Course Introduction
Financial Reporting
Practice Questions
Financial Reporting is a foundational course that explores the principles, standards, and practices underlying the preparation and presentation of external financial statements. Covering key topics such as the accounting cycle, measurement and recognition of assets and liabilities, revenue recognition, and disclosure requirements, the course emphasizes the interpretation and analysis of financial statements in accordance with International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Through case studies and real-world examples, students will develop critical skills to evaluate the financial health and performance of organizations, equipping them for advanced studies or careers in accounting, finance, and business management.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Q1) What is the principal activity of security analysts?
A) To assign credit ratings.
B) To apply IFRS adjustments.
C) To value firms.
D) To assess the need for audits.
Answer: C
Q2) The five economic attributes that are normally studied are demand,supply,manufacturing,____________________,and investing and financing.
Answer: marketing
Q3) Describe what is meant by income from continuing operations?
Answer: Income from continuing operations represent all of the cash inflows (sales)and the cash outflows (expenses)that are normally recurring in the daily operations of the company.
Q4) Another important step in financial statement analysis is to assess the quality of a firm's _____________________________ and if necessary adjust them for such characteristics as sustainability or comparability.
Answer: financial statements
Page 3
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) Discuss the three ways in which GAAP allows value changes to be treated in the financial statements.Provide an example of each value change treatment.
Answer: 1.Value changes recognized on the balance sheet and the income statement when realized in a market transaction.Examples include selling inventory or land.
2.Value changes recognized on the balance sheet when they occur,but recognized on the income statement when realized.Examples include marketable securities.
3.Value changes recognized on the balance sheet and the income statement when they occur.Examples include impairment losses.
Q2) 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
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) Bankers Company reported net income of $40,000,which included depreciation expense and depletion expense of $21,000 and $18,000,respectively.The following changes also occurred during 2010: \[\begin{array} { | l | r | l | }
\hline \text { Irventory } & \$ 10,000 & \text { decrease } \\
\hline \text { Accourts payable } & 5,000 & \text { decrease } \\
\hline \text { Notes payable (leng-term) } & 15,000 & \text { decrease } \\
\hline \text { Income taxes payable } & 7,000 & \text { increase } \\
\hline \text { Accourts receivable } & 10,000 & \text { increase } \\
\hline \end{array}\]
Required:
Calculate cash flows from operating activities.
Answer: $40,000 + $21,000 + $18,000 + $10,000 - $5,000 + $7,000 - $10,000 = $81,000
Q2) In 2010,Lamar Industries reported the following: Sales $700,000; Accounts receivable beginning of 2010 $450,000; Accounts receivable end of 2010 $369,200; Depreciation expense $55,400; Rent Expense $30,000.What is the net cash provided (used)by operating activities
Answer: $750,800
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Chapter 4: Profitability Analysis
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Q1) Refer to the information for Carl Industries.In a percentage change balance sheet over the period of 2009 to 2011,what is the change in long-term liabilities?
A) 94.7%
B) 15.4%
C) 5.3%
D) 5%
Q2) When calculating the return on fixed assets sales is divided by
Q3) The ability of a firm to generate income from operations given a particular level of sales is measured by the ______________________________.
Q4) Refer to the information for Orca Industries.Orca's basic earnings per share is:
A) .22
B) .13
C) .25
D) .30
Q5) One problem with using EPS as a measure of profitability is that it does not consider the amount of ____________________ or ____________________ required to generate a particular level of earnings.
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Chapter 5: Risk Analysis
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Q1) When calculating the quick ratio,an analyst would include in the numerator cash,________________________________________,and receivables.
Q2) A.What are the three measures that are used to analyze long-term solvency risk?
B.describe each measure briefly
Q3) Refer to the information for Mobile Company.Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was:
A) .70
B) 1.39
C) 1.00
D) .72
Q4) Refer to the information for Mobile Company.Mobile's current ratio in 2010 was:
A) 1.07
B) 1.45
C) 1
D) .69
Q5) The operating cycle must not only generate cash to supply ________________________________________ needs,it must generate sufficient cash to service debt.
Q6) The current ratio is one of the measures of the __________ of the firm.
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Chapter 6: Accounting Quality
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Q1) An extraordinary gain or loss is unusual in nature,_____________________________________________,and material in amount.
Q2) 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
Q3) Many times an analyst will have to make judgments as to whether to include unrealized gains and losses when assessing earnings persistence and predicting future profitability.Discuss the case for and the case against including unrealized gains and losses as part of sustainable earnings when examining earnings persistence and future profitability.
Q4) Banks Corp.reported net income of $595,000 in 2012.During 2012 Banks reported a loss of $87,435 from a peripheral activity.The loss was included as part of income from continuing operations.Assuming that the loss is a one-time event and that Banks has an effective tax rate of 35%,calculate Banks' adjusted net income.Show all of your calculations for credit.
In addition,discuss why analysts might make an adjustment of this type.
Page 8
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Chapter 7: Financing Activities
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Q1) Under current U.S.GAAP,unrealized gains and losses from four balance sheet items are reported in accumulated other comprehensive income or loss.Which of the following is not one of the balance sheet items?
A) Derivatives held as cash flow hedges
B) Deferred tax assets related to net operating loss carryforwards
C) Minimum pension obligations
D) Investment securities classified as available for sale
Q2) Under which of the following conditions does the equipment lease qualify for capital lease accounting?
A) The lease contains a bargain purchase option.
B) The lease term is equal to or greater than 75% of the asset's economic life.
C) A, and B are correct answers.
D) The lease transfers ownership to the lessee at the end of the lease term.
Q3) 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
Q4) The _________________________ is the date a firm gives a stock option to employees.
Page 9
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Chapter 8: Investing Activities
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Q1) A company would need to record an impairment loss for its equipment when:
A) the original cost of the equipment exceeds its fair value and is deemed not recoverable.
B) management determines that the equipment will no longer be used.
C) the carrying amount of the equipment exceeds its fair value and is deemed not recoverable.
D) the cash flows from the equipment are less than its fair value.
Q2) Firms that capitalize routine maintenance and repair charges will end up with the result of having the current period's income being ____________________.
Q3) Based on the information concerning Snowflake Corp.what is the value of the goodwill related to the acquisition?
A) $1,775,000
B) $475,000
C) $2,250,000
D) $1,325,000
Q4) Financial reporting requires firms to ____________________ immediately all R&D costs incurred internally.
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Chapter 9: Operating Activities
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Q1) Magnum Construction contracted to construct a factory building for $545,000.The company started during 2012 and was completed in 2013.Information relating to the contract is as follows:
\(\begin{array} { | l | c | c | }
\hline & \mathbf { 2 0 1 2 } & \mathbf { 2 0 1 3 } \\
\hline \text { Costs incured during the year } & \mathbf { 3 1 0 , 0 0 0 } & \mathbf { 1 7 0 , 0 0 0 } \\
\hline \text { Estinated additional cost to complete } & 165,000 & \cdots \\
\hline \text { Billings during the year } & 280,000 & 285,000 \\
\hline \text { Cash collections during the year } & 260,000 & 305,000 \\
\hline
\end{array}\)
Required:
Record the preceding transactions in Magnum's books under completed-contract and the percentage of completion methods.Determine amounts that will be reported on the balance sheet at the end of 2012.
Q2) A company that uses LIFO will find that its ______________________________ account will be somewhat out of date.
Q3) 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 ____________________,the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.
Q2) Financial statement forecasts rely on additivity within financial statements and articulation across financial statements.Given this information sales growth forecasts will most likely affect growth in:
A) accounts receivables.
B) accounts payable.
C) depreciation.
D) salary payable.
Q3) Firms that have differentiated ___________________________________ for its products may have a greater potential to increase prices.
Q4) Financial ratio,percentage,and trend comparisons can be distorted by all of the following except:
A) aggressive revenue recognition practices.
B) the timing of asset purchases.
C) accounting for similar economic fundamentals in similar fashion.
D) the presence of nonrecurring items among the firms being analyzed.
Q5) The formula for forecasting inventory is ____________ /365 X.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Using the above information,calculate Zonk's weighted-average cost of capital:
A) 11.5%
B) 7.97%
C) 7.48%
D) 10.90%
Q2) Firm-specific factors that increase the firm's nondiversifiable risk include all of the following except:
A) Exposure to interest rate changes
B) Exposure to inflation
C) Exposure to management competence
D) Exposure to cyclicality
Q3) Investors typically accept a lower risk-adjusted rate of return on debt capital than on equity capital because:
A) debt is typically less risky because fixed claims bear less residual risk than equity claims.
B) equity bears less residual risk than debt.
C) equity capital costs are tax deductible.
D) the yield to maturity on equity is inversely related to its market value.
Q4) Provide the rationale for using expected dividends in a valuation model.
Q5) Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
Q2) Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.
Q3) What is Houston's free cash flow for common equity holders for year 2012?
A) $564
B) $399
C) $324
D) $412
Q4) Explain "free" cash flows.Describe which types of cash flows are free and which are not.How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?
Q5) Regarding the equity buyout,compute the unlevered market equity (asset)beta of Simpson before consideration of the LBO.Assume that the book value of the debt equals its market value.The income tax rate is 35 percent.
Q6) What is the purpose of a free cash flow analysis?
Q7) Provide the rationale for using expected free cash flow in valuation.
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows
Q2) In some industries,competitive dynamics eventually drive long-run projections of the future returns earned by the firm to an equilibrium level equal to the long-run expected cost of equity capital in the firm.At that point,a firm can be expected to earn ____________ residual income in the future.
A) increasing
B) zero.
C) decreasing
D) There is not enough information to answer this question
Q3) Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?
A) Overbidding
B) Over optimistic appraisal of market potential
C) Over estimation of synergies
D) Overuse of conventional financial statements
Q4) Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.
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Chapter 14: Valuation: Market-Based Approaches
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Q1) A company is expected to generate $175,000 in earnings next period and requires a 20% return on equity capital.Using the assumptions of the price-earnings ratio,what would be the company's value at the beginning of next period?
A) $781,250
B) $1,250,000
C) $2,000,000
D) $875,000
Q2) Wolverwine Company's current stock price is $55 per share and the company's trailing earnings per share were $2.10.Given that analysts are forecasting growth of 12% for Wolverwine,what is the company's PEG ratio?
A) 21.2
B) 2.18
C) 2.97
D) 1.52
Q3) Studies have shown that 50-70% of the variability in PE ratios across firms comes from ________ and _______.
Q4) The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.
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