Theory Of Accounts: MCQ Quiz! Trivia

1. A common set of accounting standards and procedures are called

Financial accounting standards.

Generally accepted accounting principles.

Objectives of financial reporting.

. statements of financial accounting concepts

The correct answer is "generally accepted accounting principles." This refers to a common set of accounting standards and procedures that are widely recognized and followed by companies when preparing their financial statements. These principles provide a framework for consistent and reliable financial reporting, ensuring that financial information is comparable and transparent to users of financial statements.

Explanation

The correct answer is "generally accepted accounting principles." This refers to a common set of accounting standards and procedures that are widely recognized and followed by companies when preparing their financial statements. These principles provide a framework for consistent and reliable financial reporting, ensuring that financial information is comparable and transparent to users of financial statements.

2. Which ONE of the following statements best describes the carrying amount of an asset?

The cost (or an amount substituted for cost) of the asset less its residual value

The higher of the asset's net selling price and its value in use

The fair value of the asset at the date of a revaluation less any subsequent accumulated

"The amount … in the statement of financial position …
after accumulated depreciation and … impairment losses".
IAS16 para 6 defines the carrying amount.

Explanation

"The amount … in the statement of financial position …
after accumulated depreciation and … impairment losses".
IAS16 para 6 defines the carrying amount.

3. When using a perpetual inventory system:

No Purchases account is used.

A Cost of Goods Sold account is used.

Two entries are required to record a sale.

. all of these.

When using a perpetual inventory system, all of the given options are correct. In a perpetual inventory system, no Purchases account is used because the inventory is continuously updated with each purchase and sale. A Cost of Goods Sold account is used to record the cost of the goods that are sold. Additionally, two entries are required to record a sale in a perpetual inventory system: one to decrease the inventory and another to record the revenue from the sale. Therefore, all of these options are applicable when using a perpetual inventory system.

Explanation

When using a perpetual inventory system, all of the given options are correct. In a perpetual inventory system, no Purchases account is used because the inventory is continuously updated with each purchase and sale. A Cost of Goods Sold account is used to record the cost of the goods that are sold. Additionally, two entries are required to record a sale in a perpetual inventory system: one to decrease the inventory and another to record the revenue from the sale. Therefore, all of these options are applicable when using a perpetual inventory system.

4. On March 31, 2010, Ashley, Inc.'s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley's books was less than the market value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

. Stockholders' equity is increased.

. Additional paid-in capital is decreased.

Retained earnings is increased.

. An extraordinary loss is recognized.

Under the book value method of exchanging convertible bonds for stock, the book
value of the bonds is reallocated to the par value and the additional paid-in capital accounts of the
common stock. Thus, stockholders' equity is increased.

Explanation

Under the book value method of exchanging convertible bonds for stock, the book
value of the bonds is reallocated to the par value and the additional paid-in capital accounts of the
common stock. Thus, stockholders' equity is increased.

5. A company has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (as amended by SFAS 130). It should report the marketable equity securities that it has classified as trading at:

Lower of cost or market, with holding gains and losses included in earnings.

Lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses.

Fair value, with holding gains included in earnings only to the extent of previously recognized holding losses.

Fair value, with holding gains and losses included in earnings.

Trading securities are reported at fair value, with holding gains and losses included in earnings.

Explanation

Trading securities are reported at fair value, with holding gains and losses included in earnings.

6. Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?

As dividend revenue at Guard's carrying value of the stock.

As dividend revenue at the market value of the stock.

As a reduction in the total cost of Guard stock owned.

As a memorandum entry reducing the unit cost of all Guard stock owned.

Band should record the 2% stock dividend received from Guard with a
memorandum entry that reduces the unit cost of all Guard stock owned. The total investment in Guard,
Inc. will simply be spread over a larger amount of shares, thereby reducing the unit cost of all Guard stock
owned.

Explanation

Band should record the 2% stock dividend received from Guard with a
memorandum entry that reduces the unit cost of all Guard stock owned. The total investment in Guard,
Inc. will simply be spread over a larger amount of shares, thereby reducing the unit cost of all Guard stock
owned.

7. Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless:

The subsidiary is a finance company.

. The fiscal year-ends of the two companies are more than three months apart.

The subsidiary is in bankruptcy.

. The two companies are in unrelated industries, such as manufacturing and real estate.

The exceptions to not consolidating a majority-owned subsidiary are when the
subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under severe foreign
currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that
they cast significant doubt on the parent's ability to control the subsidiary.

Explanation

The exceptions to not consolidating a majority-owned subsidiary are when the
subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under severe foreign
currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that
they cast significant doubt on the parent's ability to control the subsidiary.

8. The failure to record a purchase of merchandise on the account even though the goods are properly included in the physical inventory results in

An overstatement of assets and net income.

An understatement of assets and net income.

An understatement of cost of goods sold and liabilities and an overstatement of assets.

An understatement of liabilities and an overstatement of owners' equity.

When a purchase of merchandise is not recorded on the account but is included in the physical inventory, it means that the company has acquired assets (merchandise) without recognizing the corresponding liability (accounts payable). This results in an understatement of liabilities because the company has not acknowledged the debt it owes for the merchandise. Additionally, since the purchase is not recorded as an expense (cost of goods sold), it leads to an overstatement of owners' equity because net income is higher than it should be. Therefore, the correct answer is an understatement of liabilities and an overstatement of owners' equity.

Explanation

When a purchase of merchandise is not recorded on the account but is included in the physical inventory, it means that the company has acquired assets (merchandise) without recognizing the corresponding liability (accounts payable). This results in an understatement of liabilities because the company has not acknowledged the debt it owes for the merchandise. Additionally, since the purchase is not recorded as an expense (cost of goods sold), it leads to an overstatement of owners' equity because net income is higher than it should be. Therefore, the correct answer is an understatement of liabilities and an overstatement of owners' equity.

9. An investor uses the cost method to account for an investment in common stock. Dividends received this year exceeded the investor's share of investee's undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be:

The total amount of dividends received this year.

Zero.

the amount of dividend revenue that should be reported in the investor's income
statement for this year would be the portion of the dividends received this year that were not in excess of
the investor's share of investee's undistributed earnings since the date of investment.

Explanation

the amount of dividend revenue that should be reported in the investor's income
statement for this year would be the portion of the dividends received this year that were not in excess of
the investor's share of investee's undistributed earnings since the date of investment.

10. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as

Consistently primary.

Consistently secondary.

Sometimes primary and sometimes secondary.

. non-existent.

The role of the Securities and Exchange Commission (SEC) in the formulation of accounting principles can be best described as sometimes primary and sometimes secondary. The SEC has the authority to establish accounting principles for publicly traded companies in the United States. However, they often delegate this responsibility to private sector bodies, such as the Financial Accounting Standards Board (FASB). In some cases, the SEC may directly establish accounting principles, while in others, they may rely on the standards set by the FASB. Therefore, the SEC's role can vary depending on the specific circumstances and the involvement of other accounting standard-setting bodies.

Explanation

The role of the Securities and Exchange Commission (SEC) in the formulation of accounting principles can be best described as sometimes primary and sometimes secondary. The SEC has the authority to establish accounting principles for publicly traded companies in the United States. However, they often delegate this responsibility to private sector bodies, such as the Financial Accounting Standards Board (FASB). In some cases, the SEC may directly establish accounting principles, while in others, they may rely on the standards set by the FASB. Therefore, the SEC's role can vary depending on the specific circumstances and the involvement of other accounting standard-setting bodies.