PassMaster Questions - Financial 1
The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a: Gain / Loss a. Yes / Yes b. Yes / No c. No / No d. No / Yes
Choice "a" is correct, Yes - Yes. A material transaction that is "infrequent in occurrence" but not "unusual in nature" should be presented separately as a component of "income from continuing operations" when the transaction results in a gain or loss.
In Yew Co.'s 1992 annual report, Yew described its social awareness expenditures during the year as follows: "The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human-service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company's commitment to the environment, the Company spent $100,000 to redesign product packaging." What amount of the above should be included in Yew's income statement as charitable contributions expense? a. $310,000 b. $390,000 c. $410,000 d. $490,000
Choice "a" is correct. Charitable contributions include amounts the company gave to recognized charities. This includes: Youth and education programs $ 250,000 Health ($140,000 - $80,000) 60,000 Total $ 310,000 Note: Of the $140,000, employees gave $80,000, and the company $60,000. Redesigning packaging is not a contribution to a charity. Choice "b" is incorrect. The company gave only $60,000 of the $140,000. Employees gave $80,000. Choice "c" is incorrect. Redesigning packaging is not a contribution to a charity. Choice "d" is incorrect. The company gave only $60,000 of the $140,000. Employees gave $80,000. Redesigning packaging is not a contribution to a charity
According to the FASB conceptual framework, which of the following relates to both relevance and reliability? a. Comparability. b. Feedback value. c. Verifiability. d. Timeliness
Choice "a" is correct. Comparability and consistency are secondary qualities of both relevance and reliability. SFAC 2 para. 111-122 Choice "b" is incorrect. Feedback value is a key characteristic of relevance only. Choice "c" is incorrect. Verifiability is a key characteristic of reliability only. Choice "d" is incorrect. Timeliness is a key characteristic of relevance only
An extraordinary gain should be reported as a direct increase to which of the following? a. Net income. b. Comprehensive income. c. Income from continuing operations, net of tax. d. Income from discontinued operations, net of tax.
Choice "a" is correct. Extraordinary items are reported as a component of net income, after income from continuing operations and discontinued operations. Choice "b" is incorrect. An extraordinary gain (or loss) only indirectly affects comprehensive income as a component of net income. Choice "c" is incorrect. Extraordinary items are reported net of tax after income from continuing operations and discontinued operations. Choice "d" is incorrect. Extraordinary items are reported net of tax after income from continuing operations and discontinued operations
The following costs were incurred by Griff Co., a manufacturer, during 1992: Accounting and legal fees $ 25,000 Freight-in 175,000 Freight-out 160,000 Officers salaries 150,000 Insurance 85,000 Sales representatives salaries 215,000 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
Choice "a" is correct. General and administrative expenses include: Accounting and legal $ 25,000 Officers salaries 150,000 Insurance 85,000 Total $ 260,000 Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are selling expenses. Choice "b" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "c" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "d" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 1994. The cumulative effect of this change should be reported in Lore's 1994 financial statements as a: a. Prior period adjustment resulting from the correction of an error. b. Prior period adjustment resulting from the change in accounting principle. c. Component of income before extraordinary item. d. Component of income after extraordinary item
Choice "a" is correct. The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings. Choice "b" is incorrect. Cash basis reporting is not an accounting principle under accrual accounting principles. Thus, the change from cash basis is not reported as a change in accounting principle. In addition, changes in accounting principle are not prior period adjustments; instead, they are treated retrospectively. Choices "c" and "d" are incorrect. Correction of prior period errors has no effect on the current year's income statemen
During 1994, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows: FIFO Weighted-average January 1, 1994 $71,000 $77,000 December 31, 1994 79,000 83,000 Orca's income tax rate is 30%. Orca should report the cumulative effect of this accounting change as a(n): a. Adjustment to beginning retained earnings. b. Component of income from continuing operations. c. Extraordinary item. d. Component of income after extraordinary items
Choice "a" is correct. The cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings. Choice "b" is incorrect. The cumulative effect of a change in accounting principle is now presented as a separate category on the retained earnings statement and is not a component of net income. Choice "c" is incorrect. Extraordinary items are unusual and infrequent in nature. Extraordinary items have nothing to do with changes in accounting principle. Choice "d" is incorrect. A change in accounting principle affects retained earnings, not the income statement, under SFAS No. 154
At December 31, 1998, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, 1997, $300,000 of which were to be written off in 1998 and the remainder in 1999. Off-Line's income tax rate is 30%. In its 1998 financial statements, what amount should Off-Line report as cumulative effect of change in accounting principle? a. $0 b. $200,000 c. $350,000 d. $500,000
Choice "a" is correct. When a change in accounting principle is considered inseparable from a change in estimate, the change is handled as a change in estimate - prospectively. No cumulative effect adjustment is made. Choices "b", "c", and "d" are incorrect since no cumulative effect adjustment is made
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported? a. As a component of income from continuing operations. b. By restating the financial statements of all prior periods presented. c. As a correction of an error. d. By footnote disclosure only
Choice "a" is correct. When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations. Under SFAS No. 154, this type of change is now called a change in accounting estimate affected by a change in accounting principle. Choice "b" is incorrect. Restatement of all prior periods is the retroactive accounting treatment that is applied to the correction of an error and the retrospective accounting treatment given to changes in accounting principle. However, a change in accounting principle that is inseparable from the effect of a change in accounting estimate is now treated as a change in accounting estimate. Choice "c" is incorrect. Correction of an error is given retroactive treatment as a prior period adjustment to retained earnings with restatement of prior periods. This is not the treatment appropriate for the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate. Choice "d" is incorrect. While footnote disclosure is always appropriate for an accounting change, such disclosure alone is never the appropriate accounting treatment.
An extraordinary item should be reported separately on the income statement as a component of income: Before discontinued operations segment of a business of a / Net of income taxes a. Yes / Yes b. Yes / No c. No / No d. No / Yes
Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income statement as a component of income: Yes - net of income taxes. No - after (not before) "discontinued operations of a segment of a business."
According to the FASB conceptual framework, which of the following statements conforms to the realization concept? a. Equipment depreciation was assigned to a production department and then to product unit costs. b. Depreciated equipment was sold in exchange for a note receivable. c. Cash was collected on accounts receivable. d. Product unit costs were assigned to cost of goods sold when the units were sold
Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83. Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no realization associated with the assignment Choice "c" is incorrect. The realization concept is integral to accounting for revenues and expenses and is not connected to collection of receivables. Choice "d" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an example of matching. There is no realization associated with this assignment.
If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current: a. Retained earnings statement after net income but before dividends. b. Retained earnings statement as an adjustment of the opening balance. c. Income statement after income from continuing operations and before extraordinary items. d. Income statement after income from continuing operations and after extraordinary items.
Choice "b" is correct. The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance. Choice "a" is incorrect. The adjustment is before net income, not after net income. Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not affect the income statement
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
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. 63
According to the FASB conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called: a. Feedback value. b. Predictive value. c. Representational faithfulness. d. Reliability.
Choice "b" is correct. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value. Forecasting is predicting. Choice "a" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not feedback value. Feedback value enables decision makers to confirm prior expectations or to adjust or correct the decisions made previously. Choice "c" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not representational faithfulness. Representational faithfulness is the agreement between financial reporting and the resources or events represented. Choice "d" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not reliability. Reliability is the combination of neutrality, representational faithfulness, and verifiability
Vane Co.'s trial balance of income statement accounts for the year ended December 31, 2002, included the following: Debit Credit Sales $575,000 Cost of sales $240,000 Administrative expenses 70,000 Loss on sale of equipment 10,000 Sales commissions 50,000 Interest revenue 25,000 Freight out 15,000 Loss on early retirement of long-term debt (unusual & infrequent item) 20,000 Uncollectible accounts expense 15,000 Totals $420,000 $600,000 Other information Finished goods inventory: January 1, 2002 $400,000 December 31, 2002 $360,000 Vane's income tax rate is 30%. In Vane's 2002 multiple-step income statement, what amount should Vane report as income from continuing operations? a. $126,000 b. $129,500 c. $140,000 d. $147,000
Choice "c" is correct, $140,000. Net of credits over debits ($600-420) $180,000 add: extraordinary item - loss on early retirement of long-term debt 20,000 Income from continuing operations 200,000 "Net of tax" rate (100%-30% tax) 70% Income after income taxes from continuing operations $140,000
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 1993? a. $0 b. $30,000 c. $50,000 d. $80,000
Choice "c" is correct. $50,000 The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated. An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change 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. The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment. Choices "a", "b", and "d" are incorrect, per the above explanation
Which of the following statements best describes an operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement? a. The emerging issues task force must approve a discussion memorandum before it is disseminated to the public. b. The exposure draft is modified per public opinion before issuing the discussion memorandum. c. A new statement is issued only after a majority vote by the members of the FASB. d. A new FASB statement can be rescinded by a majority vote of the AICPA membership
Choice "c" is correct. A new statement from the FASB is issued only after a majority vote of the members of the FASB. Choice "a" is incorrect. There is no necessity for the EITF to approve a discussion memorandum (presumably the question means a discussion memorandum of the FASB statement itself and not an EITF statement) before it is disseminated to the public. Choice "b" is incorrect. There is no necessity for an exposure draft to be modified per public opinion before issuing the discussion memorandum (a question can be raised here as to "what" discussion memorandum"). Exposure drafts are quite/most often modified before they are issued as FASB statements, but they do not have to be. Whether they are or are not modified is a function of whether the FASB thinks they should be modified, partly due to the public comments that have been received. Choice "d" is incorrect. There is no way to rescind a new FASB statement, although, in reality, a FASB statement can be rescinded by the issuance of a new statement on the same subject. However, even if there was a way to rescind a new FASB statement, it would not be by a majority vote of the AICPA membership, but by a majority vote of the members of the FASB.
During a period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about: a. Both enterprise performance and management performance. b. Management performance but not directly provide information about enterprise performance. c. Enterprise performance but not directly provide information about management performance. d. Neither enterprise performance nor management performance
Choice "c" is correct. Financial reporting, and especially financial statements, usually cannot and do not separate management performance from enterprise performance. Financial reporting provides information about an enterprise during a period when it was under the direction of a particular management but does not directly provide information about that management's performance. SFAC 1 para. 53
In September 1996, Koff Co.'s operating plant was destroyed by an earthquake. Earthquakes are rare in the area in which the plant was located. The portion of the resultant loss not covered by insurance was $700,000. Koff's income tax rate for 1996 was 40%. In its 1996 income statement, what amount should Koff report as extraordinary loss? a. $0 b. $280,000 c. $420,000 d. $700,000
Choice "c" is correct. For a loss to be reported as an extraordinary loss, the event causing the loss must be both unusual in nature and infrequent in occurrence. The earthquake in this case does meet these criteria so the loss is reported net of income tax effect as an extraordinary loss of $420,000 (60% of the total $700,000 loss). APB 30.11, .19-.26 Choice "a" is incorrect. Review the criteria for reporting an extraordinary loss. Choice "b" is incorrect. This is the tax effect of the loss. Review your calculations. Choice "d" is incorrect. It is not appropriate to report the full loss as an extraordinary loss
What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises. b. The meaning of "Present fairly in accordance with generally accepted accounting principles." c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles.
Choice "c" is correct. Statements of Financial Accounting Concepts are intended to establish the objectives and concepts that the Financial Accounting Standards Board will use in developing standards of financial accounting and reporting. SFAC 1 para. 3 Choice "a" is incorrect. The Statements of Financial Accounting Concepts do not specify financial accounting standards prescribing accounting procedures or practices. SFAC 1 para. 3 Choice "b" is incorrect. Auditing standards develop the meaning of "Present fairly in accordance with generally accepted accounting principles." Choice "d" is incorrect. The hierarchy of sources of generally accepted accounting principles is determined by GAAP.
On December 2, 20X1, Flint Corp.'s board of directors voted to discontinue operations of its frozen food division and to sell the division's assets on the open market as soon as possible. The division reported net operating losses of $20,000 in December and $30,000 in January. On February 26, 20X2, sale of the division's assets resulted in a gain of $90,000. Assuming that the frozen foods division qualifies as a component of the business and ignoring income taxes, what amount of gain/loss from discontinued operations should Flint recognize in its income statement for 20X2? a. $0 b. $40,000 c. $60,000 d. $90,000
Choice "c" is correct. The $60,000 gain from discontinued operations would be reported in Flint's 20X2 income statement. The operating loss for January would offset the gain from disposal in February, and the net amount would be reported as a gain (in this case) from discontinued operations. The operating losses for December would have been reported in Flint's 20X1 income statement. Choice "a" is incorrect per the above. It would be correct if all of the gains and losses were included in 20X1 instead of 20X2. However, gains and losses from discontinued operations are included in the year they occur. Choice "b" is incorrect. It includes the operating loss for December, 20X1 in with the 20X2 amounts. Choice "d" is incorrect. It ignores the January operating loss. Operating losses are included in gain/loss from discontinued operations, along with impairment losses and gains/losses on disposal
Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis? a. Going concern. b. Periodicity. c. Monetary unit. d. Economic entity.
Choice "c" is correct. The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis. Choice "a" is incorrect. The going concern assumption has nothing to do with money per se. The going concern assumption presumes that an entity will continue to operate in the foreseeable future. Choice "b" is incorrect. The periodicity has nothing to do with money per se. The periodicity assumption is that economic activity can be divided into meaningful time periods. Choice "d" is incorrect. The economic entity assumption has nothing to do with money per se. The economic entity assumption is that economic activity can be accounted for when considering an identifiable set of activities
How should the effect of a change in accounting estimate be accounted for? a. By restating amounts reported in financial statements of prior periods. b. By reporting pro forma amounts for prior periods. c. As a prior period adjustment to beginning retained earnings. d. In the period of change and future periods if the change affects both.
Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future) periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is incorrect. Restating prior years' financial statements is required when comparative financial statements are shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in accounting principle. Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect prior periods
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Assume the transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently. Gold should report the: a. Net effect of the two transactions as an extraordinary gain. b. Net effect of the two transactions in income before extraordinary items. c. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond transaction as an extraordinary loss. d. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in income before extraordinary items.
Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds (an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not a "refinancing" (where one would sell new bond debt to buy back old bond debt outstanding). The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp. transaction is a loss in "income before extraordinary items." Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted. Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the provisions of APB Opinion No. 30
On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X3, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500 during 20X3. Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements as a(n): a. Cumulative effect of a change in accounting principle of $2,000 in its income statement. b. Adjustment to beginning retained earnings of $2,000. c. Cumulative effect of a change in accounting principle of $1,400 in its income statement. d. None of the above.
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. The cumulative effect treatment on the income statement was the treatment of most changes in accounting principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now given to changes in accounting principle by SFAS No. 154. However a change in depreciation method is no longer accounted for as a change in accounting principle. Choices "a", "b", and "c" are incorrect, per the above explanation.
The cumulative effect of a change in accounting estimate should be shown separately: a. On the income statement above income from continuing operations. b. On the income statement after income from continuing operations and before extraordinary items. c. On the retained earnings statement as an adjustment to the beginning balance. d. It should not be recorded separately on any financial statement.
Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary. Choices "a", "b", and "c" are incorrect, per the above explanation
In the hierarchy of generally accepted accounting principles, APB Opinions have the same authority as AICPA: a. Statements of Position. b. Industry Audit and Accounting Guides. c. Issues Papers. d. Accounting Research Bulletins.
Choice "d" is correct. AICPA Accounting Research Bulletins, FASB Standards, FASB Interpretations, FASB Staff Positions, FASB Statement 133 Implementation Issues, and APB Opinions and Interpretations are the most authoritative sources of generally accepted accounting principles. Choice "a" is incorrect. AICPA Statements of Position, AICPA Accounting and Auditing Guides, and FASB Technical Bulletins are secondary sources of generally accepted accounting principles. Choice "b" is incorrect. AICPA Statements of Position, AICPA Accounting and Auditing Guides, and FASB Technical Bulletins are secondary sources of generally accepted accounting principles. Choice "c" is incorrect. AICPA Issues Papers and Practice Bulletins, FASB Concepts Statements, and other authoritative pronouncements are tertiary sources for generally accepted accounting principles.
A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of income: a. After cumulative effect of accounting changes and before discontinued operations of a segment of a business. b. After cumulative effect of accounting changes and after discontinued operations of a segment of a business. c. Before cumulative effect of accounting changes and before discontinued operations of a segment of a business. d. After discontinued operations of a segment of a business.
Choice "d" is correct. An extraordinary item (a transaction that is both "unusual in nature" and "infrequent in occurrence") should be reported separately as a component of income after discontinued operations of a segment of a business. The cumulative effect of a change in accounting principle is shown on the retained earnings statement. This is why memorizing the mnemonic "idea" is so important
What is the underlying concept that supports the immediate recognition of a contingent loss? a. Substance over form. b. Consistency. c. Matching. d. Conservatism.
Choice "d" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. Recognition of a contingent loss is the recording of an amount representing uncertainty and risk in a business situation. SFAC 2, SFAS 5 para. 82 Choice "a" is incorrect. The substance over form concept presumes that the transaction form may not dictate the accounting treatment. Choice "b" is incorrect. Consistency is conformity from period to period with unchanging policies and procedures. SFAC 2 Choice "c" is incorrect. The matching principle dictates that expenses be matched with the related revenues generated or the time period in which the expense is incurred and known. SFAS #5 cites matching as the one concept supporting the immediate recognition of a contingent loss, but it is not the primary underlying concept. SFAS 5 para. 76
A material loss should be presented separately as a component of income from continuing operations when it is: a. An extraordinary item. b. A cumulative effect type change in accounting principle. c. Unusual in nature and infrequent in occurrence. d. Not unusual in nature but infrequent in occurrence
Choice "d" is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations. Choice "a" is incorrect. Extraordinary items are shown net of tax in a separate section of the income statement after income from continuing operations. Choice "b" is incorrect. Cumulative effects of changes in accounting principle are now shown net of tax as an adjustment to the opening balance of retained earnings in the retained earnings statement. This treatment is called retrospective application. There really are no longer any cumulative effect types of changes in accounting principle. The cumulative effect is merely how the amount of the change is measured. Choice "c" is incorrect. This is the definition of an extraordinary item
Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements: a. Do not include nontaxable revenues and nondeductible expenses in determining income. b. Include detailed information about current and deferred income tax liabilities. c. Contain no disclosures about capital and operating lease transactions. d. Recognize certain revenues and expenses in different reporting periods
Choice "d" is correct. Income tax-basis financial statements recognize events when taxable income or deductible expenses are recognized on the entity's tax return. Non-taxable income and non-deductible expenses are shown on the financial statement and included in the determination of income (and become M-1 adjustments to arrive at taxable income). Please Note: This question appeared in the releases for 1999 in FARE; however, it may also apply to OCBOA financial statements discussed in the Auditing textbook. The question did not apply well to any FARE CSO line item, so we included it here so that you could read the explanation and learn from it.
According to the FASB conceptual framework, which of the following situations violates the concept of reliability? a. Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits. b. Financial statements are issued nine months late. c. Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results. d. Financial statements include property with a carrying amount increased to management's estimate of market value.
Choice "d" is correct. Management's estimate of market value lacks verifiability, which is a component of reliability. SFAC 2 para. 89 Choice "a" is incorrect. Communicating data on segments to analysts does not violate the concept of reliability. Choice "b" is incorrect. Issuing financial statements nine months late violates timeliness, which is a component of relevance, not reliability. SFAC 2 para. 56 Choice "c" is incorrect. Neglecting to report results of new projects violates full disclosure, not reliability
In April 30, 20X4, Deer Corp. approved a plan to dispose of a component of its business. For the period January 1 through April 30, 20X4, the component had revenues of $500,000 and expenses of $800,000. The assets of the component were sold on October 15, 20X4 at a loss. In its income statement for the year ended December 31, 20X4, how should Deer report the component's operations from January 1 to April 30, 20X4? a. $500,000 and $800,000 should be included with revenues and expenses, respectively, as part of continuing operations. b. $300,000 should be reported as part of the loss on disposal of a component and included as part of continuing operations. c. $300,000 should be reported as an extraordinary loss. d. $300,000 should be reported as a loss from operations of a component and included in loss from discontinued operations.
Choice "d" is correct. Once the decision has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period reported on, and any gain or loss from the disposal, should be reported separately from continuing operations, net of tax. In this question, the component was classified as held for sale and was sold in the same year. Thus, in 20X4, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss from discontinued operations. The loss on disposal would be reported as part of that loss from discontinued operations also. Choice "a" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a part of discontinued operations Choice "b" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a loss from operations of a component and included in loss from discontinued operations. Choice "c" is incorrect. The results of discontinued operations are not reported as an extraordinary item
Which of the following is true regarding the comparison of managerial to financial accounting? a. Managerial accounting is generally more precise. b. Managerial accounting has a past focus and financial accounting has a future focus. c. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness. d. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them
Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes. Choice "a" is incorrect. Financial accounting is generally more precise. Choice "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on reporting past results. Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial statement users (including the characteristic of relevance), while the emphasis of managerial accounting is providing timely information to management decision makers
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is: a. Allocation. b. Matching. c. Realization. d. Recognition.
Choice "d" is correct. Recognition is the process of recording an item in the financial statements of an entity. SFAC 5 para. 6 Choice "a" is incorrect. Allocation is the accounting process of assigning or distributing an amount according to a plan or a formula. SFAC 6 para. 142 Choice "b" is incorrect. Matching of costs and revenues is simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. SFAC 6 para. 146 Choice "c" is incorrect. Realization is the process of converting noncash resources and rights into money. SFAC 6 para. 143
Arpco, Inc., a for-profit provider of healthcare services, recently purchased two smaller companies and is researching accounting issues arising from the two business combinations. Which of the following accounting pronouncements are the most authoritative? a. AICA Statements of Position. b. AICPA Industry and Audit Guides. c. FASB Statements of Financial Accounting Concepts. d. FASB Statements of Financial Accounting Standards
Choice "d" is correct. Since Arpco is a for-profit provider of healthcare services, it is covered under normal GAAP. Thus, the most authoritative pronouncements are the FASB Statements of Financial Accounting Standards (SFAS). Choice "a" is incorrect. AICPA Statements of Position are not the most authoritative pronouncement for almost anything (other than for some issues that only they cover). They are normally "merely" the opinion of the AICPA. Choice "b" is incorrect. AICPA Industry and Audit Guides are not the most authoritative pronouncement for almost anything (other than for some issues that only they cover). Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are not authoritative pronouncements except where they have been incorporated by reference into an SFAS. They are the basis on which SFAS can be constructed
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on: a. Generally accepted accounting principles. b. Reporting on management's stewardship. c. The need for conservatism. d. The needs of the users of the information.
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. Generally accepted accounting principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around. 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. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97
On November 1, 20X2, Smith Co. contracted to dispose of an industry segment. Throughout 20X2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is projected on final disposition, how much of the operating losses should be included in the loss from discontinued operations reported in Smith's 20X2 income statement? I. Operating losses for the period January 1 to October 31, 20X2. II. Operating losses for the period November 1 to December 31, 20X2. III. Estimated operating losses for the period January 1 to February 28, 20X3. a. II only. b. II and III only. c. I and III only. d. I and II only
Choice "d" is correct. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Projected operating losses are not anticipated and accrued. Choice "a" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "b" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "c" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses.
According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory? a. Historical cost. b. Replacement cost. c. Net realizable value. d. Present value of future cash flows
Choice "d" is correct. The present value of future cash flows is used to measure long-term receivables or payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows. SFAC 5 para. 67 Choice "a" is incorrect. Historical cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "b" is incorrect. Replacement (or current) cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "c" is incorrect. Net realizable value can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory
Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism during a particular reporting period? a. Capitalization of research and development costs. b. Accrual of a contingency deemed to be reasonably possible. c. Reporting investments with appreciated market values at market value. d. Reporting inventory at the lower of cost or market value
Choice "d" is correct. The rule of conservatism states that revenues and gains should be recognized when the earnings process is complete, but that expenses and losses should be expensed immediately. Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when market is lower than cost in the period the loss is sustained, rather than when the inventory is sold, consistent with the rule of conservatism. Choice "a" is incorrect. Because the future benefits of R&D costs are questionable, these cost should be expensed immediately, consistent with the rule of conservatism and the matching principle. Choice "b" is incorrect. The rule of conservatism only requires the accrual of "probable" losses. The accrual of a reasonably possible loss is not required and the accrual of any contingent gain, whether probable, reasonably possible, or remote, is prohibited. Choice "c" is incorrect. The reporting of marketable securities with appreciated values at market value requires the recording of a gain on the asset before the gain is realized. This contradicts the rule of conservatism, but is allowed because fair value is a more relevant measure of the value of marketable securities
