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NEW QUESTION 30
Which of the following is true regarding the presentation of "comprehensive income."
- A. Option C
- B. Option D
- C. Option B
- D. Option A
Answer: A
Explanation:
Choice "c" is correct. No - Yes.
Comprehensive income may be shown on the face of a combined "statement of income and
comprehensive income" a separate section below net income, or in:
1 . Separate "statement of comprehensive income," 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 notes to the statement.
Choices "a", "b", and "d" are incorrect, per the above rules.
NEW QUESTION 31
According to the FASB conceptual framework, which of the following is an essential characteristic of an
asset?
- A. An asset is tangible.
- B. An asset is obtained at a cost.
- 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 32
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an accounting
error.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production
breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List A (Select one)
- A. Change in accounting principal.
- B. Neither an accounting change nor an accounting error.
- C. Correction of an error in previously presented financial statements.
- D. Change in accounting estimate.
Answer: D
Explanation:
Choice "b" is correct. Change in the computation of warranty costs from 3% of sales to 1% of sales is a
change in accounting estimate.
NEW QUESTION 33
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
Quo changed from FIFO to average cost to account for its raw materials and work in process inventories.
List B (Select one)
- A. Cumulative effect approach.
- B. Retroactive or retrospective restatement approach.
- C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. A change in accounting principle should be shown in the retained earnings
statement of the earliest year presented as an adjustment of the beginning balance. All prior year financial
statements are recast.
NEW QUESTION 34
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. Income statement after income from continuing operations and before extraordinary items.
- B. Income statement after income from continuing operations and after extraordinary items.
- C. Retained earnings statement after net income but before dividends.
- D. Retained earnings statement as an adjustment of the opening balance.
Answer: D
Explanation:
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 is before net income, not after net income.
Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not
affect the income statement.
NEW QUESTION 35
Which of the following accounting pronouncements is the most authoritative?
- A. AICPA Statement of Position.
- B. FASB Statement of Financial Accounting Concepts.
- C. FASB Technical Bulletin.
- D. AICPA Accounting Principles Board Opinion.
Answer: D
Explanation:
Choice "c" is correct. The AICPA accounting principal board opinion (APBO) is a first floor (category A) of
established accounting principle pronouncements.
Choice "a" is incorrect. FASB statement of financial accounting concepts (SFAC or FACs) is a fifth floor
(other accounting literature) category.
Choice "b" is incorrect. FASB technical bulletins are a second floor (category B) accounting
pronouncement.
Choice "d" is incorrect. AICPA statement of position is a second floor (category B) accounting
pronouncement.
NEW QUESTION 36
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as
follows: 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:
- A. $190,000
- B. $200,000
- C. $240,000
- D. $230,000
Answer: C
Explanation:
Choice "d" is correct. $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.
NEW QUESTION 37
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. Information on major customers is not required in segment reporting.
- B. The identity of any external customer considered to be "major" by management.
- 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 providing 10% or more of a particular operating segment's
revenue.
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 38
Hyde Corp. has three manufacturing divisions, each of which has been determined to be a reportable
segment. In 1989, Clay division had sales of $3,000,000, which was 25% of Hyde's total sales, and had
operating costs of $1,900,000, as reported to the CFO. In 1989, Hyde incurred operating costs of
$ 500,000 that were not directly traceable to any of the divisions. In addition, Hyde incurred corporate
interest expense of $300,000 in 1989. In reporting segment information, what amount should be shown as
Clay's operating profit for 1989?
- A. $1,100,000
- B. $975,000
- C. $900,000
- D. $875,000
Answer: A
Explanation:
Choice "d" is correct. $1,100,000 operating profit for clay.
Rule: Operating profit by segments is based on the measure of profit reported to the "chief operating
decision maker."
Allocations for general operating costs and interest, etc., should not be made solely for purposes of
segment disclosures.
NEW QUESTION 39
During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses
the units of production depletion method. As a result of the change, which of the following should be
reported in Krey's 1992 financial statements?
- A. Option C
- B. Option D
- C. Option B
- D. Option A
Answer: A
Explanation:
Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current
and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in
accounting principle" is only used for changes in "accounting principle."
NEW QUESTION 40
Deficits accumulated during the development stage of a company should be:
- A. Reported as organization costs.
- B. Capitalized and written off in the first year of principal operations.
- C. Capitalized and amortized over a five year period beginning when principal operations commence.
- D. Reported as a part of stockholders' equity.
Answer: D
Explanation:
Choice "b" is correct. Deficits accumulated during the development stage of a company should be
reported as a part of stockholders' equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional
disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales &
expenses (part of I/S), cumulative statement of cash flows and supplementary "shareholders equity."
Choices "a", "c", and "d" are incorrect, per the rule above.
NEW QUESTION 41
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is
preferable, accounting for these long-term contracts was switched from the completed-contract method to
the percentage-of-completion method.
List B (Select one)
- A. Cumulative effect approach.
- B. Retroactive or retrospective restatement approach.
- C. Prospective approach.
Answer: B
Explanation:
Choice "B" is correct. Changes in accounting principle are handled "retrospectively." Beginning retained
earnings of the earliest year presented is adjusted for the cumulative effect of the change and all prior
year financial statements are restated.
NEW QUESTION 42
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an accounting
error.
Item to Be Answered
During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the
period January 1, 1992, through January 1, 1994.
List A (Select one)
- A. Change in accounting principal.
- B. Correction of an error in previously presented financial statements.
- C. Change in accounting estimate.
- D. Neither an accounting change nor an accounting error.
Answer: B
Explanation:
Choice "c" is correct. Expensing insurance premiums when paid (rather than allocating them to the
periods benefited) is a correction of an error in previously presented financial statements.
NEW QUESTION 43
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
As a result of a production breakthrough, Quo determined that manufacturing equipment previously
depreciated over 15 years should be depreciated over 20 years.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Cumulative effect approach.
- C. Prospective approach.
Answer: C
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior
periods, not retained earnings.
NEW QUESTION 44
In financial reporting of segment data, which of the following must be considered in determining if an
industry segment is a reportable segment?
- A. Option A
- B. Option D
- C. Option C
- D. Option B
Answer: A
Explanation:
Choice "a" is correct. A segment is considered reportable if its reported revenue, including sales to
unaffiliated customers and intersegment sales, is 10% or more of the combined revenue (unaffiliated and
intersegment) of all operating segments.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
NEW QUESTION 45
The following costs were incurred by Griff Co., a manufacturer, during 1992:
What amount of these costs should be reported as general and administrative expenses for 1992?
- A. $260,000
- B. $635,000
- C. $550,000
- D. $810,000
Answer: A
Explanation:
Choice "a" is correct. General and administrative expenses include:
Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are selling expenses.
Choice "b" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales
salaries are selling expenses.
Choice "c" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales
salaries are selling expenses.
Choice "d" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales
salaries are selling expenses.
NEW QUESTION 46
There are multiple active markets for a financial asset with different observable market prices:
There is no principal market for the financial asset. What is the fair value of the asset?
- A. $76
- B. $71
- C. $72
- D. $74
Answer: D
Explanation:
Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the
fair value measurement. Although transaction costs are not included in the fair value measurement, they
are used to determine the most advantageous market, as follows:
Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted
Price - Transaction Costs = $74 - 2 = $72
Because the net price in Market B is higher than the net price in Market A, Market B is the most
advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect.
This is the net price in Market A.
Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B.
This net price indicates that Market B is the most
advantageous market, but the net price is not the fair value because fair value does not include
transaction costs. Choice "d" is incorrect. If Market A were the principal market for the asset, then this
would be the fair value of the asset. However, because there is no principal market, the price in the most
advantageous market (Market B) is the price of the asset.
NEW QUESTION 47
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.
The estimate for 20X3 turned out to be correct. Alpha's 20X2 operating loss was $1,400,000, and the
division was actually sold for $400,000 less than its carrying amount. Maxy's effective tax rate is 30%.
In its 20X3 income statement, what amount should Maxy report as loss from discontinued operations?
- A. $600,000
- B. $350,000
- C. $420,000
- D. $500,000
Answer: C
Explanation:
Choice "c" is correct. The 20X3 loss from discontinued operations would include both the 20X3 operating
loss of $500,000 (which turned out to be a correct estimate) and the "additional" loss (on disposal) of
$ 100,000, net of tax, for a total of $600,000 x .70 or $420,000. Choice "a" is incorrect. It includes the 20X3
operating loss of $500,000 but not the $300,000 impairment loss but does report the 20X3 operating loss
net of tax. Choice "b" is incorrect. It includes the 20X3 operating loss of $500,000, but not the $100,000
loss on disposal, and reports the 20X3 operating loss gross of tax and not net of tax. Choice "d" is
incorrect. It reports the 20X3 loss from discontinued operations gross of tax and not net of tax. The 20X3
loss from discontinued operations should include both the 20X3 operating loss of $500,000 and the loss
on disposal of $100,000, net of tax, for a total of $600,000 x .70 or $420,000.
NEW QUESTION 48
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 exceeded its loss on the sale of the Iron bonds. Assume the
transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.
Gold should report the:
- A. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond
transaction as an extraordinary loss. - B. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in
income before extraordinary items. - C. Net effect of the two transactions in income before extraordinary items.
- D. Net effect of the two transactions as an extraordinary gain.
Answer: B
Explanation:
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 bond debt to buy back old bond debt outstanding).
The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in
nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp.
transaction is a loss in "income before extraordinary items."
Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted.
Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before
extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the
provisions of APB Opinion No. 30.
NEW QUESTION 49
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. Part of continuing operations.
- D. Reduction of the cost of the new warehouse.
Answer: C
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 50
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