Advanced Financial Reporting Exam Practice Tests
Course Introduction
Advanced Financial Reporting delves into the complex standards and practices used in the preparation and analysis of financial statements for multinational corporations and other entities with sophisticated financial structures. The course covers topics such as foreign currency transactions, consolidation of subsidiaries, segment reporting, financial instruments, and accounting for income taxes, pensions, and leases under international and national accounting standards. Emphasis is placed on the interpretation and application of accounting rules, ethical considerations, and the communication of financial information to various stakeholders. Students will engage in case studies and real-world scenarios to enhance their analytical and decision-making skills in advanced reporting contexts.
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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Q1) FAF
A)FASB's predecessor.
B)Primary national organization of accountants working in industry.
C)Regulates the financial reporting for public companies.
D)The FASB's parent organization.
E)National organization of certified public accountants.
F)Sets accounting standards in the United States.
G)Provides timely responses to financial reporting issues.
H)Advises the FASB
I)Sets global accounting standards.
J)Establishes auditing standards in the US for public companies.
Answer: D
Q2) A constraint on qualitative characteristics of accounting information is:
A) Timeliness.
B) Going concern.
C) Neutrality.
D) Cost-effectiveness.
Answer: D
Q3) Compute the cash balance at the end of the first year for Tri Fecta.
Answer: 11ee8885_a80a_ecd4_91cb_4bd94c97ce97_TB2599_11
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Accrued the interest recognized but not collected on notes receivable.
Answer: \[\begin{array} { | l | c | c | c | }
\hline \text { TRANSACTION } & \begin{array} { c }
\text { Account(s) } \\
\text { debited }
\end{array} & \begin{array} { c }
\text { Account(s) } \\
\text { credited }
\end{array} & \begin{array} { c }
\text { Transaction } \\
\text { type }
\end{array} \\
\hline \text { Accrued the interest recognized but } & 1150 & 5300 & 2 \\
\text { hot collected on notes receivable. } & & & \\ \hline \end{array}\]
Q2) Based on the information presented above, prepare the Income Statement for Krafty Foods for the year ended December 31, 2018.
Answer: 11ea937b_366c_29c7_a419_034b0dec2329_TB2599_00
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) Retained earnings
A)Asset recorded when an expense is paid for in advance.
B)Goods to be sold in the ordinary course of business.
C)Transactions with owners, managers, and affiliated companies.
D)An intangible asset.
E)Management's views on significant events.
F)Net income less dividends since inception of the corporation.
G)Amounts due from customers.
H)Material events that occur after the end of the fiscal year and before the statements are issued.
I)Obligations to suppliers of merchandise or of services purchased on account.
J)Cash received from a customer in advance of providing a good or service.
Answer: F
Q2) HHF's debt to equity ratio is (Round your answer to two decimal places.):
A) 0.75.
B) 1.13.
C) 0.53.
D) 1.80.
Answer: B
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5
Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Q1) Comprehensive income is the change in equity from:
A) Owner transactions.
B) Nonowner transactions.
C) Owner or nonowner transactions.
D) Capital transactions.
Q2) Scenario 2: Assume that Jacob had not yet sold the division's assets by the end of 2018. Further, assume that the fair value less costs to sell of the division's assets at December 31, 2018, was $24 million and was expected to remain the same when the assets are sold in 2019. The book value of the division's assets was $19 million at the end of 2018. Under these assumptions, what would Jacob report in its 2018 income statement regarding the office equipment division? Explain where this information would be presented.
Q3) Hulkster's 2018 average collection period is:
A) 73 days.
B) 104 days.
C) 109 days.
D) 128 days.
Q4) Required: Compute the return on assets for 2018.
Q5) Briefly explain when and why intraperiod tax allocation is necessary.
Q6) Its inventory turnover ratio for 2018. Round your answer to one decimal place. Page 6
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Page 7
Chapter 5: Revenue Recognition
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Q1) Assume Brunetti uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar arrangements. What would be the appropriate transaction price?
Q2) Under U.S. GAAP, how much revenue would Mary recognize in year 1 of the license?
A) $0
B) $1,500
C) $3,000
D) $15,000
Q3) Which of the following is not an indicator that the customer is likely to have control over a good?
A) Asset warehoused by seller-affiliated third party
B) Accepted the asset
C) Legal title to the asset
D) Physical possession of the asset
Q4) In 2019, Lake would recognize realized gross profit of:
A) $0.
B) $300,000.
C) $310,000.
D) $700,000.
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Chapter 6: Time Value of Money Concepts
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Q1) Column 6 is an interest table for the:
A) Present value of an ordinary annuity of $1.
B) Future value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.
Q2) Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive one lump-sum payment today based on a 3% annual interest rate. What would be the lump-sum payment?
A) $23,586.
B) $22,899.
C) $21,565.
D) $23,000.
Q3) Most, but not all, liabilities are monetary liabilities.
A)True
B)False
Q4) In the future value of an ordinary annuity, the last cash payment will not earn any interest.
A)True
B)False
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Chapter 7: Cash and Receivables
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Q1) Under IFRS, accounts receivable impairments are not recognized.
A)True
B)False
Q2) Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so.
A)True
B)False
Q3) Which of the following is not true regarding accounting for transfers of receivables under IFRS?
A) Transfers of receivables sometimes are treated as a sale of receivables.
B) Transfers of receivables sometimes are treated as a secured borrowing.
C) Transfers of receivables can be treated as a sale if the transferee is a QSPE.
D) Transfer of substantially all the risk and rewards of ownership is an important consideration.
Q4) What kind of account is the Allowance for Loan Losses in Winchester's financial statements?
Q5) If Winchester is using the balance sheet approach to determining loan losses and the Allowance account balance, what percentage did it use in 2018?
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Page 10
Chapter 8: Inventories: Measurement
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Q1) Ramen Inc. adopted dollar-value LIFO (DVL) as of January 1, 2018, when it had a cost inventory of $600,000. Its inventory as of December 31, 2018, was $667,800 at year-end costs and the cost index was 1.06. What was DVL inventory on December 31, 2018?
A) $630,000.
B) $631,800.
C) $636,000.
D) None of these answer choices are correct.
Q2) Physical counts of inventory are never made with perpetual inventory systems.
A)True
B)False
Q3) If a company uses LIFO, a LIFO liquidation causes a company's income taxes to increase:
A) When inventory purchase costs are rising.
B) When inventory purchase costs are declining.
C) Whether inventory purchase costs are declining or rising.
D) LIFO liquidations have no effect on a company's income taxes.
Q4) Required: Compute the January 31 ending inventory and cost of goods sold for January, assuming Random Creations uses LIFO and perpetual inventory system.
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Page 11
Chapter 9: Inventories: Additional Issues
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Q1) California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2018. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1, 2018, $300,000; sales and purchases from January 1, 2018, to May 1, 2018, $1,300,000 and $875,000, respectively. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2018, is:
A) $302,500.
B) $360,000.
C) $395,000.
D) $455,000.
Q2) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to the total inventory.
Q3) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to categories of feed products.
Q4) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to categories of trees.
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) Under International Financial Reporting Standards (IFRS), development expenditures are:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Capitalized if certain criteria are met.
D) None of these answer choices are correct.
Q2) Interest capitalized for 2018 was:
A) $48,000.
B) $42,000.
C) $60,000.
D) $36,000.
Q3) Why would an oil company argue to use the full-cost method of accounting for oil and gas exploration costs?
Q4) What amount of interest expense, if any, would Corso record on December 31, 2019, the company's fiscal year end?
A) $68,687.
B) $60,000.
C) $80,000.
D) $69,959.
Q5) How are assets valued when they are acquired by issuing stock?
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Chapter 11: Property, Plant, and Equipment and Intangible Assets: Utilization
and Disposition
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Q1) Qualcomm Inc. engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. In a recent income statement the company reported a $114 million goodwill impairment loss. The loss related to the goodwill of its Firethorn reporting unit.
Required:
1. Why did Qualcomm conduct an impairment test of the goodwill of this reporting unit?
2. Describe the steps Qualcomm performed to conduct its impairment test.
3. Where would the impairment loss be shown in the company's income statement?
Q2) Smithson Ltd. prepares its financial statements according to IFRS. On March 30, 2018, the company purchased a franchise for $3,000,000. The franchise has a 10-year contractual life with no residual value. Smithson uses the straight-line amortization method for all intangible assets. On December 31, 2018, the end of the company's fiscal year, Smithson chooses to revalue the franchise. There is an active market for this particular franchise and its fair value on December 31 is $2,860,000.
Required:
1. Calculate amortization for 2018.
2. Prepare the journal entry to record the revaluation of the patent.
3. Calculate amortization for 2019.
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Chapter 12: Investments
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Q1) For trading securities, unrealized holding gains and losses are included in earnings:
A) Only at the end of the fiscal year.
B) On each reporting date.
C) Only when they exceed 10% of the underlying investment.
D) Based on a vote of the board of directors.
Q2) If an available-for-sale investment is sold for which there are unrealized holding gains in accumulated other comprehensive income (AOCI), a reclassification adjustment affects other comprehensive income (OCI) in the period of sale by:
A) Reducing OCI for the amount of unrealized holding gains in AOCI.
B) Increasing OCI for the amount of unrealized holding gains in AOCI.
C) No effect on OCI, as OCI only includes the effects of unrealized holding gains and losses.
D) No effect on OCI, as the realized gain is included in AOCI.
Q3) Under IAS No. 39, which is not a category for accounting for investments?
A) Fair value through profit and loss.
B) Fair value through other comprehensive income.
C) Held-to-maturity.
D) Available-for-sale.
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Chapter 13: Current Liabilities and Contingencies
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Q1) Swift Drug Company is being sued this year for a wrongful death due to violation of FDA rules. There is no doubt that Swift is guilty and the settlement is reasonably estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain how Swift would address this in its current year financial statements.
Q2) Z Co. filed suit against W Inc. in 2018 seeking damages for patent infringement. At December 31, 2018, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2019. Z should report this award in its 2018 financial statements, issued in March 2019 as:
A) A receivable and deferred revenue of $40 million.
B) A receivable and revenue of $40 million.
C) A disclosure of a gain contingency of $40 million.
D) A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.
Q3) Briefly explain the GAAP requirement from which the costs/obligations for environmental cleanup and product liability/tort claim matters were accrued in the financial statements.
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Chapter 14: Bonds and Long-Term Notes
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Q1) MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2017 for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May 1, 2018, $10,000 of the bonds were retired at 112. As a result of the retirement, MSG will report:
A) a $600 loss.
B) a $667 loss.
C) a $1,200 loss.
D) a $1,200 gain.
Q2) Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:
A) Deducted from bonds payable.
B) Added to bonds payable.
C) Included as an expense in the year of issue.
D) Reported as a deferred charge.
Q3) Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.
A)True
B)False
Q4) How are bonds and notes the same? How do they differ?
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Chapter 15: Leases
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Q1) One of the five criteria for a finance lease specifies that the lease term be equal to or greater than:
A) the major part of the remaining economic life of the leased property.
B) the entire amount of the remaining economic life of the leased property.
C) a meaningful part of the remaining economic life of the leased property.
D) a non-insignificant part of the remaining economic life of the leased property.
Q2) J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:
A) A cash outflow from investing activities.
B) A cash outflow from financing activities.
C) A cash outflow from operating activities.
D) No cash outflow.
Q3) What is the outstanding balance after payment 9?
A) $8,929.
B) $13,463.
C) $5,000.
D) $5,537.
Q4) Discuss the economic advantages of leasing.
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Page 18
Chapter 16: Accounting for Income Taxes
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Q1) Prepaid expenses, tax deductible when paid.
A)L
B)N
C)A
Q2) Rent collected in advance results in deferred tax assets.
A)True
B)False
Q3) Changes in enacted tax rates only affect income tax expense in the years those changes affect tax payable.
A)True
B)False
Q4) How much tax expense on income from continuing operations would be reported in Hobson's income statement?
A) $56 million.
B) $60 million.
C) $62 million.
D) $50 million.
Q5) Why are the depreciation and patent amortization listed as deferred tax liabilities?
Q6) What is a valuation allowance for deferred tax assets and when is it used?
Page 19
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) The attribution period for postretirement benefits spans each year of service from the employee's date of hire to the employee's date of:
A) Full eligibility.
B) Death.
C) Retirement.
D) Termination.
Q2) Differentiate between a defined contribution pension plan and a defined benefit pension plan.
Q3) The difference between pension plan assets and the PBO is equal to the funded status of the plan.
A)True
B)False
Q4) Service cost with regard to pension plans:
A) increases pension expense and reduces the return on plan assets.
B) increases the projected benefit obligation and increases pension expense.
C) increases the projected benefit obligation and reduces plan assets.
D) increases pension expense and reduces plan assets.
Q5) Prepare a list of how retiree health benefits differ from pension benefits with respect to accounting, funding, regulation, and employee benefits.
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Chapter 18: Shareholders Equity
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Q1) The December 31, 2018, balance sheet of MBI Company included the following: \(\begin{array}{|l|l|}
\hline\text { Common stock, 20 million shares outstanding at } \$ 1 \text { par } & \$ 20,000,000 \\
\hline \text { Paid-in capital-excess of par } & 100,000,000 \\
\hline \text { Retained earnings } & 115,000,000\\\hline \end{array}\) MBI completed the following transactions in 2018 relating to treasury stock: \(\begin{array}{|l|l|}
\hline \text { March 17: } & \text { Reacquired } 2 \text { million shares at } \$ 10 \\
\hline \text { May 17: } & \text { Reacquired 2 million shares at } \$ 9 \\
\hline \text { August 10: } & \text { Issued 3 million shares at } \$ 12 \\ \hline \end{array}\) Required:
Prepare journal entries to record the foregoing transactions on a weighted average basis.
Q2) Treasury stock transactions never increase retained earnings or net income.
A)True B)False
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Pastore Inc. granted options for 1 million shares of its $1 par common stock at the beginning of the current year. The exercise price is $35 per share, which was also the market value of the stock on the grant date. The fair value of the options was estimated at $8 per option. What would be the total compensation indicated by these options?
A) $3 million.
B) $27 million.
C) $8 million.
D) $35 million.
Q2) Nagy Industries reported a net income of $619,369 on December 31, 2018. At the beginning of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000 shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger. On December 1, 2018, the company declared and issued a 10% stock dividend.
Required:
Compute Nagy's net income that would produce a basic EPS of $2.00 per share for 2018.
Q3) GAAP requires using intrinsic value accounting for employee stock options.
A)True
B)False
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Chapter 20: Accounting Changes and Error Corrections
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Questions
Q1) Red Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $4 million. At the beginning of 2018, Red decided to change to the sum-of-the-years'-digits method. Ignoring income taxes, what will be Red's depreciation expense for 2018?
A) $4.80 million.
B) $5.40 million.
C) $6.60 million.
D) $11.55 million.
Q2) Prospective approach
A)No journal entry needed, but disclosure is required.
B)Handled prospectively.
C)Adjustment to retained earnings of earliest year reported.
D)Not used for changes in accounting principle.
E)Information for change in reporting entity.
Q3) How may accounting changes detract from accounting information?
Q4) How are accounting errors treated?
Q5) Name and briefly describe the three categories of accounting changes.
Q6) Describe briefly the approaches of reporting changes in accounting principles.
Page 23
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Chapter 21: The Statement of Cash Flows Revisited
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Q1) When using the indirect method to determine cash flows from operating activities, an increase in held-to-maturity securities that does not arise from the interest component of the debt should be reported as:
A) A deduction from net income in determining cash flows from operating activities.
B) An addition to net income in determining cash flows from operating activities.
C) An investing activity.
D) A financing activity.
Q2) Ilene South Company owns 40% of the outstanding common stock of Ilene Wright Company. During the year, South received a $150 million cash dividend from Wright. What effect does this dividend have on South's statement of cash flows for the year?
A) Cash flows from operating activities increased.
B) Cash flows from investing activities increased.
C) Cash flows from financing activities increased.
D) No effect.
Q3) What was most responsible for the negative cash flow from financing activities during 2017? What amount was paid?
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