Financial Accounting
Study Guide Questions
Course Introduction
Financial Accounting introduces students to the fundamental principles and practices essential for understanding, preparing, and interpreting financial statements. The course covers topics such as the accounting cycle, measurement and recognition of assets, liabilities, and equity, revenue recognition, and the analysis of income statements, balance sheets, and cash flow statements. By exploring the regulatory environment and ethical considerations, students gain the skills needed to evaluate financial information, support decision-making, and communicate effectively within various organizational contexts.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 6th Edition by Clyde P. Stickney
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) An example of an intangible asset is
A) a patent
B) land
C) investment in another company
D) raw material inventory
Answer: A
Q2) On a common size basis, which of the following assets is normally largest for a commercial bank?
A) Accounts and Notes Receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities
Answer: A
Q3) What three financial statements are prepared by business firms and what information does each provide?
Answer: 11ea92c5_78cc_2a1f_9469_7340757b7f88_TB5976_00
Q4) How easily can customers switch to substitute products is a question one might ask when assessing the ___________________________________.
Answer: threat of substitutes
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Chapter 2: Asset and Liability Valuation and Income Measurement
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Q1) The difference between income tax payable and income tax expense is reported on the balance sheet as either ___________________________________ or a
Answer: deferred tax asset, deferred tax liability
Q2) The amount initially paid to acquire an asset is called ______________________________.
Answer: acquisition cost
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) Net income equals revenues plus ____________________ minus expenses and ____________________.
Answer: gains, losses
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Chapter 3: Income Flows Versus Cash Flows: Key
Relationships in the Dynamics of a Business
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Sample Questions
Q1) One rationale for the statement of cash flows is to
A) ensure that the cash account balances at year-end.
B) reconcile differences between net income and cash receipts and disbursements.
C) calculate the company's free cash flow.
D) examine the cash effects of income from discontinued operations, extraordinary items and changes in accounting principles.
Answer: B
Q2) Which of the following companies would you expect to report significant amounts of cash provided by financing activities?
A) A yet to be profitable biotechnology company.
B) A mature company operating in the oil refinery industry.
C) A profitable established company in the retail industry.
D) A large multinational pharmaceutical company.
Answer: A
Q3) Cash collected from customers would appear in the operating activities section of a statement of cash flows prepared using the ____________________ method
Answer: indirect
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Page 5
Chapter 4: Profitability Analysis
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Sample Questions
Q1) Asset turnover represents
A) The ability of the firm to generate income from operations for a particular level of sales.
B) The ability to generate sales from a particular investment in assets.
C) The ability to manage the level of investment in assets for a particular level of assets.
D) The number of days, on average, it takes management to turnover assets.
Q2) Return on common equity can be disaggregated into three components, which of the three is not one of the components?
A) Assets Turnover ratio
B) Profit Margin ratio
C) Debt to Equity ratio
D) Capital Structure Leverage ratio
Q3) To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.
Answer:
Q4) Inventory turnover is calculated by dividing ________________________________________ by average inventories.
Answer:
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Chapter 5: Risk Analysis
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Sample Questions
Q1) When the excess of ROA over the after-tax cost of borrowing declines, additional ________________________________________ begins to reduce the return to common shareholders.
Q2) Beta captures the _________________________ of the firm.
Q3) Which of the following ratios is not a measure of long-term solvency risk?
A) Debt /Equity Ratio
B) Interest Coverage Ratio
C) Operating Cash Flows to Current Liabilities Ratio
D) Liabilities to Assets Ratio
Q4) The analysis of short-term liquidity risk requires an understanding of the _________________________ of a firm.
Q5) Which of the following is a measure of market equity risk?
A) Bankruptcy
B) Beta
C) Overdue amounts
D) Defaults
Q6) Short-term ____________________________ represents a firm's near-term ability to generate cash to service working capital needs and debt service requirements.
Q7) Discuss the differences between Chapter 7 and Chapter 11 bankruptcy filings?
Page 7
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Chapter 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data
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Q1) In a restructuring it is possible that managers may use the opportunity to write down assets that do not even relate directly to the restructuring action. Why might a manager decide to write down an asset that is not included in the restructuring action?
A) The manager is practicing conservatism.
B) The write down relieves future periods of depreciation expense, which increases cash flows.
C) Normally the stock market reacts positively to restructuring and the greater the amount the better.
D) The write down relieves future periods of depreciation expense, which increases earnings.
Q2) Many times an analyst will have to make judgments as to whether to include unrealized gains and losses when assessing earnings persistence and predicting future profitability. Discuss the case for and the case against including unrealized gains and losses as part of sustainable earnings when examining earnings persistence and future profitability.
Q3) When evaluating the quality of accounting information the user should consider the ____________________ of the measurements made.
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Page 8
Chapter 7: Revenue Recognition and Related Expenses
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Q1) Which of the following would not be suggestive of a company recognizing sales too early?
A) large and volatile amounts of uncollectible accounts receivable
B) excessive warranty expenditures
C) large growth in accounts receivable
D) unusually large amount of returned goods
Q2) When cash collectibility is uncertain the ___________________________________ method matches the costs of generating revenues dollar for dollar with cash receipts until the firm recovers all such costs.
Q3) Financial reporting requires firms to ____________________ immediately all R&D costs incurred internally.
Q4) Under the percentage-of-completion contract method
A) revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed.
B) revenue, cost, and gross profit are recognized during the production cycle.
C) revenue, cost, and gross profit are recognized at the time the contract is completed.
D) none of these
Q5) ___________________________________ is primarily a question of timing.
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Chapter 8: Liability Recognition and Related Expenses
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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) A derivative has one or more ____________________, which are a specified interest rate, commodity price, foreign exchange rate, or other variable.
Q3) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
Q4) Income tax expense consists of two components, the ____________________ portion and the ____________________ portion.
Q5) A security that has both equity and debt characteristics is referred to as a ______________________________.
Q6) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
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Chapter 9: Intercorporate Entities
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Q1) Under the fair value method of accounting for stock options, firms must value of stock options on the A) grant date.
B) intrinsic date.
C) measurement date.
D) fair value date.
Q2) Which of the following is not a classification for a minority, passive investment?
A) trading securities
B) equity securities
C) available-for-sale securities
D) held-to-maturity securities
Q3) Under the fair value method of accounting for stock options, firms must value of stock options on the date of ____________________.
Q4) The _________________________ is the date a firm gives a stock option to employees.
Q5) Ownership of 50% or more of the voting stock of another company implies an ability to ____________________.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) To ensure that the financial statements articulate it is important that the change in the cash balance on the balance sheet each year agrees with
A) the cash collections from sales in the projected income statement.
B) the cash provided by or used by operations on the projected statement of cash flows.
C) the net change in cash on the projected statement of cash flows.
D) the net change in working capital from period to period.
Q2) To develop forecasts of individual assets the analyst must first link historical growth rates for individual assets to historical growth rates in ____________________ and other activity-based drivers.
Q3) A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
Q4) Financial statement forecasts should rely on ____________________ within financial statements.
Q5) To develop forecasts of individual assets, the analyst must first link historical growth rates for individual assets to historical growth rates in sales or other
Q6) Realistic expectations are ____________________ and ____________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) In some valuation scenarios, such as a leveraged buyout, it may be necessary to adjust the market equity beta to reflect a
Q2) Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.
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) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q5) Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%. In addition, the excess return over the risk-free rate is 5.9%. Calculate the firm's cost of equity capital using the CAPM model.
Page 13
Q6) Provide the rationale for using expected dividends in a valuation model.
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) The conceptual framework for free cash flows separates the balance sheet equation into the following categories:
A) CA + LT A = CL + LT L + SE
B) OA + FA = OL + FL + SE
C) OA + FA = OL + FL + OSE + FSE
D) Non-FA + FA = Non-FL + FL + SE
Q2) Operating liabilities include all of the following except A) accounts payable
B) pension obligations
C) accrued taxes
D) long-term debt
Q3) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q4) What three elements are needed to value a resource when using cash flows?
Q5) Changes in general price levels cause the ______________________________ of the monetary unit to change over time.
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) At the beginning of 2007 investors had invested $125,000 of common equity in Jets Corp.and expect to earn a return of 15% per year. In addition, investors expect Jets Corp. to pay out 100% of income in dividends each year. Forecasts of Jet's net income are as follows: 2007 - $41,000
2008 - $35,400
2009 - $33,200
2010 and beyond - $25,000
Using this information what is Jet's residual income valuation at the beginning of 2007?
A) $125,000
B) $184,600
C) $190,262
D) $260,415
Q2) Accounting earnings numbers provide a basis for valuation because earnings are the primary measure of ______________________________ produced by the accrual accounting system.
Q3) Clean surplus accounting means that net income includes all of the recognized elements of income for the firm for
Q4) What is the rationale for using expected earnings as a basis for valuations?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The differences in industry market-to-book ratios may be the result of differences in growth, ROCE relative to R<sub>E</sub>, as well as differences in
Q2) A company with a PEG ratio of greater than one would be interpreted as having a stock price
A) that is consistent with the company's growth prospects
B) that is low relative to the company's growth prospects
C) that is high relative to the company's growth prospects
D) that is undervalued
Q3) The process of ___________________________________ stock prices assumes that intrinsic value equals market price.
Q4) 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.
Q5) Firms with low P/E ratios tend to have current residual income that is greater than _____________________________________________.
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