Financial Reporting
Mock Exam
Course Introduction
Financial Reporting is a comprehensive course that introduces students to the principles, standards, and processes involved in preparing and analyzing financial statements for organizations. Covering international and local reporting frameworks, the course emphasizes the application of key accounting concepts, the interpretation of financial data, and the role of financial reports in decision-making by various stakeholders. Topics include the structure and content of income statements, balance sheets, statements of cash flows, and the disclosure requirements mandated by regulatory bodies, preparing students to evaluate the financial health and performance of businesses with confidence and accuracy.
Recommended Textbook
Financial Accounting An Introduction to Concepts Methods and Uses 14th Edition by Roman L. Weil
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Chapter 1: Introduction to Business Activities and Overview
of Financial Statements and the Reporting Process
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Sample Questions
Q1) _____ reflect values at the balance sheet date, so they reflect that day's economic conditions.
A)Historical amounts
B)Current amounts
C)Present amounts
D)Liquidation amounts
E)Discounted cash flow amounts
Answer: B
Q2) As of 2011, the _____ is an independent accounting standard-setting entity with 15 voting members from a number of countries.
A)Public Companies Accounting Oversight Board (PCAOB)
B)International Accounting Standards Board (IASB)
C)American Institute of Certified Public Accountants (AICPA)
D)World Institute of Certified Public Accountants (WICPA)
E)International Institute of Certified Public Accountants (IICPA)
Answer: B
Q3) Current liabilities represent obligations a firm expects to pay within one year.
A)True
B)False
Answer: True
Page 3
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Chapter 2: The Basics of Record Keeping and Financial
Statement Preparation: Balance Sheet
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Sample Questions
Q1) Before preparing the balance sheet and income statement, an accountant would use what accounting record to first record the firm's transactions?
A)the trial balance
B)the adjusting entry
C)the general ledger
D)the subsidiary ledger
E)the journal
Answer: E
Q2) What is the relationship between a T-account and a journal entry?
Answer: Typically, the accountant records journal entries before transferring the amounts to T-accounts.A T-account is used to record the effects of events and transactions that affect a specific asset, liability, shareholders' equity, revenue, or expense account (which the text has not yet introduced).It captures both increases and decreases in that specific account, without reference to the effects on other accounts.It also shows the beginning and ending balances of balance sheet accounts.A journal entry shows all the accounts affected by a single event or transaction; each debit and each credit in a journal entry will affect a specific T-account.Journal entries provide a record of transactions, and T-accounts summarize the effects of transactions on specific accounts.
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Chapter 3: The Basics of Record Keeping and Financial
Statement Preparation: Income Statement
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Sample Questions
Q1) What are common-size income statements?
Answer: COMMON-SIZE INCOME STATEMENT
One tool for analysis of the income statement, a common-size income statement, expresses each expense and net income as a percentage of revenues.An analyst can use a common-size income statement to study over-time changes or among firm differences in the relations among revenues, expenses, and net income and to identify relations that the analyst should explore further.
Q2) The _____ are linked (that is, they articulate) through the shareholders' equity account, Retained Earnings.
A)balance sheet and the income statement
B)balance sheet and the statement of cash flows
C)statement of cash flows and the income statement
D)all of the above
E)none of the above
Answer: A
Q3) Cost is the economic sacrifice made to acquire goods or services.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Balance Sheet: Presenting and Analyzing
Resources and Financing
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Sample Questions
Q1) Retained earnings are
A)a source of financing for assets.
B)cash.
C)other non-cash assets.
D)the sum of a firm's dividend declarations.
E)the source of net assets generated by the earnings process.
Q2) A liability arises when a firm
A)signs a new labor union contract which includes a 6% pay raise for its union employees.
B)issues a purchase order for 100,000 units of inventory from a supplier over the next two years.
C)receives inventory previously ordered.
D)Both answers b and c are correct.
E)None of these answer choices is correct.
Q3) The balance sheet amount of shareholders' equity does not, and is not intended to, provide the user of the financial reports with a measure of the market value of common equity.
A)True
B)False
Q4) Describe Asset recognition, definition, and measurement.
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Chapter 5: Income Statement: Reporting Results of Operating Activities
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Q1) Both U.S.GAAP and IFRS require the presentation of an income statement and the presentation of the items of Other Comprehensive Income.U.S.GAAP permits the following reporting format(s) except for:
A)a single statement of comprehensive income that shows all the changes in net assets except from transactions with owners.
B)a two-statement presentation that includes an income statement and a separate statement of comprehensive income.
C)a separate display of the items comprising Other Comprehensive Income within a statement of changes in shareholders' equity.
D)a separate display of the items comprising Other Comprehensive Income within a statement of retained earnings.
E)All of the above are acceptable reporting formats.
Q2) Revenues measure the inflow of net assets from operating activities.
A)True B)False
Q3) How are expenses recognized and measured?
Q4) What is revenue recognition?
Q5) How are period expenses recognized and measured?
Page 7
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Chapter 6: Statement of Cash Flows
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Sample Questions
Q1) Firms not experiencing rapid growth can often finance capital expenditures with A)cash flow from operations.
B)borrowed funds.
C)issue common shares.
D)sales of existing noncurrent assets.
E)none of the above.
Q2) Most firms prefer to prepare the statement of cash flows after they have prepared the income statement and the balance sheet.The amounts debited to various accounts on the T-account work sheet
A)do not equal amounts credited to various accounts.
B)must equal amounts credited to the liability accounts, only.
C)may or may not equal amounts credited to various accounts.
D)must equal amounts credited to various accounts.
E)must equal amounts credited to the shareholders' equity accounts, only.
Q3) Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than, net income as a performance measure.Interpreting cash from operations as a measure of operating performance requires considering cash flows along two dimensions: (1) their timing and (2) their classification and disclosure in the statement and related notes.Explain.
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Page 8
Chapter 7: Introduction to Financial Statement Analysis
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Q1) Management can take deliberate steps to produce a financial statement that presents a better current ratio at the balance sheet date than the average, or normal, current ratio during the rest of the year. Analysts refer to such actions as window dressing:
A)near the end of its accounting period a firm might delay normal purchases on account.
B)hasten the collections of a loan receivable, classified as noncurrent assets, and use the proceeds to reduce current liabilities.
C)near the end of its accounting period a firm might accelerate normal purchases on account.
D)hasten the collections of a loan receivable, classified as current assets, and use the proceeds to reduce long-term liabilities.
E)choices a and b.
Q2) What are pro forma financial statements?
Q3) Common shareholders have a residual claim on all income after creditors and preferred shareholders receive amounts contractually owed them.
A)True
B)False
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Chapter 8: Revenue Recognition, Receivables, and
Advances From Customers
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Q1) Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.Provision in this context refers to
A)a liability in U.S.GAAP, not an expense; that provision in IFRS refers to an expense whose timing or amount, or both, are uncertain.
B)an expense in U.S.GAAP, not a liability; that provision in IFRS refers to an expense whose timing or amount, or both, are uncertain.
C)an liability in U.S.GAAP, not an expense; that provision in IFRS refers to a liability whose timing or amount, or both, are uncertain.
D)an expense in U.S.GAAP, not a liability; that provision in IFRS refers to a liability whose timing or amount, or both, are uncertain.
E)none of the above.
Q2) Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.
A)True
B)False
Q3) How do sellers measure revenue?
Q4) Describe the allowance method for uncollectible accounts.
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Chapter 9: Working Capital
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Sample Questions
Q1) Discuss inventory accounting concepts and issues.
Q2) LIFO is like a stack of trays in a cafeteria: the last tray deposited on the stack is the first one taken off, and the lowest tray in the stack remains there as long as any trays remain.
A)True
B)False
Q3) As time passes, firms gain information about both actual warranty usage and actual warranty expenditures.
A)True
B)False
Q4) (CMA adapted, Jun 96 #15) Refer to the Fabulous Engine Company example.If Fabulous uses a weighted average periodic inventory system, the total cost of the inventory for carburetor 2642J at March 31 is
A)$188,374
B)$194,200
C)$198,301
D)$198,374
E)$199,233
Q5) What costs are included in inventory of manufacturing and merchandising firms?
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Chapter 10: Long-Lived Tangible and Intangible Assets
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Sample Questions
Q1) An engineering firm has decided to construct its own office building.The construction will be partially financed through a construction loan and any remainder will be financed from internally generated funds.The internal accountants have collected the following information concerning the construction.
\(\begin{array}{llll}
& \text { Average Balance } & \text { Construction } & \text { Other } \\ \text { Year } & \text { Construction Account } & \text { Debt } @ 10 \% & \text { Debt } @12 \%\\
1 & \$ 1,000,000 & \$ 1,000,000 & \$ 500,000 \\
2 & \$ 1,500,000 & \$ 1,000,000 & \$ 250,000 \\
3 & \$ 2,000,000 & \$ 800,000 & \$ 200,000 \end{array}\) Required:
Determine the amount, if any, of capitalized interest cost for each year.
a. Year 1
b. Year 2
c. Year 3
Q2) How does disposal of an asset through sale, abandonment, or trade-in on another asset affect net income?
Q3) How are periodic depreciation and amortization accounted for?
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Page 12
Chapter 11: Notes, Bonds, and Leases
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Q1) U.S.GAAP specifies criteria for a capital lease.Which of the following is not one of the criteria?
A)The lease transfers ownership of the leased asset to the lessee at the end of the lease term.
B)Transfer of ownership at the end of the lease term seems likely because the lessee has a bargain purchase option.
C)The lease extends for at least 75% of the asset's expected useful life.
D)The lease extends for at least 50% of the asset's expected useful life.
E)The present value of the contractual minimum lease payments equals or exceeds 90% of the fair value of the asset at the time the lessee signs the lease using a discount rate appropriate for the creditworthiness of the lessee.
Q2) Firms that need cash for long-term purposes, such as acquiring buildings and equipment or financing a business acquisition, and that wish to use debt as a means of obtaining cash, will
A)borrow from commercial banks.
B)borrow from insurance companies.
C)borrow from financial institutions.
D)issue bonds in the capital markets.
E)all of the above
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Page 13
Chapter 12: Liabilities: Off-Balance Sheet Financing,
Benefits, and Income Taxes
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Q1) Using accounts receivable to achieve off-balance-sheet financing. Marvel Appliance Store has $100,000 of accounts receivable on its books on January 2, 2013. These receivables are due on December 31, 2013. The firm wants to use these accounts receivables to obtain financing.
a. Prepare journal entries during 2013 for the transactions in parts (i) and (ii) below:
(1) The firm borrows $100,000 from its bank, using the accounts receivable as collateral. The loan is repayable on December 31, 2013, with interest at 8%.
(2) The firm sells the accounts receivable to the bank for $92,593. It collects amounts due from customers on these accounts and remits the cash to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Marvel Appliance Store structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?
Q2) Discuss the accounting for income taxes and the disclosure of income taxes in the financial statements.
Q3) Do firms confront ethical issues when engaging in off-balance-sheet financing?
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Page 14
Chapter 13: Marketable Securities and Derivatives
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Sample Questions
Q1) The argument for measuring held-to-maturity debt securities at amortized cost and ignoring most changes in fair value during the contractual term of the debt is/are
A)changes in fair value are not relevant if the firm has the intention and ability to hold the securities to maturity.
B)firms would recognize impairment losses because of conservatism.
C)firms would recognize impairment losses because of impairments due to changes in default risk that reflect changes in the amount the investor is likely to receive.
D)all of the above
E)none of the above
Q2) How are securities measured after acquisition?
Q3) The U.S.GAAP and IASB require that firms record derivatives on the balance sheet date at
A)historical cost.
B)fair value.
C)amortized acquisition cost.
D)future value of present cash flows.
E)present value of future cash flows.
Q4) What disclosures about marketable securities are required by U.S.GAAP?
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Page 15
Chapter 14: Intercorporate Investments in Common Stock
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Sample Questions
Q1) To avoid double counting P's investment in S, P must eliminate
A)the investment in S and S's separate company shareholders' equity.
B)all debt on S's separate company financial statements.
C)any dividends paid against the cash account.
D)all intercompany transactions.
E)all of the above.
Q2) Minority, passive investments are initially recorded at the A)acquisition cost.
B)fair market value of the net assets.
C)lower of cost or market.
D)present value of future cash flows.
E)future value of present cash flows.
Q3) The accounting for investments in common stock depends on (1) the expected holding period, and (2) the purpose of the investment, as determined by both the percentage held and management intent.
A)True
B)False
Q4) Describe U.S.GAAP and IFRS requirements in accounting for the business combination.
Q5) Discuss the accounting for majority, active investments.
Page 16
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Chapter 15: Shareholders Equity: Capital Contributions and Distributions
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Q1) Most publicly traded firms operate as corporations.Discuss three advantages of the corporate form.
Q2) Jurisdiction-specific corporate laws limit directors' freedom to declare dividends.Without these limits, directors might dissipate the firm's assets for the benefit of
A)common shareholders, harming other nonshareholding stakeholders.
B)creditors, harming other stakeholders.
C)employees, harming other stakeholders.
D)management, harming other stakeholders.
E)customers, harming other stakeholders.
Q3) U.S.GAAP and IFRS do not require the firm to measure the fair value of the stock warrants separately from the value of the associated bond or preferred stock and allocate the issue price between the two securities. A)True B)False
Q4) IFRS does not require firms to allocate a portion of the issue price of convertible bonds and convertible preferred stock to the conversion feature. A)True
B)False
Page 17
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Chapter 16: Statement of Cash Flows: Another Look
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Q1) The product life-cycle concept from microeconomics and marketing provides useful insights into the relations between cash flows from operating, investing, and financing activities.When a product matures,
A)operations generate positive cash flow, enough to finance expenditures on property, plant, and equipment.
B)firms use the excess cash flow to repay borrowing from the introduction and growth phases and to begin paying dividends to shareholders.
C)capital expenditures usually maintain, rather than increase, productive capacity. D)all of the above
E)none of the above
Q2) The accountant prepares the statement of cash flows after completing the A)balance sheet, only.
B)income statement, only
C)balance sheet and the income statement.
D)funds flow statement.
E)statement of retained earnings.
Q3) Discuss the indirect and direct methods in deriving cash flow from operations.
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18
Chapter 17: Synthesis and Extensions
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Sample Questions
Q1) Firms initially record property, plant, and equipment, sometimes referred to as fixed assets, at acquisition cost, the cash paid or the fair value of other consideration given in exchange for the asset. Which of the following is/are true?
A)Acquisition cost includes all costs necessary to prepare the asset for its intended use.
B)Firms capitalize into the asset's carrying amount subsequent expenditures that extend the service life or increase the benefits of a fixed asset beyond those initially anticipated.
C)Buildings and equipment have a finite life, so firms must depreciate their acquisition cost less estimated salvage over the expected service life.
D)Firms may use a straight-line method or accelerated depreciation methods.
E)all of the above
Q2) Firms account for material errors in previously issued financial statements by retrospectively restating net income of prior periods and adjusting the beginning balance in Retained Earnings of the current period. A)True B)False
Q3) Explain the accounting for marketable securities.
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