Corporate Financial Reporting Practice Exam
Course Introduction
Corporate Financial Reporting explores the principles, standards, and processes involved in preparing and presenting financial statements for corporations. This course covers the regulatory environment, including International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), and examines the role of financial statements in decision-making by external and internal stakeholders. Students will learn to analyze balance sheets, income statements, cash flow statements, and shareholders equity statements, and develop skills to interpret financial information, assess corporate performance, and understand issues related to transparency, ethics, and disclosure in corporate reporting.
Recommended Textbook
Intermediate Accounting Volume 2 3rd Edition by Kin Lo
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Page 2
Chapter 1: Current Liabilities and Contingencies
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Sample Questions
Q1) Which is not a current liability?
A) Accounts payable due in 120 days.
B) Bank loan due in three years that is in default.
C) Bonds payable maturing in five years.
D) Certain held for trading liabilities.
Answer: C
Q2) A company,using a perpetual inventory system,sells goods on credit for $10,000.The applicable PST rate is 5% and the GST rate is 10%.The cost of goods sold was $6,000.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.
Answer: Sale of goods
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Q3) Why is it important to distinguish financial from non-financial liabilities?
Answer: IFRS requires that some financial liabilities be measured at their fair value rather than at amortized cost.
Q4) AV Airlines sold a ticket on May 1,2016 for travel on Jun 15,2016 for $1,500.The customer paid at time of booking the flight.Provide the necessary journal entries.
Answer: Booking flight
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Chapter 2: Non-Current Financial Liabilities
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Sample Questions
Q1) What are "debentures"?
A) Bonds that are unsecured.
B) Bonds that protect investors against inflation.
C) Bonds that mature at different dates.
D) Bonds backed by specific collateral.
Answer: A
Q2) Why do bonds often include covenants?
A) To reduce information asymmetry.
B) To reduce moral hazard.
C) To compensate for value-added services.
D) To ensure repayment of the bond.
Answer: B
Q3) Why do lenders avoid lending large amounts of money to one borrower?
Answer: Lenders such as banks would rather have diversified holdings of loans such that the default of any single borrower will not entail severe consequences for the lender.
Q4) Why are banks able to pay such low interest rates on customer deposits?
Answer: Banks are able to offer a low rate on deposits because they offer a safe place for depositors to put their funds,whereas someone buying a note from a company faces significant information asymmetry about the company.
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Chapter 3: Equities
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Sample Questions
Q1) Which statement about a "treasury shares" is correct?
A) The "single transaction method" treats the reacquisition as the end of the initial share issuance transaction.
B) The "two transaction method" decreases the contributed surplus when the repurchased shares are later resold.
C) The "two transaction method" treats the reacquisition and subsequent sale as one cycle for accounting.
D) The "single transaction method" treats the reacquisition and subsequent sale as two parts of the same transaction.
Answer: D
Q2) Which statement about a "treasury shares" is correct?
A) No company is permitted to hold treasury shares.
B) Treasury shares have voting rights.
C) Treasury shares receive dividends.
D) There are two methods that can be used to account for treasury shares: the single-transaction method and the two-transaction method.
Answer: D
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Chapter 4: Complex Financial Instruments
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Sample Questions
Q1) Which of the following is an example of a "warrant"?
A) Right to buy 100 shares of CIBC at $50.00 per share over the next 5 years.
B) Commitment to buy 100 barrels of oil next month at $125/barrel.
C) Commitment to buy $100,000 U.S. dollars in 4 months at US$ = 1.10.
D) Pay interest at prime +3% in exchange for receiving interest at 5%.
Q2) Assume that Signh agrees to purchase US$100,000 for C$84,745 on January 15,2018.The exchange rate at year-end is US$1 = C$1.20 and the January 15,2018 exchange rate is US$1 = C$1.19.What journal entry is required at January 15,2013?
A) $701 loss.
B) $701 gain.
C) $711 loss.
D) $711 gain.
Q3) Amel Company issues convertible bonds with face value of $7,000,000 and receives proceeds of $7,500,000.Each $1,000 bond can be converted,at the option of the holder,into 40 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $7,200,000.
Required:
Record the journal entry for the issuance of these bonds.
Q4) Explain how convertible bonds alleviate moral hazard.
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Chapter 5: Earnings Per Share
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Sample Questions
Q1) Which of the following is correct about the difference between basic earnings per share (EPS)and diluted earnings per share?
A) Basic EPS uses total common shares outstanding, whereas diluted EPS uses the weighted-average number of common shares.
B) Basic EPS is not a required disclosure, whereas diluted EPS is required disclosure.
C) Basic EPS is not adjusted for the potential dilutive effects of complex financial structures, whereas diluted EPS is adjusted.
D) Basic EPS uses comprehensive income in its calculation, whereas diluted EPS does not.
Q2) Which statement is correct regarding a company which buys call options on its own shares from an outside company?
A) Issued options are always antidilutive.
B) Issued options are always dilutive.
C) Purchased options are always antidilutive.
D) Purchased options are always dilutive.
Q3) Explain why other comprehensive income is excluded from the numerator of the EPS calculation.
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Chapter 6: Accounting for Income Taxes
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Sample Questions
Q1) When will a terminal loss occur?
A) When proceeds of disposal are less than undepreciated capital cost.
B) When proceeds of disposal are between undepreciated capital cost and original cost.
C) When proceeds of disposal are more than undepreciated capital cost.
D) When proceeds of disposal are less than original cost.
Q2) In the first two years of operations,a company reports taxable income of $125,000 and $65,000,respectively.In the first two years,the company paid $50,000 and $13,000.It is now the end of the third year,and the company has a loss of $160,000 for tax purposes.The company carries losses to the earliest year possible.The tax rate is currently 25%.
Required:
Compute the amount of income tax payable or receivable in the current (third)year.
Q3) Which method reflects the tax effect in the period that tax is payable?
A) Accrual method.
B) Taxes payable method.
C) Deferral method.
D) Tax allocation method.
Q4) Describe what is meant by a permanent difference.
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Page 8
Chapter 7: Pensions and Other Employee Future Benefits
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Q1) A company has a defined benefit pension liability of $1,050,000 at the beginning of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at year-end.
Q2) A company's defined benefit pension plan incurs current service cost of $2,000,000.Expected income on the pension plan's assets amounted to $8,500,000,while actual income was $8,800,000.The interest on the pension obligation was $10,000,000,which matched the actuarial estimates.No past service costs arose during the year.
Required:
Compute the amount of pension expense for the year.
Q3) Which of the following component refers to the benefits earned by employees in a defined benefit plan?
A) Interest cost on pension obligations.
B) Income from plan assets.
C) Amortization of past service cost.
D) Amortization of actuarial gains and losses.
Q4) Summarize the three steps in the accounting for defined benefit pension plans.
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Chapter 8: Accounting for Leases
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Sample Questions
Q1) Which statement is true?
A) The guaranteed residual value is provided by the lessor.
B) The bargain purchase option is not a part of the minimum lease payment calculation.
C) The incremental borrowing rate is the interest rate that the lessor would have to pay on a similar lease or loan.
D) One of the risks of ownership is the risk of obsolescence.
Q2) Which will increase the "agency cost of leasing"?
A) Having a bargain purchase option in the lease agreement.
B) Having maintenance requirements for the leased asset.
C) Leasing assets that are easy to damage.
D) Having a guaranteed residual value by the lessee.
Q3) Why do the supporting indicators for lease classification use "major part" and "substantially all" rather than "all" in reference to the amount of time and value contained in the lease?
Q4) Give three examples which a lessee could use to manipulate estimates,and how the wording of the accounting standards anticipate and compensate for this tendency toward manipulation.
Q5) List four examples of the risks and four examples of rewards of ownership.
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Chapter 9: Statement of Cash Flows
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Sample Questions
Q1) Define cash and cash equivalents.
Q2) List three reasons why the statement of cash flows is a useful component of an enterprise's financial statements.
Q3) Explain how the following transactions should be reported in the statement of cash flows,assuming the indirect method is used to determine cash flows from operating activities.Identify all available options.If not reported on the statement of cash flows,indicate the disclosure requirements,if any.
1.Income tax expense of $30,000.The income tax payable account increased $7,000,while the deferred income tax liability account decreased $9,000.
2.Cash dividend of $40,000 declared.The dividends payable account increases $25,000.
Q4) Which category is used on the cash flow statement?
A) Non-current.
B) Operating.
C) Non-operating.
D) Discontinued.
Q5) How are cash flows from discontinued operations shown in the statement of cash flows?
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Chapter 10: Accounting Changes
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Q1) Cantac Construction purchased a piece of equipment for $40 million in early 2017.The company depreciates the equipment using the straight-line method over its useful life of 20 years,when it will have zero residual value.Cantac's income tax rate is 40%.At the end of 2020,after four years of depreciation,the company wrote down the carrying amount of the equipment from $32 million to $24 million after performing an impairment test on the cash generating unit (CGU)to which the equipment belonged.As a result of the impairment,the annual depreciation declined from $2 million to $1.5 million.In 2023,prior to recording depreciation for that year,the company's staff discovered an error in one of the formulas in the spreadsheet used to compute the value in use for the impairment test carried out at the end of 2020.Removing the error in the spreadsheet,the value in use for the CGU exceeded its carrying value.Therefore,the CGU was in fact not impaired,and Cantac should not have recorded an impairment writedown on the demolition equipment at the end of 2020. Required: Prepare the journal entries to correct the error including subsequent years' depreciation and related tax effects.
Q2) Over time,has management's free will over accounting changes increased or decreased? Explain why.
Q3) What types of accounting changes are treated retrospectively and why?
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