Financial Accounting II
Test Questions
Course Introduction
Financial Accounting II builds on foundational accounting principles by exploring more complex topics, including accounting for partnerships, corporate equity, long-term liabilities, and investments. The course delves into the preparation and analysis of financial statements in compliance with generally accepted accounting principles (GAAP), emphasizing the treatment of income taxes, pensions, leases, and financial instruments. Students will also develop analytical skills to interpret financial data, deepen their understanding of consolidation and foreign currency transactions, and gain practical experience in ethical decision-making within the accounting profession.
Recommended Textbook
Intermediate Accounting Volume 1 12th Canadian Edition by Donald E. Kieso
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1318 Flashcards
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Page 2
Chapter 1: The Canadian Financial Reporting Environment
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Sample Questions
Q1) Principles- versus rules-based aproaches
Explain the difference between the principles- versus rules-based approaches regarding GAAP.
Answer: In a rules-based approach-much like the Canadian tax system-there is a rule for most things (even though the rule may be based on a principle). The result is that the body of knowledge in a rules-based approach is significantly larger than that in a principles-based approach.
IFRS and ASPE are more principles-based. The body of knowledge is smaller and the idea is that one or more principles form the basis for decision-making in many differing scenarios. In addition, professional judgement is fundamental. There is less emphasis on right and wrong answers. Rather, the financial reporting is a result of carefully reasoned application of the principle to the business facts
Q2) Management's primary responsibility with respect to financial statements is to A) prepare them, as they have the best insight and know what should be included. B) audit them, as they are distant enough from daily operations.
C) rely on them to make decisions.
D) None of the above are true.
Answer: A
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Page 3
Chapter 2: Conceptual Framework Underlying Financial Reporting
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Sample Questions
Q1) Financial reporting pressures caused by budgets
Explain why budgets might exert negative influence into accounting decisions. Offer some examples to illustrate where this might be the case.
Answer: Budgets put tremendous pressure on company management since bonuses and even jobs might depend on meeting budget targets. For example, if a manager's year-end bonus depends upon reaching a certain sales target, he might create some artificial sales near year-end to inflate the sales figure.
Q2) Comparability allows any financial statement user to
A) make timely decisions.
B) understand all the information presented.
C) verify all the data provided.
D) identify the real similarities and differences in economic phenomena.
Answer: D
Q3) Under IFRS, equity does NOT include
A) long-term leases.
B) common and/or preferred shares.
C) accumulated other comprehensive income.
D) retained earnings.
Answer: A
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Chapter 3: Measurement
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Sample Questions
Q1) Under the expected cash flow approach,
A) the model is best used where the element being measured does not have variable cash flows.
B) the projected cash flows reflect the certainty in terms of amount and timing.
C) the discount rate is adjusted to accommodate the riskiness of the cash flows.
D) the cash flow uncertainty is dealt with by using probabilities.
Answer: D
Q2) Which of the following is an example of an item that would be measured under the hybrid measurement categorization?
A) investment properties.
B) inventory measured at the lower of cost and net realizable value.
C) biological assets.
D) financial instruments carried at cost.
Answer: B
Q3) Level 1 inputs
A) are the lowest-quality inputs but provide the best-quality fair value.
B) are used when level 3 inputs are not available.
C) are generally not observable in various markets.
D) are more objective.
Answer: D
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Chapter 4: Reporting Financial Performance
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Sample Questions
Q1) The following information is available for Quiny Inc. for 2020: \(\begin{array}{llcc}
\text { Disbursements for purchases........................ } &\$715,000 \\ \text {Increase in trade accounts payable................. } &63,800\\ \text { Decrease in merchandise inventory.............. } &30,800\\ \end{array}\)
Cost of goods sold for 2020 was
A) $715,000.
B) $778,800.
C) $770,000.
D) $809,600.
Q2) The OSC and non-GAAP measures
In an effort to curb to potential confusion created by non-GAAP earnings discussed in Exercise 4-111, the OSC has issued a staff notice on these disclosures. Briefly explain what this notice states issuers should do. Why do you think the OSC is particularly interested in streamlining these disclosures?
Q3) Low-cost/high-volume strategy versus cost differentiation strategy Explain the difference between a low-cost/high-volume strategy and a cost differentiation strategy.
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Chapter 5: Financial Position and Cash Flows
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Sample Questions
Q1) When assessing earnings quality, financial analysts are concerned that management may attempt to manipulate information to make earnings appear better or worse than they really are. Which of the following would NOT suggest poor earnings quality?
A) reduction of the allowance for doubtful accounts
B) consistent application of GAAP
C) significantly higher net income than cash flows from operations
D) reliance on share issuances to offset repeated negative cash flow from operations
Q2) Which of the following is a contra account?
A) Premium on bonds payable
B) Unearned revenue
C) Patents
D) Accumulated depreciation
Q3) IFRS Practice Statement 2
IFRS Practice Statement 2 (PS2) was issued in September 2017 and provides (non-mandatory) guidance for reporting entities to consider. Given that information is material if its omission or misstatement could influence financial information users' decisions, identify the four-step process for assessing materiality suggested by PS2.
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Chapter 6: Revenue Recognition
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Sample Questions
Q1) A project was correctly accounted for under the percentage-of-completion method. At the end of the project, the Construction-in-Process account includes total debits and credits of $ 3,500,000. Assuming that total gross profit of $ 1,200,000 was recognized throughout the contract, total construction costs were
A) $ 4,600,000.
B) $ 3,500,000.
C) $ 2,300,000.
D) $ 2,100,000.
Q2)
Performance obligations
Trikonasana Inc. enters into a contract to design and build a bridge connecting a busy downtown core to a shoreline across the way that is home to many commuters. Trikonasana is responsible for overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, and so on.
Instructions
Under IFRS, does Trikonasana have a single performance obligation to the city in this revenue arrangement?
Q3) Explain the advantages and disadvantages of the completed-contract method.
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) Receivables are initially valued based on their ______.
A) fair value
B) estimated amount collectible
C) lower-of-cost-and-market value
D) historical cost
Q2) Grieves Company has the following items at year end: Cash in bank...................................................................................$42,,000
Petty cash........................................................................................1,500
Short-term paper with maturity of 2 months.................................6,500
Postdated chequer..........................................................................3,400
Grieves should report cash and cash equivalents of
A) $42,000.
B) $43,500.
C) $50,000.
D) $46,600.
Q3) Secured borrowings vs. factoring of receivables
Explain the difference between secured borrowings and factoring.
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Chapter 8: Inventory
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Sample Questions
Q1) If a material amount of inventory has been ordered through a formal purchase contract at the statement of financial position date, for future delivery, at firm prices,
A) this fact must be disclosed.
B) disclosure is required only if prices have declined since the date of the order.
C) disclosure is required only if prices have since risen substantially.
D) an appropriation of retained earnings is necessary.
Q2) Assume that no correcting entries were made at December 31, 2019. Ignoring income taxes, by how much will retained earnings at December 31, 2020 be overstated or understated?
A) $4,000 understated
B) $6,000 overstated
C) $6,000 understated
D) $15,000 understated
Q3) The inventory turnover ratio is calculated as
A) cost of goods sold divided by average inventory.
B) average inventory divided by cost of goods sold.
C) cost of goods sold times average inventory.
D) average assets divided by cost of goods sold.
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Chapter 9: Investments
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Sample Questions
Q1) Investment in shares of other entities - cost model
Manson Corp. acquired 10,000 shares of Digicex Corp. on July 1, 2020 at $ 15 per share. There is no quoted market price for Digicex shares as it is a private company. Manson reports under ASPE and has elected to account for the investment using the cost method. On September 1, Digicex declared and paid a $ 0.75 per share dividend and on December 31, Manson sells the shares at $ 12 per share.
Instructions
Prepare the journal entries to record the above transactions.
Q2) If Thunder Bay acquired a 30% interest in Fort William on December 31, 2020, for $ 75,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Fort William Corp. would have been
A) $ 90,000.
B) $ 75,000.
C) $ 67,500.
D) $ 60,000.
Q3) Significant influence
Describe how to determine if an investment results in significant influence.
Q4) Motivation for investments
List three reasons why an organization would make investments.
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Chapter 10: Property, Plant, and Equipment: Accounting Model
Basics
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Sample Questions
Q1) Under ASPE, the costs for environmental clean-up at the end of an asset's useful life
A) are always expensed as incurred.
B) are recognized only if they represent a legal obligation.
C) are capitalized once they have become apparent.
D) include only costs related to the acquisition of the asset.
Q2) Revaluation model (proportionate method)
Mongolia Inc. owns equipment that it purchased on January 1, 2021, for $ 4 million.
The following additional information is available:
Dec. 31, 2021 Book value (after recording 2021 depreciation): $ 3,600,000
Dec. 31, 2021 Fair value: $ 4,100,000
The company uses the revaluation model (proportionate method) to account for its property, plant, and equipment.
Instructions 10-104
Assuming the entry for the current year's depreciation has already been recorded, prepare the entr(ies) to adjust the asset's carrying amount to fair value.
Q3) Explain the concept of componentization as it applies to the recognition of PP&E assets.
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Page 12
Chapter 11: Depreciation, Impairment, and Disposition
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Sample Questions
Q1) Assume that at the end of calendar 2019, the UCC for this machine is $83,300. Tarantula sells the machine on January 2, 2020 for $90,000, and does not replace it. The recapture of CCA or terminal loss would be
A) $60,500 terminal loss.
B) $56,000 recapture.
C) $6,700 terminal loss.
D) $6,700 recapture.
Q2) The most common method of recording depletion for accounting purposes is the A) single-declining method.
B) double-declining method.
C) straight-line method.
D) units of production method.
Q3) To two decimals, what is Wren Corp.'s asset turnover ratio?
A) 1.82
B) 1.79
C) 0.35
D) 0.34
Q4) Explain why assets that are held for sale are not depreciated while they are held.
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Page 13
Chapter 12: Intangible Assets and Goodwill
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Sample Questions
Q1) Which of the following research and development related costs should be capitalized and amortized over current and future periods?
A) research and development general laboratory building that can be put to alternative uses in the future
B) inventory used for a specific research project
C) administrative salaries allocated to research and development
D) research findings purchased from another company to aid a particular research project currently in process
Q2) Intangible assets and goodwill
Explain the three main characteristics of intangible assets. Is goodwill an intangible asset? Why, or why not? Explain.
Q3) Development costs may be capitalized if
A) the resulting product or service is technically feasible.
B) the entity has sufficient resources to complete the project.
C) all of these (all of these criteria, in addition to others, must be met in order for development costs to be capitalized).
D) the entity intends to use or sell the resulting product or service.
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14
Chapter 13: Accounting Information Systems and Adjusting
Entries: A Comprehensive Guide
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Sample Questions
Q1) Some events are NOT recorded in the accounting information system because
A) the service has been provided but the cash has not yet been received.
B) the service has not been provided but the cash has already been received.
C) their measurement is too complex.
D) the amounts are not material.
Q2) On September 1, 2020, Rudolph Corporation received $ 54,000 cash from a tenant for one year's rent in advance, and recorded the transaction with a credit to Rent Revenue.
The December 31, 2020, required adjusting entry in connection with this would be
A) debit Rent Revenue and credit Unearned Rent, $ 18,000.
B) debit Rent Revenue and credit Unearned Rent, $ 36,000.
C) debit Unearned Rent and credit Rent Revenue, $ 18,000.
D) debit Cash and credit Unearned Rent, $ 9,000.
Q3) The salary expense on the 2020 statement of comprehensive income was
A) $ 118,400.
B) $ 133,100.
C) $ 131,300.
D) $ 129,500.
Q4) The accounting cycle
Summarize the steps in the accounting cycle.
Page 15
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