Intermediate Exam 1: Multiple Choice

Gains are…

Increases in equity arising from non-revenue transactions and other events

What is true regarding equity?

It represents the residual interest in the assets of an entity that remains after deducting its liabilities

Cash dividends are an example of which of the following elements?

Distributions to owners

The primary objective of financial accounting information is to provide useful information about economic activity to …

capital providers

A constraint on qualitative characteristics of accounting information is

Cost-effectiveness

According to the conceptual framework, verifiability implies..

Consensus

Recognizing expected losses immediately, but deferring expected gains, is an example of:

Conservatism

Change in equity from nonowner sources is:

Comprehensive income

The assumption that in the absence of contrary information a business entity will continue indefinitely is the:

Going concern assumption

Revenue should not be recognized until:

The seller has transferred goods or services to a customer

On December 1, Lawn Co. signed a contract with a retailer to supply maintenance for the next calendar year. How should this transaction be recorded on December 1 by Lawn Co?

No transaction should be recorded

MP Company paid $15,000 to acquire 3,000 shares of ABC Company common stock. MP’s Journal entry to record this transaction would include a:

Debit to Investments

An accrued liability is created when

An expense is incurred but not yet paid

Receiving a utility bill for costs in the current period but delaying payment of that bill until the following period is an example of a(n):

accrued expense

Kyra Corp. reported COGS of $2,000,000 this year. The Inventory account increased by $200,000 during the year to an ending balance of $400,000. What was the cost of the merchandise inventory that Kyra Corp. purchased during the year?

$2,200,000

Deferred revenue represents:

goods or services owed to customers who have paid in advance

How can you described other comprehensive income (OCI)

Gains and losses that are excluded from the determination of net income and the income statement

The statement of shareholder’s equity reports:

all of the above

Current Liabilities?

A/P + Deferred Revenue + Interest payable + Notes Payable (short term)

When converting an income statement from a cash basis to an accrual accounting basis, expenses

May exceed or be less than cash payments to suppliers

Long-term solvency refers to the

Risk that a company will not be able to pay its long-term debt

Patents, copyrights, franchises etc. are examples of?

Intangible assets

Cash equivalents would include:

investments with a maturity date no longer than three months from the date of purchase

Rent collected in advance is a(n)

liability account in the balance sheet

Accrued liabilities occur when

an expense has been recorded but is not yet paid

Disclosure notes are best described as

Additional information provided by management about amounts reported in a company’s financial statements

The principal concern with accounting for related-party transactions is:

Differences between economic substance and legal form

An example of fraud is:

Knowingly classifying a material long term receivable as a current receivable

An example of an error is:

Counting an inventory item twice when taking physical inventory

Independent auditors express an opinion on the:

Extent to which financial statements are in compliance with GAAP

Liquidity refers to:

The readiness of an asset to be converted into cash

Lack of long-term solvency refers to:

Risk of nonpayment of both current and long-term liabilities

Auditors have the following primary role in financial reporting:

Independent party hired by a company to express a professional opinion of the extent to which the company’s financial reporting is in compliance with GAAP

An auditor expresses a going concern when:

There is significant doubt as to whether the company will be able to pay its debts as they come due

Suppose circumstances outside the auditor’s control prevents them from having physical access to verify the company’s inventory balance, which is material to the financial statements. Which may be issued in this situation?

Qualified opinion

An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in a(n)

An adverse opinion

Using borrowed funds to generate additional profits for shareholders is referred to as:

Financial leverage

A company borrows funds at 6% and then generates a return on those funds of 9% typically has:

Greater default risk, favorable financial leverage, higher return on equity

Earnings quality refers to the ability of:

Reported earnings to predict a company’s future earnings

Income smoothing refers to the ability of management to:

Use accruals to reduce the volatility of reported earnings over time

To accomplish income smoothing, managers could do what?

In a year net income is particulary high, estimate future bad debts for a higher amount

Managers may engage in classification shifting by:

reporting operating expenses as nonoperating expenses to inflate reported operating income

What would be classified as restructuring costs?

Severance pay for employee layoffs associated with facility closings

The distinction between operating and nonoperating income relates to

Primary activities of the reporting entity

What is classified as discontinued operations?

all of the above

A company has decided to discontinue a component of its business but, when the reporting period ends, the component has not yet been sold. The amount that the operations is:

Income from operations for the year and the amount by which the components’ fair value less cost to sell is less than the book value

The principal benefit of separately reporting discontinued operations is to enhance:

Predictive ability of future profitability

What best described why taxes on discontinued operations are reported separately from taxes on continuing operations?

The taxes on discontinued operations are not expected to recur in future years

When a material error is discovered in prior financial statements:

all the above

Comprehensive income is the change in equity from:

Nonowner transactions

What would affect the balance of accumulated other comprehensive income (AOCI)?

Foreign currency translation adjustment

The FASB’s stated preference for reporting operating cash flows is the:

Direct method

In comparing the direct and indirect methods of preparing the statement of cash flows:

Only operating activities are presented differently

Operating cash flows would include:

Purchases of inventory

Cash flows from financing activities include:

Dividends paid

Kyra Co. had salaries payable of $60,000 and $90,000 at the beginning and end of the year, respectively. During the year, Kyra recorded $620,000 in salaries expense in its Income statement. Cash outflows are:

$590,000

Kyra Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Kyra would report:

Investing cash inflows of $18,000

Kyra Co. paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Kyra would report cash outflows from activities as follows:

Operating, $12,000; Financing $6,000

A company is effectively leveraging when the:

Return on equity exceeds the return on assets

Suppose a company made an error by overstating the amount of total revenue in a prior year’s income statement. The error was discovered in the current year. To correct this error, the company would:

Reduce the beginning balance of retained earnings in the current year’s statement of shareholder’s equity

Net income accumulates into the retained earnings account over time, and items included in other comprehensive income (OCI) accumulate into the:

accumulated other comprehensive income account