Financial Reporting Practice Questions
Course Introduction
Financial Reporting is a critical course that introduces students to the principles and practices involved in preparing, presenting, and analyzing financial statements in accordance with generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The course emphasizes the conceptual framework of financial accounting, the accounting cycle, and the structure and content of key financial statements such as the balance sheet, income statement, statement of cash flows, and statement of changes in equity. Students will learn how to interpret and use financial reports to assess an organizations financial performance and position, make informed decisions, and ensure transparency and accountability to stakeholders. Case studies and real-world scenarios provide practical applications, preparing students for careers in accounting, finance, and related fields.
Recommended Textbook
Advanced Accounting 11th Edition by Joe Ben Hoyle
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19 Chapters
1785 Verified Questions
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity inventory profit must be deferred by Tower?
A) $6,480.
B) $3,240.
C) $10,800.
D) $16,200.
E) $6,610.
Answer: B
Q2) What argument could be made against the equity method?
Answer: An argument could be made against the recognition of income under the equity method. The investor is required to recognize its share of the investee's income even when it is unlikely that the investor will ever receive the entire amount in cash dividends.
Q3) When should an investor not use the equity method for an investment of 21% in another corporation?
Answer: When the investor does not have significant influence with regard to the investee.
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3
Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true?
A) Negative goodwill is recorded.
B) A deferred credit is recorded.
C) A gain on bargain purchase is recorded.
D) Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit.
E) Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain.
Answer: C
Q2) What term is used to refer to a business combination in which only one of the original companies continues to exist?
Answer: The appropriate term is statutory merger.
Q3) How are stock issuance costs accounted for in an acquisition business combination?
Answer: Stock issuance costs reduce the balance in the acquirer's Additional Paid-In Capital in an acquisition business combination.
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4
Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Sample Questions
Q1) What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?
Answer: The partial equity method is a compromise between the initial value method and the equity method. It provides some of the advantages of the equity method but is easier to use. Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary's income and decreased when the subsidiary pays dividends. The method is simpler than the equity method because amortization of excess fair value allocations is not done.
Q2) For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?
Answer: The balance of the investment account is increased for the subsidiary's net income. It is decreased for subsidiary dividends and losses. The amortization of excess fair value allocations does not affect the account balance.
Q3) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?
Answer: The initial value method is the easiest to use.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Sample Questions
Q1) In measuring non-controlling interest at the date of acquisition, which of the following would not be indicative of the value attributed to the non-controlling interest?
A) Fair value based on stock trades of the acquired company.
B) Subsidiary cash flows discounted to present value.
C) Book value of subsidiary net assets.
D) Projections of residual income.
E) Consideration transferred by the parent company that implies a total subsidiary value.
Q2) Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of non-controlling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?
A) $350,000.
B) $300,000.
C) $400,000.
D) $370,000.
E) $0.
Q3) Where should a non-controlling interest appear on a consolidated balance sheet?
Page 6
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Sample Questions
Q1) On January 1, 2010, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2010 and 2011, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. For consolidation purposes, what net debit or credit will be made for the year 2010 relating to the accumulated depreciation for the equipment transfer?
A) Debit accumulated depreciation, $46,000.
B) Debit accumulated depreciation, $48,000.
C) Credit accumulated depreciation, $48,000.
D) Credit accumulated depreciation, $46,000.
E) Debit accumulated depreciation, $2,000.
Q2) When is the gain on an intra-entity transfer of land realized?
Q3) How does a gain on an intra-entity sale of equipment affect the calculation of a non-controlling interest?
Q4) What is meant by unrealized inventory gains, and how are they treated on a consolidation worksheet?
Page 7
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other Issues
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Sample Questions
Q1) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000.
(2)) Non-controlling interest in Stage's net income was $30,000.
(3)) Graham paid dividends of $15,000.
(4)) Stage paid dividends of $10,000.
(5)) Excess acquisition-date fair value over book value was expensed by $6,000.
(6)) Consolidated accounts receivable decreased by $8,000.
(7)) Consolidated accounts payable decreased by $7,000.
Using the indirect method, where does the decrease in accounts payable appear in a consolidated statement of cash flows?
A) $7,000 increase to net income as an operating activity.
B) $7,000 decrease to net income as an operating activity.
C) $5,600 increase to net income as an operating activity.
D) $5,600 decrease to net income as an operating activity.
E) $7,000 increase as a financing activity.
Q2) How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000. What is consolidated net income?
A) $229,500.
B) $237,000.
C) $245,000.
D) $232,500.
E) $240,000.
Q2) What are the benefits or advantages of filing a consolidated income tax return?
Q3) What configuration of corporate ownership is described as a father-son-grandson relationship?
Q4) What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.
Q5) Under what conditions must a deferred income tax asset be recorded?
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Chapter 8: Segment and Interim Reporting
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Sample Questions
Q1) Kaycee Corporation's revenues for the year ended December 31, 2010, were as follows: Consolidated Revenue per the Income Statement: $1,200,000
Upstream Intersegment Sales: $180,000
Downstream Intersegment Sales: $60,000
For purposes of the Revenue Test, what amount will be used as the benchmark for determining whether a segment is reportable?
A) $24,000.
B) $120,000.
C) $138,000.
D) $144,000.
E) $0.
Q2) How are extraordinary gains reported in a third quarter interim financial report?
A) Recognized at year-end only.
B) Recognized in the first quarter.
C) Recognized ratably over the first three quarters.
D) Recognized in the third quarter.
E) Ignored.
Q3) What related items need to be disclosed in regard to total segment assets?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
A) Recognized foreign currency denominated assets and liabilities.
B) Unrecognized foreign currency firm commitments.
C) Forecasted foreign currency denominated transactions.
D) Net investment in foreign operations.
E) Deferred foreign currency gains and losses.
Q2) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?
Q3) Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2011. Pigskin received payment of 35,000 British pounds on May 8, 2011. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)
A) $10,500 loss
B) $10,500 gain
C) $1,750 loss
D) $3,850 loss
E) No gain or loss should be recognized.
Q4) How is the fair value of a Forward Contract determined by U.S. GAAP?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Sample Questions
Q1) Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2011, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2011, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2011 was U.S. $.68, and the 2011 year-end exchange rate was U.S. $.65. Kennedy's share of Hastie's net income for 2011 would be
A) $18,000.
B) $15,000.
C) $18,200.
D) $16,000.
E) $18,500.
Q2) What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?
Q3) Contrast the purpose of remeasurement with the purpose of translation.
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Sample Questions
Q1) Which of the following is not true about IFRS?
A) The IASB does not have the ability to enforce proper usage of IFRS.
B) IFRS is available to any organization or nation that wishes to use those standards.
C) IFRS is a comprehensive set of financial reporting standards.
D) IFRS includes only pronouncements issued by the IASB.
E) IFRS are considered as generally accepted accounting principles.
Q2) A company incurs research and development costs of $200,000 in 2011 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. As a result of research and development costs, what is the difference in income between reporting using U.S. GAAP and IFRS in 2011?
A) U.S. GAAP income is $50,000 higher.
B) U.S. GAAP income is $50,000 lower.
C) IFRS income is $50,000 lower.
D) IFRS income is $150,000 lower.
E) IFRS income is $150,000 higher.
Q3) What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Sample Questions
Q1) Which one of the following forms is used in connection with employee stock plans?
A) S-8.
B) S-3.
C) S-4.
D) S-1.
E) S-11.
Q2) Describe the two parts of the SEC registration statement.
Q3) The prospectus part of a registration contains all except which of the following?
A) financial statements for the issuing company audited by an independent CPA along with appropriate supplementary data.
B) an explanation of the intended use of the proceeds to be generated by the sale of the new securities.
C) a description of the risks associated with the securities.
D) a description of the business and the properties owned by the company.
E) additional data concerning expenses of issuance.
Q4) What was the purpose of the Securities Exchange Act of 1934?
Q5) Why is the SEC's Rule 14c-3 important to the accounting profession?
Page 14
Q6) What are the four interconnected goals that the SEC has tried to achieve?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Sample Questions
Q1) Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building).
Assets available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?
Q2) Which statement is false regarding a plan for reorganization?
A) The plan is the heart of every Chapter 7 bankruptcy.
B) The provisions of the plan specify the treatment of all creditors and equity holders upon approval by the Court.
C) The plan shapes the financial structure of the entity that emerges.
D) The plan may contain numerous provisions as solutions to financial difficulties.
E) The plan may contain provisions for changes in the management of the company.
Q3) What is meant by a "fully secured liability"?
Q4) What information is included on the statement of realization and liquidation?
Q5) What are duties of the creditors committee in Chapter 7 liquidation?
Q6) What are the four categories of debts in a Statement of Financial Affairs?
Q7) What term is used for a bankruptcy forced upon a debtor by its creditors?
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Chapter 14: Partnerships: Formation and Operation
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Sample Questions
Q1) Jerry, a partner in the JSK partnership, begins the year on January 1, 2011 with a capital balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on this weighted average capital balance. On March 1, 2011, when the partnership tax return for 2010 was completed, Jerry's capital account was credited for his share of 2010 profit of $120,000.
Jerry withdrew this amount quarterly, beginning April 1.
On September 1, Jerry's capital account was credited with a special bonus of $60,000 for business he brought to the partnership. What amount of interest will be attributed to Jerry for year 2011 that will go toward his profit distribution for the year? (Use a 360-day year for calculations.)
A) $5,250
B) $6,000
C) $6,400
D) $7,000
E) $7,200
Q2) By what methods can a person gain admittance to a partnership?
Q3) Why are the terms of the Articles of Partnership important to partners?
Q4) What events cause the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) What is the role of the accountant during the liquidation process?
Q2) What accounting transactions are not recorded by an accountant during partnership liquidation?
A) The conversion of partnership assets into cash.
B) The allocation of gains and losses from sales of assets.
C) The payment of liabilities and expenses.
D) The initiation of legal action by creditors of the partnership.
E) Write-off of remaining unpaid debts.
Q3) What is the preferred method of resolving a partner's deficit balance, according to the Uniform Partnership Act?
A) Partners never have a deficit balance.
B) The other partners must contribute personal assets to cover the deficit balance.
C) The partnership must sell assets in order to cover the deficit balance.
D) The partner with a deficit balance must contribute personal assets to cover the deficit balance.
E) The partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities.
Q4) For a partnership, how should liquidation gains and losses be accounted for?
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Chapter 16: Accounting for State and Local Governments
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Sample Questions
Q1) Under modified accrual accounting, when should revenues be reported by a governmental-type fund?
Q2) The Town of Anthrop has recorded the receipt of a $10,000 grant to make its Town Hall handicapped-accessible. The town now spends $10,000 to make the Town Hall handicapped-accessible.
Required:
Prepare the journal entry (or entries), and identify the fund for recording, to record that the town spends $10,000 of a grant it received to make the Town Hall handicapped-accessible.
Q3) GASB Codification Section N50.104 divides all eligibility requirements into four general classifications including all of the following except:
A) Required characteristics of the recipients.
B) Time requirements.
C) Reimbursement.
D) Contingencies.
E) Refunding.
Q4) What are the four fiduciary fund types?
Q5) In governmental accounting, what term is used for a decrease in financial resources?
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Chapter 17: Accounting for State and Local Governments
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Q1) For government-wide financial statements, what account is credited when a piece of equipment is leased on a capital lease?
A) Equipment - Capital Lease
B) Encumbrances - Long Term
C) Encumbrances - Lease Obligations
D) Capital Lease Obligation
E) The lease is not recorded.
Q2) What information is required in the financial section of a state or local government's CAFR?
Q3) Which of the following is a financial statement of a proprietary fund?
A) Balance sheet.
B) Statement of Operations.
C) Statement of Changes in Cash Flows.
D) Statement of Net Assets.
E) Statement of Revenues, Expenditures, and Changes in Fund Balance.
Q4) What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?
Q5) What are the three broad sections of a state or local government's CAFR?
Q6) What is meant by the term fiscally independent?
Page 19
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) If the total acquisition value of an acquired not-for-profit organization is greater than the fair value of all identifiable net assets of the organization, and that organization's revenues are not earned by dues or other types of earned revenues, then the excess of acquisition value over identifiable net assets is immediately reported:
A) As goodwill on the consolidated balance sheet.
B) As a pro-rata increase to the identifiable assets and liabilities acquired.
C) As a direct reduction in unrestricted net assets on the balance sheet.
D) As a reduction in unrestricted net assets on the statement of activities.
E) As an increase in other assets on the balance sheet.
Q2) Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition for A) miscellaneous revenues.
B) contributions.
C) unconditional promises to give.
D) exchange transactions.
E) pledges.
Q3) For a voluntary health and welfare organization, what are supporting services expenses?
Q4) What are the objectives of accounting for a not-for-profit organization?
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Chapter 19: Accounting for Estates and Trusts
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Q1) The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds
$50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000.
Prepare the journal entry to record the collection of the life insurance policy.
Q2) What are the goals of probate laws? (1) gather and preserve all of the decedent's property;
(2) carry out an orderly and fair settlement of all debts;
(3) discover and follow the decedent's intent for the remaining property
A) 1 only.
B) 2 only.
C) 3 only.
D) 1 and 2.
E) 1, 2, and 3.
Q3) What is the difference between an executor and an administrator?
Q4) What are the three goals of probate laws?
Q5) What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?
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