Financial Reporting and Analysis Practice Exam
Course Introduction
Financial Reporting and Analysis provides a comprehensive overview of the principles and practices underlying the preparation, presentation, and interpretation of financial statements. The course covers key accounting standards, the structure and content of balance sheets, income statements, and cash flow statements, and the implications of financial statement information for decision-making by internal and external stakeholders. Emphasis is placed on developing analytical skills to assess a company's financial health, profitability, and risk using various tools and techniques such as ratio analysis, trend analysis, and comparative financial statement analysis. Students also explore the impact of accounting policies, estimates, and ethical considerations on financial reporting, as well as the use of financial reports in investment, credit, and management decisions.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Chapter 1: The Demand for and Supply of Financial
Accounting Information
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Q1) "Members should act in a way that will service the public interest, honor the public trust, and demonstrate commitment to professionalism." This is the Public Interest Principle of the AICPA's Code of Professional Conduct.
A)True
B)False
Answer: True
Q2) The FASB and IASB have some ambitious accounting standards projects to complete prior to their convergence. List five of the projects currently on the agenda.
Answer: 1) consolidated financial statements
2) fair value measurement
3) financial statement presentation
4) leases
5) financial instruments
6) revenue recognition
Q3) A problem arising from equal information is called information asymmetry.
A)True
B)False
Answer: False
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Chapter 2: Financial Reporting: Its Conceptual Framework
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Q1) A constraint mentioned by GAAP on qualitative characteristics is A) understandability
B) timeliness
C) faithful representation
D) benefits greater than costs
Answer: D
Q2) Oil and gas reserves information would be included within the financial statements.
A)True
B)False
Answer: False
Q3) Information about comprehensive income is useful to external users for all of the following purposes except
A) evaluating management's performance
B) examining cash flows for the current period
C) predicting future income
D) assessing the risk of lending to the company
Answer: B
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Chapter 3: Review of a Companys Accounting System
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Q1) The entire group of accounts for a company is referred to as the
A) general ledger
B) worksheet
C) journal
D) document of original entry
Answer: A
Q2) What is the purpose of a reversing entry?
Answer: It is an optional entry that simplifies the recording of future entries. It enables a company to routinely record the subsequent transactions without having to consider the possible imparct of the prior adjusting entry. It is the inverse of an adjusting entry and usually completed the first day of the next period.
Q3) Under cash-basis accounting,
A) revenue is recorded when earned
B) revenue is recorded when cash is received
C) expenses are recorded when incurred
D) expenses are recorded when due
Answer: B
Q4) ........
Answer: ........
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Q1) Assume an asset is measured by the amount of cash (or its equivalent) into which it is expected to be converted in an orderly transaction between market participants on the date of measurement. Which measurement alternative is in use in this case?
A) fair value
B) historical cost
C) present value
D) reliable value
Q2) A comparison of a company's performance with that of its own past results is known as
A) common-size analysis
B) intercompany analysis
C) ratio analysis
D) intracompany analysis
Q3) Refer to Exhibit 4-1. Blue Bell's quick ratio at December 31, 2014 was
A) 3.67 times
B) 2.33 times
C) 1.33 times
D) 0.43 times
Q4) What are the three categories of intangible assets?
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Chapter 5: The Income Statement and the Statement of Cash Flows
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Q1) Which of the following is not used as a caption if there is nothing to report?
A) income from continuing operations
B) extraordinary items
C) interest expense
D) income taxes
Q2) Financial flexibility is generally defined as
A) the ability of a company to adapt to unexpected needs and opportunities
B) the uncertainty or unpredictability of the future results of a company
C) a measure of overall company performance
D) a company's ability to maintain a given level of operations
Q3) A terrorist attack would be considered an extraordinary event because terrorist attacks are infrequent in nature.
A)True
B)False
Q4) Which of the following is not considered part of comprehensive income?
A) translation adjustments from financial statement conversions
B) gains and losses on derivative financial instruments
C) gains and losses associated with the sale of a business component
D) gain and losses associated with adjustments to pension plan assets and liabilities
7
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Chapter 6: Cash and Receivables
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Q1) Which of the following is a key element of internal control over cash payments?
A) periodically reconciling the cash account balance on the company's books to the bank statement balance
B) making daily bank deposits
C) requiring that all petty cash vouchers be approved by two signatures
D) authorizing and verifying that all cash received is recorded daily
Q2) Describe the key elements for internal control of cash receipts and cash payments.
Q3) How does GAAP require receivables to be recorded? What about trade receivables?
Q4) Cash control systems are the methods and procedures used to ensure
A) that current obligations are met
B) that excess cash does not exist
C) the safeguarding of cash
D) that unused cash is invested
Q5) The sales returns and allowances account is reported as a
A) contra-revenue account on the income statement
B) current liability on the balance sheet
C) deduction from accounts receivable on the balance sheet
D) selling expense on the income statement
Q6) What two issues are related to the valuation of receivables?
Page 8
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Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Q1) The use of dollar-value LIFO follows the same methodology as the LIFO method but reduces the record keeping.
A)True
B)False
Q2) Which one of the following is an advantage of LIFO?
A) In periods of rising prices, less income taxes are paid.
B) In periods of rising prices, more holding gains are reported in net income.
C) Record keeping and financial statement preparation are easier.
D) Conservative income statements and balance sheet disclosures result from falling prices.
Q3) For companies that have little change in the characteristics of their inventory items, the most appropriate method for computing a cost index for dollar-value LIFO is the
A) inventory pool method
B) double-extension method
C) weighted average method
D) link-chain method
Q4) When a seller offers a discount, it can be accounted for under the gross or net price method. What is the difference between the gross and net price method?
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Chapter 8: Inventories: Special Valuation Issues
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Q1) Stacie's Shoes uses the FIFO retail inventory method to determine its ending inventory. The accounting records for Stacie's Shoes contained the following information: \(\begin{array}{lll}
\underline{\text { Retail }}&\underline{\text {Cost}} \\
\$ 348,830 & \$ 242,000 & \text { Purchases } \\
394,000 & & \text { Sales } \\
5,076 & & \text { Sales returns } \\
107,294 & 60,500 & \text { Beginning inventory } \\
32,800 & & \text { Net markups } \\
12,000 & & \text { Net markdowns } \end{array}\)
The freight-in charges for the merchandise were $7,500. What is the cost of ending inventory for Stacie's Shoes?
A) $49,280
B) $55,792
C) $57,200
D) $59,400
Q2) Describe the lower of cost or market rule.
Q3) ......
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Chapter 9: Current Liabilities and Contingencies
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Q1) Liabilities whose amounts must be estimated are disclosed in financial statements by
A) including details in the footnotes
B) describing the estimated liabilities among the liabilities on the balance sheet but not including the amounts in the liability totals
C) an appropriation of retained earnings
D) including the amounts in the liability totals
Q2) The Captain Company began operations on January 1, 2014. The company estimated that $0.10 of warranty costs will be incurred for each $1 of sales. In 2014, Captain's sales were $400,000, and payments arising out of warranty obligations were $18,000.
Required: a. Prepare the 2014 journal entry(ies) for warranty expense and payments using the modified cash basis.
b. Prepare the 2014 journal entry(ies) for warranty expense and payments using the expense warranty accrual method.
c. Prepare the 2014 journal entries for sales and warranties using the sales warranty accrual method.
Q3) How are current liabilities valued?
Q4) How are current liabilities classified? Provide an example of each.
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Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent Investments
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Q1) Improvements made to a leased property, unless specifically exempt, revert to the lessor at the end of the lease. These improvements can be capitalized for the life of the lease or the life of the assets whichever is shorter.
A)True
B)False
Q2) Describe the IFRS treatment of increases in the market value of property, plant, and equipment held during the year. Compare that treatment to U.S. GAAP requirements.
Q3) Mathison Company exchanged a worn-out tractor that had cost $30,000 and was half depreciated for a new tractor with a fair value of $12,000. Mathison paid an additional $4,500 cash. The transaction lacked commercial substance.
Required:
Compute the amount at which Mathison should record the new tractor.
Q4) Which one of the following types of assets should not be classified as property, plant, and equipment?
A) leasehold improvements
B) fully-depreciated building (still in use)
C) idle land and buildings
D) long-lived tangible assets
Page 12
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Q1) Consider the following:
a.Regent Corp. bought a machine costing $22,400 on January 1, 2014. A six-year life was estimated, and a $1,400 residual value was expected. The sum-of-the-years'-digits depreciation method was used.
Compute depreciation expense for 2018.
b.The company bought a machine costing $50,000 on January 1, 2014 A six-year life was expected, and residual value was estimated to be $8,000. The 150%-declining-balance depreciation method was used.
Compute depreciation expense for 2015.
Q2) Clementine Co. computes depreciation to the nearest whole month and uses the straight-line method. On May 2, 2013, the company purchased an asset for $18,000 with a four-year life and a $3,600 residual value. On October 6, Karen also sold an asset with a cost of $34,500 that had been purchased in 2011. The sold asset had been estimated to have a five-year life and no residual value when it was purchased. The depreciation expense on these two assets for 2013 totals
A) $ 7,575
B) $10,500
C) $ 9,300
D) $ 7,600
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Chapter 12: Intangibles
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Q1) The Lane Company incurred the following expenditures in January 2014: (1) research and development costs of $510,000 that resulted in a new product that was patented near year-end, (2) $12,000 in legal fees to have the patent registered, (3) $100,000 in advertising costs to develop a trademark for the newly patented product, (4) Legal fees of $8,000 incurred with the registration of the trademark, which will only be used for five years, and (5) $25,000 of advertising costs to promote its good name. Benefits to be derived from the patent are expected to last for five years. The president believes the promotion of Lane's good name will benefit the firm for three years. How much amortization expense should Lane recognize for 2014?
A) $ 1,000
B) $ 4,000
C) $ 9,000
D) $25,000
Q2) Trademarks are considered to have an indefinite life and are therefore not subject to amortization.
A)True
B)False
Q3) If intangible assets are acquired during the period, what does GAAP require company's to disclose?
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Chapter 13: Investments and Long-Term Receivables
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Q1) Unrealized gains and losses on investments in trading securities are reported
A) as a current asset
B) on the income statement
C) on the balance sheet as part of stockholders' equity
D) as a contra asset
Q2) Investments that are typically held for short periods of time and sold by the company in the expectation of a profit on the short-term differences in price are classified as
A) available-for-sale securities
B) trading securities
C) held-to-maturity securities
D) marketable securities
Q3) For available-for-sale securities, a decline in value due to a temporary decline in market value below cost is
A) disclosed in the financial statements by means of a footnote
B) disclosed as a reduction from stockholders' equity on the balance sheet
C) disclosed as a loss on the income statement
D) not disclosed because the decline in value is only temporary
Q4) What are the five components necessary to account for investments in available-for-sale securities?
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Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Q1) Interest expense is more than interest paid when bonds are issued at par.
A)True
B)False
Q2) Which of the following may not be equal to the contract rate of interest?
A) stated rate
B) nominal rate
C) face rate
D) effective rate
Q3) Bond issue costs
A) should be amortized by the straight-line method to interest expense
B) should be included in bond discount or subtracted from bond premium and amortized by the effective interest method
C) should be subtracted from bonds payable on the balance sheet
D) should not be amortized and should be written off at bond retirement
Q4) Refer to Exhibit 14-9. The entry to record the conversion using the book value method would include a
A) debit to Loss on Conversion for $5,000
B) debit to Retained Earnings for $5,000
C) debit to Discount on Bonds Payable for $5,000
D) credit to Additional Paid-in Capital from Bond Conversion for $5,000
Page 16
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Chapter 15: Contributed Capital
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Q1) Which one of the following statements is not true with regard to employee compensatory share option plans?
A) When a stock option is exercised under a compensatory stock option plan, the newly issued common stock is recorded at the exercise price and the value of the options at the grant date.
B) When stock warrants are issued under a noncompensatory stock option plan, no formal journal entry is required to record the stock warrants.
C) When a stock option is exercised under a compensatory stock option plan, the newly issued common stock is recorded at the exercise price and the previously recorded value of the warrants.
D) For federal income tax purposes, any gains resulting from stock options earned by employees are taxed at ordinary income tax rates.
Q2) Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2013?
A) $ 3,333
B) $10,000
C) $30,000
D) $33,333
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) The Rico company began 2014 with $90,000 balance in retained earnings. The following events occurred during the year:
1) Cash dividends of $15,000 were declared.
2) Three thousand shares of callable preferred stock were recalled and retired for a price of $125 per share. The stock was originally issued for $110 per share.
3) Net income was $125,000.
4) Treasury stock was acquired at a cost of $25,000. The state of Rico's incorporation requires by a law a restriction of retained earnings equal to the amount acquired. The company reports the restriction in a note to the financial statements.
5) A material error in net income for a previous period was corrected. The error decrease retained earnings by $15,000 after a related income tax credit of $$5,250. The company is subject to a 35% tax rate.
Required:
Prepare the statement of retained earnings for the year ended 2014, prepare any note disclosures separately.
Q2) ......
Q3) Other Comprehensive Income or loss might include what four items?
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Chapter 17: Advanced Issues in Revenue Recognition
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Q1) Refer to Exhibit 17-2. What amount of gross profit was recognized in 2016?
A) $ 29,375
B) $ 50,000
C) $117,500
D) $150,000
Q2) Denton Products Co., a consignee, received inventory items on consignment. The cost of these goods was $2,000. Denton paid reimbursable advertising costs of $250. The goods were sold for $5,700, and Denton earned a 20% commission on the sales price. Denton paid the consignor the amount due.
Required: Prepare journal entries to record the information above.
Q3) The deferred gross profit on installment sales is reported on the balance sheet as a A) current asset
B) current liability
C) contra-asset
D) long-term liability
Q4) At what point would using the cost recovery method over the installment method be appropriate?
Q5) What three factors decide when to recognize revenue?
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Chapter 18: Accounting for Income Taxes
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Q1) Interest received on municipal bonds is taxable; this is because the bonds pay a lower rate of interest than corporate bonds. The fact that they are taxable reduces the cost of borrowing for the municipalities.
A)True
B)False
Q2) GAAP requires intraperiod income tax allocation to income or loss as they relate to discontinued operations and extraordinary items but not to retrospective adjustments or prior period adjustments.
A)True
B)False
Q3) Deferred tax liabilities and deferred tax assets must be reported on the balance sheet.
Required:
Explain the process of classifying and reporting deferred tax liabilities and deferred tax assets.
Q4) Deductions that are allowed for income tax purposes but do not qualify as expenses under GAAP are permanent differences.
A)True
B)False
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Chapter 19: Accounting for Postretirement Benefits
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Q1) Which of the following disclosures are required by GAAP for OPEBs?
A) the assumed healthcare cost trend rates
B) the amounts of securities included in the plan assets
C) the types of securities included in the plan assets
D) All of these choices
Q2) If an employer were to account for a defined benefit pension plan on the cash basis, it would be a violation of the
A) going-concern assumption
B) accrual concept
C) separate entity concept
D) historical accounting
Q3) Postemployment benefits are provided to former employees
A) after employment
B) after retirement
C) before retirement
D) after employment but before retirement
Q4) What five alternatives were examined by regulators to determine which best met the recognition-measurement criteria of a liability?
Q5) What are the advantages of qualified pension plans?
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Chapter 20: Accounting for Leases
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Q1) On January 1, 2014, Stacie signed a lease agreement with Amy. Amy will use the equipment and make ten annual payments of $15,000 beginning December 31, 2014. The lease is considered to be a sales-type lease. When reading the Stacie income statement, you would expect to find which of the following accounts?
A) Rent Revenue
B) Interest Revenue
C) Rental Expense
D) Interest Expense
Q2) From the lessee's point of view leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.
A)True
B)False
Q3) Which of the following is not a required disclosure by a lessor of a sales-type lease?
A) the guaranteed residual value accruing to the benefit of the lessor
B) total contingent rentals included in revenue for the period
C) unearned income
D) a general description of the lessor's leasing arrangements
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Chapter 21: The Statement of Cash Flows
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Q1) Which of the following statements is true regarding GAAP and reporting operating activities on the statement of cash flows?
A) The direct method is required of large companies.
B) The GAAP prefers the indirect method.
C) The GAAP prefers the direct method.
D) The GAAP did not express a preference for either the direct or indirect method.
Q2) The visual inspection method is used when a company has simple financial statements and when the relationships between the changes in account balances can be easily analyzed.
A)True
B)False
Q3) Provide three examples of noncash investing and financing activities.
Q4) When preparing a statement of cash flows using a spreadsheet, it is best to begin the spreadsheet with
A) a trial balance
B) an adjusted trial balance
C) a balance sheet
D) a balance sheet and an income statement
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Chapter 22: Accounting for Changes and Errors
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Questions
Q1) Bethany Corp. reported $80,000 of net income for 2014. The following errors were then discovered:
Ending 2014 accrued expense was overstated by $2,000. 2014 earned revenue was overstated by $3,000.
Ending 2014 prepaid expense was overstated by $500. Ignoring income taxes, the correct 2014 net income is
A) $85,500
B) $84,500
C) $78,500
D) $76,500
Q2) Refer to Exhibit 22-1. Assuming an income tax rate of 35%, depreciation expense related to the equipment reported in Chrissy's 2016 income statement would be
A) $124,000
B) $100,750
C) $140,000
D) $155,000
Q3) Explain the direct and indirect effects of a change in accounting principles.
Q4) What are the two methods for reporting changes as approved by GAAP provide a brief explanation of each?
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Chapter 23: Time Value of Money Module
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Q1) Although most accountants believe that the use of present value creates relevant accounting measurements, there are some reliability questions. Discuss the reasons why present value computations create less reliable measurements.
Q2) Charlie's Construction Co. acquired a new $800,000 backhoe on April 1, 2014. Charlie's will make six annual payments based upon 8% interest compounded annually, starting on March 31, 2015. How much will each payment be?
A) $504,136
B) $173,056
C) $160,234
D) $109,052
Q3) Using the table approach, the future amount of an annuity due may be calculated by finding the table factor for the future amount of an ordinary annuity of
A) n + 1 and then subtract 1
B) n + 1 and then add 1
C) n - 1 and then add 1
D) n - 1 and then subtract 1
Q4) What is the difference between simple interest and compound interest?
Q5) In what situations would a company use present or future value?
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