FAR 3

Question 1

Defensive Interval Ratio

Answer 1

The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources. Thus, the measure is a liquidity measure.

Question 2

When a set of financial statements is prepared using the cash basis or the modified cash basis of accounting, which one of the following is least likely to be an appropriate financial statement title?

Answer 2

When the cash basis or the modified cash basis of accounting is used, the title Income Statement, which is appropriate when the accrual basis of accounting is used, should be replaced by the title Statement of Cash Receipts and Cash Disbursements. This helps distinguish that the statement is not based on full accrual accounting consistent with U.S. GAAP.

Question 3

Current Value of Life Insurance Policy

Answer 3

Assets should be reported at estimated current value (fair value), which for a life insurance policy is the current cash value, less the settlement amount of any loans against the life insurance policy. Thus, the correct answer is cash value of $12,000 less the loan against the policy of $3,000, which results in a reportable fair value of $9,000.

Question 4

How should personal stock and jewelry be valued?

Answer 4

Both the Ink stock and the jewelry should be measured at fair value. Thus, the correct answer is $745,000, which is the sum of the buyout value (fair value) of the stock ($675,000) and the fair value of the jewelry ($70,000).

Question 5

In personal financial statements, how should estimated income taxes on the excess of the estimated current values of assets over their tax bases be reported in the statement of financial condition?

Answer 5

Estimated income taxes (i.e., provision for income taxes) on the excess of the estimated current values of assets over their tax bases should be reported as a separate line item between liabilities and net worth sections of the personal financial statement.

Question 6

Is earned income included when calculating personal net worth?

Answer 6

No.

Question 7

Which of the following accounting concepts, if any, is/are used in the preparation of personal financial statements?

Answer 7

Fair Value Measurement and Accrual Accounting.

Question 8

The Private Company Council has issued modified accounting for private companies for what aspect of Goodwill?

Answer 8

The PCC allows private companies to amortize goodwill over a period to not exceed 10 years.

Question 9

Which of the following is the purpose of the Private Company Council?

Answer 9

The PCC works with the FASB to set private company accounting standards.

Question 10

Which of the following are not measured at the expected cash to be paid or received?

Answer 10

Liabilities are to be measured using existing GAAP and not written down based on “expectations” unless legally forgiven.

Question 11

Which of the following is the purpose of the liquidation basis accounting?

Answer 11

Liquidation basis of accounting is focused on informing the financial statement users that liquidation is imminent.

Question 12

What is the objective of the IFRS Foundation?

Answer 12

The objective of the IFRS Foundation is to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings

Question 13

How does IFRS define a SME

Answer 13

the Board simply states that the entity does not have public accountability and that the entity publishes general purpose financial statements for external users, such as owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. IFRS for SME, para. 1.2.

Question 14

IFRS Hierarchy:

Answer 14

The IFRS hierarchy, as presented in IAS 8, includes first, the requirements in IFRS dealings with similar or related issues; second, the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework; and lastly, the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent that these do not conflict with IFRS or the Framework. IAS 8, para. 12.

Question 15

IFRS Statement of Financial Position includes:

Answer 15

Under IFRS, the classified Statement of Financial Position has just two classifications: Current and Non-current. Both assets and liabilities are divided into these two classifications, with Non-current being the default category.

Question 16

When is a check deducted from Cash?

Answer 16

When it is mailed.

Question 17

Are Prepaid Shipping costs included in payment discounts i.e. 2/15 n 40?

Answer 17

No.

Question 18

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would

Answer 18

Increase the allowance for uncollectible accounts.

The entries are:

Accounts receivable

          Allowance for uncollectibles

Cash

             Accounts receivable

The first entry reinstates the amount of allowance used up when the account was originally written off. The normal balance in the account is a credit. The first entry increases the account.

Question 19

To calculate cash collected from customers under the Cash basis of Accounting:

Answer 19

AR, beginning + Sales - Write-offs - customer collections = AR, ending
$500,000 $2,300,000 $10,000 ? = $650,000

Question 20

How does the credit sales method of uncollectible accounts work?

Answer 20

The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% x $1,000,000 = $20,000.