Financial Statement Analysis
Final Exam
Course Introduction
Financial Statement Analysis is a course designed to equip students with the skills needed to critically evaluate and interpret financial statements of organizations. Through the use of real-world case studies and practical analytical tools, the course covers key topics such as ratio analysis, cash flow analysis, earnings quality assessment, and the impact of accounting choices on financial reports. Students will learn how to assess a companys financial health, profitability, liquidity, solvency, and operational efficiency, enabling them to make informed decisions for investment, lending, or management purposes. The course is essential for aspiring professionals in accounting, finance, and business management.
Recommended Textbook
Intermediate Accounting Volume 1 3rd Edition by Kin Lo
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Chapter 1: Fundamentals of Financial Accounting Theory
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Sample Questions
Q1) Which statement best explains "adverse selection"?
A)The term refers to a situation where one party has an information advantage over another.
B)The term refers to the need external parties have for financial information.
C)The term refers to the fact that some people have more information than others.
D)The term refers to a situation where one party cannot observe the actions of another party.
Answer: A
Q2) Explain the meaning of generally accepted accounting principles (GAAP).
Answer: GAAP refers to broad principles and conventions of general application as well as rules and procedures that determine accepted accounting practices.
Q3) Having an audit performed on the company's financial statements best illustrates which of the following?
A)Cheap talk.
B)Signalling.
C)Moral hazard.
D)Information.
Answer: B
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3
Chapter 2: Conceptual Frameworks for Financial Reporting
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Q1) What is the most commonly used measurement basis?
A)Current cost.
B)Realizable value.
C)Historical cost.
D)Present value.
Answer: C
Q2) Which statement is not correct?
A)Private enterprises may follow IFRS.
B)Private enterprises may follow ASPE.
C)Not-for-profit organizations may follow IFRS.
D)Government organizations must follow IFRS.
Answer: D
Q3) What decision would users of financial information need to make under the IFRS Conceptual Framework?
A)Determining whether to lend to the company.
B)Determining if a company is an ethical company.
C)Determining if the liquidation values are accurate.
D)Determine if the company is socially responsible.
Answer: A
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Page 4
Chapter 3: Accrual Accounting
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Sample Questions
Q1) Which of the following would result in an overstatement in reported net income?
A)Failure to record $45,000 collection of accounts receivable.
B)Expensing rather than capitalizing the $12,500 cost of a capital asset.
C)Failure to record an accrued revenue of $24,000.
D)Failure to record an accrued expense of $18,000.
Answer: D
Q2) Which statement is correct about expenses in the income statement?
A)The nature of expense format classifies expenses based on their source.
B)Some nature of expense categories are cost of sales,administration or warehouse.
C)Expenses must be classified by their function.
D)Expenses should be classified in decreasing order of magnitude.
Answer: A
Q3) Information on the income statement is categorized into
A)operating,investing and financing activities.
B)current and non-current activities.
C)continuing and discontinued activities.
D)nature and function activities.
Answer: C
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Chapter 4: Revenue and Recognition
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Sample Questions
Q1) 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 why the transit authority cannot recognize revenue at time of distribution.
A)The retailers have not taken physical possession of the asset.
B)A contract has not been entered into.
C)The transaction price is not known.
D)The retailers do not bear the significant risks and rewards of ownership.
Q2) Shear Company sells computer equipment with a 2-year warranty.Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year.In 2018,Shear had sales of $1,800,000.It paid $250,000 for materials and labour to make warranty-related repairs in 2018.What amount should the warranty expense for 2018 be?
A)$18,000
B)$36,000
C)$54,000
D)$250,000
Q3) Discuss advantages and disadvantages of using the cash basis to recognize revenues.Provide three valid reasons in your discussion.
Q4) List the five key steps in the revenue recognition process.
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Chapter 5: Cash and Receivables
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Q1) Medical Machines reported credit sales of $800,000,cash collections of $550,000 and bad debt write-offs of $15,000 for last year.Accounts receivable had a balance of $1,000,000 at the beginning of the year.What was the ending balance in the accounts receivable account?
A)$450,000
B)$1,235,000
C)$1,250,000
D)$1,800,000
Q2) Family Fun reported cash sales of $250,000,credit sales of $750,000,cash collections from receivables of $500,000,bad debt write-offs of $25,000 and bad debt expense of $35,000 for last year.Accounts receivable had a balance of $1,000,000 at the beginning of the year.What was the ending balance in the accounts receivable account?
A)$1,190,000
B)$1,225,000
C)$1,440,000
D)$1,475,000
Q3) Explain two problems associated with the direct write-off method.
Q4) Identify the two criteria for classifying an investment as a cash equivalent.
Q5) Explain why a bank reconciliation is necessary.
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Chapter 6: Inventories
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Q1) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2016,but the inventory was excluded in error during the ending inventory count.What impact will this have on fiscal 2017 financial reporting?
A)Gross margin is understated by $1,000.
B)Cost of sales is overstated by $1,000.
C)Ending inventory is not affected by the prior year inventory counting error.
D)Beginning inventory is overstated by $1,000.
Q2) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2016,but the inventory was excluded in error during the ending inventory count.What impact will this have on fiscal 2017 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.
Q3) Which statement is not correct about overhead?
A)Fixed overhead is capitalized under absorption costing.
B)Fixed overhead is expensed under variable costing.
C)Variable overhead is expensed under both absorption and variable costing.
D)Both fixed and variable overhead are capitalized under absorption costing.
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Page 8
Chapter 7: Financial Assets
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Q1) Which statement is correct about an at fair value through OCI investment?
A)The investment is reported at historical cost.
B)Changes in fair value are recorded in OCI.
C)These investments are acquired exclusively for selling in the near term.
D)Changes in fair value are recorded in income.
Q2) Explain the nature of and the appropriate accounting treatment for investments in subsidiaries,joint ventures,and associates.
Q3) What is the meaning of "control"?
A)The power to participate in the financial and operating policy decisions of the investee.
B)The power to govern the financial and operating policies of an entity.
C)The power to share in strategic decisions affecting an entity.
D)The power to sell the shares of an entity.
Q4) How does having significant influence over an investee alleviate information asymmetry?
Q5) Explain the difference between a joint arrangement,joint control,joint operation and a joint venture.
Q6) Explain the nature of and the appropriate accounting treatment for investments subsequently measured at amortized cost.
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Chapter 8: Property, plant and Equipment
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Q1) What is the accounting treatment recommended under IFRS for interest capitalization for property,plant and equipment (PPE)?
A)Capitalize cost of debt directly attributable to construction of the PPE.
B)Capitalize cost of internal funds directly attributable to construction of the PPE.
C)Expense cost of debt directly attributable to construction of the PPE.
D)IFRS does not provide any specific guidance for interest capitalization.
Q2) What factor will not affect the estimated useful life of property,plant or equipment?
A)Legal life of the asset.
B)Technological obsolescence.
C)Competitive pressures.
D)Productive capacity.
Q3) What accounting issue arises for recognizing non-monetary transactions?
A)Determining when the substantial risks and rewards of ownership are transferred.
B)Determining the amount to be allocated to each performance obligation.
C)Determining the costs incurred or still to be incurred to fulfill the performance obligation.
D)Determining the amount at which to record the transaction.
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Page 10
Chapter 9: Intangible Assets, goodwill, mineral Resources, and Government Grants
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Q1) Explain the difference between indefinite lived and finite lived intangible assets.
Q2) Which of the following is not a characteristic of an intangible asset?
A)It has no physical substance.
B)Its useful life may exceed its legal life.
C)It may be amortized using the straight-line method.
D)It may be impaired and written off.
Q3) Which statement is correct?
A)In the extraction phase,the mineral site is ready for mineral production.
B)In the extraction phase,the mineral site is prepared for resource extraction.
C)In the extraction phase,the mineral site is assessed for technical viability.
D)In the extraction phase,the six criteria required for capitalization are met.
Q4) What is the appropriate treatment for re-payment of government grants under ASPE?
A)Accounted for prospectively.
B)Accounted for retrospectively.
C)Partial prospective treatment and partial retrospective treatment.
D)Full prospective treatment and full retrospective treatment.
Q5) Why is it important to understand the difference between research costs and development costs?
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Chapter 10: Applications of Fair Value to Non-Current Assets
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Q1) Which statement is not correct?
A)Accounting for biological assets is covered by the requirements of IAS 41.
B)Biological assets include grapes,milk,wine,cheese and lumber.
C)End of processing activities are covered under the requirements of IAS 18.
D)Post harvesting processing activities are covered under the requirements of IAS 2.
Q2) How is an impairment loss allocated to the non-current asset(s)?
A)Allocate the impairment loss in proportion to the gross amounts of the assets in the cash generating unit.
B)Allocate the impairment loss to assets with the highest carrying amounts in the cash generating unit.
C)Allocate the impairment loss in proportion to the net carrying amounts of the assets in the cash generating unit.
D)Allocate the impairment loss to assets with the lowest carrying amounts in the cash generating unit.
Q3) Company One purchased land for $900,000 some years ago.Fair value was $450,000 at the beginning of this year and $340,000 at the end of this year. Prepare the journal entry to record this year's revaluation adjustment.
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