Advanced Financial Accounting
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Course Introduction
Advanced Financial Accounting builds upon foundational concepts to explore complex accounting issues faced by large organizations, particularly those operating internationally or comprising multiple entities. The course covers topics such as consolidated financial statements, accounting for mergers and acquisitions, foreign currency transactions, segment reporting, and accounting for joint ventures and partnerships. Emphasis is placed on relevant international accounting standards, ethical considerations, and the application of advanced principles in real-world scenarios. By the end of the course, students will have developed the analytical and technical skills necessary to address intricate financial reporting challenges and support informed decision-making in a global business environment.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 6th Edition by Clyde
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Page 2
P. Stickney
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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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) What three financial statements are prepared by business firms and what information does each provide?
Answer: 11ea92c5_78cc_2a1f_9469_7340757b7f88_TB5976_00
Q3) Many market participants argue that financial markets are efficient and that financial statement users cannot routinely analyze financial statements to find mispriced securities. This view would lead some to suggest that there is little value to financial statement analysis. Provide a discussion of the role of financial statement analysis in an efficient capital market and reasons why financial statement analysis is still valuable.
Answer: 11ea92c5_78cd_62a4_9469_971dea374853_TB5976_00
Q4) Assets that do not represent a claim to a fixed amount of cash are called ____________________ assets.
Answer: nonmonetary
Q5) Normally, intense rivalries have a tendency to reduce ____________________. Answer: profitability
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Discuss the two principal reasons income before taxes for financial reporting differs from taxable income.
Answer: 11ea92c5_789e_14e4_9469_e73c6edd1d92_TB5976_00
Q2) The application of GAAP requires firms to write down assets whose fair values decrease below their book values, but does not allow firms to revalue upward the values of assets whose fair values have increased. This asymmetric treatment rests on the ________________________________________.
Answer: conservatism convention
Q3) 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
Q4) The amount initially paid to acquire an asset is called ______________________________.
Answer: acquisition cost
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Chapter 3: Income Flows Versus Cash Flows: Key
Relationships in the Dynamics of a Business
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Q1) The issuance of debt would be classified as a (an) ____________________ activity in the statement of cash flows.
Answer: financing
Q2) Normally, cash flows from operations will peak during which phase of the product life cycle?
A) Introduction
B) Growth
C) Maturity
D) Decline
Answer: C
Q3) Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method
A) Subtract depreciation expense
B) add depreciation expense
C) add an increase in accounts receivable
D) add a decrease in accounts payable
Answer: B
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Chapter 4: Profitability Analysis
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Q1) Firms with high levels of operating leverage experience which of the following in comparison to firms with low levels of operating leverage
A) Higher levels of risk in operations.
B) Lower expected rates of return.
C) Lower variability in returns on assets.
D) Higher sales.
Q2) When calculating return on common stockholders' equity the financial analyst subtracts ________________________________________ from net income.
Answer:
Q3) Which of the following might an analyst not want to eliminate from past earnings when using past earnings to forecast future earnings.
A) nonrecurring gains from the sale of assets.
B) unusual asset impairment charges.
C) nonrecurring restructuring charges.
D) revenue from the sale of inventory.
Q4) Operating income is negative in an amount equal to _________________________ when revenues are zero.
Answer:
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Chapter 5: Risk Analysis
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Q1) Dallas Corp. has a current ratio of 6, under which of the following scenarios might this indicate a problem
A) inventories are increasing due to the introduction of a new product
B) the company is holding cash in expectation of making a large investment in equipment
C) receivables are increasing due to increasing sales
D) inventories are increasing and the industry in which Dallas Corp. operates is experiencing a recession
Q2) Which of the following is not one of the three explanatory variables that determines 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) Refer to the financial statement data for Patriot Comp. for 2006 and 2005. Complete the table by computing the ratios.
Q4) Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ______________________________.
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Chapter 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data
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Q1) Which of the following items is consistent with earnings not being informative about current performance but are informative about future earnings?
A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.
Q2) GAAP requires that changes in estimates be accounted for by recognizing the effect ________________________________________ period(s).
Q3) Which of the following is not a characteristic of an extraordinary item?
A) Unusual in nature
B) Infrequent in occurrence
C) Material in amount
D) Subject to a firm commitment
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Chapter 7: Revenue Recognition and Related Expenses
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Q1) A LIFO liquidation during periods when prices are increasing results in a company
A) recording a large inventory write down.
B) recording higher earnings than it would have if it had used FIFO.
C) recording lower earnings than it would have if it had used FIFO.
D) having operational problems, but no financial statement effects.
Q2) GAAP stipulates that firms should ____________________ expenditures that increase the service potential of an asset beyond that originally anticipated
Q3) When cash collectibility is uncertain, a firm using the ____________________ method recognizes revenue as it collects portions of the selling price in cash.
Q4) ___________________________________ include trade and brand names, trademarks, patents, copyrights, franchise rights, customer lists and goodwill.
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
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Chapter 8: Liability Recognition and Related Expenses
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Q1) Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.
Q2) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
Q3) Many firms use derivative instruments to hedge exposure to changes in the fair value an asset or liability or to hedge exposure to variability in expected future cash flows. As an analyst examining the financial reports of a company that uses derivative instruments to hedge, what questions should be asked when thinking about derivatives and accounting quality?
Q4) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q5) Which of the following accounts would not be considered a reserve account?
A) Allowance of Doubtful Accounts
B) Estimated Warranty Liability
C) Prepaid Expense
D) Accumulated Depreciation
Q6) Differences between income before taxes and taxable income result are either ____________________ or ____________________.
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Chapter 9: Intercorporate Entities
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Q1) Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, the investment will appear in the December 31, 2005 balance sheet at what amount?
A) $60,000
B) $65,000
C) $64,000
D) $75,000
Q2) The first date at which employees can exercise their stock options is termed the _________________________.
Q3) When a foreign entity operates as a direct and integral extension of the U.S. parent, normally, its functional currency is the _________________________.
Q4) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
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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 sales or other
Q2) Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to experience technological improvements in its production process.
D) A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.
Q3) The analyst can capture projected levels of operating activity by using ______________________________ to develop forecasts for individual assets.
Q4) Financial statement forecasts should rely on ____________________ within financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) 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
Q2) 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?
Q3) If dividend projections include the effect of inflation then the discount rate used should be a ____________________ rate.
Q4) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q5) 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.
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) Free cash flow from operations equals cash flow from operations adjusted for net interest after tax and adjusted for
Q2) The forecasting and valuation process is particularly difficult for ______________________________ when the near term free cash flows tend to be negative.
Q3) The present value of future free cash flows valuation method focuses on free cash flows, a base that economists argue has more economic meaning than
Q4) ________________________________________ typically include accounts payable, accrued expenses, accrued taxes, deferred taxes, pension obligations and other retirement benefit obligations.
Q5) Steady-state growth in free cash flows could be driven by long-run expectations for growth attributable to
A) interest rates
B) national exports
C) general economic productivity
D) balance of payments
Q6) What three elements are needed to value a resource when using cash flows?
Q7) 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) Over the life of a firm, the capital invested in the firm by the shareholders plus the income of the firm will reflect the ______________________________ to the shareholders.
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
A) exactly equal to the book value of common shareholders' equity.
B) greater than the book value of common shareholders' equity.
C) less than the book value of common shareholders' equity.
D) exactly equal to working capital.
Q3) ______________________________ is the amount by which expected future earnings exceed the required earnings.
Q4) The appropriate discount rate for the residual income model is
A) Weighted average cost of capital
B) The risk free interest rate
C) The risk free interest rate plus the market premium
D) Cost of common equity capital
Q5) The required earnings of the firm equals the product of the required rate of return on common equity capital times the
at the beginning of the period.
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Valuation using market multiples captures
A) absolute valuation per dollar of book value or per dollar of earnings.
B) dollar of book value or dollar of earnings per dollar of common equity.
C) relative valuation per dollar of book value or per dollar of earnings.
D) intrinsic valuation per dollar of book value or per dollar of earnings.
Q2) Sometimes a high market to book ratio is a result of having
Q3) The market-to-book ratio is calculated by
A) dividing a firm's market value of total equity by the book value of total equity.
B) dividing a firm's market value of common equity by the book value of total equity.
C) dividing a firm's market value of common equity by the book value of common equity.
D) dividing a firm's market value of total equity by the book value of total debt.
Q4) What is a price differential and how is it computed? What information does a price differential provide to an analyst?
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