Financial Reporting
Textbook Exam Questions
Course Introduction
Financial Reporting is a foundational course that examines the principles, standards, and processes involved in preparing and presenting financial statements for external users. The course covers key topics such as the conceptual framework of accounting, measurement and recognition of assets, liabilities, equity, revenue, and expenses, and compliance with relevant reporting standards such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). Students learn how to analyze and interpret financial statements to assess the financial performance and position of an organization, as well as the regulatory, ethical, and communicative aspects of transparent financial disclosure.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) Many market participants argue that financial markets are efficient and that financial statement users cannot routinely analyze financial statements to find mispriced securities.This view would lead some to suggest that there is little value to financial statement analysis.
Required:
Provide a discussion of the role of financial statement analysis in an efficient capital market and reasons why financial statement analysis is still valuable.
Answer: 1.Even if markets are perfectly efficient,someone must do the analysis to bring about appropriate prices.
2.A finding that the market is efficient on average does not preclude temporary mispricing of securities.Financial analysis can identify specific mispriced securities.
3.Research has shown that equity markets are not perfectly efficient,financial analysis has uncovered anomalies.
4.Financial analysis can adjust financial statements for the biases related to managers' preference of job security and compensation.
5.Financial analysis is valuable outside to the equity capital markets.
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3
Chapter 2: Asset and Liability Valuation and Income Recognition
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Sample Questions
Q1) Refer to Balance Sheet Equation.ORP Corporation Purchases land for $9,000 cash and 1,000 shares of common stock values at 10 per share.This transaction results in ORP recording a decrease in cash of $9,000,an increase in non-cash assets of $ 19,000,and an increase in ______________________________ of $10,000
Answer: contributed capital
Q2) ________________________________________ is the net amount that a firm would receive if it sold an asset or the net amount it would have to pay to settle a liability.
Answer: Net realizable value
Q3) Acquisition costs includes all costs necessary to get an asset ready for its _________________________.
Answer: intended use
Q4) When recognizing deferred tax assets and liabilities,the income statement approach and the balance sheet approach yield identical results:
A) when enacted tax rates applicable to future periods do not change.
B) when the firm recognizes no valuation allowance on deferred tax assets.
C) Both (a) and (b) are correct.
D) None of these answers is correct.
Answer: C
Page 4
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) Cash flows from ____________________ activities will normally be negative during the introduction and growth phase of the product life cycle.
Answer: investing
Q2) Lagos Corp.recorded sales of $345,000 in 2010.In addition,its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows: \(\begin{array}{lll}
&\text {Jan. 1, 2010 }&\text { Dec. 31,2010 }\\
\text { Accounts Receivable } & \$ 65,000 & \$ 90,000 \\
\text { Accounts Payable } & \$ 32,000 & \$ 28,000 \end{array}\)
How much cash did Lagos collect from customers in 2010?
A) $345,000
B) $320,000
C) $324,000
D) $316,000
Answer: B
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) When calculating Basic earnings per share net income is adjusted by____________
Q2) Adjustments for dilutive securities and the adjustment to weighted average number of Shares outstanding presumes that the dilutive securities are converted to common shares:
A) as of the beginning of the year.
B) as of the end of the year.
C) as of the middle of the year.
D) as of the point in time where the maximum number of shares are outstanding.
Q3) Refer to the information for Orca Industries.Orca's basic earnings per share is:
A) .22
B) .13
C) .25
D) .30
Q4) Refer to the information for Extreme Sports Company and All Sports Corporation.
Calculate All Sports' inventory turnover ratio.
A) 5.3
B) 1.2
C) 3.9
D) .256
Chapter 5: Risk Analysis
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Q1) Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in financing? \(\begin{array}{lll} & \underline {\text { Ability to generate cash}}&\underline {\text { Need to use cash}}\\
a. &\text { Profitability of goods and services sold }& \text { Working capital requirements}\\
b. &\text { Sales of existing plant assets }& \text { Plant capacity requirements}\\
c. & \text { Borrowing capacity} & \text { Debt service requirements}\\
d. & \text { Profitability of goods and services sold }& \text { Debt service requirements}\\ \end{array}\)
Q2) One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator.Detail how the interest coverage ratio and fixed charges coverage ratio are calculated.In addition,discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) All of the following are typically recognized as accounting liabilities except:
A) Bonds Payable
B) Rental Fees Received in Advance
C) Loan Guarantees
D) Taxes Payable
Q2) One of the conditions that must be met to recognize an estimated loss from a contingency is that the amount of loss can be estimated with
Q3) Creighton Corp.,a textile manufacturer,reported net income of $258,000 in 2012.During 2012 Creighton reported a gain of $29,800 from the sale of three used delivery trucks.The gain was included as part of income from continuing operations.Assuming that the gain is a one-time event and that Creighton has an effective tax rate of 35% calculate Creighton's adjusted net income.Show all of your calculations for credit.
In addition,discuss why analysts might make an adjustment of this type.
Q4) Which of the following does not describe an extraordinary gain or loss?
A) infrequent in occurrence
B) peripheral to the company's core business
C) unusual in nature
D) material in amount
Page 8
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Chapter 7: Financing Activities
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Sample Questions
Q1) Derivatives are financial instruments that derive their value from changes in any of the following underlying securities except:
A) Stock prices
B) Percentage discount on accounts receivable
C) Interest rates
D) Commodity prices
Q2) Convertible preferred stock has both the attributes of _____________ and __________________________.
Q3) Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.
Q4) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q5) There are three dates that are important to a corporation when they issue new shares of stock.Identify the three dates and explain the significance of each?
Q6) A(n)____________________ lease arrangement is one in which the lessee enjoys the use of the property for a set period of time.
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Chapter 8: Investing Activities
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Q1) A key characteristic of asset measurement is best described as:
A) average value based on all assets held by the company
B) disposal cost less depreciation
C) fair value at the acquisition date
D) fair value less depreciation
Q2) Unrealized holding gains or losses that are recognized in the income statement are from securities classified as:
A) trading
B) available for sale
C) held-to-maturity
D) equity
Q3) An investing firm consolidates the variable interest entity if it absorbs the majority of the entity's expected ____________________ if they occur,receives a majority of the entity's expected ______________________________ if they occur,or both.
Q4) Which of the following would not be used to determine the cost of an asset?
A) cash paid
B) sales and excise taxes
C) cost incurred to get the asset ready for its intended use
D) depreciation method
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Chapter 9: Operating Activities
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Q1) Based on the information provided by Falcon Networks how much cash did income taxes use during 2012?
A) $154.19 million
B) $54.17 million
C) $208.36 million
D) $284.84 million
Q2) Which of the following will most likely help identify an increasing proportion of uncollectible sales?
A) accounts receivable turnover
B) the ratio of bad debt expense to sales
C) the ratio of sales returns to sales
D) the ratio of cost of sales to sales
Q3) The difference between the economic resources received from customers and the economic resources paid to suppliers,employees and other providers of goods and services is called ____________________.
Q4) Explain the difference between a temporary and a permanent timing difference for income tax purposes"
Q5) A company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.
11
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) As an analyst it is important when projecting sales to make estimates about future changes in sales volume.Compare how you might make estimates about future sales value for a company in a mature industry and one in a rapidly growing industry.
Q2) Given the information provided about Card Sharks,what is the company's 2012 projected year-end cash balance?
A) $966
B) $50,820
C) $15,623
D) $38,524
Q3) Projected financial statements can be used to assess the sensitivity of all of the following except:
A) a firm's liquidity.
B) a firm's leverage to changes in assumptions.
C) conditions under which the firm's debt covenants may become binding.
D) unusual patterns for projected total assets.
Q4) The formula for forecasting inventory is ____________ /365 X.
Q5) The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.Discuss the seven steps necessary to prepare the three principal financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?
Q2) Under the cash-flow-based valuation approach,free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:
A) this approach focuses on earnings as a measure of the capital that a firm creates.
B) over the life of the firm, the free cash flows into the firm and cash flows paid out of the firm in dividends to shareholders will be equivalent.
C) over the life of the firm, the free cash flows out of the firm for investments and cash flows paid into the firm in dividends from these investments will be equivalent.
D) this approach focuses on wealth distribution to shareholders.
Q3) Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements.What are the three elements that the analyst needs to measure?
Q4) Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) Financial assets include all of the following except:
A) excess cash
B) short term investments
C) intangible assets
D) long-term investments
Q2) Even in relatively efficient securities markets,______ is observable but ______ is not; therefore,______ must be estimated.
Q3) Which of the following is not a problem with using a dividend-based valuation formula?
A) Dividends are arbitrarily established.
B) Dividends represent a transfer of wealth to shareholders.
C) Some firms do not pay a regular periodic dividend.
D) It is a challenge to forecast the final liquidating dividend.
Q4) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
Q5) One advantage of the free cash flow valuation method is cash is the medium of exchange and therefore is a fundamental source of ________________________
Q6) Provide the rationale for using expected free cash flow in valuation.
Q7) What three elements are needed to value a resource when using cash flows?
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q2) Over the life of a firm,the capital invested in the firm by the shareholders plus the income of the firm will reflect the ______________________________ to the shareholders.
Q3) Accounting for the residual income in a firm with 100% dividend payout can be expressed as follows:
RIt = CIt- ____________________ X BVt??
Q4) In theory,all three valuation models,when correctly implemented with internally consistent assumptions,will produce the same estimates of value.However,in practice,which of the following errors can result in different value estimates?
A) Incomplete or inconsistent earnings and cash flow forecasts
B) Inconsistent estimates of weighted average costs of capital
C) Incorrect continuing value computations
D) All of these errors result in different value estimates.
Q5) Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Which of the following ratios usually reflects investor's opinions of the future prospects for the firm?
A) Earnings per share
B) Dividend yield
C) Price/earnings ratio
D) Book value per share
Q2) The differences in industry market-to-book ratios may be the result of differences in growth,ROCE relative to RE,as well as differences in
Q3) Under the value-to-book model a firm will be valued below book value when:
A) the ROCE is greater than RE
B) the ROCE is equal to RE
C) the ROCE is less than RE
D) the firm's growth rate is above the industry average
Q4) If the market price of a share of stock is based on the expectations of all of the market participants and the trading volume in that stock,what would happen if the company's reputation were damaged by a scandal or defective product that caused personal injury or death?
Q5) Explain the analysts' role in making the capital markets efficient.
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