Certified Public Accountant CPA Questions + Answers Part 5
Posted: Tue Feb 22, 2022 6:08 pm
QUESTION 55
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:
A. Theneedforconservatism.
B. Reportingonmanagement'sstewardship. C. Generally accepted accounting principles. D. The needs of the users of the information.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting stem from the informational needs of the external users of the information. SFAC 1 para. 28 Choice "a" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97
Choice "b" is incorrect. Information concerning management's stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1 para. 50 Choice "c" is incorrect. Generally accepted accounting principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around.
QUESTION 56
According to the FASB conceptual framework, predictive value is an ingredient of:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes - No. Predictive value is an ingredient of relevance but not of reliability. Memorize:
Bud's relevance to "PFT."
Bud's reliability to "VRN."
QUESTION 57
According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is:
A. Recognition. B. Realization. C. Allocation. D. Matching.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Recognition.
According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is recognition.
QUESTION 58
Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealizedlossoninvestmentsinnoncurrentmarketableequitysecuritiesavailableforsale. B. Unrealizedlossoninvestmentsincurrentmarketableequitysecuritiesheldfortrading.
C. Loss on exchange of nonmonetary assets without commercial substance.
D. Loss on exchange of nonmonetary assets with commercial substance.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles.
Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and other non-owner changes in equity (such as changes in market value of marketable securities available for sale) that are included in comprehensive income for a period.
QUESTION 59
FASB's conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?
A. Option A
B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Financial capital - Financial capital. Financial capital maintenance is considered to be an element of both "currently reported net income" and "comprehensive income." This was a rare instance in which this type of information was asked on the exam.
QUESTION 60
According to the FASB conceptual framework, an entity's revenue may result from:
A. Adecreaseinanassetfromprimaryoperations.
B. Anincreaseinanassetfromincidentaltransactions. C. Anincreaseinaliabilityfromincidentaltransactions. D. Adecreaseinaliabilityfromprimaryoperations.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity's ongoing major operations, not from "incidental" operations. Choice "d" is correct. An entity's revenue may result from a decrease in a liability from primary operations.
QUESTION 61
Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Yes - No.
Yes - "Depreciation methods" should be disclosed in the "summary of significant accounting policies." No - Composition of fixed assets (or any other account) should not be disclosed in the "summary of significant accounting policies."
QUESTION 62
Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 1989 included the following expense and loss accounts:
One-half of the rented premises is occupied by the sales department. Brock's total selling expenses for 1989 are:
A. $480,000 B. $400,000 C. $370,000 D. $360,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Note: Only one-half of rent for office space was used for sales office. Choice "a" is correct. $480,000.
QUESTION 63
In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the following:
In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of:
A. $216,300 B. $215,400 C. $203,700 D. $201,900
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $201,900.
The various amounts from discontinued operations should be included in discontinued operations, not in revenues.
QUESTION 64
FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB:
A. StatementsofFinancialAccountingConcepts.
B. Emerging Issues T ask Force Consensus.
C. Technical Bulletins.
D. Statements of Financial Accounting Standards.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. FASB interpretations of the "statements of financial accounting standards" (SFAS) have the same authority as the FASB statements of financial accounting standards (SFAS), which by themselves determine GAAP.
Choice "a" is incorrect. Statements of financial accounting concepts (FAC's) have much less authority (fifth floor) and do not by themselves determine GAAP as is the case with SFASs and interpretations of SFASs.
Choice "b" is incorrect. Emerging issues task force (EITF) consensus is in the nature of a "third floor" authority. The EITF was established in 1984 to aid the FASB in identifying and implementing emerging issues before they become widespread and ultimately require action by the FASB. After discussing the issues and the relevant accounting pronouncements, the group can sometimes reach a consensus on an issue, in which case no action by the FASB is usually needed. Choice "c" is incorrect. Technical bulletins of the FASB (second floor) do not by themselves determine GAAP.
QUESTION 65
Which of the following accounting pronouncements is the most authoritative?
A. FASBStatementofFinancialAccountingConcepts. B. FASBTechnicalBulletin.
C. AICPA Accounting Principles Board Opinion.
D. AICPA Statement of Position.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The AICPA accounting principal board opinion (APBO) is a first floor (category A) of established accounting principle pronouncements. Choice "a" is incorrect. FASB statement of financial accounting concepts (SFAC or FACs) is a fifth floor (other accounting literature) category.
Choice "b" is incorrect. FASB technical bulletins are a second floor (category B) accounting pronouncement.
Choice "d" is incorrect. AICPA statement of position is a second floor (category B) accounting pronouncement.
QUESTION 66
Which of the following should be disclosed in a summary of significant accounting policies?
A. Management'sintentiontomaintainorvarythedividendpayoutratio.
II. Criteria for determining which investments are treated as cash equivalents. III. Composition of the sales order backlog by segment.
B. Ionly.
C. I and III.
D. II only.
E. IIandIII.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Il only.
The criteria for determining which investments are treated as "cash equivalents" is a method of accounting policies that needs to be disclosed in the summary of significant accounting policies. Choice "a" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an "accounting policy." Choices "b" and "d" are incorrect. Composition of the sales order backlog by segment is not an "accounting policy."
QUESTION 67
The summary of significant accounting policies should disclose the:
A. Maturitydatesofnoncurrentdebts.
B. Termsforconvertibledebttobeexchangedforcommonstock.
C. Concentration of credit risk of all financial instruments by geographical region. D. Criteria for determining which investments are treated as cash equivalents.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The criteria for determining which investments are treated as cash equivalents would be part of the summary of significant accounting policies. Choice "a" is incorrect. The maturity dates of noncurrent debts are required disclosures, but are not a part of the summary of significant accounting policies. Choice "b" is incorrect. The terms for convertible debt to be exchanged for common stock are not accounting policies; they would be disclosed separately. Choice "c" is incorrect. The concentration of credit risk of all financial instruments by geographic region may be a required segment disclosure, especially for financial institutions. However, it would not be a part of the summary of significant accounting policies.
QUESTION 68
The following costs were incurred by Griff Co., a manufacturer, during 1992:
What amount of these costs should be reported as general and administrative expenses for 1992?
A. $260,000 B. $550,000 C. $635,000 D. $810,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $260,000. General and administrative
"Freight-in" is part of "cost of goods sold." "Freight-out" is a "selling" expense.
Sales representative salaries is a selling expense.
QUESTION 69
Which of the following information should be included in Melay, Inc.'s 1992 summary of significant accounting policies? A. Property,plant,andequipmentisrecordedatcostwithdepreciationcomputedprincipallybythestraight-linemethod.
B. During1992,theDelaycomponentwassold.
C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
D. Future common share dividends are expected to approximate 60% of earnings.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "b" is incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting policy."
Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "presidents letter to shareholders."
QUESTION 70
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?
A. FASBTechnicalBulletins.
B. AICP A Accounting Interpretations.
C. FASB Statements of Financial Accounting Concepts.
D. AICPA Technical Practice Aids.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions, and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and FASB Technical Bulletins. Choice "b" is incorrect. AICPA Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the fourth floor.
Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice Aids are among the least authoritative of accounting literature (fifth floor).
QUESTION 71
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:
Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. Coffey prepares a multiple-step income statement for 1988.
Income from operations before income tax is:
A. $190,000 B. $200,000 C. $230,000 D. $240,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $240,000
The gain on debt extinguishment does not meet the unusual and infrequent criteria of APB 30 to be treated as an extraordinary item (per SFAS No. 145, extinguishments of debt are no longer automatically extraordinary), so it is included as part of income from continuing operations.
QUESTION 72
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:
Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. The hurricane is considered an unusual and infrequent event. Coffey prepares a multiple-step income statement for 1988.
Net income is:
A. $140,000 B. $161,000 C. $168,000 D. $200,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $140,000.
Net income is the "bottom line" amount after all has been considered on the income statement. Without showing all the line items as required for the income statement, the "bottom line" amount of $140,000 is derived as follows:
QUESTION 73
Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
A. Extraordinarygain,netofincometaxes.
B. Partofcontinuingoperations.
C. Gain from discontinued operations, net of income taxes. D. Reduction of the cost of the new warehouse.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Part of continuing operations.
Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. The amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount (FMV) of the fixed asset sold. Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax. Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations. Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.
QUESTION 74
Adam Corp. had the following infrequent transactions during 1989:
· A $190,000 gain on reacquisition and retirement of bonds. This material event is also considered unusual for Adam Corp. · A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at another location.
· A $90,000 loss on the abandonment of equipment.
In its 1989 income statement, what amount should Adam report as total infrequent net gains that are not considered extraordinary?
A. $100,000 B. $170,000 C. $360,000 D. $450,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Infrequent net gains not considered extraordinary include:
Choice "b" is correct. $170,000.
QUESTION 75
A transaction that is unusual, but not infrequent, should be reported separately as a(an):
A. Extraordinaryitem,netofapplicableincometaxes.
B. Extraordinaryitem,butnotnetofapplicableincometaxes.
C. Component of income from continuing operations, net of applicable income taxes.
D. Component of income from continuing operations, but not net of applicable income taxes.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a component of continuing operations, (gross) but not net of applicable income taxes. Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent." Choice "c" is incorrect, per "d" above.
QUESTION 76
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
· Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. · A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. · A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount of gain (loss) should be reported separately as a component
of income from continuing operations in 1990?
A. $260,000 B. $5,000
C. $(255,000) D. $(350,000)
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $5,000.
The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).
QUESTION 77
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
· Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. · A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. · A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in 1990?
A. $0
B. $5,000
C. $(90,000) D. $(350,000)
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $0.
Note: The sale of the steel transportation component resulted in a loss from discontinued operations and is reported after "income from continuing operations." The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).
QUESTION 78
In 1990, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a substantial increase in production costs caused when a major supplier's workers went on strike. Which of these losses should be reported as an extraordinary item?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Yes - No.
Rule: Losses arising from a company's first (and probably "last") "anti-trust" action are unusual and extraordinary and should be reported as an extraordinary item. Losses resulting from additional costs caused by a strike at a major supplier or even at one's own company are not extraordinary and should be disclosed as a separate component of "income from continuing operations."
QUESTION 79
Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The tax rate is 30%. The following data relate to the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income before extraordinary items?
A. $1,030,000 B. $780,000 C. $730,000 D. $0
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary items.
QUESTION 80
Which of the following should be reported as a prior period adjustment?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. No - Yes
Change in estimated lives of depreciable assets is a "change in estimate." They affect only current and future periods (not "prior periods," not retained earnings). Change from unaccepted principle to accepted principle is an example of an error of a prior period that should be reported as a "prior period adjustment."
QUESTION 81
On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the double declining balance method for both financial statement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method for financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31, 20X5, was $560,000. If the straight-line method had been used, the accumulated depreciation at December 31, 20X5, would have been $420,000. Pell's enacted income tax rate for 20X6 and thereafter is 30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the straight-line method should be:
A. $98,000debit. B. $98,000credit. C. $140,000 credit. D. $0.
Correct Answer: D Section: (none)
Explanation Explanation/Reference:
Explanation:
Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. And, certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 82
Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The cumulative effect of a change in accounting principle is now reported as an adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative effect. When making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively. A change from LIFO to weighted average, there is no such impracticability. The cumulative effect is computed and the change is handled retrospectively.
Choices "a", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 83
Goddard has used the FIFO method of inventory valuation since it began operations in 1987. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of 1990. The following schedule shows year-end inventory balances under the FIFO and weighted- average methods:
What amount, before income taxes, should be reported in the 1990 retained earnings statement as the cumulative effect of the change in accounting principle?
A. $5,000decrease. B. $3,000decrease. C. $2,000 increase. D. $0.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $5,000 decrease.
The cumulative effect of change in accounting principle is determined as of the beginning of the year of change if comparative financial statements are not presented. In this case, the year of change is 1990, so the cumulative effect is the difference in inventory as of the end of 1989. [Note that inventory is a balance sheet item, so the change is based on the balances at the end of the last year the prior method was used. Had this question shown annual income statement amounts of cost of goods sold, we would have had to look at all the past years in the aggregate.] This will allow us to arrive at the adjustment to obtain the amount of retained earnings that would have been reported at the beginning of the period of change if the new accounting principle had been used for all prior periods.
QUESTION 84
In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?
A. Effectofafailuretoprovideforuncollectibleaccountsinthepreviousperiod.
B. Effectofadecreaseintheestimatedusefullifeofdepreciableequipment.
C. Cumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects. D. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error.
Choice "c" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
QUESTION 85
While preparing its 1991 financial statements, Dek Corp. discovered computational errors in its 1990 and 1989 depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:
Dek's 1991 net income is correctly reported at $180,000. Which of the following amounts should be reported as prior period adjustments and net income in Dek's 1991 and 1990 comparative financial statements?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. 1990 ($25,000) $125,000 1991 -- 180,000
Because these are comparative financial statements, prior period adjustments require retroactive treatment for the years presented. Because 1989 is not presented, the 1989 correction is shown as a prior period adjustment of $25,000 to retained earnings statement of 1990.
QUESTION 86
Tack, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 1991?
A. $190,000 B. $178,000 C. $150,000
D. $122,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $178,000.
QUESTION 87
On January 2, 1991, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in 1990 but did not do so. Air's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, Air should adjust the beginning balance of its retained earnings by a:
A. $230,000credit. B. $230,000debit. C. $300,000 credit. D. $370,000 debit.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $230,000 debit.
QUESTION 88
For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes - Yes.
The effective income tax rates for operations for the full year should reflect anticipated foreign tax rates and available tax planning alternatives. In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.
QUESTION 89
An inventory loss from a permanent market decline of $360,000 occurred in May 1989. Cox Co. appropriately recorded this loss in May 1989 after its March 31, 1989 quarterly report was issued. What amount of inventory loss should be reported in Cox's quarterly income statement for the three months ended June 30, 1989?
A. $0
B. $90,000 C. $180,000 D. $360,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $360,000 inventory loss reported for the quarter ended 6-30-89. Rule: Inventory losses from "permanent market declines" are recognized in the interim period, incurred and later, if they "turn-around," are recognized as gains in a subsequent interim period only to the extent of previously reported losses. Rule: "Temporary" market declines need not be recognized at interim when a "turn-around" can reasonably be expected to occur before the end of the fiscal year. Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the quarter interim period incurred (6-30-89).
QUESTION 90
Advertising costs may be accrued or deferred to provide an appropriate expense in each period for:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Yes - Yes.
Advertising costs may be accrued or deferred to provide an appropriate expense in each period for both "interim" and "year-end" financial reporting.
QUESTION 91
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes - Yes.
Rule: Volume variances that are planned or expected to be absorbed by the end of the year should be deferred at interim whether favorable or unfavorable.
QUESTION 92
An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year. However, in the third quarter the inventory's market price recovery exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should:
A. Decreaseinthefirstquarterbytheamountofthemarketpricedeclineandincreaseinthethirdquarterbytheamountofthedecreaseinthefirstquarter.
B. Decreaseinthefirstquarterbytheamountofthemarketpricedeclineandincreaseinthethirdquarterbytheamountofthemarketpricerecovery. C. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter.
D. Not be affected in either the first quarter or the third quarter.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Market price declines should be recognized in the interim period in which decline is judged permanent and later, if they "turn around," are recognized as gains in subsequent periods only to the extent of previously reported losses.
Choice "b" is incorrect. Recovery should not cause an increase in inventory value above original cost. Choice "c" is incorrect. The recovery should be recognized to the extent of the first quarter write down.
Choice "d" is incorrect.
QUESTION 93
The following information pertains to Aria Corp. and its divisions for the year ended December 31, 1988:
Aria and all of its divisions are engaged solely in manufacturing operations. Aria has a reportable segment if that segment's revenue exceeds:
A. $264,000 B. $260,000 C. $204,000 D. $200,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $260,000 represents a reportable segment (10% of total sales):
Rule: To be significant enough to report on, a segment must be at least 10% of:
1. Combined revenues (whether intersegment or unaffiliated customers), or 2. Operating income, or
3. Identifiable assets.
QUESTION 94
Hyde Corp. has three manufacturing divisions, each of which has been determined to be a reportable segment. In 1989, Clay division had sales of $3,000,000, which was 25% of Hyde's total sales, and had operating costs of $1,900,000, as reported to the CFO. In 1989, Hyde incurred operating costs of $500,000 that were not directly traceable to any of the divisions. In addition, Hyde incurred corporate interest expense of $300,000 in 1989. In reporting segment information, what amount should be shown as Clay's operating profit for 1989?
A. $875,000 B. $900,000 C. $975,000 D. $1,100,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $1,100,000 operating profit for clay. Rule: Operating profit by segments is based on the measure of profit reported to the "chief operating decision maker."
Allocations for general operating costs and interest, etc., should not be made solely for purposes of segment disclosures.
QUESTION 95
YIV, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated customers. YIV should report segment financial information for each division meeting which of the following criteria?
A. Segmentoperatingprofitorlossis10%ormoreofconsolidatedprofitorloss.
B. Segmentoperatingprofitorlossis10%ormoreofcombinedoperatingprofitorlossofallcompanysegments. C. Segment revenue is 10% or more of combined revenue of all the company segments.
D. Segment revenue is 10% or more of consolidated revenue.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Segment revenue is 10% or more of combined revenue of all the company segments. Rule: To be significant enough to report on, a segment must be at least 10% of:
1. Combined revenues (whether intersegment or affiliated customers) or 2. Operating profit (of all segments not having an operating loss), or
3. Identifiable assets.
Choice "a" is incorrect. Rule is 10% of "operating profit," not "consolidated profit." Choice "b" is incorrect. Segments with "operating losses" are not combined with those having "operating profits" in determining a segment.
Choice "d" is incorrect. "Consolidated revenue" would not include "intersegment revenue." Rule is "combined revenue," not "consolidated revenue."
QUESTION 96
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31, 1991, were $40,000,000.
In its 1991 financial statements, Grum should disclose major customer data if sales to any single customer amount to at least:
A. $300,000
B. $1,500,000 C. $4,000,000 D. $5,000,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $5,000,000 (10% x $50,000,000 revenue). If revenue from a single external customer is 10% or more of total revenue, then the company should disclose this fact, the total amount of revenue from the customer, and the segment or segments reporting the revenues. The identity of the customer need not be disclosed.
QUESTION 97
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31, 1991, were $40,000,000.
Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of Cott's total revenues and total assets as follows:
Which of these business segments are deemed to be reportable segments?
A. Ebononly.
B. EbonandFaironly.
C. Ebon, Fair, and Gel only. D. Ebon, Fair, Gel, and Hak.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Rule: A segment must be at least 10% of:
1. Combined revenues (whether intersegment or unaffiliated customers), or 2. Operating income (of all segments not having an operating loss), or
3. Identifiable assets.
Choice "d" is correct. Ebon, Fair, Gel, and Hak, since all four companies meet at least one of the criteria.
QUESTION 98
Chester Corp. was a development stage enterprise from its inception on September 1, 1987 to December 31, 1988. The following information was taken from Chester's accounting records for the above period:
For the period September 1, 1987 to December 31, 1988, what amount should Chester report as net loss?
A. $50,000 B. $150,000 C. $350,000 D. $450,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to DeC. 31, 1988. Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
QUESTION 99
Deficits accumulated during the development stage of a company should be:
A. Reportedasorganizationcosts.
B. Reportedasapartofstockholders'equity.
C. Capitalized and written off in the first year of principal operations.
D. Capitalized and amortized over a five year period beginning when principal operations commence.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Deficits accumulated during the development stage of a company should be reported as a part of stockholders' equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales & expenses (part of I/S), cumulative statement of cash flows and supplementary "shareholders equity." Choices "a", "c", and "d" are incorrect, per the rule above.
QUESTION 100
Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to footnote disclosures:
A. Only.
B. Andexpenserecognitionprinciplesonly.
C. And revenue recognition principles only.
D. And revenue and expense recognition principles.
Correct Answer: A Section: (none)
Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to (more extensive) footnote disclosures only.
Choices "b", "c", and "d" are incorrect. Revenue and expense recognition principles are the same. Rule: Development stage enterprises should present financial statements in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales and expenses (as part of the income statement), cumulative statement of cash flows and supplementary "shareholders equity."
QUESTION 101
A statement of cash flows for a development stage enterprise:
A. Isthesameasthatofanestablishedoperatingenterpriseand,inaddition,showscumulativeamountsfromtheenterprise'sinception. B. Showsonlycumulativeamountsfromtheenterprise'sinception.
C. Is the same as that of an established operating enterprise, but does not show cumulative amounts from the enterprise's inception.
D. Is not presented.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Rule: Development stage enterprises should present financial statements in accordance with GAAP and make additional disclosures such as cumulative amounts from inception for: net losses, deficits, sales, expenses, and cash flows and supplementary data.
Choice "a" is correct, per the rule shown above.
Choice "b" is incorrect. Current amounts are shown as well as cumulative amounts. Choice "c" is incorrect. Cumulative amounts from inception are shown. Choice "d" is incorrect. A statement of cash flows is required.
QUESTION 102
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, accounting for these long-term contracts was switched from the completed-contract method to the percentage-of-completion method.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Switching from the completed-contract method of accounting to the percentage- ofcompletion method is a "change in accounting principle."
QUESTION 103
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Change in lives of fixed assets is a change in accounting estimate.
QUESTION 104
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.
Item to Be Answered
As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
List B (Select one)
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.
QUESTION 105
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Change in the computation of warranty costs from 3% of sales to 1% of sales is a change in accounting estimate.
QUESTION 106
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List B (Select one)
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.
QUESTION 107
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo changed from LIFO to FIFO to account for its finished goods inventory.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Change from LIFO to FIFO is a change in accounting principle.
QUESTION 108
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.
Item to Be Answered
Quo changed from LIFO to FIFO to account for its finished goods inventory.
List B (Select one)
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. A change in accounting principle should be shown in the retained earnings statement of the earliest year presented as an adjustment of the beginning balance. All prior year financial statements are recast.
QUESTION 109
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements. During 1993, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 1992, to 30%, and acquired a seat on Worth's board of directors. As a result of its increased investment, Quo changed its method of accounting for investment in Worth, Inc. from the cost method to the equity method.
List B
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. The equity method of accounting is applied retroactively when the investor has acquired 20% ownership. Prior to acquiring the ability to influence the investee, the cost method is proper. The retroactive restatement approach does not mean that this change is the correction of an error (which is now treated retroactively), a change in accounting principle (which is now treated retrospectively), or a change in accounting entity (which is now treated retrospectively). It just means that retroactive restatement is the proper treatment.
QUESTION 110
According to the FASB conceptual framework, what does the concept of reliability in financial reporting include?
A. Effectiveness. B. Certainty.
C. Precision.
D. Neutrality.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality, representational faithfulness and verifiability. Choices "a", "b", and "c" are incorrect, per the above.
QUESTION 111
According to the FASB conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
A. Consistency. B. Cost-benefit. C. Reliability.
D. Representational faithfulness.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The pervasive constraint on providing information in financial statements is that the cost should be outweighed by the benefit to be derived from providing the information. SFAC 1 para. 23, SFAC 2 para. 133
Choice "a" is incorrect. Consistency is an underlying concept for financial statements (and a secondary quality of accounting information), but it is not a constraint on providing information. SFAC 2 para. 120 Choice "c" is incorrect. Reliability is a primary quality of accounting information and an underlying concept for financial statements, but it is not a constraint on providing information. SFAC 2 para. 58 Choice "d" is incorrect. Representational faithfulness is an underlying concept for financial statements (as an element of reliability), but it is not a constraint on providing information. SFAC 2 para.
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:
A. Theneedforconservatism.
B. Reportingonmanagement'sstewardship. C. Generally accepted accounting principles. D. The needs of the users of the information.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting stem from the informational needs of the external users of the information. SFAC 1 para. 28 Choice "a" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97
Choice "b" is incorrect. Information concerning management's stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1 para. 50 Choice "c" is incorrect. Generally accepted accounting principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around.
QUESTION 56
According to the FASB conceptual framework, predictive value is an ingredient of:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes - No. Predictive value is an ingredient of relevance but not of reliability. Memorize:
Bud's relevance to "PFT."
Bud's reliability to "VRN."
QUESTION 57
According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is:
A. Recognition. B. Realization. C. Allocation. D. Matching.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Recognition.
According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is recognition.
QUESTION 58
Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealizedlossoninvestmentsinnoncurrentmarketableequitysecuritiesavailableforsale. B. Unrealizedlossoninvestmentsincurrentmarketableequitysecuritiesheldfortrading.
C. Loss on exchange of nonmonetary assets without commercial substance.
D. Loss on exchange of nonmonetary assets with commercial substance.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles.
Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and other non-owner changes in equity (such as changes in market value of marketable securities available for sale) that are included in comprehensive income for a period.
QUESTION 59
FASB's conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?
A. Option A
B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Financial capital - Financial capital. Financial capital maintenance is considered to be an element of both "currently reported net income" and "comprehensive income." This was a rare instance in which this type of information was asked on the exam.
QUESTION 60
According to the FASB conceptual framework, an entity's revenue may result from:
A. Adecreaseinanassetfromprimaryoperations.
B. Anincreaseinanassetfromincidentaltransactions. C. Anincreaseinaliabilityfromincidentaltransactions. D. Adecreaseinaliabilityfromprimaryoperations.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity's ongoing major operations, not from "incidental" operations. Choice "d" is correct. An entity's revenue may result from a decrease in a liability from primary operations.
QUESTION 61
Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Yes - No.
Yes - "Depreciation methods" should be disclosed in the "summary of significant accounting policies." No - Composition of fixed assets (or any other account) should not be disclosed in the "summary of significant accounting policies."
QUESTION 62
Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 1989 included the following expense and loss accounts:
One-half of the rented premises is occupied by the sales department. Brock's total selling expenses for 1989 are:
A. $480,000 B. $400,000 C. $370,000 D. $360,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Note: Only one-half of rent for office space was used for sales office. Choice "a" is correct. $480,000.
QUESTION 63
In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the following:
In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of:
A. $216,300 B. $215,400 C. $203,700 D. $201,900
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $201,900.
The various amounts from discontinued operations should be included in discontinued operations, not in revenues.
QUESTION 64
FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB:
A. StatementsofFinancialAccountingConcepts.
B. Emerging Issues T ask Force Consensus.
C. Technical Bulletins.
D. Statements of Financial Accounting Standards.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. FASB interpretations of the "statements of financial accounting standards" (SFAS) have the same authority as the FASB statements of financial accounting standards (SFAS), which by themselves determine GAAP.
Choice "a" is incorrect. Statements of financial accounting concepts (FAC's) have much less authority (fifth floor) and do not by themselves determine GAAP as is the case with SFASs and interpretations of SFASs.
Choice "b" is incorrect. Emerging issues task force (EITF) consensus is in the nature of a "third floor" authority. The EITF was established in 1984 to aid the FASB in identifying and implementing emerging issues before they become widespread and ultimately require action by the FASB. After discussing the issues and the relevant accounting pronouncements, the group can sometimes reach a consensus on an issue, in which case no action by the FASB is usually needed. Choice "c" is incorrect. Technical bulletins of the FASB (second floor) do not by themselves determine GAAP.
QUESTION 65
Which of the following accounting pronouncements is the most authoritative?
A. FASBStatementofFinancialAccountingConcepts. B. FASBTechnicalBulletin.
C. AICPA Accounting Principles Board Opinion.
D. AICPA Statement of Position.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The AICPA accounting principal board opinion (APBO) is a first floor (category A) of established accounting principle pronouncements. Choice "a" is incorrect. FASB statement of financial accounting concepts (SFAC or FACs) is a fifth floor (other accounting literature) category.
Choice "b" is incorrect. FASB technical bulletins are a second floor (category B) accounting pronouncement.
Choice "d" is incorrect. AICPA statement of position is a second floor (category B) accounting pronouncement.
QUESTION 66
Which of the following should be disclosed in a summary of significant accounting policies?
A. Management'sintentiontomaintainorvarythedividendpayoutratio.
II. Criteria for determining which investments are treated as cash equivalents. III. Composition of the sales order backlog by segment.
B. Ionly.
C. I and III.
D. II only.
E. IIandIII.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Il only.
The criteria for determining which investments are treated as "cash equivalents" is a method of accounting policies that needs to be disclosed in the summary of significant accounting policies. Choice "a" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an "accounting policy." Choices "b" and "d" are incorrect. Composition of the sales order backlog by segment is not an "accounting policy."
QUESTION 67
The summary of significant accounting policies should disclose the:
A. Maturitydatesofnoncurrentdebts.
B. Termsforconvertibledebttobeexchangedforcommonstock.
C. Concentration of credit risk of all financial instruments by geographical region. D. Criteria for determining which investments are treated as cash equivalents.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The criteria for determining which investments are treated as cash equivalents would be part of the summary of significant accounting policies. Choice "a" is incorrect. The maturity dates of noncurrent debts are required disclosures, but are not a part of the summary of significant accounting policies. Choice "b" is incorrect. The terms for convertible debt to be exchanged for common stock are not accounting policies; they would be disclosed separately. Choice "c" is incorrect. The concentration of credit risk of all financial instruments by geographic region may be a required segment disclosure, especially for financial institutions. However, it would not be a part of the summary of significant accounting policies.
QUESTION 68
The following costs were incurred by Griff Co., a manufacturer, during 1992:
What amount of these costs should be reported as general and administrative expenses for 1992?
A. $260,000 B. $550,000 C. $635,000 D. $810,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $260,000. General and administrative
"Freight-in" is part of "cost of goods sold." "Freight-out" is a "selling" expense.
Sales representative salaries is a selling expense.
QUESTION 69
Which of the following information should be included in Melay, Inc.'s 1992 summary of significant accounting policies? A. Property,plant,andequipmentisrecordedatcostwithdepreciationcomputedprincipallybythestraight-linemethod.
B. During1992,theDelaycomponentwassold.
C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
D. Future common share dividends are expected to approximate 60% of earnings.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "b" is incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting policy."
Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "presidents letter to shareholders."
QUESTION 70
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?
A. FASBTechnicalBulletins.
B. AICP A Accounting Interpretations.
C. FASB Statements of Financial Accounting Concepts.
D. AICPA Technical Practice Aids.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions, and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and FASB Technical Bulletins. Choice "b" is incorrect. AICPA Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the fourth floor.
Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice Aids are among the least authoritative of accounting literature (fifth floor).
QUESTION 71
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:
Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. Coffey prepares a multiple-step income statement for 1988.
Income from operations before income tax is:
A. $190,000 B. $200,000 C. $230,000 D. $240,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $240,000
The gain on debt extinguishment does not meet the unusual and infrequent criteria of APB 30 to be treated as an extraordinary item (per SFAS No. 145, extinguishments of debt are no longer automatically extraordinary), so it is included as part of income from continuing operations.
QUESTION 72
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:
Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. The hurricane is considered an unusual and infrequent event. Coffey prepares a multiple-step income statement for 1988.
Net income is:
A. $140,000 B. $161,000 C. $168,000 D. $200,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $140,000.
Net income is the "bottom line" amount after all has been considered on the income statement. Without showing all the line items as required for the income statement, the "bottom line" amount of $140,000 is derived as follows:
QUESTION 73
Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
A. Extraordinarygain,netofincometaxes.
B. Partofcontinuingoperations.
C. Gain from discontinued operations, net of income taxes. D. Reduction of the cost of the new warehouse.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Part of continuing operations.
Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. The amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount (FMV) of the fixed asset sold. Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax. Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations. Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.
QUESTION 74
Adam Corp. had the following infrequent transactions during 1989:
· A $190,000 gain on reacquisition and retirement of bonds. This material event is also considered unusual for Adam Corp. · A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at another location.
· A $90,000 loss on the abandonment of equipment.
In its 1989 income statement, what amount should Adam report as total infrequent net gains that are not considered extraordinary?
A. $100,000 B. $170,000 C. $360,000 D. $450,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Infrequent net gains not considered extraordinary include:
Choice "b" is correct. $170,000.
QUESTION 75
A transaction that is unusual, but not infrequent, should be reported separately as a(an):
A. Extraordinaryitem,netofapplicableincometaxes.
B. Extraordinaryitem,butnotnetofapplicableincometaxes.
C. Component of income from continuing operations, net of applicable income taxes.
D. Component of income from continuing operations, but not net of applicable income taxes.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a component of continuing operations, (gross) but not net of applicable income taxes. Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent." Choice "c" is incorrect, per "d" above.
QUESTION 76
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
· Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. · A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. · A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount of gain (loss) should be reported separately as a component
of income from continuing operations in 1990?
A. $260,000 B. $5,000
C. $(255,000) D. $(350,000)
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $5,000.
The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).
QUESTION 77
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
· Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. · A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. · A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in 1990?
A. $0
B. $5,000
C. $(90,000) D. $(350,000)
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $0.
Note: The sale of the steel transportation component resulted in a loss from discontinued operations and is reported after "income from continuing operations." The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).
QUESTION 78
In 1990, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a substantial increase in production costs caused when a major supplier's workers went on strike. Which of these losses should be reported as an extraordinary item?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Yes - No.
Rule: Losses arising from a company's first (and probably "last") "anti-trust" action are unusual and extraordinary and should be reported as an extraordinary item. Losses resulting from additional costs caused by a strike at a major supplier or even at one's own company are not extraordinary and should be disclosed as a separate component of "income from continuing operations."
QUESTION 79
Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The tax rate is 30%. The following data relate to the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income before extraordinary items?
A. $1,030,000 B. $780,000 C. $730,000 D. $0
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary items.
QUESTION 80
Which of the following should be reported as a prior period adjustment?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. No - Yes
Change in estimated lives of depreciable assets is a "change in estimate." They affect only current and future periods (not "prior periods," not retained earnings). Change from unaccepted principle to accepted principle is an example of an error of a prior period that should be reported as a "prior period adjustment."
QUESTION 81
On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the double declining balance method for both financial statement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method for financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31, 20X5, was $560,000. If the straight-line method had been used, the accumulated depreciation at December 31, 20X5, would have been $420,000. Pell's enacted income tax rate for 20X6 and thereafter is 30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the straight-line method should be:
A. $98,000debit. B. $98,000credit. C. $140,000 credit. D. $0.
Correct Answer: D Section: (none)
Explanation Explanation/Reference:
Explanation:
Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. And, certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 82
Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The cumulative effect of a change in accounting principle is now reported as an adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative effect. When making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively. A change from LIFO to weighted average, there is no such impracticability. The cumulative effect is computed and the change is handled retrospectively.
Choices "a", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 83
Goddard has used the FIFO method of inventory valuation since it began operations in 1987. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of 1990. The following schedule shows year-end inventory balances under the FIFO and weighted- average methods:
What amount, before income taxes, should be reported in the 1990 retained earnings statement as the cumulative effect of the change in accounting principle?
A. $5,000decrease. B. $3,000decrease. C. $2,000 increase. D. $0.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $5,000 decrease.
The cumulative effect of change in accounting principle is determined as of the beginning of the year of change if comparative financial statements are not presented. In this case, the year of change is 1990, so the cumulative effect is the difference in inventory as of the end of 1989. [Note that inventory is a balance sheet item, so the change is based on the balances at the end of the last year the prior method was used. Had this question shown annual income statement amounts of cost of goods sold, we would have had to look at all the past years in the aggregate.] This will allow us to arrive at the adjustment to obtain the amount of retained earnings that would have been reported at the beginning of the period of change if the new accounting principle had been used for all prior periods.
QUESTION 84
In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?
A. Effectofafailuretoprovideforuncollectibleaccountsinthepreviousperiod.
B. Effectofadecreaseintheestimatedusefullifeofdepreciableequipment.
C. Cumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects. D. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error.
Choice "c" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
QUESTION 85
While preparing its 1991 financial statements, Dek Corp. discovered computational errors in its 1990 and 1989 depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:
Dek's 1991 net income is correctly reported at $180,000. Which of the following amounts should be reported as prior period adjustments and net income in Dek's 1991 and 1990 comparative financial statements?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. 1990 ($25,000) $125,000 1991 -- 180,000
Because these are comparative financial statements, prior period adjustments require retroactive treatment for the years presented. Because 1989 is not presented, the 1989 correction is shown as a prior period adjustment of $25,000 to retained earnings statement of 1990.
QUESTION 86
Tack, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 1991?
A. $190,000 B. $178,000 C. $150,000
D. $122,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $178,000.
QUESTION 87
On January 2, 1991, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in 1990 but did not do so. Air's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, Air should adjust the beginning balance of its retained earnings by a:
A. $230,000credit. B. $230,000debit. C. $300,000 credit. D. $370,000 debit.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $230,000 debit.
QUESTION 88
For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes - Yes.
The effective income tax rates for operations for the full year should reflect anticipated foreign tax rates and available tax planning alternatives. In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.
QUESTION 89
An inventory loss from a permanent market decline of $360,000 occurred in May 1989. Cox Co. appropriately recorded this loss in May 1989 after its March 31, 1989 quarterly report was issued. What amount of inventory loss should be reported in Cox's quarterly income statement for the three months ended June 30, 1989?
A. $0
B. $90,000 C. $180,000 D. $360,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $360,000 inventory loss reported for the quarter ended 6-30-89. Rule: Inventory losses from "permanent market declines" are recognized in the interim period, incurred and later, if they "turn-around," are recognized as gains in a subsequent interim period only to the extent of previously reported losses. Rule: "Temporary" market declines need not be recognized at interim when a "turn-around" can reasonably be expected to occur before the end of the fiscal year. Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the quarter interim period incurred (6-30-89).
QUESTION 90
Advertising costs may be accrued or deferred to provide an appropriate expense in each period for:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Yes - Yes.
Advertising costs may be accrued or deferred to provide an appropriate expense in each period for both "interim" and "year-end" financial reporting.
QUESTION 91
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes - Yes.
Rule: Volume variances that are planned or expected to be absorbed by the end of the year should be deferred at interim whether favorable or unfavorable.
QUESTION 92
An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year. However, in the third quarter the inventory's market price recovery exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should:
A. Decreaseinthefirstquarterbytheamountofthemarketpricedeclineandincreaseinthethirdquarterbytheamountofthedecreaseinthefirstquarter.
B. Decreaseinthefirstquarterbytheamountofthemarketpricedeclineandincreaseinthethirdquarterbytheamountofthemarketpricerecovery. C. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter.
D. Not be affected in either the first quarter or the third quarter.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Market price declines should be recognized in the interim period in which decline is judged permanent and later, if they "turn around," are recognized as gains in subsequent periods only to the extent of previously reported losses.
Choice "b" is incorrect. Recovery should not cause an increase in inventory value above original cost. Choice "c" is incorrect. The recovery should be recognized to the extent of the first quarter write down.
Choice "d" is incorrect.
QUESTION 93
The following information pertains to Aria Corp. and its divisions for the year ended December 31, 1988:
Aria and all of its divisions are engaged solely in manufacturing operations. Aria has a reportable segment if that segment's revenue exceeds:
A. $264,000 B. $260,000 C. $204,000 D. $200,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. $260,000 represents a reportable segment (10% of total sales):
Rule: To be significant enough to report on, a segment must be at least 10% of:
1. Combined revenues (whether intersegment or unaffiliated customers), or 2. Operating income, or
3. Identifiable assets.
QUESTION 94
Hyde Corp. has three manufacturing divisions, each of which has been determined to be a reportable segment. In 1989, Clay division had sales of $3,000,000, which was 25% of Hyde's total sales, and had operating costs of $1,900,000, as reported to the CFO. In 1989, Hyde incurred operating costs of $500,000 that were not directly traceable to any of the divisions. In addition, Hyde incurred corporate interest expense of $300,000 in 1989. In reporting segment information, what amount should be shown as Clay's operating profit for 1989?
A. $875,000 B. $900,000 C. $975,000 D. $1,100,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $1,100,000 operating profit for clay. Rule: Operating profit by segments is based on the measure of profit reported to the "chief operating decision maker."
Allocations for general operating costs and interest, etc., should not be made solely for purposes of segment disclosures.
QUESTION 95
YIV, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated customers. YIV should report segment financial information for each division meeting which of the following criteria?
A. Segmentoperatingprofitorlossis10%ormoreofconsolidatedprofitorloss.
B. Segmentoperatingprofitorlossis10%ormoreofcombinedoperatingprofitorlossofallcompanysegments. C. Segment revenue is 10% or more of combined revenue of all the company segments.
D. Segment revenue is 10% or more of consolidated revenue.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Segment revenue is 10% or more of combined revenue of all the company segments. Rule: To be significant enough to report on, a segment must be at least 10% of:
1. Combined revenues (whether intersegment or affiliated customers) or 2. Operating profit (of all segments not having an operating loss), or
3. Identifiable assets.
Choice "a" is incorrect. Rule is 10% of "operating profit," not "consolidated profit." Choice "b" is incorrect. Segments with "operating losses" are not combined with those having "operating profits" in determining a segment.
Choice "d" is incorrect. "Consolidated revenue" would not include "intersegment revenue." Rule is "combined revenue," not "consolidated revenue."
QUESTION 96
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31, 1991, were $40,000,000.
In its 1991 financial statements, Grum should disclose major customer data if sales to any single customer amount to at least:
A. $300,000
B. $1,500,000 C. $4,000,000 D. $5,000,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $5,000,000 (10% x $50,000,000 revenue). If revenue from a single external customer is 10% or more of total revenue, then the company should disclose this fact, the total amount of revenue from the customer, and the segment or segments reporting the revenues. The identity of the customer need not be disclosed.
QUESTION 97
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31, 1991, were $40,000,000.
Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of Cott's total revenues and total assets as follows:
Which of these business segments are deemed to be reportable segments?
A. Ebononly.
B. EbonandFaironly.
C. Ebon, Fair, and Gel only. D. Ebon, Fair, Gel, and Hak.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Rule: A segment must be at least 10% of:
1. Combined revenues (whether intersegment or unaffiliated customers), or 2. Operating income (of all segments not having an operating loss), or
3. Identifiable assets.
Choice "d" is correct. Ebon, Fair, Gel, and Hak, since all four companies meet at least one of the criteria.
QUESTION 98
Chester Corp. was a development stage enterprise from its inception on September 1, 1987 to December 31, 1988. The following information was taken from Chester's accounting records for the above period:
For the period September 1, 1987 to December 31, 1988, what amount should Chester report as net loss?
A. $50,000 B. $150,000 C. $350,000 D. $450,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to DeC. 31, 1988. Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
QUESTION 99
Deficits accumulated during the development stage of a company should be:
A. Reportedasorganizationcosts.
B. Reportedasapartofstockholders'equity.
C. Capitalized and written off in the first year of principal operations.
D. Capitalized and amortized over a five year period beginning when principal operations commence.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Deficits accumulated during the development stage of a company should be reported as a part of stockholders' equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales & expenses (part of I/S), cumulative statement of cash flows and supplementary "shareholders equity." Choices "a", "c", and "d" are incorrect, per the rule above.
QUESTION 100
Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to footnote disclosures:
A. Only.
B. Andexpenserecognitionprinciplesonly.
C. And revenue recognition principles only.
D. And revenue and expense recognition principles.
Correct Answer: A Section: (none)
Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to (more extensive) footnote disclosures only.
Choices "b", "c", and "d" are incorrect. Revenue and expense recognition principles are the same. Rule: Development stage enterprises should present financial statements in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales and expenses (as part of the income statement), cumulative statement of cash flows and supplementary "shareholders equity."
QUESTION 101
A statement of cash flows for a development stage enterprise:
A. Isthesameasthatofanestablishedoperatingenterpriseand,inaddition,showscumulativeamountsfromtheenterprise'sinception. B. Showsonlycumulativeamountsfromtheenterprise'sinception.
C. Is the same as that of an established operating enterprise, but does not show cumulative amounts from the enterprise's inception.
D. Is not presented.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Rule: Development stage enterprises should present financial statements in accordance with GAAP and make additional disclosures such as cumulative amounts from inception for: net losses, deficits, sales, expenses, and cash flows and supplementary data.
Choice "a" is correct, per the rule shown above.
Choice "b" is incorrect. Current amounts are shown as well as cumulative amounts. Choice "c" is incorrect. Cumulative amounts from inception are shown. Choice "d" is incorrect. A statement of cash flows is required.
QUESTION 102
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, accounting for these long-term contracts was switched from the completed-contract method to the percentage-of-completion method.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Switching from the completed-contract method of accounting to the percentage- ofcompletion method is a "change in accounting principle."
QUESTION 103
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Change in lives of fixed assets is a change in accounting estimate.
QUESTION 104
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.
Item to Be Answered
As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.
List B (Select one)
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.
QUESTION 105
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Change in the computation of warranty costs from 3% of sales to 1% of sales is a change in accounting estimate.
QUESTION 106
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List B (Select one)
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.
QUESTION 107
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo changed from LIFO to FIFO to account for its finished goods inventory.
List A (Select one)
A. Changeinaccountingprincipal.
B. Changeinaccountingestimate.
C. Correction of an error in previously presented financial statements. D. Neither an accounting change nor an accounting error.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Change from LIFO to FIFO is a change in accounting principle.
QUESTION 108
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.
Item to Be Answered
Quo changed from LIFO to FIFO to account for its finished goods inventory.
List B (Select one)
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. A change in accounting principle should be shown in the retained earnings statement of the earliest year presented as an adjustment of the beginning balance. All prior year financial statements are recast.
QUESTION 109
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:
· Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.
· Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992. · Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements. During 1993, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 1992, to 30%, and acquired a seat on Worth's board of directors. As a result of its increased investment, Quo changed its method of accounting for investment in Worth, Inc. from the cost method to the equity method.
List B
A. Cumulativeeffectapproach.
B. Retroactiveorretrospectiverestatementapproach. C. Prospective approach.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. The equity method of accounting is applied retroactively when the investor has acquired 20% ownership. Prior to acquiring the ability to influence the investee, the cost method is proper. The retroactive restatement approach does not mean that this change is the correction of an error (which is now treated retroactively), a change in accounting principle (which is now treated retrospectively), or a change in accounting entity (which is now treated retrospectively). It just means that retroactive restatement is the proper treatment.
QUESTION 110
According to the FASB conceptual framework, what does the concept of reliability in financial reporting include?
A. Effectiveness. B. Certainty.
C. Precision.
D. Neutrality.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality, representational faithfulness and verifiability. Choices "a", "b", and "c" are incorrect, per the above.
QUESTION 111
According to the FASB conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
A. Consistency. B. Cost-benefit. C. Reliability.
D. Representational faithfulness.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The pervasive constraint on providing information in financial statements is that the cost should be outweighed by the benefit to be derived from providing the information. SFAC 1 para. 23, SFAC 2 para. 133
Choice "a" is incorrect. Consistency is an underlying concept for financial statements (and a secondary quality of accounting information), but it is not a constraint on providing information. SFAC 2 para. 120 Choice "c" is incorrect. Reliability is a primary quality of accounting information and an underlying concept for financial statements, but it is not a constraint on providing information. SFAC 2 para. 58 Choice "d" is incorrect. Representational faithfulness is an underlying concept for financial statements (as an element of reliability), but it is not a constraint on providing information. SFAC 2 para.