,1. Multiple Choice: What is the effect of a stock dividend on a
company's total assets?
a) Increase
b) Decrease
c) No effect
d) Cannot be determined
Answer: c) No effect. Rationale: A stock dividend merely
redistributes a portion of retained earnings to common stock and
additional paid-in capital, but it does not change the total assets of
the company.
2. Fill-in-the-Blank: When a company changes its inventory
valuation from FIFO to LIFO, it must also restate its previous
financial statements as if _______ had been used all along.
Answer: LIFO. Rationale: According to the consistency
principle, when a change in accounting principle occurs, prior
financial statements must be restated to reflect the application of
the new principle as if it had been used in prior periods.
3. True/False: The equity method of accounting for investments
requires the investor to adjust the investment account for their
proportionate share of the investee's net income or loss.
, Answer: True. Rationale: The equity method requires
adjustments to the investment account based on the investor's share
of the investee's earnings or losses, reflecting the economic reality
of the investment's value.
4. Multiple Response: Which of the following are potential
financial statement impacts of a capital lease? (Select all that apply)
a) Increase in assets
b) Increase in liabilities
c) Decrease in equity
d) Increase in expenses
Answers: a) Increase in assets, b) Increase in liabilities.
Rationale: A capital lease is recorded as both an asset and a liability
at the present value of the lease payments, reflecting the company's
right to use the asset and the obligation to make payments.
5. Multiple Choice: Under the revenue recognition principle,
revenue is recognized when it is:
a) Earned
b) Realizable
c) Both a and b
d) Neither a nor b
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