FAR
A company has the following items on its year-end trial balance: Net Sales $500,000 Common Stock 100,000 Insurance Expense 75,000 Wages 50,000 Cost of Goods Sold 100,000 Cash 40,000 Accounts Payable 25,000 Interest Payable 20,000 What is the company's gross profit?
$400,000 Gross Profit is calculated as sales less cost of goods sold. Net Sales $500,000 Cost of Goods Sold (100,000)
Clear's Co.'s trial balance has the following selected accounts: Cash (includes $10,000 in bond sinking $50,000 fund for long-term bond payable) Accounts receivable 20,000 Allowance for doubtful accounts 5,000 Deposits received from customers 3,000 Merchandise inventory 7,000 Unearned rent 1,000 investment in trading securities 2,000 What amount should Clear report as total current assets in its balance sheet
$64,000 Explanation: $40,000 in cash (not related to sinking fund) $15,000 net assets ($20,000 in gross A/R less $5,000 in the allowance account). $7,000 merchandise inventory 2,000 in investment in trading securities
For a company to obtain a retail business license in a particular state, the company is required to pay the stated the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as:
A non-current Asset Explanation: Paying the equivalent of three months of sales taxes on projected retails sales in satisfaction of the licensing requirement that is fully refundable after five years is a noncurrent asset. Because the transaction is expected to result in a realization of cash in the future, the payment is an asset. It is a noncurrent asset because the cash will be realized at a time beyond the normal operating business cycle or one year.
For the company to obtain a retail business in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as:
A noncurrent asset
Gar, Inc.'s trial balance reflected the following liability account balances at December 31, Year 1: Accounts payable $19,000 Bonds payable, due Year 2 34,000 Deferred tax liability 4,000 Discount on bonds payable 2,000 Dividends payable on 2/15/Year 2 5,000 Income tax payable 9,000 Notes payable, due 01/19 Year 3 The deferred tax liability is based on temporary differences that will reverse in Year 3 and Year 4. In Gar's December 31, Year 6, balance sheet, the current liabilities total was:
$65,000 Accounts Payable $19,000 Bonds payable, due Year 2 34,000 Discount on bonds payable (2,000) Dividends payable, due 02/15 Year 2 5,000 Income tax payable 9,000 Total current liabilities $65,000 Explanation: The current liabilities consist of all payable due within one year. The deferred income tac payable of $4,000 is reported as non*current. The notes payable due 1/19 Year 3 after one year and are considered a long-term liability.
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 warehouse 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 Under U.S. GAAP, what amount of gain should Ocean report as a separate component of income from continuing operations?
$730,000 Replacement Cost $1,100,000 Less: Deductible clause (50,000) Insurance proceeds $1,050,000 Less: Cost to dismantle old warehouse (20,000) $1,030,000 Less: Current carrying amount (300,000) Gain on insurance settlement of casualty $730,000
According to the FASB conceptual framework, an entity's revenue may result from:
A decrease in an liability from primary operations.
In Baer Food Co.'s single step income statement, the section titled "Revenues" consisted of the following: Net sales revenue $187,000 Loss from operations of component (2,400) (net of $1,200 tax effect) Gain on disposal of component 14,400 (net of $7,200 tax effect) 12,000 Interest revenue 10,200 Gain on sale of equipment 4,700 Total Revenues $213,900 In the revenues section of its income statement, Baer Food should have reported total revenues of:
$201,900 Net sales revenue (of goods & services) $187,000 Interest revenue (and dividends earned) 10,200 Gain on sale of equipment 4,700 Total revenues $201,900 Explanation: The various amounts from discontinued operations should be included in discontinued operations, not in revenues.
Coffey Corp's trial balance of Income Statement Accounts for the year ended December 31 as follows: Debit Credit Net Sales $1,600,000 Costs of Goods Sold $960,000 Administrative Expenses 235,000 Interest Expense 150,000 Gain on debt extinguishment 10,000 Totals $1,370,000 $1,610,000 Coffey uses U.S. GAAP and has an income tax rate of 30%. The gain on debt extinguishment is considered as usual and recurring part of Coffey's operations. Coffey prepares a multi-step income statement. Income from continuing operations before income tax is:
$240,000 Net Sales $1,600,000 Cost of Goods Sold (960,000) Selling expenses (235,000) Administrative expenses (150, 000) Interest expense (25,000) Gain on debt extinguishment 10,000
In Dart Co's Year 2 single-step income statement, as prepared by Dart's controller, the section titled "Revenues" consisted of the following: Sales $250,000 Purchase discounts $3,000 Recovery of accounts written off $10,000 Total Revenues = $263,000
$250,000 Explanation: The single-step income statement will include in total revenues all sales of goods, services, and rentals. Purchase discounts are not included in revenue, but instead reduce cost of goods sold. The recovery of accounts written off does not hit the revenue account.
The following costs were incurred by Griff Co., a manufacturer: Accounting and legal fees: $25,000 Freight-in: 175,000 Freight-out: 160,000 Officers salaries: 150,000 Insurance 85,000 Sales Rep. Salaries 215,000 What amount of these costs should be reported as general and administrative expenses?
$260,000 Accounting and Legal Fees $25,000 Officers Salaries 150,000 Insurance 85, 000
The following items were among those that were reported on Lee Co.'s income statement for the year ended December 31: Legal and audit fees $170,000 Rent for office space 240,000 Interest on inventory floorplan 210,000 Loss on abandoned data processing 35,000 equipment used in operations
$290,000 Legal and audit fees $170,000 Rent for admin office (1/2 x $240,000) 120,000 Total general and admin expenses $290,000 Explanation: 1/2 of the office space of $240,000 was used by the sales department, which should be allocated to "selling expenses"
In Yew's annual report, Yew described it's social awareness 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?
$310,000 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 Of the $140,000, employees gave $80,000 =, and the company $60,000. Redesigning packaging is not a contribution to a charity.
On August 1, Metro Inc. leased a luxury apartment unit to Klum. The parties signed a one-year lease, beginning September 1, for a $1,000 monthly rent payable on the first day of the month. The normal lease term for this property is three year. At the August 1 signing sate, Metro collected $540 as a nonrefundable fee for allowing Klum to sign a one-year lease, and $1,000 rent for September. Klum has made timely payments each month, but prepaid January's rent on December 20. In Metro's income statement for the year ended December 31, rent revenue should be report as:
$4,180 Explanation: Sign-up fee [($540/12 months} x 4 mo] Monthly rent ($1,000 x 4 mos.)
Under U.S. GAAP, 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 - Yes Loss - Yes Explanation: Under U.S. GAAP, a material that is "infrequent in occurrence" and/or "unusual in nature" should be presented separately as a component of "income from continuing operations" when the transaction results in a gain or loss
Financial information provided in general purpose financial reports does not include information about:
How effectively and efficiently the entity's shareholders have discharged their responsibility to use the entity's resources. Explanation: Shareholders do not have a responsibility to use the entity's resources.
Concept Industries is preparing its income statement for the year ended December 31. In preparing the statement, the line item displayed before considering income tax effects is:
Income (loss) from operations Explanation: The lien item "Income (loss) from operations" is shown gross (before taxes). The line item is an intermediate line item displayed on a multiple step income statement that represents the difference between gross margin and operating expenses such as selling and general and administrative expenses.
Under U.S GAAP, a gain that is both unusual and infrequent should be reported as which of the following?
Income from continuing operations. Explanation: Under U.S GAAP, items that are both unusual and infrequent are reported as a separate component of income from continuing operations.
According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of reporting concept?
Replacement Cost Explanation: Replacement cost is defined as the amount of cash of its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost.
The primary purpose of not-for-profit organization's statement of activities is to provide relevant information to its:
Resource providers Explanation: Regardless of whether an entity is a for-profit or not-for-profit, the objective of financial reporting is to provide information about the entity that is useful to primary users in making decisions about resources to provide to the entity.
Which of the following is not defined in FASB Statement of Financial Accounting Concepts Number 7 as one of the five elements of present value (or economic value) measurement used to establish the value of assets or liabilities using cash flow information?
Risk Tolerance of Management Explanation: SFAC defines the following elements of present value measurement: - The Price for Bearing Uncertainty - Expectations about Timing Variations of Future Cash Flows. - Other Factors ( Liquidity Issues and Market Imperfections) - Time Value of Money (The Risk-Free Rate of Interest) - Estimate of Future Cash Flow
At October 31, Dingo, Inc. had cash account at three different banks. One account balance is segregated soley for November 15 payment into a bond sinking fund. A second account, used for branch operations is overdrawn. The third account, used for regular corporate operation, has a positive balance. How should these accounts be reported in Dingo's October 31 classified balance sheet?
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. Explanation: The segregated bank account (at bank #1) to be used to pay a current maturity of a long-term bond sinking fund debt should be classified as a noncurrent asset, not "cash".
A contract contains multiple service-related performance obligations. All of the following criteria below will lead to the treatment of each service as distinct obligation except:
The services are all similar in nature and provided in the same manner. Explanation: When the services are all very similar in nature and can be provided in a similar manner, this would indicate that the services can be combined into a single performance obligation. When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation can be split into distinct components.
Jersey Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Jersey sells appliances on installment contracts, but all service contracts must be paid in full at the time of the sale. Collections received for service contracts should be recorded as an increase in a:
Unearned service revenue account. Explanation: Collections received for service contracts should be recorded as an increase in an unearned service revenue account.
Materiality and relevance are both defined by:
What influences or makes a difference to a decision maker. Explanation: The accountant's determination of materiality and relevance is based in professional judgement and is affected by the needs of those who will be using the financial statements to make decisions.
Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31 included the following expense and loss accounts: Accounting and legal fees $120,000 Advertising 150,000 Freight out 80,000 Interest 70,000 Loss on sale of long-term investment 30,000 Officers' salaries 225,000 Rent for office space 220,000 Sales salaries and commissions 140,000 One half of the rented premises is occupied by the sales department. Brock's total selling expenses are:
$480,000 Advertising $150,000 Freight Out 80,000 Office Space 110,000 (1/2 x $220,000) Sales salaries and commissions 140,000
Macklin Co. entered into service agreement with Heath Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was singed. The balance was to be paid at a rate of $10,000 per year. starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Mackling recognize as revenue in the current year?
$50,000 Explanation: Macklin Co. should report revenue from initial fees when all performance obligations of the sale have been satisfied. Macklin Co. will recognize revenue the entire initial fee in the current year.
XYZ Communications, manufacturer of smart cellular phones, had to write down the value of it's unsold smartphone inventory by $20,000,000. XYZ had to decrease the price of it's smartphones due to sudden unexpected competition from a new competitor's smartphone, leading to a drop in it's profit margins and the inventory write-down. How should XYZ account for the $20,000,000 loss in its quarterly multistep income statement?
Income from continuing operations - unusual or infrequent items section. Explanation: The loss is material and probably infrequent occurring.
The Statement of Financial Accounting Concepts (SFAC) that requires a statement of comprehensive income is:
SFAC 5, dealing with recognition and measurement
Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as expense:
in the period incurred
The premium on a three-year insurance policy expiring on December 31, Year 3 was paid in total on January 2, Year 1. If the company has a six-month operating cycle, then on December 31, Year 1 the prepaid insurance reported as a current asset would be for:
12 months Explanation: The minimum operating cycle for purposes of reporting a "prepaid" current asset is one year.
On April 15, Year 3 Landon Co. signed a contract that entailed providing a piece of scientific equipment for $215,000 to Jacobs Inc., with delivery expected to occur on August 31, Year 3. Per the terms of the contract, Jacobs will pay Landon for the full amount on July 31, Year 3. Landon's cost to produce the equipment is $175,000. Assuming delivery occurs as expected, the August 31 journal entry for Landon will involve which of the following debits/credits?
Debit to unearned sales revenue of $215,000. Cash - Debit $215,000 215,000 Unearned Sales Revenue - Credit 215,000 Unearned Sales Revenue - Debit Sales Revenue - Credit COGS - Debit $175,000 Inventory - Credit $175,000
An automobile dealer sells service contracts. The contracts stipulate that the dealer will perform specific repairs on covered vehicles. The contracts vary in length from 12 to 36 months. Do the following increase when service contracts are sold?
Deferred Revenue - Yes Service Revenue - No Explanation: When service contracts are sold, deferred revenue increases, but service revenue does not increase until services are performed.
Which of the following statements is correct regarding deferred revenues recorded by a company that provides services to customers?
Deferred revenue is a liability until the service has been performed.
After speaking to the company's sales manager, a customer placed a large order. The customer has no immediate need for the products, so the customer asked the company to wait 60 days before delivering the products. In this case, the company should recognize revenue for the sale when the order is:
Delivered to the customer. Explanation: Delivery to the customer ensures that control of the inventory is transferred to the customer, and as a result, the company has satisfied the performance obligation and can record revenue.
A country club charges its members $15,000 per year for full rights to use the club, which includes to dining facilities facilities, tennis courts, two golf courses, and the swimming pool. The club operates with a fiscal year ending June 30. The annual fee is automatically collected from all the member on July 1 of each year and covers the upcoming period July 1-June 30. With 350 members as of June 30, Year 3, what amount of Year 4 revenue will be reflected on the interim Year 4 income statement through December 31?
$2,625,000 Explanation: In regard to the earning the annual fee collected by the country club, performance is satisfied over time; revenue will be recognized evenly throughout the covered period. $15,000x350 members = $5,250,000. This amount, received on July 1, covers the upcoming 12 months. For an income statement produced as of December 31, Year 4 this will represent six months of Year 4 revenue. $5,250,000x6/12 = $2,625,000
A company's activities for Year 2 included the following: Gross sales $3,600,000 Cost of goods sold 1,200,000 Selling and administrative expense 500,000 Adjustment for a prior-year understatement 59,000 of amortization expense Sales returns 34,000 Gain on sale of available-for-sale securities 8,000 Gain on disposal of a discontinued business segment 4,000 Unrealized gain on available-for-sale debt securities 2,000 The company has a 30 percent effective income tax rate. What is the company's net income for Year 2?
$1,314,600 Net Sales ($3,566,000 - $34,000 sales returns) COGS ($1,200,000) Gross Profit 2,366,000 Selling Administrative (500,000) Operating Income 1,866,000 Other Income (gain on sale) 8,000 Income from continuing 1,874,000 operations Income tax expense (562,200) = $1,874,000 x 30% Income before discontinued $1,311,800 operations Gain from discontinued segment (after tax) 2,800 ($4,000 x (1-30%) Net Income $1,314,600
The following trial balance of Trey Co. at December 31 has been adjusted except for income tax expense: Debit Credit Cash $550,000 Accounts receivables, net 1,650,000 Prepaid taxes 300,000 Accounts Payable $120,000 Common Stock 500,000 Additional paid-in capital 680,000 Retained Earnings 630,000 Foreign currency translation adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000 $5,530,000 $5,530,000 Additional Information - During the year, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statements and income tax income, and Trey's tax rate is 30%. - Included in accounts receivable is $500,000 due from customer. Special terms granted to this customer require payment in equal seimannual installments of $125,000 every April 1 and October 1. In Trey's December 31 balance sheet, what amount should be reported as total current assets?
$1,950,000 Cash $550,000 Accounts Receivable ($1,650,000-$250,000) Prepaid Tax ($300,000-$300,000) Total Current Assets $1,950,000
Adam Corp. uses U.S GAAP and had the following infrequent transaction during Year 1: - 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 Year 1 income statement, what amount should Adam report in income from continuing operations?
$100,000 Gain on reacquisition and retirement of bonds $190,000 Loss on abandonment of equipment (90,000) Total $100,000 Explanation: The $260,000 is a part of discontinued operations. The other two items are reported in income from continuing operations as separate items assuming both are material. The loss on abandonment of equipment is treated like a sale. Disposal of a component of a business is a discontinued operation.
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31 as follows: Debit Credit Net sales $ 1,600,000 Cost of goods sold $ 960,000 Selling expenses 235,000 Administrative expenses 150,000 Interest expense 25,000 Hurricane Damage 40,000 Gain on debt extinguishment 10,000 Totals $1,410,000 $1,610,000 Coffey uses U.S. GAAP and has an income tax rate of 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. The hurricane is considered to be an unusual and infrequent event. Coffey prepares a multiple-step income statement. Net income is:
$140,000 Income from continuing operations $200,000 (credit-debits on Trial Balance) Less: Income taxes (30%) (60,000) Net Income $140,000
The FASB amends the Accounting Standards Codification through the issuance of:
Accounting Standards Update Explanation: The FASB updates the Accounting Standards (ASC) for new U.S. GAAP issued by the FASB and for any changes to existing GAAP, with Accounting Standards Update.
Changes to existing authoritative GAAP for nonissuer, nongovernmental entities are communicated by the Financial Accounting Standards Board through the issuance of:
Accounting Standards Update Explanation: When the FASB announces a change to existing authoritative GAAP, it is done through an Accounting Standards Update, which details the specific changes/updates made to the Accounting Standards Codification.
Accrual accounting involves accruals and deferrals. Which of the following best describes accruals and deferrals?
Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments. Explanation: Accruals occur when revenue or expense was incurred for a given period but nothing has been booked in the financial statements; the cash receipt or payment will occur in the future, but revenue or expense needs to be book prior to cash event. Deferrals represent situations in which the cash receipt or payment already occurred, but the revenue or expense applies to a later period.
Under the U.S. GAAP which of the following would be included in income from continuing operations on the income statement? I. A large loss from a foreign currency transaction. II. A union strike that shuts down operations for three months. III. A foreign government takes possession of a company's only plant. IV. Damage to a factory due to an earthquake in an area that had not previously experienced earthquakes.
All of the Above.
When the total consideration for a contract with multiple embedded obligations reflects a discount, the most appropriate way to assign that discounts is to:
Allocate it proportionally to all obligations within the contract. Explanation: Any discounts that exists in a contract based on the total value of the contract versus the stand-along value of each obligation summed within the contract should be allocated proportionally across all obligations within a contract. Example: If there is a contract for $240,000 with two obligations one valued at $200,000 and the other valued at $100,000, the $60,000 discount will be assigned $40,000 to the first obligation and $20,000 to the second.
Which of the following statements best describes an operating procedure for issuing FASB Accounting Standards Update?
An Accounting Standards Update is issued only after a majority vote by the members of the FASB
According to the FASB conceptual framework, which of the following is an essential characteristic of an asset?
An asset provides future benefits.
When a CPA is applying the enhancing qualitative characteristics of useful financial information, it is important for the CPA to remember that:
Applying the enhancing qualitative characteristics qualitive characteristics is an iterative process that does not follow a prescribed order. Explanation: As described in SFAC No. 8 "Conceptual Framework for Financial Reporting" the enhancing qualitative characteristic are comparability, verifiability, timeliness and understandability. The application of these characteristics is a process that does not follow a specific or prescribed order.
Interim financial reporting should be viewed primarily in which of the following ways?
As reporting for integral part of an annual period.
Lenser Construction is the builder on a new neighborhood of 12 residential homes. All the homes are built in a similar style and footprint, and potential buyers are not given the authority to provide significant customization requests. Construction on the neighborhood begins on July 1, Year 1. A verbal agreement to purchase on the the homes occurs between the Baker family and Lenser on December 15, Year 1. How and when can Lenser recognize the revenue from the sale of the Baker house?
At the point in time , on May 18 Year 2 Explanation: Revenue recognition for the Baker house will occur at a point in time, as the homes in this neighborhood would be considered "homogeneous" because of the lack of significant customizations and the fact that if a potential sale fell through, Lenser could realistically find another buyer. The Baker will officially be entitled to the benefits of the new home on the closing date when title officially transfers, which will be on May 18, Year 2.
Which of the following situations would require that the seller recognize revenue over time rather than at a point in time?
Benefits are received by the buyer as the seller performs. Explanation: If the buyer is benefitting as the seller performs per the terms of the contract, this is an indication that revenue should be recognized over time as opposed to at a point in time. The buyer having legal title to an asset indicates control, which is in line with recognizing revenue at a point in time. When rewards and risks of ownership remain with the seller, revenue would not be recognized. When physical possession transfers to the buyer, this is indicative of control, which implies revenue recognition at a point in time.
How are amendments incorporated into the FASB Accounting Standards Codification?
By releasing an Accounting Standards update. Explanation: Any change to the Codification must be made through the issuance of an Accounting Standards Update. This is required when a new accounting standard is established or if there is a change to an existing accounting standard.
How should unearned rent that has already paid by tenants for the next eight months of occupancy be reported in a landlord's financial statements?
Current Liability Explanation: Cash received in advance of earning the revenue is reported as a liability, specifically unearned revenue. Because the liability will be satisfied within a year from the financial statements date, it will be reported as a current liability. Note that the question is asked from the landlord's perspective. If the question was asked from the tenant's perspective, it would be reported as a current asset (prepaid rent).
According to the FASB conceptual framework, predictive value is an ingredient of:
Relevance - Yes Faithful Representation - No Explanation: Predictive value is an ingredient of relevance, but not faithful representation.
According to the FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of useful information with one of its components?
Relevance and materiality Explanation: Under the FASB conceptual framework, relevance is a fundamental qualitative characteristic, and materiality is a component of relevance.
For $50 a month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue under U.S. GAAP.
Evenly over the contract as the services are performed. Explanation: This is the GAAP - Accrual basis of accounting.
Which of the following authoritative source of U.S. GAAP?
FASB Accounting Standards Codification Explanation: FASB Accounting Standards is the single source of authoritative nongovernmental U.S. GAAP.
A U.S. public company needs guidance in accounting for an reporting a complex derivative transaction that it entered into with a European subsidiary. This company is most likely to find the appropriate guidance in the:
FASB Accounting Standards Codification. The FASB Accounting Standards Codification is the single source of U.S. GAAP. U.S. public companies are required to follow U.S. GAAP.
Which of the following characteristics means that information is reasonably free from error and bias?
Faithful Representation Explanation: Faithful representation requires the financial information to be complete, neutral, and free from error.
According to the FASB conceptual framework, neutrality is an ingredient of:
Faithful representation Explanation: Neutrality, which is freedom from bias in selection or presentation, is an ingredient of faithful representation.
According to the FASB conceptual framework, useful information must exhibit the fundamental qualitative characteristics of:
Faithful representation and relevance.
Which of the following should be included in general and administrative expenses?
Interest - No Advertising - No Explanation: Interest expense is classified as a separate line item on the income statement. Advertising is classified as a selling expense.
A company's year-end comparative of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000 and all other assets decreased by $65,000, which of the following statements is correct regarding the current-year change in the company's stockholder's equity?
It decreased by $57,000. Explanation: Assets=Liabilities + Stockholder's Equity. If cash increased by $40,000 and other assets decreased by $65,000, the net change in assets is a decline of $25,000. Liabilities increased by $32,000.
Each of the following is correct regarding the Financial Accounting Standards Board, Except:
It develops principles and attributes that allow organizations to understand the necessary elements to ensure a robust system of internal control. Explanation: The FASB is not responsible for prescribing standards related to internal control.
Which of the following is true regarding the comparison of managerial to financial accounting?
Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting follow them. Explanation: Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not to be followed for (internal) managerial accounting purposes.
BCA Tech, a new company, produces webcams and other computer-related software products and deliver over 500,000 webcams to be distributed evenly over the next months. If the company would like to use an output method to recognize revenue during the first year of the contract, which of the following methods would be the most appropriate?
Milestones achieved. Explanation: Milestones achieved are an example of an output method used to recognize revenue.
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?
Monetary Unit Explanation: The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis.
Scott Corporation sold a fixed asset used for operations for greater than its carrying amount. Scott should report the transaction in the income statement using the:
Net concepts, showing the total gain as part of continuing operations, not net income taxes. Explanation: The transaction resulted in a gain, which should be reported using the net concept (proceeds less carrying amount). This gain resulted in the recognition of an asset not in the ordinary course of business, but it did not qualify as part of discontinued operations.
At the beginning of the current year, Hayworth. sold equipment with a two-year service contract for a single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth's current-year financial statements?
Net income will be oerstated. Explanation: Net income is overstated because Hayworth should not report the entire $20,000 as sales revenue during the current year. Under the revenue recognition rule, revenue cannot be recognized until the performance obligation has been satisfied. Of the $20,000 received by Hayworth, $18,000 is for the equipment and $2,000 is for the two-year service contract. When the $20,000 was received, it should have been recorded with the following journal entry: Cash - Debit $20,000 Sales Revenue - Credit $18,000 Deferred Revenue - Credit $2,000 As services are provided on the contract over the two years, deferred revenue will be debited and sales revenue will be credited.
On December 31, Brooks Co. decided to end operations and dispose of its assets within 3 months. At December 31, the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in Brooks' December 31 balance sheet.
Net realizable value Explanation: Net realizable value is the appropriate measurement basis for equipment included in Brooks Dec. 31 balance sheet because of the decision to end operations (3 months) and quickly dispose of its assets.
According to the FASB conceptual framework, what does the conceptual of faithful representation include?
Neutrality Explanation: The concept of faithful representation includes neutrality, completeness, and freedom from error.
On January 1, Year 1 Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for five years. Brecon's Year 1 multi-step income statement should include:
One-fifth of the cabinet costs in selling, general, and administrative expenses. Explanation: One-fifth of the cabinets costs (depreciation expense) should be included in selling, general, and administrative expenses for Year 1.
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):
Part of continuing operations.
Grown, Inc. sold 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(n):
Part of continuing operations. Explanation: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. The amount of gain or loss is equal to the difference between the proceeds from the sale and the carrying amount of the fixed asset sold.
According to the FASB conceptual framework, to be relevant, information should have which of the following?
Predictive Value Explanation: To be relevant, information should have predictive value and or confirming value, and must be material.
According to the FASB conceptual framework, the quality of information that helps users forecast future outcomes is:
Predictive value Explanation: The quality of information that helps users forecast future outcomes is predictive value. Forecasting is predicting.
Franklin Corp. sells, installs and services telephone systems to businesses. Franklin includes two years of customer training and support as part of its sales contract. In a contract with a new customer who pays in full at the time of equipment installation, when would Franklin recognize revenue for the work under U.S. GAAP?
Proportionately as separate contract elements are performed. Explanation: When sales contract includes multiple products or services, the fair value of the contract must be allocated to the separate contract elements. Revenue is recognized as each element is completed.
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is:
Recognition
According to the FASB conceptual framework, the primary users of the financial reports include all of the following, except:
Regulators Explanation: The FASB conceptual framework indicates that regulators are not considered to be primary users.
Users of financial statements rely upon the data displayed in the financial statements frequently rely upon the data displayed in the financial statements to predict future financial outcomes. Financial accounting concepts refer to the characteristics of accounting information that provides predictive value to users as the quality of:
Relevance Explanation: The fundamental qualitative characteristic of useful accounting information described by the term "relevance" contemplates predictive value, confirming value, and materiality.
According to the FASB conceptual framework, completeness is an ingredient of:
Relevance - No Faithful Representation - Yes Explanation: Completeness is an ingredient of faithful representation. Other ingredients of faithful representation include neutrality and freedom from error.
In Year 10, hail damaged several of Toncan Co.'s vans, Hailstorms are frequently caused similar damage to Toncan's vans. Over the years, Toncan had saved money by not buying hail insurance an either paying for repairs, or selling damaged vans and then replacing them. In Year 10, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan's Year 10 financial statements under U.S. GAAP?
The actual Year 10 hail damage loss in continuing operations, with no separate disclosure. Explanation: Actual hail damage must be reported. Because the hailstorms are frequent, the damage is not considered unusual. Thus, the damages would be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence.
The objectives of financial reporting stem from which of the following sources?
The needs of the external users of the information. Explanation: The objective of financial reporting is to provide financial information that is useful to the primary users of financial reports. The primary users are external users, such as creditors, lenders, and investors.
Conceptually, interim financial statements can be described as emphasizing which of the following enhancing qualitative characteristics?
Timeliness Explanation: Interim financial statements emphasize timeliness by providing financial information based on actual performance to date and estimates prior to year end.
Which of the following characteristics enhances relevance and faithful representation?
Timeliness Explanation: Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented.
What is the primary objective of financial reporting?
To provide information that is useful for economic decision making. Explanation: The objective of financial reporting is to provide financial information about the reporting entity that is useful to the primary users of general-purpose financial reports. This information will help the users make decisions about providing resources to the reporting entity.
Which of the following defined equity as it relates to a business entity?
Total assets less total liabilities Explanation: The basic accounting equation states that Assets = Liabilities + Stockholder's Equity. By definition, equity is the residual interest in the assets of a company that remains after deducting its liabilities.