Financial Reporting
Exam Preparation Guide
Course Introduction
Financial Reporting is a foundational course that explores the principles, standards, and practices involved in the preparation and presentation of financial statements for external users. The course emphasizes the conceptual framework underpinning accounting, the regulatory environment influencing reporting standards, and the analysis of balance sheets, income statements, and cash flow statements. Through case studies and problem-based learning, students develop the ability to interpret financial disclosures, assess organizational performance, and apply International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). This course equips students with essential skills for ethical and effective communication of financial information in todays dynamic business landscape.
Recommended Textbook
Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) A company should always use the equity method to account for an investment if: A) it has the ability to exercise significant influence over the operating policies of the investee.
B) it owns 30% of another company's stock.
C) it has a controlling interest (more than 50%) of another company's stock.
D) the investment was made primarily to earn a return on excess cash.
E) it does not have the ability to exercise significant influence over the operating policies of the investee.
Answer: A
Q2) Wathan Inc. sold $180,000 in inventory to Miller Co. during 2010, for $270,000. Miller resold $108,000 of this merchandise in 2010 with the remainder to be disposed of during 2011.
Required:
Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Wathan should have recorded at the end of 2010 to defer the unrealized intra-entity inventory profit.
Answer: 11ea8df8_a858_82f3_b636_db09c11c9b65_TB4172_00
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Chapter 2: Consolidation of Financial Information
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Q1) Which of the following statements is true regarding the acquisition method of accounting for a business combination?
A) Net assets of the acquired company are reported at their fair values.
B) Net assets of the acquired company are reported at their book values.
C) Any goodwill associated with the acquisition is reported as a development cost.
D) The acquisition can only be effected by a mutual exchange of voting common stock.
E) Indirect costs of the combination reduce additional paid-in capital.
Answer: A
Q2) Acquired in-process research and development is considered as
A) a definite-lived asset subject to amortization.
B) a definite-lived asset subject to testing for impairment.
C) an indefinite-lived asset subject to amortization.
D) an indefinite-lived asset subject to testing for impairment.
E) a research and development expense at the date of acquisition.
Answer: D
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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Q1) Kaye Company acquired 100% of Fiore Company on January 1, 2011. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2011 and paid dividends of $100.
Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?
A) $400 increase.
B) $300 increase.
C) $380 increase.
D) $280 increase.
E) $480 increase.
Answer: C
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) Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2010. During 2010, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2010.
The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be
A) $132,000.
B) $150,000.
C) $168,000.
D) $160,000.
E) $0.
Q2) Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?
Q3) On January 1, 2010, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the amount of goodwill to be recognized in this acquisition.
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Q1) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land purchased from Stark in 2010 for $92,000 in 2012. Compute the gain or loss on the intra-entity sale of land.
A) $80,000 gain.
B) $80,000 loss.
C) $5,000 gain.
D) $5,000 loss.
E) $85,000 loss.
Q2) What is meant by unrealized inventory gains, and how are they treated on a consolidation worksheet?
Q3) What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?
Q4) When is the gain on an intra-entity transfer of land realized?
Q5) What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intra-entity transfer of a depreciable asset?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70 percent interest in the new shares. Which of the following statements is true?
A) Since the sale was made at the end of the year, the parent's investment account is not affected.
B) Since the shares were sold for book value, the parent's investment account must be increased.
C) Since the shares were sold for book value, the parent's investment account must be decreased.
D) Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares.
E) None of the above.
Q2) How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?
Q3) How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?
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Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) How does a foreign currency forward contract differ from a foreign currency option?
Q2) What is meant by the spot rate?
Q3) Where can you find exchange rates between the U.S. dollar and most foreign currencies?
Q4) What factors create a foreign exchange gain?
Q5) Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2011. Pigskin received payment of 35,000 British pounds on May 8, 2011. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)
A) $10,500 loss
B) $10,500 gain
C) $1,750 loss
D) $3,850 loss
E) No gain or loss should be recognized.
Q6) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?
Q7) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q8) What is the purpose of a hedge of foreign exchange risk?
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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) A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
A) There is no translation adjustment.
B) There is a transaction loss.
C) There is a transaction gain.
D) There is a negative translation adjustment.
E) There is a positive translation adjustment.
Q3) A highly inflationary economy is defined as
A) Cumulative 5-year inflation in excess of 100%.
B) Cumulative 3-year inflation in excess of 100%.
C) Cumulative 5-year inflation in excess of 90%.
D) Cumulative 3-year inflation in excess of 90%.
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E) Any country designated as a company operating in a third-world economy.
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Chapter 9: Partnerships: Formation and Operation
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Q1) Which of the following statements is correct regarding the admission of a new partner?
A) A new partner must purchase a partnership interest directly from the business.
B) The right of co-ownership in the business property can be transferred to a new partner without the consent of other existing partners.
C) The right to participate in management of the business can be conveyed without the consent of other existing partners.
D) The right to share in profits and losses can be sold to a new partner without the consent of other existing partners.
E) A new partner always pays book value.
Q2) Determine the balance in both capital accounts at the end of 2011 to the nearest dollar.
Q3) Partnerships have alternative legal forms including all of the following except:
A) General Partnership.
B) Limited Partnership.
C) Subchapter S Partnership.
D) Limited Liability Partnership.
E) Limited Liability Company.
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Chapter 10: Partnerships: Termination and Liquidation
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Q1) Which of the following statements is false concerning the partnership Schedule of Liquidation?
A) Liquidations may take a considerable length of time to complete.
B) Frequent reporting by the accountant is rarely necessary.
C) The Schedule of Liquidation provides a listing of transactions to date, current cash, and capital balances.
D) The Schedule of Liquidation provides a listing of property still held by the partnership as well as liabilities remaining unpaid.
E) The Schedule of Liquidation keeps creditors and partners apprised of the results of the process of dissolution.
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 the purpose of a predistribution plan?
Q4) What is the role of the accountant during the liquidation process?
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Chapter 11: Accounting for State and Local Governments
Part 1
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Q1) Which of the following statements is true regarding fund financial statements?
A) Fund financial statements report a government's activities and financial position as a whole.
B) Fund financial statements should tell the amount spent this year on such services as public safety, education, health and sanitation, and the construction of a new road.
C) Fund financial statements utilize the accrual basis of accounting much like any for-profit entity.
D) Fund financial statements help to determine whether the government's overall financial position improved or deteriorated.
E) Fund financial statements report all assets and liabilities in a way comparable to business-type accounting.
Q2) 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.
Q3) What are the five types of governmental funds?
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Chapter 12: Accounting for State and Local Governments
Part 2
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Q1) What is meant by the term fiscally independent?
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) The City of Nextville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been collected. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest.
Required:
Prepare the journal entries for these transactions that are necessary to prepare government-wide financial statements.
Q4) What is meant by the term legally independent?
Q5) What are the three broad sections of a state or local government's CAFR?
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