1. ACC 422 Final Exam
ANSWERS ARE HERE 
1) Which of the following is NOT considered cash for financial reporting purposes?
A. Coin, currency, and available funds
B. Money orders, certified checks, and personal checks
C. Petty cash funds and change funds
D. Postdated checks and I.O.U.'s
2) What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
A. As assets but separately from other receivables.
B. As offsets to capital.
C. As trade notes and accounts receivable if they otherwise qualify as current assets.
D. By means of footnotes only.
3) Which of the following is considered cash?
A. Money market savings certificates
B. Certificates of deposit (CDs)
C. Postdated checks
D. Money market checking accounts
4) If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as
A. an item of "other expense" in the income statement
B. a deduction from accounts receivable in determining the net realizable value of accounts receivable
C. a deduction from sales in the income statement
D. sales discounts forfeited in the cost of goods sold section of the income statement
5) Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does NOT make the
balance sheet misleading because
A. the allowance for uncollectible accounts includes a discount element

2. B. the amount of the discount is NOT material
C. most short-term receivables are NOT interest-bearing
D. most receivables can be sold to a bank or factor
6) Which of the following methods of determining annual bad debt expense best achieves the matching
concept?
A. Direct write-off
B. Percentage of average accounts receivable
C. Percentage of ending accounts receivable
D. Percentage of sales
7) The accountant for the Orion Sales Company is preparing the income statement for 2007 and the
balance sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1, 2007
merchandise inventory balance will appear
A. as an addition in the cost of goods sold section of the income statement and as a current asset on the
balance sheet
B. only as an asset on the balance sheet
C. only in the cost of goods sold section of the income statement
D. as a deduction in the cost of goods sold section of the income statement and as a current asset on the
balance sheet
8) Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in
inventory, but did NOT record the transaction. The effect of this on its financial statements for January
31 would be
A. net income, current assets, and retained earnings were understated
B. net income, current assets, and retained earnings were overstated
C. net income was correct and current assets were understated
D. net income and current assets were overstated and current liabilities were understated
9. If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods sold for
2006, net income for 2006, and assets at December 31, 2007, respectively, are
A. understatement, overstatement, no effect

3. B. overstatement, understatement, overstatement
C. overstatement, understatement, no effect
D. understatement, overstatement, overstatement
10) Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of
goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when
inventory is valued using the LIFO method?
A. Price trend cannot be determined from information given
B. Prices decreased
C. Prices remained unchanged
D. Prices increased
11) Which method of inventory pricing best approximates specific identification of the actual flow of
costs and units in most manufacturing situations?
A. Base stock
B. Average cost
C. First-in, first-out
D. Last-in, first-out
12) All of the following costs should be charged against revenue in the period in which costs are incurred
EXCEPT for
A. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory
B. manufacturing overhead costs for a product manufactured and sold in the same accounting period
C. costs which will NOT benefit any future period
D. costs from idle manufacturing capacity resulting from an unexpected plant shutdown
13) In no case can "market" in the lower-of-cost-or-market rule be more than
A. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal, an allowance for an approximately normal profit margin, and an adequate
reserve for possible future losses
B. estimated selling price in the ordinary course of business

4. C. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal
D. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal and an allowance for an approximately normal profit margin
14) When the direct method is used to record inventory at market
A. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of
goods sold
B. there is a direct reduction in the selling price of the product that results in a loss being recorded on
the income statement prior to the sale
C. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on
inventory decline
D. only the portion of the loss attributable to inventory sold during the period is recorded in the
financial statements
15) An item of inventory purchased this period for $15.00 has been incorrectly written down to its
current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling
price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is
NOT true?
A. Income of the following year will be understated
B. The cost of sales of the following year will be understated
C. The current year's income is understated
D. The closing inventory of the current year is understated
16) The retail inventory method is based on the assumption that the
A. proportions of markups and markdowns to selling price are the same
B. final inventory and the total of goods available for sale contain the same proportion of high-cost and
low-cost ratio goods
C. ratio of gross margin to sales is approximately the same each period
D. ratio of cost to retail changes at a constant rate
17) A major advantage of the retail inventory method is that it

5. A. provides a method for inventory control and facilitates determination of the periodic inventory for
certain types of companies
B. provides reliable results in cases where the distribution of items in the inventory is different from that
of items sold during the period
C. hides costs from competitors and customers
D. gives a more accurate statement of inventory costs than other methods
18) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for
$700,000. Before the December 31, 2006 balance sheet date, the market price for these materials
dropped to $510,000. The journal entry to record this situation at December 31, 2006 will result in a
credit that should be reported
A. on the income statement
B. as a valuation account to Inventory on the balance sheet
C. as a current liability
D. as an appropriation of retained earnings
19) The cost of land typically includes the purchase price and all of the following costs EXCEPT
A. assumption of any liens or mortgages on the property
B. grading, filling, draining, and clearing costs
C. street lights, sewers, and drainage systems cost
D. private driveways and parking lots
20) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with
the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday
Hotel should be
A. capitalized as part of the cost of the new hotel
B. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down
C. written off as an extraordinary loss in the year the hotel is torn down
D. capitalized as part of the cost of the land
21) If a corporation purchases a lot and building and subsequently tears down the building and uses the
property as a parking lot, the proper accounting treatment of the cost of the building would depend on

6. A. the intention of management for the property when the building was acquired
B. the length of time for which the building was held prior to its demolition
C. the significance of the cost allocated to the building in relation to the combined cost of the lot and
building
D. the contemplated future use of the parking lot
22) The period of time during which interest must be capitalized ends when
A. the activities that are necessary to get the asset ready for its intended use have begun
B. no further interest cost is being incurred
C. the asset is substantially complete and ready for its intended use
D. the asset is abandoned, sold, or fully depreciated
23) Which of the following assets do NOT qualify for capitalization of interest costs incurred during
construction of the assets?
A. Assets NOT currently undergoing the activities necessary to prepare them for their intended use
B. Assets intended for sale or lease that are produced as discrete projects
C. Assets under construction for an enterprise's own use
D. Assets financed through the issuance of long-term debt
24) When computing the amount of interest cost to be capitalized, the concept of "avoidable interest"
refers to
A. that portion of average accumulated expenditures on which no interest cost was incurred
B. a cost of capital charge for stockholders' equity
C. the total interest cost actually incurred
D. that portion of total interest cost which would NOT have been incurred if expenditures for asset
construction had NOT been made
25) The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the
exchange. The exchange is NOT expected to cause a material change in the future cash flows for either
entity. If a gain on the disposal of the old asset is indicated, the gain will
A. be credited directly to the owner's capital account

7. B. effectively reduce the amount to be recorded as the cost of the new asset
C. be reported in the Other Revenues and Gains section of the income statement
D. effectively increase the amount to be recorded as the cost of the new asset
26) When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly
measured by the
A. market value of the stock
B. stated value of the stock
C. par value of the stock
D. book value of the stock
27) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the
exchange has commercial substance is usually recorded at
A. either the fair value of the asset given up or the asset received, whichever one results in the largest
gain (smallest loss) to the company
B. the fair value of the asset given up, and a gain but NOT a loss may be recognized
C. the fair value of the asset given up, and a gain or loss is recognized
D. the fair value of the asset received if it is equally reliable as the fair value of the asset given up
28) Which of the following principles best describes the conceptual rationale for the methods of
matching depreciation expense with revenues?
A. Partial recognition
B. Systematic and rational allocation
C. Associating cause and effect
D. Immediate recognition
29) If an industrial firm uses the units-of-production method for computing depreciation on its only
plant asset, factory machinery, the credit to accumulated depreciation from period to period during the
life of the firm will
A. vary with production
B. vary with unit sales

8. C. be constant
D. vary with sales revenue
30) Which of the following most accurately reflects the concept of depreciation as used in accounting?
A. An accounting concept that allocates the portion of an asset used up during the year to the contra
asset account for the purpose of properly recording the fair market value of tangible assets
B. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to
those periods expected to benefit from the use of the asset
C. The process of charging the decline in value of an economic resource to income in the period in which
the benefit occurred
D. A method of allocating asset cost to an expense account in a manner which closely matches the
physical deterioration of the tangible asset involved
31) Prentice Company purchased a depreciable asset for $200,000. The estimated salvage value is
$20,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation.
What is the depreciation base of this asset?
A. $200,000
B. $20,000
C. $18,000
D. $180,000
32) Harrison Company purchased a depreciable asset for $100,000. The estimated salvage value is
$10,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation.
What is the depreciation base of this asset?
A. $100,000
B. $10,000
C. $9,000
D. $90,000
33) Starr Company purchased a depreciable asset for $150,000. The estimated salvage value is $10,000,
and the estimated useful life is 8 years. The double-declining balance method will be used for
depreciation. What is the depreciation expense for the second year on this asset?
A. $37,500

9. B. $26,250
C. $17,500
D. $28,125
34) Costs incurred internally to create intangibles are
A. capitalized
B. expensed only if they have a limited life
C. capitalized if they have an indefinite life
D. expensed as incurred
35) Factors considered in determining an intangible asset’s useful life include all of the following EXCEPT
A. the expected use of the asset
B. the amortization method used
C. any legal or contractual provisions that may limit the useful life
D. any provisions for renewal or extension of the asset’s legal life
36) The cost of purchasing patent rights for a product that might otherwise have seriously competed
with one of the purchaser's patented products should be
A. charged off in the current period
B. amortized over the remaining estimated life of the original patent covering the product whose market
would have been impaired by competition from the newly patented product
C. amortized over the legal life of the purchased patent
D. added to factory overhead and allocated to production of the purchaser's product
37) Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006
for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line
amortization for patents. On December 31, 2007, the expected future cash flows expected from the
patent were expected to be $800,000 per year for the next eight years. The present value of these cash
flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be
carried on the December 31, 2007 balance sheet?
A. $10,000,000

10. B. $4,800,000
C. $8,000,000
D. $6,400,000
38) Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for
$5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line
amortization for patents. On December 31, 2007, the expected future cash flows expected from the
patent were expected to be $600,000 per year for the next eight years. The present value of these cash
flows, discounted at Mining’s market interest rate, is $2,800,000. At what amount should the patent be
carried on the December 31, 2007 balance sheet?
A. $5,000,000
B. $2,800,000
C. $4,800,000
D. $4,000,000
39) General Products Company bought Special Products Division in 2006 and appropriately booked
$250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products
Division is $2,000,000 and it is carried on General Product’s books for a total of $1,700,000, including
the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $200,000 exists
on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?
A. $0
B. $300,000
C. $200,000
D. $50,000
40) The intangible asset goodwill may be
A. capitalized only when purchased
B. written off directly to retained earnings
C. capitalized either when purchased or created internally
D. capitalized only when created internally
41) The reason goodwill is sometimes referred to as a master valuation account is because

11. A. it represents the purchase price of a business that is about to be sold
B. it is the only account in the financial statements that is based on value, all other accounts are
recorded at an amount other than their value
C. it is the difference between the fair market value of the net tangible and identifiable intangible assets
as compared with the purchase price of the acquired business
D. the value of a business is computed without consideration of goodwill and then goodwill is added to
arrive at a master valuation
42) Goodwill
A. generated internally should NOT be capitalized unless it is measured by an individual independent of
the enterprise involved
B. exists in any company that has earnings that differ from those of a competitor
C. is easily computed by assigning a value to the individual attributes that comprise its existence
D. represents a unique asset in that its value can be identified only with the business as a whole
43) If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to
the financial statements describing this event should include all of the following information EXCEPT
A. a general description of the financing arrangement
B. the number of financing institutions that refused to refinance the debt, if any
C. the terms of the new obligation incurred or to be incurred
D. the terms of any equity security issued or to be issued
44) Stock dividends distributable should be classified on the
A. income statement as an expense
B. balance sheet as an item of stockholders' equity
C. balance sheet as an asset
D. balance sheet as a liability
45) Which of the following items is a current liability?
A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due
in three months

12. B. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the
refunding issue
C. Bonds due in three years
D. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
46) A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007.
Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000 packages of light bulbs
are sold, and 140,000 $1 rebates are mailed to customers. What is the rebate expense and liability,
respectively, shown on the 2007 financial statements dated December 31?
A. $400,000; $400,000
B. $140,000; $260,000
C. $400,000; $260,000
D. $260,000; $260,000
47) A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically,
10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and
210,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively,
shown on the 2007 financial statements dated December 31?
A. $600,000; $600,000
B. $210,000; $390,000
C. $600,000; $390,000
D. $390,000; $390,000
48) A company buys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10 years is $200,000 (present value at 10% is $77,110).
10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a
result of these events?
A. Depreciation expense of $120,000
B. Depreciation expense of $100,000 and interest expense of $7,711
C. Depreciation expense of $100,000 and interest expense of $20,000
D. Depreciation expense of $107,710 and interest expense of $7,711
49) A contingency can be accrued when

13. A. it is certain that funds are available to settle the disputed amount
B. an asset may have been impaired
C. the amount of the loss can be reasonably estimated and it is probable that an asset has been
impaired or a liability incurred
D. it is probable that an asset has been impaired or a liability incurred even though the amount of the
loss cannot be reasonably estimated
50) Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad.
On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and
burned. Ward had had a dispute with the Railroad for several years concerning the ownership of a small
parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad
may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has
sustained from the fire. Ward appears inclined to accept the Railroad's offer. The Railroad's 2007
financial statements should include the following related to the incident:
A. recognition of a loss and creation of a liability for the value of the land
B. recognition of a loss only
C. creation of a liability only
D. disclosure in note form only
51) Which of the following contingencies need NOT be disclosed in the financial statements or the notes
thereto?
A. Probable losses NOT reasonably estimable
B. Environmental liabilities that cannot be reasonably estimated
C. Guarantees of indebtedness of others
D. All of these must be disclosed
52) The covenants and other terms of the agreement between the issuer of bonds and the lender are
set forth in the
A. bond indenture
B. bond debenture
C. registered bond
D. bond coupon

14. 53) If bonds are issued initially at a premium and the effective-interest method of amortization is used,
interest expense in the earlier years will be
A. greater than if the straight-line method were used
B. greater than the amount of the interest payments
C. the same as if the straight-line method were used
D. less than if the straight-line method were used
54) Bonds that pay no interest unless the issuing company is profitable are called
A. collateral trust bonds
B. debenture bonds
C. revenue bonds
D. income bonds
55) Minimum lease payments may include a
A. penalty for failure to renew
B. bargain purchase option
C. guaranteed residual value
D. any of these
56) An essential element of a lease conveyance is that the
A. lessor conveys less than his or her total interest in the property
B. lessee provides a sinking fund equal to one year's lease payments
C. property that is the subject of the lease agreement must be held for sale by the lessor prior to the
drafting of the lease agreement
D. term of the lease is substantially equal to the economic life of the leased property
57) While only certain leases are currently accounted for as a sale or purchase, there is theoretic
justification for considering all leases to be sales or purchases. The principal reason that supports this
idea is that
A. [Answer Text]all leases are generally for the economic life of the property and the residual value of
the property at the end of the lease is minimal

15. B. at the end of the lease the property usually can be purchased by the lessee
C. a lease reflects the purchase or sale of a quantifiable right to the use of property
D. during the life of the lease the lessee can effectively treat the property as if it were owned by the
lessee
58) In the earlier years of a lease, from the lessee's perspective, the use of the
A. capital method will enable the lessee to report higher income, compared to the operating method.
B. capital method will cause debt to increase, compared to the operating method
C. operating method will cause income to decrease, compared to the capital method
D. operating method will cause debt to increase, compared to the capital method
59) In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income
A. should be amortized over the period of the lease using the interest method
B. should be amortized over the period of the lease using the straight-line method
C. does NOT arise
D. should be recognized at the lease's expiration
60) In order to properly record a direct-financing lease, the lessor needs to know how to calculate the
lease receivable. The lease receivable in a direct-financing lease is best defined as
A. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing
lease
B. the difference between the lease payments receivable and the fair market value of the leased
property
C. the present value of minimum lease payments
D. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to
the lease agreement