Financial Accounting II
Mock Exam
Course Introduction
Financial Accounting II builds upon the foundational concepts introduced in Financial Accounting I, focusing on more advanced accounting principles and procedures. The course delves into topics such as the accounting for liabilities, equity, income taxes, pensions, leases, and investments, as well as the preparation and analysis of cash flow statements. Students learn how to apply relevant accounting standards and regulations to complex financial transactions, interpret financial statements for decision-making purposes, and understand the ethical and legal considerations involved in financial reporting. The course equips students with the skills necessary to analyze real-world financial scenarios and effectively communicate financial information to stakeholders.
Recommended Textbook
Intermediate Accounting IFRS 6th Edition by
J. David Spiceland
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Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) One of the elements that many believe distinguishes a profession from other occupations is the acceptance by its members of a responsibility for the interests of those it serves, often articulated in:
A)Its conceptual framework.
B)Its code of ethics.
C)Federal laws.
D)State laws.
Answer: B
Q2) Materiality can be affected by the dollar amount of an item, the nature of the item, or both.
A)True
B)False
Answer: True
Q3) Gains or losses result, respectively, from the disposition of business assets for greater than, or less than, their book values.
A)True
B)False
Answer: True
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) When the amount of revenue collected in advance decreases during an accounting period:
A)Accrual-basis revenues exceed cash collections from customers.
B)Accrual-basis net income exceeds cash-basis net income.
C)Accrual-basis revenues are less than cash collections from customers.
D)Accrual-basis net income is less than cash-basis net income.
Answer: A
Q2) When converting an income statement from a cash basis to an accrual basis, cash received for services:
A)Exceed service revenue.
B)May exceed or be less than service revenue.
C)Is less than service revenue.
D)Equals service revenue.
Answer: B
Q3) Unearned revenues
Answer: \(\begin{array}{ccc} & \text { Effect } & \text { Classification } \\ \text { Unearned revenues } & 2 & 3 \end{array}\)
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Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Disclosure notes would not include:
A)Depreciation methods used and estimated useful life.
B)Definition of cash equivalents.
C)Details of pension plans.
D)Data to adjust the financial statements so that they are not misleading.
Answer: D
Q2) Lack of long-term solvency refers to:
A)Risk of non-payment relative to liabilities in the capital structure.
B)The length of time before long-term debt becomes due.
C)The ability to refinance long-term debt when it becomes due.
D)Long-term assets.
Answer: A
Q3) A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0.
A)True
B)False
Answer: True
Q4) Altoid Co.'s long term debt-to-equity ratio
Answer: Long term debt-to-equity $600/$1,150 = .52
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Chapter 4: The Income Statement and Statement of Cash Flows
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Sample Questions
Q1) Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
A)Operating, $2,000; financing $16,000.
B)Operating, $0; financing $18,000.
C)Operating, $12,000; financing $6,000.
D)Operating, $18,000; financing $0.
Q2) Howard Co.'s 2009 income from continuing operations before income taxes was $280,000. Howard Co. reported a before-tax extraordinary gain of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2009, Howard Co. would show the following line-item amounts for net income and income tax expense:
A)$198,000 and $112,000.
B)$230,000 and $92,000.
C)$330,000 and $132,000.
D)$198,000 and $79,000.
Q3) Give an example of a major investing activity cash outflow that would be reported in the statement of cash flows for a manufacturing company.
Q4) Briefly explain when and why intraperiod tax allocation is necessary.
Page 6
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Chapter 5: Income Measurement
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Q1) Using the information provided above, briefly summarize the operating performance of Uncle Joe's relative to its benchmark competitors.
Q2) In its December 31, 2009, balance sheet, Rigsby would report:
A)Realized gross profit of $100,000.
B)Deferred gross profit of $100,000.
C)Installment receivables (net) of $3,200,000.
D)Installment receivables (net) of $4,000,000.
Q3) The first disclosure note to the financial statements is typically the summary of significant accounting policies.
A)True
B)False
Q4) Return on Shareholders' Equity is increased if a firm can maintain its return on assets but increase its leverage.
A)True
B)False
Q5) Its return on stockholders' equity for 2009.
Q6) Assume that Beavis uses the percentage-of-completion method for revenue recognition.
Required: Compute the amount of gross profit recognized during 2008 and 2009.
Page 7
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?
A)$32,617.
B)$29,924.
C)$27,250.
D)$26,800.FVA = $5,000 x 5.9847* = $29,924 *FVA of $1: n=5; i=9%
Q2) Davenport Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what lump sum at employment date would make her indifferent between the two options?
A)$60,000.
B)$62,867.
C)$72,867.
D)$80,000.The lump sum equivalent would be $30,000 + the present value of $50,000 where n=2 and i=8%.That is, $30,000 + ($50,000 x 0.85734 from Table 2) = $72,867.
Q3) Briefly describe the difference between simple interest and compound interest.
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8
Chapter 7: Cash and Receivables
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Q1) Explain the reason that Halliburton indicates that its receivables include notes with varying interest rates totaling $12 million at December 31. What significance does this have to the reader?
Q2) If HP is using the balance sheet approach to determining bad debt expense, what percentage of year-end receivables did it use in 2007 and 2006, respectively?
Q3) Huckabee's 2009 receivables turnover is:
A)3.69.
B)5.00.
C)5.26.
D)3.16.
Q4) Long-term notes receivable issued for noncash assets at an unrealistically low interest rate will be:
A)Discounted at an imputed interest rate.
B)Recorded at the contract amount.
C)Recorded at an amount equal to the future cash flows.
D)Accounted for on the installment basis.
Q5) How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?
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Chapter 8: Inventories: Measurement
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Sample Questions
Q1) Bunker Auto Supply purchased merchandise on January 4, 2009, at a price of $70,000, subject to credit terms of 2/10, n30. Bunker uses the gross method for recording purchases and uses a periodic inventory system.
Required:
1. Prepare the journal entry to record the purchase.
2. Prepare the journal entry to record the payment of one-half the invoice amount on January 11, 2009.
3. Prepare the journal entry to record the balance of the amount due on February 2, 2009.
Q2) Tiger Inc. adopted dollar-value LIFO on January 1, 2009, when the inventory value was $360,000 and the cost index was 1.25. On December 31, 2009, 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.
Q3) 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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Sample Questions
Q1) In applying the LCM rule, the inventory of apparel would be valued at:
A)$108,000.
B)$ 90,000.
C)$110,000.
D)$115,000.$90,000 designated market value is less than $108,000 cost.
Q2) The average cost-to-retail percentage is:
A)74.5%.
B)55.6%.
C)57.4%.
D)58.7%.55.6%
Cost-to-retail percentage = $155,000 $279,000 = 55.6%
Q3) Briefly explain how a material adjustment to inventory due to application of the lower-of-cost-or-market rule should be reported in the financial statements.
Q4) Estimated ending inventory at cost is:
A)$90,720.
B)$83,920.
C)$91,600.
D)None of these is correct.
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11
Chapter 10: Operational Assets: Acquisition and Disposition
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Sample Questions
Q1) What was the final cost of Dreamworld's warehouse?
A)$2,154,480.
B)$2,143,860.
C)$1,950,000.
D)$1,254,000.
Q2) Ford Inc. exchanged land and $7,500 cash for material handling equipment. The land had a book value of $75,000 and a fair value of $105,000. Assume the exchange has commercial substance.
Required:
Prepare the journal entry to record the exchange.
Q3) Assets acquired in a lump-sum purchase are valued based on:
A)Their assessed valuation.
B)Their relative fair values.
C)The present value of their future cash flows.
D)Their cost plus the difference between their cost and fair values.
Q4) A distinguishing characteristic of intangible assets is the degree of uncertainty about when or if they will provide future benefits.
A)True
B)False
Q5) How are donated assets recorded?
Page 12
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Chapter 11: Operational Assets: Utilization and Impairment
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Sample Questions
Q1) Briefly differentiate between activity-based and time-based allocation methods.
Q2) Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?
A)Straight-line.
B)Units-of-production.
C)Double-declining balance.
D)Sum-of-the-year's digits.
Q3) Depreciation for 2009, using the straight-line method is:
A)$13,500.
B)$15,000.
C)$ 4,500.
D)$ 5,000.($200,000 20,000) 10 3/12 = $4,500
Q4) Compute depreciation for 2009 and 2010 and the book value of the machinery at December 31, 2009 and 2010, assuming double-declining balance method is used.
Q5) The physical life of a depreciable asset sets the lower limit of its service life.
A)True
B)False
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Page 13
Chapter 12: Investments
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Sample Questions
Q1) Matrix, Inc acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2009. The fair value and book value of 25% of Neo's identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2009 Neo recognized net income of $500,000 and paid dividends of $400,000. Neo had a fair market value of $10,000,000 as of December 31, 2009.
Required: Write the journal entries necessary to account for the Neo investment, assuming that Fredo accounts for that investment as (1) an equity method investment, and (2) elects the fair-value option.
Q2) Required:
How much did Arctic Cat actually receive from the sale of available-for-sale securities during 2005?
Q3) Which of the following is not true about derivatives?
A)large losses on derivative investments have been reported in the press.
B)derivatives are so named because their value is derived from some underlying measure.
C)derivatives are useful instruments for managing risk.
D)accounting for derivatives is fully resolved and no additional rules or interpretations are likely.
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Chapter 13: Current Liabilities and Contingencies
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Q1) On November 1, 2009, Ziegler Products issued a $200,000, 9-month, noninterest-bearing note to the bank. Interest was discounted at a 12% discount rate. Required:
1. Prepare the appropriate journal entry by Ziegler to record the issuance of the note.
2. Determine the effective interest rate.
3. Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Ziegler.
4. Prepare the appropriate journal entry on December 31, 2009, to accrue interest expense on the note described in 3. for the 2009 financial statements.
Q2) Identify the major components included in the official definition of a liability as set forth by the FASB.
Q3) Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold.
A)True
B)False
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Chapter 14: Bonds and Long-Term Notes
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Sample Questions
Q1) On January 1, 2009, Club Company purchased 10% bonds, dated January 1, 2009, with a face amount of $20 million. The bonds mature in 2018 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2009.
2. Prepare the journal entry to record the bond purchase by Club on January 1, 2009.
3. Prepare the journal entry to record interest on June 30, 2009, using the straight-line method.
4. Prepare the journal entry to record interest on December 31, 2009, using the straight-line method.
Q2) List at least three ways that bonds may be taken off the market prior to maturity.
Q3) Which of the following indicates the margin of safety provided to creditors?
A)Rate of return on shareholders' equity.
B)Times interest earned ratio.
C)Gross margin.
D)Debt to equity ratio.
Q4) A zero-coupon bond pays no interest. Explain.
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Chapter 15: Leases
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Q1) The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the risks and rewards of ownership occur during the first 75% of an asset's life.
A)True
B)False
Q2) In this situation, Reagan:
A)Is the lessee in a sales type lease.
B)Is the lessee in a capital lease.
C)Is the lessor in a capital lease.
D)Is the lessor in a sales type lease.7 year lease term is > 75% of 9 year useful life.
Q3) On a sale-leaseback transaction, any gain on the "sale" portion of the transaction is recognized immediately.
A)True
B)False
Q4) In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset.
A)True
B)False
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17
Chapter 16: Accounting for Income Taxes
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Q1) How are deferred tax assets and deferred tax liabilities reported in a classified balance sheet?
Q2) Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: Puritan's tax rate is 40% for all years. As of December 31, 2009, Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback. What would Puritan report as net income for 2010?
A)$620,000.
B)$420,000.
C)$250,000.
D)$460,000.
Q3) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?
A)Tax depreciation in excess of book depreciation.
B)Revenue collected in advance.
C)The installment sales method.
D)None of these.
Q4) Indicate why LMC lists Net operating loss carryforwards as a component of deferred tax assets.
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) The following information is related to the defined benefit pension plan of Simpson Company for the year: Assuming no other relevant data exists, what is the pension expense for the year?
A)$ 90,000.
B)$230,600.
C)$121,400.
D)$154,000.
Q2) Fox Company received the following reports on its defined benefit pension plan for the current calendar year: The long-term expected rate of return on plan assets is 8%.
Assuming no other data are relevant, what is the pension expense for the year?
A)$384,000.
B)$360,000.
C)$424,000.
D)$374,000.
Q3) Pension expense and funding amounts are both accounting decisions.
A)True
B)False
Q4) Differentiate between a defined contribution pension plan and a defined benefit pension plan.
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Chapter 18: Shareholders Equity
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Q1) The December 31, 2009, balance sheet of Springer Company included the following: Springer completed the following transactions in 2009 relating to treasury stock:
March 17: Reacquired 5 million shares at $10. May 17: Reacquired 3 million shares at $9.
August 10: Sold 6 million shares at $12.
Required:
Assuming Springer uses the cost method, prepare journal entries to record the foregoing transactions on a FIFO basis.
\(\begin{array}{lr}
\text { Common stock, } 20 \text { million shares outstanding at } \$ 1 \text { par } & \$ 20,000,000 \\
\text { Paid-in capital }- \text { excess of par } & 100,000,000 \\ \text { Retained earnings } & 115,000,000 \end{array}\)
Q2) What is the difference between a stock split and a stock split affected in the form of a stock dividend?
Q3) What is comprehensive income and how does it differ from net income? Where is it reported in the balance sheet?
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Page 20
Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Dublin Inc. had the following common stock record during the current calendar year: A 10% stock dividend was paid on December 1. What is the number of shares to be used in computing basic EPS?
A)2,075,000.
B)2,282,500.
C)2,475,000.
D)2,620,000.
Q2) Morrison Corporation had the following common stock record during the current calendar year: What is the number of shares to be used in computing basic EPS?
A)2,000,000.
B)2,200,000.
C)2,307,500.
D)2,310,000.
Q3) Stock options, rights, and warrants are different from convertible securities in that they:
A)Typically increase cash upon exercise.
B)Usually reduce total assets upon exercise.
C)Often reduce liabilities upon exercise.
D)Normally increase retained earnings upon exercise.
Page 21
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Chapter 20: Accounting Changes
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Q1) B Co. reported a deferred tax liability of $24 million for the year ended December 31, 2008, related to a temporary difference of $60 million. The tax rate was 40%. The temporary difference is expected to reverse in 2010 at which time the deferred tax liability will become payable. There are no other temporary differences in 2008-2010. Assume a new tax law is enacted in 2009 that causes the tax rate to change from 40% to 30% beginning in 2010. (The rate remains 40% for 2009 taxes.) Taxable income in 2009 is $90 million.
Required:
Determine the effect of the change and prepare the appropriate journal entry to record B's income tax expense in 2009. What adjustment, if any, is needed to revise retained earnings as a result of the change?
Q2) Prior years' financial statements are restated when the prospective approach is used.
A)True
B)False
Q3) The after-tax cumulative effect on income is no longer required for changes in accounting principles.
A)True
B)False
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Page 22
Chapter 21: The Statement of Cash Flows
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Q1) Using the direct method, cash received from customers is calculated as sales:
A)Plus an increase in allowance for uncollectible accounts.
B)Minus an increase in allowance for uncollectible accounts.
C)Plus an increase in accounts receivable.
D)Plus a decrease in accounts receivable.
Q2) Hemmer Company reported net income for 2009 in the amount of $40,000. The company's financial statements also included the following: What is net cash provided by operating activities?
A)$38,000.
B)$43,000.
C)$35,000.
D)$48,000.
Q3) Which of the following never requires an outflow of cash?
A)Early extinguishment of debt.
B)Retirement of common stock.
C)Payment of dividends.
D)Amortization of patent.
Q4) What was the net change in cash and cash equivalents experienced by Henchman & Co. during 2008? Was it positive or negative?
Q5) Did accounts receivable increase or decrease during 2009?
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Chapter 22: Appendix a Derivatives
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Q1) The key criterion for qualifying as a hedge is that the hedging relationship must be highly effective in achieving offsetting changes in fair values or cash flows based on the hedging company's specified risk management objective and strategy. Explain what happens if a swap is used ineffectively to hedge the fair value of a note.
Q2) The key criterion for qualifying as a hedge is that the hedging relationship:
A)Must be highly effective in achieving offsetting changes in fair values or cash flows.
B)Must have predictable results.
C)Must have fixed outcomes.
D)None of these.
Q3) How is a gain or a loss from a cash flow hedge reported when it initially occurs? When is it reported in the income statement?
Q4) To be adequately informed about the adequacy of a company's risk management, investors and creditors need information about strategies for holding derivatives and specific hedging activities. Toward that end, extensive disclosure requirements are required. Identify several of these requirements.
Q5) What is a futures contract? A financial futures contract? Provide an example of each.
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