Introduction to Financial Accounting Study Guide Questions
Course Introduction
Introduction to Financial Accounting provides students with a comprehensive overview of the fundamental principles and practices used in the field of financial accounting. The course covers essential topics such as the accounting cycle, preparation and analysis of financial statements, and the measurement of business transactions. Students will learn how to record, classify, and summarize financial data in accordance with established accounting standards. Emphasis is placed on understanding the role of financial information in decision-making for various stakeholders, including management, investors, and regulators. By the end of the course, students will have developed the analytical and practical skills necessary to interpret financial reports and apply accounting concepts to real-world situations.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 7th Edition by James M. Whalen
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Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Q1) The _____________________________________________ defines more clearly the explicit responsibility of managers for financial statements,the relation between the independent auditor and the firm audited and the kinds of services permitted and not permitted.
Answer: Sarbanes-Oxley Act of 2002
Q2) ___________________________________ equals net income for a period plus or minus the changes in shareholders' equity accounts other than from net income and transactions with owners.
Answer: Comprehensive income
Q3) ______________________________ relates to the relative number of buyers and sellers in a particular industry.
Answer: Buyer power
Q4) The first step in financial statement analysis is to identify the __________________________________________________ of the industry in which a firm participates.
Answer: economic characteristics
Q5) The ______________________________ sets forth the sequence of activities involved in the creation,manufacture and distribution of its products and services.
Answer: value chain
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Use of acquisition costs generally results in more reliable asset and liability valuations than do
A) appraised values.
B) unrealized cost values.
C) current values.
D) all of these.
Answer: D
Q2) Future taxable income is characteristic of all of the following situations except: A) where deferred tax assets result.
B) where deferred tax liabilities result.
C) where the tax basis of liabilities exceed the financial reporting basis.
D) where the tax basis of assets is less than financial reporting basis.
Answer: A
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: Understanding
the Statement of Cash Flows
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Q1) Under the indirect method of preparing the statement of cash flows,addbacks to net income include all of the following except:
A) depreciation expense
B) deferred tax expense
C) asset write-downs
D) share-based compensation
Answer: C
Q2) The receipt of cash when employees exercise stock options is a (an)____________________ activity.
Answer: financing
Q3) Which of the following companies would you expect to report significant amounts of cash provided by financing activities?
A) A yet-to-be-profitable biotechnology company.
B) A mature company operating in the oil refinery industry.
C) A profitable established company in the retail industry.
D) A large multinational pharmaceutical company.
Answer: A
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Chapter 4: Profitability Analysis
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Q1) Firms that have either convertible securities or stock options or warrants outstanding have __________________________________________________.
Q2) Firms with simple capital structures can have which of the following?
A) outstanding convertible bonds.
B) stock options issued
C) stock warrants issued
D) declared preferred stock dividends
Q3) One problem with using EPS as a measure of profitability is that it does not consider the amount of ____________________ or ____________________ required to generate a particular level of earnings.
Q4) Return on common shareholders' equity can be disaggregated into profit margin,asset turnover and __________________________________________________.
Q5) Freedom Company reported net income for 2010 of $2,031 million on sales of $25,600 million.Interest expense for 2010 was $235 million,and minority interest was $344 million for 2010.The income tax rate is 40 percent.Total assets were $10,800 million at the beginning of 2010 and $14,874 million at the end of 2010.Compute the rate of ROA for 2010 and disaggregate ROA into profit margin for ROA and asset turnover components.
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Chapter 5: Risk Analysis
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Q1) Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.
Q2) All of the following typically drive firm-specific risks except:
A) the nature of the business
B) competition
C) supplier relationships
D) demographic shifts
Q3) Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?
A) Investment factors
B) Financing factors
C) Operating factors
D) Credit factors
Q4) Common shareholders benefit with increasing proportions of debt in the capital structure as long as the firm maintains an excess of ____________________ over the after-
Q5) The source of risk related to political unrest and exchange rate changes are
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Chapter 6: Financing Activities
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Q1) All of the following are typically recognized as accounting liabilities except:
A) Obligations with Fixed Payment Dates and Amounts
B) Obligations under Mutually Unexecuted Contracts
C) Obligations Arising from Advances from Customers on Unexecuted Contracts and Agreements
D) Obligations with Fixed Payment Amounts but Estimated Payment Dates
Q2) Assume that you are currently negotiating a lease transaction in the role of the lessee.Discuss whether you would rather structure the lease as an operating lease or a capital lease and why.In addition,provide the conditions that would require that the lease be accounted for as a capital lease.
Q3) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
Q4) Why can exercising stock options can create cash flow problems for managers at the exercise date? What is an alternative to this problem?
Q5) One criteria that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already
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Chapter 7: Investing Activities
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Q1) Carlson Company began constructing a building for its own use in January 2012.During 2012,Carlson incurred interest of $70,000 on specific construction debt and $15,000 on other borrowings.Interest computed on the weighted-average amount of accumulated expenditures for the building during 2012 as $60,000. Required: What amount of interest should Carlson capitalize?
Q2) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
Q3) Assume that Hsu Company needs to acquire a large special-purpose materials handling facility.Given that no outside vendor exists for this type of facility and that the company has available engineering,management,and productive capacity,the Hsu borrows funds and builds the facility.Identify the costs that should be capitalized as part of this facility.
Q4) Although the organizational structure and operating policies of a particular foreign unit determine its functional currency,discuss two actions that a management team might take to ensure that the foreign currency is the functional currency.
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Chapter 8: Operating Activities
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Q1) Which of the following accounts would not be considered a reserve account?
A) Allowance of Doubtful Accounts
B) Estimated Warranty Liability
C) Prepaid Expense
D) Accumulated Depreciation
Q2) Which of the following is not part of the balance sheet approach when computing income tax expense?
A) Identifying at each balance sheet date all differences between the book basis of assets, liabilities, and tax loss carryforwards
B) Eliminating permanent differences between book and tax basis.
C) Eliminating deferred tax assets.
D) Assessing the likelihood that the firm will realize the benefits of deferred tax assets in the future.
Q3) Differences between income before taxes and taxable income are either ____________________ or ____________________.
Q4) A contractor would not use ________________________________________ method of income recognition when there is substantial uncertainty regarding the total costs it will incur in completing the project.
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Chapter 9: Accounting Quality
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Q1) A ______________________________ is accounted for by spreading the effect of the prior year's misstatement over the current and future periods.
Q2) Which of the following items is consistent with earnings being informative about current performance but not informative about future earnings?
A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.
Q3) Income or loss from discontinued operations would best be regarded by an analyst as:
A) sustainable earnings.
B) impairments.
C) transitory earnings.
D) permanent earnings.
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Chapter 10: Forecasting Financial Statements
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Q1) Card Sharks,Inc. Card Sharks,Inc.sells baseball cards and other memorabilia.The company tries to maintain a cash balance equivalent to approximately 30 days of sales.Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 33% and in 2013 of 40%.
Given the information provided about Card Sharks,what is the company's 2013 projected cash balance?
A) $53,934
B) $49,524
C) $21,873
D) $38,524
Q2) The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.Discuss the seven steps necessary to prepare the three principal financial statements.
Q3) For some types of assets,such as accounts receivable,asset growth typically ____________________ future sales growth.
Q4) Financial statement forecasts should rely on _________________________ across financial statements.
Q5) Realistic expectations are ____________________ and ____________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Explain the theory behind the dividends valuation approach.Why are dividends value-relevant to common equity shareholders?
Q2) With respect to dividends and priority in liquidation,what has priority over common stock?
A) treasury stock
B) debt capital
C) preferred stock
D) nonconvertible common equity
Q3) The CAPM computes expected rates of return on common equity capital using the following model:
E[R<sub>Ej</sub>] = E[R<sub>F</sub>] + b<sub>j</sub> x {E[R<sub>M</sub>]E[R<sub>F</sub>]}
What are the roles of each of the three components of this model?
Q4) Under the assumption of clean surplus accounting,how would you compute total dividends paid to common equityholders in order to value the firm?
Q5) In some valuation scenarios,such as a leveraged buyout,it may be necessary to adjust the market equity beta to reflect a
new capital structure
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) If cash flow projections include the effect of inflation then the discount rate used should be a ____________________ rate.
Q2) A disadvantage of the free cash flow valuation method is
A) The terminal value tends to dominate the total value in many cases.
B) The projection of free cash flows depends on earnings estimates.
C) The free cash flow method is not rigorous.
D) The free cash flow method is not used widely in practice.
Q3) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
Q4) What three elements are needed to value a resource when using cash flows?
Q5) If an analyst wants to value a potential investment in the common stock equity in a firm,the relevant cash flows the analyst should use are
A) free cash flow from operations
B) free cash flows for all debt and equity capital stakeholders
C) free cash flows to common equity shareholders
D) cash flow from operations
Q6) ____________________ is an estimate of systematic risk based on the degree of covariation between a firm's stock returns and an index of stock returns for all firms in the market.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) The foundation for residual income valuation is the classical _____________________________________________.
Q2) Residual income will be zero when
A) the firm's reported net income exactly equals the required level of earnings necessary to cover the cost of equity capital.
B) the firm's expected future income is greater than the required level of earnings necessary to cover the cost of equity capital.
C) the firm's expected future income exactly equals the required level of earnings necessary to cover the cost of equity capital.
D) the firm's expected future income is less than the required level of earnings necessary to cover the cost of equity capital.
Q3) Explain required income.What does required income represent? How is required income conceptually analogous to interest expense?
Q4) Economists sometimes argue that earnings are not a _________________________ attribute on which to base valuation.
Q5) Provide the intuition for the residual income valuation model.In addition,define residual income.
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The PEG ratio does not take into account differences in ____________________ and ________________________________________ across firms.
Q2) All of the following are accounting factors that can drive a firm's price-earnings ratio in a given period to be higher than that of other firms in the same industry except:
A) non-recurring expenses or losses in that period
B) a greater degree of accounting conservatism that requires expensing R&D or other intangible asset-generating activities
C) a less conservative accounting stance that uses straight-line depreciation rather than accelerated methods.
D) a greater degree of accounting conservatism regarding accelerated depreciation of PP&E
Q3) The differences in industry market-to-book ratios may be the result of differences in growth,ROCE relative to R<sub>E</sub>,as well as differences in
Q4) In the value-to-book model growth adds value to shareholders only if the growth is ________________________________________.
Q5) Explain the analysts' role in making the capital markets efficient.
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