Advanced Financial Reporting
Exam Questions
Course Introduction
Advanced Financial Reporting delves into complex topics of financial accounting and reporting, building on foundational principles to explore the preparation and interpretation of financial statements for entities engaged in sophisticated transactions. The course covers areas such as business combinations, consolidations, foreign currency transactions, segment reporting, and the adoption of new and emerging accounting standards. Emphasizing critical thinking and practical application, students analyze real-world cases, enhance their professional judgment, and develop the skills required to navigate the evolving landscape of corporate financial disclosures and regulatory compliance.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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14 Chapters
1070 Verified Questions
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) The threat of new entrants is measured by whether there are entry barriers,such as capital investment,________________________________________,patents,or regulation that inhibit new entrants.
Answer: technological expertise
Q2) Which forces typically represent vertical competition in a value chain?
A) Potential entry and substitutes.
B) Buyer power and rivalry among existing firms
C) Supplier power and potential entry.
D) Buyer power and supplier power
Answer: D
Q3) What is the principal activity of security analysts?
A) To assign credit ratings.
B) To apply IFRS adjustments.
C) To value firms.
D) To assess the need for audits.
Answer: C
Q4) What is an industry's value chain?
Answer: An industry's value chain is the sequence of activities involved in the creation,manufacture and distribution of its products and services.
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Chapter 2: Asset and Liability Valuation and Income Recognition
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Sample Questions
Q1) The amount that a company would have to pay today to acquire an asset it now holds is called ________________________________________.
Answer: current replacement cost
Q2) Present value methods are often used with receivables and liabilities:
A) With payment schedules in excess of one year.
B) With payment schedules of less than one year.
C) When fair values can be easily determined.
D) When asset are sold in the middle of the accounting cycle.
Answer: A
Q3) The net amount a firm would receive if it sold an asset or the net amount it would pay to settle a liability is referred to as:
A) current replacement cost
B) net realizable value
C) current cost
D) acquisition cost
Answer: B
Q4) Acquisition costs includes all costs necessary to get an asset ready for its
Answer: intended use
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) Clarion Industries manufactures computer equipment and provides financing for purchases by its customers.Clarion reported sales and interest revenues of $79,500 million for 2010.The balance sheet showed current and noncurrent receivables of $ 30,750 million at the beginning of 2010 and $ 26,900 million at the end of 2010.Compute the amount of cash collected from customers during 2010.
Answer: (in \$millions)
\(\begin{array}{ll}
\text {Sales and Interest Revenues for 2010 } & \$ 79,500 \\
\text {Plus Receivables at Beginning of 2010 } & 30,750\\
\text { Less Receivables at End of 2010} &\underline{(26,900)}\\ \text { Cash Collections from Customers during 2010 } &\underline{\$83,350}\\ \end{array}\)
Q2) Interest expense and interest revenue would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
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Page 5
Chapter 4: Profitability Analysis
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Sample Questions
Q1) Carridine Company reported net income of $1,903 on revenues of $55,618 for Year 4.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.
Q2) The ability of a firm to manage the level of investment in assets for a particular level of sales is measured by the ______________________________.
Q3) When calculating the return on fixed assets sales is divided by
Q4) When calculating Basic earnings per share net income is adjusted by____________
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Chapter 5: Risk Analysis
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Q1) When the excess of ROA over the after-tax cost of borrowing declines,additional ________________________________________ begins to reduce the return to common shareholders.
Q2) The operating cycle must not only generate cash to supply ________________________________________ needs,it must generate sufficient cash to service debt.
Q3) The source of risk related to political unrest and exchange rate changes are _________________________.
Q4) Working capital is defined as ______________________ minus
Q5) The source of risk related to management competence,strategic direction and lawsuits is _________________________.
Q6) The main ratio used by many financial analysts to examine a company's short-term liquidity risk is the current ratio.However,there are a number of problems that arise when this ratio is used to examine short-term liquidity risk that may make the current ratio less useful than initially thought.Discuss the interpretative problems of using the current ratio.
Q7) The source of risk related to interest rate changes and demographic changes is ____________________.
Page 7
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Chapter 6: Accounting Quality
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Sample Questions
Q1) An extraordinary gain or loss is unusual in nature,_____________________________________________,and material in amount.
Q2) The Orbus Company has a 30,000 unrealized gain and a 10,000 unrealized loss.Where would Orbus Company report these transactions?
A) Only in non-current assets and liabilities
B) In stockholders' equity
C) Other comprehensive income
D) On the balance sheet as a current asset
Q3) Which of the following items is consistent with earnings not being informative about current performance but are informative about future earnings?
A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.
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Chapter 7: Financing Activities
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Sample Questions
Q1) Which of the following is not one of the three criteria for recognition of a liability?
A) The obligation involves a probable future sacrifice of resources at a specified or determinable date.
B) The firm is required to make a cash payment for the goods or services.
C) The firm has little or no discretion to avoid the transfer.
D) The transaction or event giving rise to the liability has already occurred.
Q2) According to U.S.GAAP,which of the following provides the most reliable measure for fair value measurement?
A) Observable market data serving as inputs into estimates into present value-based measurements such as foreign exchange rates.
B) Quoted market prices of identical assets or liabilities in inactive markets
C) Observable quoted market prices in active markets for identical assets or liabilities
D) Unobservable inputs used by the reporting entity when modeling how the market would determine the fair value of the asset or liability in question
Q3) Why can exercising stock options create cash flow problems for managers at the exercise date? What is an alternative to this problem?
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Chapter 8: Investing Activities
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Sample Questions
Q1) Financial reporting requires firms to ____________________ immediately all R&D costs incurred internally.
Q2) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
Q3) 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
Q4) Goodwill represents:
A) the synergies that will be achieved through the acquisition.
B) the difference between the acquisition cost and the market value of the identifiable assets and liabilities.
C) the difference between the acquisition cost and the book value of the identifiable assets and liabilities.
D) the merger premium.
Q5) When a foreign entity operates as a direct and integral extension of the U.S.parent,normally,its functional currency is the _________________________.
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Chapter 9: Operating Activities
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Sample Questions
Q1) Typical U.S.GAAP disclosures for deferred income taxes include all of the following except:
A) Components of income tax expense
B) Components of income before taxes
C) Reconciliation of income taxes at statutory rate with income tax expense
D) Components of permanent tax differences
Q2) Analysts concerns with postretirement benefits include all of the following except: A) Should the underfunded postretirement benefit obligation be added to liabilities in assessing risk?
B) How reasonable are the firms' assumptions regarding health care cost increases?
C) Is the postretirement benefit fund adequately paying benefits?
D) Is the postretirement benefit fund generating returns consistent with the expected rate of return?
Q3) A contractor would not use ________________________________________ method of income recognition when there is substantial uncertainty regarding the total costs it will incur in completing the project.
Q4) ___________________________________ is primarily a question of timing.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) Common-size financial statements recast each statement item as:
A) a percentage of the "bottom line."
B) a percentage using industry averages for the "base number."
C) a percentage using a base year number for each line item.
D) a percentage of some "base number" on the financial statement in question.
Q2) 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.
Q3) Based on the following statement from the text-"to develop forecasts of individual operating assets and liabilities,you must first determine the underlying operating activities that drive them"-explain what those underlying activities are.
Q4) A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
Q5) Realistic expectations are ____________________ and ____________________.
Q6) The formula for forecasting inventory is ____________ /365 X.
Page 12
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) The historical discount rate of the firm may be a good indicator of the appropriate discount
Rate to apply to the firm in the future,when all of the following conditions hold true except:
A) The current risk of the firm is the same as the expected future risk of the firm.
B) Expected future interest rates are likely to equal current interest rates.
C) The existing capital structure of the firm is the same as the expected future capital structure of the firm.
D) The current mix of debt and equity financing is equal.
Q2) In theory,the value of a share of common equity is the present value of ____________________________________________________________.
Q3) 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.
Q4) Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25.In addition,the excess return over the risk-free rate is 6.3%.Calculate the firm's cost of equity capital using the CAPM model.
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) An equity security with systematic risk equal to the average amount of systematic risk of all equity securities in the market:
A) has a market beta equal to one.
B) should expect to earn the same rate of return as the average stock in the market portfolio.
C) gives no insight into the risk premium of stock.
D) Both a and b are correct.
Q2) All of the following are logical steps that enable the analyst to determine reliable estimates of value except:
A) Understand the economics of the industry
B) Assess the particular firm's strategy
C) Evaluate the quality of the firm's accounting
D) Derive a single point estimate of value for a share's current price
Q3) When should an analyst use nominal cash flows and when should an analyst use real cash flows?
Q4) Even in relatively efficient securities markets,______ is observable but ______ is not; therefore,______ must be estimated.
Q5) Provide the rationale for using expected free cash flow in valuation.
Q6) What is the purpose of a free cash flow analysis?
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Sample Questions
Q1) Dirty surplus items in U.S.GAAP typically arise from all of the following except:
A) changes in investment security fair values
B) foreign currency exchange rates
C) interest rates
D) realized gains
Q2) The residual income valuation model is a rigorous and straightforward valuation approach,
But the analyst should be aware of all of the following implementation issues that will hinder its ability to measure firm value correctly except:
A) common stock transactions
B) portions of net income attributable to equity claimants other than common shareholders
C) dirty surplus accounting items
D) positive book value of equity
Q3) What is the rationale for using expected earnings as a basis for valuations?
Q4) 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.
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15
Chapter 14: Valuation: Market-Based Approaches
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Sample Questions
Q1) Which of the following ratios give a perspective on risk in the capital structure?
A) Book value per share
B) Price/earnings ratio
C) Degree of financial leverage
D) Dividend yield
Q2) Which of the following normally does not introduce measurement error into the calculation of P/E ratios?
A) differences in firm specific growth rates
B) restructuring losses
C) transitory gains
D) deferred taxes
Q3) Firms with low P/E ratios tend to have current residual income that is greater than:
A) future actual income.
B) future residual income.
C) past actual income.
D) past residual income.
Q4) What is a price differential and how is it computed? What information does a price differential provide to an analyst?
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