Advanced Accounting Mock Exam 2011-2012

Use these questions to prepare for your exam coming soon. This is not guarantee that the exam will be similar except the fact that the exam will also have multiple choice questions.

Question 1: An analyst evaluating financial statements for various firms is most likely to conclude that:

a) U.S. GAAP ensures uniformity in accounting practices among different firms. b) Firms account for their debt obligations in the liabilities section of the income statement. c) Notes to the financials should be used to get further detail on financial statement

balances. d) Management discussion is more useful than Notes to financial statements

Question 2: Which of the following statements regarding the International Accounting Standards Board (IASB) is correct?

a) The IASB is an independent standard setting body with the responsibility to advance the process of global harmonization of accounting standards.

b) The standards issued by the IASB are called "Statements on Standards for International Financial Reporting."

c) The IASB requires member countries to adopt the International Financial Reporting Standards.

d) IFRS is rules-based while US GAAP is principles-based Question 3: Upon reviewing a firm's most recent financial statements an analyst is least likely to use the:

a) Income statement to calculate and evaluate the firm's profit margins over the past year. b) Balance sheet to compare the book value of the firm's common stock to its market value. c) Income statement to discern the current and prior year status of the firm's debts and

holdings. d) Cash Flow Statement to assess profitability next year

Question 4: The Rotor Corporation has a pretax profit margin of 20%, an asset turnover of 1.8, and a financial leverage ratio of 2.5. If Rotor's effective income tax rate is 30%, what is its return on equity?

a) 27.0% b) 35.0% c) 63.0% d) 32.78%

Question 5: Detroit Tire Company has pre-tax profits of $300. The company's times-interest-earned ratio is 7.0. What is the company's interest expense?

a) $35 b) $40 c) $50 d) $55

Question 6: Hammond Corporation was formed on December 31, 20X0 with $10.0 million in cash from its shareholders. During 20X1, the following transactions and items were noted:

The company had net income of $12.0 million, which included depreciation and amortization expenses of $6.0 million

Hammond declared a $2.0 million cash dividend to be paid in January 20X2.

The company purchased new equipment for $8.0 million in cash

A new bond was issued resulting in cash proceeds of $15.0 million

The company paid down its revolving line of credit by $4.0 million

Net working capital items (other than cash) increased by $14.0 million

Hammond's December 31, 20X1 balance sheet will reflect a cash balance of ($ millions):

a) $13.0. b) $15.0. c) $17.0. d) $16.5

Question 7: Small Cheese Company has 30,000 cumulative preferred shares and 25,000 non-cumulative preferred shares both paying out $10 per share in dividends. No dividends are declared in 20X7. Small Cheese has net income of $2,000,000 and has weighted average common shares outstanding of 1,000,000 on December 31, 20X7. What is the basic earnings per share of Small Cheese for the year ended December 31, 20X7?

a) $2.00 b) $1.45 c) $1.70 d) $1.85

Question 8: Under IFRS, when an asset is deemed impaired, a firm should proceed to write down the asset to:

a) Its value in use. b) Its net realizable value. c) The greater of its net realizable value and its value in use. d) The greater of recoverable amount and value in use

Question 9: Which of the following statements regarding the liability method of accounting for deferred taxes is most accurate?

a) Deferred tax liabilities are reported on the balance sheet when it is expected that income taxes will be paid in the future when temporary differences reverse.

b) The current period's income tax expense reported on the income statement is determined by subtracting the increase in deferred tax liabilities from the income taxes owed

c) The liability method makes no attempt to reconcile differences between pretax income reported on the income statement and taxable income reported on the company's income tax filing.

a) None of the above

Question 10: On January 1, 20X8, Soldier Inc. determined that Fixed Asset #1 had a book value of $530,000 and a fair value of $430,000, while Fixed Asset #2 had a book value of $260,000 and a fair value of $270,000. Fixed Asset #1 has an estimated remaining life of 10 years and Fixed Asset #2 has an estimated remaining life of 8 years. Both assets are held for use by the company and both are depreciated using the straight-line method. The before-tax impact of these assets on Soldier Inc.'s December 31, 20X8 income statement is an expense of:

a) $175,500. b) $100,000. c) $85,500. d) $78,650

Question 11: A lessee would account for a lease as a finance lease if the:

a) Lease agreement includes a bargain purchase option. b) Asset has a 10-year economic life and is leased for 3 years. c) Present value of the lease payments is $50,000 and the fair market value of the leased

asset is $95,000. d) If incidental risks and rewards are ‘more likely than not’ to remain with the lessor.

Question 12: Price Company sold a $50,000,000 bond issue at 102. If the company recognizes interest expense using the effective interest method, how will the interest expense change over time?

a) Increase. b) Decrease. c) Same each year. d) Neither increase nor decrease

Question 13: Management may want to over-report earnings in order to:

a) Improve free cash flow. b) Be compliant with debt covenants. c) Negotiate clout to bargain with employees. d) To conserve capital for future expansion

Question 14: How are dividend payments reported on the statement of cash flows under IFRS and U.S. GAAP?

a) Financing activities only under IFRS and operating or financing activities under U.S. GAAP.

b) Operating or financing activities under IFRS and financing activities only under U.S. GAAP.

c) Operating or financing activities under IFRS and operating or financing activities under U.S. GAAP.

d) Treatment of dividends paid is at the discretion of the reporting company

Question 15: The following table presents selected financial information for Specialty Retailers, Inc. (SRI):

20X6 20X5 20X4

Net sales $509.8 $493.6 $479.7

Selling, general & Admin expenses ($ millions) 158.2 161.5 176.1

Gross margin (%) 42.6% 47.4% 53.8%

Operating profit margin (%) 11.3% 14.5% 18.6%

Based only on the above data, the most likely explanation for the declining operating profit margin is:

a) Declining gross margins offset by decreasing operating expenses. b) Increasing product costs and increasing operating expenses. c) Declining selling prices and increasing product costs. d) Decreasing expenses reflect more dividends paid out

Question 16: Which of the following is one of the criteria for recognizing revenue under IFRS?

a) It must be possible to measure the amount of revenue and costs of the transaction. b) It is probable that the economic benefits of the transaction will flow to the buyer. c) For a sale of services, the service must be complete. d) Cash must be received

Question 17: Carco has estimated a 30 percent decrease in sales in the next fiscal year. As a result, Carco has undertaken a strategic plan to reduce the variable costs associated with the production of its main SUV car line by 30 percent. The impact of this strategy will most likely be evident through a decrease in the:

a) Fixed asset turnover. b) Gross profit margin. c) Payables turnover. d) Days receivables outstanding

Question 18: Rybak Inc. is considering repurchasing shares of common stock and the current market price is $25 per share. The company will fund the repurchase with $6.25 million in additional debt. Other information pertinent to the buyback includes the following:

• EPS before the buyback $1.50 • Earnings yield (E/P) $1.50/$25 = 6.0% • After-tax cost of borrowing 6.75% • Net earnings for period $2,100,000

• Shares outstanding 1,150,000 •

The company's earnings per share after the share repurchase would be closest to:

a) $1.46. b) $1.87. c) $1.92. d) $1.98

Question 19: An analyst gathers the following data from a firm's financial statements ($000):

Credit sales 50,000

Cost of goods sold 35,000

Beginning inventory 4,000

Ending inventory 5,000

Average accounts receivable 5,000

Average accounts payable 3,500

Assuming that the firm makes all its sales on credit, its net operating cycle is closest to:

a) 48.0 days. b) 83.4 days. c) 118.9 days.

d) 120.3 dyas

Question 20: IAS 1 Presentation of Financial Statements requires the following items to appear on the face of the Statement of Changes in Equity

I. The net amount of cash from the issue of any securities during the period II. The cumulative effect of changes in accounting policy and the correction of errors

III. Each item of income or expenses that are required to be recognised directly in equity

IV. Profit or loss for the period.

a) I, II, III and IV

b) II, III and IV only

c) I, III and IV only

d) II and IV only

Question 21: Which of the following is not an example of an agency arrangement where the selling entity would recognize revenue on a net basis?

a) A travel agent selling an airline ticket to a customer, charging the customer $200

and remitting $180 to the airline.

b) A supermarket selling groceries to a customer for $110 and remitting $10 GST to

the government.

c) A distributor receiving stock from its supplier on a sale-or–return basis. The

sales price per unit is $120 and the cost per unit is $75

d) A licensed hotel selling keno tickets to customers for $5.00 and remitting $4.50

per ticket to the state gaming authority.

Question 22: Special Limited is in the business of producing and distributing special screenings

on various topics.

On 1 January 20X9, Special granted a license to TV 101 for $250,000 in relation to a special

titled “The Big Ice”. The following conditions were attached to the license:

TV 101 was allowed to show the special once only within the 20X9 calendar year.

TV 101 could choose the date and time of the screening.

The documentary was delivered to TV 101 on 1 January 20X9. TV 101 screened the

documentary on 30 March 20X9. The $250,000 fee was paid to Special on 30 March 20X9.

Special should recognize revenue as follows:

a) Recognize the $250,000 on 1 January 20X9.

b) Recognize the $250,000 evenly over the 20X9 calendar year.

c) Recognize the $250,000 on 30 March 20X9 (the date of screening)

d) Recognize the $250,000 on 31 December 20X9.

Question 23: ABC has recorded interest revenue of $21 000 for the year ended 30 June 2010.

$15 000 has been received in cash and a receivable has been raised for $6 000. The opening

balance of the receivable account as at 1 July 2009 was $1 000. The tax rate is 30%. The

amount of tax payable in respect of these balances in the year ended 30 June 2010 is:

a) $1 800

b) $4 500

c) $4 800

d) $6 300

Question 24: The following information relates to Godfrey Limited for the year ended 30 June

2009.

Accounting profit before income tax (after all expenses have been included) $300,000

Fines and penalties (not tax deductible) 20,000

Depreciation of plant (accounting) 40,000

Depreciation of plant (tax) 100,000

Long-service leave expense (not a tax deduction until the leave is paid) 8,000

Income tax rate 30%

On the basis of this information the current tax liability is:

a) $74,400;

b) $78,000;

c) $80,400;

d) $99,600.

Question 25: A change in accounting policy from the revaluation model to the cost model

requires a retrospective adjustment to the:

a) revenue in the statement of comprehensive income

b) expenses in the statement of comprehensive income

c) opening balance of retained earnings

d) opening balance of share capital.

Question 26: Fredericks Limited acquired the identifiable assets, liabilities and contingent

liabilities of Nicole Limited for $134 000. The items acquired, stated at fair value, are: Plant

$72 000 Inventory $40 000 Accounts receivable $18 000 Patents $10 000 Accounts payable

$16 000. The difference on acquisition is:

a) Gain on bargain purchase $10 000

b) Gain on bargain purchase $16 000

c) Goodwill of $10 000

d) Goodwill of $124 000.

Question 27: Candy Limited expected future cash flows from the use of Equipment as follows:

End of Year 1 $4000; End of Year 2 $5000; End of Year 3 $2000. The discount rate was

determined as 5%. The value in use of the equipment is:

a) $10 073

b) $10 576

c) $11 000

d) $11 550.

Question 28: Crane Sales Company uses the retail inventory method to value its merchandise

inventory. The following information is available for the current year:

Cost Retail

Beginning inventory $ 30,000 $ 50,000

Purchases 145,000 200,000

Freight-in 2,500 —

Net markups — 8,500

Net markdowns — 10,000

Employee discounts — 1,000

Sales — 205,000

If the ending inventory is to be valued at the lower-of-cost-or-net realizable value, what is the cost to retail ratio?

a) $177,500 ÷ $250,000 b) $177,500 ÷ $258,500 c) $175,000 ÷ $260,000 d) $177,500 ÷ $248,500

Question 29: Markowitz Company reported the following data:

2010 2011

Sales $2,000,000 $2,600,000

Net Income 300,000 400,000

Assets at year end 1,800,000 2,500,000

Liabilities at year end 1,100,000 1,500,000

What is Markowitz’s asset turnover for 2011?

a. 1.04 b. 1.07 c. 1.21 d. 1.44

Question 30: Which of the following costs of goodwill should be amortized over their estimated useful lives?

Costs of goodwill from a Costs of developing

business combination goodwill internally

a) No No b) No Yes c) Yes Yes d) Yes No

On January 2, 2011, Q. Tong Inc. purchased equipment with a cost of HK$10,440,000, a useful life of 10 years and no salvage value. The Company uses straight-line depreciation. At December 31, 2011 and December 31, 2012, the company determines that impairment indicators are present. The following information is available for impairment testing at each year end:

12/31/2011 12/31/2012

Fair value less cost to sell HK$9,315,000 Hk$8,350,000

Value-in-use HK$9,350,000 HK$8,315,000

There is no change in the asset’s useful life or salvage value. The 2012 income statement will

report

a. Recovery of Impairment Loss of HK$3,889. b. Impairment Loss of HK$10,000. c. Recovery of Impairment Loss of HK$38,889. d. Impairment Loss of HK$1,000,000.

Solutions will be provided a few days before the exam, just keep watching BB!!

Postponing studying until Answers are provided may be counterproductive!!

GOOD LUCK