Advanced Financial Accounting Practice Exam
Course Introduction
Advanced Financial Accounting delves into complex accounting concepts and practices related to business combinations, consolidated financial statements, foreign currency transactions, and partnership accounting. The course examines the procedures for preparing consolidated financial reports for groups of related companies, including parent-subsidiary relationships and variable interest entities. Students explore accounting for intercompany transactions, mergers and acquisitions, international financial reporting, and the impact of regulatory environments on financial statement presentation. Through case studies and real-world examples, the course equips students with the analytical skills needed to interpret advanced financial information and make informed accounting decisions in a global business environment.
Recommended Textbook
Advanced Financial Accounting 6th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) Which of the following user groups has the most influence on reporting objectives?
A)Canada Revenue Agency
B)The company's audit committee
C)The company's major lenders
D)Industry security analysts
Answer: B
Q2) How do financial analysts refer to earnings that correspond closely to cash flows?
A)Cash flow per share
B)High quality earnings
C)Earnings determined on a cash basis
D)Low quality earnings
Answer: B
Q3) What effect does income smoothing have on risk analysis?
A)Reduces the business risk of a company
B)Increases the financial risk of a company
C)Reduces the audit risk of a company
D)Has no effect on risk analysis
Answer: A
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) In Canada,what subsidiaries must be included in consolidated financial statements?
A)All subsidiaries
B)All subsidiaries,except for ones in unrelated industries
C)All domestic subsidiaries
D)All subsidiaries,except for ones where control is impaired
Answer: D
Q2) Which methods will result in the same income and shareholders' equity?
A)Equity and consolidation
B)Cost and consolidation
C)Cost and equity
D)Each method results in different income and shareholder's equity amounts.
Answer: A
Q3) Under which method does the Statement of Comprehensive Income show "Equity in earnings of Subsidiary"?
A)Cost method
B)Equity method
C)Modified equity
D)Consolidation
Answer: B
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Chapter 3: Business Combinations
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Q1) How should the transaction costs of issuing shares in an acquisition be recognized?
A)Expensed
B)Capitalized as part of the cost of the shares
C)Deducted in total from shareholders' equity
D)Deducted from shareholders' equity,net of related income tax benefits
Answer: D
Q2) How should accounting fees for an acquisition be treated?
A)Expensed in the period of acquisition
B)Capitalized as part of the acquisition cost
C)Deferred and amortized
D)Deferred until the company is disposed of or wound-up
Answer: A
Q3) How should the cost of issuing debt in an acquisition be recognized?
A)Expensed
B)Amortized over the term of the debt
C)Deducted from the value of the debt
D)Deducted from shareholders' equity
Answer: C
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Chapter 4: Wholly-Owned Subsidiaries: Reporting
Subsequent to Acquisition
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Q1) Piri Ltd.acquired 100% of the commons shares of Golden Co.This business combination resulted in $100,000 of goodwill.Piri allocated the goodwill to three cash-generating units.At its year-end,Piri conducts a goodwill impairment test.Which of the following statements about the impairment test is true?
A)The impairment test is applied to Golden Co.as a whole.
B)The impairment test is applied to the business combination as a whole.
C)The impairment test is applied to each of the three cash-generating units to which goodwill has been allocated.
D)Piri is not required to conduct an impairment test unless its circumstances have changed materially from its previous year.
Q2) In consolidating a wholly-owned parent-founded subsidiary,which of the following adjustments or eliminations is not required?
A)Eliminating any unrealized profits or losses
B)Eliminating intercompany payables and receivables
C)Adjusting for intercompany transactions
D)Adjusting for goodwill impairment
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Amber Ltd.purchased 80% of Patel Ltd.for $1,000,000.At the time of acquisition,the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000.What is the amount of the goodwill under the entity method?
A)$(100,000)
B)$100,000
C)$280,000
D)$350,000
Q2) In preparing consolidation working papers,why is it necessary to eliminate intercompany profits?
A)To nullify the effect of intercompany transactions on consolidated financial statements
B)To defer intercompany profits until the following year
C)To allocate unrealized profits until the following year
D)To reduce consolidated income
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Mallard Ltd.acquired 75% of the outstanding common shares of Teal Ltd.at December 31,20X1 for $900,000.Mallard has recorded its investment using the cost method.At the end of 20X7,Mallard still had $40,000 of goods purchased from Teal in its inventory and Teal had $50,000 of goods purchased from Mallard in its inventory.Both companies had gross margins of 40% in their sales of goods to each other and both companies sold these goods in 20X8.What adjustment should be made for Mallard's 20X8 consolidated financial statements with respect to the goods purchased from Teal that were still in Mallard's opening inventory?
A)Decrease cost of sales by $40,000;decrease opening retained earnings by $30,000,decrease opening non-controlling interest by $10,000
B)Decrease cost of sales by $40,000;decrease opening retained earnings by $30,000;increase opening non-controlling interest by $10,000
C)Decrease cost of sales by $40,000;decrease sales by $40,000
D)No adjustment is required as the profits have been realized
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8
Chapter 7: Segmented and Interim Reporting
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Q1) Which of the following is not an aspect in identifying an operating segment?
A)The business component's operating results are reviewed regularly by the enterprise's chief operating decision maker.
B)It is a component of the enterprise that is expected to generate revenues and expenses.
C)Discrete financial information on the business component is regularly available through the company's financial reporting system.
D)Other companies in the same industry use similar operating segments.
Q2) Which of the following statements about interim financial statements for public companies is true?
A)Interim financial statements must be audited.
B)Interim financial statements should be in a format consistent with the year-end financial statements.
C)Interim financial statements must have the same level of detail as the annual financial statements.
D)Interim financial statements do not have to be in full compliance with IFRS.
Q3) Explain what entity-wide disclosures are required by a public company.Why is this disclosure required under IFRS8 and how is this information useful?
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) On November 2,20X9,Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment requirement on March 30,20X10.To eliminate the risk of foreign exchange losses on this payable,Henry entered into a forward exchange contract on November 3,20X9 to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30,20X10.The spot rate was CHF1 = $1.95 on November 2,20X9 and CHF1 = $1.97 on December 1,20X9.What is the amount of the premium or discount on the forward exchange contract on December 1,20X9?
A)A premium of $3,000
B)A discount of $3,000
C)A premium of $5,000
D)A discount of $5,000
Q2) Fransen Co.does a lot of businesses in Denmark.It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones.What type of hedge does Fransen have?
A)Fair-value hedge
B)Cash-flow hedge
C)Natural hedge
D)Hedge instrument
Q3) Compare and contrast accounting for foreign currency transactions and hedges under IFRS and ASPE.
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Chapter 9: Reporting Foreign Operations
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Q1) Under the temporal method,what is the accounting treatment for exchange gains and losses arising from previous years?
A)Reported as equity
B)Reported in other comprehensive income
C)Reported in consolidated net income
D)Included in opening consolidated retained earnings
Q2) What gives rise to accounting exposure to changes in the foreign exchange rate?
A)Holding common shares in a foreign entity
B)Holding preferred shares in a foreign entity
C)The accounting method used to translate the foreign entity's financial statements
D)The impact of exchange rate fluctuations on the present value of future cash flows
Q3) Under the current-rate method,what is the accounting treatment for exchange gains and losses arising from previous years?
A)Reported as equity
B)Reported in other comprehensive income
C)Reported in consolidated net income
D)Included in opening consolidated retained earnings
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11
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) During the year,a not-for-profit art gallery acquired a number of pieces for its collection.Which of the following choices for reporting the acquisitions is not in accordance with the CICA Handbook?
A)Capitalize,but do not depreciate
B)Capitalize and depreciate
C)Immediate write-off
D)Note disclosure only
Q2) Which of the following statements about incorporated not-for-profit (NFP)organizations is true?
A)Incorporated NFP organizations can only issue preferred shares capital.
B)Incorporated NFP organizations do not have share capital.
C)Incorporated NFP organizations can only be government-owned.
D)NFP organizations cannot be incorporated.
Q3) Which of the following reporting objectives for not-for-profit organizations allows the users to determine whether restricted funds were spent in accordance with the intended purpose?
A)Cash flow prediction
B)Performance evaluation
C)Stewardship
D)Measuring the cost of services rendered
Page 12
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Chapter 11: Public Sector Financial Reporting
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Q1) What can the non-financial assets of a government be used for?
A)Providing services only
B)Debt payment only
C)Providing services and debt payment
D)Neither service provision nor debt payment
Q2) Which financial statements are recommended by the PSAB for presentation by governments?
A)Statement of financial position,statement of operations,statement of changes in net debt,and statement of cash flows
B)Statement of financial position,statement of operations,and statement of net debt
C)Statement of financial position and statement of operations only
D)Statement of financial position and statement of net debt only
Q3) Which of the following is a non-financial asset?
A)Available-for-sale investment
B)Investment in a government enterprise
C)Crown land
D)Tangible capital asset
Q4) Clearly distinguish between a government business organization and a non-business government organization.
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Chapter 12: Income Tax Allocation
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Q1) Foster Ltd.acquired 100% of Benson Ltd.The carrying values of Benson's capital assets differed from their fair values and their fair values differ from their adjusted cost bases for tax purposes.Which of the following statements is true?
A)The difference between Benson's carrying values and its fair values creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
B)The difference between Benson's fair values and its adjusted cost bases for tax purposes creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
C)The difference between Benson's carrying values and its adjusted cost bases for tax purposes creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
D)No deferred tax asset or liability arises from the above situation.
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Chapter 13: Income Tax Allocation Subsequent to Acquisition
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Q1) Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.What deferred income tax adjustment must Morin make for its consolidated financial statements?
A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.
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Chapter 14: Good will Impairment Test
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Q1) For private enterprises that have acquired goodwill in a business combination,which of the following is considered a change of circumstances for purposes of testing for goodwill impairment?
A)A large unfavourable income tax reassessment
B)Sale of a capital asset for a small loss
C)A major competitor has ceased operations
D)Retirement of the subsidiary's operations manager
Q2) How should goodwill acquired in a business combination be allocated?
A)Proportionately to assets
B)Proportionately to fair-value increments
C)To cash-generating units
D)It is not allocated.
Q3) For private enterprises that have acquired goodwill in a business combination,how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
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16
Chapter 15: Step Purchases
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Q1) When an inter-corporate investment is acquired in stages,when does the equity method first becomes appropriate?
A)The initial investment is made
B)The intent to control is determined
C)Significant influence is first achieved
D)When control is attained
Q2) Husch Ltd.acquired 35% of the common shares of Megia Ltd.on June 30,20X1.Husch uses the equity method to record its investment.On June 30,20X8,Husch acquired another 40% of Megia's common shares.At June 30,20X8,how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30,20X8 and added to the new acquisition.
C)The carrying value of the original 35% at June 30,20X8 is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.
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Page 17
Chapter 16: Decreases in Ownership Interest
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Q1) When a subsidiary issues shares,________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces minority interest
D)this may increase minority interest
Q2) Gumble Ltd.has owned 65% of the common shares of Lopez for several years.This year,Gumble reduced its interest in Lopez to 10%.Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumbel must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
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18
Chapter 17: Preferred and Restricted Shares of Investee Corporation
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Q1) What is a coattail provision?
A)It allows preferred shares to be converted to common shares.
B)It allows restricted shares to become fully voting shares under limited circumstances.
C)It allows common shares to be converted to preferred shares.
D)It allows restricted shares to receive additional dividends.
Q2) Ngo Ltd.'s subsidiary has restricted shares.What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
Q3) A parent company owns a subsidiary's preferred and common shares.How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
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Page 19
Chapter 18: Intercompany Bond Holdings
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Q1) Basaraba Ltd.owns 75% of the outstanding common shares of Gill Ltd.Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount.The bonds have an unamortized premium attached.This transaction,in effect,retires the bond and results in a gain.Under the par-value approach to dealing with a gain on elimination of intercompany bond holdings,which of the following statements is true?
A)The gain is allocated all to the purchaser.
B)The gain is allocated all to the issuer.
C)The gain is allocated to both the purchaser and issuer as though they do not have any affiliation with each other.
D)The gain is eliminated on consolidation.
Q2) A subsidiary has purchased some bonds from its parent company.Under the par-value method,the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and carrying value
C)the bond's market value and carrying value
D)the bond's par value and carrying value
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Page 20
Chapter 19: Fund Accounting
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Q1) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd.What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
Q2) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
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