CFA Accounting Mock Q's

Inventory values under GAAP are recorded at the lower of cost or: A.) market. B.) net realizable value. C.) estimated selling price.

A is correct

Company A (in $ millions, except per share data) Net income --> $7,098 Weighted average common shares outstanding --> 4,366 Common share dividends --> $1,700 Stock price per share at year-end --> $41.00 Company B Basic EPS --> $4.35 Earnings multiple --> 21.17 Dividend payout ratio --> 25.9% Compared with Company B, Company A most likely has a higher: A.) price-to-earnings ratio. B.) dividend payout ratio. C.) earnings per share.

A is correct EPS = 1.63 Net income/Weighted average number of common shares outstanding = 7,098/4,366 = P/E = 25.15x -- Market price/EPS = 41.00/1.63 Dividend Payout = 24.0% -- Common share dividends/Net income = 1,700/7,098

Which of the following is best described as a necessary characteristic for an effective financial reporting framework? A.) Transparency to the underlying economics B.) Consistency in the measurement basis used across the balance sheet C.) Uniform treatment of transactions by different entities

A is correct. An effective framework should enhance the transparency of the underlying economics through the financial statements; transparency arises through full disclosure and fair presentation.

Which income or expense item is prohibited under both IFRS and US GAAP? A.) Extraordinary items B.) Discontinued operations C.) Unusual or infrequent items

A is correct. Both IFRS and US GAAP prohibit classification of any income or expense items as being extraordinary.

Amounts recorded as deferred revenue are most likely included in income when they are: A.) earned. B.) invoiced. C.) paid.

A is correct. Deferred revenue is a liability account that arises when money has been collected for goods or services that have not been delivered. Revenue is recognized (included in income) as it is earned, and the deferred revenue liability will decrease accordingly.

Deferred tax liabilities result when: A.) taxable income in a period is less than reported financial statement income before taxes. B.) items of expense are included in financial statement income in earlier periods than those for which taxable income is reported. C.) straight-line depreciation methods are used for tax purposes and accelerated methods are employed for financial statement purposes.

A is correct. Deferred tax liabilities result when, for a given period, taxable income and the associated income tax payable are less than the reported financial statement income before taxes and the associated income tax expense.

When preparing a common-sized income statement, the appropriate denominator for converting the reported cost of sales is: A.) revenues. B.) net income. C.) pretax income.

A is correct. For a common-sized income statement, each line item, including cost of sales, is stated as a percentage of revenue. Common-size statements facilitate comparison across time periods and across companies because the standardization of each line item removes the effect of size.

According to US GAAP, the payment of cash dividends during the year will most likely affect the cash flow from which type of activity? A.) Financing B.) Investing C.) Operating

A is correct. For a company that prepares its financial statements under US GAAP, cash dividends paid are reported as a cash outflow in the cash flow from financing activities section on the statement of cash flows.

An analyst notes that a company's most recent financial statements show £65 million in net income, £7 million in dividends paid to common shareholders, and £5 million of other net expense items excluded from the net income calculation. The company's comprehensive income is: A.) £60 million. B.) £65 million. C.) £53 million.

A is correct. Given that comprehensive income includes net income and both other revenue and expense items that are excluded from the net income calculation (other comprehensive income), then the company's comprehensive income is: £65 million - £5 million = £60 million.

Under US GAAP, interest paid is most likely included in which of the following cash flow activities? A.) Operating only B.) Financing only C.) Either operating or financing D.) Investing only

A is correct. Interest paid must be categorized as an operating cash flow activity under US GAAP, although it can be categorized as either an operating or financing cash flow activity under IFRS.

Obligations of a company arising from past events are best described as: A.) liabilities. B.) prepaid expenses. C.) shareholders' equity.

A is correct. Liabilities represent obligations of a company arising from past events, the settlement of which is expected to result in an outflow of economic benefits from the entity.

Non-operating items reported on the income statement: A.) include interest expense and interest revenue for non-financial service firms. B.) are shown as either financing or investing items on the cash flow statement. C.) are required to be reported as separate entries.

A is correct. Non-financial service companies disclose interest received, dividends, or profits from the sale of securities held as investments as non-operating items. Interest expense is also disclosed as a non-operating item.

The cumulative amount of earnings recognized on a company's income statements that have not been distributed as dividends to the company's owners is best described as: A.) retained earnings. B.) accumulated other comprehensive income. C.) dividends payable.

A is correct. Retained earnings, a component of equity, is defined as the cumulative amount of earnings recognized on the company's income statements that have not been distributed as dividends to the company's owners.

When a company issues common stock as part of the conversion of a convertible bond, the cash flow statement will most likely: A.) omit the transaction but disclose it in a separate note or supplementary statement. B.) omit the transaction without disclosure. C.) include the transaction because it materially affects the company's financial position.

A is correct. Significant non-cash transactions, such as the exchange of non-monetary assets or issuance of stock as part of a stock dividend or conversion are not incorporated in the cash flow statement. They are required to be disclosed, however, in either a separate note or a supplementary schedule to the cash flow statement.

According to International Financial Reporting Standards, which of the following is a condition that must be met for revenue recognition to occur? A.) Costs can be reliably measured. B.) Goods have been delivered to the customer. C.) Payment has been partially received.

A is correct. The IFRS conditions that must be met include that the costs incurred can be reliably measured, the seller knows what it expects to collect and is reasonably certain of collection, and the significant risks and rewards of ownership have been transferred, which is normally (but not always) when the goods have been delivered.

According to the International Financial Reporting Standards (IFRS), which of the following conditions should be satisfied to report revenue from the sale of goods on the income statement? A.) Costs can be reliably measured. B.) Goods have been delivered to the customer. C.) Payment has been received.

A is correct. The IFRS conditions that should be met to recognize revenue from the sale of goods include that the costs incurred can be reliably measured, that the economic benefits will flow to the entity, and that the significant risks and rewards of ownership have been transferred, which is normally when the goods have been delivered but not always. The actual receipt of any payment is not a condition.

An analyst wants to compare a company with its industry and gathers the following selected financial information for the company: Current assets including inventory -- €260,000 Current liabilities -- €80,000 LIFO reserve -- €53,000 If the industry norm is to use the FIFO method of inventory valuation, the current ratio of the company that the analyst would use for comparison purposes is closest to: A.) 3.91. B.) 3.25. C.) 2.59.

A is correct. The company must be currently using LIFO, based on the disclosure of the LIFO reserve. For comparison purposes the analyst should adjust for the difference in accounting methods and increase current assets by the LIFO reserve. The adjusted current ratio is [(260,000 + 53,000)/80,000] = 3.91.

Which of the following is not a characteristic of a coherent financial reporting framework? A.) Timeliness. B.) Consistency. C.) Transparency.

A is correct. Timeliness is not a characteristic of a coherent financial reporting framework. Consistency, transparency, and comprehensiveness are characteristics of a coherent financial reporting framework.

Trade receivables are most commonly reported at: A.) net realizable value. B.) net present value. C.) face value.

A is correct. Trade receivables are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value based on estimates of collectability.

The role of the International Organization of Securities Commissions (IOSCO) is best described as: A.) promoting cross-border cooperation and uniformity in securities regulation. B.) enforcing financial reporting requirements for entities participating in capital markets. C.) promoting the use of International Financial Reporting Standards (IFRS) and the convergence of national accounting standards.

A is correct. IOSCO provides a forum for regulators from different jurisdictions to work together toward fair, efficient, and transparent markets, promoting cross-border cooperation and uniformity in securities regulation.

Using a common-size income statement to compare a company to its peers, an analyst can determine the company's: A.) relative performance. B.) size. C.) revenue recognition policies.

A is correct. A company's relative performance can be evaluated by examining and comparing the percentages shown across the common-size income statements. B is incorrect because size data, such as total sales, is not shown on common-sized income statements; for the company and its peers, the common-sized income statements show revenue as 100% for each company. The resulting standardization of each line item removes the effect of size.

Accounts payable are: A.) amounts a company owes its vendors for purchase of goods and services. B.) financial liabilities owed by a company through a formal loan agreement. C.) reported in a different section of the balance sheet from notes payable due in one year.

A is correct. Accounts payable are amounts that a company owes its vendors for purchases of goods and services. They represent the unpaid amount as of the balance sheet date of the company's purchases on credit. B is incorrect because notes payable (not accounts payable) are financial liabilities owed by a company through a formal loan agreement.

The assumption that the effects of transactions and other events are recognized when they occur, not when the cash flows occur, is called: A.) relevance. B.) accrual basis. C.) going concern.

B is correct Accrual basis reflects the effects of transactions and other events being recognized when they occur, not when the cash flows. These effects are recorded and reported in the financial statements of the periods to which they relate.

The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests: A.) held by the corporation in other entities that it does not control, but has significant influence. B.) of minority shareholders in subsidiaries that have been consolidated. C.) of minority shareholders of the corporation who have significant influence, but not control.

B is correct B is correct. Non-controlling interests found in the equity section represent the equity interests of minority shareholders in non-wholly-owned subsidiaries that have been consolidated.

Unless it is impractical to do so, changes in accounting policies are to be reported: A.) prospectively. B.) retrospectively. C.) at the bottom of the income statement in the year of change.

B is correct. Changes in accounting policies are reported through retrospective application unless it is impractical to do so. *retrospectively (restate financial statements as though the standard existed in the past)*

Under general principles of expense recognition, a company should: A.) apply uniform treatment for administrative and depreciation costs. B.) recognize expenses in the period that it consumes the associated economic benefits. C.) allocate lost economic benefits prospectively over the expected period in which the benefits would have been earned.

B is correct. In general, a company recognizes expenses in the period that it consumes (i.e., uses up) the economic benefits associated with the expenditure or loses some previously recognized economic benefit.

According to the International Accounting Standards Board's (IASB) Conceptual Framework for Financial Reporting, the two fundamental qualitative characteristics that make financial information useful are best described as: A.) understandability and verifiability. B.) relevance and faithful representation. C.) timeliness and accrual accounting.

B is correct. Relevance and faithful representation are the two fundamental qualitative characteristics that make financial information useful, according to the IASB Conceptual Framework.

The objective of general purpose financial reporting is best described as: A.) providing information about financial performance to a wide range of users. B.) facilitating resource allocation decisions by current and potential investors and creditors. C.) reporting an entity's economic resources and claims, and changes therein, to shareholders.

B is correct. According to the Conceptual Framework for Financial Reporting 2010 within the International Financial Reporting Standards, as well as Concept Statement 8 under US GAAP, "the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity."

For which of the examples given would common-size income statements generally provide the greatest insight? A.) A liquidity analysis of two companies within the same industry B.) A time-series analysis of a rapidly expanding single company C.) A comparison of similarly sized companies from different industries

B is correct. Common-size income statements facilitate comparison across time periods (time-series analysis) because the standardization of each line item removes the effect of size. They would be particularly useful in neutralizing the size effect for a company experiencing rapid growth. For example, efficiencies gained from increased volume may be more readily apparent. Common-size income statements would be less useful for similarly sized companies from different industries because the size effect is less important in the comparison.

Under US GAAP, a company's comprehensive income is reported as: A.) Net income less common stock dividends. B.) The change in equity during a period from transactions and other events and circumstances from non-owner sources. C.) revenue less expense items that are excluded from the net income calculation.

B is correct. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which means comprehensive income is the sum of all transactions and other events and circumstances from non-owners. A is incorrect because common stock dividends are distributions to owners and, as such, they result in a change in equity and therefore are not a subtraction in determining comprehensive income. C is incorrect because this choice is describing other comprehensive income, but comprehensive income is the combination of net income and other comprehensive income.

A payment received for a subscription service at the beginning of the period will most likely be recorded as: A.) trade payable. B.) deferred income. C.) notes payable.

B is correct. Deferred income (also called deferred revenue and unearned revenue) arises when a company receives payment in advance of delivery of the goods and services associated with the payment.

The industries most likely to be affected by the converged revenue recognition standard issued in May 2014 by the International Accounting Standards Board and Financial Accounting Standards Board are those: A.) with repetitive, low-value sales, such as the retail industry. B.) with bundled sales, such as the telecommunications services industry. C.) in highly regulated sectors, such as banking and financial services.

B is correct. Industries in which bundled services are common are expected to be significantly affected by the converged standard. A is incorrect because this is not one of the industries identified as likely to be significantly affected. C is incorrect because this sector has not been identified as likely to be significantly affected.

A company using IFRS reports its interest payments on long-term debt as a financing activity. If the company reported under US GAAP, the most likely effect would be a: A.) higher cash flow from operations. B.) higher cash flow from financing activities. C.) lower cash flow from investing activities.

B is correct. Interest payments can be reported either as operating or financing cash flow under IFRS, but they can be reported only as operating cash flow under US GAAP. The interest payment was originally reported as financing activity under IFRS, but under US GAAP it would be an operating activity. Therefore, under US GAAP, cash flow from financing activities would be higher and operating cash flows lower by the same amount.

US generally accepted accounting principles are currently developed by which entity? A.) The Securities and Exchange Commission. B.) The Financial Accounting Standards Board. C.) The Public Company Accounting Oversight Board.

B is correct. The FASB is responsible for the Accounting Standards Codification™, the single source of nongovernmental authoritative US generally accepted accounting principles.

Which inventory method is *least likely* to be used under IFRS? A.) First in, first out (FIFO). B.) Last in, first out (LIFO). C.) Weighted average.

B is correct. The last in, first out (LIFO) method is not permitted under IFRS. The other two methods are permitted.

Which of the following is most likely a benefit of the direct method for reporting cash flow from operating activities? Compared with the indirect method, the direct method: A.) mirrors the forecasting approach normally used by analysts. B.) provides details on the specific sources of operating receipts and payments. C.) provides insight on differences between net income and operating cash flows.

B is correct. The primary benefit of the direct method is that it provides information on the specific sources of operating cash receipts and payments. A is incorrect because this is a benefit of the indirect method when analysts start their forecasting with forecasted net income. C is incorrect because this is also a benefit of the indirect method.

Which of the following is not a required financial statement according to IAS No. 1? A.) Statement of financial position. B.) Statement of changes in income. C.) Statement of comprehensive income.

B is correct. There is no statement of changes in income. Under IAS No. 1, a complete set of financial statements includes a statement of financial position, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows, and notes comprising a summary of significant accounting policies and other explanatory information.

Under International Financial Reporting Standards (IFRS), which of the following items is most likely to be shown separately on the face of an income statement? A.) Adjustments for changes in accounting estimates B.) Loss from discontinued operations C.) Extraordinary loss on expropriation of land

B is correct. Under IFRS, losses on discontinued operations are shown separately on the income statement.

A company sells a product with a three-year warranty included in the price. According to IFRS, which of the following is the most appropriate accounting treatment for the warranty? A.) Fully recognizing the revenue at the time of the sale but waiting until the actual warranty costs are incurred to recognize the expense. B.) Fully recognizing the revenue and estimated warranty expense at the time of the sale and updating the expense as indicated by experience over the life of the warranty. C.) Deferring all of the revenue and recognizing it over the life of the warranty period.

B is correct. Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties and to update the expense as indicated by experience over the life of the warranty. Waiting until actual costs are incurred will not match the expense with the associated revenue.

At year end, a company has non-convertible debt, ordinary shares, and employee stock options outstanding. The company's capital structure is considered to be: A.) complex, because the company has both debt and equity. B.) complex, because the options are convertible into ordinary shares. C.) simple, if the options are antidilutive.

B is correct. When a company has issued any financial instruments that are potentially convertible into common stock, it is said to have a complex capital structure. Potentially convertible financial instruments include convertible bonds, convertible preferred stock, employee stock options, and warrants. Any antidilutive effect of a convertible security relates to the calculation of EPS and is not part of the distinction of simple vs. complex capital structure.

Working capital equals the excess of: A.) cash over current liabilities. B.) current assets over current liabilities. C.) shareholders' equity over non-current assets.

B is correct. Working capital is defined as the excess of current assets over current liabilities.

Under IFRS, the statement of shareholders' equity presents information about the: A.) carrying amounts of each component of equity as of the end of the year only. B.) effects of any accounting changes retrospectively applied to previous periods. C.) contracts that give rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

B is correct. IFRS requires that the statement of shareholders' equity present information about the effects of any accounting changes that have been retrospectively applied to previous periods.

Which of the following items is treated as other comprehensive income under both IFRS and US GAAP? A.) Costs of a company's defined benefit post-retirement plans that are recognized in the current period B.) Foreign currency translation adjustment from consolidating financials of foreign subsidiaries C.) Certain changes in the value of long-lived assets measured using the cost model

B is correct. Foreign currency translation adjustments resulting from consolidating foreign subsidiaries are included in other comprehensive income. A is incorrect because costs of a company's defined benefit post-retirement plans that are recognized in the current period are not included in comprehensive income because they already are reflected in current period income. C is incorrect because, under IFRS, certain changes in value of long-lived assets measured using the revaluation model, not the cost model, are included in other comprehensive income.

Ratios are an input into which step in the financial statement analysis framework? A.) Process data. B.) Collect input data. C.) Analyze/interpret the processed data.

C is correct. Ratios are an output of the process data step but are an input into the analyze/interpret data step.

Which of the following best describes a limitation of the balance sheet in determining a company's intrinsic value? A company's balance sheet: A.) reflects the company's intrinsic value only at the end of the reporting period. B.) adjusts the value of debt obligations only when interest rates change. C.) records some values using different measurement methods.

C is correct. The balance sheet provides important information about a company's financial condition, but it is limited in its ability to provide all the detail necessary to determine a company's market or intrinsic value. One limitation is that under current accounting standards, some assets and liabilities are measured at historical cost but others are measured on a current value basis.

Unrealized gains and losses on securities categorized as available-for-sale: A.) do not affect shareholders' equity. B.) affect the profit and loss statement as unrealized holding gains or losses. C.) affect shareholders' equity through other comprehensive income.

C is correct. Unrealized gains and losses on available-for-sale securities are treated as other comprehensive income under both IFRS and US GAAP. A is incorrect because unrealized gains and losses on available-for-sale securities do affect shareholders' equity. They bypass the income statement and go directly to shareholders' equity through other comprehensive income.

A core objective of the International Organization of Securities Commissions is to: A.) eliminate systemic risk. B.) protect users of financial statements. C.) ensure that markets are fair, efficient, and transparent.

C is correct. A core objective of IOSCO is to ensure that markets are fair, efficient, and transparent. The other core objectives are to reduce, not eliminate, systemic risk and to protect investors, not all users of financial statements.

A firm with convertible securities initially calculates that its diluted EPS is greater than its basic EPS. The firm will: A.) not be required to report diluted EPS. B.) report basic EPS that is not equal to reported diluted EPS. C.) report basic EPS that is equal to reported diluted EPS.

C is correct. A higher diluted EPS indicates that the company's convertible securities are antidilutive (i.e., their inclusion in the computation would result in an EPS higher than the company's basic EPS), and the company is required to report a basic EPS that equals diluted EPS. This occurs because, by definition, diluted EPS has to be equal to or lower than basic EPS.

An example of an expense classification by function is: A.) tax expense. B.) interest expense. C.) cost of goods sold.

C is correct. Cost of goods sold is a classification by function. The other two expenses represent classifications by nature.

In contrast to US GAAP, cash flow statements prepared under IFRS: A.) require adherence to the direct method format when reporting operating activities. B.) are less flexible regarding the classification of dividends paid or received. C.) allow interest receipts to be classified as either operating or investing cash flows.

C is correct. IFRS allows interest receipts to be classified as either operating or investing activities; in contrast, US GAAP requires interest receipts to be classified only as operating cash flows.

Which of the following best describes the role of financial statement analysis? A.) To provide information about a company's performance B.) To provide information about a company's changes in financial position C.) To form expectations about a company's future performance and financial position

C is correct. In general, analysts seek to examine the past and current performance and financial position of a company in order to form expectations about its future performance and financial position.

Net revenue most likely refers to revenue minus: A.) revenues attributable to non-controlling interests. B.) estimates of warranty expense. C.) volume discounts and estimated returns.

C is correct. Net revenue means that the revenue number is reported after adjustments for cash or volume discounts or for estimated returns. A is incorrect because revenues attributed to non-controlling interests are not segregated on the income statement. B is incorrect because warranty expenses are operating expenses and not netted from revenues.

Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from: A.) similar barter transactions with unrelated parties. B.) similar non-barter transactions with related parties. C.) similar non-barter transactions with unrelated parties.

C is correct. Revenue for barter transactions should be measured based on the fair value of revenue from similar non-barter transactions with unrelated parties.

An analysis used to forecast earnings that shows a range of possible outcomes as specific assumptions change best describes which of the following techniques? A.) Scenario analysis B.) Simulation C.) Sensitivity analysis

C is correct. Sensitivity analysis, also known as "what if" analysis, shows the range of possible outcomes as specific assumptions are changed.

"Other current assets" typically include: A.) trade receivables. B.) customer prepayments. C.) items deemed too small to be individually listed on the balance sheet.

C is correct. The amounts shown in "other current assets" reflect items that are individually not material enough to require separate line items on the balance sheet and so are aggregated into a single category.

Which of the following most likely results in an increase of owners' equity? Share repurchase Cash dividend New equity issuance

C is correct. The basic components of owners' equity are paid-in capital and retained earnings. In the paid-in capital account, an example of an increase in owners' equity is a new equity issuance. Cash dividends reduce retained earnings and owners' equity. Share repurchases reduce paid-in capital and owners' equity.

If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is: A.) the cost recovery method. B.) the completed contract method. C.) the percentage-of-completion method.

C is correct. The preferred method is the percentage-of-completion method. The completed contract method should be used under US GAAP only when the outcome cannot be measured reliably. A method similar to, but not referred to as, the cost recovery method is used under IFRS when the outcome cannot be measured reliably.

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? A.) Straight-line depreciation with a short useful life. B.) Declining balance depreciation with a long useful life. C.) Declining balance depreciation with a short useful life.

C is correct. This would result in the highest amount of depreciation in the first year and hence the lowest amount of net income relative to the other choices.

Trade receivables are: A.) typically reported at gross value. B.) owed by customers for products and services to be delivered. C.) based on the company's estimate of amounts that ultimately will be collectible.

C is correct. Trade receivables are typically reported at net realizable value, based on estimates of collectability

Shares that have been repurchased and not cancelled by the company that issued them are referred to as: A.) preferred shares. B.) contributed capital. C.) treasury stock.

C is correct. Treasury shares or treasury stock are shares in the company that have been repurchased by the company and not cancelled.

When a firm can choose where in the cash flow statement to classify interest received, which of the following choices is the most appropriate? A.) As an financing activity under IFRS B.) As an investing activity under US GAAP C.) As a operating activity under IFRS

C is correct. Under IFRS, interest received may be classified as either an operating activity or as an investing activity, but under US GAAP, it can be classified only as an operating activity.

Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown on the income statement separately: A.) below continuing operations. B.) below discontinued operations. C.) as part of continuing operations.

C is correct. Under US GAAP, material items that are unusual or infrequent and that are both as of reporting periods beginning after 15 December 2015 are shown as part of a company's continuing operations but are presented separately.

Which of the following items is most likely to be classified as a non-current asset? A.) Inventories B.) Prepaid insurance C.) Machinery acquired within the past year

C is correct. Machinery is an asset not consumed or sold in the current period and is therefore considered to be a non-current asset. A is incorrect because inventories are classified as current assets, given that they are expected to be sold within one operating cycle of a business. B

Beginning interest payable -- 90.4 Cash paid for interest -- 103.3 Ending interest payable -- 84.5 Interest expense (in millions) for the year is closest to: £97.4. £109.2. £71.6.

97.4 is correct Begin I/P + interest expense - cash paid = Ending I/P

. When analyzing a company that prepares its financial statements according to US GAAP, calculating the ratio of price to tangible book value instead of the ratio of price to book value is most appropriate if the company: A.) grows primarily through acquisitions. B.) develops its patents and processes internally. C.) invests a substantial amount in new capital assets.

A is correct. A company that grows primarily through acquisitions will have more goodwill and other intangible assets on its balance sheet than a company with fewer acquisitions or that has grown internally. To provide for comparisons with companies that do not follow such a growth strategy, an analyst would remove all intangibles and focus on tangible book value.

Along with relevance, the most critical qualitative characteristic of financial information is: A.) faithful representation. B.) comparability. C.) understandability.

A is correct. According to the conceptual frameworks adopted under both International Financial Reporting Standards and US GAAP, faithful representation and relevance are the two fundamental qualitative characteristics that make financial information useful.

Under IFRS, dividends received are least likely classified as which type of cash flow on the cash flow statement? A.) Financing B.) Operating C.) Investing

A is correct. Dividends received can be classified as either an operating or investing activity under IFRS but not as a financing activity.

Under US GAAP, internally created identifiable intangible assets most likely: A.) are expensed and not reported on the balance sheet. B.) have their amortization method and useful life reviewed at least annually. C.) can be revalued only when there is an active market for the specific intangible asset.

A is correct. Under US GAAP, internally created identifiable intangibles are expensed rather than reported on the balance sheet.

An area of difference regarding revenue recognition between IFRS and US GAAP within the converged IASB and FASB accounting standards is the: A.) threshold for probable collectability under a contract. B.) determination of the transaction price. C.) recognition of revenue based on the consideration which the entity expects.

A is correct. Under both IFRS and US GAAP accounting standards, a contract establishes each party's obligations and rights, including payment terms, and a contract exists only if collectability is probable. However, the threshold for probable collectability differs. Under IFRS, probable means more likely than not, and under US GAAP it means likely to occur. As a result, economically similar contracts may be treated differently under IFRS and US GAAP.

Under the converged FASB and IASB revenue recognition accounting standards, companies are required to disclose: A.) remaining performance obligations and transaction price allocated to those obligations. B.) general descriptions of any contract-related assets and liabilities. C.) aggregated information about customer contracts.

A is correct. Under the converged FASB and IASB revenue recognition accounting standards, companies are required at year end to disclose remaining performance obligations and transaction prices allocated to those obligations.

Other comprehensive income is least likely to include gains or losses on: A.) the sale or disposal of discontinued operations. B.) derivative contracts accounted for as hedges. C.) the translation of foreign currency-denominated subsidiary financial statements.

A is correct. Gains or losses on the disposal of discontinued operations are reported separately near the bottom of the income statement and are included in net income, not other comprehensive income. B is incorrect because gains or losses on derivative contracts accounted for as cash flow hedges are included in other comprehensive income. C is incorrect because gains or losses on the translation of certain foreign currency-denominated subsidiary financial statements are included in other comprehensive income.

Which of the following expense recognition choices is least consistent with conservative accounting of reported net income? A.) Recognizing expenses later rather than earlier B.) Reflecting lower warranty expenses due to improved product quality C.) Estimating lower uncollectible accounts due to stricter credit policies

A is correct. All else equal, recognizing expenses later rather than sooner is considered to be less conservative in reporting net income. B is incorrect because reflecting fewer warranty claims as a percentage of sales could be due to improved product quality and a change in business operations, not to an aggressive calculation of reported net income. C is incorrect because estimating lower uncollectible accounts due to stricter credit policies would reflect a change in business operations and not indicate a more aggressive accounting approach.

A company that reports under IFRS shows internally generated development costs in its balance sheet. Which of the following policies should raise concern when analyzing that company? A.) Intangibles capitalization B.) Revenue recognition C.) Long-lived asset depreciation

A is correct. Analysts' concerns may be raised with respect to the capitalization of expenditures for intangible assets such as internally generated development costs. B is incorrect because internally generated development costs are unrelated to revenue recognition.

Which of the following statements about the cash flow statement prepared under the direct method is mostaccurate? A.) For users, it is easier to interpret information necessary to assess a company's financial needs and ability to repay obligations. B.) For preparers, it is the easier and less costly format to prepare. C.) It mirrors the forecasting approach for future income that adjusts for the timing differences between accrual and cash accounting.

A is correct. Cash flow statement users, such as analysts and commercial lenders, prefer the direct method because operating receipts and payments are critical to assessing a company's financing needs and ability to repay existing obligations. B is incorrect. The indirect method is easier and less costly than reporting gross operating cash receipts and payments.

An artists' cooperative sells its artwork on a consignment basis through a local art gallery. The cooperative should most likely recognize revenue when the art gallery: A.) sells the artwork. B.) remits payment for the artwork. C.) receives the artwork.

A is correct. Revenue is recognized by the cooperative when the art gallery sells the artwork because that is the point at which the risks and rewards transfer from the cooperative to a third party and the amount of revenue is measurable.

An analyst would most likely conduct additional analysis when faced with which of the following financial presentations? A.) A non-GAAP financial measure that excludes an expense that is likely to recur B.) Reporting a non-GAAP financial measure in an SEC filing C.) A change from LIFO inventory accounting to FIFO

A is correct. The exclusion of recurring items from non-GAAP financial measures is strictly prohibited by the SEC and should raise concerns that additional analysis is needed. B is incorrect because if a company uses non-GAAP measures in its SEC filings, it must display the comparable GAAP measure with equal prominence and provide a reconciliation between the two.

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009? A.) $600,000. B.) $1,000,000. C.) $3,000,000.

A is correct. The installment method apportions the cash receipt between cost recovered and profit using the ratio of profit to sales value (i.e., $3,000,000 ÷ $5,000,000 = 60 percent). Argo will, therefore, recognize $600,000 in profit for 2009 ($1,000,000 cash received × 60 percent).

Under US GAAP, property, plant, and equipment is reported on the balance sheet based on: A.) a cost model only. B.) a revaluation model only. C.) either a cost model or a revaluation model. Solution

A is correct. Under US GAAP, only the cost model is permitted for reporting property, plant, and equipment (PPE). Under the cost model, PPE is carried at amortized cost (historical cost less any accumulated depreciation or accumulated depletion and less any impairment losses). B is incorrect because, while IFRS permits reporting of PPE using either a revaluation or cost model, US GAAP allows only the use of a cost model for reporting PPE.

A liquid asset can be easily converted into cash in a short amount of time at: A.) any price. B.) a price close to fair market value. C.) a price above the original purchase value.

B is correct. A liquid asset is one that can be easily converted into cash in a short period of time at a price close to fair market value.

Resources controlled by a company as a result of past events are: A.) equity. B.) assets. C.) liabilities.

B B is correct. Assets are resources controlled by a company as a result of past events.

The role of financial statement analysis is best described as: A.) providing information useful for making investment decisions. B.) evaluating a company for the purpose of making economic decisions. C.) using financial reports prepared by analysts to make economic decisions.

B The primary role of financial statement analysis is to use financial reports prepared by companies to evaluate the past, current, and potential performance and financial position of a company for the purpose of making investment, credit, and other economic decisions.

International financial reporting standards are currently developed by which entity? A.) The IFRS Foundation. B.) The International Accounting Standards Board. C.) The International Organization of Securities Commissions.

B is correct. The IASB is currently charged with developing International Financial Reporting Standards.

A company that prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) is attempting to produce lighter and longer-lasting batteries for portable electronic devices. The mostappropriate accounting treatment for the related costs incurred in this project is to: A.) capitalize costs directly related to the development. B.) expense costs until technical feasibility has been established. C.) expense them as incurred.

B is correct. Under IFRS, research and development costs are expensed until certain criteria, including demonstration of technical feasibility, have been met. A and C are incorrect because costs can only be capitalized once certain criteria, including the establishment of technical feasibility, have been met.

B is correct. Under US GAAP, operating activities generally involve producing and delivering goods and providing services. Hence, an impairment loss on inventory that has become obsolete would be considered an operating item on the income statement.

B is correct. Under US GAAP, operating activities generally involve producing and delivering goods and providing services. Hence, an impairment loss on inventory that has become obsolete would be considered an operating item on the income statement.

Which of the following sources of information used by analysts is found outside a company's annual report? A.) Auditor's report B.) Peer company analysis C.) Management's discussion and analysis

B is correct. When performing financial statement analysis, analysts should review all company sources of information as well as information from external sources regarding the economy, the industry, the company, and peer (comparable) companies.

For a company paying preferred dividends, the components needed to compute basic EPS are net income: A.) and the weighted average number of common shares outstanding. B.) preferred dividends, and the weighted average number of common shares outstanding. C.) preferred dividends, additional shares issued if preferred is converted, and the weighted average number of common shares outstanding.

B is correct. Basic EPS is calculated by subtracting preferred dividends from net income and then dividing the result by the weighted average number of shares outstanding. A is incorrect because preferred dividends must be subtracted from net income before dividing by the weighted average number of shares outstanding. C is incorrect because basic EPS is not adjusted for additional ordinary shares issued, an adjustment which uses the if-converted method for potentially dilutive securities. This method is applicable when determining diluted EPS.

Company A owns 60% of Company B. Company A's consolidated income statement most likely includes 100% of Company A's revenues and expenses and what portion of Company B's? A.) 0% B.) 100% C.) 60%

B is correct. Because Company A owns more than 50% of the shares in Company B it must present consolidated financial statements, which will include 100% of Company B's revenues and expenses. A is incorrect because all subsidiaries, even those that are partially owned, are included in a consolidated statement. C is incorrect because all subsidiary revenues and expenses are included, even if they are not 100% owned by the parent.

Which of the following items is most likely to be classified as a current asset? A.) A trade payable due to be settled within one year B.) A receivable expected to be collected within one operating cycle C.) Goodwill attributable to an acquisition made in the most recent reporting period

B is correct. Current assets are assets expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of a business, whichever is greater. A receivable expected to be collected within one operating cycle is therefore a current asset.

All of the following are current assets except: cash. goodwill. inventories.

B is correct. Goodwill is a long-term asset, and the others are all current assets.

Inventory values under IFRS are recorded at the lower of cost or: A.) market. B.) net realizable value. C.) estimated selling price.

B is correct. Inventories are measured at the lower of cost or net realizable value under IFRS. A is incorrect because inventories are measured at the lower of cost or market under US GAAP.

A classified balance sheet shows assets separately classified as either: A.) liquid or non-liquid. B.) tangible or intangible. C.) current or non-current.

C

The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is: A.) current cost. B.) present value. C.) realizable value.

C

Which of the following statements regarding balance sheets is correct? A.) Equity equals the market value of assets minus the market value of liabilities. B.) Liabilities are measured over a specific period of time rather than at a specific point in time. C.) Some assets are presented on a historical cost basis, while others are presented on a current value basis.

C

When a company pays its rent in advance, its balance sheet will reflect a reduction in: A.) assets and liabilities. B.) assets and shareholders' equity. C.) one category of assets and an increase in another.

C is correct. Paying rent in advance will reduce cash and increase prepaid expenses, both of which are assets.

Mabel Corporation (MC) reported accounts receivable of $66 million at the end of its second fiscal quarter. MC had revenues of $72 million for its third fiscal quarter and reported accounts receivable of $55 million at the end of its third fiscal quarter. Based on this information, the amount of cash MC collected from customers during the third fiscal quarter is: A.) $61 million. B.) $72 million. C.) $83 million.

C is correct. The amount of cash collected from customers during the quarter is equal to beginning accounts receivable plus revenues minus ending accounts receivable: $66 million + $72 million - $55 million = $83 million. A reduction in accounts receivable indicates that cash collected during the quarter was greater than revenue on an accrual basis.

Which of the following best describes common equity? A.) The initial investment by common shareholders in the company B.) The resources owned or controlled by a company C.) The residual interest in a company's assets after deducting its liabilities

C is correct. Common equity is a component of the balance sheet and represents the owners' residual interest in the company's assets after deducting its liabilities.

Expenses on the income statement may be grouped by: A.) nature, but not by function. B.) function, but not by nature. C.) either function or nature.

C is correct. IAS No. 1 states that expenses may be categorized by either nature or function. Grouping together expenses such as depreciation on manufacturing equipment and depreciation on administrative facilities into a single line item called "depreciation" is an *example of a grouping by nature of the expense.* An example of *grouping by function* would be grouping together expenses into a category such as cost of goods sold, which may include labour and material costs, depreciation, some salaries

Changing the estimates of the salvage value of capital assets is the least effective way to manage earnings during the life of an asset for companies whose method of depreciation is: A.) straight-line. B.) units-of-production. C.) double-declining balance.

C is correct. The double-declining balance depreciation method applies the rate to the gross cost of the equipment, so a change in the salvage assumption will have no effect on earnings until the net book value reaches the estimated salvage value, at which point the company ceases to take depreciation on the asset. A is incorrect because the straight-line method calculates depreciation on the net cost of the assets. Changing the salvage value will change the depreciation deduction and thereby affect earnings.

Which of the following statements is most accurate regarding cash flow statements? A.) Under IFRS, the indirect method of preparation is encouraged. B.) Under IFRS, interest paid can be reported either as an operating or as an investing cash flow. C.) Under US GAAP, bank overdrafts should be classified as a financing cash flow.

C is correct. Under US GAAP, bank overdrafts are not considered part of cash and cash equivalents and are classified as financing cash flows. A is incorrect because both direct method and indirect method are allowed under IFRS and US GAAP, and the direct method is encouraged under both. B is incorrect because under IFRS, interest paid could be reported either as an operating or financing cash flow.

Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? A.) $90 million. B.) $100 million. C.) $110 million.

A is correct. Revenues of $100 million minus the increase in accounts receivable of $10 million equal $90 million cash received from customers. The increase in accounts receivable means that the company received less in cash than it reported as revenue.

If a company issues shares in exchange for a capital asset, the transaction is most likely reported as: A.) Supplementary information to the cash flow statement. B.) A financing inflow and an investing outflow in the cash flow statement. C.) An investing inflow and outflow in the cash flow statement.

A is correct. Significant non-cash investing and financing transactions, such as purchasing a capital asset by issuing shares, are required to be disclosed, either in a separate note or a supplementary schedule to the cash flow statement.

Overloading distribution channels ("channel stuffing") would understate: A.) inventories. B.) accounts receivable. C.) revenues.

A is correct. "Channel stuffing," or inducing customers to buy more than usual, will produce an overstatement of revenues, which may be corrected in future periods if product is returned. Returned product in future periods would tend to understate inventories in the current period.

Distinguishing between current and non-current items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as: A.) a classified balance sheet. B.) an unclassified balance sheet. C.) a liquidity-based balance sheet.

A is correct. A classified balance sheet is one that classifies assets and liabilities as current or non-current and provides a subtotal for current assets and current liabilities. A liquidity-based balance sheet broadly presents assets and liabilities in order of liquidity.

Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: A.) continuing operations. B.) discontinued operations. C.) other comprehensive income.

A is correct. A fire may be infrequent, but it would still be part of continuing operations and reported in the profit and loss statement. Discontinued operations relate to a decision to dispose of an operating division.

Conservative, rather than aggressive, accounting is most likely associated with: A.) increased sustainability of earnings. B.) higher current reported performance. C.) recognition of losses once certain.

A is correct. Conservative accounting choices decrease a company's reported performance and results in the current period and may increase its reported performance and financial position in later periods. Therefore, it typically avoids a sustainability issue.

Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: A.) $67 million. B.) $79 million. C.) $83 million.

A is correct. Cost of goods sold of $75 million less the decrease in inventory of $6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million).

For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders' equity? A.) They are not recognized. B.) They flow through retained earnings. C.) They are a component of accumulated other comprehensive income.

A is correct. Financial assets classified as held to maturity are measured at amortised cost. Gains and losses are recognized only when realized.

When preparing an income statement, which of the following items would most likely be classified as other comprehensive income? A.) A foreign currency translation adjustment B.) An unrealized gain on a security held for trading purposes C.) A realized gain on a derivative contract not accounted for as a hedge

A is correct. Other comprehensive income includes items that affect shareholders' equity but are not reflected in the company's income statement. In consolidating the financial statements of foreign subsidiaries, the effects of translating the subsidiaries' balance sheet assets and liabilities at current exchange rates are included as other comprehensive income.

Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? A.) Operating. B.) Investing. C.) Financing.

A is correct. The operating section may be prepared under the indirect method. The other sections are always prepared under the direct method.

For which of the following inventory valuation methods is the gross profit margin least likely to be the same under both a perpetual inventory system and a periodic inventory system? A.) LIFO B.) Specific identification C.) FIFO

A is correct. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO. B and C are incorrect because the periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO.

A US company that complies with US GAAP would like to exclude some items in determining non-GAAP financial measures, other than EBIT and EBITDA. Which of the following items may be excluded? A.) For performance measures, items tagged as infrequent that occurred within the past two years B.) Impairment charges for long-lived assets C.) For liquidity measures, litigation costs requiring cash settlement

B is correct . To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding asset impairment charges either for long-lived assets, goodwill, or other intangible assets.

Which of the following is most likely classified as a current liability? A.) Payment received for a product due to be delivered at least one year after the balance sheet date B.) Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle C.) Payment on debt due in six months for which the company has the unconditional right to defer settlement for at least one year after the balance sheet date

B is correct Payments due within one operating cycle of the business, even if they will be settled more than one year after the balance sheet date, are classified as current liabilities. Payment received in advance of the delivery of a good or service creates an obligation or liability. If the obligation is to be fulfilled at least one year after the balance sheet date, it is recorded as a non-current liability, such as deferred revenue or deferred income. Payments that the company has the unconditional right to defer for at least one year after the balance sheet may be classified as non-current liabilities.

The information provided by a balance sheet item is limited because of uncertainty regarding: A.) measurement of its cost or value with reliability. B.) the change in current value following the end of the reporting period. C.) the probability that any future economic benefit will flow to or from the entity.

B is correct. Balance sheet information is as of a specific point in time, and items measured at current value reflect the value that was current at the end of the reporting period. For all financial statement items, an item should be recognized in the financial statements only if it is probable that any future economic benefit associated with the item will flow to or from the entity and if the item has a cost or value that can be measured with reliability.

Which of the following conditions would most likely create opportunities for a company to issue low-quality financial reports? A.) A company with an audit committee comprised only of independent board members B.) Government cutbacks in the enforcement branch of the financial regulator C.) Accounting standards that provide few choices

B is correct. Cutbacks in the enforcement branch of the financial regulator could lead to less effective enforcement and oversight of financial issuers, thus creating an opportunity for low-quality financial reporting. A is incorrect because an independent audit committee reduces the opportunity to produce low-quality financial reports.

When a company buys shares of its own stock to be held in treasury, it records a reduction in: A.) both assets and liabilities. B.) both assets and shareholders' equity. C.) assets and an increase in shareholders' equity.

B is correct. Share repurchases reduce the company's cash (an asset). Shareholders' equity is reduced because there are fewer shares outstanding and treasury stock is an offset to owners' equity.

At the end of the year, a company reported an impairment loss on its manufacturing plant, reducing its carrying amount by 10%. The impairment loss is least likely to cause the company's: A.) debt-to-asset ratio to increase. B.) cash flow from operations to decline. C.) fixed asset turnover to increase.

B is correct. The impairment loss is a non-cash charge and will not affect cash flow from operations. A is incorrect because the statement is correct: the carrying amount of assets has been reduced, so the debt-to-asset ratio will increase. C is incorrect because the statement is correct: the carrying amount of assets has been reduced, so the fixed asset turnover will increase.

Under the indirect method of presenting operating cash flows, which action to alter the cash flow from operations will be most difficult to detect? A.) Defer payment of a current liability B.) Transact with an unconsolidated special purpose entity C.) Change inventory costing from FIFO to weighted average

B is correct. Unconsolidated special purpose entities are outside of the view of investors. Transacting with such an entity may initially produce the appearance of a positive or negative cash flow for the controlling company. Ultimately, this transaction will most likely be reversed along with the appearance of the initial cash flow.

A company has total liabilities of £35 million and total stockholders' equity of £55 million. Total liabilities are represented on a vertical common-size balance sheet by a percentage closest to: A.) 35%. B.) 39%. C.) 64%.

B is correct. Vertical common-size analysis involves stating each balance sheet item as a percentage of total assets. Total assets are the sum of total liabilities (£35 million) and total stockholders' equity (£55 million), or £90 million. Total liabilities are shown on a vertical common-size balance sheet as (£35 million/£90 million) ≈ 39%.

Accounting goodwill is created when an acquisition's purchase price: A.) results in a "bargain purchase." B.) exceeds the value of acquired net identifiable assets. C.) is attributed solely to separately identifiable assets and liabilities.

B is correct. Accounting goodwill arising from an acquisition is the excess of the cost to purchase a target company over the acquired net identifiable assets (fair value of identifiable assets minus fair value of the liabilities and contingent liabilities).

For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? A.) They are not recognized. B.) They flow through income into retained earnings. C.) They are a component of accumulated other comprehensive income.

B is correct. For financial assets classified as trading securities, unrealized gains and losses are reported on the income statement and flow to shareholders' equity as part of retained earnings.

When preparing the cash flow statement, which of the following purchases is the best example of an investing activity? A.) Equity securities held for trading purposes B.) Equity securities to be held for more than one year C.) Liquid securities held for 30 days

B is correct. Investing activities on the cash flow statement comprise the purchase and sale of long-term assets and other investments. These activities include investments in equity and debt issued by other companies, whether long term or short term, and exclude those classified as cash equivalents (liquid securities held for less than 30 days) or those held for trading purposes.

The sale of a building for cash would be classified as what type of activity on the cash flow statement? A.) Operating. B.) Investing. C.) Financing.

B is correct. Purchases and sales of long-term assets are considered investing activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock of another company, or a long-term note receivable), it would have been considered a significant non-cash activity.

Shareholders' equity reported on the balance sheet is most likely to differ from the market value of shareholders' equity because: A.) historical cost basis is used for all assets and liabilities. B.) some factors that affect the generation of future cash flows are excluded. C.) shareholders' equity reported on the balance sheet is updated continuously.

B is correct. The balance sheet omits important aspects of a company's ability to generate future cash flows, such as its reputation and management skills. The balance sheet measures some assets and liabilities based on historical cost and measures others based on current value. Market value of shareholders' equity is updated continuously. Shareholders' equity reported on the balance sheet is updated for reporting purposes and represents the value that was current at the end of the reporting period.

Which of the following accounting actions would increase stockholders' equity in the current period? A.) Using LIFO rather than FIFO accounting for inventory in an inflationary environment. B.) Capitalizing, rather than expensing, a payment. C.) Increasing the allowance for uncollectible accounts receivable.

B is correct. The capitalization of payments is an example of how choices affect both the balance sheet and income statement. Capitalizing a payment changes the benefit from only the current period—making it an expense—to a benefit in future periods as an asset. The creation of an asset results in a comparable increase in stockholder's equity.

Money received from customers for products to be delivered in the future is recorded as: A.) revenue and an asset. B.) an asset and a liability. C.) revenue and a liability.

B is correct. The cash received from customers represents an asset. The obligation to provide a product in the future is a liability called "unearned income" or "unearned revenue." As the product is delivered, revenue will be recognized and the liability will be reduced.

A company that prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) uses the revaluation model to value land. At the end of the current year, the value of land, newly acquired this year, has increased and will be adjusted on the balance sheet. This land is the only asset in its asset class for revaluation purposes. Which of the following statements is most accurate? In the current period, the revaluation of the land will: A.) increase return on sales. B.) decrease the debt-to-equity ratio. C.) increase return on assets.

B is correct. The increase in the value of the land bypasses the income statement and goes directly to a revaluation surplus account in equity, assuming no previous decreases in value in the asset class for revaluation purposes. Equity increases, thereby decreasing the debt-to-equity ratio.

The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet: A.) as a long-term liability. B.) separately, but as a part of shareholders' equity. C.) as a mezzanine item between liabilities and shareholders' equity.

B is correct. The non-controlling interest in consolidated subsidiaries is shown separately as part of shareholders' equity.

Under which section of a manufacturing company's cash flow statement are the following activities reported? --> Item 1: Purchases of securities held for trading --> Item 2: Sales of securities considered cash equivalents A.) Both items are investing activities. B.) Both items are operating activities. C.) Only Item 1 is an investing activity.

B is correct. The purchase and sale of securities considered cash equivalents and securities held for trading are considered operating activities even for companies in which this activity is not a primary business activity.

Which of the following best describes the link between the cash flow statement and the balance sheet? A.) The statement's investing activities section reconciles the changes in current assets on the balance sheet. B.) The cash flow statement reconciles the beginning and ending balances of cash reported on the balance sheet. C.) The cash flow statement reconciles changes in all accounts on the balance sheet.

B is correct. The statement of cash flows ultimately shows the change in cash during an accounting period. The company's balance sheet shows the beginning and ending cash balances for the previous and current years, and the bottom of the cash flow statement reconciles beginning cash with ending cash. Non-cash changes in accounts may appear on the balance sheet; therefore, not all changes in the balance sheet are reconciled on the cash flow statement.

Information about a company's objectives, strategies, and significant risks would most likely be found in the: A.) auditor's report. B.) management commentary. C.) notes to the financial statements.

B is correct. These are components of management commentary.

January 1st -- 180,000 shares outstanding June 1st -- 60,000 shares issued August 1st -- 2-for-1 stock split December 31st -- 480,000 shares outstanding To calculate earnings per share for 2012, the company's weighted average number of shares outstanding is closest to: A.) 315,000. B.) 215,000. C.) 430,000.

C is correct 5/12 * 180,000 = 75,000 7/12 * ( 108,000+60,000) = 140,000 ------------------------------------- = 215,000 before stock split 2* 215,000 = 430,000

Net income --90.0 Non-cash charges -- 15.2 Interest expense -- 28.0 Capital expenditures -- 34.3 Working capital expenditures -- 13.0 --------------------------------------------------------------------- If the firm's tax rate is 40%, the free cash flow to the firm (FCFF) is closest to: A.) 57.9. B.) 87.7. C.) 74.7.

C is correct Net income + NCC + (Interest exp. (1-T)) - Cap ex - NWC = FCFF

Accrued expenses (accrued liabilities) are: A.) expenses that have been paid. B.) created when another liability is reduced. C.) expenses that have been reported on the income statement but not yet paid.

C is correct. Accrued liabilities are expenses that have been reported on a company's income statement but have not yet been paid.

The effectiveness of a debt covenant in disciplining financial reporting quality is most often limited due to: A.) ineffectiveness of financial triggers. B.) reporting requirements that may not be legally binding. c.) potential for managers to inflate earnings.

C is correct. Avoidance of debt covenant violation is a potential motivation for managers to inflate earnings.

An increase in assets and a decrease in liabilities that occur simultaneously and in equivalent magnitude are consistent with which of the following changes in equity? A.) A decrease B.) No change C.) An increase

C is correct. Given the accounting equation Assets - Liabilities = Equity, an increase in assets and a decrease in liabilities will result in a larger equity balance.

Interest paid is classified as an operating cash flow under: A.) US GAAP but may be classified as either operating or investing cash flows under IFRS. B.) IFRS but may be classified as either operating or investing cash flows under US GAAP. C.) US GAAP but may be classified as either operating or financing cash flows under IFRS.

C is correct. Interest expense is always classified as an operating cash flow under US GAAP but may be classified as either an operating or financing cash flow under IFRS.

Balance sheet items presented on a current value basis are measured at the: A.) start of the reporting period. B.) midpoint of the reporting period. C.) end of the reporting period.

C is correct. Items measured at current value reflect the value that was current at the end of the reporting period. The values of those items can change after the balance sheet is prepared.

Which of the following events is most likely to lead management to make biased accounting choices? A.) Changing the company's fiscal year B.) Changing the company's audit firm C.) Changing the company's CEO

C is correct. A company might report lower earnings in the CEO's first year to create a positive trajectory for future periods. Alternatively, there could be motivation to report higher earnings under the new CEO. Either situation could lead to biased accounting choices.

An example of a contra asset account is: A.) depreciation expense. B.) sales returns and allowances. C.) allowance for doubtful accounts.

C is correct. A contra asset account is netted against (i.e., reduces) the balance of an asset account. The allowance for doubtful accounts reduces the balance of accounts receivable. Accumulated depreciation, not depreciation expense, is a contra asset account. Sales returns and allowances create a contra account that reduce sales, not an asset.

A company recently engaged in a non-cash transaction that significantly affected its property, plant, and equipment. The transaction is: A.) reported under the investing section of the cash flow statement. B.) reported differently in cash flow from operations under the direct and indirect methods. C.) disclosed as a separate note or in a supplementary schedule to the cash flow statement.

C is correct. Because no cash is involved in non-cash transactions, these transactions are not incorporated in the cash flow statement. However, non-cash transactions that significantly affect capital or asset structures are required to be disclosed either in a separate note or a supplementary schedule to the cash flow statement.

White Flag, a women's clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries? $18 million. $21 million. $22 million.

C is correct. Beginning salaries payable of $3 million plus salaries expense of $20 million minus ending salaries payable of $1 million equals $22 million. Alternatively, the expense of $20 million plus the $2 million decrease in salaries payable equals $22 million.

The most likely costs included in both the cost of inventory and property, plant, and equipment are: selling costs. storage costs. delivery costs.

C is correct. Both the cost of inventory and property, plant, and equipment include delivery costs, or costs incurred in bringing them to the location for use or resale.

For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? A.) They are not recognized. B.) They flow through retained earnings. C.) They are a component of accumulated other comprehensive income.

C is correct. For financial assets classified as available for sale, unrealized gains and losses are not recorded on the income statement and instead are part of other comprehensive income. Accumulated other comprehensive income is a component of Shareholders' equity

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for: A.) all prior periods. B.) current and future periods. C.) prior periods shown in a report.

C is correct. If a company changes an accounting policy, the financial statements for all fiscal years shown in a company's financial report are presented, if practical, as if the newly adopted accounting policy had been used throughout the entire period; this retrospective application of the change makes the financial results of any prior years included in the report comparable. Notes to the financial statements describe the change and explain the justification for the change.

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in: A.) the debt-to-equity ratio but not the total asset turnover. B.) the total asset turnover but not the debt-to-equity ratio. C.) both the debt-to-equity ratio and the total asset turnover.

C is correct. Impairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.

For which of the following assets is it most appropriate to test for impairment at least annually? A.) Land B.) A patent with a legal life of 20 years C.) A trademark with an indefinite expected life

C is correct. Intangible assets with indefinite lives need to be tested for impairment at least annually. Property, plant, and equipment (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment.

Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? A.) $22 million for interest and $10 million for taxes. B.) $16 million for interest and $2 million for taxes. C.) $16 million for interest and $10 million for taxes.

C is correct. Interest expense of $19 million less the increase in interest payable of $3 million equals interest paid of $16 million. Tax expense of $6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.

A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: A.) reported as a $1 million investing cash inflow and outflow. B.) reported as a $1 million financing cash outflow and inflow. C.) reported as supplementary information to the cash flow statement.

C is correct. Non-cash transactions, if significant, are reported as supplementary information, not in the investing or financing sections of the cash flow statement.

Cash flows from taxes on income must be separately disclosed under: A.) IFRS only. B.) US GAAP only. C.) both IFRS and US GAAP.

C is correct. Taxes on income are required to be separately disclosed under IFRS and US GAAP. The disclosure may be in the cash flow statement or elsewhere.

An investor worried about a company's long-term solvency would most likely examine its: A.) current ratio. B.) return on equity. C.) debt-to-equity ratio.

C is correct. The debt-to-equity ratio, a solvency ratio, is an indicator of financial risk.

The carrying value of inventories reflects: A.) their historical cost. B.) their current value. C.) the lower of historical cost or net realizable value.

C is correct. Under IFRS, inventories are carried at historical cost, unless net realizable value of the inventory is less. Under US GAAP, inventories are carried at the lower of cost or market.

A company that prepares its financial statements using IFRS wrote down its inventory value by €20,000 at the end of year 1. In year 2, prices increased and the same inventory at the end of the year was worth €30,000 more than its value at the end of the prior year. Which of the following statements is most accurate? In year 2, the company's cost of sales: A.) was unaffected. B.) decreased by €30,000. C.) decreased by €20,000.

C is correct. Under IFRS, the recovery of a previous write-down is limited to the amount of the original write-down (€20,000) and is reported as a decrease in the cost of sales.