10) Limitations of the income statement include all of the following except

A.items that cannot be measured reliably are not reported.

B.only actual amounts are reported in determining net income.

C.income measurement involves judgment.

D.income numbers are affected by the accounting methods employed.

11) Which of the following would represent the least likely use of an income statement prepared for a business enterprise?

A.Use by customers to determine a company’s ability to provide needed goods and services.

B.Use by labor unions to examine earnings closely as a basis for salary discussions.

C.Use by government agencies to formulate tax and economic policy.

D.Use by investors interested in the financial position of the entity.

12) Which of the following is not a generally practiced method of presenting the income statement?

A.Including prior period adjustments in determining net income

B.The single-step income statement

C.The consolidated statement of income

D.Including gains and losses from discontinued operations of a component of a business in determining net income

13) Which of the following is not a reason why revenue is recognized at time of sale?

A.Title legally passes from seller to buyer.

B.Realization has occurred.

C.All of these are reasons to recognize revenue at time of sale.

D.The sale is the critical event.

14) In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

A.the method commonly used by the contractor to account for other long-term construc-tion contracts.

B.the terms of payment in the contract.

C.the inherent nature of the contractor’s technical facilities used in construction.

D.the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.

15) Which of the following is not an accurate representation concerning revenue recognition?

A.Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.

B.Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.

C.Revenue from disposing of assets other than products is recognized at the date of sale.

D.Revenue from services rendered is recognized when cash is received or when services have been performed.

16) The balance sheet contributes to financial reporting by providing a basis for all of the following except

A.determining the increase in cash due to operations.

B.computing rates of return.

C.assessing the liquidity and financial flexibility of the enterprise.

D.evaluating the capital structure of the enterprise.

17) The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as




D.financial flexibility.

18) One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is

A.an extensive use of estimates.

B.failure to reflect current value information.

C.failure to include items of financial value that cannot be recorded objectively.

D.the extensive use of separate classifications.

19) Which of the following should be disclosed in a Summary of Significant Accounting Policies?

A.Claims of equity holders

B.Types of executory contracts

C.Depreciation method followed

D.Amount for cumulative effect of change in accounting principle

20) The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This information is important to financial statement readers in determining

A.the value of obsolete items included in ending inventory.

B.net income for the year.

C.whether the working capital position is adequate for future operations.

D.whether accounting policies are consistently applied from year to year.

21) Events that occur after the December 31, 2008 balance sheet date (but before the balance sheet is issued) and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be

A.used to record an adjustment to Bad Debt Expense for the year ending December 31, 2008.

B.discussed only in the MD&A (Management’s Discussion and Analysis) section of the annual report.

C.used to record an adjustment directly to the Retained Earnings account

D.disclosed only in the Notes to the Financial Statements.

22) If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be





23) The MD&A section of an enterprise’s annual report is to cover the following three items:

A.liquidity, capital resources, and results of operations.

B.income statement, balance sheet, and statement of owners’ equity.

C.changes in the stock price, mergers, and acquisitions.

D.income statement, balance sheet, and statement of cash flows.

24) The required approach for handling extraordinary items in interim reports is to

A.charge or credit the loss or gain in the quarter that it occurs.

B.prorate them over all four quarters.

C.disclose them only in the notes.

D.prorate them over the current and remaining quarters.

25) The payout ratio is calculated by dividing

A.cash dividends by market price per share.

B.dividends per share by earnings per share.

C.cash dividends by net income less preferred dividends.

D.cash dividends by net income plus preferred dividends.

26) Which of the following ratios measures long-term solvency?

A.Debt to total assets

B.Acid-test ratio

C.Current ratio

D.Receivables turnover

27) The calculation of the number of times interest is earned involves dividing

A.net income plus income taxes and interest expense by annual interest expense.

B.net income by annual interest expense.

C.none of these.

D.net income plus income taxes by annual interest expense.

28) An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)

A.cash outflow from investing activities.

B.addition to net income in arriving at net cash flow from operating activities.

C.cash outflow from financing activities.

D.deduction from net income in arriving at net cash flow from operating activities.

29) Of the following questions, which one would not be answered by the statement of cash flows?

A.Where did the cash come from during the period?

B.What was the change in the cash balance during the period?

C.What was the cash used for during the period?

D.Were all the cash expenditures of benefit to the company during the period?

30) To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by

A.re-recording all income statement transactions that directly affect cash in a separate cash flow journal.

B.eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

C.estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions.

D.eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.

31) In determining net cash flow from operating activities, a decrease in accounts payable during a period

A.means that income on an accrual basis is less than income on a cash basis.

B.requires a decrease adjustment to cost of goods sold under the direct method.

C.requires an addition adjustment to net income under the indirect method.

D.requires an increase adjustment to cost of goods sold under the direct method.

32) In a statement of cash flows, the cash flows from investing activities section should report

A.the issuance of common stock in exchange for a factory building.

B.the assignment of accounts receivable.

C.stock dividends received.

D.a major repair to machinery charged to accumulated depreciation.

33) Riley Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or paid by Wood during the year. On Riley’s statement of cash flows (indirect method), the $25,000 should

A.not be shown.

B.be shown as a deduction from net income in the cash flows from operating activities section.

C.be shown as cash inflow from investing activities.

D.be shown as cash outflow from financing activities.

34) Which of the following tables would show the smallest factor for an interest rate of 10% for six periods?

A.Future value of an ordinary annuity of 1

B.Present value of an annuity due of 1

C.Present value of an ordinary annuity of 1

D.Future value of an annuity due of 1

35) Which table has a factor of 1.00000 for 1 period at every interest rate?

A.Future value of 1

B.Present value of an ordinary annuity of 1

C.Present value of 1

D.Future value of an ordinary annuity of 1

36) Which of the following tables would show the smallest value for an interest rate of 5% for six periods?

A.Future value of 1

B.Present value of an ordinary annuity of 1

C.Present value of 1

D.Future value of an ordinary annuity of 1