Financial Accounting
Final Exam
Course Introduction
Financial Accounting is an introductory course that covers the fundamental principles and practices of recording, summarizing, and reporting financial transactions of organizations. Students learn how to prepare and interpret key financial statements such as the balance sheet, income statement, and cash flow statement while exploring core concepts such as accrual accounting, revenue recognition, and the accounting cycle. The course emphasizes the role of financial information in decision-making by various stakeholders, adherence to accounting standards, and the ethical responsibilities of accountants in communicating financial data.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James M. Wahlen
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Page 2
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Q1) Which of the following is not a characteristic of an extraordinary item?
A) Material in amount.
B) Nonrecurring.
C) Unusual given the nature of the firm's activities.
D) Requires a cash outflow.
Answer: D
Q2) Obtaining a competitive advantage by being the first company to introduce new concepts or ideas is referred to as ________________________________________.
Answer: first mover advantage
Q3) The third step in financial statement analysis is to assess the quality of the firm's financial statements.Which of the following is a question an analyst should ask when performing this step?
A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?
Answer: B
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Firms use acquisition cost valuations and adjusted acquisition cost valuations for which of the following types of assets?
A) Assets that do not have fixed amounts of future cash flows.
B) Assets that have fixed amounts of future cash flows.
C) Assets with certain future economic benefits.
D) monetary
Answer: A
Q2) When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities.What type of event would create a deferred tax asset and deferred tax liability?
Answer: Deferred tax assets arise when taxable income exceeds book income. an example would be warranty expense.Deferred tax liabilities arise when book income exceeds taxable income.
an example would be recognized more depreciation expense for tax purposes than for book purposes.
Q3) The amount initially paid to acquire an asset is called
Answer: acquisition cost
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Chapter 3: Income Flows Versus Cash Flows:
Understanding the Statement of Cash Flows
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Q1) Lagos Corp.recorded sales of $345,000 in 2010,in addition its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows: \[\begin{array} { l c c } & \text { Jan. 1,2010 } & \text { Dec. 31, 2010 } \\ \text { Accounts Receivable } & \$ 65,000 & \$ 90,000 \\ \text { Accausts Payable } & \$ 32,000 & \$ 28,000 \end{array}\]
How much cash did Lagos collect from customers in 2010?
A) $345,000
B) $320,000
C) $324,000
D) $316,000
Answer: B
Q2) The receipt of dividends from an investee would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
Q3) ____________________ activities relate to the acquisition and sale of noncurrent assets,particularly property,plant and equipment.
Answer: Investing
Page 5
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Chapter 4: Profitability Analysis
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Q1) Firms with ____________________ levels of operating leverage experience greater variability in their return on assets.
Q2) Refer to the information for Orca Industries.The return on assets for Orca Industries is
A) 6.8%
B) 13.5%
C) 10%
D) 12.3%
Q3) To calculate diluted EPS,the accountant does all of the following except:
A) adds back to net income any compensation expense recognized on the employee stock options
B) adds back any interest expense (net of taxes) on convertible bonds
C) adds back any dividends on convertible preferred stock the firm subtracted in computing net income to common shareholders.
D) enters only the net incremental shares issued (shares issued under options minus assumed shares repurchased) in the computation of diluted EPS.
Q4) ________________________________________ is the level of earnings and the growth in the levels of earnings expected to persist in the future.
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Chapter 5: Risk Analysis
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Q1) A.What are the three measures that are used to analyze long term solvency risk?
B- describe each measure briefly
Q2) Refer to the information for Mobile Company.Mobile's days accounts payable outstanding at the end of 2010 is
A) 7.53 days
B) 48.09 days
C) 45.51 days
D) 50 days
Q3) Marker's 2012 Long-term Debt to Shareholders' Equity ratio is
A) 31.4%
B) 29.4%
C) 34.0%
D) 45.8%
Q4) All of the following typically drive firm-specific risks except:
A) the nature of the business
B) competition
C) supplier relationships
D) demographic shifts
Q5) In bankruptcy prediction analysis a type ____________________ error is classifying a firm as bankrupt and it ultimately survives.
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Chapter 6: Accounting Quality
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Q1) Users of financial statements should consider which of the following when evaluating the quality of accounting information?
A) Economic faithfulness of accounting measurements and classifications.
B) Reliability of the measurements.
C) Reasonableness of the estimates made in applying GAAP or IFRS.
D) All of these should be considered.
Q2) Which of the following items is consistent with earnings being informative about current performance but not informative about future earnings?
A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.
Q3) Accounting information should provide relevant information to forecast the firm's expected future earnings and _________________________.
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Chapter 7: Financing Activities
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Q1) All of the following are benefits of leasing except:
A) They have the ability to shift the tax benefits from depreciation and other deductions from a lessee that has little or no taxable income to a lessor that has substantial taxable income.
B) They provide flexibility to change capacity as needed without having to purchase or sell assets.
C) They have the ability to reduce the risk of technological obsolescence, relative to outright ownership, by maintaining the flexibility to shift to technologically more advanced assets.
D) In an operating lease, the lessee recognizes the signing of the lease as the simultaneous acquisition of a long-term asset and the incurring of a long-term liability for lease payments.
Q2) Which kind of dividends have an interest-bearing promise to pay dividends?
A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend
Q3) __________ means that a company will buy back those receivables that are not collected by the company they are factored to.
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Page 9
Chapter 8: Investing Activities
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Q1) If Ashley Company accounts for the investment as a minority,active investment and uses the equity method to account for the investment,Ashley will recognize what amount of 2010 income from the investment?
A) $4,000
B) $10,000
C) $25,000
D) $15,000
Q2) Firms recognize an ______________________________ when the carrying amount of a fixed asset exceeds its fair value and is deemed not recoverable.
Q3) The functional currency of a foreign unit whose receivables and payables are denominated in foreign currency and not usually remitted to parent company is the ______________________________.
Q4) The method used to account for oil and gas exploration costs that capitalizes the exploration costs of productive wells is the
A) reserve recognition accounting.
B) successful efforts approach.
C) soft asset approach.
D) full-cost approach.
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Chapter 9: Operating Activities
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Q1) Which of the following is not a distinguishing characteristic of a derivative instrument?
A) Derivative instruments have terms that require or permit net settlement.
B) Derivative instruments have a low initial net investment.
C) Derivative instruments are highly effective throughout their term.
D) Derivative instruments have one or more underlyings and notional amounts.
Q2) Which of the following statements best describes the difference between U.S.GAAP and IFRS with respect to revenue recognition?
A) IFRS has a substantial amount of industry specific guidance for revenue recognition.
B) IFRS revenue recognition is not consistent with U.S. GAAP in principle.
C) There are subtle differences in the wording of U.S. GAAP as compared with IFRS.
D) IFRS has four criteria and U.S. GAAP has five conditions for revenue recognition.
Q3) When cash collectibility is uncertain,a firm using the ____________________ method recognizes revenue as it collects portions of the selling price in cash.
Q4) ___________________________________ is primarily a question of timing.
Q5) What are the foiur disclosures required by US.GAAP relating to income taxes?
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11
Chapter 10: Forecasting Financial Statements
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Q1) As an analyst it is important when projecting sales to make estimates about future changes in sales volume.Compare how you might make estimates about future sales value for a company in a mature industry and one in a rapidly growing industry.
Q2) For some types of assets,such as accounts receivable,asset growth typically ____________________ future sales growth.
Q3) Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity.Which of the following types of companies would most likely be able to increase prices?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to experience technological improvements in its production process.
D) A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.
Q4) If a firm operates at less then full capacity then price _______________________ are not likely
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Conceptually,why should an analyst expect the dividends valuation approach to yield equivalent value estimates to the valuation approach that is based on free cash flows available to be distributed to common equity shareholders?
Q2) If dividend projections include the effect of inflation,then the discount rate used should be a ____________________ rate.
Q3) The historical discount rate of the firm may be a good indicator of the appropriate discount rate to apply to the firm in the future,when all of the following conditions hold true except:
A) The current risk of the firm is the same as the expected future risk of the firm.
B) Expected future interest rates are likely to equal current interest rates.
C) The existing capital structure of the firm is the same as the expected future capital structure of the firm.
D) The current mix of debt and equity financing is equal.
Q4) An analyst wants to value the common shareholders' equity of Bridgetron,compute the relevant cost of capital that should be used.
Q5) Provide the rationale for using expected dividends in a valuation model.
Q6) Why are dividends value-relevant to common equity shareholders?
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) If an analyst wants to value a potential investment in the common stock equity of a firm,the analyst should discount the projected free cash flows at the A) required return on equity capital
B) weighted average cost of capital
C) risk free rate
D) market risk premium
Q2) One advantage of the free cash flow valuation method is cash is the medium of exchange and therefore is a fundamental source of ________________________
Q3) Explain "free" cash flows.Describe which types of cash flows are free and which are not.How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?
Q4) The conceptual framework for free cash flows separates the balance sheet equation into the following categories:
A) CA + LT A = CL + LT L + SE
B) OA + FA = OL + FL + SE
C) OA + FA = OL + FL + OSE + FSE
D) Non-FA + FA = Non-FL + FL + SE
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) The residual income_____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.
Q2) If the firm competes in a very competitive,mature industry,what effect will competitive conditions have on residual income for the firm and others in the industry? Now suppose the firm holds a competitive advantage in an industry,but the advantage is not likely to be sustainable for more than a few years because of the potential for entry in the industry.As the firm's competitive advantage diminishes,what effect will that have on that firm's residual income?
Q3) Compute the value of Jarrett Corp.on January 1,2011,using the residual income valuation model.Use the half-year adjustment.
A) $112,768
B) $185,329
C) $195,540
D) $133,624
Q4) The foundation for residual income valuation is the classical
Q5) What is meant by the term clean surplus accounting?
Q6) What is the rationale for using expected earnings as a basis for valuations?
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) All of the following are economic factors that can cause a firm's price-earnings ratio to be higher than that of other firms in the same industry except:
A) when investors expect that the firm's strategy enables it to generate and sustain greater profitability for a given cost of equity capital
B) when the firm earns the same profitability but with lower risk and, therefore, a lower cost of equity capital
C) a firm's business model that enables it to generate faster growth in earnings provided the growth creates positive residual ROCE
D) a firm's business model that results in slower growth in earnings and this creates negative residual ROCE
Q2) What is the value of reverse engineering stock prices? How does the process work?
Q3) What is a price differential and how is it computed? What information does a price differential provide to an analyst?
Q4) The PEG ratio does not take into account differences in ____________________ and ________________________________________ across firms.
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