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37 Cards in this Set
- Front
- Back
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According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:
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The needs of the users of the information.
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According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is:
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Recognition
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Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
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a. Unrealized loss on investments in noncurrent marketable equity securities available for sale.
Rule: SFAC 5 defines "earnings" for a period to exclude certain cumuulative accounting adustments and other non-owner changes in equity (such as changes in market value of marketable securities available for sale) that are included in comprehensive income for a period. |
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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?
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c. 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. |
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According to the FASB conceptual framework, which of the following is an essential characteristic of an asset?
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d. An asset provides future benefits.
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. |
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According to the FASB conceptual framework, an entity's revenue may result from:
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d. A decrease in a liability from primary operations.
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. |
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Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
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Depreciation method Composition
c. Yes No |
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In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the following:
Net sales revenue $187,000 Results from discontinued operations: Loss from operations of component (net of $1,200 tax effect) $(2,400) Gain on disposal of component (net of $7,200 tax effect) 14,400 12,000 Interest revenue 10,200 Gain on sale of equipment 4,700 Total revenues $213,900 In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of: |
d. $201,900
The various amounts from discontinued operations should be included in discontinued operations, not in revenues. |
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FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB:
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d. Statements of Financial Accounting Standards.
FASB Interpretations of the "Statements of Financial Accounting Standards (SFAS)" have the same authority as the FASB Statements of Financial accounting Stands (SFAS), which by themselves determine GAAP. |
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On January 1, 1991, Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for five years. Brecon's 1991 multi-step income statement should include:
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b. One-fifth of the cabinet costs in selling, general, and administrative expenses.
One-fifth of the cabinet costs (depreciation expense) should be included in selling, general and administrative expenses for 1991. |
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Which of the following accounting pronouncements is the most authoritative?
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c. AICPA Accounting Principles Board Opinion.
The AICPA Accounting Principal Board Opinion (APBO) is a first floor (category A) of established accounting principle pronouncements. |
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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. III. Composition of the sales order backlog by segment. |
c. 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. |
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Which of the following information should be included in Melay, Inc.'s 1992 summary of significant accounting policies?
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a. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.
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." |
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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?
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a. FASB Technical Bulletins.
The most authoritative pronouncements (first floor) are FASB statements, 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. |
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Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:
Debit Credit Net sales $1,600,000 Cost of goods sold $ 960,000 Selling expenses 235,000 Administrative expenses 150,000 Interest expense 25,000 Gain on debt extinguishment 10,000 Totals $1,370,000 $1,610,000 Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. Coffey prepares a multiple-step income statement for 1988. Income from operations before income tax is: |
d. $240,000
The gain on debt extinguishment does not meet the unusual and infrequent criteria of APB 30 to be treated as an Extraordinary Item (per SFAS No. 145, Extinguishments of debt are no longer automatically extraordinary), so it is included as part of income from continuing operations. |
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Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:
Debit Credit Net sales $1,600,000 Cost of goods sold $960,000 Selling expenses 235,000 Administrative expenses 150,000 Interest expense 25,000 Hurricane damage 40,000 Gain on debt extinguishment 10,000 Totals $1,410,000 $1,610,000 Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. The hurricane is considered an unusual and infrequent event. Coffey prepares a multiple-step income statement for 1988. Net income is: |
a. $140,000
Net Income is the "bottom line" amount after all has been considered on the income statement. |
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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):
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b. 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. |
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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 tax rate is 30%. 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 before extraordinary items? |
c. $730,000
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Extraordinary Items
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Unusual and Infrequent in occurence
1. Material in nature 2. Of a character significantly different from the typical or customary business activities 3. Not expected to recur in the foreseeable future 4. Not normally considered in evaluating the ordinary operating results of an enterprise |
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Which of the following should be reported as a prior period adjustment?
Change in Change from estimated lives unaccepted principle of depreciable assets to accepted principle |
b. No Yes
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Prior Period Adjustment
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a) Corrections of errors in the financial statements of prior periods
b) Retroactive restatements required by new GAAP pronouncements c) Changes from a non-GAAP method of accounting to a GAAP method of accounting, which is a specific correction of an error |
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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, 20X5, 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 30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the straight-line method should be:
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d. $0.
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 a 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 adjustments should be made to retained earnings. And, certainly, the cumulative effect should not be reflected on the income statement any more. |
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Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for
LIFO to Weighed average weighted average? to LIFO? |
b. Yes No
The cumulative effect of a change in accounting principle is now reported as an adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative effect. When making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively. |
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Goddard has used the FIFO method of inventory valuation since it began operations in 1987. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of 1990. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods:
Year FIFO Weighted-average 1987 $45,000 $54,000 1988 78,000 71,000 1989 83,000 78,000 |
a. $5,000 decrease.
The cumulative effect of change in accounting principle is determined as of the beginning of the year of change if comparative financial statements are not presented. In this case, the year of change is 1990, so the cumulative effect is the difference in inventory as of the end of 1989. [Note that inventory is a balance sheet item, so the change is based on the balances at the end of the last year the prior method was used. Had this question shown annual income statement amounts of cost of goods sold, we would have had to look at all the past years in the aggregate.] This will allow us to arrive at the adjustment to obtain the amount of retained earnings that would have been reported at the beginning of the period of change if the new accounting principle had been used for all prior periods. |
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During 20X5, Dale Corp. made the following accounting changes:
Method used in 20X4 Method used in 20X5 After-tax effect Sum-of-the-years' digits Straight-line $30,000 depreciation depreciation Last-in, first-out First-in, first-out 98,000 for inventory valuation for inventory valuation What amount should be shown in the 20X5 retained earnings statement as an adjustment to the beginning balance? |
c. $98,000
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Earnings per share data should be reported on the income statement for:
Income before Extraordinary items extraordinary items |
b. Yes Yes
Both the "extraordinary items" and "income before extraordinary items" should be shown with an earnings per share number on the income statement. |
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The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported:
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c. As a component of income from continuing operations, in the period of change and future periods if the change affects both.
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In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?
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b. Effect of a decrease in the estimated useful life of depreciable equipment.
A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary The correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error. |
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In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brighton's financial statements as a:
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a. Prior period adjustment on the retained earnings statement, with separate disclosure.
A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories is an example of change in accounting principle. |
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While preparing its 1991 financial statements, Dek Corp. discovered computational errors in its 1990 and 1989 depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:
1990 1989 Retained earnings, 1/1 $700,000 $500,000 Net income $150,000 $200,000 Retained earnings, 12/31 $850,000 $700,000 Dek's 1991 net income is correctly reported at $180,000. Which of the following amounts should be reported as prior period adjustments and net income in Dek's 1991 and 1990 comparative financial statements? Prior period Year Adjustment Net Income |
c. 1990 ($25,000) $125,000
1991 - $180,000 Because these are comparative financial statements, prior period adjustments require retroactive treatment for the years presented. Because 1989 is not presented, the 1989 correction is shown as a prior period adjustment of $25,000 to retained earnings statement of 1990. |
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Tack, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 1991?
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b. $178,000
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On January 2, 1991, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in 1990 but did not do so. Air's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, Air should adjust the beginning balance of its retained earnings by a:
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b. $230,000 debit.
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On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:
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a. As of January 1, 1992.
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods. This assumes that the company is not presenting comparative financial statements. If comparative financial statements are presented, then the adjustment is made to the beginning retained earnings of the earliest year presented. |
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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?
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b. $428,000
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Which of the following is true regarding the presentation of "comprehensive income."
Must be shown on Related tax effects the face of the for components income statement must be disclosed |
c. No Yes
Comprehensive income may be shown on the face of the a combined "statement of income and comprehensive income" a separate section below net income, or in: 1. Separate "statement of comprehensive," or as a 2. Component of the "statement of changes of owners' equity" The income tax expense or benefit allocated to components must be disclosed, either on the face of the statement or in the notes to the statement. |
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Reclassification adjustments must be shown in the financial statement that discloses comprehensive income:
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c. To avoid double counting in comprehensive income items, which are currently displayed in net income.
Reclassification entries may be necessary to avoid double counting an item previously reported as comprehensive income (i.e., unrealized gain), which are now reported as part of net income (i.e.' realized gain). |
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Dean Co. acquired 100% of Morey Corp. prior to 1989. During 1989, 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 1989 consolidated financial statements? |
c. $175,000
The only related party transaction that would be 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. |
