FAR - Section 1

Question 1

According to the FASB conceptual framework, which of the following correctly pairs a fundamental quali­tative characteristic of accounting information with one of its components?

A. Relevance and free from error.
B. Faithful representation and confirmatory value.
C. Relevance and predictive value.
D. Faithful representation and materiality.

Answer 1

C

Information is relevant if it is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations. Components of relevance are predictive value or confirmatory value or both. Information must faithfully represent what it purports to represent. It must be complete, neutral, and free from error.

Question 2

Which of the following consists primarily of national accounting standard-setters and regional bodies with an interest in financial reporting and are selected by the Trustees?
A. The IFRS Advisory Council
B. The IFRS Interpretations Committee
C. The IFRS Foundation Monitoring Board
D. The Accounting Standards Advisory Forum

Answer 2

D

The Accounting Standards Advisory Forum is an advisory group to the IASB consisting of national accounting standard-setters and regional bodies with an interest in financial reporting and are selected by the Trustees. The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees. The IFRS Interpretations Committee has 14 voting members appointed by the Trustees of the IFRS Foundation for their technical ability. The IFRS Foundation Monitoring Board Members consist of capital markets authorities responsible for setting the form and content of financial reporting.

Question 3

Question # 1465 | Blueprint Area: 1 A i : Conceptual Framework

The IASB Conceptual Framework uses which basis of accounting for assessing the entity’s past and future performance?

A. Accrual
B. Modified accrual
C. International accrual
D. Modified-international accrual

Answer 3

A

The IASB Conceptual Framework uses the accrual basis of accounting for assessing the entity’s past and present performance. Modified accrual accounting is used by US state and local governments. There is no such thing as an international or modified-international accrual basis of accounting.

Question 4

How are amendments incorporated into the FASB Accounting Standards Codification?

A. By issuing an exposure draft
B. By releasing an accounting standards update
C. By producing a discussion paper
D. By publishing a statement of financial accounting standards

Answer 4

The correct answer is (B).

The release of an Accounting Standards Update marks the incorporation of amendments into the FASB Accounting Standards Codification. FASB amends the ASC through the issuance of Accounting Standards Updates (ASU) which describes the amendment to the ASC and date from when the amendment will be effective. The other answers may be steps in the process, but the release of an accounting standards update makes it official.

Question 5

In Dart Co.’s year 2 single-step income statement, as prepared by Dart’s controller, the section titled “Revenues” consisted of the following:

Sales $250,000
Purchase discounts 3,000
Recovery of accounts written off 10,000
In its year 2 single-step income statement, what amount should Dart report as total revenues?

A. $250,000
B. $253,000
C. $260,000
D. $263,000

Answer 5

In the single step income statement, the Total revenues = Net sales + Other revenues & gains. Therefore, the Total revenue is $250,000.

Option (B) is incorrect because purchase discounts will not be included in the revenues but deducted from the cost of goods sold.
Option (C) is incorrect because recovery of accounts written off will not impact the revenues. The recovery will reduce the allowance for doubtful debts account.
Option (D) is incorrect as per the above explanation.

Question 6

On January 2, year 3, Pare Co. purchased 75% of Kidd Co.’s outstanding common stock. Selected balance sheet data at December 31, year 3, is as follows:

 	Pare	Kidd
Total assets	$420,000	$180,000
Liabilities	120,000	60,000
Common stock	100,000	50,000
Retained earnings	200,000	70,000
 	$420,000	$180,000
During year 3, Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.
In its December 31, year 3, consolidated balance sheet, what amount should Pare report as common stock?

A. $50,000
B. $100,000
C. $137,500
D. $150,000

Answer 6

B

Pare reports the same amount of common stock as it did before the purchase; $100,000. No new Pare common stock was issued for the purchase. Pare’s Kidd
common stock is not Pare common stock.

Question 7

Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?

A. $0
B. $50,000
C. $350,000
D. $400,000

Answer 7

The correct answer is (D).

Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, the $50,000 of costs associated with in-process research & development activities are intangible asset costs. Because Park, Inc. will assume all of Gravel Co.’s net assets, the intangible assets must be recorded at fair value of $400,000.

(A) is incorrect because technology based intangibles include in-process research and development activities to be consolidated.

(B) is incorrect because $50,000 is the book value of the in-process research and development activities.

(C) is incorrect because book value is backed out from the fair value instead of using the fair value to recognize the in-process research and development activities (i.e. $350,000 = $400,000 - $50,000).

Question 8

In September of the current year, Koff Co.’s operating plant was destroyed by an earthquake.
The portion of the resultant loss not covered by insurance was $700,000. Koff’s income tax rate for the year is 40%. In its year-end income statement, what
amount should Koff report as an ordinary loss?

A. $0
B. $280,000
C. $700,000
D. $420,000

Answer 8

C

The loss is $700,000. The tax rate is not considered in the calculation and is included as a distractor.

Question 9

A company’s wages payable increased from the beginning to the end of the year. In the company’s statement of cash flows (direct method), the cash paid for wages would be
A. Salary expense plus wages payable at the beginning of the year.
B. Salary expense plus the increase in wages payable from the beginning to the end of the year.
C. Salary expense less the increase in wages payable from the beginning to the end of the year.
D. The same as salary expense.

Answer 9

C

Wages payable has increased from the beginning to the end of the year, which means that a portion of the salaries has not been paid. Therefore, wages paid are less than salary expense reported on an accrual basis. The cash paid for wages is determined by subtracting the increase in wages payable from the beginning to the end of the year from reported salary expense.

Question 10

In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold should report the

A. Net effect of the two transactions as an extraordinary gain.
B. Net effect of the two transactions in income from continuing operations.
C. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond transaction as an extraordinary loss.
D. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in income before extraordinary items.

Answer 10

B

Gains or losses from the sale of long-term investments are reported as income from continuing operations.

Question 11

For the year ended December 31, Ion Corp. had cash inflows of $25,000 from the purchases, sales, and maturities of held-to-maturity securities and $40,000 from the purchases, sales, and maturities of available-for-sale debt securities. What amount of net cash from investing activities should Ion report in its cash flow statement?

A. $0
B. $25,000
C. $40,000
D. $65,000

Answer 11

D

Investing activities include the following:Principal collections or loans made by the entity (interest and dividends received are operating). Acquisition or disposal of Available-for-Sale (AFS) debt securities or Held-to-Maturity (HTM) investments (not trading). Acquisition or disposal of PP&E and intangibles.The net cash from investing activities is reported at $65,000

Ref

Cash flows from investing activities

Change

a

Purchases, sales and maturities of HTM

$25,000

b

Purchases, sales and maturities of AFS debt securities

40,000

c

Net cash provided (used) by investing activities (a+b)

$65,000

Option (a) is incorrect because net cash inflow from investing activities is reported at $65,000.Option (b) is incorrect because it does not include cash inflow from AFS debt Option (c) is incorrect because it does not include cash inflow from HTM securities.

Question 12

Mint Co.'s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance against a long-term borrowing arrangement. In addition, Mint has classified cash of $250,000 that has been restricted for future expansion plans as "other assets". Which of the following should Mint disclose in notes to its financial statements?
#	Compensating balance	Restricted cash
A.  	Yes	Yes
B.  	Yes	No
C.  	No	Yes
D.  	No	No

Answer 12

A

A compensating balance is a legally restricted deposit held against borrowing arrangements with a lending institution. The combined aggregate amount of maturities and sinking fund requirements for all long-term borrowings must be disclosed for each of the five years following the date of the latest balance sheet period. Restricting cash to be used for future expansion would be a significant accounting policy of Mint Co. All significant accounting policies followed by an enterprise should be disclosed in its financial statements. Although no specific disclosure format is required, it is preferred to have a separate note, or a summary preceding the notes entitled’summary of Significant Accounting Policies’. The accounting policy disclosures should identify and describe the principles and methods that materially affect the financial position and operations.

Question 13

At December 31 of the previous year, Rama Corp. had 20,000 shares of $1 par value treasury stock that had been acquired during that year at $12 per share.
In May of the current year, Rama issued 15,000 of these treasury shares at $10 per share. The cost method is used to record treasury stock transactions. Rama
is located in a state where laws relating to acquisition of treasury stock restrict the availability of retained earnings for declaration of dividends. At December
31 of the current year, what amount should Rama show in notes to financial statements as a restriction of retained earnings as a result of its treasury stock
transactions?

A. $ 5,000
B. $10,000
C. $60,000
D. $90,000

Answer 13

C

At December 31 of the previous year, Rama Corp. had 20,000 shares of $1 par value treasury stock that had been acquired during that year at $12 per share.
In May of the current year, Rama issued 15,000 of these treasury shares at $10 per share. The cost method is used to record treasury stock transactions. Rama
is located in a state where laws relating to acquisition of treasury stock restrict the availability of retained earnings for declaration of dividends. At December
31 of the current year, what amount should Rama show in notes to financial statements as a restriction of retained earnings as a result of its treasury stock
transactions?

A. $ 5,000
B. $10,000
C. $60,000
D. $90,000

Question 14

Ral Corp.’s checkbook balance on December 31, year 8 was $5,000. In addition, Ral held the following items in its safe on that date:
1. Check payable to Ral Corp., dated January 2, year 9, in payment of a sale made in December year 8, not included in December 31 checkbook balance $2,000
2. Check payable to Ral Corp., deposited December 15 and included in December 31 checkbook balance, but returned by Bank on December 30 stamped “NSF.” The check was redeposited on January 2, year 9, and cleared on January 9 500
3. Check drawn on Ral Corp.’s account, payable to a vendor, dated and recorded in Ral’s books on December 31 but not mailed until January 10, year 9 300 The proper amount to be shown as Cash on Ral’s balance sheet at December 31, year 8 is
A. $4,800
B. $5,300
C. $6,500
D. $6,800

Answer 14

A

To determine the cash balance to be reported at year-end, the checkbook balance must be adjusted as follows:

The $2,000 check payable to Ral, dated 1/2, year 9, properly is not included in the 12/31, year 8 checkbook balance. Because the check is dated after the balance sheet date, the amount of the check should be reported as a receivable at 12/31, year 8.

Checkbook balance, 12/31, year 8 $ 5,000
Add check payable to vendor recorded on 12/31, year 8 but not mailed until 1/10, year 9 300
Less check payable to Ral returned by bank on 12/30, year 8 marked NSF, not redeposited until 1/2, year 9 (500)
Cash balance, 12/31, year 8 $ 4,800

Question 15

Dean Co. acquired 100% of Morey Corp. prior to the current year. During the current year, the individual companies included in their financial statements the following:
Dean	Morey
Officers' salaries	$ 75,000	$50,000
Officers' expenses	20,000	10,000
Loans to officers	125,000	50,000
Intercompany sales	150,000	--- What amount should be reported as related party disclosures in the notes to Dean's year-end consolidated financial statements?
A.    $150,000
B.    $155,000
C.    $175,000
D.    $330,000

Answer 15

C

Financial statements should include disclosures of material-related party transactions other than (1) compensation arrangements, (2) expense allowances, (3) other similar items in the ordinary course of business, and (4) transactions that are eliminated in the preparation of consolidated or combined financial statements. Thus, Dean should report related party disclosures totaling $175,000 ($125,000 + $50,000), the amount of the loans to officers. The amounts for officers’ salaries, officers’ expenses, and intercompany sales should not be disclosed as related party transactions.

Question 16

Perez, Inc. owns 80% of Senior, Inc. During the current year, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in this year.
For year-end consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted?

A. Sales and cost of goods sold should be reduced by the intercompany sales.
B. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
C. Net income should be reduced by 80% of the gross profit on intercompany sales.
D. No adjustment is necessary.

Answer 16

A

The sale of inventory between two affiliates triggers the individual accounting systems for both companies. Revenue is recorded by the seller while the
purchase simultaneously is entered into the accounts of the acquiring company. However, from a consolidated perspective, neither a sale nor a purchase has
occurred. Therefore, the amount reported as sales in the consolidated income statement must be reduced by the full amount of the intercompany sale. In
recording the sale of the inventory to the purchasing affiliate, the selling affiliate recognized cost of goods sold (CGS) based upon its acquisition cost. The
purchasing affiliate later recognized cost of goods sold equal to the amount of the intercompany sale when it later resold all of these goods to unaffiliated
customers. The CGS to unaffiliated customers should be based upon the CGS to the selling affiliate. Therefore, the amount reported as CGS in the
consolidated income statement should also be reduced by the full amount of the intercompany sale because this is the amount of CGS recognized by the
purchasing affiliate.

Question 17

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method? (Ignore income tax considerations.)

A. Dividends received from investments
B. Gain on sale of equipment
C. Gain on early retirement of bonds
D. Change from straight-line to accelerated depreciation

Answer 17

A

Under direct method (direct cash approach) - cash sources and uses related to each account in income from continuing operations are listed individually. Dividends received from investments will increase reported cash flows from operating activities using the direct method.Option (b) is incorrect because it will form part of inflow under investing activities.On sale of equipment the cash inflow should include both the carrying amount of the equipment plus the gain. Only when using the indirect method, the gain is deducted from net income under operating activities.Option (c) is incorrect because gain on early retirement of bonds will form part of an outflow of financing activities.Option (d) is incorrect because depreciation is a non-cash item and change in the method from straight-line to accelerated depreciation will not have any impact on cash flows under operating activities using the direct method.

Question 18

On December 31, year 1, Deal, Inc. failed to accrue the December year 1 sales salaries that were payable on January 6, year 2. What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's year 1 financial statements?
#	Working capital	Cash flows from 
operating activities
A.  	Overstated	No effect
B.  	Overstated	Overstated
C.  	No effect	Overstated
D.  	No effect	No effect

Answer 18

A

The company failed to record an accrued expense at the end of year 1. This error understates current liabilities at the end of year 1, thus overstating working capital at the balance sheet date. The failure to accrue the expense has no effect on the cash account, and therefore no effect on cash flows from operating activities for year 1.

Question 19

Conceptually, interim financial statements can be described as emphasizing
A.    Timeliness over reliability.
B.    Reliability over relevance.
C.    Relevance over comparability.
D.    Comparability over neutrality.

Answer 19

Answer is A

Question 20

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the
A. Beginning of the earliest period reported (or at time of issuance, if later).
B. Beginning of the earliest period reported (regardless of time of issuance).
C. Middle of the earliest period reported (regardless of time of issuance).
D. Ending of the earliest period reported (regardless of time of issuance).

Answer 20

A

Dilutive convertible securities are included in EPS computations under the if-converted method. Under that method, the security is assumed to have been converted at the beginning of the earliest period reported (or at time of issuance, if later).

Question 21

Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise’s financial statements?

The segment’s assets constitute more than 10% of the combined assets of all operating segments.
The segment’s liabilities constitute more than 10% of the combined liabilities of all operating segments.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 21

A

There are three tests to determine whether an identified segment of an enterprise should be reported in the enterprise’s financial statements. (1) The revenue test: the segment’s reported revenue is 10% or more of the combined revenue of all operating segments; (2) The profit (loss) test: the absolute amount of the segment’s profit or loss is 10% or more of the greater, in absolute amount, of the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss; (3) The assets test: the segment’s assets are 10% or more of the combined assets of all operating segments.

Question 22

A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?

A. 60 days
B. 75 days
C. 90 days
D. 120 days

Answer 22

B

The Form 10-K is an annual report that gives a comprehensive summary of a public company’s performance. The maximum number of days after the company’s fiscal year end that the company has to file the Form 10-K with the SEC depends on the category of the filer. There are three categories of filers: (1) non-accelerated filers, (2) accelerated filers, and (3) large accelerated filers. Non-accelerated filers must file the Form 10-K with the SEC within 90 days after the end of the company’s fiscal year. Non-accelerated filers are issuers that have a public float of less than $75 million. Accelerated filers must file the Form 10-K with the SEC within 75 days after the end of the company’s fiscal year. Accelerated filers are issuers that have a public float of at least $75 million but less than $700 million. Large accelerated filers must file the Form 10-K with the SEC within 60 days after the end of the company’s fiscal year. Large accelerated filers are issuers that have a public float of $700 million or more.

Options (A), (C) and (D) are incorrect because a large accelerated filer is allowed 60 days and a non-accelerated filer is allowed 90 days from fiscal year end.

Question 23

A company reported net income available to common stockholders of $2,000,000 for the year ended December 31, year 2. The company had 1,500,000 shares of common stock outstanding as of January 1, year 2, and issued 500,000 additional shares of common stock on May 1, year 2. What amount is the company’s basic earnings per share for the year ended December 31, year 2?

A. $1.00
B. $1.09
C. $1.20
D. $1.33

Answer 23

The correct answer is (B).

Income available to common shareholders = $2,000,000.

Calculation of weighted average number of common shares:-

The common shares issued on May 1 will be appropriated for 8 months: 500,000 x 8 / 12 = 333,333 shares.

Weighted average number of shares outstanding = 1,500,000 + 333,333 = 1,833,333. Basic EPS = $2,000,000 / 1,833,333 = $1.09.

(A) is incorrect because the new issue on May 1 has to be prorated as outstanding for 8 months of the year.

(C) is incorrect is incorrect due to inaccurate calculation.

(D) is incorrect because the new issue on May 1 is ignored in calculating the average number of shares.

Question 24

The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished preparing Carlton’s income statement for the current fiscal year. While reviewing the income statement, Carlton’s finance director noticed that the earnings per share data has been omitted. What changes will have to be made to Carlton’s income statement as a result of the omission of the earnings per share data?

A. No changes will have to be made to Carlton’s income statement. The income statement is complete without the earnings per share data.
B. Carlton’s income statement will have to be revised to include the earnings per share data.
C. Carlton’s income statement will only have to be revised to include the earnings per share data if Carlton’s market capitalization is greater than $5,000,000.
D. Carlton’s income statement will only have to be revised to include the earnings per share data if Carlton’s net income for the past two years was greater than $5,000,000.

Answer 24

B

Publicly-held companies are required to present basic EPS and dilutive EPS on the face of the income statement for:

Income from continuing operations.
Net income.
Option (A), (C) and (D) are incorrect because EPS data is an integral part of the presentation of financial statements for the publicly-held companies.

Question 25

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal’s interim income statements?

A. Proportionately over the second, third, and fourth quarters
B. Proportionately over the third and fourth quarters
C. In the second quarter only
D. In the fourth quarter only

Answer 25

D

In case of declines in inventory values at interim dates that are expected to be recovered by year-end, inventory should not be written down to market at the interim date. At the end of the year, the decline in the value of inventory has not reversed it should be recognized in the earliest interim period in which it is determined that it will not be recovered, which is in this case the fourth quarter.

Option (A), (B) and (C) are incorrect based on the above explanation.

Question 26

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?

A. 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.
B. 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.
C. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
D. 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.

Answer 26

The correct answer is (C).

A preferred dividend on the cumulative preferred stock is deducted from the net income or added to the net loss regardless of the fact it’s declared or not.

The dividends on the non-cumulative preferred stock have been declared but not paid. So, the dividends on the noncumulative preferred stock should be added to the net loss.

Therefore, the current year dividends on the cumulative preferred stock (current year only) and noncumulative preferred stock should be added to the net loss.


(A) is incorrect because dividends in arrears for cumulative preferred shares should not be added to the net loss when not declared. The dividends on noncumulative shares should be included when declared in a net loss.


(B) is incorrect because the current year dividends for cumulative preferred shares are added to a net loss.


(D) is incorrect because the current year dividends should be included in net loss for non-cumulative preference shares and for cumulative preference shares

Question 27

Unusual or infrequently occurring items should be accounted for in which of the following ways for interim financial reporting?
A. Included in determining interim period income and the full year effective income tax rate
B. Included in determining interim period income, but excluded in determining the full year effective income tax rate
C. Excluded in determining interim period income, but included in determining the full year effective income tax rate
D. Excluded in determining interim period income and the full year effective income tax rate

Answer 27

B

For interim financial reporting, unusual or infrequently occurring items should be included in determining interim period income, but should be excluded in determining the full year effective income tax rate.

Question 28

The primary means for disseminating unofficial administrative interpretations and practices of the SEC’s Division of Corporation Finance in reviewing financial information in SEC filings is which of the following?

A. Financial Reporting Releases (FRRs)
B. Staff Accounting Bulletins (SABs)
C. Accounting and Auditing Enforcement Releases (AAERs)
D. Concept releases

Answer 28

B

Staff Accounting Bulletins are intended to achieve dissemination of administrative interpretations and practices of the SEC staff in reviewing financial information in SEC filings. The bulletins are not rules or interpretations of the Commission, nor have they been officially approved. They represent interpretations by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws. Financial Reporting Releases (FRRs) may require an additional disclosure or define accounting to be followed by issuers. Accounting and
Auditing Enforcement Releases (AAERs) communicate enforcement actions involving accountants. Concept releases are published to solicit the public’s views on securities issues so that it can better evaluate the need for future rulemaking.

Question 29

Which of the following is true regarding annual reporting and filing requirements in accordance with the SEC regulations?

A. Reporting companies must send annual reports to their shareholders when holding annual meetings to elect directors, which may not be satisfied by providing the Form 10-K to shareholders.
B. Form 10-K typically contains less detailed information about the company’s financial condition than the traditional annual report to shareholders.
C. Large accelerated filers must file Form 10-K within 30 days after fiscal year end.
D. Companies with less than $75 million of average annual cash flow have 90 days after the fiscal year end to file Form 10-K.

Answer 29

D

Non-accelerated filers (i.e., those that have less than $75 million of average annual cash flow) have 90 days after the end of the fiscal year to file the Form 10-K. Companies sometimes elect to send their Form 10-K to their shareholders in lieu of providing shareholders with an annual report. The Form 10-K typically contains more, not less, detailed information about the company’s financial condition than the traditional annual report to shareholders. Large companies with an average annual cash flow of more than $700 million are considered to be “large accelerated filers.” Large accelerated filers must file their 10-K within 60 days after their fiscal year ends.

Question 30

Which of the following works very closely with the FASB’s Emerging Issues Task Force (EITF)?

A. The Chief Accountant
B. The Division of Corporation Finance
C. The Division of Internal Affairs
D. The Division of Accounting

Answer 30

A

The Emerging Issues Task Force (EITF) was established by the FASB in July 1984. The objective of the EITF is to assist the FASB and its staff in the identification of accounting issues and implementation problems on a timely basis. While the EITF does not have the authority to issue authoritative accounting standards, the Chief Accountant of the SEC attends EITF meetings and takes the position that since an EITF consensus sets the tone for future accounting,. The SEC’s Division of Corporation Finance reviews documents that publicly held companies are required to file with the SEC. There is no known specific Division of Internal Affairs or Division of Accounting.

Question 31

A company is required to file quarterly financial statements with the United States Securities and Exchange Commission on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations that could have a significant impact on its financial condition. In addition to the most recent quarter end, for which of the following periods is the company required to present balance sheets on Form 10-Q?
A. The end of the corresponding fiscal quarter of the preceding fiscal year.
B. The end of the preceding fiscal year and the end of the corresponding fiscal quarter of the preceding fiscal year.
C. The end of preceding fiscal year.
D. The end of the preceding fiscal year and the end of the prior two fiscal years.

Answer 31

C

The Form 10-Q is a report of a public company’s performance that must be filed quarterly with the SEC. It includes unaudited financial statements and provides a continuing view of the company’s financial position during the year. In addition to the most recent quarter end balance sheet, a company is required to present the balance sheet for the end of the preceding fiscal year on the Form 10-Q..

Question 32

The following information pertains to Jet Corp.’s outstanding stock for the current year:
Common stock, $5 par value
Shares outstanding, 1/1 20,000
2-for-1 stock split, 4/1 20,000
Shares issued, 7/1 10,000
Preferred stock, $10 par value, 5% cumulative
Shares outstanding, 1/1 4,000 What are the number of shares Jet should use to calculate earnings per share?
A. 40,000
B. 45,000
C. 50,000
D. 54,000

Answer 32

B

The weighted average number of common shares outstanding during the year, determined as follows, should be used to calculate earnings per share.
1/1 Common shares outstanding 20,000
4/1 Common shares issued due to 2-for-1 stock split 20,000
7/1 Common shares issued for cash (10,000 × 6/12) 5,000
Weighted average common shares, 12/31 45,000 Stock splits are given retroactive recognition in the computation of earnings per share (i.e., the shares are assumed outstanding for the entire period regardless of when they were issued). Shares issued must be weighted averaged according to the length of time they are outstanding. Since the preferred stock is nonconvertible it does not affect the number of shares used to calculate EPS.

Question 33

Fay Corporation's capital structure at December 31, year 1, was as follows:
Shares issued and outstanding
Common stock	200,000
Nonconvertible preferred stock	50,000 On October 1, year 2, Fay issued a 10% stock dividend on its common stock, and paid $100,000 cash dividends on the preferred stock. Net income for the year ended December 31, year 2, was $960,000. Fay's year 2 earnings per common share should be
A.    $3.91
B.    $4.10
C.    $4.36
D.    $4.68

Answer 33

A

Basic earnings per share is equal to net income minus the preferred dividends declared for the current period divided by the weighted average number of shares of common stock and common stock equivalents outstanding. Stock dividends are retroactively applied to the beginning of the year. Basic EPS are $3.91 [(net income of $960,000 - preferred dividend of $100,000) divided by 220,000 weighted average common stock outstanding.]
Common shares outstanding on January 1 200,000
Add: Stock dividend (retroactive to first of the year) 20,000
Total common shares outstanding 220,000

Question 34

Each of the following events is required to be reported to the United States Securities and Exchange Commission on Form 8-K, except

A. The creation of an obligation under an off-balance sheet arrangement of a registrant.
B. The unregistered sale of equity securities.
C. A change in a registrant’s certifying accountant.
D. The quarterly results of operations and financial condition of a registrant.

Answer 34

D

The correct answer is (D).

Form 8 K is filed to report the material events such as Memorandum & Associations, changes in directors or CEO, other major changes in operations or status, changes in auditors, etc. The Form 8-K is required by the SEC when a publicly held company incurs any event that might affect its financial situation or the share value of its stock.

The following are required to be reported to the SEC via Form 8-K:

The creation of an obligation under an off-balance sheet arrangement of a registrant.
The unregistered sale of equity securities.
A change in a registrant’s certifying accountant.
Quarterly results of operations and financial condition of a registrant are not reported via Form 8-K. Form 10-Q is filed by the issuers quarterly that contains the unaudited Financial Statements.

(A), (B) and (C) are incorrect because all these events will be reported to the Securities and Exchange Commission (SEC) on Form 8K.

Question 35

The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed on Chan’s income statement for the year ending December 31:

Net income for the year is $600,000.
$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan’s common stock.
Chan’s corporate income tax rate is 25%.
Chan has no preferred stock outstanding, and no other convertible securities.
What amount should be used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that the bonds are dilutive securities?

A. $130,000
B. $247,500
C. $952,500
D. $1,070,000

Answer 35

C

For convertible securities, use “If-converted method”- the calculation of diluted earnings per share (EPS) (assume anyone who “could convert” does so) for a company with convertible preferred stock or convertible bonds starts with basic EPS. For numerator, earnings are increased by the dividends or after-tax interest expense that would not have been due if the securities were converted to common stock at beginning of the year, which would be $952,500 ($352,500 + $600,000).

Ref Summary Amount
a Convertible bonds outstanding $5,000,000
b Stated interest rate 9%
c Annual Interest paid on bonds (a x b) $450,000
d Amortization of discount on bonds $20,000
e Interest expense (c+d) $470,000
f Corporate income tax rate 25%
g After tax interest expense {e x (1-0.25)} $352,500
h Net income $600,000
I Numerator for dilutive EPS (g+h) $952,500
Option (A) is incorrect because the interest expense is deducted from net income, instead of adding it to NI and after-tax expense impact is not considered. [$130,000 = $600,000 - $470,000].
Option (B) is incorrect because the interest expense is deducted from net income, instead of adding it to NI. {$247,500 = $600,000 - [$470,000 x (1- 25%)]}.
Option (D) is incorrect because the interest expense should be added after tax to NI. [$1,070,000 = $600,000 + $470,000.

Question 36

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen's basic earnings per share?
A.    $9.00
B.    $9.09
C.    $10.00
D.    $11.11

Answer 36

A

Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding during the period. The income available for common stockholders is net income, less any adjustments for senior claims. Senior claims include preferred stock. The total adjustment for preferred dividends is $200,000 (20,000 shares × $100 par value × 10%). The net income of $2,000,000 less preferred dividends earned of $200,000 leaves $1,800,000 of income available to common stockholders. The $1,800,000 divided by 200,000 shares provides basic EPS of $9.00.

Question 37

The following information relates to the capital structure of Parke Corporation:

December 31
Previous Current

Outstanding shares of:
Common stock 90,000 90,000
Preferred stock, convertible into 30,000 shares of common 30,000 30,000
10% convertible bonds, convertible into 20,000 shares of common $1,000,000 $1,000,000
During the current year, Parke paid $45,000 dividends on the preferred stock, which was earned in this year. Parke’s net income for the year was $980,000 and
the income tax rate was 40%.
For the current year ended December 31, diluted EPS is

A. $9.82
B. $8.29
C. $7.71
D. $7.43

Answer 37

The correct answer is (D).

Basic Earnings per share (EPS) is computed by dividing net income less preferred stock dividends by the weighted average shares of common stock outstanding.

Diluted EPS adjusts this calculation to reflect all potentially dilutive securities. To compute diluted EPS for this question, the convertible securities are assumed to have been converted at the beginning of the year.

The preferred stock dividend of $45,000 is added back to the numerator (canceling out its original subtraction, since in this question we already have Net Income, Preference Dividend wasn’t subtracted and hence need not be added back) and the 30,000 shares of converted common stock are added to the denominator.

The bond interest expense, net of tax, of $60,000 [($1,000,000 × 10%) × (1 - 40%)] is added back to the numerator as it was subtracted from Net Income and the 20,000 shares of converted common stock are added to the denominator.

Diluted EPS = $980,000 Net income + $60,000 Bond interest (net tax) = $7.43
90,000 (CS) + 30,000 (conv. PS) + 20,000 (conv. bonds)

Question 38

Terra Co.'s total revenues from its three operating segments were as follows:
Segment	Sales to
External Customers	Intersegment
Sales	Total
Revenues
Lion	$ 70,000	$30,000	$100,000
Monk	22,000	4,000	26,000
Nevi	8,000	16,000	24,000
Combined	$100,000	50,000	150,000
Elimination	\_\_\_\_\_\_	(50,000)	(50,000)
Consolidation	$100,000	$----	$100,000 Which operating segment(s) is(are) deemed to be reportable segments?
A.    None.
B.    Lion only.
C.    Lion and Monk only.
D.    Lion, Monk, and Nevi.

Answer 38

D

An operating segment is deemed to be a reportable segment if it meets one or more of the revenue, profit(loss), and assets tests. If an operating segment’s revenue, including both sales to external customers and intersegment sales and transfers, is 10% or more of the combined revenue of all operating segments, it meets the revenue test. Lion, Monk, and Nevi each have more than 10% of combined revenues and are deemed to be reportable segments.

Question 39

Unless a majority of the segment's \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ are from \_\_\_\_\_\_\_\_\_\_\_\_\_, an enterprise must report interest revenue separately from interest expense for each reportable segment.
A.    Revenues; operating income
B.    Expenses; operating income
C.    Revenues; interest
D.    None of the above

Answer 39

C

An enterprise must report interest revenue separately from interest expense for each reportable segment unless a majority of the segment’s revenues are from interest.

Question 40

Cox Corporation had 1,200,000 shares of common stock outstanding on January 1, and December 31, year 2. In connection with the acquisition of a
subsidiary company in June of year 1, Cox is required to issue 50,000 additional shares of its common stock on July 1, of year 3, to the former owners of the
subsidiary. Cox paid $200,000 in preferred stock dividends in year 2, and reported net income of $3,400,000 for the year. Cox’s diluted earnings per share for
year 2 should be

A. $2.83
B. $2.72
C. $2.67
D. $2.56

Answer 40

The correct answer is (D).

If shares are to be issued in the future upon the mere passage of time, they should be considered as outstanding for the computation of EPS.

Since there will be no effect of issuing new shares on income(loss), the numerator will remain unaffected and will be calculated the same way as for basic EPS.

The denominator will include the inclusion of contingent shares.

      NI - Preferred Dividend        	= EPS Outstanding Shares + Contingent Shares

       $3,400,000 - $200,000          	= $2.56 1,200,000 + 50,000