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CPA Exam- FAR > 1- Framework, Overview, and Financial Statements > Flashcards

1- Framework, Overview, and Financial Statements Flashcards

1
Q

Which of the following statements best describes the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement?

The emerging issues task force must approve a discussion memorandum before it is disseminated to the public.

The exposure draft is modified per public opinion before issuing the discussion memorandum.

A new statement is issued only after a majority vote by the members of the FASB.

A new FASB statement can be rescinded by a majority vote of the AICPA membership

A

A new statement is issued only after a majority vote by the members of the FASB.

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2
Q

Which of the following will best protect investors against fraudulent financial reporting by corporations?

Criminal statutes.

The requirement that financial statements be audited.

The fact that all firms must report the same way.

The integrity of management.

A

The requirement that financial statements be audited.

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3
Q

In reference to proposed accounting standards, the term “negative economic consequences” includes:

The cost of complying with GAAP.

The inability to raise capital.

The cost of government intervention when not in compliance with GAAP.

The failure of internal control systems.

A

The inability to raise capital.

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4
Q

Choose the correct statement about GAAP.

GAAP are laws.

Only publicly traded companies must comply with GAAP.

It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

Firms may not restate financial statements previously issued.

A

It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

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5
Q

T or F

The top level of the GAAP hierarchy is the FASB Accounting Standards Codification.

A

False

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6
Q 
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of:
 A.   Consistency. 
 B.   Going concern. 
 C.   Matching. 
 D.   Substance over form.
A

C. Matching

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7
Q

Current market value is used to value what?

A

Trading and Available-for-sale- securities

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8
Q 
According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
 A.   Consistency. 
 B.   Cost-benefit. 
 C.   Relevance. 
 D.   Representational faithfulness.
A

B. Cost-Benefit

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9
Q

What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?

A. Conservatism.
B. Relevance.
C. Consistency.
D. Faithful representation.

A

A. Conservatism.
Gain contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.

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10
Q 
Which regulation governs the form and content of financial statement disclosures?
A.  Regulation S-X. 
 B.  Sarbanes Oxley. 
 C.  Regulation S-K. 
 D.  Regulation S-Q.
A

A. Regulation S-X.

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11
Q

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?

I. Quoted market prices should be adjusted for a “blockage factor” when a firm holds a sizable portion of the asset being valued.

II. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

A

D. Neither I nor II.
Neither Statement I nor Statement II is correct. Quoted market prices should not be adjusted for a “blockage factor” when a firm holds a sizable portion of the asset being valued (Statement I). A “blockage factor” occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market. Using a “blockage factor” would adjust the market value for the impact of such a large block of securities being sold, but is not permitted in determining fair value. Additionally, quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value (Statement II). Such prices would be considered level 2 factors, observable inputs but not in active markets

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12
Q

Which one of the following is not a required disclosure in annual financial reports for an entity that uses fair value measurement?
A. The level of the fair value hierarchy within which fair value measurements fall.
B. The valuation techniques used to measure fair value.
C. Combined disclosures about fair value measurements required by all pronouncements.
D. A discussion of any change from the prior period in valuation techniques used to measure fair value.

A

C. Combined disclosures about fair value measurements required by all pronouncements.

Combined disclosures about fair value measurements required by all pronouncements are not required, but are encouraged.

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13
Q

Which of the following statements concerning disclosures when fair value measurement is used is/are correct?

I. Disclosures must be provided that show information for each major category of assets and/or liabilities.

II. Most disclosures must be in both interim and annual financial statements.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II

A

C. Both I and II.
Both Statement I and Statement II are correct. Disclosures must be provided that show information for each major category of assets and/or liabilities (e.g., investments held-for-trading, investments available-for-sale, derivatives, etc.) (Statement I), and most disclosures must be in both interim and annual financial statements (Statement II).

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14
Q

Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:

A. Federal Reporting Updates (FRU).
B. Financial Reporting Releases (FRR).
C. Staff Auditing Bulletins (SAB).
D. Accounting Principles Opinions (APO).

A

B. Financial Reporting Releases (FRR).
The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB).

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15
Q

In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which one of the following?

A. What is physically possible.
B. What is financially feasible.
C. How the reporting entity would use the asset.
D. What is legally permissible.

A

C. How the reporting entity would use the asset.

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16
Q

In determining the fair value of an asset in the most advantageous market, the market based exit price should be adjusted for

Transaction Cost Transportation Cost

A. Yes Yes
B. Yes No
C. No Yes
D. No No

A

C. No Yes

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17
Q

Which of the following benefits is the fair value framework intended to accomplish with respect to fair value measurement and fair value reporting?

Increased Consistency Increased Comparability

A. Yes Yes
B. Yes No
C. No Yes
D. No No

A

A. Yes Yes

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18
Q 
Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?
 A.   Market. 
 B.   Income. 
 C.   Cost. 
 D.   Observable inputs.
A

B. Income.

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19
Q

When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, which one of the following valuation techniques has been used?

A. Income approach.
B. Cost approach.
C. Expense approach.
D. Market approach.

A

B. Cost approach.

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20
Q

If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?

A. As a change in accounting principle.
B. As an adjustment to beginning retained earnings of the period of change in approach.
C. As a change in accounting estimate.
D. As gain on the income statement for the period of change in approach.

A

C. As a change in accounting estimate.

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21
Q

In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?

Asset Fair Value Liability Fair Value
A. Entry price Entry price
B. Entry price Exit price
C. Exit price Entry price
D. Exit price Exit price

A

D. Exit price Exit price

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22
Q

Which one of the following can be measured at fair value at the option of the reporting entity?
A. A liability under a lease contract.
B. An investment classified as held-for-trading.
C. An investment classified as held-to-maturity.
D. A liability under a pension plan.

A

C. An investment classified as held-to-maturity.

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23
Q

Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by Alphaco. Alphaco and Betaco have elected to measure their respective investments held-to-maturity at fair value. Charlieco measures its investments held-to-maturity using amortized cost. In its consolidated financial statements, for which companies, if any, may Alphaco elect to report investment held-to-maturity at fair value?
A. Alphaco only.
B. Alphaco and Betaco only.
C. Alphaco, Betaco, and Charlieco.
D. None of the companies; all investments held-to-maturity must be measured and reported at amortized cost.

A

C. Alphaco, Betaco, and Charlieco.

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24
Q

Inputs to the valuation techniques used to determine (measure) fair value may include inputs that are:

Observable Unobservable

A. No No
B. No Yes
C. Yes No
D. Yes Yes

A

D. Yes Yes

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25
Q

Which of the following levels of the fair value hierarchy is the highest and which is the lowest in terms of desirability for use in determining fair value?

Highest Level Lowest Level

A. Level 3 Level 1
B. Level 1 Level 4
C. Level 1 Level 3
D. Level 4 Level 1

A

C. Level 1 Level 3

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26
Q

Observable inputs, other than quoted prices in active markets for identical items, would constitute what level in the fair value hierarchy?

A. Level 1
B. Level 2
C. Level 3
D. Level 4

A

B. Level 2

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27
Q

Which one of the following is not a required disclosure in annual financial reports for an entity that uses fair value measurement?

A. The level of the fair value hierarchy within which fair value measurements fall.
B. The valuation techniques used to measure fair value.
C. Combined disclosures about fair value measurements required by all pronouncements.
D. A discussion of any change from the prior period in valuation techniques used to measure fair value.

A

C. Combined disclosures about fair value measurements required by all pronouncements.
Combined disclosures about fair value measurements required by all pronouncements are not required, but are encouraged.

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28
Q

Under U.S. GAAP the disclosure requirements when fair value measurement is used are differentiated by which of the following classifications?

A. Between assets measured at fair value and liabilities measured at fair value.
B. Between fair value measurements that result in gains and fair value measurements that result in losses.
C. Between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis.
D. Between items for which fair value measurement is required and items for which fair value measurement is elected.

A

C. Between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis.

Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-trading. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.

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29
Q

When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is not an expected outcome of the disclosures required of that entity?

A. Users being able to understand management’s reasons for using the fair value option.
B. Users being able to understand how changes in fair value affect net income.
C. Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value.
D. Users being able to understand the difference between fair value and cash flows.

A

C. Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value.

The disclosures required when the fair value option is used are not intended to replace the kind and amount of information that would have been provided if the fair value option had not been used. Rather, the intent is to provide the same kind and amount of information that would have been provided if the fair value option had not been elected.

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30
Q 
The SEC is comprised of five commissioners, appointed by the President of the United States, and four divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
 A.   Division of Corporate Finance. 
 B.   Division of Enforcement. 
 C.   Division of Trading and Markets. 
 D.   Division of investment management.
A

A. Division of Corporate Finance.

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31
Q

Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:
A. Federal Reporting Updates (FRU).
B. Financial Reporting Releases (FRR).
C. Staff Auditing Bulletins (SAB).
D. Accounting Principles Opinions (APO).

A

B. Financial Reporting Releases (FRR).

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32
Q

The SEC enforces the corporate registration requirements of the Securities Act of 1933 as one of its principal objectives. These requirements are intended to provide information that enables the SEC to:
A. Evaluate the financial merits of the corporation offering the securities to the public.
B. Ensure that investors are provided with adequate information on which to base investment decisions.
C. Guarantee that the facts contained in the registration statement are accurate.
D. Assure investors of the accuracy of the financial statements.

A

B. Ensure that investors are provided with adequate information on which to base investment decisions.

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33
Q

Which of the following is not a required component of the 10-K filing?

A. Product market share.
B. Description of the business.
C. Market price of common stock.
D. Executive compensation.

A

A. Product market share.
The market share of the company’s product is not a required disclosure. The company may chose to voluntarily present this information, but it is not a required disclosure.

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34
Q

A company is required to file quarterly financial statements with the United States Securities and Exchange Commission on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations, which could have a significant impact on its financial condition. In addition to the most recent quarter end, for which of the following periods is the company required to present Balance Sheets on Form 10-Q?

A. The end of the corresponding fiscal quarter of the preceding fiscal year.
B. The end of the preceding fiscal year and the end of the corresponding fiscal quarter of the preceding fiscal year.
C. The end of preceding fiscal year.
D. The end of the preceding fiscal year and the end of the prior two fiscal years.

A

C. The end of preceding fiscal year.
The Balance Sheet for the end of the preceding fiscal year would have been the last audited Balance Sheet. This Balance Sheet is presented along with the current fiscal quarter.

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35
Q

A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?

A. 60 days.
B. 75 days.
C. 90 days.
D. 120 days.

A

B. 75 days.
An accelerated filer has an aggregate worldwide market value of the voting and nonvoting common stock held by nonaffiliates of $75 million or more, but less than $700 million on the last business day of the issuer’s most recently completed second fiscal quarter. A large accelerated filer has market capitalization (as described) of $700 million or more. Beginning in 20X6 the SEC changed the 10-K filing deadline for large accelerated filers to be 60 days from the fiscal year end. Accelerated filers still have 75 days to file their 10-K.

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36
Q

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:

A. Conservatism.
B. Fair value.
C. Market value.
D. Historical cost.

A

D. Historical cost.
Reporting accounts receivable at net realizable value is a departure from the principle of historical cost. Accounts receivable is usually aged by some method and reported at net realizable value.

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37
Q

Measurement Attribute for Land

A. Historical
B. Amortized Historical Cost
C. Fair Market Value
D. Net Realizable Value
E.  Present Value
A

A. Historical

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38
Q

Measurement Attribute for Fixed Assets

A. Historical
B. Amortized Historical Cost
C. Fair Market Value
D. Net Realizable Value
E.  Present Value
A

B. Amortized Historical Cost

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39
Q

Measurement Attribute for Prepaid Insurance

A. Historical
B. Amortized Historical Cost
C. Fair Market Value
D. Net Realizable Value
E.  Present Value
A

A. Historical

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40
Q

Measurement Attribute for Marketable Securities and Derivatives

A. Historical
B. Amortized Historical Cost
C. Fair Market Value
D. Net Realizable Value
E.  Present Value
A

C. Fair Market Value

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41
Q 
Measurement Attribute for Accounts Receivable
A. Historical
B. Amortized Historical Cost
C. Fair Market Value
D. Net Realizable Value
E.  Present Value
A

D. Net Realizable Value

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42
Q

Ratio for liquidity

A

CA/CL

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43
Q

Which of the following is responsible for fund raising for entire operations involving the IASB?

A. IFRS Interpretations Committee.
B. IFRS Advisory Council.
C. IFRS Foundation.
D. Standard Advisory Council.

A

C. IFRS Foundation.
The IFRS Foundation, as the legal entity of the entire organization, has the responsibility to ensure that the operations are sufficiently funded in order to ensure the fulfillment of the standard-setting objectives without compromising the independence and objectivity of the standard-setting process.

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44
Q

Which of the following is a member of the Monitoring Board?

A. Global Accounting Technical Officer of the World Bank.
B. CEO of the Financial Executives International.
C. Chair of the CFA Institute.
D. Chair of the U.S. Securities and Exchange Commission.

A

D. Chair of the U.S. Securities and Exchange Commission.

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45
Q

The IFRS Foundation serves as the administrative umbrella for a group of bodies. Which of the following bodies are NOT included under the IFRS Foundation umbrella?

A. International Federation of Accountants (IFAC).
B. International Accounting Standards Board.
C. IFRS Interpretations Committee.
D. IFRS Advisory Council.

A

A. International Federation of Accountants (IFAC).
The International Federation of Accountants (IFAC) is a global organization for the accounting profession. Its members are accounting and auditing organizations throughout the world. It is an independent organization not under the IFRS Foundation umbrella, but it does support the activities of the IFRS Foundation by encouraging high-quality practices by the world’s accountants and auditors.

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46
Q

Which of the following is an objective of the IFRS Foundation?

A. To enforce the use and rigorous application of those standards.
B. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.
C. To develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial-reporting standards (IFRSs) through its member associations.
D. To require adoption of international financial reporting standards (IFRSs) globally.

A

B. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.

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47
Q

According to the IASB 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.

A

D. An asset provides future benefits.
According to the IASB’s Framework, an asset is defined as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.” IASB Framework, para. 49.

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48
Q

Under IFRS for SMEs, which of the following cost flow assumptions can be used for inventory valuation purposes?

FIFO LIFO Weighted Average Cost

Yes Yes Yes
Yes Yes No
Yes No Yes
Yes No No

A

Yes No Yes

Under IFRS for SMEs, the FIFO and weighted average cost assumptions of cost flow may be used for inventory valuation purposes, but the LIFO cost flow assumption may not be used.

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49
Q

Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements?

Earnings per Share (EPS) Information by Segment

Yes Yes
Yes No
No Yes
No No

A

No No
Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either U.S. GAAP or full IFRS.

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50
Q

Gross Profit =

A

Sales - COGS

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51
Q

Net Sales =

A

Sales- Returns and Allowances

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52
Q

Cost of Goods Manufactured (COGM)=

A

Cost of Goods brought to completion during the year

COGM + Beginning Year FG Inventory - End of Year FG= Cost of Sales

53
Q

Definition of Comprehensive Income

Examples of Other Comprehensive Income

A

Comprehensive Income= Net Income + Other Comprehensive Income

Examples:

  • Foreign Currency Translation Adjustments
  • Unrealized holding gains/losses
  • Pension plan cost adjustments
  • Certain deferred derivative gains/losses
54
Q

Definition of Accounting Income

A

Revenues less expenses
+
Gains Less Losses

55
Q

Definition of Economic Income

A

Change in Net worth of a business during an accounting period

FV of Net Assets on Jan 1 + Net Income for Period + Owner Investments - Dividends and Stock Repurchases= Fair Value at Dec 31

56
Q

The Income Statement Is divided into two portions:

Top Portion (Above the Line)
Bottom Portion (Below the Line)
A

Top: Routinely occurring items and other items that are included in income from continuing operations

Bottom: Unrelated to Continuing Operations

57
Q

Gross Margin

A

=Net Sales- COGS

58
Q

Order of Sample Income Statement

A

Net Sales
- COGS
= Gross Margin

-  Operating Expenses
\+  Misc Revenues and Gains
-  Misc Expenses and Losses
\+- Unusual or infrequent items
= Income from Continuing Operations BEFORE TAX
  • Less Income Tax Expense
    = Income from Continuing Operations

+- Income from Discontinued Operations (net of tax)
= Net Income

59
Q

Which of the following should be included in general and administrative expenses?

Interest Advertising

Yes Yes
Yes No
No Yes
No No

A

No No

Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified.

60
Q

Equation for Comprehensive Income

A

Comprehensive Income= Net Income + Other Comprehensive Income

61
Q

Name the Four “Other Comprehensive Items”

Name two items that are NOT “OCI” and how they are reported

A
  1. Unrealized G/L on AFS Securities
  2. Unrealized G/L from Certain Derivative Transactions
  3. Unrecognized G/L from Pension Costs
  4. Foreign currency translation adjustments

Not OCI:

  1. Prior period adjustments
  2. Retrospective effects of changes in accounting principles

Reported as adjusments to retained earnings.

62
Q

What does AOCI stand for, how is it calculated, and where is it reported?

A

Accumulated Other Comprehensive Income

The amount carried over from the previous period and then increased/decreased during the current period.

Reported on the Owners Equity section of the balance sheet in an account title; AOCI

63
Q

Net Income is closed out to Retained Earnings and Other Comprehensive INcome is closed out to what?

A

AOCI

64
Q

Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?

A. Unrealized loss on investments in noncurrent marketable equity securities.
B. Unrealized loss on investments in current marketable equity securities.
C. Loss on exchange of similar assets.
D. Loss on exchange of dissimilar assets.

A

A. Unrealized loss on investments in noncurrent marketable equity securities.

Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings.
This is a change in owners’ equity that is not included in earnings and is not the result of a transaction with owners. It is an “other” comprehensive income item. “Other” refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.

65
Q

What is the purpose of reporting comprehensive income?

A. To summarize all changes in equity from nonowner sources.
B. To reconcile the difference between net income and cash flows provided from operating activities.
C. To provide a consolidation of the income of the firm’s segments.
D. To provide information for each segment of the business.

A

A. To summarize all changes in equity from nonowner sources.

The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and

66
Q

5 Items of Owner’s Equity

A 
Stock (Common and Preferred)
APIC
Retained Earnings
Treasury Stock
AOCI
67
Q

The basic purpose of an Statement of Cash Flows (SCF) and the three sections

A

To present the reader with information about the sources and uses of cash

Operating
Investing
Financing

68
Q

The primary purpose of a Statement of Cash Flows is to provide relevant information about:

A. Differences between net income and associated cash receipts and disbursements.
B. An enterprise’s ability to generate future positive net cash flows.
C. The cash receipts and cash disbursements of an enterprise during a period.
D. An enterprise’s ability to meet cash operating needs.

A

C. The cash receipts and cash disbursements of an enterprise during a period.

The Statement of Cash Flows is a listing of cash flows for a period in meaningful categories. Thus, it depicts the major cash receipts and disbursements during a period. Although such information may help a user to assess the ability of a firm to generate future cash flows, it does not, necessarily, say anything about the firm’s ability to do so in the future.
Similarly, the cash flow statement does not directly indicate the firm’s ability to meet future cash operating needs. The reconciliation of income and net operating cash flows does indicate the differences between income and operating cash flows, but this is not the primary purpose of the statement

69
Q

Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available:

Mortgage repayment $20,000 
Available-for-sale securities purchased 10,000 increase 
Bonds payable-issued 50,000 increase 
Inventory 40,000 increase 
Accounts payable 30,000 decrease

What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year?

A. $0
B. $10,000
C. $20,000
D. $30,000

A

A. $0
Operating Activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70.000 - $40 000 - $30 000 = $0

70
Q

Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?

A. Income Statement, Balance Sheet, Statement of Cash Flows.
B. Income Statement, Statement of Cash Flows.
C. Statement of Cash Flows.
D. Balance Sheet and Statement of Cash Flows.

A

C. Statement of Cash Flows.

This statement generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The Statement of Cash Flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.

71
Q

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill.
In preparing Bay’s Statement of Cash Flows, this purchase would:

A. Have no effect.
B. Be treated as an outflow from financing activities.
C. Be treated as an outflow from investing activities.
D. Be treated as an outflow from lending activities.

A

C. Be treated as an outflow from investing activities.
Even if this transaction involved a change in cash and cash equivalents, it would not be classified as an investing activity. But the three-month bill meets the definition of cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

72
Q

Operating, Investing, or Financing Activity?

Sale/Purchase of PPE

A

Investing

73
Q

Operating, Investing, or Financing Activity?

Sale/Purchase of Debt or Equity Securities (Held-to-Maturity or Available-for-Sales), or Bonds of Other Entities

A

Investing

74
Q

Operating, Investing, or Financing Activity?

Collection of loan principal

A

Investing

75
Q

Operating, Investing, or Financing Activity?

Cash inflows from customers

A

Operating

76
Q

Operating, Investing, or Financing Activity?

Cash outflows to suppliers, employees, or government

A

Operating

77
Q

Operating, Investing, or Financing Activity?

Cash Inflows from interest income of dividend income

A

Operating

78
Q

Operating, Investing, or Financing Activity?

Sales of trading investments

A

Operating

79
Q

Operating, Investing, or Financing Activity?

Cash outflows for interest

A

Operating

80
Q

Operating, Investing, or Financing Activity?

Sale or Purchase of trading securities/investments

A

Operating

81
Q

Operating, Investing, or Financing Activity?

Cash inflows from the sale of equity securities

A

Financing

82
Q

Operating, Investing, or Financing Activity?

Cash inflows from the issuance of debt (bonds and notes)

A

Financing

83
Q

Operating, Investing, or Financing Activity?

Cash outflows to stockholders as dividends

A

Financing

84
Q

Operating, Investing, or Financing Activity?

Cash outflows to redeem long-term debt

A

Financing

85
Q

Operating, Investing, or Financing Activity?

Cash outflows to re-acquire own capital stock

A

Financing

86
Q

Operating, Investing, or Financing Activity?

Income Tax Paid

A

Operating

87
Q

Operating, Investing, or Financing Activity?

Interest Paid

A

Operating

88
Q

Operating, Investing, or Financing Activity?

Cash Inflows from sale of own stock

A

Financing

89
Q

Operating, Investing, or Financing Activity?

Proceeds from Borrowing (Bonds, Notes, etc)

A

Financing

90
Q

Operating, Investing, or Financing Activity?

Paying back lendors (Principal only)

A

Financing

91
Q

Operating, Investing, or Financing Activity?

Gain/Loss on the sale of equipment

A

The gain on the sale of equipment is subtracted in the reconciliation of net cash flow and net income, but it is not, itself, a cash flow.

92
Q

Operating, Investing, or Financing Activity?

Amortization of a bond discount

A

The amortization of the bond discount is a reconciling item, not a cash flow.

93
Q

Operating, Investing, or Financing Activity?

Payments to acquire shares of common stock in other companies

A

Investing

94
Q

Operating, Investing, or Financing Activity?

Proceeds from issuance of common stock?

A

Financing

95
Q

Operating, Investing, or Financing Activity?

Proceeds from issuance of convertible bonds

A

Financing

96
Q

Operating, Investing, or Financing Activity?

Borrowing on a line of credit

A

Financing

97
Q

Operating, Investing, or Financing Activity?

Down payment on equipment purchase

A

Investing

98
Q

Operating, Investing, or Financing Activity?

Payments to retire bonds outstanding

A

Financing

99
Q

Equation for Figuring Net PPE

A

Beginning Balance + Purchases - Book Value of Disposals - Depreciation Expense= Ending Balance

or

BB + Purch - BV of Disposals - Depr = EB

100
Q

Equation for figuring Inventory

A

BB + Purch - COGS = EB

101
Q

1.Primary qualitative characteristics

A

relevance and faithful representation;

102
Q

2.Enhancing qualitative characteristics

A

comparability, verification, timeliness and understandability;

103
Q

3.Assumptions

A

entity, going concern, time period and unit of measure

104
Q

4.Principles

A

historical cost, revenue recognition, matching and full disclosure;

105
Q

5.Constraints

A

materiality and cost benefit.

106
Q

Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements?

Earnings per Share (EPS) Information by Segment

Yes Yes

Yes No

No Yes

No No

A

No No

107
Q

Which of the following statements, if any, concerning IFRS for SMEs is/are correct?

I. IFRS for SMEs is based on accrual basis accounting.

II. Generally, IFRS for SMEs may be used as an alternative to using OCBOA.

I only.

II only.

Both I and II.

Neither I nor II.

A

Both I and II.

108
Q

Glenda Corporation prepares its financial statements in accordance with IFRS. Glenda must report finance costs on the statement of cash flows

In operating activities.

Either in operating activities or financing activities.

In financing activities.

In investing activities or financing activities.

A

Either in operating activities or financing activities.

109
Q

Which of the following may not be disclosed on the income statement for a company that prepares its financial statements in accordance with IFRS?

Gain or loss.

Tax expense.

Gain or loss from extraordinary items.

Gain or loss from discontinued operations.

A

Gain or loss from extraordinary items.

110
Q

Filigree Corporation prepares its financial statements in accordance with IFRS. Filigree acquired equipment by issuing 5,000 shares of its common stock. How should this transaction be reported on the statement of cash flows?

As an outflow of cash from investing activities and an inflow of cash from financing activities.

As an inflow of cash from financing activities and an outflow of cash from operating activities.

At the bottom of the statement of cash flows as a significant noncash transaction.

In the notes to the financial statements as a significant noncash transaction.

A

In the notes to the financial statements as a significant noncash transaction.

This transaction did not involve an exchange of cash; therefore, it is not included on the statement of cash flows. IFRS requires that significant noncash transactions be reported in the notes to the financial statements. (Note that for U.S. GAAP, if there are only a few significant noncash transactions, they may be reported at the bottom of the statement of cash flows, or they may be reported in a separate schedule in the notes to the financial statements.)

111
Q

Largo Corporation prepares its financial statements in accordance with IFRS. Which of the following items is required disclosure on the income statement?

Revenues, cost of goods sold, and advertising expense.

Finance costs, tax expense, and income.

Operating expenses, nonoperating expenses, and extraordinary items.

Gross profit, operating profits, and net profits.

A

Finance costs, tax expense, and income.

112
Q

The summary of significant accounting policies should disclose the

A. Maturity dates of noncurrent debts.

B. Terms for convertible debt to be exchanged for common stock.

C. Concentration of credit risk of all financial instruments by geographical region.

D. Criteria for determining which investments are treated as cash equivalents.

A

Criteria for determining which investments are treated as cash equivalents

113
Q

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of

A. Concentration of credit risk.

B. Concentration of market risk.

C. Risk of measurement uncertainty.

D. Off‐balance sheet risk of accounting loss.

A

Concentration of credit risk.

114
Q

The following information was taken from Baxter Department Store’s financial statements:

Inventory on January 1 $ 100,000
Inventory on December 31 300,000
Net sales 2,000,000
Net purchases 700,000

What was Baxter’s inventory turnover for the year ending December 31?

A. 2.5
B. 3.5
C. 5
D. 10

A

2.5

115
Q

What is the formula for inventory turnover ratio?

A

COGS/Average Balance in Inventory

116
Q

What is the formula for A/R turnover ratio?

A

= Sales/ Average Balance in A/R

117
Q

What is the formula for Average Number of Days to Collect?

A

=365 / A/R turnover ratio

118
Q

Are the following ratios useful in assessing the liquidity position of a company?

Defensive‐interval ratio Return on stockholders’ equity

Yes Yes

Yes No

No Yes

No No

A

Yes No

119
Q

Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?

Depreciation method Composition

No Yes

Yes Yes

Yes No

No No

A

Yes No

120
Q

IFRS requires a classified Statement of Financial Position. What are the required classifications?

A. Cash; trade receivables and payables; property, plant and equipment; long‐term assets and liabilities; and other assets and liabilities.

B. Cash; trade receivables and payables; property, plant and equipment; and other assets and liabilities.

C. Current, long‐term, and other assets and liabilities.

D. Current and non‐current assets and liabilities.

A

Current and non‐current assets and liabilities

121
Q

Which of the following items would not appear on the Income Statement prepared using IFRS?

A. Discontinued operations.

B. Gross Profit.

C. Depreciation and amortization.

D. All items would appear on the Income Statement when using IFRS.

A

D. All items would appear on the Income Statement when using IFRS.

122
Q

The summary of significant accounting policies should disclose the

Pro forma effect of retroactive application of an accounting change.

Basis of profit recognition on long‐term construction contracts.

Adequacy of pension plan assets in relation to vested benefits.

Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

A

Basis of profit recognition on long‐term construction contracts.

123
Q

How to figure book value per share?

A

= Total Stockholder Equity/ Common Stock Shares (less any required)

124
Q

Another Name for Balance Sheet

A

Statement of Financial Position

125
Q 
Measurement Attribute for Accounts Receivable
A. Historical
B. Amortized Historical Cost
C. Fair Market Value
D. Net Realizable Value
E.  Present Value
A

Present Value

126
Q

A company buys ten shares of securities at $2,000 each on December 31, year 1. The securities are classified as available for sale. The company does not elect to use the fair value option for reporting its available‐for‐sale securities. The fair value of the securities increases to $2,500 on December 31, year 2, and to $2,750 on December 31, year 3. On December 31, year 3, the company sells the securities. Assume no dividends are paid and that the company has a tax rate of 30%. What is the amount of the reclassification adjustment for other comprehensive income on December 31, year 3?

A. $ 7,500
B. $ (7,500)
C. $ 5,250
D. $ (5,250)

A

D. $ (5,250)

Assuming the fair value option is not elected, the calculation of holding gains recognized in other comprehensive income is as follows:

Before tax Income tax Net of tax
Year ended

12/31/Y2 $5,000 $1,500 $3,500
Year ended

12/31/Y3 2,500 750 1,750
Total gain $7,500 $2,250 $5,250

The reclassification adjustment should be shown net of tax, so ($5,250) is the adjustment amount. $5,250 had been previously added to other comprehensive income when the gains occurred. The $5,250 needs to be taken out in order to avoid counting the gains twice. The securities have been sold so the gains are now realized and will be part of net income.

127
Q

When a full set of general‐purpose financial statements are presented, comprehensive income and its components should

A. Appear as a part of discontinued operations, extraordinary items, and cumulative effect of a change in accounting principle.

B. Be reported net of related income tax effect, in total and individually.

C. Appear in a supplemental schedule in the notes to the financial statements.

D. Be displayed in a financial statement that has the same prominence as other financial statements.

A

D. Be displayed in a financial statement that has the same prominence as other financial statements.

Comprehensive income (net income plus other comprehensive income) should be displayed in a financial statement that has the same prominence as other financial statements.

128
Q

Accumulated other comprehensive income should be reported on the balance sheet as a component of

Retained earnings Additional paid‐in capital

A. No Yes
B. Yes Yes
C. Yes No
D. No No

A

D. No No
The accumulated balance of other comprehensive income should be reported as a component of equity, separate from retained earnings and additional paid‐in capital.

129
Q

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid‐in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

$2
$5
$10
$12

A

$12

If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid‐in capital ($10,000/1,000 shares, or $10), which totals $12.

CPA Exam- FAR (5 decks)

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