Corporate Financial Reporting
Exam Solutions
Course Introduction
Corporate Financial Reporting is a comprehensive course designed to introduce students to the principles, standards, and processes involved in the preparation and analysis of financial statements in a corporate environment. The course examines the regulatory framework governing financial reporting, including key accounting standards and the conceptual foundation underlying them. Students will learn to interpret balance sheets, income statements, and cash flow statements, and gain an understanding of how financial information can be used by stakeholders for decision-making. Emphasis is placed on the ethical and practical challenges of corporate disclosure, transparency, and financial analysis, providing students with the skills needed to evaluate corporate performance and communicate financial information effectively.
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) The revenue/expense approach emphasizes determining the appropriate amounts of revenue and expense in each reporting period.
A)True
B)False
Answer: True
Q2) What are the key provisions of the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002?
Answer: The Act requires the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for auditors and securities analysts, and requires that companies document and assess their internal controls. It also requires auditors to express an opinion on management's assessment of internal controls, and the auditors must also express their own opinion on company internal controls.
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
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Page 3
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, which of the following is incorrect?
A) An adjustment for depreciation reduces net income.
B) A decrease in salaries payable decreases net income.
C) A reduction in prepaid expenses decreases net income.
D) An increase in accrued payables decreases net income.
Answer: B
Q2) The accounting equation can be stated as:
A) A + L OE = 0.
B) A L + OE = 0.
C) A + L OE = 0.
D) A L OE = 0.
Answer: D
Q3) Accounts receivable
Answer: \[\begin{array} { | l | c | c | }
\hline & \text { Effect } & \text { Classification } \\
\hline \text { Accounts receivable } & 1 & 1 \\
\hline
\end{array}\]
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:
A) Twelve months.
B) Thirty months.
C) Six months.
D) Three months.
Answer: B
Q2) Using an example, discuss the techniques that analysts use to transform accounting numbers into more useful forms.
Answer: Analysts convert accounting numbers into <b>ratios</b> in order to control for size differences over time and among firms. In addition, they use <b>horizontal analysis</b>, comparing changes in certain metrics over time, and <b>vertical analysis</b>, comparing each financial statement item to a base total, such as sales revenue.
Q3) Altoid Co.'s current ratio. Round your answer to two decimal places. Answer: ($150 + 200 + 300 + 450) /$450 = 2.44 Current ratio
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
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Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Sample Questions
Q1) Required: Prepare a 2018 multiple-step income statement for Kroeger Inc. with earnings per share disclosure.
Q2) Required: Compute the receivables turnover ratio for 2018.
Q3) Required: Prepare a 2018 single, continuous statement of comprehensive income for Rollins Inc. Use a multiple-step income statement format.
Q4) Required: Prepare a single-step income statement with earnings per share disclosure.
Q5) Income from continuing operations sometimes includes gains from nonoperating activities.
A)True
B)False
Q6) The FASB's stated preference for reporting operating cash flows is the:
A) Indirect method.
B) Direct method.
C) Working capital method.
D) All financial resources method.
Q7) Required: Compute the average days in inventory for 2018.
Page 6
Q8) Required: Compute the return on shareholders' equity for 2018. Round your answer to one decimal place, e.g., .1234 as 12.3%.
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Page 7
Chapter 5: Revenue Recognition
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Sample
Questions
Q1) In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.
A)True
B)False
Q2) In 2018, JRE2 would report gross profit (loss) of:
A) $(223,000).
B) $(150,000).
C) $(206,000).
D) $0.
Q3) Prepare Terra's January journal entry to account for the revenue earned from January 1 - January 31.
Q4) In 2017, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
A) $0.
B) $(100,000).
C) $56,000.
D) $73,000.
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8
Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) 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.
Q2) An annuity is a series of equal periodic payments.
A)True
B)False
Q3) MBI Company's largest computer has a cash selling price of $200,000. A customer wishes to buy the computer on a lease purchase plan over five years, with the first payment to be made at the inception of the lease. Interest is at 10%.
Required:
a. Compute the amount of the annual lease payment and the gross amount due (total payments) under the lease.
b. Compute the amount of interest income earned by MBI for the first year of the lease.
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Page 9
Chapter 7: Cash and Receivables
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Sample Questions
Q1) Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period for which accounts receivable remain outstanding.
Q2) Accounts receivable are normally reported at the:
A) Present value of future cash receipts.
B) Current value plus accrued interest.
C) Expected amount to be received.
D) Current value less expected collection costs.
Q3) On March 12, 2018, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for $10,000, subject to terms 2/10, n/30. Admiral uses the gross method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on March 20, 2018.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on April 5, 2018.
Q4) Is there any evidence in Winchester's disclosures above that are consistent with earnings management?
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Page 10
Chapter 8: Inventories: Measurement
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Sample Questions
Q1) Unit LIFO is more costly to implement than dollar-value LIFO.
A)True
B)False
Q2) Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2018, when it had an inventory of $800,000. Its inventory as of December 31, 2018, was $811,200 at year-end costs and the cost index was 1.04. What was DVL inventory on December 31, 2018?
A) $780,000.
B) $800,000.
C) $811,200.
D) $832,000.
Q3) The ending inventory assuming FIFO is:
A) $5,140.
B) $5,080.
C) $5,060.
D) $5,050.
Q4) Required: Compute the January 31 ending inventory and cost of goods sold for January, assuming Denver uses FIFO.
Q5) What additional income tax payments did the 2014 liquidation cost SUPERVALU?
Q6) Briefly explain the advantages of dollar-value LIFO (DVL).
Page 11
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Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) The conventional cost-to-retail percentage (rounded) is:
A) 54.9%.
B) 58.9%.
C) 53.6%.
D) 70.6%.
Q2) Briefly explain the financial reporting required when a company changes to or from the LIFO inventory method.
Q3) To the nearest thousand, estimated ending inventory using the conventional retail method is:
A) $37,000.
B) $32,000.
C) $34,000.
D) $30,000.
Q4) In applying the lower of cost or market rule, the inventory of skis would be valued at:
A) $162,000.
B) $128,000.
C) $120,000.
D) $126,000.
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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Sample Questions
Q1) It's not unusual for one company to buy another company in order to obtain technology that the acquired company has developed or is in the process of developing.
Required:
Explain the accounting treatment of purchased technology.
Q2) Cool Globe Inc. entered into two transactions, as follows:
1. Purchased equipment paying $20,000 at the date of purchase and signing a noninterest-bearing note requiring the balance to be paid in four annual installments of $20,000 on the anniversary date of the contract. Based on Cool Globe's 12% borrowing rate for such transactions, the implicit interest cost is $19,253.
2. Purchased a tract of land in exchange for $10,000 cash that was paid immediately and signed a noninterest-bearing note requiring five $10,000 annual payments. The first annual payment of the note is due in one year. The fair value of the land is $46,000. Required:
Prepare the journal entries for these transactions.
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.
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Page 13
Chapter 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition
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Sample Questions
Q1) Required:
Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.
Q2) Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.
A)True
B)False
Q3) On February 20, 2018, Genoa Mining Company incurred costs of $3,600,000 to acquire and prepare to extract an estimated 4,000,000 tons of mineral deposits. In 2018, 450,000 tons of ore were mined. At the beginning of 2019, Genoa geologists estimated that 3,900,000 tons of ore still remained. In 2019, 700,000 tons of ore were mined. Required:
Compute depletion for 2018 and 2019.
Q4) Notsofast Inc. acquired land for $500,000 on July 1, 2017. It erroneously recorded the full amount as an expense. Explain what Notsofast must do when it discovers the error in 2018.
Page 14
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Chapter 12: Investments
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Sample Questions
Q1) Nichols Enterprises has an investment in 250 bonds of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott bonds are publicly traded, and The Wall Street Journal quotes a price for those bonds of $1,000 per bond, but Nichols believes the market has not appreciated the full value of the Elliott bonds and that a more accurate price is $1,200 per bond. Nichols should carry the Elliott investment on its balance sheet at:
A) $300,000.
B) $250,000.
C) Either $250,000 or $300,000, as either are defensible valuations.
D) $275,000, the midpoint of Nichols' range of reasonably likely valuations of Elliott.
Q2) Trading securities, by definition, are properly classified in the balance sheet as:
A) Shareholders' equity.
B) Intangibles.
C) Current assets.
D) Other assets.
Q3) Both debt and equity securities can be categorized as trading securities.
A)True
B)False
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Chapter 13: Current Liabilities and Contingencies
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Sample Questions
Q1) A liability for an unasserted claim must be accrued if it is reasonably possible that the claim will be asserted.
A)True
B)False
Q2) Diversified Industries sells perishable electronic products. Some must be shipped in reusable containers. Customers pay a deposit for each container. The deposit is equal to the container's cost. Customers receive a refund when the container is returned. During 2018, deposits collected on containers shipped were $700,000. Deposits are forfeited if containers are not returned in 18 months. Containers held by customers on January 1, 2018, were $330,000. During 2018, $410,000 was refunded and deposits of $25,000 were forfeited.
Required:
1. Prepare the appropriate journal entries for the deposits received and returned during 2018.
2. Determine the liability for refundable deposits to be reported in the December 31, 2018, balance sheet.
Q3) Some liabilities are not contractual obligations and may not be payable in cash.
A)True
B)False
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Page 16
Chapter 14: Bonds and Long-Term Notes
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Q1) Required: What total interest expense will Morton Sales Co. report over the 10-year life of these bonds?
Q2) An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest.
A)True
B)False
Q3) What is meant by the "market rate" of interest, the "effective rate" of interest, and the "yield rate" of interest?
Q4) Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:
A) The reduction in the premium is smaller with each successive interest payment.
B) The outstanding balance (book value) of the bonds increases eventually to face value.
C) The total effective interest over the term to maturity is equal to the amount of the premium plus the total cash interest paid.
D) The interest expense is less with each successive interest payment.
Q5) Required: What was the annual effective interest rate in the market when the bonds were issued?
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Chapter 15: Leases
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Sample Questions
Q1) On September 1, 2018, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments by Custom Shirts are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much total lease expense will Custom Shirts recognize for 2018?
A) $6,667.
B) $24,000.
C) $20,000.
D) $ 8,000.
Q2) Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:
A) Depreciation expense.
B) A right-of-use asset.
C) Amortization expense.
D) Interest revenue.
Q3) When the lessee guarantees an estimated residual value of $75,000, the amount the lessee records as a right-of-use asset and as a lease liability is increased by $75,000.
A)True
B)False
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Page 18
Chapter 16: Accounting for Income Taxes
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Sample Questions
Q1) Under current tax law, generally a net operating loss may be carried back:
A) 2 years.
B) 5 years.
C) 15 years.
D) 20 years.
Q2) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?
A) Depreciation early in the life of an asset.
B) Unrealized losses from recording investments at fair value.
C) Rent collected in advance.
D) None of these answer choices are correct.
Q3) Interperiod tax allocation
A)Is usually a revenue or expense item that is excluded or not deductible in determining taxable income.
B)Is reduced by a valuation allowance if realization of future tax benefit is not more likely than not.
C)Arises when future taxable amounts are created by temporary differences.
D)Is the process of allocating income taxes among two or more reporting periods.
E)Will always create a deferred tax asset.
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Page 19
Chapter 17: Pensions and Other Postretirement Benefits
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Q1) What is the 2018 service cost for Havana's plan?
A) $276 thousand.
B) $528 thousand.
C) $648 thousand.
D) Cannot be determined from the given information.
Q2) Which of the following describes defined benefit pension plans?
A) They raise few accounting issues for employers.
B) Retirement benefits depend on how much money has accumulated in an individual's account.
C) They are simple to construct.
D) Retirement benefits are based on the plan benefit formula.
Q3) Differentiate between a defined contribution pension plan and a defined benefit pension plan.
Q4) Why did the loss result in a reduction in accumulated other comprehensive income?
Q5) The postretirement benefit obligation is the:
A) Future value of the estimated benefits during retirement.
B) Present value of the estimated benefits during retirement.
C) Fair value of the estimated benefits during retirement.
D) Actual value of estimated benefits during retirement.
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Chapter 18: Shareholders Equity
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Sample Questions
Q1) When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for the dividend should be recorded as of the:
A) Date the dividend is declared.
B) Last day of the fiscal year.
C) Date of record.
D) Date of payment.
Q2) 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 owned by shareholders.
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) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to debt and equity for preferred stock?
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Page 21
Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) If previous experience indicates that a material number of stock options will be forfeited before they vest, the fair value estimate of the options on the grant date should be adjusted to reflect that expectation.
A)True
B)False
Q2) Simple capital structure
A)Assumption used for options, rights, and warrants.
B)Dual presentation of EPS does not apply.
C)Applies to both convertible debt and convertible equity securities.
D)Approximation of EPS assuming potential common shares became common stock.
E)Add after-tax interest to EPS numerator.
Q3) The single accounting number in the annual report that receives the most attention by investors is:
A) Total revenue.
B) Book value per share.
C) Equity per share.
D) Earnings per share.
Q4) Compare the concepts of basic and diluted earnings per share with respect to their calculation.
22
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Chapter 20: Accounting Changes and Error Corrections
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Sample Questions
Q1) Buckeye Company purchased a machine on January 1, 2016. The machine had a cost of $260,000 with a $10,000 residual value. The estimated useful life of the machine was eight years. On January 1, 2018, due to technological innovations, the estimated useful life was reduced by two years from the original life and the residual value was reduced by 50%. The company uses straight-line depreciation.
Required:
Prepare the journal entry to record the annual depreciation on December 31, 2018.
Q2) Hepburn Company bought a copyright for $90,000 on January 1, 2015, at which time the copyright had an estimated useful life of 15 years. On January 5, 2018, the company determined that the copyright would expire at the end of 2021. How much should Hepburn record as amortization expense for this copyright for 2018?
A) $14,400.
B) $7,200.
C) $8,000.
D) $18,000.
Q3) If inventory is understated at the end of 2017 and the error is not discovered, how will net income be affected in 2018?
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Chapter 21: The Statement of Cash Flows Revisited
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Q1) 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.
Q2) What was most responsible for the negative cash flow from financing activities during 2017? What amount was paid?
Q3) Financing cash inflow
A)Cash collection of a nontrade note receivable.
B)Cash collected on accounts receivable.
C)Issuance of a long-term note payable for cash.
D)Cash purchase of securities issued by another corporation.
E)Payment of a property dividend.
Q4) Cash flows from financing activities do not include cash received from:
A) issuing common stock.
B) issuing bonds.
C) selling used equipment.
D) a bank loan.
Q5) What are the general guidelines for an investment to be considered a cash equivalent?
24
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