AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 71:

  A statement of cash flows for a development stage enterprise:

  A. Is the same as that of an established operating enterprise and, in addition, shows cumulative amounts from the enterprise's inception.

  B. Shows only cumulative amounts from the enterprise's inception.

  C. Is the same as that of an established operating enterprise, but does not show cumulative amounts from the enterprise's inception.

  D. Is not presented.

  Correct Answer: A

  Explanation:

  Rule: Development stage enterprises should present financial statements in accordance with GAAP and

  make additional disclosures such as cumulative amounts from inception for: net losses, deficits, sales,

  expenses, and cash flows and supplementary data.

  Choice "a" is correct, per the rule shown above.

  Choice "b" is incorrect. Current amounts are shown as well as cumulative amounts.

  Choice "c" is incorrect. Cumulative amounts from inception are shown.

  Choice "d" is incorrect. A statement of cash flows is required.

• Question 72:

  Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to footnote disclosures:

  A. Only.

  B. And expense recognition principles only.

  C. And revenue recognition principles only.

  D. And revenue and expense recognition principles.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Financial reporting by a development stage enterprise differs from financial reporting

  for an established operating enterprise in regard to (more extensive) footnote disclosures only.

  Choices "b", "c", and "d" are incorrect. Revenue and expense recognition principles are the same.

  Rule: Development stage enterprises should present financial statements in accordance with GAAP and

  make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity),

  cumulative sales and expenses (as part of the income statement), cumulative statement of cash flows and

  supplementary "shareholders equity."

• Question 73:

  ABC Corp. was a development stage enterprise from its inception on September 1, 1987 to December 31, 1988. The following information was taken from ABC's accounting records for the above period:

  

  For the period September 1, 1987 to December 31, 1988, what amount should ABC report as net loss?

  A. $ 50,000

  B. $150,000

  C. $350,000

  D. $450,000

  Correct Answer: D

  Explanation:

  Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to Dec. 31, 1988.

  Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional

  disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.

  

• Question 74:

  Deficits accumulated during the development stage of a company should be:

  A. Reported as organization costs.

  B. Reported as a part of stockholders' equity.

  C. Capitalized and written off in the first year of principal operations.

  D. Capitalized and amortized over a five year period beginning when principal operations commence.

  Correct Answer: B

  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 and

  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.

• Question 75:

  ABC Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its

  income statement for the year ended December 31, 1991, ABC reported revenues of $50,000,000,

  operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll

  costs of $ 15,000,000. ABC's combined identifiable assets of all industry segments at December 31, 1991,

  were $40,000,000.

  In its 1991 financial statements, ABC should disclose major customer data if sales to any single customer

  amount to at least:

  A. $300,000

  B. $1,500,000

  C. $4,000,000

  D. $5,000,000

  Correct Answer: D

  Explanation: Choice "d" is correct. $5,000,000 (10% x $50,000,000 revenue). If revenue from a single external customer is 10% or more of total revenue, then the company should disclose this fact, the total amount of revenue from the customer, and the segment or segments reporting the revenues. The identity of the customer need not be disclosed.

• Question 76:

  ABC, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated customers. ABC should report segment financial information for each division meeting which of the following criteria?

  A. Segment operating profit or loss is 10% or more of consolidated profit or loss.

  B. Segment operating profit or loss is 10% or more of combined operating profit or loss of all company segments.

  C. Segment revenue is 10% or more of combined revenue of all the company segments.

  D. Segment revenue is 10% or more of consolidated revenue.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Segment revenue is 10% or more of combined revenue of all the company segments. Rule: To be significant enough to report on, a segment must be at least 10% of:

  1.

  Combined revenues (whether intersegment or affiliated customers) or

  2.

  Operating profit (of all segments not having an operating loss), or

  3.

  Identifiable assets.

  Choice "a" is incorrect. Rule is 10% of "operating profit," not "consolidated profit."

  Choice "b" is incorrect. Segments with "operating losses" are not combined with those having "operating

  profits" in determining a segment.

  Choice "d" is incorrect. "Consolidated revenue" would not include "intersegment revenue." Rule is

  "combined revenue," not "consolidated revenue."

• Question 77:

  ABC 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 ABC's total sales, and had operating costs of $1,900,000, as reported to the CFO. In 1989, ABC incurred operating costs of $500,000 that were not directly traceable to any of the divisions. In addition, ABC 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. $875,000

  B. $900,000

  C. $975,000

  D. $1,100,000

  Correct Answer: D

  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.

  

• Question 78:

  The following information pertains to ABC Corp. and its divisions for the year ended December 31, 1988:

  

  ABC and all of its divisions are engaged solely in manufacturing operations. ABC has a reportable segment if that segment's revenue exceeds:

  A. $264,000

  B. $260,000

  C. $204,000

  D. $200,000

  Correct Answer: B

  Explanation:

  Choice "b" is correct. $260,000 represents a reportable segment (10% of total sales):

  

  Rule: To be significant enough to report on, a segment must be at least 10% of:

  1.

  Combined revenues (whether intersegment or unaffiliated customers), or

  2.

  Operating income, or

  3.

  Identifiable assets.

• Question 79:

  An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year. However, in the third quarter the inventory's market price recovery exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should:

  A. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.

  B. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery.

  C. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter.

  D. Not be affected in either the first quarter or the third quarter.

  Correct Answer: C

  Explanation:

  Choice "a" is correct. Market price declines should be recognized in the interim period in which decline is

  judged permanent and later, if they "turn around," are recognized as gains in subsequent periods only to

  the extent of previously reported losses.

  Choice "b" is incorrect. Recovery should not cause an increase in inventory value above original cost.

  Choice "c" is incorrect. The recovery should be recognized to the extent of the first quarter write down.

  Choice "d" is incorrect.

• Question 80:

  On March 15, 1992, ABC Co. paid property taxes of $90,000 on its office building for the calendar year 1992. On April 1, 1992, ABC paid $150,000 for unanticipated repairs to its office equipment. The repairs will benefit operations for the remainder of 1992. What is the total amount of these expenses that ABC should include in its quarterly income statement for the three months ended June 30, 1992?

  A. $172,500

  B. $97,500

  C. $72,500

  D. $37,500

  Correct Answer: C

  Explanation:

  Rule: Actual and estimated expenditures benefiting all interim periods equally should be expensed ratably

  throughout the year.

  

  Choice "c" is correct. $72,500 total expense for the three months ended June 30, 1992.