Advanced Financial Reporting
Test Questions
Course Introduction
Advanced Financial Reporting builds upon foundational accounting principles to explore complex financial reporting topics encountered by corporations and multinational entities. The course examines advanced issues such as business combinations, consolidations, foreign currency transactions, segment and interim reporting, and the application of international accounting standards. Emphasis is placed on understanding the theoretical frameworks behind these standards and applying them to practical scenarios, with analysis of current developments in financial reporting. Students will develop skills in interpreting financial statements, identifying the impact of alternative accounting treatments, and preparing comprehensive reports for various stakeholders in compliance with regulatory requirements.
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 best demonstrates the full disclosure principle?
A) The multi-step income statement.
B) The auditors' report.
C) The company's tax return.
D) Disclosure notes to financial statements.
Answer: D
Q2) Materiality can be affected by the dollar amount of an item, the nature of the item, or both.
A)True
B)False
Answer: True
Q3) Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by 10 days the time to get information to investors and creditors. The qualitative concept improved is:
A) Comparability.
B) Consistency.
C) Timeliness.
D) Faithful representation.
Answer: C
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Chapter 2: Review of the Accounting Process
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Q1) Mama's Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2018, with principal and interest due on October 31, 2019. The company's fiscal year ends June 30, 2018. What adjusting entry is necessary on June 30, 2018?
A) No entry.
B) \(\begin{array}{|l|l|l|}
\hline \text { Interest expense } & 240 & \\
\hline \text { Interest payable } & & 240 \\
\hline
\end{array}\)
C) \(\begin{array}{|l|l|l|}
\hline \text { Interest expense } & 120 & \\
\hline \text { Interest payable } & & 120 \\
\hline
\end{array}\)
D) \(\begin{array}{|l|l|l|}
\hline \text { Prepaid interest } & 120 & \\
\hline \text { Interest payable } & & 120 \\
\hline
\end{array}\)
Answer: C
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Liquidity refers to the riskiness of a company with regard to the amount of total assets in its capital structure.
A)True
B)False
Answer: False
Q2) Vertical analysis
A)An indication of how adept a company is at withstanding various events and circumstances that might impair its ability to earn profits.
B)An indication of whether a company won't be able to pay its obligations when they come due.
C)Each item in the financial statements is expressed as a percentage of an appropriate corresponding total, or base amount, but within the same year.
D)Each item in a financial statement is expressed as a percentage of that same item in the financial statements of another year (base amount).
Answer: C
Q3) 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
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Page 5
Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Sample Questions
Q1) Reporting comprehensive income can be accomplished by each of the following methods except:
A) in the statement of shareholders' equity.
B) a single, continuous statement of comprehensive income.
C) in two separate, but consecutive statements.
D) all of these answer choices are acceptable methods.
Q2) What limitations exist in drawing meaningful comparisons about the performance of Uncle Joe's from the data above?
Q3) Based on this information, if you were going to advise McDonald's about how it could enhance return on shareholders' equity, what would you suggest? Be as specific as possible in the operational or financial changes you would recommend.
Q4) In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest received is most often classified as an operating cash flow.
A)True B)False
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.
Q7) Required: Compute the return on assets for 2018.
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Chapter 5: Revenue Recognition
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Sample Questions
Q1) If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.
A)True
B)False
Q2) Which of the following is a characteristic of a contract for purposes of revenue recognition?
A) Commercial substance.
B) Nonverbal.
C) Reasonable profit margin.
D) Notarized within the company's state of incorporation.
Q3) Baldi Piano manufactures customized pianos for concert halls. On July 1, 2018, Baldi signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also obligated to provide a one-year maintenance service. If sold separately, the piano and the maintenance service would have cost $140,000 and $20,000, respectively.
Required:
How much of the transaction price would be allocated to the piano and the maintenance service, assuming they are separate performance obligations? Show your work.
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) Sondra deposits $2,000 in an IRA account on April 15, 2018. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2028?
A) $20,600.
B) $20,928.
C) $23,616.
D) $24,715.
Q2) On January 1, 2018, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2020. You are eager to earn 3%. What is the present value of the investment on January 1, 2018?
A) $26,662.
B) $27,462.
C) $28,286.
D) $29,135.
Q3) Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.
A)True
B)False
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) Which of the following does not reduce the balance in accounts receivable?
A) Returns on credit sales.
B) Collections from customers.
C) Recognizing bad debts expense.
D) Write-offs.
Q2) What kind of account is the Allowance for Loan Losses in Winchester's financial statements?
Q3) In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors.
A)True
B)False
Q4) How could a company with receivables like HP be able to manage earnings in applying generally accepted accounting principles?
Q5) Calistoga's final balance in its allowance for uncollectible accounts at December 31, 2018, is:
A) $1,575.
B) $1,505.
C) $1,650.
D) $1,720.
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Chapter 8: Inventories: Measurement
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Sample Questions
Q1) In a perpetual inventory system, the cost of purchases is debited to:
A) Purchases.
B) Cost of goods sold.
C) Inventory.
D) Accounts payable.
Q2) Perpetual inventory system
A)Goods are transferred to another company but title remains with transferor.
B)Items sold are those acquired first.
C)Items sold are those acquired last.
D)Inventory is viewed as a quantity of value.
E)Legal title passes when goods arrive at customer location.
F)Items sold come from a mixture of goods acquired during the period.
G)Continuously records changes in inventory.
H)Legal title passes when goods are delivered to common carrier.
I)Adjusts inventory at the end of the period.
J)If LIFO is used for income tax purposes, it must be used for financial reporting.
Q3) Physical counts of inventory are never made with perpetual inventory systems.
A)True
B)False
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Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) If the quantity of goods held in inventory decreased during the period, the dollar amount of ending inventory can't exceed the dollar amount of beginning inventory.
A)True
B)False
Q2) Poppy Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Poppy's cost of goods sold for this year was:
A) Overstated by $31,000.
B) Overstated by $5,000.
C) Understated by $31,000.
D) Understated by $48,000.
Q3) Briefly explain the financial reporting required when material misstatements are found in previous years' financial statements that are included for comparative purposes in the current year's financial statements.
Q4) 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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Sample Questions
Q1) Briefly explain the differences between U.S. GAAP and International Financial Reporting Standards (IFRS) in accounting for government grants for the purchase of assets.
Q2) Watson Company purchased assets of Holmes Ltd. at auction for $1,300,000. An independent appraisal of the fair value of the assets acquired is listed below:
\[\begin{array} { l r }
\text { Land } & \$ 214,500 \\
\text { Building } & 357,500 \\
\text { Equipment } & 572,000 \\
\text { Inventories } & 286,000
\end{array}\] Required:
Prepare the journal entry to record the purchase of the assets.
Q3) Peanut Corporation exchanged land and cash of $6,500 for equipment. The land had a book value of $45,000 and a fair value of $34,000. Assume the exchange has commercial substance.
Required:
Prepare the journal entry to record the exchange.
Q4) Briefly explain how R&D is reported in financial statements.
Page 12
Q5) How are assets valued when they are acquired by issuing stock?
Q6) Why are software development costs treated differently than other types of R&D?
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Chapter 11: Property, Plant, and Equipment and Intangible
Assets: Utilization and Disposition
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Sample Questions
Q1) Depreciation for 2018, using the double-declining balance method, would be:
A) $40,000.
B) $10,000.
C) $36,000.
D) $9,000.
Q2) Compute depreciation for 2018 and 2019 and the book value of the machinery at December 31, 2018 and 2019, assuming double-declining balance method is used.
Q3) Required:
Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.
Q4) Percentage depletion
A)Triggers commencement of depreciation.
B)Cost less accumulated depreciation.
C)Expenditures made to restructure an asset without addition, replacement, or improvement.
D)Only used for tax purposes.
E)Three methods are employed to record these costs.
Q5) Briefly discuss why straight-line is the most common depreciation method used in practice.
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Chapter 12: Investments
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Sample Questions
Q1) Under IAS No. 39, transfers of debt investments out of the FVPL category into AFS or HTM are permitted under "rare circumstances."
A)True
B)False
Q2) Bonds that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as:
A) Securities available for sale.
B) Consolidating securities.
C) Held-to-maturity securities.
D) Trading securities.
Q3) Prepare appropriate entry(s) at December 31, 2020, and indicate how the scenario will affect net income, OCI, and comprehensive income.
Q4) Consolidated financial statements are prepared when one company has:
A) Accounted for the investment using the equity method.
B) Accounted for the investment as securities available for sale.
C) Control over another company.
D) None of these answer choices are correct.
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15
Chapter 13: Current Liabilities and Contingencies
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Sample Questions
Q1) Panther Co. had a quality-assurance warranty liability of $350,000 at the beginning of 2018 and $310,000 at the end of 2018. Warranty expense is based on 4% of sales, which were $50 million for the year. What were the warranty expenditures for 2018?
A) $0.
B) $1,960,000.
C) $2,000,000.
D) $2,040,000.
Q2) At the beginning of 2018, Scarlet Industries began providing a three-year warranty on its products. The warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-year warranty period. Net sales made under warranty in 2018 were $270 million. Thirteen percent of the units sold were returned in 2018 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred.
Required:
Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2018. Show calculations.
Q3) Bank loans are often arranged in advance as lines of credit. What is a line of credit? How do a committed and a noncommitted line of credit differ?
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16
Chapter 14: Bonds and Long-Term Notes
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Sample Questions
Q1) At January 1, 2018, BB Industries, Inc., owed Second Bank $24 million, under a 10% note due December 31, 2019. Interest was paid last on December 31, 2016. BB was experiencing severe financial difficulties and asked Second Bank to modify the terms of the debt agreement. After negotiation Second Bank agreed to:
Forgive the interest accrued for the year just ended, Reduce the remaining two years' interest payments to $2 million each and delay the first payment until December 31, 2019, and Reduce the principal amount to $22 million.
Required:
Prepare the journal entries by BB Industries, Inc. necessitated by the restructuring of the debt at (A) January 1, 2018, (B) December 31, 2019, and (C) December 31, 2020.
Q2) Discount on bonds
A)Market rate higher than stated rate.
B)Market rate less than stated rate.
C)Legal, accounting, printing.
D)No maturity payment.
E)Many separate maturity dates.
Q3) How are bonds and notes the same? How do they differ?
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Chapter 15: Leases
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Sample Questions
Q1) Finance leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.
A)True
B)False
Q2) A sales-type lease is reported in the lessor's balance sheet as:
A) An asset.
B) A liability.
C) Interest revenue.
D) A contra account to lease liability.
Q3) Francisco leased equipment from Julio on December 31, 2018. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2018. The present value of the lease payments is $1,020,000. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2019?
A) $824,400.
B) $807,000.
C) $806,400.
D) $792,000.
Q4) Discuss the economic advantages of leasing.
Page 18
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Chapter 16: Accounting for Income Taxes
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Q1) Deferred tax assets and liabilities typically are classified as current or long term according to when the underlying temporary difference is expected to reverse.
A)True B)False
Q2) A deferred tax asset represents the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.
A)True B)False
Q3) Which of the following circumstances creates a future deductible amount?
A) Earning of non-taxable interest on municipal bonds.
B) Sales of property (installment method for tax purposes).
C) Prepaid advertising expense.
D) Accrued warranty expenses.
Q4) Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets. A)True B)False
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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Sample Questions
Q1) Data for 2018 were as follows: PBO, January 1, $240,000 and December 31, $270,000; pension plan assets (fair value) January 1, $180,000, and December 31, $230,000. The projected benefit obligation was underfunded at the end of 2018 by:
A) $30,000.
B) $60,000.
C) $20,000.
D) $40,000.
Q2) The process of assigning the cost of postretirement benefits to the years during which those benefits are assumed to be earned by employees is called:
A) Restitution.
B) Retribution.
C) Attribution.
D) Assignation.
Q3) The net pension liability (PBO minus plan assets) is decreased by:
A) Service cost.
B) Expected return on plan assets.
C) Amortization of net gain-AOCI.
D) Prior service cost.
Q4) Discuss income smoothing as the term relates to pension plans.
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Chapter 18: Shareholders Equity
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Sample Questions
Q1) 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.
Q2) Corporations are formed in accordance with:
A) The Model Business Corporation Act.
B) Federal statutes.
C) The laws of individual states.
D) Federal trade commission regulations.
Q3) A statement of comprehensive income does not include:
A) Gains resulting from the return on pension assets exceeding expectations.
B) Gains and losses on unsold held-to-maturity debt securities.
C) Adjustments from foreign currency translation.
D) Prior service cost of pensions.
Q4) The prescribed accounting treatment for stock dividends implicitly assumes that shareholders are fooled by "small" stock dividends and benefit by the market value of their additional shares. Explain this statement. Is it logical?
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) On December 31, 2017, the Bennett Company had 100,000 shares of common stock issued and outstanding. On July 1, 2018, the company sold 20,000 additional shares for cash. Bennett's net income for the year ended December 31, 2018, was $650,000. During 2018, Bennett declared and paid $89,000 in cash dividends on its nonconvertible preferred stock. What is the 2018 basic earnings per share?
A) $5.91.
B) $5.61.
C) $5.10.
D) None of these answer choices are correct.
Q2) At December 31, 2018 and 2017, Cow Co. had 100,000 shares of common stock and 5,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2018 or 2017. Net income for 2018 was $500,000. For 2018, basic earnings per share was:
A) $2.50
B) $4.50
C) $4.75
D) $5.00
Q3) What is the "if converted method"?
Q4) How is a complex capital structure different from a simple capital structure?
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Chapter 20: Accounting Changes and Error Corrections
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Q1) Cooper Inc. took physical inventory at the end of 2017. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.
A) Cooper needs to correct an accounting error.
B) Cooper has made a change in accounting principle, requiring retrospective adjustment.
C) Cooper is required to adjust a change in accounting estimate prospectively.
D) Cooper is not required to make any accounting adjustments.
Q2) During 2018, Hoffman Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.
A) Hoffman is not required to make any accounting adjustments.
B) Hoffman has made a change in accounting principle requiring retrospective adjustment.
C) Hoffman has made a change in accounting principle requiring prospective application.
D) Hoffman needs to correct an accounting error.
Q3) What are the changes in accounting principle that require the prospective approach?
Q4) Describe briefly the approaches of reporting changes in accounting principles.
Q5) How are accounting errors treated?
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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 prepaid expenses should be reported as:
A) An addition to net income in determining cash flows from operating activities.
B) A deduction from net income in determining cash flows from operating activities.
C) An investing activity.
D) Not reported.
Q2) Using the direct method, cash received from customers is calculated as sales:
A) On account.
B) On account plus cash sales.
C) Plus an increase in accounts receivable.
D) Plus a decrease in accounts receivable.
Q3) A purchase of equipment for cash is:
A) Reported as an operating activity in the statement of cash flows.
B) Reported as an investing activity in the statement of cash flows.
C) Reported as a financing activity in the statement of cash flows.
D) None of these answer choices are correct.
Q4) Did accounts receivable increase or decrease during 2018? Explain.
Q5) Is depreciation a source of cash? Explain.
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