Intermediate Accounting J David Spiceland 10th Edition- Test Bank

 

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Sample Test

Intermediate Accounting, 10e (Spiceland)

Chapter 3   The Balance Sheet and Financial Disclosures

 

1) The balance sheet reports a company’s financial position at a point in time.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

2) A company’s market value is generally less than its book value.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

3) All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

4) The balance of net receivables represents the amount expected to be collected.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

5) Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

6) Assets classified as property, plant, and equipment include machinery, equipment, and inventory.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

7) Intangible assets usually are reported in the balance sheet as current assets.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

8) Accrued salaries and wages in a balance sheet represent salaries that have been earned by employees but not yet paid.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

9) The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

10) Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

11) Subsequent events are significant developments that take place after a company’s year-end, and after the financial statements are issued or available to be issued.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

12) The details of transactions between the company and its owners’ family members do not need to be disclosed separately in the notes to the financial statements.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

13) The ultimate responsibility for the financial statements lies with the auditors.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Audit and Auditor’s report; Disclosure–Management – Directors – Executives

Learning Objective:  03-06 Explain the purpose of an audit and describe the content of the audit report.; 03-05 Describe disclosures related to management’s discussion and analysis, responsibilities, and compensation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Legal; FN Reporting / Keyboard Navigation

 

14) The compensation of top executives is disclosed in the proxy statement.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Disclosure―Management – Directors – Executives

Learning Objective:  03-05 Describe disclosures related to management’s discussion and analysis, responsibilities, and compensation.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Legal / Keyboard Navigation

 

15) Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Using information―Analysis and methods

Learning Objective:  03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

16) Vertical analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Using information―Analysis and methods

Learning Objective:  03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

17) An example of vertical analysis would be comparing inventory this year to inventory last year to calculate the percentage change in inventory.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Using information―Analysis and methods

Learning Objective:  03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

18) An example of vertical analysis would be stating each individual asset as a percentage of total assets.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Using information―Analysis and methods

Learning Objective:  03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

19) Liquidity refers to the riskiness of a company with regard to the amount of total assets in its capital structure.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Balance sheet―Usefulness – Limits – Elements; Using information―Liquidity ratios

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Resource Management; FN Risk Analysis / Keyboard Navigation

 

 

20) A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Using information―Liquidity ratios

Learning Objective:  03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA/Accessibility:  BB Resource Management; FN Risk Analysis / Keyboard Navigation

 

21) Balance sheets prepared under IFRS often report long-term items before current items.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  IFRS―Balance sheet presentation

Learning Objective:  03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting.

Bloom’s:  Remember

AACSB:  Reflective Thinking; Diversity

AICPA/Accessibility:  BB Global; FN Measurement / Keyboard Navigation

 

22) Balance sheets prepared under IFRS often exclude a shareholders’ equity section.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  IFRS―Balance sheet presentation

Learning Objective:  03-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting.

Bloom’s:  Remember

AACSB:  Reflective Thinking; Diversity

AICPA/Accessibility:  BB Global; FN Measurement / Keyboard Navigation

 

23) Segment reporting requires disclosure of each customer that accounts for more than 5% of total enterprise revenue.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Segment reporting – Appendix

Learning Objective:  03-Appendix 3: Reporting Segment Information.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

24) The balance sheet reports:

1.   A) Net income at a point in time.

2.   B) Cash flows for a period of time.

3.   C) Assets and equities at a point in time.

4.   D) Assets and liabilities for a period of time.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

25) Which financial statement provides information for a point in time only?

1.   A) Statement of cash flows.

2.   B) Income statement.

3.   C) Statement of shareholders’ equity.

4.   D) Balance sheet.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

26) A classified balance sheet:

1.   A) Shows only current assets and current liabilities.

2.   B) Shows changes in assets, liabilities, revenues and expenses.

3.   C) Contains confidential information.

4.   D) Shows subtotals for current assets and current liabilities.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

27) Which of the following is a primary reason a company’s book value is less than its market value?

1.   A) Management recording errors.

2.   B) Many valuable resources of the company are not recorded as assets.

3.   C) Land and buildings are valued at their fair value.

4.   D) Investors tend to be too optimistic about a company’s growth opportunities.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

28) Which of the following potentially limit the usefulness of the balance sheet?

1.   A) Many valuable resources of the company are not recorded as assets.

2.   B) Many items in the balance sheet reflect estimates and judgments of management.

3.   C) Property, plant, and equipment are recorded at their book values rather than fair values.

4.   D) All of the other answers represent potential limitations.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Balance sheet―Usefulness – Limits – Elements

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

29) Current assets include cash and all other assets expected to become cash or be consumed:

1.   A) Within one year.

2.   B) Within one operating cycle.

3.   C) Within one year or one operating cycle, whichever is shorter.

4.   D) Within one year or one operating cycle, whichever is longer.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

30) A company would classify a six-month prepaid insurance policy as:

1.   A) Property, plant, and equipment.

2.   B) Investment.

3.   C) Current asset.

4.   D) Goodwill.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

31) An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer, is:

1.   A) Building.

2.   B) Accounts receivable.

3.   C) Inventory.

4.   D) Supplies.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Classify assets―Long-term assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

32) Long-term solvency refers to:

1.   A) The efficiency with which a company manages its resources.

2.   B) The profitability of a company over a long-term period of time.

3.   C) The amount of current assets relative to long-term assets.

4.   D) The risk that a company will not be able to pay its long-term debt.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Balance sheet―Usefulness – Limits – Elements; Using information―Solvency ratios

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.; 03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

33) Which is a shareholders’ equity account in the balance sheet?

1.   A) Accumulated depreciation.

2.   B) Paid-in capital.

3.   C) Salaries payable.

4.   D) Accounts receivable.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Classify shareholders’ equity

Learning Objective:  03-01 Describe the purpose of the balance sheet and understand its usefulness and limitations.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

34) Rent collected in advance is:

1.   A) An asset account in the balance sheet.

2.   B) A liability account in the balance sheet.

3.   C) A shareholders’ equity account in the balance sheet.

4.   D) A temporary account, not in the balance sheet at all.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

35) Notes payable that are due in two years are:

1.   A) Current liabilities.

2.   B) Long-term intangible assets.

3.   C) Long-term liabilities.

4.   D) Long-term investments.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Classify liabilities―Long-term liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

36) Which of the following is not a current liability account?

1.   A) Accrued payroll.

2.   B) Dividends payable.

3.   C) Prepaid rent.

4.   D) Subscriptions collected in advance from customers.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

37) New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:

1.   A) Twelve months.

2.   B) Thirty months.

3.   C) Six months.

4.   D) Three months.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

38) Long-term assets generally include:

1.   A) Inventory held for sale.

2.   B) Prepaid rent.

3.   C) Accounts receivable.

4.   D) Land held for a possible future plant site.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Classify assets―Long-term assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

39) Long-term productive assets used in the normal course of business are typically classified as:

1.   A) Current assets.

2.   B) Investments.

3.   C) Intangible assets.

4.   D) Property, plant and equipment.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Classify assets―Long-term assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

40) Patents, copyrights, franchises, and trademarks are examples of:

1.   A) Current assets.

2.   B) Investments.

3.   C) Intangible assets.

4.   D) Property, plant and equipment.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Classify assets―Long-term assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

41) The following information is provided for a company.

 

Accounts payable	$	15,000
Buildings		80,000
Cash		10,500
Accounts receivable		9,500
Salaries payable		4,500
Retained earnings		47,500
Supplies		40,000
Notes payable (due in 18 months)		35,000
Interest payable		3,000
Common stock		35,000

 

What is the amount of current assets, assuming the accounts above reflect normal activity?

1.   A) $20,000.

2.   B) $60,000.

3.   C) $140,000.

4.   D) $175,000.

 

Answer:  B

Explanation:  Total current assets: $10,500 + $9,500 + $40,000 = $60,000

Difficulty: 3 Hard

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

42) The following information is provided for a company. All liabilities are due to be satisfied within one year unless stated otherwise.

 

Retained earnings	$	52,000
Supplies		37,000
Equipment		72,000
Accounts receivable		9,000
Deferred revenue		6,000
Accounts payable		15,000
Common stock		25,000
Notes payable (due in 18 months)		35,000
Interest payable		7,000
Cash		22,000

 

What is the amount of current liabilities?

1.   A) $63,000.

2.   B) $28,000.

3.   C) $46,000.

4.   D) $22,000.

 

Answer:  B

Explanation:  Total current liabilities: $6,000 + $15,000 + $7,000 = $28,000

Difficulty: 3 Hard

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

43) The following information is provided for Sacks Company.

 

Cash	$	12,000
Supplies		4,500
Prepaid rent		2,000
Salaries expense		4,500
Equipment		65,000
Service revenue		30,000
Miscellaneous expenses		20,000
Dividends		3,000
Accounts payable		5,000
Common stock		68,000
Retained earnings		8,000

 

What is the amount of total assets?

500.             A) $81,500.

501.             B) $82,500.

502.             C) $68,500.

503.             D) $83,500.

 

Answer:  D

Explanation:  Total assets: $12,000 + $4,500 + $2,000 + $65,000 = $83,500

Difficulty: 2 Medium

Topic:  Total assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

44) The following information is provided for Sacks Company.

 

Cash	$	12,000
Supplies		4,500
Prepaid rent		2,000
Salaries expense		4,500
Equipment		65,000
Service revenue		30,000
Miscellaneous expenses		20,000
Dividends		3,000
Accounts payable		5,000
Common stock		68,000
Retained earnings		8,000

 

What is the amount of total liabilities?

1.   A) $5,000.

2.   B) $78,500.

3.   C) $68,500.

4.   D) $83,500.

 

Answer:  A

Explanation:  Total liabilities: $5,000 (Accounts Payable)

Difficulty: 2 Medium

Topic:  Total liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

45) The following information is provided for Sacks Company before closing entries.

 

Cash	$	12,000
Supplies		4,500
Prepaid rent		2,000
Salaries expense		4,500
Equipment		65,000
Service revenue		30,000
Miscellaneous expenses		20,000
Dividends		3,000
Accounts payable		5,000
Common stock		68,000
Retained earnings		8,000

 

What is the amount of total shareholders’ equity?

1.   A) $5,000.

2.   B) $78,500.

3.   C) $68,500.

4.   D) $83,500.

 

Answer:  B

Explanation:  Total shareholders’ equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500.

Total shareholders’ equity = $68,000 + $10,500 = $78,500. Alternatively, total stockholders’ equity = total assets ($83,500) – total liabilities ($5,000).

Difficulty: 3 Hard

Topic:  Classify shareholders’ equity

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

46) Consider the following items:

 

• Land
• Accounts Receivable
• Notes Payable (due in three years)
• Accounts Payable
• Retained Earnings
• Prepaid Rent
• Deferred Revenue
• Buildings
• Notes Payable (due in six months)
• Equipment

 

How many of the items listed above are generally long-term assets?

1.   A) Two.

2.   B) Three.

3.   C) Four.

4.   D) Five.

 

Answer:  B

Explanation:  Land, Buildings, and Equipment

Difficulty: 2 Medium

Topic:  Classify assets―Long-term assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

47) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

 

	Debit		Credit
Accounts receivable	710
Building and equipment	920
Cash	39
Interest receivable	30
Inventory	16
Land	150
Notes receivable (long-term)	450
Prepaid rent	20
Supplies	8
Trademark	40
Accounts payable			560
Accumulated depreciation			80
Additional paid-in capital			485
Dividends payable			30
Common stock (at par)			15
Income tax payable			65
Notes payable (long-term)			800
Retained earnings			308
Deferred revenue			40
TOTALS	2,383		2,383

 

What would Symphony report as total current assets?

1.   A) $823 million.

2.   B) $838 million.

3.   C) $863 million.

4.   D) $1,696 million.

 

Answer:  A

Explanation:  Total current assets: $710 + $39 + $30 + $16 + $20 + $8 = $823

Difficulty: 3 Hard

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

48) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

 

	Debit		Credit
Accounts receivable	710
Building and equipment	920
Cash	39
Interest receivable	30
Inventory	16
Land	150
Notes receivable (long-term)	450
Prepaid rent	20
Supplies	8
Trademark	40
Accounts payable			560
Accumulated depreciation			80
Additional paid-in capital			485
Dividends payable			30
Common stock (at par)			15
Income tax payable			65
Notes payable (long-term)			800
Retained earnings			308
Deferred revenue			40
TOTALS	2,383		2,383

 

What would Symphony report as total assets?

1.   A) $2,463 million.

2.   B) $2,383 million.

3.   C) $2,318 million.

4.   D) $2,303 million.

 

Answer:  D

Explanation:  Total assets: $710 + ($920 − $80) + $39 + $30 + $16 + $150 + $450 + $20 + $8 + $40 = $2,303

Difficulty: 3 Hard

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

49) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

 

	Debit		Credit
Accounts receivable	710
Building and equipment	920
Cash	39
Interest receivable	30
Inventory	16
Land	150
Notes receivable (long-term)	450
Prepaid rent	20
Supplies	8
Trademark	40
Accounts payable			560
Accumulated depreciation			80
Additional paid-in capital			485
Dividends payable			30
Common stock (at par)			15
Income tax payable			65
Notes payable (long-term)			800
Retained earnings			308
Deferred revenue			40
TOTALS	2,383		2,383

 

What would Symphony report as total shareholders’ equity?

1.   A) $323 million.

2.   B) $808 million.

3.   C) $838 million.

4.   D) $928 million.

 

Answer:  B

Explanation:  Total shareholders’ equity: $485 + $15 + $308 = $808

Difficulty: 2 Medium

Topic:  Classify shareholders’ equity

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

50) Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

 

	Debit		Credit
Accounts receivable	710
Building and equipment	920
Cash	39
Interest receivable	30
Inventory	16
Land	150
Notes receivable (long-term)	450
Prepaid rent	20
Supplies	8
Trademark	40
Accounts payable			560
Accumulated depreciation			80
Additional paid-in capital			485
Dividends payable			30
Common stock (at par)			15
Income tax payable			65
Notes payable (long-term)			800
Retained earnings			308
Deferred revenue			40
TOTALS	2,383		2,383

 

What is the amount of working capital for Symphony?

1.   A) $148 million.

2.   B) $158 million.

3.   C) $128 million.

4.   D) $113 million.

 

Answer:  C

Explanation:

Current assets: $710 + $39 + $30 + $16 + $20 + $8 =	$	823
Current liabilities:  $560 + $30 + $65 + $40 =		695
Working capital	$	128

 

Difficulty: 3 Hard

Topic:  Using information―Liquidity ratios

Learning Objective:  03-08 Identify and calculate the common liquidity and solvency ratios used to assess risk.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

 

 

51) Assets do not include:

1.   A) Property, plant, and equipment.

2.   B) Investments.

3.   C) Paid-in capital.

4.   D) Nontrade receivables.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Total assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

52) Cash equivalents would not include:

1.   A) Cash not available for current operations.

2.   B) Money market funds.

3.   C) U.S. treasury bills.

4.   D) Bank drafts.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

53) Cash equivalents would include:

1.   A) Highly liquid investments that can be quickly converted to cash.

2.   B) Accounts receivable from customers.

3.   C) Cash restricted for special purposes such as to repay debt in the future.

4.   D) Prepaid expenses that were purchased with cash.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

54) Accrued liabilities:

1.   A) Are generally paid in services rather than cash.

2.   B) Result from payment before services are received.

3.   C) Result from services received before payment is made.

4.   D) Are deferred charges to expense.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

55) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period?

1.   A) Net income will be too low.

2.   B) Net income will be correct.

3.   C) Net income will be too high.

4.   D) Not possible to determine.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

56) Janson Corporation Co.’s trial balance included the following account balances at December 31, 2021:

 

Accounts receivable	$	12,000
Inventory		40,000
Patent		12,000
Investments		30,000
Prepaid insurance		6,000
Notes receivable, due 2024		50,000

 

Investments consist of treasury bills that were purchased in November, 2021, and mature in January, 2022. Prepaid insurance is for two years. What amount should be included in the current assets section of Janson’s December 31, 2021, balance sheet?

1.   A) $88,000.

2.   B) $85,000.

3.   C) $55,000.

4.   D) $135,000.

 

Answer:  B

Explanation:  $12,000 + $40,000 + $30,000 + $3,000 (1/2 of prepaid insurance) = $85,000.

Difficulty: 2 Medium

Topic:  Classify assets―Current assets

Learning Objective:  03-02 Identify and describe the various asset classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

57) Lanson Corporation Co.’s trial balance included the following account balances at December 31, 2021:

 

Accounts payable	$	25,000
Bonds payable, due 2030		22,000
Salaries payable		16,000
Notes payable, due 2022		20,000
Notes payable, due 2026		40,000

 

What amount should be included in the current liabilities section of Lanson’s December 31, 2021, balance sheet?

1.   A) $63,000.

2.   B) $41,000.

3.   C) $61,000.

4.   D) $101,000.

 

Answer:  C

Explanation:  $25,000 + $16,000 + $20,000 = $61,000.

Difficulty: 2 Medium

Topic:  Classify liabilities―Current liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Analyze; Apply

AACSB:  Analytical Thinking; Knowledge Application

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

58) The usual difference between accounts payable and notes payable is:

1.   A) Legally enforceable debt.

2.   B) Current–Long-term classification.

3.   C) Known payment terms.

4.   D) Explicitly stated interest.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Classify liabilities―Long-term liabilities

Learning Objective:  03-03 Identify and describe the various liability and shareholders’ equity classifications.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

59) Which of the following would be disclosed in the summary of significant accounting policies disclosure note?

 

	Composition of Long-term debt	Depreciation Method
a.	No	Yes
b.	Yes	No
c.	Yes	Yes
d.	No	No

 

1.   A) Option a

2.   B) Option b

3.   C) Option c

4.   D) Option d

 

Answer:  A

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

60) Which of the following is not a required disclosure for related-party transactions?

1.   A) The nature of the relationship.

2.   B) A description of the transactions.

3.   C) The amounts due from or to related parties.

4.   D) The impact of the transactions on current year’s income.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

61) Disclosure notes would not include:

1.   A) Depreciation methods used and estimated useful life.

2.   B) Definition of cash equivalents.

3.   C) Details of pension plans.

4.   D) Data to adjust the financial statements so that they are not misleading.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

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

1.   A) The size of the transactions.

2.   B) Differences between economic substance and legal form.

3.   C) The absence of legally binding contracts.

4.   D) The lack of accurate data to record transactions.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

63) A subsequent event for an entity with a December 31, 2021, year-end would not include:

2022.         A) A change in the estimated useful lives of equipment in January 2022.

2023.         B) An issuance of bonds in January 2022.

2024.         C) An acquisition of another company in January 2022.

2025.         D) A major uncertainty at December 31, resolved in January 2022.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation

 

 

64) How are management’s responsibility and the auditor’s opinion on internal controls represented in the unqualified auditor’s report?

 

	Management’s Responsibility	Auditors’ Responsibility
a.	Not stated	Stated
b.	Stated	Stated
c.	Not stated	Not stated
d.	Stated	Not stated

 

1.   A) Option a

2.   B) Option b

3.   C) Option c

4.   D) Option d

 

Answer:  B

Difficulty: 1 Easy

Topic:  Audit and Auditor’s report

Learning Objective:  03-06 Explain the purpose of an audit and describe the content of the audit report.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Reporting / Keyboard Navigation

 

65) Management’s Report on Internal Control Over Financial Reporting:

1.   A) Provides the auditor’s opinion on the fairness of the financial statements.

2.   B) Contains personal certification of the financial statements by the company’s executives.

3.   C) Contains a detailed description of compensation of the company’s executives for the year.

4.   D) Provides a summary of significant accounting policies used to prepare financial statements.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Disclosure―Management – Directors – Executives

Learning Objective:  03-06 Explain the purpose of an audit and describe the content of the audit report.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Legal; FN Reporting / Keyboard Navigation

 

 

66) The Management’s Discussion and Analysis section of the annual report can best be described as:

1.   A) Frank but objective.

2.   B) Independent but precise.

3.   C) Legalistic and lengthy.

4.   D) Biased but informative.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Disclosure―Management – Directors – Executives

Learning Objective:  03-05 Describe disclosures related to management’s discussion and analysis, responsibilities, and compensation.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking / Keyboard Navigation

 

67) An example of fraud would be:

1.   A) Issuing a purchase order without first securing bids.

2.   B) Buying raw materials from an affiliated company.

3.   C) Knowingly classifying a material long-term receivable as a current receivable.

4.   D) Forgetting to accrue salaries payable.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Analyze

AACSB:  Analytical Thinking; Ethics

AICPA/Accessibility:  BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

 

68) An example of an error would be:

1.   A) Purchasing inventory from a related party.

2.   B) Counting an inventory item twice when taking a physical inventory.

3.   C) Holding back invoices so that accounts payable are understated.

4.   D) Receiving kickbacks in exchange for issuing a purchase order to a vendor.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Disclosure―Notes to financial statements

Learning Objective:  03-04 Explain the purpose of financial statement disclosures.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

 

 

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

1.   A) A disclaimer.

2.   B) An unqualified opinion.

3.   C) An adverse opinion.

4.   D) A consistency exception.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Audit and Auditor’s report

Learning Objective:  03-06 Explain the purpose of an audit and describe the content of the audit report.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  FN Reporting / Keyboard Navigation

 

70) A company may compare the amount of receivables in the current year to the amount of receivables in the previous year to estimate a trend in the company’s ability to collect cash from customers. This type of analysis is known as:

1.   A) Horizontal analysis.

2.   B) Time analysis.

3.   C) Vertical analysis.

4.   D) Turnover analysis.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Using information―Analysis and methods

Learning Objective:  03-07 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA/Accessibility:  BB Critical Thinking; FN Measurement / Keyboard Navigation