Financial Accounting
Exam Solutions
Course Introduction
Financial Accounting introduces students to the fundamental principles and practices involved in recording, summarizing, and reporting financial transactions of businesses and organizations. The course covers essential topics such as the accounting cycle, preparation of financial statements, analysis of assets, liabilities, and equity, and the use of Generally Accepted Accounting Principles (GAAP). Through practical exercises and case studies, students will develop the skills needed to interpret and analyze financial information, enabling informed decision-making in both business and personal contexts.
Recommended Textbook
Intermediate Accounting 1st Edition by Elizabeth A. Gordon
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Chapter 1: The Financial Reporting Environment
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Sample Questions
Q1) Which need is the primary influence on the demand for financial information?
A)the need for managers to make decisions that improve organizational effectiveness and efficiency
B)the need for society to maintain an equilibrium of good and services
C)the need for user groups to make decisions regarding resource allocation
D)the need for regulators to control improper business behavior
Answer: C
Q2) The FASB gives the SEC authority to regulate accounting for publicly traded companies.
A)True
B)False
Answer: False
Q3) The SEC permits the use of IFRS-based financial statements by international companies with shares trading on U.S.stock exchanges.
A)True
B)False
Answer: True
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Chapter 2: Financial Reporting Theory
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Sample Questions
Q1) IFRS does not treat transactions with owners as separate elements.
A)True
B)False
Answer: True
Q2) Which of the following is not a characteristic of relevance?
A)confirmatory value
B)materiality
C)free from error
D)predictive value
Answer: C
Q3) What drives the measurement and timing of revenue recognition?
Answer: Companies should recognize revenue to record the transfer of control of goods or services that reflects the consideration to which the company expects to be entitled.This occurs when a company satisfies its performance obligations specified in the contract with a customer.
Q4) Publicly traded U.S.companies are required to comply with IFRS.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Judgment and Applied Financial Accounting Research
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Q1) Why is it important for accountants to understand the structure of the Codification?
Answer: Conducting financial accounting research can be very time consuming,and there is a lot of information to sort through.Understanding the structure of the Codification can streamline the search process,because accountants can begin by searching for a topic and narrowing the search from there,or easily finding cross-referenced material.
Q2) IFRS and U.S.GAAP have the same disclosure requirements regarding the estimates made at the end of the accounting period.
A)True
B)False
Answer: False
Q3) Numerical references to the Accounting Standards Codification are structured as Topic-Subtopic-Section-Paragraph.
A)True
B)False
Answer: True
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Chapter 4: Review of the Accounting Cycle
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Sample Questions
Q1) If the total of all debit entries equals the total of all credit entries on the unadjusted trial balance,all transactions have been correctly recorded.
A)True
B)False
Q2) Which of the following accounts is a permanent account?
A)Interest Expense
B)Gain on Sale of Equipment
C)Patents
D)Bad Debt Expense
Q3) Which of the following accounts would be shown on the post-closing trial balance?
A)Dividends
B)Investments
C)Bad Debt Expense
D)Loss on Sale of equipment
Q4) If an unearned revenue is initially recorded as a revenue,the end-of-period adjusting entry records the unexpired portion.
A)True
B)False
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6
Chapter 5: Statements of Net Income and Comprehensive
Net Income
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Q1) What are the most common approaches management uses to manipulate earnings?
Q2) Which of the following is not a characteristic that must be considered when determining that a business activity is a component of an entity for purposes of classifying that activity as a discontinued operation?
A)The activity comprises operations and cash flows.
B)The activity constitutes a strategic advantage.
C)The activity can be clearly distinguished for financial reporting purposes.
D)The activity is a portion of the entity.
Q3) The "cookie jar reserves" earnings management technique involves ________.
A)increasing earnings in the current period in anticipation of significant future decreases
B)decreasing losses in the current period to allow the firm to show increased net income in the future
C)increasing earnings so as to increase managers' compensation
D)increasing losses in the current period to allow the firm to show increased net income in the future
Q4) What items are included in a company's results from discontinued operations? For this purpose,how is a component defined?
Q5) How are expenses similar to losses and how are they different?
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Chapter 6: Statements of Financial Position and Cash Flows
and the Annual Report
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Sample Questions
Q1) When preparing the operating section of the statement of cash flows using the direct method,which of the following statements is true?
A)An increase in accounts payable is added to expenses.
B)An increase in accounts receivable is added to sales.
C)Depreciation expense is added to cash flows.
D)Gains on sales of long term assets are subtracted from cash flows.
Q2) Which of the following items are not required to be presented in management's report on internal control?
A)an assertion of management's responsibility for establishing and maintaining internal control
B)management's assertion of the effectiveness of internal control
C)the extent to which internal auditors assisted management
D)identification of the framework used to assess the effectiveness of internal control
Q3) There is an inverse relationship between a company's solvency level and risk of default.
A)True
B)False
Q4) What are three limitations associated with the balance sheet?
Page 8
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Chapter 7: Accounting and the Time Value of Money
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Sample Questions
Q1) When payments take place at the beginning of the period,the series of cash flows is called ________.
A)ordinary annuity
B)annuity due
C)posterior annuity
D)anterior annuity
Q2) Interest calculated on the original principal regardless of the amount of interest that has been paid or accrued in the past is ________.
A)principal interest
B)original interest
C)simple interest
D)compound interest
Q3) Determining the future value of one or more previous cash flows is known as ________.
A)disinvesting
B)compounding
C)discounting
D)annuitizing
Q4) What is the time value of money?
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Chapter 8: Revenue Recognition
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Sample Questions
Q1) Gleason Construction enters into a long-term fixed price contract to build an office building for $20,000,000.In the first year of the contract Camey incurs $6,000,000 of cost and the engineers determined that the remaining costs to complete are $10,000,000.How much gross profit or loss should Gleason recognize in Year 1 assuming the use of the completed-contract method?
A)$-0-
B)$$4,000,000 profit
C)$4,000,000 loss
D)$375,000 profit
Q2) Refer to Camey Construction.How much gross profit should Camey recognize in Year 1 assuming the use of the percentage of completion method?
A)$375,000
B)$750,000
C)$937,500
D)$5,000,000
Q3) Define the term "commercial substance."
Q4) Revenue recognition deals with the issues of timing and measurement.
A)True
B)False
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Chapter 9: OL: Revenue Recognition
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Sample Questions
Q1) What is a major difference between GAAP and IFRS with regard to recognition of revenue?
A)Under IFRS,the seller does not have to transfer risks and rewards of ownership to the buyer.
B)IFRS does not require delivery of goods for revenue to be recognized.
C)Under IFRS,the price of the goods does not have to be fixed or determinable.
D)Under IFRS,the seller may retain managerial involvement over the goods after sale.
Q2) Refer to Tullis Corporation.How should Tullis report Construction in Progress and Billings on Construction in Progress at the end of year 1 on the balance sheet assuming the use of the completed-contract method?
A)liability of $1,000,000
B)asset of $1,000,000
C)asset of $500,000
D)liability of $500,000
Q3) When using the IFRS zero-gross-profit approach,________.
A)expenses in excess of revenues are recorded each year
B)an equal amount of revenue and expense is recorded each year
C)neither revenue nor expenses are reported
D)expenses are recorded each year
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Page 11
Chapter 10: Short-Term Operating Assets: Cash and Receivables
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Q1) The balance-sheet value of the asset Accounts Receivable represents the amount of cash the company is expected to collect from its customers.
A)True
B)False
Q2) If a company employs the gross method of recording accounts receivable from customers,then sales discounts taken should be reported as ________.
A)sales discounts forfeited on the income statement
B)an item of "other income and expense" on the income statement
C)an increase to sales revenue on the income statement
D)a deduction from sales revenue on the income statement
Q3) Which of the following must be disclosed in the footnotes to the financial statements?
A)reclassification of a cash amount that is restricted from use in the current operating cycle
B)negative cash balance that occurs when a company writes a check in an amount that exceeds the account balance
C)short-term liquid investment with original maturity of three months or less
D)minimum cash balance required to be maintained by a credit agreement
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Chapter 11: Short-Term Operating Assets: Inventory
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Q1) Dombrose Company uses a perpetual inventory system.On January 1,inventory is $253,000.On April 5,Dombrose sells inventory with a selling price of $75,000 on account.The cost of the inventory sold is $50,000.The journal entry (entries)to record the sale is (are)________.
A)debit Cash and Cost of Goods Sold and credit Sales Revenue and Inventory
B)debit Accounts Receivable and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory
C)debit Accounts Receivable and credit Sales Revenue
D)debit Cash and credit Sales Revenue
Q2) On June 1,Addison Company purchased $5,000 of inventory on account from Garrison Company.Garrison offers a 3% discount if payment is received within 15 days.Addison records the purchase using the gross method and the perpetual inventory system.The journal entry on June 1 by Addison Company includes ________.
A)a debit to Inventory for $4,850
B)a credit to Accounts Payable for $4,850
C)a debit to Inventory for $5,000
D)a credit to Cash for $5,000
Q3) Explain the difference between the basic retail method and the conventional retail method.
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Page 13
Chapter 12: Long-Term Operating Assets: Acquisition, cost
Allocation, and Derecognition
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Q1) The fixed asset turnover ratio is computed as average net fixed assets divided by total revenues.
A)True
B)False
Q2) Briefly explain the half-year convention for recognizing depreciation.
Q3) Which of the following costs should be capitalized in the year incurred?
A)costs to successfully defend a patent
B)research and development costs for a new product to be introduced later this year
C)cost to internally generate goodwill
D)organizational costs
Q4) The average remaining life of a company's assets is computed as the balance of ending net fixed assets divided by depreciation expense.
A)True
B)False
Q5) How do IFRS disclosure requirements of property,plant,and equipment differ from U.S.GAAP disclosure requirements?
Q6) Under what circumstances does derecognition of an asset occur?
Q7) List and briefly describe five types of finite-life intangible assets.
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Chapter 13: Long-Term Operating Assets: Departures From
Historical Cost
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Q1) Briefly describe the process for determining impairment losses on property,plant,and equipment and finite-life intangible assets.
Q2) When testing for impairment of goodwill,the recoverable amount of the cash-generating unit is calculated as ________.
A)the greater of the implied fair value of goodwill and the value in use of goodwill
B)the greater of the implied fair value of the cash-generating unit and the value in use of the cash-generating unit
C)the lesser of the implied fair value of goodwill and the value in use of goodwill
D)the lesser of the implied fair value of the cash-generating unit and the value in use of the cash-generating unit
Q3) Explain how gains or losses on impaired assets should be reported in income.
Q4) Explain the IFRS impairment test process including determination of the amount of the impairment loss,if any.
Q5) List the four key steps related to accounting for impairments of long-term operating assets.
Q6) List four impairment indicators.
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Chapter 14: Operating Liabilities and Contingencies
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Q1) Onopea Inc.considered two contingencies at the end of 2016: ** a probable loss in the range of $300,000 to $500,000 ** a reasonably possible loss of $150,000 Under U.S.GAAP,what is the balance for contingent liabilities at the end of 2016?
A)$300,000
B)$400,000
C)$450,000
D)$550,000
Q2) More contingencies are reported on the balance sheet under U.S.GAAP than under IFRS because of different definitions of "probable."
A)True
B)False
Q3) Dismantling an ocean oil-rig platform is an example of an asset retirement obligation.
A)True
B)False
Q4) How does IFRS accounting for asset retirement obligations different from U.S.GAAP accounting?
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Chapter 15: OL: Operating Liabilities and Contingencies
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Q1) If the warranty is required by law,it is more likely to be an base warranty.
A)True
B)False
Q2) Warranties that cover longer time periods are more likely to be base warranties.
A)True
B)False
Q3) When a company sells the extended warranty contract,it records a liability for unearned revenue.
A)True
B)False
Q4) Accounting for product warranty costs under an base warranty ________.
A)is required for income tax purposes
B)charges an expense account when the seller performs in compliance with the warranty
C)is frequently justified on the basis of expediency when warranty costs are immaterial D)should be used whenever the warranty is an integral and inseparable part of the sale
Q5) Describe how to account for warranty costs if the warranty is determined to be a extended warranty? A base warranty?
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Chapter 16: Financing Liabilities
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Q1) On January 2,2017,Edmond,Inc.issued 8,000 bonds at $1,040 each.Each bond contains 20 detachable stock warrants,each of which gives the owner the right to purchase one share of Weston $1 par value common stock at $35.The current selling price of common stock is $25 per share.Edmond bonds without stock warrants are currently selling for $1,025 and it has additional warrants on the market selling for $15.
Required:
1.Prepare the journal entry to record the sale of the bonds using the proportional method. 2.Prepare the journal entry to record the exercise of all warrants on March 19,2019,when the market price of the stock was $50.
Q2) Under U.S.GAAP,debtors in technical default may continue to classify their debt as long-term if the creditor grants a waiver before the balance sheet date. A)True B)False
Q3) A company's calculated effective borrowing rate is higher under IFRS than U.S.GAAP. A)True B)False
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Chapter 17: Accounting for Stockholders Equity
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Q1) On January 1,2013,Moulin Company issued 1,200 shares of $60 par callable preferred shares for $180,000.According to the preferred share agreement,Moulin can call these preferred shares on January 1,2015,for $150 per share.On January 1,2015,Moulin calls the shares.
a.What is the journal entry to record the issuance of the preferred shares?
b.What is the journal entry when Moulin calls the preferred shares?
Q2) Syd's Co.reported comprehensive income of $7,600 for the current year.It had unrealized losses on available-for-sale securities of $1,700 after tax,and a foreign currency translation gain of $1,500 after tax.What is net income for the current year?
A)$7,800
B)$7,600
C)$7,400
D)$7,200
Q3) Corrections to past years' financial statements are called prior-period adjustments.
A)True
B)False
Q4) When treasury stock is sold above or below cost-why isn't this reported on the income statement as a gain or loss?
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Page 19
Chapter 18: Investing Assets
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Q1) As of 12/31/17,XYZ Inc.had Available-for-Sale debt investments with a fair value of $522,000,an amortized cost of $535,000,and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500.What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?
A)Unrealized Loss of $6,500,reported as part of Other Comprehensive Income.
B)Unrealized Loss of $20,500,reported as part of Net Income.
C)Unrealized Loss of $20,500,reported as part of Other Comprehensive Income.
D)Unrealized Loss of $6,500,reported as part of Net Income.
Q2) Accounting for Trading securities remains unchanged if a company elects the fair value option for reporting this investment.Why?
Q3) Refer to Sheppard Corporation.If Sheppard sold all of its shares of Meredith for $75,000 at the end of 2017,what would be the effect on net income of this transaction?
A)$13,000 gain
B)$10,000 gain
C)$23,500 gain
D)$0 gain
Q4) List and discuss the three categories of investing securities.
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Chapter 19: Accounting for Income Taxes
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Q1) Inferno Inc.is embroiled in a lawsuit.In 2015 they recognize that a loss of $45,000 is probable.Given a tax rate of 40%,how will this be treated in the accounting records?
A)deferred tax asset of $18,000
B)deferred tax liability of $18,000
C)deferred tax asset of $45,000
D)deferred tax liability of $45,000
Q2) What should Greene Co.record as its federal income tax liability for 2015?
A)$88,500
B)$91,450
C)$84,150
D)$92,850
Q3) In 2015,the MoosePants Corporation reported income from continuing operations before taxes of $865,500 and income from discontinued operations of $213,000.MoosePants also reported $82,000 of unrealized gains from fair value accounting adjustments recorded as other comprehensive income.The company is subject to a 34% tax rate and reports no permanent differences. Prepare a partial income statement including comprehensive income.
Q4) What purpose does a carryback or carryforward serve to a company with a volatile earnings stream?
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Chapter 20: Accounting for Employee Compensation and Benefits
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Sample
Questions
Q1) Net pension liability is decreased by ________.
A)amortization of prior service costs
B)service costs
C)expected return on plan assets
D)amortization of net gain in other comprehensive net income
Q2) Which of the following statements is true regarding share appreciation rights (SAR)payable in cash?
A)Changes in estimated total compensation are recorded as prior period adjustments.
B)The amount of compensation under the SAR plan is unknown until the rights are actually exercised.
C)At the time of exercise a participant may receive either cash or common stock.
D)Deferred compensation expense is recorded at the time the share appreciation rights are granted.
Q3) Which of the following is a characteristic of the projected benefit obligation measurement?
A)It considers only vested employees.
B)It uses projected future salary levels.
C)It is the smallest estimate of the projected benefit obligation.
D)It considers only current employees.
Page 22
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Chapter 21: Earnings Per Share
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Q1) Footnote disclosures for EPS is concerned only with current and prior years,such that subsequent events after the close of the year are ignored.
A)True
B)False
Q2) A security is antidilutive if decreases the diluted EPS below basic EPS.
A)True
B)False
Q3) Charlotte Engineering experienced net income of $450,000 for the year.It declared $30,000 in preferred dividends on December 23.It began the year with 100,000 common shares outstanding.On July 1,Charlotte declared a 10% common stock dividend.Compute the weighted-average common shares outstanding for the year.
A)100,000
B)105,000
C)110,000
D)120,000
Q4) Earnings per share is the most-often quoted financial statistic in the business media.
A)True
B)False
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Chapter 22: Accounting Corrections and Error Analysis
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Q1) Bauer Corp.purchased an insurance policy on its plant with liability for harm to its employees in the case of a catastrophe in January,2015 and paid a five-year premium for $300,000.The whole amount was recorded as Insurance Expense.The error was discovered in early 2018 when the accountants were reconciling 2017 for adjusting entries.(The tax rate is 40% for all years.)Income before taxes for 2015 is $1,040,000 and 2016 is $1,220,000.
Required: Describe the steps to properly accounting for this error correction.
Q2) Refer to Superbyte Corporation.
Record the journal entries that SuperByte will make at the inception of the lease and on July 1.
A)True
B)False
Q3) When the lessor pays executory costs then shifts the costs to the lessor through higher rental payments,the executory costs are not included in the calculation of minimum rental payments.
A)True
B)False
Q4) Prepare the comparative income statements for Machino,Inc.after the change to FIFO.
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