test bank chapter 6-financial accounting theory and analysis

Example Test Questions Chapter 6 Multiple choice 1. The disposal of a significant component of a business is called a. A change in accounting principle b. An extraordinary item c. An other expense d. Discontinued operation Answer d

2. If year one sales equal $800,000, year two equal $840,000 and year three equals $896,000 thepercentage to be assigned for year two in a sales trend analysis, assuming that year 1 is thebase year, is a. 100% b. 89% c. 105% d. 112% Answer c 3. A measure of a company’s profitability is the a. Current ratio b. Current cash debt coverage ratio c. Return on assets ratio d. Debt to total assets ratio Answer c 4.Which of the following is not an economic consequence of financial reporting? a.Financial information can affect the distribution of wealth among investors. More informed investors, or investors employing security analysts, may be able to increset heir wealth at the expense of less informed investors. b.Financial information can affect the level of risk accepted by a firm. Focusing on short-term, less risky projects may have long-term detrimental effects. c.Financial information can affect the rate of capital formation in the economy and result ina reallocation of wealth between consumption and investment within the economy. d.Financial information can affects the allocation of psychic income among investors. Answer d 5.Which of the following is not an income statement element? a.Asset b.Gain c.Revenue d.Expense Answer a

6.The statement, net income should reflect all items that affected the net increase or decrease in stockholders’ equity during the period is consistentwithwhich of the following concepts of income? a.Economic b.All inclusive c.Current operating performance d.Money Answer b 7. The phrase events and transactions that are distinguished by both their unusual nature andtheir infrequency of occurrence describes: a.Changes in accounting principles b.Prior period adjustments c.Extraordinary items d.Prior period adjustments Answer c 8.Which of the following is not an accounting change? a.Change in accounting principle b.Change in accounting estimate c.Change in a reporting entity d.Change because of an error Answer d 9.Which of the following is not an example of an error? a.A change from an accounting practice that is not generally acceptable to a practice thatis generally acceptable. b.Mathematical mistakes. c.A change from LIFO to FIFO inventory costing d.The incorrect classification of costs and expense Answer c 10.The formula, Operating profit/Sales, is used to calculate a.Gross profit percentage b.Net profit percentage c.Comprehensive income percentage d.Operating profit percentage Answer d 11.The accounts receivable turnover and inventory turnover ratios are used to analyze a. Long-term solvency b. Profitability c. Liquidity d. Leverage Answer c

12.A high accounts receivable turnover ratio indicates a. Customers are making payments quickly b.A large portion of the company’s sales are on credit c. Many customers are not paying their receivables in a timely manner d.The company’s sales have increased Answer c 13. The return on assets ratio is comprised of a. Profit margin and debt to total assets ratio .b. Profit margin and asset turnover ratio c. Times interest earned and debt to stockholders’ equity ratio. d. Profit margin and free cash flow. Answer b 14.An example of the correction of an error in previously issued financial statements is a change a.From the completed contract to the percentage-of-completion method of accounting for longterm construction-type contracts. b.In the depletion rate, based on new engineering studies of recoverable mineralresources. c.From the sum-of-years-digits to the straight-line method of depreciation for all plantassets. d.From the installment basis of recording sales to the accrual basis, when collection of thesales price has been and continues to be reasonably assured Answer d 15.Which of the following is characteristic of a change in an accounting estimate? a.It usually need not be disclosed b.It does not affect the financial statements of prior periods c.It should be reported through the restatement of the financial statements d.It makes necessary the reporting of pro forma amounts for prior periods Answer b 16.Which of the following items, if material in amount would normally be considered anextraordinary item for reporting results of operations? a.Utilization of a net operating loss carryforward b.Gains or losses on disposal of a segment of a business c.Adjustments of accruals on long-term contracts d.Gains or losses from a fire Answer d 17.Which of the following is an example of an extraordinary item in reporting results of operations? a.A loss incurred because of a strike by employees b.The write-off of deferred research and development costs believed to have no futurebenefit c.A gain resulting from the devaluation of the U.S. dollar d.A gain resulting from the state exercising its right of eminent domain on a piece of landused as a parking lot Answer d

18.A company changed its method of inventory pricing from last-in, first-out to first-in, first-out during the current year. Generally accepting accounting principles require that this change in accounting method be reported by: a.Accounting for the effects of the change in the current and future periods. b.Showing the cumulative effect of the change in the current year’s financial statementsand pro forma effects on prior year’s financial statements in an appropriate footnote c.Disclosing the reason for the change in the “significant accounting policies” footnote for the current year but not restating prior year financial statements d.Applying retroactively the new method in restatements of prior years and appropriatefootnote disclosures Answer d 19.A transaction that is material in amount, unusual in nature, but not infrequent in occurrences hould be presented separately as a (an) a.Component of income from continuing operations, but not net of applicable incometaxes b.Component of income from continuing operations, net of applicable income taxes c.Extraordinary item, net of applicable income taxes d.Prior period adjustment, buy not net of applicable income taxes Answer a 20.An extraordinary item should be reported separately as a component of income a.After discontinued operations of a component of a business b.Before discontinued operations of a component of a business c.After cumulative effect of accounting changes and after discontinued operations of acomponent of a business d. After cumulative effect of accounting changes and before discontinued operations of acomponent of a business Answer b 21. The correction of an error in the financial statements of a prior period should be reflected, netof applicable income taxes, in the current a.Income statement after income from continuing operations and before extraordinaryitems b.Income statement after income from continuing operations and after extraordinary items c.Retained earnings statement as an adjustment of the opening balance d.Retained earnings statement after net income but before dividends Answer c 22.A loss from the disposal of a component of a business enterprise should be reportedseparately as a component of income a.Before extraordinary items b.After extraordinary items c.After extraordinary items and cumulative effect of accounting changes d.Before extraordinary items and cumulative effect of accounting changes Answer a

23.A prior period adjustment should be reflected, net of applicable income taxes, in the financialstatements of a business entity in the a.Retained earnings statement after net income but before dividends b.Retained earnings statement as an adjustment of the opening balance c.Income statement after income from continuing operations d.Income statement as part of income from continuing operations Answer b 24.Antidilutive securities would generally be used in the calculation of Basic Diluted Earnings per share Earnings per share a.Yes Yes b.No Yes c.No No d.Yes No Answer c 25.A change in the salvage value of an asset depreciated on a straight-line basis and arisingbecause additional information has been obtained is a.An accounting change that should be reported in the period of change and futureperiods of change if the change affects both b. An accounting change that should be reported by restating the financial statements of allprior periods presented c.A correction of an error d.Not an accounting change Answer b 26.A loss should be separately as a component of net income when it is unusual in nature andwhich of the following? Material Infrequent In Amount In Occurrence a. No Yes b. No No c. Yes No d. Yes Yes Answer d 27.When a component of a business has been discontinued during the year, this s’ component s operating losses of the current period up to the measurement date should be included in the a.Income statement as part of the income (loss) from operations of the discontinuedcomponent b.Income statement as part of the loss on disposal of the discontinued component c.Income statement as part of the income (loss) from continuing operations d.Retained earnings statement as a direct decrease in retained earningsAnswer a