Accounting for Decision Making Practice Questions
Course Introduction
Accounting for Decision Making introduces students to the fundamental principles and techniques of accounting as they apply to managerial decision-making processes. The course covers the use of financial and non-financial information in planning, controlling, and evaluating organizational activities, with a focus on cost behavior, budgeting, performance analysis, and relevant costing for short- and long-term decisions. By integrating real-world case studies and practical examples, the course equips students with the analytical tools required to interpret accounting data and make informed decisions that drive organizational success.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James
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14 Chapters
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Page 2
M. Wahlen
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Sample Questions
Q1) An example of an intangible asset is
A) A patent
B) Land
C) Investment in another company
D) Raw material inventory
Answer: A
Q2) The threat of new entrants is measured by whether there are entry barriers,such as capital investment,________________________________________,patents,or regulation that inhibit new entrants.
Answer: technological expertise
Q3) When assessing buyer power using Porter's five forces,which of the following is not consistent with low buyer power?
A) Brand loyalty
B) Control of distribution channel
C) Large number of suppliers
D) Low price
Answer: C
Q4) Cash and cash equivalents are considered ____________________ assets.
Answer: Monetary
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Which of the following transactions is consistent with recognizing value changes on the balance sheet and income statement when they are realized in a market transaction?
A) Selling land at a cost greater than its original purchase price.
B) Recording an increase in the fair value of investments at year end.
C) Translating foreign operations accounted for in Yen back to U.S. dollars in order to prepare consolidated financial statements.
D) Writing down the value of an asset due to obsolescent.
Answer: A
Q2) Valuation methods that reflect current values or a combination of historical and current values include all of the following except:
A) fair value for assets and liabilities.
B) current replacement cost for assets.
C) net realizable value for assets.
D) adjusted acquisition costs for assets.
Answer: D
Q3) Net income equals revenues plus ____________________ minus expenses and
Answer: gains,losses
Page 4
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Chapter 3: Income Flows Versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) A firm's cash flows will differ from net income each period for all of the following reasons except:
A) cash receipts from customers do not necessarily occur in the same period in which a firm recognizes revenues.
B) cash expenditures to employees, suppliers, and governments do not necessarily occur in the same period in which a firm recognizes expenses.
C) the company is sustaining losses each period.
D) cash inflows and outflows that pertain to investing and financing activities do not immediately flow through the income statement.
Answer: C
Q2) Lui Company's 2010 income statement reported total sales revenue of $350,000.The 2009-2010 comparative balance sheets showed that accounts receivable increased by $20,000.The 2010 "cash receipts from customers" would be
A) $270,000
B) $250,000
C) $330,000
D) $40,000
Answer: C
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) One important difference between return on assets (ROA)and return on common shareholder's equity (ROCE)is
A) ROA does not differentiate based on how a company finances its assets; ROCE does.
B) ROA does not distinguish between the different types of income items, such as income from continuing operations, discontinued operations, extraordinary items and changes in accounting principles; ROCE does.
C) ROCE does not distinguish between the different types of income items, such as income from continuing operations, discontinued operations, extraordinary items and changes in accounting principles; ROA does.
D) ROCE does not differentiate based on how a company finances its assets; ROA does.
Q2) Refer to the information for Orca Industries.The return on common shareholders' equity for Orca Industries is
A) 15.2%
B) 13.5%
C) 10%
D) 11.9%
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Chapter 5: Risk Analysis
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Q1) Falcon Corporation has current assets of $400,000 and current liabilities of $275,000. Required:
Compute the effect of each of the following transactions on Falcon's current ratio:Compute the effect of each of the following transactions on Falcon's current ratio:
a.Refinanced a $60,000 long-term mortgage with a short-term note.
b.Purchasing $108,000 of merchandise inventory with short-term accounts payable.
c.Paying $50,000 of short-term accounts payable.
d.Collecting $90,000 of short-term accounts receivable.
Q2) When a company wants to calculate the current ratio the would divide the current assets by the ___________
Q3) Bankruptcy analysis research has gone through many iterations,from univariate bankruptcy prediction models to sophisticated logit models.However,after examining the results of the research there appear to be a number of common factors that consistently explain bankruptcy.These factors can be grouped into investment factors,financing factors,operating factors.For each of the three groups discuss specific factors that have been found to significantly explain bankruptcy.
Q4) The current ratio is one of the measures of__________ of the firm.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) During July 2012 Ralston Company decides to dispose of one of its subsidiaries which qualifies for accounting as a discontinued operation.At the July 2012 measurement date Ralston Company estimates that it will report net losses of $1,500,000 dollars from the measurement date until the disposal date which is expected to be in April 2013.In addition,Ralston estimates that it will lose $300,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes)?
A) $1,500,000 loss
B) $0
C) $1,800,000 loss
D) $300,000 loss
Q2) All of the following are true regarding a high quality balance sheet except:
A) It should portray the economic resources that can be reasonably expected to generate future economic benefits.
B) It should provide a complete and fair portrayal of all of the firm's obligations at a point in time, including the present value of long-term liabilities for future payments.
C) It should minimize measurement error and bias.
D) It should be optimistic in terms of accounting numbers.
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Chapter 7: Financing Activities
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Sample Questions
Q1) Which of the following is the date on which a company determines the owners of the stock that will receive a dividend?
A) date of record
B) measurement date
C) date of declaration
D) date of payment
Q2) Assuming that Santa Corporation was required to capitalize its operating lease how would the company's fixed asset ratio change under this assumption.
A) increase
B) decrease
C) no effect
D) unable to determine
Q3) One of the conditions that must be met to recognize an estimated loss from a contingency is that the amount of loss can be estimated with
Q4) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
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Chapter 8: Investing Activities
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Q1) All of the following are types of intercorporate investments in capital stock except:
A) minority, passive
B) minority, active
C) majority, active
D) majority, passive
Q2) Ownership of 50% or more of the voting stock of another company implies an ability to ____________________ the company and _________________ should be prepared
Q3) If Ashley Company accounts for the investment as a minority,passive investment and classifies it as a available-for-sale security the investment will appear in the December 31,2010 balance sheet at what amount?
A) $60,000
B) $65,000
C) $64,000
D) $75,000
Q4) Under US GAAP when an assets carrying amount is deemed _______________the asset is considered impaired
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Chapter 9: Operating Activities
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Q1) Which of the following accounts would not be considered a reserve account?
A) Allowance For Doubtful Accounts
B) Estimated Warranty Liability
C) Prepaid Expense
D) Accumulated Depreciation
Q2) A LIFO liquidation during periods when prices are increasing results in a company
A) recording a large inventory write down.
B) recording higher earnings than it would have if it had used FIFO.
C) recording lower earnings than it would have if it had used FIFO.
D) having operational problems, but no financial statement effects.
Q3) Which of the following would not be suggestive of a company recognizing sales too early?
A) large and volatile amounts of uncollectible accounts receivable
B) excessive warranty expenditures
C) large growth in accounts receivable
D) unusually large amount of returned goods
Q4) Deferred tax liabilities result in future tax ____________________ when temporary differences reverse.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) Financial statement forecasts should rely on ____________________ within financial statements.
Q2) Based on the following statement from the text," to develop forecasts of individual operating assets and liabilities,you must first determine the underlying operating activities that drive them".Explain what those underlying activities are?
Q3) The formula for forecasting inventory is ____________ /365 X .
Q4) Financial statement forecasts rely on additivity within financial statements and articulation across financial statements.Given this information sales growth forecasts will most likely affect growth in A) accounts receivables. B) accounts payable. C) depreciation. D) salary payable.
Q5) It may be difficult to forecast sales for firms with _________________________ patterns because their historical growth rates reflect wide variations in both direction and amount from year to year.
Q6) For some types of assets,such as plant,property and equipment,asset growth typically ____________________ future sales growth.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Sample Questions
Q1) Under the assumption of clean surplus accounting,how would you compute total dividends paid to common equityholders in order to value the firm?
Q2) Assume that Zonk is a potential leveraged buyout candidate.Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity.Compute the revised equity beta for Zonk based on the new capital structure.
A) 4.35
B) 4.77
C) 4.34
D) 3.91
Q3) All of the following are steps in the analysis and valuation framework used to understand the fundamentals of a business and determine estimates of its value except:
A) Analyze the firm's strategy in terms of the competition.
B) Assess the quality of the firm's accounting and financial reporting.
C) Derive forecasts of future earnings from the firm's projected financial statements.
D) Obtain the national ranking of the firm's external auditors.
Q4) Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Financial assets include all of the following except
A) Excess cash
B) short term investments
C) intangible assets
D) long trm investments
Q2) The risk-adjusted discount rate used to compute the present value of all the projected free cash flows for common equity shareholders equals the _______________________________________________________.
Q3) Financial liabilities include all of the following except
A) mortgages payable
B) current maturities of long term debt
C) accrued taxes
D) bonds payable
Q4) A disadvantage of the free cash flow valuation method is
A) The terminal value tends to dominate the total value in many cases.
B) The projection of free cash flows depends on earnings estimates.
C) The free cash flow method is not rigorous.
D) The free cash flow method is not used widely in practice.
Q5) Provide the rationale for using expected free cash flow in valuation.
Q6) What is the purpose of a free cash flow analysis?
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Residual income will begreater than zero when
A) the firm's reported net income exactly equals the required level of earnings necessary to cover the cost of equity capital.
B) the firm's expected future income is greater than the required level of earnings necessary to cover the cost of equity capital.
C) the firm's expected future income exactly equals the required level of earnings necessary to cover the cost of equity capital.
D) the firm's expected future income is less than the required level of earnings necessary to cover the cost of equity capital.
Q2) ____________________ are the fundamental,value-relevant attribute of expected future returns.
Q3) Accounting earnings numbers provide a basis for valuation because earnings are the primary measure of ______________________________ produced by the accrual accounting system.
Q4) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be equal to the ______________________________ of common shareholders' equity.
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Firms with low P/E ratios tend to have current residual income that is greater than
Q2) Which of the following is not a reason why price-earnings ratios would differ across firms?
A) Risk
B) Profitability
C) Growth
D) Operating leverage
Q3) Which of the following would not be an example of the use of a multiple when valuing common equity?
A) Price-to-operating cash flow
B) Price-to-book.
C) Price-to-earnings.
D) Multiperiod discounted earnings models.
Q4) Studies have shown that 50-70% of the variability in PE ratios across firms comes from and .
Q5) Explain the analysts' role in making the capital markets efficient.
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