财务会计题库 The Financial Statements

CHAPTER 1FINANCIAL ACCOUNTING ANDITS ECONOMIC CONTEXTISSUES FOR DISCUSSIONID1–1Security analysts and stockholders: These users would use financial statements to try to estimate the future earnings and cash flow potential of the company, which would be used to project a value for the company’s stock.Bank loan officers: These users would use the financial statements to determine the ability of a company to repay loans to the bank.A company’s customers and suppliers: These users would use financial statements todetermine whether to extend credit to the company (suppliers) or whether to rely upon the company to be a supplier (customers). Both suppliers and customers would also use the financial statements to monitor the company’s profit margins.Public utilities: This group would use the financial statements to determine the company’s growth rate and how that might impact upon the company’s utility needs. Also, they would evaluate the company’s ability to pay its bills.Labor unions: These groups would use the financial statements to monitor the profitability of the company to help determine the amount of pay raises and benefits that it will negotiate for from the company.A company’s managers: The company’s managers will use the financial statements to assessthe overall financial health of the company. This could impact the managers in a number of ways: raises, promotion opportunities, performance of other departments, etc.ID1–2The board of directors serves various functions for a company. One is to represent and protect the interests of the stockholders who are not on the board. Another is to provide oversight and input to management. The managers are involved in running the business on a day-to-day basis whereas the board is more focused on the bigger, long-term picture. A weak board may not ask probing questions of management but instead may take everything at face value and believe anything that management says to them. A healthy management team would want a strong board that delivers valuable input. A management team that wants a weak board of directors may be trying to hide something (management fraud).Auditors are concerned with management fraud because, if there is a problem, in many cases the auditors will be sued by the stockholders on the basis that the auditors should have detected the fraud.ID1–3The function of the audit committee is to provide a channel whereby the auditors report their findings and concerns, if any, to the board of directors. Typically there are outside members of the board that are on the audit committee so that if the auditors have concerns about management’s financial statements or activities, then the auditors have a way to speak directly to the board of directors.The auditors are in a sensitive position because the financial statements and activities that they are auditing are prepared by the same people who hire and pay the auditors. Therefore, they may be reluctant to jeopardize their relationship with the company by being too negative.ID1–4Since Pepsi’s profits increased by a greater percentage than sales increased, it must mean that expenses as a percentage of sales dropped. Pepsi was able to improve its profitability per dollar of sales.The growth in equity was larger than the growth in assets, indicating that Pepsi reduced its liabilities. The financing activities verify that Pepsi used a significant amount of cash, partially to reduce debt. In addition to the reduction in liabilities, the strong cash flow from operations was used to purchase additional assets for the company.ID1–5Creditors would impose these types of restrictions on Continental Airlines so that the creditors would be protected for their loans. These types of restrictions are fairly common and act as a trip wire to warn the creditors that business may not be going well. The cash restriction would force Continental to have enough cash to pay the interest on the debt, the minimum stockholders’ equity makes sure that there are assets to act as collateral for the loans, and the restriction of dividends insures that management doesn’t distribute cash or assets out to the stockholders and not leave assets in the company to satisfy the creditors.These restrictions act as trip wires in that as soon as a restriction is violated the creditors can call the debt and force the company to pay back the loans. What is more typical is for the loans to be restructured. This usually means higher interest rates and fees to do the restructuring. These all put the creditors in a better position to protect their loans.ID1–6Companies would usually engage in this type of behavior to try to improve their stock price. By showing higher revenues or lower expenses investors are more likely to reward the company with a higher stock price. Companies that have negative cash flow are under a lot of pressure to maintain a high stock price since selling stock is the only way to fund the business. This type of incentive can lead to questionable behavior.The ethical implications are significant because if investors lose faith in the financial statements that are reported this would severely impact the stock market. A strong driver to a robust economy is access to capital (stock markets). If this source is reduced because investors don’t believe the numbers that are reported, a very bad impact on the overall economy would result.ID1–7This is the normal statement that an auditor would make about a company whose books it had audited and found no significant problems. This would be part of what is called a “non-qualified opinion”. If there was a particular item that the auditors did not agree with they would issue a “qualified opinion” – they would agree with everything except the qualified item that would be identified.“In our opinion”, it is their opinion and not a fact, “fairly, in all material respects”, means that the auditors can not say that every single number is exactly accurate to the penny but that the numbers are generally about right. This reflects the concept of materiality. The auditors believe that all material items have been presented accurately. “in conformity with generally accepted accounting principles”, this means that the financial statements have been compiled in a way that meets all of the accounting principles that are called GAAP.ID1–8Corporate governance describes the relationship among the stakeholders of a company, mainly : the shareholders, the Board of Directors, management and the company’s auditors.Corporate governance mechanisms encourage management and the Board of Directors to act in the best interest of the shareholders and to provide the shareholders with accurate and timely financial information. The Sarbanes-Oxley Act was passed to upgrade the financial transparency of corporate operations, requiring increased financial disclosures and management responsibilities for the intergrity of the financial statements. Improved information provided to shareholders and other providers of capital will strenghten the confidence in the financial system, ultimately benefitting both providers and users of capital.ID1–9Management is charged with the responsibility to benefit the shareholders’ investment in the company. Choosing investments that will boost the short-term results of the company in lieu of long-term gains does not meet this requirement. While satisfying the needs of Wall Street analysts for short-term results, a management decision to forego larger long-term returns violates the relationship between the owners of the company and the management of the company. Many observers feel that short-term profit pressures from analysts have caused management to ignore its responsibility to work for the long-term benefit of the shareholder.ID1–10While the NYSE is reacting to potential rules changes based on marketing considerations, the SEC is reacting based on a desire to improve the quality of financial information that companies disclose. The SEC has a very strong argument in that the US equity markets are the largest and most liquid markets in the world. All other countries would love to have a financial market like the ones that exist in the US.One of the possible reasons that other countries don’t want to adopt the same accounting rules as exist in the US is that their companies may not compare well with US companies that have been operating under the stricter rules. To lower the accounting standards may have the impact of influencing the US capital markets to look more like capital markets in other countries, which would not be good for the US economy.ID1–11Many experts agree that one of the driving forces recently in economic growth has been the globalization of the economy, with countries across the world doing more and more business with each other. This globalization is threatened when the companies cannot agree on a uniform set of guidelines covering a business practice as important as financial reporting. The flow of capital is dependent on transparent and accurate financial information. If countries cannot agree on accounting standards, the ability of those companies to do business in each other’s markets, and the ability of capital to move from one country to another, will be limited.ID1–12Management accounting is the accounting system that generates information that is used exclusively by the managers of the company. Financial accounting refers to the financial statements that are prepared and distributed outside of the company. So in many cases management accounting information is the operational information used by the managers of the company. This can be very proprietary to the company and so is not made public.Management accounting numbers are not subject to audit and therefore are prepared in whatever form is helpful to the manager.Financial accounting information is audited and therefore has to follow GAAP. Its primary purpose is to be used by people outside of the company.ID1-13a. Home Depot is a large retailing company, focusing on hardware sales to consumers andcontractors. It is a retailer because it does not manufacture the goods that it sells. It buys products from vendors and offers those products for sale in its stores.b. The firm of KPMG audits the financial statements of Home Depot. The audit report consists of4 paragraphs. The first paragraph states what years and financial statements were auditedand therefore being commented upon by this audit report. The second paragraph explains what an audit is intended to do and how the company has gone about doing this audit. The third paragraph states the auditors’ opinion regarding the financial statements that have been audited. The final paragraph indicates a change in accounting methods by the company.c. Net income in 2003 was $4,304,000,000, for 2002 net income was $3,664,000,000 and for2001 net income was $3,044,000,000.d. 2003 2002Current liabilities $9,554 27.7% $8,035 26.8%Long-term liabilities 2,476 7.2% 2,174 7.2%Total assets $34,437 $30,011From 2002 to 2003 Home Depot increased its current liabilities by $1.5 billion and increased its long-term liabilities by $300 million. As a percentage of total assets, however, long-term liabilities remained constant. The ratio of current liabilities to total assets increased by nearly a percentage point. This shows that the increase in total assets (over $4 billion) was generated by the increase in current liabilities and net income.e. Cash from operating activities was $6,545,000,000 in 2003, in 2002 it was $4,802,000,000 andin 2001 was $5,963,000,000.f. Home Depot is considered to be one of the best-managed companies in the US. The companyis extremely profitable (see c above), growing and well-capitalized. This financial condition is reflected in the company’s cash balance of over $2.8 billion and shareholders’ equity of over $22 billion.。

1.GeneralHyComm Wireless Limited (“the Company”) was incorporated in Bermuda on 30 July 1997 as an exempted company with limited liability under the Companies Act 1981 of Bermuda (as amended). The shares of the Company are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).The Company is an investment holding company. The activities of its principal subsidiaries are set out in note 36.2.Basis of Preparation of Financial StatementsIn preparing the financial statements, the directors have given careful consideration to the future liquidity of the Group. The Group incurred a loss of approximately HK$80 million for the year ended 31 March 2004 and had net current liabilities of approximately HK$27 million at that date.The directors consider that the Group will be able to meet in full its financial obligations as they fall due for the foreseeable future because the Group is currently in the process of disposing certain properties and arranging additional banking facilities in order to provide additional working capital for the Group.Accordingly, the financial statements have been prepared on a going concern basis.1.362.80,000,00027,000,0003.Adoption of Revised Statement of StandardAccounting PracticeIn the current year, the Group has adopted the following revised Statement of Standard Accounting Practice (“SSAP”) issued by the Hong Kong Society of Accountants:SSAP 2.112 (Revised)Income TaxesIn accordance with the SSAP 2.112 (Revised), deferred tax liabilities are provided in full, using the liability method, on all temporary differences between the carrying amount of assets and liabilities in the balance sheet and their tax bases used in the computation of taxable profits, while deferred tax assets are recognized to the extent that it is probable that the future taxable profits will be available against which the deductible temporary differences and unused tax losses can be utilized.The adoption of the revised SSAP 2.112 represents a change in accounting policy, which has been applied retrospectively, and the comparative figures have been restated accordingly. In adjusting prior year figures, the opening accumulated losses as at 1 April 2003 have been increased by HK$588,000 (2002: HK$160,000) which represents the unprovided net deferred tax liabilities of the Group in prior years. In addition, this change in accounting policy has resulted in an increase of HK$560,000 (2003: HK$428,000) in the Group’s net loss for the year.3.:2.1122.1122.112588,000160,000560,000428,0004.Significant Accounting PoliciesThe financial statements have been prepared under the historical cost convention as modified for the revaluation of investment properties, leasehold land and buildings and investments in securities. The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong. The significant accounting policies adopted by the Group are set out below:(a)Basis of consolidationThe consolidated financial statements of the Group includethe financial statements of the Company and its subsidiariesmade up to 31 March each year.A subsidiary is a company whose financial and operatingpolicies are under the Company’s control, directly orindirectly, so as to obtain benefits from its activities.The results of subsidiaries acquired or disposed of duringthe year are consolidated from the effective dates ofacquisition or up to their effective dates of disposal.All significant inter-company transactions and balanceshave been eliminated on consolidation.In the Company’s financial statements, investments insubsidiaries are carried at cost less any accumulatedimpairment losses. The results of the subsidiaries areincluded in the income statement to the extent of dividendsreceived and receivable.4.(a)4.Significant Accounting Policies (Continued)(b)AssociatesAn associate is a company, not being a subsidiary nor ajoint venture, in which an equity interest is held, or thelong-term and significant influence is exercised in itsmanagement.The consolidated income statement includes the Group’sshare of the current year’s results of the associates, and theconsolidated balance sheet includes the Group’s share ofthe net assets or liabilities of the associates and goodwill/negative goodwill (net of accumulated amortisation andaccumulated impairment losses) arising on acquisition.In the Company’s balance sheet, the investments inassociates are stated at cost less provision for impairmentlosses. The results of associates are accounted for by theCompany on the basis of dividends received andreceivable.(c)Revenue recognitionSales of goods are recognised when goods are deliveredand title has passed.Rental income, including rentals invoiced in advance fromproperties let under operating leases, is recognised on astraight line basis over the term of the relevant lease.Interest income is accrued on a time basis by reference tothe principal outstanding and at the interest rate applicable.Property management and other fees are recognised whenservices are rendered.Service fee income is recognised as revenue when the inter-operator short message services are rendered.4.(b)(c)4.Significant Accounting Policies (Continued)(d)Investment propertiesInvestment properties are completed properties which areheld for their investment potential, any rental income beingnegotiated at arm’s length.Investment properties are stated at their open market valuebased on independent professional valuations at thebalance sheet date. Any surplus or deficit arising onrevaluation of investment properties is credited or chargedto the investment property revaluation reserve unless thebalance of the reserve is insufficient to cover a deficit, inwhich case the excess of the deficit over the balance ofthe investment property revaluation reserve is charged tothe income statement. Where a deficit has previously beencharged to the income statement and a revaluation surplussubsequently arises, this surplus is credited to the incomestatement to the extent of the deficit previously charged.On subsequent disposal of an investment property, thebalance on the investment property revaluation reserveattributable to that property is included in the determinationof the profit and loss on disposal.No depreciation and amortisation is provided in respectof investment properties which are held under leases withunexpired terms, including the renewable period, of morethan twenty years.4.(d)4.Significant Accounting Policies (Continued)(e)Property, plant and equipmentProperty, plant and equipment, other than leasehold landand buildings, are stated at cost less depreciation,amortisation and accumulated impairment losses.The gain or loss arising from the disposal or retirement ofan asset is determined as the difference between the saleproceeds and the carrying amount of the asset and isrecognised in the income statement.Leasehold land and buildings are stated in the balancesheet at their revalued amount, being the fair value on thebasis of their existing use at the date of revaluation lessany subsequent accumulated depreciation andamortisation. Revaluations are performed with sufficientregularity such that the carrying amount does not differmaterially from that which would be determined using fairvalues at the balance sheet date.Any surplus arising on revaluation of leasehold land andbuildings is credited to the revaluation reserve, except tothe extent that it reverses a revaluation deficit of the sameasset previously recognised as an expense, in which casethis surplus is credited to the income statement to the extentof the deficit previously charged. A decrease in net carryingamount arising on revaluation of an asset is charged to theincome statement to the extent that it exceeds the balance,if any, on the revaluation reserve relating to a previousrevaluation of that asset. On the subsequent sale orretirement of a revalued asset, the attributable revaluationsurplus is transferred to retained profits.4.(e)4.Significant Accounting Policies (Continued)(e)Property, plant and equipment (Continued)Depreciation and amortisation is provided to write off thecost or valuation of property, plant and equipment overtheir estimated useful lives, using the straight line method,at the following rates per annum:Leasehold land Over the lease termsBuildings2%Furniture, fixtures and equipment20-30%Motor vehicles20-30%(f)Properties under developmentLand and buildings in the course of development for sale,rental or administrative purposes or for purposes not yetdetermined are carried at cost less any provision forimpairment loss considered necessary by the directors. Costincludes land cost, development cost, borrowing costscapitalized and other direct costs attributable to suchproperties. Depreciation and amortisation of these assets,on the same basis as other property assets, commenceswhen the assets are ready for their intended use.Properties under development which are due forcompletion more than one year from the balance sheetdate are shown as non-current assets.Properties under development which are due forcompletion within one year from the balance sheet dateand are intended to be held for long term for theirinvestment potential are shown as non-current assets.4.(e)2%20-30%20-30%(f)4.Significant Accounting Policies (Continued)(f)Properties under development (Continued)Properties under development which are due forcompletion within one year from the balance sheet dateand are intended to be held for sale will be treated asproperties under development for sale and are shown ascurrent assets.(g)Cash and cash equivalentsCash and cash equivalents comprise cash at bank and onhand, demand deposits with banks and other financialinstitutions, and short-term, highly liquid investments thatare readily convertible into known amounts of cash andwhich are subject to an insignificant risk of changes invalue, having been within three months of maturity atacquisition. Bank overdrafts that are repayable on demandand form an integral part of the group’s cash managementare also included as a component of cash and cashequivalents for the purpose of the cash flow statement.(h)Capitalisation of borrowing costsBorrowing costs directly attributable to the acquisition,construction or production of qualifying assets, which areassets that necessarily take a substantial period of time toget ready for their intended use or sale, are capitalized aspart of the costs of those assets. Capitalisation of suchborrowing costs ceases when the assets are substantiallyready for their intended use or sale. Investment incomeearned on the temporary investment of specific borrowingspending their expenditure on qualifying assets is deductedfrom the borrowing costs capitalized.All other borrowing costs are recognised as an expense inthe period in which they are incurred.4.(f)(g)(h)4.Significant Accounting Policies (Continued)(i)Investments in securitiesInvestments in securities are recognised on a trade-datebasis and are initially measured at cost.Investments other than held-to-maturity debt securities areclassified as investment securities and other investments.Investment securities, which are securities held for anidentified long-term strategic purpose, are measured atsubsequent reporting dates at cost, as reduced by anyimpairment loss that is other than temporary.Other investments are measured at fair value, withunrealised gains and losses included in net profit or lossfor the period.(j)GoodwillGoodwill arising on consolidation represents the excessof the cost of acquisition over the Group’s interest in thefair value of the identifiable assets and liabilities of asubsidiary, associate or jointly controlled entity at the dateof acquisition.Goodwill arising on acquisitions prior to 1 April 2001continues to be held in reserves, and will be charged tothe income statement at the time of disposal of the relevantsubsidiary, associate or jointly controlled entity, or at suchtime as the goodwill is determined to be impaired.4.(i)(j)4.Significant Accounting Policies (Continued)(j)Goodwill (Continued)Goodwill arising on acquisitions after 1 April 2001 iscapitalised and amortised on a straight line basis over itsuseful economic life. Goodwill arising on the acquisitionof an associate or a jointly controlled entity is includedwithin the carrying amount of the associate or jointlycontrolled entity. Goodwill arising on the acquisition ofsubsidiaries is presented separately in the balance sheet.On disposal of a subsidiary, an associate or jointlycontrolled entity, the attributable amount of unamortisedgoodwill/goodwill previously eliminated against reservesis included in the determination of the profit or loss ondisposal.(k)Negative goodwillNegative goodwill represents the excess of the Group’sinterest in the fair value of the identifiable assets andliabilities of a subsidiary, associate or jointly controlledentity at the date of acquisition over the cost of acquisition.Negative goodwill arising on acquisitions prior to 1 April2001 continues to be held in reserves and will be creditedto income at the time of disposal of the relevant subsidiary,associate or jointly controlled entity.Negative goodwill arising on acquisitions after 1 April 2001is presented as a deduction from assets and will be releasedto income based on an analysis of the circumstances fromwhich the balance resulted.4.(j)(k)4.Significant Accounting Policies (Continued)(k)Negative goodwill (Continued)To the extent that the negative goodwill is attributable tolosses or expenses anticipated at the date of acquisition, itis released to income in the period in which those lossesor expenses arise. The remaining negative goodwill isrecognised as income on a straight line basis over theremaining average useful life of the identifiable acquireddepreciable assets. To the extent that such negativegoodwill exceeds the aggregate fair value of the acquiredidentifiable non-monetary assets, it is recognised in incomeimmediately.Negative goodwill arising on acquisitions of an associateor a jointly controlled entity is deducted from the carryingvalue of that associate or jointly controlled entity. Negativegoodwill arising on the acquisition of subsidiaries ispresented separately in the balance sheet as a deductionfrom assets.(l)InventoriesInventories represent trading merchandise and are statedat the lower of cost and net realisable value. Cost iscalculated using the first-in, first-out method. Net realisablevalue represents the estimated selling price in the ordinarycourse of business less the estimated costs necessary tomake the sale.4.(k)(l)4.Significant Accounting Policies (Continued)(m)ImpairmentAt each balance sheet date, the Group reviews the carryingamounts of its tangible and intangible assets to determinewhether there is any indication that these assets havesuffered an impairment loss. If the recoverable amount ofan asset is estimated to be less than its carrying amount,the carrying amount of the asset is reduced to itsrecoverable amount. Impairment losses are recognised asan expense immediately, unless the relevant asset is carriedat a revalued amount under another SSAP, in which casethe impairment loss is treated as revaluation decrease underthat SSAP.Where an impairment loss subsequently reverses, thecarrying amount of the asset is increased to the revisedestimate of its recoverable amount, but so that the increasedcarrying amount does not exceed the carrying amount thatwould have been determined had no impairment loss beenrecognised for the asset in prior years. A reversal of animpairment loss is recognised as income immediately,unless the relevant asset is carried at a revalued amountunder another SSAP, in which case the reversal of theimpairment loss is treated as a revaluation increase.(n)TaxationThe charge for taxation is based on the results for the yearafter adjusting for items which are non-assessable ordisallowed. Certain items of income and expense arerecognised for tax purposes in a different accounting periodfrom that in which they are recognised in the financialstatements. The tax effect of the resulting timing differences,computed under the liability method, is recognised asdeferred taxation in the financial statements to the extentthat it is probable that a liability or asset will crystallise inthe foreseeable future.4.(m)(n)4.Significant Accounting Policies (Continued)(o)Foreign currenciesTransactions in currencies other than Hong Kong dollarsare translated into Hong Kong dollars at the rates rulingon the dates of the transactions. Monetary assets andliabilities denominated in currencies other than Hong Kongdollars are translated into Hong Kong dollars at the ratesruling on the balance sheet date. Gains and losses arisingon exchange are dealt with in the income statement.(p)Operating leasesLeases where substantially all the rewards and risks ofownership of assets remain with the lessor are accountedfor as operating leases. Where the Group is the lessor, assetsleased by the Group under operating leases are includedin non-current assets and rental receivable under theoperating leases are credited to the income statement onthe straight line basis over the lease terms. Where the Groupis the lessee, rentals payable under the operating leasesare charged to the income statement on the straight linebasis over the lease terms.4.(o)(p)17.Investments in Securities (Continued)The trading of the shares in Codebank Limited (“Codebank”), a company with its shares listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange on 21 December 2001, have been suspended since 14 May 2002. On 28 May 2002, the previous directors of Codebank informed its shareholders that certain recent events took place in Codebank were being investigated by them and since then trading of the shares remains suspended. Accordingly, the directors of the Company determined that the investments in Codebank were fully impaired as at 31 March 2002.The amount stated in the investments in securities represents the carrying value of the Group’s investment in Inno-Tech Holdings Limited (“Inno-Tech”). The shares of Inno-Tech was listed on GEM on 12 August 2002 and it is the Group’s plan to hold this investment on a long term basis.17.24.Share OptionsThe Company’s share option scheme (the “old scheme”) was adopted on 15 September 1997 for the primary purpose of providing incentives to the employees of the Group. Pursuant to a resolution passed at a special general meeting of the shareholders held on 15 July 2002, the Company terminated the old scheme and adopted the new share option scheme.There were no outstanding options granted under the old and the new schemes at the beginning and at the end of the year. In addition, there were no options granted to, or exercised by, any eligible employees during the year.24.25.Share Premium and Reserves (Continued)Under the Companies Act 1981 of Bermuda (as amended), contributed surplus is also available for distribution to shareholders. However, a company cannot declare or pay a dividend, or make a distribution out of contributed surplus, if:(a)the company is, or would after the payment be, unable topay its liabilities as they become due; or(b)the realisable value of the company’s assets would therebybe less than the aggregate of its liabilities and its issuedshare capital and share premium accounts.In the opinion of the directors, as at 31 March 2003 and 31 March 2004, the Company did not have any reserve available for distribution to shareholders.25.(a)(b)30.Retirement Benefit SchemeWith effect from 1 December 2000, the Group joined a Mandatory Provident Fund Scheme (“MPF Scheme”) for all employees in Hong Kong. The MPF Scheme is registered with the Mandatory Provident Fund Scheme Authority under the Mandatory Provident Fund Schemes Ordinance. The assets of the MPF Scheme are held separately from those of the Group in funds under the control of independent trustees.Under the rules of the MPF Scheme, the employer and its employees are each required to make contributions to the scheme at rates specified in the rules. The only obligation of the Group with respect of MPF scheme is to make the required contributions under the scheme. No forfeited contribution is available to reduce the contribution payable in the future years.The retirement benefit scheme contribution arising from the MPF Scheme charged to the consolidated income statement represent contributions payable to the funds by the Group at rates specified in the rules of the MPF Scheme.During the year, the retirement benefit schemes contribution, net of forfeited contributions utilised of approximately HK$Nil (2003: HK$Nil), amounted to approximately HK$586,450 (2003: HK$124,450).At the balance sheet date, the Group had no significant 30.586,450124,450At 31 March 2004, the Company had outstanding unlimited guarantees and a corporate guarantee given in favour of banks amounting to approximately HK$120,000, 000 (2003: HK$126,000,000) to secure general banking facilities granted to a subsidiary. The total amount of facilities utilised by the subsidiary as at 31 March 2004 amounted to approximately HK$113,881,000 (2003: HK$107,750,000).33.Pledge of AssetsTHE GROUP(a)At 31 March 2004, the Group’s borrowings were secured by the following:(i)first legal charges over the investment properties ofHK$126,500,000 (2003: HK$111,700,000);(ii)the interest in share capital of a subsidiary;(iii)assignment of rental income generated from certain investment properties;(iv)floating charges on all the existing and future assets undertakings of a subsidiary;(v)assignments of the right, title, interest and benefits in and under all the existing and future building contracts in respect of properties under development;(vi)the benefit under all insurance policies of properties under development;(vii)assignment of sales proceeds from sales of investment properties; and(viii)subordination of shareholders’ loans of a subsidiary 33.(a)(i)126,500,000111,700,000(ii)(iii)(iv)(v)(vi)(vii)(viii)(b)11,000,00014,397,0008,000,00010,000,000。

Financial Accounting, 7eHarrison/HorngrenTest Item FileChapter 1: The Financial Statements1.1-1 Bookkeeping is a type of accounting used primarily by proprietorships.Answer: False LO: 1-1 Diff: 2 EOC: QC 11.1-2 The three forms of business organizations are proprietorships, partnerships, and for-profit organizations.Answer: False LO: 1-1 Diff: 1 EOC: E1-131.1-3 To convince an investor to invest money in a particular company, relevant and reliable accounting information is required.Answer: True LO: 1-1 Diff: 1 EOC: E1-141.1-4 Limited Liability Companies (LLCs) have members instead of stockholders.Answer: True LO: 1-1 Diff: 1 EOC: E1-131.1-5 All business owners are personally liable for the debts of their businesses.Answer: False LO: 1-1 Diff: 1 EOC: E1-131.1-6 A proprietorship is a distinct and separate entity from the proprietor, from both an accounting and a legal viewpoint.Answer: False LO: 1-1 Diff: 2 EOC: E1-131.1-7 The two types of accounting are:A. profit and nonprofit.B. financial and managerial.C. internal and external.D. bookkeeping and decision-oriented.Answer: B LO: 1-1 Diff: 2 EOC: E1-13 1.1-8According to the author, potential investors need information that is:A. relevant and reliable.B. fair and future-oriented.C. accurate and truthful.D. audited and complete.Answer: A LO: 1-1 Diff: 2 EOC: E1-141.1-9 Who ultimately controls a corporation?A. Board of DirectorsB. The Chief Executive Officer (CEO)C. The stockholdersD. The PresidentAnswer: C LO: 1-1 Diff: 2 EOC: E1-131.1-10 Financial statements are:A. standard documents issued by outside consultants who are hired toanalyze key operations of the business in financial terms.B. standard documents that tell us how well a business is performingand where it stands in financial terms.C. reports created by management that states it is responsible forthe acts of the corporation.D. reports issued by outside consultants who are hired to analyzekey operations of the business.Answer: B LO: 1-1 Diff: 1 EOC: E1-261.1-11 For which form of business ownership are the owners of a business legally distinct from the business?A. CorporationB. PartnershipC. ProprietorshipD. All of the aboveAnswer: A LO: 1-1 Diff: 1 EOC: E1-13 1.1-12All of the following are forms of business organizations EXCEPT:A. proprietorship.B. limited partnership.C. limited proprietorship.D. limited liability company.Answer: C LO: 1-1 Diff: 1 EOC: E1-131.1-13 The largest organization of professional accountants in the United States is the:A. Financial Accounting Standards Board.B. Securities and Exchange Commission.C. American Institute of Certified Public Accountants.D. Auditing Standards Board.Answer: C LO: 1-1 Diff: 2 EOC: P1-53B1.2-1 Generally accepted accounting principles, or GAAP, are the rules and procedures established by the Financial Accounting Standards Board, or the FASB.Answer: True LO: 1-2 Diff: 1 EOC: QC 1 1.2-2The entity concept is the most basic accounting concept.Answer: True LO: 1-2 Diff: 1 EOC: S1-3 1.2-3The stable monetary unit concept means that the type of currency usedfor the financial statements is NOT expected to change.Answer: False LO: 1-2 Diff: 2 EOC: E1-14 1.2-4Since cost is a reliable measure to use in financial accounting, theobjectivity principle states that assets and services should be recorded at their actual cost.Answer: False LO: 1-2 Diff: 2 EOC: E1-14 1.2-5The Financial Accounting Standards Board is responsible for establishing:A. the code of professional conduct for accountants.B. the Securities and Exchange Commission.C. generally accepted accounting principles.D. the American Institute of Certified Public Accountants.Answer: C LO: 1-2 Diff: 2 EOC: QC 11.2-6 The acronym GAAP stands for:A. generally acceptable authorized pronouncements.B. government authorized accountant principles.C. generally accepted accounting principles.D. government audited accounting pronouncements.Answer: C LO: 1-2 Diff: 2 EOC: E1-271.2-7 All of the following are characteristics of useful accounting information EXCEPT:A. informative.B. relevant.C. consistent.D. reliable.Answer: A LO: 1-2 Diff: 2 EOC: E1-141.2-8 The objectivity principle of accounting:A. holds that the entity will remain in operation for theforeseeable future.B. enables accountants to ignore the effect of inflation in the accounting records.C. maintains that each organization or section of an organizationstands apart from other organizations and individuals.D. ensures that accounting records and statements are based on themost reliable data available.Answer: D LO: 1-2 Diff: 2 EOC: E1-14 1.2-9The stable-monetary-unit concept of accounting:A. ensures that accounting records and statements are based on themost reliable data available.B. holds that the entity will remain in operation for the foreseeable future.c.maintains that each organization or section of an organizationstands apart from other organizations and individuals.d.enables accountants to ignore the effect of inflation in theaccounting records.Answer: D LO: 1-2 Diff: 2 EOC: E1-141.2-10 The going-concern concept of accounting:A. enables accountants to ignore the effect of inflation in theaccounting records.B. holds that the entity will remain in operation for the foreseeable future.c.maintains that each organization or section of an organizationstands apart from other organizations and individuals.d.ensures that accounting records and statements are based on themost reliable data available.Answer: B LO: 1-2 Diff: 2 EOC: P1-43A1.2-11 The principle which states that assets acquired by the business should be recorded at their actual price is the:A. cost principle.B. objectivity principle.C. reliability principle.D. stable dollar principle.Answer: A LO: 1-2 Diff: 1 EOC: Q1-301.2-12 The reliability principle is also called the:A. relevance concept.B. truthfulness concept.C. objectivity principle.D. full and fair principle.Answer: C LO: 1-2 Diff: 2 EOC: E1-14 1.2-13Which of the following statements is FALSE?A. Reliable data may be supported by objective evidence.B. The informed opinion of owners is an important source ofobjective evidence.C. An independent appraisal, conducted by a licensed professional,is usually considered reliable.D. Reliable data are verifiable.Answer: B LO: 1-2 Diff: 2 EOC: E1-141.2-14 The relevant measure of the value of the assets of a company that is going out of business is the:A. book value.B. current market value.C. historical cost.D. recorded value.Answer: B LO: 1-2 Diff: 2 EOC: P1-43A1.2-15 The CEO of a business owns a residence in Flagstaff. The company the CEO works for owns a residence in Chandler used for strategic planning meetings by its executives. Which of these properties is considered an asset(s) of the business?A. The Flagstaff residence onlyB. The Chandler residence onlyC. Both the Flagstaff and Chandler residencesD. Neither the Flagstaff nor Chandler residencesAnswer: B LO: 1-2 Diff: 2 EOC: S1-31.2-16 An Oklahoma City business paid $15,000 cash for equipment used in the business. At the time of p urchase, the equipment had a list price of $20,000. When the balance sheet was prepared, the value of the equipment later rose to $22,000. What is the relevant measure of the value of the equipment?A. Historical cost, $15,000B. Fair market cost, $20,000C. Current market cost, $22,000D. $15,000 on the day of purchase, $22,000 on balance sheet dateAnswer: A LO: 1-2 Diff: 2 EOC: Q1-301.3-1 The accounting equation expresses the idea that Resources - Insider claims = Outsider claims.Answer: True LO: 1-3 Diff: 3 EOC: S1-5 1.3-2 The accounting equation must always be in balance.Answer: True LO: 1-3 Diff: 1 EOC: S1-1 1.3-3 Liabilities are divided into "outsider claims" and "insider claims."Answer: False LO: 1-3 Diff: 2 EOC: S1-51.3-4 "Net assets", as stockholders’ equity is often referred to, represents the residual amount of business assets which can be claimed by the owners.Answer: True LO: 1-3 Diff: 2 EOC: QC 121.3-5 Common stock and retained earnings are the main components of paid-in capital.Answer: False LO: 1-3 Diff: 2 EOC: S1-101.3-6 Retained earnings do not represent cash that is available to a company for future operations and expansion.Answer: True LO: 1-3 Diff: 3 EOC: E1-271.3-7 Net income appears on both the income statement and the statement of retained earnings.Answer: True LO: 1-3 Diff: 2 EOC: Q1-391.3-8 The statement of cash flows is organized in terms of the organization’s operating, investing, and financing activities.Answer: True LO: 1-3 Diff: 2 EOC: E1-251.3-9 Expenses are increases in retained earnings that result from operations.Answer: False LO: 1-3 Diff: 2 EOC: S1-71.3-10 Dividend payments are NOT classified as expenses.Answer: True LO: 1-3 Diff: 2 EOC: S1-91.3-11 The calculation of ending retained earnings considers current net income or net loss and dividends.Answer: True LO: 1-3 Diff: 2 EOC: S1-9 1.3-12 The owners’ equity of proprietorships and partnerships is the same.Answer: False LO: 1-3 Diff: 2 EOC: S1-91.3-13 The accounting equation can be stated as:A. Assets + Stockholders’ Equity = LiabilitiesB. Assets - Liabilities = Stockholders’ EquityC. Assets = Liabilities - Stockholders’ EquityD. Assets - Stockholders’ Equity + Liabilities = ZeroAnswer: B LO: 1-3 Diff: 1 EOC: QC 31.3-14 Which of the following best describes a liability? Liabilities are:A. a form of paid-in capital.B. future economic benefits to which a company is entitled.C. payables of the corporation.D. economic obligations to owners to be paid at some future date bythe corporation.Answer: C LO: 1-3 Diff: 1 EOC: S1-51.3-15 The owners’ interest in the assets of a corporation is known as:A. common stock.B. stockholders’ equity.C. long-term assets.D. operating expenses.Answer: B LO: 1-3 Diff: 2 EOC: S1-51.3-16 Claims held by the stockholders of a corporation are also known as:A. retained earnings.B. paid-in capital.C. paid-in capital plus retained earnings.D. net income.Answer: C LO: 1-3 Diff: 3 EOC: S1-5 1.3-17 Payables are classified as:A. increases in earnings.B. decreases in earnings.C. liabilities.D. assets.Answer: C LO: 1-3 Diff: 1 EOC: S1-61.3-18 Receivables are classified as:A. increases in earnings.B. decreases in earnings.C. liabilities.D. assets.Answer: D LO: 1-3 Diff: 1 EOC: S1-61.3-19 The sum of "outsider claims" plus "insider claims" equals:A. net income.B. total liabilities.C. total assets.D. total stockholders’ equity.Answer: C LO: 1-3 Diff: 3 EOC: S1-51.3-20 Revenues are:A. decreases in assets resulting from delivering goods or servicesto customers.B. increases in liabilities resulting from delivering goods orservices to customers.C. increases in retained earnings resulting from delivering goods orservices to customers.D. decreases in retained earnings resulting from delivering goods orservices to customers.Answer: C LO: 1-3 Diff: 2 EOC: S1-41.3-21 How do revenues for a period relate to the beginning and ending balances in retained earnings?A. Revenues will increase the beginning balance of retained earningsfor the period.B. Revenues will increase the ending balance of retained earningsfor the period.C. Revenues less expenses will either increase or decrease thebeginning balance of retained earnings for the period.D. None of these answers are correct.Answer: C LO: 1-3 Diff: 2 EOC: S1-91.3-22 Expenses are:A. increases in liabilities resulting from purchasing assets.B. increases in assets resulting from operations.C. increases in retained earnings resulting from operations.D. decreases in retained earnings resulting from operations.Answer: D LO: 1-3 Diff: 2 EOC: S1-41.3-23 Dividends:A. are expenses.B. always affect net income.C. are distributions to stockholders of assets (usually cash)generated by net income.D. are distributions to stockholders of assets (usually cash)generated by a favorable balance in retained earnings.Answer: C LO: 1-3 Diff: 2 EOC: E1-161.3-24 A corporation’s paid-in capital consists ofA. revenues and expenses.B. assets and liabilities.C. common stock.D. net income.Answer: C LO: 1-3 Diff: 2 EOC: S1-10 1.3-25 Net income is computed as:A. revenues – expenses – dividends.B. revenues + expenses.C. revenues – expenses.D. revenues – expenses + dividends.Answer: C LO: 1-3 Diff: 2 EOC: QC 81.3-26 Which of the following must be added to beginning Retained Earnings to compute ending Retained Earnings?A. Net incomeB. ExpensesC. DividendsD. All of these answers are correct.Answer: A LO: 1-3 Diff: 2 EOC: P1-44A1.3-27 At the end of the current accounting period, account balances were as follows: Cash, $180,000; Accounts Receivable, $75,000; Common Stock, $20,000; Retained Earnings, $65,000. Liabilities for the period were:A. $ 70,000.B. $170,000.C. $190,000.D. $210,000.Answer: B LO: 1-3 Diff: 2 EOC: S1-1 1.3-28 On January 1, 2009, total assets for Liftoff Technologies were $125,000; on December 31, 2009, total assets were $145,000. On January 1, 2009, total liabilities were $110,000; on December 31, 2009, total liabilities were $115,000. What is the amount of the change and the direction of the change in Liftoff Technologi es' stockholders’ equity for 2009?A. Decrease of $15,000B. Increase of $15,000C. Increase of $30,000D. Decrease of $30,000Answer: B LO: 1-3 Diff: 2 EOC: QC 121.3-29 Revenues were $170,000, expenses were $90,000, and cash dividends were $30,000. What was the net income and the change in retained earnings for the period? income was $50,000; change in retained earnings was $50,000B. Net income was $80,000; change in retained earnings was $50,000C. Net income was $80,000; change in retained earnings was $80,000D. Net income was $250,000; change in retained earnings was $250,000Answer: B LO: 1-3 Diff: 2 EOC: E1-231.3-30 At the beginning of the period, assets were $490,000 and stockholders’ equity was $240,000. During the year, assets increased by $60,000, liabilities increased by $40,000, and stockholders’ equity increased by $20,000. Beginning liabilities must have been:A. $230,000.B. $250,000.C. $280,000.D. $300,000.Answer: B LO: 1-3 Diff: 3 EOC: S1-11.3-31 If assets increase $210,000 during a given period and liabilities increase $65,000 during the same period, stockholders’ equity must:A. increase $145,000.B. decrease $275,000.C. decrease $145,000.D. increase $275,000.Answer: A LO: 1-3 Diff: 3 EOC: P1-44A1.3-32 If liabilities increase $120,000 during a given period and stockholders’ equity decreases $25,000 during the same period, assets must:A. increase $95,000.B.decrease $95,000.C. decrease $145,000.D. increase $145,000.Answer: A LO: 1-3 Diff: 3 EOC: P1-44A1.3-33 Stockholders’ equity for Commerce-GA Corporation on 01/01/2008 and 12/31/2008 were $60,000 and $75,000, respectively. Assets on 01/01/2008 and 12/31/2008 were $115,000 and $105,000, respectively.Liabilities on 01/01/2008 were $55,000. What is the amount of liabilities on 12/31/2008?A. $40,000B. $15,000C. $30,000D. The amount is indeterminable from the given information.Answer: C LO: 1-3 Diff: 3 EOC: S1-11.4-1 Ramos, Inc. has monthly revenues of $30,000 and monthly expenses of $18,000, and the company paid $4,000 in dividends; therefore net income for the month is $8,000.Answer: False LO: 1-4 Diff: 2 EOC: S1-81.4-2 Able Co. has $500,000 in assets and $400,000 in liabilities; therefore the equity is $900,000.Answer: False LO: 1-4 Diff: 1 EOC: S1-1 1.4-3 Yummy Inc. has beginning retained earnings of $10,000, net income of $50,000, and dividends paid of $5,000; therefore the ending retained Earnings is $65,000.Answer: False LO: 1-4 Diff: 2 EOC: S1-81.4-4 Dividends appear on the:A. statement of retained earnings.B. both the statement of retained earnings and the income statement.C. income statement.D. balance sheet.Answer: A LO: 1-4 Diff: 2 EOC: S1-121.4-5 Assets appear on the:A. balance sheet.B. income statement.C. statement of retained earnings.D. both balance sheet and the statement of retained earnings.Answer: A LO: 1-4 Diff: 1 EOC: S1-121.4-6 Common stock appears on the:A. balance sheet.B. income statement.C. statement of cash flows and the statement of retained earnings.D. None of the above are correct.Answer: A LO: 1-4 Diff: 1 EOC: S1-121.4-7 A company’s gross profit for the period is reported on the:A. balance sheet.B.income statement.C. statement of cash flows.D. statement of retained earnings.Answer: B LO: 1-4 Diff: 1 EOC: S1-81.4-8 Gains and losses appear on which of the financial statements listed below?A. Balance sheetB.Income statementC. Statement of cash flowsD. Statement of retained earningsAnswer: B LO: 1-4 Diff: 1 EOC: S1-81.4-9 The ending balance in Retained Earnings appears on the:A. balance sheet only.B. balance sheet and statement of retained earnings.C. statement of retained earnings only.D. income statement and statement of cash flows.Answer: B LO: 1-4 Diff: 2 EOC: P1-49A1.4-10 Cash dividends:A. decrease revenue on the income statement.B. decrease retained earnings on the statement of retained earnings.C. increase expenses on the income statement.D. decrease operating activities on the statement of cash flows.Answer: B LO: 1-4 Diff: 2 EOC: S1-91.4-11 Which of the following financial statements shows the net increase or decrease in cash during the period?A. Balance sheet onlyB. Statement of operationsC. Statement of retained earnings and balance sheetD. Statement of cash flowsAnswer: D LO: 1-4 Diff: 1 EOC: S1-121.4-12 An investor wishing to assess a company’s financial position at the end of the period would probably examine the:A. statement of cash flows and the income statement.B. income statement only.C. balance sheet.D. statement of retained earnings.Answer: C LO: 1-4 Diff: 2 EOC: E1-261.4-13 A potential investor interested in evaluating a company’s financial performance for the current period would probably examine which of the following financial statements?A. Balance sheet onlyB. Income statement onlyC. Statement of cash flows and income statementD. Statement of retained earnings and balance sheetAnswer: B LO: 1-4 Diff: 2 EOC: E1-261.4-14 Which statement(s) summarizes the revenues and expenses of an entity?A. Balance sheet onlyB. Statement of cash flows and income statementC. Statement of retained earnings and statement of operationsD. Statement of operations onlyAnswer: D LO: 1-4 Diff: 2 EOC: S1-81.4-15 Which financial statement provides a "snapshot photo" of one moment in time?A. Balance sheet onlyB. Income statement onlyC. Statement of retained earnings and income statementD. Statement of cash flows onlyAnswer: A LO: 1-4 Diff: 2 EOC: E1-26 1.4-16The income statement:A. is not dated.B. may cover a period of time or only one day in time, like asnapshot photograph.C. covers a defined period of time.D. reports the results of operations since the inception of thebusiness.Answer: C LO: 1-4 Diff: 2 EOC: QC 51.4-17 The income statement presents a summary of the:A. cash inflows and outflows of an entity.B. assets and liabilities of an entity.C. revenues and expenses of an entity for a specific time period.D. c hanges that occurred in the stockholders’ equity of an entity.Answer: C LO: 1-4 Diff: 1 EOC: E1-191.4-18 Operating expenses appear on the income statement:A. directly after revenue.B. directly after gross profit.C. directly after cost of goods sold.D. Operating expenses do not appear on the income statement.Answer: B LO: 1-4 Diff: 2 EOC: S1-71.4-19 Cost of goods sold appears on the:A. statement of retained earnings as an addition to beginning retained earnings.B. income statement as a deduction from sales.C. balance sheet as a deduction from sales.D. income statement as a deduction from gross profit.Answer: B LO: 1-4 Diff: 2 EOC: P1-49A1.4-20A retail store sells t-shirts for $85 and purchases them for $60. The store’s co st of goods sold would be:A. $25.B. $85.C. $60.D. None of these answers are correct.Answer: C LO: 1-4 Diff: 1 EOC: P1-49A1.4-21 Net income is:A. added to assets on the balance sheet.B. deducted from beginning retained earnings on the retainedearnings statement.C. added to beginning retained earnings on the retained earningsstatement.D. deducted from ending retained earnings on the retained earningsstatement.Answer: C LO: 1-4 Diff: 2 EOC: S1-91.4-22 A net loss occurs when:A. not enough cash exists.B. total revenues exceed total expenses.C. total expenses exceed total revenues.D. total revenues and dividends exceed total expenses.Answer: C LO: 1-4 Diff: 2 EOC: P1-49A1.4-23 The balance sheet is also known as the:A. statement of profit and loss.B. operating statement.C. assets statement.D. statement of financial position.Answer: D LO: 1-4 Diff: 2 EOC: S1-10 1.4-24The balance sheet reports information about:A. revenues, expenses, and equity.B. liabilities, equity, and expenses.C. assets, revenues, and liabilities.D. assets, liabilities, and equity.Answer: D LO: 1-4 Diff: 1 EOC: S1-101.4-25 Assets are generally classified as:A. producing assets and consumable assets.B. current assets and producing assets.C. current assets and long-term assets.D. long-term assets and consumable assets.Answer: C LO: 1-4 Diff: 1 EOC: E1-201.4-26 Current assets are assets expected to be converted to cash, sold, or consumed:A. within the next 12 months or within the business’s normal operating cycle if longer than a year.B. within the next 12 months or within the business’s normaloperating cycle if less than a year.C. within the next 6 months.D. within the next 24 months.Answer: A LO: 1-4 Diff: 2 EOC: E1-191.4-27 Notes receivable due in 60 days would be classified as a:A. current liability on the balance sheet.B. current asset on the balance sheet.C. long-term asset on the balance sheet.D. long-term liability on the balance sheet.Answer: B LO: 1-4 Diff: 1 EOC: E1-19 1.4-28Equipment would appear on the:A. balance sheet with the long-term assets.B. income statement with the revenues.C. income statement with the operating expenses.D. balance sheet with the current assets.Answer: A LO: 1-4 Diff: 1 EOC: E1-201.4-29 Depreciation is normally associated with which asset on the balance sheet?A. InventoryB. Accounts receivableC. LandD. EquipmentAnswer: D LO: 1-4 Diff: 2 EOC: P1-55B1.4-30 Accounts receivable would appear on the:A. balance sheet with the current liabilities.B. balance sheet with the current assets.C. income statement with the revenues.D. retained earnings statement with the net income.Answer: B LO: 1-4 Diff: 1 EOC: E1-201.4-31 Notes payable (due in 60 days) would appear as a:A. current liability on the balance sheet.B. current asset on the balance sheet.C. long-term asset on the balance sheet.D. long-term liability on the balance sheet.Answer: A LO: 1-4 Diff: 1 EOC: P1-56B1.4-32Income taxes owed to the federal government would be classified as a(n):A. expense on the income statement.B. financing activity on the statement of cash flows.C. current asset on the balance sheet.D. current liability on the balance sheet.Answer: D LO: 1-4 Diff: 2 EOC: P1-56B1.4-33 In relation to the cash flow statement, purchases and sales of long-term assets are examples of:A. investing activities.B. accrual activities.C. financing activities.D. operating activities.Answer: A LO: 1-4 Diff: 2 EOC: S1-111.4-34 Stockholders’ equity decreases as a result of:A. owner investments.B. a net loss during the period.C. a net income during the period.D. Both A and C are correct.Answer: B LO: 1-4 Diff: 2 EOC: QC 71.4-35 When treasury stock is purchased by a company, this transaction:A. increases the amount of owners’ equity.B. decreases the amount of owners’ equity.C. decreases the amount of total liabilities.D. increases the amount of total liabilities.Answer: B LO: 1-4 Diff: 3 EOC: P1-49A1.4-36The statement of cash flows is divided into which three categories?A. Operating, investing, and financing activitiesB. Planning, executing, and evaluating activitiesC. Increasing, decreasing, and non-cash activitiesD. Developing, producing, and marketing activitiesAnswer: A LO: 1-4 Diff: 1 EOC: P1-49A1.4-37 What is the proper order for the categories of the statement of cash flows?A. Financing activities, investing activities, and operatingactivitiesB. Operating activities, investing activities, and financingactivitiesC. Operating activities, financing activities, and investingactivitiesD. Investing activities, financing activities, and operatingactivitiesAnswer: B LO: 1-4 Diff: 2 EOC: P1-49A1.4-38 Where would cash received from the sale of stock appear on the statement of cash flows?A. In the operating activity sectionB. In the non-cash financing activity sectionC. In the investing activity sectionD. In the financing activity sectionAnswer: D LO: 1-4 Diff: 2 EOC: E1-231.4-39 How would the repayment of a long-term note payable be classified in the statement of cash flows?A. As an investing activityB. As a financing activityC. As an operating activityD. As a current asset on the balance sheetAnswer: B LO: 1-4 Diff: 3 EOC: P1-49A1.4-40How would the issuance of stock for cash be classified on the statement cash flows?A. As an investing activityB. As a financing activityC. As an operating activityD. As a current asset on the balance sheetAnswer: B LO: 1-4 Diff: 3 EOC: P1-48A1.4-41 How would cash collected from customers appear on the statement of cash flows?A. As an operating activityB. As a financing activityC. As an investing activityD. Under the indirect methodAnswer: A LO: 1-4 Diff: 2 EOC: P1-48A1.4-42 Where would the payment of salaries appear on the statement of cash flows?A. With the operating activitiesB. With the current liabilitiesC. Not on statement of cash flows, but on the statement of earningswith the revenuesD. Not on statement of cash flows, but on the statement ofoperations as part of cost of goods soldAnswer: A LO: 1-4 Diff: 3 EOC: E1-191.5-1 The statement of cash flows reports on where assets came from and how these assets were used.Answer: False LO: 1-5 Diff: 2 EOC: S1-111.5-2 The statement of cash flows contains three “parts”—operating activities, investing activities, and stock activities.。

Chapter 1 A. An example of a business stakeholder is the federal government.B. A corporation is a business that is legally separate and distinct from its owners.C. Accounting is a service that provides many different users with financial information to make economic decisions.D. Small ethical lapses are harmless in and of themselves.E. Managerial accounting is primarily concerned with the recording and reporting of economic data and activities of an entity for use by owners, creditors, governmental agencies, and the public.F. The unit of measurement concept requires that economic data be recorded in a common unit of measurement.G. If a building is appraised for $90,000, offered for sale at $95,000, and the buyer pays $85,000 cash for it, the buyer would record the building at $90,000.H. The owner’s rights to the assets rank ahead of the creditors’ rights to the assets.I. Business transactions are economic events that directly or indirectly change an entity’s financial condition or results f rom operations.J. If net income for a proprietorship was $25,000, the owner withdrew $10,000 in cash and the owner invested $5,000 in cash, the capital of the owner increased by $20,000. K. The owner is only allowed to withdraw cash from the business.L. Receiving a bill or otherwise being notified that an amount is owed is amount is paid.M. The principal financial statements of a proprietorship are the income statement, statement of owner’s equity, and the balance sheet.N. An income statement is a summary of the revenues and expenses of a business as of a specific date.O. A low ratio of liabilities to owner’s equity indicates that a business is near bankruptcy. 1. Profit is the difference betweena. assets and liabilitiesb. the incoming cash and outgoing cashc. the assets purchased with cash contributed by the owner and the cash spent to operate the businessd. the assets received for goods and services and the amounts used to provide the goods and services2. Which of the items below is not a business organization form?a. entrepreneurshipb. proprietorshipc. partnershipd. corporation3. Which of the following is not a step in providing accounting information to stakeholders? a. design the accounting information systemb. prepare accounting surveysc. identify stakeholdersd. record economic data4. For accounting purposes, the business entity should be considered separate from its owners if the entity isa. a corporationb. a proprietorshipc. a partnershipd. all of the above5. Which of the following is not a business transaction?a. make a sales offerb. sell goods for cashc. receive cash for services to be rendered laterd. pay for supplies6. The Reynolds Company estimated that the value of its land had increased from $10,000 to $16,000 and therefore wrote up the land account to $16,000. Which accounting concept(s) was (were) violated?a. cost conceptb. objectivity conceptc. all of the aboved. none of the above7. Goods purchased on account for future use in the business, such as supplies, are called a. prepaid liabilities b. revenuesc. prepaid expensesd. liabilities8. All of the following are financial statement(s) of a proprietorship except thea. statement of retained ear ningsb. statement of owner’s equityc. income statementd. statement of cash flowsChapter 2 A. A chart of accounts is a listing of accounts that make up the journal.B. Drawings are an example of an expense.C. To determine the balance in an account, always subtract credits from debits.D. The double-entry accounting system records each transaction twice.E. The increase side of all accounts is the normal balance.F. The journal is the book of original entry.G. Journalizing transactions using the double-entry bookkeeping system will eliminate fraud. H. The process of transferring the data from the journal to the ledger accounts is posting. I. The post reference notation used in the journal is the page number.J. When a business receives a bill from the utility company, no entry should be made until the invoice is paid.K. A proof of the equality of debits and credits in the ledger at the end of an accounting period is called a balance sheet.L. Even when a trial balance is in balance, there may be errors in the individual accounts. M. Posting a part of a transaction to the wrong account will cause the trial balance totals to be unequal.N. Horizontal analysis is used to compare the financial statements of the same company for different periods. 1. A group of related accounts that comprise a complete unit is called aa. Journalb. liability2.3.4.5.6. c. ledger d. transaction Which statement(s) concerning cash is (are) true? a. cash will always have more debits than credits b. cash will never have a credit balance c.cash is increased by debiting d. all of the above Which of the following types of accounts have a normal credit balance? a. assets and liabilities b. liabilities and expenses c. revenues and liabilities d. capital and drawing Which of the following entries records the receipt of cash from patients on account? a. Accounts Payable, debit; Fees Earned, credit b. Accounts Receivable, debit; Fees Earned, credit c. Accounts Receivable, debit; Cash, credit d. Cash, debit; Accounts Receivable, credit If the two totals of a trial balance are not equal, it could be due to a. failure to record a transaction b. recording the same erroneous amount for both the debit and the credit parts of a transaction c. an error in determining the account balances, such as a balance being incorrectly computed d. recording the same transaction more than once Which of the following errors, each considered individually, would cause the trial balance totals to be unequal?a. a transaction was not postedb. a payment of $96 for insurance was posted as a debit of $46 to Prepaid Insurance and a credit of $46 to Cashc. a payment of $311 to a creditor was posted as a debit of $3,111 to Accounts Payable and a debit of $311 to Accounts Receivabled. cash received from customers on account was posted as a debit of $140 to Cash and a credit of $140 to Accounts PayableChapter 3 1. The accrual basis of accounting requires revenue be recorded when cash is received from customers.2. The matching concept requires expenses be recorded in the same period that the related revenue is recorded.3. Adjusting entries are made at the end of an accounting period to adjust accounts on the balance sheet.4. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded.5. The systematic allocation of land’s cost to expense is called depreciation.6. The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation account is termed the book value of the asset.7. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and owner’s equity will be overstated for the period.8. The financial statements are prepared from the unadjusted trial balance.9. Vertical analysis compares each item in a statement with another item in the same statement.The correct: 2,6,91. Which account would normally not require an adjusting entry?a. Wages Expenseb. Accounts Receivablec. Accumulated Depreciationd. Smith, Capital2. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, $15,500, and unexpired amounts per analysis of policies, $4,500?a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500b. debit Insurance Expense, $15,500; credit Prepaid Insurance, $15,500c. debit Prepaid Insurance, $11,500; credit Insurance Expense, $11,500d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,0003. Depreciation Expense and Accumulated Depreciation are classified, respectively, asa. expense, contra assetb. asset, contra liabilityc. revenue, assetd. contra asset, expense4. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n)a. deferralb. accrualc. drawingd. revenue5. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, $15,500, and unexpired amounts per analysis of policies, $4,500?a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500b. debit Insurance Expense, $15,500; credit Prepaid Insurance, $15,500c. debit Prepaid Insurance, $11,500; credit Insurance Expense, $11,500d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,0006. Depreciation Expense and Accumulated Depreciation are classified, respectively, asa. expense, contra assetb. asset, contra liabilityc. revenue, assetd. contra asset, expense7. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n)a. deferralb. accrualc. drawingd. revenueMultiple choice: d d a aChapter 41. The most important output of the accounting cycle is the financial statements.2. A net loss is shown on the work sheet in the credit columns of both the Income Statement columns and the Balance Sheet columns.3. The difference between a classified balance sheet and one that is not classified is that the classified one has subheadings.4. Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or post them to the ledger.5. The post-closing trial balance will generally have fewer accounts than the trial balance.6. Solvency is essentially the ability of an organization to pay its bills.7. Working capital is current assets plus current liabilities.ANS:T F T F T T F1. The worksheeta. is an integral part of the accounting cycleb. eliminates the need to rewrite the financial statementsc. is a working paper that is requiredd. is used to summarize account balances and adjustments for the financial statements2. Which one of the fixed asset accounts listed below will not have a related contra asset account? a. Office Equipment b. Land c. Delivery Equipment d. Building3. Which of the accounts below would be closed by making a debit to the account?a. Unearned Revenueb. Fees Earnedc. Jeff Ritter, Drawingd. Rent Expense4. Which of the following accounts ordinarily appears in the post-closing trial balance?a. Bill Smith, Drawingb. Supplies Expensec. Fees Earnedd. Unearned Rent5. A fiscal yeara. ordinarily begins on the first day of a month and ends on the last day of the following twelfth monthb. for a business is determined by the federal governmentc. always begins on January 1 and ends on December 31 of the same yeard. should end at the height of the business’s annual operating cycle6. A current ratio of 4.3 means thata. there are $4.30 in current assets available to pay each dollar of current liabilitiesb. the company cannot pay its debts as they come duec. there are $4.30 in current assets for every $4.30 in current liabilitiesd. there are $4 in current assets for every $3 in current liabilitiesANS: dbbdaaChapter 61. In a merchandise business, sales minus operating expenses equals net income.2. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.3. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available.4. Under the perpetual inventory system, when a sale is made, both the retail and cost values are recorded.5. Sales Discounts is a revenue account with a credit balance.6. Discounts taken by the buyer for early payment of an invoice are credited to Cash Discounts by the buyer.7. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.8. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $50.9. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold. 1. The primary difference between a periodic and perpetual inventory system is that aa. periodic system determines the inventory on hand only at the end of the accounting periodb. periodic system keeps a record showing the inventory on hand at all timesc. periodic system provides an easy means to determine inventory shrinkaged. periodic system records the cost of the sale on the date the sale is made2. A sales invoice included the following information: merchandise price, $4,000; transportation, $300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $600 is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid within the discount period, what is the amount of cash received by the seller? a.$3,366 b.$3,400c.$3,666d.$3,9503. The net sales to asset s ratio measures a company’sa. working capitalb. net worthc. effective use of sales to support the purchase of new assetsd. effective use of assets to generate salesThe correct: 3,4,8,9 Multiple choice: a c dChapter 74. A customer’s c heck received in settlement of an account receivable is considered cash.5. If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash shortages have exceeded cash overages for the period.6. A voucher system is an example of an internal control procedure over cash payments.7. A remittance advice is the notification accompanying the check issued to a creditor that states the specific invoice being paid.8. The amount of the "adjusted balance" appearing on the bank reconciliation as ofa given date is the amount that is shown on the balance sheet for that date.9. When the petty cash fund is replenished, the petty cash account is credited for the total of all expenditures made since the fund was last replenished.10. Cash equivalents are short -term investments that will be converted to cash within 120 days.11. The doomsday ratio is almost always less than one.ANS:T F T T T F F T1. Credit memorandums from the banka. decrease a bank custom er’s accountb. are used to show a bank service chargec. show that a company has deposited a customer’s NSF checkd. show the bank has collected a note receivable for the customer2. Journal entries based on the bank reconciliation are required in the depositor’s accounts for a. outstanding checks b. deposits in transitc. bank errorsd. book errorsANS: d dChapter 81. Receivables from company owners and officers should be disclosed separately on the balance sheet.2. Since those responsible for receivables record keeping and credit approval do not handle cash, these duties do not need to be separated to maintain good internal control.3. Of the two methods of accounting for uncollectible receivables, the allowance method provides inadvance for uncollectible receivables.4. Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a debit or a credit balance before adjusting entries are recorded at the end of the accounting period.5. At the end of a period, before the accounts are adjusted, Allowance for Doubtful Accounts has a debit balance of $2,000. If the estimate of uncollectible accounts determined by aging the receivables is $30,000, the current provision to be made for uncollectible accounts expense is $30,000.6. The due date of a 60-day note dated July 10 is September 10.7. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored.8. The discounting of a note receivable creates a contingent liability that continues in effect until the due date of the note. ANS: T F T T F F T T 1. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year (before adjustment), and uncollectible accounts expense is estimated at 3% of net sales. If net sales are $600,000, the amount of the adjusting entry to record the provision for doubtful accounts is a. $18,500 b. $17,500 c. $18,000 d. none of the above 2. On the balance sheet, the amount shown for the Allowance for Doubtful Accounts is equal to the a. Uncollectible accounts expense for the year b. total of the accounts receivables written-off during the year c. total estimated uncollectible accounts as of the end of the year d. sum of all accounts that are past due. 3. What is the type of account and normal balance of Allowance for Doubtful Accounts? a. Contra asset, credit b. Asset, debit c. Asset, credit d. Contra asset, debit 4. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer’s account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense 5. A 90-day, 12% note for $10,000, dated May 1, is received from a customer on account. Thematurity value of the note isa. $10,000b. $10,300c. $450d. $9,550ANS: c c a b bChapter 91. 2. 3. 4. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory. Unsold consigned merchandise should be included in the consignee’s inventory. Of the three widely used inventory costing methods (FIFO, LIFO, and average), the LIFO method of costing inventory is based on the assumption that costs are charged against revenues in the reverse order in which they were incurred.During inflationary periods, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet approximating the current replacement cost.When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. Generally, the lower the number of days’ sales in inventory, the better.ANS: F F F T T F F TTaking a physical count of inventorya. is not necessary when a periodic inventory system is usedb. is a detective controlc. has no internal control relevanced. is not necessary when a perpetual inventory system is usedMerchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner’s equity?a. net income is overstated, assets are overstated, owner’s equity is understatedb. net income is overstated, assets are overstated, ow ner’s equity is overstatedc. net income is understated, assets are understated, owner’s equity is understatedd. net income is understated, assets are understated, owner’s equity is overstated Inventory costing methods place primary emphasis on assumptions abouta. flow of goodsb. flow of costsc. flow of goods or costs depending on the methodd. flow of valuesIf merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income?a. average costb. LIFO 5. 6. 7. 8. 1. 2. 3. 4.c. FIFOd. weighted average 5. On the basis of the following data, what is the estimated cost of the merchandise inventory on October 31 by the retail method? Oct. 1 Merchandise Inventory $225,000 $324,500 Oct. 1-31 Purchases (net) 335,000 475,500 Oct. 1-31 Sales (net) 700,000 a. $372,000 b. $140,000 c. $100,000 d. $ 70,000 6. If the estimated rate of gross profit is 40%, what is the estimated cost of the merchandise inventory on June 30, based on the following data? June 1 Merchandise inventory $ 75,000 June 1-30 Purchases (net) 150,000 June 1-30 Sales (net) 135,000 a. $144,000 b. $140,000 c. $ 81,000 d. $ 54,500 7. Too much inventory on handa. reduces solvencyb. increases the cost to safeguard the assetsc. increases the losses due to price declinesd. all of the aboveANS: b b b b d a dChapter 10 1. The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary costs to get the asset in place and ready for use.2. Land acquired as a speculation is reported under Investments on the balance sheet.3. Standby equipment held for use in the event of a breakdown of regular equipment is reported as property, plant, and equipment on the balance sheet.4. As a company depreciates a piece of equipment, it cash flow goes up.5. All property, plant, and equipment assets are depreciated over time.6. The declining-balance method is an accelerated depreciation method.7. The cost of replacing an engine in a truck is an example of ordinary maintenance.8. The cost of new equipment is called a revenue expenditure because it will help generate revenues in the future.9. A gain can be realized when a fixed asset is discarded.10. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results.11. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is amortized over 10 years.12. The method used to calculate the depletion of a natural resource is the straight line method.13. The higher the ratio of fixed assets to long-term liabilities the greater the margin of safety.ANS: T T T F F T F F F F F F T1. Factors contributing to a decline in the usefulness of a fixed asset may be divided into the following two categoriesa. salvage and functionalb. physical and functionalc. residual and salvaged. functional and residual2. Accumulated Depreciationa. is used to show the amount of cost expiration of intangiblesb. is the same as Depreciation Expensec. is a contra asset accountd. is used to show the amount of cost expiration of natural resources3. Equipment with a cost of $80,000, an estimated residual value of $5,000, and an estimated life of 15 years was depreciated by the straight-line method for 5 years. Due to obsolescence, it was determined that the useful life should be shortened by 5 years and the residual value changed to zero. The depreciation expense for the current and future years isa. $5,500b. $11,000c. $10,000d. $5,0004. A fixed asset with a cost of $42,000 and accumulated depreciation of $38,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $5,000, the cost basis of the new asset isa. $58,000b. $58,500c. $60,000d. $61,5005. A machine with a cost of $65,000 has an estimated residual value of $5,000 and an estimated life of 4 years or 18,000 hours. What is the amount of depreciation for the second full year, using the declining-balance method at double the straight-line rate?a. $15,000b. $30,000c. $16,250d. $32,500ANS: b c b b cChapter 11 1. For a current liability to exist, the following two tests must be met. The liability must be due usually within a year and must be paid out of current assets.2. For an interest bearing note payable, the amount borrowed is equal to the face value of the note.3. The proceeds of a discounted note are equal to the face value of the note.4. Obligations that depend on past events and that are based on future transactions are contingent liabilities.5. The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense.6. Generally, all deductions made from an employee’s gross pay are required by law.7. FICA tax is a payroll tax that is paid only by employers.8. The higher the quick ratio, the more liquid a company is.ANS: T T F F F F F T1. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the fiscal year of Acme Co. ends June 30. What is the amount of interest expense recognized by Acme in the current fiscal year?a. $293.33b. $400.00c. $391.11d. $1,600.002. Proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount rate used by the bank in computing the proceeds wasa. 6.25%b. 10.00%c. 10.26%d. 9.75%3. Pilgrim Company sells merchandise with a one year warranty. In 2005, sales consisted of 1,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2005 and 70% in 2006. In the 2005 income statement, Pilgrim should show warranty expense ofa. $4,500b. $10,500c. $15,000d. $0ANS: a b cChapter 12 1. A corporation is a separate entity for accounting purposes but not for legal purposes.2. Double taxation is a disadvantage of a corporation because the same party has to pay taxes twice on the income.3. The two main sources of stockholders’ equity are investments contributed by stockholders and net income retained in the business.4. The balance in retained earnings should be interpreted as representing surplus cash left over for dividends.5. Preferred stock with a preferential right to dividends in arrears is referred to asparticipating preferred.6. If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 39,000.7. When a corporation issues stock at a premium, it reports the premium as an other income item on the income statement.8. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported in the income statement.9. Since a stock split changes information of a business, this transaction needs to be recorded.10. If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $14,000.11. The declaration and issuance of a stock dividend does not affect the total amount of a corporation’s assets, liabilities, or stockholders’ equity.12. The dividend yield indicates the rate of return to stockholders in terms of cash dividend distributions.ANS: F F T F F F F F F F T T1. The outstanding stock is composed of 10,000 shares of $100 par, cumulative preferred $8 stock, and 50,000 shares of no-par common stock. Preferred dividends have been paid every year except for the preceding year and the current year. If $380,000 is to be distributed as a dividend for the current year, what total amount will be distributed to the common stockholders? a. $380,000b. $220,000c. $80,000d. $160,0002. A corporation issues 2,000 shares of common stock for $ 32,000. The stock has a stated value of $10 per share. The journal entry to record the stock issuance would include a credit to Common Stock fora. $20,000b. $32,000c. $12,000d. $2,0003. When common stock is issued in exchange for a noncash asset, the transaction should be recorded ata. the par value of the stock issuedb. the fair market value of the stockc. the fair market value of the asset acquiredd. the fair market value of the asset acquired or the fair market value of the stock, whichever canbe determined more objectively.4. Treasury stock that had been purchased for $5,400 last month was reissued this month for $7,500. The journal entry to record the reissuance would include a credit。