Accounting for Decision Making Question Bank
Course Introduction
Accounting for Decision Making introduces students to the fundamental concepts and practices of accounting with a focus on how financial and managerial information is used in decision-making processes. The course explores the preparation and interpretation of financial statements, cost behavior analysis, budgeting, performance evaluation, and relevant costs for short-term decisions. Emphasizing real-world applications, students learn how accounting data supports strategic planning, operational control, and informed resource allocation within organizations. The course is designed for both future accountants and non-accountants seeking to enhance their ability to analyze financial information for effective business decisions.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James M. Wahlen
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Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Q1) Most financial statement analysis aims to assess a firm's ____________________ and ____________________.
Answer: profitability,risk
Q2) The _____________________________________________ defines more clearly the explicit responsibility of managers for financial statements,the relation between the independent auditor and the firm audited and the kinds of services permitted and not permitted.
Answer: Sarbanes-Oxley Act of 2002
Q3) Assets for a particular business might include
A) Cash, retained earnings, and accounts payable.
B) Cash, common shareholders' equity, and accounts receivable. C) Cash, property, plant, and equipment, and accumulated other comprehensive income.
D) Cash, inventories, and goodwill.
Answer: D
Q4) Nonmonetary assets include assets that are ____________________,such as inventories,and assets that are ____________________ such as brand names.
Answer: tangible,intangible
Page 3
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Chapter 2: Asset and Liability Valuation and Income Measurement
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Q1) What valuation methods reflect current values? Discuss the advantage(s)and disadvantage(s)of valuing assets and liabilities using current values.
Answer: Valuation methods reflecting current values include:
1.current replacement cost
2.net realizable value
3.present value of cash flows using current interest rates
The main advantage of using current values is increased relevance for financial statement users.The disadvantages include greater subjectivity.
Q2) Relevant asset valuations refer to all of the following except:
A) they are timely.
B) they have the capacity to affect a user's decisions, based on the information. C) they incorporate all available information.
D) they are always subjective.
Answer: D
Q3) Acquisition costs includes all costs necessary to get an asset ready for its
Answer: intended use
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Page 4
Chapter 3: Income Flows Versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) Discuss operating,investing,and financing cash flows in relation to the various stages of the product life cycle.
Answer: 1.Operating cash flows begin negative in the introduction phase and start becoming positive in the growth phase.Operating cash flows reach their peak in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase.2.Investing cash flows begin negative in the introduction phase and stays negative in the growth phase.Investing cash flows become positive in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase.3.Financing cash flows are positive in the introduction and growth phase.Financing cash flows start to decrease at the end of the maturity phase and continue to decrease in the decline phase.
Q2) Which of the following is not an expense excluded when calculating EBITDA?
A) depreciation expense
B) administrative expense
C) interest expense
D) tax expense
Answer: B
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Chapter 4: Profitability Analysis
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Q1) Return on assets will likely differ across firms and across time.Three elements of risk that will help explain these differences are operating leverage,___________________________________,and stage and length of product life cycle.
Q2) In order to measure how profitable a firm is in generating a return for its common shareholders,a financial analyst would examine the return on _____________________________________________.
Q3) To calculate diluted EPS,the accountant does all of the following except:
A) adds back to net income any compensation expense recognized on the employee stock options
B) adds back any interest expense (net of taxes) on convertible bonds
C) adds back any dividends on convertible preferred stock the firm subtracted in computing net income to common shareholders.
D) enters only the net incremental shares issued (shares issued under options minus assumed shares repurchased) in the computation of diluted EPS.
Q4) The ____________________ effect of interest expense on net income equals one minus the marginal tax rate times the interest expense.
Q5) When calculating Basic earnings per share net income is adjusted by____________
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Chapter 5: Risk Analysis
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Q1) Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.
Q2) The ________________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense.
Q3) Foxmoor Company's merchandise inventory and other related accounts for 2012 follow:
\[\begin{array} { | l | r | }
\hline \text { Sales } & \text { \$3,100,00] } \\
\hline \text { Cast of Gades Sold } & 2,153,200 \\
\hline \text { Merchanthise Inventary } & \\
\hline \text { Beginning of Year } & 850,000 \\
\hline \text { End of Year } & 995,000 \\
\hline
\end{array}\]
Required:
Calculate Foxmoor's inventory turnover during 2012 assuming that the merchandise inventory buildup was relatively constant during the year.
Q4) Discuss the differences between Chapter 7 and Chapter 11 bankruptcy filings?
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Chapter 6: Accounting Quality
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Q1) Examples of poor earnings quality that hinder the forecasting of expected future earnings include all of the following except:
A) Earnings dominated by a substantial one-time gains from the sale of real estate tangential to the firm's operations.
B) Reporting a large expense from a warehouse fire that was not covered by insurance.
C) A local government corrects a processing error and a firm receives an unexpected rebate on property taxes previously paid.
D) The company adds equipment that reduces carbon emissions in response to EPA requirements and increases production efficiency.
Q2) Quality accounting information seeks to maximize relevance and economic faithfulness,subject to the constraints of the ____________________ of the measurements.
Q3) When evaluating the quality of accounting information the user should consider the ____________________ of the measurements made.
Q4) When evaluating the quality of accounting information the user should consider the ____________________ of the firm's disclosures.
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Page 8
Chapter 7: Financing Activities
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Q1) Which of the following is the date on which the dividend distribution occurs?
A) date of record
B) commitment date
C) date of declaration
D) date of payment
Q2) Under which of the following conditions does the equipment lease qualify for capital lease accounting?
A) The lease contains a bargain purchase option.
B) The lease term is equal to or greater than 75% of the asset's economic life.
C) A, and B are correct answers.
D) The lease transfers ownership to the lessee at the end of the lease term.
Q3) Using the information provided by Santa Corporation calculate the present value of the operating leases.
A) $2,155,843
B) $2,024,945
C) $1,482,390
D) $2,854,452
Q4) The acceptable method of accounting for stock options is the _________________________ method.
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Chapter 8: Investing Activities
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Q1) Which of the following is(are)a difficulty in determining current market values when determining the value of fixed assets?
A) There is an absence of active markets for many fixed assets.
B) It is difficult to identify comparable assets currently available in the marketplace to value assets in place
C) It is difficult to make assumptions about the effects of technology and other improvements when using the prices of new assets currently available on the market in the valuation process.
D) All of the above.
Q2) When dividends from an investment are recognized as a reduction of the investment account,the investment must have been of which type?
A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment
Q3) Unrealized holding gains and losses from investments classified as available for sale are reported in _____________________________________________.
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Chapter 9: Operating Activities
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Q1) Under U.S.GAAP,application of the LIFO and FIFO inventory methods result in differences in the balance sheet,income statement and cash flow statement.Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.
Q2) An inventory pricing procedure in which the current costs have a direct impact on the inventory is:
A) FIFO
B) LIFO
C) Base stock
D) Weighted-average
Q3) A company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.
Q4) Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.
Q5) When firms use derivatives effectively to manage risks,the net gain or loss each period should be relatively ____________________.
Q6) Recording municipal bond interest received in the general ledger will generate a _________________ difference
Page 11
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Chapter 10: Forecasting Financial Statements
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Q1) For some types of assets,such as plant,property and equipment,asset growth typically ____________________ future sales growth.
Q2) An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that A) the method reduces the potential understatement inherent in average balances. B) the method can introduce artificial volatility in ending balances. C) the method results in understating inventory each year. D) the method results in overstating inventory each year.
Q3) Office Mart,Inc.sells numerous office supply products through a national distribution center.The company has focused on maintaining a cash balance equivalent to approximately 14 days of sales.Sales in 2010 amounted to $125,980,673 and the company expects growth in 2011 of 11% and in 2012 of 15%.Given this information determine Office Mart,Inc.'s projected year-end cash balance for 2011 and 2012.
Q4) Financial statement forecasts should rely on _________________________ across financial statements.
Q5) The formula for forecasting inventory is ____________ /365 X .
Q6) Financial statement forecasts should rely on ____________________ within financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future,when all of the following conditions hold true except:
A) The current risk of the firm is the same as the expected future risk of the firm.
B) Expected future interest rates are likely to equal current interest rates.
C) The existing capital structure of the firm is the same as the expected future capital structure of the firm.
D) The current mix of debt and equity financing is equal.
Q2) With respect to dividends and priority in liquidation,what has priority over common stock?
A) treasury stock
B) debt capital
C) preferred stock
D) nonconvertible common equity
Q3) Why are dividends value-relevant to common equity shareholders?
Q4) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q5) Provide the rationale for using expected dividends in a valuation model.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Continuing free cash flows represent
A) the cash flows remaining after deducting cash flows attributable to debt holders
B) the free cash flows after the point at which the firm has settled into a long-run steady-state growth rate.
C) all sustainable free cash flows
D) all after-tax free cash flows
Q2) Nonsystematic risk factors would include all of the following except:
A) the sustainability of the firm's strategy
B) the firm's ability to generate revenue growth
C) the firm's ability to control expenses
D) unemployment levels
Q3) The conceptual framework for free cash flows separates the balance sheet equation into the following categories:
A) CA + LT A = CL + LT L + SE
B) OA + FA = OL + FL + SE
C) OA + FA = OL + FL + OSE + FSE
D) Non-FA + FA = Non-FL + FL + SE
Q4) What three elements are needed to value a resource when using cash flows?
Q5) What is the purpose of a free cash flow analysis?
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Investors have invested $30,000in common equity in a company.Given the risk inherent in the company,the investors expect to earn a 13percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company earns $4,500 the first year.For this company determine the following:a.The company's required earnings b.The company's residual earnings
Q2) Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?
A) Overbidding.
B) Over optimistic appraisal of market potential.
C) Over estimation of synergies.
D) Overuse of conventional financial statements.
Q3) Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are
Q4) The residual income_____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.
Q5) What is the rationale for using expected earnings as a basis for valuations?
Page 15
Q6) What is meant by the term clean surplus accounting?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The use of P/E ratios in valuation can result in measurement bias.What two items can result in measurement error and why?
Q2) Explain the analysts' role in making the capital markets efficient.
Q3) A company with a PEG ratio of less than one would be interpreted as having a stock price
A) are underpriced given earnings and expected earnings growth
B) that is low relative to the company's growth prospects
C) that is high relative to the company's growth prospects
D) That is overvalued
Q4) The value-to-book ratio reflects an analyst's expectation of the firm's ____________________ value to book value.
Q5) Companies value-to-book and market-to-book ratios may differ due to accounting reasons.An example of an accounting reason that would create a difference is
A) accelerated methods of depreciation.
B) investments in successful research and development programs that are expensed according to conservative accounting principles.
C) using LIFO versus FIFO for inventory.
D) high operating leverage.
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