Questions 8 Flashcards
A company’s first IFRS reporting period is for the year ended December 31, Year 2. While preparing the Year 2
statement of financial position, management identified an error in which a $90,000 loss accrual was not recorded.
$40,000 of the loss accrual related to a Year 1 event and $50,000 related to a Year 2 event. What amount of loss
accrual should the company report in its December 31, Year 1, IFRS statement of financial position?
a. $50,000
b. $90,000
C. $40,000
d. $0
Choice “c” is correct. Like GAAP, IFRS requires errors to be corrected retrospectively. The statement of financial
position for Year 1 will be corrected for the amount of loss accrual not recorded in Year 1.
A company recently moved to a new building. The old building is being actively marketed for sale, and the
company expects to complete the sale in four months. Each of the following statements is correct regarding the
old building, except:
a. It will be reclassified as an asset held for sale.
b. It will be valued at historical cost.
c. It will be classified as a current asset.
d. It will no longer be depreciated.
Choice “b” is correct. The old building being actively marketed for sale will be valued at the lower of its book value
or net realizable value (fair value less the costs to sell).
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are
based on:
a. Generally accepted accounting principles.
b. The needs of the users of the information.
c. The need for conservatism.
d. Reporting on management’s stewardship.
Choice “b” is correct. The FASB conceptual framework states that the objectives of financial reporting stem from
the informational needs of the external users of the information. SFAC 1 para. 28.
According to the FASB and IASB conceptual frameworks, predictive value is an ingredient of
Faithful
Relevance Representation
a. Yes Yes
b. Yes No
C. No Yes
d. No NoChoice “b” is correct. Yes - No. Predictive value is an ingredient of relevance, but not of faithful representation.
FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital
maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?
Currently reported Comprehensive
net income income.
a. Financial capital Financial capital
b. Physical capital Financial capital
C. Financial capital Physical capital
d. Physical capital Physical capital
Choice “a” is correct. Financial capital - Financial capital.
Financial capital maintenance is considered to be an element of both “currently reported net income” and
“comprehensive income.” This was a rare instance in which this type of information was asked on the exam.
Paragraphs 71 and 72 of SFAC No. 6 provide the definitions of financial capital and physical capital:
A concept of maintenance of capital or recovery of cost is a prerequisite for separating return on capital from
return of capital because only inflows in excess of the amount needed to maintain capital are a return on equity.
Two major concepts of capital maintenance exist, both of which can be measured in units of either money or
constant purchasing power: the financial capital concept and the physical capital concept (which is often
expressed in terms of maintaining operating capability; that is, maintaining the capacity of an enterprise to provide a constant supply of goods or services). The major difference between them involves the effects of price changes on assets held and liabilities owed during a period. Under the financial capital concept, if the effects of those price changes are recognized, they are called “holding gains and losses” and are included in return on capital.
Under the physical capital concept, those changes would be recognized but called “capital maintenance
adjustments” and would be included directly in equity and would not be included in return on capital. Under that concept, capital maintenance adjustments would be a separate element rather than gains and losses.
The financial capital concept is the traditional view and is generally the capital maintenance concept in present
primary financial statements. Comprehensive income, as defined in paragraph 70, is a return on financial capital.
SFAC No. 6 is the only place in the authoritative literature where these two terms are defined.
According to the FASB conceptual framework, which of the following is an essential characteristic of an asset?
a. An asset is obtained at a cost.
b. An asset provides future benefits.
c. An asset is tangible.
d. The claims to an asset’s benefits are legally enforceabl
Choice “b” is correct. An asset provides future benefits.
Rule: According to the FASB conceptual framework, assets are probable future economic benefits obtained or
controlled by a particular entity as a result of past transactions or events.
According to the FASB conceptual framework, an entity’s revenue may result from:
a. An increase in a liability from incidental transactions.
b. A decrease in a liability from primary operations.
c. A decrease in an asset from primary operations.
d. An increase in an asset from incidental transactions.
Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity’s ongoing major operations, not from “incidental” operations.
Choice “b” is correct. An entity’s revenue may result from a decrease in a liability from primary operations.
Which of the following facts concerning fixed assets should be included in the summary of significant accounting
policies?
Depreciation Method Composition
a. Yes No
b. No No
C. Yes Yes
d. No Yes
Choice “a” is correct. Yes - No.
Yes - “Depreciation methods” should be disclosed in the “summary of significant accounting policies.”
No - Composition of fixed assets (or any other account) should not be disclosed in the “summary of significant
accounting policies.”
On January 1, Year 1, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon
expects to use these cabinets for the years. Brecon’s Year 1 multi-step income statement should include:
a. All of the cabinet costs in cost of goods sold.
b. All of the cabinet costs in selling, general, and administrative expenses.
c. One-fifth of the cabinet costs in selling, general, and administrative expenses.
d. One-fifth of the cabinet costs in cost of goods sold.
Choice “c” is correct. One-fifth of the cabinet costs (depreciation expense) should be included in selling, general, and administrative expenses for Year 1.
Which of the following should be disclosed in a summary of significant accounting policies?
I. Management’s intention to maintain or vary the dividend payout ratio.
II. Criteria for determining which investments are treated as cash equivalents.
Ill. Composition of the sales order backlog by segment.
a. II only.
b. II and Ill.
c. I only.
d. I and Ill.
Choice “a” is correct. II only.
The criteria for determining which investments are treated as “cash equivalents” is a method of accounting
policies that needs to be disclosed in the summary of significant accounting policies
The summary of significant accounting policies should disclose the:
a. Concentration of credit risk of all financial instruments by geographical region.
b. Criteria for determining which investments are treated as cash equivalents.
c. Terms for convertible debt to be exchanged for common stock.
d. Maturity dates of noncurrent debts.
Choice “b” is correct. The criteria for determining which investments are treated as cash equivalents would be part
of the summary of significant accounting policies
Which of the following information should be included in Melay, lnc.’s summary of significant accounting policies?
a. Business segment sales are Alay $1 M, Belay $2M, and Celay $3M.
b. Future common share dividends are expected to approximate 60% of earnings.
c. During the current period, the Delay component was sold.
d. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line
method.
Choice “d” is correct. Computing depreciation principally by the straight-line method is a GAAP method of
depreciation that should be described in the “summary of significant accounting policies.”
Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds
over the carrying amount of the warehouse sold should be reported as a(an):
a. Gain from discontinued operations, net of income taxes.
b. Reduction of the cost of the new warehouse.
c. Extraordinary gain, net of income taxes.
d. Part of continuing operations.
Choice “d” is correct. Part of continuing operations.
Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. The
amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount (FMV) of the fixed asset sold.
Adam Corp. uses U.S. GAAP and had the following infrequent transactions during Year 1:
• A $190,000 gain on reacquisition and retirement of bonds. This material event is also considered unusual
for Adam Corp.
• A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at
another location.
• A $90,000 loss on the abandonment of equipment.
In its Year 1 income statement, what amount should Adam report as total infrequent net gains that arenot
considered extraordinary?
a. $360,000
b. $450,000
C. $170,000
d. $100,000
Choice “c” is correct. $170,000. Infrequent net gains not considered extraordinary include:
Gain on disposal of a component of a business $ 260,000
Loss on abandonment of equipment (90,000)
Total $ 170,000
Under U.S. GAAP, a transaction that is unusual, but not infrequent, should be reported separately as a(an):
a. Component of income from continuing operations, net of applicable income taxes.
b. Component of income from continuing operations, but not net of applicable income taxes.
c. Extraordinary item, but not net of applicable income taxes.
d. Extraordinary item, net of applicable income taxes.
Choice “b” is correct. A transaction that is unusual, but not “infrequent” should be reported separately as a
component of continuing operations, (gross) but not net of applicable income taxes.
