FAR CPA

Question 1

It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

True or False?

Answer 1

True.

SEC requires all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP.

Question 2

The FASB is a(n):

Answer 2

Private sector body.

The FASB has no official connection with the US government although the SEC, an agency of the FED government, can modify or revoke an accounting standard adopted by the FASB.

Question 3

The term “negative economic consequences” includes:

Answer 3

The inability to raise capital.

Question 4

GAAP may be described as:

Answer 4

The standards used in preparing financial statements.

Question 5

Managerial accounting need not follow GAAP.

True or False?

Answer 5

True.

Managerial accounting is for internal use, and as such, does not follow GAAP. Financial accounting is for external users and must follow GAAP.

Question 6

A new FASB statement is issued only after a majority vote by the members of the FASB.

True or False?

Answer 6

True.

At least 4 of the 7 FASB members must vote in favor of a proposed Statement of Financial Accounting Standards.

First issue discussion memorandum, then exposure draft which is the proposed accounting standard.

Question 7

New GAAP should be neutral and not favor any particular reporting objective.

True or False?

Answer 7

True.

One of the objectives of the FASB in setting standards is to develop rules that are unbiased.

Question 8

What group currently writes GAAP?

IRS
SEC
FAF
FASB

Answer 8

FASB.

The FASB is currently the rule-making body for GAAP. The board is a private-sector body, the third serving as entity creating GAAP for US businesses. The FASB cannot enforce GAAP.

The SEC has the ultimate authority for setting GAAP.

Question 9

Current asset vs. non-current asset

Answer 9

A current asset is expected to be consumed within 1 year. The definition of a current asset uses the period “operating cycle or one year, whichever is longer”.

Question 10

How should the nondeductible portion of expenses, such as meals & entertainment, be reported in financial statements prepared on income-tax basis?

Answer 10

Included in expense category in the determination of income.

Note: Expenses are not deductible for tax purposes. The income tax return requires information on meals & entertainment expenses to calculate deductible amount.

Question 11

Under the accrual method, supplies expense is:

Answer 11

Beginning supplies + purchases - ending supplies. If beginning supplies cannot be determined, then it is assumed to be zero. This understates supplies expense and overstates net income.

Question 12

What adjustments need to be made when converting from cash-basis SALES to accrual-basis SALES?

Answer 12

Adjustments for the net change in AR.

For example, if in current year ended AR is $30K and in previous year was $50K, the decrease of $20K should be reflected in current year sales.

Question 13

Cash-based operating expenses vs. accrual-based operating expenses

Answer 13

Adjust for prepaid and accrued expenses.

Add BEG prepaid balance and subtract END balance from cash-based operating.

Subtract BEG accrual balance and add END balance to cash-based operating.

Question 14

Revenue under the cash-basis is:

Answer 14

Cash collected.

Gross cash sales - returns and allowances + gross credit sales - discounts + decrease in AR.

Question 15

Cash-basis balance sheet to accrual-basis balance sheet:

Answer 15

1. Add BEG liability balances
2. Subtract END liability balances
3. Subtract BEG asset balances
4. Add ending asset balances

To and from cash-basis net income.

Question 16

What is a modified cash basis of accounting?

Answer 16

Under a modified cash basis of accounting , certain accruals and/or deferrals are recorded for financial statement purposes.

Most common modifications are the capitalization and amortization of long-lived assets and the accrual for income taxes (recognition of income tax expense and related liability).

Question 17

Insurance premiums

Answer 17

BEG prepaid insurance balance
+ premiums paid
- insurance expense charges
= END prepaid insurance balance

Question 18

Cash-basis purchases and payments to accrual-basis purchases and payments:

Answer 18

BEG AP
+ accrual purchases
- cash payments
= END AP

Question 19

Sales and uncollectible accounts under cash-basis:

Answer 19

BEG AR balance 
\+ sales
- collections
- write offs
= END AR balance

Bad debt expense/allowance for uncollectible accounts does not impact AR.

Question 20

Increase in AR and accrued expenses payable effect on cash-basis net income compared to accrual-basis.

Answer 20

Accrual method recognizes AR sales as earnings, causing income to exceed cash-basis income.

Accrual method recognizes accrued expenses payable in earnings, causing income to decrease relative to cash-basis income.