.
Question 32. The inventory turnover for 2007 is
a.2,560 ÷ 520.
b.1,680 ÷ 520.
c.2,560 ÷ 480.
d.1,680 ÷ 480.
Question 33. It is an objective of the statement of cash flows to
a.disclose changes during the period in all asset and all equity accounts.
b.disclose the change in working capital during the period.
c.provide information about the operating, investing, and financing activities of an entity during a period.
d.none of these.
Question 34. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities?
a.A change in interest payable
b.A change in dividends payable
c.A change in income taxes payable
d.All of these are adjustments.
Use the following information for questions 35 through 38.
Renfro Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Renfro Mining Co. for 2007 and 2006 are provided below.
BALANCE SHEETS
12/31/07 12/31/06
Cash $153,000 $ 72,000
Accounts receivable 135,000 81,000
Merchandise inventory 144,000 180,000
Property, plant and equipment $228,000 $360,000
Less accumulated depreciation (120,000) 108,000 (114,000) 246,000
$540,000 $579,000
Accounts payable $ 66,000 $ 36,000
Income taxes payable 132,000 147,000
Bonds payable 135,000 225,000
Common stock 81,000 81,000
Retained earnings 126,000 90,000
$540,000 $579,000
INCOME STATEMENT
For the Year Ended December 31, 2007
Sales $3,150,000
Cost of sales 2,682,000
Gross profit 468,000
Selling expenses $225,000
Administrative expenses 72,000 297,000
Income from operations 171,000
Interest expense 27,000
Income before taxes 144,000
Income taxes 36,000
Net income $ 108,000
The following additional data were provided:
1.Dividends for the year 2007 were $72,000.
2.During the year, equipment was sold for $90,000. This equipment cost $132,000 originally and had a book value of $108,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales.
3.All depreciation expense is in the selling expense category.
The following question(s) relate(s) to a statement of cash flows (direct method) for the year ended December 31, 2007, for Renfro Mining Company.
Question 35. The net cash provided by operating activities is
a.$153,000.
b.$108,000.
c.$90,000.
d.$75,000.
Question 36. The net cash provided (used) by investing activities is
a.$(132,000).
b.$18,000.
c.$90,000.
d.$(108,000).
Question 37. Under the direct method, the cash received from customers is
a.$3,204,000.
b.$3,096,000.
c.$3,150,000.
d.$3,165,000.
Question 38. The net cash provided (used) by financing activities is
a.$(90,000).
b.$18,000.
c.$(162,000).
d.$72,000.
Use the following 8% interest factors for questions 39 through 40.
Present Value of Future Value of
Ordinary Annuity Ordinary Annuity
7 periods 5.2064 8.92280
8 periods 5.7466 10.63663
9 periods 6.2469 12.48756
Question 39.What will be the balance on September 1, 2010 in a fund which is accumulated by making $24,000 annual deposits each September 1 beginning in 2003, with the last deposit being made on September 1, 2010? The fund pays interest at 8% compounded annually.
a.$255,279
b.$214,148
c.$181,440
d.$137,918
Question 40.What amount should be recorded as the cost of a machine purchased December 31, 2006, which is to be financed by making 8 annual payments of $8,000 each beginning December 31, 2007? The applicable interest rate is 8%.
a.$56,000
b.$49,975
c.$85,093
d.$45,973