area II B. Trade receivables

Question 1

sales discount are

Answer 1

reductions in the sale price offered to customers as an incentive to encourage
prompt payment. When accounting for sales discounts with trade receivables, there are two common methods:

the Gross method:
sales are recorded at their full amount. If
the customer takes advantage of the discount by paying early, the discount is recorded at the time of payment.

the Net method:
records sales at the net amount, assuming that the customer will take the discount. If the customer does not take the discount, the difference is recorded as sales discount
forfeited. In the net method, if the customer does not take the discount, the additional amount received is recognized as “Sales Discount Forfeited,” which is generally treated as other income.

Question 2

estimating allowance for uncollectible A/R is based on

Answer 2

historical data, industry averages, customer
creditworthiness, and current economic conditions

Question 3

allowance for credit loss, i.e., allowance for uncollectible A/R is

Answer 3

a contra asset account, i.e., it increases with credit and decreases with debit

Question 4

Writing Off an Uncollectible Account: If a specific account, say $1,000, is deemed uncollectible:

Answer 4

This entry does not affect the income statement since the expense was already recognized when the allowance was created. It merely reduces the receivable and the allowance

Question 5

Sales returns occur when customers return previously purchased goods to the seller. This event requires specific accounting
treatments to reflect the change in revenue and inventory, if applicable.

Answer 5

Accounting for Sales Returns
● Recognizing the Return: When goods are returned, the seller needs to reverse the revenue recognized from the sale and adjust the inventory if the goods are restockable.
● Updating Receivables: If the original sale was made on credit, the seller also needs to reduce the accounts receivable

Upon the return of goods:
● Reducing Revenue: The sales return account, which is a contra-revenue account, is debited to show a reduction in revenue.
● Adjusting Receivables: The accounts receivable are credited to reflect the decrease in the amount owed by the customer.
● Updating Inventory: If the goods are restockable, inventory is debited to reflect the return of goods to inventory, and cost of
goods sold is credited to reverse the expense recorded at the time of sale

Question 6

sales revenue and sales returns and allowances accounts are

Answer 6

opposites, i.e., sales revenue increases with credit. sales return account increases with debit

Question 7

in secured borrowing, A/R used as collateral in exchange for loan and there is no

Answer 7

direct journal entry for pledging A/R as collateral for loan. Only receipt of loan is recorded.
The receivables remain on the balance
sheet, and details are disclosed in financial statement notes. the company remains responsible of collecting A/R

Question 8

factoring means

Answer 8

selling trade receivables to a third party (factor) at a discount. The factor then assumes the risk of collecting the receivables (if without recourse). If with recourse (company bears the risk of
uncollectible A/R). It involves selling the receivables outright, often transferring the risk to the factor.

Question 9

Assignment means

Answer 9

specific receivables are used/earmarked as collateral for a specific loan. The rights to the receivables are assigned to the lender but ownership usually remains with the company. Company remains responsible for collection. It is more tailored compared to general secured borrowing.
There’s no direct journal entry for assigning the receivables, but details are disclosed in the financial statements

Question 10

Pledging is

Answer 10

a form of secured borrowing where receivables are pledged as collateral for a loan, but the company retains control and ownership and continues to collect them. Pledging often implies a more general claim against the receivables, rather than a specific lien. it is often used in broader financing arrangements, not tied to specific receivables pledging itself doesn’t require a journal entry; the receivables remain on the balance sheet.

Question 11

FAR3B10005
Which factor does not impact the reporting of a contingent liability?
A. The probability of the future event occurring.
B. The ability to estimate the potential financial impact.
C. The company’s policy for dividend distribution.
D. Whether the event stems from past transactions.

Answer 11

C. The company’s policy for dividend distribution.

Dividend distribution policies do not affect the reporting of contingent liabilities. Factors that do impact include the probability of occurrence (A), ability to estimate the financial impact (B), and linkage to past events (D).

Question 12

FAR1B10024
How should a non-profit entity correct an error where a multi-year grant was entirely recognized in the year it was received?
A. Recognize more revenue in the current year
B. Defer a portion of the revenue to future periods
C. Decrease net assets and increase liabilities
D. Increase expenses in the current year

Answer 12

B. Defer a portion of the revenue to future periods

Multi-year grants should be recognized over the periods they are intended to cover. Therefore, the correction involves deferring a portion of the revenue to future periods, ensuring revenue recognition aligns with the period of benefit.

Question 13

FAR2B006n
What of the following is true when receivables are factored without recourse?
A. The transferor (original creditor) bears the responsibility for any uncollectible accounts
B. Factoring without recourse is usually considered a sale of the receivables
C. The transferor (original creditor) is still responsible to perform credit checks and collect payments
D. The factor can go after the transferor (original creditor) for any uncollectible accounts.

Answer 13

B. Factoring without recourse is usually considered a sale of the receivables

When receivables are factored “without recourse”, this is a sale of the receivables because the factor has no recourse against the transferor for any uncollectible receivables.
The term “without recourse” means that once the receivables are transferred to the factor (the new creditor), the factor now bears the responsibility of collecting payments on the receivables, and can’t seek relief from the transferor.

Question 14

FAR1C002n
Which of the following are the required financial statements for a nongovernmental not-for-profit entity?
A. 1)a statement of financial position 2) a statement of activities 3) a statement of cash flows and 4) a statement of functional expenses
B. 1) a statement of financial position 2) a statement of activities and 3) a statement of cash flows
C. 1) a balance sheet 2) an income statement 3) a statement of cash flows and 4) a statement of functional expenses
D. 1) a statement of financial position 2) a statement of functional expenses and 3) a statement of cash flows

Answer 14

B. 1) a statement of financial position 2) a statement of activities and 3) a statement of cash flows

The required financial statements for an NFP are 1) a statement of financial position 2) a statement of activities and 3) a statement of cash flows.

The statement of financial position is essentially a balance sheet, the statement of activities is essentially an income statement, and the statement of cash flows is… a statement of cash flows. NFPs report based on the net assets model.
NFPs do have to report expenses by nature and by function, but that can be done on either the face of the statement of activities, or in a schedule in the notes, or on a separate statement.

Question 15

FAR1A60037
What is the best course of action when a discrepancy is identified in the depreciation expense reported in the consolidated financial statements?
A. Increasing the depreciation expense in the next financial period
B. Reviewing and correcting the depreciation calculations if necessary
C. Distributing the discrepancy amount over future periods
D. Reporting the discrepancy in the financial statement notes

Answer 15

B. Reviewing and correcting the depreciation calculations if necessary

When a discrepancy is identified in the depreciation expense, the best course of action is to review and correct the depreciation calculations. This ensures that the expense is accurately represented in the consolidated financial statements.

A is incorrect because corrections should be made in the current period, not deferred.

C is incorrect as distributing the discrepancy over future periods does not address the root cause.

D is incorrect because merely reporting the discrepancy does not correct it

Question 16

A/R rollforward is

Answer 16

an accounting schedule that shows the beginning balance, additions, reductions, and ending balance for a particular account over a period
Beginning Balance 100,000
Add: Sales on Credit 50,000
Less: Collections (40,000)
Less: Write-offs (5,000)
Ending Balance 105,000

Question 17

FAR2A10005

Which of the following best describes why bank reconciliations are important for calculating cash balances?

A. They help in adjusting the sales revenue
B. They confirm the accuracy of cash disbursements
C. They identify timing differences between the company’s records and the bank
D. They are used to calculate depreciation expense

Answer 17

C. They identify timing differences between the company’s records and the bank

Bank reconciliations are crucial as they identify timing differences (C) between the company’s records and the bank statement. These differences can arise from outstanding checks, deposits in transit, bank charges, or errors.

This process does not directly adjust sales revenue (A), although it may confirm the accuracy of cash disbursements (B). It has no relation to calculating depreciation expense (D).

Question 18

FAR1A40024
When an error in the recognition of revenue from the previous year is discovered, what is the correct adjustment in the statement of changes in equity?
A) Increase the current year’s revenue.
B) Decrease the current year’s total assets.
C) Adjust the opening balance of retained earnings.
D) Increase the current year’s total liabilities.

Answer 18

C) Adjust the opening balance of retained earnings.

When an error in the recognition of revenue from the previous year is discovered, it should be corrected by adjusting the opening balance of retained earnings in the current year’s statement of changes in equity.
This does not involve increasing the current year’s revenue (Option A), decreasing total assets (Option B), or increasing total liabilities (Option D).

Question 19

FAR3E10027
Under what circumstances might Level 1 inputs not be suitable for fair value measurement?
A. When the asset or liability is frequently traded in an active market.
B. When there are significant adjustments to the quoted price in an active market.
C. When the asset or liability is a common financial instrument.
D. When the valuation is straightforward and based on observable data.

Answer 19

B. When there are significant adjustments to the quoted price in an active market.

Although Level 1 inputs are preferable due to their reliability, they may not be suitable if there are significant adjustments or modifications required to the quoted price in an active market, which may necessitate the use of Level 2 or Level 3 inputs.

Question 20

FAR1A30010
What aspect of a company’s financial status does the Statement of Comprehensive Income not directly address?
A. The company’s overall profitability.
B. The liquidity and cash flow position.
C. The efficiency of operational activities.
D. The details of asset purchases.

Answer 20

B. The liquidity and cash flow position.

While the Statement of Comprehensive Income provides a broad view of a company’s profitability and operational efficiency, it does not directly address the liquidity and cash flow position, which is typically detailed in the Cash Flow Statement.
Choice A is incorrect as it does address profitability. Choice C is incorrect as it does reflect operational efficiency. Choice D is incorrect as asset purchases are not its primary focus.

Question 21

FAR2B10040
What should be done if an adjustment is necessary after reconciling the trade receivables subledger and general ledger?
A) Only adjust the general ledger
B) Only adjust the subledger
C) Make corresponding adjustments in both ledgers
D) No adjustment is necessary if the discrepancy is small

Answer 21

C) Make corresponding adjustments in both ledgers

When an adjustment is necessary, corresponding entries should be made in both the subledger and the general ledger to ensure consistency and accuracy. Adjusting only one ledger would not resolve the discrepancy.

Question 22

FAR3G10002
Which of the following is an example of a Type I subsequent event?
A) Discovery of fraud that happened after the balance sheet date.
B) Settlement of a lawsuit that originated after the balance sheet date.
C) Loss of inventory due to a natural disaster occurring after the balance sheet date.
D) Information about a condition that existed at the balance sheet date, such as customer bankruptcy.

Answer 22

D) Information about a condition that existed at the balance sheet date, such as customer bankruptcy.

A Type I subsequent event provides additional evidence about conditions that existed at the balance sheet date and requires adjustment in the financial statements. Customer bankruptcy, if related to the financial status of the customer at the balance sheet date, falls under this category.

Question 23

The stockholders of Meadow Corp. approved a stock-option plan that grants the company’s top three executives options to purchase a maximum of 1,000 shares each of Meadow’s $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?
A. $20,000
B. $60,000
C. $100,000
D. $300,000

Answer 23

C. $100,000

To record compensation expense for stock options, you need to determine the fair value of the options, and then record the expense ratably over the vesting period. In this case, the full fair value is given, so the total fair value of $300,000 would be expensed over the 3-year vesting period, for a compensation expense in year 1 of $100,000.

Question 24

FAR3D10001
What is the primary objective of accounting for uncertainty in income taxes?
A. To ensure that the maximum possible tax is paid.
B. To recognize and measure uncertain tax positions.
C. To defer tax payments as long as possible.
D. To minimize the reported taxable income.

Answer 24

B. To recognize and measure uncertain tax positions.

The main objective of accounting for uncertainty in income taxes is to recognize and measure uncertain tax positions. This helps in providing accurate and reliable financial information to users of financial statements.

Question 25

FAR2D10058
How should the change in estimated useful life of a PPE asset be accounted for in a rollforward analysis?
A. It should not be included as it has no immediate financial impact
B. Adjust the opening balance of the asset
C. Reflect the change in the calculation of depreciation for the period
D. Show as a separate line item under revaluations

Answer 25

C. Reflect the change in the calculation of depreciation for the period

A change in the estimated useful life of a PPE asset should be reflected in the rollforward analysis by adjusting the depreciation calculation for the period.

Question 26

FAR1F10018
For evaluating the profitability of a company’s core business activities, excluding tax and interest expenses, which ratio is appropriate?
A. Return on Sales
B. Gross Profit Margin
C. EBIT Margin
D. Net Profit Margin

Answer 26

C. EBIT Margin

EBIT Margin is appropriate for evaluating profitability excluding tax and interest expenses, as it is calculated using Earnings Before Interest and Taxes. A focuses on operating income, B on cost of goods sold, and D includes all income and expenses.

Question 27

FAR1A70001
When correcting an error in the notes to the financial statements regarding the classification of a short-term liability, which principle is primarily being addressed?
A. Materiality
B. Conservatism
C. Accrual basis
D. Matching principle

Answer 27

A. Materiality

Materiality refers to the significance of an item, transaction, or error in the context of the financial statements. Correcting an error related to the classification of a short-term liability ensures that users of the financial statements are not misled about the company’s short-term obligations.

Question 28

FAR1A20014
A company’s trial balance includes the following: Service Revenue $150,000, Supplies Expense $20,000, Salaries Expense $40,000, Rent Expense $30,000, and Interest Revenue $10,000. What is the Operating Income?
A) $60,000
B) $70,000
C) $80,000
D) $90,000

Answer 28

A) $60,000

Operating Income is calculated by subtracting all operating expenses from service revenue.
Operating Income = Service Revenue − Supplies Expense − Salaries Expense − Rent Expense
Operating Income = $150,000 − $20,000 −$40,000 − $30,000 = $60,000
Note that Interest Revenue is not included as it is a non-operating item.

Question 29

FAR2A10020
If a company finds that it incorrectly recorded a $500 payment as $50 in its general ledger, what adjustment is needed in the bank reconciliation?
A. Add $450 to the bank statement balance
B. Deduct $450 from the bank statement balance
C. Add $450 to the general ledger balance
D. Deduct $450 from the general ledger balance

Answer 29

D. Deduct $450 from the general ledger balance

Since the company under-recorded the payment by $450 in its general ledger, it needs to deduct $450 from the general ledger balance to reconcile with the bank statement.
Adding to the bank statement balance (A) or deducting from it (B) is unnecessary because the error is in the company’s records. Adding $450 to the general ledger balance (C) would further increase the discrepancy.

Question 30

FAR1A20024
If a sale was recorded in the wrong period, what is the correct adjustment in the income statement?
A) Increase revenues in the current period and decrease in the next period.
B) Decrease revenues in the current period and increase in the next period.
C) Increase revenues in both periods.
D) No adjustment is needed as it will balance over the two periods.

Answer 30

B) Decrease revenues in the current period and increase in the next period.

The correct adjustment is to shift the revenue from the incorrect period to the correct one: decrease revenues in the period where the sale was wrongly recorded and increase it in the correct period.
A) is incorrect as it does the opposite. C) is incorrect as it increases revenues in both periods, which is not required. D) is incorrect because accurate period reporting is essential for financial statements.

Question 31

FAR1C008aicpa
On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an unconditional pledge of $20,000 for each of the next four calendar years to be paid on the first day of each year. The present value of an ordinary annuity for four years at a constant interest rate of 8% is 3.3. What amount of net assets with a donor restriction is reported in the year the pledge was received?

A. $66,000
B. $86,000
C. $100,000
D. $106,000

Answer 31

A. $66,000

The $20,000 received upfront is classified as a contribution with no donor restrictions.

The $20,000 to be received for each of the next 4 years will be net assets with a donor restriction, and it needs to be discounted using the PV factor of 3.3.

$20,000 x 3.3 = $66,000

Question 32

FAR3C10022
What characterizes a pass-through contribution for a not-for-profit entity?
A. Funds received and disbursed to a designated third party without donor-imposed conditions
B. Resources received with a restriction for a specific program
C. Funds received to be invested for a specified period
D. Contributions received with an endowment stipulation

Answer 32

A. Funds received and disbursed to a designated third party without donor-imposed conditions

Pass-through contributions are funds that a not-for-profit entity receives and disburses to a designated third party without any donor-imposed conditions.

Question 33

FAR1B20022
If a grant intended for a specific future project was prematurely recognized as revenue, what adjustment is necessary in the statement of activities?
A) Reclassify it as deferred revenue
B) Reclassify it from operating to non-operating revenue
C) Increase the unrestricted net assets
D) Decrease the temporarily restricted net assets

Answer 33

A) Reclassify it as deferred revenue

The grant should be reclassified as deferred revenue until the conditions for revenue recognition are met.

Question 34

FAR3E10022
When would a fair value measurement be categorized under Level 3 of the fair value hierarchy?
A. When it is based on quoted market prices in active markets.
B. When it uses observable inputs for similar assets or liabilities.
C. When it involves significant unobservable inputs.
D. When it is derived from the cost of replacing the asset.

Answer 34

C. When it involves significant unobservable inputs.

Level 3 of the fair value hierarchy is used when the valuation requires significant unobservable inputs. These are inputs for which market data is not available, and the entity must rely on its own assumptions. Option A describes Level 1, and Option B pertains to Level 2. Option D is incorrect as the cost of replacement is a valuation technique, not a level in the fair value hierarchy.

Question 35

FAR1D10027
What is the impact of a stock split on the calculation of EPS?
A. It increases the numerator (Net Income).
B. It increases the denominator (Weighted Average Shares Outstanding).
C. It decreases the numerator (Net Income).
D. It has no impact on the EPS calculation.

Answer 35

B. It increases the denominator (Weighted Average Shares Outstanding).

A stock split increases the number of shares outstanding, which affects the denominator of the EPS calculation. This adjustment is necessary to provide an accurate measure of earnings per share post-split.

Question 36

FAR3F10036
A lessee’s lease liability is initially $50,000. If the annual interest rate is 4% and the annual lease payment is $10,000, what is the interest expense for the first year?
A. $2,000
B. $4,000
C. $1,600
D. $2,400

Answer 36

A. $2,000

Interest expense is calculated on the lease liability at the beginning of the period. So, $50,000 x 4% = $2,000. Since the lease payment is made annually, the full year’s interest is recognized.

Question 37

FAR1D10020
Which of these is not a focus in the Management’s Discussion and Analysis section in Form 10-K (Item 7, Part II)?
A. The company’s financial condition over the past year.
B. Future financial projections and strategies.
C. Detailed quantitative data about market risk.
D. Explanation of the financial statements.

Answer 37

C. Detailed quantitative data about market risk.

The Management’s Discussion and Analysis section in Form 10-K (Item 7, Part II) focuses on providing narrative context to the financial statements, discussing the company’s financial condition, results of operations, and future financial projections and strategies. Detailed quantitative data about market risk is covered in Item 7A, not in the MD&A section.

Question 38

FAR2C10008
A company using LIFO had 200 units at $10 each at the beginning of the year. During the year, it purchased 300 units at $15 each and sold 400 units. What is the cost of goods sold (COGS)?
A. $5,500
B. $5,000
C. $4,500
D. $6,500

Answer 38

A. $5,500

Under LIFO, the COGS includes the newest costs first. This includes all 300 units purchased at $15 each ($4,500) and 100 of the beginning units at $10 each ($1,000), totaling $5,500.

Question 39

FAR2B10038
A company’s subledger shows a total trade receivables balance of $100,000, while the general ledger shows $95,000. What is a likely cause of this discrepancy?
A) Overstatement of cash sales
B) Understatement of cost of goods sold
C) A transaction not posted to the general ledger
D) Excessive bad debt expense

Answer 39

C) A transaction not posted to the general ledger

A likely cause for a higher balance in the subledger is a transaction that was recorded in the subledger but not posted to the general ledger. Overstating cash sales, understating cost of goods sold, or excessive bad debt expense would not typically result in this specific discrepancy.

Question 40

FAR1E10040
In income tax basis accounting, how is a contingent liability recognized?
A) When the future event is probable and can be reasonably estimated.
B) When it is paid.
C) In the period the related expense is deductible.
D) Only when the contingency becomes an actual liability.

Answer 40

C) In the period the related expense is deductible.

Contingent liabilities are recognized in the period the related expense is deductible under tax laws in income tax basis accounting.

Question 41

FAR1A40034
In the context of equity revaluation, which document is crucial for resolving discrepancies?
A) Independent valuation reports.
B) Previous year’s financial statements.
C) Shareholder meeting minutes.
D) Debt covenant agreements.

Answer 41

A) Independent valuation reports.

For discrepancies related to equity revaluation, independent valuation reports are critical as they provide an external and objective assessment of the revalued assets.
Previous year’s financial statements (Option B) and shareholder meeting minutes (Option C) may provide context but are not as directly relevant. Debt covenant agreements (Option D) are related to liabilities, not equity revaluation.

Question 42

FAR2E20012
Which of the following best describes how to amortize a premium on a bond investment over its life?
A) Adding the premium to the interest income each period.
B) Subtracting the premium from the interest income each period.
C) Allocating the premium equally over the life of the bond.

Answer 42

B) Subtracting the premium from the interest income each period.

Amortizing a premium involves subtracting a portion of the premium from the interest income for each period, thereby reducing the investment’s carrying amount over time.

Question 43

FAR1A10023
A loan received was mistakenly recorded as revenue. What is the appropriate adjustment?
A) Decrease liabilities and increase revenues
B) Increase liabilities and decrease revenues
C) Decrease assets
D) Increase assets

Answer 43

B) Increase liabilities and decrease revenues

The loan should be recorded as a liability, not revenue. The adjustment involves increasing liabilities (to record the loan) and decreasing revenues (to reverse the mistaken entry).

Options A, C, and D do not correctly address the error of misclassifying a loan as revenue.

Question 44

FAR2D10024
An asset with a carrying amount of $50,000 and a value in use of $45,000 has a fair value less costs to sell of $40,000. What is the impairment loss?
A. $5,000
B. $10,000
C. $15,000
D. No impairment loss

Answer 44

A. $5,000

The recoverable amount is the higher of the asset’s value in use and fair value less costs to sell. Here, it’s $45,000 (value in use). The impairment loss is the carrying amount ($50,000) minus the recoverable amount ($45,000), which equals $5,000.

Question 45

FAR1E10014
A firm received a bill for $1,800 for utilities used in December, to be paid in January. On a December accrual basis balance sheet, how should this be recorded?
A) Debit Utility Expense $1,800, Credit Cash $1,800
B) Debit Accounts Payable $1,800, Credit Utility Expense $1,800
C) Debit Utility Expense $1,800, Credit Accounts Payable $1,800
D) Debit Cash $1,800, Credit Utility Expense $1,800

Answer 45

C) Debit Utility Expense $1,800, Credit Accounts Payable $1,800

Accrual accounting recognizes expenses when incurred. The utility expense for December is recognized with a corresponding payable since it’s unpaid. Options A and D involve cash, which is incorrect. Option B reverses the correct entry.

Question 46

FAR1E10036
In the income tax basis of accounting, how is inventory typically recorded?
A) As an asset until sold.
B) Expensed when purchased.
C) Recorded using the LIFO or FIFO method as per tax regulations.
D) Not recorded until it is used.

Answer 46

C) Recorded using the LIFO or FIFO method as per tax regulations.
Inventory in income tax basis accounting is recorded using LIFO or FIFO methods, as allowed by tax regulations. This differs from Option A, which is more typical of accrual accounting, and Option B, which reflects cash basis accounting. Option D is incorrect as inventory is always recorded when purchased.

Question 47

FAR3C10065
In the case of a multi-year pledge of cash to a not-for-profit entity, how should the initial recognition be measured?
A. At the total amount pledged
B. At the present value of the future cash flows
C. At the amount received in the first year
D. At the average annual amount pledged

Answer 47

B. At the present value of the future cash flows

A multi-year pledge of cash should be recognized at the present value of the future cash flows, discounting the future amounts to their present value.

Question 48

FAR2E20004
In the context of amortized cost accounting, what is the primary focus when valuing an investment?
A) The current market value of the investment.
B) The historical cost of the investment.
C) The expected cash flows from the investment until maturity.
D) The potential for capital gains on the investment.

Answer 48

C) The expected cash flows from the investment until maturity.

Amortized cost accounting focuses on the expected cash flows from the investment until maturity. This method amortizes any discounts or premiums on the acquisition cost over the life of the investment, reflecting the earning process.

Question 49

FAR1A60030
If an error is identified in the underestimation of a liability in a subsidiary, how should this be reflected in the consolidated financial statements?
A. Increase the liability in the consolidated balance sheet
B. Decrease the subsidiary’s equity
C. Increase the parent company’s retained earnings
D. Reflect the change only in the subsidiary’s balance sheet

Answer 49

A. Increase the liability in the consolidated balance sheet

An error in underestimating a liability in a subsidiary should be corrected by increasing the liability in the consolidated balance sheet. This ensures that the consolidated financial statements accurately reflect the group’s true financial obligations.

Question 50

FAR1B20008
What role does the statement of activities play in demonstrating a not-for-profit entity’s accountability?
A) It shows the entity’s profitability
B) It indicates the entity’s borrowing capacity
C) It reflects how resources are used in accordance with its mission
D) It demonstrates the entity’s market share

Answer 50

C) It reflects how resources are used in accordance with its mission

The statement of activities demonstrates accountability by showing how the not-for-profit uses its resources in support of its mission.

Question 51

According to the FASB conceptual framework, for financial reporting to be useful, it must
A. Be in accordance with generally accepted accounting principles.
B. Provide information useful for making business and investment decisions.
C. Be understandable to those who have a limited knowledge of business activities.
D. Directly measure the value of the entity being reported on.

Answer 51

B. Provide information useful for making business and investment decisions.

The whole point of financial reporting is to provide useful information to users in order to make decisions with.

Question 52

FAR3D10008
Which of the following is true regarding the disclosure of uncertain tax positions in financial statements?
A. No disclosure is required if the position is not recognized.
B. Full disclosure of all uncertain tax positions is mandatory, regardless of recognition.
C. Only recognized uncertain tax positions are disclosed.
D. Disclosure is only required for positions that have been resolved with tax authorities.

Answer 52

B. Full disclosure of all uncertain tax positions is mandatory, regardless of recognition.

Full disclosure of all uncertain tax positions is mandatory in financial statements, regardless of whether they are recognized or not. This disclosure provides users of financial statements with complete information about the potential tax liabilities.

Question 53

FAR1D10029
When calculating diluted EPS, why are in-the-money stock options considered?
A. Because they increase the company’s net income.
B. Because they represent potential additional common shares in the market.
C. Because they decrease the company’s liabilities.
D. Because they are a form of employee compensation.

Answer 53

B. Because they represent potential additional common shares in the market.

In-the-money stock options are considered in diluted EPS calculations because they represent potential additional common shares if the options are exercised. This could dilute the earnings per share.

Question 54

FAR3F003nsim
Dimple entered into an agreement to lease an ice cream mixer from Smile for 10 months for $100 per month. The fair value of the mixer is $800, and its useful life is 24 months. How should Dimple classify this lease?
A. As an operating lease.
B. As a short term lease.
C. As a direct financing lease.
D. As a finance lease.

Answer 54

B. As a short term lease.

Since the lease period is less than 12 months, this is a short term lease. Dimple would record lease expense of $100 each month, and Smile would record lease revenue of $100 each month.