AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 151:

  During the first quarter of the calendar year, ABC Co. had income before taxes of $100,000, and its effective income tax rate was 15%. ABC's effective annual income tax rate for the previous year was 30%. ABC expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should ABC report?

  A. $15,000

  B. $25,000

  C. $30,000

  D. $35,000

  Correct Answer: B

  Explanation:

  Choice "b" is correct. When preparing interim financial statements, income tax expense is estimated each

  quarter using the effective tax rate expected to apply to the entire year.

  Choice "a" is incorrect. ABC should use the effective annual tax rate, not the effective tax rate for the

  quarter only.

  Choice "c" is incorrect. ABC should use the effective annual tax rate expected to apply to the current year,

  not the prior year's effective tax rate.

  Choice "d" is incorrect. ABC should use the effective annual tax rate, not the statutory tax rate.

• Question 152:

  In general, an enterprise preparing interim financial statements should:

  A. Defer recognition of seasonal revenue.

  B. Disregard permanent decreases in the market value of its inventory.

  C. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred.

  D. Use the same accounting principles followed in preparing its latest annual financial statements.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual

  report of an enterprise should be applied to interim financial statements of the current year, unless a

  change in accounting principle is adopted in the current year.

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

• Question 153:

  Due to a decline in market price in the second quarter, ABC Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in ABC's interim income statements?

  A. Ratably over the second, third, and forth [sic] quarters.

  B. Ratably over the third and fourth quarters.

  C. In the second quarter only.

  D. In the fourth quarter only.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full.

  This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the

  year-end at the lower of cost or market, recognizing the loss at that time.

  Choice "a" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable

  and not ratably over several quarters.

  Choice "b" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable

  and not ratably over several quarters.

  Choice "c" is incorrect. Since the loss is not probable at the end of the second quarter, no amount should

  be recognized at that time.

• Question 154:

  During the first quarter of 1993, ABC Co. had income before taxes of $200,000, and its effective income tax rate was 15%. ABC's 1992 effective annual income tax rate was 30%, but ABC expects its 1993 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should ABC report?

  A. $0

  B. $30,000

  C. $50,000

  D. $60,000

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Interim period tax expense is the estimated annual effective tax rate (25% in this

  case) applied to the year-to-date income before taxes minus the tax expense recognized in previous

  interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% ×

  $200,000 = $50,000. FIN 18, para. 16

  Choice "a" is incorrect. Income tax expense is reported in interim income statements.

  Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used

  to calculate income tax expense for interim statements.

  Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used

  to calculate income tax expense for interim statements.

• Question 155:

  APB Opinion No. 28, Interim Financial Reporting, concluded that interim financial reporting should be viewed primarily in which of the following ways?

  A. As useful only if activity is spread evenly throughout the year.

  B. As if the interim period were an annual accounting period.

  C. As reporting for an integral part of an annual period.

  D. As reporting under a comprehensive basis of accounting other than GAAP.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Interim financial reporting should be viewed as reporting for an integral part of an

  annual period.

  Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 156:

  Conceptually, interim financial statements can be described as emphasizing:

  A. Timeliness over reliability.

  B. Reliability over relevance.

  C. Relevance over comparability.

  D. Comparability over neutrality.

  Correct Answer: A

  Explanation: Choice "a" is correct. Interim financial statements emphasize timeliness (an element of relevance) by providing financial information based on actual performance to date and estimates prior to year end. Information must be available when it is needed to be useful. Reliability is impeded by the extensive use of estimates; however, the lag until verifiability is obtained detracts from usefulness. SFAC 2 para. 56 Choice "b" is incorrect. Relevance (particularly timeliness) of information in interim financial statements is emphasized more than reliability. Reliability is impeded by the extensive use of estimates in interim data. Choice "c" is incorrect. Since comparability is a secondary quality of information, there should be no need to trade off comparability for relevance (a primary quality). Choice "d" is incorrect. Neutrality is an element of reliability (a primary quality of information). There should be NO need for a trade-off for comparability over neutrality.

• Question 157:

  Which of the following is correct concerning financial statement disclosure of accounting policies?

  A. Disclosures should be limited to principles and methods peculiar to the industry in which the company operates.

  B. Disclosure of accounting policies is an integral part of the financial statements.

  C. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles.

  D. Disclosures should duplicate details disclosed elsewhere in the financial statements.

  Correct Answer: B

  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.

• Question 158:

  Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements?

  A. Description of current year equity transactions.

  B. Summary of long-term debt outstanding.

  C. Schedule of fixed assets.

  D. Revenue recognition policies.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The summary of significant accounting policies should include "policies." The only

  policy in the choices listed is the revenue recognition policies.

  Choice "a" is incorrect. A description of current year equity transactions is not a policy. It should be

  disclosed somewhere in the footnotes but not in the summary of significant accounting policies.

  Choice "b" is incorrect. A summary of long-term debt outstanding is not a policy. It should be disclosed

  somewhere in the footnotes but not in the summary of significant accounting policies.

  Choice "c" is incorrect. A schedule of fixed assets is not a policy. It should be disclosed somewhere in the

  footnotes but not in the summary of significant accounting policies.

• Question 159:

  Which of the following should be disclosed in a summary of significant accounting policies?

  A. Basis of profit recognition on long-term construction contracts.

  B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

  C. Depreciation expense.

  D. Composition of sales by segment.

  Correct Answer: A

  Explanation: Choice "a" is correct. The summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies. Choice "b" is incorrect. The future minimum lease payments should be disclosed, but not in the summary of significant accounting policies. Choice "c" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of significant accounting policies. Choice "d" is incorrect. The composition of sales by segment should be disclosed, but not in the summary of significant accounting policies.

• Question 160:

  What is the purpose of information presented in notes to the financial statements?

  A. To provide disclosures required by generally accepted accounting principles.

  B. To correct improper presentation in the financial statements.

  C. To provide recognition of amounts not included in the totals of the financial statements.

  D. To present management's responses to auditor comments.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Information presented in notes to the financial statements have the purpose of

  providing disclosures required by generally accepted accounting principles.