Financial Accounting

Part I: Multiple choice

1. Byron and Co. owns several gyms. Members pay an upfront fee for access to the gyms. The firm has been recognizing the revenue of these fees when memberships are initiated. Assume there are memberships initiated every year and not all memberships are initiated on the first day of the fiscal year. If the firm had recognized fees over the life of the membership

a. Liabilities would be higher, and shareholders’ equity would be lower, but income before taxes for a given period could be higher or lower.

b. Liabilities and shareholders’ equity would be higher, but income before taxes for a given period could be higher or lower.

c. Liabilities, shareholders’ equity and income before taxes would be higher.

d. There would be no effect on liabilities or shareholders’ equity, but net income would be higher.

2. In a period of rising prices:

a. The cost of goods sold under LIFO is always higher than the cost of goods sold under FIFO.

b. The cost of goods sold under LIFO is always lower than the cost of goods sold under FIFO.

c. Inventory under LIFO is higher than inventory under FIFO.

d. None of the above

3. On July 1, 2010, a company obtained a £10,000 one year loan with an interest rate of 10%. The principal and interest will be paid at the due date, June 30, 2011. The firm’s fiscal year end is on December 31st. The company did not record any entries related to this transaction.

As a result,

a. Liabilities are understated by £10,000, assets are understated by £10,000, and income before taxes is correct.

b. Liabilities are understated by £10,000, assets are understated by £10,000 and income before taxes is understated by £500.

c. Liabilities are understated by £10,500, assets are understated by £10,000 and income before taxes is overstated by £500.

d. Liabilities are understated by 10,000, assets are understated by £9,500 and income before taxes is overstated by 500.

4. Keats Co.’s...