Commonly Missed Questions on Practice Tests

Question 1

Which of the following is a General and Administrative Expense?

• Advertising
• Interest

Answer 1

• Nope. Selling expense

- Nope. Separate line item.

Question 2

What is OCI in the following items:

• Net Income
• Owner Contribution
• Deferred gain on effective CF hedge
• Foreign Currency Translation Gain
• PSC not recognized in net periodic pension cost

Answer 2

Answer:
\+Deferred gain on effective CF hedge
\+FX translation gain
-PSC not recognized in net periodic pension cost
= OCI

Question 3

Company is performing impairment testing on long-term equipment.  Out of these options, which one is not appropriate for measuring FV of the equipment?
-Income approach
-NRV approach
-Cost Approach
Market Approach
-

Answer 3

Although net realizable value is used to measure many items on the balance sheet, the fair value of equipment cannot be measured using this approach.
-Others are all appropriate.

Question 4

Comprehensive income includes which of the following (FASB)?

• Loss on discontinued ops
• Investments by owners

Answer 4

-Yes
-No
Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.

Question 5

What is the interest on note receivable to be reported as a current asset in the following:

• 8% note receivable dated 6/30, Year 1
• Original amount of loan: 150K
• Payments of 50K on 7/1 of each year
• 6/30 Year 3 balance sheet.

Answer 5

-The current asset for interest receivable on June 30, Year 3, is the interest to be received within one year. Interest to be received on July 1, Year 3 is:

$100,000 balance of note x 8% = $8,000

Only one payment has been recorded to date.

Question 6

What should we record for rent revenue as of 12/31?

• 1000 rent payable on the first of each month.
• Signed on August 1
• Lease begins September 1
• Nonrefundable fee for unique lease terms: 540
• Timely payments made every month
• What’s rent revenue for renter?

Answer 6

• 1000 per month
• 4 months (September - December)
• 540 nonrefundable, should be allocated throughout the year. 4/12 of the year * 540 = 180.
• (4000 + 180 = 4,180).

Question 7

Which of the following items would NOT be found in Comprehensive Income?

1) Unrealized Losses from changes in value of AFS securities
2) Income from Continuing Ops
3) Nonmonetary exchanges of common stk for assets
4) Recognition of PSC due to pension plan amendment

Answer 7

• First off… what is Comprehensive Income Jack?
• Comprehensive Income = Net Income + OCI…
• So if its in either NI or OCI… it’s in CI
  1) Unrealized losses from AFS equity securities are in net income. Unrealized losses from AFS DEBT securities are in OCI. Both are in CI.
  2) First Part of CI (duh)
  3) NOT included in CI. Transaction with owners specifically excluded from CI.
  4) Included in OCI. Changes in the funded status of a pension plan–due to the recognition of PSC from a pension plan amendment–is always OCI.
• *Caveat to #4:
• Prior service costs, recognized in the year of adjustment, should be recorded to P.B.Ob and OCI

Question 8

The FASB is responsible for all of the following (true/false):

• establishes accounting concepts & standards for reporting, provides guidance on implementation
• provides a conceptual framework that helps increase understanding of & confidence in financial information
• recognized as authoritative by SEC and AICPA
• develops principles and attributes related to organizations systems of internal control

Answer 8

• Truuuu
• Truuuu
• Truuuu
• HELL NAW. Not responsible for prescribing standards related to internal control.

Question 9

What is a GAAP required enterprise wide disclosure related to external customers?

Answer 9

Financial statements for public companies must report segment information about a company’s major customers if… that customer provides 10% or more of the COMBINED revenue (internal + external) of ALL operating segments (not just that one).

Question 10

Beginning of the year inventory was off because of an understatement or overstatement. Discovered in the next year. What should the company do?

Answer 10

-Adjust beginning retained earnings to include the net-of-tax effect of the miscounted inventory. Either increases PY net income or decreases PY net income by a net-of-tax amount related to the increase/decrease in COGS. Therefore, that PY net income will trickle into beginning retained earnings.

Question 11

According to GAAP:

Accounting change results in financials that are effectively statements of a different reporting entity. What do we do?

Answer 11

-Financial statements of all prior periods presented should be restated.

Question 12

A company operating under IFRS regulations has a change in inventory costing system during the current year. When should the cumulative effect of this change be reflected on the balance sheet?

Answer 12

Company must present three balance sheets. Cumulative effect will be reflected in the beginning retained earnings of prior year (first of the three balance sheets).

Question 13

Company accounts for insurance premiums via debits to prepaid insurance. For interim reporting, the company makes estimated charges to insurance expense with credits to prepaid insurance. Charges during the year were 437,500 to insurance expense.
-Beginning balance of PPI: 105,000
-Ending balance of PPI: 122,500
Question: what is the total amount of payments made by East during the year?

Answer 13

BB: 105,000
+ Total Payments made (each one increases the prepaid debit account balance)
- Charges during the year to insurance expense (reducing the prepaid) - 437,500
=EB: 122,500

Answer: 455,000

Question 14

Under U.S. GAAP, a gain that is both unusual and infrequent should be reported as what?

Answer 14

-As a part of income from continuing operations. This should be as a separate component of income from continuing operations. Key point: NOT reported net of tax.

Question 15

Company developed a software program intended to market and sell to customers. The timeline of development is below:

• Jan 1 - March 31: $200,000 spent on software coding
• April 1 - June 30: $100,000 spent on software testing
• July 31: Technological feasibility achieved
• After July 31…Product masters being produced: $125,000

-What is R&D expense for the year?

Answer 15

• Software coding = include (200,000)
• Software testing = include (100,000)
• Technological feasibility achieved - stop counting R&D expense
• Key point: Costs related to the planning, design, coding, and testing of software incurred until technological feasibility are appropriate to record as R&D expense.
• Costs incurred after technological feasibility are not recorded as R&D

Question 16

J Company (consignee) paid freight costs for goods shipped from D company (consignor). Those freight costs will be deducted from J’s payments to D once the consignment goods are sold. Until J sells the goods, the freight costs should be included in J’s…?

Answer 16

-Accounts receivable. These costs that he has incurred (liability assumed) will be reimbursed via deductions in payments. Recoverable costs are recorded as A/R.

Question 17

A corporation issued debt to purchase land for development purposes. Expenditures related to the purchase are as follows:
-Purchase price: $1,000,000
-Real estate taxes in arrears: $15,000
-Debt issuance costs: $2,000
-Attorney fee for title search on land: $5,000
What should the company record the land at in its FS?

Answer 17

Include:
-Purchase price
-Real estate taxes in arrears
-Attorney fee for title search on land
Don't include:
-Debt issuance costs.  These should be presented on the balance sheet as a direct reduction to the carrying amount of the bond.  Do not include in the cost of the land.
Total: 1,020,000

Question 18

• In PY, Katt Company reduced the carrying amount of its long lived assets from 120K to 100K due to impairment.
• In CY, Katt Company determined the value of these same assets to be $130K.
• What amount should Katt record as restoration of previously recognized impairment loss if he uses GAAP?

Answer 18

• GAAP does not allow for subsequent reversals of impairment losses, unless the asset is held for disposal
• IFRS does allow for reversal of impairment losses

Question 19

What is the total carrying value of a company’s inventory under IFRS?

Answer 19

For each item of inventory, calculate the Net Realizable Value. IFRS requires inventory to be recorded at the lower of:

• Cost or
• Net Realizable Value

NRV is calculated as Sales Price - Cost to sell or dispose

Question 20

How does a company calculate its AR turnover for a given year?

Answer 20

• Numerator: Net Sales
• Denominator: Average Net Accounts Receivable (average AR between beginning of the year and end of year, subtracting Allowance for Doubtful Accounts from each)

Key Point: Don’t forget to include the Allowance for Doubtful accounts in your calculation of average AR

Question 21

Corporation entered into a contract to purchase inventory. There was a fixed purchase price at the time of the contract. By the end of the accounting period, the current Market Value of the inventory was less than the fixed purchase price by a material amount. How should they treat this debacle?

Answer 21

-They should:
1) Describe the nature of the contract in a note to the financial statements
2) Recognize a loss in their income statement
3) Recognize a liability for the accrued loss
They should not:
-Recognize a reduction in inventory by use of a valuation account. This is NOT a move.

Question 22

What is the rule for determining whether a component is deemed a “reportable segment?”

Example facts:
A: Net income 215K
B: Net income 30K
C: Net loss (180 K)
D: Net income 80K
E: Net loss (20K)

Answer 22

A segment meets the “size” test for reportability if the absolute amount of its reported profit/loss is 10% or more of the greater of the following:

1) the Combined reporting profit of all operating segments that did not report a loss
2) the Combined reporting loss of all operating segments that did report a loss

Test:

1) Combined reporting profit of all operating segments that reported net income: 215K + 30K + 80K = 325K
2) Combined reporting loss of all operating segments that reported losses: -180K + -20K = -200K

Which is greater? 325K (operating profits). Therefore, size test is 32.5K threshold. Has to be greater than or equal to 32.5K in order to be a reportable segment.

Question 23

A change from the cost approach to the market approach for measuring fair value is considered what type of accounting change?

• Error correction?
• Change in accounting estimate?
• Change in accounting principle?
• Change in valuation technique?

Answer 23

Answer: Change in accounting estimate.
Incorrect: Error correction is not appropriate. Plus, an error correction is not a type of accounting change.
Incorrect: A change in valuation technique is not one of the defined types of accounting change. This does fall within the category of changes in accounting estimate however. Not a change in principle.

Question 24

A company incurs a couple expenses during laboratory research aimed at discovering new knowledge.

• 100K of costs are probable to result in future benefits
• 50K of costs are reasonably possible to result in future benefits
• Which amount of these costs are expensible as R&D costs?

Answer 24

-Under U.S. GAAP, unless the tangible assets associated with these R&D costs have alternative future uses, or if the work is undertaken on behalf of others to be reimbursed, the costs that are associated with R&D expenses are indeed R&D expenses, and should be directly charges as an expense on the income statement.

Question 25

Under GAAP, is the cumulative effect of an inventory pricing change on PY earnings reported on the FS for?

1) LIFO to Weighted Average
2) Weighted Average to LIFO

Answer 25

1) Normally, yes, you would report the cumulative effect. The cumulative effect of a change in accounting principle is reported as an adjustment to beginning retained earnings. Caveat: this only applies when it is considered “practicable” to calculate the cumulative effect.
- Exception: when you are switching from any system TO LIFO… it is not considered practicable, because historical LIFO layers data is usually not available for PY’s inventories…

Question 26

What is one disadvantage of the periodic inventory system?

Answer 26

-COGS amount used for FS reporting includes both 1) cost of inventory sold and 2) inventory shortages

Question 27

How do you calculate the index number for inventory layers under LIFO dollar value?

Answer 27

Numerator: ending inventory at current year cost
Denominator: ending inventory at base year cost

Question 28

What is the calculation for return on equity?

Answer 28

Numerator: Net income - preferred dividends
Denominator: Average common equity

Key point: any time you’re looking at return on EQUITY, DEBT, or ASSETS… you need to consider the AVERAGE of the account in the denominator. These are static amounts, so you need to take the average…

Question 29

For governmental fund types, which item is considered the primary measurement focus?

Answer 29

Current financial resources is the primary measurement focus for governmental fund types.
The measurement focuses of government funds include:
-Current financial resources
-Determination of financial position
-Changes in financial position (sources, uses, and balances of current resources)

Question 30

A company is required to file 10-Q’s with the SEC. The industry it operates in is not subject to seasonal fluctuations. What periods’ balance sheets must be reported on the current 10-Q?

Answer 30

• Most recent quarter end
• End of preceding fiscal YEAR

**NOT required: end of corresponding fiscal quarter. Due to the absence of seasonal fluctuations, this is not required.