CPA FAR - F2

Question 1

Item Revenue Recognition

Answer 1

Once an item has been manufactured and the item has specifications that separately identify the items (and cannot be given to another customer), you recognize the revenue.

Question 2

Financing Arrangement

Answer 2

Purchase Price >= Original Sale Price AND Expected Market Value

Question 3

OCI and Unrealized Losses on Trading Securities

Answer 3

Since Unrealized Losses on Trading Securities are already included in Net Income, they do not go into OCI.

Question 4

Where on the Balance Sheet does Deferred Tax Liabilities (DTL) go?

Answer 4

Non-Current Liabilities

Question 5

Financial Reporting Releases (FRR)

Answer 5

These comprise the Financial Reporting Policies which represent the principles of accounting to be followed by registrants.

Question 6

How is a Change in Estimate accounted for?

Answer 6

The effect is reported PROSPECTIVELY as a component of income from continuing operations

Question 7

How is a Correction of Error accounted for?

Answer 7

The applicable error is restated retroactively through a prior period adjustment of retained earnings.

Question 8

How is a Change in Accounting Principle accounted for?

Answer 8

The effect is reported RETROSPECTIVELY to retained earnings with a separate disclosure.

Question 9

How is a Change in Reporting Entity accounted for?

Answer 9

All prior financial statements that are presented in the financial statements should be restated.

Question 10

What do you do when you can’t tell the difference between a change in estimate and a change in principle?

Answer 10

You consider it a change in estimate and report PROSPECTIVELY.

Question 11

When should significant estimates be disclosed in the financial statements?

Answer 11

When it is reasonably possible (not probably) that the estimate will change in the near term and that the effect of the change will be material.

Question 12

How should a reasonably possible loss be displayed on the financial statements?

Answer 12

It should have a footnote disclosure only.

Question 13

What are the Special Purpose Frameworks?

Answer 13

1. Cash Basis
2. Modified Cash Basis
3. Tax Basis

Question 14

What is the equation for Inventory Turnover?

Answer 14

COGS / Average Inventory

Question 15

What is the equation for Days in Inventory?

Answer 15

Ending Inventory / (COGS/365)

Question 16

What is the equation for Net Profit Margin?

Answer 16

Net Income after Taxes / Net Sales

Question 17

What is the equation for Return on Assets?

Answer 17

Net Income / Average Total Assets

Question 18

What is the equation for Return on Equity?

Answer 18

(Net Income - Preferred Dividends) / Average Total Equity

Question 19

What is the equation for Working Capital Turnover?

Answer 19

Sales / Average Working Capital (CA-CL)

Question 20

What is the equation for Current Ratio?

Answer 20

Current Assets / Current Liabilities

Question 21

What is the equation for Quick Ratio (Acid Test)?

Answer 21

(Cash + Marketable Securities + Net Accounts Receivable) / Current Liabilities

Question 22

Where is inventory on the balance sheet?

Answer 22

Current asset

Question 23

What is the equation for A/R Turnover Ratio?

Answer 23

Net Sales / Average Net A/R

Question 24

What is the equation for Total Debt Ratio?

Answer 24

Total Debt / Total Assets

Question 25

What is the equation for Times Interest Earned?

Answer 25

EBIT / Interest Expense (NOTE: You may need to add back in interest if it was taken out)

Question 26

What is the equation for Residual Income?

Answer 26

Net Operating Income (Sales * Return on Sales) - Interest Charge (Average Total Assets (Sales / Asset Turnover) * Imputed Interest Rate)

operating income less imputed interest (the product of a required rate of return and operating assets). The operating assets are equal to the sales divided by the capital turnover ratio

Question 27

What is the equation for Return on Investment?

Answer 27

Net Income / Average Invested Capital (Avg Op Assets)