MCQ's Conceptual Framework, Standard-setting and Financial Reporting

Question 1

An entity’s cash purchases and sales of investments considered as cash equivalents are generally part of the entity’s __________ activities, and details of those transactions need not be reported in a statement of cash flows.

A - Investing
B - Operating
C - Cash management
D - Financing

Answer 1

C - Cash management

An entity’s cash purchases and sales of investments considered as cash equivalents generally are part of the enterprise’s cash management activities, and the details of those transactions need not be reported in a statement of cash flows.

Question 2

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?

Answer 2

40 Days

Question 3

Ocean Corp.’s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean’s waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The following data relate to the warehouse:

Current carrying amount $ 300,000
Replacement cost 1,100,000

What amount of gain should Ocean report as a separate component of income on the income statement?

Answer 3

$ 730,000
A gain or loss on the involuntary conversion (e.g., casualty, condemnation, theft) of a nonmonetary asset is recognized in income even if the proceeds received as a result of the involuntary conversion are reinvested in a replacement nonmonetary asset. The gain on the involuntary conversion is
reported as a separate component of income from continuing operations.

Insurance proceeds ($1,100,000 - $50,000) $1,050,000
Carrying amount at conversion date$ 300,000
Add: Dismantling cost 20,000
Amount to determine gain (320,000)
Gain recognized on involuntary conversion $ 730,000

Question 4

On December 31 of the current year, Paxton Corp. purchased 80% of the outstanding common stock of Small Inc. On the purchase date, the book value of Small’s net assets equaled $1,800,000 and the fair value equaled $2,000,000. In the current year consolidated balance sheet non-controlling interests were reported at $425,000. Under the acquisition method, what amount should be reported as goodwill in the current year consolidated balance sheet?

A - $ 25,000
B - $ 65,000
C - $125,000
D - $325,000

Answer 4

$ 125,000
Goodwill is the excess of the cash paid (i.e cost) versus the fair value of the net assets. If the 20% non-controlling interest in Small Inc. was $425,000, then 100% cost of Small would be $2,125,000 [$425,000/20%]. Cash of $2,125,000 less fair value of $2,000,000 creates goodwill of $125,000.

Question 5

The net asset reclassification of a nongovernmental not-for-profit organization would be reported on which of the following?

A - Statement of financial position
B - Statement of activities
C - Statement of cash flows
D - Statement of functional expenses

Answer 5

Statement of activities

The statement of activities includes the revenues, expenses and the net assets released from restriction. Thus, any net asset reclassification (from net asset with donor restrictions to net asset without donor restrictions) is reflected in the statement of activities.

Question 6

For the eight months ended August 31, year 5, the carpet division of a flooring company, which is considered a major line of business, had an operating loss of $115,000 from operations. On September 1, year 5, the board of directors voted to discontinue the division’s operations. On December 31, year 5, the division was sold for a pre-tax loss of $135,000. The division’s operating loss for year 5 was $240,000. The company’s income tax rate is 30%. What amount of loss should the company report as discontinued operations in the December 31, year 5, income statement?

A - $262,500
B - $260,000
C - $182,000
D - $168,000

Answer 6

$262,500

Results of all discontinued operations are reported net of tax as a separate component on the income statement. The loss to be reported as discontinued operations by the flooring company in question is as follows:

Loss on sale of division $135,000
Add: Division’s operating loss $240,000
Total loss from discontinued operations $375,000
Less: Income Tax @ 30% ($112,500)
After-tax loss $262,500

Question 7

A company that wishes to disclose information about the effect of changing prices in accordance with FASB Standards should report this information in
A - The body of the financial statements.
B - The notes to the financial statements.
C - Supplementary information to the financial statements.
D - Management’s report to shareholders.

Answer 7

Supplementary information to the financial statements.

A company disclosing voluntary information about the effect of changing prices should report this information in the supplementary information to the financial statements. This information should not be reported in the body of the financial statements, the notes to the financial statements, or management’s report to shareholders.

Question 8

The GASB’s primary goal for the SEA Concepts Statements is which of the following?

A - Provide fundamental reporting characteristics to help
preparers develop consistent reporting
B - Outline specific reporting standards
C - Identify preferred performance benchmarks
D - Designate appropriate program data that should be
included in SEA reports

Answer 8

Provide fundamental reporting characteristics to help preparers develop consistent reporting

The SEA Concepts Statements are focused on a reporting framework, not the specifics to include in a SEA report. The GASB hopes the SEA Concepts Statements and the Voluntary Reporting Guidelines will help preparers develop comparable reports that improve the usefulness of SEA reports. The GASB has not established specific reporting or measurement standards for SEA reports. Identification of the appropriate performance data is a management function, not a role for the GASB.

Question 9

On November 1, year 2, Smith Co. contracted to dispose of an industry segment on February 28, year 3. Throughout year 2 the segment had operating losses. These losses were expected to continue until the segment’s disposition. If a loss is anticipated on final disposition, how much of the operating losses should be included in the loss on disposal reported in Smith’s year 2 income statements?

I - Operating losses for the period January 1 to October 31,
year 2.
II - Operating losses for the period November 1 to December
31, year 2.
III - Estimated operating losses for the period January 1 to
February 28, year 3.

Answer 9

I and II only.

In the period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise for current and prior periods shall report the results of operations of the component in discontinued operations in the period(s) in which they occur. Estimated future operating losses are included in the income statement in the future, when they are incurred.

Question 10

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 10

The quarterly results of operations and financial condition
of a registrant.

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 8-K.

Question 11

A $100,000 gift was received by Group Home Projects, a nongovernmental not-for-profit organization. Group’s board of directors stipulated that this gift must be invested for a period of four years, with the income to be used for general operations. How should the gift be reported in Group Home’s statement of activities?

A - contribution without donor restrictions.
B - contribution with donor restrictions.
C - contribution without donor restrictions of $25,000 and
contribution with donor restrictions of $75,000.
D - Deferred revenue.

Answer 11

contribution without donor restrictions.

Contribution without donor restrictions - Many contributions received by NFP are unrestricted gifts of cash, and are reported as revenues in the net assets without donor restrictions section of the statement of activities. It includes assets designated by the board of trustees to be spent in a certain manner, since such designation does not constitute a legal restriction against the NFP, and the board can alter its designation at any time. Option (b), (c) and (d) are incorrect because the gift received was not restricted, restrictions were placed by the group board.

Question 12

Kell Corp.’s $95,000 net income for the current year quarter ended September 30, included the following items:

A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2 of the current year.
In addition, Kell paid $48,000 on February 1, of the current year, for current year calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of the current year.

For the current year quarter ended September 30, Kell should report net income of

Answer 12

$111,000

The cumulative-effect type accounting change made in the third quarter should be accounted for in retained earnings; no cumulative effect of the change should be included in net income of the third quarter. The $12,000 of calendar-year property taxes are allocated to the third quarter; annual property taxes should be accrued or deferred at each interim reporting date to provide an appropriate cost in each period and thus are allocated ratably to each interim period of the year.

Net income for the quarter, as reported $95,000
Add: Cumulative-effect loss resulting from change in
accounting principle included in third quarter 16,000
Corrected net income for third quarter $111,000

Question 13

Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1 of the current year. The following information is from the condensed yearend income statements of Pirn and Scroll:

Pirn Scroll

Sales to Scroll $100,000 $ —
Sales to others 400,000 300,000
500,000 300,000

Costs of goods sold:
Acquired from Pirn — (80,000)
Acquired from others (350,000) (190,000)
Gross profit 150,000 30,000
Depreciation (40,000) (10,000)
Other expenses (60,000) (15,000)
Income from operations 50,000 5,000
Gain on sale of equipment to Scroll 12,000 —
Income before income taxes $ 62,000 $ 5,000

Sales by Pirn to Scroll are made on the same terms as those made to third parties.

Equipment purchased by Scroll from Pirn for $36,000 on January 1 is depreciated using the straight-line method over four years.

What amount should be reported as depreciation expense in Pirn’s year-end consolidated income statement?

Answer 13

$47,000

The cost of the equipment to the purchasing affiliate exceeds the carrying amount of the equipment to the consolidated entity by the gain recognized on the sale by the selling affiliate. Consolidated depreciation expense must be based upon the cost of the equipment to the consolidated entity. Therefore,
consolidated depreciation expense must be reduced by the excess depreciation recorded by the purchasing affiliate [i.e., ($40,000 + $10,000) - ($12,000 / 4) =
$47,000]

Question 14

Terra Co.’s total revenues from its three business segments were as follows:

Segment Sales to unaffiliated Intersegment Total
customers Sales 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)
—— —– ——
Consolidated $100,000 $ - $100,000
======== ====== =======
Which business segment(s) is (are) deemed to be reportable segment(s)?

Answer 14

Lion, Monk, and Nevi

A segment is reportable if its sales (including intersegment sales) are at least 10% of total combined revenues (including intersegment sales) for all segments.

Total combined sales are $150,000. Thus, all three segments are reportable because the combined sales of each exceed $15,000.

Question 15

The SEC is comprised of five commissioners, appointed by the President of the United States, and five divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?

Answer 15

Division of Corporate Finance
The Division of Corporate Finance oversees the compliance with the securities acts and examines all filings made by publicly held companies.
The Division of Trading and Markets oversees the secondary markets, exchanges, brokers, and dealers, not for overseeing compliance with the securities acts.

Question 16

Which of the following is an example of the expense recognition principle of associating cause and effect?
Allocation of insurance cost.
Sales commissions.
Depreciation of fixed assets.
Officers’ salaries.

Answer 16

Sales commissions
This answer is correct because sales commissions are recognized as an expense on the basis of a presumed direct association with the related sales revenue (SFAC 5).
Depreciation of fixed assets is an example of the systematic and rational allocation expense recognition principle.
Officers’ salaries is an example of the immediate recognition expense recognition principle.
Allocation of insurance cost is an example of the systematic and rational allocation expense recognition principle.

Question 17

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the

Answer 17

Beginning of the earliest period reported (or at time of issuance, if later).

Question 18

The summary of significant accounting policies should disclose the
A - Pro forma effect of retroactive application of an accounting change.
B - Basis of profit recognition on long-term construction contracts.
C - Adequacy of pension plan assets in relation to vested benefits.
D - Future minimum lease payments in the aggregate and for each of the five
succeeding fiscal years.

Answer 18

Basis of profit recognition on long-term construction contracts.
The summary of significant accounting policies conveys information regarding the important accounting methods and policies chosen by the firm, when a choice is available.

Knowledge of the methods is critical to an understanding of the amounts disclosed in the financial statements. The method of accounting for long-term contracts may be the percentage of completion or completed contract method. Disclosure of this method assists the user in understanding the meaning of reported revenue and gross profit.

The other answer alternatives give data on specific accounts or the result of applying specific accounting principles. They do not indicate what choices the firm has made for accounting and reporting.

Question 19

The results of the consolidating process are recorded in the books of the:
Parent or Subsidiary

Answer 19

Neither
The results of the consolidating process (adjustments, eliminations, etc.) are not recorded on either the books of the parent or of any subsidiary. The consolidating process takes place on worksheets and schedules, and the results are presented in the form of consolidated financial statements. Some of the worksheet and schedule data is carried forward from period end to period end to facilitate the recurring consolidating process.

Question 20

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?

Answer 20

In the fourth quarter only

Temporary declines in inventory value are not recognized in the interim period in which they occur. This decline was expected to be temporary, i.e. it was expected to reverse. Therefore, it is not recorded until the fourth quarter, at which time the normal annual LCM valuation is applied because the decline had not reversed. Had the decline in the second quarter been deemed permanent, it would have been recognized in the second quarter.

Question 21

Ahm Corp. owns 90% of Bee Corp.’s common stock and 80% of Cee Corp.’s common stock. The remaining common shares of Bee and Cee are owned by their respective employees. Bee sells exclusively to Cee, Cee buys exclusively from Bee, and Cee sells exclusively to unrelated companies. Selected year 1 information for Bee and Cee follows:

                                                          Bee Corp.	Cee Corp. Sales	                                                 $130,000	$91,000 Cost of sales	                                           100,000	  65,000 Beginning inventory	                               None	    None Ending inventory	                                       None	  65,000

What amount should be reported as gross profit in Bee and Cee’s combined income statement for the year ended December 31, year 1?

Answer 21

$41,000

Combined financial statements are prepared for companies that are owned by the same parent company or individual but are not consolidated. These statements are prepared by combining the separate companies’ financial statement classifications. Intercompany transactions, balances, and profit (loss) should be eliminated. Therefore, to determine the gross profit in Bee and Cee’s combined income statement, the intercompany profit resulting from Bee’s sales to Cee should be eliminated. Cee sold to outsiders 50% ($65,000/$130,000) of the inventory purchased from Bee. The cost of sales to the combined entity is thus 50% of the $100,000 cost of sales reported by Bee. Gross profit of the combined entity amounts to $41,000, which is $91,000 of sales to unrelated companies less $50,000 cost of sales.

Question 22

According to the conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:

A. Confirmatory value.
B. Predictive Value.
C. Representational faithfulness.
D. Faithful representation.

Answer 22

B. Predictive Value

Predictive value is the ingredient that helps users increase the likelihood of forecasting the outcome of events. Financial statement information is useful if it helps users make decisions about investing and extending credit. These decisions involve predictions of a firm’s future financial performance, position, and cash flows.

Question 23

In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for
Transaction Cost And/Or Transportation Cost

Answer 23

Transportation cost yes
Transaction cost no

In determining the fair value of an asset in the most advantageous market, the market-based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.

Question 24

Which of the following statements is true regarding the fair value option for valuing financial assets and liabilities?

A. The fair value option can be applied to a portion of a
financial instrument.
B. Unrealized gains and losses from reporting items using the f
air value option are reported in other comprehensive i
income for the period.
C. The fair value option can be elected on an instrument-by-
instrument basis.
D. The fair value option cannot be applied to insurance contracts.

Answer 24

C. The fair value option can be elected on an instrument-by-
instrument basis.

For false answer
A. the fair value option must be applied to all portions of the instrument.
B. unrealized gains and losses are reported in earnings for the period.
D. the fair value option may be applied to insurance contracts that can be settled by a third party.

Question 25

Selected information from the separate and consolidated balance sheets and income statements of Pard, Inc. and its subsidiary, Spin Co., as of December 31, year 1, and for the year then ended is as follows:

                                                         Pard	      Spin          Consol Balance sheet accounts			 Accounts receivable	               $ 26,000	$19,000	    $39,000 Inventory	                                   30,000	   25,000	      52,000 Investment in Spin                          67,000	           --	              -- Goodwill	                                           --	           --	      30,000 Noncontrolling interest	                   --	           --	      10,000 Stockholders' equity	                154,000	  50,000	    154,000 Income statement accounts			 Revenues	                              $200,000	$140,000   $308,000 Cost of goods sold	                150,000	  110,000     231,000 Gross profit	                                  50,000	    30,000       77,000 Equity in earnings of Spin	          20,000	             --          	-- Net income	                                  36,000	    20,000       40,000 Additional information

1) During year 1, Pard sold goods to Spin at the same markup on cost that Pard uses for all sales. At December 31, year 1, Spin had not paid for all of these goods and still held 37.5% of them in inventory.
2) Pard acquired its interest in Spin on January 2, year 1.

What was the amount of intercompany sales from Pard to Spin during year 1?

Answer 25

$32,000

Pard’s separate revenues are $200,000, and Spin’s separate revenues are $140,000, resulting in a total of $340,000 ($200,000 + $140,000). Since the consolidated income statement shows sales of only $308,000, intercompany sales of $32,000 ($340,000 − $308,000) from Pard to Spin must have been eliminated during consolidation.

Question 26

The following trial balance of Trey Co. at December 31, 20X5 has been adjusted except for income tax expense.

                                                                         Dr.	          Cr. Cash	                                                           $550,000	 Accounts Receivable, net	                          1,650,000	 Prepaid taxes	                                             300,000	 Accounts payable		                                                       $ 120,000 Common stock		                                                          500,000 Additional paid-in capital		                                          680,000 Retained earnings		                                                  630,000 Foreign currency translation adjustment     430,000	 Revenues		                                                               3,600,000 Expenses	                                                  2,600,000	          
                                                                    $5,530,000 $5,530,000 Additional information:

During 20X5, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between the financial statement and the income tax income, and Trey’s tax rate is 30%.
Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payments in equal, semiannual installments of $125,000 every April 1 and October 1.

In Trey’s December 31, 20X5 Balance Sheet, what amount should be reported as total current assets?

Answer 26

$1,950,000

Current assets are assets that are collectible within one year. The sum of the stated current assets is $2,500,000 ($550,000 + $1,650,000+$300,000). However, once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense. In addition, $250,000 of the special accounts receivable is not due for over one year and is, therefore, noncurrent. Therefore, current assets should be $1,950,000 ($2,500,000–$300,000–$250,000).

Question 27

What is the underlying concept that supports estimating a fixed asset impairment charge?

A. Substance over form.
B. Consistency.
C. Matching.
D. Faithful representation.

Answer 27

D. Faithful representation.

An estimate of an impairment charge to a fixed asset can only be a faithful representation if the entity has applied impairment rules properly, disclosed the process of arriving at the impairment estimate and disclosed any uncertainties that affect the impairment estimate. Assuming the above is true, and no other estimate is better than the derived estimate, then the estimate is comprised of the best available information. Therefore, it is a faithful representation.

Question 28

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year’s consolidated statement of retained earnings?

Answer 28

$15,000

This is the amount ($15,000) that Peace will report as dividends in its consolidated statement of retained earnings. Only Peace’s (the parent’s) dividends paid of $15,000 are shown on the Peace/Surge consolidated statement of retained earnings. The dividend paid by Surge to Peace ($8,000 × .75 = $6,000) will not show on the consolidated statement of retained earnings, because it will be eliminated as intercompany dividend (you can’t pay a dividend to yourself!). The balance of Surge’s dividend ($8,000 × .25 = $2,000) goes to the 25% minority shareholders in Surge and reduces their claim to Surge’s retained earnings, not Peace’s consolidated retained earnings.

Question 29

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance.

In a statement of cash flows, what amount is included in investing activities for the above transaction?

A. Cash payment
B. Acquisition price
C. Zero
D. Mortgage amount

Answer 29

Cash Payment

The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, only the cash amount paid is disclosed in the statement of cash flows. The noncash activity schedule would disclose the acquisition price and amount financed with the mortgage.

Question 30

It is generally presumed that an entity is a variable interest entity subject to consolidation if its equity is

A. Less than 50% of total assets.
B. Less than 25% of total assets.
C. Less than 10% of total assets.
D. Less than 10% of total liabilities.

Answer 30

C. Less than 10% of total assets.

It is presumed that an entity with equity of less than 10% of total assets does not have sufficient funding to finance its activities unless there is definitive evidence to the contrary (e.g., a source of outside financing).

Question 31

In October, year 2, a large U.S. aircraft manufacturer signed a significant contract with the government of France to build 50 jumbo jets, with delivery scheduled for year 5.

In February, year 3, the firm signed a second contract with the government of Germany to build 35 jumbo jets. The year 2 financial statements were issued in early March , year 3. The firm did not begin work on either contract before the issuance of the year 2 statements.

Which contract(s) should be recognized in the accounts for the year 2 financial statements?

Answer 31

Neither

No transactions have taken place for either contract. Even though the French contract was signed before the balance sheet date, there is nothing to recognize. Footnotes will describe both contracts.

Question 32

Which of the following is an inherent difficulty in the determination of the results of operations on an interim basis?

A. Cost of sales reflects only the amount of product expense
allocable to revenue recognized as of the interim date.
B. Depreciation on an interim basis is a partial estimate of the
actual annual amount.
C. Costs expensed in one interim period may benefit other
periods.
D. Revenues from long-term construction contracts accounted
for by the percentage of completion method are based on
annual completion and interim estimates may be incorrect.

Answer 32

C. Costs expensed in one interim period may benefit other
periods.

This answer is correct. The most serious problem specified is dealing with costs that are expensed in one interim period but may provide benefits to other interim periods. Per ASC Topic 270, such expenses may be allocated to the interim periods benefited.