Course Introduction
Accounting Theory
Final Exam Questions
Accounting Theory explores the conceptual foundations and frameworks that underpin accounting practices and standards. This course examines the development, application, and evolution of accounting principles, as well as the philosophical, ethical, and economic influences that shape financial reporting. Students will analyze various accounting theories, including positive and normative approaches, and critically evaluate their impact on policy-making, regulation, and decision-making in business contexts. The course aims to enhance students' understanding of how accounting information affects stakeholders and supports transparency, accountability, and effective governance.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) 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
Q2) When a company sells a subsidiary or a product line on what financial statement is it reported and how is it reported?
Answer: The sale of a company's subsidiary or a product line is reported on the income statement as a gain or loss from discontinued operations and is reported net of applicable income taxes.
Q3) Which of these would be considered Property,Plant,and Equipment?
A) Trademark
B) Office Building
C) Patent
D) Goodwill
Answer: B
Q4) The five economic attributes that are normally studied are demand,supply,manufacturing,____________________,and investing and financing.
Answer: marketing
Page 3
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Chapter 2: Asset and Liability Valuation and Income Recognition
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Q1) When income tax expense for a period is greater than income tax payable the difference will be reported how and on which financial statement?
A) Deferred tax asset and Statement of Cash Flows
B) Deferred tax asset and Balance Sheet
C) Deferred tax liability and Statement of Cash Flows
D) Deferred tax liability and Balance Sheet
Answer: D
Q2) If a portfolio manager had to estimate the fair value of privately placed bond issues,which of the following would he/she most likely identify as the level of inputs to determine this?
A) Level 1.
B) Level 2.
C) Level 3.
D) None of these.
Answer: B
Q3) Stockholders' equity can be expanded into the following three accounts: Accumulated other comprehensive income,retained earnings and
Answer: contributed capital
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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) Interest expense and interest revenue would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
Q3) The receipt of cash when employees exercise stock options is a(n)____________________ activity.
Answer: financing
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Refer to the information for Net Devices Inc.What is the accounts receivable turnover ratio for Net Devices for 2011?
A) 24.65
B) 14.85
C) 14.81
D) 10.50
Q2) Common-size analysis requires the analyst to be aware that percentages can change because of all of the following except:
A) changes in expenses in the numerator independent of changes in sales
B) changes in sales independent of changes in expenses
C) interaction effects between the numerator and denominator
D) All of these are possible explanations.
Q3) Refer to the information for Net Devices Inc.What is the rate of return on assets for Net Devices for 2011?
A) 11.64%
B) 14.50%
C) 12.60%
D) 13.88%
Q4) When calculating Basic earnings per share net income is adjusted by____________
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Chapter 5: Risk Analysis
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Q1) Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be:
A) 54.36 days
B) 75.36 days
C) 102.94 days
D) 5.27 days
Q2) One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to:
A) pay off accounts payable prior to year-end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.
Q3) When management takes deliberate steps at a balance sheet date to produce a better current ratio than is normal it is called
Q4) The source of risk related to political unrest and exchange rate changes are
Q5) The current ratio is one of the measures of the __________ of the firm.
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Chapter 6: Accounting Quality
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Q1) As transitory components become a more important part of a firm's reported earnings,the reported earnings:
A) are more quality enhanced.
B) become a more reliable indicator of sustainable cash flows.
C) are a less reliable indicator of sustainable cash flows.
D) are a more reliable indicator of fundamental value.
Q2) Some firms attempt to maximize the amount of restructuring charge in a particular year; analysts refer to this as the _________________________ approach.
Q3) One definition of earnings management is that it occurs when managers use:
A) judgment in financial reporting to alter financial reports to mislead stakeholder.
B) an accounting method that is inconsistent with other industry members.
C) more conservative accounting estimates than other companies.
D) pro forma accounting results as opposed to GAAP results.
Q4) In bankruptcy prediction analysis,a type ____________________ error is classifying a firm as nonbankrupt when it ultimately goes bankrupt.
Q5) U.S.GAAP requires that changes in estimates be accounted for by recognizing the effect ________________________________________ period(s).
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Chapter 7: Financing Activities
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Q1) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q2) All of the following are benefits of leasing except:
A) They have the ability to shift the tax benefits from depreciation and other deductions from a lessee that has little or no taxable income to a lessor that has substantial taxable income.
B) They provide flexibility to change capacity as needed without having to purchase or sell assets.
C) They have the ability to reduce the risk of technological obsolescence, relative to outright ownership, by maintaining the flexibility to shift to technologically more advanced assets.
D) In an operating lease, the lessee recognizes the signing of the lease as the simultaneous acquisition of a long-term asset and the incurring of a long-term liability for lease payments.
Q3) Which is the first date when employees can exercise their stock options?
A) vesting date
B) grant date
C) exercise date
D) liquidating date
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Chapter 8: Investing Activities
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Q1) Currently,the FASB's Statements of Accounting Concepts (Nos.5 and 6)define an asset
As having all of the following characteristics except:
A) costs not guided by management's judgment
B) probable future benefits
C) resulting from past transactions and events
D) something that is obtained/controlled by the entity
Q2) Unrealized holding gains or losses that are recognized in the income statement are from securities classified as:
A) trading
B) available for sale
C) held-to-maturity
D) equity
Q3) Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as ___________________________________ securities.
Q4) When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in,it should account for the investment using the
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Chapter 9: Operating Activities
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Q1) Income tax expense consists of two components,the ____________________ portion and the ____________________ portion.
Q2) If the portions of the firm's foreign operations in higher-tax-rate countries grew more rapidly than foreign operations in lower-tax-rate countries,the company may seek out more tax effective ways of operating abroad through all of the following means except:
A) Assess whether transfer prices or cost allocations can be adjusted to shift income From high-tax-rate to low-tax-rate jurisdictions.
B) Shift from domestic to foreign borrowing to increase deductions for interest against Foreign-source income.
C) Shift from debt to equity financing of foreign operations to increase interest deductions Against foreign-source income.
D) Shift some operations, like marketing, to the United States where the average tax rate is lower.
Q3) The statement of cash flows allows the accountant to agree the net cash provided to the _________________________ general ledger
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Chapter 10: Forecasting Financial Statements
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Q1) Financial statement forecasts rely on additivity within financial statements and articulation across financial statements.Given this information forecasts of future growth in inventory will most likely affect growth in:
A) accounts receivables.
B) accounts payable.
C) depreciation.
D) salary payable.
Q2) For some types of assets,such as plant,property and equipment,asset growth typically ____________________ future sales growth.
Q3) In developing forecasts of expenses the analyst must take into consideration that expenses can be broken down into ________________________ or ______________________ components.
Q4) One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in projected ending balances.What might an analyst do to reduce the "sawtooth" pattern caused by using turnover ratios?
Q5) If a firm operates at less than full capacity,then price _______________________ are not likely
Q6) The formula for forecasting inventory is ____________ /365 X.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual)dividends?
Q2) Normally,valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.
Q3) In theory,the value of a share of common equity is the present value of ____________________________________________________________.
Q4) One rationale for using expected dividends in valuation is:
A) Dividends are a necessary payment in order for a firm to have value.
B) Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
C) Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
D) Dividend payout ratios are set based on profitability.
Q5) Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25.In addition,the excess return over the risk-free rate is 6.3%.Calculate the firm's cost of equity capital using the CAPM model.
Q6) 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) If a firm's stock returns co-vary identically with returns to a market-wide portfolio,then its market beta from such a regression is:
A) equal to zero.
B) equal to one.
C) less than one.
D) greater than one.
Q2) If an analyst wants to value a potential investment in the common stock equity in a firm,the relevant cash flows the analyst should use are:
A) free cash flow from operations.
B) free cash flows for all debt and equity capital stakeholders. C) free cash flows to common equity shareholders. D) cash flow from operations.
Q3) If cash flow projections include the effect of inflation then the discount rate used should be a(n)____________________ rate.
Q4) If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.
Q5) What three elements are needed to value a resource when using cash flows?
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Assume that a firm's book value at the beginning of the year is $17,800 and that the firm reports net income of $6,200.If the firm's book value at the end of the year is $20,000 what was the amount of dividends paid during the year?
A) $4,000
B) $8,800
C) $2,200
D) Insufficient information to determine
Q2) What would be Jarrett's common shareholders' equity at the end of 2014?
A) $180,909
B) $208,161
C) $95,540
D) $112,768
Q3) Accounting for the residual income in a firm with 100% dividend payout can be expressed as follows:
RIt = CIt- ____________________ X BVt??
Q4) What are the four components that make up dirty surplus accounting according to the FASB?
.
Q5) 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 market price of a share of common equity reflects:
A) the aggregated expectations of all of the market participants following that particular stock.
B) the present value of future residual income.
C) book value plus the present value of future residual income.
D) the correct value for the particular stock.
Q2) When a company has a high market to book ratio this could be a result of the company having
Q3) Firms with low P/E ratios tend to have current residual income that is greater than
Q4) 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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