Advanced Financial Accounting
Final Exam
Course Introduction
Advanced Financial Accounting delves into complex accounting issues faced by corporations, including business combinations, consolidated financial statements, foreign currency transactions, translation of foreign currency financial statements, and partnership accounting. The course also examines the accounting and reporting requirements for multinational enterprises, governmental and nonprofit organizations, and special topics such as segment reporting and interim financial statements.
Emphasis is placed on the application of accounting theory, interpretation of accounting standards, and analysis of financial statements for advanced business scenarios, preparing students for decision-making in a global financial 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 NOT a major standard-setting body responsible for the establishment of U.S. and international GAAP (Generally Accepted Accounting Principles)?
A) SEC (Securities Exchange Commission)
B) PCAOB (Public Company Accounting Oversight Board)
C) FASB (Financial Accounting Standards Board)
D) IASB (International Accounting Standards Board)
Answer: B
Q2) The stated principles of the AICPA Code of Professional Conduct do NOT include
A) Integrity
B) Honesty
C) Objectivity and Independence
D) Responsibilities
Answer: B
Q3) Which organization has the most legal authority?
A) Financial Accounting Standards Board
B) Accounting Standards Executive Committee
C) Governmental Accounting Standards Board
D) Securities and Exchange Commission
Answer: D
Page 3
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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) All of the following items are classified as accounting assumptions and conventions except for
A) going concern
B) timeliness
C) monetary unit
D) reporting entity
Answer: B
Q3) Which fundamental characteristic is an ingredient of faithful representation?
A) predictive value
B) confirmatory value
C) timeliness
D) neutrality
Answer: D
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Chapter 3: Review of a Companys Accounting System
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Q1) When cash is debited for rents that are collected but are not yet earned, the amount credited should be
A) recognized as revenue when collected
B) presented as a liability until earned
C) recorded as an asset until earned
D) presented as a separate item in stockholders' equity
Answer: B
Q2) In order to compute revenue the ending accounts receivable balance must be added to the collections from customers minus the beginning balance in accounts receivable. This adjustment will convert the cash-basis information to the accrual-basis accounting.
A)True
B)False Answer: True
Q3) The general journal has all journal entry transactions listed by account title. A)True
B)False Answer: False
Q4) ........
Answer: ........
Page 5
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Q1) Refer to Exhibit 4-1. Blue Bell's quick ratio at December 31, 2014 was
A) 3.67 times
B) 2.33 times
C) 1.33 times
D) 0.43 times
Q2) The measurement of an asset's value that considers the discounted future cash inflows (and outflows) relating to the asset is called the
A) net realizable value
B) future value
C) historical value
D) present value
Q3) Discuss how intracompany and intercompany comparisons help fulfill the qualitative characteristics of consistency and comparability.
Q4) Which of the following formulas represents working capital?
A) current assets - current liabilities
B) quick assets - current liabilities
C) current assets ¸ current liabilities
D) quick assets ¸ current liabilities
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Q5) What differences exist between IFRS and U.S. GAAP balance sheet presentation?
Chapter 5: The Income Statement and the Statement of Cash Flows
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Q1) The SEC reported that overstating revenue and recognizing revenue too soon was the culprit in more than half of the financial reporting frauds in the United States. As such Staff Accounting Bulletin No. 104 provided additional guidance on revenue recognition. It emphasized four criteria for revenue recognition. What are these criteria?
Q2) Which ratios are the most commonly analyzed from the income statement?
A) gross profit margin
B) net profit margin
C) operating profit margin
D) all of these
Q3) Intraperiod tax allocation requires a corporation's total income tax expense to be allocated to all of the following except
A) extraordinary items
B) other revenues and expenses
C) discontinued operations
D) prior-period adjustments
Q4) What three tests are used to evaluate an operating segment in order to determine if it is a reportable segment?
Q5) What are the seven major components of a company's income statement?
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Chapter 6: Cash and Receivables
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Q1) Angler Fish Co. factored $540,000 of its accounts receivable to Gause Finance Co.
Gause Finance advanced 85% of the factored receivables and charged a 10% commission on the gross amount of the receivables. All conditions for a sale have been met.
Required:
Prepare the journal entries necessary to record the following:
a.The sale of the receivables.
b.Sales Returns and Allowances of $2,200 on a factored account.
c.The conclusion of the sale agreement.
Q2) Which of the following is not a disadvantage of using the direct write-off method for recording uncollectible accounts?
A) reports actual losses
B) violates the matching principle
C) allows manipulation of income
D) overstates accounts receivable
Q3) The two forms of financing agreements that companies use to obtain cash from accounts receivables are pledging and assigning.
A)True
B)False
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Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Q1) What is the LIFO conformity rule?
Q2) A manufacturing firm would not normally have an account titled
A) goods in process inventory
B) raw materials inventory
C) merchandise inventory
D) finished goods inventory
Q3) Use the following letters to represent items:
P = Purchases (net)
C = Cost of goods sold
B = Beginning inventory
E = Ending inventory
Which equation is correct?
A) B - C + P = E
B) B - E = C + P
C) P - E = B + C
D) B = C - E + P
Q4) When a seller offers a discount, it can be accounted for under the gross or net price method. What is the difference between the gross and net price method?
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Chapter 8: Inventories: Special Valuation Issues
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Q1) In general, it is argued that the lower of cost or market rule is supported most closely by which of the following theoretical assumptions?
A) revenue recognition
B) conservatism
C) historical cost
D) going concern
Q2) Major Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one item in the inventory is $58.20. The following is other information concerning this unit: \(\begin{array} { l l }
\$5.00 & \text { Transportation costs } \\
12.70 & \text { Narmal profit margain } \\
5.20 & \text { Packanging coste } \end{array}\)
The market value for this item is
A) $58.20
B) $70.90
C) $78.90
D) $81.10
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Chapter 9: Current Liabilities and Contingencies
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Q1) Refer to Exhibit 9-5. The amount of expenditures for warranty costs for 2013 is
A) $ 80,000
B) $120,000
C) $140,000
D) $240,000
Q2) When a contingency must be accrued under IFRS, the charge is referred to as
A) an extraordinary loss
B) a provision
C) an appropriation
D) a risk expense
Q3) Refer to Exhibit 9-3. What amount should John report as estimated premium claims outstanding at December 31, 2014?
A) $121,250
B) $328,750
C) $450,000
D) $500,000
Q4) FASB recommends that assets and liabilities with differing liquidities be arranged as separate items.
A)True
B)False
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Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent Investments
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Q1) Concerning current accounting for oil and gas properties, which statement is true?
A) The successful-efforts method must be used.
B) The reserve-recognition method must be used.
C) Either the successful-efforts method or the full-cost method may be used.
D) The full-cost method must be used.
Q2) Discuss when the interest capitalization period begins and ends for assets constructed for a company's own use.
Q3) Under IFRS, which of the following must be expensed?
A) maintenance only
B) repairs only
C) rearrangements only
D) maintenance, repairs, and rearrangements
Q4) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the new asset acquired.
A)True
B)False
Q5) In order to capitalize interest under GAAP there are three issues that must be addressed prior to implementation, what are these three issues?
Page 12
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Q1) Refer to Exhibit 11-03, what is the amount in the accumulated depreciation account prior to bring the depreciation expense up to date before the disposal?
A) $1,480
B) $1,850
C) $1,050
D) $3,700
Q2) On June 15, 2015, Jupiter Corporation purchased a machine for $50,000 with an estimated useful life of six years and a residual value of $8,000. The company uses units-of-production depreciation and estimates the machine will last 300,000 units. The machine made 15,000 units in 2015 and 45,000 units in 2016. The accumulated depreciation balance on December 31, 2016, after the adjusting entries have been posted should be
A) $ 8,400
B) $10,000
C) $11,200
D) $13,333
Q3) Under the MACRS principles the residual value is eliminated.
A)True
B)False
Page 13
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Chapter 12: Intangibles
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Q1) Which statement about negative goodwill is true?
A) Negative goodwill is the amount by which the fair value of identifiable net assets acquired exceeds the price paid.
B) Negative goodwill results when the cash paid for a company exceeds the fair market value of the net assets acquired.
C) Negative goodwill should be recorded as a direct credit to retained earnings.
D) Negative goodwill should first be allocated proportionately to reduce the cost of all assets acquired (except long-term investments in marketable securities) on the basis of their relative market values.
Q2) At the date of purchase, materials, equipment, facilities, and intangibles purchased from others that have alternative future uses in research and development should be
A) capitalized
B) charged directly to retained earnings
C) included in R&D expense immediately
D) charged as a loss from continuing operations
Q3) List 3 activities that can be included in R&D.
Q4) List 5 activities that would be excluded from R &D.
Q5) Provide two examples that would indicate goodwill is impaired.
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Chapter 13: Investments and Long-Term Receivables
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Q1) On January 1, 2015, Brewster's, Inc. bought $50,000 of 10% ten-year bonds of Chocolate Co. for $56,795 to yield 8% annually. The bonds pay interest semiannually and are classified as held-to-maturity. Interest is paid on June 30 and December 31.
Required:
Using the effective interest method, journalize the receipt of the interest and amortization at December 31, 2015.
Q2) An investment of 20% or more in the outstanding common stock of the investee leads to the presumption of significant influence and the use of the consolidation method.
A)True
B)False
Q3) With the equity method, the investor recognizes its share of the earnings of the subsidiary when the
A) investor sells the investment
B) investee pays a cash dividend
C) investee declares a cash dividend
D) investee reports earnings on its income statement
Q4) 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) Under what situations might a company call a bond?
Q2) Refer to Exhibit 14-3. The entry to record the payment of interest on July 1, 2013, would include a
A) credit to Bond Interest Expense for $10,667
B) debit to Premium on Bonds Payable for $154
C) credit to Cash for $16,000
D) debit to Bond Interest Payable for $16,000
Q3) Refer to Exhibit 14-3. The entry to record the sale would include a
A) credit to Interest Expense for $10,667
B) debit to Cash for $400,000
C) credit to Bonds Payable for $410,667
D) credit to Premium on Bonds Payable for $10,667
Q4) Refer to Exhibit 14-6. The journal entry to record the reacquisition of the bonds will include a
A) debit to Loss on Bond Redemption for $5,100
B) credit to Gain on Bond Redemption for $5,000
C) debit to Discount on Bonds Payable for $1,100
D) debit to Loss on Bond Redemption for $5,200
Q5) How should a company treat the issuance of convertible debt per GAAP? What two methods are available to record the issuance?
Page 16
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Chapter 15: Contributed Capital
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Q1) On January 1, 2015, sixty executives are offered a fixed compensatory stock option plan in which each of them will receive options to buy 5,000 shares of $10 par common stock at $30 a share. On the grant date, the fair value per option is $7.50. There is a three-year service period and an estimated annual employee turnover rate of 3%.
Required:
a.Compute the expected total compensation cost.
b.Compute the compensation expense for 2011.
c.Prepare the journal entry to record the exercise of options by six of the executives on January 1, 2018.
Q2) What rights is a shareholder of capital stock entitled?
Q3) Which one of the following statements is false?
A) When stock is issued, legal capital is usually the total amount received.
B) Par value has no direct relationship to market value.
C) The accounting for stated value, no-par stock parallels accounting for par-value stock.
D) Capital stockholders have limited liability.
Q4) What kind of characteristics may be specified in the contract for preferred stock?
Q5) What are share based compensation plans?
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) Reporting basic earnings per share is required for which type of corporate capital structure?
A) simple
B) complex
C) primary
D) both simple and complex
Q2) Which of the following items would be included in a basic earnings per share calculation?
A) declared dividends on noncumulative preferred stock
B) declared dividends on cumulative preferred stock
C) undeclared dividends on cumulative preferred stock
D) all of these
Q3) 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
Q4) Describe the two types of corporate capital structures.
Q5) List 4 factors that management may consider prior to declaring a dividend.
Page 18
Q6) What is a restriction of retained earnings and why would it be necessary?
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Chapter 17: Advanced Issues in Revenue Recognition
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Q1) If the consignment-in account has a credit balance, it is reported on the consignee's balance sheet as a(n)
A) contra-asset account
B) revenue account
C) liability account
D) equity account
Q2) Which of the following methods could not be used to recognize revenue on a real estate sale?
A) completed contract
B) deferral method
C) installment method
D) cost recovery method
Q3) Refer to Exhibit 17-3. What net income (loss) should be recognized by Dundee in 2014?
A) $2,590 loss
B) $1,160 income
C) $1,210 income
D) $2,640 loss
Q4) What are the advantages of using the percentage-of-completion method of revenue recognition?
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Chapter 18: Accounting for Income Taxes
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Q1) Interperiod income tax allocation is based on the assumption that A) permanent differences ultimately reverse and require interperiod tax allocation
B) permanent differences do not have deferred tax consequences
C) total income tax expense should be apportioned among numerous line items on the income statement
D) the amount of income tax expense reported on the income statement should be the same as the income tax obligation on the corporation's income tax return
Q2) Which of the following is false concerning deferred tax assets and liabilities?
A) a corporation must separate its deferred tax liabilities into current and noncurrent groups
B) a corporation must separate its deferred tax assets into current and noncurrent groups
C) a corporation must combine the amounts in current groups
D) a corporation must not combine the amounts in current groups
Q3) Discuss what criteria a company should employ to determine whether a deferred tax asset is considered impaired or "more likely than not" to be realized.
Q4) What is intraperiod tax allocation?
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Chapter 19: Accounting for Postretirement Benefits
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Q1) Which of the following is typically the most significant OPEB (other postemployment benefits)?
A) life insurance
B) healthcare
C) legal service
D) tuition assistance
Q2) Amortization of any net gain or loss is included in pension expense of a given year if at the
A) end of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets
B) beginning of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual accumulated benefit obligation or the fair value of the plan assets
C) end of the year, the cumulative gain or loss exceeds 10% of the greater of the actual accumulated benefit obligation or the fair value of the plan assets
D) beginning of the year, the cumulative gain or loss exceeds 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets
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Chapter 20: Accounting for Leases
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Q1) As a generalized statement regarding lease accounting, which statement best describes U.S. versus international accounting principles?
A) IFRS for leases are more principles-based than GAAP.
B) IFRS for leases are more rules-based than GAAP.
C) IFRS and GAAP are similarly rules-based.
D) IFRS and GAAP are similarly principles-based.
Q2) Which statement is not true?
A) If a lease is a capital lease because of a bargain purchase option, the leased asset should be depreciated over the life of the asset, not the life of the lease.
B) The lessee ignores unguaranteed residual value in the measurement of the lease obligation.
C) If there is a bargain purchase option, the lessor does not consider an unguaranteed residual value in measuring the lease receivable at the date of lease signing.
D) In direct financing leases, the net investment in the lease should be adjusted each year by material changes (increases or decreases) in estimated unguaranteed residual values.
Q3) What is included in the calculation of the minimum lease payment?
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Chapter 21: The Statement of Cash Flows
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Q1) Unlike GAAP, IFRS encourage the disclosure of all of the following except
A) reconciliation of net income to operating cash flows when the direct method is used in the cash flow statement
B) undrawn borrowing capacity available for operating activities
C) separation of cash flows that increase operating capacity from those that maintain operating capacity
D) operating, investing, and financing activities by segment
Q2) In a statement of cash flows prepared by the indirect method, which of the following events would be deducted from net income?
A) increase in accrued pension cost
B) loss on the sale of an available-for-sale investment
C) proceeds from the sale of plant assets
D) amortization expense on a patent
Q3) The visual inspection method is used when a company has simple financial statements and when the relationships between the changes in account balances can be easily analyzed.
A)True
B)False
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) What must be disclosed when making a retrospective adjustment?
Q2) During a year-end evaluation of the financial records of the Matthew Company for the year ended December 31, 2014, the following was discovered:
Inventory on January 1, 2014, was understated by $6,000. Inventory on December 31, 2014, was understated by $18,000. Rent of $20,000 collected in advance on December 29, 2014, was included in income for 2014.
A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2014.
Net income for 2014 (before any of the above items) was $250,000. The corrected net income, ignoring income taxes, for 2014 should be
A) $300,000
B) $208,000
C) $212,000
D) $218,000
Q3) What are the three type of accounting changes defined by GAAP; provide a brief explanation of each?
Q4) What is the GAAP requirement of accounting for a change in estimates?
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Chapter 23: Time Value of Money Module
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Q1) Maxine has $1,000 to invest today. How much will her money be worth in 15 years if she earns 9% compounded semiannually on her money?
A) $ 3,745
B) $13,268
C) $ 3,642
D) $ 1,935
Q2) On January 2, 2014, Christopher inherited a trust fund that he could use for college tuition. Christopher hopes to make five equal withdrawals of $40,000 from the fund that will earn 10% compounded annually. The first withdrawal will be made on January 2, 2015. How much does he need to have invested in the fund on January 2, 2014, to be able to withdraw the needed amounts each year?
A) $151,631
B) $200,000
C) $244,204
D) $268,624
Q3) The present value of an annuity is the present value of a series of equal cash flows that occur in the future.
A)True
B)False
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