Question 1

According to the realization principle, revenue from a sale of a firm's products are recognized:
A) when the products are shipped to the buyer.
B) when the buyer orders the goods.
C) when cash is realized from the sale of the products.
D) at the time of the sale whether or not cash is actually received.

Accepted Answer

The realization principle states that revenue should be recognized at the time of sale, regardless of when cash is actually received. This means that revenue is recognized when a product or service is provided to a customer and the customer is obligated to pay for it, even if payment is received at a later date. Therefore, option D is correct. Options A, B, and C are incorrect as they do not fully reflect the realization principle.

Question 2

Annual reports are prepared by a firm's management to:
A) communicate to its shareholders the firm's failures in the previous year.
B) provide a good overview of the firm's financial and operating performance.
C) highlight the performance of its chief competitors.
D) provide a forecast of the economy in the coming years.

Accepted Answer

Annual reports are primarily prepared by a firm's management to provide a comprehensive overview of the firm's financial and operating performance for the previous year. The report includes financial statements, a discussion of the management's analysis of the company's performance, and highlights of achievements and challenges, among others. The report is designed to provide shareholders and other stakeholders with valuable information to make informed decisions about their investment in the company. The other options, such as communicating failures, highlighting competitors or forecasting the economy, are not the primary objectives of an annual report.

Question 3

The assumption of arm's-length transaction states that:
A) both parties to a transaction can act independently of each other and make economically rational decisions.
B) both parties to a transaction must have had previous transactions.
C) one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness.
D) None of the above.

Accepted Answer

The assumption of arm's-length transaction means that the parties involved in a transaction can act independently of each other and are not dependent on each other. This assumption implies that both parties can make economically rational decisions in their own best interest without any undue influence from the other party. Option B is not correct as having previous transactions is not a mandatory requirement for an arm's-length transaction. Option C is also not correct as it assumes that one of the parties is a bank with knowledge of creditworthiness, which is not an essential feature of an arm's-length transaction.

Question 4

The cost principle states that an asset should be recognized on the balance sheet:
A) at the market value of the asset.
B) at the market value less the accumulated depreciation on the asset.
C) at its historical cost.
D) at its historical cost plus the accumulated depreciation on the asset.

Accepted Answer

The cost principle states that an asset should be recognized on the balance sheet at its historical cost, which is the amount paid to acquire the asset. This cost includes any expenses incurred to purchase and bring the asset to its useful condition. The market value of the asset, accumulated depreciation on the asset, and accumulated depreciation plus the historical cost are not relevant in determining the initial recognition of an asset on the balance sheet.

Question 5

When prices are falling, valuing inventory using the LIFO method rather than FIFO gives:
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.

Accepted Answer

The answer of When prices are falling, valuing inventory using...

Question 6

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on:
A) June 23, 2008.
B) July 2, 2008.
C) September 20, 2008.
D) None of the above

Accepted Answer

The answer of On June 23, 2008, Mikhal Cosmetics sold...

Question 7

When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives:
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.

Accepted Answer

Under FIFO (First-In, First-Out), the oldest costs are assigned to the cost of goods sold, leaving the newer, higher costs in ending inventory. This results in a higher ending inventory value and higher net income when prices are rising.

Question 8

Which of the following sections do annual reports typically contain?
A) Financial summary related to the past year's performance
B) Information about the company, its products, and its activities
C) Audited financial statements, including limited historical financial data
D) All three of the above sections are included in the annual report.

Accepted Answer

Annual reports typically contain all three of the sections mentioned - financial summary related to the past year's performance, information about the company, its products, and its activities, and audited financial statements, including limited historical financial data.

Question 9

The matching principle calls for the accountant of a firm to:
A) identify an asset with each liability of the firm.
B) associate the revenue generated from a sale to the costs or expenses incurred to produce the product.
C) match each item of inventory with the historical cost at which it was acquired.
D) None of the above.

Accepted Answer

The matching principle requires an accountant to associate the revenue generated from a sale with the costs or expenses incurred to produce the product. This helps to determine the profitability of a business operation. Option A is incorrect as identifying an asset with each liability is the principle of balance sheet approach. Option C is incorrect as matching historical costs with inventory is an aspect of the cost principle. Option D is incorrect as there is an applicable principle but it is not identified by any of the options.

Question 10

Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because:
A) they make the financial statements of all firms standardized.
B) they allow one to examine a firm's performance with ease over a period of time.
C) they make it possible for management or analysts to compare a firm's performance with that of other competitors.
D) All of the above.

Accepted Answer

Accounting standards prescribed by GAAP make the financial statements of all firms standardized, allow one to examine a firm's performance with ease over a period of time, and make it possible for management or analysts to compare a firm's performance with that of other competitors. Therefore, all of the above choices are correct.

Question 11

The conventional way of preparing a balance sheet is to list all assets in the order of their:
A) market value.
B) risk.
C) liquidity.
D) historical cost.

Accepted Answer

The conventional way of preparing a balance sheet is to list all assets in the order of their liquidity, from most liquid to least liquid. This provides a clear picture of the company's ability to meet its short-term obligations and helps investors and lenders assess the company's financial health. Listing assets by market value or historical cost may not accurately reflect their current market value or their ability to generate cash in the short-term, while listing assets by risk is not a common practice in balance sheet preparation.

Question 12

The average tax rate is the total taxes divided by the taxable income.

Accepted Answer

The formula for calculating the average tax rate is: Total Taxes / Taxable Income. Therefore, the statement is true.

Question 13

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?
A) Current assets, goodwill, and plant and equipment.
B) Current assets, plant and equipment, and goodwill.
C) Goodwill is not an asset and is not listed here.
D) None of the above.

Accepted Answer

Current assets should be listed first, followed by long-term assets such as plant and equipment, and then any intangible assets such as goodwill. Therefore, the correct order is current assets, plant and equipment, and goodwill.

Question 14

The generally accepted accounting principles (GAAP) are:
A) rules that outline how a firm can operate ethically.
B) rules on how the firm will be valued in the event of a merger.
C) rules and procedures that define how companies are to maintain financial records and prepare financial statements.
D) rules for how a company can issue stock to raise money.

Accepted Answer

The generally accepted accounting principles (GAAP) are a set of rules and procedures that define how companies are to maintain financial records and prepare financial statements in order to provide consistent and transparent financial reporting.

Question 15

The going concern assumption implies that:
A) a firm will continue to be in business for the foreseeable future.
B) a firm will be going out of business in the near future.
C) a firm will continue to operate in the near future, but only after being acquired by another firm.
D) None of the above.

Accepted Answer

The going concern assumption in accounting assumes that the business will continue to operate for the foreseeable future, which means that it is not expected to go out of business in the near future. Option B is incorrect because it contradicts the going concern assumption. Option C is also incorrect because it suggests that the firm will continue to operate only after being acquired by another firm, which is not a part of the going concern assumption. Option D is incorrect because one of the main assumptions in accounting is the going concern assumption.

Question 16

Rent and insurance are examples of depletion expenses.

Accepted Answer

Rent and insurance are not examples of depletion expenses. Depletion expenses refer to the consumption of natural resources, such as oil or minerals, over time. Rent and insurance are classified as operating expenses.

Question 17

Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The net value of the asset that should be reported on the balance sheet is:
A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.75 million.

Accepted Answer

The net value of the asset on December 31, 2008 can be calculated as follows:

Original cost: $2.3 million
Accumulated depreciation (as of December 31, 2008): $230,000 x 3 years = $690,000
Net book value: $2.3 million - $690,000 = $1.61 million

Since the market value on December 31, 2008 is $1.75 million, the net book value of $1.61 million should be reported on the balance sheet.

Question 18

The key financial statement that ties the other three statements together is the statement of cash flows, which summarizes changes in the balance sheet from the beginning of the year to the end.

Accepted Answer

The statement of cash flows shows how cash has been generated and used during a period, which helps explain the changes in the balance sheet accounts. Therefore, it ties together the income statement, balance sheet, and statement of retained earnings.

Question 19

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate:
A) the inventory acquired on July 2 with the products sold.
B) the inventory acquired on April 23 with the products sold.
C) neither of these dates is valid because the products were sold in July.
D) None of the above.

Accepted Answer

According to the FIFO method, the first goods purchased are the first goods sold. Therefore, the inventory acquired on April 23 should be associated with the products sold in July. This follows the matching principle, which requires expenses (cost of goods sold) to be matched with the revenues (sales) generated during the same period.

Question 20

Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of:
A) the cost principle.
B) the assumption of arm's-length transactions.
C) the realization principle.
D) the going concern assumption.

Accepted Answer

The transaction between the buyer (you) and the seller (your uncle) is an example of an arm's-length transaction, where both parties act in their own self-interest to negotiate a fair price for the property. The cost principle, realization principle, and going concern assumption do not directly apply to this transaction.

Quiz 3: The Financial System and the Level of Interest Rates

According to the realization principle, revenue from a sale of a firm's products are recognized:

Annual reports are prepared by a firm's management to:

The assumption of arm's-length transaction states that:

The cost principle states that an asset should be recognized on the balance sheet:

When prices are falling, valuing inventory using the LIFO method rather than FIFO gives:

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on:

When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives:

Which of the following sections do annual reports typically contain?

The matching principle calls for the accountant of a firm to:

Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because:

The conventional way of preparing a balance sheet is to list all assets in the order of their:

The average tax rate is the total taxes divided by the taxable income.

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

The generally accepted accounting principles (GAAP) are:

The going concern assumption implies that:

Rent and insurance are examples of depletion expenses.

The key financial statement that ties the other three statements together is the statement of cash flows, which summarizes changes in the balance sheet from the beginning of the year to the end.

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate:

Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of: