Test Prep FINANCIAL-ACCOUNTING-AND-REPORTING Online Practice Questions and Exam Preparation

Test Prep FINANCIAL-ACCOUNTING-AND-REPORTING Online Questions & Answers

• Question 1:

  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 of related income taxes. What amount should Foy report as prior period adjustments in 1993?

  A. $0
  B. $30,000
  C. $50,000
  D. $80,000
  C. $50,000

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  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. An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment. Choices "a", "b", and "d" are incorrect, per the above Explanation: .

• Question 2:

  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 authoritative?

  A. AICA Statements of Position.
  B. AICPA Industry and Audit Guides.
  C. FASB Statements of Financial Accounting Concepts.
  D. FASB Statements of Financial Accounting Standards.
  D. FASB Statements of Financial Accounting Standards.

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  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. AICPA Statements of Position are not the most authoritative pronouncement for almost anything (other than for some issues that only they cover). They are normally "merely" the opinion of the AICPA. Choice "b" is incorrect. AICPA Industry and Audit Guides are not the most authoritative pronouncement for almost anything (other than for some issues that only they cover). Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are not authoritative pronouncements except where they have been incorporated by reference into an SFAS. They are the basis on which SFAS can be constructed.

• Question 3:

  On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:

  A. As of January 1, 1992.
  B. As of August 31, 1992.
  C. During the eight months ending August 31, 1992, by a weighted average of the purchases.
  D. During 1992 by a weighted average of the purchases.
  A. As of January 1, 1992.

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  Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected

  prior periods.

  Choice "a" is correct. As of January 1, 1992, the beginning of the year. This assumes that the company is not presenting comparative financial statements. If comparative financial statements are presented, then the adjustment is made to the

  beginning retained earnings of the earliest year presented.

  Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the decision is made.

  Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a weighted average. (A far out distractor.)

• Question 4:

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

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  Choice "a" is correct. Information presented in notes to the financial statements have the purpose of providing disclosures required by generally accepted accounting principles. SFAC 5 para. 7

• Question 5:

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

  

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

  A. $ 50,000
  B. $150,000
  C. $350,000
  D. $450,000
  D. $450,000

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  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 6:

  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. $350,000
  B. $500,000
  C. $420,000
  D. $600,000
  C. $420,000

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  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.

• Question 7:

  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 the users of the information.
  D. The needs of the users of the information.

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  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 principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around. Choice "b" is incorrect. Information concerning management's stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1 para. 50 Choice "c" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97

• Question 8:

  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, 20X4 at a loss. In its income statement for the year ended December 31, 20X4, how should Deer report the component's operations from January 1 to April 30, 20X4?

  A. $500,000 and $800,000 should be included with revenues and expenses, respectively, as part of continuing operations.
  B. $300,000 should be reported as part of the loss on disposal of a component and included as part of continuing operations.
  C. $300,000 should be reported as an extraordinary loss.
  D. $300,000 should be reported as a loss from operations of a component and included in loss from discontinued operations.
  D. $300,000 should be reported as a loss from operations of a component and included in loss from discontinued operations.

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  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 from the disposal, should be reported separately from continuing operations, net of tax. In this question, the component was classified as held for sale and was sold in the same year.

  Thus, in 20X4, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss from discontinued operations. The loss on disposal would be reported as part of that loss from discontinued operations also.

  Choice "a" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a part of discontinued operations. Choice "b" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a loss from operations of a component and included in loss from discontinued operations. Choice "c" is incorrect. The results of discontinued operations are not reported as an extraordinary item.

• Question 9:

  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 managerial accounting is relevance and the emphasis on financial accounting is timeliness.
  D. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.
  D. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.

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  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 "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on reporting past results. Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial statement

  users (including the characteristic of relevance), while the emphasis of managerial accounting is providing timely information to management decision makers.

• Question 10:

  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 principles."
  C. The objectives and concepts for use in developing standards of financial accounting and reporting.
  D. The hierarchy of sources of generally accepted accounting principles.
  C. The objectives and concepts for use in developing standards of financial accounting and reporting.

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  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

  Choice "a" is incorrect. The Statements of Financial Accounting Concepts do not specify financial accounting standards prescribing accounting procedures or practices. SFAC 1 para. 3 Choice "b" is incorrect. Auditing standards develop the

  meaning of "Present fairly in accordance with generally accepted accounting principles." Choice "d" is incorrect. The hierarchy of sources of generally accepted accounting principles is determined by GAAP.