Accounting for Finance Majors Practice Exam
Course Introduction
This course provides finance majors with a comprehensive understanding of accounting principles and practices essential for financial decision-making and analysis. Emphasizing the role of accounting in the context of corporate finance, the course covers the preparation and interpretation of financial statements, the analysis of accounting information for investment and credit decisions, and the application of key accounting concepts to real-world financial scenarios. Students will gain practical skills in evaluating financial reports, understanding revenue recognition, expense measurement, and the impact of accounting choices on financial performance. The course also highlights the regulatory environment and ethical considerations relevant to financial accounting.
Recommended Textbook
Intermediate Accounting 8th Edition by
J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing operations.
A)True
B)False
Answer: True
Q2) The conceptual framework's qualitative characteristic of faithful representation includes:
A)Predictive value.
B)Neutrality.
C)Confirmatory value.
D)Timeliness.
Answer: B
Q3) The FASB's framework for measuring fair value doesn't change the situations in which fair value is used under current GAAP.
A)True
B)False
Answer: True
Q4) Compute the cash balance at the end of the first year for Alpaca Corporation. Answer: 11ea906f_5651_9c75_a7a0_991789c06ebd_TB2444_00
3
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Chapter 2: Review of the Accounting Process
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Q1) Describe what is meant by deferred revenues and provide two examples.
Answer: Deferred revenues are created when a company receives cash from a customer for goods or services that will be provided in a future period.Examples include magazine subscriptions received in advance by a publishing firm or rent received in advance by a property leasing firm.A liability exists because of the obligation to provide the service.
Q2) Collected cash on account from customers.
Answer: 11ea906f_564d_086a_a7a0_39986d2f8289_TB2444_00
Q3) The closing process brings all temporary accounts to a zero balance and updates the balance in the retained earnings account.
A)True
B)False
Answer: True
Q4) Cost of goods sold
Answer: 11ea906f_564b_cfd7_a7a0_89e25dd6d609_TB2444_00
Q5) Describe what is meant by prepaid expenses and provide two examples.
Answer: Prepaid expenses represent assets recorded when a cash disbursement creates benefits beyond the current period.Examples include insurance or rent paid in advance of use.
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Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Noncurrent assets
Answer: Total assets = Current assets + Noncurrent assets
$1,400,000 = $600,000 + Noncurrent assets
Noncurrent assets = $800,000
Q2) Red Onion Restaurant would classify a six-month prepaid insurance policy as:
A)Property,plant,and equipment.
B)Investment.
C)Current asset.
D)Goodwill.
Answer: C
Q3) Quick assets total:
A)$60.
B)$230.
C)$280.
D)$305.
Answer: C
Q4) Compute the times interest earned ratio for Marjoram Company.Round your answer to two decimal places.
Answer: ($73,080 + 31,320 + 11,000)/$11,000 = 10.49 Times interest earned ratio
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Chapter 4: The Income Statement, comprehensive Income, and
the Statement of Cash Flows
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Q1) Required: Prepare a single-step income statement with earnings per share disclosure.
Q2) The FASB's stated preference for reporting operating cash flows is the:
A)Indirect method.
B)Direct method.
C)Working capital method.
D)All financial resources method.
Q3) Schneider Inc.had salaries payable of $60,000 and $90,000 at the end of 2015 and 2016,respectively.During 2016,Schneider recorded $620,000 in salaries expense in its income statement.Cash outflows for salaries in 2016 were:
A)$590,000.
B)$620,000.
C)$650,000.
D)$530,000.
Q4) Material restructuring costs are reported as an element of income from continuing operations.
A)True
B)False
Page 6
Q5) Briefly explain why the income statement is referred to as a change statement.
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Chapter 5: Income Measurement
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Q1) In its December 31,2015,balance sheet,ADH would report:
A)The contract asset,cost and profits in excess of billings,of $500,000.
B)The contract liability,billings in excess of cost,of $300,000.
C)The contract asset,contract amount in excess of billings,of $1,500,000.
D)The contract asset,deferred profit,of $400,000.
Q2) Which of the following does not apply to a seller who is a principal?
A)Has control over goods or services
B)Primarily responsible for providing goods or services to customer
C)Exposed to risks associated with holding inventory
D)Primary performance obligation is to facilitate the transfer of goods or services
Q3) Goods and services are distinct if they are either capable of being distinct or are separately identifiable.
A)True
B)False
Q4) What were the construction billings by CCC during 2016?
A)$142.5 million.
B)$67.5 million.
C)$37.5 million.
D)Cannot be determined from the given information.
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Chapter 6: Time Value of Money Concepts
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Q1) LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years.She should use a table for the:
A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Future value of an annuity due of 1.
Q2) George Jones is planning on a cruise for his 70th birthday party.He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years.He should use a table for the:
A)Future value of an ordinary annuity of 1.
B)Future value of an annuity due of 1.
C)Future value of 1.
D)Present value of an annuity due of 1.
Q3) On May 1,2016,Bo Smith,proud father of newborn son Bobo,purchased $200,000 in zero-coupon bonds that mature on May 1,2036.The bonds pay no interest during the period of time they are outstanding.The interest rate for such borrowings is at 9%.Interest compounds annually.
Required: Calculate the price Bo paid for the bonds.
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Chapter 7: Cash and Receivables
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Q1) How could a company with receivables like HP be able to manage earnings in applying generally accepted accounting principles?
Q2) Using a T-account for the Allowance for Loan Losses,identify the changes in the account during 2016.
Q3) As of January 1,2016,Farley Co.had a credit balance of $520,000 in its allowance for uncollectible accounts.Based on experience,2% of Farley's credit sales have been uncollectible.During 2016,Farley wrote off $650,000 of accounts receivable.Credit sales for 2016 were $18,000,000.In its December 31,2016,balance sheet,what amount should Farley report as allowance for uncollectible accounts?
A)$230,000.
B)$360,000.
C)$590,000.
D)$880,000.
Q4) If HP is using the balance sheet approach to determining bad debt expense,what percentage of year-end receivables did it use in 2013 and 2012,respectively?
Q5) How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?
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Chapter 8: Inventories: Measurement
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Q1) HH Company uses LIFO.HH disclosed that if FIFO had been used,inventory at the end of 2016 would have been $20 million lower than the difference between LIFO and FIFO at the end of 2015.Assuming HH has a 30% income tax rate:
A)Its reported cost of goods for 2016 would have been $14 million less if it had used FIFO rather than LIFO for its financial statements.
B)Its reported cost of goods for 2016 would have been $20 million less if it had used FIFO rather than LIFO for its financial statements.
C)Its reported cost of goods sold for 2016 would have been $14 million higher if it had used FIFO rather than LIFO for its financial statements.
D)Its reported cost of goods sold for 2016 would have been $20 million higher if it had used FIFO rather than LIFO for its financial statements.
Q2) The choice of cost flow assumption (FIFO,LIFO,or average)does not depend on the actual physical flow of the product.
A)True
B)False
Q3) Briefly explain the advantages of dollar-value LIFO (DVL).
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Chapter 9: Inventories: Additional Issues
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Q1) In applying the lower of cost and net realizable value rule,the inventory of surgical equipment would be valued at:
A)$230.
B)$240.
C)$170.
D)$152.
Q2) The first step,when using dollar-value LIFO retail method for inventory,is to:
A)Determine the estimated ending inventory at current year retail prices.
B)Determine the estimated cost of goods sold for the current year.
C)Determine the cost-to-retail percentage for the current year transactions.
D)Price index adjust the LIFO inventory layers.
Q3) In applying the lower of cost and net realizable value rule,the inventory of supplies would be valued at:
A)$45,000.
B)$54,000.
C)$41,000.
D)$60,000.
Q4) The gross profit method and retail method are both ways of estimating ending inventory.Briefly explain how the two methods differ.
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Chapter 10: Property, plant, and Equipment and Intangible
Assets: Acquisition and Disposition
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Q1) What disclosures are required relative to interest costs incurred during the year?
Q2) In Case A,Grand Forks would record the new equipment at:
A)$65,000.
B)$75,000.
C)$50,000.
D)$60,000.
Q3) The fair value of the asset,debt,or equity securities given in a noncash acquisition should determine the value of the consideration received.
A)True
B)False
Q4) In Case B,Grand Forks would record a gain/(loss)of:
A)$ 5,000.
B)$ 3,000.
C)$(5,000).
D)$(3,000).
Q5) Briefly explain how R&D is reported in financial statements.
Q6) How are donated assets recorded?
Q7) How are assets valued when they are acquired by issuing stock?
Q8) Why are software development costs treated differently than other types of R&D? Page 12
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Chapter 11: Property, plant, and Equipment and Intangible
Assets: Utilization and Impairment
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Q1) Using the straight-line method,the book value at December 31,2016,would be:
A)$57,600.
B)$51,600.
C)$58,800.
D)$52,800.
Q2) On September 30,2016,Sternberg Company sold office equipment for $12,000.The equipment was purchased on March 31,2013,for $24,000.The asset was being depreciated over a five-year life using the straight-line method,with depreciation based on months in service.No residual value was anticipated.
Required:
Prepare the journal entries to record 2016 depreciation and the sale of the equipment.
Q3) Briefly explain the following statement.Depreciation is a process of cost allocation,not valuation.
Q4) Component depreciation,required under International Financial Reporting Standards (IFRS),is allowed but rarely used by U.S.companies.
A)True
B)False
Q5) Briefly explain how to account for a change in depreciation method.
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Chapter 12: Investments
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Q1) Purchases and sales of securities are always reported as investing activities in a statement of cash flows.
A)True
B)False
Q2) Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1,2016.Jack can significantly influence Jill.On December 10,2016,Jill declared and paid $1 million in dividends.Jill reported a net loss of $6 million for the year.What amount of loss should Jack report in its income statement for 2016 relative to its investment in Jill?
A)$1,000,000.
B)$1,200,000.
C)$1,400,000.
D)$1,500,000.
Q3) Which of the following investment securities held by Zoogle Inc.are not reported at fair value in its balance sheet?
A)Common stock held as available for sale securities.
B)Debt securities held to maturity.
C)Preferred stock held as trading securities.
D)All of these answer choices are reported at fair value.
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Chapter 13: Current Liabilities and Contingencies
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Q1) During 2016,Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program.Each belt carried one coupon,which entitles the customer to a $5.00 cash rebate.Deluxe estimates that 70% of the coupons will be redeemed,even though only 350,000 coupons had been processed during 2016.At December 31,2016,Deluxe should report a liability for unredeemed rebates of:
A)$ 560,000.
B)$1,050,000.
C)$1,225,000.
D)$1,750,000.
Q2) Current liabilities are normally recorded at the amount expected to be paid rather than at their present value.This practice can be supported by GAAP according to the concept of:
A)Matching.
B)Consistency.
C)Materiality.
D)Conservatism.
Q3) Revenue is recognized upon sale of gift cards,rather than being deferred.
A)True
B)False
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Chapter 14: Bonds and Long-Term Notes
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Q1) Required: How much interest will Morton Sales Co.pay on these bonds in 2016?
Q2) On January 1,2011,F Corp.issued 2,000 of its 10%,$1,000 bonds for $2,080,000.These bonds were to mature on January 1,2021,but were callable at 101 any time after December 31,2014.Interest was payable semiannually on July 1 and January 1.On July 1,2016,F called all of the bonds and retired them.The bond premium was amortized on a straight-line basis.Before income taxes,F Corp.'s gain or loss in 2016 on this early extinguishment of debt was:
A)$16,000 gain.
B)$20,000 loss.
C)$24,000 gain.
D)$60,000 gain.
Q3) What would be the total interest cost of the bonds over their full term?
A)$1,359,033.
B)$4,640,967.
C)$6,000,000.
D)$7,359,033.
Q4) How are bonds and notes the same? How do they differ?
Q5) Required: What amount of interest expense on these bonds would Morton Sales Co.report in its 2016 income statement?
Q6) A zero-coupon bond pays no interest.Explain.
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Chapter 15: Leases
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Q1) Hamilton Security leased equipment to American Parcel Service for a 16-year period,at which time possession of the leased asset will revert back to Hamilton.The equipment cost Hamilton $16 million and has an expected useful life of 22 years.Its normal sales price is $23 million.The present value of the minimum lease payments for both the lessor and lessee is $20 million.The first payment was made at the inception of the lease.
Required:
How would American Parcel Service classify this lease if it prepares its financial statements using U.S.GAAP? IFRS? Why?
Q2) Under the new ASU,what amount did SmithCo record in its income statement for the reporting year ending December 31,2016,in connection with the lease?
A)$ 3,400.
B)$14,000.
C)$17,400.
D)$20,800.
Q3) Discuss the three major types of leases that may apply to the lessor.How do they differ?
Q4) What is meant by the term "minimum lease payments"?
Q5) What lease disclosures are required of the lessor and lessee?
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Chapter 16: Accounting for Income Taxes
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Q1) For classification purposes,a valuation allowance:
A)Is allocated proportionately between deferred tax assets and deferred tax liabilities.
B)Is allocated proportionately between the current and noncurrent portions of the deferred tax asset.
C)Is allocated proportionately between the current and noncurrent portions of the deferred tax liability.
D)Is added to the deferred tax asset.
Q2) EZ,Inc. ,reports pretax accounting income of $400,000,but due to a single temporary difference,taxable income is $500,000.At the beginning of the year,no temporary differences existed.EZ is subject to a tax rate of 40%.
Required:
Prepare the appropriate journal entry to record EZ's income taxes.Show well-labeled computations.
Q3) The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is if probable taxable income is anticipated to be insufficient to realize the tax benefit.
A)True
B)False
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) There almost always is a balance sheet liability for plans of postretirement benefits other than pensions since very few of these plans are funded.
A)True
B)False
Q2) When the service method is used for amortizing prior service costs,the amount recognized each year is:
A)In proportion to the fraction of the total remaining service years worked during the year.
B)A constant amount or fixed amount.
C)Prior service cost divided by the average remaining service life of the active employee group.
D)Prior service cost divided by the average estimated retirement age of the currently enrolled employee group.
Q3) Interest cost is calculated by multiplying the:
A)ABO by the expected return on the plan assets.
B)ABO by the discount rate.
C)PBO by the expected return on plan assets.
D)PBO by the discount rate.
Q4) What are the five components of postretirement benefit expense?
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Chapter 18: Shareholders Equity
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Q1) Roberto Corporation was organized on January 1,2016.The firm was authorized to issue 100,000 shares of $5 par common stock.During 2016,Roberto had the following transactions relating to shareholders' equity:
Issued 10,000 shares of common stock at $7 per share.
Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000.
Paid dividends of $50,000.
Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total shareholders' equity at the end of 2016?
A)$270,000.
B)$300,000.
C)$250,000.
D)$200,000.
Q2) Common shareholders usually have all of the following rights except:
A)To share in the profits.
B)To share in assets upon liquidation.
C)To elect a board of directors.
D)To participate in the day-to-day operations.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Paul Company had 100,000 shares of common stock outstanding on January 1,2016.On September 30,2016,Paul sold 48,000 shares of common stock for cash.Paul also had 10,000 shares of convertible preferred stock outstanding throughout 2016.The preferred stock is $100 par,6%,and is convertible into 3 shares of common for each share of preferred.Paul also had 500,8%,convertible bonds outstanding throughout 2016.Each $1,000 bond is convertible into 30 shares of common stock.The bonds sold originally at face value.Reported net income for 2016 was $300,000 with a 40% tax rate.Common shareholders received $2 per share dividends after preferred dividends were paid in 2016.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places)for 2016.
Q2) All other things equal,what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?
A)Decrease.
B)No effect if the shares are held as treasury shares.
C)Increase only if the shares are considered to be retired.
D)Increase.
Q3) Why are preferred dividends deducted from net income when calculating EPS?
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Chapter 20: Accounting Changes
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Q1) What is the difference between U.S.GAAP and IFRS with regard to the correction of accounting errors?
Q2) Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S.GAAP than with International Financial Reporting Standards (IFRS)?
A)Change in reporting entity.
B)Change to the LIFO method from the FIFO method.
C)Change in accounting estimate.
D)Change in depreciation methods.
Q3) Which of the following is not a change in estimate?
A)A change in the useful life of a depreciable asset.
B)A change in the mortality rate used for pension computations.
C)A change from the cost to the equity method in accounting for investments.
D)A change in the warranty expense percentage.
Q4) What are the situations deemed to constitute a change in reporting entity? Describe the way changes in reporting entity are reported.
Q5) If inventory is understated at the end of 2015 and the error is not discovered,how will net income be affected in 2016?
Q6) How may accounting changes detract from accounting information?
Page 23
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Chapter 21: The Statement of Cash Flows
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Q1) Assuming the decrease in accrued expenses during fiscal year 2015 included a $20,000 reduction due to taxes,compute the income tax expense for Kinney in that year.
Q2) Interest payments and interest received must be reported as operating cash flows
Using:
A)U.S.GAAP.
B)IFRS.
C)Both U.S.GAAP and IFRS.
D)Neither U.S.GAAP nor IFRS.
Q3) Moon Company owns 56 million shares of stock of Center Company classified as available for sale.During 2016,the fair value of those shares increased by $34 million.What effect did this increase have on Moon's 2016 statement of cash flows?
A)Cash from operating activities increased.
B)Cash from investing activities increased.
C)Cash from financing activities increased.
D)No effect.
Q4) Which type of activity (operating,investing,financing)was most responsible for the cash flow experienced by Henchman & Co.during 2015?
Q5) Did accounts receivable increase or decrease during 2016? Explain.
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