ACCT 304 STUDY GUIDE QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Financial information helps investors revise a previous expectation about future cash flows. Which
aspect of relevance does this illustrate most directly?
A. Historical cost measurement
B. Mechanical precision
C. Legal form
D. Confirmatory value
Correct Answer: D. Confirmatory value
Explanation: Information has confirmatory value when it provides feedback that confirms or changes prior
evaluations. Relevance can include predictive value, confirmatory value, or both.
2. Under U.S. GAAP, how is cash received as interest on a debt investment generally classified?
A. Operating inflow
B. Noncash investing activity
C. Investing inflow
D. Financing inflow
Correct Answer: A. Operating inflow
Explanation: U.S. GAAP generally classifies cash interest received as an operating cash flow.
Classification can differ under other reporting frameworks, which is why the framework matters.
3. An investor properly applies the equity method. How does a cash dividend received from the investee
generally affect the investor's carrying amount and income?
A. It reduces the investment carrying amount and is not recognized as dividend income
B. It increases equity-method income and increases the investment account
C. It is reported in OCI and leaves the investment unchanged
D. It creates a gain on sale of the investment
Correct Answer: A. It reduces the investment carrying amount and is not recognized as dividend income
Explanation: Under the equity method, the investor recognizes its share of investee earnings as income.
Dividends are treated as a return of investment and therefore reduce the investment carrying amount.
, 4. Which expenditure incurred when acquiring new production equipment should normally be expensed
rather than included in the equipment's initial cost?
A. Installation necessary to make the equipment ready for use
B. Testing required before normal production begins, net of applicable proceeds under the accounting
policy
C. Freight to bring the equipment to the plant
D. Training employees to operate the equipment
Correct Answer: D. Training employees to operate the equipment
Explanation: PPE cost includes expenditures necessary to acquire the asset and prepare it for its intended
use. Employee training generally does not create or prepare the equipment itself and is expensed as incurred.
5. How do qualifying debt issuance costs affect interest expense over the life of a debt instrument under
U.S. GAAP?
A. They are charged to common stock and never affect interest expense
B. They are amortized so that they increase the borrower's effective interest expense
C. They are recognized as revenue over the debt term
D. They are ignored after reducing cash at issuance
Correct Answer: B. They are amortized so that they increase the borrower's effective interest expense
Explanation: Debt issuance costs are presented as a deduction from the related debt carrying amount and
are amortized over the debt term, which increases the effective cost of borrowing.
6. A manufacturer estimates warranty expense at the date of sale. In the following period, it performs
covered repairs that were anticipated by the estimate. Which accounting effect is appropriate when those
repairs are performed?
A. Debit sales revenue and credit the warranty liability
B. Record the repair as an extraordinary loss
C. Debit the warranty liability and credit cash, inventory, or wages payable as appropriate
D. Record a new warranty expense for the full repair cost regardless of the prior estimate
Correct Answer: C. Debit the warranty liability and credit cash, inventory, or wages payable as
appropriate
Explanation: Assurance-type warranty costs are estimated and expensed when the related sales occur.
When covered repairs are later performed, the previously recognized warranty liability is reduced rather than
recording the same expected cost a second time.
ANSWERS AND EXPLANATIONS
| American Public University
1. Financial information helps investors revise a previous expectation about future cash flows. Which
aspect of relevance does this illustrate most directly?
A. Historical cost measurement
B. Mechanical precision
C. Legal form
D. Confirmatory value
Correct Answer: D. Confirmatory value
Explanation: Information has confirmatory value when it provides feedback that confirms or changes prior
evaluations. Relevance can include predictive value, confirmatory value, or both.
2. Under U.S. GAAP, how is cash received as interest on a debt investment generally classified?
A. Operating inflow
B. Noncash investing activity
C. Investing inflow
D. Financing inflow
Correct Answer: A. Operating inflow
Explanation: U.S. GAAP generally classifies cash interest received as an operating cash flow.
Classification can differ under other reporting frameworks, which is why the framework matters.
3. An investor properly applies the equity method. How does a cash dividend received from the investee
generally affect the investor's carrying amount and income?
A. It reduces the investment carrying amount and is not recognized as dividend income
B. It increases equity-method income and increases the investment account
C. It is reported in OCI and leaves the investment unchanged
D. It creates a gain on sale of the investment
Correct Answer: A. It reduces the investment carrying amount and is not recognized as dividend income
Explanation: Under the equity method, the investor recognizes its share of investee earnings as income.
Dividends are treated as a return of investment and therefore reduce the investment carrying amount.
, 4. Which expenditure incurred when acquiring new production equipment should normally be expensed
rather than included in the equipment's initial cost?
A. Installation necessary to make the equipment ready for use
B. Testing required before normal production begins, net of applicable proceeds under the accounting
policy
C. Freight to bring the equipment to the plant
D. Training employees to operate the equipment
Correct Answer: D. Training employees to operate the equipment
Explanation: PPE cost includes expenditures necessary to acquire the asset and prepare it for its intended
use. Employee training generally does not create or prepare the equipment itself and is expensed as incurred.
5. How do qualifying debt issuance costs affect interest expense over the life of a debt instrument under
U.S. GAAP?
A. They are charged to common stock and never affect interest expense
B. They are amortized so that they increase the borrower's effective interest expense
C. They are recognized as revenue over the debt term
D. They are ignored after reducing cash at issuance
Correct Answer: B. They are amortized so that they increase the borrower's effective interest expense
Explanation: Debt issuance costs are presented as a deduction from the related debt carrying amount and
are amortized over the debt term, which increases the effective cost of borrowing.
6. A manufacturer estimates warranty expense at the date of sale. In the following period, it performs
covered repairs that were anticipated by the estimate. Which accounting effect is appropriate when those
repairs are performed?
A. Debit sales revenue and credit the warranty liability
B. Record the repair as an extraordinary loss
C. Debit the warranty liability and credit cash, inventory, or wages payable as appropriate
D. Record a new warranty expense for the full repair cost regardless of the prior estimate
Correct Answer: C. Debit the warranty liability and credit cash, inventory, or wages payable as
appropriate
Explanation: Assurance-type warranty costs are estimated and expensed when the related sales occur.
When covered repairs are later performed, the previously recognized warranty liability is reduced rather than
recording the same expected cost a second time.
