Advanced Accounting Exam Practice Tests
Course Introduction
Advanced Accounting examines complex topics in financial reporting, including consolidations, intercompany transactions, foreign currency translations, segment reporting, partnerships, and accounting for non-profit and governmental entities. The course builds on foundational accounting principles, equipping students with the knowledge and skills to prepare and analyze financial statements for corporate groups, handle mergers and acquisitions, and address specialized issues encountered in multinational and multi-entity environments. Emphasis is placed on the application of relevant accounting standards, professional judgment, and ethical considerations within advanced financial scenarios.
Recommended Textbook
Intermediate Accounting 18th Edition by Earl K. Stice
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Page 2
Chapter 1: Financial Reporting
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Q1) The area of accounting that emphasizes developing accounting information for use within a company is known as __________ accounting.
A)management
B)forensic
C)audit
D)financial
Answer: A
Q2) Once the FASB has established an accounting standard,the
A)standard is continually reviewed to see if modification is necessary.
B)standard is not reviewed unless the SEC makes a complaint.
C)task of reviewing the standard to see if modification is necessary is given to the AICPA.
D)principle of consistency requires that no revisions ever be made to the standard.
Answer: A
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Chapter 2: A Review of the Accounting Cycle
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Q1) Richards Company,a calendar-year company,sells magazine subscriptions to subscribers.The magazine is published semiannually and is shipped to subscribers on April 15 and October 15.Only one-year subscriptions for two issues are accepted.Subscriptions received after the March 31 and September 30 cutoff dates are held for the following publication.Cash is received evenly during the year and is credited to deferred subscription revenue.During 2013,$3,600,000 of cash was received from customers.The beginning balance for 2013 of the deferred subscription revenue account was $750,000.What is Richards' December 31,2013,deferred subscription revenue balance?
A)$2,700,000.
B)$1,800,000.
C)$1,650,000.
D)$900,000.
Answer: D
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Chapter 3: The Balance Sheet and Notes to the Financial Statements
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Q1) Analysis of a firm's balance sheet provides information on its liquidity,which is the ability to
A)satisfy short-term obligations.
B)maintain profitable operations.
C)maintain past levels of preferred and common dividends.
D)survive a major economic downturn.
Answer: A
Q2) Barron Co.'s current ratio is 2:1.Which of the following transactions would normally increase Barney's current ratio?
A)Purchasing inventory on account
B)Borrowing money by signing a long-term note
C)Collecting an account receivable
D)Purchasing land for cash
Answer: B
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Page 5
Chapter 4: The Income Statement
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Q1) The term "comprehensive income" as defined by the FASB
A)must be reported on the face of the income statement.
B)includes all changes in equity during a period except those resulting from investments by and distributions to owners.
C)is the net change in owners' equity for the period.
D)is synonymous with the term "net income."
Q2) A material loss should be presented separately as a component of income from continuing operations when it is
A)infrequent in occurrence but not unusual in nature.
B)infrequent in occurrence and unusual in nature.
C)a cumulative effect-type change in accounting principle.
D)an extraordinary item.
Q3) Which of the following is NOT true regarding restructuring charges?
A)Restructuring charges reflect a loss in asset values of assets no longer consistent with a company's strategic plan.
B)Severance pay for employees working at terminated operations may be a component of restructuring charges.
C)Restructuring charges may include plant closing costs.
D)Restructuring charges are reported as extraordinary items.
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Page 6
Chapter 5: Statement of Cash Flows and Articulation
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Q1) In a statement of cash flows (indirect method),an increase in inventories should be presented as
A)a deduction from net income from continuing operations.
B)an inflow and outflow of cash.
C)an addition to net income.
D)an inflow of cash.
Q2) In a statement of cash flows,receipts from sales of property,plant,and equipment would be classified as cash inflows from
A)liquidating activities.
B)operating activities.
C)investing activities.
D)financing activities.
Q3) Which of the following is not a cash inflow from investing activities?
A)Receipts from collections of sales of loans made by the enterprise
B)Receipts from sales of equity instruments of other entities
C)Receipts from issuance of equity instruments of the enterprise
D)Receipts from sales of productive assets
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Chapter 6: Earnings Management
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Q1) Recent accounting scandals have raised concerns over the quality and transparency of financial accounting and reporting in the United States.Critics of what is termed the "rules-based" system currently used in the U.S.cite the increasingly detailed and complex nature of rule-driven accounting pronouncements.These critics suggest that the United States should adopt a principles-based system similar to that of the International Accounting Standards Board. Explain what is meant by a principles-based system and the advantages and disadvantages of such a system.
Q2) Most companies that engage in earnings management typically do NOT go beyond which of the following activities on the earnings management continuum?
A)Strategic matching
B)Change in methods or estimates with full disclosure
C)Change in methods or estimates with little or no disclosure
D)Non-GAAP accounting
Q3) Which of the following typically involves the use of non-GAAP accounting?
A)Strategic matching
B)A change in accounting estimate that is fully disclosed
C)Proforma earnings
D)A change in accounting principle that is fully disclosed
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Page 8
Chapter 7: The Revenuereceivablescash Cycle
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Q1) In preparing a bank reconciliation,interest paid by the bank on the account is
A)added to the book balance.
B)subtracted from the bank balance.
C)added to the bank balance.
D)subtracted from the book balance.
Q2) Which of the following would be considered part of the category "trade receivables"?
A)Advances to employees
B)Amounts due from customers
C)Dividends receivable
D)Income tax refunds receivable
Q3) Bank statements provide information about all of the following except
A)checks cleared during the period.
B)NSF checks.
C)bank charges for the period.
D)errors made by the company.
Q4) See Foreman Company information above.
Required:
Explain how and why this transaction was structured as it is.
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9
Chapter 8: Revenue Recognition
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Q1) Which of the following is NOT a difference between the percentage-of completion and completed-contract methods of accounting for long-term construction contracts?
A)They report different amounts for inventory during the construction period.
B)They report different amounts for progress billings during the construction period.
C)They cause a different cash inflow during the construction period.
D)They report different amounts for accounts receivable during the construction period.
Q2) If the percentage-of-completion method is used,what is the basis for determining the gross profit to be recognized in the second year of a three-year contract?
A)Cumulative actual costs and estimated costs to complete
B)Incremental cost for the second year only
C)Cumulative actual costs incurred only
D)No gross profit would be recognized in year 2
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10
Chapter 9: Inventory and Cost of Goods Sold
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Q1) At the close of its fiscal year on March 31,2014,Villager Industries,Inc.was in the process of relocating its plant.This resulted in some confusion relating to the inventory cutoff,as indicated by the following:
(1)Merchandise on hand costing $1,794 was included in the inventory although the purchase invoice was not recorded until April 12,2014.
(2)Merchandise shipped on April 1,2014,was included in inventory--the cost of this merchandise was $2,219,and the sale was recorded as $3,138 on March 31,2014.
(3)Merchandise costing $12,150 was included in the inventory although it was shipped to a customer on March 31,2014,FOB shipping point; the company recorded the sale of $19,246 on that date.
(4)Merchandise costing $1,820 was not counted.
(5)Merchandise in transit (shipped to the company FOB destination)was recorded as a purchase as of April 2,2014,and its cost of $17,287 was not included in the March 31,2014,inventory.
Assuming that the company does not maintain a perpetual inventory system and that the books for the fiscal year have been closed,provide the necessary correcting entries.(Ignore income taxes.)
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11
Chapter 10: Investments in Noncurrent Operating
Assets-Acquisition
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Q1) Sonora Company borrowed $400,000 on a 10 percent note payable to finance a new warehouse Sonora is constructing for its own use.The only other debt on Sonora's books is a $600,000,12 percent mortgage payable on an office building.At the end of the current year,average accumulated expenditures on the new warehouse totaled $475,000.Sonora should capitalize interest for the current year in the amount of
A)$40,000.
B)$47,500.
C)$49,000.
D)$52,250.
Q2) You have just been promoted to the position of senior accountant with the public accounting firm of Ohm and Dylan.Your first audit client as senior accountant is to be the United Manufacturing Company.You have had a considerable amount of experience both in planning and conducting the audit procedures for current asset accounts such as cash,receivables,and inventory.This is your first experience,however,in planning the audit of the property,plant,and equipment accounts.Compare the nature of current assets with property,plant,and equipment,and describe how any differences might affect your audit generally.
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Page 12
Chapter 11: Investments in Noncurrent Operating
Assets-Utilization and Retirement
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Q1) The Fanfare Company applied for and received numerous patents at a total cost of $286,500 at the beginning of 2011.It is assumed the patents will be useful evenly during their full legal lives.At the beginning of 2013,the company paid $48,600 in legal fees for successful defense in a patent infringement suit.At the beginning of 2014,information became available that caused the company to reduce the remaining life of the patents to five years.
Calculate the amortization expense for the years 2011,2012,2013,and 2014.Round to the nearest dollar.
Q2) On January 1,2012,Costas Co.purchased a new machine for $1,250,000.The new machine has an estimated useful life of five years and the salvage value was estimated to be $250,000.Costas uses the sum-of-the-years'-digits method of depreciation.The amount of depreciation expense for 2014 is
A)$200,000.
B)$250,000.
C)$300,000
D)$416,667
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Page 13
Chapter 12: Debt Financing
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Q1) On January 1,2014,Marco Hospital issued a $250,000,10 percent,5-year bond for $231,601.Interest is payable on June 30 and December 31.Marco uses the effective-interest method to amortize all premiums and discounts.Assuming an effective interest rate of 12 percent,approximately how much discount will be amortized on December 31,2014?
A)$2,230
B)$1,480
C)$1,396
D)$987
Q2) The net amount of a bond liability that appears on the balance sheet is the
A)call price of the bond plus bond discount or minus bond premium.
B)face value of the bond plus related premium or minus related discount.
C)face value of the bond plus related discount or minus related premium.
D)maturity value of the bond plus related discount or minus related premium.
Q3) The effective interest rate on bonds is lower than the stated rate when bonds sell
A)above face value.
B)at maturity value.
C)below face value.
D)at face value.
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Page 14
Chapter 13: Equity Financing
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Q1) Which of the following is NOT a component of comprehensive income?
A)Asset revaluation reserve
B)Net income
C)Foreign currency translation adjustment
D)Minimum pension liability adjustment
Q2) Taylor Company paid cash dividends totaling $150,000 in 2012 and $75,000 in 2013.In 2014,Taylor intends to pay cash dividends of $800,000.Compute the amount of cash dividends per share to be received by common stockholders in 2014 under each of the following assumptions.Treat each case independently.There were no dividends in arrears as of January 1,2012.
(1)25,000 shares of common; 100,000 shares of 6 percent,$50 par cumulative preferred.
(2)25,000 shares of common; 50,000 shares of 6 percent,$50 par noncumulative preferred.
(3)25,000 shares of common; 70,000 shares of 6 percent,$100 par cumulative preferred.
Q3) Prepare a statement of comprehensive income in a one-statement format.
Q4) Prepare a statement of comprehensive income in a two-statement format.
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Page 15
Chapter 14: Investments in Debt and Equity Securities
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Q1) When an entity reduces its interest in an investment in equity securities accounted for by the equity method,and changes to the fair value method,what is the initial cost value for purposes of subsequent changes in market value?
A)Original cost
B)Book value at the date of change
C)Market value at the date of the change
D)Market value at the date of acquisition
Q2) The equity method of accounting for an investment in the common stock of another company should be used when the investment
A)is composed of common stock and it is the investor's intent to vote the common stock.
B)ensures a source of supply such as raw materials.
C)enables the investor to exercise significant influence over the investee.
D)gives the investor voting control over the investee.
Q3) Which category includes only debt securities?
A)Held-to-maturity securities
B)Available-for-sale securities
C)Marketable equity securities
D)Trading securities
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Chapter 15: Leases
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Q1) On January 2,2014,the Clapton Studios leased six computers for use in the engineering department.The lease period is for 13 years and the estimated economic life of the leased property is 15 years.The lease does not contain automatic title transfer or a bargain purchase option.Lease payments are $11,000 per year,payable each December 31.The incremental borrowing rate for Clapton is 12 percent and the implicit interest rate (known by Clapton)is 10 percent.The company uses straight-line depreciation for this type of equipment.
Provide the necessary journal entries to record the transactions for Clapton for the period January 2,2014 through December 31,2015.
Q2) Which of the following statements characterizes an operating lease?
A)The lessee records depreciation and interest.
B)The lessee records the lease obligation related to the leased asset.
C)The lessor records depreciation and lease revenue.
D)The lessor transfers title of the leased property to the lessee for the duration of the lease term.
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17
Chapter 16: Income Taxes
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Q1) Which of the following is an example of a temporary difference that could result in a deferred tax asset?
A)Gain on disposal of an asset when included in taxable income before it is included in pretax accounting income
B)Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
C)Gross margin on installment sales is recognized for accounting purposes before it is included in taxable income in the income tax return
D)Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year
Q2) Which of the following temporary differences ordinarily creates a deferred tax asset?
A)Accrued warranty costs
B)Depreciation
C)Installment sales
D)Prepaid insurance
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18
Chapter 17: Employee Compensation-Payroll,pensions, Other Compissues
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Q1) Using the information above,Evasive's total expense related to the January payroll is
A)$95,120
B)$86,720
C)$88,680
D)$81,120
Q2) Which of the following payroll taxes are paid by the employer?
A)FICA taxes
B)Federal unemployment taxes
C)State unemployment taxes
D)All of these
Q3) Pension-related estimates (not funding data)are provided by the A)employer company.
B)independent actuary.
C)pension fund trustees.
D)employee union.
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Chapter 18: Earnings Per Share
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Q1) At December 31,2013,Nightstyle Inc.had 190,000 shares of common stock outstanding.On October 1,2014,an additional 70,000 shares of common stock were issued for cash.Nightstyle also had 2,000,000 of 8 percent convertible bonds outstanding at December 31,2014,which are convertible into 55,000 shares of common stock.The bonds are dilutive in the 2014 earnings per share computation.No bonds were issued or converted into common stock during 2014.What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31,2014?
A)160,000
B)175,000
C)205,000
D)262,500
Q2) Using the information above,what is the number of shares that should be used in computing diluted earnings per share for 2014?
A)735,000
B)780,000
C)885,000
D)910,000
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Page 20
Chapter 19: Derivatives, contingencies, business Segments, and Interim Reports
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Q1) Information obtained prior to the issuance of the current period's financial statements of a company indicates that it is probable that,at the date of the financial statements,a liability will be incurred for obligations related to product warranties on products sold during the current period.During the past three years,product warranty costs have been approximately 1 1/2 percent of annual sales revenue.
An estimated loss contingency should be
A)neither accrued nor disclosed in the financial statements.
B)recognized as an appropriation of retained earnings.
C)accrued in the accounts and reported in the financial statements.
D)disclosed in the financial statements but not accrued.
Q2) Using the information above and assuming the exchange rate on September 30 is ¥115=$1,what amount will Stagger pay to,or receive from,the bank (rounded to the nearest dollar)?
A)$15,217 payment
B)$15,217 receipt
C)$16,667 payment
D)$16,667 receipt
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Page 21
Chapter 20: Accounting Changes and Error Corrections
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Q1) Ending inventory for 2012 is overstated by $5,500 due to a faulty count and costing.The tax rate is 39%.Assume the same accounting methods for both financial reporting and taxes.The error is discovered late in 2014.The 2014 annual report shows the financial statements for 2012,2013,2014 on a comparative basis. Which of the following is correct regarding the reporting of this error in the 2014 annual report?
A)A journal entry is made to report the prior period adjustment, and the 2012 and 2013 statements are shown corrected.
B)No journal entry is needed, and the 2012 and 2013 statements are shown as they were in the 2013 annual report.
C)No journal entry is needed, and the 2012 and 2013 statements are shown corrected.
D)A journal entry is made to report the prior period adjustment, and the 2012 and 2013 statements are shown as they were in the 2013 annual report.
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Chapter 21: Statement of Cash Flows Revisited
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Q1) Which of the following items involving current trade accounts receivable is most likely to appear in a statement of cash flows?
A)The balance in the allowance for doubtful accounts
B)The change in net sales
C)Sales returns and allowances
D)Collection of an account previously written off
Q2) Which of the following is NOT added to net income as an adjustment to reconcile net income to cash from operating activities on the statement of cash flows?
A)Increase in an accrued liability
B)Amortization of discount on bond payable
C)Loss on sale of operational asset
D)Increase in deferred tax asset
Q3) Which of the following transactions would not be reported on the statement of cash flows?
A)Purchase of treasury stock
B)Declaration of a cash dividend which has not yet been paid
C)Patent amortization
D)Purchase of an operational asset by issuing common stock
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Chapter 22: Accounting in a Global Market
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Q1) Current generally accepted accounting principles require that the translation of a foreign subsidiary's accounting records should be accomplished by the
A)monetary/nonmonetary method.
B)current rate method.
C)current/noncurrent method.
D)functional currency method.
Q2) Which of the following is correct regarding international accounting standards for the impairment of intangible assets?
A)Goodwill impairments may not be reversed.
B)Goodwill impairments may be reversed.
C)No impairment losses may be reversed.
D)A distinction is made between impairment procedures for intangibles with finite and indefinite lives.
Q3) The foreign currency translation adjustments amount is a(n)
A)account in the parent company's general ledger.
B)account in the foreign subsidiary's general ledger.
C)balancing amount for translation.
D)balancing amount for remeasurement.
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Chapter 23: Analysis of Financial Statements
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Q1) Refer to the Sculley Corporation information above.Sculley's quick (acid test)ratio as December 31,2014,is
A)1.44 to 1.
B)1.50 to 1.
C)1.67 to 1.
D)1.66 to 1.
Q2) In comparing the current ratios of two companies,why is it invalid to assume that the company with the higher current ratio is the better company?
A)The two companies may be different sizes.
B)A high current ratio may indicate inadequate inventory on hand.
C)The two companies may define working capital in different terms.
D)A high current ratio may indicate inefficient use of various assets and liabilities.
Q3) Whereis Company is expected to pay a $0.50 per share dividend at the end of the year.The required rate of return on the stock is 15 percent.
Required:
What is the value per share of the company's stock?
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