Intermediate Accounting
Pre-Test Questions
Course Introduction
Intermediate Accounting delves deeper into the principles and practices of financial accounting beyond the introductory level. It emphasizes the preparation and analysis of financial statements in accordance with generally accepted accounting principles (GAAP), covering topics such as revenue recognition, inventory valuation, long-term assets and liabilities, income taxes, leases, pensions, and shareholders equity. The course develops critical thinking and analytical skills needed to address complex accounting issues faced by businesses, while also highlighting recent changes in accounting standards and their implications for corporate financial reporting and decision-making.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by
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Page 2
James M. Wahlen
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Q1) All of the following are the building blocks for financial statement analysis except:
A) Targeting growth opportunities that diversify exchange rates, risk exposure, and political uncertainty.
B) Describing strategies that a firm pursues to differentiate itself from competitors in order to evaluate competitive advantages, sustainability of the firm's earnings, and its risks.
C) Evaluating the financial statements, including the accounting concepts and methods That underlie them and the quality of the information they provide.
D) Identification of the economic characteristics of the industries and the relation of those economic characteristics to the various financial statement ratios.
Answer: A
Q2) Labor contracts and purchase order commitments are examples of ____________________ contracts.
Answer: executory
Q3) Normally,intense rivalries have a tendency to reduce ____________________.
Answer: profitability
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3
Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Fish Farm Corporation purchases a new tract of land on which it is going to build new growing and holding tanks in order to expand its business.Which of the following costs would not be part of the cost of the land?
A) costs to run a title search
B) costs of grading to level the land
C) costs of tearing down an existing structure
D) cost of the new holding tanks
Answer: D
Q2) Disregarding cash flows with owners,over sufficiently long periods of time,net income equals:
A) revenues minus dividends and expenses
B) assets minus liabilities
C) stockholders' equity
D) cash inflows minus cash outflows
Answer: D
Q3) Firms recognize the reduction in service potential of assets such as patents and trademarksusing the process of ____________________.
Answer: amortization
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Chapter 3: Income Flows Versus Cash Flows:
Understanding the Statement of Cash Flows
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Q1) The receipt of cash when employees exercise stock options is a (an)____________________ activity.
Answer: financing
Q2) EBITDA not only ignores four expenses but also ignores changes in __________________________________________________ accounts.
Answer: operating working capital
Q3) While preparing a statement of cash flows,you encountered the following transaction:
February 1,2011: Galvinize Corporation acquired a small office building in exchange for 5,000 shares of its own common stock;par value $10 per share;market value $15 per share.
A.Should this transaction be shown on the statement of cash flows?
B.Why or why not?
Answer: A.Yes
B.Because it is a direct exchange,it is reported on the statement of cash flows in a supplemental schedule or note as "Office building,acquired for 5,000 shares of Galvinize Corporation's common stock,$75,000."
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Chapter 4: Profitability Analysis
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Q1) Return on assets can be disaggregated into asset turnover and ____________________________________________________________.
Q2) Carridine Company reported net income of $1,903 on revenues of $55,618 for Year4.Interest expense totaled $459,and preferred dividends totaled $13.5.Average total assets for Year 4 were $17,500.The income tax rate is 40 percent.Average preferred shareholders' equity totaled $250,and average common shareholders' equity totaled $7,500.Assume that all the following amounts are in thousands.
REQUIRED:a.Compute the rate of ROA.Disaggregate ROA into profit margin for ROA and assets
turnover components.
b.Compute the rate of ROCE.Disaggregate ROCE into profit margin for ROCE,assets turnover,and capital leverage ratio components.
c.Calculate the amount of net income to common shareholders derived from the excess return on creditors' capital,the excess return on preferred shareholders' capital, and the return on common shareholders' capital.
Q3) Inventory turnover is calculated by dividing ________________________________________ by average inventories.
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Chapter 5: Risk Analysis
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Q1) Marker's 2012 Interest Coverage ratio is
A) 7.66
B) 1.00
C) 11.35
D) 4.35
Q2) Marker's Liabilities to Assets Ratio for 2012 is
A) 105.1%
B) 63.1%
C) 78.3%
D) 100.0%
Q3) Which of the following is not one of the three explanatory variables that determines a firm's market beta?
A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.
Q4) By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of
the firm requires.
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Chapter 6: Accounting Quality
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Q1) 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.
Q2) Which of the following is not considered a motive to manage earnings?
A) To create optimal manager compensation payments.
B) To create optimal job security for senior management.
C) To create optimal measures of assets and liabilities for balance sheet purposes.
D) To manage reported earnings in order to reduce industry-specific actions.
Q3) 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
Q4) When evaluating the quality of accounting information the user should consider the _____________________________________________ of the measurements made.
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Chapter 7: Financing Activities
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Q1) Which of the following does not represent an acceptable method of transferring receivables to increase cash flow?
A) With recourse
B) Without recourse
C) Factoring
D) Tax deferred Method
Q2) One criteria that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already
Q3) Under U.S.GAAP,which of the following items would require a lessee to classify a lease of equipment as a capital lease?
A) There is no transfer of ownership to the lessee at the end of the lease term.
B) The lease does not contain a bargain purchase option.
C) The lease term is 90% of the estimated economic life of the lease property.
D) The present value of the contractual minimum lease payments is 75% of the fair value of the leased property.
Q4) An agreement in which a purchaser agrees to pay specified amounts periodically to a seller for products or services is known as a
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Chapter 8: Investing Activities
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Q1) Olivia Co.owns 5,600 of the 14,000 outstanding shares of Hobbitt Corp.common stock and exercises significant influence over the company.During 2011,Hobbitt earns $$90,000 and pays cash dividends of $25,000 If the beginning balance in the investment account was $190,000,the balance at December 31,2011 should be:
A) $192,000
B) $172,000
C) $180,000
D) $216,000
Q2) Specifically identifiable intangible assets acquired from others may have either a ____________________ useful life or an ____________________ useful life.
Q3) For U.S.GAAP,software development costs are capitalized as intangible assets
A) after a copyright is obtained.
B) once the technological feasibility of the product is established.
C) from the beginning of development.
D) once the product is introduced into the marketplace.
Q4) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
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Chapter 9: Operating Activities
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Q1) A typical defined benefit pension plan formula includes all of the following except:
A) the number of years of employee service
B) the fair market value of pension plan assets
C) a credit for each year of annual service
D) the final salary at retirement date
Q2) Differences between income before taxes and taxable income are either ____________________ or ____________________.
Q3) Regarding actuarial assumptions,firms must disclose in notes to the financial statements all of the following except:
A) the discount rate used to compute the pension benefit obligation.
B) the expected rate of return on pension investments.
C) estimates of the number of retirees over the future 10 years.
D) the rate of compensation increase.
Q4) A LIFO liquidation during periods when prices are increasing results in a company
A) recording a large inventory write down.
B) recording higher earnings than it would have if it had used FIFO.
C) recording lower earnings than it would have if it had used FIFO.
D) having operational problems, but no financial statement effects.
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Chapter 10: Forecasting Financial Statements
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Q1) In comparison of 2010 to 2009 performance,Watson Company's inventory turnover decreased substantially,although sales and inventory amounts were essentially unchanged.
Required:
During a corporate meeting you heard the following managers postulate why the decreased inventory turnover ratio happened.Which statement best explains the decreased inventory turnover ratio and why? a.The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods sold.
b.The operations manager said: The decreased inventory turnover ratio is due to increased gross profit percentage.
c.The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts receivable turnover.
d.The shipping manager said: The decreased inventory turnover ratio is due toinventory being shipped FOB destination point which keeps those items in inventory until they reach the purchasers warehouse.
Q2) Financial statement forecasts should rely on ____________________ within financial statements.
Q3) 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) 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
Q2) The CAPM computes expected rates of return on common equity capital using the following model:
E[RE ] = E[RF] + x {E[RM] - E[RF]}
What are the roles of each of the three components of this model?
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) If dividend projections include the effect of inflation,then the discount rate used should be a ____________________ rate.
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) Regarding the equity buyout,compute the weighted average cost of capital of the new capital structure.
Q2) Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.
Q3) If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.
Q4) The analyst can use expectations of the dividends to be paid to the investor or the free cash flows to be generated by the firm (that will ultimately be paid to the investor)as equivalent approaches to measure the ____________ expected payoffs to shareholders.
Q5) 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?
Q6) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be equal to the ______________________________ of common shareholders' equity.
Q2) Explain required income.What does required income represent? How is required income conceptually analogous to interest expense?
Q3) Economists sometimes argue that earnings are not a _________________________ attribute on which to base valuation.
Q4) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q5) What are the three arguments economists provide against using earnings as a value-relevant attribute in valuation?
Q6) Investors have invested $30,000in common equity in a company.Given the risk inherent in the company,the investors expect to earn a 13percent return.In addition,the investors expect the company to return all income to investors in the form of dividends.The company earns $4,500 the first year.For this company determine the following:a.The company's required earnings b.The company's residual earnings
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Strictly speaking,the price-earnings ratio assumes that firm value is the
A) future value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate.
B) future value of a constant stream of expected future earnings, discounted at a constant expected future discount rate.
C) present value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate.
D) present value of a constant stream of expected future earnings, discounted at a constant expected future discount rate.
Q2) Book value per share may not approximate market value per share because:
A) Land may have substantially increased in value.
B) Market value reflects future potential earning power.
C) Investments may have a market value substantially above the original cost.
D) All of these are reasons why book value per share may not approximate market value per share.
Q3) The risk of the firm increases the
Q4) Explain the analysts' role in making the capital markets efficient.
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