Advanced Financial Accounting
Exam Solutions
Course Introduction
Advanced Financial Accounting is designed to deepen students understanding of complex financial reporting topics and practices, including business combinations, consolidated financial statements, foreign currency transactions, and accounting for partnerships and non-profit entities. The course explores regulatory frameworks, recent developments in accounting standards, and addresses current issues such as fair value measurement and segment reporting. Emphasis is placed on both the conceptual and technical aspects of financial accounting, enabling students to analyze and interpret financial statements of larger, more complex organizations. Through a combination of theoretical discussion and practical problem-solving, students develop the expertise required to address challenging accounting scenarios and to make informed decisions in a dynamic financial reporting environment.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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14 Chapters
1070 Verified Questions
1070 Flashcards
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) Under the ____________________ basis of accounting,a firm recognizes revenue when it performs all or a substantial portion,of the services it expects to perform and receives either cash or a receivable.
Answer: accrual
Q2) Identify Porters' Five Forces?
Answer: 1.How easily can new firms enter the market? Rivalry among existing firms
2.Do new firms require a large capital investment? Threat of new entrants
3.Do new firms require large amounts of technological expertise? Threat of substitutes
4.Does regulation inhibit new firms from entering the market? Buyer Power
5.Supplier Power
Q3) Depreciation is a(n)___________________ added back to net income when preparing the operating activities section of the Statement of Cash Flows.
Answer: Non-cash expenditure
Q4) The ______________________________ sets forth the sequence of activities involved in the creation,manufacture and distribution of its products and services.
Answer: value chain
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Page 3
Chapter 2: Asset and Liability Valuation and Income Recognition
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Sample Questions
Q1) Future tax deductions:
A) result in deferred tax assets.
B) result in deferred tax liabilities.
C) occur where the tax basis of liabilities is more than the financial reporting basis.
D) occur where the tax basis of assets is less than financial reporting basis.
Answer: A
Q2) Historical costs include all of the following except:
A) acquisition costs for assets
B) net realizable values for assets.
C) adjusted acquisition costs for assets.
D) initial present value for assets and liabilities
Answer: B
Q3) Which of the following would not represent an acquisition cost to be added to the purchase price of building:
A) Sales Tax.
B) Cost of grading the land.
C) Capital repairs to get the building ready for occupancy.
D) Renovations that would extend the life of the building.
Answer: B
Page 4
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) Clarion Industries manufactures computer equipment and provides financing for purchases by its customers.Clarion reported sales and interest revenues of $79,500 million for 2010.The balance sheet showed current and noncurrent receivables of $ 30,750 million at the beginning of 2010 and $ 26,900 million at the end of 2010.Compute the amount of cash collected from customers during 2010.
Answer: (in \$millions)
\(\begin{array}{ll}
\text {Sales and Interest Revenues for 2010 } & \$ 79,500 \\
\text {Plus Receivables at Beginning of 2010 } & 30,750\\
\text { Less Receivables at End of 2010} &\underline{(26,900)}\\ \text { Cash Collections from Customers during 2010 } &\underline{\$83,350}\\
\end{array}\)
Q2) ____________________
equals current assets minus current liabilities
Answer: Working capital
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Discuss how the following three elements of risk help us understand return on assets differs across firms and changes over time:
1.Operating leverage
2.Cyclicality of sales
3.Product life cycle
Q2) Refer to the information for Orca Industries.Orca's accounts receivable turnover is (assume that Orca makes all sales on account):
A) 7.0
B) .53
C) 11.2
D) 10
Q3) Multiples of EPS to value firms are referred to as:
A) ROA
B) price-earnings ratios
C) ROCE
D) Weighted average number of common shares outstanding
Q4) When calculating Basic earnings per share net income is adjusted by____________
Q5) Inventory turnover is calculated by dividing ________________________________________ by average inventories.
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Chapter 5: Risk Analysis
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Sample Questions
Q1) When a company wants to calculate the current ratio they would divide the current assets by the ___________
Q2) Which of the following is not one of the three explanatory variables that determine a firm's market beta?
A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.
Q3) The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?
A) Sales
B) Earnings
C) Positive cash flows
D) Income from continuing operations
Q4) One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.
Q5) An analyst can view the revenues to cash ratio as a(n)______________________________________.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) Users of financial statements should consider which of the following when evaluating the quality of accounting information?
A) Economic faithfulness of accounting measurements and classifications.
B) Reliability of the measurements.
C) Reasonableness of the estimates made in applying GAAP or IFRS.
D) All of these should be considered.
Q2) On the income statement,income from discontinued operations is shown:
A) as an accounting principle change.
B) without any income tax effect.
C) as a separate section of income from continuing operations.
D) net of taxes after income from continuing operations.
Q3) When evaluating the quality of accounting information,an analyst should consider all of the following except:
A) reliability of the measurements made
B) adequacy of disclosures
C) comparability of estimates
D) economic faithfulness of the measurements made
Q4) ____________________ represents the concept of being able to compare financial statement data across years for any particular firm.
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Chapter 7: Financing Activities
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Sample Questions
Q1) One criterion that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already
Q2) According to U.S.GAAP,which of the following provides the most reliable measure for fair value measurement?
A) Observable market data serving as inputs into estimates into present value-based measurements such as foreign exchange rates.
B) Quoted market prices of identical assets or liabilities in inactive markets
C) Observable quoted market prices in active markets for identical assets or liabilities
D) Unobservable inputs used by the reporting entity when modeling how the market would determine the fair value of the asset or liability in question
Q3) The first date at which employees can exercise their stock options is termed the
Q4) Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.
Q5) Convertible preferred stock has both the attributes of _____________ and __________________________.
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Chapter 8: Investing Activities
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Sample Questions
Q1) Goodwill represents:
A) the synergies that will be achieved through the acquisition.
B) the difference between the acquisition cost and the market value of the identifiable assets and liabilities.
C) the difference between the acquisition cost and the book value of the identifiable assets and liabilities.
D) the merger premium.
Q2) Based on the information concerning Snowflake Corp.what is the value of the goodwill related to the acquisition?
A) $1,775,000
B) $475,000
C) $2,250,000
D) $1,325,000
Q3) When the functional currency is the U.S.dollar,financial reporting requires firms to use the ___________________________________ translation method.
Q4) Held-to-maturity securities are accounted for at
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Chapter 9: Operating Activities
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Sample Questions
Q1) ___________________________________ is primarily a question of timing.
Q2) The _____________________________________________ is equal to the actuarial present value of amounts that the employer expects to pay to retired employees,based on the employees' service to date and using expected future salary amounts.
Q3) One sign that a company may be recognizing sales too early is that it has unusually large amounts of ______________________________.
Q4) 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
Q5) Which of the following would not be suggestive of a company recognizing sales too early?
A) large and volatile amounts of uncollectible accounts receivable
B) excessive warranty expenditures
C) large growth in accounts receivable
D) unusually large amount of returned goods
Q6) What are the five steps to apply the core principles of revenue recognition?
Page 11
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) To develop forecasts of individual assets,the analyst must first link historical growth rates for individual assets to historical growth rates in ____________________ and other activity-based drivers.
Q2) The formula for forecasting inventory is ____________ /365 X.
Q3) All of the following are true regarding projected financial statements except:
A) The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
B) Preparing projected financial statements must incorporate a company's past performance records.
C) Preparing projected financial statements must incorporate a company's current performance records.
D) The income statement demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital.
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) Realistic expectations are ____________________ and ____________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Sample Questions
Q1) Equity valuation models based on dividends,cash flows,and earnings have been the topic of many theoretical and empirical research studies in recent years.All of the following are true regarding these studies except:
A) Share prices in the capital markets generally correlate closely with share value.
B) Share prices do not always equal share values.
C) Temporary deviations of price from value occur.
D) Unexpected changes in earnings, dividends, and cash flows do not correlate closely With changes in stock prices.
Q2) Firm-specific factors that increase the firm's nondiversifiable risk include all of the following except:
A) Exposure to interest rate changes
B) Exposure to inflation
C) Exposure to management competence
D) Exposure to cyclicality
Q3) In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) If an analyst wants to value a potential investment in the net operating assets of a division of another firm,the analyst should discount the projected free cash flows at the: A) cost of debt capital.
B) cost of equity capital.
C) weighted average cost of capital.
D) risk-free rate.
Q2) One advantage of the free cash flow valuation method is cash is the medium of exchange and therefore is a fundamental source of ________________________
Q3) Steady-state growth in ___________________________________ could be driven by long-run expectations for growth attributable to economy-wide inflation,general economic productivity,the population,or long-run growth in industry's sales.
Q4) Currently,financial reporting does not take into account changes in prices,either at the general level or at the specific level.Many analysts believe that not taking price changes into account distorts the meaningfulness of financial reports.How do changing prices affect financial reports?
Q5) What three elements are needed to value a resource when using cash flows?
Q6) What is the purpose of a free cash flow analysis?
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Chapter 13: Valuation: Earnings-Based Approaches
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Sample Questions
Q1) Accounting for the residual income in a firm with 100% dividend payout can be expressed as follows: RIt = CIt- ____________________ X BVt??
Q2) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be equal to the ______________________________ of common shareholders' equity.
Q3) Compute the value of Jarrett Corp.on January 1,2011,using the residual income valuation model.Use the half-year adjustment.
A) $112,768
B) $185,329
C) $195,540
D) $133,624
Q4) Investors have invested $25,000 in common equity in a company.Given the risk inherent in the company the investors expect to earn a 15 percent return.In addition,the investors expect that the company will reinvest all income in projects that will earn 16%.The company is forecasted to earn $6,000 the first year,$5,000 the second year,$5,500 the third year and $6,244 each year after the third year.For this company determine the company's residual income valuation (round all numbers to the nearest dollar).
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Chapter 14: Valuation: Market-Based Approaches
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Sample Questions
Q1) All of the following are accounting factors that can drive a firm's price-earnings ratio in a given period to be higher than that of other firms in the same industry except:
A) non-recurring expenses or losses in that period
B) a greater degree of accounting conservatism that requires expensing R&D or other intangible asset-generating activities
C) a less conservative accounting stance that uses straight-line depreciation rather than accelerated methods
D) a greater degree of accounting conservatism regarding accelerated depreciation of PP&E
Q2) Which of the following normally does not introduce measurement error into the calculation of P/E ratios?
A) differences in firm specific growth rates
B) restructuring losses
C) transitory gains
D) deferred taxes
Q3) The value-to-book model indicates that a firm in steady state equilibrium earnings ROCE=RE will be valued at _________________________.
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