09 May WHICH ACCOUNTING METHOD CAN BE USED BY AN INVESTOR?
Questions 1 and 2 are based on the following information: Lake Company recently incurred the following costs: (1) Purchase price of land and dilapidated building $250 000 (2) Real estate broker’s commission 14 000 (3) Net demolition costs of dilapidated building 39 000 (4) Excavation costs for new building 44 000 (5) Architect’s fees and building permits 30 000 (6) Costs associated with new building construction 750 000 (7) Costs associated with new furniture and equipment 250 000 (8) Actual interest costs during building construction 168 000 (9) Actual interest cost after completion of building construction 120 000 (10) Costs of walks driveways and parking lot 55 000 ____ 1. The building should be recorded on Lake’s books at a. $680 000. b. $724 000. c. $763 000. d. $892 000. ____ 2. Land should be recorded on Lake’s books at a. $250 000. b. $264 000. c. $303 000. d. $333 000. ____ 3. Colaw Supply bought equipment at a cost of $72 000 on January 2 2000. It originally had an estimated life of ten years and a salvage value of $12 000. Colaw uses the straight-line depreciation method. On December 31 2003 Colaw decided the useful life likely would end on December 31 2007 with a salvage value of $6 000. The depreciation expense recorded on December 31 2003 should be a. $6 000. b. $6 600. c. $9 600. d. $13 200. ___ 4. According to the FASB conceptual framework in order to be relevant accounting information must a. be neutral. b. be verifiable. c. have predictive value. d. be a faithful representation. ____ 5. Orlando Company exchanged old equipment for similar new equipment. The old equipment had a cost of $150 000 accumulated depreciation of $90 000 and a fair market value of $75 000. Orlando paid an additional $66 000 in cash. The new equipment should be recorded at a. $135 000. b. $150 000. c. $126 000. d. $141 000. ____ 6. If the entry to record the purchase of inventory is inadvertently omitted but the item is correctly included in ending inventory the effect when using the periodic inventory method is Net Income Assets a. Overstated No effect b. Overstated Understated c. Overstated Overstated d. No effect No effect ____ 7. The cost of a patent should be a. amortized over the assets’ estimated useful life or 20 years whichever is shorter. b. amortized over a period not exceeding 5 years. c. amortized over the assets’ estimated useful life. d. charged to an expense account at acquisition. ____ 8. In a period of rising prices the inventory method that results in the lowest income tax payment is a. LIFO. b. FIFO. c. average cost. d. specific identification. ____ 9. On November 30 Mann Company issued a $6 000 10% 4-month note to the National Bank. The entry on Mann’s books to record the payment of the note at maturity will include a credit to Cash for a. $6 000. b. $6 600. c. $6 200. d. $6 150. ____ 10. The following information is available for Sanchez Company: Beginning Inventory $ 60 000 Cost of Goods Sold 600 000 Ending Inventory 100 000 Net Sales 800 000 Inventory turnover for the year is a. 10.0 times. b. 8.0 times. c. 7.5 times d. 6.0 times. ____ 11. The inventory methods that result in the most current costs in the income statement and balance sheet are Income Statement Balance Sheet a. FIFO FIFO b. LIFO FIFO c. LIFO LIFO d. FIFO LIFO ____ 12. The following information is available for Norton Company: Sales $130 000 Freight-in $10 000 Ending Merchandise Inventory 12 000 Purchase Returns and Allowances 5 000 Purchases 70 000 Beginning Merchandise Inventory 15 000 Norton’s cost of goods sold is a. $95 000. b. $90 000. c. $78 000. d. $75 000. ____ 13. If ending inventory is understated net income and assets will be Net Income Assets a. Understated Understated b. Overstated Overstated c. Understated Unaffected d. None of the above. ____ 14. One of the two “constraints” recognized by the FASB in applying the operating guidelines within its conceptual framework is a. comparability. b. materiality. c. reliability. d. relevance. ____ 15. The assumption that assumes a company will continue in operation long enough to carry out its existing objectives is the a. economic entity assumption. b. going concern assumption. c. monetary unit assumption. d. time period assumption. ____ 16. All of the following are intangible assets except a. patents. b. oil deposits. c. goodwill. d. franchises. ____ 17. A daily cash count of register receipts made by a cashier department supervisor demonstrates an application of which of the following internal control principles? a. Documentation procedures b. Segregation of duties c. Establishment of responsibility d. Independent internal verification ____ 18. When the allowance method is used for bad debts the entry to write off an individual account known to be uncollectible involves a a. debit to an expense account. b. credit to an expense account. c. credit to the allowance account. d. debit to the allowance account. ____ 19. Shipping terms of FOB destination mean that the a. purchaser is responsible for the shipping charges. b. shipping charges are debited to Freight-Out. c. items should be in the purchaser’s inventory account at year-end if the items are in transit. d. both (a) and (c) above. ____ 20. Adler Company has a $450 000 balance in Accounts Receivable and a $6 000 debit balance in Allowance for Doubtful Accounts. Credit sales for the period totaled $2 700 000. What is the amount of the bad debt adjusting entry if Adler uses a percentage of credit sales basis (at 2%) or a percentage of receivables basis (at 10%)? % Credit Sales % Receivables a. $54 000 $45 000 b. $60 000 $39 000 c. $54 000 $51 000 d. $48 000 $39 000 ____ 21. The constraint of conservatism is best expressed as: a. The cost of applying an accounting principle should not exceed its benefit. b. Only material items should be recorded and reported. c. When in doubt choose the method that will least likely overstate assets and net income. d. The lower of cost or market method should be used for inventories. ____ 22. A petty cash fund a. results in expense accounts being charged when cash is disbursed. b. should be replenished when the fund is low and at the end of the period. c. results in expense accounts being charged when the fund is replenished. d. both (b) and (c) above. ____ 23. If merchandise is sold for $4 000 subject to credit terms of 2/10 n/30 the entry to record collection in full within the discount period would include a a. credit to Sales Discounts for $80. b. credit to Accounts Receivable for $3 920. c. credit to Accounts Receivable for $80. d. none of the above. ____ 24. Harder Company’s records show the following for the month of January: Total Retained Earnings at January 1 $200 000 Total Retained Earnings at January 31 300 000 Total Revenues 335 000 Total Dividends Declared 15 000 Total expenses for January were a. $320 000. b. $335 000. c. $235 000. d. $220 000. ____ 25. Maxwell Company’s financial information is presented below. Sales $ ???? Purchase Returns and Allowances $ 30 000 Sales Returns and Allowances 60 000 Ending Merchandise Inventory 70 000 Net Sales 700 000 Cost of Goods Sold 360 000 Beginning Merchandise Inventory ???? Gross Profit ???? Purchases 340 000 The missing amounts above are: Sales Beginning Inventory Gross Profit a. $760 000 $90 000 $340 000 b. $640 000 $90 000 $400 000 c. $760 000 $120 000 $340 000 d. $640 000 $120 000 $400 000 ____ 26. The necessity of making adjusting entries relates mostly to the a. economic entity assumption. b. time period assumption. c. going concern assumption. d. monetary unit assumption. ____ 27. The preparation of closing entries a. is an optional step in the accounting cycle. b. results in zero balances in all accounts at the end of the period so that they are ready for the following period’s transactions. c. is necessary before financial statements can be prepared. d. results in transferring the balances in all nominal accounts to Retained Earnings. ____ 28. Allowance for Doubtful Accounts is reported in the a. balance sheet as a contra asset. b. balance sheet as a contra liability account. c. income statement under other expenses and losses. d. income statement under other revenues and gains. ____ 29. Current liabilities are obligations that are reasonably expected to be paid from Existing Creation of Other Current Assets Current Liabilities a. No No b. Yes Yes c. Yes No d. No Yes ____ 30. Which of the following errors will cause a trial balance to be out of balance? The entry to record a payment on account was a. not posted at all. b. posted as a debit to Cash and a credit to Accounts Payable. c. posted as a debit to Cash and a debit to Accounts Payable. d. posted as a debit to Accounts Receivable and a credit to Cash. ____ 31. Mitchell Company bought furniture on account. Their accountant debited Furniture and credited Accounts Receivable. An appropriate correcting entry is a. debit Furniture and credit Accounts Payable. b. debit Accounts Receivable and credit Accounts Payable. c. debit Miscellaneous Expense and credit Accounts Payable. d. no correcting entry is needed. ____ 32. The current source(s) of authoritative pronouncements (i.e. “generally accepted accounting principles”) for profit-oriented organizations is(are) the a. Securities and Exchange Commission. b. Accounting Principles Board. c. Financial Accounting Standards Board. d. both (a) and (c) above. ____ 33. Carey Company’s equipment account increased $400 000 during the period; the related accumulated depreciation increased $30 000. New equipment was purchased at a cost of $700 000 and used equipment was sold at a loss of $20 000. Depreciation expense was $100 000. Proceeds from the sale of the used equipment were a. $210 000. b. $250 000. c. $280 000. d. $320 000. ____ 34. Which of the following would not be included in the operating activities section of a statement of cash flows? a. Cash inflows from returns on loans (i.e. interest) b. Cash inflows from returns on equity securities (i.e. dividends) c. Cash outflows to governments for taxes d. Cash outflows to reacquire treasury stock ____ 35. Which of the following combinations presents correct examples of liquidity profitability and solvency ratios respectively? Liquidity Profitability Solvency a. Inventory turnover Inventory turnover Times interest earned b. Current ratio Inventory turnover Debt to total assets c. Receivables turnover Return on assets Times interest earned d. Quick ratio Payout ratio Return on assets ____ 36. The concept of “significant influence” must be satisfied before Which accounting method can be used by an investor? a. Cost b. Equity c. Consolidated financial statements d. All of the above ____ 37. Which of the following pairs of terms in the area of financial statement analysis are synonymous? a. Ratio – Trend b. Horizontal – Trend c. Vertical – Ratio d. Horizontal – Ratio ____ 38. Which of the following statements is true? a. Trading securities are debt securities that the investor has the intent to hold to maturity. b. Trading securities are securities bought and held primarily for sale in the near term. c. Trading securities are securities that may be sold in the future. d. Trading securities are reported at cost in the balance sheet. ____ 39. Dividends received are credited to what account under the equity method and cost method respectively? Equity Method Cost Method a. Stock Investments Dividend Revenue b. Dividend Revenue Dividend Revenue c. Stock Investments Stock Investments d. Dividend Revenue Stock Investments ____ 40. In accounting for available-for-sale securities the Unrealized Loss – Equity account should be classified as a a. liability on the balance sheet. b. loss on the income statement. c. deduction in the stockholders’ equity section of the balance sheet. d. contra asset on the balance sheet. ____ 41. Nott Corporation has the following stock outstanding: 6% Preferred $100 Par $2 000 000 Common Stock $50 Par 4 000 000 No dividends were paid the previous 2 years. If Nott declares $600 000 of dividends in the current year how much will common stockholders receive if the preferred stock is cumulative? a. $240 000 b. $360 000 c. $480 000 d. $160 000 ____ 42. The statement of cash flows is a(n) a. required supplemental financial statement. b. required basic financial statement. c. optional basic financial statement. d. optional supplementary statement. ____ 43. The directors of Caldwell Corp. are trying to decide whether they should issue par or no par stock. They are considering three alternatives for their new stock which they are assuming will be issued at $8 per share. The alternatives are: (A) $5 par value (B) no par with a $1 stated value and (C) no par no stated value. If 90 000 shares are issued what amount will be credited to the common stock account in each of these cases? (A) (B) (C) a. $90 000 $450 000 $720 000 b. $90 000 $720 000 $720 000 c. $720 000 $720 000 $720 000 d. $450 000 $90 000 $720 000 ____ 44. Rifkin Corp. reacquired 40 000 shares of its $2 par common stock at a cost of $13 per share on April 30 2003. The stock was originally issued at $11 per share. On January 10 2003 the 40 000 shares were sold at $16 per share. The sales entry should include a credit to Paid-in Capital from Treasury Stock for a. $0. b. $80 000. c. $120 000. d. $560 000. ____ 45. What is the effect on total paid-in capital of a stock dividend and a stock split respectively? Stock Dividend Stock Split a. Increase No effect b. No effect No effect c. Decrease No effect d. Decrease Decrease ____ 46. Which of the following should be classified as an extraordinary item? a. Effects of major casualties not infrequent in the area b. Write-off of a significant amount of receivables c. Loss from the expropriation of facilities by a foreign government d. Losses due to a bitter lengthy labor strike ____ 47. Gannon Company changed from the straight-line method to the double-declining-balance method of depreciation during 2003 for equipment purchased for $500 000 on January 1 2001. The equipment has an estimated 5-year life with no salvage. Gannon’s tax rate is 40%. Gannon should report depreciation expense and a cumulative effect of change in accounting principle in 2003 of Depreciation Expense Cumulative Effect a. $72 000 $72 000 b. $48 000 $48 000 c. $43 200 $69 867 d. $72 000 $120 000 ____ 48. A Discount on Bonds Payable account a. is a contra account to Bonds Payable. b. will cause interest expense to be less than cash interest payable. c. is increased over the life of the bond until it equals the bond’s face value. d. is an adjunct account to Bonds Payable. ____ 49. In order to be considered extraordinary an item must be a. frequent and uninsured. b. unusual and uninsured. c. uninsured and infrequent. d. infrequent and unusual. ____ 50. If the market rate of interest is lower than the stated rate bonds will sell at an amount a. equal to face value. b. not determinable from the given information. c. lower than face value. d. higher than face value.
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