Financial Accounting
Textbook Exam Questions
Course Introduction
Financial Accounting is an essential course that introduces students to the fundamental principles and concepts of accounting used to prepare financial statements for external users such as investors, creditors, and regulatory agencies. The course covers key topics such as the accounting cycle, recording transactions, adjusting entries, and preparing financial statements in accordance with generally accepted accounting principles (GAAP). Students will develop an understanding of the balance sheet, income statement, statement of cash flows, and how these documents inform business decision-making. By the end of the course, learners will be equipped to analyze and interpret financial information, providing a strong foundation for further studies in accounting or finance.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Q1) When assessing buyer power using Porter's five forces,which of the following is not consistent with low buyer power?
A) Brand loyalty
B) Control of distribution channel
C) Large number of suppliers
D) Low price
Answer: C
Q2) The Second step in financial statement analysis requires businesses to analyze strategies that will __________________________ itself from the firms' competitors.
Answer: differentiate
Q3) Most financial statement analysis aims to assess a firm's ____________________ and ____________________.
Answer: profitability,risk
Q4) How easily can new firms enter a market is a question one might ask when assessing _____________________________________________.
Answer: threat of entrants
Q5) Cash and cash equivalents are considered ____________________ assets. Answer: Monetary
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Chapter 2: Asset and Liability Valuation and Income
Recognition
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Q1) Reporting financial assets and liabilities at fair values also is referred to as:
A) historical cost.
B) acquisition cost.
C) mark-to-market.
D) mortgage-backed cost
Answer: C
Q2) Discuss the two principal reasons income before taxes for financial reporting differs from taxable income.
Answer: 1.Permanent Differences--Revenues and expenses that firms include in net income to shareholders,but which never appear in the income tax return.
2.Temporary Differences--Revenues and expenses that firms include in both net income to shareholders and in taxable income but in different periods.
Q3) A change in the _________________________ or _________________________ will not change a preset series of cash flows,however it will change the present value of those cash flows.
Answer: interest rate,discount rate discount rate,interest rate
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) Under the ______________________________ of preparing the statement of cash flow's operating activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to providers of goods and services.
Answer: direct method
Q2) When net income is high relative to operating cash flows,we describe the firm as having recorded:
A) income-decreasing accruals.
B) income-increasing accruals.
C) income-neutral accruals.
D) abnormal accruals.
Answer: B
Q3) The receipt of dividends from an investee would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
Q4) The payment of dividends would be classified as ____________________ activities in the statement of cash flows.
Answer: financing
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Chapter 4: Profitability Analysis
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Q1) In order to measure how profitable a firm is in generating a return for its common shareholders,a financial analyst would examine the return on
Q2) Return on assets can be disaggregated into three components.Which of the following is not one of the components?
A) Assets Turnover ratio
B) Profit Margin ratio
C) Debt to Equity ratio
D) Capital Structure Leverage ratio
Q3) Firms with high operating leverage have a higher proportion of _________________________ in their cost structure.
Q4) Return on assets can be a misleading ratio when analyzing technology firms because two important assets,______________________________ and ______________________________ do not appear on their balance sheets
Q5) Operating income is negative in an amount equal to _________________________ when revenues are zero.
Q6) Accounts receivable turnover is calculated by dividing ________________________________________ by average net accounts receivable.
6
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Chapter 5: Risk Analysis
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Q1) Financially healthy firms frequently close any cash flow gaps in their operating cycles with ________________________________________.
Q2) Short-term ____________________________ represents a firm's near-term ability to generate cash to service working capital needs and debt service requirements.
Q3) Changes in foreign exchange rates can affect a firm in all of the following ways except:
A) The prices a firm pays to acquire raw materials from suppliers abroad.
B) The amount of cash a firm receives when it collects an account receivable, a loan Receivable, or another receivable denominated in a currency other than its own.
C) The value of domestic liabilities with fixed interest rates.
D) The prices a firm charges for products sold to customers abroad.
Q4) Working capital is defined as ______________________ minus _____________________.
Q5) When calculating the quick ratio,an analyst would include in the numerator cash,________________________________________,and receivables.
Q6) The source of risk related to technology,regulation and availability of raw materials is ____________________.
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Page 7
Chapter 6: Accounting Quality
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Q1) A change in the useful life of an asset is treated as a(n)_____________
Q2) During July 2012,Ralston Company decides to dispose of one of its subsidiaries,which qualifies for accounting as a discontinued operation.At the July 2012 measurement date,Ralston Company estimates that it will report net losses of $1,500,000 dollars from the measurement date until the disposal date,which is expected to be in April 2013.In addition,Ralston estimates that it will lose $300,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes)?
A) $1,500,000 loss
B) $0
C) $1,800,000 loss
D) $300,000 loss
Q3) The Orbus Company has a 30,000 unrealized gain and a 10,000 unrealized loss.Where would Orbus Company report these transactions?
A) Only in non-current assets and liabilities
B) In stockholders' equity
C) Other comprehensive income
D) On the balance sheet as a current asset
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Chapter 7: Financing Activities
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Q1) Which is the date when a firm gives a stock option to employees?
A) vesting date
B) grant date
C) exercise date
D) market date
Q2) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q3) Under U.S.GAAP,which of the following items would require a lessee to classify a lease of equipment as a capital lease?
A) There is no transfer of ownership to the lessee at the end of the lease term.
B) The lease does not contain a bargain purchase option.
C) The lease term is 90% of the estimated economic life of the lease property.
D) The present value of the contractual minimum lease payments is 75% of the fair value of the leased property.
Q4) Which of the following is not one of the GAAP classifications for derivatives?
A) Speculative investment
B) Fair value hedge
C) Asset-liability hedge
D) Cash flow hedge
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Chapter 8: Investing Activities
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Q1) Interpretation No.46R relates to the issue of whether an investing firm is the primary beneficiary in a variable-interest entity.When is an entity classified as a variable interest entity?
Q2) Currently,the FASB's Statements of Accounting Concepts (Nos.5 and 6)define an asset
As having all of the following characteristics except:
A) costs not guided by management's judgment
B) probable future benefits
C) resulting from past transactions and events
D) something that is obtained/controlled by the entity
Q3) When one company acquires another company it may not be able to estimate the potential losses inherent in the acquired assets or the potential liability of the acquired company,for these reasons the acquirer may establish
Q4) Expenditures included in the cost of a long-lived asset are:
A) intangible.
B) charged off.
C) expensed.
D) capitalized.
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Chapter 9: Operating Activities
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Q1) Which of the following calculations is used to determine the amount of the liability reported on the balance sheet for underfunding?
A) Plan assets less projected benefit obligation.
B) Projected benefit obligation less plan assets.
C) Plan assets less accumulated benefit obligation.
D) Accumulated benefit obligation less plan assets.
Q2) What are the four disclosures required by U.S.GAAP relating to income taxes?
Q3) U.S.GAAP requires firms to report the assets and liabilities of defined benefit plans _______________________________________________________.
Q4) All of the following conditions signal that revenue recognition may have been recorded too early except:
A) large and volatile amounts of uncollectible accounts receivable.
B) a decrease in the number of days accounts receivable are outstanding.
C) unusually large amounts of returned goods.
D) excessive warranty expenditures.
Q5) Income tax expense consists of two components,the ____________________ portion and the ____________________ portion.
Q6) What are the five steps to apply the core principles of revenue recognition?
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Chapter 10: Forecasting Financial Statements
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Q1) When projecting operating expenses,it is important to determine the mix of fixed and variable costs; one clue suggesting the presence of fixed costs is:
A) the percentage change in cost of goods sold in prior years is significantly greater than the percentage change in sales.
B) the percentage change in cost of goods sold in prior years is significantly less than the percentage change in sales.
C) low capital intensity in the production process.
D) the percentage change in sales in prior years is significantly greater than the percentage change in receivables.
Q2) A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
Q3) The formula for forecasting inventory is ____________ /365 X.
Q4) If a firm operates at less than full capacity,then price _______________________ are not likely
Q5) Financial statement forecasts should rely on _________________________ across financial statements.
Q6) Realistic expectations are ____________________ and ____________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) A company with a new Capital structure will increase the __________ and at the same time the __________ risk.
Q2) When deriving the equity value of a firm,an analyst forecasts the real dividends expected to be paid in the future.In this case,which discount rate should be used?
A) The nominal rate of return
B) The real rate of return
C) The risk-free rate of return
D) The risk adjusted rate of return
Q3) In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?
Q4) Using the above information,calculate Zonk's weighted-average cost of capital:
A) 11.5%
B) 7.97%
C) 7.48%
D) 10.90%
Q5) If dividend projections include the effect of inflation,then the discount rate used should be a(n)____________________ rate.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Financial liabilities include all of the following except:
A) mortgages payable
B) current maturities of long-term debt
C) accrued taxes
D) bonds payable
Q2) 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
Q3) The conceptual framework for free cash flows separates all assets and liabilities into the following categories:
A) Current and non-current
B) Monetary and non-monetary
C) Operating and non-operating
D) Operating and financial
Q4) Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Investors have invested $30,000in common equity in a company.Given the risk inherent in the company,the investors expect to earn a 13percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company earns $4,500 the first year.For this company determine the following:
a.The company's required earnings
b.The company's residual earnings
Q2) __________________ means that net income includes all of the recognized elements of income of the firm for common equity shareholders and dividends include all direct capital transactions between the firm and the common equity shareholders.
Q3) The residual income _____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.
Q4) Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.
Q5) What are the three arguments economists provide against using earnings as a value-relevant attribute in valuation?
Q6) What is the rationale for using expected earnings as a basis for valuations?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Under the value-to-book model a firm will be valued below book value when:
A) the ROCE is greater than RE
B) the ROCE is equal to RE
C) the ROCE is less than RE
D) the firm's growth rate is above the industry average
Q2) When a company has a high market to book ratio this could be a result of the company having
Q3) In research examining market efficiency,Bernard and Thomas examined quarterly earnings announcements.Discuss how Bernard and Thomas test the issue of market efficiency and the results of their research.
Q4) What is a price differential and how is it computed? What information does a price differential provide to an analyst?
Q5) Discuss how risk and profitability factors cause differences in price-earnings ratios across firms.Explain the difference between abnormal and normal earnings.
Q6) The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.
Q7) Explain the analysts' role in making the capital markets efficient.
Page 16
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