Question 1

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

Accepted Answer

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

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

If a company buys a building, the cost of the building would normally include any legal fees paid as part of the process of buying the building.

Accepted Answer

A) True 
 B)False

Question 9

An example of a Level 1 input used to value a stock at the end of the year is market information of sales of that stock on a stock exchange on the last day of the year.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

If a company records its bonds payable at fair value, and the market price of the bonds falls, the company will record a loss.

Accepted Answer

A) True 
 B)False

Question 12

The term "entry price" means:

Accepted Answer

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 13

GAAP says that if a company owns bonds, even if it intends to hold those bonds until they mature, it must use fair value to account for them, and must show any holding gains or losses in income each year.

Accepted Answer

A) True 
 B)False

Question 14

The term "value in use" means:

Accepted Answer

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

When companies use direct costing, managers have more of an incentive to overproduce inventory than if the company used absorption costing.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

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

Question 18

Concerns about the reliability of fair value accounting are greater when a company uses Level 1 inputs than when it uses Level 3 inputs to value its assets.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

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 20

In general, GAAP rules for situations where a company "hedges" some asset call for recognizing the gain or loss on the "hedge" in a later time period than the gain or loss on the asset.

Accepted Answer

A) True 
 B)False

Exam 7: Tackling the General Ledger

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

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.

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.

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.

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

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

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

If a company buys a building, the cost of the building would normally include any legal fees paid as part of the process of buying the building.

An example of a Level 1 input used to value a stock at the end of the year is market information of sales of that stock on a stock exchange on the last day of the year.

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.

If a company records its bonds payable at fair value, and the market price of the bonds falls, the company will record a loss.

The term "entry price" means:

GAAP says that if a company owns bonds, even if it intends to hold those bonds until they mature, it must use fair value to account for them, and must show any holding gains or losses in income each year.

The term "value in use" means:

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

When companies use direct costing, managers have more of an incentive to overproduce inventory than if the company used absorption costing.

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

Concerns about the reliability of fair value accounting are greater when a company uses Level 1 inputs than when it uses Level 3 inputs to value its assets.

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

In general, GAAP rules for situations where a company "hedges" some asset call for recognizing the gain or loss on the "hedge" in a later time period than the gain or loss on the asset.