Part 1 Reviewer
Part 1 Reviewer
Question 1
McCarthy Corp. is issuing its first financial statements. The CFO of the company is of the view that all
assets shall be recorded at historical cost throughout the life of the organization. Which of the following
is the best critique of such a disclosure?
A. Historical value assumes that the value of an asset is the amount that would have to be paid to
replace the asset on the balance sheet date.
B. Historical value takes into account the effects of inflation on the asset; therefore, the value
fluctuates in each period.
C. Historical value does not take into account the effect of depreciation; therefore, the true value
of the asset cannot be determined.
D. Historical value is less relevant for assessing a company's current financial position.
Question 2
While approving the financial statements for the current year, the management accountant of Rachael
Groups discovered that sales were overstated. Which of the following is the most likely reason for the
overstatement?
Question 3
The following information is available for Becker Manufacturing.
A. $210,000
B. $300,000
C. $390,000
D. $345,000
Question 4
The financial statement that provides a summary of the firm's operations for a period of time is the:
Question 5
Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock was sold
for $150,000 during the current fiscal year. The result of this transaction should be shown in the
Investing Activities Section of James' Statement of Cash Flows as:
A. $50,000.
B. $100,000.
C. $150,000.
D. Zero.
Question 6
Atwater Company has recorded the following payments for the current period.
The amount to be shown in the Investing Activities Section of Atwater's Cash Flow Statement should be:
A. $500,000
B. $900,000.
C. $300,000.
D. $700,000.
Question 7
Last year, Alpha Corporation spent $250,000 to repurchase 15,000 shares of its own outstanding
common stock. The company also paid $40,000 in interest on a construction loan that it had obtained
from its bank. How should these transactions be reflected on Alpha's annual statement of cash flows,
and why?
A. The two transactions should be reported in separate sections of the statement because one
involves a change in equity while the other involves a change in income. Specifically, Alpha
should record a $250,000 cash outflow in the financing section and a $40,000 cash outflow in
the operating section.
B. The two transactions should be reported in separate sections of the statement because one
involves long-term assets while the other involves long term liability. Specifically, Alpha should
record a $250,000 cash outflow in the investing section and a $40,000 cash outflow in the
financing section
C. Both transactions should be reported in the operating activities section of the statement
because both involve alterations in the company's income. Because the two transactions are
unrelated, they should be recorded separately—as a $250,000 cash outflow from the stock
repurchase and a $40,000 cash outflow from the interest payment.
Part 1: Financial Statements Types, Presentation, Limitations, Users
D. Both transactions should be reported in the financing activities section of the statement
because both involve long-term liability and/or equity items. Because the two transactions are
unrelated, they should be recorded separately—as a $250,000 cash outflow from the stock
repurchase and a $40,000 cash outflow from the interest payment.
Question 8
Reflecting on the six capitals included in Integrated Report, all of the following statements about
Financial Capital are true except:
A. Financial Capital includes grant money from the federal government, a state government, or a
not-for-profit foundation.
B. Financial Capital is the pool of funds that is available to an organization for use in the production
or purchase of goods or the provision of services.
C. Financial Capital includes funds generated through operations or investments.
D. Financial Capital includes all elements of Working Capital.
Question 9
In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness
did not capitalize any interest during the current year. Changes occurred in several balance sheet
accounts as follows:
In its income statement for the current year, what amount would Ness have reported as interest
expense?
A. $ 76,000
B. $ 30,000
C. $ 64,000
D. $110,000
Question 10
Ace prepares its statement of cash flows using the direct method. In which section of the statement
should Ace report the dividends received from an investment?
A. Financing activities.
B. Operating activities.
C. Investing activities.
D. Supplemental disclosures.
Question 11
A publicly traded company has 100,000 outstanding shares of common stock, with a par value of $5. The
company uses U.S. GAAP to prepare its financial statements. The company recently declared a 5% stock
Part 1: Financial Statements Types, Presentation, Limitations, Users
dividend. On the date the stock dividend was declared, the company's stock was trading at $25 per
share. On the date of declaration, the company's
Question 12
When using the indirect method, which of the following statements provides the most accurate
description of the relationship between accounts receivable and the operating activities section on the
statement of cash flows?
Question 13
A firm's statement of cash flows is often said to be ________ than its other financial statements because
it ________.
Question 14
Manufactured capital, as defined under Integrated Reporting, includes all of the following items except:
A. Work-in-process inventory
B. Patents and trademarks
C. Custom-made tools and patterns used in the manufacturing process
D. Roads and bridges
Question 15
Echo Company reported net income of $360,000 for the current year. Depreciation recorded on
buildings and equipment amounted to $160,000 for the year. Balances of the current asset and current
liability accounts at the beginning and end of the year are as follows:
Part 1: Financial Statements Types, Presentation, Limitations, Users
What amount did Echo Company report as cash flows from operating activities?
A. $545,800
B. $494,200
C. $225,800
D. $535,800
Question 16
Emerson Industries sold a new issue of common stock to investors. How would this be recorded
differently in the statement of cash flows than if they used the stock to purchase equipment?
A. The sale of stock to investors should be disclosed in a separate schedule as a supplement to the
cash flow statement, whereas exchange of stock for equipment should be included in cash flows
from investing activities
B. The sale of stock to investors should be included in cash flows from financing activities, whereas
exchange of stock for equipment should be disclosed in a separate schedule as a supplement to
the cash flow statement.
C. The sale of stock to investors should be included in cash flows from investing activities, whereas
the exchange of stock for equipment should be included in cash flows from financing activities.
D. The sale of stock to investors should not be disclosed in the statement of cash flows, whereas
exchange of stock for equipment should be disclosed in a separate schedule as a supplement to
the cash flow statement.
Question 17
On January 2, Year 1, Smith purchased the net assets of Jones’ Cleaning, a sole proprietorship, for
$350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying
amount of $375,000 and a market value of $340,000. In Spiffy's cash-basis financial statements for the
year ended December 31, Year 1, Spiffy reported revenues in excess of expenses of $60,000. Smith's
drawings during Year 1 were $20,000. In Spiffy's financial statements, what amount should be reported
as Capital-Smith?
A. $390,000
B. $380,000
C. $410,000
Part 1: Financial Statements Types, Presentation, Limitations, Users
D. $415,000
Question 18
Selected financial information for Kristina Company for the year just ended is shown below.
Kristina's cash flow from financing activities for the year is:
A. $(80,000).
B. $3,520,000.
C. $800,000
D. $720,000.
Question 19
Based on the stock's par value, a large stock dividend is most similar to a ________; but based on the
stock's market value, a large stock dividend is most similar to a ________.
Question 20
All of the following items would typically be included in the Content Element: Basis of Preparation and
Presentation of an integrated report except:
Question 21
Which aspect of a firm's statement of cash flows most interests potential stockholders?
Question 22
The presentation of the major classes of operating cash receipts (such as receipts from customers) less
the major classes of operating cash disbursements (such as cash paid for merchandise) is best described
as the:
Question 23
Although ________ show changes in account balances from year to year, a ________ gives more detail
about how those changes occur.
Question 24
Why is it important for a financial analyst to scrutinize the statement of cash flows’ footnotes?
A. Footnotes provide significant information about noncash investing and financing activities, such
as the issuing of stock for fixed assets
B. Footnotes provide vital information about a company's liquidity position, trend in revenue from
different demographic regions, and changes in capital structure.
C. Footnotes detail the executive compensation details and shareholders' voting procedures and
information.
D. Footnotes provide significant information about mergers and acquisitions a company is
targeting in the current year.
Question 25
In terms of integrated reporting, all of the following are providers of financial capital except:
A. Legislators.
B. Stockholders.
C. Bondholders.
D. Asset or fund managers.
Part 1: Financial Statements Types, Presentation, Limitations, Users
Question 26
Which of the following financial statement changes would best represent the impact of incurring and
paying interest on a note payable for the period:
Question 27
Onyx Inc.’s net income is $570,000. During the year accounts receivable increased $280,000 and
accounts payable decreased $80,000. Using the indirect method of preparing the statement of cash
flows, what amount will be reported as cash provided by operating activities?
A. $370,000
B. $210,000
C. $770,000
D. $930,0003
Question 28
All of the following express a primary purpose of Integrated Reporting except:
Question 29
Reed Co.’s year 2 statement of cash flows reported cash provided from operating activities of $400,000.
For year 2, depreciation of equipment was $190,000, amortization of patent was $5,000, and dividends
paid on common stock were $100,000. If this is the only information relevant to cash flows, what
amount was reported as net income in Reed's year 2 statement of cash flows?
A. $105,000
B. $305,000
C. $595,000
D. $205,000
Question 30
Gilliam Industries records revenue of $6.4 million for an accounting period. In that same accounting
period, they have a beginning balance of $392,000 and an ending balance of $439,000 in the Accounts
Receivable account. How should the cash flows from operating activities be adjusted to account for
these items? Why? Assume Gilliam uses the indirect method.
Part 1: Financial Statements Types, Presentation, Limitations, Users
A. Using the indirect method, Gilliam will only have to adjust for the change in Accounts
Receivable, resulting in a $47,000 increase in cash flows from operating activities
B. Using the indirect method, Gilliam will have to adjust for both the revenue and the change in
Accounts Receivable, resulting in a $6,353,000 increase in cash flows from operating activities.
C. Using the indirect method, Gilliam will have to adjust for both the revenue and the change in
Accounts Receivable, resulting in a $6,447,000 increase in cash flows from operating activities.
D. Using the indirect method, Gilliam will only have to adjust for the change in Accounts
Receivable, resulting in a $47,000 decrease in cash flows from operating activities.
Question 31
Last year, XYZ Inc. sold one of its warehouse facilities for $1.5 million. It also earned $25,000 in interest
on a loan that it made to another company. How should these transactions be reflected on XYZ's annual
statement of cash flows, and why?
A. The two transactions should be reported in separate sections of the statement because one
involves income while the other involves financing activities. Specifically, XYZ should record a
$1.5 million cash inflow in the operating activities section and a $25,000 cash inflow in the
financing activities section.
B. The two transactions should be reported in separate sections of the statement because one
involves long-term assets while the other involves income. Specifically, XYZ should record a $1.5
million cash inflow in the investing activities section and a $25,000 cash inflow in the operating
activities section
C. Both transactions should be reported in the operating activities section of the statement
because both involve income statement items. Because the two transactions are unrelated, they
should be recorded separately—as a $1.5 cash inflow from the facility sale and a $25,000 cash
inflow from interest income
D. Both transactions should be reported in the investing activities section of the statement because
both involve asset items. Because the two transactions are unrelated, they should be recorded
separately—as a $1.5 cash inflow from the facility sale and a $25,000 cash inflow from interest
income.
Question 32
Stock dividends ________ retained earnings and ________ total paid-in capital.
A. increase, decrease
B. increase, increase
C. decrease, increase
D. decrease, decrease
Question 33
Mike's Ice Cream Shop has 500 shares of stock outstanding at $1 par value per share. As a reward for a
great year, Mike (the majority owner and CEO) is issuing a stock dividend of 300 shares to all
shareholders. Current market value of the stock is $20/share. What are the appropriate accounting
entries to record this stock dividend?
A. Dr. Retained earnings $6,000, Cr. Par value distributable $300 Cr. Paid-in Capital $5,700
B. Dr. Retained earnings $6,000, Cr. Paid-in capital $6,000
Part 1: Financial Statements Types, Presentation, Limitations, Users
Question 34
Holden Company purchased 150 acres of land on the outer edge of a growing city. Holden expects the
value of this land to appreciate by 500% over the next three years. How would you expect Holden to
report the value of this land on their balance sheet?
A. At market value
B. At the expected future value at the time of sale
C. At historical cost
D. At a depreciated value
Question 35
Which accounts are affected by a small stock dividend?
Question 36
In which section of the statement of cash flows would a gain on the sale of equipment be reported?
A. Investing
B. Operating
C. Financing
D. Noncash activities
Question 37
How does the balance sheet help users?
Question 38
The most likely use of an income statement prepared by a business enterprise is its use by which of the
following?
Question 39
Both stock splits and stock dividends ________ total stockholders’ equity, while only ________ result in
a decrease in the par value of common stock.
Question 40
Last year Urban Kicks earned $5.2 million from the sale of shoes and $1.4 million from the sale of one of
their manufacturing plants. How would these cash flows be categorized on the statement of cash flows?
Question 41
Whereas comparing a firm's annual balance sheets can help investors ________, analysis of the firm's
statements of cash flows will ________.
A. understand why any changes in balances have occurred; show the exact amount of each change
B. spot any changes in dividend policies; provide greater insight as to the exact nature of these
changes
C. understand why any changes in dividend policies have occurred; show the exact amount of each
change
D. spot any changes in account balances; provide greater insight as to how these changes occurred
Question 42
AWS Inc. is engaged in the construction of rail tracks. The CEO suggests allocating all of the insurance,
property taxes, and supervisory factory labor to construction, but the management accountant
disagrees. The management accountant will argue that the indirect costs should be allocated in what
way?
A. The indirect costs should be allocated to the extent of the difference between net realizable
value and carrying value.
B. The indirect costs should be allocated to the extent of proportionate completion.
C. The indirect costs should be allocated up to, but not exceeding, the value of the asset.
D. The indirect costs should not be capitalized to the rail tracks.
Question 43
According to the FASB's conceptual framework, which of the following is/are included in comprehensive
income?
Part 1: Financial Statements Types, Presentation, Limitations, Users
Question 44
Which of the following is true of an income statement presented as per U.S. GAAP?
Question 45
In March, Parker Products repurchased 25,000 of its outstanding common shares at a price of $14 per
share. Seven months later, Parker sold 15,000 of these shares on the open market for $15.50 each.
When recording the effects of these transactions on its annual statement of cash flows, Parker reports
only a $117,500 cash outflow related to financing activities. Is this entry correct, and why?
A. Parker is correct in placing this entry in the financing section. It is also correct in reporting only a
cash outflow of $117,500 because the $350,000 cash outflow from the stock repurchase must
be netted against the $232,500 inflow from the stock sale.
B. Parker is incorrect in placing this entry in the financing section. However, it is correct in
reporting only a cash outflow of $117,500 because the $350,000 cash outflow from the stock
repurchase must be netted against the $232,500 inflow from the stock sale.
C. Parker is incorrect in placing this entry in the financing section. It is also incorrect in recording
only a net cash flow of $117,500 rather than both a cash outflow of $350,000 and a cash inflow
of $232,500.
D. Parker is correct in placing this entry in the financing section. However, rather than recording
only a net cash outflow of $117,500, Parker should have reported both a cash outflow of
$350,000 and a cash inflow of $232,500.
Question 46
Holcomb Industries sold a piece of machinery with an original cost of $918,000 and accumulated
depreciation of $856,800 for $80,000. They realized a gain of $18,800 on the sale. How would this
transaction affect overall cash flows?
Question 47
In an integrated report, which Content Element would be used to answer this question: What challenges
and uncertainties is the organization likely to encounter in pursuing its strategy?
A. Outlook
B. Risk and opportunities
C. Strategy and resource allocation
D. Business model
Question 48
An extract of the footnotes of Chavez Inc., with 13 subsidiaries across 4 countries, reads as follows:
"Paid-in capital accounts have been translated using the historic rate. All assets and liabilities have been
translated using the current exchange rate on
the balance sheet date, whereas income statement accounts have been translated using the end-of-year
rate."
The CEO of the company did not approve the financial statements, stating that the accounting policies
followed are not in line with U.S. GAAP. Which of the following statements support the CEO's decision?
A. Income statement accounts should be translated based on the current exchange rate on the
balance sheet date.
B. Income statement accounts should be translated based on the average rate for the current year.
C. All assets and liabilities should be translated using the average rate for the current year.
D. Paid-in capital accounts should be translated using the end-of-year rate.
Question 49
Which one of the following should be classified as an operating activity on the statement of cash flows?
Question 50
The following information was abstracted from the accounts of the Oar Corporation at December 31,
Year 2:
Part 1: Financial Statements Types, Presentation, Limitations, Users
The donated stock did not allow the company to exercise significant influence over the investee. What
should be the current balance of retained earnings?
A. $580,000
B. $610,000
C. $670,000
D. $520,000
Question 51
The purchase of treasury stock:
Question 52
"Employing different accounting methods will yield different net incomes." How is this factor a limitation
of financial statements?
A. Choice between cash-based accounting and accrual accounting for financial reporting allows
companies to smooth earnings for a longer period.
B. The flexibility of employing different methods for presentation of financial statements can lead
to inaccurate disclosure of information.
C. Change in net income due to change in accounting methods affects the determination of future
performance of a company.
D. Difference in results due to change in accounting methods makes it difficult for users to
compare the performance of different entities.
Question 53
Which section of the statement of cash flows includes the proceeds from selling equipment?
A. Investing
B. Financing
C. Operating
D. Noncash activities
Question 54
Last quarter Hyperion Enterprises sold new stock and paid dividends. How do these activities compare?
Question 55
The sale of available-for-sale securities should be accounted for on the statement of cash flows as a(n):
A. investing activity.
Part 1: Financial Statements Types, Presentation, Limitations, Users
B. financing activity.
C. non-cash investing and financing activity.
D. operating activity.
Question 56
According to U.S. GAAP, where on the income statement should a multinational company report the loss
from the disposal sale of a major operating unit?
A. Report the loss, pretax, in a separate section between income from continuing operations and
net income.
B. Report the loss, net of tax, in a separate section between income from continuing operations
and net income.
C. Report the loss, pretax, in a separate section between income from operations and income
before income tax.
D. Report the loss, net of tax, in a separate section between income before tax and net income.
Question 57
As of December 31, 20x8, Mather Corporation's net cash flow from operating activities was $174,000
and its net income was $158,600. Over the course of 20x8, Mather's accounts payable balance dropped
by several thousand dollars. If Mather uses the indirect method to calculate net cash flows and the only
other asset and liability is accounts receivable, then which of the following statements is accurate?
A. Mather must have seen a significant increase in its accounts receivable balance over the course
of 20x8.
B. Mather's accounts receivable balance likely held steady over the course of 20x8.
C. Mather must have seen a significant decrease in its accounts receivable balance over the course
of 20x8.
D. Based on these figures, we cannot make any conclusions about how Mather's accounts
receivable balance must have changed during 20x8.
Question 58
Wells Enterprises holds a debt that is due 20 months from now. Wells prepares a classified balance
sheet using a one-year operating cycle. How would classification of this debt be different if Wells used a
two-year operating cycle?
A. With a one-year cycle it is classified as a current liability and with a two-year cycle it is classified
as a long-term liability.
B. With a one-year cycle it is classified as stockholders’ equity and with a two-year cycle it is
classified as a current liability.
C. With the one-year cycle it is classified as a long-term liability, while with a two-year cycle it is
classified as a current liability
D. With a one-year cycle it is classified as a current liability and with a two-year cycle it is classified
as stockholders’ equity.
Question 59
Parisi Incorporated and Keeling International both sold some old equipment. Parisi sold their equipment
because it was outdated, and they replaced it with new equipment. Keeling sold their equipment
Part 1: Financial Statements Types, Presentation, Limitations, Users
because the operations that needed the equipment are being shut down by the company. How would
the income or loss from the sale of this equipment be reported differently by these companies?
A. Parisi would report their income or loss under discontinued operations, whereas Keeling would
not.
B. Keeling would report their income or loss under discontinued operations, whereas Parisi would
not.
C. Keeling would report their income or loss as a note to the financial statements, whereas Parisi
would report their income or loss in the actual financial statements.
D. Parisi would report their income or loss as a note to the financial statements, whereas Keeling
would report their income or loss in the actual financial statements.
Question 60
Below is the balance sheet and a partial income statement for Wonderful Water Bottles, a water bottle
manufacturer and distributor:
Part 1: Financial Statements Types, Presentation, Limitations, Users
This year Wonderful Water Bottles declared and paid dividends of $500,000. Based on the information
provided, what was Wonderful Water Bottles’ sales revenue for the year?
A. $15,000,000
B. $15,500,000
C. $16,000,000
D. Not enough information provided.
Part 1: Financial Statements Types, Presentation, Limitations, Users