Advanced Financial Accounting
Textbook Exam Questions
Course Introduction
Advanced Financial Accounting explores complex accounting principles and practices beyond the introductory level, focusing on the preparation, analysis, and interpretation of financial statements in specialized contexts. Topics typically include accounting for business combinations and consolidations, foreign currency transactions, segment and interim reporting, partnership accounting, governmental and nonprofit accounting, and issues related to international financial reporting standards. The course emphasizes critical thinking and problem-solving skills necessary for addressing advanced accounting challenges, making it essential for students aiming for professional accounting qualifications or roles in corporate finance and auditing.
Recommended Textbook
Intermediate Accounting Volume 2 3rd Edition by Kin Lo
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10 Chapters
1033 Verified Questions
1033 Flashcards
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Page 2
Chapter 1: Current Liabilities and Contingencies
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Sample Questions
Q1) Explain the nature of current liabilities and how these are accounted for in the financial statements.
Answer: Current liabilities are obligations that are expected to be settled within one year of the balance sheet date or the business's normal operating cycle,whichever is longer.Current liabilities are reported separately from non-current liabilities in the balance sheet unless they are presented in order of liquidity to provide more reliable and relevant information.
Q2) Explain how commitments and guarantees are accounted for under accrual accounting.
Answer: Contractual commitments pertaining to the acquisition of property,plant,and equipment must be disclosed.
Enterprises shall record provisions for onerous contracts. Enterprises shall record provisions for financial guarantee contracts and disclose such guarantees.
Q3) What are the three broad categories of liabilities?
Answer: The three broad categories of liabilities are:
1.Financial liabilities held for trading
2.Other financial liabilities
3.Non-financial liabilities
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Chapter 2: Non-Current Financial Liabilities
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Sample Questions
Q1) Blue Sky Travel Inc.issues $2,000,000 of ten-year,8% bonds dated January 1,2017.Interest is payable on January 1 and July 1 each year.The proceeds realized from the issue were the $1,821,367 sales price less the $20,000 fee charged by Blue Sky's investment bank.Blue Sky's year-end is December 31.
Required:
Prepare journal entries:
a.The issuance of the bonds.
b.Payment of interest and related amortization on July 1,2017.
c.Accrual of interest and related amortization on December 31,2017.
Answer: Determining the effective interest rate for the period using a BAII PLUS financial calculator
The net proceeds (PV)to Blue Sky are $1,801,367 ($1,821,367 - $20,000); N = 20 (10 × 2); PMT = $80,000 ($2,000,000 × 8% × 6/12)
20 N,1,801,367 +/- PV,2000000 FV,80000 PMT,CPT I/Y I/Y = 4.7823% (rounded) 11ea7ef7_db33_d387_92e1_1bbbf920731c_TB1321_00_TB1321_00_TB1321_00_TB1321_00
Q2) What is meant by the "spread" charged by banks on loans?
Answer: It is the difference between the interest it pays on customer deposits and the interest it earns on loans.
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Page 4
Chapter 3: Equities
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Sample Questions
Q1) Assume that a company issued 10,000 shares for $30/share and a par value of $5/share.1,000 shares were repurchased back at $22/share.Which statement about share repurchases and cancellation is correct?
A) Contributed surplus from the share repurchase can be netted against the contributed surplus from share issuance.
B) Contributed surplus from the share repurchase must be separated from the contributed surplus on share issuance.
C) Contributed surplus arising from share repurchase must be debited in this transaction.
D) Contributed surplus from the initial share issuance must now be credited in this transaction.
Answer: B
Q2) When is a corporation legally obligated (liable)to pay dividends?
Answer: A corporation is legally obligated to pay cash dividends when it declares them to be payable.
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Chapter 4: Complex Financial Instruments
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Sample Questions
Q1) How is the subsequent conversion of bonds into common shares recorded under IFRS?
A) Book value.
B) Market value.
C) Fair value.
D) Historical value.
Q2) Briefly describe a compound financial instrument and its advantages.
Q3) Princeton Inc.granted 290,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2018,when the share price was $23.Employees still employed by the company four years after the grant date may exercise the option to purchase shares at $45 each; that is,the options vest to the employees after four years.A consultant estimated the value of each option at the date of grant to be $2.50 each.
Required:
Record the journal entries relating to the issuance of stock options.
Q4) Explain how convertible bonds alleviate moral hazard.
Q5) What is speculation?
Q6) Explain how bonds issued with warrants alleviate adverse selection problem.
Q7) What is a derivative and what are two reasons why parties would enter into a derivative contract?
Page 6
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Chapter 5: Earnings Per Share
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Sample Questions
Q1) For stock splits and stock dividends,while it is possible to state the number of shares as beginning-of-year equivalents,it makes more sense to use end-of-year equivalents because financial statement readers are evaluating EPS after the end of the year.Explain why the adjustment for stock splits and stock dividends is standardized.
Q2) Explain why dividends to preferred shareholders are adjusted in the numerator of the EPS calculation.
Q3) Which statement is correct about basic EPS?
A) It indicates the net income before tax attributable to a company's ordinary shares.
B) It indicates the net income before tax attributable to a company's preferred shares.
C) It indicates the net income attributable to a company's preferred shares.
D) It indicates the net income attributable to a company's ordinary shares.
Q4) Which statement is correct about diluted EPS?
A) The incremental EPS of the least dilutive item is compared to the basic EPS.
B) The incremental EPS of the most dilutive item is compared to the basic EPS.
C) If the incremental EPS is higher than the basic EPS, the item is dilutive.
D) If the incremental EPS is lower than the basic EPS, the item is anti-dilutive.
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Page 7
Chapter 6: Accounting for Income Taxes
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Sample Questions
Q1) During its first year of operations,Keen Corp.reported the following information: Income before income taxes for the year was $650,000 and the tax rate was 25%.
Depreciation expense was $200,000 and CCA was $100,000.The carrying amount of property,plant,and equipment at the end of the year was $720,000,while UCC was $820,000.
Warranty expense was reported at $110,000,while actual cash paid out was $60,000. $15,000 of expenses included in income was not deductible for tax purposes. No other items affected deferred tax amounts besides these transactions.
Required:
a.Prepare the journal entries to record income tax expense for the year.
b.Assume Keen reported a loss instead of income in its first year of operations.Explain what accounting policy choices are available to Keen to record the tax implications of the loss,and provide a recommendation.
Q2) Which statement is not correct?
A) The accrual method focuses on the balance sheet.
B) The deferral method focuses on the income statement.
C) The deferral method matches tax expense to the balance sheet.
D) The accrual and deferral methods are both tax allocation methods.
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Chapter 7: Pensions and Other Employee Future Benefits
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Sample Questions
Q1) Why does IAS 19 require Recognizing changes in the fair value of pension assets and liabilities to flow through OCI and not through the income statement?
Q2) Which of the following component refers to the benefits earned by employees in a defined benefit plan?
A) Interest cost on pension obligations.
B) Income from plan assets.
C) Amortization of past service cost.
D) Amortization of actuarial gains and losses.
Q3) What is true of the interest cost component of the pension expense?
A) ASPE specifies that enterprises should use the yields on high-quality corporate bonds. B) IFRS specifies that enterprises should use the yields on high-quality short-term corporate bonds.
C) It represents the increase in the pension obligation due to the passage of time. D) IFRS specifies that enterprises should use the yields on medium-quality corporate bonds.
Q4) What is the fundamental difference between a defined contribution and a defined benefit pension plan?
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Chapter 8: Accounting for Leases
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Sample Questions
Q1) On May 1,2018,Janus Company entered into a ten-year lease for equipment.Annual lease payments are $5,000,payable at the beginning of each lease year (May 1).At the end of the lease,possession of the equipment will revert to the lessor.The equipment has an expected useful life of 10 years.Similar equipment could be purchased for $90,000 cash.Janus's incremental borrowing rate is 6%.The company has a April 30 year-end,and it uses straight-line depreciation for its property,plant,and equipment.
Required:
a.Prepare the journal entries relating to the lease and leased asset for Janus's fiscal year ending April 30,2019.
b.State the amounts related to the lease that would be reported on the April 30,2019 balance sheet,indicating the balance sheet classifications,account names,and amounts.
Q2) Under IFRS,assuming all information is available,which rate is used by the lessee in the minimum lease calculation?
A) Implicit borrowing rate.
B) Lessee's incremental borrowing rate.
C) Lower of the incremental and implicit rate.
D) Either the incremental or implicit rate.
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Chapter 9: Statement of Cash Flows
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Sample Questions
Q1) Which is a correct statement?
A) The direct method of presentation for the cash flow statement must be used under ASPE.
B) The direct method of presentation for the cash flow statement must be used under IFRS.
C) The statement of cash flows explains the change between opening and closing cash.
D) The "cash" balance on the cash flow statement does not have to be equal to the "cash" balance amount on the balance sheet.
Q2) If a company has gaps between the change in cash and the net income for the year:
A) the income statement provides sufficient explanation for the sources of these changes.
B) the financial statement notes provide explanation for the sources of these changes.
C) the statement of cash flow provides explanation of the sources of these changes.
D) the statement of cash flow and balance sheet provide explanation for these changes.
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11
Chapter 10: Accounting Changes
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Sample Questions
Q1) Catherwood Inc.purchased a piece of real estate in early 2016.The staff accountant allocated the $5,000,000 purchase price as follows: 30% to land,50% to building,and 20% to fixtures.Catherwood recorded straight-line depreciation based on useful lives of 20 years and 5 years on the building and fixtures,respectively.No residual value was assigned to either depreciable asset.The company has a policy of recording a full year of depreciation in the year of acquisition,and none in the year of disposal. In 2020 a Catherwood staff in the accounting department discovered that the bundled purchase actually cost $6,000,000 and the extra $1,000,000 was debited to land,while the remaining $5,000,000 was allocated 30% to land,50% to building,and 20% to fixtures.The accounting staff believe that the allocation of 30% to land,50% to building,and 20% to fixtures still applies.
Required:
Record any adjusting entries required to correct the accounts in 2020 and provide supporting calculations.
Q2) What is the essential characteristic that distinguishes a change in accounting policy from either an error correction or a change in estimate?
Q3) Define "a retrospective adjustment."
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