1. Which of the following is considered as extraordinary by the accounting profession?

a. Write-down or write-off of receivables, inventory, and intangible assets.

b. Gains and losses from the sale or abandonment of equipment used in a business.

c. Effects of a strike, including those against competitors and major suppliers.

d. Flood damage from unusually heavy rains in a normally dry environment.

Answerd. Extraordinary items must be both unusual in nature and occur infrequently. The only choice that satisfies these conditions is "d."

 

2. Which of the following would not be reported as a separate component on the income statement?

a. Income from continuing operations

b. Discontinued operations

c. Prior period adjustment

d. Extraordinary item

Answerc. Prior period adjustments are reported on the statement of retained earnings. Income from continuing operations, discontinued operations, and extraordinary items are all separately reported on the income statement.

 

3. Oakwood Furniture Corporation had 100,000 shares of common stock outstanding on January 1. An additional 50,000 shares were issued on July 1, and 25,000 shares were reacquired on September 1. What was the weighted-average number of shares outstanding during the year?

a. 140,000

b. 125,000

c. 118,750

d. 116,667

Answerd. 116,667. [100,000 X 6/12 = 50,000] [150,000 X 2/12 = 25,000] [125,000 X 4/12 = 41,667] Weighted Average 116,667 = (50,000 + 25,000 + 41,667)

 

4. Sparks Corporation had 15,000 shares of common stock outstanding on January 1, and issued an additional 5,000 shares on June 1. There was no preferred stock outstanding. The corporation reports net income of $200,000. How much is basic earnings per share (to the nearest cent) for the calendar year?

a. $10.00

b. $11.16

c. $11.43

d. $13.33

Answerb. $11.16. The $200,000 net income is divided by the weighted-average shares outstanding ((15,000 X 5/12) + (20,000 X 7/12) = 17,916.67 shares).

 

5. Sparks Corporation had 15,000 shares of common stock outstanding on January 1, and issued an additional 5,000 shares on June 1. There was preferred stock outstanding, and dividends on the preferred stock amounted to $20,000. The corporation reports net income of $200,000. The preferred stock is not convertible. How much is basic earnings per share (to the nearest cent) for the calendar year?

a. $9.00

b. $10.00

c. $10.05

d. $10.29

Answerc. $10.05. The income available to common shareholders ($200,000 - $20,000 preferred dividends = $180,000) is divided by the weighted-average shares outstanding ((15,000 X 5/12) + (20,000 X 7/12) = 17,916.67 shares).

 

6. If a corporation has total stockholders' equity of $1,000,000, 100,000 shares of common stock outstanding, and 1,000 shares of $100 par value preferred stock outstanding, how much is book value per common share? Assume that the preferred stock is callable at $110 and dividends of $4,000 on preferred stock are due.

a. $8.86

b. $9.00

c. $9.96

d. $10.00

Answera. $8.86. The equity attributable to common stockholders ($1,000,000 total equity - $110,000 call price of preferred stock - $4,000 dividends due on preferred stock = $886,000) is divided by the common shares outstanding (100,000).

 

7. Which of the following is a stated objective of financial reporting?

a. To provide information useful in assessing the amounts, timing, and uncertainty of an organization's cash inflows and outflows.

b. To provide information useful in preparing tax returns and other governmental reports.

c. To provide information about the current cost of an enterprise's assets.

d. To ensure that all companies use the same financial accounting principles.

Answera. A stated objective of financial reporting is to provide information that is useful in assessing the amounts, timing, and uncertainty of an organization's cash inflows and outflows. Tax return preparation is not a primary financial accounting objective. Accounting is based on historical cost, not current cost. Different companies typically use different accounting methods.

 

8. The organization that has been given the authority by Congress to set accounting principles for public companies is the:

a. Internal Revenue Service.

b. Financial Accounting Standards Board.

c. Securities and Exchange Commission.

d. Institute of Management Accountants.

Answerc. Congress has given the ultimate authority for setting accounting principles to the Securities and Exchange Commission. The Internal Revenue Service deals with tax law implementation. The Financial Accounting Standards Board and the National Association of Accountants are both private sector groups.

 

9. Relevance is a qualitative characteristic of accounting information. Which definition best applies to the concept of relevance?

a. The quality of information that assures that information is reasonably free from error and bias.

b. The capacity of information to make a difference in the decision process.

c. The quality of information that enables users to comprehend the message being communicated.

d. The quality of information that enables users to identify similarities and differences between two sets of economic phenomena.

Answerb. Relevance means that information bears on the decision process. Choice "a" relates to reliability, choice "c" to understandability, and choice "d" to comparability.

 

10. Darland Corporation (USA) purchased goods on account for 1,000 Swiss francs. On the date of purchase, the spot rate for the Swiss franc was $0.70. By the time the corporation settled its obligation, the spot rate had fallen to $0.65 per Swiss franc. How much was the foreign currency exchange gain or loss?

a. $0

b. $50 gain

c. $50 loss

d. $83 gain

Answerb. $50 gain. The $0.05 decrease in the spot rate reduced the U.S. dollar equivalent by $50 ((1,000 X $0.70) - (1,000 X $0.65)). Because Darland had a payable, the reduction in the payable is a gain.