CPA Questions April 19

Question 1

U Co. had cash purchases and payments on account during the current year totaling $455,000. U’s beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U’s accrual‐basis purchases for the year?

Answer 1

$441,000
$469,000
$505,000
$519,000
 You Answered Incorrectly.
This response incorrectly analyzes the change in accounts payable (AP). AP has decreased for the year. If AP had increased $14,000, this answer would be correct.

Question 2

In Dart Co.’s year two single‐step Income Statement, as prepared by Dart’s controller, the section titled “Revenues” consisted of the following:
Sales $250,000
Purchase discounts 3,000
Recovery of accounts written off 10,000
Total revenues $263,000
In its year two single‐step Income Statement, what amount should Dart report as total revenues?

Answer 2

$250,000
$253,000
$260,000
$263,000
 You Answered Incorrectly.
This calculation includes the recovery of accounts written off, which is incorrect. Total revenue is only the $250,000 in sales.

Question 3

U.S. GAAP includes a very large set of accounting guidance. Choose the correct statement.

Answer 3

The FASB Accounting Standards Codification includes guidance about items that are not under the purview of the Generally Accepted Accounting Principles, such as the income tax basis of accounting.
Authoritative guidance from FASB Statements adopted before the FASB Accounting Standards Codification does not appear in the Codification.
There is an implied hierarchy within the FASB Accounting Standards Codification, with FASB Statements assuming the top level.
International accounting standards are not included in the FASB Accounting Standards Codification.
You Answered Incorrectly.
Much of the Codification is a repackaging of existing GAAP at the time the Codification was adopted.

Question 4

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?

Answer 4

Reliability.
Timeliness.
Neutrality.
Relevance.
 You Answered Incorrectly.
The question is asking which of the following terms captures predictive value. Neutrality is a component of faithful representation. It is not a component of relevance. Relevance captures predictive value.

Question 5

Reporting inventory at the lower of cost or market is a departure from the accounting principle of:

Answer 5

Historical cost.
Consistency.
Conservatism.
Full disclosure.
 You Answered Incorrectly.
LCM does not violate full disclosure. It can be argued that, given a decline in market value below cost, LCM actually provides more relevant information than maintaining the historical cost valuation.

Question 6

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

Answer 6

(Conservatism.)
Relevance.
Consistency.
Faithful representation.
 You Answered Incorrectly.
Relevance pertains to the quality of information that causes it to be useful for decision making. Gain contingencies are not recognized in the accounts. Thus, the nonrecognition of gain contingencies that are probable and estimable could be considered a compromise of the relevance characteristic of accounting information. Users might benefit from knowing about gain contingencies.

Question 7

Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:
Front Market Side Market
Selling Price $52/sh $50/sh
Transaction Cost $ 6/sh $ 1/sh
If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?

Answer 7

($52/sh)
$50/sh
$49/sh
$46/sh
 You Answered Incorrectly.
This incorrect answer ($50/sh) results from using the selling price in Side market, rather than Front market. Since Front, not Side, is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.

Question 8

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except

Answer 8

Quoted prices for identical assets and liabilities in markets that are not active.
Quoted prices for similar assets and liabilities in markets that are active.
Internally generated cash flow projections for a related asset or liability.
(Interest rates that are observable at commonly quoted intervals.)
You Answered Incorrectly.
This response is a true statement—quoted prices for identical items in markets that are not actively traded are observable inputs.

Question 9

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.

Answer 9

I only.
II only.
Both I and II.
(Neither I nor II.)
 You Answered Incorrectly.
Quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value. Such prices would be considered level 2 factors, observable inputs but not in active markets.

Question 10

Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct?
I. The fair value hierarchy level within which fair value measurements fall must be disclosed.
II. Quantitative fair value measurement disclosures must be in tabular format.

Answer 10

(Both I and II are correct.)
I only.
II only.
Neither I nor II are correct.
 You Answered Incorrectly.
It is true that quantitative disclosures about fair values must be in tabular format (Statement II), but it also is true that fair value amounts must be disclosed separately for each level of the fair value hierarchy (Statement I).

Question 11

According to the IASB Framework, the process of reporting an item in the financial statements of an entity is:

Answer 11

(Recognition.)
Statement of Financial Position.
Disclosure.
Presentation.
 You Answered Incorrectly.
Presentation in the financial statements is addressed in individual IFRSs, not in the IASB's Framework.

Question 12

Identify which of the following is an assumption(s) underlying the preparation and presentation of financial statements under the IASB Framework.

Answer 12

Accrual Basis
Going Concern
Yes
No
(Yes
Yes)
No
Yes
No
No
 You Answered Incorrectly.
There are two assumptions underlying the preparation and presentation of financial statements, including going concern.

Question 13

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

Answer 13

Earnings per Share (EPS)
Information by Segment
YesYes
YesNo
NoYes
(NoNo)
You Answered Incorrectly.
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.

Question 14

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.

Answer 14

I only.
II only.
(Both I and II.)
Neither I nor II.
 You Answered Incorrectly.
While it is correct that IFRS for SMEs is based on accrual basis accounting (Statement I), it is also correct that, generally, IFRS for SMEs may be used as an alternative to using OCBOA (Statement II).

Question 15

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

Answer 15

Discontinued operations.
Gross Profit.
Depreciation and amortization.
(All items would appear on the Income Statement when using IFRS.)
You Answered Incorrectly.
Discontinued operations are included in the Income Statement. They are included at the end of the statement, similar to U.S. GAAP reporting.

Question 16

On January 1, 20X5, Layton Co. acquired the copyright to a book owned by Garner for royalties of 15% of future book sales. Royalties are payable on September 30 for sales in January through June of the same year, and on March 31 for sales in July through December of the preceding year.

During 20X5 and 20X6, Layton remitted royalty checks to Garner as follows:
March 31 September 30
2005 $ ‐ $25,000
2006 22,000 40,000

Layton’s sales of the Garner book totaled $300,000 for the last half of 20X6. In its 20X6 Income Statement, Layton should report royalty expense of:

Answer 16

($85,000)
$67,000
$62,000
$45,000
 You Answered Incorrectly.
Royalty expense for 20X6 equals 15% of sales for the year 20X6, regardless of when the royalties are paid. The $40,000 paid on September 30, 20X6 applies to the sales in the first half of 20X6 (January ‐ June). Sales for the second half of 20X6 were $300,000. The royalty expense associated with these sales is .15($300,000) = $45,000. Therefore, total royalty expense for the year 20X6 is $40,000 + $45,000 = $85,000. The $67,000 answer is the sum of the $45,000 computed above (for the second half of 20X6) and the $22,000 check paid March 31, 20X6. However, the $22,000 check relates to the second half of 20X5, and therefore should not be included in 2006 royalty expense.

Question 17

Single step vs multistep income statement.

Answer 17

you

Question 18

Which items could never be extra ordinary ???

Answer 18

The write down of any asset

Gain or loss on foreign currency exchange

Gain or loss on the sale or abandonment of a fixed asset

Loss when employees go on strike