General-Purpose Financial Statements

Question 1

Could a firm with an operating cycle of three years in duration report as current a liability due two years from the balance sheet date?

Answer 1

Yes

Question 2

An account balance of $10,000 may represent different attributes, depending on the account.

Answer 2

True

Question 3

All contra accounts are also valuation accounts.

Answer 3

False

Question 4

Are at least two formats for reporting balance sheet information found in common use?

Answer 4

Yes

Question 5

A contra account must have a credit balance.

Answer 5

False

Question 6

Historical cost , market value, and present value are all measurement attributes presented on the balance sheet.

Answer 6

True

Question 7

Account Form is the term applied to the balance sheet format that shows assets on the left and liabilities and equity on the right.

Answer 7

True

Question 8

In analyzing an entity’s annual financial report, which financial statement would an analyst primarily use to assess the entity’s liquidity?

Answer 8

Balance Sheet

Question 9

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:

Answer 9

Historical Cost

Question 10

Unusual and infrequent items appear above income from continuing operations.

Answer 10

True

Question 11

Miscellaneous revenues and expenses appear below income from continuing operations in the income statement.

Answer 11

False

Question 12

All items of operating income would appear above income from continuing operations in the income statement.

Answer 12

True

Question 13

GAAP prescribes detailed reporting requirements for items appearing below continuing operations in the income statement.

Answer 13

True

Question 14

GAAP prescribes detailed reporting requirements for items appearing above continuing operations in the income statement.

Answer 14

False

Question 15

All inflows of assets are revenues.

Answer 15

False

Question 16

One example of an expense is an increase in a liability from providing the firm’s main service.

Answer 16

True

Question 17

Intraperiod tax allocation requires that cumulative effects of accounting principle changes be reported net of tax.

Answer 17

True

Question 18

Prior period adjustment is not found below income from continuing operations in the income statement.

Answer 18

True

Question 19

Gross margin is subject to intraperiod tax allocation.

Answer 19

False

Question 20

A loss could be associated with the incurred liability.

Answer 20

True

Question 21

Gains and revenues arise from the same transactions.

Answer 21

False

Question 22

Intraperiod tax allocation is the process that adjusts deferred tax accounts.

Answer 22

False

Question 23

The income tax expense account reflects the tax effect only on those items above income from continuing operations.

Answer 23

True

Question 24

Both losses and expenses cause income to decrease and cause a benefit for the firm.

Answer 24

False

Question 25

Are interest and advertising included in general and administrative expenses?

Answer 25

No

Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified. Interest is identified with specific financing activities, and advertising with specific promotional activities (selling expenses).

Question 26

If the accountant forgets to record salary expense in the Statement of Income, what is the result?

Answer 26

Net income is too high.

Question 27

Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?

Answer 27

Disclosed but NOT accrued.

Contingencies are accrued and recognized as a liability when the occurrence of the liability is probable and the amount can be reasonably estimated. This lawsuit is reasonably possible, but not probable. Reasonably possible is typically a 50/50 chance of occurrence, where probable is a higher likelihood of occurrence. This answer is correct because this lawsuit would be disclosed, but not accrued.

Question 28

A multi-step Income Statement is prepared:

Answer 28

Because it is more meaningful presentation of revenue and expenses.

A multi-step Income Statement is not required but is prepared because it is a more meaningful presentation of revenue and expenses. In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations.

Question 29

In Yew Co.’s 2004 annual report, Yew described its social awareness expenditures during the year as follows:

“The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company’s commitment to the environment, the Company spent $100,000 to redesign product packaging.”

What amount of the above should be included in Yew’s Income Statement as charitable contributions expense?

Answer 29

$310,000

The charitable contributions are limited to the $250,000 contribution and the portion of the $140,000 contribution paid for by the firm (which amounted to $60,000 or $140,000 - $80,000 paid by the employees). Thus total charitable contributions are $310,000.

The product packaging cost is a promotional cost.

Question 30

In a multi-step Income Statement:

Answer 30

Gross profit (margin) is shown as a separate item.

In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Gross profit (margin) is shown as a separate item.