Advanced Financial Accounting
Exam Questions
Course Introduction
Advanced Financial Accounting delves into complex aspects of accounting theory and practice, focusing on financial reporting for business combinations, consolidated financial statements, foreign currency translations, and governmental and not-for-profit entities. The course emphasizes understanding and application of relevant accounting standards, analyzing financial statements of multinational corporations, and addressing issues such as intercompany transactions, partnership accounting, and segment reporting. Through case studies and problem-solving exercises, students develop critical skills necessary to interpret, prepare, and communicate advanced financial information in a dynamic regulatory environment.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Page 2
Chapter 1: The Demand for and Supply of Financial Accounting Information
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Q1) Which of the following is an internal stakeholder of a company's financial information?
A) company treasurer
B) stockholder in the company
C) bank lending to the company
D) union
Answer: A
Q2) "In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities." This is the Integrity principle of the AICPA Code of Professional Conduct.
A)True
B)False
Answer: False
Q3) FASB's Emerging Issues Task Force was established to identify issues in which it felt FASB needed to address.
A)True
B)False
Answer: True
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Chapter 2: Financial Reporting: Its Conceptual Framework
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Q1) Similar to the constraints in the FASB's qualitative characteristics, the joint IASB/FASB boards have identified which constraint
A) consistency
B) benefits that justify the costs
C) materiality
D) objectivity
Answer: B
Q2) According to GAAP, which is not a specific objective?
A) to provide information about an enterprise's cash flows
B) to provide information that is useful to present to potential investors, creditors, and other users in making rational investment, credit, and similar decisions
C) to provide information about an enterprise's comprehensive income and its components
D) to provide information about an enterprise's economic resources, obligations, and owners' equity
Answer: B
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Chapter 3: Review of a Companys Accounting System
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Q1) If the trial balance does not balance and the difference between debits and credits is evenly divisible by 9, there is a good chance that
A) a transaction has not been recorded
B) a transaction has been journalized to the wrong account
C) a transposition or slide has occurred
D) only one side of the transaction has been recorded
Answer: C
Q2) The Orange Company made year-end adjusting entries affecting each of the following accounts: Office Salaries Payable (credited); Depreciation Expense (debited); Unearned Rental Revenue (debited); and Prepaid Insurance (credited). Which account is likely to appear in Orange's reversing entries?
A) Office Salaries Payable
B) Depreciation Expense
C) Unearned Rental Revenue
D) Prepaid Insurance
Answer: A
Q3) ........
Answer: ........
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Q1) Which of the following assets is most likely reported at its historical cost on the balance sheet?
A) short-term investments
B) merchandise inventory
C) net accounts receivable
D) prepaid insurance
Q2) A comparison of a company's performance with that of its competitors is known as
A) common-size analysis
B) intercompany comparison
C) ratio analysis
D) intracompany comparison
Q3) A subsequent event is an event that occurs
A) after the annual report is issued
B) anytime after the end of the accounting period
C) between the end of the accounting period and the date the annual report is issued
D) anytime before the annual report is issued
Q4) Discuss how intracompany and intercompany comparisons help fulfill the qualitative characteristics of consistency and comparability.
Q5) How would a common classification of a balance sheet look?
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Chapter 5: The Income Statement and the Statement of Cash Flows
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Q1) An operating segment is a component of a company that does all of the following except
A) has financial information available
B) engages in business activities to earn revenues and incur expenses
C) is part of a publicly held company
D) has operating results that are regularly reviewed by the company's chief operating officer
Q2) Operating capability refers to
A) the ability of a company to adapt to unexpected needs and opportunities
B) the uncertainty or unpredictability of the future results of a company
C) a measure of overall company performance
D) a company's ability to maintain a given level of operations
Q3) To classify an event or transaction as extraordinary it must be unusual in nature and infrequent in occurrence.
A)True
B)False
Q4) Describe the major differences that still exist between the income statement information presentation requirements under IFRS and GAAP.
Q5) What are the four items of other comprehensive income under U.S. GAAP?
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Chapter 6: Cash and Receivables
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Q1) A bank reconciliation is a analysis of the difference between the account records and the bank records to ensure the accurate ending cash balance.
A)True
B)False
Q2) The direct write off method is generally not allowed under GAAP because management selects the period of write off thus allowing earnings management. Where as an estimation of uncollectible accounts an entry is necessary each period to accurately match revenues and expenses.
A)True
B)False
Q3) When a company extends credit to its customers, the company realizes it will not likely collect all of the related accounts receivable. As some accounts may prove to be uncollectible, a company must estimate its bad debt expense.
Required:
a.What is the purpose of estimating bad debt expense?
b.There are two relationships that can be used to estimate the bad debt expense for a company. Describe the two major relationships that can be used to estimate bad debts expense and the financial statement orientation of each.
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Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Q1) The cost of goods sold can be determined only after a physical count of inventory on hand under the
A) perpetual inventory system
B) variable costing system
C) moving average system
D) periodic system
Q2) Refer to Exhibit 7-1. Edwards uses a perpetual inventory system and the gross price method.
A) $42,000
B) $76,000
C) $92,150
D) $95,000
Q3) What is the LIFO Valuation Allowance, also known as LIFO reserve?
Q4) For goods sold FOB shipping point, ownership of the inventory is passed when the A) inventory arrives at the destination
B) purchase order for the inventory is complete
C) inventory is shipped to the buyer
D) inventory sold is segregated from the seller's other inventory
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Q5) What is the cost of goods sold model for a merchandiser? What is the cost of goods sold model for a manufacturer?
Chapter 8: Inventories: Special Valuation Issues
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Q1) The Maxa Company normally sells its inventory at a 20% profit margin on sales. In 2014, the net realizable value of inventory purchased for $75,000 declined to $66,000. There are no costs to complete and dispose of this inventory. What is the floor constraint on the valuation of this inventory using the lower of cost or market rule?
A) $60,000
B) $66,000
C) $79,200
D) $52,800
Q2) An auditor would most likely not use the gross profit method to verify the accuracy of the reported cost of inventory.
A)True
B)False
Q3) The gross profit method is more sensitive to price changes and produces a more accurate estimate of current period ending inventory.
A)True
B)False
Q4) What is dollar value LIFO retail method?
Q5) Describe the lower of cost or market rule.
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Chapter 9: Current Liabilities and Contingencies
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Q1) Which of the following is the most appropriate way to display liabilities on the balance sheet?
A) nearness to maturity
B) relative likelihood of payment
C) alphabetically by payee
D) all of the above
Q2) With regard to liabilities, liquidity refers to
A) a company's ability to convert its assets to cash to pay its liabilities
B) a company's ability to use its financial resources to adapt to change
C) a company's operating cycle
D) only liabilities and not assets
Q3) Liabilities are defined as probable future sacrifices of economic benefits arising from present obligations of a company to provide services or assets in the future as defined by FASB.
A)True
B)False
Q4) List 5 liabilities whose amounts are determined by operating activities.
Q5) IFRS accounting for contingencies differs from U.S. GAAP in several details. Briefly describe three of those differences.
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Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent Investments
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Q1) On April 1, 2014, Bennett Corporation purchased a new machine on a deferred payment basis. A down payment of $5,000 was made and 10 monthly installments of $14,000 each are to be made beginning on May 1, 2014. The cash equivalent price of the machine was $130,000. Bennett incurred and paid installation costs amounting to $6,000. The amount to be capitalized as the cost of the machine is
A) $130,000
B) $136,000
C) $140,000
D) $145,000
Q2) The amount of interest that can be capitalized for a qualifying asset is the lesser of the amount considered as avoidable interest costs or actual interest cost.
A)True
B)False
Q3) Under GAAP, which one of the following types of costs should not be capitalized?
A) rearrangements
B) routine maintenance
C) replacements
D) additions
Q4) List 5 costs that can be included as part of the building.
Page 12
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Sample Questions
Q1) The factors involved in computing periodic depreciation charges for an asset do not include the
A) method of cost allocation
B) current value of the asset
C) service life
D) residual value of the asset
Q2) On January 1, 2013, the Jones-Smith Corp. acquired a parcel of land for $6,000,000 from which it expects to extract 300,000 tons of coal over the next ten years. Afterwards, the land will be reclaimed at an estimated cost of $650,000 and sold for an estimated $350,000. In 2014, a building was constructed on the mine site for $680,000 with an estimated zero value when mining is completed.
During 2013, 15,000 tons were mined, and in 2014, 19,000 tons were mined. At the beginning of 2014, the amount of ore remaining was revised to 250,000 tons.
Required:
a.Prepare the depletion entry for 2013.
b.Determine the total amount of inventoriable costs to be recorded in 2014.
Q3) As part of the normal activities of company's assets are sold or disposed. What steps are necessary in order to complete an asset disposal?
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Chapter 12: Intangibles
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Q1) The costs associated with internally developed goodwill are capitalized.
A)True
B)False
Q2) List 3 activities that can be included in R&D.
Q3) The Lane Company incurred the following expenditures in January 2014: (1) research and development costs of $510,000 that resulted in a new product that was patented near year-end, (2) $12,000 in legal fees to have the patent registered, (3) $100,000 in advertising costs to develop a trademark for the newly patented product, (4) Legal fees of $8,000 incurred with the registration of the trademark, which will only be used for five years, and (5) $25,000 of advertising costs to promote its good name. Benefits to be derived from the patent are expected to last for five years. The president believes the promotion of Lane's good name will benefit the firm for three years. How much amortization expense should Lane recognize for 2014?
A) $ 1,000
B) $ 4,000
C) $ 9,000
D) $25,000
Q4) What characteristics do Intangible and tangible noncurrent assets have in common?
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Chapter 13: Investments and Long-Term Receivables
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Q1) On July 1, 2014, James Company purchased Timothy Company's six-year 9% bonds with a face value of $200,000 for $196,000, which included $6,000 of accrued interest. The bonds, which mature on March 1, 2020, are to be held-to-maturity and pay interest semiannually on March 1 and September 1. James uses the straight-line method of amortization. The amount of income James should report for the calendar year 2014 as a result of this investment would be
A) $8,823.52
B) $9,882.36
C) $9,529.40
D) $8,117.64
Q2) Reagan Company purchased 10,000 shares of Clinton's Company at $45 per share plus $15,000 of Delta Company's 12% bonds, acquired at par, as an available-for-sale securities. The bond pays interest on June 30 and December 31 each year. What amount should be recorded to the Investment in Available-for-Sale Securities account?
A) $450,000
B) $466,800
C) $ 15,000
D) $465,000
Q3) List 3 investments in debt securities and 3 investments in equity securities.
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Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Q1) When the market rate of interest is greater than the contract rate of interest, the bonds should sell at
A) a premium
B) par value
C) a discount
D) face value
Q2) Debt financing typically has a higher cost of capital than equity.
A)True
B)False
Q3) Which statement is true?
A) The carrying amount of the bonds will increase each year if the bonds were issued at a discount.
B) The carrying amount of the bonds will increase each year if the bonds were issued at a premium.
C) Total interest expense will increase each year if the bonds are issued at a discount and the straight-line method of amortization is used.
D) Total interest expense will increase each year if the bonds are issued at a premium and the effective interest method of amortization is used.
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Chapter 15: Contributed Capital
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Q1) State laws established the concept of legal capital which is designed to protect the corporation's creditors by restricting the distribution of shareholder's equity to shareholders.
A)True
B)False
Q2) A company is exchanging its common stock for land in a nonmonetary exchange. This transaction should be valued based upon the
A) fair value of the stock
B) book value of the land
C) fair value of the stock issued and the land received
D) fair value of the stock issued and the land received, whichever is more reliable
Q3) Under the fair value method, if an executive does not exercise a stock option and it is allowed to lapse, Paid-in Captial Share Options is debited. What is credited?
A) Additional Paid-In Capital from Expired Share Options
B) Compensation Expense
C) Gain from Expired Share Options
D) Deferred Compensation
Q4) What is a stock subscription?
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) When reporting basic and diluted earnings per share companies are required to include a schedule or note identifying and reconciling the numerators and denominators use in their calculations. What other information be included in the schedule or note in the financial statements?
Q2) The two defined sections of stockholders' equity under IFRS are
A) conditional capital and other equity
B) earned capital and retained earnings
C) contributed capital and retained earnings
D) share capital and other equity
Q3) A board of directors may decide to restrict retained earnings to meet legal requirements or to meet a contractual restriction.
A)True
B)False
Q4) Comprehensive income represents
A) net income plus "other comprehensive income"
B) net income less dividends paid
C) retained earnings plus net income
D) retained earnings plus "other comprehensive income"
Q5) Describe the two types of corporate capital structures.
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Chapter 17: Advanced Issues in Revenue Recognition
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Q1) Forest Hill, Inc. repossessed an item it sold in 2014 with a gross profit of 40%. The fair value of the repossessed item was $140. The remaining receivable amounted to $400. What account had the smallest amount debited to it?
A) Allowance for Doubtful Installment Accounts Receivable
B) Accounts Receivable
C) Repossessed Inventory
D) Deferred Gross Profit
Q2) In 2015, Hart Company purchased land for $75,000 for future expansion. The market collapsed causing Hart to sell the land for $100,000 on credit. Due to the issues associated with current market conditions Hart used the cost recovery method for the sale. The cash collections were $25,000, $45,000, and $30,000, respectively.
Required:
Prepare the journal entries for each year.
Q3) Realization occurs when
A) revenues have been earned
B) noncash resources are converted to cash or rights to cash
C) an item is formally recorded in the books
D) an item is reported in a company's financial statements
Q4) What three factors decide when to recognize revenue?
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Chapter 18: Accounting for Income Taxes
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Q1) A corporation must report its deferred tax liabilities and assets in two classifications, which are gross current amount and gross noncurrent amounts.
A)True
B)False
Q2) In 2014, its first year of operations, Wilber Company reported pretax accounting income of $60,000. Included in the $60,000 was an expense for accrued, unpaid warranty costs of $8,000, which are not deductible until paid for income tax purposes. Wilber's income tax rate was 20%. The entry to record the income tax expense would include a
A) credit to Income Tax Expense for $12,000
B) credit to Income Taxes Payable for $12,000
C) credit to Deferred Tax Liability for $1,600
D) debit to Deferred Tax Asset for $1,600
Q3) The amount owed the IRS is recorded in the accounting records in which account?
A) Income Tax Expense
B) Income Tax Liability
C) Deferred Tax Expense
D) Deferred Tax Liability
Q4) What two objectives did FASB identify for accounting for income taxes?
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Chapter 19: Accounting for Postretirement Benefits
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Q1) To improve usefulness of defined pension plans, GAAP requires disclosure of reconciliations of the beginning and ending amounts of the projected benefit obligation and fair value of the plan assets.
A)True
B)False
Q2) Accounting principles for defined benefit pension plans under IFRS differ from U.S. GAAP in all of the following areas except that under IFRS
A) certain components of pension expense may be reported as a part of different line items in the income statement
B) actuarial gains and losses may be recognized in full in the period in which they occur directly into equity
C) any portion of prior service cost that is not vested must be recognized on the balance sheet as a component of other comprehensive income
D) any portion of prior service cost that is immediately vested must be expensed
Q3) Define the following:
expected postretirement benefit obligation (EPBO)
accumulated postretirement benefit obligation (APBO)
Q4) What five components comprise pension expense?
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Chapter 20: Accounting for Leases
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Q1) From the lessee's point of view leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.
A)True
B)False
Q2) Which of the following facts would require a lessor to classify a lease as an operating lease?
A) No important uncertainties exist about unreimbursable costs yet to be incurred by the lessor.
B) The collectibility of the minimum lease payments is reasonably assured.
C) The lease term is 75% of the estimated economic life of the leased property.
D) The sum of the minimum lease payments is 90% of the fair value of the leased property to the lessor.
Q3) When a lessee makes periodic cash payments for a capital lease, which of the following accounts is increased?
A) Lease Rental Expense
B) Leased Equipment
C) Capital Lease Obligation
D) Interest Expense
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Chapter 21: The Statement of Cash Flows
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Q1) GAAP allows the use of either the direct or indirect methods but prefers the direct method, but companies who use the indirect method must also include a separate schedule reconciling its net income to net cash flow provided by operating activities.
A)True
B)False
Q2) Under the direct method, which one of the following would represent cash paid?
A) gains on sales of plant assets
B) losses on sales of plant assets
C) depreciation expense, adjusted for changes in depreciation methods
D) interest expense, adjusted for changes in interest payable and amortization of bond premium or discount
Q3) Refer to Exhibit 21-3. Net cash provided (used) in the investing activities section of Travis's 2015 statement of cash flows was
A) $ 0
B) $(150,000)
C) $ (50,000)
D) $ 150,000
Q4) According to GAAP, what must a company's statement of cash flows show?
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Chapter 22: Accounting for Changes and Errors
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Q1) During 2016, Dragon Company determined, based on new information, that equipment previously depreciated using a ten-year life and a salvage value of $100,000 had a total estimated life of only six years and a salvage value of $50,000. The equipment was acquired on January 1, 2014 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2016 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Assuming Dragon's income before depreciation, before income taxes, and before any retroactive effect of the accounting change (if any) for the year ended December 31, 2016, was $180,000, Dragon's net income for 2016 should be
A) $80,000
B) $67,500
C) $56,000
D) $47,250
Q2) Refer to Exhibit 22-6. By how much was North's 2015 net income overstated or understated?
A) $23,000 understated
B) $14,000 overstated
C) $ 7,000 understated
D) $35,000 overstated
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Chapter 23: Time Value of Money Module
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Q1) Discounting is the process of converting a future cash flow to a present value.
A)True
B)False
Q2) The formula to compute the present value of a dollar is PV = FV x . \(\frac { 1 } { ( 1 + i ) ^ { n } }\)
A)True
B)False
Q3) Mildred desires to have $7,049 on deposit five years from today. If she has $4,000 to deposit, what rate of interest, compounded annually, must be obtained to accumulate the desired $7,049 in five years?
A) 12%
B) 10%
C) 9%
D) 8%
Q4) Although most accountants believe that the use of present value creates relevant accounting measurements, there are some reliability questions. Discuss the reasons why present value computations create less reliable measurements.
Q5) What four conditions must exist in solving measurement problems involving the use of annuities?
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