Financial Reporting and Analysis Exam Practice Tests
Course Introduction
Financial Reporting and Analysis provides students with an in-depth understanding of how financial statements are prepared, analyzed, and interpreted in accordance with accounting standards. The course covers essential topics such as the preparation and presentation of balance sheets, income statements, and cash flow statements, as well as the analysis of financial ratios and performance metrics. Emphasis is placed on how financial information is used by various stakeholders, including investors, creditors, and managers, to make informed economic decisions. Through case studies and real-world examples, students develop critical skills in evaluating the financial health of organizations and understanding the implications of financial reporting practices and regulatory requirements.
Recommended Textbook
Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2010, for $80,000 when the book value of Ritz was $800,000. During 2010 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2011, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2011?
Answer: 11ea8df8_a859_1f39_b636_033173941a6d_TB4172_00
Q2) A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true?
A) A cumulative effect change in accounting principle must occur.
B) A prospective change in accounting principle must occur.
C) A retrospective change in accounting principle must occur.
D) The investor will not receive future dividends from the investee.
E) Future dividends will continue to be recorded as revenue.
Answer: C
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3
Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) Using the acquisition method for a business combination, goodwill is generally defined as:
A) Cost of the investment less the subsidiary's book value at the beginning of the year.
B) Cost of the investment less the subsidiary's book value at the acquisition date.
C) Cost of the investment less the subsidiary's fair value at the beginning of the year.
D) Cost of the investment less the subsidiary's fair value at acquisition date.
E) is no longer allowed under federal law.
Answer: D
Q2) What is the difference in consolidated results between a business combination whereby the acquired company is dissolved, and a business combination whereby separate incorporation is maintained?
Answer: There is no difference in consolidated results.
Q3) What term is used to refer to a business combination in which only one of the original companies continues to exist?
Answer: The appropriate term is statutory merger.
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Chapter 3: Consolidationssubsequent to the Date of Acquisition
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Sample Questions
Q1) Red Co. acquired 100% of Green, Inc. on January 1, 2010. On that date, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2010. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2010 related to the acquisition allocations of Green?
A) $43,000.
B) $33,000.
C) $5,000.
D) $15,000.
Answer: D
Q2) What advantages might push-down accounting offer for internal reporting?
Answer: Push-down accounting requires the subsidiary to record acquisition fair value allocations and amortizations in its accounting records. One advantage that the method offers to internal reporting is that it simplifies the consolidation process. More important, it provides better information for internal evaluation.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000. Determine the amount of the non-controlling interest as of the date of the acquisition.
Q2) Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of non-controlling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?
A) $350,000.
B) $300,000.
C) $400,000.
D) $370,000.
E) $0.
Q3) What is preacquisition income?
Q4) Where should a non-controlling interest appear on a consolidated balance sheet?
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Sample Questions
Q1) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2010 and 2011, respectively. Pepe uses the equity method to account for its investment in Devin.
Compute the non-controlling interest in the net income of Devin for 2010.
A) $116,400.
B) $120,400.
C) $120,000.
D) $123,200.
E) $112,000.
Q2) Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2010, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2010, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare the consolidation entries that should be made at the end of 2010.
Q3) How is the gain on an intra-entity transfer of a depreciable asset realized?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?
A) The investment in subsidiary will decrease.
B) Additional paid-in capital will decrease.
C) Retained earnings will increase.
D) The investment in subsidiary will increase.
E) No adjustment will be necessary.
Q2) Which of the following statements is true concerning variable interest entities (VIEs)?
1) The role of the VIE equity investors can be fairly minor.
2) A VIE may be created specifically to benefit its sponsoring firm with low-cost financing.
3) VIE governing agreements often limit activities and decision making.
4) VIEs usually have a well-defined and limited business activity.
A) 2 and 4.
B) 2, 3, and 4.
C) 1, 2, and 4.
D) 1, 2, and 3.
E) 1, 2, 3, and 4.
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Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) All of the following hedges are used for future purchase/sale transactions except
A) Forward contracts used as a fair value hedge of a firm commitment.
B) Options used as a fair value hedge of a firm commitment.
C) Option contract cash flow hedge of a forecasted transaction.
D) Forward contract cash flow hedges of a forecasted transaction.
E) Forward contracts used to hedge a foreign currency denominated liability.
Q2) A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?
A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.
Q3) What factors create a foreign exchange gain?
Q4) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q5) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?
Q6) What is the major assumption underlying the one-transaction perspective?
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Chapter 8: Translation of Foreign Currency Financial Statements
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Q1) Under the current rate method, inventory at market would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) Which method of translating a foreign subsidiary's financial statements is correct?
A) Historical rate method.
B) Working capital method.
C) Current rate method.
D) Remeasurement.
E) Temporal method.
Q3) What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?
Q4) Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?
Page 10
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Chapter 9: Partnerships: Formation and Operation
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Q1) P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest.
If C contributes $40,000 to the partnership and the goodwill method is used, what amount will be debited for goodwill?
A) $15,000
B) $20,000
C) $25,000
D) $28,000
E) $60,000
Q2) Determine the balance in both capital accounts at the end of 2011 to the nearest dollar.
Q3) For what events or conditions should the Articles of Partnership make provision?
Q4) The dissolution of a partnership occurs
A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.
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Chapter 10: Partnerships: Termination and Liquidation
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Q1) The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash.
Required:
Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss directly to the partners.
Q2) A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners.
Required: Who would have received the $10,400?
Q3) What is a safe cash payment?
Q4) What is the purpose of a predistribution plan?
Q5) What is the role of the accountant during the liquidation process?
Q6) Why is a Schedule of Liquidation prepared?
Q7) What should occur when a solvent partner has a deficit balance?
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Chapter 11: Accounting for State and Local Governments
Part 1
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Sample Questions
Q1) On August 21, 2011, Fred City transferred $100,000 to the School System to cover repairs to a school building.
Required:
Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements.
Q2) Which classifications may be not used for the Fund Balance of governmental funds?
A) Spendable
B) Non-Spendable
C) Assigned
D) Unassigned
E) Restricted
Q3) For governmental entities, the accrual basis of accounting is used for:
A) Special revenue funds.
B) Internal service funds.
C) Debt service funds.
D) General Fund.
E) Capital Projects Fund.
Q4) What is a special revenue fund used to account for?
Page 13
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Chapter 12: Accounting for State and Local Governments
Part 2
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Sample Questions
Q1) For fund financial statements, what account is credited when a piece of equipment is leased on a capital lease?
A) Equipment - Capital Lease.
B) Encumbrances - Long Term.
C) Encumbrances - Lease Obligations.
D) Capital Lease Obligation.
E) Other Financing Sources - Capital Lease.
Q2) A method of depreciation for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called
A) Government-wide depreciation.
B) Proprietary depreciation.
C) GASB depreciation.
D) Modified approach.
E) Alternative depreciation.
Q3) What three criteria must be met to identify a governmental unit as a primary government?
Q4) What are the three broad sections of a state or local government's CAFR?
Q5) What is meant by the term legally independent?
Q6) What is meant by the term fiscally independent?
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