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1. To reduce agency cost, accounting should provide the information for management stewardship. Then, which item can be more directly related to the management stewardship information? a. Goodwill impairment loss b. Projected benefit obligation c. Employee stock option expense d. Gain from asset exchange 2. Which one is not a main objective of the Sarbanes-Oxley Act? a. Mainly it intends to prevent myopic investment of the individual investors. b. It requires the creation of PCAOB. c. It requires CEO and CFO certification on the financial statements d. One of the main goals of the Act is to improve the governance systems inside the public accounting firms. 3. The current pension accounting is based on SFAS87 and SFAS 158. Please choose the item that is not in the pension GAAP. a. Under the defined benefits plan, employer is taking investment risk b. The pension asset is recorded when net periodic pension cost is less than amounts the employer has contributed to the plan. c. SFAS No. 87 provides a frame of the current pension accounting and defines the following factors: service cost component, interest cost, return on plan assets and more d. All of the above are correct 4. Which one is not correct practice under GAAP? a. Trading securities are in current assets, but securities held to maturity is in long-term assets (non current) b. Holding gain or loss for held-to maturity securities are estimated at the end of every accounting period c. Generally cash equivalents include the investments purchased within three months of their maturity value. d. Holding gain or loss for trading and available for sale securities are not reported on income statement. 5. Which one is not a correct practice under the GAAP for the segment reporting? a. Segment reporting is included as one of the basic financial statements. b. Segment reporting can be done by each operating segment. c. Segment reporting can help investors to forecast sales and earnings for future. d. The segment reporting is a line-of-business reporting and is mandatory disclosure. 7. FASB attempts to improve the quality of accounting information. One of the recent changes made by the FASB is the goodwill impairment test. Instead of the amortization, the goodwill should be revalued. Which type of investors can get more benefits from this change? a. Passive investors b. Active investors c. Equally beneficial d. Neither 8. For the mergers and acquisitions, what accounting method should be used? a. Equity method and minority method b. Either Purchase method or pooling of interest c. Purchase method based on fair market value d. Pooling of interest 9. JK Company has the following balances on the 2006 Balance Sheet. Current assets 70,000, long term assets 250,000, current liabilities 40,00, long term debt 130,000, and stockholders’ equity 150,000. The company has an operating lease contract. If promises to pay a lessor 10,000 annually for the next three years. The company average borrowing rate (discounted rate) is 10%. Which one is correct if the lease is recorded as a capital lease. a. Working capital will be increased. b. Current ratio will be increased b. ROA will be increased d. None of the above 10. Which one is not correct in the context of tax accounting? a. Deferred tax liability might be resulted when tax expense on income statement is less than tax payment based on tax code. b. Non taxable expense causes permanent differences between pretax accounting income and taxable income. c. Corporate income tax is an expense, not a distribution of profits to the government d. Deferred tax assets might be resulted from Loss Carryback. 11. . JK Company has the following balances on the 2006 Balance Sheet. Current assets 70,000, long term assets 250,000, current liabilities 40,00, long term debt 130,000, and stockholders’ equity 150,000. The company has an operating lease contract. If promises to pay a lessor 10,000 annually for the next three years. The company average borrowing rate (discounted rate) is 10%. If the lease is recorded as a capital lease, what will be the long-term asset total> a. about 296,321 b. about 285,131 c. about 250,500 d. about 274,658, Assets are raised by PV of annual lease rental payment considering discount rate @10%. While recording capital lease you record asset at so calculated PV against liability. i.e 10,000*2.8468. 12. Which one is a not correct practice under the current GAAP for investments in equity securities? a. Although a firm has less than 50% of the ownership, if the firm actually controls the business operation of the targeted firm, the firm should use consolidation. b. When a firm has 35% of the ownership, the firm should use the equity method. c. When a firm has 15% of the ownership and the fair value is not available, the firm should use the equity method. d. When a firm has 55% of the ownership, the firm should use the consolidation. 13. SFAC No. 6 describes the elements comprising the balance sheet as assets, liabilities, and equity. The net assets of a business are equal to a. Total shareholders’ equity b. total assets c. current assets d. total assets minus long-term liabilities 14. Which one is a voluntary disclosure that released by a firm? a. Management Discussion & Analysis b. Pro forma earnings announcement c. Material accounting policies that firm uses d. Auditor’s report 15. Now FASB required that all employee stock options should be expensed on income statement. On January 2005, AA company granted total $100,000 (fair value) of stock options to the employee. The exercise price is equal to the market price at the grant time. The employees cannot exercise the options until 2007. According to the new requirement, the company should record an expense $50,000 for 2005 and $50,000 for 2006. During 2008, all options are exercised. What is the effect of on total equity at the end of 2006? a. not determinable b. decrease c. no effect d. increase, it increases by amount of compensation booked for the year, i.e. $50,000. 16. Now FASB required that all employee stock options should be expensed on income statement. On January 2005, AA company granted total $100,000 (fair value) of stock options to the employee. The exercise price is equal to the market price at the grant time. The employees cannot exercise the options until 2007. According to the new requirement, the company should record an expense $50,000 for 2005 and $50,000 for 2006. During 2008, all options are exercised. What is the effect on the accruals for 2005? a. decrease b. no effect c. increase, it increased by accumulated compensation booked till 2005. d. not determinable 17.Users are looking for firms who can generate more future cash flows. Which one may mostly decrease earnings quality when the users examine the earnings figures as the indicator of future cash flows? a. Unrealized holding gain or loss. b. Credit Sales. c. R&D expense d. accruals 18. The following items discuss the current practices under the GAAP. Which one is not correct? a. company should report changes in the deferred tax asset and liability accounts as footnotes in 10-K. b. Current GAAP does not allow any off-balance-sheet financing available c. Tax accounting is related to the quality of earnings because it affects the ability to assess future cash flows. d. Capital Lease is assumed to be the same as purchase with financing. 19. Which one is the definition (or implication) of earnings conservatism ratio? a. It is the ratio used as a proxy of firm performance b. It implies the effective tax rate for the firm c. It is used to evaluate the degree of aggressiveness in the firm accounting d. None of the above 20. Which one is not a correct practice under the GAAP? a. ARB 43 noted that there are two separate types of intangibles: those having a term of existence limited by regulation and others and those having no such terms of existence b. Goodwill should be amortized as an expense over less than 40 years. c. Generally R&D is recorded as a current expense d. all of the above are correct 21. Management Discussion & Analysis includes manager’s forecasts for firm’s future. Specially the forecast can help to estimate future cash flows or future earnings that can be generated by firm. Which decision model can get more benefit from the forecasts? a. CAPM b. Residual Earnings model (earnings capitalization model) c. equally beneficial 22. K. Co. uses LIFO inventory method. At the end of the 2006 accounting period, the company reported $10,000 of net earnings on the Income Statement. The inventory balance on the 2006 Balance Sheet is $7,000. In the footnotes LIFO reserve at the end of 2006 is $3,000 and LIFO reserve at the end of 2005 is $2,500. JJ Co. uses FIFO and reported 10,300 of net earnings on the 2006 Income Statement. Which company has a higher earnings if both of the companies would use the same inventory method? a. K. LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. So if we recalculate profit for K Co. we need to add $3000 (2006 LIFO reserve) and reduce $2500 (2005 ending reserve) from existing reported earnings. This gives us a profit increment of $500, thus making new profit under FIFO as $10,500 which is more than $10,300 of JJ Co. b. cannot determine c. JJ. 24. Which one is not correct for Pro forma earnings? a. Pro forma earnings are used in valuation by investors b. Pro forma earnings are based on the current GAAP. c. Company does not need to disclose for how to calculate the Pro Forma earnings d. Pro forma earnings are voluntarily disclosed by the firm 25. Now FASB required that all employee stock options should be expensed on income statement. On January 2005, AA company granted total $100,000 (fair value) of stock options to the employee. The exercise price is equal to the market price at the grant time. The employees cannot exercise the options until 2007. According to the new requirement, the company should record an expense $50,000 for 2005 and $50,000 for 2006. During 2008, all options are exercised. What is the effect of the free cash flows for 2005? a. not determinable b. decrease c. no effect, it’s in the year of exercise that cash flow is affected, which in this case if 2008 and not 2005. d. increase 26. Which one is not a correct practice of inventory accounting under GAAP? a. the amount of inventory disclosed on the financial statements does not represent the future cash receipts expected to be generated. b. Liquidity problems can arise from the failure to convert current assets into cash in a timely manner or from excessive bad debt losses. c. Under inflation, use of FIFO can result in distortions of earnings when normal inventory levels are depleted because of LIFO liquidation. 27. Under the disclosure provisions of SFAS No. 123, the estimated stock option expense for 2006 would be $15,500 for W. Co. .When the company records this expense. a. The equity on Balance Sheet has no effect b. Retained Earnings account has no effect c. the capital decreases by $15,500 d. The total assets increase by $15,500 28.The following items discusses the practices related to the treasury stock. Please Choose the item that is not a correct practice. a. Treasury stock is the own common share repurchased by the firm. b. The profit from sales of the treasury stock is recorded as a capital increase. c. Treasury stock is recorded as an asset on the Balance Sheet. d. To increase the stock price, firms may have treasury socks. Note:Treasury Stock is a contra equity item. It is not reported as an asset; rather, it is subtracted from stockholders\' equity. 29. Which one is false? a. Generally off-balance-sheet financing is not ethical in terms of the users. b. Off-balance-sheet financing may reduce the total assets and total liabilities on Balance Sheet. c. Off-balance-sheet financing mostly increases return on assets (ROA) d. Off-balance-sheet financing may be frequently used by firms who has stronger restrictions on bond covenant. 30. Which one is least possible item in Management Discussion & Analysis? a. Market sales trend b. discussion for the accounting policy change c. detail information for the executive compensation d. The effect of oil price increase on firm’s performance.

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