Financial Reporting Practice Exam
Course Introduction
Financial Reporting is a comprehensive course that introduces students to the principles and practices involved in preparing, presenting, and interpreting financial statements in accordance with generally accepted accounting principles (GAAP) and international standards. The course covers key topics including the conceptual framework of accounting, the structure and content of balance sheets, income statements, and cash flow statements, as well as the analysis of notes to financial statements. Students will learn how to apply recognition, measurement, and disclosure criteria to various types of transactions and events, evaluate the impacts of accounting choices on reported financial performance, and develop the skills necessary to critically assess the quality and transparency of financial information for decision-making purposes.
Recommended Textbook
Cornerstones of Financial Accounting 2nd Edition by Jay Rich
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Page 2
Chapter 1: Accounting and the Financial Statements
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Sample Questions
Q1) ____________________ is a liquidity measure that is calculated by subtracting current assets from current liabilities.
Answer: Working capital
Q2) Which of the following items would not be reported on a multiple-step income statement after income from operations?
A)Income taxes
B)Interest income
C)Selling expenses
D)Interest expense
Answer: C
Q3) Independent auditors (CPAs)render an opinion that the financial statements do or do not fairly present a company's financial position,operating results,and cash flows.
A)True
B)False
Answer: True
Q4) The financial statement in which you list revenues,starting with sales revenue (service revenue),is called the ____________________.
Answer: Income Statement
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Chapter 2: The Accounting Information System
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Sample Questions
Q1) Which of the following statements is true regarding economic events?
A)The signing of a service contract is an example of an external event that is recorded in the accounting records.
B)Every event which affects an entity can be identified from a source document.
C)All internal and external events must be measured with sufficient reliability.
D)External events involve exchanges between an entity and another entity outside the company.
Answer: D
Q2) The going concern assumption is concerned with
A)The company's ability to continue operations long enough to carry out its existing obligations.
B)Any information that is capable of influencing the decisions of anyone using the financial statements.
C)Measuring ongoing business activities at their exchange price at the time of the initial external transaction.
D)offsetting management's natural optimism by providing a prudent approach to uncertainty in financial statement items.
Answer: A
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4
Chapter 3: Accrual Accounting
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Sample Questions
Q1) Matching requires expenses be recorded and reported in the same period as the revenue that it helped to generate.
A)True
B)False
Answer: True
Q2) Accumulated depreciation is a contra asset account.
A)True
B)False
Answer: True
Q3) The ____________ basis of accounting recognizes revenue when it is received regardless of when the revenue is earned.
Answer: cash
Q4) Which one of the following adjustments increases net income for the period?
A)Recognition of the amount of supplies used.
B)Recognition revenue earned,but not recorded.
C)Recognition of wages earned,but not paid to employees.
D)Recognition of rent costs that had been paid to the landlord in advance.
Answer: B
Q5) The first step in the accounting cycle is to ________________ transactions.
Answer: analyze
5
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Chapter 4: Internal Control and Cash
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Sample Questions
Q1) While reconciling the checking account,the accountant noticed that an error had been made in recording a check received by the company.The bookkeeper had recorded the receipt as $729 but the correct amount of the check was $279.Which of the following reconciling adjustments is necessary?
A)Add $450 to the company's records.
B)Deduct $450 from the company's records.
C)Add $450 to the bank statement balance.
D)Deduct $450 from the bank statement balance.
Q2) The account used to record the discrepancies that will occasionally occur between the amounts deposited and amounts shown on cash register tapes is called
Q3) An amount recorded as an increase in the company's cash account at the end of the period,but which has not yet been reflected on the bank statement is called a(n)____________________.
Q4) Which of the following documents is used in the control of cash receipts?
A)canceled checks
B)Outstanding checks
C)Bank deposit slips
D)Bank debit memos
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Chapter 5: Sales and Receivables
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Sample Questions
Q1) Refer to the Ace Computing Company.The entry required to recognize the bad debts expense for 2012 will act to:
A)Increase total assets and retained earnings
B)Decrease total assets and retained earnings
C)Decrease total assets and increase net income
D)Increase total assets and decrease net income
Q2) The following information is available for All Care Nursing Supply for fiscal year ending December 31,2012.Calculate the Accounts Receivable Turnover Ratio: \(\begin{array} { l l l }
\text { Nat Sules } & \$ 450,000 & \text { Acconnta Receivabile, December } 31,2011 &5175,000\\
\text { Operatirpincome } & \$ 120,000 & \text { Acerunte Receivabie, December } 31,2012&\$ 125,000 \\ \text { Net Inedme } & \$ 100,000 & \end{array}\) A)3 B).8 C)3.6 D)2.57
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Page 7
Chapter 6: Cost of Goods Sold and Inventory
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Sample Questions
Q1) During a period of increasing purchase prices,which inventory costing method will yield the lowest cost of goods sold?
A)Any method in which the company uses a periodic system.
B)FIFO
C)LIFO
D)Weighted average cost
Q2) All of the following are acceptable for financial accounting purposes EXCEPT:
A)Specific identification
B)FIFO
C)LIFO
D)Retail cost
Q3) The inventory turnover ratio is defined as cost of goods sold divided by average inventory.
A)True
B)False
Q4) Items should be included as part of the company's inventory if they are
A)Purchased from a creditor,although not paid for by year end.
B)Held in anticipation of an increase in market value.
C)Determined to be part of cost of goods sold.
D)Sold during the period.
Page 8
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Chapter 7: Operating Assets
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Sample Questions
Q1) FASB allows companies to use different depreciation methods so they can capture declining service potential of an operating asset.
A)True
B)False
Q2) How does goodwill arise? How is it accounted for and reported on the financial statements?
Q3) A company wants to minimize the amount of time and effort its bookkeepers spend on calculating depreciation.Since the company has not been profitable,taxes are not an issue,but maximizing the profit and minimizing reported losses are major objectives.Recommend a course of action for this company and provide support for your recommendation.
Q4) Why do many companies use MACRS (Modified Accelerated Cost Recovery System)depreciation for tax purposes?
Q5) The effect of recording depreciation for the year is a(n)
A)decrease in assets and a decrease in net income.
B)decrease in assets but no change in owners' equity.
C)increase in assets and an increase in net income.
D)decrease in net income and no change in assets.
Q6) Explain what costs are included in the acquisition cost of operating assets.
Page 9
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Chapter 8: Current and Contingent Liabilities
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Sample Questions
Q1) Refer to the partial balance sheet presented above for Gibraltar,Inc.Compute the following liquidity ratios for 2013 and 2012:
\(\text { Current Ratic }\)
\(\text { Ouick Ratio }\)
\(\text { Cash Ratio }\) Comment on the direction and significance of the change in the ratios from 2012 to 2013.
Q2) A company provides a one-year warranty for its products.The estimated cost of parts and labor required to satisfy warranty claims should be recorded as a current liability in the period the products are sold.
A)True
B)False
Q3) When a company uses past experience to estimate the amount of likely warranty claims in the future,a current liability account must be created.
A)True
B)False
Q4) A(n)____________________ arises when a business purchases goods or services on credit.
Q5) Why are unearned revenues considered current liabilities?
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Chapter 9: Long-Term Liabilities
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Sample Questions
Q1) Refer to Kaleidoscope Paint.The interest expense on the bonds at June 30,2013,is
A)$22,500
B)$24,037
C)$21,634
D)$43,267
Q2) Which of the following lease conditions would result in a capital lease to the lessee?
A)The lessee will return the property to the lessor at the end of the lease term.
B)The lessee can purchase the property for $1 at the end of the lease term.
C)The fair market value of the property at the inception of the lease is $20,000;the present value of the lease payments is $17,600.
D)The lease term is 70% of the property's economic life.
Q3) If bonds were initially issued at a discount,the interest expense on the bonds calculated using the effective interest method will
A)decrease as the bonds approach their maturity date
B)increase as the bonds approach their maturity date
C)remain constant throughout the bonds' life
D)fluctuate throughout the bonds' life
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Page 11
Chapter 10: Stockholders Equity
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Sample Questions
Q1) A corporation began operations on October 1,2014,with 3,000 shares of $2 par common stock authorized.The company issued common stock on several occasions during 2014 and 2015.On December 31,2015,the company repurchased 1,000 shares of its outstanding shares and then reissued 500 of these shares on March 1,2016.On June 1,2016,the company's board of directors declared a 2-for-1 stock split.As a result of this stock split,which of the following is true?
A)Assets decreased.
B)The number of shares issued decreased.
C)Total liabilities decreased.
D)Total stockholders' equity remained the same.
Q2) Which of the following is true for a corporation that issues 1,000 shares of $2 par common stock at $5 per share?
A)The common stock account will increase by $5,000.
B)$2 per share is the maximum selling price for these shares of stock.
C)Total stockholders' equity will increase by $5,000.
D)The per share dividend amount on these shares is $2.
Q3) Capitalization of retained earnings occurs when a corporation's stock is split.
A)True
B)False
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Page 12
Chapter 11: The Statement of Cash Flows
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Q1) Under the indirect method,a gain from the sale of land is subtracted from ___________ in the operating activities section of the statement of cash flows.
Q2) Which of the following measures can be used to evaluate a company's ability to meet future debt obligations after paying operating expenses,dividends and making capital expenditures?
A)Earnings per share
B)Net income
C)Cash flow adequacy ratio
D)Net increase or decrease in cash and cash equivalents
Q3) When using the indirect method to determine operating cash flows,how is the receipt of cash from the sale of long-term investments treated on the statement of cash flows?
A)Operating activity
B)Investing activity
C)Financing activity
D)Noncash investing or financing activity
E)Not reported on the statement of cash flows
Q4) Cash flows from operating activities correspond to the cash effects of items that determine ____________________.
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Chapter 12: Financial Statement Analysis
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Sample Questions
Q1) Which of the following combinations of ratios will best analyze a company's income statement performance?
A)Gross profit percentage,return on common equity,and debt-to-equity
B)Gross profit percentage,earnings per share,and net profit margin percentage
C)Gross profit percentage,current ratio,and return on common equity
D)Gross profit percentage,net profit margin percentage,and debt-to-equity
Q2) ____________________ analysis compares one corporation to another corporation and to industry averages.
Q3) Which of the following would report the market price of the company's stock?
A)balance sheet.
B)income statement.
C)statement of cash flows.
D)Item 5 in Form 10-K.
Q4) A company issued additional shares of stock.Which of the following is true with regard to the effect of the stock issuance transaction on the company's ratio computations?
A)Earnings per share decreased.
B)The debt-to-equity ratio increased.
C)The asset turnover ratio decreased.
D)Return on equity remained unchanged.
Page 14
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