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

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

• Question 91:

  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:

  A. Cumulative effect approach.
  B. Retroactive or retrospective restatement approach.
  C. Prospective approach.

  C. Prospective approach.

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  Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.

• Question 92:

  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.

  Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount in 20X3. Maxy's effective tax rate is 30%. In its 20X2 income statement, what amount should Maxy report as loss from discontinued operations?

  A. $980,000
  B. $1,190,000
  C. $1,400,000
  D. $1,700,000
  B. $1,190,000

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  Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value, there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000 impairment loss plus the $1,400,000 20X2

  operating loss would be recognized in 20X2 net of tax. The total loss would be $1,700,000 ?70% (100% - 30%) or $1,190,000.

  Choice "a" is incorrect. It includes the 20X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2 operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but

  not the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax.

  Choice "d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.

• Question 93:

  A material loss should be presented separately as a component of income from continuing operations when it is:

  A. An extraordinary item.
  B. A cumulative effect type change in accounting principle.
  C. Unusual in nature and infrequent in occurrence.
  D. Not unusual in nature but infrequent in occurrence.
  D. Not unusual in nature but infrequent in occurrence.

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  Choice "d" is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations. Choice "a" is incorrect. Extraordinary items are shown net of tax in a separate section of the income statement after income from continuing operations. Choice "b" is incorrect. Cumulative effects of changes in accounting principle are now shown net of tax as an adjustment to the opening balance of retained earnings in the retained earnings statement. This treatment is called retrospective application. There really are no longer any cumulative effect types of changes in accounting principle. The cumulative effect is merely how the amount of the change is measured. Choice "c" is incorrect. This is the definition of an extraordinary item.

• Question 94:

  A segment of Ace Inc. was discontinued during 1992. Ace's loss from discontinued operations should not:

  A. Include employee relocation costs associated with the decision to dispose.
  B. Exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992.
  C. Include additional pension costs associated with the decision to dispose.
  D. Include operating losses of the current period up to the date the decision to dispose of the segment was made.
  B. Exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992.

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  Choice "b" is correct. Ace's loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses should be included. Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations. Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations. Choice "d" is incorrect. Ace's loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date. All 1992 operating losses should be included.

• Question 95:

  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
  C. $74

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  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 96:

  According to the FASB conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:

  A. Feedback value.
  B. Predictive value.
  C. Representational faithfulness.
  D. Reliability.
  B. Predictive value.

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  Choice "b" is correct. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value. Forecasting is predicting. Choice "a" is incorrect. The quality of

  information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not feedback value. Feedback value enables decision makers to confirm prior expectations or to

  adjust or correct the decisions made previously.

  Choice "c" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not representational faithfulness. Representational faithfulness is

  the agreement between financial reporting and the resources or events represented.

  Choice "d" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not reliability. Reliability is the combination of neutrality,

  representational faithfulness, and verifiability.

• Question 97:

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

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  D. Option D

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  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 98:

  What information should a public company present about revenues from its reporting segments?

  A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales.
  B. Disclose as a combined amount sales to unaffiliated customers and intracompany sales between geographic areas.
  C. Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany sales between geographic areas.
  D. No disclosure of revenues from foreign operations need be reported.
  A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales.

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  Choice "a" is correct. Unaffiliated customers sales and intracompany sales must be disclosed separately.

• Question 99:

  On January 2, 1991, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in 1990 but did not do so. Air's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, Air should adjust the beginning balance of its retained earnings by a:

  A. $230,000 credit.
  B. $230,000 debit.
  C. $300,000 credit.
  D. $370,000 debit.
  B. $230,000 debit.

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  Choice "b" is correct. $230,000 debit.

• Question 100:

  Which of the following information should be included in Melay, Inc.'s 1992 summary of significant accounting policies?

  A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.
  B. During 1992, the Delay component was sold.
  C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
  D. Future common share dividends are expected to approximate 60% of earnings.
  A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.

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  Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "b" is incorrect. Disclosing the sale of

  a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a

  "significant accounting policy."

  Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "presidents letter to shareholders."