Advanced Financial Accounting
Mock Exam
Course Introduction
Advanced Financial Accounting delves into the complex financial reporting issues faced by corporations, with a focus on business combinations, consolidated financial statements, foreign currency transactions, and partnership accounting. The course explores accounting standards and regulations affecting multinational enterprises and special types of entities, such as not-for-profit organizations and governmental bodies. Students will analyze real-world case studies, apply advanced concepts through problem-solving, and develop a comprehensive understanding of disclosure requirements, international financial reporting standards, and ethical considerations in financial reporting. This course is designed to equip students with the technical expertise and analytical skills necessary for effective decision-making in advanced financial accounting environments.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 6th Edition by Clyde P. Stickney
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14 Chapters
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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 second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis?
A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?
Answer: D
Q2) The higher the value added from any activity, the higher should be the ____________________ from engaging in that activity.
Answer: pro fitability
Q3) Many people view the balance sheet as being a representation of a firm's economic position. What are some issues that reduce the quality of this representation?
Answer: 11ea92c5_78cc_5130_9469_1163ab92d06c_TB5976_00
Q4) The residual interest in a company is referred to as
Answer: shareholders' equity
Page 3
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Why might income tax expense on the income statement differ from actual income taxes paid to the government?
A) There are timing differences to when income is recognized and there are items that may or may not be subject to taxation.
B) The IRS uses the accrual method of calculating income.
C) Financial statement preparers can use an estimated tax rate.
D) The IRS requires deferral of most expenses.
Answer: A
Q2) What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations.
Answer: Valuation methods reflecting historical cost include: 11ea92c5_789d_2a81_9469_3720069b8771_TB5976_00 The main advantages of using historical valuations are simplicity, less subjectivity and reliability. The disadvantages include lack of relevance.
Q3) Stockholders' equity can be expanded into the following three accounts: contributed capital, retained earnings and
Answer: accumulated other comprehensive income
Page 4
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Chapter 3: Income Flows Versus Cash Flows: Key
Relationships in the Dynamics of a Business
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Q1) Many analysts use ____________________ as a crude measure of a firm's ability to pay down debt.
Answer: EBITDA
Q2) When preparing the statement of cash flows using the indirect method the payment of dividends would appear as
A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the financing activities section
D) a source of cash in the financing activities section
Answer: C
Q3) The issuance of debt would be classified as a (an) ____________________ activity in the statement of cash flows.
Answer: financing
Q4) The expense incurred by issuing stock options should be A) classified as a financing activity. B) added back to net income in the operating activities section. C) subtracted from net income in the operating activities section. D) does not appear in the statement of cash flows.
Answer: B
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Chapter 4: Profitability Analysis
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Q1) Return on assets can be a misleading ratio when analyzing technology firms because two important assets, ______________________________ and ______________________________ do not appear on their balance sheets
Answer:
Q2) EPS is an ambiguous measure of profitability because it reflects operating performance in the numerator and ________________________________________ in the denominator.
Answer:
Q3) Operating income is negative in an amount equal to _________________________ when revenues are zero.
Answer:
Q4) When calculating return on common stockholders' equity the financial analyst subtracts ________________________________________ from net income.
Answer:
Q5) The ____________________ effect of interest expense on net income equals one minus the marginal tax rate times the interest expense.
Answer:
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Chapter 5: Risk Analysis
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Q1) When calculating the quick ratio, an analyst would include in the numerator cash, ________________________________________, and receivables.
Q2) One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.
Q3) In bankruptcy prediction analysis a type ____________________ error is classifying a firm as bankrupt and it ultimately survives.
Q4) By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of _____________________________________________ the firm requires.
Q5) One common problem with the current ratio is that it is susceptible to "window dressing". If prior to the end of the accounting period Streetwise 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.
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Page 7
Chapter 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data
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Q1) When a company makes a change in an estimate that it has used in its financial statements, it should account for the change by
A) retroactively restating all prior financial statements
B) treat the change as a cumulative effect change in accounting estimate
C) spread the effect of the change over the current and future periods
D) companies are not allowed to make changes to estimates
Q2) Some firms attempt to maximize the amount of restructuring charge in a particular year, analysts refer to this as the _________________________ approach.
Q3) Firm's choices and estimates within GAAP should be determined by A) how the industry operates.
B) the firm's underlying economic circumstances.
C) SEC interpretations regarding specific choices.
D) the firm's auditor.
Q4) When evaluating the quality of accounting information the user should consider the reasonableness of the ____________________ made in applying GAAP.
Q5) When evaluating the quality of accounting information the user should consider the ____________________ of the firm's disclosures.
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Chapter 7: Revenue Recognition and Related Expenses
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Q1) GAAP stipulates that firms should ____________________ expenditures that increase the service potential of an asset beyond that originally anticipated
Q2) An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
A) FIFO
B) LIFO
C) Base stock
D) Weighted-average
Q3) Financial reporting requires firms to ____________________ immediately all R&D costs incurred internally.
Q4) Note that this topic is covered in the Appendix 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) The difference between the economic resources received from customers and the economic resources paid to suppliers, employees and other providers of goods and services is called ____________________.
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Chapter 8: Liability Recognition and Related Expenses
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Q1) Which of the following best describes the accounting treatment for derivative instruments not held for purposes of hedging?
A) Record as an asset or liability and recognize changes in fair value in other comprehensive income.
B) Do not record as an asset or liability, record income from the transaction at maturity and recognize in earnings.
C) Record as an asset or liability, recognize changes in fair value currently in earnings.
D) Record as an asset or liability if off-balance sheet risk is material.
Q2) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
Q3) ____________________ differences arise from revenues and expenses that GAAP requires firms to include in income before taxes but that the income tax law excludes from taxable income.
Q4) ____________________ over sufficiently long time periods equals cash inflows minus cash outflows from operating, investing, and financing activities
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Chapter 9: Intercorporate Entities
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Q1) Ownership of 50% or more of the voting stock of another company implies an ability to ____________________.
Q2) When the functional currency is the U.S. dollar, financial reporting requires firms to use the ___________________________________ translation method.
Q3) The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.
Q4) Which of the following is not a classification for a minority, passive investment?
A) trading securities
B) equity securities
C) available-for-sale securities
D) held-to-maturity securities
Q5) When a foreign entity operates as a relatively self-contained and integrated unit within a foreign country, normally, its functional currency is the
Q6) The _________________________ is the date a firm gives a stock option to employees.
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Chapter 10: Forecasting Financial Statements
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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) To ensure that the financial statements articulate it is important that the change in the cash balance on the balance sheet each year agrees with A) the cash collections from sales in the projected income statement. B) the cash provided by or used by operations on the projected statement of cash flows. C) the net change in cash on the projected statement of cash flows. D) the net change in working capital from period to period.
Q3) A firm in a mature industry with little expected change in its market share might anticipate volume increases equal to the growth rate in the _________________________ with in its geographic markets.
Q4) Financial statement forecasts should rely on ____________________ within financial statements.
Q5) To develop forecasts of individual assets, the analyst must first link historical growth rates for individual assets to historical growth rates in sales or other
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Page 12
Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%. In addition, the excess return over the risk-free rate is 5.9%. Calculate the firm's cost of equity capital using the CAPM model.
Q2) In theory, the value of a share of common equity is the present value of
Q3) When deriving the equity value of a firm an analyst forecasts the real dividends expected to be paid in the future. In this case which discount rate should be used? A) The nominal rate of return
B) The real rate of return
C) The risk free rate of return
D) The risk adjusted rate of return
Q4) Under the assumption of clean surplus accounting how would you compute total dividends paid to common equityholders in order to value the firm?
Q5) If dividend projections include the effect of inflation then the discount rate used should be a ____________________ rate.
Q6) Provide the rationale for using expected dividends in a valuation model.
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Changes in general price levels cause the ______________________________ of the monetary unit to change over time.
Q2) The conceptual framework for free cash flows separates the balance sheet equation into the following categories:
A) CA + LT A = CL + LT L + SE
B) OA + FA = OL + FL + SE
C) OA + FA = OL + FL + OSE + FSE
D) Non-FA + FA = Non-FL + FL + SE
Q3) 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.
Q4) If the objective is to value operating assets net of operating liabilities of a firm then the appropriate free cash flow measure to be used is
Q5) Free cash flow from operations equals cash flow from operations adjusted for net interest after tax and adjusted for
Page 14
Q6) Provide the rationale for using expected free cash flow in valuation.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) At the beginning of 2007 investors had invested $125,000 of common equity in Jets Corp.and expect to earn a return of 15% per year. In addition, investors expect Jets Corp. to pay out 100% of income in dividends each year. Forecasts of Jet's net income are as follows: 2007 - $41,000
2008 - $35,400
2009 - $33,200
2010 and beyond - $25,000
Using this information what is Jet's residual income valuation at the beginning of 2007?
A) $125,000
B) $184,600
C) $190,262
D) $260,415
Q2) Economists sometimes argue that earnings are not a _________________________ attribute on which to base valuation.
Q3) Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.
Q4) Why is the weighted average cost of capital not used as the discount rate when computing residual income?
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Page 15
Chapter 14: Valuation: Market-Based Approaches
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Q1) Which of the following is not a reason why price-earnings ratios would differ across firms?
A) Risk
B) Profitability
C) Growth
D) Operating leverage
Q2) A company is expected to have a value of $142,857 at the start of next period and investors require a 14 percent return on equity capital. Using the assumptions of the price-earnings ratio what would be the company's earnings for the current year?
A) $20,000
B) $14,286
C) $2,800
D) $12,500
Q3) The risk of the firm increases the _____________________________________________.
Q4) A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons. Discuss how a successful internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one.
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