NAME :

CLASS :
FSA 1.11 Test2
40 Questions DATE :

1. Which of the following approaches will most likely reveal manipulation of financial
reporting?

A. Using EBITDA to adjust for non- B. Evaluating potential warning signals in

A B
recurring items isolation

C. Comparing a company’s methods and

C
policies to those of its peers

2. Q. A high-quality financial report may reflect:

A A. earnings smoothing. B B. low earnings quality.

C C. understatement of asset impairment.

3. Q. Which of the following statements most likely describes a situation that would motivate a
manager to issue low-quality financial reports?

A. The manager’s compensation is tied to B. The manager has increased the market
A B
stock price performance. share of products significantly.

C. The manager has brought the

C company’s profitability to a level higher
than competitors.

4. 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 most appropriate accounting treatment for the related
costs incurred in this project is to:

A. capitalize costs directly related to the B. expense costs until technical feasibility
A B
development. has been established.

C C. expense them as incurred.

5. The following excerpt was taken from the notes of a company’s financial statements that
were prepared in accordance with International Financial Reporting Standards. All figures
are in thousands of Australian dollars. Note 12/ Broadcast Licenses/ During 2014, the
company successfully disposed of broadcast licenses that were held for sale for A$37,900
(net book value of A$23,500). Based on the successful completion of that sale, the
impairment losses taken in 2012 on other licenses have been reversed, restoring those
intangible assets to their amortized historical cost. Broadcast licenses are amortized over a
period of 15–25 years./ The note leads an analyst to believe that the rapid reversal of the
impairment loss related to the broadcast licenses arose as an attempt by management to
manage earnings./ If the analyst’s belief is correct, her analysis of the original 2013 financial
statements would most likely have shown that, compared with the economic reality in 2013,
the company had:

A A. understated ROA. B B. understated fixed asset turnover.

C C. overstated net profit margin.

6. Which of the following is most likely a sign of inventory manipulation to improve reported
financial results?

A A. Inventory markdowns for obsolescence. B B. Declining inventory turnover ratio.

C. Selective sales of older layers of

C
inventory.

7. Under the indirect method of presenting operating cash flows, which action to alter the cash
flow from operations will be most difficult to detect?

B. Transact with an unconsolidated special

A A. Defer payment of a current liability B
purpose entity

C. Change inventory costing from FIFO to

C
weighted average

8. Q. A company is most likely to:

A. use a fair value model for some B. change from the fair value model when
A investment property and a cost model for B transactions on comparable properties
other investment property. become less frequent.

C. change from the fair value model when

the company transfers investment
C
property to property, plant, and
equipment.
 9. Q. Earnings that result from non-recurring activities most likely indicate:

A A. lower-quality earnings. B B. biased accounting choices.

C C. lower-quality financial reporting.

10.

A A. $121,500 . B B. $192,000 .

C C. $128,000 .

11. Q. Comte Industries issues $3,000,000 worth of three-year bonds dated 1 January 2015. The
bonds pay interest of 5.5% annually on 31 December. The market interest rate on bonds of
comparable risk and term is 5%. The sales proceeds of the bonds are $3,040,849. Under the
straight-line method, the interest expense in the first year is closest to:

A A. $150,000 . B B. $151,384 .

C C. $152,042 .
12.

A A. £960. B B. £690.

C C. £1,650.
13.

A A. $377 . B B. $361 .

C C. $473 .

14. Q. Which of the following characteristics is most likely to differentiate investment property
from property, plant, and equipment?

A A. It is tangible. B B. It earns rent.

C C. It is long-lived.

15. Q. An analyst reviewing a firm with a large reported restructuring charge to earnings should:

A. view expenses reported in prior years B. disregard it because it is solely related

A B
as overstated. to past events.

C. consider making pro forma adjustments

C
to prior years’ earnings.
16. Which of the following long-term debt information is presented both on the balance sheet
and in the notes to the financial statements?

A A. Maturity dates B B. Current maturities of long-term debt

C C. Effective interest rate

17. The most appropriate treatment for intangible assets with indefinite useful lives is to:

A A. expense. B B. capitalize with no amortization.

C C. capitalize and amortize.

18. 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 A. Intangibles capitalization B B. Revenue recognition

C C. Long-lived asset depreciation

19. Q. A company is comparing straight-line and double-declining balance amortization

methods for a non-renewable six-year license, acquired for €600,000. The difference
between the Year 4 ending net book values using the two methods is closest to:

A A. €81,400 . B B. €118,600 .

C C. €200,000 .

20. Q. All else equal, in the fiscal year when long-lived equipment is purchased:

A A. depreciation expense increases. B B. cash from operations decreases.

C. net income is reduced by the amount of

C
the purchase.
21.

A A. 8,967 . B B. 13,284 .

C C. 13,496 .

22. Q. Compared with a finance lease, an operating lease:

B. is equivalent to the purchase of an

A A. is similar to renting an asset. B
asset.

C. term is for the majority of the economic

C
life of the leased asset.

23. Where might an analyst look for details covering the full extent of a company’s capital
resources?

B. Management discussion and analysis

A A. Balance sheet B
(MD&A)

C C. Notes to the financial statements

24. Q. Under IFRS, an impairment loss on a property, plant, and equipment asset is measured
as the excess of the carrying amount over the asset’s:

A A. fair value. B B. recoverable amount.

C. undiscounted expected future cash

C
flows.

25. Q. Fairmont Golf issued fixed rate debt when interest rates were 6 percent. Rates have since
risen to 7 percent. Using only the carrying amount (based on historical cost) reported on the
balance sheet to analyze the company’s financial position would most likely cause an analyst
to:

A. overestimate Fairmont’s economic B. underestimate Fairmont’s economic

A B
liabilities. liabilities.

C. underestimate Fairmont’s interest

C
coverage ratio.

26. Under IFRS, reversals of impairments of long-lived assets are allowed:

A. for previously recognized impairment B. if the recoverable amount exceeds the

A B
losses only. previous carrying amount.

C C. for assets held for sale only.

27. 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 A. increase return on sales. B B. decrease the debt-to-equity ratio.

C C. increase return on assets.

28. Which of the following statements regarding the extinguishment of debt is correct?

A. After an offsetting adjustment of net

B. Net income is adjusted to remove any
income, cash paid to extinguish debt is
A B gain or loss on the extinguishment of debt
classified as cash used for operating
from operating cash flows.
activities.

C. A gain or loss on the extinguishment of

debt is disclosed on the income statement
C
in a separate line item, even if the amount
is immaterial.
29.

A A. $72,750 . B B. $69,450 .

C C. $64,500 .

30. Q. A company issues €10,000,000 face value of 10-year bonds dated 1 January 2015 when
the market interest rate on bonds of comparable risk and terms is 6%. The bonds pay 7%
interest annually on 31 December. Based on the effective interest rate method, the interest
expense on 31 December 2015 is closest to:

A A. €644,161 . B B. €700,000 .

C C. €751,521 .

31. 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 A. straight-line. B B. units-of-production.

C C. double-declining balance.

32. Conservative, rather than aggressive, accounting is most likely associated with:

A A. increased sustainability of earnings. B B. higher current reported performance.

C C. recognition of losses once certain.

33. Which of the following common debt covenants best describes an affirmative covenant?

B. Prohibiting financial ratios from falling

A A. Restricting future borrowings B
below specified levels

C C. Limiting dividend payments

34. Q. When certain expenditures result in tax credits that directly reduce taxes, the company
will most likely record:

A A. a deferred tax asset. B B. a deferred tax liability.

C C. no deferred tax asset or liability.

35. Q. A company issues €1 million of bonds at face value. When the bonds are issued, the
company will record a:

A A. cash inflow from investing activities. B B. cash inflow from financing activities.

C C. cash inflow from operating activities.

36.

A. 112,000, using the double-declining B. 140,000, using the units-of-production

A method compared with the units-of- B method compared with the straight-line
production method. method.

C. 180,000, using the double-declining

C balance method compared with the
straight-line method.

37. Q. Which of the following would most likely signal that a company may be using aggressive
accrual accounting policies to shift current expenses to later periods? Over the last five-year
period, the ratio of cash flow to net income has:

A A. increased each year. B B. decreased each year.

C C. fluctuated from year to year.

38. Q. Which of the following is an example of an affirmative debt covenant? The borrower is:

B. prevented from issuing excessive

A A. prohibited from entering into mergers. B
additional debt.

C. required to perform regular

C maintenance on equipment pledged as
collateral.
39. 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

B. Impairment charges for long-lived
A tagged as infrequent that occurred within B
assets
the past two years

C. For liquidity measures, litigation costs

C
requiring cash settlement

40. A company has a building with a net carrying amount of $100,000 and a tax base of
$120,000. The tax rate was 20% when the asset was purchased, but it is scheduled to be
reduced to 17% this year. Which of the following will the company most likely report related
to this building?

A A. Deferred tax asset: $4,000 B B. Deferred tax asset: $3,400

C C. Deferred tax liability: $600