Financial Reporting and Analysis
Midterm Exam
Course Introduction
Financial Reporting and Analysis provides students with a comprehensive understanding of how financial information is recorded, reported, and interpreted within organizations. The course covers the fundamental principles of accounting, the structure and contents of key financial statements including the balance sheet, income statement, and cash flow statement and the regulatory environment governing financial reporting. Emphasis is placed on techniques for analyzing financial statements, assessing organizational performance, and making informed business decisions. Students will also explore topics such as the impact of accounting choices on financial results, ethics in financial reporting, and emerging trends in international accounting standards.
Recommended Textbook
Advanced Accounting 6th Edition by
Debra C. Jeter
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Chapter 1: Introduction to Business Combinations and the
Conceptual
Framework
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Q1) The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the:
A)economic unit concept.
B)current practice concept.
C)parent company concept.
D)historical cost company concept.
Answer: C
Q2) When following the parent company concept in the preparation of consolidated financial statements,noncontrolling interest in combined income is considered a(n):
A)prorated share of the combined income.
B)addition to combined income to arrive at consolidated net income.
C)expense deducted from combined income to arrive at consolidated net income.
D)deduction from current assets in the balance sheet.
Answer: C
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Chapter 2: Accounting for Business Combinations
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Q1) If an impairment loss is recorded on previously recognized goodwill due to the transitional goodwill impairment test,the loss should be treated as a(n):
A)loss from a change in accounting principles.
B)extraordinary loss
C)loss from continuing operations.
D)loss from discontinuing operations.
Answer: A
Q2) Under SFAS 141R:
A)both direct and indirect costs are to be capitalized.
B)both direct and indirect costs are to be expensed.
C)direct costs are to be capitalized and indirect costs are to be expensed.
D)indirect costs are to be capitalized and direct costs are to be expensed.
Answer: B
Q3) With an acquisition,direct and indirect expenses are:
A)expensed in the period incurred.
B)capitalized and amortized over a discretionary period.
C)considered a part of the total cost of the acquired company.
D)charged to retained earnings when incurred.
Answer: A
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Page 4
Chapter 3: Consolidated Financial Statements Date of Acquisition
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Q1) Which of the following is a limitation of consolidated financial statements?
A)Consolidated statements provide no benefit for the stockholders and creditors of the parent company.
B)Consolidated statements of highly diversified companies cannot be compared with industry standards.
C)Consolidated statements are beneficial only when the consolidated companies operate within the same industry.
D)Consolidated statements are beneficial only when the consolidated companies operate in different industries.
Answer: B
Q2) The main evidence of control for purposes of consolidated financial statements involves:
A)possessing majority ownership
B)having decision-making ability that is not shared with others.
C)being the sole shareholder
D)having the parent company and the subsidiary participating in the same industry.
Answer: B
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Chapter 4: Consolidated Financial Statements After Acquisition
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Q1) On January 1,2017,Puma Corporation acquired 30 percent of Slume Company's stock for $150,000.On the acquisition date,Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value.The difference was due to the increased value of buildings with a remaining life of 10 years.During 2017 Slume reported net income of $25,000 and paid dividends of $10,000.Puma uses the equity method. What will be the balance in the Investment account as of Dec 31,2017?
A)$150,000
B)$157,500
C)$154,500
D)$153,000
Q2) On the consolidated statement of cash flows,the parent's acquisition of additional shares of the subsidiary's stock directly from the subsidiary is reported as:
A)an investing activity.
B)a financing activity.
C)an operating activity.
D)none of these.
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Chapter 5: Allocation and Depreciation of Differences
Between Implied and Book Values
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Q1) The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded:
A)on the subsidiary's books.
B)on the parent's books.
C)on the consolidated statements workpaper.
D)on the parent's books and on the consolidated statements workpaper.
Q2) Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry.Briefly explain the concept of push down accounting.
Q3) The SEC requires the use of push down accounting when the ownership change is greater than:
A)50%
B)80%
C)90%
D)95%
Q4) When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition).Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements.
7
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Chapter 6: Elimination of Unrealized Profit on Intercompany
Sales of Inventory
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Q1) The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary's reported net income:
A)plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
B)plus realized profit in ending inventory less realized profit in beginning inventory.
C)less unrealized profit in ending inventory plus realized profit in beginning inventory.
D)less realized profit in ending inventory plus realized profit in beginning inventory.
Q2) The noncontrolling interest's share of the selling affiliate's profit on intercompany sales is considered to be realized under:
A)partial elimination.
B)total elimination.
C)100% elimination.
D)both total and 100% elimination.
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Chapter 7: Elimination of Unrealized Gains or Losses on
Intercompany Sales of Property and Equipment
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Q1) In January 2014,S Company,an 80% owned subsidiary of P Company,sold equipment to P Company for $990,000.S Company's original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000.P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method.This equipment was sold to a third party on January 1,2017 for $720,000.What amount of gain should P Company record on its books in 2017?
A)$30,000.
B)$60,000.
C)$120,000.
D)$180,000.
Q2) On January 1,2016 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000.P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life.What is the effect of the sale on P Corporation's Equity from Subsidiary Income account for 2017?
A)no effect
B)increase of $12,000.
C)decrease of $12,000.
D)increase of $3,000.
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Chapter 8: Changes in Ownership Interest
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Q1) If a parent company acquires additional shares of its subsidiary's stock directly from the subsidiary for a price less than their book value:
A)total noncontrolling book value interest increases.
B)the controlling book value interest increases.
C)the controlling book value interest decreases.
D)total noncontrolling book value interest increases; and the controlling book value interest decreases.
Q2) On January 1 2016,Paulus Company purchased 75% of Sweet Corporation for $500,000.Sweet' stockholders' equity on that date was equal to $600,000 and Sweet had 60,000 shares issued and outstanding on that date.Sweet Corporation sold an additional 15,000 shares of previously unissued stock on December 31,2016. Assuming that Paulus Company purchased the additional shares,what would be their current percentage ownership on December 31,2016?
A)92%
B)87%
C)80%
D)100%
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Chapter 9: Intercompany Bond Holdings and Miscellaneous Topics Consolidated
Financial Statements
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Q1) Soren Corporation is an 80% owned subsidiary of Passia Company.Soren purchased bonds of Passia Company for $103,000.Passia Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000.Assuming that the constructive gain or loss is material,the consolidated income statement should report an:
A)ordinary loss of $8,000.
B)ordinary gain of $8,000.
C)extraordinary loss of $8,000 adjusted for income tax effects.
D)extraordinary gain of $8,000 adjusted for income tax effects.
Q2) From a consolidated entity point of view,the constructive gain or loss on the open market purchase of a parent company's bonds by a subsidiary company is:
A)considered realized at the date of the open market purchase.
B)realized in future periods through discount and premium amortization on the books of the individual companies.
C)realized only to the extent of the parent company's interest in the subsidiary.
D)deferred and recognized in the consolidated income statement when the bonds are retired.
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Page 11
Chapter 10: Insolvency Liquidation and Reorganization
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Q1) When a bankruptcy court enters an "order for relief" it has:
A)accepted the petition.
B)dismissed the petition.
C)appointed a trustee.
D)started legal action against the debtor by its creditors.
Q2) On January 1,2016,Terminator,Inc.owed 9th National Bank $12 million on a 10% note due December 31,2017.Interest was last paid on December 31,2015.Terminator was experiencing severe financial difficulties and asked 9th National Bank to modify the terms of the debt agreement.After negotiation 9th National Bank agreed to:
- Forgive the interest accrued for the year just ended,
- Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31,2017,and
- Reduce the unpaid principal amount to $9,600,000.
Required:
Prepare the journal entries for Terminator,Inc.necessitated by the restructuring of the debt at (1)January 1,2016,(2)December 31,2017,and (3)December 31,2015.
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Page 12
Chapter 11: International Financial Reporting Standards
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Q1) All of the following are options for non-US companies who wish to list securities on a US exchange EXCEPT:
A)The company can use either IFRS or their local GAAP.
B)If a company uses their local GAAP they must reconcile net income and shareholders' equity or fully disclose all financial information required of US companies.
C)If a company uses their local GAAP they must reconcile net income and shareholders' equity and fully disclose all financial information required of US companies
D)The company must file a form 20-F with the SEC.
Q2) The amount of a long-lived asset impairment loss is generally determined by comparing:
A)the asset's carrying amount and its fair value under US GAAP.
B)the asset's carrying amount and its discounted future cash flows less cost to sell under IFRS.
C)the asset's carrying amount and its undiscounted future cash flows under US GAAP. D)the asset's carrying amount and its undiscounted future cash flows less disposal cost under IFRS.
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Chapter 12: Accounting for Foreign Currency Transactions and Hedging Foreign
Exchange
Risk
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Q1) A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:
A)hedge a net investment in a foreign entity.
B)hedge an identifiable foreign currency commitment.
C)speculate in foreign currency.
D)none of these.
Q2) On October 1,2016,Kill Company shipped equipment to a foreign customer for a foreign currency (FC)price of FC 3,000,000 due on January 31,2017.All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1.Simultaneously,Kill entered into a forward contract to sell 3,000,000 FCU on January 31,2017 for $1,200,000.Payment was received from the foreign customer on January 31,2017.Spot rates on October 1,December 31,and January 31 were $0.42,$0.425,and $0.435,respectively.Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.
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Chapter 13: Translation of Financial Statements of Foreign
Affiliates
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Q1) A foreign subsidiary's functional currency is its local currency which has not experienced significant inflation.The weighted average exchange rate for the current year would be the appropriate exchange rate for translating:
A)Wages expense,Yes; Sales to customers,Yes
B)Wages expense,Yes; Sales to customers,No
C)Wages expense,No; Sales to customers,No
D)Wages expense,No; Sales to customers,Yes
Q2) Paid-in capital accounts are translated using the historical exchange rate under:
A)the current rate method only.
B)the temporal method only.
C)both the current rate and temporal methods.
D)neither the current rate nor temporal methods.
Q3) The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:
A)verification.
B)translation.
C)remeasurement.
D)None of these.
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Chapter 14: Reporting for Segments and for Interim
Financial Periods
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Q1) Companies using the LIFO method may encounter a liquidation of base period inventories at an interim date that is expected to be replaced by the end of the year.In these cases,cost of goods sold should be charged with the:
A)cost of the most recent purchases.
B)average cost of the liquidated LIFO base.
C)expected replacement cost of the liquidated LIFO base.
D)none of these.
Q2) If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year,when should they be expensed?
A)An allocated portion in each of the last three quarters
B)An allocated portion in each quarter of the year
C)In full in the first quarter
D)In full in the second quarter
Q3) In SFAS No.131,the FASB requires all public companies to report a variety of information for reportable segments.Define a reportable segment and identify the information to be reported for each reportable segment.
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Page 16
Chapter 15: Partnerships: Formation, operation and Ownership Changes
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Q1) When the goodwill method is used to record the admission of a new partner,total partnership capital increases by an amount:
A)equal to the new partner's investment.
B)greater than the new partner's investment.
C)less than the new partner's investment.
D)that may be more or less than the new partner's investment.
Q2) Letterman and Conan are partners who share profits and losses 3:7.The capital accounts on January 1,2017,are $120,000 and $160,000,respectively.Leno is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000.Goodwill is not to be recorded.The capital balances after admission should be:
A)Letterman,$117,000; Conan,$153,000; Leno,$90,000
B)Letterman,$120,000; Conan,$160,000; Leno,$90,000
C)Letterman,$123,000; Conan,$160,000; Leno,$80,000
D)Letterman,$120,000; Conan,$167,000; Leno,$80,000
Q3) The profit and loss sharing ratio should be:
A)in the same ratio as the percentage interest owned by each partner.
B)based on relative effort contributed to the firm by the partners.
C)a weighted average of capital and effort contributions.
D)based on any formula that the partners choose.
Page 17
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Chapter 16: Partnership Liquidation
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Q1) An advance cash distribution plan is prepared:
A)each time cash is distributed to partners in an installment liquidation.
B)each time a partnership asset is sold in an installment liquidation.
C)to determine the order and amount of cash each partner will receive as it becomes available for distribution.
D)none of these.
Q2) Which of the following statements is correct?
A)Personal creditors have first claim on partnership assets.
B)Partnership creditors have first claim on partnership assets.
C)Partnership creditors have first claim on personal assets.
D)Partnership creditors have first claim on partnership assets; and partnership creditors have first claim on personal assets.
Q3) In a partnership liquidation the final cash distribution to the partners should be made in accordance with the:
A)partners' profit and loss sharing ratio.
B)balances of the partners' capital accounts.
C)ratio of the capital contributions by the partners.
D)ratio of capital contributions less withdrawals by the partners.
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Chapter 17: Introduction to Fund Accounting
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Q1) The GASB has the responsibility for establishing financial accounting standards for all of the following entities EXCEPT:
A)state and local government entities.
B)veterans hospitals.
C)school districts.
D)civic organizations.
Q2) In accounting for expendable fund entities,revenue is ordinarily not recognized until: A)it can be objectively measured and it is available to finance expenditures of the current period.
B)a transaction has taken place and the earnings process is complete.
C)it has been received in cash.
D)none of these.
Q3) Governmental units include all of the following EXCEPT: A)counties.
B)school districts.
C)industrial development districts.
D)voluntary health and welfare organizations.
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Chapter 18: Introduction to Accounting for State and Local
Governmental Units
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Q1) The following events take place:
1.Interest payments in the amount of $20,000 that are the responsibility of the Debt Service Fund are paid by the General Fund.
2.The Internal Service Fund bills the Special Revenue Fund $25,000 for services performed.
3.The Special Revenue Fund transfers $10,000 to the Internal Service Fund as a temporary loan.
4.The General Fund transfers $150,000 to start an Internal Service Fund.
Required:
Identify the interfund activity as a loan,services provided and used,interfund transfer,or interfund reimbursement and prepare entries in general journal form to record the transactions on the records of the fund involved.
Q2) Which of the following funds would account for operations that are financed and operated in a manner similar to private business enterprises?
A)Debt Service Fund
B)Enterprise Fund
C)Internal Service Fund
D)Special Revenue Fund
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Chapter 19: Accounting for Nongovernment Nonbusiness
Organizations: Colleges and Universities, hospitals, and
Other Health Care Organizations
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Q1) When the donor has specified a particular date or event after which the principal of the Endowment Fund may be expended,the Endowment Fund is referred to as a(n):
A)pure endowment fund.
B)term endowment fund.
C)quasi endowment fund.
D)expendable endowment fund.
Q2) Which basis of accounting should a voluntary health and welfare organization use?
A)Cash basis for all funds
B)Modified accrual basis for all funds
C)Accrual basis for all funds
D)Accrual basis for some funds and modified accrual basis for other funds
Q3) Special entities are not-for-profit organizations that are:
A)government owned.
B)privately owned.
C)publicly owned.
D)either government owned or privately owned.
Q4) Contributions to NNOS include gifts of cash,pledges,donated services,and gifts of noncash assets.Explain how contributions are recorded by NNOS.
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