Financial Accounting
Final Exam
Course Introduction
Financial Accounting introduces students to the fundamental principles and practices of accounting used to prepare and interpret financial statements. The course covers the accounting cycle, including recording transactions, adjusting entries, preparing balance sheets, income statements, and cash flow statements. Emphasis is placed on understanding generally accepted accounting principles (GAAP), the role of ethical considerations in financial reporting, and how financial statements are used by external stakeholders such as investors, creditors, and regulators to make informed business decisions. Through practical exercises and real-world examples, students develop the skills necessary to analyze and communicate an organizations financial health.
Recommended Textbook
Intermediate Accounting 9th Edition by J.
David Spiceland
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Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) Expenses
A)Net assets.
B)Transfers of resources in exchange for common and preferred stock.
C)Claims of creditors against the assets of a business.
D)Outflows of resources to generate revenues.
E)Cash dividends.
Answer: D
Q2) Equity is a residual amount representing the owner's interest in the assets of the business.
A)True
B)False
Answer: True
Q3) The assumption that in the absence of contrary information a business entity will continue indefinitely is the:
A) Periodicity assumption.
B) Entity assumption.
C) Going concern assumption.
D) Historical cost assumption.
Answer: C
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) The accounting processing cycle:
A) Is a three-wheeled vehicle used to deliver audit papers to clients.
B) deals only with internal transactions.
C) Is the process of bringing the company's financial information up to date before preparing the financial statements.
D) Is the process used to identify, analyze, record, and summarize transactions and prepare financial statements.
Answer: D
Q2) Debits increase asset accounts and decrease liability accounts.
A)True
B)False
Answer: True
Q3) Buildings and equipment (B&E)
Answer: \[\begin{array} { | l | c | c | }
\hline & \text { Effect } & \text { Classification } \\
\hline \text { Buildings and equipment } ( B \& E ) & 1 & 2 \\ \hline \end{array}\]
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Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Shareholders' equity
Answer: Total debt + Total equity = Total assets = $1,400,000
Debt/Equity = 1.5; therefore, Total debt = 1.5 Equity
1.5 Equity + 1 Equity = $1,400,000
2.5 Equity = $1,400,000; Shareholders' equity = $560,000
Q2) Which of the following is not a required disclosure for related-party transactions?
A) The nature of the relationship.
B) A description of the transactions.
C) The amounts due from or to related parties.
D) The impact of the transactions on current year's income.
Answer: D
Q3) Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal places.
Answer: ($19,000 + 35,000 + 48,400) /$108,400 = .94 Acid-test ratio
Q4) The compensation of top executives is disclosed in the proxy statement.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Q1) Required: Prepare a 2018 separate statement of comprehensive income for Rollins Inc.
Q2) Reporting comprehensive income according to International Financial Reporting Standards (IFRS) can be accomplished by each of the following methods except:
A) in the statement of shareholders' equity.
B) a combined statement of income and comprehensive income.
C) in two separate statements.
D) the entity may choose either a combined statement of income and comprehensive income or two separate statements.
Q3) 152) Earnings per share
153) Comprehensive income
154) Restructuring costs
155) Multiple-step income statement
156) Foreign currency translation adjustment
157) Change in estimate
158) Nonoperating income
159) Change in accounting principle
160) Discontinued operations
161) Earnings quality
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Chapter 5: Revenue Recognition
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Q1) Briefly explain how a company that recognized revenue over time by estimating percentage of completion using a cost-to-cost ratio could manage earnings upward to meet a profit projection. What sort of ethical problems could result from that earnings management?
Q2) Which of the following statement is most true?
A) Variable consideration means that the transaction price is uncertain.
B) Basing an estimate on the most likely amount is always superior to basing an estimate on the expected value.
C) The most likely estimated amount is estimated by multiplying the possible amounts with their respective probability of occurrence.
D) When the transaction price is uncertain, revenue should not be recognized.
Q3) Which of the following is not one of the five steps for recognizing revenue?
A) Recognize revenue when (or as) each performance obligation is satisfied.
B) Determine the transaction price.
C) Allocate the transaction price to each performance obligation.
D) Estimate variable consideration.
Q4) Assume that Beavis recognizes revenue upon completion of the project.
Required:
Compute the amount of gross profit recognized during 2017 and 2018.
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:
A) Present value of an annuity due of $1.
B) Future value of an annuity due of $1.
C) Present value of an ordinary annuity of $1.
D) Future value of an ordinary annuity of $1.
Q2) How much must be invested now at 9% interest to accumulate to $10,000 in five years?
A) $9,176.
B) $6,499.
C) $5,500.
D) $5,960.
Q3) Explain how you would compute the imputed interest on cash borrowed at 0% interest when the market rate of interest is 8%.
Q4) Briefly describe the differences between an ordinary annuity, an annuity due, and a deferred annuity.
Q5) Briefly describe the difference between simple interest and compound interest.
Q6) The total cash interest payments in 2018 for these notes.
Page 8
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the end of July, the balance in the general ledger checking account was $2,750 and the bank balance on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited were $400. The bank statement revealed that a check written for $120 was incorrectly recorded by Brockton as a $220 disbursement. The bank statement listed service charges and NSF check charges totaling $150. The corrected cash balance is:
A) $2,270.
B) $2,550.
C) $2,470.
D) $2,700.
Q2) The income statement approach to calculating bad debt expense should not be used if it results in a carrying value of accounts receivable that is materially different from what would be obtained under a balance sheet approach.
A)True
B)False
Q3) Explain briefly how IFRS and U.S. GAAP differ in determining whether a transfer of an accounts receivable qualifies as a sale.
Q4) Define what it is meant by internal control.
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Chapter 8: Inventories: Measurement
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Q1) Tiger Inc. adopted dollar-value LIFO on January 1, 2018, when the inventory value was $360,000 and the cost index was 1.25. On December 31, 2018, the inventory was valued at year-end cost of $395,000 and the cost index was 1.30. Tiger would report a LIFO inventory of:
A) $410,800.
B) $374,400.
C) $379,808.
D) $380,600.
Q2) Dollar-value LIFO eliminates the risk of LIFO liquidations.
A)True
B)False
Q3) Shipping charges on outgoing goods are included in either cost of goods sold or selling expenses.
A)True
B)False
Q4) Required: Compute the January 31 ending inventory and cost of goods sold for January, assuming Random Creations uses average cost and a perpetual inventory system.
Q5) Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.
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Chapter 9: Inventories: Additional Issues
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Q1) The market value for purposes of using the lower of cost or market (LCM) method is defined as replacement cost, subject to a ceiling and a floor.
A)True
B)False
Q2) In applying the lower of cost or net realizable value rule, the inventory of rehab supplies would be valued at:
A) $165.
B) $152.
C) $162.
D) $155.
Q3) In applying the lower of cost or net realizable value rule, the inventory of surgical equipment would be valued at:
A) $230.
B) $240.
C) $170.
D) $152.
Q4) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to individual tree products.
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Chapter 10: Property, Plant, and Equipment and Intangible Assets:
Acquisition
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Q1) On January 1, 2018, Laramie Inc. acquired land for $6.2 million. Laramie paid $1.2 in cash and signed a 6% note requiring the company to pay the remaining $5 million plus interest on December 31, 2019. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. For what amount should Laramie record the purchase of land?
A) $6.8 million.
B) $5.0 million.
C) $5.6 million.
D) $6.2 million.
Q2) A company that prepares its financial statements according to International Financial Reporting Standards (IFRS) accounts for a government grant by recognizing revenue for the amount of the grant.
A)True
B)False
Q3) For what amount will Markwell record the purchase of equipment?
A) $761,905.
B) $769,523.
C) $609,523.
D) $800,000.
Q4) Briefly explain how R&D is reported in financial statements.
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Chapter 11: Property, Plant, and Equipment and Intangible
Assets: Utilization and Disposition
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Q1) Required:
Compute depreciation for 2018 and 2019 and the book value of the drill press at December 31, 2018 and 2019, assuming the units-of-production method is used.
Q2) An asset that has an estimated physical life of six years and an estimated service life of four years should be depreciated over:
A) Four years.
B) Five years.
C) Six years.
D) Any of these choices can be chosen by management.
Q3) Depreciation
A)Allocation of cost for plant and equipment.
B)Is a change in accounting estimate.
C)Results from subsequent year correction of a material error.
D)Expenditures made to maintain a given level of benefits from an asset.
E)Generate declining amounts of depreciation over time.
Q4) Any method of depreciation should be both systematic and rational.
A)True
B)False
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Q5) Briefly differentiate between activity-based and time-based allocation methods.
Chapter 12: Investments
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Q1) Sometimes companies change the extent to which they can significantly influence an investee, such that they have to change to the equity method or from the equity method of accounting for the investment.
Required:
Describe the adjustments necessary when a company (1) changes to the equity method from another method, and (2) when a company changes from the equity method to another method.
Q2) A weakness of ________ is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized holding gains or unrealized holding losses.
A) the available-for-sale approach
B) the trading-securities approach
C) both the available-for-sale and trading-securities approaches
D) neither the available-for-sale and trading-securities approaches
Q3) What was the after-tax realized gain or loss on the sale of available-for-sale securities in 2018? Assume a 40% tax rate.
Q4) Prepare appropriate entry(s) at December 31, 2018, and indicate how the scenario will affect net income, OCI, and comprehensive income.
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Page 14
Chapter 13: Current Liabilities and Contingencies
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Q1) Which of the following is not true about deferred revenue?
A) Deferred revenue with respect to gift cards is recognized as revenue when the gift cards expire.
B) Deferred revenue is a liability.
C) Deferred revenue is recognized on credit sales when collectibility can be estimated.
D) Customer prepayments typically require recognition of deferred revenue.
Q2) Texon Oil is being sued for price fixing and environmental damage. The litigation started this year and is expected to last five years. There is no doubt that Texon is guilty, but the settlement cost will be between $3 billion and $22 billion. Briefly explain how Texon would address this in its current year financial statements.
Q3) Which of the following may create employer liabilities in connection with their payrolls?
A) Employee withholding taxes.
B) Employee voluntary deductions.
C) Employee fringe benefits.
D) All of these answer choices are correct.
Q4) What is the point of the last paragraph of the Goodday disclosure? Explain in terms of authoritative GAAP.
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Chapter 14: Bonds and Long-Term Notes
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Q1) When bonds are retired prior to their maturity date:
A) GAAP has been violated.
B) The issuing company probably will report an ordinary gain or loss.
C) The issuing company probably will report a gain.
D) The issuing company will report a non-operating gain or loss.
Q2) Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond book value, respectively?
A) Understated, understated.
B) Understated, overstated.
C) Overstated, understated.
D) Overstated, overstated.
Q3) Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:
A) The reduction in the premium is smaller with each successive interest payment.
B) The outstanding balance (book value) of the bonds increases eventually to face value.
C) The total effective interest over the term to maturity is equal to the amount of the premium plus the total cash interest paid.
D) The interest expense is less with each successive interest payment.
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Chapter 15: Leases
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Q1) Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year in the amount of $6,309,410. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%.
Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the journal entry for Diablo Company at the beginning of the lease.
2. Prepare the journal entry for the first lease payment (ignore amortization).
3. Prepare the journal entry for the second lease payment (ignore amortization).
Q2) On January 1, 2018, Green Co. recorded a right-of-use asset of $270,360 in an operating lease. The lease calls for ten annual payments of $40,000 at the beginning of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2018, will be:
A) $270,360.
B) $253,396.
C) $243,324.
D) $230,360.
Q3) What is a purchase option? How does it affect accounting for a lease?
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Chapter 16: Accounting for Income Taxes
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Q1) Assuming no other deferred tax items exist in a particular year, a net operating loss (NOL) carryforward can only be result in the balance sheet at the end of the NOL year showing:
A) A receivable under current assets for an income tax refund.
B) A current deferred tax asset.
C) A noncurrent deferred tax asset.
D) Both a current and a noncurrent deferred tax asset.
Q2) Under current tax law, generally a net operating loss may be carried back:
A) 2 years.
B) 5 years.
C) 15 years.
D) 20 years.
Q3) A temporary difference originates in one period and reverses, or turns around, in one or more later periods.
A)True
B)False
Q4) Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect. How are future deductible amounts recognized in the financial statements?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) Which of the following is not a potential component of pension expense?
A) Return on plan assets.
B) Prior service cost.
C) Retiree benefits paid.
D) Gains and losses.
Q2) What was PVE's pension expense for the year?
A) $250.
B) $50.
C) $68.
D) $62.
Q3) Rodeo Corporation amended its defined benefit pension plan on January 31, 2018, to increase retirement benefits earned with each service year. The actuary estimated the prior service cost to be $216,000. Rodeo's 80 present employees are expected to retire at the rate of about 10 each year at the end of each of the next eight years beginning on December 31, 2018.
Required:
Using the service method, calculate the amount of prior service cost to be amortized to pension expense in each of the next eight years.
Q4) Discuss income smoothing as the term relates to pension plans.
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Chapter 18: Shareholders Equity
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Q1) The typical rights of preferred shares usually include:
A) the right to vote.
B) a preference to a predesignated amount of dividends, that is, a stated dollar amount per share or percent of par per share.
C) a preference over common shareholders and lenders in the distribution of assets in the event the corporation is dissolved.
D) the "preemptive right" to maintain one's percentage share of ownership when new shares are issued.
Q2) When preferred stock carries a redemption privilege, the shareholders may:
A) Purchase new shares as they become available.
B) Exchange their preferred shares for common shares.
C) Surrender the preferred shares for a specified amount of cash.
D) Purchase treasury shares ahead of common shareholders.
Q3) Dividends in arrears on cumulative preferred stock are liabilities to be paid at a later date.
A)True
B)False
Q4) What is comprehensive income and how does it differ from net income? Where is it reported in the balance sheet?
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Stock volatility
A)Require(s) compensation expense regardless of condition satisfaction.
B)Date on or after which employees can buy stock with options.
C)An important factor in option pricing models.
D)Date on which options are awarded.
E)The amount paid to convert the option into stock.
Q2) The tax code differentiates between qualified and nonqualified incentive plans. What are the major differences in tax treatment between the two?
Q3) Reacting to opposition to the FASB's "Share-Based Payment" Exposure Draft, Senator Carl Levin stated, "Stock options are the 800-pound gorilla that has yet to be caged by corporate reform." In reference to a bill that would thwart the FASB's position, Senator John McCain said, "This legislation blocking stock option expensing not only undermines FASB's independence, but undermines the effort to restore confidence in our financial markets as well." Discuss what these two senators meant by their statements.
Q4) How is a complex capital structure different from a simple capital structure?
Q5) When the income statement includes discontinued operations, which amounts require per share presentation?
Page 21
Q6) Why are preferred dividends deducted from net income when calculating EPS?
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Chapter 20: Accounting Changes and Error Corrections
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Q1) Mobic Inc. acquired some manufacturing equipment in January 2015 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2018, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2021. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2018, Mobic should:
A) Charge $280,000 in depreciation expense.
B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.
C) Make an adjustment to retained earnings for the error in measuring depreciation during 2015-2017.
D) None of these answer choices are correct.
Q2) Name and briefly describe the three categories of accounting changes.
Q3) A change in reporting entity requires note disclosure in all subsequent financial statements prepared for the new entity.
A)True
B)False
Q4) How may accounting changes detract from accounting information?
Q5) Describe briefly the approaches of reporting changes in accounting principles.
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Chapter 21: The Statement of Cash Flows Revisited
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Q1) Which of the following is not true regarding the statement of cash flows?
A) The indirect method derives cash flows indirectly by starting with sales revenue and "working backwards" to convert that amount to a cash basis.
B) Noncash transactions sometimes are reported in conjunction with the statement.
C) Either the direct or the indirect method can be used to calculate and report the net cash increase or decrease from operating activities.
D) The statement of cash flows provides information about cash flows that the other statements either do not provide or provide only indirectly.
Q2) Kinney reported cost of goods sold of $168,114,150 in its fiscal 2018 income statement. Compute Kinney's net inventory purchases during the year.
Q3) (a.) What is the most significant change in operating cash outflow activity in 2018 relative to 2017?
(b.) What balance sheet accounts would likely have changed during 2018 in relation to the cash flow change that you identify in (a)?
Q4) Did accounts receivable increase or decrease during 2018? Explain.
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