Corporate Financial Reporting
Study Guide Questions
Course Introduction
Corporate Financial Reporting explores the principles, standards, and processes underlying the preparation and interpretation of financial statements within corporations. This course provides students with an in-depth understanding of accounting concepts such as balance sheets, income statements, and cash flow statements, and how they are used to convey a companys financial performance and position to stakeholders. Students will analyze key issues related to revenue recognition, asset valuation, and liabilities, and examine the regulatory environment, including the impact of international accounting standards and governance structures. Case studies and practical exercises enable students to interpret and critically assess financial reports for informed decision-making.
Recommended Textbook
Intermediate Accounting 18th Edition by Earl K. Stice
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Page 2
Chapter 1: Financial Reporting
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Q1) The following is NOT one of the fundamental criteria for recognition?
A)Timeliness
B)Measurability
C)Relevance
D)Reliability
Answer: A
Q2) Which of the following qualitative characteristics of financial information requires that information NOT be biased in favor of one group of users to the detriment of others?
A)Relevance
B)Reliability
C)Verifiability
D)Neutrality
Answer: D
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3
Chapter 2: A Review of the Accounting Cycle
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Q1) In an accrual accounting system,
A)all accounts have normal debit balances.
B)a debit entry is recorded on the left-hand side of an account.
C)liabilities, owner's capital, and dividends all have normal credit balances.
D)revenues are recorded only when cash is received.
Answer: B
Q2) The last step in the accounting cycle is to
A)prepare a post-closing trial balance.
B)journalize and post closing entries.
C)prepare financial statements.
D)journalize and post adjusting entries.
Answer: A
Q3) Pheasant Tail Company's total equity increased by $32,000 during 2013.New stockholder investment during the year totaled $65,000.Total revenues during the year were $500,000 and total expenses were $460,000.Cash on hand decreased by $7,500 during the year.What amount of dividends did Pheasant Tail declare during 2013?
Answer: 11ea822a_7a70_5267_9591_af690ce09464_TB2120_00
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Page 4
Chapter 3: The Balance Sheet and Notes to the Financial Statements
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Q1) Which of the following circumstances would require recording an accrual for a loss contingency under current generally accepted accounting principles?
A)Event is unusual in nature and occurrence of event is probable
B)Event is unusual in nature and event occurs infrequently
C)Amount of loss is reasonably estimable and occurrence of event is probable
D)Amount of loss is reasonably estimable and event occurs infrequently
Answer: C
Q2) Which of the following characteristics may result in the classification of a liability as current?
A)Short-term obligations expected to be refinanced with long-term debt
B)Debts to be liquidated from funds that have been accumulated and are reported as noncurrent assets
C)Violation of provisions of a debt agreement
D)Obligations for advance collections that involve long-term deferment of the delivery of goods or services
Answer: C
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Chapter 4: The Income Statement
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Q1) Which of the following is an application of the principle of systematic and rational allocation?
A)Sales commissions
B)Office salaries
C)Telephone expense
D)Depreciation expense
Q2) Which of the following most likely would be considered a discontinued operation?
A)Production or marketing functions are shifted from one location to another.
B)A sporting goods manufacturer has a bicycle division that meets FASB's definition of a component of the entity and decides to outsource the manufacture of its bicycles.
C)The unprofitable brands of a beauty products component of an entity that manufactures and sells consumer products are discontinued.
D)An entity that is a franchiser in the quick-service restaurant business also operates company-owned restaurants that are unprofitable in a certain region and, as a result, the entity decides to exit both the quick-service business as well as the company-owned restaurants in that region.
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Chapter 5: Statement of Cash Flows and Articulation
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Q1) Which of the following is a noncash transaction that should be disclosed in a schedule accompanying the statement of cash flows?
A)Sale of an investment for cash
B)Purchase of a machine for cash
C)Issuance of common stock in exchange for land
D)Declaration and payment of a cash dividend on common stock
Q2) Which of the following would be subtracted from net income when using the indirect method to derive net cash flows from operating activities?
A)Decrease in net accounts receivable
B)Loss on sale of investments
C)Decrease in salaries and wages payable
D)Depreciation expense
Q3) Cash flows from financing activities would be reduced by which of the following?
A)Purchase of inventory
B)Repayment of long-term debt
C)Purchase of machinery
D)Payment of interest
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Chapter 6: Earnings Management
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Q1) Recent accounting scandals suggest the need for care on the part of an independent auditor in accepting new clients.The independent auditor needs to know both the business of and the personnel employed by a prospective client.All other control procedures are fruitless if a CPA chooses to serve an undesirable client.The damage suffered as a result of associating with an undesirable client can be irreparable. Discuss some key issues an independent auditor should consider in the client acceptance decision.
Q2) Earnings management can range from methods that suggest astute management to outright fraud.
Required:
1.Identify and discuss the activities on the earnings management continuum.
2.Express your opinion as to where on the earnings management continuum most companies likely fall.
Q3) Research has shown that numerous companies manage their earnings.A variety of earnings management techniques are available ranging from income smoothing to outright fraud.
Define income smoothing and explain how it is implemented.
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8
Chapter 7: The Revenuereceivablescash Cycle
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Q1) See Abe Company information above.What was the total cash received from Bee during July?
A)$441
B)$450
C)$793
D)$800
Q2) A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a
A)quantity discount.
B)cash discount.
C)trade discount.
D)size discount.
Q3) An operating cycle
A)is twelve months or less in length.
B)is the average time required for a company to collect its receivables.
C)is used to determine current assets when the operating cycle is longer than one year. D)begins with inventory and ends with cash.
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Chapter 8: Revenue Recognition
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Q1) Builder Construction Company's projects extend over several years and collection of receivables is reasonably certain.Each project has a contract that specifies a price and the rights and obligations of all parties.Both the contractor and the customer are expected to fulfill their contractual obligations on each project.Reliable estimates can be made of the extent of progress and cost to complete each project.The method that the company should use to account for construction revenue is A)installment sales.
B)percentage-of-completion.
C)completed-contract.
D)cost recovery.
Q2) A company providing maintenance services on equipment for a fixed periodic fee would recognize
A)an equal amount of service revenue for each act.
B)service revenue over the fixed period by the straight-line method.
C)service revenue in proportion to the direct costs to the provider of the services to perform each act.
D)service revenue only when the fixed period has ended.
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Chapter 9: Inventory and Cost of Goods Sold
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Q1) If a company experiences a liquidation of a LIFO inventory layer in the second quarter that is expected to be restored by the end of the annual financial reporting period,the company should
A)treat the layer as if it were liquidated and include in cost of goods sold the expected replacement cost of the inventory sold.
B)deplete the LIFO layer as if the interim period were an annual period.
C)change to an alternative inventory cost method, such as FIFO, so that the problem of LIFO liquidation is not encountered.
D)delay the recognition of both revenue and cost of goods sold on the inventory involved until a final determination of the LIFO inventory can be made at the end of the annual period.
Q2) See information for Paper Depot above.If Paper Depot uses a FIFO cost perpetual inventory system,the ending inventory of Model III calculators at August 31 is reported as A)$150,080.
B)$150,160.
C)$152,232.
D)$152,960.
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Chapter 10: Investments in Noncurrent Operating
Assets-Acquisition
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Q1) A copyright is an example of which general category of intangible asset that should be recognized separately according to current generally accepted accounting principles?
A)Marketing-related
B)Customer-related
C)Artistic-related
D)Contract-based
Q2) The third year of a construction project began with a $30,000 balance in Construction in Progress.Included in that figure is $6,000 of interest capitalized in the first two years.Construction expenditures during the third year were $80,000 which were incurred evenly throughout the entire year.The company has had over $300,000 in interest-bearing debt outstanding the third year,at a weighted average rate of 9 percent.How much interest for the third year is capitalized?
A)$3,600
B)$6,300
C)$9,360
D)$9,900
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Chapter 11: Investments in Noncurrent Operating
Assets-Utilization and Retirement
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Q1) Carbonite Bottling purchased for $800,000 a trademark for a very successful soft drink it markets under the name BLAST!.The trademark was determined to have an indefinite life.A competitor recently introduced a product that is in direct competition with the BLAST! product,thus suggesting the need for an impairment test.Data gathered by Carbonite suggests that the useful life of the trademark is still indefinite,but the cash flows expected to be generated by the trademark have been reduced either to $30,000 per year (with a probability of 80%)or to $60,000 per year (with 20% probability).The appropriate risk-free interest rate is 5%.The appropriate risk-adjusted interest rate is 10%. Prepare the appropriate journal entry (if needed)to record the effect of the events described above.
Q2) Which of the following depreciation methods applies a uniform depreciation rate each period to an asset's book value?
A)Straight-line
B)Declining-balance
C)Units-of-production
D)Sum-of-the-years'-digits
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Page 13
Chapter 12: Debt Financing
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Q1) On January 1,2014,Gustavo Hospital issued a $250,000,10 percent,5-year bond for $231,601.Interest is payable on June 30 and December 31.Gustavo uses the effective-interest method to amortize all premiums and discounts.Assuming an effective interest rate of 12 percent,how much interest expense should be recorded on June 30,2014?
A)$11,935.14
B)$12,500.00
C)$13,896.06
D)$14,729.82
Q2) Thunder Corporation is authorized to issue $500,000 of 6 percent,10-year bonds dated July 1,2014,with interest payments on December 31 and June 30.When the bonds are issued on November 1,2014,Thunder Corporation receives cash of $515,000,including accrued interest.The journal entry to record the issuance of the bonds would include
A)$15,000 bond premium.
B)$5,000 bond premium.
C)$15,000 bond discount.
D)no bond premium or discount.
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Page 14
Chapter 13: Equity Financing
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Q1) Stock warrants outstanding should be classified as A)liabilities.
B)reductions of capital contributed in excess of par value. C)capital stock.
D)additions to contributed capital.
Q2) Prepare a statement of comprehensive income in a two-statement format.
Q3) On February 24,Bramlett Company purchased 4,000 shares of Delaney Corp.'s newly issued 6 percent cumulative $75 par preferred stock for $304,000.Each share carried one detachable stock warrant entitling the holder to acquire at $10 one share of Delaney no-par common stock.On February 25,the market price of the preferred stock was $72 per share,and the market price of the stock warrants was $8 per warrant.On December 29,Bramlett sold all the stock warrants for $41,000.The gain on the sale of the stock warrants was
A)$0.
B)$1,000.
C)$9,000.
D)$10,600.
Q4) Prepare a statement of comprehensive income in a one-statement format.
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Page 15
Chapter 14: Investments in Debt and Equity Securities
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Q1) A firm purchased bonds to be classified as an investment in securities available-for-sale.The bonds were purchased at a premium.Assume the market price of the bond is volatile.Given these facts,which of the following is correct?
A)Less cash interest is received each year than interest revenue is recognized
B)The ending valuation allowance account balance will depend on ending market value and original cost
C)The ending valuation allowance account balance will depend on ending market value and original cost adjusted for amortization of premium
D)The premium is ignored because the bonds are not classified as held-to-maturity
Q2) If an investment in stock is reclassified from available-for-sale securities to trading securities,the stock should be recorded on the date it is reclassified at the
A)market value at the date of acquisition.
B)book value at the date of reclassification.
C)market value at the date of reclassification.
D)lower-of-cost-or-market value at the date of reclassification.
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Chapter 15: Leases
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Q1) From the standpoint of the lessee,the minimum lease payment includes all of the following except
A)the guaranteed residual value.
B)the lessee's obligation to pay executory costs.
C)the bargain purchase option.
D)any payment that the lessee must make upon failure to extend or renew the lease.
Q2) If the lessee and the lessor use different interest rates to account for a capital lease,then
A)the lease will never be accounted for as a capital lease by the lessee.
B)total expenses (or revenues) will be equal for both lessee and lessor.
C)total expenses (or revenues) will be different for the lessee and the lessor.
D)GAAP has been violated since the lessor and the lessee are not allowed to use different interest rates in accounting for capital leases.
Q3) Celestion should account for this lease as
A)an operating lease.
B)a direct-financing lease.
C)a sale-type lease.
D)leveraged lease.
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Chapter 16: Income Taxes
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Q1) Which of the following is an example of a temporary difference that could result in a deferred tax asset?
A)Gain on disposal of an asset when included in taxable income before it is included in pretax accounting income
B)Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
C)Gross margin on installment sales is recognized for accounting purposes before it is included in taxable income in the income tax return
D)Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year
Q2) Which factor would most likely cause a firm to choose the carryforward option for an NOL?
A)Expectations of lower earnings in the future relative to the past
B)Expectations of higher earnings in the future relative to the past
C)Expectations of lower tax rates in the future relative to the past
D)Expectations of higher tax rates in the future relative to the past
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Chapter 17: Employee Compensation-Payroll,pensions, Other Compissues
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Q1) Which of the following statements characterizes defined contribution plans?
A)They are more complex in construction than defined benefit plans.
B)The employer's obligation is satisfied by making the appropriate amount of periodic contribution.
C)The investment risk is borne by the employer.
D)Contributions are made in equal amounts by employer and employees.
Q2) Mint Company sponsors a noncontributory,defined-benefit pension plan.At December 31,2014,the end of the company's fiscal year,the actuary's report showed pension benefits paid of $15,000,and PBO balance of $300,000.The trustee's report showed a beginning plan assets balance (at fair value)of $240,000,contributions for the year of $36,000,and an actual return on plan assets of 10 percent (the expected return was 9 percent).
The underfunded PBO at the end of 2014 was
A)$0.
B)$15,000.
C)$24,000.
D)$30,000.
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Page 19
Chapter 18: Earnings Per Share
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Q1) Warrants exercisable at $15 each to obtain 25,000 shares of common stock were outstanding during a period when the average and year-end market price of the common stock was $30.Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted-average number of outstanding common shares by
A)5,000
B)10,000
C)11,000
D)12,500
Q2) In calculating earning per share,stock options warrants,and rights are A)always dilutive.
B)never dilutive.
C)dilutive if the exercise price is less than the average market price of the common stock.
D)dilutive if the exercise price is more than the average market price of the common stock.
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Chapter 19: Derivatives, contingencies, business Segments, and Interim Reports
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Q1) A truck owned and operated by Mingus Company was involved in an accident with an auto driven by S.Nara on January 12,2014.Mingus received notice on April 24,2014,of a lawsuit for $800,000 damages for a personal injury suffered by S.Nara.Mingus's counsel believes it is probable that S.Nara will be successful against the company for an estimated amount in the range between $100,000 and $400,000.No amount within this range is a better estimate of potential damages than any other amount.It is expected that the lawsuit will be adjudicated in the latter part of 2015.What amount of loss should Mingus accrue at December 31,2014?
A)$400,000
B)$250,000
C)$100,000
D)$800,000
Q2) Using the information above and assuming the exchange rate on September 30 is ¥105=$1,what amount will Stagger pay to,or receive from,the bank (rounded to the nearest dollar)?
A)$15,217 payment
B)$15,217 receipt
C)$16,667 payment
D)$16,667 receipt
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Chapter 20: Accounting Changes and Error Corrections
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Q1) Badger Corporation purchased a machine for $132,000 on January 1,2011,and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value.On January 1,2014,Badger determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $12,000.A change in estimate was made in 2014 to reflect these additional data.What amount should Badger record as the balance of the accumulated depreciation account for this machine at December 31,2014?
A)$73,000
B)$77,000
C)$61,250
D)$63,600
Q2) Which of the following would NOT be accounted for as a change in accounting principle?
A)Change from the first-in, first-out method to the last-in, first-out method of inventory pricing
B)Change from the last-in, first-out method to the first-in, first-out method of inventory pricing
C)Change from completed-contract accounting to percentage-of-completion
D)Change from straight-line method to accelerated method of depreciation
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Page 22
Chapter 21: Statement of Cash Flows Revisited
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Q1) Under the direct method,cash paid to suppliers can be computed as cost of goods sold for the period
A)minus a decrease in inventory and plus an increase in accounts payable.
B)plus a decrease in inventory and minus an increase in accounts payable.
C)minus an increase in inventory and plus an increase in accounts payable.
D)plus an increase in inventory and minus an increase in accounts
Q2) Which of the following is NOT added to net income as an adjustment to reconcile net income to cash from operating activities on the statement of cash flows?
A)Increase in an accrued liability
B)Amortization of discount on bond payable
C)Loss on sale of operational asset
D)Increase in deferred tax asset
Q3) Which of the following need not be disclosed in a statement of cash flows as a noncash exchange?
A)Dividend paid in capital stock of the company (stock dividend).
B)Acquisition of fixed assets in exchange for capital stock
C)Retirement of a bond issue through the issuance of another bond issue
D)Conversion of convertible debt to capital stock
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Chapter 22: Accounting in a Global Market
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Q1) Which of the following is the primary factor in determining the functional currency of a foreign subsidiary?
A)How the costs for the foreign entity's product are determined
B)The denomination of the foreign entity's financing
C)The location of the primary sales market that influences the price of the foreign entity's product
D)Management's assessment of all relevant factors
Q2) Under international accounting standards,if a sale-leaseback results in an operating lease then
A)any profit on the original sale is deferred and recognized over the life of the subsequent lease.
B)any profit on the original sale is not recognized in the financial statements.
C)any profit on the original sale is deferred and recognized over the life of the leased asset.
D)assuming the original sale was clearly at fair value, any profit is recognized immediately even when the leaseback results in an operating lease.
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Chapter 23: Analysis of Financial Statements
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Q1) In comparing the current ratios of two companies,why is it invalid to assume that the company with the higher current ratio is the better company?
A)The two companies may be different sizes.
B)A high current ratio may indicate inadequate inventory on hand.
C)The two companies may define working capital in different terms.
D)A high current ratio may indicate inefficient use of various assets and liabilities.
Q2) Sinbad Company is expected to pay a $0.50 per share dividend at the end of the year.The dividend is expected to grow at a constant rate of 7 percent per year.The required rate of return on the stock is 15 percent.
Required: What is the value per share of the company's stock?
Q3) Refer to the Sculley Corporation information above.Sculley's quick (acid test)ratio as December 31,2014,is
A)1.44 to 1.
B)1.50 to 1.
C)1.67 to 1.
D)1.66 to 1.
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