Accounting and Financial Reporting Practice Exam
Course Introduction
This course introduces the fundamental principles of accounting and financial reporting, focusing on the processes and methods involved in the preparation, analysis, and interpretation of financial statements. Students will explore the key concepts underlying the measurement and communication of financial information, including the accounting cycle, regulatory frameworks, asset and liability recognition, revenue and expense reporting, and disclosure requirements. Emphasis is placed on the role of accounting in supporting decision-making for internal and external stakeholders and on understanding the ethical considerations and professional standards guiding financial reporting practices.
Recommended Textbook
Financial Accounting An Introduction to Concepts Methods and Uses 14th Edition by Roman L. Weil
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Page 2
Chapter 1: Introduction to Business Activities and Overview
of Financial Statements and the Reporting Process
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Q1) _____ are the end results toward which the firm directs its energies.
A)Goals
B)Strategies
C)Objectives
D)Activities
E)Milestones
Answer: A
Q2) FASB board members make standard-setting decisions guided by a conceptual framework that addresses the qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting information holds that the information should be pertinent to the decisions made by users of financial statements, in the sense of having the capacity to affect their resource allocation decisions?
A)Relevance
B)Reliability
C)Comparability.
D)Subjective
E)all of the above
Answer: A
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Chapter 2: The Basics of Record Keeping and Financial
Statement Preparation: Balance Sheet
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Q1) Brice Foods Group, a European food retailer that operates supermarkets in seven countries, engaged in the following transaction during 2013: purchased and received inventory costing 500 million on account from various suppliers. Indicate the effects of the transaction on the balance sheet equation.Brice Foods Group applies IFRS, and reports its results in millions of euros.
A)Assets + 500 million; Liabilities + 500 million
B)Assets + 500 million; Shareholders' Equity + 500 million
C)Liabilities + 500 million; Shareholders' Equity + 500 million
D)Liabilities + 500 million; Shareholders' Equity - 500 million
E)Assets + 500 million; Shareholders' Equity - 500 million
Answer: A
Q2) What distinguishes noncurrent assets from current assets?
Answer: The distinction is based on time.Current assets are expected to be converted to cash or used within a year.Noncurrent assets are expected to be converted to cash over longer periods.
Q3) Explain how tenants record rent paid in advance for an office building and how a landlord or owner of the property rented records the receipt of the advance payment. Show journal entries as part of your answer.
Answer: 11edceec_1c3d_818d_b46f_0b044756f697_TB6253_00
Page 4
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Chapter 3: The Basics of Record Keeping and Financial
Statement Preparation: Income Statement
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Sample Questions
Q1) The last step in the accounting record-keeping process is:
A)making adjusting journal entries to the accounts to correct errors and to reflect the financial statement impacts of items that occur because of usage or the passage of time.
B)preparing the income statement for the period from amounts in the income statement accounts.
C)closing the temporary income statement accounts to retained earnings.
D)preparing the balance sheet from amounts in the balance sheet accounts.
E)preparing the statement of cash flows from balance sheet amounts and from details of transactions affecting the cash account.
Answer: E
Q2) The accounting system uses a device called an account.An account
A)is created each time a transaction takes place.
B)accumulates the increases and decreases that occur during the period for a single item.
C)is created only for income statement items.
D)is created only for balance sheet items.
E)None of these answer choices is correct.
Answer: B
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Chapter 4: Balance Sheet: Presenting and Analyzing
Resources and Financing
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Q1) At December 31, Year 1, Bolton Corporation has par value common stock with a par value of $1.50 per share, Additional paid-in capital of $60,000, total shareholders' equity of $100,000, and retained earnings of $25,000.What is the number of common stock shares?
A)5,000
B)10,000
C)15,000
D)20,000
E)25,000
Q2) The balance sheet imperfectly describes both resources and financing (claims on those resources).Explain why applying asset and liability definitions and recognition criteria under U.S.GAAP and IFRS does not result in the balance sheet including all economic benefits (resources) and obligations.
Q3) The principal objective of accounting reports as currently prepared is to present accurately the results of operations and the financial condition of the firm.
A)True B)False
Q4) Describe Asset recognition, definition, and measurement.
Page 6
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Chapter 5: Income Statement: Reporting Results of Operating Activities
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Q1) Comprehensive income equals net income as reported on the income statement plus (minus) the increase (decrease) in other comprehensive income for the year.
A)True
B)False
Q2) What are the criteria for revenue recognition?
Q3) Accumulated Other Comprehensive Income
A)is a shareholders' equity account on the balance sheet.
B)reports the cumulative amounts of other comprehensive income as of the date of the balance sheet.
C)equals net income on the traditional income statement plus other comprehensive income for the period.
D)is both choices a and b.
E)is all choices a, b, and c.
Q4) There are three formats available for both U.S.GAAP and IFRS reporting of the items that are included in Other Comprehensive Income.
A)True
B)False
Q5) What is comprehensive income?
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Chapter 6: Statement of Cash Flows
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Q1) Under U.S.GAAP, the classification of interest expense as a(n) _____ activity and dividends paid on common or preferred shares as a(n) _____ activity appears inconsistent to some observers as both are payments to suppliers of funds.
A)operating; financing
B)investing; financing
C)financing; investing
D)financing; operating
E)investing; operating
Q2) If the balance sheet shows the same beginning and ending balance for depreciable assets, there
A)have been no financing activities during the year.
B)have been no investing activities during the year.
C)may have been investing activities.
D)may have been financing activities.
E)have been no investing and financing activities during the year.
Q3) Cash flows do not always fit unambiguously into only one of the three categories: operating, investing and financing. Explain.
Q4) How does the statement of cash flows helps readers understanding?
Q5) Describe the various sections of the statement of cash flows.
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Chapter 7: Introduction to Financial Statement Analysis
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Q1) The rate of return on common shareholders' equity (ROCE) measures a firm's performance in using and financing assets to generate earnings.
A)True
B)False
Q2) Rate of return on common shareholders' equity (ROCE)
A)measures a firm's performance in using and financing assets to generate earnings and explicitly considers financing costs.
B)a measure of profitability that incorporates the results of operating, investing, and financing activities.
C)equals net income (less dividends on preferred stock, if any) divided by average common shareholders' equity.
D)all of the above
E)none of the above
Q3) Describe the disaggregation of the rate of return on common shareholders' equity.
Q4) Why are ratios useful?
Q5) Discuss how investors base their investment decisions on the return anticipated from each investment and the risk associated with that return.
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Chapter 8: Revenue Recognition, Receivables, and
Advances From Customers
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Q1) Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.
A)True
B)False
Q2) Operating risks
A)include variability in sales from changing economic conditions (cyclicality risk).
B)include variability in sales from short product life cycles (because of technological change or changes in consumer taste).
C)include variability of earnings that arises when the firm has a high proportion of fixed costs that do not change as sales change.
D)Answers a, b, and c are correct.
E)None of these answer choices is correct.
Q3) Notes receivable is the amount owed to a seller by customers who have purchased goods and services on credit.
A)True
B)False
Q4) Discuss the application of the allowance method for sales returns.
Q5) Describe the accounts receivable recognition process.
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Chapter 9: Working Capital
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Q1) The accountant's definition of working capital is the same as the definition often used in finance.
A)True
B)False
Q2) In a time of rising prices, unrealized holding gains on ending inventory are
A)higher under LIFO than FIFO.
B)higher under FIFO than LIFO.
C)reported on the income statement.
D)required to be reported in notes to the financial statements.
E)none of the above
Q3) Focus Company sells merchandise with a one year warranty. In 2013, sales consisted of 2,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2013 and 70% in 2014. In the 2013 income statement, Focus should show warranty expense of
A)$25,000
B)$7,500
C)$17,500
D)$0
E)$12,500
Q4) What costs are included in inventory of manufacturing and merchandising firms?
Page 11
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Chapter 10: Long-Lived Tangible and Intangible Assets
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Q1) Discuss the treatment of expenditures as assets versus immediate expenses.
Q2) How are long-lived assets analyzed?
Q3) When a firm constructs its own buildings or equipment:
A) it recognizes the labor, material, and overhead costs incurred as an asset.
B)U.S.GAAP and IFRS require firms to include, or capitalize, interest costs during construction in the cost of a self-constructed asset.
C) it recognizes the labor, material, and overhead costs incurred as a period expense.
D)U.S.GAAP and IFRS require firms to expense interest costs incurred during construction of a self-constructed asset.
E)both choices a and b are correct.
Q4) Estimating _____ presents the most difficult task in the depreciation and amortization calculation.A change in this estimate will change the depreciation and amortization amounts going forward.
A)disposal costs
B)salvage value
C)acquisition costs
D)service lives
E)ordinary wear and tear from use
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Chapter 11: Notes, Bonds, and Leases
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Q1) Capital leases are economically similar to purchasing assets with funds obtained from issuing long-term bonds and result in similar accounting.
A)True
B)False
Q2) Loans from commercial banks and other financial institutions often require firms to pledge assets as _____.
A)"senior" tranches
B)derivatives
C)collateral
D)"junior" tranches
E)principal payments
Q3) What determine(s) the risk of investing in a bond issue, which in turn affects the interest rate investors demand and therefore the bond's price?
A)industry economic characteristics
B)the financial health of a firm
C)particular provisions of a bond issue
D)all of the above
E)none of the above
Q4) How does a lessor account for leases?
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Chapter 12: Liabilities: Off-Balance Sheet Financing, Retirement
Benefits, and Income Taxes
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Q1) Firms recognize deferred tax assets only to the extent that they expect to generate sufficient taxable income to realize the assets in the form of tax savings in the future.IFRS requires that firms recognize the _____of deferred tax assets, with explanatory disclosures.
A)expected realizable amount
B)present value of the amount
C)future value of the amount
D)negotiated value of the amount
E)liquidation value of the amount
Q2) Discuss the accounting for income taxes and the disclosure of income taxes in the financial statements.
Q3) U.S.GAAP and IFRS require firms to report pension plan assets at the estimated future value.
A)True B)False
Q4) Many off-balance-sheet financings fall into one of two categories that accounting typically does not recognize as liabilities: executory contracts and contingent obligations.
A)True B)False
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Chapter 13: Marketable Securities and Derivatives
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Q1) Armul Insurance acquired shares of Bannock's common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Armul Insurance sold these shares on January 3, 2014, for $405,000.
a. What is the journal entry to record acquisition of trading securities on December 28, 2013?
b. What is the journal entry to measure trading securities at fair value and recognize unrealized holding gain on December 31, 2013?
c. What is the journal entry to record the sale of trading securities at a gain on January 3, 2014?
d. What is the total income from the purchase and sale of the securities?
Q2) U.S.GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to maturity nor trading securities as securities available-for-sale. A)True B)False
Q3) What is the accounting treatment for securities available for sale?
Q4) Describe the accounting for derivatives.
Q5) What are elements of a derivative?
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Chapter 14: Intercorporate Investments in Common Stock
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Q1) Parton Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000.Parton Corporation acquires the investment in Import Corporation by buying previously issued shares of Import Corporation from other investors. When Parton Corporation acquired 30% of Import Corporation's common shares for $600,000, Import Corporation's total shareholders' equity was $1.5 million.Parton Corporation's cost exceeds the carrying value of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)].Parton Corporation may pay this premium because
A)the fair values of Import's net assets differ from their carrying values, only.
B)of unrecorded assets (for example, trade secrets), only.
C)the fair values of Import's net assets differ from their carrying values and/or unrecorded assets (for example, trade secrets).
D)the liquidation values of Import's net assets differ from their carrying values, only.
E)of unrecorded liabilities (for example, contingent liabilities), only.
Q2) What are qualifying special purpose entities?
Q3) Describe the limitations of consolidated statements.
Q4) Describe the accounting and reporting of investments in common stock.
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Chapter 15: Shareholders Equity: Capital Contributions and Distributions
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Q1) In most cases U.S.GAAP requires firms to allocate the full issue price of Convertible Bonds or Convertible Preferred Stock to the bonds or preferred stock and none of the price to the conversion feature.
A)True
B)False
Q2) Common and preferred stock usually do not have a par or stated value.
A)True
B)False
Q3) Firms occasionally issue stock options in order to
A)compensate employees.
B)compensate managers.
C)motivate employees to take actions that will increase the market value of the firm's common shares.
D)conserve cash.
E)all of the above
Q4) Firms may periodically distribute net assets generated by earnings to shareholders as a dividend.Firms reduce net assets and retained earnings for the distribution.
A)True
B)False
17
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Chapter 16: Statement of Cash Flows: Another Look
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Q1) Which of the following is not true regarding the fair value option for marketable securities and derivatives?
A)Subsequent to the acquisition of a derivative, the firm may report changes in fair value of derivatives in Other Comprehensive Income.
B)Subsequent to the acquisition of a derivative, the firm may report changes in fair value of derivatives, but they have no effect on any lines of the statement of cash flows.
C)Firms using the fair value option mark the carrying value of the asset to fair value each period.
D)If the change in fair value increases carrying value, then the firm reports a gain in income equal to the amount of the increase in carrying value during the current period.
E)The cash flow from operations section shows an addition for the amount of the gain equal to the amount of the increase in carrying value of a derivative during the current period.
Q2) The balance sheet portrays the effects of a firm's investing and financing decisions.In analyzing these decisions, what two principles guide financing decisions?
Q3) Discuss the indirect and direct methods in deriving cash flow from operations.
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Chapter 17: Synthesis and Extensions
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Q1) U.S.GAAP and IFRS require firms to treat some or all expenditures made to internally develop brand names, customer lists, new technologies, and other intangibles
A)at fair value.
B)as expenses in the period of the expenditure.
C)as capitalized assets without amortization because of infinite lives.
D)as capitalized assets with amortization over the finite lives.
E)as capitalized assets tested annually for impairment.
Q2) The joint efforts of the FASB and the IASB to set forth qualitative characteristics of financial reporting information have led to which of the following tentative pervasive constraints?
A)cost, only
B)materiality, only
C)understandability, only
D)timeliness, only
E)materiality and cost
Q3) How do firms account for inventories?
Q4) Describe the conceptual framework used by FASB and the IASB to guide their standard-setting decisions.
Q5) Explain the accounting for leases.
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