FAR - I Can Pass! Flashcards
Liquidation value
The likely price of an asset when there is insufficient time to sell in an orderly manner. It is lower than fair value.
What is the objective of present value when used in accounting measurements?
To eliminate uncertainty of receiving future cash flows.
To establish basis for an asset.
To establish a market price.
To provide an estimate of fair value.
To provide an estimate of fair value.
To estimate fair value. Present value should attempt to capture the elements that taken together would comprise a market price if one existed. Present value does not set the market price, the market does.
Which of the following is not an objective of the conceptual framework found in the FASB’s Statements of Financial Accounting Concepts?
To guide the Board in developing sound accounting principles.
To establish generally accepted accounting standards
To guide the selection of economic phenomena to be recognized and measured for financial reporting.
To provide the Board and its constituents with an understanding of the limitations of financial reporting.
To establish generally accepted accounting standards
The FASB Concepts Statements are intended to serve the public interest by setting the objectives, qualitative characteristics, and other concepts that guide selection of economic phenomena to be recognized and measured for financial reporting and their display in financial statements or related means of communicating information to those who are interested. Concepts Statements guide the Board in developing sound accounting principles and provide the Board and its constituents with an understanding of the appropriate content and inherent limitations of financial reporting.
A Statement of Financial Accounting Concepts does not establish generally accepted accounting standar
What is the mission of the FASB?
To establish and improve financial accounting and reporting standards.
To protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
To foster the stability, integrity, and efficiency of the nation’s monetary, financial, and payment systems so as to promote optimal macroeconomic performance.
To provide the most relevant knowledge, resources and advocacy, and protect the evolving public interest.
To establish and improve financial accounting and reporting standards.
Net realizable value
In liquidation, the debtors and other interested parties are primarily interested in the amount of cash that will become available. Therefore, assets are reported at the amount of cash that will be received from the liquidation which is often referred to as the net realizable value. Fair value is not used for this reporting because officials might be in a hurry to conclude the liquidation and be forced to sell the building before they have time to get the actual fair value from the property.
Accounts Receivable Turnover
Credit Sales / Average AR
Accumulated other comprehensive income is reported in which of the following financial statements? The income statement. The statement of comprehensive income. The statement of cash flows. The statement of financial position.
The statement of financial position is another name for the balance sheet. Accumulated other comprehensive income is a line item within the equity section of the balance sheet that includes items that do not appear on the income statement.
If a pharmaceutical company donates medications to a non-profit healthcare organization that are essential to the organization’s operations, the donation would be classified as:
No entry is required
Donation revenue
Operating expenses
None of the above
Donation revenue
If the medications are essential to the operations of the organization, then the donation is classified as donation revenue. There would be a debit to medication inventory, and a credit to donation revenue.
Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?
It defers any gains and losses.
It defers losses to the extent of any gains.
It recognizes gains and losses immediately.
It defers gains and recognizes losses immediately.
It recognizes gains and losses immediately.
When there is commercial substance, gains and losses are recognized immediately.
Which of the following activities should be excluded when governmental fund financial statements are converted to government-wide financial statements?
Proprietary activities.
Fiduciary activities.
Government activities.
Enterprise activities.
Fiduciary activities.
Fiduciary funds are funds the government is holding as a trustee and won’t be used to benefit the government entity, so they are left out of government-wide financial statements.
Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill?
Enterprise
Permanent
Special revenue
Internal service
Enterprise
When a government charges customers for a service - similar to a regular business - that activity is managed through an enterprise fund. Enterprise funds are just that: used for government services that are funded by charging external customers a fee for.
The fair value for an asset or liability is measured as
The appraised value of the asset or liability.
The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.
The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.
The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
How should the acquirer recognize a bargain purchase in a business acquisition?
As negative goodwill in the statement of financial position.
As goodwill in the statement of financial position.
As a gain in earnings at the acquisition date.
As a deferred gain that is amortized into earnings over the estimated future periods benefited
As a gain in earnings at the acquisition date.
When this happens, the gain is recognized in earnings. It means that the buyer acquired the equipment or property for less than FMV, and thus recognized a gain.
Fenn Museum, a nongovernmental not-for-profit organization, had the following balances in its statement of functional expenses:
Education: $300,000 Fundraising: $250,000 Management and general: $200,000 Research: $50,000 What amount should Fenn report as expenses for support services?
$450,000
In a non-profit you have two main groups of expenses: program services and support services. Program services are the services related to the mission and primary activities of the non-profit. On the other hand, support services are like admin-type expenses, such as management, general admin, and fundraising.
On June 19, Don Co., a U.S. company, sold and delivered merchandise on a 30-day account to Cologne GmbH, a German corporation, for 100,000 euros. On July 19, Cologne paid Don in full. Relevant currency exchange rates were:
June 19 July 19 Spot rate $.988 $.995 30-day forward rate $.990 $1.000
What amount should Don record on June 19 as an account receivable for its sale to Cologne?
$99,500
$98,800
$995,000
$100,000
$98,800
The receivable will be recorded using that day’s spot rate, which is the spot rate on June 19th. 100,000 x .988 = $988,000
Under IFRS, which of the following items is considered investment property?
Land held for use in the production or supply of goods or services.
A building held for use for administrative purpose.
Land held for sale in the ordinary course of business.
Part of a building held to earn rentals.
Part of a building held to earn rentals.
Under IFRS, investment property must be held to earn rentals or for capital appreciation (or both). It can’t be used in the production or supply of goods or services, held for administrative purposes, or held for sale in the ordinary course of business.
Titan’s monthly bank statement shows a balance of $12,000. Reconciliation of the statement with company books reveals the following information:
Bank service charge $30
Insufficient funds check 500
Checks outstanding 1,000
Deposits in transit 300
Check deposited by Titan and cleared by the bank for $200,
but improperly recorded by Titan as $100
What is the net cash balance after the reconciliation?
$11,300
$11,570
$10,770
$10,500
$11,300
The bank service charge and the insufficient funds check are already reflected in the bank balance of $12,000. Also, the $100 mistake by Titan is on Titan’s books, but the bank recorded it properly so it doesn’t need to be adjusted. The only two things that need to be adjusted are the checks outstanding and the deposits in transit. 12,000 - 1,000 checks outstanding = 11,000 + 300 of deposits in transit equal $11,300.
In a business combination, the closing date is the same as which of the following:
The settlement date
Acquisition date
The recording date
The planning date
Acquisition date
The date on which the acquirer gains control of the acquired business, this is the closing date, which is officially the acquisition date.
Which of the following statements is correct regarding deferred revenues recorded by a company that provides services to customers?
Deferred revenue is a liability until the service had been performed.
Deferred revenues represent revenues earned but not yet received in cash.
Deferred revenues result from services that have been performed but have not been billed.
A deferred revenue on the books of one company is an accrued expense on the books of another company
Deferred revenue is a liability until the service had been performed.
The revenue is not earned until the service has been performed, and until then - it is a liability.
Four years ago on January 2, Randall Co. purchased a long-lived asset. The purchase price of the asset was $250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the asset of $30,000 was recognized on December 31 of the current year. The estimated useful life of the asset at December 31 of the current year did not change. What amount should Randall report as depreciation expense in its income statement for the next year?
$20,000
$25,000
$30,000
$32,500
$20,000
Don’t overcomplicate a question like this. The original yearly depreciation would be $25,000, and 4 years have gone by so $100,000 has been depreciated. You have $150,000 left with an impairment loss of $30,000, so you now have $120,000 with 6 years of depreciation left. 120,000 / 6 = $20,000 per year
Under the acquisition method, the acquired assets and liabilities are reported at their recorded value or fair value?
Fair value
Goodwill
Results from an excess of the amount paid over the FV
Revaluation of the equipment
Any amount paid in excess of BV to the extent of FV
Costs of registering securities and issuing common stock in a business combination accounted for as an acquisition should be accounted for as?
In a business combination accounted for as an acquisition, costs of registering securities and issuing common stock are netted against the proceeds and recorded in the additional paid-in capital account.
Acquisition costs
Expensed in the year the costs are incurred or the services are received, and the acquisition is recorded at the fair value of consideration given.
Pann, a nongovernmental not-for-profit organization, provides food and shelter to the homeless. Pann received a $15,000 gift with the stipulation that the funds be used to buy beds. In which net asset class should Pann report the contribution?
Endowment
Temporarily restricted
Permanently restricted
Unrestricted
Temporarily restricted
The gift is restricted for a specific purpose, but isn’t a permanent investment. Therefore it is classified as temporarily restricted.
A company enters into a three-year operating lease agreement effective January 1, year 1. The amounts due on the first day of each year are $25,000 in year 1, $30,000 in year 2, and $35,000 in year 3. What amount, if any, is the related liability on the first day of year 2?
$0
$5,000
$60,000
$65,000
$5,000
Operating leases need to be recorded in the books on a straight-line basis, regardless of the actual payment schedule. So the 3 yearly payments add up to $90,000, which would be a rent expense of $30,000 per year. In the first year they would have made a payment of $25,000 according to the agreement, which would have left a lease liability of $5,000. The entry for the first payment would be:
Rent expense 30,000
Cash 25,000
Rent payable 5,000
In year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following?
The unrealized loss should be credited to the investment account.
The unrealized loss should be credited to the other comprehensive income account.
The unrealized loss should be debited to the other comprehensive income account.
The unrealized loss should be credited to beginning retained earnings.
The unrealized loss should be credited to the other comprehensive income account.
This is the difference in an unrealized loss and a realized loss. In year 1, the investment went down in value so the loss was ‘unrealized’, and is recorded in other comprehensive income (OCI) by debiting OCI. Then, when the investment was actually sold, at the same lower amount, that means the loss is now ‘realized’, and the previous debit to OCI is credited - to take it out- and the loss will be recognized in current income for the period. Also note that the unrealized loss is debited to OCI because it was an available for sale security (AFS). If they were trading securities, the unrealized gains or losses are recorded directly in the current period’s income, NOT in OCI. Held-to-maturity investments do not record unrealized gains or losses.
Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except
The net change in fair value of each significant class of investments.
The net change in the actuarial present value of accumulated plan benefits.
Contributions from the employer and participants.
Benefits paid to participants.
The net change in the actuarial present value of accumulated plan benefits.
The actuarial present value of accumulated plan benefits is referring to the actual benefits the plan is going to pay out, meaning it refers to the liability side of the plan. The other responses are all aspects of the plan assets.
On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 20% of Newman Corp.’s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?
$20,000
$14,000
$12,000
$8,000
$14,000
Because the investment is held under the fair value method, the income recognized by Peabody would be the increase in fair value ($10k), and the amount of dividends received (20% of $20k = $4k) for a total of $14,000. The fair value method means the net income of Newman corp is NOT included in Peabody’s net income attributable to the investment. If this had been the equity method, then Peabody would have included the income from Newman, which would also have increased the investment account in Newman on the balance sheet, and Peabody’s portion of the dividends would have decreased the investment account.
Orange Inc. made leasehold improvements to a property it was going to lease for 10 years. The estimated useful life of the improvements was 8 years. The costs for the improvements should be:
Expensed in the year the improvements were made
Capitalized and depreciated over 10 years
Capitalized and depreciated over 8 years
Added to the rent expense and expensed evenly over 10 years
Capitalized and depreciated over 8 years
Leasehold improvements are capitalized and depreciated over the term of its useful life, or the lease term, whichever is shorter. In this case the useful life of 8 years would be used for depreciation.
Which of the following items would be classified as a research and development cost?
Periodic design changes to an existing product.
Engineering follow-up in an early phase of commercial production.
Testing in search of product or process alternatives.
Legal work in connection with a patent application.
Testing in search of product or process alternatives.
Testing in search of product alternatives would be an R&D cost. The other responses are specific examples of non-R&D costs. The idea behind R&D is any research or development moving towards establishing a product, but once commercial production has started, or anything to do with an existing product, it’s no longer R&D. Also, legal work in connection with a patent application is not R&D.
In the financial statements of employee benefit pension plans and trusts, the plan investments are reported at
Fair value
Historical cost
Net realizable value
Lower of historical cost or market
Fair value
Plan assets are always reported at fair value
When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the
Face value of the bonds at the beginning of the period by the contractual interest rate.
Face value of the bonds at the beginning of the period by the effective interest rates.
Carrying value of the bonds at the beginning of the period by the contractual interest rate.
Carrying value of the bonds at the beginning of the period by the effective interest rates.
Face value of the bonds at the beginning of the period by the contractual interest rate.
Interest payable on a bond is the face value of the bond times the contractual or “stated” interest rate.
In preparing Chase City’s reconciliation of the statement of revenues, expenditures, and changes in fund balances to the government-wide statement of activities, which of the following items should be subtracted from changes in fund balances?
Capital assets purchases.
Payment of long-term debt principal.
Internal service fund increase in net assets.
Book value of capital assets sold during the year.
Book value of capital assets sold during the year.
Under government fund accounting, the full proceeds from the sale of a capital asset is available for the fund to use, so they record all of it. When fund balances are transferred over to the government-wide statements, only the gain or loss on the sale would be recorded, so you would subtract the book value of the capital assets sold during the year.
Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?
Accrued and disclosed
Accrued but not disclosed
Disclosed but not accrued
No disclosure or accrual
Disclosed but not accrued
The standard for accruing a contingent liability is “probable” and the amount is measurable. Reasonably possible is more like 50/50, and as such Blythe would disclose the lawsuit, but nothing would be accrued.
In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?
$80,000
$83,000
$85,000
$88,000
$83,000
First remember that LIFO is in layers. So the original $50,000 is one layer and its value stays at $50,000. During the year the inventory increased by $30,000 using base-year prices, so the inventory goes to $80,000. But, the “prices increased 10%”, so you need to multiply the $30,000 by the 1.10, which is another $3,000. So the inventory at year end would be valued at 50,000 + 30,000 + 3,000 = $83,000
Fern Co. has net income, before taxes, of $100,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 10%. What is Fern’s effective tax rate?
8%
9%
7%
10%
9%
The ‘effective’ tax rate is the taxes actually paid over net income. Temporary and permanent differences can increase or decrease taxable income from net income (book income), and then the taxes actually paid over the net income amount gives you the effective tax rate. In this example, taxable income is $90,000: $100,000 - 20,000 for muni bond interest, + 10,000 paid for officers’ life insurance = $90,000 So taxes paid are 90,000 * 10% = $9,000. Then, the $9,000 over the original $100,000 of net income is an effective tax rate of 9% Just in case: The muni bond interest is subtracted because this isn’t taxable but it was counted as revenue in net income. The $10,000 of officer life insurance is an expense for book income, but it is taxable so it is added back in to taxable income.
Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?
FIFO (first in, first out)
LIFO (last in, first out)
Moving average
Weighted average
FIFO (first in, first out)
Inventory turnover is COGS/average inventory, so if inventory is increasing in cost during the year, FIFO would have the lowest COGS and the highest ending inventory. The highest-priced batches of inventory would make up ending inventory at the end of the year.
How should NSB, Inc. report significant research and development costs incurred?
Expense all costs in the year incurred.
Capitalize the costs and amortize over a five-year period.
Capitalize the costs and amortize over a 40-year period.
Expense all costs two years before and five years after the year incurred.
Expense all costs in the year incurred.
Under U.S. GAAP, all research & development costs are expensed in the period incurred.
Which of the following is one of the three standard sections of a governmental comprehensive annual financial report?
Investment
Actuarial
Statistical
Single audit
Statistical
The 3 sections of a comprehensive annual financial report (CAFR) are:
Introductory
Financial
Statistical
Jonn City entered into a capital lease for equipment during the year. How should the asset obtained through the lease be reported in Jonn City’s government-wide statement of net assets?
General capital asset
Other financing use
Expenditure
Not reported
General capital asset
As far as capital leases, governments report them just like private companies; as both an asset and a liability. Specifically, the capital lease becomes a general capital asset. As a side note, keep in mind that government-wide financial statements are prepared with the ‘economic resources’ measurement focus, and the accrual basis of accounting.
If a city government is the primary reporting entity, which of the following is an acceptable method to present component units in its combined financial statements?
Consolidation
Cost method
Discrete presentation
Government-wide presentation
Discrete presentation
This is the term for how component units are presented on government-wide financial statements. The other way that component units can be reported is “blended” with the primary government. The difference is, if the component unit performs services solely for the primary government and not to the general public, then its activities are “blended” with the primary government. If the component unit is financially dependent on the primary government but provides services to the general public, then its activities are presented using discrete presentation. By the way, discrete presentation means the component unit is presented in a separate column from the primary government on the government-wide financial statements.
How should plan investments be reported in a defined benefit plan’s financial statements?
At actuarial present value
At cost
At net realizable value
At fair value
At fair value
Plan assets are reported at fair value.
What is the primary purpose of the statement of activities of a nongovernmental not-for- profit organization?
To report the change in net assets for the period.
To report the liquidity of the entity as of a specific date.
To report assets, liabilities, and net assets as of a specific date.
To report the cash flow position of the entity for the period.
To report the change in net assets for the period.
The statement of activities for a nonprofit explains the changes in net assets for the period.
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets?
Net income: decrease. Total assets: decrease
Net income: decrease. Total assets: no effect
Net income: no effect. Total assets: decrease
Net income: no effect. Total assets: no effect
Net income: no effect. Total assets: no effect
Under the allowance method, the allowance for doubtful accounts sits as a contra account to AR. If a customer’s receivable is determined to be uncollectible, it is written off from AR, and deducted from the allowance account. This means there is no net effect on the balance sheet, and no effect on the income statement. Under the direct write-off method, the bad debt would be expensed through the bad debt expense account, and both net income and total assets would be reduced.
Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?
Litigation costs would be capitalized regardless of the outcome of the litigation.
Litigation costs would be expensed regardless of the outcome of the litigation.
Litigation costs would be capitalized if the patent right is successfully defended.
Litigation costs would be capitalized only if the patent was purchased rather than internally developed.
Litigation costs would be capitalized if the patent right is successfully defended.
Patent litigation costs are capitalized if the patent right is successfully defended. Otherwise the litigation costs would be expensed.
A deferred tax liability may result from which of the following items?
Penalties paid for legal violations.
Life insurance proceeds received on the death of key employees.
Depreciation of tangible assets.
Interest on municipal bonds.
Depreciation of tangible assets.
Depreciation creates a temporary difference, which can result in a deferred tax liability. The other choices are permanent differences, and they don’t create a deferred tax asset or liability because they never reverse. So again, temporary differences result in a deferred tax asset or a deferred tax liability. Permanent differences do not, because they never reverse.
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial position?
Net assets, income, and expenses.
Income, expenses, and unrestricted net assets.
Assets, liabilities, and net assets.
Changes in unrestricted, temporarily restricted, and permanently restricted net assets.
Assets, liabilities, and net assets.
A non-profit’s statement of financial position (not balance sheet) includes 3 categories:
Assets
Liabilities
Net assets (not retained earnings)
Which of the following local government funds uses the accrual basis of accounting?
Enterprise
Debt service
Capital projects
Special revenue
Enterprise
Enterprise funds use accrual accounting. These are the funds that run business-like services, where the government provides a service and gets paid by customers.
Which of the following fund types do not appear in the government-wide financial statements?
General fund
Capital projects funds
Special revenue funds
Fiduciary funds
Fiduciary funds
Fiduciary funds don’t appear in the government-wide financials because the government is holding these funds as a fiduciary and these funds aren’t used for government purposes.
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from non-owner sources.
To reconcile the difference between net income and cash flows provided from operating activities.
To provide a consolidation of the income of the firm’s segments.
To provide information for each segment of the business.
To summarize all changes in equity from non-owner sources.
This is the whole point of reporting comprehensive income.
How should a city’s general fund report the acquisition of a new police car in its governmental fund statement of revenues, expenditures and changes in fund balances?
Noncurrent asset
Expenditure
Expense
Property, plant, and equipment
Expenditure
“Expenditure” is a term used in the modified-accrual basis of accounting, which is what government funds use. They don’t use the word expense. Expenditure is really any cash outflow- whether it was an “expense” or a capital purchase, which is what the police car would be.
Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In year 3, Cuthbert discovered an error in the previously issued financial statements for year 1. The error affects the financial statements that were issued in years 1 and 2. How should the company report the error?
The financial statements for years 1 and 2 should be restated; an offsetting adjustment to the cumulative effect of the error should be made to the comprehensive income in the year 3 financial statements.
The financial statements for years 1 and 2 should not be restated; financial statements for year 3 should disclose the fact that the error was made in prior years.
The financial statements for years 1 and 2 should not be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.
The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.
The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.
Since Cuthbert prepares three-year financials, the error needs to be corrected in years 1 and 2, and the beginning balances of year 3 should reflect the correction so that all 3 years of the financials are comparable. Also, the year 1 and 2 financials should be restated.
At which of the following amounts should a nongovernmental not-for-profit organization report investments in debt securities?
Potential proceeds from liquidation sale.
Discounted expected future cash flows.
Quoted market prices.
Historical cost.
Quoted market prices.
Nonprofits don’t use debt investment classifications such as available-for-sale or held-to-maturity. Everything is valued at market price (fair value).
Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?
Discounted cash flow of Favre’s operations.
Quoted market prices available from a business broker for a similar asset.
Quoted market prices on a stock exchange for an identical asset.
Historical performance and return on Driver’s investment in Favre.
Quoted market prices on a stock exchange for an identical asset.
The best source for fair value is quoted market prices for an identical asset in an active market. This describes “level 1” inputs, which is the most reliable source of determining fair value according to the hierarchy of fair value inputs.
The measurement focus of governmental fund accounting is on which of the following?
Current financial resources.
Economic resources.
Cash.
Working capital.
Current financial resources.
Government funds use the ‘current financial resources’ measurement focus. This means that the cash or assets that are expected to be converted to cash within the accounting period. In other words, the “current resources” that are available to use within the period.
King, Inc. owns 70% of Simmon Co.’s outstanding common stock. King’s liabilities total $450,000, and Simmon’s liabilities total $200,000. Included in Simmon’s financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?
$520,000
$550,000
$590,000
$650,000
$550,000
The intercompany note payable would be eliminated, lowering Simmon’s liabilities to $100,000. In addition to King’s $450,000 of liabilities, consolidated liabilities would be $550,000.
The stockholders of Meadow Corp. approved a stock-option plan that grants the company’s top three executives options to purchase a maximum of 1,000 shares each of Meadow’s $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?
$20,000
$60,000
$100,000
$300,000
$100,000
To record compensation expense for stock options, you need to determine the fair value of the options, and then record the expense ratably over the vesting period. In this case, the full fair value is given, so the total fair value of $300,000 would be expensed over the 3-year vesting period, for a compensation expense in year 1 of $100,000.
In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?
$80,000
$83,000
$85,000
$88,000
$83,000
First remember that LIFO is in layers. So the original $50,000 is one layer and its value stays at $50,000. During the year the inventory increased by $30,000 using base-year prices, so the inventory goes to $80,000. But, the “prices increased 10%”, so you need to multiply the $30,000 by the 1.10, which is another $3,000. So the inventory at year end would be valued at 50,000 + 30,000 + 3,000 = $83,000
For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as
An expense
A current asset
A noncurrent liability
A noncurrent asset
A noncurrent asset
It’s not “current” because it won’t be realized within the next year. Since it is a refundable payment, it is an asset. These details make it a noncurrent asset.
Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongovernmental not- for-profit health organization. How should Belle record these funds?
Increase in assets and increase in liabilities.
Increase in assets and increase in revenue.
Increase in assets and increase in deferred revenue.
Decrease in assets and decrease in fund balance.
Increase in assets and increase in liabilities.
Since these funds are pledged to another organization, it would be an increase in assets and an increase in liabilities, for a net effect of zero, since Belle can’t use the funds.
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
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.
Internally generated cash flow projections for a related asset or liability.
Internally generated cash flow projections are an example of level 3 inputs, the least reliable source.
Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. What amount should Alta capitalize related to the patent?
$40,000
$50,000
$90,000
$490,000
$90,000
The $40,000 for applying the patent license can be capitalized, and since the defense of the patent was successful, the $50,000 of legal costs can be capitalized as well. The $400,000 R&D spent developing the patent is expensed as incurred, not capitalized.
A $100,000 bond was issued on March 1, 2017 at 103. The bond is due in 5 years. If the straight-line method is being used, what is the bond liability at December 31, 2017?
$99,500
$103,500
$102,500
$103,000
$102,500
The premium ($3,000) is being reduced on a straight-line basis over 5 years. $3,000 / 5 = $600 / 12 = $50 being reduced monthly. If the bond was issued March 1st, 10 months have gone by at Dec 31st. 10 x $50 = $450. $103,000 - $500 = $102,500
A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?
30 days
40 days
45 days
60 days
40 days
A large accelerated filer has a market cap of $700 million or more. They have 40 days after the end of the period to file their form 10-Q (quarterly), and 60 days after the company’s fiscal year end to file their 10-K (annual report). An accelerated filer on the other hand, is a company with a market cap of more than $75 million but less than $700 million. They have 40 days after each period to file their 10-Q, and 75 days after fiscal year end to file their 10-K.
Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which consumers claim that one of Martin’s best selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Martin will win the suit and be awarded $5 million in damages. What amount should Martin report on its financial statements as a result of these two lawsuits?
$0
$5 million income
$15 million expense
$20 million expense
$0
The standard for recording a contingent liability is that it is probable and measurable. “Reasonably possible”, is a lower chance than “probable”, and so nothing needs to be recorded for the class-action suit. For the lawsuit that Martin might be awarded $5 million, contingent gains are never recorded, until the award is actually received.
What are the components of the lease receivable for a lessor involved in a direct- financing lease?
The minimum lease payments plus any executory costs.
The minimum lease payments plus residual value.
The minimum lease payments less residual value.
The minimum lease payments less initial direct costs.
The minimum lease payments plus residual value.
In a direct-financing lease, the lessor records the lease receivable that is equal to the minimum lease payments plus any residual value - residual value being the fair value of the asset at the end of the lease. Most questions on this that involve any numbers will usually have “no salvage value” or “no residual value”. So in general, for a direct-financing lease, the “lease receivable” for the lessor will equal the sum of the minimum lease payments.
When you’re dealing with a capital lease, it can either be a direct financing lease, or a sales type lease. Which type only matters to the lessor. If the leased asset book value is equal to fair value, then it is a direct-financing lease and the lessor only earns interest on the lease. In a sales-type lease, the asset book value does not equal fair value, and therefore the lessor earns a margin in addition to the interest on the lease (this just means the lessor is “selling” the asset at a profit).
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?
The names and ownership percentages of the other stockholders in the investee company.
The reason for the company’s decision to invest in the investee company.
The company’s accounting policy for the investment.
Whether the investee company is involved in any litigation.
The company’s accounting policy for the investment.
How the company is accounting for the investment is the only required disclosure among the responses listed. The company could be accounting for the investment through either the equity method, or the fair value method, and this could impact how users make decisions with the information.
A company decided to sell an unprofitable division of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 20%. The assets and liabilities of the discontinued operation are as follows:
Buildings $5,000,000 Accumulated depreciation 3,000,000 Mortgage on buildings 1,100,000 Inventory 500,000 Accounts payable 600,000 Accounts receivable 200,000 What is the net after-tax loss on the disposal of the division?
$200,000
$160,000
$1,160,000
$2,000,000
$160,000
To figure this out, first break apart the assets and liabilities (net of accumulated depreciation). Assets: 2,000,000 + 500,000 + 200,000 = 2,700,000 Liabilities: 1,100,000 + 600,000 = 1,700,000 Net assets = 1,000,000, but the purchase price is $800,000 so there’s a net loss of $200,000. With a 20% tax rate, the net loss becomes $160,000. (this is because the loss reduces taxable income by 200,000, but net of tax would actually be a loss of $160,000)
On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company’s staff moves into the property on May 1. The monthly rental payments begin on July 1. The recognition of rental expense for the new offices should begin in which of the following months?
January
March
May
July
January
The rent expense needs to start being recognized when the company receives control of the property, and on a straight line basis, even though the actual payments don’t begin until July.
Black Inc issued ten year bonds with a face value of $100,000 and a stated rate of 8%. The bonds were issued at $90,000 to yield a 10% effective rate. What amount of interest expense should be reported for the end of year 2?
$8,600
$9,100
$8,000
$9,000
$9,100
n year one, interest paid is 100,000 x 8% = $8,000. Interest expense is based on the effective rate, so 90,000 x 10% = $9,000. The $1,000 difference is recognized but not paid, so it is added to the principal for year 2. The new principal amount is $91,000. In year 2, The interest paid is the same $8,000, but the interest expense is calculated on the $91,000, so interest expense is 91,000 x 10% = $9,100.
Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $100,000. What amount of gain should Damon report related to this transaction?
$25,000
$100,000
$50,000
$40,000
$40,000
To find Damon’s gain, you figure out the fair value of the net assets acquired, and subtract the costs of the investment. But, remember that the acquisition costs are expensed when incurred and are not part of the costs of the investment. The ‘contingent consideration’ IS part of the investment cost. Net assets acquired: $350,000 - 100,000 = $250,000 Cost of the investment: $200,000 + 10,000 = $210,000 Gain: $40,000
The replacement cost of an inventory item is below the net realizable value and above the net realizable value less a normal profit margin. The inventory item’s original cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at
Original cost
Replacement cost
Net realizable value
Net realizable value less normal profit margin
Replacement cost
The general rule for inventory is that it is valued at the lower of cost or market. Market value is determined by taking 3 amounts: replacement cost, net realizable value (NRV), and NRV minus the normal profit margin. Of those 3 amounts, market will be whatever is in the middle. So if replacement cost is higher than NRV, then market is NRV. If replacement cost is less than NRV, then market is replacement cost. A lot of candidates get tripped up on thinking cost is the same as replacement cost. In this question, it says that cost is above NRV, meaning that what they paid for the inventory originally is more than NRV, but replacement cost (what they could buy the same inventory for today) is less than NRV but higher than NRV minus profit margin. That makes the replacement cost the market value.
Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a result of the acquisition?
$0
$100
$300
$400
$100
Under the par value method for treasury stock, the APIC (additional paid-in capital) account is decreased by the amount it was credited for on that amount of stock when the stock was originally issued. This stock was issued at $7 per share and a $6 par, so that put $1 into APIC for every share issued. So, when 100 shares are acquired as treasury stock, $1 is taken back out of the APIC account, or $100.
Which of the following would a nongovernmental not-for-profit educational institution report as program services?
Publicity costs.
Teacher salaries.
Management salaries.
Fundraising expenses.
Teacher salaries.
In a non-profit you have program services and support services. Program services are the activities directly related with carrying out the mission of the non-profit. In this case, a teacher’s salary at a educational non-profit would be a program service.
A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows:
What is the fair value of the financial asset?
$900
$925
$1,000
$1,050
$1,000
To determine the fair value without a principal market, you need to determine the most advantageous market. To do that, you subtract the transaction costs to see which market provides the highest overall price.
Market A: $1,000 - $75 = $925
Market B: $1,050 - $150 = $900
This means market A is market we’ll base the price on, and we go back to using the quoted price of $1,000 as the fair value. You don’t subtract the transaction costs to arrive at fair value, you only do that to determine which market is the most advantageous.
On January 1, Fonk City approved the following general fund resources for the new fiscal period:
What amount should Fonk record as estimated revenues for the new fiscal year?
$5,400,000
$5,550,000
$5,750,000
$5,900,000
$5,550,000
Everything listed would be revenue except for the transfers in from other funds.
A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?
Treasury stock is debited for $300.
Additional paid-in capital is credited for $2,700.
Retained earnings is debited for $300.
Common stock is debited for $3,000.
Retained earnings is debited for $300.
A “large stock dividend” is a stock dividend of more than 25% of the current outstanding stock. When this happens, retained earnings is debited for the par value, and common stock is credited for the par value. In this case, 30% of 1,000 shares is 300 shares, and at $1 par, the entry would be $300 debit to RE, and $300 credit to common stock.
Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be
Allocated on a pro rata basis to the nonmonetary assets acquired.
Capitalized as part of goodwill and tested annually for impairment.
Capitalized as an other asset and amortized over five years.
Expensed as incurred in the current period.
Expensed as incurred in the current period.
According to ASC 805, acquisition costs related to a business combination are expensed in the period incurred.
Which of the following statements is the most significant characteristic in determining the classification of an enterprise fund?
The predominant customer is the primary government.
The pricing policies of the activity establish fees and charges designed to recover its cost.
The activity is financed by debt that is secured partially by a pledge of the net revenues from fees and charges of the activity.
Laws or regulations require that the activity’s costs of providing services including capital costs be recovered with taxes or similar revenues.
The pricing policies of the activity establish fees and charges designed to recover its cost
Recovering the costs of providing the service from fees from customers is what defines an enterprise fund. In other words, it runs like a regular business.
MemberMultiple Choice QuestionsFAR Quick Quiz
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FAR Quick Quiz
Question 5 of 5
5. Question
(unofficial CPA question)
If ABC corp purchases 25% of XYZ corp and uses the equity method of accounting. What effect does XYZ’s net income and dividends have on ABC’s balance sheet for the investment in XYZ?
Income increases the investment account, and dividends decrease the investment account
Income and dividends increase the investment account
Dividends increase the investment account and income decreases the investment account
Income and dividends decrease the investment account
Income increases the investment account, and dividends decrease the investment account
Under the equity method, income from the investment company increases the investment account, and dividends decrease the investment account. If you just think it through, it’s just an extension of the parent company itself: income adds to the company’s balance sheet, and dividends decreases it.
On January 1, year 2, Ritt Corp. acquired 50,000 shares of Shaw Corp. stock which represented 80% of Shaw’s $10 par common stock for $19.50 per share. On the date of acquisition, the fair value of the 12,500 shares representing the noncontrolling interest in Shaw was $18 per share. On this date, the carrying amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities were the same as their carrying amounts. For the year ended December 31, year 2, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. In the December 31, year 2, consolidated balance sheet, noncontrolling interest should be reported at $200,000 $213,000 $243,750 $256,750
$256,750
$256,750 is correct. Noncontrolling interest at the date of the business combination should be the noncontrolling interest proportionate share of total fair value at that date, including goodwill. The total fair value of Shaw (including goodwill) at the date Ritt acquired 80% of Shaw’s common stock would be $1,218,750 ($975,000/.80). The noncontrolling interest upon acquisition would be .20 × $1,218,750 = $243,750. At 12/31/Y2 the noncontrolling interest is computed below
1/1/Y2 noncontrolling interest $243,750
Year 2 net income (20% × $190,000) 38,000
Year 2 dividends (20% × $125,000) (25,000)
Noncontrolling interest at 12/31/Y2 $256,750
The voting interest entity model
relies on one entity owning more than 50% of the voting interest in the other entity.
The variable interest model
relies on determination if one entity has the power to direct the activities of the other entity.
Acquisition-related costs for a business acquisition
Normally treated as expense in the period in which the costs are incurred or the services are received. Acquisition-related costs may include finder’s fees, advisory, legal, accounting, valuation, consulting and other professional fees.
Although the costs of registering and issuing debt and equity securities are considered part of acquisition costs, these costs are not expensed in the period of the acquisition, but are recognized in accordance with other GAAP.
Costs of registering and issuing common stock are normally netted against the proceeds of the stock and reduce the paid in capital in excess of par account.
Bond issue costs are treated as a deferred charge and amortized on a straight-line basis over the life of the bond.
Accounting Treatment for Equity Investments
Financial reporting % owned
FV or amortized cost 20
Equity or fair value method 20-50
Consolidated or equity 51-100
Cash paid to suppliers
COGS - the decrease in inventory + the decrease in ending accounts payable.
Accumulated other comprehensive income
A permanent account and is reported in the statement of financial position.
Changes in the account are reported in the statement of comprehensive income.
Allocation
The process of assigning or distributing an amount according to a plan or formula. Allocation is broader in scope and thus includes amortization.
Amortization
An allocation process for accounting for prepayments and deferrals.
Specific examples of amortization include recognizing expenses for depletion, depreciation, and insurance, and recognizing earned subscription revenues.
Equity Method
The equity method also begins with recording the cost of the investment in the investment account but the two methods (Cost adjusted for fair value method vs. Equity method) differ from this point on. A basic concept of the equity method is the reciprocal relationship formed between the investment account on the investor’s books and the book values of the net assets on the investee’s books. As changes in the investee’s net assets occur (e.g., earnings, dividends, etc.), the investor will recognize in the investment account the percentage of ownership share of those changes.
Note that under the equity method, dividends received from the investee are a reduction in the Investment balance sheet account and are not part of the Income from Investment account. Alternative levels of recording the results of intercompany transactions and amortization in both the investment and investment income accounts are used in accounting practice.
Deposit method
It is to be used when:
- Until the sale is consummated, when all activities necessary for closing have been performed.
- If the buyer’s initial and continuing investments are not adequate to demonstrate a commitment to pay for the property and the seller is not reasonably assured of recovering the cost of the property if the buyer defaults.
Reduced profit method
It is used only when the initial investment is adequate to demonstrate a commitment to pay for the property but the continuing investments are not. The continuing investments must also meet certain additional requirements for the reduced profit method to be used.
Cost recovery method
The problem states that the sale has been consummated and that Kame’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property. However, the fact that Esker’s receivable is subject to future subordination precludes recognition of the profit in full. Instead, the cost recovery method must be used to account for the sale.
Full accrual method
It may be used only if profit on the sale is determinable, the earning process is virtually complete, and all of the following:
1. A sale is consummated.
2. The buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property.
3. The seller’s receivable is not subject to future subordination.
4. The seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is, in substance, a sale and does not have a substantial continuing involvement in the property.
Acquisition method
The assets and liabilities are brought over at their fair value (ASC Topic 810). Therefore, the increase in stockholders’ equity resulting from the acquisition will be the fair value of the stock issued.
Cost Recovery Method
No profit of any type is recognized until cumulative receipts (principal and interest) exceed the cost of the asset sold.
Cash payment to suppliers
Cash payments to suppliers
+ Increase in AP
– Increase in inventory
= Cost of Goods Sold
So PV of $1, for 8%
1 year = 1/1.08 = .926
2 years = 1/(1.08*1.08) = .857
3 years = 1/(1.081.081.08) = .794
4 years = 1/(1.081.081.08*1.08) = .735
5 years = 1/(1.081.081.081.081.08) = .680
PV Ordinary Annuity of $1, 8% for 5 years = .926+.857+.794+.735+.680 = 3.992
Reserved for Encumbrances
It is a budgetary account. When goods or services are ordered (purchase order approved), appropriations are encumbered, or restricted from use, in the amount of the estimated purchase cost. The following entry is made which increases reserved for encumbrances:
Encumbrances xx
Reserved for Encumbrances xx
Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year? $ 1,500 $ 2,000 $ 4,500 $20,000
$ 2,000
This answer is correct. The journal entries for Porter for the treasury stock are as follows:
Purchase Treasury stock 3,000
Cash 3,000
(500 shares @ $6)
Reissue Cash 5,000
Treasury stock 3,000
APIC − TS 2,000
Therefore, Porter should report $2,000 as additional paid-in capital from treasury stock in its balance sheet for the current year and this answer is correct.
Deferrals
Transactions in which cash is received or cash is paid in a period prior to the earning of the revenue or the incurring of the expense (e.g., income received in advance and prepaid expenses).
Accruals (expenses and revenues)
Transactions wherein expenses are incurred or the revenue earned prior to the period in which the expense is paid or the revenue received. In contrast to accruals are deferrals. Deferrals are transactions in which cash is received or cash is paid in a period prior to the earning of the revenue or the incurring of the expense (e.g., income received in advance and prepaid expenses).
Royalty revenue
Should be recognized when earned, regardless of when the cash is collected.
Replacement cost
The amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently.
Accrual to Cash-basis
Follow the sign of Liabilities!
Cash-basis to Accrual
Follow the sign of Assets!
Direct Method
Follow the sign of Assets!
Indirect Method
Follow the sign of Liabilities!
The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January 1, year 1. Assuming that the original payment was recorded as a prepaid asset, how would total assets and stockholders’ equity be affected during year 3?
Total assets would decrease and stockholders’ equity would increase.
Both total assets and stockholders’ equity would decrease.
Both total assets and stockholders’ equity would increase.
Neither total assets nor stockholders’ equity would change.
Both total assets and stockholders’ equity would decrease.
This answer is correct because when the premium on the 3-year insurance policy was paid in total on January 1, year 1, a prepaid asset was recorded. At the end of each of the next 3 years, one-third of the premium must be amortized to expense using the following journal entry:
Insurance expense xxx
Prepaid insurance (asset) xxx
The effect of this amortization is to increase expenses (a decrease in stockholders’ equity) and decrease prepaid assets.
Income
According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
According to the Private Company Decision-Making Framework, which of the following five items are to be used as a guide to determine if there should be differential guidance between public and private companies.
Recognition and measurement; disclosures; display; effective date; and transition method.
Push down accounting
Is accounting for mergers and acquisitions, the convention of accounting of the purchase of a subsidiary at the purchase cost rather than its historical cost. This method of accounting is required under U.S. GAAP, but is not accepted in IFRS accounting standards.
Three criteria for a prior period adjustment
These criteria are as follows: (1) the effect of the adjustment is material to income from continuing operations, (2) the adjustment can be identified with a prior period, and (3) the amount of the adjustment could not be estimated in prior periods. ASC Topic 250 does not require that a prior period adjustment be attributable to economic events occurring subsequent to the prior period financial statements.
Correction of an error of a prior period
ASC Topic 250 requires that items of profit or loss related to the correction of an error in the financial statements of a prior period be accounted for and reported as prior period adjustments and excluded from the determination of net income for the current period.
How should a company report its decision to change from a cash basis of accounting to accrual basis of accounting?
As a change in accounting principle, requiring the cumulative effect of the change (net of tax) to be reported in the income statement.
Prospectively, with no amounts restated and no cumulative adjustment.
As an extraordinary item (net of tax).
As a prior period adjustment (net of tax), by adjusting the beginning balance of retained earnings.
As a prior period adjustment (net of tax), by adjusting the beginning balance of retained earnings.
This answer is correct because error corrections are recorded by recording a prior period adjustment net of tax to the beginning balance of retained earnings for the earliest period presented. Cash basis accounting is not an acceptable method of accounting under generally accepted accounting principles. Therefore, if a change is made from the cash basis to the accrual basis of accounting, it is considered a correction of an error.
Under IFRS reporting, a prior period error includes all of the following except for:
Changing accounting policies.
Incorrect application of accounting policies.
Disclosure mistakes.
Measurement mistakes.
Changing accounting policies.
This answer is correct because under IFRS reporting, changes in accounting policies are not considered prior period errors. Prior period errors include arithmetic mistakes; accounting policy application mistakes; and recognition, measurement, presentation, and disclosure mistakes.
Prior period adjustments are reported where?
The change from an unacceptable accounting principle to an acceptable accounting principle is considered a correction of an error per ASC Topic 250. Thus both of these items are corrections of errors and as such are reported as prior period adjustments. Prior period adjustments are reported in the retained earnings statement and not in the income statement.
Changes in accounting estimates
Accounted for on a prospective basis. The financial statements are not restated or retrospectively adjusted. The change is accounted for in the current period and future periods. If a change in accounting estimate is effected by a change in principle (change in depreciation method), it is treated as a change in estimate. In cases where an entity effects a change in estimate by changing an accounting principle, the footnote disclosures required by a change in accounting principle apply and must be included in the notes to the financial statements.
Sum-of-the-years’ digits method
10 years: (1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55)
Year 1 depreciation = $275,000 × 10 = $50,000
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(10) (11) ÷ 2
Under IFRS, a change in accounting estimate is accounted for
Retrospectively.
Prospectively in the period of change and future periods.
Currently in the financial statements.
As a cumulative effect of an accounting change in the income statement.
Prospectively in the period of change and future periods.
Changes in accounting estimates are accounted for on a prospective basis in the period of the change and in future periods.
Gaffney uses IFRS to prepare its financial statements. During year 4, Gaffney voluntarily changes its accounting method because the new method will provide more reliable and relevant information. Gaffney can estimate the effects of the change. How should Gaffney treat the change in accounting principle?
On a prospective basis.
On a retrospective basis.
By restating the financial statements.
By a cumulative adjustment on the income statement.
On a retrospective basis.
This answer is correct because IFRS requires changes in accounting principles to be reported by giving retrospective application to the earliest period presented.
A change in the periods benefited by a deferred cost because additional information has been obtained is
A correction of an error.
An accounting change that should be reported by restating the financial statements of all prior periods presented.
An accounting change that should be reported in the period of change and future periods if the change affects both.
Not an accounting change.
An accounting change that should be reported in the period of change and future periods if the change affects both.
This answer is correct. ASC Topic 250 states that a change in the periods benefited by a deferred cost should be treated as a change in accounting estimate. Changes in accounting estimates are accounted for in the period of change and future periods if the change affects both.
Under IFRS, a voluntary change in accounting method is applied: Retrospectively. Prospectively. Currently. Currently and prospectively.
Retrospectively.
This answer is correct. A voluntary change in accounting method is given retrospective application by applying the policy as if the new policy had always been applied.
A change in accounting principle that would require retrospectie application to all prior periods would be a change
From using the percentage-of-completion method of accounting for long-term construction contracts to the completed contract method.
In the salvage value of a depreciable asset.
From the straight-line method of depreciation to the double-declining balance method.
From reporting revenues on a cash basis to reporting on an accrual basis.
From using the percentage-of-completion method of accounting for long-term construction contracts to the completed contract method.
This answer is correct because it is a change in accounting principle. Per ASC Topic 250, an entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.
Which of the following is included in other comprehensive income?
Unrealized holding gains and losses on trading securities.
Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category.
Foreign currency translation adjustments.
The difference between the accumulated benefit obligation and the fair value of pension plan assets.
Foreign currency translation adjustments.
This answer is correct because the effects of foreign currency translation adjustments for the period are included in comprehensive income.
Unrealized holding gains and losses on trading securities. (This answer is incorrect because unrealized holding gains and losses on trading securities are included in income of the period.)
Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category. (This answer is incorrect because unrealized holding gains and losses from the reclassification of a debt security from available-for-sale to held-to-maturity are included in accumulated other comprehensive income and amortized over the remaining holding period.)
The difference between the accumulated benefit obligation and the fair value of pension plan assets.
(This answer is incorrect because the difference between the accumulated benefit obligation and the fair value of plan assets is no longer used to determine pension liability.)
According to ASC Topic 820, the fair value of an asset should be based upon
The price that would be paid to acquire the asset.
The price that would be paid to replace the asset.
The price that would be received to sell the asset.
The price that the item is appraised at balance sheet date.
The price that would be received to sell the asset.
This answer is correct. ASC Topic 820 requires that the fair value of an asset be based upon the price that would be received to sell the asset, which is an exit price.
Unrealized gains and losses for available-for-sale securities are reported where?
Unrealized gains and losses for available-for-sale securities are reported as a component of other comprehensive income (loss)
During year 1, a hurricane destroyed Barston’s factory and the company incurred a $2,000,000 loss. Barston is located in a geographic area where hurricanes have not occurred in over 100 years. Barston plans to rebuild the plant within the next 18 months. If Barston prepares its financial statements in accordance with IFRS, how should the loss be disclosed? Expense or loss from hurricane. Cost of goods sold. Extraordinary loss net of tax. Discontinued operation net of tax.
Expense or loss from hurricane.
This answer is correct. IFRS does not distinguish losses from expenses, and the loss would be recorded in the expense section of the income statement.
In single period statements, which of the following should be reflected as an adjustment to the opening balance of retained earnings?
Effect of a failure to provide for uncollectible accounts in the previous period.
Effect of a decrease in the estimated useful life of depreciable equipment.
Results from the disposal of a discontinued segment.
Cumulative effect of a change from an accelerated method to straight-line depreciation.
Effect of a failure to provide for uncollectible accounts in the previous period.
This answer is correct. The correction of an error in the financial statements of a prior period which is discovered after issuance should be reported as a prior period adjustment to the opening balance of retained earnings. Such errors are described in and include oversights or misuse of facts that existed at the time the financial statements were prepared. Failure to provide for uncollectible accounts would be such an error.
Effect of a decrease in the estimated useful life of depreciable equipment. (This answer is incorrect because a decrease in the estimated useful life of depreciable equipment is a change in accounting estimate. Such a change is included in the net income of the period of change and (if affected) future periods.)
Results from the disposal of a discontinued segment. (This answer is incorrect. Results of discontinued operations are presented in the current year at the bottom of the income statement after income from continuing operations.)
Cumulative effect of a change from an accelerated method to straight-line depreciation. (This answer is incorrect because a change from an accelerated method to straight-line depreciation is a change in accounting principle. Such a change is recognized as a change in estimate effected by a change in principle and is accounted for in the current period and future periods.)
Which of the following statements is true regarding the fair value option for valuing financial assets and liabilities?
The fair value option must be applied to all instruments in that classification.
The fair value option must be applied to all interests in the same entity.
The fair value option cannot be revoked until the next balance sheet date.
The fair value option can be applied to a portion of a financial instrument.
The fair value option must be applied to all interests in the same entity.
This answer is correct. The fair value option must be applied to all interests in the same entity.
The fair value option must be applied to all instruments in that classification. (This answer is incorrect because the fair value option may be applied on an instrument-by-instrument basis.)
The fair value option cannot be revoked until the next balance sheet date. (This answer is incorrect because once the fair value option is elected, it is irrevocable.)
The fair value option can be applied to a portion of a financial instrument. (This answer is incorrect because the fair value option must be applied to all portions of the instrument.)
The most significant difference between IFRS and US GAAP is where certain items are presented on the statement of cash flows.
Interest and dividends received may be reported on the statement of cash flows as operating or investing activities. Interest and dividends paid may be reported either in the operating activities or the financing activities sections.
Loy Corp. purchased a machine in year 1 when the average Consumer Price Index (CPI) was 180. The average CPE was 190 for year 2, and 200 for year 3. Loy prepares supplementary constant dollar statements (adjusted for changing prices). Depreciation on this machine is $200,000 a year. In Loy’s supplementary constant dollar statement for year 3, the amount of depreciation expense should be stated as $180,000 $190,000 $210,526 $222,222
$222,222
This answer is correct. Depreciation is a nonmonetary item. Therefore, it must be adjusted to current year dollars. The $200,000 of historical cost depreciation is converted into year 3 dollars by multiplying it by the To/From ratio of 200/180.
$200,000 × 200
180 = $222,222
Therefore, year 3 depreciation stated in constant dollars is $222,222.
Which of the following statements is true regarding the fair value option for valuing financial assets and liabilities?
The fair value option can be applied to a portion of a financial instrument.
Unrealized gains and losses from reporting items using the fair value option are reported in other comprehensive income for the period.
The fair value option can be elected on an instrument-by-instrument basis.
The fair value option cannot be applied to insurance contracts.
The fair value option can be elected on an instrument-by-instrument basis.
This answer is correct. The fair value option can be elected on an instrument-by-instrument basis.
The fair value option can be applied to a portion of a financial instrument. (This answer is incorrect because the fair value option must be applied to all portions of the instrument.)
Unrealized gains and losses from reporting items using the fair value option are reported in other comprehensive income for the period. (This answer is incorrect because unrealized gains and losses are reported in earnings for the period.)
The fair value option cannot be applied to insurance contracts. (This answer is incorrect because the fair value option may be applied to insurance contracts that can be settled by a third party.)
Which of the following is an accepted valuation technique for fair value estimates? The conservative approach. The residual value approach. The cost approach. The consistent approach.
The cost approach
This answer is correct. The accepted valuation approaches in ASC Topic 820 are the cost approach, the market approach, and the income approach.
When computing information on a historical cost-constant dollar basis, which of the following is classified as nonmonetary? Accumulated depreciation of equipment. Advances to unconsolidated subsidiaries. Allowance for doubtful accounts. Unamortized premium on bonds payable.
Accumulated depreciation of equipment.
This answer is correct because per ASC Topic 255, nonmonetary items include assets and liabilities whose amounts may change over time in terms of a monetary unit (e.g., the U.S. dollar). Examples of nonmonetary assets and liabilities included inventory, property, plant, equipment, and obligations under warranties. Accumulated depreciation is a nonmonetary item because it relates to equipment.
Advances to unconsolidated subsidiaries. (This answer is incorrect because the advance represents a claim to receive a fixed amount in terms of a monetary unit and is therefore a monetary item.)
Allowance for doubtful accounts. (This answer is incorrect because the allowance account relates to the accounts receivable, which is a monetary item.)
Unamortized premium on bonds payable. (This answer is incorrect because the unamortized premium relates to the bonds payable account, which is a monetary item.)
A company changes from the double-declining balance method of depreciation for previously recorded assets to the straight-line method. According to ASC Topic 250, the effect of the change should be reported separately as a(n)
Unusual item.
Component of income after discontinued operations.
Component of income from continuing operations on a prospective basis.
Prior period adjustment.
Component of income from continuing operations on a prospective basis.
This answer is correct. ASC Topic 250 requires changes in depreciation method to be treated as a change in estimate and handled on a prospective basis.
In accordance with ASC Topic 255, the Consumer Price Index for All Urban Consumers is used to compute information on a Historical cost basis. Current cost basis. Constant dollar basis. Nominal dollar basis.
Constant dollar basis.
This answer is correct. The Consumer Price Index is used to compute information on a “constant dollar” basis. The index is used to restate financial statement elements to dollars which have the same purchasing power.
According to ASC Topic 250, the cumulative effect of changing to a new accounting principle should be included in net income of
Prior periods
According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is Revenue. Income. Profits. Gains.
Income.
This answer is correct because the IASB Framework has five elements: asset, liability, equity, income, and expense. The definition given is that of income. Note that income includes both revenues and gains.
- US GAAP vocabulary is somewhat different from IFRS.
A change in the periods benefited by a deferred cost because additional information has been obtained is
A correction of an error.
An accounting change that should be reported by restating the financial statements of all prior periods presented.
An accounting change that should be reported in the period of change and future periods if the change affects both.
Not an accounting change.
An accounting change that should be reported in the period of change and future periods if the change affects both.
This answer is correct. ASC Topic 250 states that a change in the periods benefited by a deferred cost should be treated as a change in accounting estimate. Changes in accounting estimates are accounted for in the period of change and future periods if the change affects both.
The measurement focus of governmental fund accounting is on which of the following?
Current financial resources.
Economic resources.
Cash.
Working capital
Current financial resources.
Government funds use the ‘current financial resources’ measurement focus. This means that the cash or assets that are expected to be converted to cash within the accounting period. In other words, the “current resources” that are available to use within the period.
Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?
The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
Declared dividends on noncumulative preferred stock and the current-year dividends on the cumulative preferred stock would be included in the calculation, which would make the net loss greater when calculating basic EPS. Dividends in arrears are NOT included because they were included in previous years’ calculations of EPS.
Neron Co. has two derivatives related to two different financial instruments, instrument A and instrument B, both of which are debt instruments. The derivative related to instrument A is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. Neron experienced gains in the value of instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?
Gain in A; Yes. Gain in B; Yes.
Gain in A; Yes. Gain in B; No.
Gain in A; No. Gain in B; Yes.
Gain in A; No. Gain in B; No.
Gain in A; Yes. Gain in B; No
On a fair value hedge, gains or losses are recognized in current income. On a cash flow hedge, gains or losses are recognized in other comprehensive income.
Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?
Gain on sale of plant asset.
Sale of property, plant and equipment.
Payment of cash dividend to the shareholders.
Issuance of common stock to the shareholders.
Gain on sale of plant asset.
Under the direct method, actual cash inflows and outflows are listed line by line such as “cash paid to suppliers” or “cash received from customers”. Under the indirect method, you start with net income on the accrual basis, and list adjustments to get to the net cash flows from operating activities, and each line is an adjustment, such as an “increase in accounts payable” or a “decrease in accounts receivable”,instead of an actual amount of cash in or out. Therefore, since the gain on the sale of a plant asset is a noncash item, it would appear on a cash flow statement prepared under the indirect method.
In a periodic inventory system that uses the weighted-average cost flow method, the beginning inventory is the
Net purchases minus the ending inventory.
Net purchases minus the cost of goods sold.
Total goods available for sale minus the net purchases.
Total goods available for sale minus the cost of goods sold.
Total goods available for sale minus the net purchases.
This answer is correct. In a periodic inventory system (regardless of the cost flow method assumed), the computation of CGS is:
Beginning inventory \+ Net purchases Cost of goods available for sale − Ending inventory Cost of goods sold From this computation can be derived the equation CGAS minus net purchases equals BI.
COGS
Sales - Gross Margin on sales
Beg Inv
COGS + EI - Purchases
Which of the following statements regarding inventory accounting systems is true?
A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
An advantage of the perpetual inventory system is that the recordkeeping required to maintain the system is relatively simple.
An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.
A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
This answer is correct. A disadvantage of the periodic inventory system is that the exact amount of inventory shortages cannot be determined. The amount is buried in cost of goods sold.
A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts. (This answer is incorrect. The perpetual inventory system maintains up-to-date records for interim reporting.)
An advantage of the perpetual inventory system is that the recordkeeping required to maintain the system is relatively simple. (This answer is incorrect. The perpetual inventory system requires more recordkeeping effort than the periodic inventory system.)
An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance. (This answer is incorrect. The periodic inventory system does not maintain a continuous record of the inventory balance.)
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of
Costs incurred in year 3 to total billings.
Costs incurred in year 3 to total estimated costs.
Total costs incurred to date to total billings.
Total costs incurred to date to total estimated costs.
Total costs incurred to date to total estimated costs.
This answer is correct. The amount is computed as the ratio of total costs incurred to date to the total estimated costs.
The following information is available for Cooke Company for year 2:
Net sales $1,800,000
Freight-in 45,000
Purchase discounts 25,000
Ending inventory 120,000
The gross margin is 40% of net sales. What is the cost of goods available for sale? $ 840,000 $ 960,000 $1,200,000 $1,220,000
$1,200,000
This answer is correct. Gross margin is 40% of net sales ($1,800,000), or $720,000. Therefore, cost of goods sold is $1,080,000 ($1,800,000 net sales less $720,000 gross margin). Finally, cost of goods available for sale is $1,200,000 ($1,080,000 cost of goods sold plus $120,000 ending inventory). The amounts for freight-in ($45,000) and purchase discounts ($25,000) are not necessary for the computation.
The original cost of an inventory item is above the replacement cost. The replacement cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be priced at its
Replacement cost.
Original cost.
Net realizable value.
Net realizable value less the normal profit margin.
Net realizable value.
This answer is correct because under LCM, market is the replacement cost provided that replacement cost is lower than net realizable value (ceiling) and higher than the net realizable value less a normal profit margin (floor). Since the replacement cost is above the ceiling, the ceiling represents the market value to be compared with cost. The ceiling (market price) is less than cost so the inventory would be priced at net realizable value.
The moving average inventory cost flow method is applicable to which of the following inventory systems?
Periodic
Perpetual
Perpetual
The moving average method is used with perpetual records. A new average unit cost is computed each time a purchase is made and this unit cost is used in costing withdrawals of inventory until another purchase is made. The weighted-average method is used with periodic records.
When should an indicated loss on a long-term contract be recognized under the completed-contract method and the percentage-of-completion method, respectively?
ASC Topic 605 requires that expected losses should be recognized immediately under both methods.
When progress billings are sent on a long-term contract, what type of account should be credited under the completed-contract method and percentage-of-completion method?
Revenue
Contra asset
Contra asset
Under the percentage-of-completion method, income is recognized periodically on the basis of the percentage of the job that is complete. The completed-contract method recognizes income from the job only when the contract is completed. This is the only difference in accounting for the two methods. For both methods, when progress billings are sent, “Billings on construction in progress” is credited for the amount billed. This is shown on the balance sheet as a contra account to Construction in progress.
Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?
FIFO.
Dollar-value LIFO.
Weighted-average.
Moving average.
This answer is correct. In a period of rising prices, the FIFO inventory method would result in the most recent, higher inventory costs being assigned to ending inventory. In a period of rising prices, FIFO also results in the older, lower inventory costs assigned to cost of goods sold, resulting in higher net income for the period. Therefore, this is correct
FIFO.
In a period of rising prices, the FIFO inventory method would result in the most recent, higher inventory costs being assigned to ending inventory. In a period of rising prices, FIFO also results in the older, lower inventory costs assigned to cost of goods sold, resulting in higher net income for the period. Therefore, this is correct.
During a period of inflation, an account balance remains constant. When supplemental statements are being prepared, a purchasing power gain is reported if the account is a Monetary asset. Monetary liability. Nonmonetary asset. Nonmonetary liability.
Monetary liability.
This answer is correct. Per ASC Topic 255, the dollar amounts of monetary assets and liabilities are fixed or determinable without reference to future prices or specific goods or services. If the general price level changes, a purchasing power gain (loss) may occur on monetary items. A monetary liability held constant during a period of inflation creates a purchasing power gain because the liability could be paid using a fixed amount of cash which is worth less than the cash borrowed earlier.
