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NEW QUESTION 91
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. Extraordinary gain, net of income taxes.
- B. Gain from discontinued operations, net of income taxes.
- C. Reduction of the cost of the new warehouse.
- D. Part of continuing operations.
Answer: D
Explanation:
Choice "b" 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.
Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax.
Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations.
Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.
NEW QUESTION 92
Tanker Oil Co., a development stage enterprise, incurred the following costs during its first year of
operations:
Tanker had no revenue during its first year of operation. What amount may Tanker capitalize as
organizational costs?
- A. $115,000
- B. $55,000
- C. $95,000
- D. $0
Answer: D
Explanation:
Choice "d" is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).
NEW QUESTION 93
Which of the following describes how comprehensive income should be reported?
- A. Should not be reported in the financial statements but should only be disclosed in the footnotes.
- B. May be reported in a separate statement, in a combined statement of income and comprehensive
income, or within a statement of stockholders' equity. - C. Must be reported in a separate statement, as part of a complete set of financial statements.
- D. May be reported in a combined statement of income and comprehensive income or disclosed within a
statement of stockholders' equity; separate statements of comprehensive income are not permitted.
Answer: B
Explanation:
Choice "c" is correct.
Comprehensive income must be presented in one of three formats:
1 . In a combined statement of income and comprehensive income;
2 . In a separate statement of comprehensive income that begins with net income; or
3 . In a statement of changes in equity.
Choices "a", "b", and "d" are incorrect, per the above.
NEW QUESTION 94
On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to
discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would
be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.
Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its
carrying amount in 20X3. Maxy's effective tax rate is 30%.
In its 20X2 income statement, what amount should Maxy report as loss from discontinued operations?
- A. $980,000
- B. $1,190,000
- C. $1,400,000
- D. $1,700,000
Answer: B
Explanation:
Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value,
there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000
impairment loss plus the $1,400,000 20X2 operating loss would be recognized in 20X2 net of tax. The
total loss would be $1,700,000 * 70% (100% - 30%) or $1,190,000. Choice "a" is incorrect. It includes the
2 0X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2
operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but not
the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax. Choice
"d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.
NEW QUESTION 95
A transaction that is unusual, but not infrequent, should be reported separately as a(an):
- A. Component of income from continuing operations, but not net of applicable income taxes.
- B. Component of income from continuing operations, net of applicable income taxes.
- C. Extraordinary item, but not net of applicable income taxes.
- D. Extraordinary item, net of applicable income taxes.
Answer: A
Explanation:
Choice "d" 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.
Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent."
Choice "c" is incorrect, per "d" above.
NEW QUESTION 96
During a period when an enterprise is under the direction of a particular management, its financial
statements will directly provide information about:
- A. Neither enterprise performance nor management performance.
- B. Both enterprise performance and management performance.
- C. Enterprise performance but not directly provide information about management performance.
- D. Management performance but not directly provide information about enterprise performance.
Answer: C
Explanation:
Choice "c" is correct. Financial reporting, and especially financial statements, usually cannot and do not
separate management performance from enterprise performance. Financial reporting provides
information about an enterprise during a period when it was under the direction of a particular
management but does not directly provide information about that management's performance. SFAC 1
para. 53
NEW QUESTION 97
On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no
salvage. The machine was depreciated by the double declining balance method for both financial
statement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method for
financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31,
2 0X5, was $560,000. If the straight-line method had been used, the accumulated depreciation at
December 31, 20X5, would have been $420,000. Pell's enacted income tax rate for 20X6 and thereafter is
3 0%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the
straight-line method should be:
- A. $98,000 debit.
- B. $98,000 credit.
- C. $0.
- D. $140,000 credit.
Answer: C
Explanation:
Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in
method and a change in estimate. These changes should be accounted for as changes in estimate and
handled prospectively. The new depreciation method should be used as of the beginning of the year of
change and should start with the current book value of the underlying asset. No retroactive or
retrospective calculations should be made, and no adjustment should be made to retained earnings. And,
certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a",
"b", and "c" are incorrect, per the above Explanation: .
NEW QUESTION 98
According to the FASB conceptual framework, which of the following relates to both relevance and
reliability?
- A. Feedback value.
- B. Comparability.
- C. Timeliness.
- D. Verifiability.
Answer: B
Explanation:
Choice "a" is correct. Comparability and consistency are secondary qualities of both relevance and
reliability. SFAC 2 para. 111-122
Choice "b" is incorrect. Feedback value is a key characteristic of relevance only.
Choice "c" is incorrect. Verifiability is a key characteristic of reliability only.
Choice "d" is incorrect. Timeliness is a key characteristic of relevance only.
NEW QUESTION 99
Which of the following information should be included in Melay, Inc.'s 1992 summary of significant
accounting policies?
- A. Future common share dividends are expected to approximate 60% of earnings.
- B. During 1992, the Delay component was sold.
- C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
- D. Property, plant, and equipment is recorded at cost with depreciation computed principally by the
straight-line method.
Answer: D
Explanation:
Choice "a" 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." Choice "b" is
incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on
"discontinued operations" in the F1 class) but is not a "significant accounting policy."
Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting
policy."
Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for
the financial statements. They might be appropriate for the "presidents letter to shareholders."
NEW QUESTION 100
Which of the following is a generally accepted accounting principle that illustrates the practice of
conservatism during a particular reporting period?
- A. Reporting investments with appreciated market values at market value.
- B. Reporting inventory at the lower of cost or market value.
- C. Capitalization of research and development costs.
- D. Accrual of a contingency deemed to be reasonably possible.
Answer: B
Explanation:
Choice "d" is correct. The rule of conservatism states that revenues and gains should be recognized when
the earnings process is complete, but that expenses and losses should be expensed immediately.
Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when
market is lower than cost in the period the loss is sustained, rather than when the inventory is sold,
consistent with the rule of conservatism. Choice "a" is incorrect. Because the future benefits of R&D costs
are questionable, these cost should be expensed immediately, consistent with the rule of conservatism
and the matching principle. Choice "b" is incorrect. The rule of conservatism only requires the accrual of
"probable" losses. The accrual of a reasonably possible loss is not required and the accrual of any
contingent gain, whether probable, reasonably possible, or remote, is prohibited. Choice "c" is incorrect.
The reporting of marketable securities with appreciated values at market value requires the recording of a
gain on the asset before the gain is realized. This contradicts the rule of conservatism, but is allowed
because fair value is a more relevant measure of the value of marketable securities.
NEW QUESTION 101
According to the FASB conceptual framework, comprehensive income includes which of the following?
- A. Option A
- B. Option D
- C. Option B
- D. Option C
Answer: C
Explanation:
Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in
equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.
NEW QUESTION 102
Dean Co. acquired 100% of Morey Corp. prior to 1989. During 1989, the individual companies included in
their financial statements the following:
What amount should be reported as related party disclosures in the notes to Dean's 1989 consolidated
financial statements?
- A. $175,000
- B. $150,000
- C. $155,000
- D. $330,000
Answer: A
Explanation:
Choice "c" is correct. The only related party transaction that would require disclosure (assuming that all
amounts are material to the financial statements) would be the loans to officers since they are outside of
the ordinary course of business. Choices "a", "b", and "d" are incorrect. Officers' salaries, officers'
expenses and intercompany sales (between entities included in a consolidated set of financial statements)
are all transactions in the ordinary course of business and generally would not require disclosure.
NEW QUESTION 103
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 is tangible.
- C. The claims to an asset's benefits are legally enforceable.
- D. An asset provides future benefits.
Answer: D
Explanation:
Choice "d" 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.
NEW QUESTION 104
Conn Co. reported a retained earnings balance of $400,000 at December 31, 1991. In August 1992, Conn
determined that insurance premiums of $60,000 for the three-year period beginning January 1, 1991, had
been paid and fully expensed in 1991. Conn has a 30% income tax rate. What amount should Conn report
as adjusted beginning retained earnings in its 1992 statement of retained earnings?
- A. $442,000
- B. $428,000
- C. $440,000
- D. $420,000
Answer: B
Explanation:
Choice "b" is correct. $428,000 net of tax.
NEW QUESTION 105
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting
principle. Which of the following should the auditor consider the most authoritative?
- A. FASB Technical Bulletins.
- B. AICPA Technical Practice Aids.
- C. AICPA Accounting Interpretations.
- D. FASB Statements of Financial Accounting Concepts.
Answer: A
Explanation:
Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB
Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions,
and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate
guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting
Guides, AICPA Statements of Position, and FASB Technical Bulletins. Choice "b" is incorrect. AICPA
Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the
fourth floor. Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice
Aids are among the least authoritative of accounting literature (fifth floor).
NEW QUESTION 106
In April 30, 20X4, Deer Corp. approved a plan to dispose of a component of its business. For the period
January 1 through April 30, 20X4, the component had revenues of $500,000 and expenses of $800,000.
The assets of the component were sold on October 15, 20X4 at a loss. In its income statement for the
year ended December 31, 20X4, how should Deer report the component's operations from January 1 to
April 30, 20X4?
- A. $500,000 and $800,000 should be included with revenues and expenses, respectively, as part of
continuing operations. - B. $300,000 should be reported as an extraordinary loss.
- C. $300,000 should be reported as a loss from operations of a component and included in loss from
discontinued operations. - D. $300,000 should be reported as part of the loss on disposal of a component and included as part of
continuing operations.
Answer: C
Explanation:
Choice "d" is correct. Once the decision has been made to dispose of a component of a business and that
component meets the criteria to be classified as held for sale, the operating results of the component for
the period reported on, and any gain or loss from the disposal, should be reported separately from
continuing operations, net of tax. In this question, the component was classified as held for sale and was
sold in the same year.
Thus, in 20X4, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss
from discontinued operations. The loss on disposal would be reported as part of that loss from
discontinued operations also.
Choice "a" is incorrect. The results of operations prior to the decision date, and also after the decision
date, are reported separately from the results of continuing operations as a part of discontinued
operations. Choice "b" is incorrect. The results of operations prior to the decision date, and also after the
decision date, are reported separately from the results of continuing operations as a loss from operations
of a component and included in loss from discontinued operations.
Choice "c" is incorrect. The results of discontinued operations are not reported as an extraordinary item.
NEW QUESTION 107
Which of the following is correct concerning financial statement disclosure of accounting policies?
- A. Disclosure of accounting policies is an integral part of the financial statements.
- B. Disclosures should be limited to principles and methods peculiar to the industry in which the company
operates. - C. Disclosures should duplicate details disclosed elsewhere in the financial statements.
- D. The format and location of accounting policy disclosures are fixed by generally accepted accounting
principles.
Answer: A
Explanation:
Choice "b" is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of
the financial statements. Choice "a" is incorrect. For disclosure of accounting policies, disclosure should
not be limited to principles and methods peculiar to the industry in which the company operates. All
material accounting policies should be disclosed. Choice "c" is incorrect. For disclosure of accounting
policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy
disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It
does make sense to disclose the "why" before the "what." Choice "d" is incorrect. Disclosure of
accounting policies should not duplicate details disclosed elsewhere in the financial statements.
Interim Financial Reporting
NEW QUESTION 108
Thorpe Co.'s income statement for the year ended December 31, 1990, reported net income of $74,100.
The auditor raised questions about the following amounts that had been included in net income:
The loss from the fire was an infrequent but not unusual occurrence in Thorpe's line of business.
Thorpe's December 31, 1990, income statement should report net income of:
- A. $66,100
- B. $81,600
- C. $65,000
- D. $87,000
Answer: D
Explanation:
Net income before adjustments
Rule: Unrealized losses (or gains) resulting from changes in market value of available-for-sale
investments should be reported as a component of other comprehensive income in shareholders' equity.
Unrealized gains and losses on investments held for trading would be included in net income.
Correction of errors of prior periods should be reported as an adjustment to beginning retained earnings,
not as an item of net income.
Choice "d" is correct. $87,000.
NEW QUESTION 109
Opto Co. is a publicly-traded, consolidated enterprise reporting segment information. Which of the
following items is a required enterprise-wide disclosure regarding external customers?
- A. The identity of any external customer providing 10% or more of a particular operating segment's
revenue. - B. Information on major customers is not required in segment reporting.
- C. The fact that transactions with a particular external customer constitute more than 10% of the total
enterprise revenues. - D. The identity of any external customer considered to be "major" by management.
Answer: C
Explanation:
Choice "a" is correct. In order to conform to GAAP, financial statements for public business enterprises
must report segment information about a company's major customers if that customer provides 10% or
more of the combined revenue, internal and external, of all operating segments.
Choice "b" is incorrect. Revenue is 10% of ALL operating segments not "a particular" segment.
Choice "c" is incorrect. Disclosure is not at management's discretion.
Choice "d" is incorrect. Disclosure is required.
NEW QUESTION 110
......
Introduction to Financial Accounting and Reporting (FAR) Exam
The Standardized CPA Evaluation is the exam portion of the Financial Accounting and Reporting (FAR) which measures the expertise and skills that a newly qualified CPA must demonstrate in the financial accounting and reporting systems used by enterprise (public and non-public), non-profit, and state and local government agencies.
In the FAR portion of the test, the examination contains the requirements and regulations provided by:
- International Accounting Standards Board (IASB)
- U.S. Securities and Exchange Commission (U.S. SEC)
- Governmental Accounting Standards Board (GASB)
- American Institute of Certified Public Accountants (AICPA)
- Financial Accounting Standards Board (FASB)
The FAR section consists of questions that emphasize the conceptual structure and financial reporting, the selection of accounts of financial statements, the selection of transactions, and the application of state and local governments to accounting work. These sections can be overviewed from the FAR practice test. References at the end of this introduction provide a list of guidelines and regulations provided by these bodies and other reference materials that are available for evaluation in the FAR portion of the review.
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