Multiple Choice Questions Flashcards
What is the primary protection for investors against fraudulent financial reporting by Corporations?
The requirement that financial statements be audited
What best describes the operating procedure for issuing a new financial accounting standards Board statement?
A new statement is issued only after a majority vote by the members of the FASB.
Ie. 4 out of 7
What has the FASB maintained about GAAP?
New GAAP should be neutral and not favor any particular reporting objective
A deferred revenue is what type of account.
Liability
FASB statements are no longer included in GAAP. True or false.
False
The FASB accounting standards codification presents relevant SEC guidance for publicly traded firms. True or false
True
July 1, 03 Roxy Co. obtained fire insurance @ annual premium of 72k.
Oct 1, 03 Roxy paid 24k real estate taxes to cover period ending 9/30/04.
In 12/31/03 balance sheet, report prepaid expenses of:
54k
72k.5=36k
24k.75=18k
Total 54k
Toro paid $7200 to renew only insurance policy for 3years ($200/mo) on 3/1/05 effective date. At 3/31/05 unadjusted trial balance showed $300 prepaid and $7200 ins expense.
What should be reported at 3/31/05?
$7000 prepaid ins, $500 ins expense
The $300 orig represents unexpired policy. One month or $200 used from new policy = $500. Prepaid remaining is 7200 - 200=$7000.
Company has the following accrual basis balances at the end of its first year of operation:
Unearned consulting fees 2,000
Consulting fees receivable 3,500
Consulting fee revenue 25,000
What is the company’s cash basis consulting revenue?
23,500
Cash basis revenue is the amount of cash collected for the period. 25,000 of accrual basis revenue was recognized + 2,000 in unearned fees minus the 3,500 receivable which was not collected.
Bird corp's trademark was licensed to Brian for royalties of 15% of sales. royalties are payable semi annually on 3/15 for sales July to Dec of the prior year and 9/15 for sales in Jan to June of the same year. Bird received the following royalties: 3/15/04 5k; 9/15/04 7.5k 3/15/05 6k; 9/15/05 8.5k Estimated sales $30,000 July to Dec05 Royalty Revenue for 05 should be...?
$13,000
Sept receipt $8,500 (1st half of 05) +
.15*$30,000
In financial statements prepared on the income tax basis, how should the nondeductible portion of expenses, such as meals and entertainment, be reported?
Included in the expense category in the determination of income.
Hahn Co. prepared financial statements on the cash basis of accounting. The cash basis was modified so that an accrual of income taxes was reported. Are these financial statements in accordance with the modified cash basis of accounting?
Yes.
Under a strict cash basis of accounting, revenues and expenses are recorded only when cash is received or paid. Under a modified cash basis of accounting, certain accruals and or deferrals are recorded for financial statement purposes. The most common modifications are the capitalization and amortization of long-lived assets and the accrual for income taxes
Under royalty agreement with another company, Wand company will pay royalties for the assignment of a patent for three years. When should the royalties paid be reported as an expense?
In the period incurred. The period to which specific royalty amounts relate is the period for expense recognition. Often royalty payments occur at specified intervals that do not correspond to the period in which the royalties were earned.
Doren Co’s officers compensation expense account had a balance of $490,000 at December 31, 2004 before any y/e adjustments related to the following:
Salary accrual was not made for 12/25-31, salaries totaled $18,000 and were paid January 5, 2005
Bonuses to officers for 2004 total $175,000 and were paid on 1.31.05
What is the adjusted balance for compensation expense?
$683,000 which is composed of $490,000 plus $18,000 plus $175,000
Under East co’s accounting system, all paid insurance premiums are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance.
Prepaid ins 12/31/04 $105,000
Charges to ins exp in 2005 $437,500 incl. $17,500 y/e adjustment
Prepaid ins 12/31/05 $122,500
What was total amount of premiums paid during 2005?
$455,000
Beg balance + premiums pd - expense charges = end balance
105,000 + prem paid - 437,500 = 122,500
What is the general rule to convert from cash basis to accrual basis?
It is to add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.
Sanni Co. had $150,000 in cash basis pretax income for the year. At the current year end, Accounts Receivable decreased by $20,000 and accounts payable increased by $16,000 from the previous year. How much higher or lower is the cash basis from accrual basis?
Higher by $36,000
The $20,000 AR ⬇️ implies that cash received on acct was 20,000 ⬆️ than accrual sales. Cash basis income I s therefore $20,000 greater than accrual income for this difference. The $16,000 accounts payable ⬆️ implies that more inventory was purchased and included in accrual cost of goods sold than was paid. Cash basis income is therefore 16,000 more than accrual income. For a total of $36,000 more than accrual income.
An analysis of thrift corporations unadjusted prepaid expense account at 12/31/04 revealed the following:
Thrift had a beginning balance of $1500 for it’s insurance policy. They had paid an annual premium of $3000 on July 1, 2003. A $3,200 annual insurance premium payment made 7/1/04 was unadjusted. A $2,000 advance rental payment for a warehouse lease for one year beginning in 2005 was included. What amount should Thrift report as prepaid expenses on it’s 2004 balance sheet?
$3,600
Beg Bal $1,500
- amort no longer prepaid ($1,500)
+ 1/2 of 3,200 pmt 1,600
+ warehouse pmt 2,000
= 3,600
Accounting records maintained on cash basis but restated to accrual for financial statements to. Class had $60,000 in cash basis pretax income for 2002. The following information pertains to class operations for the years ended December 31, 2002 and 2001:
A/R 40,000; 20,000
A/P 15,000; 30,000
Under the accrual method what amount of income before taxes should be reported in the 2002 income statement?
$95,000
60k plus 20k plus 15k
20 represents sales not collected
15 represents add back excess pmts
On November 1, 2005 Key company paid $3600 to renew its insurance policy for three years. At December 31, 2005 keys unadjusted trial balance showed a balance of $90 for prepaid and $4410 for insurance expense. What amount should be reported for prepaid insurance and insurance expense in keys December 31, 2005 financial statements?
Prepaid $3,400; ins exp $1,100
PPins at y/e is $3,400 from new policy
Ins exp incl. $90 PP expired, $200 from new policy, & expense portion of $4,410 expense amount. (4,410-3,600)
90+200+810=1,100
Collection of a note receivable for a related party would be what kind of activity in a company’s statement of cash flow’s?
Investing
What would be the balance sheet classification of treasury stock?
Contra equity
What would be the balance sheet classification of accounts payable or notes payable, due in nine months?
Current liabilities
What would be the balance sheet classification of allowance for uncollectible accounts?
Contra asset
What would be the balance sheet classification for sales discounts or cost of goods sold?
N/A. Not a balance sheet account
What would be the income statement classification of sales discounts?
Contra revenue
What would be the income statement classification of cost of goods sold?
Expense
GAAP assumes that most financial statement users are experts such as stock analysts. True or false
False
Yes or no. Is the primary focus of financial accounting information on assisting the evaluation of past performance rather than on assisting users to assess the future prospects of a firm?
No
Which of the conceptual framework characteristics relates to both accounting relevance and faithful representation?
Comparability
According to the conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called what?
Predictive value
During the period when an enterprise is under the direction of a particular management, it’s financial statements will directly provide information about what?
Enterprise performance but not directly provide information about management performance
What are the primary characteristics of the conceptual framework?
Relevance and faithful representation
What are the three components of faithful representation?
Completeness, neutrality, and free from material error
What are the four enhancing characteristics of the conceptual framework?
Comparability, verifiability, timeliness, understandability.
On 12/31/02 Brooks co. decided to end operations and dispose of its assets within 3 months. At 12/31/02 the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in the 2002 balance sheet?
Net realizable value.
When a firm is in liquidation historical cost or replacement cost are no longer relevant.
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows which accounting concept?
Matching
According to FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?
Replacement cost
What is the underlying concept governing the generally accepted accounting principles pertaining to recording gain contingencies?
Conservatism
Gain contingencies are not recognized but loss contingencies that are probable and estimable are.
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of which accounting concept?
Economic entity.
Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity.
Peabody co. purchased an investment for $400,000 that represented 30% of Newman corps outstanding voting stock. Newman reported net income of $60,000 and paid dividends of $20,000. At y/e the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize as net income attributable to the investment?
$16,000
it should recognize its share of cash dividends received during the period (30% * $20,000 = $6000) and the increase in the fair value of the investment $10,000
What is the fair value for an asset or liability measured as?
It is measured as the price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants; that is, fair value is measured as an exit price
True or false property plant and equipment may be measured and reported using fair value
False
Alphaco has two subsidiaries, Betaco & Charlieco, both of which are consolidated by Alpha. Alpha and beta have elected to measure their respective investments held to maturity at fair value. Charlie measures it’s investments held to maturity using amortized cost. In it’s consolidated financial statements, for which companies, if any, may Alpha elect to report investment held to maturity at fair value?
Alpha, Beta, Charlie.
As the parent alpha may elect to report all of the investments at fair value in it’s consolidated statements whether or not the fair value option was elected by the subsidiaries
True or false. One role of the trustees of the IFRS foundation is to appoint the members of the IASB and establish their contracts of service and performance criteria.
True
The SEC is comprised of five commissioners, appointed by the president of the United States, and four divisions. Which division is responsible for overseeing compliance with the securities acts?
Division of corporate finance
What is the current ratio formula?
Current assets divided by current liabilities
What is the formula for the quick or acid test ratio?
(Cash plus or minus short-term investments plus or minus AR) divided by current liabilities
How are retained earnings calculated?
Ending Retained earnings equals revenue - expenses - income taxes = net income + beg retained earnings
Should interest be included in general and administrative expenses?
No interest is identified with specific financing activities.
Should advertising be included in general administrative expenses?
No advertising is identified with specific promotional activities i.e. selling expenses
Out of the following accounts which ones should be reported as general administrative expenses?
Accounting and legal fees freight in freight out Officer salaries Insurance Sales representatives salaries
Accounting and legal, officers salaries, and insurance
Which of the following accounts are included in selling expenses?
Accounting and legal fees Advertising Freight out Interest Loss on the sale of long-term investments Officers salaries Rent for office space Sales salaries and commissions
Advertising, freight out, rent for office space, and sales salaries and commissions
How is cost of goods manufactured computed?
Cost of goods manufactured
+ finished goods beginning inventory
- finished goods ending inventory
= cost of sales
Or cost of goods manufactured = cost of sales + finished EI - finished BI
How should donated assets be valued on the books?
Fair value
According to the FASB Accounting Standards Codification, the financial statements of a not-for-profit entity focus on:
A. the entity as a whole.
B. standardization of funds nomenclature.
C. inherent differences of not-for-profit entities that impact reporting presentations.
D. distinctions between current fund and noncurrent fund presentations.
A. the entity as a whole
When is warranty expense recognized?
In the year that the warranted item is sold
Derivative A, a fair value hedge, and Derivative B, a cash value hedge, both experience gains. Which of the above are included in net income?
Choices: A, B, or both
Derivative A.
Note: Gain/loss from cash value hedges are in OCI
A nongovernmental not-for-profit entity borrowed $5k to purchase a truck. In the org’s stmt of cash flows the transaction should be reported in:
A. cash inflow and cash outflow from investing
B. cash inflow and cash outflow from financing
C. cash inflow from financing & cash outflow from investing
D. cash inflow from operating & cash outflow from investing
C. inflow from financing, outflow from investing
When valuing ending inventory on a balance sheet and cost of goods sold on an income statement, U.S. GAAP allows for the use of the LIFO, FIFO, and the average cost flow assumptions. IFRS allows the use of which of the following?
LIFO
FIFO
Average cost flow
Only FIFO and Average Cost Flow
What are the seven key components if the general purpose external financial report?
- Income stmt
- Balance sheet
- Statement of cash flows
- Statement of retained earnings
- Statement of comprehensive income
- Footnote disclosures
- Auditors opinion
Are accrued expenses an asset or liability?
Liability
Are prepaid expenses an asset or liability?
Asset
Are unearned revenues an asset or liability?
Liability
Which financial statement would an investor use to assess the company’s liquidity and financial flexibility?
Balance sheet
On 2/12/05 VIP purchased the copyright to a book for $15k and agreed to pay royalties = to 10% sales with guaranteed minimum royalty of $60k. VIP had sales of $800k in 2005. In its 2005 income statement, what amount should VIP report as royalty expense?
$80,000 bc the cost of copyright is not relevant to the royalty computation
What does it mean when accounts receivable decreases?
More cash was collected than what was recorded as sales.
What is the general rule to convert from cash to accrual basis?
The general rule is to add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances
A company has the following accrual basis balances at the end oh the year:
Unearned consulting fees 2k
Consulting fees receivable 3.5k
Consulting fee revenue 25k
What is the company’s cash basis consulting revenue?
$23,500
25+2-3.5
What are the major purposes intended to be accomplished by the fair value framework?
To achieve increased consistency and comparability and expand disclosure
Define fair value for accounting purposes
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What does Regulation S-X govern?
The firm and content of financial statements and financial statement disclosures including income stmt, balance sheet, changes in shareholders equity, cash flow statement, footnotes to financial statements, and qualification of accountants (independence rules).
What does Regulation S-K govern?
The form and content of non-financial statement closures in the 10-K.
A) descr of the business
B) descr of stockholder matters
C) mgmt discussion & analysis (MD&A)
D) changes in/disagreements w acct’ts
E) information in directors and management
