Financial Accounting
Chapter Exam Questions
Course Introduction
Financial Accounting introduces students to the fundamental principles and practices of accounting that are essential for understanding, preparing, and analyzing financial statements. The course covers key concepts such as the accounting cycle, recording business transactions, accruals, deferrals, and the preparation of income statements, balance sheets, and cash flow statements. Emphasis is placed on the application of generally accepted accounting principles (GAAP), ethical considerations, and the role of financial information in decision-making for both internal and external stakeholders. Through practical exercises and case studies, students will gain the foundational skills necessary for success in further accounting studies and real-world business environments.
Recommended Textbook
Financial Reporting and Analysis Revsine 6th Edition by Collins Johnson Mittelstaedt Soffer
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Page 2
Chapter 1: The Economic and Institutional Setting for Financial Reporting
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Q1) Under certain circumstances,it is permissible to issue financial statements that contain a material departure from GAAP.
A)True
B)False
Answer: True
Q2) Stock markets are common in many countries and economies.Explain the need for and use of a stock market in an economy.
Answer: A stock market enables an efficient allocation of capital.It serves as a market place for buyers and sellers to meet and provides liquidity.
Q3) Regulators of industries granted monopoly privileges use financial statement data in setting allowable charges for the services these industries provide.
A)True
B)False Answer: True
Q4) Companies have an economic incentive to supply the information investors want.
A)True
B)False
Answer: True
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Chapter 2: Accrual Accounting and Income Determination
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Q1) When a company changes from straight-line depreciation to double-declining-balance depreciation,the change is reported
A)prospectively because it is impractical to determine the effects of this change on prior years' net income.
B)as an error correction.
C)as a change in an accounting estimate.
D)using the retrospective approach.
Answer: C
Q2) When analysts provide basic EPS for income from continuing operations that exclude the effects of special (i.e.,nonrecurring)gains or losses and certain other non-cash charges,such earnings are frequently referred to as
A)normal earnings.
B)pro forma earnings.
C)sustainable earnings.
D)real earnings.
Answer: B
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4
Chapter 3: Additional Topics in Income Determination
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Q1) Under the percentage-of-completion method of revenue recognition,the percentage-of-completion ratio is computed by dividing
A)profits earned to date by estimated total profits.
B)costs incurred to date by estimated total costs.
C)costs incurred to date by the contract price.
D)profits earned to date by the contract price.
Answer: B
Q2) Initial franchise fee revenue should be recognized when all material services or conditions relating to the sale have been substantially performed by the franchisor.
A)True
B)False
Answer: True
Q3) When the outcome of a service contract cannot be reliably estimated,IFRS rules require firms to use the completed contract method.
A)True
B)False
Answer: False
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5
Chapter 4: Structure of the Balance Sheet and Statement of
Cash Flows
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Sample Questions
Q1) Firms that use International Financial Reporting Standards (IFRS)are required to order assets and liabilities from least liquid to most liquid on the statement of financial position.
A)True
B)False
Q2) Which one of the following equations explains why successive balance sheets can be used to prepare a firm's cash flow statement?
A)Assets = Liabilities - Equity
B)Cash - Noncash assets = Liabilities - Equity
C) Cash = Liabilities - Noncash assets + Stockholders' equity
D) Cash = Liabilities + Stockholders' equity
Q3) For companies having monetary assets denominated in foreign currency units,these assets are converted into dollars at the historical rate of exchange that was in effect at the time of the foreign currency inflow.
A)True
B)False
Q4) The sale of fixed assets represents an investing activity.
A)True
B)False
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Chapter 5: Essentials of Financial Statement Analysis
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Q1) Common size income statements show you how much of each sales dollar hits the bottom line as profit.
A)True
B)False
Q2) The first step to informed financial statement analysis is a careful examination of the auditor's opinion.
A)True
B)False
Q3) Return on assets will generally equal return on common equity except when the company has no long-term debt.
A)True
B)False
Q4) The Z-score model combines five financial ratios in a precise way to estimate a company's default risk.
A)True
B)False
Q5) Companies assigned a Moody's "Aaa" credit rating have a 2-4% default rate.
A)True
B)False
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Chapter 6: The Role of Financial Information in Valuation and
Credit Risk Assessment
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Q1) Firms that earn less than the cost of equity capital have a share price below book value.
A)True
B)False
Q2) A bond that is considered unsecured is referred to as a A)debenture.
B)sinking fund bond.
C)senior bond.
D)callable bonD.
Q3) If securities markets are rational and efficient in the sense that they fully and correctly impound all available information into a company's stock price,then the price will reflect investors' unbiased expectations about the company's future earnings and cash flows.
A)True B)False
Q4) Earnings are a proxy-imperfect but the best we have-for free cash flow.
A)True
B)False
Page 8
Q5) Give at least three examples of low-quality earnings items.
Q6) Describe the role of accounting numbers in corporate valuation.
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Page 9
Chapter 7: The Role of Financial Information in Contracting
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Q1) When "fixed GAAP" is not permitted by the loan agreement,lenders still have the option to waive or renegotiate covenants that are harmed by a new accounting standard.
A)True
B)False
Q2) A compensation committee should be comprised of
A)the CEO and the CFO of the company.
B)the CEO of the company and the outside attorney.
C)members of the Board of Directors who are also officers of the company.
D)members of the Board of Directors who are outside (non-management)directors.
Q3) As a general rule,the proportion of pay "at risk" falls off for executives on the higher rungs of the corporate ladder.
A)True
B)False
Q4) Potential conflicts of interest permeate
A)few business relationships.
B)only relationships between investors and managers.
C)only relationships between borrowers and lenders.
D)many business relationships.
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Chapter 8: Receivables
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Q1) An analyst notes that ABC Inc.'s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed.Which of the following would be a plausible explanation for the change?
A)ABC's management expects a default rate on outstanding receivables different than that which has occurred in prior years.
B)ABC's management is using bad debt accruals to "manage" earnings.
C)The company ages its receivables and the distribution of accounts receivable over the various age categories is different than in prior years.
D)All of these are plausible reasons for the noted change.
Q2) A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms where the original loan is cancelled and a new loan agreement is signed.
A)True
B)False
Q3) In a troubled debt restructuring,there is a lack of symmetry in the financial reporting of the borrower and lender.
A)True
B)False
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Chapter 9: Inventories
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Q1) Because IFRS do not permit the use of LIFO,inventory holding gains are included in income.
A)True
B)False
Q2) Examples of variable costs include all of the following except A)raw materials costs.
B)the plant manager's salary.
C)direct labor costs.
D)electricity used in running production machinery.
Q3) If the cost of inventory never changed,all three cost flow assumptions (i.e.,LIFO,FIFO and weighted average)would yield the same financial statement result.
A)True
B)False
Q4) The LIFO reserve disclosure is required because LIFO inventory costs are
A)higher than FIFO inventory costs.
B)lower than FIFO inventory costs.
C)equal to FIFO inventory costs.
D)usually of no consequence.
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Chapter 10: Long-Lived Assets
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Q1) Firms facing asset retirement obligations must report these obligations only in the notes to their financial statements.
A)True
B)False
Q2) Goodwill represents
A)management's estimate of the value of the firm's "unidentified" intangible assets.
B)the difference between the acquisition value of an acquired business and the fair value of its identifiable net assets.
C)the difference between the acquisition value of an acquired business and the book value of its identifiable net assets.
D)the sum of the acquisition value of an acquired business and the fair value of its identifiable net assets.
Q3) The method of measuring long-lived assets at their estimated value in an input market is the economic sacrifices approach.
A)True
B)False
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Chapter 11: Financial Instruments As Liabilities
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Q1) The intent of covenants in debt agreements is to discourage lender fraud.
A)True
B)False
Q2) Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The amount of bond interest expense for 2015 is
A)$16,000.
B)$17,696.
C)$18,458.
D)$19,280.
Q3) Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The bond carrying amount at the end of 2014 is
A)$175,422.
B)$176,964.
C)$200,000.
D)$201,542.
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Chapter 12: Financial Reporting for Leases
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Q1) Under IFRS,which of the following is an indicator of a situation (individually or in combination)that could lead to a lease being classified as a finance lease?
A)If the lessor can cancel the lease,the lessee's losses associated with the cancellation are borne by the lessor.
B)The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.
C)Gains or losses from the fluctuation in the fair value of the residual accrue to the lessor.
D)All of the choices are indicators.
Q2) The annual expense associated with a capital lease decreases over the term of the lease.
A)True
B)False
Q3) Constructive capitalization provides a preview of how the FASB/IASB exposure draft will affect lessee financial statements.
A)True
B)False
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Chapter 13: Income Tax Reporting
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Q1) GAAP requires a disclosure that reconciles a company's effective income tax rate and the U.S.statutory income tax rate.
A)True
B)False
Q2) Divergence between the statutory rate and the effective rate arise for all of the following reasons except
A)temporary differences.
B)state and local taxes.
C)various credits offered by the government.
D)differential tax rates in foreign jurisdictions in which the firm operates.
Q3) Uncertain tax positions
A)are prohibited under GAAP.
B)are recognized if they might be sustained solely on technical merits.
C)require a two-step process to determine how much benefit should be recognized.
D)are measured as the smallest amount of benefit that is cumulatively greater than 50 percent likely of being realizeD.
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Chapter 14: Pensions and Postretirement Benefits
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Q1) The total pension expense for the year is
A)$124,761.
B)$131,451.
C)$136,431.
D)$142,511.
Q2) What is the pension plan fund balance as of December 31,2015?
A)$1,863,000
B)$1,800,000
C)$1,953,750
D)$1,860,000
Q3) The projected benefit obligation is the present value of the retirement benefits earned to date by the employees and is based on future salary levels.
A)True B)False
Q4) The interest cost component of pension expense in year two is determined by multiplying the projected benefit obligation at the beginning of year two by the discount rate.
A)True B)False
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Chapter 15: Financial Reporting for Owners Equity
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Q1) If a company purchases treasury stock its earnings per share will increase.
A)True
B)False
Q2) When a dividend is not declared on preferred stock,and the common shareholders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders,the preferred stock is
A)cumulative.
B)noncumulative.
C)participating.
D)nonparticipating.
Q3) A company that has earnings in Year 2 equal to the earnings of Year 1 can improve its Year 2 reported earnings per share by
A)selling additional common stock.
B)selling additional preferred stock.
C)selling shares of treasury stock at a price exceeding what was paid for the treasury stock.
D)purchasing shares of treasury stock.
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Chapter 16: Intercorporate Equity Investments
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Q1) Almond Industries owns an investment that experienced a decline during 2015 that has been judged to be "other than temporary." The investment is held in Almond's trading portfolio.It was purchased in March 2014 at a cost of $460,000.At the end of 2014,the fair value of the investment was $520,000.At the end of 2015,the fair value of the investment is $410,000.What amount of loss will Almond Industries report on its income statement for the year ending December 31,2015 related to this investment?
A)an unrealized loss of $110,000.
B)an unrealized loss of $50,000.
C)an unrealized loss of $60,000.
D)a realized loss of $50,000.
Q2) While both IFRS and GAAP require companies to consolidate entities they control,IFRS defines control more narrowly than GAAP.
A)True
B)False
Q3) Unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income.
A)True
B)False
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Chapter 17: Statement of Cash Flows
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Q1) The depreciation for 2015 is
A)$300,000.
B)$390,000.
C)$400,000.
D)$450,000.
Q2) The direct method and the indirect method are alternative presentations for presenting cash flows from
A)investing activities.
B)operating activities.
C)financing activities.
D)research activities.
Q3) Cash flows arising from the purchase or sale of marketable securities are cash flows from
A)investing activities.
B)operating activities.
C)financing activities.
D)research activities.
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