Financial Reporting Exam
Bank
Course Introduction
Financial Reporting is a foundational course designed to introduce students to the principles, standards, and practices that govern the preparation and presentation of financial statements for external users. The course covers key concepts such as the accounting cycle, the structure and interpretation of balance sheets, income statements, and cash flow statements, and the application of major accounting standards like IFRS and GAAP. Students will learn how to analyze and communicate financial information, assess the financial health of an organization, and understand the ethical responsibilities involved in financial reporting. This course is essential for those seeking careers in accounting, finance, or auditing, providing the skills to produce transparent, accurate financial disclosures required by stakeholders and regulatory bodies.
Recommended Textbook
Intermediate Accounting 2nd Edition Volume I by Kin Lo George Fisher
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10 Chapters
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Page 2
Chapter 1: Fundamentals of Financial Accounting Theory
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Sample Questions
Q1) Explain what accounting is and why financial reporting exists.
Answer: Accounting is the production of information about an enterprise and the transmission of that information from those who have it to those who need it. In other words, accounting is communicating information about business transactions and activities about business entities to interested external parties. Financial reporting is the process by which enterprises provide information to external parties. Financial reporting is an economic good that is subject to the laws of supply and demand. Financial reporting exists because interested parties require information about the business entity to make their investment, credit or other decisions. The demand for information arises from people's need to make decisions under uncertainty about the future. In many contexts, there are asymmetric distributions of information amongst people. Those who have more information are the potential suppliers of information to those who have less.
People making decisions under uncertainty demand information to alleviate that uncertainty; an asymmetric distribution of information allows some individuals to supply information to others.
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3
Chapter 2: Conceptual Frameworks for Financial Reporting
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Sample Questions
Q1) Which statement best explains the qualitative characteristic of "relevance"?
A)Financial reports should be understandable to the users of the information.
B)Omitting information would influence a user's economic decision.
C)Information should influence a user's economic decisions.
D)Financial reports should be accurate and complete.
Answer: C
Q2) When are financial items recognized in the financial statements?
A)Items are recognized if the fair value amounts can be determined.
B)Items are recognized if the inflows or outflows of resources are probable.
C)Items are recognized if the future gains will result from disposal of the item.
D)Items are recognized if there are no measurement uncertainties.
Answer: B
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Chapter 3: Accrual Accounting
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Sample Questions
Q1) What is meant by the phrase "true and fair view" of financial reporting?
A)The financial statements provide a true representation of the company's economic conditions and performance.
B)The financial statements provide an unbiased representation of the company's economic conditions and performance.
C)The financial statements provide a fair representation of the company's economic conditions and performance.
D)The financial statements provide an accurate representation of the company's economic conditions and performance.
Answer: C
Q2) A correction of an accounting error does not involve
A)note disclosure.
B)retrospective adjustment.
C)retrospective restatement.
D)management bias.
Answer: D
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Page 5
Chapter 4: Revenue Recognition
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Sample Questions
Q1) How is the prudence principle applied to the accounting for construction contracts?
A)If a loss is expected on the contract, all of this loss is immediately recognized.
B)Only a proportional amount of revenue and expenses are recorded each year.
C)If a loss is expected on the contract, a loss is recognized in the current year based on the degree of completion.
D)Under this principle, good news is reflected earlier than bad news.
Q2) A city transit authority issues 200,000 monthly passes at $80 each for sale at various retailers. Retailers act as consignees for these passes. Identify which revenue recognition criteria is not met at the point of sale, preventing the recognition of revenue at that time.
A)The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
B)It is probable that the economic benefits associated with the transaction will flow to the entity.
C)Stage of completion - either the coverage period has not yet begun or the period has not elapsed.
D)The amount of revenue can be measured reliably.
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6
Chapter 5: Cash and Receivables
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Sample Questions
Q1) Which statement about using the aging of accounts receivable to estimate bad debt expense is correct?
A)This method has the same results as estimating the bad debt expense by using the percentage of credit sales.
B)This method records an adjustment to the allowance account irrespective of the balance in that account, immediately prior to the adjustment.
C)This method focuses on the income statement.
D)This method focuses on the balance sheet.
Q2) Which statement about internal controls over cash is correct?
A)A bank reconciliation is the only control required for cash.
B)A bank reconciliation is designed for detection of problems after the fact.
C)A bank reconciliation is a tool to investigate employee fraud.
D)A bank reconciliation is designed to prevent problems from happening.
Q3) Explain why it is important to segregate duties of employees dealing with cash in an organization. Provide three examples of ways which this segregation could be made on the receivables side.
Q4) Define "cash" and explain how funds that are subject to restrictions should be accounted for in the accounting records.
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Page 7
Chapter 6: Inventories
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Sample Questions
Q1) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2012, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2013 financial reporting?
A)Gross margin is understated by $1,000.
B)Cost of sales is overstated by $1,000.
C)Ending inventory is understated by $1,000.
D)Beginning inventory is understated by $1,000.
Q2) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2012, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2013 financial reporting?
A)Gross margin is understated by $1,000.
B)Cost of goods available for sale is understated by $1,000.
C)Cost of sales is overstated by $1,000.
D)Beginning inventory is overstated by $1,000.
Q3) Explain how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation?
Q4) Explain why the absorption costing method is appropriate under GAAP.
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Page 8
Chapter 7: Financial Assets
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Sample Questions
Q1) Which statement is correct about joint arrangements?
A)IFRS distinguishes between joint operations and joint ventures.
B)IFRS uses the terms joint operations and joint ventures inter-changeably.
C)IFRS permits either the proportionate consolidation method or equity method.
D)IFRS permits only the equity method.
Q2) What is a "joint arrangement"?
A)An entity where unanimous consent by the owners for all decisions is required.
B)An entity that is controlled by another entity.
C)An entity over which the investor has the ability to participate in decisions affecting the entity's operations.
D)An entity that sells shares to the public.
Q3) Which statement is correct about non-strategic financial assets ?
A)ASPE refers to trading intentions when categorizing these investments.
B)IFRS classifies these investments in accordance with legal substance.
C)ASPE classifies these investments in accordance with their nature.
D)The accounting is the same under ASPE and IFRS for these investments.
Q4) Explain the characteristics of a financial asset. Discuss if cash has the characteristics of a financial asset. Why is (or is not)cash a financial asset?
Q5) Explain the meaning of the "effective interest method."
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Chapter 8: Property, Plant, and Equipment
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Sample Questions
Q1) Daniel Manufacturing Limited (DML)purchased a large lathe. The invoice cost of the lathe was $6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were $700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000.
Required:
For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly justify each of your responses.
Q2) Discuss how a company can manipulate earnings through estimates used in depreciation.
Q3) Explain how non-monetary transactions are accounted for.
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10
Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and Government Grants
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Sample Questions
Q1) Which statement does not describe the "successful efforts" method?
A)A method of accounting that capitalizes costs of mineral exploration and evaluation only if the outcome is successful.
B)A method of accounting that capitalizes costs of mineral exploration and evaluation only if the production is technically feasible.
C)A method of accounting that capitalizes costs of mineral exploration and evaluation until the production is successful.
D)A method of accounting that capitalizes costs of mineral exploration and evaluation only if the production is commercially viable.
Q2) Which of the following is correct with respect to the accounting for re-payment of government grants?
A)Accounted for prospectively under IFRS.
B)Accounted for retrospectively under ASPE.
C)Partial prospective treatment and partial retrospective treatment under ASPE.
D)Partial prospective treatment and partial retrospective treatment under IFRS.
Q3) Explain the difference in recognition of externally acquired intangibles versus internally developed intangibles.
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Page 11
Chapter 10: Applications of Fair Value to Non-Current Assets
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Sample Questions
Q1) Which statement is not correct?
A)Impairment testing is required under ASPE.
B)Impairment testing is required under IFRS.
C)Impairment testing is not required under ASPE.
D)Impairment testing is required under both IFRS and ASPE.
Q2) Explain how non-current assets that are part of a discontinued operation should be accounted for.
Q3) Which of the following is correct with respect to the "impairment loss under the revaluation model"?
A)All impairment losses flow through the income statement under ASPE.
B)All impairment losses flow through the income statement under IFRS.
C)All impairment losses flow through the revaluation surplus account under ASPE.
D)All impairment losses flow through the revaluation surplus account under IFRS.
Q4) Which statement is not correct?
A)Agricultural activity involves growth, degeneration and reproduction.
B)Agricultural activity includes processing into the final product.
C)Revenue recognition for agricultural produce is covered under the requirements of IAS 18.
D)Inventory valuation for agricultural produce is covered under the requirements of IAS 2.
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