FINANCIAL ACCOUNTING PART 3

Theories

1. For an entity that has only ordinary shares outstanding, total shareholders equity divided
by the number of shares outstanding represents the
a. Return on Equity c. Book value per share
b. Stated Value per share d. Price-earnings ratio

2. The standard requires disclosure on the face of income statement of

a. Both basic and diluted earnings per share
b. Basic earnings per share only
c. Neither basic nor diluted earnings per share
d. Diluted earnings per share only

3. During a period of inflation the specific price of land increased at a lower rate than the
general price index. The accounting method that would measure the land at the highest
amount is
a. Historical cost/nominal peso c. Historical cost/constant peso
b. Current cost/nominal peso d. Current cost/constant peso

4. Incomplete accounting records using only a cash book is a characteristics of

a. Single entry system c. Cash Basis
b. Double entry system d. Accrual Basis

5. If an inventory account is understated at year-end, the effect will be to

a. Overstate the cost of goods sold c. Overstate the net purchases
b. Overstate the net income d. Overstate the cost of good available for sale

6. If an inventory account is overstated at the beginning of the year, the effect will be to
a. Overstate the cost of goods sold c. Overstate the net purchases
b. Overstate the net income d. Overstate the cost of good available for sale

7. Failure to record the expired amount of prepaid rent expense would not
a. Understate liabilities
b. Understate expense
c. Overstate net income
d. Overstate owners equity

8. Failure to record the accrued salaries at the end of an accounting period results in
a. Overstated retained earnings
b. Overstated assets
c. Overstated revenue
d. Understated retained earnings

9. Failure to record the depreciation expense at the end of an accounting period results in
a. Overstated retained earnings 1
 b. Overstated assets
c. Overstated revenue
d. Understated retained earnings

10. Which of the following would cause income of the current period to be understated?
a. Capitalizing research and development cost
b. Understating estimate of residual value
c. Failure to recognize unearned rent revenue
d. Changing from weighted average to FIFO method

11. Which of the following is a counterbalancing error?

a. Prepaid expense adjusted incorrectly
b. Understated depletion expense
c. Overstated depreciation expense
d. Bond premium under-amortized

12. Which of the following is a non-counterbalancing error?

a. Depreciation expense overstated for the year
b. Accrued expense not recognized at year-end
c. Accrued income not recognized at year-end
d. Prepaid expense not recognized at year-end

13. For an entity with a periodic inventory system, which of the following would cause income
to be overstated in the period of occurrence?
a. Understating beginning inventory c. Overstated purchases
b. Overestimating bad debt expense d. Understated ending inventory

14. In statement of cash flows, interest payments to lenders and other creditors shall be
classified as
a. Borrowing activities
b. Operating activities
c. Lending activities
d. Financing activities

15. In statement of cash flows, dividend payments to shareholders shall be classified as

a. Cash outflows for investing activities
b. Cash outflows for financing activities
c. Cash inflows from investing activities
d. Cash inflows from financing activities

16. In statement of cash flows, alternatively interest received and dividend received may be
classified as Cash flow from
a. Borrowing activities
b. Operating activities
c. Investing activities
d. Financing activities 2
 17. Cash flows arising from income taxes shall be separately disclosed and classified as
cash flows from
a. Borrowing activities
b. Operating activities
c. Investing activities
d. Financing activities

18. The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall
a. Be classified as investing activities
b. Be classified as operating activities
c. Be classified as financing activities
d. Not be reported

19. Cash advances and loans made by a financial institution are usually classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Borrowing activities

20. Which of the following is not classified as an operating activity?

a. Interest received
b. Interest paid
c. Dividend paid
d. Dividend received

Problems

21. CK Companys accounting records provided the following information:

12/31/2010 12/31/2011
Current Assets 240,000 ?
Property, plant and equipment 1,600,000 1,700,000
Current Liabilities ? 130,000
Noncurrent liabilities 580,000 616,000

All assets and liabilities of the entity are reported in the schedule above. Working Capital of
92,000 remained unchanged from 2010 to 2011. Net income of 2011 was 64,000. No dividends
were declared during 2011 and there were no other changes in owners equity. Total noncurrent
liabilities on the December 31, 2011 would be
a. 340,000
b. 432,000
c. 580,000
d. 616,000

22. Blue Company purchased a machine on January 1, 2005 for 6,000,000. At the date of
acquisition, the machine had a life of six years with no residual value. The machine is being 3
 depreciated on a straight-line basis. On January 1, 2008, Blue determined that the machine
had a useful life of eight years from the date of acquisition with no residual value. What should
be the depreciation for 2008?
a. 750,000
b. 600,000
c. 375,000
d. 500,000

23. Booker Company committed to sell its comic book division (a component of the business) on
September 1, 2008. The book value of the divisions net assets was 4,000,000 and the fair value
of the net assets was 3,500,000. The disposal date is expected to be June 1, 2009. The division
reported an operating loss of 200,000 for the year ended December 31, 2008. Ignoring tax, what
amount should be reported as loss form discontinued operations in 2008?
a. 500,000
b. 200,000
c. 700,000
d. 0

24. On January 1, 2006, Brazilia Company purchased for 4,800,000 a machine with a useful life
of ten years and a residual value of 200,000. The machine was depreciated by the double
declining balance method and the carrying amount of the machine was 3,072,000 on December
31, 2007. Brazilia changed to the straight-line method on January 1, 2008. The residual value
did not change. What should be the depreciation expense on this machine for the year ended
December 31, 2008?
a. 287,200
b. 384,000
c. 460,000
d. 359,000

25. Universal Company failed to accrue warranty cost of 100,000 in its December 31, 2007
financial statements. In addition, a change from straight line to accelerated depreciation made at
the beginning of 2008 resulted in a cumulative effect of 60,000 on Universals retained earnings.
What amount before tax should Universal report as prior period error in 2008?
a. 100,000
b. 160,000
c. 60,000
d. 0

26. Aroma Company and its divisions are engaged solely in manufacturing. The following data
pertain to the industries in which operations were conducted for the current year ended
December 31:
Segment profit (loss)
V 3,400,000 4
 W 1,000,000
X (2,000,000)
Y 400,000
Z (200,000)
2,600,000
In its segment information for the current year, what are the reportable segments?
a. V,W,X and Y
b. V, W and X
c. V and W
d. V,W,X,Y and Z

27. The following information pertains to Aria Company and its divisions for the current year:
Sales to unaffiliated customers 20,000,000
Intersegment sales of products similar to
Those sold to unaffiliated customers 6,000,000
Interest earned on loans to other industry segments 400,000

Aria and all of its divisions are engaged solely in manufacturing operations. Aria has a
reportable segment if that segments revenue is at least
a. 2,640,000
b. 2,600,000
c. 2,040,000
d. 2,000,000

28.-30. Gerber Company sells toys so its sales are heavily concentrated in the last quarter of
the year because of holiday buying. Gerber reported total sales for the past three years broken
down to quarterly sales as follows (all numbers are in millions):

March 31 June 30 September 30 December 31 Total

2006 6,000 6,000 6,000 12,000 30,000
2007 8,000 8,000 8,000 16,000 40,000
2008 10,000 10,000 10,000 20,000 50,000

28. Using just the annual sales data, what is the sales forecast for fourth quarter of 2009?
a. 60,000
b. 15,000
c. 40,000
d. 10,000

29. Using the quarterly sales data, what is the sales forecast for the fourth quarter of 2009?
a. 24,000
b. 16,000
c. 40,000
d. 36,000

30. Using the quarterly sales data and the fact that the first quarter sales in 2009 amount to
14,000, what is the sales forecast for the fourth quarter of 2009? 5
 a. 15,000
b. 19,000
c. 28,000
d. 24,000

31. On January 1, the statement of financial position of Racel Company showed total assets of
5,000,000, total liabilities of 2,000,000 and contributed capital of 2,000,000. During the current
year, the corporation issued share capital of 500,000 par value at a premium of 300,000.
Dividend of 250,000 was paid on December 31. The statement of financial position on

December 31 showed total assets of 7,500,000 and total liabilities of 3,200,000. What was the
net income for the current year?
a. 1,750,000
b. 1,000,000
c. 750,000
d. 500,000

32. Easy Companys beginning and ending total liabilities were 840,000 and 1,000,000,
respectively. At year-end, owners equity was 2,600,000 and total assets were 200,000 larger
than at the beginning of the year. If new share capital issued exceeded dividends by 240,000,
net income or loss for the year was apparently
a. 280,000 income
b. 280,000 loss
c. 200,000 loss
d. 40,000 income

33. The following changes in Vela Companys account balances occurred during the current
year;
Increase
Assets 8,900,000
Liabilities 2,700,000
Share Capital 6,000,000
Share Premium 600,000

Except for a 1,300,000 dividend payment and the years earnings, there were no changes in
retained earnings for the year. What was Velas net income for the current year?
a. 400,000
b. 900,000
c. 1,300,000
d. 1,700,000

34. Zeta Company reported sales revenue of 4,600,000 in its income statement for the year
ended December 31, 2008. Additional information is as follows:

12/31/2010 12/31/2011
Accounts Receivable 1,000,000 1,300,000 6
 Allowance for uncollectible accounts 60,000 110,000

Zeta wrote off uncollectible accounts totaling 20,000 during 2011. Under the cash basis
accounting, Zeta would have reported sales revenue for 2008 at
a. 4,900,000
b. 4,350,000
c. 4,300,000
d. 4,280,000

35. Reid Company, which began operations on January 1, 2010, has elected to use cash basis
accounting for tax purposes and accrual basis accounting for its financial statements. Reid
reported sales of 1,750,000 and 800,000 in its tax returns for the years ended December 31,
2011 and 2010, respectively. Reid reported accounts receivable of 300,000 and 500,000 as of
December 31, 2011 and 2010, respectively. What amount should Reid report as sales in its
income statement for the year ended December 31, 2011?
a. 1,450,000
b. 1,550,000
c. 1,950,000
d. 2,050,000

36. Canal Company reported the following net income:

2010 6,000,000
2011 6,500,000
In determination of the net income, the following items are ignored:

2010 2011
Prepaid insurance 100,000 150,000
Accrued salaries 50,000 200,000
Unearned rental income 250,000 450,000
Accrued interest receivable 300,000 400,000

The corrected net income for 2008 should be

a. 6,100,000
b. 6,300,000
c. 6,400,000
d. 6,500,000

37-40. Galaxy Company had the following financial statement information:

2011 2010
Revenue 1,350,000 1,000,000
Expenses 980,000 650,000
Net Income 370,000 350,000

12/31/2011 12/31/2010

Total assets 1,570,000 1,050,000 7

Total Liabilities 500,000 350,000
Total owners equity 1,070,000 700,000

Galaxy failed to record 120,000 of accrued wages at the end of 2010. The wages were recorded
and paid in January 2011. The correct accruals were made on December 31, 2011.

37. What is the corrected net income for 2010?

a. 230,000
b. 350,000
c. 470,000
d. 250,000

38. What is the corrected net income for 2011?

a. 490,000
b. 370,000
c. 250,000
d. 430,000

39. The corrected total liabilities on December 31, 2010 should be

a. 470,000
b. 230,000
c. 400,000
d. 500,000

40. The corrected total owners equity on December 31, 2011 should be
a. 1,070,000
b. 1,190,000
c. 1,010,000
d. 950,000

41-43. The differences in Beal Companys balance sheet accounts at December 31, 2011 and
2010 are presented below:

Increase (Decrease)
Assets
Cash and Cash Equivalents 120,000
Short-term investments 300,000
Accounts receivable, net -
Inventory 80,000
Long-term investments (100,000)
Property, plant and equipment 700,000
Accumulated depreciation _-___
1,100,000

Liabilities and Shareholders Equity

Accounts payable and accrued liabilities (5,000) 8
Dividend payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Ordinary share capital, 10 par 100,000
Share premium 120,000
Retained Earnings 290,000
1,100,000

The following additional information relates to the current year:

- Net income for the current year was 790,000
- Cash Dividend of 500,000 was declared.
- Equipment costing 600,000 and having a carrying amount of 350,000 was sold for
350,000.
- Equipment costing 110,000 was acquired through issuance of long-term debt.
- A long-term investment was sold for 135,000. There were no other transactions affecting
long-term investments.
- 10,000 ordinary shares were issued for 22 a share.

41. In Beals 2011 statement of cash flows, Net Cash provided by operating activities was
a. 1,160,000
b. 1,040,000
c. 920,000
d. 705,000

42. Net Cash used in investing activities was

a. 1,005,000
b. 1,190,000
c. 1,275,000
d. 1,600,000

43. Net Cash provided by financing activities was

a. 20,000
b. 45,000
c. 150,000
d. 205,000

44. Oakwood Company provided the following data for the current year:
Cash balance, beginning of year 1,300,000
Cash flow from financing activities 1,000,000
Total shareholders equity, end of year 2,300,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Total shareholders equity, beginning of year 2,000,000

What is the cash balance at the end of the current year?

a. 1,200,000
b. 1,600,000 9
 c. 1,400,000
d. 1,700,000

45. The following information is available for Santana Company for the current year:

December 31 January 1
Cash 1,500,000 1,000,000
Retained Earnings 7,000,000 5,400,000
Cash flow from operating activities ?
Cash flow from investing activities (4,800,000)
Cash flow from financing activities 1,800,000
Dividends declared and paid 2,000,000
Net Income 3,600,000

How much was the cash flow from operating activities?

a. 3,500,000
b. 2,500,000
c. 4,500,000
d. 3,600,000

1 C 21 D
2 A 22 B
3 C 23 C
4 A 24 D
5 A 25 A
6 D 26 B
7 A 27 B
8 A 28 B
9 B 29 A
10 B 30 C
11 A 31 C
12 A 32 C
13 A 33 B
14 B 34 D
15 B 35 B
16 C 36 B
17 B 37 A
18 A 38 A
19 A 39 A
20 C 40 A
41 C
42 A
43 D
44 A
45 A

10
11