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Multiple choice

1. In computing the earnings per share of common stock,
noncumulative preferred dividends not declared should be
A. deducted from the net income for the year.
B. added to the net income for the year.
C. ignored.
D. deducted from the net income for the year, net of tax.

2. When using the if-converted method to compute diluted
earnings per share, convertible securities should
A. be included only if antidilutive.
B. be included only if dilutive.
C. be included whether dilutive or not.
D. not be included.

3. Effective January 2, 2007, Kincaid Co. adopted the accounting principle of expensing
advertising and promotion costs as they're incurred. Previously, advertising and promotion
costs applicable to future periods were recorded in prepaid expenses. Kincaid can justify
the change, which was made for both financial statement and income tax reporting
purposes. Kincaid's prepaid advertising and promotion costs totaled $250,000 at
December 31, 2006. Assume that the income tax rate is 40 percent for 2006 and 2007.
The adjustment for the effect of the change in accounting principle should result in a net
charge against income in the 2007 income statement of
A. $0. C. $150,000.
B. $100,000. D. $250,000.

4. What is the correct treatment of a stock dividend issued in mid-year when computing the
weighted average number of common shares outstanding for earnings per share purposes?
A. The stock dividend should be weighted by the length of time that the additional
number of shares are outstanding during the period.
B. The stock dividend should be included in the weighted average number of common
shares outstanding only if the additional shares result in a decrease of 3 percent or
more in earnings per share.
C. The stock dividend should be weighted as if the additional shares were issued at the
beginning of the year.
D. The stock dividend should be ignored since no additional capital was received.

5. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its
magazine. Payments are recorded as revenue when received. Amounts received but
unearned at the end of each of the last three years are shown below:
2005 2006 2007
Unearned revenues $120,000 $150,000 $176,000
Barker failed to record the unearned revenues in each of the three years. As a result of
the omission, 2007 income was
A. overstated by $146,000. C. understated by $26,000.
B. understated by $146,000. D. overstated by $26,000.

6. Selected information for Henry Company is as follows:
December 31
2006 2007
Common stock $600,000 $600,000
Additional paid-in capital 250,000 250,000
Retained earnings 170,000 370,000
Net income for year 120,000 240,000
Henry's return on common stockholder's equity, rounded to the nearest percentage point,
for 2007 is
A. 20 percent. C. 28 percent.
B. 21 percent. D. 40 percent.

7. On December 31, 2006, Superior, Inc. had 600,000 shares of common stock issued and
outstanding. Superior issued a 10 percent stock dividend on July 1, 2007. On October 1,
2006, Superior reacquired 48,000 shares of its common stock and recorded the purchase
using the cost method of accounting for treasury stock. What number of shares should be
used in computing basic earnings per share for the year ended December 31, 2007?
A. 612,000 C. 648,000
B. 618,000 D. 660,000

8. Koppell Co. made the following errors in counting its year-end physical inventories:
2000 $ 60,000 overstatement
2001 108,000 understatement
2002 90,000 overstatement
The entry to correct the accounts at the end of 2002 is
A. Retained Earnings $ 48,000
Cost of Goods Sold $ 42,000
Inventory 90,000
B. Retained Earnings 18,000
Cost of Goods Sold 72,000
Inventory 90,000
C. Inventory 90,000
Cost of Goods Sold 18,000
Retained Earnings 72,000
D. Cost of Goods Sold 198,000
Retained Earnings 108,000
Inventory 90,000

9. A company changes from an accounting principle that's not generally accepted to one
that's generally accepted. The effect of the change should be reported, net of applicable
income taxes, in the current
A. income statement after income from continuing operations and before extraordinary
items.
B. income statement after extraordinary items.
C. retained earnings statement as an adjustment of the opening balance.
D. retained earnings statement after net income but before dividends.

10. At December 31, 2006, the Murdock Company had 150,000 shares of common stock
issued and outstanding. On April 1, 2007, an additional 30,000 shares of common stock
were issued. Murdock's net income for the year ended December 31, 2007, was
$517,500. During 2007, Murdock declared and paid $300,000 in cash dividends on its
nonconvertible preferred stock. The basic earnings per common share, rounded to the
nearest penny, for the year ended December 31, 2006, should be
A. $3.00. C. $1.45.
B. $2.00. D. $1.26.

11. Selected information from the accounting records of Thorne Company is as follows:
Net sales for 2004 $900,000
Cost of goods sold for 2004 600,000
Inventory at December 31, 2003 180,000
Inventory at December 31, 2004 156,000
Thorne's inventory turnover for 2004 is
A. 5.36 times. C. 3.67 times.
B. 3.85 times. D. 3.57 times.

12. An example of an item that should be reported as a prior-period adjustment is the
A. collection of previously written-off accounts receivable.
B. payment of taxes resulting from examination of prior years' income tax returns.
C. correction of an error in financial statements of a prior year.
D. receipt of insurance proceeds for damage to a building sustained in a prior year

13. Landrover, Inc. had 150,000 shares of common stock issued and outstanding at
December 31, 2005. On July 1, 2006, an additional 25,000 shares of common stock were
issued for cash. Landrover also had unexercised stock options to purchase 20,000 shares
of common stock at $15 per share outstanding at the beginning and end of 2006. The
market price of Landrover's common stock was $20 throughout 2006. What number of
shares should be used in computing diluted earnings per share for the year ended
December 31, 2006?
A. 182,500 C. 177,500
B. 180,000 D. 167,500

14. Which of the following transactions would increase a firm's current ratio?
A. Purchase of inventory on account
B. Payment of accounts payable
C. Collection of accounts receivable
D. Purchase of temporary investments for cash

15. An accounting change that requires that the cumulative effect of the adjustment be
presented in the income statement is a change in
A. the life of equipment from five to seven years.
B. depreciation method from straight-line to double-declining-balance.
C. the specific subsidiaries included in consolidated financial statements.
D. percentage used to determine the allowance for bad debts.

16. At December 31, 2005, the Roberts Company had 700,000 shares of common stock
outstanding. On September 1, 2006, an additional 300,000 shares of common stock were
issued. In addition, Beck had $20,000,000 of 8 percent convertible bonds outstanding at
December 31, 2005, which are convertible into 400,000 shares of common stock. No
bonds were converted into common stock in 2006. The net income for the year ended
December 31, 2006, was $6,000,000. Assuming the income tax rate was 40 percent,
what should be the diluted earnings per share for the year ended December 31, 2006?
A. $5.00 C. $5.80
B. $5.53 D. $8.30

17. In comparing the current ratios of two companies, why is it invalid to assume that the
company with the higher current ratio is the better company?
A. A high current ratio may indicate inadequate inventory on hand.
B. A high current ratio may indicate inefficient use of various assets and liabilities.
C. The two companies may define working capital in different terms.
D. The two companies may be different sizes.

18. On January 1, 2004, Carnival Shipping bought a machine for $1,500,000. At that time,
this machine had an estimated useful life of six years, with no salvage value. As a result of
additional information, Carnival determined on January 1, 2007, that the machine had an
estimated useful life of eight years from the date it was acquired, with no salvage value.
Accordingly, the appropriate accounting change was made in 2007. How much depreciation
expense for this machine should Carnival record for the year ended December 31, 2007,
assuming Carnival uses the straight-line method of depreciation?
A. $125,000 C. $187,500
B. $150,000 D. $250,000

19. The 2006 net income of Atwater Inc. was $200,000, and 100,000 shares of its common
stock were outstanding during the entire year. In addition, there were outstanding options
to purchase 10,000 shares of common stock at $10 per share. These options were granted
in 2003, and none had been exercised by December 31, 2006. Market prices of Atwater's
common stock during 2006 were
January 1 $20 per share
December 31 $40 per share
Average Price $25 per share
The amount that should be shown as Atwater's diluted earnings per share for 2006
(rounded to the nearest cent) is
A. $2.00. C. $1.89.
B. $1.95. D. $1.86.

20. On December 31, 2006, Prince Company appropriately changed to the FIFO cost method
from the weighted-average cost method for financial statement and income tax purposes.
The change will result in a $700,000 increase in the beginning inventory at January 1,
2006. Assuming a 40 percent income tax rate, the cumulative effect of this accounting
change reported for the year ended December 31, 2006, is
A. $700,000. C. $350,000.
B. $420,000. D. $280,000.

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