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Download Financial Accounting Theory and Analysis Text and Cases 10th Edition Schroeder Test Bank all chapters
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Example Test Questions
Chapter 8
Multiple Choice
1. Of the following items, the one that should be classified as a current asset is
a. Trade installment receivables normally collectible in 18 months
b. Cash designated for the redemption of callable preferred stock
c. Cash surrender value of a life insurance policy of which the company is beneficiary
d. A deposit on machinery ordered, delivery of which will be made within six months
Answer d
2. The advantage of relating a company’s bad debt experience to its accounts receivable is that
this approach
a. Gives a reasonable correct statement of receivables in the balance sheet
b. Relates bad debts expense to the period of sale
c. Is the only generally accepted method for valuing accounts receivable
d. Makes estimates of uncollectible accounts unnecessary
Answer a
3. Assuming that the ideal measure of short-term receivables in the balance sheet is the
discounted value of the cash to be received in the future, failure to follow this practice usually
does not make the balance sheet misleading because
a. Most short-term receivables are not interest bearing
b. The allowance for uncollectible accounts includes a discount element
c. The amount of the discount is not material
d. Most receivables can be sold to a bank or factor
Answer c
Answer d
5. Which of the following statements is not valid as it applies to inventory costing methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested
(plowed back) in inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern, since it matches current cost of goods
sold with current revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position
(reduces stock on hand below customary levels), there may be a matching of old costs
with current revenue.
d. The use of FIFO permits some control by management over the amount of net income for
a period through controlled purchases, which is not true with LIFO.
Answer c
6. Jamison Corporation’s inventory cost on its statement of financial position was lower using
first-in, first-out than last-in, first-out. Assuming no beginning inventory, what direction did
the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined
Answer a
7. If inventory levels are stable or increasing an argument that favors the FIFO method as
compared to LIFO is
a. Income taxes tend to be reduced in periods of rising prices
b. Cost of goods sold tends to be stated at approximately current cost in the income
statement
c. Cost assignments typically parallel the physical flow of the goods
d. Income tends to be smoothed as prices change over time
Answer c
8. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the
ending inventory valuation is
a. FIFO
b. LIFO
c. Conventional retail
d. Weighted average
Answer b
9. When inventory declines in value below original (historical) cost, and this decline is
considered other than temporary, what is the maximum amount that the inventory can be
valued at?
a. Sales price net of conversion costs
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin
Answer d
10. Which of the following inventory cost flow methods involves computations based on broad
inventory pools of similar items?
a. Regular quantity of goods LIFO
b. Dollar-value LIFO
c. Weighted average
d. Moving average
Answer b
11. When the allowance method of recognizing bad debt expense is used, the entries at the time
of collection of an account previously written off would
a. Increase net income
b. Have no effect on total current assets
c. Increase working capital
d. Decrease total current liabilities
Answer b
12. The original cost of an inventory item is above the replacement cost. The replacement cost is
below the net realizable value less the normal profit margin. Under the lower of cost or
market method the inventory item should be priced at its
a. Original cost
b. Replacement cost
c. Net realizable value
d. Net realizable value less the normal profit margin
Answer d
Answer c
Answer b
Answer b
1. The net realizable value of receivables is calculated as the face value of the receivables less
adjustments for
a. Credit sales
b. Actual uncollected amounts adjusted for purchase discounts.
c. Bad debts already written off.
d. Estimated uncollectible accounts
18. A successful discount retail store such as Wal-Mart would probably have
a. A low inventory turnover
b. A high inventory turnover
c. Zero profit margin
d. Low volume
Answer b
Answer b
Answer d
Essay
Working capital is the net short-term investment needed to carry on day-to-day activities. It is
calculated: current assets – current liabilities.
Cash equivalents are short-term investments that satisfy the following two criteria: (1) readily
convertible into a known amount of cash and (2) sufficiently close to its maturity date so that
its market value is relatively insensitive to interest rate changes.
b. Temporary investments
c. Receivables
The term receivables encompasses a wide variety of claims held against others. Receivables
are classified into two categories for financial statement presentation: (1) trade receivables
and (2) nontrade receivables. The outstanding receivables balance often constitutes a major
source of cash inflows to meet maturing obligations; therefore, the composition of this
balance must be carefully evaluated so that financial statement users are not misled. In order
for an item to be classified as a receivable, both the amount to be received and the expected
due date must be subject to reasonable estimation.
d. Inventories
The term inventory designates the aggregate of those items of tangible personal property
which: (1) are held for sale in the ordinary course of business, (2) are in process of
production for such sale, or (3) are to be currently consumed in the production of goods or
services to be available for sale.
e. Payables
Payables are obligations that are fixed by a transaction and involve a promise to pay at a
subsequent date. In addition to notes and accounts payable, dividends and taxes represent
payables requiring the use of current funds.
f. Deferrals
Deferrals are liabilities whose settlement requires the performance of services rather than the
payment of money. Examples of deferrals include magazine subscriptions collected in
advance, advance-purchase airline tickets, and unearned rent.
g. Current maturities
Current maturities are that portion of long-term debt that is due to be repaid within the current
year.
LIFO liquidation occurs when normal inventory levels are depleted. That is, if inventory
levels fall below the normal number of units in any year, the older, usually much lower, cost
of these items is charged to cost of goods sold and matched against current sales revenue
dollars, resulting in an inflated net income amount that is not sustainable.
b. LIFO conformity
The LIFO conformity rule stipulates that LIFO inventory costing must be used for reporting
purposes when it is used for income tax purposes.
When inventories have declined in value, current GAAP maintains that the future selling
price will move in the same direction and that anticipated future losses should be reported in
the same period as the inventory decline. In other words, companies must write-down their
inventory value to reflect current prices. .
4. List and briefly define the methods of accounting for investments under SFAS No.
115“Accounting for Certain Investments in Debt and Equity Securities” (FASB ASC 320).
FASB ASC 320-10-25 requires companies to classify equity and debt securities into one of the
following three categories:
1. Trading securities. Securities held for resale.
2. Securities available for sale. Securities not classified as trading securities or held-to-maturity
securities.
3. Securities held to maturity. Debt securities for which the reporting entity has both the positive
intent and ability to hold until they mature.
5. Define and discuss the two methods of estimating bad debts on receivables.
6. Why are cost flow assumptions used to determine inventory valuations? Define and explain the
rationale for using each of the cost flow assumptions.
Cost flow assumptions are necessary to assign the cost of goods sold when it is impossible or
impractical to maintain an actual physical count of inventory quantities
The three cost flow assumptions are:
1. The first in, first out (FIFO) method under which the oldest goods acquired are assumed to be
the first sold. This method is based on assumptions about the actual flow of merchandise
throughout the enterprise; in effect, it is an approximation of specific identification.
2. The last in, first out (LIFO) method of inventory valuation under which the last goods
acquired are assumed to be the first sold. This method is based on the assumption that current
costs should be matched against current revenues. Most advocates of LIFO cite the matching
principle as the basis for their stand and argue that decades of almost uninterrupted inflation
require that LIFO be used to more closely approximate actual net income.
3. Averaging techniques: whereby, each purchase affects both inventory valuation and cost of
goods sold. That is, the sum of all the periodic inventory costs is divided by the sum of all of
the periodic inventory qualities. As a result,, averaging does not result in either a good match
of costs with revenues or a proper valuation of inventories in fluctuating market conditions.
.
7. Discuss the perpetual vs. the periodic methods of accounting for inventories.
Businesses that issue audited financial statements are usually required to actually count all items
of inventory at least once a year unless other methods provide reasonable assurance that the
inventory figure is correct. When the inventory count is used to determine ending inventory, as in
a periodic inventory system, the expectation is that all goods not on hand were sold. However,
other factors, such as spoilage and pilferage, must be taken into consideration.When quantity is
determined by the perpetual records method, all inventory items are tabulated as purchases and
sales occur.
8. Obtain a company’s financial statements and ask the students to compute the following:
a. Working capital
b. Current ratio
c. Acid test ratio
d. Cash flow from operations to current liabilities ratio
e. Accounts receivable turnover
f. Inventory turnover
chapter xvii.
chapter xvi.
The grotto of Pausilippo.—A dying man.—The Lazzaroni.—Weather
at Naples.—The grotta del cane.—Inhuman sport.—Subterranean
fires.—A Funeral.—Characteristics of the Neapolitans.
chapter xi.
The meeting.—Discussion.—A government adopted.—Conclusion
for the present.
The time for the meeting of the people to take measures for the
establishment of a government for the island of Fredonia, was fixed
for the day which followed the events narrated in the last chapter.
This meeting was looked forward to with intense interest, by all
parties. The men, who knew that there could be no peace or safety
in society, without government, regarded the event as likely to decide
whether the inhabitants of the island were to be happy or miserable.
The women, who were perhaps not apt to reflect upon these
things, had also learned from their experience that a government,
establishing and enforcing laws, was indispensable to the quiet and
security of society: they saw that their own lives, their freedom, their
homes, were not secure, without the protection of law. Even the
children had found that government was necessary, and these as
well as the women, were now rejoicing at the prospect of having this
great blessing bestowed upon the little community of Fredonia.
The day for the meeting arrived, and the men of the island
assembled, agreeably to the appointment. First came the men of the
tent party, and then, those from the Outcast’s cave. The latter were
greeted by a shout of welcome, and mingling with the rest, a kind
shaking of hands took place between those, who so lately were
arrayed against each other in deadly conflict.
After a short time, Mr. Bonfils, being the oldest man of the
company, called the assembly to order, and he being chosen
chairman, went on to state the objects of the assembly, in the
following words:
“My dear friends; it has been the will of Providence to cast us
together upon this lonely, but beautiful island. It would seem that so
small a community, regulated by mutual respect and mutual good
will, might dwell together in peace and amity, without the restraints of
law, or the requisitions of government. But history has told us, that in
all lands, and in all ages, peace, order, justice, are only to be
secured by established laws, and the means of carrying them into
effect. There must be government, even in a family; there must be
some power to check error, to punish crime, to command obedience
to the rule of right. Where there is no government, there the violent,
the unjust, the selfish, have sway, and become tyrants over the rest
of the community. Our own unhappy experience teaches us this.
“Now we have met together, with a knowledge, a conviction of
these truths. We know, we feel, we see that law is necessary, and
that there must be a government to enforce it. Without this, there is
no peace, no security, no quiet fireside, no happy home, no pleasant
society. Without this, all is fear, anxiety, and anarchy.
“Let us then enter upon the duties of this occasion, with a proper
sense of the obligation that rests upon us; of the serious duty which
is imposed on every man present. We are about to decide questions
which are of vital interest, not only to each actor in this scene, but to
these wives and sisters and children, whom we see gathered at a
little distance, watching our proceedings, as if their very lives were at
stake.”
This speech was followed by a burst of applause; but soon a man
by the name of Maurice arose—one who had been a leading
supporter of Rogere—and addressed the assembly as follows:
“Mr. Chairman; it is well known that I am one of the persons who
have followed the opinions of that leader who lost his life in the battle
of the tents. I followed him from a conviction that his views were
right. The fact is, that I have seen so much selfishness in the officers
of the law, that I have learned to despise the law itself. Perhaps,
however, I have been wrong. I wish to ask two questions—the first is
this: Is not liberty a good thing? You will answer that it is. It is
admitted, all the world over, that liberty is one of the greatest
enjoyments of life. My second question then is—Why restrain liberty
by laws? Every law is a cord put around the limbs of liberty. If you
pass a law that I shall not steal, it is restraint of my freedom; it limits
my liberty; it takes away a part of that, which all agree is one of the
greatest benefits of life. And thus, as you proceed to pass one law
after another, do you not at last bind every member of society by
such a multiplied web of restraints, as to make him the slave of law?
And is not a member of a society where you have a system of laws,
like a fly in the hands of the spider, wound round and round by a
bondage that he cannot burst, and which only renders him a slave of
that power which has thus entangled him?”
When Maurice had done, Brusque arose, and spoke as follows:
“Mr. Chairman; I am happy that Mr. Maurice has thus stated a
difficulty which has arisen in my own mind: he has stated it fairly, and
it ought to be fairly answered. Liberty is certainly a good thing;
without it, man cannot enjoy the highest happiness of which he is
capable. All useless restraints of liberty are therefore wrong; all
unnecessary restraints of liberty are wrong. But the true state of the
case is this: we can enjoy no liberty, but by submitting to certain
restraints. It is true that every law is an abridgment of liberty; but it is
better to have some abridgment of it, than to lose it all.
“I wish to possess my life in safety; accordingly I submit to a law
which forbids murder: I wish to possess my property in security; and
therefore I submit to a law which forbids theft and violence: I wish to
possess my house without intrusion; I therefore submit to a law
which forbids one man to trespass upon the premises of another: I
wish to go and come, without hindrance, and without fear; I therefore
submit to a law which forbids highway robbery, and all interference
with a man’s pursuit of his lawful business.
“Now, if we reflect a little, we shall readily see that by submitting
to certain restraints, we do actually increase the amount of practical,
available, useful liberty. By submitting to laws, therefore, we get
more freedom than we lose. That this is the fact, may be easily
tested by observation. Go to any civilized country, where there is a
settled government and a complete system of laws, and you will find,
in general, that a man enjoys his house, his home, his lands, his
time, his thoughts, his property, without fear: whereas, if you go to a
savage land, where there is no government and no law, there you
will find your life, property, and liberty, exposed every moment to
destruction. Who, then, can fail to see that the very laws which
abridge liberty in some respects, actually increase the amount of
liberty enjoyed by the community.”
Maurice professed himself satisfied with this solution of his
difficulties; and the meeting proceeded to appoint a committee, to go
out and prepare some plan, to be submitted to the meeting. This
committee returned, and after a short space, brought in a resolution,
that Mr. Bonfils be for one year placed at the head of the little
community, with absolute power; and that, at the end of that period,
such plan of government as the people might decree, should be
established.
This resolution was adopted unanimously. The men threw up their
hats in joy, and the air rang with acclamations. The women and
children heard the cheerful sounds, and ran toward the men, who
met them half way. It was a scene of unmixed joy. Brusque and
Emilie met, and the tears of satisfaction fell down their cheeks.
François went to his aged mother, and even her dimmed eye was
lighted with pleasure at the joyful issue of the meeting.
We must now take leave of the island of Fredonia—at least for a
time—and whether we ever return to it, must depend upon the
wishes of our young readers. If they are anxious to see how the
people flourished under the reign of their aged old chief, and how
they proceeded in after years, perchance we may lift the curtain and
show them the scene that lies behind it. But I hope that our readers
have learnt, that not only men and women, but children, have an
interest in government, and therefore that it is a thing they should try
to understand.
The Tanrec.