Corporate Financial Reporting
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Course Introduction
Corporate Financial Reporting explores the principles, standards, and practices that guide the preparation and presentation of financial statements for corporations. The course covers key concepts such as income measurement, asset and liability valuation, revenue recognition, and disclosure requirements in line with International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Students analyze real-world financial statements, learn how information is used by investors and other stakeholders, and examine the impact of ethical considerations and regulatory environments on corporate reporting. Emphasis is placed on interpreting financial data for effective decision-making and communication in a corporate context.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Chapter 1: Setting the Stage
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Q1) In Canada, there are many types of business and non-business organizations and four different reporting standards that might be applicable.
Required:
What types of organizations are required to follow IFRS? What types of organizations may follow IFRS if they choose to do so, and how is this choice made?
Answer: Public companies and those entities that have a fiduciary responsibility must follow IFRS. Government business enterprises must follow IFRS since they are competing with profit-oriented businesses.
Private enterprises that are not publicly accountable enterprises have a choice to follow IFRS or ASPE. The choice will depend on management's reporting objectives and users' objectives. Not-for-profit entities in Canada also have a choice of following IFRS. Again, this choice will depend on users' and management's objectives in preparing the financial reports.
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Townsend Ltd. has the following shareholders: Palermo Co.-60%
Nix Ltd.-30%
Riley Ltd.-10%
Nix has two seats on Townsend's five-person board of directors. Which of the following statements is true?
A)Nix has significant influence over Townsend.
B)Nix has control over Townsend.
C)Townsend is a special purpose entity to Nix.
D)Nix should treat Townsend as a passive investment.
Answer: A
Q2) On whose books are the consolidating adjusting entries recorded?
A)In the general journal of both the parent and subsidiary companies
B)In the general journal of the parent company and on the consolidated worksheet
C)In the general journal of both the parent and subsidiary companies and on the consolidated worksheet
D)Only on the consolidated worksheet
Answer: D
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4
Chapter 3: Business Combinations
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Q1) What type of business combination is accounted for in a manner that is essentially the same as the pooling-of-interests method?
A)Statutory amalgamation
B)Corporate restructuring
C)Reverse takeover
D)Hostile takeover
Answer: B
Q2) How is negative goodwill treated in accounting for a joint venture in the year of acquisition?
A)Included in the investor's equity in the earnings of the investee
B)Included in the carrying value of the investment
C)Allocated among the assets and liabilities
D)Shown as a line item on the SFP
Answer: A
Q3) Which of the following is not a business combination?
A)Statutory amalgamation
B)Joint venture
C)A company's purchase of 100% of another company's net assets
D)A company's purchase of 80% of another company's voting shares
Answer: B
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Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Foster Ltd. acquired 100% of Benson Ltd. The carrying values of Benson's capital assets differed from their fair values and their fair values differed from their tax bases. Which of the following statements is true?
A)The difference between Benson's carrying values and its fair values created a deferred tax asset or liability that is part of the allocation of the acquisition cost.
B)The difference between Benson's fair values and its adjusted cost bases for tax purposes creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
C)The difference between Benson's carrying values and its adjusted cost bases for tax purposes created a deferred tax asset or liability that is part of the allocation of the acquisition cost.
D)No deferred tax asset or liability arises from the above situation.
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Flatt Ltd. is a wholly-owned subsidiary of Franco Ltd. For consolidation purposes, how does the treatment of unrealized profits on upstream sales differ from the treatment of unrealized profits on downstream sales?
A)Unrealized profits must be eliminated on upstream sales, but not on downstream sales.
B)Unrealized profits must be eliminated on downstream sales, but not on upstream sales.
C)Unrealized profits must be eliminated for both upstream and downstream sales.
D)Unrealized profits are not eliminated on either upstream or downstream sales.
Q2) A parent company records an investment in its subsidiary using the equity method.
Which of the following statements about consolidated net income is true?
A)Consolidated net income is higher than the net income under the equity method.
B)Consolidated net income is lower than the net income under the equity method.
C)Consolidated net income is higher than the net income under the equity method only if the subsidiary is profitable and has not paid any dividends.
D)Consolidated net income is the same as the net income under the equity method.
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Q1) At the time of acquisition, the fair values of these assets were higher than their carrying values and their tax bases. In Morin's consolidation each year, it must adjust for the deferred taxes that resulted from these temporary differences. Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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Q1) For private enterprises that have acquired goodwill in a business combination, which of the following is considered a change of circumstances for purposes of testing for goodwill impairment?
A)A large unfavourable income tax reassessment
B)Sale of a capital asset for a small loss
C)A major competitor has ceased operations
D)Retirement of the subsidiary's operations manager
Q2) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Q3) For private enterprises that have acquired goodwill in a business combination, how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
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9
Chapter
Subsidiaries
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Q1) Which consolidation approach excludes the NCI?
A)Proportionate consolidation
B)Parent-company method
C)Parent-company extension method
D)Entity method
Q2) In preparing consolidation working papers, why is it necessary to eliminate intercompany profits?
A)To nullify the effect of intercompany transactions on consolidated financial statements
B)To defer intercompany profits until the following year
C)To allocate unrealized profits until the following year
D)To differentiate between realized and unrealized profits
Q3) During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What amount should be shown on the consolidated statement of financial position for the non-controlling interest at December 31, 20X1?
A)$ 720
B)$1,720
C)$3,480
D)$3,720
Page 10
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Chapter 5: Appendix A: Step Purchases
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Q1) Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30, 20X8, and added to the new acquisition.
C)The carrying value of the original 35% at June 30, 20X8, is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.
Q2) Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$50,000
B)$66,667
C)$200,000
D)$250,000
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
Q2) Gumble Ltd. has owned 65% of the common shares of Lopez for several years. This year, Gumble reduced its interest in Lopez to 10%. Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumble must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Pal Co. owns 70% of the outstanding common shares of Sadd Ltd. Sadd sold an asset to Pal at a loss. There is no evidence of impairment in the value of the asset sold to Pal. Which of the following statements about the loss is true?
A)The loss should not be eliminated because this is an upstream sale.
B)The loss should not be eliminated because there is no impairment in the value of the asset.
C)The loss should not be eliminated because Pal does not own 100% of Sadd.
D)The loss should be eliminated.
Q2) A parent company can record its investment in a subsidiary using either the cost or the equity method. Which account will appear on the financial statements under the equity method, but not under the cost method?
A)Investment in subsidiary
B)Unamortized fair value adjustments
C)Equity earnings of subsidiary
D)Goodwill
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Restricted shares may have a cocktail provision. When might a coattail provision take effect?
A)When a company increases its dividends
B)When a buyer tries to acquire control of a company
C)When a company reacquires some of its shares
D)When a company issues preferred shares
Q2) A parent company owns a subsidiary's preferred and common shares. How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q3) Ngo Ltd.'s subsidiary has restricted shares. What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Basaraba Ltd. Owns 80% of the outstanding common shares of Gill Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. Under the agency approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?
A)The gain would be assigned to Basaraba.
B)The gain would be assigned to Gill.
C)The gain is assigned partially to Basaraba and partially to Gill.
D)The gain is eliminated on consolidation.
Q2) For gains on intercompany bond holdings, which method of allocating the gain emphasizes substance over form?
A)Allocating the gain to the parent company as the parent company has ultimate control
B)Allocating the gain to the bond purchasing company as the bonds will be retired under consolidation
C)Allocating the gain to the bond issuing company under the agency approach
D)Allocating the gain between the issuing and purchasing companies under the par-value approach
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Chapter 7: Segment and Interim Reporting
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Q1) IFRS 8 requires the disclosure of certain key information such as an organization's major customers and geographic areas of operations. Why are these disclosures required?
A)To demonstrate that the chief operating decision-maker has made prudent decisions
B)To allow users to assess potential business risks
C)To provide sufficient information to creditors
D)To allow users to see that the poor performance of one segment is usually offset by the good performance of other segments
Q2) Under IFRS 8, certain reconciliations, such as total reportable segment revenues to the entity's revenues, are required. Why are these reconciliations required?
A)To prove that the consolidated financial statements balance
B)To ensure that all reportable segments have been identified
C)To show the relative contribution of each segment to the total
D)To show how reportable segments were identified
Q3) Explain what entity-wide disclosures are required by a public company. Why is this disclosure required under IFRS 8, and how is this information useful?
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Which of the following statements about hedge accounting is true?
A)Hedge accounting is mandatory.
B)Hedge accounting is optional.
C)Hedge accounting is applicable only if a receivable is being hedged.
D)Hedge accounting is applicable only if a liability is being hedged.
Q2) Under IFRS, which of the following statements is true?
A)The hedge of a forecasted transaction is accounted for using a fair-value hedge.
B)The hedge of a firm commitment is accounted for using a cash-flow hedge.
C)The gain or loss on a hedging instrument under a cash-flow hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.
D)The gain or loss on a hedging instrument under a fair-value hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.
Q3) What does the holder of a put option on foreign currency have the right to do?
A)Right to buy the currency
B)Right to sell the currency
C)Right to do a currency swap
D)Right to acquire a forward contract
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Chapter 9: Reporting Foreign Operations
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Q1) A Canadian company has three subsidiaries that operate autonomously in Asia. What is the most appropriate alternative for handling translation gains and losses?
A)Immediate recognition
B)Limited recognition
C)Deferred recognition
D)Immediate recognition for losses and deferred recognition for gains
Q2) Machinery, land, and buildings were purchased on June 30, 20X4
Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Under the current-rate method, what is the balance of the total assets?
A)$2,108,625
B)$2,154,000
C)$2,161,688
D)$2,183,620
Q3) DNA's financial statements need to be translated into Canadian dollars for consolidation with INT's financial statements.
Required:
Calculate the exchange gain/loss on current monetary items for 20X6 under the temporal method.
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18
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Mr. Generous donated $100,000 to Excel Private School and specified that the principal amount not be spent but be maintained permanently. Interest on the invested funds can be used to award scholarships to those who excel in drama. How should the $100,000 contribution be presented on Excel Private School's financial statements?
A)As a direct increase in net assets of the endowment fund
B)As revenue of the operating fund
C)As revenue of the endowment fund
D)As deferred revenue of the operating fund
Q2) The CICA Handbook requires large not-for-profit organizations to ________.
A)immediately write-off the capital assets
B)capitalize, but not amortize the capital assets
C)capitalize and amortize the capital assets
D)only disclose the capital assets in the notes to the financial statements
Q3) When budgetary control accounts are first set up, ________.
A)budgeted revenues are credited and budgeted expenditures are debited
B)actual revenues are credited and actual expenditures are debited
C)budgeted revenues are debited and budgeted expenditures are credited
D)actual revenues are debited and actual expenditures are credited
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Chapter 10: Appendix A: Fund Accounting
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Q1) The Khoo Music Society, a not-for-profit organization, is purchasing musical instruments to donate to some local schools. Khoo ordered the instruments on August 1, 20X1, and requested the following delivery schedule: \(\begin{array}{|l|c|c|}
\hline\text { September } 15,20 \mathrm{X} 1 & \text { woodwinds } & (\$ 3,000) \\
\hline \text { October } 15,20 \mathrm{X} 1 & \text { strings } & (\$ 5,000) \\
\hline \text { October } 31,20\mathrm{X} 1 & \text { brass } & (\$ 6,000) \\
\hline \text { November } 15,20\mathrm{X} 1 & \text { drums } & (\$ 6,000) \\
\hline
\end{array}\) Khoo uses an encumbrance system and has properly recorded the necessary journal entry at August 1, 20X1. At November 15, 20X1, which of the following accounts should be debited and which statement will be affected?
A)Estimated commitments/statement of operations
B)Encumbrances-instruments/statement of operations
C)Estimated commitments/statement of financial position
D)Encumbrances-instruments/statement of financial position
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Chapter 11: Public Sector Financial Reporting
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Q1) What valuation must government organizations use to report derivatives?
A)Cost
B)Amortized cost
C)Fair value
D)Lower of cost or fair value
Q2) One of the largest sources of revenue for governments is government transfers. Government transfers represent non-exchange revenue. Explain what "government transfer" is and why it is a non-exchange transaction. How are government transfers reported? Be sure to address reporting from the transferor and the recipient perspectives, separately.
Q3) The Public Sector Accounting Board (PSAB)has identified a number of characteristics that differentiates governmental reporting from private sector reporting. Which of the following is one of those characteristics?
A)The government's goal is to make a surplus.
B)The focus of governmental capital spending is to maximize returns.
C)Tangible capital assets are viewed differently by governments.
D)Governments have limited debt capacity.
Q4) Describe the major differences in characteristics that exist when comparing a large government agency to a large public company.
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