Intermediate Accounting
Exam Answer Key
Course Introduction
Intermediate Accounting builds upon foundational accounting principles to deepen students' understanding of financial reporting and analysis. The course focuses on the application of accounting standards to complex transactions, including revenue recognition, inventory valuation, long-term assets, liabilities, and shareholders' equity. Emphasis is placed on interpreting and preparing financial statements in accordance with generally accepted accounting principles (GAAP), as well as analyzing their impact on business decision-making. Through a combination of theoretical concepts and practical problem-solving, students develop the skills necessary to address real-world accounting challenges and excel in advanced accounting roles.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 6th Edition by Clyde P. Stickney
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14 Chapters
732 Verified Questions
732 Flashcards
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) What is comprehensive income?
Answer: Comprehensive income equals net income for a period plus or minus the changes in shareholders' equity accounts other than from net income and transactions with owners. Items affecting comprehensive income include foreign currency translation adjustments, cash flow hedge accounting, minimum pension liability adjustments and unrealized gains and losses from holding investment securities classified as available for sale.
Q2) The accrual basis method of accounting can be best described as:
A) The recording of transactions and adjustments so that debits equal credits.
B) The method that equates assets with liabilities and owners' equity.
C) The method that recognizes revenue when money is received.
D) The method that matches incurred expenses with related revenues when they are earned.
Answer: D
Q3) Another important step in financial statement analysis is to assess the quality of a firm's ________________________________________ and if necessary adjust them for such characteristics as sustainability or comparability.
Answer: financial statements
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Sample Questions
Q1) Current replacement cost represents
A) the amount a firm would have to pay currently to acquire an asset it now holds
B) the amount a firm would have to pay currently to acquire an asset it does not now hold
C) the amount a firm would have to pay in the future to acquire an asset it now holds
D) the amount a firm would have to pay to purchase a comparably depreciated version of the asset it now holds
Answer: A
Q2) Revenues and expenses that firms include in both net income to shareholders and in taxable income, but in different periods are referred to as _____________________________________________.
Answer: temporary differences
Q3) The amount that a company would have to pay today to acquire an asset it now holds is called ________________________________________.
Answer: current replacement cost
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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) Cash collected from customers would appear in the operating activities section of a statement of cash flows prepared using the ____________________ method
Answer: indirect
Q3) When preparing the statement of cash flows using the indirect method an increase in inventories would appear as
A) a decrease in the operating activities section
B) an increase in the operating activities section
C) a use of cash in the investing activities section
D) a source of cash in the investing activities section
Answer: A
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Page 5
Chapter 4: Profitability Analysis
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Sample Questions
Q1) Firms that have either convertible securities or stock options or warrants outstanding have __________________________________________________.
Answer:
Q2) To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.
Answer:
Q3) Discuss how the following three elements of risk help us understand return on assets differs across firms and changes over time:
1. Operating leverage
2. Cyclicality of sales
3. Product life cycle
Q4) Return on assets will likely differ across firms and across time, three elements of risk that will help explain these differences are operating leverage, ___________________________________, and stage and length of product life cycle.
Answer:
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Chapter 5: Risk Analysis
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Sample Questions
Q1) One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator. Detail how the interest coverage ratio and fixed charges coverage ratio are calculated. In addition, discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.
Q2) One common problem with the current ratio is that it is susceptible to "window dressing". If prior to the end of the accounting period Streetwise Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to
A) pay off accounts payable prior to year end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.
Q3) Economic theory teaches that differences in market returns must relate to differences in
A) book value
B) perceived risk
C) price-earnings ratio
D) bankruptcy risk
Q4) Beta captures the _________________________ of the firm.
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Chapter 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data
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Q1) The _________________________ is the date on which a firm commits itself to a formal plan to dispose of a business segment.
Q2) Accounting information should provide a fair and complete representation about a number of a firm's characteristics, which of the following is not one of those characteristics?
A) risk
B) position
C) performance
D) conservatism
Q3) When a company makes a change in an estimate that it has used in its financial statements, it should account for the change by
A) retroactively restating all prior financial statements
B) treat the change as a cumulative effect change in accounting estimate
C) spread the effect of the change over the current and future periods
D) companies are not allowed to make changes to estimates
Q4) When evaluating the quality of accounting information the user should consider the reasonableness of the ____________________ made in applying GAAP.
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Chapter 7: Revenue Recognition and Related Expenses
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Sample Questions
Q1) An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
A) FIFO
B) LIFO
C) Base stock
D) Weighted-average
Q2) When cash collectibility is uncertain, a firm using the ____________________ method recognizes revenue as it collects portions of the selling price in cash.
Q3) ___________________________________ is primarily a question of timing.
Q4) Under current accounting rules an asset is ____________________ when its carrying amount is deemed "not recoverable".
Q5) GAAP stipulates that firms should do what with expenditures that increase the service potential of an asset beyond that originally anticipated?
A) Expense the expenditure immediately.
B) Capitalize the expenditure and depreciate it over the remaining service life of the asset.
C) Capitalize the expenditure, but do not depreciate the asset.
D) Charge it off to shareholders' equity.
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Page 9
Chapter 8: Liability Recognition and Related Expenses
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Q1) Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.
Q2) Derivatives are financial instruments that derive their value from changes in any of the following underlyings except
A) Stock prices
B) Percentage discount on accounts receivable
C) Interest rates
D) Commodity prices
Q3) To calculate a company's average tax rate an analyst would
A) Divide income tax payable by income before taxes
B) Divide income tax expense by income before taxes
C) Multiply the statutory income tax rate by income before tax
D) Average a firm's Federal, State, Local and Foreign tax rates.
Q4) The lessor in a capital lease recognizes both a(n) ____________________ and ____________________ equal to the present value of all future cash flows.
Q5) Derivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge. Distinguish between the two types of hedges.
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Page 10
Chapter 9: Intercorporate Entities
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Q1) The functional currency of a foreign unit whose receivables and payables are denominated in foreign currency and not usually remitted to parent company is the
Q2) When the functional currency is the U.S. dollar, financial reporting requires firms to use the ___________________________________ translation method.
Q3) Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, the investment will appear in the December 31, 2005 balance sheet at what amount?
A) $60,000
B) $65,000
C) $64,000
D) $75,000
Q4) Discuss the method of accounting for employee stock options. In your answer discuss the how the accounting has changed during recent years.
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Page 11
Chapter 10: Forecasting Financial Statements
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Q1) For some types of assets, such as plant, property and equipment, asset growth typically ____________________ future sales growth.
Q2) 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
Q3) Financial statement forecasts are important analysis tools because forecasts of ______________________________ play a central role in valuation and many other financial decision contexts.
Q4) The objective of forecasting is to develop A) stand alone financial statements for future analysis.
B) a set of realistic expectations for future value-relevant payoffs. C) a balance sheet and income statement that articulate. D) financial statements for comparison to industry averages.
Q5) One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in projected ending balances. What might an analyst do to reduce the "sawtooth" pattern caused by using turnover ratios?
Q6) Financial statement forecasts should rely on _________________________ across financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation.
Q2) In some valuation scenarios, such as a leveraged buyout, it may be necessary to adjust the market equity beta to reflect a ________________________________________.
Q3) Provide the rationale for using expected dividends in a valuation model.
Q4) One rational for using expected dividends in valuation is
A) Dividends are a necessary payment in order for a firm to have value.
B) Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
C) Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
D) Dividend payout ratios are set based on profitability.
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
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Free cash flow from operations equals cash flow from operations adjusted for net interest after tax and adjusted for __________________________________________________.
Q2) Free cash flows for common equity shareholders are the cash flows specifically available to the common shareholders after making all capital expenditures, _____________________________________________ and ____________________________________________________________.
Q3) The cash-flow-based valuation approach measures and values the cash flows that are "free" to be ________________________________________ unencumbered by necessary reinvestments in operating assets or required payments to debt holders.
Q4) Operating liabilities include all of the following except A) accounts payable B) pension obligations C) accrued taxes D) long-term debt
Q5) If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.
14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Required earnings are the
A) adjusted net income multiplied by the required rate of return on common equity capital.
B) net income the analyst expects the firm to generate multiplied by the required rate of return on common equity capital.
C) the market value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
D) the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
Q2) Investors have invested $25,000 in common equity in a company. Given the risk inherent in the company the investors expect to earn a 15 percent return. In addition, the investors expect the company to return all income to investors in the form of dividends. The company is forecasted to earn $4,000 the first year, $5,000 the second year, $4,500 the third year and $3,750 each year after the third year. For this company determine the company's residual income valuation
Q3) What is the rationale for using expected earnings as a basis for valuations?
Q4) What is meant by the term clean surplus accounting?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) To estimate security's risk neutral value we can use the _____________________________________________ and risk-free rates of return.
Q2) Valuation using market multiples captures
A) absolute valuation per dollar of book value or per dollar of earnings.
B) dollar of book value or dollar of earnings per dollar of common equity.
C) relative valuation per dollar of book value or per dollar of earnings.
D) intrinsic valuation per dollar of book value or per dollar of earnings.
Q3) 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.
Q4) The use of P/E ratios in valuation can result in measurement bias. What two items can result in measurement error and why?
Q5) The market price of a share of common equity reflects the _____________________________________________ of all of the market participants following that particular stock.
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