AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 131:

  According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is:

  A. Recognition.

  B. Realization.

  C. Allocation.

  D. Matching.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Recognition.

  According to the FASB's conceptual framework, the process of reporting an item in the financial

  statements of an entity is recognition.

• Question 132:

  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?

  A. Unrealized loss on investments in noncurrent marketable equity securities available for sale.

  B. Unrealized loss on investments in current marketable equity securities held for trading.

  C. Loss on exchange of nonmonetary assets without commercial substance.

  D. Loss on exchange of nonmonetary assets with commercial substance.

  Correct Answer: A

  Explanation: Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles. Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments 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.

• Question 133:

  According to the FASB conceptual framework, predictive value is an ingredient of:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Yes - No. Predictive value is an ingredient of relevance but not of reliability.

  Memorize:

  Bud's relevance to "PFT."

  Bud's reliability to "VRN."

• Question 134:

  A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?

  A. Change in accounting estimate.

  B. Change in accounting principle.

  C. Change in valuation technique.

  D. Error correction.

  Correct Answer: A

  Explanation: Choice "a" is correct. A change in the valuation technique used to measure fair value is a change in accounting estimate. Choice "b" is incorrect. Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principal. Choice "c" is incorrect. Although a change from the cost approach to the market approach is a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate. Choice "d" is incorrect. Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error correction is not a type of accounting change.

• Question 135:

  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. $71

  B. $72

  C. $74

  D. $76

  Correct Answer: C

  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.

• Question 136:

  Which of the following statements is incorrect regarding the inputs that can be used to measure fair value?

  I. Level I inputs are the most reliable fair value measurements and Level III inputs are the least reliable.

  II. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities.

  III. A fair value measurement based on management assumptions only (no market data) would not be acceptable per GAAP.

  IV.

  The level in the fair value hierarchy of a fair value measurement is determined by the level of the highest level significant input.

  A.

  I only.

  B.

  I, II, IV.

  C.

  II, III, IV.

  D.

  I, II, III, IV.

  Correct Answer: C

  Explanation: Choice "c" is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is incorrect because Level I measurements are quoted prices in active markets for identical assets or liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs. Statement III is incorrect because a fair value measurement based on management assumptions only is a Level III measurement and is acceptable when there are no Level I or Level II inputs or when undo cost or effort is required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input.

• Question 137:

  Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability?

  A. The market approach.

  B. The impairment approach.

  C. The income approach.

  D. The cost approach.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The impairment approach is not used to measure the fair value of an asset or liability.

  Instead, when an entity is determining whether an asset has been impaired, the entity will use the market

  approach, the income approach or the cost approach to determine the fair value of the asset.

  Choice "a" is incorrect. The market approach is an accepted method of fair value measurement in which

  price and other market information from identical or comparable assets or liabilities is used to measure fair

  value.

  Choice "c" is incorrect. The income approach is an accepted method of fair value measurement in which

  future cash flows or earnings are discounted to determine fair value.

  Choice "d" is incorrect. The cost approach is an accepted method of fair value measurement in which

  current replacement cost is used to determine the fair value of an asset.

• Question 138:

  ABC Co., a development stage enterprise, incurred the following costs during its first year of operations:

  

  ABC had no revenue during its first year of operation. What amount may ABC capitalize as organizational costs?

  A. $115,000

  B. $95,000

  C. $55,000

  D. $0

  Correct Answer: D

  Explanation:

  

  Choice "d" is correct. $0.

  All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).

• Question 139:

  Which of the following statements regarding fair value is/are correct?

  I. The fair value of an asset or liability is specific to the entity making the fair value measurement.

  II. Fair value is the price to acquire an asset or assume a liability.

  III. Fair value includes transportation costs, but not transaction costs.

  IV.

  The price in the principal market for an asset or liability will be the fair value measurement.

  A.

  I and II

  B.

  I and IV

  C.

  II and III

  D.

  III and IV

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a

  market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an

  exit price (the price to sell an asset or transfer a liability), not an entrance price.

  Choices "a", "b" and "c" are incorrect, per the above Explanation.

• Question 140:

  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 B

  C. Option C

  D. Option D

  Correct 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.