ACCT 304 EXAM PREP QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Which item is most clearly a current liability of Falcon Components absent special refinancing
circumstances?
A. Common stock
B. Accumulated depreciation
C. A 20-year bond due in 12 years
D. Accounts payable due in 45 days
Correct Answer: D. Accounts payable due in 45 days
Explanation: Obligations due within the operating cycle or one year are generally current. Long-term bonds
due years later are noncurrent; common stock is equity and accumulated depreciation is a contra-asset.
2. Delta Medical reports a gain on sale of equipment in net income. When preparing operating cash flow
by the indirect method, what adjustment is made for the gain?
A. Add the gain to net income
B. Subtract the gain from net income
C. Ignore the gain because it is noncash
D. Classify the gain itself as a financing flow
Correct Answer: B. Subtract the gain from net income
Explanation: The cash proceeds from the sale are investing. Because the gain is already included in net
income, it is subtracted in the operating reconciliation to avoid double counting the investing-related
component.
3. Which statement best describes the standard-setting relationship for U.S. public companies?
A. FASB is a federal taxing agency
B. The SEC issues all private-company bookkeeping rules and FASB has no role
C. The SEC has statutory authority over public-company reporting and has recognized FASB standards as
authoritative for nongovernmental GAAP
D. Neither FASB nor the SEC affects public-company financial reporting
Correct Answer: C. The SEC has statutory authority over public-company reporting and has recognized
FASB standards as authoritative for nongovernmental GAAP
Explanation: The SEC has legal authority over reporting by public companies, while FASB establishes
nongovernmental U.S. GAAP through its recognized standard-setting process. SEC registrants must also
follow applicable SEC rules and regulations.
, 4. Summit Software will receive customer consideration substantially later than transfer of control, and
the timing provides the customer with a significant financing benefit. What is the general
revenue-recognition consequence?
A. Recognize the full undiscounted amount as revenue immediately without interest effects
B. Classify the entire contract as a lease
C. Record the financing effect in OCI
D. Adjust promised consideration for the significant financing component so revenue reflects the cash
selling price at transfer
Correct Answer: D. Adjust promised consideration for the significant financing component so revenue
reflects the cash selling price at transfer
Explanation: When a significant financing component exists, the transaction price is adjusted for the time
value of money so that revenue reflects the cash selling price of the good or service. The financing
component is recognized separately as interest over time.
5. A long-term zero-coupon note is initially recorded at the present value of its maturity amount. What
happens to its carrying amount as the note approaches maturity?
A. It increases through interest accretion until it reaches the maturity amount
B. It is reclassified to equity each year
C. It decreases to zero because no coupon is paid
D. It remains at the initial present value for the entire term
Correct Answer: A. It increases through interest accretion until it reaches the maturity amount
Explanation: The initial discount represents unrecognized interest. Effective-interest accretion increases
both interest expense and the note's carrying amount until it equals the maturity value.
6. A 3-for-1 stock split occurs after year-end but before financial statements are issued. What is the
general effect on weighted-average shares used for the year just ended?
A. The split is reflected retrospectively as though it occurred at the beginning of the earliest period
presented
B. The split affects only the following year because it occurred after year-end
C. Only shares issued after the split date are adjusted
D. The split reduces weighted-average shares by two-thirds
Correct Answer: A. The split is reflected retrospectively as though it occurred at the beginning of the
earliest period presented
Explanation: Stock splits and similar capitalization changes are reflected retrospectively in EPS for all
periods presented so per-share information remains comparable.
ANSWERS AND EXPLANATIONS
| American Public University
1. Which item is most clearly a current liability of Falcon Components absent special refinancing
circumstances?
A. Common stock
B. Accumulated depreciation
C. A 20-year bond due in 12 years
D. Accounts payable due in 45 days
Correct Answer: D. Accounts payable due in 45 days
Explanation: Obligations due within the operating cycle or one year are generally current. Long-term bonds
due years later are noncurrent; common stock is equity and accumulated depreciation is a contra-asset.
2. Delta Medical reports a gain on sale of equipment in net income. When preparing operating cash flow
by the indirect method, what adjustment is made for the gain?
A. Add the gain to net income
B. Subtract the gain from net income
C. Ignore the gain because it is noncash
D. Classify the gain itself as a financing flow
Correct Answer: B. Subtract the gain from net income
Explanation: The cash proceeds from the sale are investing. Because the gain is already included in net
income, it is subtracted in the operating reconciliation to avoid double counting the investing-related
component.
3. Which statement best describes the standard-setting relationship for U.S. public companies?
A. FASB is a federal taxing agency
B. The SEC issues all private-company bookkeeping rules and FASB has no role
C. The SEC has statutory authority over public-company reporting and has recognized FASB standards as
authoritative for nongovernmental GAAP
D. Neither FASB nor the SEC affects public-company financial reporting
Correct Answer: C. The SEC has statutory authority over public-company reporting and has recognized
FASB standards as authoritative for nongovernmental GAAP
Explanation: The SEC has legal authority over reporting by public companies, while FASB establishes
nongovernmental U.S. GAAP through its recognized standard-setting process. SEC registrants must also
follow applicable SEC rules and regulations.
, 4. Summit Software will receive customer consideration substantially later than transfer of control, and
the timing provides the customer with a significant financing benefit. What is the general
revenue-recognition consequence?
A. Recognize the full undiscounted amount as revenue immediately without interest effects
B. Classify the entire contract as a lease
C. Record the financing effect in OCI
D. Adjust promised consideration for the significant financing component so revenue reflects the cash
selling price at transfer
Correct Answer: D. Adjust promised consideration for the significant financing component so revenue
reflects the cash selling price at transfer
Explanation: When a significant financing component exists, the transaction price is adjusted for the time
value of money so that revenue reflects the cash selling price of the good or service. The financing
component is recognized separately as interest over time.
5. A long-term zero-coupon note is initially recorded at the present value of its maturity amount. What
happens to its carrying amount as the note approaches maturity?
A. It increases through interest accretion until it reaches the maturity amount
B. It is reclassified to equity each year
C. It decreases to zero because no coupon is paid
D. It remains at the initial present value for the entire term
Correct Answer: A. It increases through interest accretion until it reaches the maturity amount
Explanation: The initial discount represents unrecognized interest. Effective-interest accretion increases
both interest expense and the note's carrying amount until it equals the maturity value.
6. A 3-for-1 stock split occurs after year-end but before financial statements are issued. What is the
general effect on weighted-average shares used for the year just ended?
A. The split is reflected retrospectively as though it occurred at the beginning of the earliest period
presented
B. The split affects only the following year because it occurred after year-end
C. Only shares issued after the split date are adjusted
D. The split reduces weighted-average shares by two-thirds
Correct Answer: A. The split is reflected retrospectively as though it occurred at the beginning of the
earliest period presented
Explanation: Stock splits and similar capitalization changes are reflected retrospectively in EPS for all
periods presented so per-share information remains comparable.
