Financial Accounting II
Mock Exam
Course Introduction
Financial Accounting II builds upon the foundational principles introduced in Financial Accounting I, delving deeper into the complex areas of financial reporting and analysis. The course focuses on advanced topics such as investments, revenue recognition, accounting for income taxes, pensions, leases, and the preparation and interpretation of cash flow statements. Students will learn to apply accounting standards to a variety of business transactions and develop skills to critically analyze financial statements. Emphasis is placed on the ethical considerations and regulatory environment influencing financial reporting. Through case studies and real-world examples, students gain practical experience necessary for professional accounting roles.
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) How does the value of an audit affect financial statements?
Answer: Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations.
Q2) Conservatism is a desired qualitative characteristic of accounting information.
A)True
B)False
Answer: False
Q3) Gains are:
A)Inflows from selling a product or service to a customer.
B)Increases in equity resulting from transfers of assets to the company from owners.
C)Increases in equity from peripheral transactions of an entity.
D)None of these.
Answer: C
Q4) How does SFAC No. 157 define fair value?
Answer: Fair value is defined as the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
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Chapter 2: Review of the Accounting Process
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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) Describe what is meant by unearned revenues and give two examples.
Answer: Unearned revenues are created when a company receives cash from a customer for goods or services that will be provided in a future period. Examples include magazine subscriptions received in advance by a publishing firm or rent received in advance by a property leasing firm. A liability exists because of the obligation to provide the service.
Q3) When converting an income statement from a cash basis to an accrual basis, expenses:
A)Exceed cash payments to suppliers.
B)Equal cash payments to suppliers.
C)Are less than cash payments to suppliers.
D)May exceed or be less than cash payments to suppliers.
Answer: D
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Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) Subsequent events are significant developments that take place after a firm's year-end, and after the financial statements are issued.
A)True
B)False
Answer: False
Q2) HHF's times interest earned ratio is:
A)3.47.
B)1.73.
C)2.47.
D)10.0.Times interest earned ratio:125/$36 = 3.47
Answer: A
Q3) The compensation of top executives is disclosed in the proxy statement.
A)True
B)False
Answer: True
Q4) Compute the return on shareholders' equity ratio for Marjoram Company.
Answer: $73,080 / ($70,000 + 157,000) = 32% Return on shareholders' equity
Q5) Compute the times interest earned ratio for Marjoram Company.
Answer: ($73,080 + 31,320 + 11,000) /$11,000 = 10.49 Times interest earned ratio
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Chapter 4: The Income Statement and Statement of Cash Flows
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Q1) Explain, using an example, how a company can use earnings management and justify it by conservatism.
Q2) Briefly describe the difference between U.S. GAAP and International Accounting Standards in the determination of what constitutes a component of the entity requiring separate reporting as a discontinued operation.
Q3) On November 1, 2009, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to SFAS No. 144. The disposal of the division was expected to be concluded by April 30, 2010. On December 31, 2009, the company's year-end, the following information relative to the discontinued division was accumulated: In its income statement for the year ended December 31, 2009, Jamison would report a before-tax loss on discontinued operations of:
A)$ 65 million.
B)$ 50 million.
C)$130 million.
D)$145 million.
Q4) List at least four operating activities that would be reported in the statement of cash flows for Wal-Mart. Assume the use of the direct method.
Q5) Briefly explain when and why intraperiod tax allocation is necessary.
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Chapter 5: Income Measurement
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Q1) Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment method and the cost recovery method.
A)True
B)False
Q2) Merchandise sold FOB shipping point indicates that:
A)The seller pays the freight.
B)The buyer holds title after the merchandise leaves the seller's location.
C)The common carrier holds title until the merchandise is delivered.
D)The sale is not consummated until the merchandise reaches the point to which it is being shipped.
Q3) In 2009, Reliable would recognize gross profit of:
A)$ 0.
B)$ 6,000.
C)$ 5,000.
D)$10,000.
Q4) Assume that McCombs uses the completed contract method for revenue recognition.
Required: Compute the amount of gross profit recognized by McCombs during 2008 and 2009.
Q5) Its inventory turnover ratio for 2009.
Page 7
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Chapter 6: Time Value of Money Concepts
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Q1) 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.
Q2) Rosie's Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?
A)$25,750.
B)$29,761.
C)$30,139.
D)$25,500.$300,000 9.95400* = $30,139 *PVA of $1: n=12; i=3%
Q3) Briefly describe the difference between simple interest and compound interest.
Q4) The total cash interest payments in 2009 for these notes.
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) Rahal's 2009 bad debt expense is:
A)$2,100.
B)$2,340.
C)$4,080.
D)None of these is correct.The correct answer is:
Q2) During Bricker Company's first year of operations, credit sales totaled $200,000 and collections on credit sales totaled $145,000. Bricker estimates that $1,000 of its ending accounts receivable balance will not be collected. By year-end, Bricker had written off $330 of specific accounts as uncollectible.
Required:
1. Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense.
2. Show the year-end balance sheet presentation for accounts receivable.
Q3) The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a company in managing its investment in receivables.
A)True
B)False
Q4) Describe some key elements of an internal control system for cash.
Q5) Define what it is meant by internal control.
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Chapter 8: Inventories: Measurement
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Q1) Thompson's 2009 inventory turnover ratio is:
A)3.91.
B)4.00.
C)4.88.
D)5.00.$336,000 [($82,000 + 86,000) 2] = 4.00
Q2) Ending inventory using the average cost method is:
A)$ 650.
B)$1,000.
C)$ 707.
D)$ 600.[(40 $100) + (70 $80) + (170 $60)] = $19,800 280 units = $70.71 per unit 10 units $70.71 = $707 (rounded)
Q3) Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a periodic inventory system.
Q4) What is Nu's net income if it elects LIFO?
A)$288.
B)$144.
C)$240.
D)$480.
Q5) Briefly explain the advantages of dollar-value LIFO (DVL).
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Chapter 9: Inventories: Additional Issues
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Q1) In applying LCM, market cannot be:
A)Less than net realizable value.
B)Greater than the normal profit.
C)Less than the normal profit margin.
D)Greater than net realizable value.
Q2) Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2008 (its base year). Its beginning inventory for 2009 was $36,000 at cost and $72,000 at retail prices. At the end of 2009, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2009 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/09 balance sheet?
A)$64,800
B)$72,000
C)$120,000
D)It can't be determined with the given informations You would need to know the retail price index for 2009 transactions relative to the base year to make this computation.
Q3) Net realizable value is selling price less costs of completion and disposal.
A)True
B)False
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Page 11
Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) Interest capitalized for 2010 was:
A)$104,625.
B)$ 86,805
C)$ 87,875.
D)$ 67,500.
Q2) The capitalization period for a self-constructed asset ends either when the asset is substantially complete and ready for use or when interest costs no longer are being incurred.
A)True
B)False
Q3) Why would an oil company argue to use the full-cost method of accounting for oil and gas exploration costs?
Q4) What is the amount of interest that Crocus should capitalize in 2008, using the specific interest method?
A)$1.90 million
B)$1.95 million
C)$2.96 million
D)None of these is correct.Average expenditures for 2008: ($54 million 6/6) + $22 million 3/6) = $65 million.The interest is: $65 million .06 6/12 = $1.95 million.
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) Using the double-declining balance method, depreciation for 2010 and book value at December 31, 2010, would be:
A)$10,000 and $5,000.
B)$10,000 and $10,000.
C)$11,250 and $6,250.
D)$11,250 and $11,250.Depreciation in 2010 = [($45,000 (45,000 50%)] 50% = $11,250 Book value, 12/31/10 = $45,000 22,500 11,250 = $11,250
Q2) Asset C3PO has a depreciable base of $16.5 million and a service life of 10 years. What would the accumulated depreciation be at the end of year five under the sum-of-the-years' digits method?
A)$ 4.5 million.
B)$8.25 million.
C)$ 12 million.
D)None of these is correct.$16.5 million [(10 + 9 + 8 + 7 + 6)/55] = $12 million
Q3) Required:
Compute depreciation for 2009 and 2010 and the book value of the drill press at December 31, 2009 and 2010, assuming the straight-line method is used.
Q4) Briefly differentiate between activity-based and time-based allocation methods.
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Page 13
Chapter 12: Investments
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Q1) Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet, depending upon their maturity dates.
A)True
B)False
Q2) Consolidated financial statements are prepared when one company has:
A)Accounted for the investment using the equity method.
B)Accounted for the investment as securities available for sale.
C)Control over another company.
D)None of these is correct.
Q3) If the fair value of an available-for-sale investment declines for a reason that is viewed as "other than temporary",
A)the investment is not written down to fair value.
B)the investment is written down to fair value, and the impairment loss is recognized in net income.
C)the investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income.
D)the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.
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Chapter 13: Current Liabilities and Contingencies
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Q1) Identify and define the three classifications prescribed by SFAS No. 5 to identify the range of possibilities for the likelihood of a confirming event for contingent liabilities. Describe the accounting action to be taken for each term.
Q2) What was General's coupon liability as of December 31, 2009?
A)$7.5 million.
B)$13.5 million.
C)$16.5 million.
D)$21.0 million.100 million $.30 70% = $21 million $21 million (45 million $.30) = $7.5 million
Q3) Oklahoma Oil Corp. paid interest of $785,000 during 2009, and the interest payable account decreased by $125,000. What was interest expense for the year?
A)$890,000.
B)$660,000.
C)$555,000.
D)$785,000.
Q4) Define and distinguish between current and noncurrent liabilities.
Q5) How are customer advances and refundable deposits similar and yet different?
Q6) Define a loss contingency and give two examples that almost always are accrued.
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Chapter 14: Bonds and Long-Term Notes
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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) Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.
A)True
B)False
Q3) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to debt and equity for preferred stock?
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Chapter 15: Leases
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Q1) When accounting for a nonoperating lease, the lessee records the leased asset at the present value of the minimum lease payments or the asset's fair value, whichever is lower.
A)True
B)False
Q2) On December 31, 2009, Perry Corporation leased equipment to Admiral Company for a 5-year period. The annual lease payment, excluding executory costs is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2009. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2009, by what amount will Perry's pretax earnings increase from this lease?
A)$20,000.
B)$24,000.
C)$28,500.
D)$40,000.
Q3) Discuss the economic advantages of leasing.
Q4) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to classifying a lease as a capital lease?
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Chapter 16: Accounting for Income Taxes
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Q1) The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $150,000 at December 31, 2009. This was a result of differences between straight line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 30% for 2009 and 40% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2009, balance sheet as:
A)A liability of $45,000.
B)A liability of $60,000.
C)An asset of $45,000.
D)An asset of $60,000.$150,000 40%
Q2) For its first year of operations Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%.
What should Tringali report as its income tax expense for its first year of operations?
A)$120,000.
B)$114,000.
C)$106,000.
D)$8,000.
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Page 18
Chapter 17: Pensions and Other Postretirement Benefits
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Q1) With respect to Ralph, what is Oregon's expected postretirement benefit obligation (EPBO) at the end of 2009, rounded to the nearest dollar?
A)$137,045
B)$205,593
C)$246,810
D)$768,000
Q2) Differentiate between a defined contribution pension plan and a defined benefit pension plan.
Q3) Which of the following is a correct statement concerning the reporting of the pension plan on the face of the employer's balance sheet?
A)Only the plan assets are separately reported.
B)Only the PBO is separately reported.
C)Both the PBO and the plan assets are separately reported.
D)Neither the PBO nor the plan assets is separately reported.
Q4) Recording pension expense might:
A)Decrease the PBO.
B)Increase current assets.
C)Increase the prior service cost-AOCI.
D)Increase the net loss-AOCI.
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Chapter 18: Shareholders Equity
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Q1) Preferred stock is called preferred because it usually has two preferences. These preferences relate to:
A)Dividends and voting rights.
B)Par value and dividends.
C)The preemptive right and voting rights.
D)Assets at liquidation and dividends.
Q2) Details of each class of stock must be reported:
A)On the face of the balance sheet only.
B)In disclosure notes only.
C)On the face of the balance sheet or in disclosure notes.
D)On the face of the balance sheet and in disclosure notes.
Q3) Share issue costs refer to the costs of obtaining the legal, promotional, and accounting services necessary to effect the sale of shares. The costs reduce the net cash proceeds from selling the shares and thus paid-in capital - excess of par, and are:
A)not recorded separately.
B)recorded as an asset.
C)recorded as a liability.
D)amortized over time.
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Page 20
Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Stock option plans give employees the option to purchase (a) a specified number of shares of the firm's stock, (b) at a specified price, (c) during a specified period of time. One of the most heated controversies in standard-setting history has been the debate over the amount of compensation to be recognized as expense for stock options. At issue is how the value of stock options is measured, which for most options determines whether any expense at all is recognized. The opposition included corporate executives, auditors, members of Congress, and the SEC.
Required:
Describe the primary objections of critics of the FASB's eventually successful attempt to require expensing of the fair value of the options.
Q2) Which of the following is not a potential common stock?
A)Convertible preferred stock.
B)Convertible bonds.
C)Stock rights.
D)Participating preferred stock.
Q3) No time-weighting of contingently issuable shares is required when computing basic EPS.
A)True
B)False
Page 21
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Chapter 20: Accounting Changes
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Q1) On January 1, 2009, Randall Construction decided to change from the completed contract method of accounting for long-term construction contracts to the percentage-of-completion method. The company will continue to use the completed contract method for tax purposes. The tax rate is 30%. The following are all relevant data concerning the change.
Required:
(1.) Prepare the journal entry to record the accounting change.
(2.) Determine the net income to be reported in the 2009-2008 comparative income statements.
\[\begin{array}{l}\begin{array} { l c c }
&\text { Income Before Income Tax }\\
\text { Year } & \text { \% of Completion } & \text { Completed Contract } \\
\hline \text { Before 2008 } & \$ 500,000 & \$ 300,000 \\ 2008 & 400,000 & 250,000 \\
2009 & 450,000 & 400,000
\end{array}
\end{array}\]
Q2) If inventory is understated at the end of 2008 and the error is not discovered, how will net income be affected in 2009?
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Page 22
Chapter 21: The Statement of Cash Flows
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Q1) Which of the following is reported as an investing activity in the statement of cash flows?
A)Sale of a subsidiary.
B)Issuance of a long-term promissory note.
C)Sale of treasury stock.
D)Purchase of highly liquid, short-term investments with excess cash.
Q2) Cash equivalents have each of the following characteristics except:
A)Little risk of loss.
B)Highly liquid.
C)Maturity of at least 3 months.
D)Short-term.
Q3) Property dividends distributed are reported in connection with a statement of cash flows as:
A)A financing activity.
B)An investing activity.
C)A noncash activity.
D)Not reported in the statement of cash flows.Property dividends represent a significant noncash investing and financing activity.
Q4) Is depreciation a source of cash? Explain.
Q5) Did accounts receivable increase or decrease during 2009?
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Chapter 22: Appendix a Derivatives
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Q1) If a derivative is not designated as a hedging instrument, or doesn't qualify as one, any gain or loss from fair value changes is not recognized immediately in earnings.
A)True
B)False
Q2) An interest rate swap to synthetically convert floating rate debt into fixed rate debt would:
A)Represent a cash flow hedge.
B)Represent a fair value hedge.
C)Represent a foreign currency hedge.
D)Not qualify as a hedge.
Q3) A gain or loss from a cash flow hedge is recognized immediately in earnings.
A)True
B)False
Q4) If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position.
A)True
B)False
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