Corporate Financial Reporting Final Exam
Course Introduction
Corporate Financial Reporting introduces students to the principles, procedures, and regulatory frameworks governing the preparation and presentation of financial statements in corporate organizations. The course covers key topics such as the conceptual framework for financial reporting, the structure and content of balance sheets, income statements, and cash flow statements, and the analysis and interpretation of these statements for decision-making purposes. Emphasis is placed on understanding international accounting standards, ethical considerations, and the role of financial reporting in communicating corporate performance to stakeholders. Students will also explore contemporary issues, including fair value measurement, disclosures, and the impact of emerging technologies on financial reporting practices.
Recommended Textbook
Intermediate Accounting IFRS 6th 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) Gains or losses result, respectively, from the disposition of business assets for greater than, or less than, their book values.
A)True
B)False
Answer: True
Q2) Which of the following groups is not among the external users for whom financial statements are prepared?
A)Customers
B)Suppliers
C)Employees
D)All of these are external users of financial statements.
Answer: D
Q3) Identify or define the following terms: a. economic entity, b. going concern.
Answer: Economic entity - All economic events can be identified with a particular economic entity.
Going concern - In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.
Q4) Compute net income for the first year for Tri Fecta.
Answer: 11ea92df_7315_eb83_9bd4_21d13bda4553_TB5911_00
Page 3
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Chapter 2: Review of the Accounting Process
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Q1) Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies the Cal Farms purchased during the year?
A)$1,600,000.
B)$1,800,000.
C)$2,200,000.
D)$2,400,000.Supplies purchases: $400,000 + 2,000,000 600,000 = $1,800,000
Answer: B
Q2) Eve's Apples opened business on January 1, 2009, and paid for two insurance policies effective that date. The liability policy was $36,000 for eighteen-months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's prepaid insurance as of December 31, 2009?
A)$ 9,000.
B)$18,000.
C)$30,000.
D)$48,000.
Answer: B
Q3) Kline's 12/31/09 total current liabilities: Answer: Kline's 12/31/09 total current liabilities = $148,000
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) A company's market value is generally less than its book value.
A)True
B)False
Answer: False
Q2) Compute the times interest earned ratio for Marjoram Company.
Answer: ($73,080 + 31,320 + 11,000) /$11,000 = 10.49 Times interest earned ratio
Q3) Liquidity refers to the riskiness of a company with regard to the amount of liabilities in its capital structure.
A)True
B)False
Answer: False
Q4) Assets do not include:
A)Property, plant, and equipment.
B)Investments.
C)Paid-in capital.
D)Unexpired insurance.
Answer: C
Q5) Altoid Co.'s long term debt-to-equity ratio
Answer: Long term debt-to-equity $600/$1,150 = .52
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Chapter 4: The Income Statement and Statement of Cash Flows
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Q1) What would be Misty's net income for the current year?
A)$148.
B)$168.
C)$112.
D)None of the amounts given are correct.
Q2) Cal's Cookies reported 2009 before-tax income before extraordinary items of $152,000 and a before-tax extraordinary loss of $32,000. All tax items are subject to a 30% tax rate. In its 2009 income statement, Cal's would report the following amounts as separate line items for net income and income tax expense:
A)$120,000 and $36,000.
B)$ 84,000 and $45,600.
C)$ 84,000 and $36,000.
D)$120,000 and $45,600.
Q3) Comprehensive income reports an expanded version of income to include four types of gains and losses not included in traditional income statements.
A)True
B)False
Q4) Required: Prepare a multiple-step income statement with earnings per share disclosure.
Page 6
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Chapter 5: Income Measurement
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Q1) Merchandise sold FOB shipping point indicates that:
A)The seller pays the freight.
B)The buyer holds title after the merchandise leaves the seller's location.
C)The common carrier holds title until the merchandise is delivered.
D)The sale is not consummated until the merchandise reaches the point to which it is being shipped.
Q2) Based on this information, if you were going to advise McDonalds about how they could enhance their return on shareholders' equity, what would you suggest? Be as specific as possible in the operational or financial changes you would recommend.
Q3) Sullivan should recognize revenue for the two parts of the arrangement as follows:
A)Recognize the entire $500 when the customer pays cash to buy the package.
B)Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package, defer the portion attributable to technical support and recognize over the support period.
C)Defer the entire $500 and recognize over the support period.
D)None of these.
Q4) Required: Compute the profit margin on sales for 2008.
Q5) Its return on assets for 2009.
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Chapter 6: Time Value of Money Concepts
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Q1) Column 5 is an interest table for the:
A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Present value of an annuity due of 1.
Q2) Sandra won $5,000,000 in the state lottery which she has elected to receive at the end of each month over the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:
A)Present value of an annuity of 1.
B)Future value of an annuity due of 1.
C)Present value of an ordinary annuity of 1.
D)Future value of an ordinary annuity of 1.
Q3) Column 1 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.
Q4) What would happen if Eastern imputed an interest rate larger than the one used in this disclosure?
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Chapter 7: Cash and Receivables
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Q1) In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges.
A)True
B)False
Q2) The balance in accounts receivable at the beginning of 2009 was $300. During 2009, $1,600 of credit sales were recorded. If the ending balance in accounts receivable was $250 and $100 in accounts receivable were written off during the year, the amount of cash collected from customers during 2009 was:
A)$1,600.
B)$1,650.
C)$1,550.
D)$1,900.$300 + 1,600 100 250 = $1,550.
Q3) False Value's 2009 income statement would report net sales of:
A)$622,000.
B)$607,000.
C)$646,000.
D)$611,000.$650,000 39,000 ($650,000 6%) = $611,000
Q4) For each posted entry in the Allowance account during 2009, indicate the remaining entry(ies) in other accounts.
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Chapter 8: Inventories: Measurement
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Q1) In a periodic inventory system, the cost of purchases is debited to:
A)Purchases.
B)Cost of goods sold.
C)Inventory.
D)Accounts payable.
Q2) The ending inventory assuming LIFO and a perpetual inventory system is:
A)$1,545.
B)$1,470.
C)$1,580.
D)$1,510.
Q3) Ending inventory assuming LIFO in a perpetual inventory system would be:
A)$4,960.
B)$5,060.
C)$5,080.
D)$5,140.
Q4) Costs and prices regularly fall every year in the microcomputer industry. Briefly indicate your recommendation and rationale for an inventory method for a firm about to enter this industry.
Q5) Briefly describe why companies that use perpetual inventory systems must still perform physical inventories.
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Chapter 9: Inventories: Additional Issues
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Q1) Losses on reduction to LCM may be charged to either cost of goods sold or to a current loss account without distorting financial statement ratios.
A)True
B)False
Q2) \[\begin{array} { | c | c | c | } \hline \text { Error } & \text { Cost of goods sold } & \text { Retained earnings } \\ \hline \text { Double counted items in ending inventory } & & \\ \hline \end{array}\]
Q3) The purpose of ceilings and floors in LCM is to prevent profit distortion. A)True
B)False
Q4) In determining lower-of-cost-or-market, market is the expected selling price under normal operations.
A)True B)False
Q5) Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to the total inventory.
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) Sales tax paid on equipment acquired for use in the business is not capitalized.
A)True
B)False
Q2) During the current year, Compton Crate Corporation purchased all of the outstanding common stock of Little Lacy Ltd. (LLL), paying $60 million in cash. Compton recorded the assets acquired as follows:
The book value of LLL's assets and owners' equity before the acquisition were $50 million and $30 million, respectively.
Required: Compute the fair value of LLL's liabilities that Compton assumed in the acquisition.
\[\begin{array} { l l }
\text { Accounts receivable } & \$ 5,500,000 \\
\text { Inventory } & 18,000,000 \\
\text { Property, plant, and equipment } & 45,500,000 \\
\text { Goodwill } & 22,000,000
\end{array}\]
Q3) Operational assets are long-term, revenue producing assets.
A)True
B)False
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) One of the advantages of group and composite methods is that gains and losses on the disposal of individual assets need not be computed.
A)True
B)False
Q2) The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method.
A)True
B)False
Q3) The factors that need to be determined to compute depreciation are an asset's:
A)Cost, residual value, and physical life.
B)Cost, replacement value, and service life.
C)Fair value, residual value, and economic life.
D)Cost, residual value, and service life.
Q4) Depreciation (to the nearest dollar) for 2010, using sum-of-the-years' digits, would be:
A)$31,909.
B)$29,455.
C)$35,456.
D)$18,000.($200,000 20,000) 10/55 9/12 + ($200,000 20,000) 9/55 3/12 = $31,909
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Chapter 12: Investments
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Q1) The Guitar World (TGW) holds an investment that increased in fair value over 2009, and accounts for that investment as available for sale. When considering taxes, TGW would
A)recognize tax expense on the income statement, and probably increase taxes payable.
B)recognize tax expense on the income statement, and probably increase their deferred tax liability.
C)reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase taxes payable.
D)reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase their deferred tax liability.
Q2) The income statement reports changes in fair value for which type of securities?
A)Securities reported under the equity method.
B)Trading securities
C)Held-to-maturity securities.
D)Securities available for sale.
Q3) In 2007, Kirby made two adjustments to its available for sale investments.
Required:
Briefly explain the adjustments and why they occurred.
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Page 14
Chapter 13: Current Liabilities and Contingencies
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Q1) On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2010. In February 2010, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet?
A)$ 0
B)$ 500,000
C)$1,000,000
D)$1,500,000 SFAS #6 states that the amount excluded from current liabilities through refinancing cannot exceed the amount actually refinanced.Therefore, L should consider the $1,000,000 paid by the refinancing to be a long-term liability and the $500,000 a current liability in the December 31, 2009 balance sheet.The refinancing was completed before the issuance of the financial statements and meets both criteria (intent & financial ability) for the classification of the $1,000,000 as a long-term liability.
Q2) How are customer advances and refundable deposits similar and yet different?
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Chapter 14: Bonds and Long-Term Notes
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Q1) How are bonds and notes the same? How do they differ?
Q2) Required: What total interest expense will Morton Sales Co. report over the 10-year life of these bonds?
Q3) 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 than the market rate of interest.
A)True
B)False
Q4) Nickel Inc. owns $100,000 of 10-year, 6% bonds as an investment on December 31, 2008. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000. Nickel uses straight-line amortization. On May 1, 2009, $10,000 of the bonds were redeemed at 110. How much, and what type of gain or loss, most likely results from this redemption?
A)$467 ordinary gain.
B)$467 extraordinary gain.
C)$467 extraordinary loss.
D)$467 ordinary loss.
Q5) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to accounting for convertible debt?
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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) Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are matched with the interest revenues they help generate in
A)an operating lease.
B)a capital lease.
C)a direct financing lease.
D)a sales-type lease.
Q3) Which of the following statements characterizes an operating lease?
A)The lessee records depreciation and interest.
B)The lessor records depreciation and lease revenue.
C)The lessor transfers title at the end of the lease term.
D)The lessee records a leased asset.
Q4) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to recognizing a gain on a sale and leaseback transaction?
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Chapter 16: Accounting for Income Taxes
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Q1) Which of the following causes a temporary difference between taxable and pretax accounting income?
A)Investment expenses incurred to generate tax-exempt income.
B)MACRS used for depreciating equipment.
C)The dividends received deduction.
D)Life insurance proceeds received due to the death of an executive.
Q2) At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A footnote 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.
Q3) How are deferred tax assets arising from net operating loss carryforwards classified under SFAS 109?
Q4) Some accountants believe that deferred taxes should not be recognized for certain temporary differences. What is the conceptual basis for this argument?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) With respect to Ralph, what is the interest cost to be included in Oregon's 2010 postretirement benefit expense, rounded to the nearest dollar?
A)$7,802
B)$7,877
C)$8,766
D)None of these is correct
Q2) What is the interest cost to be included in the current year's postretirement benefit expense?
A)$3,600.
B)$720.
C)$768.
D)$4,000.APBO at 1/1 = $60,000 4/20 = $12,000 Interest cost = $12,000 6% = $720
Q3) Interest cost is calculated by multiplying the:
A)ABO by the expected return on the plan assets.
B)ABO by the discount rate.
C)PBO by the expected return on plan assets.
D)PBO by the discount rate.
Q4) Explain how the loss is reported in the financial statements (other than the balance sheet).
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Chapter 18: Shareholders Equity
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Q1) Dividends in arrears on cumulative preferred stock are reported as current liabilities.
A)True
B)False
Q2) The par value of shares issued is normally recorded in the:
A)Paid-in capital in excess of par account.
B)Common stock account.
C)Retained earnings account.
D)Appropriated retained earnings account.
Q3) What would shareholders' equity be as of December 31, 2010?
A)Amount is not shown.
B)$5,760,000.
C)$5,820,000.
D)$6,760,000.
Q4) The preemptive right refers to the shareholder's right to:
A)Maintain a proportional ownership interest in the corporation.
B)Vote for members of the board of directors.
C)Receive a share of dividends.
D)Share in profits proportionally with all other stockholders.
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20
Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Under its executive stock option plan, Q Corporation granted options on January 1, 2009, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2011 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated, however unexpected turnover during 2010 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2011?
A)$ 0
B)$18 million
C)$19 million
D)$20 million The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million in 2009.The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.
Q2) What is restricted stock? Describe how compensation expense is determined and recorded for a restricted stock plan.
Q3) How is a complex capital structure different from a simple capital structure?
Q4) What is the "if converted method"?
Page 21
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Chapter 20: Accounting Changes
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Q1) What are the changes in accounting principle that require the prospective approach?
Q2) Lundholm Company purchased a machine for $100,000 on January 1, 2007. Lundholm depreciates machines of this type by the straight-line method over a ten-year period using no salvage value. Due to a change in sales patterns, on January 1, 2009, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2009? The tax rate is 40%.
A)$20,000.
B)$16,000.
C)$17,778.
D)$26,667.2007, 2008: $100,000 / 10 = $10,000 2009: [$100,000 ($10,000 2)] / 3 = $26,667
Q3) Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements after the change is made.
A)True
B)False
Q4) How may accounting changes detract from accounting information?
Q5) Name and briefly describe the three categories of accounting changes.
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Chapter 21: The Statement of Cash Flows
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Q1) During 2009, T Company engaged in the following activities: In T's statement of cash flows, what were net cash outflows from financing activities for 2009?
A)$392.
B)$440.
C)$560.
D)$732.
Q2) Hogan Company had the following account balances for 2009: Hogan reported net income of $300,000 for 2009. Assuming no other changes in current account balances, what is the amount of net cash provided by operating activities for 2009 reported in the statement of cash flows?
A)$291,000.
B)$290,000.
C)$281,000.
D)$301,000.
Q3) Which of the following is always reported as an outflow of cash?
A)The accrual of warranty expense.
B)The declaration of a cash dividend.
C)The purchase of equipment for cash.
D)Amortization expense.
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Chapter 22: Appendix a Derivatives
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Q1) An assessment of a hedge's effectiveness must be made:
A)At least monthly.
B)At least every three months.
C)At least every six months.
D)At least annually.
Q2) Some financial instruments are called derivatives. Why? According to the FASB, should gains and losses on a fair value hedge be recorded as they occur, or should they be recorded to coincide with losses and gains on the item being hedged?
Q3) A company recognizes a gain or loss from a fair value hedge:
A)On a deferred basis, with the gain or loss being reported in other comprehensive income in the interim.
B)Within 18 months of the gain or loss from the item being hedged.
C)Immediately in earnings along with the loss or gain from the item being hedged.
D)No gains or losses are reported on fair value hedges.
Q4) In an annual report to shareholders, Merck & Co., Inc. disclosed the following in regard to its financial instruments:
Q5) How are derivatives reported on the balance sheet? Why?
Q6) Explain why a stock option is a type of derivative instrument.
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