Accounting Analysis

When a specific account receivable is written off, the entry A) increases net income. B) decreases net income. C) can either decrease or increase net income. D) has no effect on net income.

2. Echo Company’s 2011 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2011, the company’s sales (all on credit) amounted to $857,250. Per Echo’s 2011 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the “non-cash expenses. If Echo’s beginning balance in the allowance for uncollectibles was , the ending balance in this account must be A) $15,000 B) 21,350 C) $36,350 D) $17,6003. An analyst notes that ABC Inc.

‘s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed. Which of the following would be a plausible explanation for the change? A) ABC’s management expects a default rate on outstanding receivables different than that which has occurred in prior years. B) ABC’s management is using bad debt accruals to “manage” earnings.

C) The company ages its receivables and the distribution of accounts receivable over the various age categories is different than in prior years. D) All of the above are plausible reasons for the noted change.

4. Research evidence suggests that A) companies increase bad debt expense when earnings are otherwise low and then decrease the expense when earnings are high. B) companies reduce bad debt expense when earnings are otherwise low and then increase the expense when earnings are high. C) there is no correlation between bad debt expense and earnings levels.

D) a company’s ratio of allowance for uncollectibles to gross receivables should always be close to the average for its industry. 5.

XYZ Co. ‘s 2012 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2011. To evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should A) compare the ratio to other firms in XYZ’s industry. B) look for additional discussion in XYZ’s annual report. C) listen to the analyst earnings briefing. D) do all of the above.

6. Which one of the following is an example of an aggressive revenue recognition policy?

A) A firm recognizes revenue at time of collection. B) A firm recognizes revenue at the expiration of the return period. C) A firm with a liberal return policy recognizes revenue at shipment. D) A firm with a liberal return policy recognizes revenue at shipment with a corresponding allowance for returns and allowances. 7.

Non-interest bearing notes are initially recorded at A) historical cost. B) maturity value because they bear no interest. C) present value, based on the prevailing interest for loans of this type. D) future value, based on the prevailing interest for loans of this type. .

On January 2, 2012, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided instead to let Jensen hold the note. What amount will Jensen recognize as interest income during 2012?

A) $4,356 B) $4,704 C) $5,111 D) $09. On January 2, 2012, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years.

The note bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided instead to let Jensen hold the note.

What amount will Jensen recognize as interest income during 2013? A) $4,356 B) $4,704 C) $5,111 D) $010. Accounting for long-term credit sales transactions utilizing notes receivable A) ignores interest unless an interest rate is specified in the note. B) makes it difficult to assess the degree to which a company’s overall earnings are due to profitable credit sales versus profitable customer financing.

C) achieves a clear separation between income from credit sales and interest earned. D) is controversial because it necessitates use of an assumed interest rate. 1. The Fair value adjustment—accounts receivable account is an asset valuation account A) that would be adjusted upward or downward as fair values change and as the receivables are collected. B) that is created when fair value accounting is adopted but is not subsequently adjusted. C) that can only be adjusted downward.

D) that is unaffected by the subsequent collection of receivables. 12. On August 1, 2011, Jones discounted the note under the arrangement with National Bank. How much were the proceeds of the discounted note?

A) $38,267 B) $39,867 C) $40,000 D) $41,60013. Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor.

In distinguishing between sales and collateralized borrowings using receivables, the critical issue A) is whether the terms regarding the transfer were initiated by the transferor or transferee. B) is whether the transferor surrenders control over the receivables.

C) comes down to how clearly the rights, etc. being retained are specified in the transfer agreement. D) is whether any gain or loss related to the transfer is recognized in earnings.

14. Reasons why companies might accelerate cash collections include the following except: A. B. Generally accepted accounting principles permit “off-balance sheet” treatment of factored receivables and collateralized borrowings, thus enabling management to “window dress” the company’s financial position. C. D.

A) The company may have an immediate need for cash but be short of it.

B) Generally accepted accounting principles permit “off-balance sheet” treatment of factored receivables and collateralized borrowings, thus enabling management to “window dress” the company’s financial position. C) There may be an imbalance between the credit terms of the company’s suppliers and the time required to collect customer receivables. D) Competitive conditions require credit sales but the company is unwilling to bear the cost of processing and collecting receivables. 15.

Manufacturing costs not considered to be closely associated with production are called A) period costs.

B) product costs. C) absorption costs. D) variable costs. 16. The carrying cost of inventory should include all of the following costs except A) purchase costs.

B) sales taxes and transportation costs paid by the purchaser. C) general administrative costs associated with the purchase of inventory. D) insurance and storage costs. 17. When a company uses absorption costing A) only fixed costs are inventoried.

B) only variable costs are inventoried. C) all production costs are inventoried. D) fixed costs are expensed as incurred. 18.

The mechanics of absorption costing can lead to year-to-year income changes A) whenever inventory levels remain fairly constant. B) if the productivity of factory workers improves.

C) whenever production and sales are not parallel. D) when raw material prices are increasing. 19. The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as A) realized gains and losses. B) unrealized holding gains and losses. C) extraordinary gains and losses.

D) costs of goods sold. 20.

The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas? A) FIFO inventory = LIFO inventory X LIFO reserve B) FIFO inventory = LIFO inventory/LIFO reserve C) FIFO inventory = LIFO inventory – LIFO reserve D) FIFO inventory = LIFO inventory + LIFO reserve21. The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimate of the inventory balance if the inventory had been reported using the FIFO ssumption is A) $382,000.

B) $416,000. C) $461,000. D) $484,000. 22. As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is A) inflated. B) deflated.

C) lower than normal. D) always the same as under FIFO. 23. When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose A) the dollar impact of LIFO liquidation on both a before- and after-tax basis. B) the dollar impact of LIFO liquidation on the year-end inventory balance.

C) this fact following a prescribed format.

D) the dollar impact of LIFO liquidation on net income. 24. Firms that use FIFO inventory cost assumptions always include some realized holding gains in reported income in periods of A) level prices. B) deflation. C) falling prices. D) rising prices.

25. TAD, Inc. uses the lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true? A) Historical cost is less than replacement cost. B) Replacement cost is greater than net realizable value less a normal profit margin.

C) Replacement cost is greater than historical cost.

D) Net realizable value is greater than historical cost. 26. When applying the lower of cost or market method, market value cannot exceed the A) floor. B) net realizable value. C) net realizable value less a normal profit margin. D) replacement cost.

27. The dominant method under GAAP for measuring long-lived assets is the A) expected benefit approach. B) discounted present value approach. C) historical cost approach. D) replacement cost approach28.

Which one of the following items would be charged to the cost of land rather than the cost of the building?

A) Demolition of an existing structure. B) Capitalization of interest. C) Architectural fees. D) Cost of the foundation29. The Reid Co. acquired a piece of land for a new factory paying $100,000.

Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.

The cost of the land recorded by Reid Co.

is A) $100,000 B) $115,000 C) $116,000 D) $118,00030. Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee training cost $7,000. The state charged a 5% sales tax on the invoice price.

What is the capitalized cost of the machine? A. B. C. D. A) $260,000 B) $264,600 C) $271,600 D) $284,60031. Which one of the following factors makes it difficult for financial analysts to use trend analysis? A) Decreasing costs and prices.

B) Deflation. C) An aging asset base. D) A relatively new asset base. 32. U.

S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be A) capitalized. B) expensed. C) amortized over 40 years. D) ignored33. For U.

S. GAAP, softwaredevelopment costs are capitalized as intangible assets A) from the beginning of development. B) after a copyright is obtained. C) once the product is introduced into the marketplace. D) once the technological feasibility of the product is established.

34. Goodwill represents A) management’s estimate of the value of he firm’s “unidentified” intangible assets. B) the difference between the acquisition value of an acquired business and the fair value of its identifiable net assets. C) the difference between the acquisition value of an acquired business and the book value of its identifiable net assets. D) the sum of the acquisition value of an acquired business and the fair value of its identifiable net assets.

35. If a long-lived asset’s remaining expected future value falls below its net book value, the asset is considered to be a/an A) extraordinary item. B) discontinued operation. C) valuable asset.

D) impaired asset.

36. the differences in useful lives of long-lived assets reflect real economic differences, the attempt on the part of financial analysts to undo these differences may A) impede profit and loss comparisons B) enhance profit comparisons. C) enhance profit comparisons, but impede loss comparisons. D) enhance profit and loss comparisons. 37. When firms dispose of a long-lived asset before the end of its useful life, in a transaction that has commercial substance, the difference between the net book value of the asset and the sale proceeds is a/an A) extraordinary gain or loss.

B) gain or loss from continuing operations. C) gain or loss from a discontinued item. D) gain or loss from a prior period. 38. Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case A) a gain will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets.

B) a loss will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. C) the assets acquired are recorded at the book value of the assets relinquished.

D) a gain will be recognized only when the fair value of the acquired assets exceeds the fair value of the relinquished assets. 39. Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at A) par.

B) a discount. C) a premium. D) stated value. 40. Amortization of discount on bonds payable (bond discount) results in which of the following? A) A decrease in bond interest expense B) An increase in net income C) An increase in the carrying value of the bond

D) An increase in stockholders’ equity due to the decrease in bond interest expense41. Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the A) cash interest method.

B) effective interest method. C) bond yield method. D) cumulative interest method. 42. Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31.

The bonds were sold at a discount of $24,578. The bond carrying amount at the end of 2011 is A) $175,422.

B) $176,964. C) $200,000. D) $201,542. 43.

Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of cash interest paid in 2011 on the bonds is A) $14,458. B) $16,000. C) $17,542.

D) $20,000. 44. Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.

The amount of bond discount amortization for 2012 is A) $1,696. B) $2,458.

C) $3,080. D) $4,000. 45. Dot Company issued $200,000 of bonds on January 1, 2011 with interest payable each year.

The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%. Interest expense for year one if LIBOR is 7% will be which one of the following? A) $6,000 B) $14,000 C) $16,000 D) $20,00046. A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest. The premium on bonds payable (bond premium) at the retirement date is $17,500. Which of the following statements is correct?

A) The loss on the debt extinguishment is $32,500.

B) The gain on the debt extinguishment is $2,500. C) The gain on the debt extinguishment is $32,500. D) The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of the accrued interest. 47. Some financial analysts contend that reporting debt at amortized historical cost rather than current market value A) makes it more difficult to manipulate accounting numbers.

B) makes it easier to manipulate accounting numbers. C) has no impact on the accounting numbers. D) makes it impossible to manipulate the accounting numbers. 8. When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an A) forward contract.

B) swap contract. C) performance contract. D) options contract. 49. A derivative instrument that gives the holder the right but not the obligation to do something is a/an A) future contract B) swap contract. C) performance contract.

D) options contract. 50. Losses must be accrued if they are A) remote and estimable. B) reasonably possible and estimable. C) probable and not estimable.

D) None of the above|