Chapter 3 Multiple choice questions

Question 1

which of the following is correct

a. in Canada GAAP is contained in the Canadian Institute of chartered accountants handbook
b. The differences between Canadian GAAP and American GAAP have become more important in the past two decades
c. Canadian GAAP is issued by the International Accounting Standards Board (IASB)
d. Canada has adopted US GAAP

Answer 1

a

Question 2

What is the correct book entry when a firm increases its inventories by using its sound credit with the supplier?

Answer 2

Debit inventories and credit A/P

Question 3

The CICA Handbook contains the accounting principles of :

Answer 3

Canada

Question 4

Which of the following is not a GAAP principle?

a. the entity concept
b. a period of analysis
c. the idea that revenues must be matched against the costs that generated those revenues
d. the idea that revenues are only recognized when cash is collected

Answer 4

d

Question 5

Which of the following assets does NOT qualify for capital cost allowance (CCA)

a. land
b. manufacturing equipment
c. building
d. computer

Answer 5

a : land

Question 6

which of the following is a source of cash inflows?

a. decrease of property, plant and equipment
b. increase of A/R
c. payment of dividends
d. decrease in A/P

Answer 6

a

decrease of PPE

Question 7

Which of the following is a non-cash item?

a. receipt of dividends
b. payment of interest
c. amortization
d. purchase or inventory

Answer 7

c. amortization

Question 8

Which of the following equations represents free cash flow?

a. Net income + depreciation + Deferred income taxes
b. Net income + Depreciation + deferred income taxes +/- change in working capital
c. Net income + Depreciation + Deferred income taxes +/- change in working capital - capital expenditures
d. Net income + Depreciation + deferred income taxes +/- change in working capital - capital expenditures +/- financing cash flows

Answer 8

c. Net income + Depreciation + Deferred income taxes +/- change in working capital - capital expenditures

Question 9

Which of the following is NOT classified as cash flow from financing

a. issuance of long-term debt
b. repurchase of capital stock
c. payment of dividends
d. purchase of inventory

Answer 9

d

purchase of inventory

Question 10

Which of the following is a cash outflow

a. decrease in inventories
b. decrease in a/r
c. issue of common shares
d. decrease in a/p

Answer 10

d.

decrease in a/p

Question 11

Which of the following is not classified as cash flow from operations?

a. issuance of long-term bonds
b. sale of goods
c. purchase of inventories
d. payment of employee salaries

Answer 11

a

issuance of long-term bonds

Question 12

Which of the following is mostly likely to report non-controlling interest in its balance sheet?
(NCI is the portion of equity ownership in a subsidiary not attribiutable to the parent company, which ahs a controlling interest (great than 50% but less than 100%) and consolidates the subsidiary’s financial results with its own)

a. a subsidiary firm
b. a firm that controls 20% of another firm
c. a firm that controls 80% of another firm
d. government

Answer 12

c

a firm that controls 80% of another firm

Question 13

which of the following is not a current asset?

a. cash
b. bonds
c. inventories
d. land

Answer 13

d

land

Question 14

Capital gains occur in which of the following cases?

a. selling price of the asset is less than initial cost of the asset
b. selling price of the asset is greater than the initial cost of the asset
c. selling price of the asset is greater than ending UCC
d. selling price of the asset is less than ending UCC

Answer 14

b

selling price of the asset is greater than the initial cost of the asset

Question 15

Which of the following statements is false?

a. Canada operates a progressive personal tax system
b. when dividends are received, they are preferentially taxed
c. when interest is earned, it is fully taxable
d. Ontario residents and quebec residents pay the same federal and provincial tax

Answer 15

d.

Ontario residents and quebec res. taxes are very different

Question 16

what are the 3 most basic principles of GAAP

Answer 16

1. going concern
2. period of analysis
3. matching principle
4. revenue recognition principle

Question 17

The balance sheet for a small firm shows total assets of $429,500 and total liabilities of $379,000. what is the shareholder’s equity

Answer 17

$50,500

Question 18

The firm had retained earnings of $5,000 at the beginning of the year. its net income for the year was $7,500 and it paid out $4,000 in dividends. its shareholder’s equity was $50,500. what are its retained earnings at the end of this year?

Answer 18

5,000 + 7,500 - 4,000=8,500

Question 19

Randy’s rowboats purchased and began to use its first six rowboats for a total cost of $2,400. Randy believes the boats can be used for 5 years, providing the company with equal value each year. after 5 years, the boats will be worthless.

a. use your best judgement to determine a reasonable amount to charge to amortization expense each year.
b. find the book value (cost less amortization) of the boats for each of the 5 years they will be used.
c. if the company expects to sell the rowboats for $400 after 5 years, determine the reasonable amount to charge to amortisation expense each year.

Answer 19

a. with a 5 year life and straight-line depreciation the annual charge to amortization will be $2,400 / 5 = $480 (for all 6 boats)

b. year 0
amortization is 0 book value = 2,400

year 1 amortization is 480 book value = 1,920

year 4 amortization is 480 book value is 480

year 5 amortization is 480 book value is 0

c.
with a 5 year life and straight line amortization, the annual charge to amortize will be (2,400 - 400) / 5 = $400 (total for all 6 boats)