Cpaexcel Flashcards
Zeta Co. reported sales revenue of $4,600,000 in its Income Statement for the year ended December 31, 2001. Additional information is as follows:
12/31/00 12/31/01
Accounts receivable $1,000,000 $1,300,000
Allowance for uncollectible accounts (60,000) (110,000)
Zeta wrote off uncollectible accounts totaling $20,000 during 2001. Under the cash basis of accounting, Zeta would have reported 2001 sales of:
A. $4,900,000 B. $4,350,000 C. $4,300,000 D. $4,280,000
A
Incorrect
Zeta Co. reported sales revenue of $4,600,000 in its Income Statement for the year ended December 31, 2001. Additional information is as follows:
12/31/00 12/31/01
Accounts receivable $1,000,000 $1,300,000
Allowance for uncollectible accounts (60,000) (110,000)
Zeta wrote off uncollectible accounts totaling $20,000 during 2001. Under the cash basis of accounting, Zeta would have reported 2001 sales of:
A. $4,900,000 This calculation is sales plus the change in accounts receivable during the year. But accounts receivable increased and, therefore, should be subtracted from sales in determining cash collections. When accounts receivable increases, sales exceeds cash collections. B. $4,350,000 C. $4,300,000 D. $4,280,000 The question requires a solution for cash collected on accounts receivable. Using the information for accounts receivable, the collections amount can be found: Beginning balance + sales - collections - write offs = ending balance $1,000,000 + $4,600,000 - collections - $20,000 = $1,300,000 collections = $4,280,000
D Correct
The question requires a solution for cash collected on accounts receivable. Using the information for accounts receivable, the collections amount can be found:
Beginning balance + sales - collections - write offs = ending balance
$1,000,000 + $4,600,000 - collections - $20,000 = $1,300,000
collections = $4,280,000
A company has the following accrual-basis balances at the end of its first year of operation:
Unearned consulting fees $2,000
Consulting fees receivable 3,500
Consulting fee revenue 25,000
The company’s cash-basis consulting revenue is what amount?
A. $19,500 B. $23,500 C. $26,500 D. $30,500
B
Incorrect
Cash-basis revenue is the amount of cash collected for the period. $25,000 of accrual-basis revenue was recognized for the period. Start with the $25,000 amount, and add the $2,000 unearned fees. This amount is not included in the $25,000 because it is not earned but was collected during the period. Subtract the $3,500 receivable, which is included in the $25,000 but was not collected. The result is that $23,500 in cash was collected ($25,000 + $2,000 - $3,500).
C Correct
This response treated both the unearned fees and receivable incorrectly . Starting with the $25,000 of accrual-basis revenue, the unearned fees are added because they represent collected but unearned revenue. The receivable is subtracted because it represents that part of the $25,000 that has not been collected. The result is that $23,500 of cash was collected ($25,000 + $2,000 - $3,500).
Financial Accounting Standards Codification
Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB Accounting Standards Codification.
A. The Codification includes only FASB Statements. B. The Codification is the sole source of U.S. GAAP, other than SEC GAAP, for nongovernmental entities. C. The Codification significantly modified the content of GAAP when it became effective. D. An accountant can be sure that all SEC rules are included in the Codification.
B
Correct
The Codification significantly changes how U.S. GAAP is organized and accessed and includes all authoritative GAAP for nongovernmental entities except for publicly traded firms. It also contains a significant amount of SEC guidance for publicly traded firms.
A
Incorrect…
The Codification includes all authoritative principles generally accepted and adopted before the Codification. This includes parts of APB Opinions, FASB Interpretations, and others.
C
Incorrect…
With minor exceptions, the Codification does not change GAAP but rather presents GAAP in a new, more accessible form.
D
Incorrect…
The Codification includes relevant SEC guidance but does not include all SEC guidance. When the SEC changes a rule, there is a time lag between its adoption by the SEC and its appearance in the Codification.
Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?
A. A proposed statement of position.
B. A proposed accounting standards update.
C. A proposed accounting research bulletin.
D. A proposed staff accounting bulletin.
BCorrect!
Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).
C
Incorrect…
Accounting Research Bulletins (ARB) were issues by the Committee on Accounting Procedures from 1938 and 1959 and any ARBs in effect at the time of the Codification have been superseded.
D
Incorrect…
Staff Accounting Bulletins (SAB) are issued by the Securities and Exchange Commission and reflect the views of the Commission. SABs are not formally part of the Codification, but are important to financial statement preparers of public companies.
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.
B correct
When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), the cost approach has been used.
D Incorrect
When fair value is determined as the amount that currently would be required to replace the service capacity of an asset, the cost approach, not the market approach, has been used. The market approach uses prices and other relevant information generated by market transactions involving items that are identical or comparable to those being valued in determining fair value.
In which of the following circumstances, if any, would an auditor likely be especially concerned as to whether or not the price paid to acquire an asset was the fair value of the asset?
I. The asset was acquired from the acquiring firm’s majority shareholder.
II. The asset was acquired in an active exchange market.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
A Correct
If an asset was acquired from the acquiring firm’s majority shareholder, an auditor likely would be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset because an entity and its majority shareholder are related parties. Related party transactions may not be at arms-length and, therefore, may require special attention of an auditor and special disclosures related thereto.
B Incorrect
If an asset was acquired in an active exchange market (e.g., New York Stock Exchange or other broad, public market), an auditor likely would not be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset. In most cases, prices established in an active market provide the most reliable evidence of fair value.
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 an extraordinary item for the period of change in approach.
B Incorrect
The amount of change in fair value resulting from a change in the valuation approach used to determine fair value would not be reported as an adjustment to beginning retained earnings of the period of change in approach, but rather as a change in accounting estimate.
C Correct
The amount of change in fair value resulting from a change in the valuation approach used to determine fair value is reported as a change in accounting estimate. That means that the amount of the change, like the change in fair value resulting from market forces, will be reported in current income (as income from continuing operations).
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.
D Correct
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.
C Correct
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.
Which of the following statements concerning inputs used in ascertaining fair value is/are correct?
I. Only observable inputs can be used.
II. Inputs that incorporate the entity’s assumptions may be used.
A. I only. B. II only. C. Both I and II. D. Neither I nor II.
B Correct
An entity’s assumptions may be used as inputs in determining fair value. Those assumptions would be level 3, unobservable inputs, but would be used when adequate observable inputs were not available to make fair value determinations.
C Correct
While an entity’s assumptions may be used as inputs in determining fair value (Statement II), inputs do not have to be observable inputs to be used in determining fair value (Statement I).
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
B Correct
Level 2 inputs are observable for assets or liabilities, either directly or indirectly, other than quoted prices in level 1. For example, quoted prices for similar items in an active market would be level 2 inputs.
A Incorrect
In level 1, inputs are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued that the entity can obtain at the measurement date. Observable inputs, other than those in level 1, are level 2 inputs.
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
A. Quoted prices for identical assets and liabilities in markets that are not active.
B. Quoted prices for similar assets and liabilities in markets that are active.
C. Internally generated cash flow projections for a related asset or liability.
D. Interest rates that are observable at commonly quoted intervals.
D Incorrect
This response is a true statement—interest rates that are observable are a level 2 input.
C Correct
This response is a false statement—internally generated cash flow projections are not an observable input.
Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales.
Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31, 2002, were $15,000,000. The unadjusted balance in the commissions expense account on March 31, 2002, was $400,000. March advances were paid on April 3, 2002.
In its Income Statement for the year ended March 31, 2002, what amount should Zach report as commission expense?
A. $465,000 B. $450,000 C. $415,000 D. $400,000
C
Incorrect…
This is the unadjusted expense balance at year end plus one month’s expense. This amount does not reflect the entire year’s expense.
BCorrect!
Commission expense is 3% of sales or $450,000 (.03 x $15,000,000). The information about advances is irrelevant because it pertains to how commissions are paid, not recognized.
A primary purpose of disclosures required under the fair value option is to facilitate comparisons by the user of financial statements.
True False
False
The disclosures are intended to facilitate comparisons:
a. Between entities that choose different measurement methods for similar assets and liabilities, and
b. Between assets and liabilities in the financial statements of a single entity that selects different measurement methods for similar assets and liabilities.
Required disclosures about the use of the fair value option must be made for both the balance sheet and the income statement.
True False
True
For each period for which an Income Statement is presented, the following must be disclosed about items for which the fair value option has been elected:
1. For each line item in the Statement of Financial Position (Balance Sheet), the amount of gains and losses from fair value changes included in earnings for the period and in which line in the Income Statement those gains/losses are reported.
2. A description of how interest and dividends are measured and where they are reported in the Income Statement.
3. For loans and other receivables held as assets:
a. The estimated amount of gains and losses included in earnings for the period attributable to changes in instrument-specific credit risk, and
b. How those gains and losses were determined.
4. For liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk:
a. The estimated amount of gains and losses from fair value changes included in earnings that are attributable to changes in the instrument-specific credit risk;
b. How the gains and losses were determined;
c. Qualitative information about the reasons for those changes.
The methods and significant assumptions used to estimate fair value must be disclosed in both annual and interim reports.
True False
In annual reports only, the methods and significant assumptions used to estimate fair value (of items for which the fair value option has been elected) must be disclosed.
