Deck 7: Tackling the General Ledger

Question 1

Under FASB rules, a retail store's inventory of clothing should be shown on its balance sheet at

A) Historical cost
B) Expected selling price
C) Replacement cost
D) The lower of cost or market, where "market" is replacement cost

Answer 1

D

Question 2

When the prices that a company must pay its vendors are rising, the method of accounting for inventory that normally results in the lowest ending inventory is

A) FIFO
B) LIFO
C) Average cost
D) There is no difference among the three methods.

Answer 2

B

Question 3

Under GAAP, the rules for recording contingent gains and contingent losses say that, if they are probable and can be reasonably estimated:

A) Both contingent gains and losses are recognized.
B) Contingent losses are recognized, but contingent gains are not.
C) Contingent gains are recognized, but contingent losses are not.
D) Neither contingent gains or losses may be recognized.

Answer 3

B

Question 4

The GAAP rule for recognizing loss contingencies is:

A) Loss contingencies are not recognized.
B) Loss contingencies must be recognized when the loss is at least "reasonably possible," and can be estimated.
C) Loss contingencies must be recognized as long as their likelihood is at least "slight," and the amount can be estimated.
D) Loss contingencies must be recognized as long as their likelihood is "probable," and the amount can be estimated.

Question 5

A company is trying to value certain 20-year City of Atlanta bonds it owns, which mature in 2025. It finds that on December 31, there were no sales of these particular bonds, but there were market sales of City of Atlanta 15-year bonds, which mature in 2028. The information about the 15-year bonds is an example of a:

A) Level 1 input
B) Level 2 input
C) Level 3 input
D) Level 4 input

Question 6

A company owns some installment notes that were issued by one of its customers. The customer is not a public company, and its debt is not publicly traded. The company values these notes based in part on market interest rates, and partly on its own judgment of the credit-worthiness of the supplier. The company's own judgment is an example of a:

A) Level 1 input
B) Level 2 input
C) Level 3 input
D) Level 4 input

Question 7

Under GAAP, if a company has an investment in the stock of another company, which it is holding as a long-term investment, and the value of this investment rises during the year:

A) No gain is recorded. The investment is carried at historical cost.
B) The value of the asset on the balance sheet is increased, but no gain is recorded, either in net income or in other comprehensive income.
C) A gain is recognized as part of the net income, and the value of the asset on the balance sheet is increased.
D) A gain is recognized as part of other comprehensive income, and the value of the asset on the balance sheet is increased.

Question 8

Which of the following statements about accounting for goodwill under GAAP is correct?

A) Usually, goodwill is recognized each year by profitable companies, based on estimates of the value of their reputation and customer loyalty.
B) Goodwill is typically recorded based on an appraisal report on goodwill.
C) Goodwill is recorded when a company buys another, and the value of the goodwill equals the difference between the purchase price and the value of the identifiable assets and liabilities purchased.
D) Once recorded, goodwill is never checked for impairment.

Question 9

The Charlie Corp. buys Dixon Corp., for a total purchase price of $100 million. At the time of the acquisition, Dixon's total identifiable assets had a fair value of $90 million. Their historical cost to Dixon was $80 million. Dixon's identifiable liabilities had a fair value which was the same as their historical cost of $30 million. The goodwill that should be recorded at the time of the purchase is

A) $10 million
B) $20 million
C) $40 million
D) $50 million

Question 10

The Early Corp. buys Farley Corp., for a total purchase price of $250 million. At the time of the acquisition, Farley's total identifiable assets had a fair value of $200 million. Their historical cost to Farley was $180 million. Farley's identifiable liabilities had a fair value which was the same as their historical cost of $120 million. The goodwill that should be recorded at the time of the purchase is

A) $50 million
B) $70 million
C) $170 million
D) $190 million

Question 11

Which of the following statements regarding valuations used in accounting is not correct?

A) Under GAAP, a company must choose to use historical cost accounting for all assets and liabilities.
B) Under IFRS rules, a company's financial statements will typically contain a variety of assets and liabilities using different valuation methods.
C) Even if a company's financial statements contain items valued with different information methods, financial statement readers can still find this information helpful.
D) Even if a company's financial statements contain items valued with different information methods, the financial information may still be useful for deciding on compliance with contracts, such as bonus agreements.

Question 12

Which of the following is a key characteristic of "complete markets"?

A) Perfect information
B) A market exists for every asset and liability
C) Zero transaction costs
D) The price to sell an asset is the same as the cost to buy one

Question 13

The amount that a company would receive by selling an asset in orderly markets, minus transaction costs, is called

A) Net realizable value
B) Entry price
C) Liquidation value
D) Value in use

Question 14

The term "entry price" means:

A) The price at which an asset can be sold in orderly markets
B) The amount the company would receive by selling the asset in orderly markets, less transaction costs
C) The sales value assuming the company must sell immediately
D) The price at which someone can buy the asset now.

Question 15

The term "liquidation value" means:

A) The price at which an asset can be sold in orderly markets
B) The amount the company would receive by selling the asset in orderly markets, less transaction costs
C) The sales value assuming the company must sell immediately
D) The price at which someone can buy the asset now.

Question 16

When the prices that a company must pay its vendors are rising, the method of accounting for inventory that normally results in the lowest net income is

A) FIFO
B) LIFO
C) Average cost
D) There is no difference among the three methods.

Question 17

The Liu Company started the year with 1,000 units in inventory, which cost $3 each. During January, it bought 7,000 units, which cost $4 each. During January, it sold 6,000 units, leaving it with 2,000 units at the end of the month. If it uses the weighted average method of accounting for inventory, the ending inventory value is

A) 6000
B) 7000
C) 7750
D) 8000

Question 18

Under GAAP, an asset that would be recorded at fair value would be

A) Goodwill
B) Buildings
C) Investments in marketable equity securities
D) Most inventories

Question 19

Under GAAP, an asset that would typically be recorded at amortized cost would be

A) Land
B) Cash
C) A patent purchased from another company, with a 12-year life
D) Accounts receivable

Question 20

Under GAAP, an asset that would typically be recorded at historical cost, without amortization, but less any necessary adjustment for impairment, would be

A) Goodwill
B) Buildings
C) Intangible assets with definite lives
D) Marketable equity securities

Question 21

Which of the following is a true statement about the accounting treatment of goodwill?

A) Accountants start recording the goodwill of a company as soon as the company starts, and adjust the value every year to reflect the changes in the attitudes of the company's customers.
B) Goodwill is always shown on the balance sheet at its fair value.
C) When one company acquires another, accountants find the value of goodwill by comparing the amount paid to acquire the company with the net fair value of the assets and liabilities acquired.
D) Goodwill is never reduced for impairment.

Question 22

Under GAAP, when inventory is valued at the "lower of cost or market," "market" typically means:

A) Appraised value
B) Replacement cost
C) Historical cost
D) Net realizable value

Question 23

The Nachman Company began operation on January 1 of this year. It bought 600 units of inventory at $3 each on January 3, then it bought 400 units at $4 each in December. During the year it sold 900 items. Assuming it uses the FIFO method of accounting, its ending inventory of 100 units would be measured at

A) 300
B) 340
C) 350
D) 400

Question 24

The Penman Company began operation on January 1 of this year. It bought 600 units of inventory at $3 each on January 3, then it bought 400 units at $4 each in December. During the year it sold 900 items. Assuming it uses the LIFO method of accounting, its ending inventory of 100 units would be measured at

A) 300
B) 340
C) 350
D) 400

Question 25

The Radman Company began operation on January 1 of this year. It bought 600 units of inventory at $3 each on January 3, then it bought 400 units at $4 each in December. During the year it sold 900 items. Assuming it uses the weighted average method of accounting, its ending inventory of 100 units would be measured at

A) 300
B) 340
C) 350
D) 400

Question 26

In an inflationary environment, which inventory cost flow method will produce the lowest amount of cost of goods sold and the highest net income?

A) FIFO
B) Weighted average
C) All methods will produce the same amount of cost of goods sold.
D) LIFO

Question 27

The inventory method that assumes a company sells the first items it bought before it sells ones it bought later is called:

A) Last in, first out
B) First in, first out
C) Specific identification
D) Weighted average

Question 28

For external reporting, which method of accounting for inventory is not allowed under GAAP?

A) Full costing
B) Variable costing
C) FIFO
D) Weighted average costing

Question 29

The Wang Company started the year with 300 units in inventory, which cost $2 each. During January, it bought 700 units, which cost $3 each. During January, it sold 800 units. The amount the Wang Company should show as the value of the 200 items left in its ending inventory, using the FIFO method, is

A) 400
B) 500
C) 540
D) 600

Question 30

The Lang Company started the year with 300 units in inventory, which cost $2 each. During January, it bought 700 units, which cost $3 each. During January, it sold 800 units. The amount the Lang Company should show as the value of the 200 items left in its ending inventory, using the LIFO method, is

A) 400
B) 500
C) 540
D) 600

Question 31

The Tang Company started the year with 300 units in inventory, which cost $2 each. During January, it bought 700 units, which cost $3 each. During January, it sold 800 units. The amount the Tang Company should show as the value of the 200 items left in its ending inventory, using the weighted average method, is

A) 400
B) 500
C) 540
D) 600

Question 32

The term "exit price" means:

A) The price at which an asset can be sold in orderly markets
B) The amount the company would receive by selling the asset in orderly markets, less transaction costs
C) The sales value assuming the company must sell immediately
D) The price at which someone can buy the asset now.

Question 33

The term "net realizable value" means:

A) The amount the company would receive by selling the asset in orderly markets, less transaction costs
B) The sales value assuming the company must sell immediately
C) The price at which someone can buy the asset now.
D) The price at which an asset can be sold in orderly markets

Question 34

The term "value in use" means:

A) The price at which an asset can be sold in orderly markets
B) The amount the company would receive by selling the asset in orderly markets, less transaction costs
C) The expected present value of continuing to use the asset
D) The price at which someone can buy the asset now.

Question 35

What is the major reason GAAP usually does not use liquidation values to measure assets?

A) It is not possible to determine what these values would be.
B) GAAP typically assumes companies are going concerns.
C) GAAP has a conservatism bias.
D) These would cause companies to pay too much in taxes.

Question 36

Which method of assigning values relies the least on estimates?

A) Appraised value
B) Net realizable value
C) Expected present value of future cash flows of an asset in use
D) Historical cost

Question 37

Which method of assigning values represents a measure of the market value from disposing of an asset?

A) Legally assigned values
B) Fair value of financial assets
C) Historical cost
D) Replacement cost

Question 38

Problems with using historical cost accounting include all of the following, except:

A) Historical cost facilitates "gains trading" of assets.
B) Historical cost is usually impossible to verify objectively.
C) Historical costs tend to become less relevant over time.
D) Historical cost accounting tends to overstate income in periods of inflation.

Question 39

Which of the following is not an advantage of historical cost, when compared to fair value?

A) Historical cost is always more relevant than fair value.
B) Historical cost is objective, because it was an amount actually paid.
C) Historical cost is verifiable, while fair value may require estimates.
D) Historical cost uses information the company already has, while fair value may require the company to get price information from others.

Question 40

Which of the following is an advantage of replacement cost accounting over historical cost accounting?

A) Replacement cost accounting is easier for companies to use.
B) Replacement cost accounting requires fewer estimates.
C) Replacement cost data is from a more recent data, and is more comparable across companies.
D) Replacement cost data is easier to verify.

Question 41

Which of the following is an advantage of fair value accounting for financial assets over historical cost accounting?

A) Asset values tend to be more relevant.
B) "Gains trading" to manage earnings is less likely.
C) All the assets are measured at the same date, making adding the values together mathematically meaningful.
D) All of the above.

Question 42

Which of the following is a disadvantage to using fair value to account for financial assets?

A) GAAP requires fair values to be determined at the date the assets were bought, so different assets are evaluated at different dates.
B) Fair value is never relevant information.
C) Because there are not perfect markets for some assets, fair value may require some judgmental estimates.
D) Fair value accounting ignores holding gains and losses.

Question 43

For which of the following items are the effects always shown in net income in the period they occur?

A) Changes in a company's estimates of the impact of changing life expectancy on its pension obligations.
B) Changes in the market value of a company's short-term investment in various stocks.
C) Changes in foreign currency exchange rates, for a company with foreign subsidiaries.
D) Changes in the market value of bonds that the company intends to hold until they mature.

Question 44

A company spends money researching a new idea, and believes it has come up with something that has significant future economic benefit. The valuation method that will be used for this research idea under GAAP, is

A) Nonrecognition
B) Statutory value
C) Fair value
D) Historical cost

Question 45

The valuation method that slowly reduces the stated amount of an asset over time, in a systematic fashion, is

A) Fair value
B) Replacement cost
C) Amortized cost
D) Historical cost

Question 46

Under GAAP, a company's investment in marketable equity securities is typically stated at:

A) Historical cost
B) Amortized cost
C) Replacement cost
D) Fair value

Question 47

Which of the following assets is typically accounted for at fair value?

A) Inventory
B) Marketable securities
C) Land used in the business
D) Patents owned

Question 48

Which of the following economic assets is often not recognized on a company's balance sheet?

A) The value of the company's brand name
B) The company's factory
C) Inventory manufactured by the company
D) Prepaid insurance

Question 49

Under GAAP, all assets in the balance sheet are shown at historical cost.

Question 50

One problem with GAAP is that it allows companies to change their methods of accounting for important asset and liability accounts without disclosing the change to financial statement users.

Question 51

One advantage of the "historical cost" method of accounting is that it can be readily verified.

Question 52

The historical cost of an asset tends to become less relevant as the asset is held for long periods of time.

Question 53

The term for the estimated amount that must be spent to replace an asset is net realizable value.

Question 54

During periods of inflation, historical cost typically results in understating the true economic income of companies with significant fixed assets and inventory.

Question 55

When inflation is significant, depreciation of assets recorded on a historical cost basis will be larger than it would be in today's dollars.

Question 56

In GAAP, the terms "net realizable value" and "fair value" mean the same thing.

Question 57

In GAAP, the principal difference between the "fair value" and the "net realizable value" of a financial asset is how transaction costs are treated.

Question 58

One consequence of using fair value to measure assets is that companies have to recognize "holding gains" or "holding losses" on assets they keep during the year.

Question 59

A company that uses fair value accounting for a group of assets has more opportunity than a company that uses historical cost to manage earnings by selectively selling those assets whose value has risen.

Question 60

Managing earnings by "gains trading" is easier to do when a company uses historical cost accounting than when it uses fair value to account for its assets.

Question 61

A primary disadvantage of the amortized cost method of accounting for fixed assets is that the resulting values may not reflect the possible disposal value of the asset.

Question 62

Typically, when a company owns equity securities of another company, this asset is shown on the balance sheet at replacement cost.

Question 63

Under GAAP, intangible assets that are developed internally are generally not recognized.

Question 64

If a company that uses GAAP changes its valuation method for accounting for important assets, it must disclose this change of methods.

Question 65

A key difference between the liquidation value of an asset and the exit price of the asset is that the exit price is assumed to occur in orderly markets, and the liquidation value is a price if there must be an immediate sale.

Question 66

Under IFRS, all assets in the balance sheet are shown at fair value.

Question 67

The "information perspective" on accounting says that even if company financial statements use different valuation methods for different accounts, the statements may still provide useful information to users.

Question 68

Even if company financial statements use different valuation methods for different accounts, people can still base contractual arrangements on financial statement information.

Question 69

One characteristic of a "perfect" market is zero transaction costs.

Question 70

A "perfect" market is defined as one that is totally efficient, with perfect information and zero transaction costs.

Question 71

The term for a market that is totally efficient, with perfect information and zero transaction costs, is a "complete" market.

Question 72

One characteristic of a "complete" market is perfect information.

Question 73

In a "perfect" market, entry values are the same as exit values.

Question 74

The real estate market is an example of a "perfect" market.

Question 75

The market for U.S. Treasury bonds is closer to a perfect market than the market for houses.

Question 76

The "net realizable value" of an asset is what it can be sold for, ignoring any transaction costs.

Question 77

The "exit price" of an asset is what it can be sold for, ignoring any transaction costs.

Question 78

The FASB's defines "fair value" of a financial asset as the price it would be sold at in an orderly market, with willing market participants. Transaction costs are not considered.

Question 79

Under IFRS, all assets are valued at fair value.

Question 80

Under GAAP, the same rules are used to value gain contingencies and loss contingencies.