FAR Basic Theory and Financial Reporting MCQs

43. 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 sale. Collections received for service contracts should be recorded as an increase in a a. Deferred revenue account. b. Sales contracts receivable valuation account. c. Stockholders' valuation account. d. Service revenue account.

a. Deferred revenue account. (a) The revenues from service contracts should be recognized on a pro rata basis over the term of the contract. This treatment allocates the contract revenues to the period(s) in which they are earned. Since the sale of a service contract does not culminate in the completion of the earnings process (i.e., does not represent the seller's performance of the contract), payments received for such a contract should be recorded initially in a deferred revenue account.

82. On July 1, year 2, a company decided to adopt IFRS. The company's first IFRS reporting period is as of and for the year ended December 31, year 2. The company will present one year of comparative information. What is the company's date of transition to IFRS? a. January 1, year 1. b. January 1, year 2. c. July 1, year 2. d. December 31, year 2.

a. January 1, year 1. (a) The requirement is to identify the transition date. Answer (a) is correct because the "date of transition to IFRS" is defined as the beginning of the earliest period for which an entity presents full comparative information under IFRS.

According to the Private Company Decision Making Framework, which of the following is not a potential differential factor between public business entities and private companies potentially necessitating the need for alternative private company guidance? a. Number of company investments. b. Number of primary users. c. Accounting resources. d. Ownership and capital structure

a. Number of company investments. (a) Potential differential factors between public business entities and private companies include: (1) number of primary users and their access to management; (2) investment strategies of primary users; (3) ownership and capital structure; (4) accounting resources and (5) learning about new financial reporting guidance.

5. Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during year 2. The cumulative effect of this change should be reported in Lore's year 2 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

a. Prior period adjustment resulting from the correction of an error. A change in accounting principle is a change from one generally accepted principle to another generally accepted principle. A correction of an error is the correction of a mathematical mistake, a mistake in the application of an accounting principle, an oversight or misuse of existing facts, or a change from an unacceptable principle to a generally accepted one. Therefore, a switch from the cash basis (unacceptable) to the accrual basis (acceptable) is a correction of an error reported as a prior period adjustment.

13. What is the concept that supports the issuance of interim reports? a. Relevance. b. Materiality. c. Consistency. d. Faithful representation

a. Relevance. (a) Relevant financial information is capable of making a difference if it has predictive value, confirmatory, value, or both. Predictive value requires information to be used to predict future outcomes. Confirmatory value requires that information either confirm or change prior expectations. An interim report provides both predictive value and confirmatory value because it provides a basis to forecast future earnings and it provides feedback about prior performance expectations.Therefore, interim reporting is relevant

23. Which of the following is not an objective of using present value in accounting measurements? a. To capture the value of an asset or a liability in the context of a particular entity. b. To estimate fair value. c. To capture the economic difference between sets of future cash flows. d. To capture the elements that taken together would comprise a market price if one existed.

a. To capture the value of an asset or a liability in the context of a particular entity. (a) According to SFAC 7, the objective of using present value in an accounting measurement is to capture, to the extent possible, the economic difference between sets of future cash flows. The objective of present value, when used in accounting measurements at initial recognition and fresh start measurements, is to estimate fair value. Stated differently, present value should attempt to capture the elements that taken together would comprise a market price, if one existed, that is fair value. Value-in-use and entity-specific measurements attempt to capture the value of an asset or liability in the context of a particular entity. An entity-specific measurement substitutes the entity's assumptions for those that marketplace participants would make.

26. On October 1, year 1, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, year 1, and the remaining 50,000 gallons were delivered on January 15, year 2. Payment terms were: 50% due on October 1, year 1, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during year 1? a. $75,000 b. $150,000 c. $225,000 d. $300,000

b. $150,000 (b) Generally, sales revenue is recognized at the date of delivery, because that generally is the time at which a sale has occurred. At that point the two criteria for revenue recognition were met; the revenue is (1) realized or realizable and (2) it is earned (SFAC 6). Therefore, the amount of sales revenue recognized in year 1 is $150,000 (50,000 × $3 = $150,000).

26. On October 1, year 1, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, year 1, and the remaining 50,000 gallons were delivered on January 15, year 2. Payment terms were: 50% due on October 1, year 1, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during year 1? a. $75,000 b. $150,000 c. $225,000 d. $300,000

b. $150,000 (b) Generally, sales revenue is recognized at the date of delivery, because that generally is the time at which a sale has occurred. At that point the two criteria for revenue recognition were met; the revenue is (1) realized or realizable and (2) it is earned (SFAC 6). Therefore, the amount of sales revenue recognized in year 1 is $150,000 (50,000 × $3 = $150,000). insurance premium paid on 7/1/Y2 ($3,200) would be partially expired (6/12) by 12/31/Y2. The remainder (6/12 × $3,200 =$1,600) would be a prepaid expense at year-end. The entire advance rental payment ($2,000) is a prepaid expense at 12/31/ Y2 because it applies to year 3. Therefore, total 12/31/Y2prepaid expenses are $3,600. Prepaid insurance ($3,200 × 6/12) $1,600 Prepaid rent 2,000 Total prepaid expenses $3,600

3. Tack, Inc. reported a retained earnings balance of $150,000 at December 31, year 1. In June year 2, Tack discovered that merchandise costing $40,000 had not been included in inventory in its year 1 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, year 2? a. $190,000 b. $178,000 c. $150,000 d. $122,000

b. $178,000 A correction of an error is treated as a prior period adjustment, recorded in the year the error is discovered, and is reported in the financial statements as an adjustment to the beginning balance of retained earnings. The adjustment is reported net of the related tax effect. In this case the net of-tax effect is $28,000 [$40,000 - ($30% × $40,000)]. This should increase beginning retained earnings because the understatement of 12/31/Y1 inventory would have resulted in an overstatement of cost of goods sold and therefore an understatement of retained earnings. Thus, the adjustment 1/1/Y2 retained earnings is $178,000 ($150,000 + $28,000). Tack's journal entry to record the adjustment is Inventory 40,000 Retained earnings 28,000 Taxes payable 12,000

7. On January 2, year 2, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in year 1 but did not do so. Air's reported income tax expense would have been $70,000 lower in year 1 had it properly accrued this deferred compensation. In its December 31, year 2 financial statements, Air should adjust the beginning balance of its retained earnings by a a. $230,000 credit. b. $230,000 debit. c. $300,000 credit. d. $370,000 debit.

b. $230,000 debit. The failure to record the $300,000 of deferred compensation expense in year 1 is considered an error. The profession requires that the correction of an error be treated as a prior period adjustment. Thus, the requirement is to determine the retroactive adjustment that should be made to the beginning balance of the retained earnings for year 2 (including any income tax effect). The net adjustment to beginning retained earnings would be a debit for $230,000 ($300,000 less the income tax benefit of $70,000).

41. On January 1, year 1, Sip Co. signed a five-year contract enabling it to use a patented manufacturing process beginning in year 1. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, Sip prepaid a sum equal to two years' minimum annual fees. In year 1, only minimum fees were incurred. The royalty prepayment should be reported in Sip's December 31, year 1 financial statements as a. An expense only. b. A current asset and an expense. c. A current asset and noncurrent asset. d. A noncurrent asset.

b. A current asset and an expense. (b) Current assets are identified as resources that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. These resources include prepaid expenses such as royalties. Since the balance remaining in Sip Co.'s royalty prepayment (the payment relating to year 2 royalties) will be consumed within the next year, it should be reported as a current asset. Additionally, the payment relating to year 1 should be reported as an expense

81. Under IFRS, which of the following is the first step within the hierarchy of guidance to which management refers, and whose applicability it considers, when selecting accounting policies? a. Consider the most recent pronouncements of other standard-setting bodies to the extent they do not conflict with the IFRS or the IASB Framework. b. Apply a standard from IFRS if it specifically relates to the transaction, other event, or condition. c. Consider the applicability of the definitions, recognition criteria, and measurement concepts in the IASB Framework. d. Apply the requirements in IFRS dealing with similar and related issues.

b. Apply a standard from IFRS if it specifically relates to the transaction, other event, or condition. (b) The requirement is to identify the first step within the hierarchy of guidance to which management refers when selecting accounting policies. Answer (b) is correct because the highest level in the hierarchy is an IFRS standard applicable to the transaction. Answer (a), (c), and (d) are incorrect because they all represent lower levels in the hierarchy.

6. According to the FASB conceptual framework, which of the following is an enhancing quality that relates to both relevance and faithful representation? a. Comparability. b. Confirmatory value. c. Predictive value. d. Freedom from error.

b. Confirmatory value. (a) Per SFAC 8, comparability is an enhancing quality of financial reporting which relates to both relevance and faithful representation. Confirmatory value and predictive value only relate to relevance. Freedom from error only relates to faithful representation.

3. According to the FASB conceptual framework, the relevance of providing information in financial statements is subject to the constraint of a. Comparability. b. Cost-benefit. c. Reliability. d. Faithful representation.

b. Cost-benefit. (b) The FASB conceptual framework has identified the cost benefit constraint to the relevance of providing financial reports. Information is not disclosed if the costs of disclosure outweigh the benefits of providing the information. Comparability is an enhancing qualitative characteristic. Reliability is no longer part of the conceptual framework according to SFAC 8. Faithful representation is a fundamental qualitative characteristic.

3. According to the FASB conceptual framework, the rele-vance of providing information in financial statements is subject to the constraint of: a. Comparability. b. Cost-benefit. c. Reliability. d. Faithful representation.

b. Cost-benefit. The FASB conceptual framework has identified the cost benefit constraint to the relevance of providing financial reports.Information is not disclosed if the costs of disclosure outweigh the benefits of providing the information. Comparability is an enhancing qualitative characteristic. Reliability is no longer part of the conceptual framework according to SFAC 8. Faithful representation is a fundamental qualitative characteristic.

76. According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is a. Revenue. b. Income. c. Profits. d. Gains.

b. Income. (b) The requirement is to identify the element that is defined as increases in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those resulting from contributions from equity participants. Answer (b) is correct because the IASB Framework has five elements: asset, liability, equity, income, and expense. The definition given is that of income. Note that income includes both revenues and gains.

77. According to the IASB Framework, the two criteria required for incorporating items into the income statement or statement of financial position are that a. It meets the definition of relevance and faithful representation. b. It meets the definition of an element and can be measured reliably. c. It satisfies the criteria of capital maintenance. d. It meets the requirements of comparability and consistency.

b. It meets the definition of an element and can be measured reliably. (b) The requirement is to identify the criteria under IFRS that must be met for an item to be included in financial statements. Answer (b) is correct because in order for an item to be recognized in the financial statements, IFRS requires that it meet the definition of an element and can be measured reliably.

72. The milestone method of accounting may be used to recognize revenue for a. Multiple-deliverable products or services. b. Research and development arrangements. c. Long-term construction contracts. d. Franchise arrangements.

b. Research and development arrangements. (b) The requirement is to identify the subject matter of milestone accounting. Answer (b) is correct because the milestone method of accounting may be used to recognize revenue for research and development arrangements. Note that the milestone method is an option, but it is not required.

14. During year 2, Kelly Corporation discovered that ending inventory reported in its year 1 financial statements was understated by $10,000. How should Kelly account for this understatement? a. Adjust the beginning inventory balance in year 2 by $10,000. b. Restate the financial statements with corrected balances for all periods presented. c. Adjust the ending balance in the year 2 retained earnings account. d. Make no entry because the error will self-correct

b. Restate the financial statements with corrected balances for all periods presented. The financial statements must be restated for all periods presented with period-specific effects disclosed. Answer (a) is incorrect because although beginning inventory may be adjusted, prior years' financial statements must also be restated. Answer (c) is incorrect because correcting the balance of ending retained earnings is not sufficient disclosure for error correction. Answer (d) is incorrect because even though it is a self-correcting error, financial statements must be restated with period-specific effects of the error.

44. Ward, a consultant, keeps her accounting records on a cash basis. During year 2, Ward collected $200,000 in fees from clients. At December 31, year 1, Ward had accounts receivable of $40,000. At December 31, year 2, Ward had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Ward's service revenue for year 2? a. $175,000 b. $180,000 c. $215,000 d. $225,000

c. $215,000

50. On February 1, year 1, Tory began a service proprietorship with an initial cash investment of $2,000. Theproprietorship provided $5,000 of services in February andreceived full payment in March. The proprietorship incurredexpenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship's financial statements for the two months ended March 31, year 1, prepared under the cash basis method of accounting, what amount should be reported as capital? a. $1,000 b. $3,000 c. $6,000 d. $7,000

c. $6,000 (c) The ending balance in Tory's capital account on either the accrual or cash basis is computed as follows: Beginning capital + Investments + Income - Drawings = Ending capital Tory's beginning capital is his initial cash investment of $2,000. No other investments were made. Under the cash basis method of accounting, income is the excess of cash revenues ($5,000) over cash expenses ($0, since the expenses were not paid until after March 31). Therefore, cash basis income is $5,000. Drawings are $1,000. Therefore, ending capital is $6,000 ($2,000 + $0 + $5,000 - $1,000).

80. Upon first-time adoption of IFRS, an entity may elect to use fair value as deemed cost for a. Biological assets related to agricultural activity for which there is no active market. b. Intangible assets for which there is no active market. c. Any individual item of property, plant, and equipment. d. Financial liabilities that are not held for trading.

c. Any individual item of property, plant, and equipment. (c) The requirement is to identify the assets for which the entity may use fair value as deemed cost upon adoption of IFRS. Answer (c) is correct because the entity may use fair value as deemed cost for any individual item of property plant and equipment.

73. The milestone method of revenue recognition provides that if a substantive milestone is achieved, what amount of revenue is recognized? a. Revenue is recognized up to the amount of cash collected. b. A provisions rata share of revenue based upon the percentage delivered to date. c. Contingent revenue is recognized in its entirety. d. A percentage of total revenue based on the separate units delivered.

c. Contingent revenue is recognized in its entirety. (c) The requirement is to identify the amount of revenue recognized under the milestone method. Answer (c) is correct because contingent revenue may be recognized in its entirety in the period the milestone is achieved.

78. If the outcome of rendering services cannot be estimated reliably, IFRS requires the use of which revenue recognition method? a. Percentage-of-completion method. b. Completed contract method. c. Cost recovery method. d. Installment method

c. Cost recovery method. (c) The requirement is to identify the revenue recognition method that must be used if the outcome of rendering services cannot be estimated reliably. Answer (c) is correct because if the outcome of rendering services cannot be measured reliably, IFRS requires use of the cost recovery method. Answer (a) is incorrect because the percentage-of-completion method is used when reliable estimates can be made. Answer (b) is incorrect because the completed contract method is not permissible under IFRS. Answer (d) is incorrect because the installment method is a revenue recognition method used under US GAAP, not IFRS.

62. Income recognized using the installment method of accounting generally equals cash collected multiplied by the a. Net operating profit percentage. b. Net operating profit percentage adjusted for expected uncollectible accounts. c. Gross profit percentage. d. Gross profit percentage adjusted for expected uncollectible accounts.

c. Gross profit percentage. (c) The installment method of accounting is used when there is a high degree of uncertainty regarding the collectibility of the sale price. Under this method, sales revenues and the related cost of goods sold are recognized in the period of the sale. However, the gross profit is deferred to the periods in which cash is collected. Income recognized in the period of collection is generally computed by multiplying the cash collected by the gross margin percentage. The installment method is based upon deferral of the gross profit, not the net operating profit. The installment method is generally only applicable when the reporting company is unable to estimate the amount of uncollectible accounts.

61. According to the installment method of accounting, gross profit on an installment sale is recognized in income a. On the date of sale. b. On the date the final cash collection is received. c. In proportion to the cash collection. d. After cash collections equal to the cost of sales have been received.

c. In proportion to the cash collection. (c) According to the installment method of accounting, gross profit on an installment sale is recognized in income in proportion to the cash collection. The cash collected from a given year's sales is multiplied by that year's gross profit percentage to compute the amount of gross profit to be recognized. Answer (a) describes the point-of-sale recognition basis, while answer (d) describes the cost recovery method. Answer (b) does not describe any recognition basis currently used.

61. According to the installment method of accounting, gross profit on an installment sale is recognized in income a. On the date of sale. b. On the date the final cash collection is received. c. In proportion to the cash collection. d. After cash collections equal to the cost of sales have been received.

c. In proportion to the cash collection. (c) According to the installment method of accounting, gross profit on an installment sale is recognized in income in proportion to the cash collection. The cash collected from a given year's sales is multiplied by that year's gross profit percentage to compute the amount of gross profit to be recognized. Answer (a) describes the point-of-sale recognition basis, while answer (d) describes the cost recovery method. Answer (b) does not describe any recognition basis currently used.

22. Which of the following statements regarding interest methods of allocations is not true? a. The term "interest methods of allocation" refers both to the convention for periodic reporting and to the several approaches to dealing with changes in estimated future cash flows. b. Interest methods of allocation are reporting conventions that use present value techniques in the absence of a fresh-start measurement to compute changes in the carrying amount of an asset or liability from one period to the next. c. Interest methods of allocation are grounded in the notion of current cost. d. Holding gains and losses are generally excluded from allocation systems.

c. Interest methods of allocation are grounded in the notion of current cost. (c) Like depreciation and amortization conventions, interest methods are grounded in notions of historical cost, not current cost.

According to the Private Company Decision-Making Framework, which of the following five items are to be used as a guide to determine if there should be differential guidance between public and private companies? a. Historical cost; disclosures; matching; effective date; and transition method. b. Recognition and measurement; disclosures; display; balance sheet and income statement; and transition method. c. Recognition and measurement; disclosures; display; effective date; and transition method. d. Historical cost; disclosures; display; effective date; and transition method.

c. Recognition and measurement; disclosures; display; effective date; and transition method. (c) According to the Private Company Decision-Making Framework, the following five items are to be used as a guide to determine if there should be differential guidance between public and private companies: recognition and measurement; disclosures; display; effective date; and transition method.

18. According to SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements, the most relevant measurement of an entity's liabilities at initial recognition and fresh-start measurements should always reflect a. The expectations of the entity's management. b. Historical cost. c. The credit standing of the entity. d. The single most-likely minimum or maximum possible amount

c. The credit standing of the entity. (c) The most relevant measure of a liability always reflects the credit standing of the entity obligated to pay, according to SFAC 7. Those who hold the entity's obligations as assets incorporate the entity's credit standing in determining the prices they are willing to pay

18. According to SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements, the most relevant measurement of an entity's liabilities at initial recognition and fresh-start measurements should always reflect a. The expectations of the entity's management. b. Historical cost. c. The credit standing of the entity. d. The single most-likely minimum or maximum possible amount.

c. The credit standing of the entity. (c) The most relevant measure of a liability always reflects the credit standing of the entity obligated to pay, according to SFAC 7. Those who hold the entity's obligations as assets incorporate the entity's credit standing in determining the prices they are willing to pay

60. For financial statement purposes, the installment method of accounting may be used if the a. Collection period extends over more than twelve months. b. Installments are due in different years. c. Ultimate amount collectible is indeterminate. d. Percentage-of-completion method is inappropriate

c. Ultimate amount collectible is indeterminate. (c) The profit on a sale in the ordinary course of business is considered to be realized at the time of sale unless it is uncertain whether the sale price will be collected. The Board concluded that use of the installment method of accounting is not acceptable unless this uncertainty exists. Answers (a), (b), and (d) are incorrect because they do not involve the element of uncertainty regarding the collectibility of the sale price.

6. Bren Co.'s beginning inventory at January 1, year 1, was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren's cost of goods sold for year 1 was a. Understated by $26,000. b. Overstated by $26,000. c. Understated by $78,000. d. Overstated by $78,000.

c. Understated by $78,000. Beginning inventory is the starting point for the CGS computation, so BI errors have a direct effect on CGS. The understatement of BI ($26,000) causes an understatement of goods available for sale (GAFS) and thus of CGS. Ending inventory is subtracted in the CGS computation, so EI errors have an inverse effect on CGS. The overstatement of EI ($52,000) means that too much was subtracted in the CGS computation, causing another understatement of CGS. Therefore, CGS is understated by a total of $78,000.

16. According to the FASB conceptual framework, which of the following is an essential characteristic of an asset? a. The claims to an asset's benefits are legally enforceable. b. An asset is tangible. c. An asset is obtained at a cost. d. An asset provides future benefits

d. An asset provides future benefits (d) Per SFAC 6, the common quality shared by all assets is "service potential" or "future economic benefit." Per SFAC 6, assets commonly have other distinguishing features, such as being legally enforceable, tangible or acquired at a cost. These features, however, are not essential characteristics of assets.

12. What is the underlying concept that supports estimating a fixed asset impairment charge? a. Substance over form. b. Consistency. c. Matching. d. Faithful representation

d. Faithful representation (d) An estimate of an impairment charge to a fixed asset can only be a faithful representation if the entity has applied impairment rules properly, disclosed the process of arriving at the impairment estimate and disclosed any uncertainties that affect the impairment estimate. Assuming the above is true, and no other estimate is better than the derived estimate, then the estimate is comprised of the best available information.Therefore, it is a faithful representation.

11. Which of the following errors could result in an overstatement of both current assets and stockholders' equity? a. An understatement of accrued sales expenses. b. Noncurrent note receivable principal is misclassified as a current asset. c. Annual depreciation on manufacturing machinery is understated. d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead

d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead The classification of holiday pay expense for administrative employees as manufacturing overhead would result in the capitalization of some or all of these costs as a component of ending inventory, while these costs should be expensed as incurred. This error could overstate ending inventory, a current asset. The overstatement of ending inventory also understates the cost of goods sold (Beginning inventories + Net purchases - Ending inventories = Cost of goods sold), and overstates net income and stockholders' equity. The understatement of accrued sales expenses would not affect current assets. The misclassification of the noncurrent note receivable principal as a current asset would have no impact on stockholders' equity. The understatement of depreciation on manufacturing machinery would understate the overhead added to inventories, a current asset.

69. In which of the following examples of real estate transactions would the seller not transfer the usual risks and rewards of ownership? I. The buyer can compel the seller to repurchase the property. II. The seller guarantees the return of the buyer's investment. III. The seller is required to support operations of the buyer and will be reimbursed on a cost plus 5% basis. a. I. b. II. c. III. d. I and II.

d. I and II. (d) Items I and II do not transfer the risks and rewards of ownership to the buyer since both scenarios entitle the buyer to a return of his/her initial investment. Thus, the risks of ownership still remain with the seller. The economic substance of such arrangements is that of financing, leasing, or profit sharing transactions. Item III transfers the risks and rewards of ownership since the seller will be reimbursed for cost plus a 5% profit on the support provided. Therefore, the seller is not required to support operations of the property at its own risk.

74. Which of the following organizations is responsible for setting International Financial Reporting Standards? a. Financial Accounting Standards Board. b. International Accounting Standards Committee. c. Financial Accounting Committee. d. International Accounting Standards Board.

d. International Accounting Standards Board. (d) The requirement is to identify the body that sets international accounting standards. Answer (d) is correct because the International Accounting Standards Board (IASB) issues International Financial Reporting Standards.

63. It is proper to recognize revenue prior to the sale of merchandise when I. The revenue will be reported as an installment sale. II. The revenue will be reported under the cost recovery method. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

d. Neither I nor II. (d) Under the installment method (case I) revenue (gross profit) is recognized after the sale, in proportion to cash collected. Under the cost recovery method (case II), revenue (gross profit) is again recognized after the sale, when cumulative receipts exceed the cost of the asset sold. Therefore, revenue is not recognized prior to the sale of merchandise in either case I or case II.

51. Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of Accounts receivable Accrued expenses a. Yes Yes b. Yes No c. No No d. No Yes

d. No Yes 51. (d) The requirement of this question is to determine if a decrease in accounts receivable and/or a decrease in accrued expenses would result in cash-basis income being lower than accrual-basis income.

17. 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

d. Present value of future cash flows (d) Per SFAC 5, five different attributes are used to measure assets and liabilities in present practice: historical cost, current (replacement) cost, current market value, net realizable value, and present value of future cash flows. Three of these (historical cost, replacement cost, and net realizable value) are used in measuring inventory at lower of cost or market. Present value of future cash flows is not used to measure inventory.

15. Jackson Company uses IFRS to report its financial results. During the current year, the company discovered it had overstated sales in the prior year. How should the company handle this issue? a. Adjust sales for the current period. b. Spread the adjustment over the current and future periods. c. Present the cumulative effect of the overstatement as an item in the current period income statement. d. Restate the prior year financial statements presented for comparative purposes.

d. Restate the prior year financial statements presented for comparative purposes. The requirement is to identify how an overstatement of sales in prior year financial statement should be treated under IFRS. Answer (d) is correct because the overstatement is an error which must be accounted for by restating the prior year financial statements.

2. According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on a. Generally accepted accounting principles. b. Reporting for regulators. c. The need for conservatism. d. The needs of the users of the information

d. The needs of the users of the information (d) Per SFAC 8, the objectives of financial reporting focus on providing present and potential investors and creditors with information useful in making investment decisions. Financial statement users do not have the authority to prescribe the data they desire. Therefore, they must rely on external financial reporting to satisfy their information needs, and the objectives must be based on the needs of those users.

65. Wren Co. sells equipment on installment contracts. Which of the following statements best justifies Wren's use of the cost recovery method of revenue recognition to account for these installment sales? a. The sales contract provides that title to the equipment only passes to the purchaser when all payments have been made. b. No cash payments are due until one year from the date of sale. c. Sales are subject to a high rate of return. d. There is no reasonable basis for estimating collectibility.

d. There is no reasonable basis for estimating collectibility. (d) The installment method is used when collection of the selling price is not reasonably assured. However, when the uncertainty of collection is so great that even the use of the installment method is precluded, then the cost recovery method may be used. Having no reasonable basis for estimating collectibility would provide a great enough uncertainty to use the cost recovery method. It is important to note that anytime the installment method is used, some risk of 100% collection exists, but the risk must be extreme before the cost recovery method is employed.