FAR - MCQs

Question 1

Cash and Cash Equivalents

Answer 1

MCQ# 08953

1. Petty Cash
2. Checking A/C
3. Depository A/C

EXAM NOTE:

i. Any kind of restricted cash (restricted for anything) is NOT cash equivalents.
ii. Market Securities are NOT cash equivalents. They’re “investments.

Question 2

What Costs to Capitalize for Machine

Cost of Machine

Answer 2

MCQ# 137

Cost of Machine = Purchase Cost + Reasonable Cost related to get the asset in condition and Location

Question 3

What Costs to Capitalize for Land

Cost of Land

Answer 3

MCQ#369
Cost of Land = includes everything to put the land in place + Condition for construction of the plant on the land

EXAM NOTE:

Proceeds from the sale of anything on the land is DEDUCTED from cost of land.

Question 4

Double Declining Method

Answer 4

MCQ# 11092

DDM = Apply the factor of 2/N to Total Cost

N = Useful life of asset

Question 5

Impairment

Answer 5

MCQ#5238

Impairment = Assets are impaired if

1. ) C.V > FV
2. ) CV is NOT recoverable

Question 6

Impairment Test on Fixed Assets

Answer 6

MCQ#5753

Step 1: Perform “Recoverability Test”

Step 2: Undiscounted PVFCF
- (CV of Asset)
————————————————
IMPAIRMENT LOSS

Question 7

Impairment Test (IFRS)

Answer 7

MCQ#7063

Impairment Test w.r.t IFRS is:

Recoverable Amount = XXX
- C.V = (XXX)
————————————-
Impairment Loss

Recoverable Amount = HIGHER OF

     1. ) FV of Asset - Cost to Sell Asset
     2. ) PVFCF (Asset Value in Use)

Question 8

Software Development Cost

Answer 8

costs BEFORE Technological feasibility and preliminary project stage = EXPENSED

Costs AFTER technological feasibility and preliminary project stage = CAPITALIZED!!!

Question 9

Equipment with Alternative Future Uses

Answer 9

Capitalized and depreciated over its useful life

Question 10

Legal fee related to Patents

Answer 10

Legal fee and costs related to registering the patents are always CAPITALIZED!!!

R&;D Costs related to patents are always EXPENSED!!!

Question 11

What type of Subsequent Events are there?

Answer 11

There are two types of subsequent events:

1. Events that exists on the BS date and recognized in FS.
2. Unrecognized events are those for which conditions did not exist as on Balance Sheet date and they arose later and are recognized in Financial Statements. However, footnote disclosure should be made if Financial Statements would become misleading otherwise. EG. Fire or a natural disaster happen right at the end of BS date or after the BS date.

Since a fire or a natural disaster are unpredictable and conditions for it did not exist on the Balance Sheet date. Because the fire did not occur until after the balance sheet date, it is a Type II unrecognized subsequent event. Type II subsequent events are not recognized in the financial statements, but disclosure of the event is required.

Question 12

How should decommissioning liability be recognized under IFRS?

Answer 12

Under IFRS, changes in the decommissioning liability are added to or deducted from the cost of the asset, with any reductions in excess of the carrying amount of the asset recognized as a gain in the current period. The change in the liability is therefore recognized in profit or loss.

Question 13

What should you do when there is a firm commitment to purchase goods in a future period at a set price (i.e., an enforceable contract exists?

Answer 13

If there is an enforceable contract, and the company gets a loss due to that contract.

in this case, ANY LOSS from a drop in the market value of such goods, or cancellation of the contract by the purchaser, should be RECOGNIZED in the CURRENT PERIOD.

EG: On January 2 of the current year, LTTI Co. entered into a three-year, non-cancelable contract to buy up to 1 million units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

The contract guaranteed LTTI purchase 200,000 units per year, so LTTI would recognize a loss for the 520,000 units that it had guaranteed to purchase throughout the life of the contract but had not yet purchased (120,000 current year units + 200,000 year 2 units + 200,000 year 3 units = 520,000 units). 520,000 × $0.10 = $52,000.

Question 14

What are Level 2 inputs?

Answer 14

Level 2 inputs are directly or indirectly observable inputs; it includes:

1. Quoted prices from active markets for similar assets/liabilities
2. Quoted prices from limited activity markets for similar/identical assets
3. Other observable inputs like yield curves, bank prime rates, interest rates, credit risks, default rates on loans.

Question 15

How does the FASB makes changes to the Accounting Standards Codification?

Answer 15

By issuing Accounting Standards Updates.

Accounting Standards Codification is the only authoritative literature on non-governmental US GAAP issued by FASB. Changes to it are made by issuing Accounting Standards Updates.

Question 16

Kind Nurses Assoc. is a voluntary health and welfare organization. Nurses are paid to visit the homes of elderly people and are reimbursed for mileage and supplies. Which of the following items should Kind record as a support activity expense in its statement of functional expense?

A. Nurses’ mileage expense
B. Payment for nurses’ employee benefits
C. Payment for nurses’ supplies
D. Fund-raising costs

Answer 16

The correct answer is (D).

Fundraising expenses would be appropriately classified as a support activity expense in its statement of functional expense. Supporting activities generally include fundraising costs, administrative services, and membership development expenses. The statement of functional expenses, which is prepared by voluntary health and welfare organizations, is a two-dimensional report which reports only expenses classifying them into functional categories of program expenses and support service expenses. Program expenses are services that relate directly to the organization’s mission. Support service expenses are expenses related to management and general activities of the organization, its fundraising activities and membership development activities. The fund-raising costs of Kind Nurses Assoc. are recorded as support activity expenses in the statement of functional expense.

(A) is incorrect because a nurse’s mileage expenses are not support activities. These are program expenses. Program expenses are directly related to an organization’s mission. Kind Nurses Assoc. is paying its nurses to visit the homes of elderly people and pays reimbursement for mileage expenses making it program expenses

(B) is incorrect because Payment for nurses’employee benefits is not a support activity. It is a program expense. Payment for a nurse’s employee benefits is part of the normal compensation and benefits process.

(C) is incorrect because payments for a nurse’s supplies are also part of program services.

Question 17

What is net pension cost?

Answer 17

The net pension cost is the contribution called for by the defined contribution plan for the period in which the individual renders services.

Question 18

Goodwill -> what kind of goodwill cost can you capitalize and what kind of goodwill cost can you expense?

Answer 18

Costs of goodwill from a business combination accounted for as a purchase should be capitalized.

However, costs of developing, maintaining, or restoring goodwill should be expensed when incurred.

Question 19

What is a stock right?

which of the following situations requires a journal entry instead of just a memorandum entry?
A. Stock rights are issued to existing stockholders.
B. Stock rights are exercised.
C. Stock rights are expired.
D. All of the above

Answer 19

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. In a rights offering, each shareholder receives the right to purchase a pro-rata allocation of additional shares at a specific price and within a specific period (usually 16 to 30 days).

An entry is required only when stock rights are exercised. Cash is debited for the number of common shares acquired times the exercise price of the shares. Common stock is credited for the par or stated value of the shares issued. Additional paid-in capital is credited for the excess of the cash received over the par or stated value of the shares.

Question 20

How do you calculate UNFUNDED ACCRUED PENSION COST?

Answer 20

Unfunded accrued pension costs consists of the net periodic pension cost (SIRAGE) adjusted for employer contributions and previous prepaid costs or accrued costs.

Question 21

LEASE CRITERIA

Answer 21

OWNES

O - Ownership -> transfer of ownership
W - Written option
N - NPV + residual value > 90% of FV of asset
E - Economic life of asset (w.r.t lease term) 75% or more
S - Specialized - No alternative use of asset

LESSEE:

1. if all met, it is a finance lease.
2. if none met, it is an Operating Lease

LESSOR:

1. if all met, it is a Sales-Type Lease
2. If none met, try see if it meets the PC criteria

P - PV of lease pmts + residual value > FV of asset
C - collection of payment is probable

IF both met, it is Financing lease
if none or one met, it is an operating lease

Question 22

What is a method of accounting based on measures of historical prices in units of a currency, each of which has the same general purchasing power?

Answer 22

Historical cost/constant purchasing power accounting is a method of accounting based on measures of historical prices in units of a currency, each of which has the same general purchasing power.

Question 23

Which of the following statements about the governmental statement of activities is false?
A. The statement of activities highlights the costs of programs and the sources of revenues for those programs.
B. Governmental services will likely show large deficits in the net revenue column.
C. Tax revenues may be reported as program income if these resources are restricted to a specific program.
D. Governments are allowed to allocate administrative and overhead costs from the general government category to individual programs.

Answer 23

All taxes are considered general revenues, even if restricted to a specific program. GASB Statement No. 34 shifted the governmental operating statement to a program focus that first matches the costs of program revenues and the sources of revenues for those programs. The statement of activities divides the operations of the government not into traditional line items—but into program or operational categories. Governmental services will likely show large deficits in the net (expense) revenue column. This allocation is optional, but governments are allowed to allocate the administrative and overhead costs from the general government category.

Question 24

Programs funded with taxes, grant revenues, and other nonexchange resources are reported in the government-wide statements as which of the following?
A.    Social service activities
B.    Intergovernmental activities
C.    Governmental activities
D.    Business-type activities

Answer 24

Governmental activities include those programs funded with taxes, grant revenues, and other nonexchange resources (not social service activities or intergovernmental activities). Business-type activities are financed in whole or in part by fees charged to external parties for goods and services. Enterprise funds are used to account for these programs.

Question 25

Financial statements for which fund type generally report net position?
A.    Capital projects.
B.    Expendable pension trust.
C.    Special revenue.
D.    Enterprise.

Answer 25

The enterprise fund generally reports net position. The capital projects and special revenue funds are governmental-type funds, and thus report a fund balance. Expendable trusts (under the outgoing reporting model) use fund balance accounts also.

Question 26

In the General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances, which of the following has an effect on the excess of revenues over expenditures?

A. Purchase of fixed assets
B. Payment to a debt-service fund
C. Special items
D. Proceeds from the sale of capital assets

Answer 26

The correct answer is (A).

The General Fund uses modified accrual accounting, in which the purchase of a fixed asset is an expenditure, which would affect the excess of revenue over expenditure.

Option (B) is incorrect because transfers out are reported as other financing uses which are presented below the excess of revenues (deficiency) over expenditure.

Option (C) is incorrect because special items are presented below the excess of revenues (deficiency) over expenditure.

Option (D) is incorrect because proceeds from the sale are reported in special items, which is presented below the excess of revenues (deficiency) over expenditure.

Question 27

Which of the following is not included in the FASB Accounting Standards Codification?
A. FASB Statements
B. FASB Technical Bulletins
C. FASB Interpretations
D. FASB Statements of Financial Accounting Concepts

Answer 27

FASB Statements of Financial Accounting Concepts are not part of the FASB Accounting Standards Codification. FASB Statements, Technical Bulletins, and Interpretations are part of the FASB Accounting Standards Codification.

Question 28

How do you calculate Pension Liability?

Answer 28

FV of Plan Assets : X
Less: PBO : (X)
___________________
Pension Liability if negative

Pension Asset if Positive

Question 29

What are Costs of inventory?

Answer 29

The cost of inventory includes all direct expenditures to ready inventory for sale, but excludes selling and storage costs.