Deck 24: Full Disclosure in Financial Reporting

Question 1

To compute the year-to-date tax, companies apply the estimated annual effective tax rate to the year-to-date ordinary income at the end of each interim period.

Answer 1

True

Question 2

The difference between a financial forecast and a financial projection is that a forecast provides information on what is expected to happen, while a projection provides information on what might take place.

Answer 2

True

Question 3

Fraudulent financial reporting is intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements.

Answer 3

True

Question 4

If the loss on an account receivable results from a customer's bankruptcy after the balance sheet date, the company only discloses this information in the notes to the financial statements.

Question 5

In most situations, an auditor issues a qualified opinion or disclaims an opinion.

Question 6

The MD&A section must provide information about the effects of inflation and changing prices, if they are material to financial statement trends.

Question 7

Companies report extraordinary items in interim reports by prorating them over the four quarters.

Question 8

FASB standards directly affect financial statements, notes to the financial statements, and management's discussion and analysis.

Question 9

If 10 percent or more of company revenue is derived from a single customer, the company must disclose the total amount of revenue from each such customer by segment.

Question 10

The SEC requires that companies report to it certain substantive information that is not found in their annual reports.

Question 11

Influences in a company's internal environment may relate to industry conditions, poor internal control systems, or legal and regulatory considerations.

Question 12

The FASB requires allocations of joint, common, or company-wide costs for external reporting purposes.

Question 13

A financial projection is a set of prospective financial statements that present a company's expected financial position and results of operations.

Question 14

Management's discussion and analysis section covers three financial aspects of an enterprise's business-liquidity, profitability, and solvency.

Question 15

In order to make adequate disclosure of related party transactions, companies should report the legal form, rather than the economic substance, of these transactions.

Question 16

Companies should generally use the same accounting principles for interim reports and for annual reports.

Question 17

FASB Statement 131 requires that general purpose financial statements include selected information on a single basis of segmentation.

Question 18

Accounting policies are the specific accounting principles and methods a company uses and considers most appropriate to present fairly its financial statements.

Question 19

Companies should report accounting transactions as they occur, and expense recognition should not change with the period of time covered under the integral approach.

Question 20

A qualified opinion is issued when the exception to the standard opinion is not of sufficient magnitude to invalidate the statements as a whole.

Question 21

Accounting principles are modified for the following at interim dates. $\begin{array}{lcc} & \text { Revenue } & \text { Losses } \\\end{array}$

A) $\begin{array}{lcc} & \text { Yes } &&& \text { Yes } \\\end{array}$
B) $\begin{array}{lcc} & \text { Yes } &&& \text { No } \\\end{array}$
C) $\begin{array}{lcc} & \text { No } &&& \text { Yes } \\\end{array}$
D) $\begin{array}{lcc} & \text { No } &&& \text { No }\end{array}$

Question 22

In considering interim financial reporting, how does the profession conclude that such reporting should be viewed?

A) As a "special" type of reporting that need not follow generally accepted accounting principles.
B) As useful only if activity is evenly spread throughout the year so that estimates are unnecessary.
C) As reporting for a basic accounting period.
D) As reporting for an integral part of an annual period.

Question 23

Events that occur after the December 31, 2015 balance sheet date (but before the balance sheet is issued) and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be

A) discussed only in the MD&A (Management's Discussion and Analysis) section of the annual report.
B) disclosed only in the Notes to the Financial Statements.
C) used to record an adjustment to Bad Debt Expense for the year ending December 31, 2015
D) used to record an adjustment directly to the Retained Earnings account

Question 24

Which of the following post-balance-sheet events would generally require disclosure, but no adjustment of the financial statements?

A) Retirement of the company president
B) Settlement of litigation when the event that gave rise to the litigation occurred prior to the balance sheet date.
C) Employee strikes
D) Issue of a large amount of capital stock

Question 25

The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?

A) All information related to an entity's business and operating objectives is required to be disclosed in the financial statements.
B) Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
C) Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.
D) Disclosure of any financial facts significant enough to influence the judgment of an informed reader.

Question 26

Revenue of a segment includes

A) only sales to unaffiliated customers.
B) sales to unaffiliated customers and intersegment sales.
C) sales to unaffiliated customers and interest revenue.
D) sales to unaffiliated customers and other revenue and gains.

Question 27

The following methods of estimating inventory can be used at interim dates for inventory pricing. May they also be used at year end? $\begin{array}{cc} \text { Gross Profit Method } & \text { Retail Inventory Method } \\\end{array}$
A) $\begin{array}{cc}&&&\text { No } &&&&&&&& \text { No } \\\end{array}$
B) $\begin{array}{cc} &&&\text { No } &&&&&&&& \text { Yes } \\\end{array}$
C) $\begin{array}{cc} &&&\text { Yes } &&&&&&&& \text { No } \\\end{array}$
D) $\begin{array}{cc} &&&\text { Yes } &&&&&&&& \text { Yes } \\\end{array}$

Question 28

Errors and irregularities are defined as intentional distortions of facts. $\begin{array} { c c } & \text { Errors } & \text { Irregularities } \\\end{array}$

A) $\begin{array} { l c c } & \text { Yes } &&& \text { Yes } \\\end{array}$
B) $\begin{array} { l c c } & \text { Yes } &&& \text { No } \\\end{array}$
C) $\begin{array} { l c c } & \text { No } &&& \text { Yes } \\\end{array}$
D) $\begin{array} { l c c } & \text { No } &&& \text { No }\end{array}$

Question 29

APB Opinion No. 28 indicates that

A) all companies that issue an annual report should issue interim financial reports.
B) the discrete view is the most appropriate approach to take in preparing interim financial reports.
C) the three basic financial statements should be presented each time an interim period is reported upon.
D) the same accounting principles used for the annual report should be employed for interim reports.

Question 30

All of the following information about each operating segment must be reported except

A) unusual items.
B) interest revenue.
C) cost of goods sold.
D) depreciation and amortization expense.

Question 31

The profession requires disaggregated information in the following ways:

A) products or services.
B) geographic areas.
C) major customers.
D) All of these answers are correct.

Question 32

Which of the following should be disclosed in a Summary of Significant Accounting Policies?

A) Types of executory contracts
B) Amount for cumulative effect of change in accounting principle
C) Claims of equity holders
D) Depreciation method followed

Question 33

Rondelli Manufacturing Company employs a standard cost system. A planned volume variance in the first quarter of 2015, which is expected to be absorbed by the end of the fiscal year, ordinarily should

A) be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable.
B) never be deferred beyond the quarter in which it occurs.
C) be deferred at the end of the first quarter if it is favorable; unfavorable variances are to be recognized in the period incurred.
D) be deferred at the end of the first quarter if it is unfavorable; favorable variances are to be recognized in the period incurred.

Question 34

The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This information is important to financial statement readers in determining

A) net income for the year.
B) whether accounting policies are consistently applied from year to year.
C) the value of obsolete items included in ending inventory.
D) whether the working capital position is adequate for future operations.

Question 35

If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the

A) nature of the relationship between the parties to the transactions.
B) nature of any future transactions planned between the parties and the terms involved.
C) dollar amount of the transactions for each of the periods for which an income state-ment is presented.
D) amounts due from or to related parties as of the date of each balance sheet presented.

Question 36

An operating segment is a reportable segment if

A) its operating profit is 10% or more of the combined operating profit of profitable segments.
B) its operating loss is 10% or more of the combined operating losses of segments that incurred an operating loss.
C) the absolute amount of its operating profit or loss is 10% or more of the company's combined operating profit or loss.
D) None of these answers are correct.

Question 37

Which of the following subsequent events (post-balance-sheet events) would require adjustment of the accounts before issuance of the financial statements?

A) Loss of plant as a result of fire
B) Changes in the quoted market prices of securities held as an investment
C) Loss on an uncollectible account receivable resulting from a customer's major flood loss
D) Loss on a lawsuit, the outcome of which was deemed uncertain at year end.

Question 38

A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the

A) total combined revenues of all segments reporting profits.
B) total revenues of all the enterprise's industry segments.
C) total export and foreign sales.
D) combined net income of all segments reporting profits.

Question 39

In presenting segment information, which of the following items must be reconciled to the entity's consolidated financial statements? $\begin{array}{ccc} & \text { Operating } & \text { Identifiable } \\\text { Revenues } & \text { Profit (Loss) } & \text { Assets }\\\end{array}$

A) $\begin{array}{llll}& \text { Yes }&&& & \text { Yes } &&&& \text { Yes } \\\end{array}$
B) $\begin{array}{llll} & \text { No } &&&& \text { Yes } &&&& \text { Yes } \\\end{array}$
C) $\begin{array}{llll} & \text { Yes } &&&& \text { No } &&&& \text { Yes } \\\end{array}$
D) $\begin{array}{llll}& \text { Yes } &&&& \text { Yes } &&&& \text { No }\end{array}$

Question 40

An example of an inventory accounting policy that should be disclosed in a Summary of Significant Accounting Policies is the

A) amount of income resulting from the involuntary liquidation of LIFO.
B) major backlogs of inventory orders.
C) method used for pricing inventory.
D) composition of inventory into raw materials, work-in-process, and finished goods.

Question 41

On January 15, 2015, Vancey Company paid property taxes on its factory building for the calendar year 2015 in the amount of $960,000. In the first week of April 2015, Vancey made unanticipated major repairs to its plant equipment at a cost of $2,400,000. These repairs will benefit operations for the remainder of the calendar year. How should these expenses be reflected in Vancey's quarterly income statements?

Question 42

When should an average amount be used for the numerator or denominator?

A) When the numerator is a balance sheet item or items
B) When the denominator is a balance sheet item or items
C) When a ratio consists of an income statement item and a balance sheet item
D) When the numerator is an income statement item or items

Question 43

A financial forecast per professional pronouncements presents to the best of the responsible party's knowledge and belief,

A) an entity's expected financial position, results of operations, and cash flows.
B) an assessment of the company's ability to be successful in the future.
C) given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows.
D) an assessment of the company's ability to be successful in the future under a number of different assumptions.

Question 44

Cash, short-term investments, and net receivables are the numerator for $\begin{array}{cc} & \text { Acid-Test Ratio } & \text { Current Ratio } \\\end{array}$

A) $\begin{array}{cc} && \text { Yes } &&&&&& \text { No } \\\end{array}$
B) $\begin{array}{cc} && \text { Yes } && && && \text { Yes } \\\end{array}$
C) $\begin{array}{cc} && \text { No } && && && \text { No } \\\end{array}$
D) $\begin{array}{cc} && \text { No } && && && \text { Yes }\end{array}$

Question 45

Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below: Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2015. Assume that preferred dividends for the current year have not been declared.
At December 31, 2015, the current ratio was

A) 1,500 ÷ 420.
B) 4,450 ÷ 546.
C) 3,126 ÷ 546.
D) 3,126 ÷ 696.

Question 46

The calculation of the times interest earned involves dividing

A) net income by annual interest expense.
B) net income plus income taxes by annual interest expense.
C) net income plus income taxes and interest expense by annual interest expense.
D) None of these answers are correct.

Question 47

In January 2015, Post, Inc. estimated that its year-end bonus to executives would be $840,000 for 2015. The actual amount paid for the year-end bonus for 2014 was $770,000. The estimate for 2015 is subject to year-end adjustment. What amount, if any, of expense should be reflected in Post's quarterly income statement for the three months ended March 31, 2015?

A) $ -0-.
B) $192,500.
C) $210,000.
D) $840,000.

Question 48

If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be

A) unqualified.
B) qualified.
C) adverse.
D) exceptional.

Question 49

Theoretically, in computing the accounts receivable turnover, the numerator should include

A) net sales.
B) net credit sales.
C) total sales.
D) total credit sales.

Question 50

Companies should disclose all of the following in interim reports except

A) basic and diluted earnings per share.
B) changes in accounting principles.
C) post-balance-sheet events.
D) seasonal revenue, cost, or expenses.

Question 51

The payout ratio is calculated by dividing

A) dividends per share by earnings per share.
B) cash dividends by net income plus preferred dividends.
C) cash dividends by market price per share.
D) cash dividends by net income less preferred dividends.

Question 52

Presented below are four segments that have been identified by Haley Productions: $\begin{array}{rrrr}& \text { Total Revenue } & \text { Operating } \\\text { Segments } & \text { (Unaffiliated) } & \text { Profit (Loss) } & \text { Identifiable Assets }\\\text { A } & \$ 255,000 & \$ 30,000 & \$ 900,000 \\\text { B } & 600,000 & (55,000) & 800,000 \\\text { C } & 225,000 & 6,000 & 450,000 \\\text { D } & 90,000 & 4,000 & 225,000\end{array}$ For which of the segments would information have to be disclosed in accordance with professional pronouncements?

A) Segments A, B, C, and D
B) Segments A, B, and C
C) Segments A and B
D) Segments A and D

Question 53

Which of the following ratios measures long-term solvency?

A) Acid-test ratio
B) Accounts receivable turnover
C) Debt to assets
D) Current ratio

Question 54

An inventory loss from market decline of $1,200,000 occurred in May 2015, after its March 31, 2015 quarterly report was issued. None of this loss was recovered by the end of the year. How should this loss be reflected in the company's quarterly income statements?

Question 55

Which of the following best characterizes the difference between a financial forecast and a financial projection?

A) Forecasts include a complete set of financial statements, while projections include only summary financial data.
B) A forecast is normally for a full year or more and a projection presents data for less than a year.
C) A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen.
D) A forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification.

Question 56

The required approach for handling extraordinary items in interim reports is to

A) prorate them over all four quarters.
B) prorate them over the current and remaining quarters.
C) charge or credit the loss or gain in the quarter that it occurs.
D) disclose them only in the notes.

Question 57

The MD&A section of a company's annual report is to cover the following three items:

A) income statement, balance sheet, and statement of owners' equity.
B) income statement, balance sheet, and statement of cash flows.
C) liquidity, capital resources, and results of operations.
D) changes in the stock price, mergers, and acquisitions.

Question 58

The basic limitations associated with ratio analysis include

A) the lack of comparability among firms in a given industry.
B) the use of estimated items in accounting.
C) the use of historical costs in accounting.
D) All of these answers are correct.

Question 59

A company that uses the last-in, first-out (LIFO) method of inventory pricing finds at an interim reporting date that there has been a partial liquidation of the base period inventory level. The decline is considered temporary and the partial liquidation is expected to be replaced prior to year end. The amount shown as inventory at the interim reporting date should

A) be shown at the actual level, and cost of sales for the interim reporting period should include the expected cost of replacement of the liquidated LIFO base.
B) be shown at the actual level, and cost of sales for the interim reporting period should reflect the historical cost of the liquidated LIFO base.
C) not give effect to the LIFO liquidation, and cost of sales for the interim reporting period should reflect the historical cost of the liquidated LIFO base.
D) be shown at the actual level, and the decrease in inventory level should not be reflected in the cost of sales for the interim reporting period.

Question 60

The return on common stock equity is calculated by dividing

A) net income by average common stockholders' equity.
B) net income less preferred dividends by average common stockholders' equity.
C) net income by ending common stockholders' equity.
D) net income less preferred dividends by ending common stockholders' equity.

Question 61

Advertising costs may be accrued or deferred to provide an appropriate expense in each period for

Question 62

For interim financial reporting, an extraordinary gain occurring in the second quarter should be

A) recognized ratably over the last three quarters.
B) recognized ratably over all four quarters with the first quarter being restated.
C) recognized in the second quarter.
D) disclosed by note only in the second quarter.

Question 63

Use the following information for questions 64 through 69.
The following data are provided: Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
The inventory turnover for 2015 is

A) 6,400 ÷ 1,300.
B) 4,200 ÷ 1,300.
C) 6,400 ÷ 1,200.
D) 4,200 ÷ 1,200.

Question 64

Use the following information for questions 64 through 69.
The following data are provided: Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
The book value per share of common stock at 12/31/15 is

A) 3,900 ÷ 120.
B) 3,880 ÷ 120.
C) 3,900 ÷ 110.
D) 4,000 ÷ 110.

Question 65

The following information pertains to Nixon Corp. and its divisions for the year ended December 31, 2015. $\begin{array}{l}\text { Sales to unaffiliated customers }&\$3,000,000\\\text { Intersegment sales of products similar to those sold to }\\\text { unaffiliated customers } &900,000\\\text { Interest earned on loans to other operating segments } &60,000\end{array}$ Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a reportable segment if that segment's revenue exceeds

A) $396,000.
B) $390,000.
C) $306,000.
D) $300,000.

Question 66

Unruh Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2015. In its segment information for 2015, how many reportable segments does Unruh have?

A) Three
B) Four
C) Five
D) Six

Question 67

Use the following information for questions 64 through 69.
The following data are provided: Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
The return on common stock equity for 2015 is

A) 750 ÷ 3,600.
B) 750 ÷ 4,000.
C) 650 ÷ 3,600.
D) 650 ÷ 4,000.

Question 68

Fina Corp. had the following transactions during the quarter ended March 31, 2015: What amount should be included in Fina's income statement for the quarter endedMarch 31, 2015?

Question 69

Use the following information for questions 64 through 69.
The following data are provided: Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
At December 31, 2015, the acid-test ratio was

A) 1,550 ÷ 650.
B) 1,550 ÷ 1,080.
C) 2,100 ÷ 800.
D) 2,850 ÷ 650.

Question 70

Use the following information for questions 64 through 69.
The following data are provided: Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
The accounts receivable turnover for 2015 is

A) 6,400 ÷ 800.
B) 4,200 ÷ 800.
C) 6,400 ÷ 700.
D) 4,200 ÷ 700.

Question 71

Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to unaffiliated customers. Farr should report segment financial information for each division meeting which of the following criteria?

A) Segment profit or loss is 10% or more of consolidated profit or loss.
B) Segment profit or loss is 10% or more of combined profit or loss of all company segments.
C) Segment revenue is 10% or more of combined revenue of all the company segments.
D) Segment revenue is 10% or more of consolidated revenue.

Question 72

Use the following information for questions 64 through 69.
The following data are provided: Additional information:
Depreciation included in cost of goods sold and operating expenses is $610,000. On May 1, 2015, 30,000 shares of common stock were issued. The preferred stock is cumulative. The preferred dividends were not declared during 2015.
The profit margin on sales for 2015 is

A) 2,200 ÷ 6,400.
B) 750 ÷ 6,400.
C) 2,200 ÷ 4,200.
D) 750 ÷ 4,200.

Question 73

Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below: Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2015. Assume that preferred dividends for the current year have not been declared.
At December 31, 2015, the book value per share of common stock was

A) $74.21.
B) $77.55.
C) $79.20.
D) $78.20.

Question 74

Presented below is information related to Tolbert Company. $\begin{array}{lr}\text { Current Assets }\\\text { Cash } & \$ 4,000 \\\text { Short-term investments } & 75,000 \\\text { Accounts receivable } & 61,000 \\\text { Inventories } & 110,000 \\\text { Prepaid expenses } & 30,000\\\text { Total current assets }&\$280,000\end{array}$ Total current liabilities are $100,000. What is the acid-test ratio?

A) 2.8 to 1.
B) 2.5 to 1.
C) 1.4 to 1.
D) 0.8 to 1.

Question 75

Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below: Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2015. Assume that preferred dividends for the current year have not been declared.
The number of times interest was earned during 2015 was

A) 700 ÷ 125.
B) 1,000 ÷ 125.
C) 1,124 ÷ 125.
D) 874 ÷ 125.

Question 76

Perez Company's net accounts receivable were $800,000 at December 31, 2014 and $880,000 at December 31, 2015. Net cash sales for 2015 were $520,000. The accounts receivable turnover for 2015 was 8.0. What were Perez's total net sales for 2015?

A) $4,160,000.
B) $6,720,000.
C) $7,240,000.
D) $6,200,000.

Question 77

Mayo Corp. has estimated that total depreciation expense for the year ending December 31, 2015 will amount to $450,000, and that 2015 year-end bonuses to employees will total $900,000. In Mayo's interim income statement for the six months ended June 30, 2015, what is the total amount of expense relating to these two items that should be reported?

A) $0.
B) $225,000.
C) $675,000.
D) $1,350,000.

Question 78

During 2015, Quirk, Incorporated purchased $3,500,000 of inventory. The cost of goods sold for 2015 was $3,600,000 and the ending inventory at December 31, 2015, was $400,000. What was the inventory turnover for 2015?

A) 7.0.
B) 7.2.
C) 8.0.
D) 9.0.

Question 79

Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below: Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2015. Assume that preferred dividends for the current year have not been declared.
The rate of return for 2015 based on the year-end common stockholders' equity was

A) 700 ÷ 2,346.
B) 700 ÷ 2,376.
C) 670 ÷ 2,346..
D) 670 ÷ 2,376.

Question 80

Which of the following facts concerning plant assets should be included in the summary of significant accounting policies?