Intermediate Accounting
Mock Exam
Course Introduction
Intermediate Accounting is a comprehensive course that builds upon foundational accounting principles, focusing on the recognition, measurement, and reporting of assets, liabilities, equity, revenues, and expenses in accordance with generally accepted accounting principles (GAAP). Students will explore more complex accounting topics such as income measurement, time value of money, inventories, property, plant and equipment, intangible assets, and current and long-term liabilities. The course emphasizes the preparation and analysis of financial statements and disclosures, equipping students with analytical tools necessary for informed decision-making and further study in the field of accounting.
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) 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
Q2) The Second step in financial statement analysis requires businesses to analyze strategies that will __________________________ itself from the firms' competitors.
Answer: differentiate
Q3) What three financial statements are prepared by business firms and what information does each provide?
Answer: 1.Balance sheet--Point in time reporting of assets,liabilities and stockholders' equity.
2.Income statement--Measurement of operating performance for a period of time.
3.Statement of cash flows--The net cash flows for a period of time from the three business activities: operating,investing and financing.
Q4) Under the Sarbanes-Oxley Act ____________________ assumes responsibility for establishing and maintaining adequate internal control structure and procedures.
Answer: management
Page 3
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Chapter 2: Asset and Liability Valuation and Income
Recognition
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Q1) The difference between income tax payable and income tax expense is reported on the balance sheet as either a(n)______________________________ or a(n)_______________________________.
Answer: deferred tax asset,deferred tax liability deferred tax liability,deferred tax asset
Q2) Historical costs include all of the following except:
A) acquisition costs for assets
B) net realizable values for assets.
C) adjusted acquisition costs for assets.
D) initial present value for assets and liabilities
Answer: B
Q3) What valuation methods reflect current values? Discuss the advantage(s)and disadvantage(s)of valuing assets and liabilities using current values.
Answer: Valuation methods reflecting current values include:
1.current replacement cost
2.net realizable value
3.present value of cash flows using current interest rates
The main advantage of using current values is increased relevance for financial statement users.The disadvantages include greater subjectivity.
Page 4
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows?
A) non-cash items, such as depreciation and amortization
B) changes in working capital accounts
C) gains and losses related to the sale of plant, property and equipment
D) sale or repurchase of capital stock
Answer: D
Q2) Interest expense and interest revenue would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
Q3) Normally,cash flows from financing will start using cash during which phase of the product life cycle?
A) Introduction
B) Growth
C) Maturity
D) Decline
Answer: C
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Page 5
Chapter 4: Profitability Analysis
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Q1) Which of the following is not a way a company can achieve a low-cost position?
A) economies of scale
B) production efficiency
C) customer service
D) outsourcing
Q2) Refer to the information for Ramos Company.In a common size income statement for 2011,the operating expenses are expressed as:
A) 30.3%
B) 28.0%
C) 43.8%
D) 100%
Q3) Explain the difference between a simple and complex capital structure as the terms are used in the calculation of EPS.
Q4) Firms with ____________________ levels of operating leverage experience greater variability in their return on assets.
Q5) EPS is an ambiguous measure of profitability because it reflects operating performance in the numerator and ________________________________________ in the denominator.
Q6) When calculating Basic earnings per share net income is adjusted by____________
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Chapter 5: Risk Analysis
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Q1) Marker's Liabilities to Assets Ratio for 2012 is:
A) 105.1%
B) 63.1%
C) 78.3%
D) 100.0%
Q2) Changes in interest rates can typically affect firms in all of the following ways except:
A) The value of investments in bonds or other investment securities with fixed interest Rates.
B) The value of liabilities with fixed interest rates.
C) The returns a firm generates from pension fund investments.
D) The cash-equivalent value of assets invested abroad.
Q3) Refer to the information for Mobile Company.Mobile's 2010 Inventory Turnover ratio is:
A) 7.46
B) 11.83
C) 6.16
D) 5.62
Q4) 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) Which of the following are characteristics of an extraordinary item?
A) Unusual in nature
B) Infrequent in occurrence
C) Material in amount
D) All of the above
Q2) In bankruptcy prediction analysis,a type ____________________ error is classifying a firm as nonbankrupt when it ultimately goes bankrupt.
Q3) Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company.Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports. Discuss five motives that encourage managers to practice earnings management.
Q4) 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.
Q5) A change in the useful life of an asset is treated as a(n)_____________
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Chapter 7: Financing Activities
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Sample Questions
Q1) Using the information provided by Santa Corporation,calculate the company's 2012 fixed asset ratio.
A) 3.0
B) 3.65
C) 3.23
D) 5.21
Q2) Which is the first date when employees can exercise their stock options?
A) vesting date
B) grant date
C) exercise date
D) liquidating date
Q3) All of the following are correct regarding operating leases except:
A) Cash outflow is in the form of rent payments
B) The rights to use the property for a specified period of time are conferred to the lessee by the lessor.
C) At the end of the lease the lessee returns the property to the lessor
D) Depreciation expense can be recorded on the books by the lessee
Q4) Discuss the method of accounting for employee stock options.In your answer discuss the how the accounting has changed during recent years.
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Chapter 8: Investing Activities
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Q1) If Ashley Company accounts for the investment as a minority,active investment and uses the equity method to account for the investment,then Ashley will recognize what amount of 2010 income from the investment?
A) $4,000
B) $10,000
C) $25,000
D) $15,000
Q2) U.S.GAAP requires firms to expense immediately all internal expenditures for R&D costs.Alternatively,U.S.GAAP could require firms to capitalize and subsequently amortize all internal expenditures on R&D that have future potential. Required:
Why have standard setters chosen not to allow the capitalization alternative? How would analysts be better served if U.S.GAAP required capitalization of R&D costs?
Q3) When a long-lived asset loses its ability to generate future benefits,U.S.GAAP requires firms to write down the assets to their fair values and recognize a(n)______________________________ in income from continuing operations.
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Page 10
Chapter 9: Operating Activities
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Q1) A large manufacturer recently changed its cost-flow assumption method for inventories at the beginning of 2012.The manufacturer has been in operation for almost 40 years,and for the last decade,it has reported moderate growth in revenues.The firm changed from the LIFO method to the FIFO method and reported the following information:
\(\begin{array}{|l|r|r|}
\hline\text { December 31: (amounts in millions) }&2011&2012\\
\hline\text { Inventories at FIFO cost } & \$ 388.1 & \$ 419.7 \\
\hline \text { Excess of FIFO cost over LIFO cost } & (229.0) & (210.4) \\
\hline \text { Cost of goods sold (FIFO) } & & \$ 2,050.8 \\
\hline \text { Cost of goods sold (LIFO) } & & \$ 2,417.1\\
\hline \end{array}\)
Calculate the inventory turnover ratio for 2012 using the LIFO and FIFO cost-flow assumption methods.Explain why the costs assigned to inventory under LIFO at the end of 2011 and 2012 are so much less than they are under FIFO.
Q2) Under the accrual method of accounting,when a firm has substantially completed its value-adding activities it should recognize ____________________.
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) All of the following are true regarding projected financial statements except:
A) The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
B) Preparing projected financial statements must incorporate a company's past performance records.
C) Preparing projected financial statements must incorporate a company's current performance records.
D) The income statement demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital.
Q2) If a firm competes in a capital-intensive industry with excess capacity,all of the following are true except:
A) price increases will be less likely.
B) price increases will be more likely.
C) companies in competitive industries face high exit barriers.
D) companies in competitive industries may experience future price decreases.
Q3) 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) To determine the appropriate weights to use in the weighted average cost of capital,an analyst will need to determine the ______________________________ of the debt,preferred stock and common equity capital.
Q2) 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.
Q3) Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:
A) 79.00%
B) 78.3%
C) 41.8%
D) 50%
Q4) A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Changes in general price levels due to inflation or deflation cause the ______________________________ of the monetary unit to increase or decrease ______________
Q2) Free cash flows for common equity shareholders are the cash flows specifically available to the common shareholders after making all capital expenditures,_____________________________________________ and ____________________________________________________________.
Q3) Continuing free cash flows represent:
A) the cash flows remaining after deducting cash flows attributable to debt holders.
B) the free cash flows after the point at which the firm has settled into a long-run steady-state growth rate.
C) all sustainable free cash flows.
D) all after-tax free cash flows.
Q4) Net income for the year for Tanglewood Inc.was $750,000,but the statement of cash flows reports that cash provided by operating activities was $860,000.Tanglewood also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000.Compute Tanglewood's free cash flow.
Q5) Provide the rationale for using expected free cash flow in valuation.
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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) Accounting for the residual income in a firm with 100% dividend payout can be expressed as follows: RIt = CIt- ____________________ X BVt??
Q3) The foundation for residual income valuation is the classical _____________________________________________.
Q4) Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,500 at the end of 2010.During 2011 the firm earns net income of $1,900,pays dividends to shareholders of $200,and issues new stock to raise $500 of capital.The book value of shareholders' equity at the end of 2011 is:
A) $2,750
B) $250
C) $1,450
D) $3,700
Q5) The required earnings of the firm equals the product of the required rate of return on common equity capital times the __________________________________________________ at the beginning of the period.
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The theoretical PE model does not work when the growth rate in ____________________ exceeds the cost of equity capital.
Q2) The value-to-book ratio reflects an analyst's expectation of the firm's ____________________ value to book value.
Q3) Which of the following is not a reason why price-earnings ratios would differ across firms?
A) Risk
B) Profitability
C) Growth
D) Operating leverage
Q4) The value-to-book model indicates that a firm in steady state equilibrium earnings ROCE=RE will be valued at _________________________.
Q5) A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons.Discuss how a successful,internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one another.
Q6) The PEG ratio does not take into account differences in ____________________ and ________________________________________ across firms.
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