Corporate Financial Reporting
Study Guide Questions
Course Introduction
Corporate Financial Reporting is a comprehensive course that explores the fundamental concepts, principles, and practices involved in the preparation and analysis of financial statements for corporations. Students will learn how to interpret balance sheets, income statements, cash flow statements, and statements of shareholders' equity in accordance with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The course emphasizes the significance of accurate financial reporting in decision-making processes for investors, managers, and regulatory bodies. It also covers topics such as earnings management, financial disclosure requirements, and the ethical considerations facing financial professionals. By the end of the course, students will be equipped with critical analytical skills necessary to assess a companys financial health and performance.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) In Germany, what does a company that has no debt indicate?
A)It is a superior company with stable earnings.
B)It is a safer company to invest in than a company with debt.
C)It is highly supported by financial markets.
D)The banks do not have any faith in the company.
Answer: D
Q2) What do business enterprises have that NFPs do not have?
A)Specified products or services
B)Identifiable customers or clients
C)Employees
D)Boards of directors
Answer: B
Q3) When the International Accounting Standards Board amends a standard, what must a code-law country do to adopt the amendment?
A)The country's securities regulators must approve the amendment.
B)The country's professional accounting body must approve the amendment.
C)The country must pass new legislation to adopt the amendment.
D)The country's financial institution regulators must approve the amendment.
Answer: C
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Page 3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) How are most significant influence investments in equity securities actually recorded on the investors' books?
A)Using the cost method
B)Using the equity method
C)Using proportionate consolidation
D)On a fully consolidated basis
Answer: A
Q2) Which of the following statements about the direct approach to consolidation is true?
A)It can be used for both simple and complex consolidations.
B)It is a more methodical and less intuitive approach than the worksheet approach.
C)The starting point for preparing the consolidated financial statements is the financial statements for each of the parent and subsidiary companies.
D)The starting point for preparing the consolidated financial statements is the trial balance for each of the parent and subsidiary companies.
Answer: C
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Chapter 3: Business Combinations
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Q1) 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
Q2) 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
Q3) What does push-down accounting refer to?
A)Writing down assets where value is impaired
B)Applying the lower of cost or market approach
C)Recording fair values on a subsidiary's books after a business combination
D)Recording all consolidation adjustments on the books of the subsidiary
Answer: C
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5
Chapter 3: Appendix A: AIncome 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 differed from their tax bases. Which of the following statements is true?
A)The difference between Benson's carrying values and its fair values created 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 created 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 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Flatt Ltd. is a wholly-owned subsidiary of Franco Ltd. For consolidation purposes, how does the treatment of unrealized profits on upstream sales differ from the treatment of unrealized profits on downstream sales?
A)Unrealized profits must be eliminated on upstream sales, but not on downstream sales.
B)Unrealized profits must be eliminated on downstream sales, but not on upstream sales.
C)Unrealized profits must be eliminated for both upstream and downstream sales.
D)Unrealized profits are not eliminated on either upstream or downstream sales.
Q2) Fair value increments on depreciable assets ________.
A)should be amortized in accordance with the subsidiary's depreciation policies
B)should be amortized in accordance with the parent company's depreciation policies
C)should always be recorded on the subsidiary's books
D)should be expensed immediately
Q3) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
Page 7
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Q1) At the time of acquisition, the fair values of these assets were higher than their carrying values and their tax bases. In Morin's consolidation each year, it must adjust for the deferred taxes that resulted from these temporary differences. Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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Q1) Under IFRS, how often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q2) 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
Q3) 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.
Q4) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE). To view all questions and flashcards with answers, click on the resource link above.
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Which consolidation approach excludes the NCI?
A)Proportionate consolidation
B)Parent-company method
C)Parent-company extension method
D)Entity method
Q2) Lopez Ltd. purchases 65% of Wheatfall Co. Under the entity method of consolidation, what is allocated to non-controlling interest?
A)35% of Wheatfall's net assets at fair value
B)35% of Wheatfall's net assets at carrying value
C)35% of Wheatfall's net assets at carrying value plus 35% of Wheatfall's fair value increments excluding goodwill
D)35% of Wheatfall's net assets at carrying value plus 35% of Wheatfall's fair value increments including goodwill
Q3) What is cost of sales on the consolidated statement of income for 20X6?
A)$687,000
B)$680,000
C)$685,600
D)$660,000
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Chapter 5: Appendix A: Step Purchases
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Q1) With respect to this addition purchase, which of the following is true?
A)On the consolidated statement of financial position, the goodwill balance will increase.
B)On the consolidated statement of financial position, the common shares balance will increase.
C)Frey must use the equity method to report the additional investment.
D)Frey should ignore any changes in the fair values of Sabo's net assets between January 1, 20X4, and January 1, 20X8.
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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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) 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)Gumble must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
Q2) When a subsidiary issues shares, ________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces the NCI
D)this may increase the NCI
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12
Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Roslynn Ltd. is a subsidiary of Goodale Co. Roslynn sold a machine to Goodale for a $50,000 gain. Goodale has now sold the machine to an unrelated party for a $20,000 gain. At the time of the sale, $35,000 of the profit on the sale from Roslynn was still unrealized. For consolidation purposes, what is the amount of gain that must be recognized on the sale of the machine?
A)$15,000
B)$20,000
C)$30,000
D)$55,000
Q2) When investments in associate or joint ventures are reported using the equity method, IFRS requires the application of ________.
A)proprietary theory
B)parent-company theory
C)parent-company extension theory
D)entity theory
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13
Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Q2) Restricted shares may have a cocktail provision. When might a coattail provision take effect?
A)When a company increases its dividends
B)When a buyer tries to acquire control of a company
C)When a company reacquires some of its shares
D)When a company issues preferred shares
Q3) 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
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Soft Limited owns 70% of the shares of Hard Co. On January 1, 20X5, Hard Co. issued $1,000,000 bonds payable at 6%, due on December 31, 20X10. The bonds were issued for $907,542, representing a yield of 8%. The interest is paid annually on December 31. On January 1, 20X6, Soft purchased $300,000 face value of Hard bonds for $287,700 when the bonds were yielding 7%.
Required:
Both companies use the effective interest rate to amortize the bonds. Prepare the eliminating journal entries relating to the bonds as they would appear on the consolidated worksheet. The agency method is used. Calculate the consolidated bonds payable account at December 31, 20X6, assuming there are no other bonds outstanding.
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 its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Page 15
Chapter 7: Segment and Interim Reporting
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Q1) The recommendation for interim income tax expense requires the use of which of the following rates in the first quarter?
A)Estimated average
B)Marginal
C)Applicable progressive
D)Loss carryforward
Q2) Under IAS 34, companies generally should use the discreet approach for interim reporting. However, IAS 34 outlines exceptions to this rule. Explain what these exceptions are and how they are treated in interim reports. What argument does IAS 34 provide for this treatment?
Q3) Under the revenue test only, which segments are reportable?
A)Segments A and C only
B)Segments B and D only
C)Segments B, C, and D only
D)All the segments are reportable.
Q4) Which organizations are required to issue interim financial statements?
A)Public companies
B)Private enterprises
C)Both public companies and private enterprises
D)No organizations are required to issue interim financial statements.
Page 16
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Under IFRS, which of the following statements about hedging a foreign currency risk of an accepted purchase order is true?
A)It must be accounted for using a fair-value hedge.
B)It must be accounted for using a cash-flow hedge.
C)It can be accounted for using either a fair-value hedge or a cash-flow hedge.
D)It is not eligible for hedge accounting until it becomes an accounts payable.
Q2) Assume that the transaction qualifies as a fair-value hedge. What amount of exchange gain (loss)should be recognized at April 30, 20X2?
A)$(640)
B)$(320)
C)$ 0
D)$320
Q3) Assume that the transaction qualifies as a fair-value hedge. At what amount should McBride record the drilling machine?
A)$307,440
B)$312,400
C)$317,600
D)$319,800
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17
Chapter 9: Reporting Foreign Operations
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Q1) Machinery, land, and buildings were purchased on June 30, 20X4
Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Under the temporal method, what is the total of the non-monetary assets?
A)$1,565,090
B)$1,735,730
C)$2,151,832
D)$2,185,770
Q2) What does a funds-flow statement measure?
A)Exchange gains/losses arising from the income statement
B)Exchange gains/losses arising from monetary assets and liabilities
C)Exchange gains/losses arising from non-monetary assets and liabilities
D)Exchange gains/losses arising from financing instruments
Q3) 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
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18
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Food for All (FFA)is a not-for-profit organization that has grown to be quite large. FFA operates 25 food banks in multiple locations throughout the province and has moved to a decentralized organizational structure. All of the funding is received by the head office and then each location is allocated a fixed amount of funds that can be used over the year for local expenses. Local expenses are at the discretion of the local managers. The board has decided to change its method of accounting to keep better track of costs at these various locations and to better manage the budget. The board has decided to implement a new budgeting and encumbrance accounting system.
Required:
1. In October 20X9, FFA issued a purchase order for $35,000 to have 100,000 pamphlets printed to be distributed to households over the next six months. In December 20X9, the pamphlets were received along with an invoice for $33,900. Prepare the journal entries for October and December 20X9 using encumbrance accounting.
2. Identify when encumbrance reporting would be appropriate. Comment as to whether or not encumbrance reporting is appropriate for FFA.
Q2) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?
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Page 19
Chapter 10: Appendix A: Fund Accounting
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Q1) 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
Q2) 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
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Page 20
Chapter 11: Public Sector Financial Reporting
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Q1) According to PSAB, when and how is revenue measured in government entities? Explain how transfers made through the tax system and tax concessions are different and how PSAB suggests these be treated.
Q2) Which of the following is not a typical characteristic of a non-business organization?
A)No equity investors
B)May have restrictive funds
C)Relies on the sale of goods and services
D)Provision of collective goods and services
Q3) In general, there are three types of government organizations. Identify and describe these three types and the accounting standards that are followed by each type of entity.
Q4) Local government auditors are required to report in accordance with ________.
A)municipal legislation governing municipal reporting
B)provincial legislation governing municipal reporting
C)federal legislation governing municipal reporting
D)IFRS
Q5) Describe the major differences in characteristics that exist when comparing a large government agency to a large public company.
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