Accounting Practice Final Exam

1. 1Star Traders issues an 8% annual coupon bond with a par value of $100,000 which will be redeemed after 4 years. Market interest rates at the time of issuance are 9%. Star Traders most likely issued the bond at:

   1. APremium.
   2. BDiscount.
   3. CPar.
2. 2Mercury Traders issued a 12% annual coupon bond with a par value of $100,000 and a 4‐year term. Market interest rates at issuance were 10%. Mercury Traders most likely issued the bond at:

   1. APar.
   2. BDiscount.
   3. CPremium.
3. 3.

   

   1. ADiscount
   2. BPar
   3. CPremium
4. 4Ans in millions

   

   1. A455
   2. B855
   3. C795
5. 5A company issued bonds when market interest rates stood at 8%. Today market interest rates are 10%. Given that these bonds offer a coupon of 9%, the bonds were most likely issued at:

   1. APremium
   2. BDiscount
   3. CPar
6. 6Star Traders issues an 8% annual coupon bond with a par value of $100,000 which will be redeemed after 4 years. Market interest rates at the time of issuance are 9%. The value of the liability at the beginning of Year 4 is closest to:

   1. A$100,000
   2. B98,241
   3. C$99,083
7. 7Mercury Traders issued a 12% annual coupon bond with a par value of $100,000 and a 4‐year term. Market interest rates at issuance were 10%. Interest expense for Year 3 under the effective interest method is closest to:

   1. A$10,497
   2. B$1,653
   3. C$10,347
8. 8Printing and legal fees incurred when bonds are issued are most likely to be included in the measurement of the liability under:

   1. AU.S. GAAP only.
   2. BIFRS only.
   3. CU.S. GAAP and IFRS.
9. 9Star Traders issues an 8% annual coupon bond with a par value of $100,000 which will be redeemed after 4 years. Market interest rates at the time of issuance are 9%. Interest expense in Year 2 is closest to:

   1. A$8,772
   2. B708
   3. C$8,708
10. 10This type of lease is considered a form of off-balance-sheet financing.

    1. ASpecial purpose lease
    2. BCapital lease
    3. COperating lease

11. 11How are operating leases reported in the lessee’s balance sheet?

    1. AAs either a short-term or long-term liability, depending on the length of the lease
    2. BNone of these
    3. CAs an asset that is depreciated, similar to the company’s other assets.
12. 12.

    

    1. A$170,185
    2. B12,922
    3. C$ 24,500
13. 13Failure to appropriately capitalize leased assets and liabilities results in a number of distortions in the ROE disaggregation analysis. Which of the following is not a distortion?

    1. AFinancial leverage is understated.
    2. BNet operating asset turnover is overstated due to the non-reporting of lease assets.
    3. CReported total expense is lower in the early years of a capital lease relative to an operating lease, but is higher in later years.
14. 14Which of the following is not a condition requiring the use of the capital lease reporting method?

    1. AThe lease, by its terms, does not automatically transfer ownership of the leased asset from the lessor to the lessee at the termination of the lease.
    2. BThe lease, by its terms, automatically transfers ownership of the leased asset from the lessor to the lessee at the termination of the lease.
    3. CThe lease term is at least 75% of the economic useful life of the leased asset
15. 15.

    

    1. A$4,356,103 thousand
    2. B$6,370,761 thousand
    3. C$ 306,053 thousand
16. 16Jupiter Inc. reported the following disclosures related to retirement pension obligations in its 2011 annual report. The company follows IFRS.
    
    
    ($ in Millions) 2011 2010
    Retirement obligations 2,980 2,510
    Plan assets 1,055 985
    
    Indicate the amount of pension expense that would be recognized in 2011.

    1. A$70 million
    2. B$400 million
    3. C$1,055 million
17. 17Which of the following statements regarding the two companies’ solvency ratios is most accurate?

    

    1. AAlpha Inc.’s debt‐to‐equity ratio has declined over the 2 years.
    2. BBeta Inc.’s debt‐to‐equity ratio has declined over the 2 years.
    3. CAlpha Inc. has a higher financial leverage ratio than Beta Inc.
18. 18Which of the following statements regarding pension plans is most accurate?

    1. AA defined‐contribution plan may give rise to a liability on the balance sheet.
    2. BUnder a defined‐contribution plan, the amount of cash paid by the company into the plan is treated as a financing cash outflow on the cash flow statement.
    3. CUnder a defined‐benefit plan, a company contributes an agreed‐upon amount into the plan in each period.
19. 19.

    

    1. A8.69%
    2. B20.87%
    3. C17.67%
20. 20..

    

    1. ARow II
    2. BRow III
    3. CRow I
21. 21A company with low‐quality earnings is likely to be:

    1. AReporting fictitious transactions.
    2. BUnable to sustain earnings in the future.
    3. CNon‐GAAP‐compliant accounting methods.
22. 22Which of the following most likely indicates a risk factor reflective of managements' attitudes that may allow them to rationalize accounting fraud?

    1. AThe dependence of management's compensation upon meeting aggressive stock price targets
    2. BManagements' repeated attempts to justify inappropriate accounting on the basis of materiality
    3. CNew regulatory requirements.
23. 23Prime Goods Inc., a retail company, has made the following purchases in 2012:
    
    Date of purchase Number of units Cost per unit
    January 1, 2012 3,000,000 $3.5
    July 10, 2012 2,000,000 3.2
    October 20, 2012 3,000,000 3.0
    
    Prime Goods reported sales of 6,500,000 units for $39 million in the year. Based solely on the given information, propose an inventory valuation method that will best enhance the earnings quality of the company in 2012, rather than over the long term.
    
    

    1. AFirst‐in, first‐out method, as it would lead to the highest expense level in the current year.
    2. BWeighted average cost method, as it would result in the best profit level for the current year.
    3. CLast‐in, first‐out method, as it would result in the best profit level for the current year.
24. 24Perfect Heal Corporation, a pharmaceutical company, changed the estimated useful life of its equipment, which is a substantial part of its assets, from 10 years to 5 years in 2013. The change in the estimated life of the asset is allowed under the reporting standards of the company's jurisdiction. The change was made in anticipation of a substantial increase in the tax rates within the next 5 years. The financial footnotes disclose the change in the estimated useful life of the company's equipment even though with limited explanation. However, its MD&A report makes no mention of the anticipated change in the tax rate and its implications. In the context of the quality spectrum of financial reports, which of the following best
    describes the accounting choice of Perfect Heal in 2013?

    1. AA conservative accounting policy within GAAP, but an earnings management
    2. BA conservative accounting policy within GAAP, but a biased choice.
    3. CAn aggressive and noncomplaint accounting choice departing from GAAP.
25. 25The information provided by a high‐quality financial report will most likely:

    1. AIndicate earnings are sustainable.
    2. BIncrease company value.
    3. CFaithfully represent the economic reality of the company.
26. 26A company defers certain R&D expenditure until the next accounting period in order to improve reported performance for the current year. This is most likely an example of managing earnings via:

    1. AFictitious transactions.
    2. BAccounting choices.
    3. CReal actions.
27. 27Which of the following is an example of earnings management within GAAP in the quality spectrum of financial reports?
    

    1. ACutting down of allowance for doubtful debts in a period of rising prices
    2. BDeferral of research and development expenses into the next reporting period to smoothen profits
    3. CImproper capitalization of research expenses to overstate the profits of the current reporting period
28. 28Consider the following statements:
    • Statement 1: Higher financial reporting quality typically leads to a higher cost of capital.
    • Statement 2: Typically, it is the responsibility of the auditor to ensure that a company has not engaged in fraud in the preparation of its financial statements.
    Which of the following is most likely?

    1. ABoth statements are incorrect.
    2. BOnly Statement 2 is correct.
    3. COnly Statement 1 is correct.
29. 29Which of the following is least likely a motivation to issue low‐quality financial reports?

    1. APoor corporate internal controls.
    2. BManagement seeking to increase incentive pay.
    3. CManagement looking to remove doubts over the company's ability to raise funds in the future.
30. 30A company might be motivated to use conservative accounting standards in order to:

    1. AProvide analysts with better quality information on the company.
    2. BEnsure financial statements are not biased.
    3. CReduce the present value of tax payments
31. 31Consider the following statements:
    • Statement 1: Motivations relating to trade effects tend to be stronger than those related to equity market effects.
    • Statement 2: Motivations relating to trade effects tend to be more important for smaller companies.
    Which of the following is most likely?

    1. AOnly Statement 1 is correct.
    2. BOnly Statement 2 is correct.
    3. CBoth statements are incorrect.
32. 32If a company wishes to overstate net income in the current financial year, it might, for recently purchased fixed assets:

    1. AOverestimate salvage values
    2. BUse short useful lives.
    3. CUse accelerated depreciation methods
33. 33Which of the following is the most likely accounting warning sign for improper accounting practices?

    1. AExcessive use of equity method of accounting
    2. BExcessive use of finance leases by lessees.
    3. CExcessive use of FIFO method for inventory valuation
34. 34Which of the following is least likely to be a warning sign of low‐quality revenue? A large:

    1. Aincrease in the allowance for doubtful accounts
    2. Bincrease in accounts receivable
    3. Cdecrease in deferred revenue.
35. 35Which of the following is least likely under US GAAP for a company that uses a non‐GAAP financial measure in an SEC filing?

    1. AThe company must present the most directly comparable GAAP measure with more prominence.
    2. BThe company must explain why it believes that the non‐GAAP financial measure provides useful information regarding the company's financial condition and operations.
    3. CThe company must provide a reconciliation of the non‐GAAP measure and the equivalent GAAP measure.
36. 36What is the most likely consequence of capitalizing cash expenditures?

    1. AOperating cash flows will be overstated
    2. BEarnings will deteriorate
    3. COperating cash flows will be understated
37. 37Consider the following statements:
    • Statement 1: A fully reserved tax asset suggests that management is pessimistic about the company's future prospects.
    • Statement 2: An increase in the valuation allowance increases net income.
    Which of the following is most likely?

    1. ABoth statements are incorrect.
    2. BOnly Statement 2 is correct.
    3. COnly Statement 1 is correct.
38. 38A sudden rise in inventory balances is least likely to be a warning sign of:

    1. Aunderstated expenses.
    2. Binefficient working capital management
    3. Caccelerated revenue recognition
39. 39Consider the following statements:
    • Statement 1: A ratio of accounts payable to revenues that is abnormally low relative to the industry suggests that channel stuffing may have occurred.
    • Statement 2: If there is an overabundance of orders in the current period, a company may set shipping terms as FOB destination as opposed to FOB shipping point in order to avoid raising investor expectations.
    Which of the following is most likely?

    1. AOnly Statement 2 is correct.
    2. BOnly Statement 1 is correct.
    3. CBoth statements are incorrect.
40. 40Use the following data to answer the below question:
    
    · First year sales $200,000
    · Annual sales growth 30%
    · COGS as a percentage of sales 30%
    · Operating expenses as a percentage of sales 45%
    · Tax rate 35%
    · Noncash working capital as a percentage of sales 60%
    · Annual investment in fixed capital as a percentage of sales 8%
    · Beginning noncash working capital $140,000
    · Beginning cash $15,000
    
    Pre‐tax income in Year 2 is closest to:

    1. A65,000
    2. B$22,750
    3. C42,250
41. 41Use the following data to answer the below question:
    
    · First year sales $200,000
    · Annual sales growth 30%
    · COGS as a percentage of sales 30%
    · Operating expenses as a percentage of sales 45%
    · Tax rate 35%
    · Noncash working capital as a percentage of sales 60%
    · Annual investment in fixed capital as a percentage of sales 8%
    · Beginning noncash working capital $140,000
    · Beginning cash $15,000
    
    Net income in Year 4 is closest to:

    1. A92,823
    2. B71,403
    3. C109,850
42. 42Use the following data to answer the below question:
    
    · First year sales $200,000
    · Annual sales growth 30%
    · COGS as a percentage of sales 30%
    · Operating expenses as a percentage of sales 45%
    · Tax rate 35%
    · Noncash working capital as a percentage of sales 60%
    · Annual investment in fixed capital as a percentage of sales 8%
    · Beginning noncash working capital $140,000
    · Beginning cash $15,000
    
    Investment in working capital in Year 3 is closest to:

    1. A$60,840
    2. B$202,800
    3. C$46,800
43. 43Use the following data to answer the below question:
    
    · First year sales $200,000
    · Annual sales growth 30%
    · COGS as a percentage of sales 30%
    · Operating expenses as a percentage of sales 45%
    · Tax rate 35%
    · Noncash working capital as a percentage of sales 60%
    · Annual investment in fixed capital as a percentage of sales 8%
    · Beginning noncash working capital $140,000
    · Beginning cash $15,000
    
    The amount of sales in Year 3 is closest to:

    1. A$260,000
    2. B$338,000
    3. C$439,400
44. 44Use the following data to answer the below question:
    
    · First year sales $200,000
    · Annual sales growth 30%
    · COGS as a percentage of sales 30%
    · Operating expenses as a percentage of sales 45%
    · Tax rate 35%
    · Noncash working capital as a percentage of sales 60%
    · Annual investment in fixed capital as a percentage of sales 8%
    · Beginning noncash working capital $140,000
    · Beginning cash $15,000
    
    Noncash working capital in Year 1 is closest to:

    1. A$156,000
    2. B171,500
    3. C$120,000
45. 45Use the following data to answer the below question:
    
    · First year sales $200,000
    · Annual sales growth 30%
    · COGS as a percentage of sales 30%
    · Operating expenses as a percentage of sales 45%
    · Tax rate 35%
    · Noncash working capital as a percentage of sales 60%
    · Annual investment in fixed capital as a percentage of sales 8%
    · Beginning noncash working capital $140,000
    · Beginning cash $15,000
    
    Change in cash for Year 3 is closest to:

    1. A−$18,915
    2. B$24,590
    3. C−$31,966
46. 46Consider the following information regarding two companies operating in the same industry:
    
    Rex Autos Roadways Inc.
    EBITDA/Average assets 9.2% 6.7%
    Debt/EBITDA 3.4 4.1
    Retained cash flow to debt 15.8% 7.3%
    Free cash flow to net debt 8.2% 1.4%
    
    Which of the following is NOT a reason Rex Autos is likely to be given a higher credit rating?

    1. AHigher retained cash flow relative to debt.
    2. BHigher level of debt relative to EBITDA.
    3. CA higher level of EBITDA relative to average assets.
47. 47.

    

    1. AThe Net Income/Sales ratio used here means the client is looking for stocks with profits
    2. BCompanies with negative earnings could have either a positive or negative P/E ratio
    3. CThe Net Income/Sales ratio used here means the client is looking for stocks with losses
48. 48Which of the following is least likely evaluated to analyze credit risk of a company?

    1. ACharacter
    2. BCovenants
    3. CCommitments
49. 49.

    

    1. AThe low P/E Ratio indicates that the client is looking for value stocks
    2. BThe P/E Ratio should be used in isolation by itself
    3. CThe high P/E Ratio indicates that the client is looking for value stocks
50. 50A company reports the following data on its fixed assets; it uses the straight‐line depreciation method.
    
    Gross PPE $1,050,000
    Net PPE $420,000
    Depreciation expense $70,000
    
    The remaining useful life of the PPE is expected to be:

    1. A9 years
    2. B6 years
    3. C15 years
51. 51Company × reports the estimated remaining useful life is 30 years, however a physical inspection of a company's PPE reveals that the actual remaining useful life is 20 years. This would imply that the reported net income is:
    Accurate

    1. AAccurate
    2. BUnderstated
    3. COverstated
52. 52Consider the following statements:
    • Statement 1: An analyst must remove all unrealized gains and losses from the income statement and include them in shareholders’ equity for a company that classifies all marketable securities as available for sale to compare its financial statements with a company that classifies securities as held for trading.
    • Statement 2: In order to compare a company that has a significant amount of goodwill due to acquisitions with one that has grown internally, an analyst must remove the inflating effect of goodwill on book value and rely on price‐to‐tangible book value ratio.
    Which of the following is most likely?

    1. ABoth statements are incorrect.
    2. BOnly Statement 2 is correct.
    3. COnly Statement 1 is correct.
53. 53Which of the following scenarios least likely requires adjustments to the financial statements when comparing two companies?
    

    1. AOne company uses operating leases while the other uses finance leases.
    2. BOne company uses a higher proportion of equity in its capital structure than the other.
    3. COne company uses FIFO while the other uses LIFO.
54. 54A company reports the following data on its fixed assets; it uses the straight‐line depreciation method.
    
    Gross PPE $1,800,000
    Net PPE $1,200,000
    Depreciation expense $120,000
    
    The average useful life of the PPE at installation was likely to be

    1. A15 years
    2. B5 years
    3. C10 years
55. 55A company makes heavy use of operating leases; an analyst should adjust the company's balance sheet by:
    

    1. AAdding the present value of the future lease payments to both the assets and liabilities
    2. BAdding the fair value of the assets leased to both the assets and liabilities.
    3. CThere are no adjustments needed; adjustments should be made only when a company uses capital leases.
56. 56The following data was excerpted from two companies' financial statements regarding their long‐term assets.
    
    Company A Company B
    Net PPE $4,800 $3,000
    Depreciation expense (Straight Line) $480 $200
    
    Based solely on the data provided, Company B has an estimated average remaining useful life that is:

    1. Athe same as Company A's
    2. Blonger than Company A's
    3. Cshorter than Company A's
57. 57Crux Goods Inc. purchased an advanced machine with a useful life of five years for $500,000 on January 1, 2012. As per the reporting standards, Crux Goods can depreciate the asset using straight‐line, double‐declining, or units‐of‐production method. As the company needs to train its personnel on using the machine, the expected production rates are 30,000 units in 2012, 40,000 units in 2013 and 60,000 units each in the remaining years. The expected salvage value of the asset is zero. As per the reporting standards of its jurisdiction, the company must value its inventory using LIFO method. Crux Goods is experiencing a period of falling prices. The tax rate is 30% and the tax authorities use the double‐declining‐balance method for depreciating the machine. Assuming the revenue levels to be constant, which of the following methods will Crux Goods use to smoothen its profits over the useful life of the asset?

    1. AStraight‐line method.
    2. BUnits‐of‐production method
    3. CDouble‐declining‐balance method
58. 58Which of the following is least likely to be used as an off‐balance‐sheet financing technique?

    1. AThe selling of assets to a special‐purpose‐vehicle (SPV)
    2. BOperating leases
    3. CCapital leases.

Description

1-19 is Chapter 10 20-39 is Chapter 11 40-58 is Chapter 12

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Ryan L

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