Advanced Financial Reporting
Exam Materials
Course Introduction
Advanced Financial Reporting delves into the complex principles and standards underpinning the preparation and presentation of financial statements for entities, including multinational corporations and conglomerates. The course explores the application of International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), focusing on topics such as consolidations, foreign currency transactions, segment reporting, and accounting for mergers and acquisitions. Students will critically analyze real-world cases to understand the implications of financial reporting decisions on stakeholders, and develop skills in interpreting, analyzing, and communicating advanced financial information for strategic decision-making.
Recommended Textbook
Intermediate Accounting 9th Edition by
J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) Which of the following has the statutory authority to set accounting standards in the United States?
A) FASB.
B) IRS.
C) SEC.
D) AICPA.
Answer: C
Q2) The monetary unit assumption requires that items in financial statements be measured in a particular monetary unit.
A)True
B)False
Answer: True
Q3) The International Accounting Standards Board:
A) Was the predecessor to the IASC.
B) Can overrule the FASB when their policies disagree.
C) Promotes the use of high-quality, understandable global accounting standards.
D) Has its headquarters in Geneva.
Answer: C
Q4) Compute the cash balance at the end of the first year for Tri Fecta.
Answer: 11ee8885_a80a_ecd4_91cb_4bd94c97ce97_TB2599_11
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) When converting an income statement from a cash basis to an accrual basis, cash received for services:
A) Exceeds service revenue.
B) May exceed or be less than service revenue.
C) Is less than service revenue.
D) Equals service revenue.
Answer: B
Q2) On December 31, 2017, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2018, $86,000 was paid for insurance. At the end of 2018, after adjusting entries were recorded, the balance in the prepaid insurance account was 42,000. Insurance expense for 2018 would be:
A) $6,400.
B) $134,400.
C) $86,000.
D) $92,400.
Answer: D
Q3) Prepare the closing entries for China Tea Company for the year ended December 31, 2018.
Answer: 11ea937b_366c_02b4_a419_e76a0cfa01ec_TB2599_00
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) The current ratio is calculated as:
A) Current assets divided by long-term assets.
B) Current assets divided by total assets.
C) Current assets divided by current liabilities.
D) Current assets divided by total liabilities.
Answer: C
Q2) The acid-test ratio is (Round your answer to two decimal places.):
A) 0.25.
B) 0.88.
C) 1.17.
D) 1.58.
Answer: B
Q3) A company's market value is generally less than its book value. A)True
B)False
Answer: False
Q4) Altoid Co.'s current ratio. Round your answer to two decimal places. Answer: ($150 + 200 + 300 + 450) /$450 = 2.44 Current ratio
Q5) Altoid Co.'s debt to equity ratio. Round your answer to two decimal places. Answer: ($450 + 600) /$(150 + 1,000) = .91 Debt to equity ratio
Page 5
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Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Sample Questions
Q1) Reconciliation between net income and comprehensive income would include:
A) unrealized holding losses but not unrealized holding gains on investments.
B) unrealized holding gains but not unrealized holding losses on investments.
C) unrealized holding losses and unrealized holding gains on investments.
D) neither unrealized holding losses nor unrealized holding gains on investments.
Q2) Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2018. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:
A) $155,000.
B) $221,000.
C) $211,000.
D) $151,000.
Q3) Required: Prepare a 2018 single, continuous statement of comprehensive income for Kroeger Inc. Use a multiple-step income statement format.
Q4) Required: Prepare a 2018 separate statement of comprehensive income for Kroeger Inc.
Page 6
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Chapter 5: Revenue Recognition
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Sample Questions
Q1) On June 1<sup>st</sup>, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10<sup>th</sup> the customer identified specific vintages that are included in Joseph's inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20<sup>th</sup> the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on
A) June 20<sup>th</sup>.
B) June 10<sup>th</sup>.
C) June 1<sup>st</sup>.
D) Upon consumption of the wine by the customer.
Q2) The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.
A)True
B)False
Q3) A transfer of goods or services is complete when the customer has control over the goods or services.
A)True
B)False
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Page 7
Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) Jimmy has $255,906 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?
A) 11 years.
B) 10 years.
C) 8.5 years.
D) 8.8 years.
Q2) The calculation of future value requires the removal of interest.
A)True
B)False
Q3) Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C's interest rate is:
A) Higher than Loan D.
B) Less than Loan D.
C) The same as Loan D.
D) Indeterminate compared to Loan D.
Q4) Briefly describe the difference between simple interest and compound interest.
Q5) Provide two examples of the use of present value techniques in accounting.
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) Using the balance sheet approach, bad debt expense is an indirect result of estimating the appropriate balance for the allowance for uncollectible accounts.
A)True
B)False
Q2) Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the end of July, the balance in the general ledger checking account was $2,750 and the bank balance on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited were $400. The bank statement revealed that a check written for $120 was incorrectly recorded by Brockton as a $220 disbursement. The bank statement listed service charges and NSF check charges totaling $150. The corrected cash balance is:
A) $2,270.
B) $2,550.
C) $2,470.
D) $2,700.
Q3) For each posted entry in the Allowance account during 2018, indicate the remaining entry(ies) in other accounts.
Q4) What kind of account is the Allowance for Loan Losses in Winchester's financial statements?
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Chapter 8: Inventories: Measurement
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Sample Questions
Q1) Assuming Northwest uses the gross method to record purchases, what is the cost of goods available for sale?
A) $492,500.
B) $496,500.
C) $490,500.
D) $492,550.
Q2) On January 1, 2017, ECT Co. adopted the dollar-value LIFO method for its one inventory pool. The pool's value on this date was $600 million. The 2017 and 2018 ending inventory valued at year-end costs were $702 million and $840 million, respectively. The appropriate cost indexes are 1.08 for 2017 and 1.20 for 2018. Required:
Calculate the inventory balance that ECT Co. would report on its year-end balance sheets for 2017 and 2018, using the dollar-value LIFO method.
Q3) Dollar-value LIFO eliminates the risk of LIFO liquidations.
A)True
B)False
Q4) Briefly explain how companies that use LIFO can both increase and decrease reported earnings by "managing" ending inventories.
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Page 10
Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) For companies that use FIFO or average cost, inventory is valued at the lower of cost or net realizable value at the end of the reporting period.
A)True
B)False
Q2) The conventional cost-to-retail percentage (rounded) is:
A) 54.9%.
B) 58.9%.
C) 53.6%.
D) 70.6%.
Q3) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to categories of feed products.
Q4) What should be the reported value of Sullivan's inventory if the company prepares its financial statements according to International Financial Reporting Standards (IFRS)?
A) $500,000.
B) $440,000.
C) $470,000.
D) $490,000.
Q5) Determine the inventory book value for Products A, B, and C.
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Chapter 10: Property, Plant, and Equipment and Intangible
Assets: Acquisition
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Q1) For Equipment B, Pensacola would record a gain/(loss) of:
A) $4,000.
B) ($4,000).
C) ($10,000).
D) None of these answer choices are correct.
Q2) Mad Hatter Enterprises purchased new equipment for $365,000, terms f.o.b. shipping point. Other costs connected with the purchase were as follows: \[\begin{array} { l r }
\text { State sales tax } & 29,200 \\
\text { Freight costs } & 5,600 \\
\text { Insurance while in transit } & 800 \\
\text { Insurance after equipment placed in service } & 1,200 \\
\text { Installation costs } & 2,000 \\
\text { Insurance for the first year of operations } & 2,400 \\
\text { Testing } & 700
\end{array}\] Required:
Determine the capitalized cost of the equipment.
Q3) Briefly explain the differences between U.S. GAAP and International Financial Reporting Standards (IFRS) in accounting for research and development expenditures other than software development costs.
Page 12
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Chapter 11: Property, Plant, and Equipment and Intangible
Assets: Utilization and Disposition
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Q1) Accounting for a change in the estimated service life of equipment:
A) Is handled prospectively.
B) Requires retroactive restatement of prior year's financial statements.
C) Requires a prior period adjustment.
D) Is handled currently as a change in accounting principle.
Q2) Briefly discuss why straight-line is the most common depreciation method used in practice.
Q3) An activity-based method is most often used to allocate the cost of natural resources over its useful life because:
A) This method generally results in the highest amount of assets in the earlier years.
B) This is the simplest method, and natural resource activity is hard to estimate.
C) The usefulness of natural resources generally is directly related to the amount of the resources extracted.
D) This method generally results in the highest amount of assets in the later years.
Q4) Briefly explain the differences between the terms depreciation, depletion, and amortization.
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Page 13
Chapter 12: Investments
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Q1) When the equity method of accounting for investments is used by the investor, the investment account is increased when:
A) A cash dividend is received from the investee.
B) The investee reports net income for the year.
C) The investor records additional depreciation related to the investment.
D) The investee reports a net loss for the year.
Q2) Trading securities are most commonly found on the books of:
A) Oil companies.
B) Manufacturing companies.
C) Banks.
D) Foreign subsidiaries.
Q3) Which of the following is not a reason to consider a decline in the fair value of a debt investment to be "other than temporary"?
A) The investor determines that a credit loss exists on the investment.
B) The investor intends to sell the investment.
C) The investor believes it is "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year.
D) The investor intends to hold the investment to maturity.
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Page 14
Chapter 13: Current Liabilities and Contingencies
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Q1) Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under:
A) U.S. GAAP.
B) IFRS.
C) Either U.S. GAAP or IFRS.
D) Neither U.S. GAAP nor IFRS.
Q2) For a loss contingency to be accrued, the claim must have been made before the accounting period ended.
A)True
B)False
Q3) Identify the major components included in the official definition of a liability as set forth by Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements."
Q4) Revenue is recognized upon sale of gift cards, rather than being deferred.
A)True
B)False
Q5) Define a loss contingency and give two examples that almost always are accrued.
Q6) Define and distinguish between current and noncurrent liabilities.
Q7) How are customer advances and refundable deposits similar and yet different?
Page 15
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Chapter 14: Bonds and Long-Term Notes
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Q1) LPC issued the bonds:
A) At par.
B) At a premium.
C) At a discount.
D) Cannot be determined from the given information.
Q2) The interest rate that is printed on the bond certificate is referred to as any of the following except:
A) Stated rate.
B) Contract rate.
C) Nominal rate.
D) Effective rate.
Q3) Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.
A)True
B)False
Q4) Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.
A)True
B)False
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Chapter 15: Leases
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Q1) Lancaster Services, Inc. leased equipment from Phillips Corporation. Phillips completed construction of the machine on January 1, 2018. The lease agreement for the $8 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Phillip's implicit interest rate was 10%.
Required:
1. Prepare the journal entry for Lancaster Services at the beginning of the lease on January 1, 2018.
2. Prepare an amortization schedule for the four-year term of the lease. Round your answers to the nearest whole dollar amounts.
3. Prepare the appropriate journal entries related to the lease on December 31, 2018.
4. Prepare the appropriate journal entries related to the lease on December 31, 2020.
Q2) Compare the way a purchase option that is reasonably certain to be exercised and a lessee-guaranteed residual value are treated by the lessee and lessor when determining lease payments.
Q3) Discuss the economic advantages of leasing.
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Chapter 16: Accounting for Income Taxes
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Q1) The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is if probable taxable income is anticipated to be insufficient to realize the tax benefit.
A)True
B)False
Q2) Using straight-line depreciation for financial reporting purposes and MACRS for tax purposes in the first year of an asset's life creates a:
A) Future deductible amount.
B) Permanent difference not requiring inter-period tax allocation.
C) Deferred tax asset.
D) Deferred tax liability.
Q3) The classification of deferred tax assets is sometimes dependent on when the benefit will be realized.
A)True
B)False
Q4) How are deferred tax assets arising from net operating loss carryforwards classified with regard to GAAP accounting for income taxes?
Q5) What is a valuation allowance for deferred tax assets and when is it used?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) A net gain or loss affects the pension expense only if it exceeds an amount equal to what percentage of the PBO or plan assets, whichever is higher?
A) 5%.
B) 10%.
C) 15%.
D) 20%.
Q2) Harvey Hotels has provided a defined benefit pension plan for its employees for several years. At the end of the most recent year, the following information was available with regard to the plan: service cost: $6.2 million, expected return on plan assets: $1.2 million, actual return on plan assets: $1 million, interest cost: $1.4 million, payments to retired employees: $2 million, and amortization of prior service cost (created when the pension plan was amended causing a drop in the projected benefit obligation): $1.1 million. What amount should Harvey Hotels report as pension expense in its income statement for the year?
A) $1.4 million
B) $7.5 million
C) $7.7 million
D) $8.7 million
Q3) How do U.S. GAAP and IFRS differ with regard to reporting prior service costs?
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Chapter 18: Shareholders Equity
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Q1) When preferred stock carries a redemption privilege, the shareholders may:
A) Purchase new shares as they become available.
B) Exchange their preferred shares for common shares.
C) Surrender the preferred shares for a specified amount of cash.
D) Purchase treasury shares ahead of common shareholders.
Q2) On October 15, 2018, a 5% stock dividend was declared and distributed. The fair value of the common stock on this date was $32 per share. Fractional share rights represented 100,000 shares. Cash was paid in lieu of issuing fractional share rights. On the date of declaration and payment, the company had 10 million shares of common stock outstanding. The par of the common shares was $5.
Required:
Prepare any necessary journal entries to record the above events.
Q3) Earnings-price ratio
A)Similar to an S corporation, but no limit on number of owners.
B)Net income as a percentage of average book value.
C)Paid-in capital and/or retained earnings affected when sold.
D)Preferred practice is to disclose in the notes to the financial statements.
E)Used in evaluating stock performance.
Q4) When stock is issued for consideration other than cash, what is the measurement objective?
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) On December 31, 2017, Heffner Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. On February 28, 2018, Heffner purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Heffner sold 6,000 of the treasury shares on September 30, 2018, for $47 per share. Net income for 2018 was $540,000. The income tax rate is 40%. Also outstanding at December 31, 2017, were fully vested incentive stock options giving key personnel the option to buy 50,000 common shares at $40. The market price of the common shares averaged $50 during 2018. Five thousand 6% bonds were issued at par on January 1, 2018. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2018, and no stock options were exercised during the year.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places) for Heffner Company for 2018.
Q2) A primary goal of earnings per share determination is:
A) Conservatism.
B) Comparability.
C) Materiality.
D) Objectivity.
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Chapter 20: Accounting Changes and Error Corrections
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Q1) At the end of the current year, a company failed to accrue interest of $500,000 on its investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:
A) Unaffected.
B) Understated by $350,000.
C) Understated by $500,000.
D) Understated by $150,000.
Q2) Branch Industries changes from declining balance depreciation to straight-line depreciation for existing assets. Describe in detail the way Branch would account for the change and include reasons for the accounting.
Q3) Describe in detail the way companies report most voluntary changes in accounting principle.
Q4) An item that should be reported as a prior period adjustment is the:
A) Correction of an error in depreciation from last year.
B) Payment of taxes due to a tax audit of last year's tax return.
C) Payment of a previously recorded warranty expense.
D) Receipt of the proceeds of a note receivable that was due last year.
Q5) What is the difference between U.S. GAAP and IFRS with regard to the correction of accounting errors?
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Chapter 21: The Statement of Cash Flows Revisited
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Q1) Which of the following is reported as an investing activity in the statement of cash flows?
A) The receipt of dividend revenue.
B) The payment of cash dividends.
C) The payment of interest on bonds.
D) The sale of machinery.
Q2) Like U.S. GAAP, International Financial Reporting Standards (IFRS) also require a statement of cash flows. Consistent with U.S. GAAP, cash flows are classified as operating, investing, or financing activities. However, with regard to interest and dividend inflows and outflows, the international standard for cash flow statements:
A) Allows companies to report cash outflows from interest payments as either operating or investing cash flows.
B) Allows companies to report cash inflows from interest and dividends as either operating or investing cash flows.
C) Allows companies to report dividends paid as either investing or operating cash flows.
D) Designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows.
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