Advanced Financial Reporting Exam
Preparation Guide
Course Introduction
Advanced Financial Reporting delves into the complex financial reporting standards and practices encountered by corporations in a global environment. The course covers the preparation and interpretation of consolidated financial statements, business combinations, foreign currency transactions, segment reporting, and partnership accounting. Students explore International Financial Reporting Standards (IFRS), the differences between IFRS and Generally Accepted Accounting Principles (GAAP), and issues related to fair value measurement. Through case studies and real-world examples, the course emphasizes critical thinking and analytical skills necessary for tackling advanced reporting challenges faced by accountants and financial professionals.
Recommended Textbook
Intermediate Accounting 8th 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) Compute net income for the first year for Alpaca Corporation. Answer: 11ea906f_5651_9c74_a7a0_196484933ddb_TB2444_00
Q2) Revenue should not be recognized until:
A)The seller has transferred goods or services to a customer.
B)Contracts have been signed and payment has been received.
C)Work has been performed and customer has been billed.
D)Collection has been made and warrantees have expired.
Answer: A
Q3) Compute Amazon's total liabilities at the end of the year.
Answer: Total assets = Total liabilities + Total stockholders' equity
Therefore,Total liabilities = Total assets - Total stockholders' equity = $4,363 -431 = $3,932
Q4) According to the conceptual framework,verifiability implies:
A)Legal evidence.
B)Logic.
C)Consensus.
D)Legal verdict.
Answer: C
Page 3
Q5) Compute net income for the first year for Tri Fecta.
Answer: 11ea906f_5651_c386_a7a0_1fc292a03eb4_TB2444_00
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) On December 31,2016,the end of Larry's Used Cars' first year of operations,the accounts receivable was $53,600.The company estimates that $1,200 of the year-end receivables will not be collected.Accounts receivable in the 2016 balance sheet will be valued at:
A)$53,600.
B)$54,800.
C)$52,400.
D)$ 1,200.
Answer: C
Q2) The purpose of closing entries is to transfer:
A)Accounts receivable to retained earnings when an account is fully paid.
B)Balances in temporary accounts to a permanent account.
C)Inventory to cost of goods sold when merchandise is sold.
D)Assets and liabilities when operations are discontinued.
Answer: B
Q3) Based on the information presented above,prepare the 2016 Income Statement for Krafty Foods.
Answer: 11ea906f_564d_a4b6_a7a0_0702d5245d52_TB2444_00
Q4) Retained earnings
Answer: 11ea906f_564c_1dfc_a7a0_fb1c37bdf7bf_TB2444_00
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Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) The acid-test ratio is also known as the:
A)Current ratio.
B)Debt to equity ratio.
C)Times interest earned ratio.
D)Quick ratio.
Answer: D
Q2) Compute the return on shareholders' equity ratio for Marjoram Company.Round your answer to two decimal places.
Answer: $73,080 / ($70,000 + 157,000)= 32% Return on shareholders' equity
Q3) Payment terms,interest rates,and other details of long-term liabilities usually are reported in disclosure notes.
A)True
B)False
Answer: True
Q4) Altoid Co.'s times interest earned ratio.Round your answer to two decimal places.
Answer: ($350 + 150 + 90)/$90 = 6.56 Times interest earned ratio
Q5) Compute the acid-test ratio for Marjoram Company.Round your answer to two decimal places.
Answer: ($19,000 + 35,000 + 48,400)/$108,400 = .94 Acid-test ratio
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Chapter 4: The Income Statement, comprehensive Income, and
the Statement of Cash Flows
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Q1) Suppose that the Footwear Division's assets had not been sold by December 31,2016,but were considered held for sale.Assume that the fair value of these assets at December 31 was $80 million.In the 2016 income statement for Foxtrot Co. ,under discontinued operations it would report a:
A)$ 6 million loss.
B)$ 10 million loss.
C)$13.2 million income.
D)None of the other answers is correct.
Q2) Lucia Ltd.reported net income of $135,000 for the year ended December 31,2016.January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000,respectively.Year-end balances in these accounts were $30,000 and $24,000,respectively.Assuming that all relevant information has been presented,Lucia's cash flows from operating activities would be:
A)$132,000.
B)$134,000.
C)$136,000.
D)$138,000.
Q3) Required: Prepare a 2016 single,continuous statement of comprehensive income for Kroeger Inc.Use a multiple-step income statement format.
Page 6
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Chapter 5: Income Measurement
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Sample Questions
Q1) No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.
A)True
B)False
Q2) Lux Hotels,Inc.has signed a service outsourcing contract with Deluxe Rooms,Inc.for $3 million,which was received in cash at contract inception.Under the agreement,Deluxe Rooms is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1,2016 to July 31,2017.
Required: Prepare any journal entry that Delux would record:
(1)at inception of the contract and (2)at the end of 2016 to recognize all revenue associated with this contract that should be recognized in 2016.
Q3) What are CCC's estimated remaining construction costs on the project at the end of 2016?
A)$90 million.
B)$135 million.
C)$225 million.
D)$0.
Q4) Required: Compute the receivables turnover ratio for 2016.
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) Price Mart is considering outsourcing its billing operations.A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year,$15,000 for the next two years,and $18,000 for the next two years.Interest is at 12%.Assume cash flows occur at the end of the year.
Required: Calculate the total present value of the cash flows.
Q2) Debbie has $368,882 accumulated in a 401K plan.The fund is earning a low,but safe,3% per year.The withdrawals will take place annually starting today.How soon will the fund be exhausted if Debbie withdraws $30,000 each year?
A)15 years.
B)16 years.
C)14 years.
D)12.3 years.
Q3) First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500,48-month,11% auto loan.To determine this amount,First Financial would:
A)Multiply $10,500 by the present value of 1.
B)Divide $10,500 by the future value of an ordinary annuity of 1.
C)Divide $10,500 by the present value of an annuity due of 1.
D)Multiply $10,500 by the present value of an ordinary annuity of 1.
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) Cash equivalents do not include:
A)Money market funds.
B)High grade marketable equity securities.
C)U.S.treasury bills.
D)Commercial paper.
Q2) In Dinty's adjusting entry for bad debts at year-end,which of these would be included?
A)Debit to bad debt expense for $114,000.
B)Credit to allowance for uncollectible accounts for $82,000.
C)Debit to accounts receivable for $32,000.
D)All of these answer choices are correct.
Q3) Is there any evidence in HP's disclosures above that are consistent with earnings management?
Q4) Huckabee's 2016 receivables turnover (rounded)is:
A)3.69.
B)5.00.
C)5.26.
D)3.16.
Q5) Cash is the most liquid of all assets but is not always reported under current assets.Explain this statement.
Page 9
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Chapter 8: Inventories: Measurement
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Q1) Liquidated Corporation had a dollar-value LIFO (DVL)inventory of $800,000 at the beginning of the current year when it adopted DVL.Its year-end inventory at year-end prices was $850,000.The index for the current year was 1.08.
Required:
Compute the DVL inventory (rounded)to be reported at the end of the year.
Q2) LIFO periodic and LIFO perpetual always produce the same dollar amounts for ending inventory.
A)True
B)False
Q3) Briefly describe why companies that use perpetual inventory systems must still perform physical inventories.
Q4) In a periodic inventory system,the cost of inventories sold is:
A)Debited to accounts receivable.
B)Credited to cost of goods sold.
C)Debited to cost of goods sold.
D)Not recorded at the time goods are sold.
Q5) Required: Compute the January 31 ending inventory and cost of goods sold for January,assuming Denver uses average cost and a periodic inventory system.
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Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) Under the retail method,in determining the cost-to-retail percentage for the current year:
A)Net markups are included.
B)Net markdowns are excluded.
C)Net sales are included.
D)All of these answer choices are correct.
Q2) Briefly explain the differences between U.S.GAAP and International Financial Reporting Standards (IFRS)in the application of the lower of cost and net realizable value rule for valuing inventory.
Q3) The estimated ending inventory at retail is:
A)$27,300.
B)$25,000.
C)$26,600.
D)$26,400.
Q4) Lower of cost and net realizable value can be applied to individual inventory items,to logical categories of inventory,or to the entire inventory.
A)True
B)False
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 and Disposition
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Q1) In a nonmonetary exchange of equipment,if the exchange has commercial substance,a gain is recognized if:
A)The fair value of the equipment received exceeds the book value of the equipment received.
B)The book value of the equipment received exceeds the fair value of the equipment given up.
C)The fair value of the equipment surrendered exceeds the book value of the equipment given up.
D)None of these answer choices are correct.
Q2) A company that prepares its financial statements according to International Financial Reporting Standards must calculate amortization of capitalized software development costs in the same way as under U.S.GAAP.
A)True
B)False
Q3) A company that prepares its financial statements according to International Financial Reporting Standards accounts for a government grant by recognizing revenue for the amount of the grant.
A)True
B)False
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Chapter 11: Property, plant, and Equipment and Intangible
Assets: Utilization and Impairment
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Sample Questions
Q1) Prego would report depreciation in 2016 of:
A)$36,000.
B)$43,900.
C)$18,000.
D)$21,950.
Q2) Granite Enterprises acquired a patent from Southern Research Corporation on January 1,2016,for $4 million.The patent will be used for 5 years,even though its legal life is 20 years.Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years.Compute Granite's patent amortization for 2016,assuming the straight-line method is used.
A)$380,000.
B)$400,000.
C)$760,000.
D)$800,000.
Q3) According to International Financial Reporting Standards (IFRS),property,plant,and equipment must be valued at cost less accumulated depreciation.
A)True
B)False
Q4) Briefly explain how to account for a change in depreciation method.
Page 13
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Chapter 12: Investments
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Q1) Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method.Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31,2015 and 2016,respectively.During 2016 Clor recognized $80,000 of net income and paid dividends of $30,000.Assuming that Bloomfield owned the same percentage of Clor throughout 2016,their percentage ownership must have been:
A)15%.
B)18.75%.
C)30%.
D)50%.
Q2) If the fair value of equity securities is not determinable and the equity method is not appropriate,the securities should be reported at:
A)Amortized cost.
B)Cost.
C)Consolidated value.
D)Net present value.
Q3) Net unrealized holding gains (losses)are reported in the income statement for trading securities.
A)True
B)False
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Chapter 13: Current Liabilities and Contingencies
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Q1) A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer.RoughEdge believes the customer has a 51% chance of winning the case,and that if the customer wins the case,there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur.Under U.S.GAAP,RoughEdge should accrue a liability in the amount of:
A)$0.
B)$1,000,000.
C)$2,000,000.
D)$3,000,000.
Q2) Which of the following is a contingency that should be accrued?
A)The company is being sued and a loss is reasonably possible and reasonably estimable.
B)The company deducts life insurance premiums from employees' paychecks.
C)The company offers a two-year warranty and the expenses can be reasonably estimated.
D)It is probable that the company will receive $100,000 in settlement of a lawsuit.
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Chapter 14: Bonds and Long-Term Notes
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Q1) Nickel Inc.bought $100,000 of 3-year,6% bonds as an investment on December 31,2015 for $106,000.Nickel uses straight-line amortization.On May 1,2016,$10,000 of the bonds were redeemed at 110.As a result of the retirement,MSG will report:
A)a $467 gain.
B)a $467 loss.
C)a $1,000 gain.
D)a $5,000 loss.
Q2) On March 1,2016,Doll Co.issued 10-year convertible bonds at 106.During 2019,the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value.On March 1,2016,cash proceeds from the issuance of the convertible bonds should be reported as:
A)A liability for the entire proceeds.
B)Paid-in capital for the entire proceeds.
C)Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
D)A liability for the face amount of the bonds and paid-in capital for the premium over the par value.
Q3) How are bonds and notes the same? How do they differ?
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Chapter 15: Leases
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Q1) From the perspective of the lessor,leases may be classified as either:
A)Direct financing or sales-type.
B)Operating,capital,or direct financing.
C)Operating,sales-type,indirect financing.
D)Operating,direct financing,or sales-type.
Q2) From the perspective of the lessee,leases may be classified as either:
A)Direct financing or sales-type.
B)Capital or direct financing.
C)Capital or operating.
D)Direct financing or operating.
Q3) On January 1,2016,Salvatore Company leased several machines from Nola Corporation under a three-year operating lease agreement.The lease calls for semiannual payments of $15,000 each,payable on June 30 and December 31 of each year.The machines were acquired by Nola at a cost of $90,000 and are expected to have a useful life of five years with no expected residual value.
Required:
Prepare the appropriate journal entries for the lessor from the inception of the lease through the end of 2016.
Q4) What lease disclosures are required of the lessor and lessee?
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Chapter 16: Accounting for Income Taxes
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Q1) At the end of the current year,Newsmax Inc.has $400,000 of subscriptions received in advance included in its balance sheet.A disclosure note reveals that the entire $400,000 will be earned in the next year.In the absence of other temporary differences,in the balance sheet one would also expect to find a:
A)Noncurrent deferred tax liability.
B)Noncurrent deferred tax asset.
C)Current deferred tax liability.
D)Current deferred tax asset.
Q2) According to GAAP for accounting for income taxes,when a company has a net operating loss carryforward:
A)A deferred tax liability is recognized.
B)A receivable is created.
C)A deferred tax equity account is created.
D)A deferred tax asset is recorded along with any applicable valuation allowance.
Q3) What events create permanent differences between accounting income and taxable income? What effect do these events have on the determination of income taxes payable and deferred income taxes?
Q4) 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) What are the five components of postretirement benefit expense?
Q2) Differentiate between a defined contribution pension plan and a defined benefit pension plan.
Q3) A net pension asset is the excess of the projected benefit obligation over the plan assets.
A)True
B)False
Q4) Prior service cost is recognized as pension expense over a period of several years.
A)True B)False
Q5) Consider the following:
I.Present value of vested benefits at present pay levels.
II.Present value of nonvested benefits at present pay levels.
III.Present value of additional benefits related to projected pay increases. Which of the above constitutes the projected benefit obligation?
A)III only.
B)I,II.
C)I,II,III.
D)II only.
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Chapter 18: Shareholders Equity
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Q1) Outstanding common stock is:
A)Stock that is performing well on the New York Stock Exchange.
B)Stock that has been authorized by the state for issue.
C)Stock held in the corporate treasury.
D)Stock in the hands of shareholders.
Q2) A small stock dividend is defined as one that is:
A)Less than or equal to 40%.
B)Less than 40%.
C)Less than or equal to 10%.
D)Less than 25%.
Q3) Beasley Crossing prepares its financial statements in accordance with International Financial Reporting Standards (IFRS).The company issued shares of the company's Class B stock.Beasley Crossing should report the stock in the company's statement of financial position
A)among liabilities unless the shares are mandatorily redeemable.
B)among liabilities if the shares are mandatorily redeemable or redeemable at the option of the shareholder.
C)as equity unless the shares are mandatorily redeemable.
D)as equity unless the shares are redeemable at the option of the issuer.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Zeba Company granted 27 million of its no par common shares to executives,subject to forfeiture if employment is terminated within three years.Zeba's common shares have a market price of $10 per share on January 1,2015,the grant date.
Required:
When calculating diluted EPS at December 31,2016,what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averaged $10 during 2016?
Q2) At December 31,2016,MedX Corporation had outstanding 200,000 shares of common stock.Also outstanding were 120,000 shares of preferred stock convertible into 64,000 common shares and $1,800,000 of 10% bonds convertible into 27,000 common shares
MedX's net income for the year ended December 31,2016,is $1,040,000.The income tax rate is 40%.MedX paid dividends of $2 per share on its preferred stock during 2016.
Required:
Compute basic and diluted earnings per share for the year ended December 31,2016,considering possible antidilutive effects.
Q3) What is the advantage of stock appreciation rights over stock options?
Q4) Why are preferred dividends deducted from net income when calculating EPS?
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Chapter 20: Accounting Changes
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Q1) Z Company acquired a subsidiary several years ago that was appropriately excluded from consolidation last year.This year Z has consolidated the subsidiary in its financial statements.This results in:
A)An accounting change that should be reported prospectively.
B)A correction of an error.
C)An accounting change that should be reported by restating the financial statements of all prior periods presented.
D)Neither an accounting change nor a correction of an error.
Q2) Error corrections require restatement of all the affected prior year financial statements reported in comparative financial statements.
A)True
B)False
Q3) Which of the following changes should be accounted for using the retrospective approach?
A)A change in the estimated life of a depreciable asset.
B)A change from straight-line to declining balance depreciation.
C)A change to the LIFO method of costing inventories.
D)A change from the completed-contract method of accounting for long-term construction contracts.
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Chapter 21: The Statement of Cash Flows
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Q1) On June 4,White Corporation issued $400 million of bonds for $386 million.During the same year,$1 million of the bond discount was amortized.In a statement of cash flows prepared by the indirect method,White Corporation should report:
A)A financing activity of $400 million.
B)An addition to net income of $1 million.
C)An investing activity of $386 million.
D)A deduction from net income of $1 million.
Q2) Which of the following is not true regarding the statement of cash flows?
A)The indirect method derives cash flows indirectly by starting with sales revenue and "working backwards" to convert that amount to a cash basis.
B)Noncash transactions sometimes are reported in conjunction with the statement.
C)Either the direct or the indirect method can be used to calculate and report the net cash increase or decrease from operating activities.
D)The statement of cash flows provides information about cash flows that the other statements either do not provide or provide only indirectly.
Q3) What activities are included in the statement of cash flows under the section titled "Cash flows from investing activities"?
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