According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:
a. Generally accepted accounting principles.
b. Reporting on management's stewardship.
c. The need for conservatism.
d. The needs of t
Choice "d" 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
Choice "a" is incorrect. Generally accepted accounting princ
According to the FASB conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
a. Consistency.
b. Cost-benefit.
c. Reliability.
d. Representational faithfulness
Choice "b" is correct. The pervasive constraint on providing information in financial statements is that the cost should be outweighed by the benefit to be derived from providing the information. SFAC 1 para. 23, SFAC 2 para. 133
Choice "a" is incorrect.
According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?
a. Historical cost.
b. Replacement cost.
c. Net realizable value.
d. Present value of future cash flows
Choice "d" is correct. The present value of future cash flows is used to measure long-term receivables or payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows. SFAC 5 para. 67
Choice "a" is incorrect. Histo
According to the FASB conceptual framework, which of the following situations violates the concept of reliability?
a. Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits. b. Financial stateme
Choice "d" is correct. Management's estimate of market value lacks verifiability, which is a component of reliability. SFAC 2 para. 89
Choice "a" is incorrect. Communicating data on segments to analysts does not violate the concept of reliability.
Choice
In the hierarchy of generally accepted accounting principles, APB Opinions have the same authority as AICPA:
a. Statements of Position.
b. Industry Audit and Accounting Guides.
c. Issues Papers.
d. Accounting Research Bulletins.
Choice "d" is correct. AICPA Accounting Research Bulletins, FASB Standards, FASB Interpretations, FASB Staff Positions, FASB Statement 133 Implementation Issues, and APB Opinions and Interpretations are the most authoritative sources of generally accepted
What is the underlying concept that supports the immediate recognition of a contingent loss?
a. Substance over form.
b. Consistency.
c. Matching.
d. Conservatism.
Choice "d" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. Recognition of a contingent loss is the recording of an amount representing unc
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is:
a. Allocation.
b. Matching.
c. Realization.
d. Recognition.
Choice "d" is correct. Recognition is the process of recording an item in the financial statements of an entity. SFAC 5 para. 6
Choice "a" is incorrect. Allocation is the accounting process of assigning or distributing an amount according to a plan or a f
What are the Statements of Financial Accounting Concepts intended to establish?
a. Generally accepted accounting principles in financial reporting by business enterprises.
b. The meaning of "Present fairly in accordance with generally accepted accounting
Choice "c" is correct. Statements of Financial Accounting Concepts are intended to establish the objectives and concepts that the Financial Accounting Standards Board will use in developing standards of financial accounting and reporting. SFAC 1 para. 3
C
During a period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:
a. Both enterprise performance and management performance. b. Management performance but not directly p
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 wa
According to the FASB conceptual framework, which of the following statements conforms to the realization concept?
a. Equipment depreciation was assigned to a production department and then to product unit costs.
b. Depreciated equipment was sold in excha
Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83.
Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no real
In Yew Co.'s 1992 annual report, Yew described its social awareness expenditures during the year as follows:
"The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human-service organizati
Choice "a" is correct. Charitable contributions include amounts the company gave to recognized charities. This includes:
Youth and education programs $ 250,000
Health ($140,000 - $80,000) 60,000
Total $ 310,000
Note: Of the $140,000, employees gave $80,00
According to the FASB conceptual framework, which of the following relates to both relevance and reliability?
a. Comparability.
b. Feedback value.
c. Verifiability.
d. Timeliness
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
Which of the following is true regarding the comparison of managerial to financial accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting has a past focus and financial accounting has a future focus.
c. The emphasis on ma
Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes.
Choice "a" is incorrect. Financial accounting is generally more precise. Choice
Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism during a particular reporting period?
a. Capitalization of research and development costs.
b. Accrual of a contingency deemed to be reasonabl
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 requ
Arpco, Inc., a for-profit provider of healthcare services, recently purchased two smaller companies and is researching accounting issues arising from the two business combinations. Which of the following accounting pronouncements are the most authoritativ
Choice "d" is correct. Since Arpco is a for-profit provider of healthcare services, it is covered under normal GAAP. Thus, the most authoritative pronouncements are the FASB Statements of Financial Accounting Standards (SFAS).
Choice "a" is incorrect. AIC
According to the FASB 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. Feedback value.
b. Predictive value.
c. Representational faithfuln
Choice "b" is correct. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value. Forecasting is predicting.
Choice "a" is incorrect. The quality of inform
Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis? a. Going concern.
b. Periodicity.
c. Monetary unit.
d. Economic entity.
Choice "c" is correct. The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis.
Choice "a" is incorrect. The going concern assumption has noth
Which of the following statements best describes an operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement?
a. The emerging issues task force must approve a discussion memorandum before it is disseminated to the public
Choice "c" is correct. A new statement from the FASB is issued only after a majority vote of the members of the FASB.
Choice "a" is incorrect. There is no necessity for the EITF to approve a discussion memorandum (presumably the question means a discussio
Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements:
a. Do not include nontaxable revenues and nondeductible expenses in determining income.
b. Include detailed information about curren
Choice "d" is correct. Income tax-basis financial statements recognize events when taxable income or deductible expenses are recognized on the entity's tax return. Non-taxable income and non-deductible expenses are shown on the financial statement and inc
An extraordinary gain should be reported as a direct increase to which of the following?
a. Net income.
b. Comprehensive income.
c. Income from continuing operations, net of tax.
d. Income from discontinued operations, net of tax.
Choice "a" is correct. Extraordinary items are reported as a component of net income, after income from continuing operations and discontinued operations.
Choice "b" is incorrect. An extraordinary gain (or loss) only indirectly affects comprehensive incom
On December 2, 20X1, Flint Corp.'s board of directors voted to discontinue operations of its frozen food division and to sell the division's assets on the open market as soon as possible. The division reported net operating losses of $20,000 in December a
Choice "c" is correct. The $60,000 gain from discontinued operations would be reported in Flint's 20X2 income statement. The operating loss for January would offset the gain from disposal in February, and the net amount would be reported as a gain (in thi
At December 31, 1998, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers
Choice "a" is correct. When a change in accounting principle is considered inseparable from a change in estimate, the change is handled as a change in estimate - prospectively. No cumulative effect adjustment is made.
Choices "b", "c", and "d" are incorre
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
a. As a component of income from continuing operations.
b. By restating the financial statements of all prior per
Choice "a" is correct. When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospecti
In September 1996, Koff Co.'s operating plant was destroyed by an earthquake. Earthquakes are rare in the area in which the plant was located. The portion of the resultant loss not covered by insurance was $700,000. Koff's income tax rate for 1996 was 40%
Choice "c" is correct. For a loss to be reported as an extraordinary loss, the event causing the loss must be both unusual in nature and infrequent in occurrence. The earthquake in this case does meet these criteria so the loss is reported net of income t
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,
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
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 exce
Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds (an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not a "refinancing" (where one would sell new
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 1994. The cumulative effect of this change should be reported in Lore's 1994 financial statements as a:
a. Prior period adjustment resulting from the correction o
Choice "a" is correct. The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained ear
A material loss should be presented separately as a component of income from continuing operations when it is:
a. An extraordinary item.
b. A cumulative effect type change in accounting principle.
c. Unusual in nature and infrequent in occurrence.
d. Not
Choice "d" is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations.
Choice "a" is incorrect. Extraordinary items are shown net of tax in a separate sectio
During 1994, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:
FIFO Weighted-average
January 1, 1994 $71,000 $77,000
December 31, 1994 79,000 83,0
Choice "a" is correct. The cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings. Choice "b" is incorrect. The cumulative effect of a change in accounting principle is now presented as a separate ca
A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of income:
a. After cumulative effect of accounting changes and before discontinued operations of a segment of a business.
b. After cumulativ
Choice "d" is correct. An extraordinary item (a transaction that is both "unusual in nature" and "infrequent in occurrence") should be reported separately as a component of income after discontinued operations of a segment of a business. The cumulative ef
How should the effect of a change in accounting estimate be accounted for?
a. By restating amounts reported in financial statements of prior periods.
b. By reporting pro forma amounts for prior periods.
c. As a prior period adjustment to beginning retaine
Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future) periods, if the change affects both. It does not affect "prior periods," nor "retained earnings."
Choice "a" is incorrect. Restating prior years' fin
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net o
Choice "c" is correct. $50,000
The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated.
Vane Co.'s trial balance of income statement accounts for the year ended December 31, 2002, included the following:
Debit Credit
Sales $575,000
Cost of sales $240,000
Administrative expenses 70,000
Loss on sale of equipment 10,000
Sales commissions 50,000
Choice "c" is correct, $140,000.
Net of credits over debits ($600-420) $180,000
add: extraordinary item -
loss on early retirement of long-term debt 20,000
Income from continuing operations 200,000
"Net of tax" rate (100%-30% tax) 70%
Income after income
The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:
Gain / Loss
a. Yes / Yes
b. Yes / No
c. N
Choice "a" is correct, Yes - Yes. A material transaction that is "infrequent in occurrence" but not "unusual in nature" should be presented separately as a component of "income from continuing operations" when the transaction results in a gain or loss.
An extraordinary item should be reported separately on the income statement as a component of income:
Before discontinued operations segment of a business of a / Net of income taxes
a. Yes / Yes
b. Yes / No
c. No / No
d. No / Yes
Choice "b" is correct, Yes - No.
An extraordinary item should be reported separately on the income statement as a component of income:
Yes - net of income taxes.
No - after (not before) "discontinued operations of a segment of a business.
On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X3, was
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 sho
On November 1, 20X2, Smith Co. contracted to dispose of an industry segment. Throughout 20X2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is projected on final disposition, how much of
Choice "d" is correct. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, a
If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:
a. Retained earnings statement after net income b
Choice "b" is correct. The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
Choice "a" is incorrect. The adjustment
The cumulative effect of a change in accounting estimate should be shown separately:
a. On the income statement above income from continuing operations.
b. On the income statement after income from continuing operations and before extraordinary items.
c.
Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is
The following costs were incurred by Griff Co., a manufacturer, during 1992:
Accounting and legal fees $ 25,000
Freight-in 175,000
Freight-out 160,000
Officers salaries 150,000
Insurance 85,000
Sales representatives salaries 215,000
What amount of these c
Choice "a" is correct. General and administrative expenses include: Accounting and legal $ 25,000
Officers salaries 150,000
Insurance 85,000
Total $ 260,000
Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are sell