Chapters 1-8 Final Exam Study Flashcards Preview

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Flashcards in Chapters 1-8 Final Exam Study Deck (31):
1

What is an advantage of cash basis accounting vs. accrual basis accounting?

It provides a more accurate representation of cash generated in a specific period.

2

What two primary qualitative characteristics make accounting information useful?

Faithful representation and relevance.

3

Comparability, understandability, timeliness, and verifiability are enhancing qualitative characteristics that contribute to:

Faithful representation and relevance.

4

Under accounting principles generally accepted in the United States, in order for an item to qualify for recognition in the financial statements of a company, the item must

Be measurable in monetary terms & Meet the definition of an element of the financial statements.

5

Consistency and feedback relate most closely to which two accounting concepts, respectively?

Predictive value and confirmatory value.

6

Information is considered material to the financial statements if

Its omission could make a difference in the decisions made by a user relying on the financial statements and Its misstatement could make a difference in the decisions made by a user relying on the financial statement.

7

According to the FASB Conceptual Framework, financial information is considered faithfully represented if it is

Complete, neutral, and free from error.

8

Alpha Co. reports inventory on its balance sheet using the same generally accepted methods as applied by Beta Co. These facts relate most closely to which of the following qualitative characteristics of financial reporting?

Comparability.

9

Conceptually, interim financial statements can be described as emphasizing which of the following?

Timeliness and relevance.

10

Which of the following statements is true regarding the FASB Accounting Standards Codification (ASC)?
-Only the FASB may issue pronouncements which lead to changes in the ASC.
-Only the FASB and the SEC may issue pronouncements which lead to changes in the ASC.
-Only the SEC may issue pronouncements which lead to changes in the ASC.
-The FASB, the FAF, and the SEC may issue pronouncements which lead to changes in the ASC.

Only the FASB and the SEC may issue pronouncements which lead to changes in the ASC.

11

Select the statement below which correctly describes a characteristic of the conceptual framework.
-The conceptual framework directly prescribes rules which must be adhered to under U.S. GAAP.
-Quantitative materiality guidelines based on size, industry, and other factors are provided in the conceptual framework, but are not prescriptive.
-The conceptual framework provides guidance useful to the FASB as it develops accounting standards.
-The conceptual framework is organized according to the types and perspectives of anticipated users of financial information, such as investors and creditors.

The conceptual framework provides guidance useful to the FASB as it develops accounting standards.

12

On April 1, 2018, Lenzner Company sold an item of inventory to a customer at a price resulting in gross profit to Lenzner. Which of the following statements is true regarding the effect of this transaction on the company’s current ratio and quick ratio?
-The current ratio increases and the quick ratio stays the same.
-The current ratio stays the same and the quick ratio increases.
-Both the current ratio and the quick ratio increase.
-Both the current ratio and the quick ratio stay the same.

Both the current ratio and the quick ratio increase.

13

Unique Aged Cheeses, Inc. specializes in producing two varieties of cheese which require a 1-month setup process to procure and prepare the necessary raw materials, then an 18-month aging process before the products are ready for sale to customers, who typically pay within 30 days. These two cheeses are Unique’s only products. For the purpose of classifying assets and liabilities on the balance sheet, what will be the length of the time period used to draw the current vs. noncurrent distinction?

20 months.

14

During 2017, customers purchased gift cards from LatteBucks, all of which expire on December 31, 2019. At the end of 2018, some of the gift cards still have not been redeemed. How should the unredeemed gift cards be reported on LatteBucks’s 2018 year-end financial statements?

As a current liability on the balance sheet.

15

On December 31, 2018, Supremo Co., paid in advance for a 3-year insurance policy, covering the years 2019 through 2021. The policy cost was $1,200. If the policy had been purchased on a year-to-year basis, the total cost would have been $1,800 at current rates. Supremo Co.’s normal operating cycle is 9 months long. How will the $1,200 be reported on Supremo’s balance sheet dated December 31, 2018?

$400 as a current asset, $800 as a noncurrent asset.

16

Peer Inc. is a publicly-traded enterprise and therefore must disclose information regarding its operating segments. Which of the following should be disclosed for each of Peer’s reportable operating segments?
-Both profit and loss and total assets must be reported.
-Only profit and loss, but not total assets must be reported.
-Only total assets, but not profit and loss must be reported.
-Neither total assets, not profit and loss must be reported.

Both profit and loss and total assets must be reported.

17

Randolph Corp. has a debt-to-equity ratio of 1.5, and total assets of $325 million. Randolph is considering another $25 million of debt and another $25 million of equity. What will be Randolph’s debt-to-equity ratio after the issuance?

1.4

18

When preparing interim financial statements, an enterprise should:

Use the same accounting principles followed in preparing its latest annual financial statements and Allocate expenses among all interim periods benefited, if the expenses are expected to benefit not only the period of occurrence but also additional period(s) in the same fiscal year.

19

Which of the following statements is true regarding earnings per share (EPS) disclosures under GAAP?
-All companies are required to report EPS amounts related to net income only.
-Basic earnings per share is found by dividing net income available to stockholders by the number of common shares outstanding as of the balance sheet date.
-A public company with dilutive securities may choose to report diluted EPS.
-All public companies are required to report EPS amounts related to income from continuing operations, income from discontinued operations, and net income.

All public companies are required to report EPS amounts related to income from continuing operations, income from discontinued operations, and net income.

20

An entity has two long-term construction contracts, one of which qualifies for revenue recognition over time and the other which does not (and so requires revenue recognition upon completion of the contract). For either of these two contracts, what account would be debited when preparing the journal entry to record billings?

Qualifies: Construction Receivable.
Doesn't qualify: Construction Receivable.

21

The Ole Factory, Inc. sells scented beauty products and personal care items. It is currently offering a promotion in conjunction with the launch of its new consulting business: customers can purchase a Deluxe Beauty Kit for $500, which is the normal retail price for this item, plus get one month's free access to an online Beauty Consultant, which normally costs $40 per month. For each Deluxe Beauty Kit sold as part of this promotion, how much revenue and deferred revenue should The Ole Factory recognize at the time of sale and how should it be allocated?

$500 total revenue, allocated $463 to the kit and $37 to the service.

22

Gil is a Baxley Co. salesman desperate to make quota by the end of 2018. On the afternoon of December 31, 2018, he convinces a longtime customer with excellent credit to sign a contract to accept delivery of Baxley Co.’s Widgetron Deluxe. Gil promises the customer a deep discount off the list price that they can ‘hash out later’ if the customer is 100% happy with the product. Gil does not tell the customer that the company’s policy in such cases is to offer the maximum discount of 30%. The customer states he will have to consult an astrologer and a groundhog to determine if he is happy with the product. Gil oversees the delivery that evening of the Widgetron Deluxe. Should the revenue from this sale be recognized in 2018? Why or why not?

The revenue should not be recognized because the seller lacks sufficient information to estimate returns, so the constraint on recognition of variable consideration applies.

23

Choose the correct statement(s) below regarding the direct write-off method for calculating bad debt expense.
-It is not normally consistent with GAAP and accrual accounting.
-Its use tends to result in an overstatement of accounts receivable on the balance sheet.
-Under this method, bad debt expense is recognized when a specific account is determined to be uncollectible.

All of the above.

24

When the allowance method of recognizing bad debt expense is used, it would have the following effect on the allowance account:

Recognize bad debt expense- Increase.
Write off a specific account- Decrease.
Reinstate an account previously written off_ Increase.

25

Gray Co. is concerned that it may not have enough employees to ensure proper separation of duties regarding cash disbursements. Which of the following may be performed by the same individual?

Comparing vendor invoices with associated purchase orders and verifying physical receipt of orders with receiving department.

26

Case Co.’s balances in Allowance for Doubtful Accounts were $25,000 at the beginning of the current year and $18,000 at year end. During the year, receivables of $10,000 were written off as uncollectible. What amount should Case report as bad debt expense at year end?

$3,000.

27

During the year, Carter Co. wrote off a customer’s account receivable using the allowance method for uncollectible accounts. Which statement is true about the impact the write-off had on Carter’s net income and total assets?

Net income did not change and net assets did not change.

28

Roster Co. adjusts its Allowance for Doubtful Accounts at year end. The general ledger balances for the Accounts Receivable and the related allowance account before adjustment were $1,500,000 and $45,000, respectively. Roaster estimates its necessary balance in its Allowance for Doubtful Accounts as 4% of the Accounts Receivable balance. What amount should Roaster record as an adjustment to its Allowance for Doubtful Accounts at year end?

$15,000 increase.

29

When the allowance method of recognizing uncollectible accounts is used, which of the following statements is true regarding the impact a collection of an account previously written off would have on Accounts Receivable and Allowance for Doubtful Accounts balances?

Accounts Receivable would not change and Allowance for Doubtful Accounts would increase.

30

On April 1, Keder, Inc. factored $90,000 of its accounts receivable without recourse. The factor retained 8% of the accounts receivable as an allowance for sales returns and charged a 4% commission on the gross amount of the factored receivables. What amount of cash did Keder receive from the factored receivables?

$79,200.

31

Choose the correct statement(s) below regarding the transfer of financial assets such as receivables:
-In a transfer of receivables without recourse, the transferee obtains the right to compensation from the transferor for customer accounts that prove to be uncollectible.
-In a transfer which qualifies as a secured borrowing, the transferor will record a liability for the amount borrowed.
-Under otherwise identical conditions, a transferor will generally pay a higher commission percentage on a receivable sold with recourse versus one sold without recourse.

In a transfer which qualifies as a secured borrowing, the transferor will record a liability for the amount borrowed.