1. Which of the following accounting treatments is proper for a change in reporting entity? a. Restatement of all financial statements presented b. Restatement of current period financial statements c. Note disclosure and supplementary schedules d. Adjustment to retained earnings and note disclosure 2. Which of the following should be reported as a change in accounting estimate? a. Change in the reported beginning inventory amount due to a discovery of a bookkeeping error b. Change from the completed-contract method to the percentage-of- completion method for revenue recognition on long-term construction contracts c. Increase in the rate applied to net credit sales from 1 percent to 1-1/2 percent in determining losses from uncollectible receivables d. Change made to comply with a new FASB pronouncement 3. Which of the following is not a change in accounting principle? a. A change from FIFO to LIFO for inventory valuation b. A change from completed-contracts to percentage-of-completion c. A change from eight years to five years in the useful life of a depreciable asset d. A change from double-declining-balance to straight-line depreciation 4. An example of an item that should be reported as a prior period adjustment is the a. collection of previously written off accounts receivable. b. payment of taxes resulting from examination of prior years' income tax returns. c. correction of an error in financial statements of a prior year. d. receipt of insurance proceeds for damage to a building sustained in a prior year. 5. At the time Fisher Corporation became a subsidiary of Ashbury Corporation, Fisher switched depreciation of its plant assets from the straight-line method to the sum-of-the-years'-digits method used by Ashbury. With respect to Fisher, this change was a a. change in an accounting estimate. b. correction of an error. c. change in accounting principle. d. change in the reporting entity. 6. The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported a. in the period of change and future periods. b. by restating the financial statements of all prior periods presented. c. by showing the pro forma effects of retroactive application. d. as a correction of an error. 7. Lexicon Inc. bought a patent for $600,000 on January 2, 2007, at which time the patent had an estimated useful life of ten years. On February 2, 2011, it was determined that the patent's useful life would expire at the end of 2013. How much would Lexicon record as amortization expense for this patent for the year ending December 31, 2011? a. $140,000 b. $120,000 c. $105,000 d. $60,000 ANS: B 8. Kentucky Enterprises purchased a machine on January 2, 2010, at a cost of $120,000. An additional $50,000 was spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life of five years and a salvage value of $20,000. As a result of the error, a. retained earnings at December 31, 2011, was understated by $30,000 and 2011 income was overstated by $6,000. b. retained earnings at December 31, 2011, was understated by $38,000 and 2011 income was overstated by $6,000. c. retained earnings at December 31, 2011, was understated by $30,000 and 2011 income was overstated by $10,000. d. 2010 income was understated by $50,000. 9. Under the direct method, cash paid to suppliers can be computed as cost of goods sold for the period a. plus an increase in inventory and minus an increase in accounts payable. b. plus a decrease in inventory and minus an increase in accounts payable. c. minus an increase in inventory and plus an increase in accounts payable. d. minus a decrease in inventory and plus an increase in accounts payable. 10. Which of the following investments should be classified as cash equivalents for Able Company in preparing the statement of cash flows? 1 Shares of stock in Able Company. 2 A one-month Treasury note purchased by Able Company when only 3 months remained in the note's term. 3 Share in a money market fund purchased by Able Company; the fund purchases only investment grade corporate debt instruments with maturities of 2 months or less. 4 A one-year treasury note purchased by Able Company when the treasury note was issued, which now has only 2 months remaining in its term. a. 2, 4 b. 2, 3, 4 c. 2, 3 d. 1, 2, 3, 4 11. Which of the following transactions would not be reported on the statement of cash flows? a. Purchase of treasury stock b. Purchase of an operational asset by issuing common stock c. Declaration of a cash dividend which has not yet been paid d. Patent amortization 12. Which of the following is not required by generally accepted accounting principles? a. Statement of cash flows b. Earnings per share c. Cash per share d. Disclosure in notes to financial statements of the projected benefit obligation of a defined-benefit pension plan 13. Which of the following is not classified as an operating activity? a. Interest received b. Interest paid c. Dividends received d. Dividends paid 14. The statement of cash flows and related disclosures would be of the least assistance in helping a potential investor assess a. a firms ability to generate cash. b. a firms ability to meet its obligations. c. a firms ability to make good use of cash reserves to earn interest or other return. d. the reasons for differences between income and associated cash flows. 15. Which of the following is the primary factor in determining the functional currency of a foreign subsidiary? a. How the costs for the foreign entity's product are determined b. The denomination of the foreign entity's financing c. The location of the primary sales market that influences the price of the foreign entity's product d. Management's assessment of all relevant factors 16. A translation adjustment resulting from the translation process is disclosed on the financial statements as a. a separate component of stockholders' equity. b. a below-the-line item on the income statement. c. an adjustment to retained earnings. d. a part of income from operations on the income statement. 17. Which of the following is the least likely means a company might choose to meet the needs of international investors? a. Translation of financial statements or annual reports into the language of the user. b. Denomination of the financial statements in the currency of the country where the financial statements will be used. c. Partial or complete restatement of financial statements to the accounting principles of the financial statement users' country. d. Mutual recognition in which one country accepts the financial statements of another country for regulatory purposes such as listing on stock exchanges or filing annual reports. 18. The SEC currently requires foreign companies that list shares on U.S. exchanges to provide a. both complete U.S. GAAP financial statements and a reconciliation of their reported income under non-U.S. GAAP to the reported income under U.S. GAAP. b. only complete U.S. GAAP financial statements; the SEC will not accept under any circumstances only a reconciliation of an entitys reported income under non-U.S. GAAP to reported income under U.S. GAAP. c. complete U.S. GAAP financial statements or a reconciliation of their reported income under non-U.S. GAAP to reported income under U.S. GAAP. d. only a reconciliation of their reported income under non-U.S. GAAP to reported income under U.S. GAAP; the SEC will not accept under any circumstances only a complete set of U.S. GAAP financial statements. 19. Current generally accepted accounting principles require that the translation of a foreign subsidiarys accounting records should be accomplished by the a. monetary/nonmonetary method. b. current rate method. c. current/noncurrent method. d. functional currency method. 20. Foreign currency translation adjustments arising from translation of the financial statements of a foreign subsidiary are reported in a. stockholders equity of the foreign subsidiary. b. revenue or expenses of the foreign subsidiary. c. consolidated net income of the parent company and the foreign subsidiary. d. stockholders equity of the parent company. 21. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? a. Evaluate financial statements of companies within a given industry of approximately the same value. b. Determine which companies in the same industry are at approximately the same stage of development. c. Ascertain the relative potential of companies of similar size in different industries. d. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size. 22. Which of the following transactions would increase a firm's current ratio? a. Purchase of inventory on account b. Payment of accounts payable c. Collection of accounts receivable d. Purchase of temporary investments for cash 23. Millward Corporation's books disclosed the following information for the year ended December 31, 2011: Net credit sales .................................... $1,500,000 Net cash sales ...................................... 240,000 Accounts receivable at beginning of year ............ 200,000 Accounts receivable at end of year .................. 400,000 Millward's accounts receivable turnover is a. 3.75 times. b. 4.35 times. c. 5.00 times. d. 5.80 times. 24. Which of the following is an appropriate computation for return on investment? a. Net income divided by total assets b. Net income divided by sales c. Sales divided by total assets d. Sales divided by stockholders' equity 25. From the standpoint of the stockholders of a company, the ratio that measures the overall performance of a company would be calculated using which of the following? a. Average total assets and net income b. Average stockholders equity and net sales c. Average stockholders equity and net income d. Net sales and average total assets 26. Which of the following ratios does not measure liquidity? a. Current ratio b. Quick ratio c. Working capital to total assets d. Debt to equity 27. Which of the following ratios does not measure efficiency or activity of an entity? a. Accounts receivable turnover b. Age of accounts receivable c. Net cash flow to current liabilities d. Times interest earned 28. Which of the following ratios does not measure liquidity? a. Net cash flow to current liabilities b. Working capital to total assets c. Current ratio d. Quick ratio 29. The book value per share of common stock measures a. liquidity. b. profitability. c. equity position and coverage. d. efficiency. 30. Which of the following is true regarding the debt to equity ratio? a. The debt to equity ratio is a stringent measure of liquidity. b. The debt to equity ratio measures the productivity and desirability of the equity investment. c. The debt to equity ratio measures managements ability to productively employ all its resources. d. The debt to equity ratio measures the capital structure of the entity. Short Essay I Ideally, managers should make accounting changes only as a result of new experience or information or due to changes in economic conditions that demand methods of accounting that more accurately reflect such changing conditions. Managers should be attempting to achieve the closest match between reporting and economic reality. Identify motivations for managers to make accounting changes other than the goal of achieving congruence between reporting and economic reality. The essay should be at least three paragraphs Short Essay II Laura Anderson has just been assigned as the senior accountant on the audit of Larsen Manufacturing Company. Laura currently is planning the audit and has been considering what procedures to perform in examining the company's inventories of raw materials, work-in-process, and finished goods. She has determined that the calculation of certain ratios and other financial analysis techniques will prove useful to her in deciding how to approach the audit of the company's inventory accounts. Identify the ratios to be calculated and the factors to be considered in Laura's analysis of the company's inventory accounts. The essay should be at least three paragraphs