Accounting Principles Quiz

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Questions and Answers

What is a primary consequence of earnings management on the quality of earnings?

Improves predictive value of income measures

Decreases quality and creates bias (correct)

Enhances sustainability of earnings

Inflates future earnings consistently

What comprises comprehensive income?

Net income less acquisitions

Total revenues minus total liabilities

Net income plus other comprehensive income (OCI) (correct)

Operating income plus non-operational gains

Which of the following is included in calculating operating income?

Discontinued operations

One-time restructuring charges

Ongoing revenues less ongoing expenses (correct)

Unrealized gains and losses

Which statement accurately describes Other Comprehensive Income (OCI)?

OCI can consist of unrealized gains and losses Signup and view all the answers

What is a method by which companies manage earnings according to the content provided?

Selection of specific accounting policies Signup and view all the answers

How are gains on the sale of buildings classified according to the content?

As gains Signup and view all the answers

What definition do ASPE and IFRS share regarding losses?

Decreases in equity from incidental transactions Signup and view all the answers

Which statement correctly describes the financial statement terms under ASPE and IFRS?

Income statement is equivalent to the statement of financial performance in IFRS. Signup and view all the answers

What is a key characteristic of aggressive accounting?

Overstate assets and understate liabilities Signup and view all the answers

Which of the following is NOT a reason managers might engage in aggressive accounting?

To comply with ethical standards Signup and view all the answers

What is the formula for calculating comprehensive income?

Net income + Other comprehensive income Signup and view all the answers

What role does the IASB play in financial reporting?

Applies to public companies following IFRS Signup and view all the answers

What is classified as other comprehensive income (OCI)?

All changes in equity except net income and owner’s investments Signup and view all the answers

Which foundational principle emphasizes full disclosure in financial reporting?

Full disclosure principle Signup and view all the answers

What is a consequence of any bias in financial reporting?

Leads to less useful information Signup and view all the answers

Which board is responsible for GAAP in U.S. entities?

FASB Signup and view all the answers

Which of the following principles deals with how financial elements should be recognized?

Recognition/Derecognition principle Signup and view all the answers

How is the statement of cash flows categorized in IFRS?

Statement of changes in shareholders' equity Signup and view all the answers

What is the role of security commissions regarding GAAP?

They require additional disclosures for public companies. Signup and view all the answers

Which of the following describes conservative accounting?

Downplays positives and emphasizes negatives Signup and view all the answers

When are publicly accountable companies required to follow GAAP?

As specified by the IASB and applicable standards Signup and view all the answers

What is the main focus of the course AFA300?

Intermediate financial accounting principles Signup and view all the answers

Which of the following is a prerequisite for AFA300?

AFA 100 – Introductory Financial Accounting Signup and view all the answers

Which standards are covered in AFA300?

IFRS and ASPE Signup and view all the answers

What is one of the key objectives of AFA300?

Understand financial reporting and the conceptual framework Signup and view all the answers

Which of the following topics is included in the AFA300 syllabus?

Revenue and expense recognition Signup and view all the answers

When do the classes for AFA300 take place?

Mondays from 8:00 AM to 11:00 AM Signup and view all the answers

What is a key method of instruction in AFA300?

Case studies using 'The CPA Way' Signup and view all the answers

What is a requirement for student emails directed to the instructor?

Must specify the course number in the subject line Signup and view all the answers

What qualifies a component of an enterprise for classification as discontinued operations?

It must have distinct operational cash flows. Signup and view all the answers

Which of the following is NOT one of the criteria for classifying an asset as held for sale?

The asset can be sold by any means. Signup and view all the answers

How are held for sale assets measured for presentation?

At the lower of carrying amount and fair value less costs to sell. Signup and view all the answers

Which statement about depreciation of held for sale assets is correct?

Depreciation is not recognized on held for sale assets. Signup and view all the answers

What is the treatment of gains from previously written-down held for sale assets?

Recognized up to the amount of the original loss. Signup and view all the answers

Under which standard are held for sale assets generally classified as current?

IFRS. Signup and view all the answers

What must be true about the sale price of an asset held for sale?

It should be reasonably priced and actively marketed. Signup and view all the answers

Which of the following best describes a cash-generating unit?

An identifiable component that generates its own net cash flows. Signup and view all the answers

What does the historical cost principle imply initially?

Historical cost usually equals fair value. Signup and view all the answers

What is a potential issue with subsequent remeasurement of historical cost?

It may introduce measurement uncertainty. Signup and view all the answers

How does fair value differ from value in use?

Fair value is an exit price while value in use is entity-specific. Signup and view all the answers

What is the measurement basis of fair value according to ASPE?

Price agreed upon in an arm’s length transaction. Signup and view all the answers

Which of the following is true regarding the relationship between historical cost, value in use, and fair value over time?

The three values diverge due to market and economic conditions. Signup and view all the answers

What aspect of fair value does it primarily focus on?

How the market would value an item. Signup and view all the answers

Why might historical cost lose its predictive value over time?

It is based solely on historical market conditions. Signup and view all the answers

Which statement accurately describes fair value measurement under IFRS?

Fair value is the exit price between market participants at the measurement date. Signup and view all the answers

Study Notes

Course Information

Course Title: AFA300 - Intermediate Financial Accounting I
Instructor: Harjot Mehmi
Email: [email protected]
Office: YDI 1066 (1 Dundas St W)
Office Hours: Mondays, 1 – 3 PM
Course Section: 011
Start Date: Sept. 9, 2024

Week 1: Sept. 9, 2024

Introduction to the course
Instructor's background and experience
Course prerequisite: AFA 100 - Introductory Financial Accounting
Course outline: Extensive study of Financial Accounting under International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE)
Topics to include: conceptual framework for financial reporting, financial statements, revenue and expense recognition, and current assets (e.g., cash, receivables, inventory)

Personal Introduction

Recently joined Toronto Metropolitan University
BBA, MBA, PhD (expected Dec. 2024)
Research focus: taxation
Previous teaching experience: AFA717 (Taxation I) at Wilfrid Laurier University
Currently in progress: CPA and CFA certifications

Course Objectives

Understand financial reporting and the conceptual framework
Integrate problem-solving skills and professional judgment in the application of accounting standards to accounting/economic events (e.g., revenue recognition)
Understand the differences between IFRS and ASPE
Apply IFRS and ASPE in the preparation, analysis and evaluation of financial statements and disclosures
Learn to communicate in business situations

Required Course Text

With WileyPLUS: Kieso, Weygandt, Warfield, Weicek, McConomy, Intermediate Accounting Volume 1, 13th Canadian Edition, 2021, Wiley Sons.
The 13th edition is different from the 12th edition; students are strongly advised to purchase the latest 13th edition.
CPA Canada Handbook - Accounting (Parts I and II), Chartered Professional Accountants of Canada.
Access the textbook online through TMU Libraries: learn.library.torontomu.ca/accounting/standar

Other Requirements

Calculator: Texas Instruments BA II Plus Financial Calculator
Internet access: required for email communication and D2L Brightspace access.
Course will be managed online on D2L Brightspace.
Homework assignments will be completed online on WileyPLUS.

Course Grade Breakdown

WileyPLUS Homework Assignments: 20%
In-Class Quizzes: 5%
In-Person Midterm Exam: 25%
In-Person Case Test: 20%
In-Person Final Exam: 30%
Total: 100%

WileyPLUS Homework Assignments

5 assignments (each worth 4% of the final grade) .
3 attempts per question; best score used
Same questions, different values for each student
Assignment solutions are available after the due date.
Assignments are available for 7 days and are due on Mondays at 11:59 PM.
No make-ups or due date extensions

WileyPLUS Registration

Access WileyPLUS at https://login.education.wiley.com/login.
Sign up for a WileyPLUS account; use TMU email credentials
Enter course section ID: B29592; Alternatively, you can search the instructor "Harjot Mehmi''
Click "Find my course".
Enter the registration code provided by WileyPLUS.

In-Class Quizzes

5 in-class "pop" quizzes
Quizzes will be randomly selected in 5 classes.
Open-book and collaboration are permitted during quizzes
Each quiz is worth 1% of the final grade.
Handwritten answers on scrap paper provided during class.

In-Person Midterm Exam

Week 7: Monday, Oct. 28
3-hour closed book exam.
Topics covered: Chapters 0 - 4
Exam location: TRS 2-154 (computer room)
Includes multiple choice and short/long-answer questions
Content from lecture/readings/assignments

In-Person Case Test

Saturday, November 23
1.5-hour closed book case test
Topics covered: Chapters 0, 2, 5, and 6
Location: TRS 2-154 (computer room)
Using "The CPA Way" for analysis and recommendations.

In-Person Final Exam

3-hour closed book exam
Cumulative, covering Chapters 0-8
Date, time, and location: TBD
Include multiple choice and short/long-answer questions

Academic Consideration Request (ACR)

Available for extenuating circumstances affecting the ability to complete the midterm, case test, or final exam
Examples: significant physical and mental health issues, traumatic experiences
Does not include typical circumstances, like vacations or employment.
Submit within 3 business days of the missed assessment date

Missed Assessments

For each missed assessment: email the instructor, submit the ACR, and follow-up email.
Missed midterm: the weight will transfer to the final exam (55% of the final grade)
Missed case test: request a make-up test
Missed final exam: request a make-up exam

TMU Grading System

Letter grades and corresponding grade points are provided.

Chapter 0: Accounting Cycle Review

Review of accounting cycle

Financial Accounting Review Questions

Review questions covered in today's class
Solutions will be posted; questions not covered are not posted.

Prepaid Expenses

Paid in cash before benefit reception.
Shown as assets, debited increase.
Cash is credited by decrease.
Expire with time or use.
Deferrals:*
Revenue or expense recognition after cash exchange.
Closing Entries:*
Temporary account balances are transferred to a permanent shareholders’ equity (retained earnings).
Companies close revenue and expense accounts to a separate temporary account, Income Summary.
Dividends:*
Declared as a transaction
Paid as a separate transaction
Dividends are a temporary shareholders' equity account, closed at the end of the period.

Chapter 1: The Canadian Financial Reporting Environment

Overview of financial reporting environment in Canada

In-Class Questions

CA1.2
Solutions for in-class and textbook questions available on D2L

Characteristics of Accounting

Measures and communicates financial information about economic entities to interested parties.
Two classifications:
Financial Accounting
Managerial Accounting

Basic Financial Statements

Statement of Financial Position (balance sheet)
Statement of Income or Comprehensive Income (income statement)
Statement of Cash Flows
Statement of Changes in Equity

What is at Stake for Each Stakeholder?

Entities in financial reporting environment include investors, creditors, management, securities commissions, stock exchanges, analysts, auditors, standard setters, and tax authorities; these entities have particular interests in financial reporting

Objective of Financial Reporting

Provide information about the reporting entity to current and potential decision-makers
Entity perspective: considers the need for other users besides shareholders

Information Asymmetry

Managers have more access to information than other stakeholders.
This is a problem that needs to be resolved
Types of problems that arise due to this include adverse selection and moral hazard

Management Bias

Two types: Aggressive accounting (downplay negative and emphasize positive) and Conservative accounting (downplay positive and emphasize negative)
Possible reasons include: improving company performance
Meeting analyst expectations

Entities Responsible for GAAP

Accounting standards help reduce information asymmetry
Entities involved in setting requirements: AcSB, IASB, FASB

CA1.2 – Ethics Case

Analyze issue, analyze relevant accounting issues, recommend how to address issues, and complete entries
Identify issues associated with ethical considerations in accounting.

Chapter 2: Conceptual Framework Underlying Financial Reporting

Review the conceptual framework for financial reporting
Answers for in-class questions will be posted on D2L
Answers for the textbook brief questions are already posted on D2L

Development of the Conceptual Framework

The new framework was issued by IASB in Jan 2020.
It is effective to communicate information for investors, creditors, and other users.

Fundamental Characteristics of Useful Information

Faithful representation
Complete
Neutral
Free from error
Relevant
Predictive Value
Has Feedback/Confirmatory Value
Material

Materiality

An item is material if its inclusion/omission would influence the decisions of a decision-maker
Quantitative materiality
Qualitative materiality
Examples of factors influencing quantitative and qualitative materiality

E2.4 – А, В, & C

Examples and analyses of exercises from chapter two

E2.4 – D

Examples and analyses of exercises related to ethical considerations

Enhancing Characteristics of Useful Information

These improve the usefulness of information:
- Comparability
- Verifiability
- Timeliness
- Understandability

Elements of Financial Statements

Assets
Liabilities
Equity
Revenues/Income
Expenses
Gains & Losses

1. Assets

Has three essential characteristics:
- Represents a present economic resource
- Entity has control over the resource
- The resource results from a past transaction or event

2. Liabilities

Has three essential characteristics:
- Represents a present obligation
- The obligation requires the entity to transfer an economic resource
- The obligation results from a past transaction or event

3. Equity

Residual interest in an entity after deducting liabilities from assets.
Represents the ownership interest in a business.

4. Revenues/Income & 5. Expenses

Increases in economic resources as a result of ordinary operations
Decreases in economic resources as a result of the company's operating activities

6. Gains & Losses

Increases in equity from peripheral transactions except revenues/expenses and owner's activity
Decreases in equity from peripheral transactions except revenues/expenses and owner's activity

Financial Statements

Provides a detailed view of the ASPE and IFRS
Provides a comparison of statements
Comprehensive and brief coverage with clarity

Foundational Principles

Recognition/Derecognition Measurement
Presentation/Disclosure
Economic Entity Assumption
Control
Revenue Recognition and Realization Principles
Matching Principle.
Periodicity Assumption
Monetary Unit Assumption
Going Concern Assumption
Historical Cost Principle
Fair Value
Full Disclosure

E3.1, E3.4, E3.6, E3.7, P3.1

In-class and textbook questions for review

Data, Digitization, and Digitalization

Digitalization has led to a large amount of data availability (big data) in accounting.
Digitization converts data into machine-readable format.
Digitalization transforms processes using new technologies and digital information.
Big data analysis
Data analysis versus data analytics.
Types of data analytics:
Descriptive
Diagnostic
Predictive
Prescriptive

Measuring Financial Statement Elements

Methods for calculating fair value
Measurement categories: cost-based, hybrid, and current value.
Valuation techniques

2 Approaches to Discounted Cash Flows

General discounted cash flow approach
Expected cash flow approach

Present Value Concepts

Time value
Interest rates
Value of money

PV of a Single Future Amount

Calculations: Using formulas, tables, and financial calculators
Calculations: Using Formulas, Tables, and Financial Calculators

PV of a Series of Future Cash Flows (Annuities)

Calculations using formulas, tables, and financial calculators

E3.1 - A, B, & C

Analyses of problems associated with estimated future cash flows.

P3.1 - A, B, C, & D

Analyses of problems associated with lease obligations, including time value of money, forgiveness issues

Chapter 3: Data, Decisions, & Measurement

Data analytics approach in accounting
Analysis versus analytics
Discussing different types of analytics

Chapter 4: Reporting Financial Performance

In-class quiz #1
Classifications of accounting items
What is the purpose of the statement of financial performance?

Chapter 5: Financial Position & Cash Flows

In-class quiz #2

Statement of Financial Position (SFP)

Balance Sheet; classification order
Assets: Current assets, long-term investments, property, plant and equipment, intangible assets, other assets
Liabilities and Equity: Current Liabilities, Long-term Debt, capital shares, contributed surplus, retained earnings, accumulated OCI
Current assets, short-term investments, accounts receivable, inventory, and prepaid expenses
Current liabilities include payables, unearned revenue, short-term financing, accrued expenses.

Current Assets - Cash &

Cash Equivalents:

Short-term, highly liquid securities
Convertibility into cash
Significant changes in value are unlikely

Current Assets - Accounts Receivable

Claims on customers
Accounts Receivable (A/R): amounts owed in 30-60 days.
Notes Receivable; written promises that a company will receive money
Uncollectible amounts: (AFDA) are included in the Balance sheet.

Current Assets - Inventories

Inventory in ordinary course of business
Different types of measurement methods such as FIFO, Weighted average, etc.

Current Assets - Prepaid Expenses

Expenses paid in advance
Benefits and services are received within 12 months, or the operating cycle.

Long-Term Investments

Securities: bonds, long-term notes, loans payable.
Valuation measures

Property, Plant, and Equipment (PPE)

Tangible assets
Depreciable and depletable assets

Intangible Assets & Goodwill

Goodwill: asset representing future benefits from a business combination.
Intangible assets are amortized, not goodwill.

Other assets

Non-current receivables, assets in special funds.

Current Liabilities & Long-Term Liabilities

Classifications and types

Shareholders' Equity

Consists of capital shares, contributed surplus, retained earnings, and accumulated OCI (IFRS only)

Other Required Disclosures

Contingencies
Accounting policies; includes significant accounting methods and estimates.

Statement of Cash Flows

Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities

Current Cash Debt Coverage Ratio

Indicates repayment ability

Cash Debt Coverage Ratio

Indicates a company's ability to repay its total debts from operations

Free Cash Flow

Cash from operations less capital expenditures less dividends
Provides insights into the company's ability to invest

P5.7 - A & B

Statement of Financial Position and statement of cash flows.

P5.7 - C

Liquidity analysis using ratios.
Analysis with various financial conditions like current ratio, acid test ratio, cash debt coverage ratio, and free cash flow.

P5.12

Statement of Cash Flows (Direct Method).

Chapter 6: Revenue Recognition

In-class quiz #3
Revenue recognition; calculating different aspects like net revenue

Revenue Recognition: An Overview

Asset-liability approach
Earnings approach

Revenue Recognition: 5-Step Process

Identifying the contract; identifying performance obligations, determining transaction price, allocating price to each obligation, recognizing revenue.

1. Identify the contract with the Customer

Criteria; legal binding agreements
Excluding implied contracts.

2. Identify the performance obligations

Distinct
Combined obligations
Implicit and explicit

3. Determine Transaction Price

Variable consideration
Time value of money
Non-cash consideration
Consideration payable to consumers

i. Variable Consideration- Right of Return

Analyzing the possibility of product returns.

i. Variable Consideration - Volume Discounts

Adjusting revenue based on volume discounts.

ii. Time Value of Money

Adjusting revenue for the time value of money; implied interest rates.

iii. Non-Cash Consideration

Revenue recognition for non-cash items.

iv. Consideration Paid or Payable

Recognizing revenue for consideration already paid.

P5.7 - F

Different ways to interpret financial statement information

Chapter 7: Cash & Receivables

In-class questions

A/R Write-Off Method

For handling uncollectible accounts receivable; write-offs, and adjustments

A/R Aging Schedule (Percentage-of-

Receivables Approach)

Estimating uncollectible receivables using historical data.

Allowance Method; Balance Sheet Presentation & Journal Entries

Preparation of balance sheets under allowance method
Recording journal entries with and without credit balances

Percentage-of-Sales Approach; Example & Journal Entries

Calculating loss on impairment using a % of sales, and recognizing in journal entries

A/R Write-Off; Collection; Direct Write-off Method

Other methods of handling accounts receivable; direct write-off.

Notes and Loans Receivable; Interest Bearing Short-Term Notes Receivable; Non-Interest Bearing Short-Term Notes Receivable

Differences in note receivable accounting

Long-Term Notes and Loans Receivable; Interest Bearing Note Issued at Face Value.

Valuation and amortization of promissory notes.
How interest rates affect the note valuation

Zero-Interest Bearing Notes

Recognition and calculation of present value.
Implicit interest rate determination method.

Note Amortization

Calculating Note amortization under two possible methods.

Note Issued at Discount - Effective & Straight-Line; Note Issued at Premium

Accounting for notes issued at a discount and premium.

Derecognition of Receivables

Methods of derecognizing receivables: secured borrowing and factoring

Secured Borrowing

Cash generation via secured borrowing
Interest expense recording on borrowing amount
Additional financing costs
Reporting of secured borrowing in financial statements

Factoring Receivables

Methods of accounting for factoring receivables; with and without recourse

E7.17 – B, C, & D

Analysis of factoring and its affect on ratios like accounts receivable turnover

P7.3 – A

Information and calculations of accounts receivable.
Preparation to generate the ending balance.

P7.3 – B, C, & D

Estimating uncollectible accounts
Making adjustments to balance sheet presentations.
Analyzing loss on impairment

P7.5

Various calculation and journal entries on Allowance for Doubtful Accounts (AFDA)

P7.8 – A

Present value of notes receivable using Excel’s PV function.

P7.8 – B Notes Receivable Schedule; Journal Entries

Detailed calculations showing interest and principal payments.

P7.8 – C

Comparing Instalment notes, and non-interest-bearing notes.

In-Class Quiz #6 - Chapter 7

In-class and textbook questions

Chapter 8: Inventory

In-class questions; inventory accounting systems; perpetual & periodic systems; cost formulas like FIFO, Weighted average, and specific identification

Accounting Definition of Inventory & Measurement of Inventory; Costs Included & Excluded

Identifying inventory and its features
Differences between included and excluded costs relevant to inventory accounting
Inventory accounting systems
- Perpetual system
  - Features
- Periodic system
  - Features

Comparing the 3 Cost Formulas

Examples, and calculation of inventory
Comparing the three methods of inventory valuation.

Specific Identification; Weighted Average Cost;FIFO

Detailed calculation of COGS; ending inventory, and valuation methods.

Inventory Measurement

Accounting principles: Using FIFO, Weighted average cost, and specific identification
Applying LC & NRV to individual items
Applying LC & NRV to grouped items

Gross Profit Method & Gross Profit Percentage vs Markup on Cost

Estimating inventory amounts using gross profit method.
Analyzing factors affecting calculation

Evaluation of the Gross Profit Method

Disadvantages/weakness of using the gross profit method.

E8.4, E8.8, E8.11, E8.14, E8.15, E8.20, E8.22

Various exercises; related to inventory, including physical count, COGS.

E8.22

Exercises to test understanding of inventory accounting

Studying That Suits You

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Description

Test your knowledge on key accounting principles, including earnings management, comprehensive income, and financial reporting standards under ASPE and IFRS. This quiz covers essential concepts that every accounting student should know.