pg. 1

Name ________________________________

Student ID ____________________________

Section (A/8:30am or B/10:30am) _________

Accounting 301 – Version A

Autumn 2012

Final Examination

Instructions:

1) Write your name, student ID number, and class section at the top of the page.

2) Sign the honor pledge on the next page.

3) This is a closed-book, closed notes exam. Calculators are permitted. NO cell phones,

smartphones, or other electronic devices are allowed.

4) SHOW ALL YOUR WORK OR PARTIAL CREDIT WILL NOT BE GIVEN; IF NO WORK IS

SHOWN, FULL CREDIT MAY NOT BE GIVEN

5) If you feel an assumption is necessary, please document your assumption.

6) Please read each question carefully and make sure your answer directly addresses the question

asked. Be particularly careful of the years that each column of data represents.

7) You have 1 hour and 50 minutes to complete the exam. I will collect the exam at exactly

10:20am. You may leave sooner if you are finished, but please do so quietly to avoid disturbing

your neighbors.

8) There are 16 pages to this exam. Be sure your copy has all the pages. You may take the exam

apart but be sure to reassemble the exam in the proper order AND to include all pages.

9) Point distributions are as follows:

Question 1 (35) ______

Question 2 (24) ______

Question 3 (34) ______

Question 4 (7) ______

Question 5 (20) ______

TOTAL (120) ______

pg. 2

Honor Pledge

I understand that this is a closed book, closed note exam. I pledge that I have not received any information

regarding the contents of this exam and that all work shown on this exam is my own. If I am aware or

become aware of any persons who have used work other than their own to complete the exam and/or have

improperly used their own notes during the exam, I will immediately notify Lecturer Febry. I understand

that failure to comply with these rules will result in failure of the course and possible expulsion from the

University of Washington Business School.

__________________________

Signature

__________________________

Date

pg. 3

QUESTION 1 – Revenue Recognition

RedBelKirk Company was founded in 2006. The company provides various architectural services such

as planning, architectural design, and building and site evaluation. The company routinely enters into

long-term, fixed-fee contracts. As of December 31, 2011, the company reported the following

information in its balance sheet ($’s in 000’s) relating to such long-term, fixed-fee contracts:

The company accounts for its long-term contracts using the percentage of completion method, basing

the percent complete on costs incurred.

In 2011, the company incurred $4,930 of costs relating to its long-term, fixed-fee contracts. As of

December 31, 2011, the company did not have any unprofitable projects. You may also assume that the

company completed contracts in amount of $1,230 in 2011 (HINT: When a company completes a

project, it debits “Billings on CIP” and credits “Contracts in Progress” to close accounts).

a) How much in sales did the company recognize on its income statement in 2011 related to its long-

term contracts? (5 pts)

Since we know that there are no unprofitable projects, costs incurred in CY = COGS.

Thus, Sales = COGS + Gross Profit or $4,930 + $1,413 = $6,343

If you are unable to answer part (a), assume for the remaining questions that sales amount is $6,500.

NOTE: This is NOT the answer to part (a).

b) Reconstruct the journal entries the company recorded during 2011 related to its long-term contracts.

You may assume that costs incurred were paid in cash and you may ignore cash collections on

accounts receivable. (9 pts)

Dr. CIP $4,930 Dr. A/R $7,493 (see solution on pg. 4)

Cr. Cash $4,930 Cr. Billings on CIP $7,493

Dr. COGS $4,930 Dr. Billings on CIP $1,230

Dr. CIP $1,413 Cr. CIP $1,230

Cr. Sales $6,343

12/31/2011 12/31/2010

Contracts in Progress (CIP) 14,565$ 9,452$

Billings on CIP (13,681) (7,418)

884 2,034

Beg. Bal. 9,452

Costs Incurred in CY 4,930 1,230 Projects Completed in CY

Gross Profit in CY 1,413 - Gross Loss in CY (see assumption)

End. Bal. 14,565

CIP

pg. 4

c) Assuming the company collects 90% of cash on progress billings in the year it bills, what is your

assessment of company’s billing terms from a cash flow perspective in 2011 (i.e. are cash flows

from customers sufficient to cover costs incurred)? (2 pts)

Cash collections: $7,493 * 90% = $6,744 (this ignores 10% of collections of last year’s billings)

Cash spent: $4,930

Yes, it appears the company has a favorable billing schedule as cash collected on billings exceeded cash

spent on long-term contracts by approximately $6,744 - $4,930 = $1,814 (this ignores the 10% of last

year’s billings; so, if anything, this is a conservative measure).

For questions (d) through (f), let’s go back in time. In 2006, the first year of operations, the company

only has one long-term contract. Its contract price is $2,200 and costs incurred in 2006 were $500. As of

December 31, 2006, the project was estimated to be 30% complete.

d) Calculate gross profit (or loss) recognized on the income statement in 2006. (3 pts)

e) In 2007, the company incurred additional $850 of costs and estimated the project to be 60%

complete. Calculate gross profit (or loss) recognized on the income statement in 2007. (6 pts)

Total anticipated cost: ($500 + $850) / 60% = $2,250

This is now an unprofitable project with an expected total loss of $2,250 - $2,200 = $50.

So, gross loss would need to wipe out prior year profits and recognize 100% of the anticipated loss, or

($160) + ($50) = ($210)

f) How would your answer to part (e) change if the company was using the completed contract method

in 2006 and 2007? (3 pts)

Under completed contract, 100% of the loss must still be recognized. But, there wouldn’t have been any

profit recognized in 2006. Therefore, we simply recognize 100% of the loss: ($50).

7,418 Beg. Bal.

Projects Completed in CY 1,230 7,493 Billings made in CY

13,681 End. Bal.

Billings on CIP

%-age Complete 30%

Contract Price 2,200

Revenue to Date 660

Less Revenue from PYs -

Revenue in CY 660

COGS 500

Gross Profit 160

pg. 5

Beginning in 2012, the company decided to sell its architectural software (for residential home design)

to retail customers who desire to construct their own homes. The software is sold on credit. The revenue

is considered earned upon the delivery of the CD-ROM. However, since customers tend to have poor

credit histories, the company believes it has very high uncertainty over cash collections. As a result, it

uses the installment method for such sales.

g) In 2012, software sales were $1,200 and costs associated with those sales were $800. The company

had cash collections of $300 in 2012. Provide the amount of gross profit that would be shown on the

2012 income statement. (4 pts)

Gross margin Percentage = ($1,200 - $800) / $1,200 = 33.3%

Realized Gross Profit (on income statement) = $300 * 33.3% = 100

h) In 2013, the company had additional cash collections of $600 related to last year’s software sales.

Assuming the company was using the cost recovery method in 2012 and 2013, provide the amount

of gross profit that would be shown on the 2013 income statement. (3 pts)

Under cost recovery method, gross profit is not recognized until cumulative cash collections exceed cost

of sales.

In 2013, cumulative cash collections of $900 ($300 + $600) exceeded cost of sales of $800 by $100.

Thus, $100 of gross profit would be recognized in 2013.

pg. 6

QUESTION 2 – Inventory On January 1, 2010, Fluor Corporation adopted dollar value LIFO. On that date, inventories had a

current cost of $370,000. The company will keep track of inventory on a FIFO basis and convert to

LIFO basis for financial reporting purposes by making an adjusting entry via a LIFO reserve.

In 2010, the company purchased $930,000 of inventory and determined COGS using FIFO to be

$823,000. The company will use an internally-generated price index of 1.06 in 2010 and 1.14 in 2011.

a) Compute ending inventory at 12/31/2010 in base year dollars. (4 pts)

All answers for question 2 are expressed in $ 000’s.

EIFIFO = BIFIFO + Purchases – COGSFIFO

EIFIFO = $370 + $930 - $823 = $477

EIBASE $ = EIFIFO / Price Index

EIBASE$ = $477 / 1.06 = 450

If you are unable to answer part (a), assume for the remaining questions that ending inventory (as of

12/31/10) in base year dollars is $447,000. NOTE: This is NOT the answer to part (a).

b) Record the journal entry that would be made on 12/31/2010 to adjust the LIFO reserve (5 pts).

First, we need to know EILIFO. Since EIBASE$ increased from $370 to $450, an $80 layer was added.

So, EILIFO = $370 + ($80) * 1.06 = $454.8

Dr. COGS $22.2

Cr. LIFO Reserve $22.2

c) Fast forward to next year. The company’s ending inventory (on 12/31/11) on FIFO basis was

$484,500. Did physical inventory levels increase or decrease in 2011? Explain your reasoning (3 pts)

On 12/31/11, EIBASE$ = $484.5 / 1.14 = $425

Since EI in base year dollars decreased from $450 to $425, physical levels must have decreased.

0 Adoption year; so, zero

22.2 Change in COGS in 2010

22.2 EI (FIFO) - EI (LIFO) = $477 - $454.8

LIFO Reserve

pg. 7

d) Compute ending inventory under dollar value LIFO at 12/31/11. (4 pts).

A layer of $25 must be removed at the index prevailing at the time.

Beginning inventory was composed of the following: $370 * 1.0 + $80 * 1.06 = $454.8

But, now a $25 layer was removed. We will remove the most recent layer at 1.06.

Thus, new EILIFO = $370 * 1.0 + ($80-$25) * 1.06 = $428.3

e) Starting with January 1, 2012, the company switched to a new supplier. The new supplier provides

cash discounts for timely payments. The company purchased inventory of $15,000 on credit under

terms 1/10, n/30. Assuming the company decided to use the net method for recording purchase

discounts, prepare the journal entry at the time of the purchase. (3 pts).

Net method assumes that the company will take advantage of the discount. As a result, the original

purchase is recorded in net terms.

Dr. Purchases $14,850 [$15,000 * 99%]

Cr. Accounts Payable (A/P) $14,850

While considerably less common, a debit directly to inventory would also be acceptable.

f) On December 31, 2012, the company is evaluating whether or not a write-down for inventory is

required under the lower of cost or market (“LCM”) rule. Using the following information, prepare

any necessary journal entries to adjust inventory to LCM. Assume that the LCM rule will be applied

to each product individually. (5 pts)

Total write-down: ($10) * 1,300 + ($3) * 1,700 = $18,100

Dr. COGS* $18,100

Cr. Inventory $18,100

*Can also debit “Loss on Inventory Write-down”

Product

A

Product

B

Product

C

Number of units as of 12/31/12 1,300 1,700 2,000

The following amounts are per unit:

100 80 120

90 70 125

125 105 140

10 8 5

35 20 40

Estimated costs of disposal

Normal profit margin

Historical cost (LIFO)

Replacement cost

Estimated selling price

A B C

RC 90 70 125

NRV 115 97 135

NRV-PM 80 77 95

Market 90 77 125

Cost 100 80 120

Write-down (10) (3) -

pg. 8

QUESTION 3 - Real World Financials (Receivables and Inventory)

Walgreens Co. operates the largest drugstore chain in the United States. The company provides its

customers with “convenient, multichannel access to consumer goods and services, pharmacy, and

wellness services in communities across America.”

The consolidated balance sheets and statements of income for Walgreens Inc. for the fiscal years ended

August 31, 2012 and August 31, 2011 are on pages following this question (page numbers 12 & 13).

In addition, the notes to the company’s financial statements included the following items:

Allowance for Doubtful Accounts – The provision for bad debt is based on both specific receivables

and historic write-off percentages. We have not made any material changes to the method of estimating

our allowance for doubtful accounts during the last three years.

Inventories – Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At

August 31, 2012 and 2011, inventories would have been greater by $1,897 million and $1,587 million,

respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a

result of declining inventory levels, the fiscal 2012 LIFO provision was reduced by $268 million of

LIFO liquidation.

a) What was the gross amount of Accounts Receivables at 8/31/2012 and 8/31/2011? (2 pts)

8/31/12 8/31/11

Net A/R $2,167 $2,497

AFDA $99 $101__

Gross A/R $2,266 $2,598

b) Assume the company disclosed elsewhere in the notes that it recorded specific write-offs of $109

million in fiscal year 2012. Prepare the journal entry to record bad debt expense for fiscal year 2012.

(4 pts)

Dr. Bad Debt Exp. $107

Cr. AFDA $107

c) Estimate the amount of cash collected from customers in fiscal year 2012. (4 pts)

2,598

71,633 109

71,856

2,266

A/R

109 101

107

99

AFDA

pg. 9

d) Assume the company disclosed elsewhere in the notes that it uses percentage of receivables method

(by preparing an aging schedule). What are the advantages and disadvantages of this method as

compared to the percentage of sales method from a conceptual framework and financial statements

perspective? (4pts)

Advantages – Better B/S Information [every year, estimate NRV by solving for ending AFDA]

-Errors in estimates do not accumulate, but, rather, get trued up/down every year

Disadvantages – Worse I/S information [bad debt expense is a plug; doesn’t relate to CY sales]

-Poor matching of expenses to revenues as current year expense often includes an amount

to correct an error in making last year’s estimate.

For parts (e) and (f) assume that, on September 1, 2012 (first day of fiscal year 2013), one of Walgreens’

large customers issued the company a long-term note for exchange of products sold. The note has a

stated rate of 5% (payable annually on August 31) with principal of $1,500 million due in five years.

Walgreens determined that a reasonable interest rate (i.e. market rate) on a note of this type would be

7%. (NOTE: If you do not have a financial calculator, you may use PV formulas or tables on page 14).

e) Prepare the journal entry on September 1, 2012, to record the sale. (5 pts)

PVNote = PVPrincipal + PVInterest Payments

PVNote = ($1,500 * .71299) + ($1,500 * .05 * 4.10020) = $1,377

Dr. N/R $1,500

Cr. Discount on N/R $123 [plug]

Cr. Sales $1,377 [PV]

f) How much interest revenue would the company recognize in fiscal year 2013 from this note? (4 pts)

Interest Revenue = ($1,500 - $123) * 7% = $96.39

g) Let’s now discuss inventory. How much inventory (in dollars) did Walgreens purchase in fiscal year

2012? (3 pts)

8,044

50,283 51,291

7,036

Inventory (LIFO)

pg. 10

h) What can you infer about price level changes in fiscal year 2012? Explain your reasoning (NOTE: it

is not sufficient to simply discuss general industry conditions; you can use the information given to

you regarding inventory to definitively answer this question). (4 pts)

By reconstructing the LIFO reserve, we conclude that COGSLIFO is greater than COGSFIFO by $310. This

can happen either because a LIFO layer has been added or because prices rose.

Since EILIFO decreased from $8,044 to $7,036, a LIFO layer must have been liquidated. It also says in

the note that “as a result of declining inventory levels…LIFO provision was reduced by $268 million of

LIFO liquidation.”

But, despite the LIFO liquidation, there was an increase in the LIFO reserve. This could only happen if

prices rose (and the favorable effect of prices outweighed the unfavorable impact of layer liquidation).

i) Assuming Walgreens’ tax rate is 37%, how much in taxes did the company save in fiscal year 2012

by using LIFO (as compared to using FIFO)? (4 pts)

LIFO reserve increased by $310 (which represents the current year difference in COGS between FIFO

and LIFO).

So, taxes saved in fiscal year 2012 are $310 * 37% = $114.7 million

j) Extra Credit Question (do this one ONLY IF you have time remaining after answering Questions 4

and 5): Real World Impact: Assume that any taxes Walgreens saves/defers by using LIFO cost flow

assumption (as compared to using FIFO), it pays out such tax savings annually to the shareholders in

form of a dividend. If you own 1,000 shares of Walgreens’ stock (which represents approximately a

$34,000 investment as of Dec. 3, 2012), how much in net proceeds do you expect to receive this year

as a result of Walgreens’ tax policy? (up to + 4 pts)

NOTE: Generally, dividends received by individuals are taxed at a “preferred” rate of 15%

[before they reset to ordinary rates of up to 39.6% on Jan. 1, 2013 as a result of the “fiscal cliff”]

HINT: You are given some information regarding total amount of shares outstanding on the

income statement.

Weighted average shares outstanding (per income statement): 874.7 million

Effect of tax savings on an earnings-per-share basis: $114.7 / 874.7 = $0.13 per share

Dividend received (before taxes are considered) $130 [1,000 shares * $0.13 per share]

Personal Taxes Paid ($19.5)_ [$130 * 15%]

Net Proceeds $110.5

1,587

310

1,897

LIFO Reserve

pg. 11

QUESTION 4 – Revenue Recognition (Multiple Deliverables) [it’s only one question]

For the first time in its history, Microsoft, Inc. started selling its own tablet computer called “Microsoft

Surface.” One of its popular bundles is to sell the tablet, a type cover, and a one-year warranty and tech

support service. Microsoft charges $750 for this bundle. However, it also sells each of these components

separately as follows:

Tablet $500

Type Cover $150

One-year warranty & tech support $150

a) Assuming Microsoft sold one of such bundles on October 1, 2012, how much revenue would the

company recognize in 2012 related to this bundle? (NOTE: Assume Microsoft’s fiscal year 2012

starts January 1, 2012 and ends December 31, 2012). (7 pts)

Microsoft is allowed to split out this bundle into separate units of accounting as:

1) The delivered items (tablet & type cover) have stand-alone value; these can be used by

themselves and/or sold to someone else by the customer

2) There is objective evidence of fair value (Microsoft has VSOE as it sells each component

separately)

3) As Microsoft is a Fortune 100 company, it can be reasonably expected to perform/deliver

undelivered items even if general right of return exists.

Revenue in 2012:

Revenue recognized on tablet $468.75

Revenue recognized on type cover $140.63

Revenue recognized on tech support $35.16 [$140.63 * (3 / 12)]

Total revenue in 2012 $644.54

Stand-

alone Price Weight

Separate

Units of Acctg

Delivery (i.e.

when earned)?

Tablet 500 62.5% 468.75 10/1/2012

Type Cover 150 18.8% 140.63 10/1/2012

Tech Support 150 18.8% 140.63 10/1/12-9/30/13

800 100.0% 750

pg. 12

Consolidated Balance Sheets Walgreen Co. and Subsidiaries At August 31, 2012 and 2011

(In millions, except shares and per share amounts)

Assets 2012 2011

Current Assets

Cash and cash equivalents $ 1,297 $ 1,556

Accounts receivable, net of allowances of ($99) and ($101) 2,167 2,497

Inventories 7,036 8,044

Other current assets 260 225

Total Current Assets 10,760 12,322

Non-Current Assets

Property and equipment, at cost, less accumulated depreciation and amortization 12,038 11,526

Equity investment in Alliance Boots 6,140 -

Alliance Boots call option 866 -

Goodwill 2,161 2,017

Other non-current assets 1,497 1,589

Total Non-Current Assets 22,702 15,132

Total Assets $ 33,462 $ 27,454

Liabilities and Shareholders' Equity

Current Liabilities

Short-term borrowings $ 1,319 $ 13

Trade accounts payable 4,384 4,810

Accrued expenses and other liabilities 3,019 3,075

Income taxes - 185

Total Current Liabilities 8,722 8,083

Non-Current Liabilities

Long-term debt 4,073 2,396

Deferred income taxes 545 343

Other non-current liabilities 1,886 1,785

Total Non-Current Liabilities 6,504 4,524

Commitments and Contingencies (see Note 11)

Shareholders' Equity

Preferred stock - -

Common stock 80 80

Paid-in capital 936 834

Employee stock loan receivable (19 ) (34 )

Retained earnings 20,156 18,877

Accumulated other comprehensive income 68 16

Treasury stock at cost (2,985 ) (4,926 )

Total Shareholders' Equity 18,236 14,847

Total Liabilities and Shareholders' Equity $ 33,462 $ 27,454

The accompanying Notes to Consolidated Financial Statements are integral parts of these statements.

pg. 13

Consolidated Statements of Comprehensive Income

Walgreen Co. and Subsidiaries

For the years ended August 31, 2012, 2011 and 2010 (In millions, except per share amounts)

2012 2011 2010

Net sales $ 71,633 $ 72,184 $ 67,420

Cost of sales 51,291 51,692 48,444

Gross Profit 20,342 20,492 18,976

Selling, general and administrative expenses 16,878 16,561 15,518

Gain on sale of business - 434 -

Operating Income 3,464 4,365 3,458

Interest expense, net (88 ) (71 ) (85 )

Earnings Before Income Tax Provision 3,376 4,294 3,373

Income tax provision 1,249 1,580 1,282

Net Earnings $ 2,127 $ 2,714 $ 2,091

Other comprehensive income (loss), net of tax:

Reduction (addition) of postretirement liability 52 40 (61 )

Comprehensive Income $ 2,179 $ 2,754 $ 2,030

Net earnings per common share – basic $ 2.43 $ 2.97 $ 2.13

Net earnings per common share – diluted 2.42 2.94 2.12

Average shares outstanding 874.7 915.1 981.7

Dilutive effect of stock options 5.4 9.4 6.2

Average diluted shares 880.1 924.5 987.9

The accompanying Notes to Consolidated Financial Statements are integral parts of these statements.

pg. 14

Present Value of $1

PV = $1

(1+𝑖)𝑛

Present Value of an Ordinary Annuity of $1

𝑃𝑉𝐴 = 1−(1+𝑖)−𝑛

𝑖

Table 1: Present Value of $1

n/i 1% 2% 2.5% 3% 4% 5% 6% 7% 8%

1 0.99010 0.98039 0.97561 0.97087 0.96154 0.95238 0.94340 0.93458 0.92593

2 0.98030 0.96117 0.95181 0.94260 0.92456 0.90703 0.89000 0.87344 0.85734

3 0.97059 0.94232 0.92860 0.91514 0.88900 0.86384 0.83962 0.81630 0.79383

4 0.96098 0.92385 0.90595 0.88849 0.85480 0.82270 0.79209 0.76290 0.73503

5 0.95147 0.90573 0.88385 0.86261 0.82193 0.78353 0.74726 0.71299 0.68058

6 0.94205 0.88797 0.86230 0.83748 0.79031 0.74622 0.70496 0.66634 0.63017

7 0.93272 0.87056 0.84127 0.81309 0.75992 0.71068 0.66506 0.62275 0.58349

8 0.92348 0.85349 0.82075 0.78941 0.73069 0.67684 0.62741 0.58201 0.54027

9 0.91434 0.83676 0.80073 0.76642 0.70259 0.64461 0.59190 0.54393 0.50025

10 0.90529 0.82035 0.78120 0.74409 0.67556 0.61391 0.55839 0.50835 0.46319

Table 2: Present Value of an Ordinary Annuity of $1

n/i 1% 2% 2.5% 3% 4% 5% 6% 7% 8%

1 0.99010 0.98039 0.97561 0.97087 0.96154 0.95238 0.94340 0.93458 0.92593

2 1.97040 1.94156 1.92742 1.91347 1.88609 1.85941 1.83339 1.80802 1.78326

3 2.94099 2.88388 2.85602 2.82861 2.77509 2.72325 2.67301 2.62432 2.57710

4 3.90197 3.80773 3.76197 3.71710 3.62990 3.54595 3.46511 3.38721 3.31213

5 4.85343 4.71346 4.64583 4.57971 4.45182 4.32948 4.21236 4.10020 3.99271

6 5.79548 5.60143 5.50813 5.41719 5.24214 5.07569 4.91732 4.76654 4.62288

7 6.72819 6.47199 6.34939 6.23028 6.00205 5.78637 5.58238 5.38929 5.20637

8 7.65168 7.32548 7.17014 7.01969 6.73274 6.46321 6.20979 5.97130 5.74664

9 8.56602 8.16224 7.97087 7.78611 7.43533 7.10782 6.80169 6.51523 6.24689

10 9.47130 8.98259 8.75206 8.53020 8.11090 7.72173 7.36009 7.02358 6.71008

pg. 15

QUESTION 5 - Miscellaneous Multiple Choice (2 pts each)

For each of the following questions, circle the letter of the statement that you believe best answers the

question. (2 pts. each)

1) Which of the following items constitutes objective evidence of fair value of undelivered item

when a company is trying to determine whether or not a software-only bundle (i.e. SOP 97-2, or,

also known as ASC 985-605, applies) can be split into separate units of accounting?

a) Vendor Specific Objective Evidence (VSOE)

b) Third-party Evidence (TPE)

c) Estimated Selling Price (ESP)

d) All of the above

2) If Langdam company uses the net method to account for cash discounts and sells merchandise of

$20,000 on credit under terms 2/10, n/30, the journal entry recorded at the time of the sale would

include:

a) A credit to sales of $20,000

b) A debit to sales discounts of $400

c) A credit to sales of $19,600

d) A credit to interest income of $400

3) When management is considering somehow disposing of its receivables, it generally would

prefer the following accounting treatment:

a) “Sales” – as it will result in immediate expense recognition in the year of the disposition

b) “Sales” - as it will result in a lower leverage (as compared to “financing” treatment)

c) “Financing” - as it will result in recognizing a liability for cash received

d) “Financing” - as it will result in showing cash received in the financing section of statement

of cash flows

4) Which of the following is a reason for a company to use the FIFO cost flow assumption?

a) To lower income in periods of falling prices because of political pressure

b) To provide the most relevant balance sheet information

c) To avoid recordkeeping costs that are associated with the LIFO cost flow assumption

d) All of the above

5) Which of the following is true regarding IFRS’s standards for lower of cost or market rule?

a) Under IFRS, there is no concept of a “ceiling” and a “floor.” Instead, market is always

defined as the replacement cost

b) Under IFRS, net realizable value (NRV) is defined differently as compared to U.S. GAAP

c) Under IFRS, write-downs made in prior years can be subsequently reversed if market

value increases

d) All of the above

pg. 16

6) A company estimates amounts of uncollectible receivables using the percentage of sales method.

A company made specific write-offs of $1,200 in 2010. In 2011, one of the customers whose

account was written-off in 2010 ended up paying on his account. The journal entry to record this

event in 2011 would include:

a) A credit to bad debt expense

b) A debit to allowance for doubtful accounts

c) A credit to cash

d) A credit to allowance for doubtful accounts

7) A company estimates amounts of uncollectible receivables using the percentage of receivables

method. At December 31, 2010, the company’s balance in accounts receivable and allowance for

doubtful accounts was $54,000 and $3,560, respectively. During 2011, the company’s credit

sales and collections were $356,000 and $340,000, respectively, and $3,200 in bad accounts

were written off. The company estimated that 3% of its ending A/R (as of 12/31/11) will be

uncollectible. The amount of bad debt expense that should be recorded for 2011 is:

a) $1,644

b) $1,740

c) $2,004

d) $2,100

8) At December 31, 2010, Beta Company took a physical count of inventory but erroneously

excluded inventory in transit that was shipped under terms “FOB destination.” In the following

year, the company correctly counted its inventory. This error will:

a) Increase net income in 2010 and decrease net income in 2011

b) Overstate tax expense in 2010 and understate tax expense in 2011

c) Decrease net income in 2010 and increase net income in 2011

d) Understate cost of goods sold in 2010 and overstate cost of goods sold in 2011

9) After 2011, which of the following is a proper presentation option with regards to other

comprehensive income:

a) Report comprehensive income in two separate but consecutive statements

b) Report other comprehensive income in statement of shareholders’ equity

c) Include other comprehensive income into retained earnings

d) All of the above

10) If the company uses a perpetual inventory system (as compared to periodic inventory system),

the following would be true:

a) In using LIFO, cost of goods sold would always be the same under either systems

b) In using FIFO, cost of goods sold would always be the same under either systems

c) In using Weighted Average, cost of goods sold would always be the same under either

systems

d) Cost of goods sold is recorded periodically only after the inventory is physically counted