Financial Accounting, 6th Edition – Jay S. Rich – Complete Test Bank (Chapters 1–12)

TEST BANK
Financial Accounting 6th Edition
by Jay Rich, Jeff Jones
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,Table of Content
1. Accounting and the Financial Statements

2. The Accounting Information System

3. Accrual Accounting
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4. Internal Control and Cash

5. Sales and Receivables
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6. Cost of Goods Sold and Inventory
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7. Operating Assets
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8. Current and Contingent Liabilities

9. Long-Term Liabilities
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10. Stockholders’ Equity
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11. The Statement of Cash Flows
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12. Financial Statement Analysis

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Appendix 1: Investments
1. A debt security represents a creditor relationship with another company.
a. True
b. False
ANSWER: True

2. If an investor owns over 50% of the outstanding common stock, the investor is deemed to have control over the
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operating and financial policies of the investee.
a. True
b. False
ANSWER: True

3. Held-to-maturity securities are equity and debt investments that management intends to sell in the future, but not
necessarily in the near term.
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a. True
b. False
ANSWER: False
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4. For all debt investments classified as trading or available-for-sale securities, the initial purchase of the investment is
recorded at cost. At each subsequent reporting date, the fair value method is used to account for the investment.
a. True
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b. False
ANSWER: True

5. On the balance sheet, held-to-maturity securities are classified as noncurrent assets unless the date of maturity is within
1 year or one operating cycle, whichever is longer.
a. True
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b. False
ANSWER: True

6. Securities issued by a corporation as a form of ownership in the business, such as common stock and preferred stock,
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are called equity securities.
a. True
b. False
ANSWER: True
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7. The equity method of accounting is used if an investor owns between 20% and 50% of another company and the
investor is able to exert influence over the other company.
a. True
b. False
ANSWER: True

8. An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own
income by exerting influence over the amount and timing of investee dividends.
a. True
b. False
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Appendix 1: Investments
ANSWER: True

9. If an investor holds enough common stock to control the investee (50% or more common stock ownership), then the
two corporations are no longer separate accounting entities. In such cases, the investor must prepare consolidated financial
statements, which combine its financial statements with those of the investee as if they were a single company.
a. True
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b. False
ANSWER: True

10. If the parent owns 90% of the subsidiary's stock, then 90% of the subsidiary's assets and liabilities are included in the
consolidated balance sheet.
a. True
b. False
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ANSWER: False

11. If an investor holds 50% or more of the investee's outstanding common stock, then the investor is referred to as the
parent and the investee is called the subsidiary.
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a. True
b. False
ANSWER: True
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12. Minority (or noncontrolling) interest is disclosed when the parent owns more than 50%, but less than 100% of the
outstanding common stock.
a. True
b. False
ANSWER: True
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13. Any transaction or set of transactions that brings together two or more previously separate entities to form a single
accounting entity is called a business combination.
a. True
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b. False
ANSWER: True

14. The excess of acquisition cost over the current value of the investee's identifiable net assets, referred to as goodwill,
may not be recorded by the investor under current generally accepted accounting principles.
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a. True
b. False
ANSWER: False

15. A purchased company must be recorded at the value of the cash and other consideration given by the acquiring
company.
a. True
b. False
ANSWER: True

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