Advanced Financial Reporting Exam Review
Course Introduction
Advanced Financial Reporting delves into the complex aspects of financial statement preparation and analysis, focusing on topics such as consolidations, foreign currency transactions, and accounting for mergers and acquisitions. The course emphasizes the application of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), exploring the implications of evolving standards on global businesses. Students will critically examine specialized reporting issues, including segment reporting, interim financial reporting, and disclosures related to financial instruments. Practical exercises and case studies reinforce analytical skills, ethical considerations, and the ability to interpret and communicate advanced financial information to diverse stakeholders.
Recommended Textbook
Intermediate Accounting 1st Edition by Elizabeth
A. Gordon
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Page 2
Chapter 1: The Financial Reporting Environment
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Q1) Which of the following is not a current trend in accounting-standards setting?
A)increase in political involvement
B)move toward principles-based system
C)focus on asset/liability approach
D)emphasis on measuring fair value
Answer: A
Q2) IFRS refers to generally accepted accounting standards that apply globally.
A)True
B)False Answer: True
Q3) Accountants in the United States do not need to learn international accounting standards.
A)True
B)False Answer: False
Q4) Contrast the differences between rules-based standards and principles-based standards.
Answer: 11ea822b_79fc_1769_bbd8_21c943c239f0_TB3884_00
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Chapter 2: Financial Reporting Theory
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Q1) Under U.S.GAAP,it would need to be disclosed that Smith Company is under investigation for bribery charges because of ________.
A)materiality
B)the cost constraint
C)timeliness
D)reliability
Answer: A
Q2) In the conceptual framework,what are the two types of elements of financial reporting?
A)fundamental and enhancing
B)point-in-time and period-of-time
C)recognition and measurement
D)elements and principles
Answer: B
Q3) U.S.GAAP and IFRS identify the same three period-of-time elements.
A)True
B)False
Answer: False
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Chapter 3: Judgment and Applied Financial Accounting Research
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Q1) When accountants use judgment to interpret standards it often detracts from the usefulness of the financial statements.
A)True
B)False
Answer: False
Q2) What is the Codification topic number and the International Accounting Standards number in which you would begin your research into a question about revenue recognition?
Answer: Codification Topic 605-Revenue Recognition; International Accounting Standard (IAS)18-Revenue
Q3) Which account balance is least likely to be based on an estimate?
A)Accounts Receivable
B)Property,Plant,and Equipment
C)Accounts Payable
D)Contingent Liabilities
Answer: C
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Page 5
Chapter 4: Review of the Accounting Cycle
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Q1) Which of the following accounts is a permanent account?
A)Interest Expense
B)Gain on Sale of Equipment
C)Patents
D)Bad Debt Expense
Q2) On January 1,Mountbatten Corporation paid $18,000 for a year's advance rent on a building and recorded it as Rent Expense.When financial statements are prepared on March 31,the adjusting entry should include ________.
A)a credit to Cash for $13,500
B)a credit to Rent Expense for $13,500
C)a credit to Prepaid Rent for $4,500
D)a debit to Rent Expense for $4,500
Q3) ABC Corporation issued common stock to its investors for $125,000.The journal entry to record this transaction includes a(n)________.
A)debit to Investments
B)credit to Revenue
C)credit to Common Stock
D)debit to Expense
Q4) List the steps required to close temporary accounts.
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Chapter 5: Statements of Net Income and Comprehensive
Net Income
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Q1) What are the most common approaches management uses to manipulate earnings?
Q2) What items are included in a company's operating income?
Q3) Which of the following is the key performance measure reported on the income statement that is typically presented first in sequence?
A)sales revenue
B)income from continuing operations
C)gross profit
D)operating income
Q4) What is the amount of operating income for Cambridge Company?
A)$2,809
B)$3,195
C)$5,108
D)$5,494
Q5) Most elements of operating income are permanent in nature.
A)True
B)False
Q6) Noncontrolling interest represents the portion of the reporting entity that is owned by others.
A)True
B)False Page 7
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Page 8
Chapter 6: Statements of Financial Position and Cash Flows
and the Annual Report
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Q1) The return on equity for Matthews Corporation is ________.
A)27.7%
B)24.9%
C)30.9%
D)31.2%
Q2) Which of the following is classified as an operating activity on a statement of cash flows?
A)payment of dividends
B)sale of equipment
C)issuance of common stock
D)purchase of inventory
Q3) If a company's financial statements are not fairly presented,which type of opinion will the auditor issue?
A)qualified
B)unqualified
C)adverse
D)disclaimer
Q4) IFRS specifies that biological assets be reported on the balance sheet.
A)True
B)False
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Chapter 7: Accounting and the Time Value of Money
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Q1) A future value is always less than the corresponding present value.
A)True
B)False
Q2) All of the following are conditions for an ordinary annuity except ________.
A)the future value is equal to the present value
B)the time periods between the cash flows are the same length
C)periodic cash flows must be equal in amount
D)interest is compounded at the end of each time period
Q3) The length of a period is determined by the frequency of interest compounding.
A)True
B)False
Q4) For any specific number of periods,the present value factor decreases as the discount rate increases.
A)True
B)False
Q5) An example of a deferred annuity is payments for ________.
A)pension benefits
B)loan obligations
C)preferred dividends
D)insurance premiums
10
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Chapter 8: Revenue Recognition
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Q1) Two methods used to account for revenue recognition for long term contracts are the percentage-of-completion method and the ________.
A)installment sales method
B)cost recovery method
C)completed-contract method
D)sales method
Q2) Able Company enters into a contract with a customer to provide them with an accounts receivable program.Able will also provide installation services as part of the contract.Able will make sure that this program will be installed so that it will be customized and be able to integrate with the company's other program modules.What is the number of performance obligations for this contract?
A)1
B)2
C)3
D)4
Q3) Explain a bill-and-hold arrangement.
Q4) Refer to Kramer Iron Works.Allocate the transaction price using the standalone approach.
Q5) What are the issues to consider when determining the transaction price?
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Chapter 9: OL: Revenue Recognition
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Q1) Transactions where a buyer accepts title and billings but delays receipt of the goods is a bill-and-hold arrangement.
A)True
B)False
Q2) Losses on unprofitable contracts are recognized ratably over the life of the contract.
A)True
B)False
Q3) The major difference between the percentage-of-completion method and the completed-contract method is the timing of ________.
A)revenue and cost recognition
B)revenue and billing recognition
C)revenue and gross profit recognition
D)revenue and net profit recognition
Q4) The percentage-of-completion method may utilize a cost-to-cost approach or an output measure approach.
A)True
B)False
Q5) Explain a bill-and-hold arrangement.
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Chapter 10: Short-Term Operating Assets: Cash and Receivables
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Q1) When does a company record the transfer of accounts receivable as a sale? As a secured borrowing (a liability)?
Q2) The inventory turnover ratio is equal to 365 divided by the number of days of inventory on hand.
A)True
B)False
Q3) How long is the company's cash operating cycle?
A)-5 days
B)+5 days
C)-15 days
D)+40 days
Q4) What is a cash equivalent?
A)reclassification of a cash amount that is restricted from use in the current operating cycle
B)negative cash balance that occurs when a company writes a check in an amount that exceeds the account balance
C)short-term liquid investment with original maturity of three months or less
D)minimum cash balance required to be maintained by a credit agreement
Q5) How does a note receivable differ from an account receivable?
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Chapter 11: Short-Term Operating Assets: Inventory
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Q1) When inventory costs are falling,and inventory levels are stable,the LIFO method will generally result in ________.
A)a higher gross profit than under FIFO
B)a lower gross profit than under FIFO
C)a lower inventory value than under FIFO
D)a higher cost of goods sold than under FIFO
Q2) Goodee Bakery is considering a change in its inventory valuation method.Goodee Bakery currently uses the FIFO method and is considering a change to the LIFO method.Goodee Bakery started the year on January 1 with inventory at a FIFO cost of $22,000 and a LIFO cost of $20,500.The ending inventory on December 31 is $24,750 at FIFO cost and $21,800 at LIFO cost.The LIFO effect is ________.
A)$2,950
B)$1,500
C)$4,450
D)$1,450
Q3) A perpetual inventory system always provides current information about inventory levels.
A)True
B)False
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Page 14
Chapter 12: Long-Term Operating Assets: Acquisition, cost
Allocation, and Derecognition
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Q1) How do IFRS disclosure requirements of property,plant,and equipment differ from U.S.GAAP disclosure requirements?
Q2) U.S.GAAP requires companies to reconcile the historical cost and accumulated depreciation at the beginning of the period with amounts at the end of the period.
A)True
B)False
Q3) IFRS requires companies to reconcile the historical cost and accumulated depreciation at the beginning of the period with amounts at the end of the period.
A)True
B)False
Q4) Which of the following costs should be capitalized in the year incurred?
A)costs to successfully defend a patent
B)research and development costs for a new product to be introduced later this year
C)cost to internally generate goodwill
D)organizational costs
Q5) Under what circumstances does derecognition of an asset occur?
Q6) Briefly explain the half-year convention for recognizing depreciation.
Page 15
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Chapter 13: Long-Term Operating Assets: Departures From
Historical Cost
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Q1) For indefinite-life intangibles,impairment must be tested at least annually,even in the absence of indicators.
A)True
B)False
Q2) Companies should evaluate indefinite life intangible assets at least annually for
A)amortization
B)derecognition
C)recoverability
D)impairment
Q3) Under the IFRS one-step impairment test,an assets recoverable value is its fair value or its value in use,whichever is lower.
A)True
B)False
Q4) U.S.GAAP does not permit subsequent reversals of impairment losses for finite-life intangible assets.
A)True
B)False
Page 16
Q5) Explain how gains or losses on impaired assets should be reported in income.
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Chapter 14: Operating Liabilities and Contingencies
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Q1) Provisions for contingent losses are accrued because the likelihood of an unfavorable outcome is ________.
A)virtually certain
B)more likely than not
C)reasonably possible
D)more than remote
Q2) Asset retirement obligations must be legal obligations under both U.S.GAAP and IFRS.
A)True
B)False
Q3) Which of the following best describes the accounting for assurance-type warranty costs?
A)expensed when paid
B)expensed when obligations are probable and estimable
C)expensed based on estimate in year of sale
D)expensed when warranty claims are certain
Q4) If a litigation-related loss is not probable,it cannot be accrued as a liability.
A)True
B)False
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Chapter 15: OL: Operating Liabilities and Contingencies
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Q1) If the warranty is required by law,it is more likely to be an base warranty.
A)True
B)False
Q2) A extended warranty exists if the customer has the option to purchase the warranty separately.
A)True
B)False
Q3) Accounting for product warranty costs under an base warranty ________.
A)is required for income tax purposes
B)charges an expense account when the seller performs in compliance with the warranty
C)is frequently justified on the basis of expediency when warranty costs are immaterial D)should be used whenever the warranty is an integral and inseparable part of the sale
Q4) Describe how to account for warranty costs if the warranty is determined to be a extended warranty? A base warranty?
Q5) An assurance-type warranty is also referred to as an extended warranty.
A)True
B)False
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Chapter 16: Financing Liabilities
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Sample Questions
Q1) Wilson Corp.issued $1,000,000 of 4% bonds on April 30 at par value.The bonds were dated January 1.The company pays interest on June 30 and December 31 each year.How much will the buyer need to pay the company in accrued interest?
A)$5,000
B)$6,667
C)$10,000
D)$13,333
Q2) The incremental method allocates proceeds from the issuance of bonds with warrants between debt and equity based on relative separate fair values of the bonds and warrants.
A)True
B)False
Q3) Nondetachable stock warrants are in essence,convertible bonds. A)True
B)False
Q4) Secured bonds are also referred to as debenture bonds.
A)True
B)False
Q5) Discuss what causes bonds to sell at par,a premium,or a discount.
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Chapter 17: Accounting for Stockholders Equity
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Q1) Bitters Co.'s net income is $12,000,the market value is $150,000,and the book value of stockholders' equity is $80,000.What is the Price-to-Book Ratio for Bitters Co.?
A).15
B).53
C)1.88
D)2.1
Q2) A change in stated value does not require shareholder approval and filings with the state.
A)True
B)False
Q3) IFRS requires a company to disclose information that enables users to assess its objectives,policies,and processes for managing capital.
A)True
B)False
Q4) The most popular method of accounting for treasury stock is the ________ method.
A)par value
B)cost
C)fair value
D)A and B are utilized equally
Page 20
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Chapter 18: Investing Assets
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Q1) For securities classified as held to maturity,companies must disclose the aggregate fair value of those securities the notes to its financial statements.
A)True
B)False
Q2) Summarize the the financial disclosure requirements for investments accounted for under the equity method.
Q3) On July 1,Year 1,Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590.The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities.The bonds mature in 10 years and pay interest annually on July 1.Assuming that Fairfield uses the effective interest method of amortization,what amount should it report for its investment in bonds on December 31,Year 1?
A)$1,747,695
B)$1,740,854
C)$1,750,117
D)$2,000,000
Q4) The fair value option improves financial reporting by enabling entities to offset volatility in reported earnings.How is this accomplished?
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Chapter 19: Accounting for Income Taxes
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Q1) When a company carries forward a net operating loss (NOL),the income tax expense will be reduced in future years,but not income tax payable.
A)True B)False
Q2) A firm is not required to reconcile the federal statutory tax rate to its effective tax rate.
A)True B)False
Q3) If a company chooses to carryback a net operating loss (NOL),but is not able to fully offset the loss,they will ________.
A)forgo the carryback option and carryforward the entire NOL
B)forfeit the unused amount
C)carry forward the remaining balance
D)both A & C are viable options
Q4) Red Lantern Corp.reported a net deferred tax asset balance of $247,000 resulting from an estimated warranty expense accrual for book purposes.The enacted statutory tax rate related to this balance changed from 38% to 32%,effective immediately.Prepare the necessary journal entry to account for this change in tax rates.
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Page 22
Chapter 20: Accounting for Employee Compensation and Benefits
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Q1) Which of the following is not a factor in calculating a defined benefit?
A)percentage of salary
B)current salary level
C)return on plan assets
D)credits for years of service
Q2) The vested benefit obligation uses future salary levels.
A)True
B)False
Q3) A company's defined benefit pension plan had a projected benefit obligation (PBO)of $350,000 on January 1,Year 1.During Year 1,pension benefits paid were $60,000,The discount rate for the plan for Year 1 was 11%.Service cost for the year was $90,000.Plan assets (fair value)increased during the year by $50,000.What was the PBO at December 31,Year 1?
A)$290,000
B)$368,500
C)$380,000
D)$418,500
Q4) In what ways must an accountant exercise judgment in relation to stock-based compensation plans?
Page 23
Q5) List and describe the five components of annual pension expense.
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Chapter 21: Earnings Per Share
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Q1) When a stock split or stock dividend occurs during the year,it is retroactive to the beginning of the year.
A)True
B)False
Q2) When companies release EPS information,it does not influence stock prices.
A)True
B)False
Q3) George Manufacturing had net income of $200,000 and declared preferred dividends of $25,000 during the current year.George began the year with 20,000 common shares outstanding.It issued 30,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1.Compute George's weighted-average common shares outstanding for the year.
A)22,000
B)34,000
C)44,000
D)50,000
Q4) When is a potentially dilutive antidilutive?
Q5) When is a potentially dilutive security dilutive?
Q6) Describe how users utilize the EPS ratios.
Q7) Why should shareholders pay attention to the diluted EPS?
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Chapter 22: Accounting Corrections and Error Analysis
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Q1) The bargain purchase option is not included in the minimum lease payments for either the lessee or the lessor.
A)True
B)False
Q2) Jackson Corporation leases equipment to Andrews Company for a five year period.At the beginning of the lease,Jackson records sales revenue.The lease to Andrews must ________.
A)be a sales type lease
B)be a direct financing lease
C)have a bargain renewal option
D)be an operating lease
Q3) Which of the four criteria should not be applied if a lease begins in the last 25% of an asset's useful life?
A)The 75% test and the bargain purchase option.
B)The 90% test and the bargain purchase option.
C)The 75% test and the 90% test.
D)The 90% test and the passage of title test.
Q4) How are the direct method and the indirect method alike?
A)True
B)False
Page 25
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