Financial Accounting Exam Bank
Course Introduction
Financial Accounting introduces students to the foundational principles and practices used to collect, analyze, and report financial information for business entities. This course covers topics such as the accounting cycle, preparation and interpretation of financial statements, accrual accounting, and the treatment of assets, liabilities, and equity. Students will gain an understanding of the regulatory frameworks guiding financial reporting, develop skills in using accounting software, and learn to apply ethical standards in accounting. Emphasis is placed on the relevance of financial information for internal and external decision-making, equipping students to analyze the financial health of organizations and to communicate financial data effectively.
Recommended Textbook
Intermediate Accounting Vol. 1 4th Edition by Kin Lo
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Chapter 1: Fundamentals of Financial Accounting Theory
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Sample Questions
Q1) Which statement best explains "moral hazard"?
A)The term refers to a situation where one party has an information advantage over another.
B)The term refers to the need external parties have for financial information.
C)The term refers to the fact that some people have more information than others.
D)The term refers to a situation where one party cannot observe the actions of another party.
Answer: D
Q2) Why is financial information required?
Answer: Governmental bodies issue proclamations requiring companies to provide financial information.
Quasi-governmental organizations issue proclamations requiring companies to provide financial information.
Accounting organizations such as the CPA or IASB issue proclamations requiring companies to provide financial information.
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Chapter 2: Conceptual Frameworks for Financial Reporting
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Sample Questions
Q1) Which of the following is an attribute of "relevance"?
A)Verifiability.
B)Predictive value.
C)Free from error.
D)Comparability.
Answer: B
Q2) Which of the following is not correct about the conceptual framework in accounting?
A)It is the basis for standard-setting for accounting standard setting bodies.
B)It is based on fundamental accounting truths derived from the laws of nature.
C)It can be used to solve emerging or complex accounting problems.
D)It can be used to develop consistent and comparable accounting principles.
Answer: B
Q3) Which is an assumption of financial information in the IFRS Conceptual Framework?
A)Accrual basis of accounting.
B)Historical cost.
C)Timeliness.
D)Financial capital maintenance.
Answer: D
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4
Chapter 3: Accrual Accounting
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Sample Questions
Q1) A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. How much are the unbiased accruals?
A)$150
B)$250
C)$400
D)$600
Answer: B
Q2) Which is not an example of a biased accrual?
A)Accruals based on overly optimistic estimates.
B)Accruals based on overly conservative estimates.
C)Accruals based on achieving target level of revenues.
D)Accruals based on applying professional judgment.
Answer: D
Q3) Explain what is meant by "quality of earnings."
Answer: Quality of earnings conceptually refers to how close the reported earnings are to an unbiased amount. Since we cannot observe unbiased earnings, quality of earnings is difficult to measure in practice.
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Chapter 4: Revenue and Recognition
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Sample Questions
Q1) Fancy Cars sold a used car for $35,000 cash. The company will also provide 4 oil changes per year for 5 years and an extended service-type warranty for 5 years. This is the first time that Fancy has offered an extended warranty. They intend to offer it to customers on a stand-alone basis but have not yet established a sales price. The observable selling prices of the car and oil changes follow:
\[\begin{array} { | l | l | }
\hline \text { Gar } & \$ 30,000 \\
\hline \text { Bil change } & \$ 50 \text { each oil change } \\
\hline
\end{array}\] a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction.
Q2) You are an accountant working at Phantastic Pharmaceutical Inc. and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization. Identify two alternatives that are in accordance with IFRS 15 for recognizing revenue at Phantastic.
Q3) List the five key steps in the revenue recognition process.
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Chapter 5: Cash and Receivables
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Sample Questions
Q1) Pomegranate Company's bank balance on its October 31, 2021 bank statement is $11,500. Pomegranate's accountant is preparing a bank reconciliation and determined that three cheques issued by Pomegranate to its suppliers for a total of $6,500 had not yet cleared the bank. Also, a deposit for $700 made by Pomegranate on October 31 did not appear on the bank statement. Bank service charges of $240 appear on the bank statement, but have not yet been recorded in the general ledger. Given the above information, prepare a bank reconciliation to determine the correct cash balance that should be reflected in Pomegranate's general ledger at October 31, 2021.
Q2) Which statement best describes the gross method of accounting for cash discounts?
A)Records receivables at their present value amount.
B)Records any discounts forfeited as income.
C)Records any discounts taken as a reduction in revenue.
D)Records any discounts taken as an expense.
Q3) Explain the differences and relationships among expenditures, assets, and expenses. Use an example to support your discussion.
Q4) Explain some controls that can be used in an organization to safeguard cash and other assets.
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Chapter 6: Inventories
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Sample Questions
Q1) Which method cannot be used in Canada to allocate inventory costs between the income statement and the balance sheet?
A)Specific identification.
B)FIFO.
C)Retail inventory method.
D)LIFO.
Q2) Which statement is not correct about overhead?
A)Fixed overhead is capitalized under absorption costing.
B)Fixed overhead is expensed under variable costing.
C)Variable overhead is expensed under both absorption and variable costing.
D)Both fixed and variable overhead are capitalized under absorption costing.
Q3) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2020 financial reporting?
A)Gross margin is understated by $1,000.
B)No effect on cost of goods available for sale.
C)Cost of sales is understated by $1,000.
D)Beginning inventory is overstated by $1,000.
Q4) Explain why the absorption costing method is appropriate under GAAP.
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Chapter 7: Financial Assets
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Sample Questions
Q1) According to the above table.If Amacon classifies its investment in DEF at fair value through profit or loss, what amount will be reported in other comprehensive income at December 31, 2020?
A)$0
B)$3,000 loss.
C)$3,000 gain.
D)$5,000 gain.
Q2) Explain the meaning of the "effective interest method."
Q3) On January 1, 2019, CC Company acquired 60,000 shares, representing 20% of the outstanding shares of VV Limited, at $25 per share. On July 31, 2019, VV declared and paid a dividend of $3 per share. VV's net income for 2019 was $1,000,000. On December 31, 2019, the shares of VV were trading on the Toronto Stock Exchange at $31 per share. Required:
CC is not sure how to report its investment in VV shares. Using the format provided, indicate the amounts that would appear on the balance sheet and the statement of comprehensive income for 2019 if the investment is considered to be (a)at fair value through OCI, (b)at fair value through profit or loss, or (c)an associate.
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Chapter 8: Property, Plant and Equipment
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Sample Questions
Q1) Hotel-R-Us owns a machine that it purchased on Jan 1, 2019 for $600,000. The machine had an estimated useful life of 5 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2021 for $140,000. What was the accumulated depreciation at December 31, 2021?
A)$292,800
B)$180,000
C)$150,000
D)$76,800
Q2) Explain how non-monetary transactions are accounted for.
Q3) An important piece of equipment requires major maintenance. Management has decided to upgrade the machine, by installing a new component which will extend the useful life of the machine from the three remaining years to five more years. The regular part could have been purchased for $75,000 but a more reliable part cost $225,000. The replaced part was not set up as a separate asset when the machine was purchased. Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment.
Q4) Explain derecognition of property, plant or equipment.
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Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and
Government Grants
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Sample Questions
Q1) Why is it important to understand the difference between research costs and development costs?
Q2) Xavier Corp capitalized exploration and evaluation costs of $470,000. A further $1,357,000 was spent on tangible property, plant, and equipment to develop an oil well. Reserves at the beginning of the year were 480,000 barrels. During the year, the Corp produced 57,600 barrels of oil.
Calculate the amounts for depletion and depreciation.
Q3) What factor will not affect the estimated useful life of a finite lived intangible asset?
A)Legal life of the asset.
B)Technological obsolescence.
C)Physical condition of the asset.
D)Certainty of future cash flows.
Q4) Assume that a company has spent $1 million during the year and is deciding whether these costs should be expensed as research costs or capitalized as development costs. Explain the impact of undercapitalization of development costs on the financial statements.
Q5) Explain the accounting for internally developed intangible assets.
Page 11
Q6) Explain the accounting for assets in the mineral resource exploration industry.
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Chapter 10: Applications of Fair Value to Non-Current Assets
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Sample Questions
Q1) According to the table above.The fair value for the property is $100,000. What amount would be booked to the "accumulated depreciation" account if Grover chooses to use the elimination method to record the revaluation?
A)$20,000 credit.
B)$40,000 debit.
C)$40,000 credit.
D)$80,000 debit.
Q2) When does agricultural activity end?
A)To the point just before harvest.
B)To the point of harvest.
C)To the point of sale to wholesaler.
D)To the point of sale to final customer.
Q3) Company One purchased land for $900,000 some years ago. Fair value was $450,000 at the beginning of this year and $340,000 at the end of this year. Prepare the journal entry to record this year's revaluation adjustment.
Q4) Explain the accounting under the revaluation model available under IFRS.
Q5) Explain why non-current assets held for sale are recorded at the lower of carrying value and fair value less costs to sell.
Page 12
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