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

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

• Question 11:

  Reclassification adjustments must be shown in the financial statement that discloses comprehensive income:

  A. To show what portion of comprehensive income is from the realization of current assets.
  B. To show the tax effect of items of comprehensive income.
  C. To avoid double counting in comprehensive income items, which are currently displayed in net income.
  D. To avoid including transactions with shareholders in items of comprehensive income.
  C. To avoid double counting in comprehensive income items, which are currently displayed in net income.

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  Choice "c" is correct. Reclassification entries may be necessary to avoid double counting an item previously reported as comprehensive income (i.e., unrealized gain), which are now reported as part of net income (i.e., realized gain). Choice "a" is incorrect. The classification of assets as current or non-current has no bearing on reporting comprehensive income. Choice "b" is incorrect. All items of comprehensive income must be shown net of the related tax effects, but it is not done with reclassification adjustments. Choice "d" is incorrect. Transactions with shareholders such as paying dividends and issuing capital stock are not included in comprehensive income, thus, reclassification adjustments are not necessary to exclude them.

• Question 12:

  How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

  A. As a component of income from continuing operations.
  B. By restating the financial statements of all prior periods presented.
  C. As a correction of an error.
  D. By footnote disclosure only.
  A. As a component of income from continuing operations.

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  Choice "a" is correct. When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations. Under SFAS No. 154, this type of change is now called a change in accounting estimate affected by a change in accounting principle. Choice "b" is incorrect. Restatement of all prior periods is the retroactive accounting treatment that is applied to the correction of an error and the retrospective accounting treatment given to changes in accounting principle. However, a change in accounting principle that is inseparable from the effect of a change in accounting estimate is now treated as a change in accounting estimate. Choice "c" is incorrect. Correction of an error is given retroactive treatment as a prior period adjustment to retained earnings with restatement of prior periods. This is not the treatment appropriate for the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate. Choice "d" is incorrect. While footnote disclosure is always appropriate for an accounting change, such disclosure alone is never the appropriate accounting treatment.

• Question 13:

  Rock Co.'s financial statements had the following balances at December 31:

  

  What amount should Rock report as comprehensive income for the year ended December 31?

  A. $400,000
  B. $420,000
  C. $520,000
  D. $570,000
  C. $520,000

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  Choice "c" is correct. Comprehensive Income includes all items included in "Net Income" plus "Other Comprehensive Income" items. Since the $50,000 extraordinary gain is already included in Net Income, Comprehensive Income is:

  

• Question 14:

  According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?

  A. Historical cost.
  B. Replacement cost.
  C. Net realizable value.
  D. Present value of future cash flows.
  D. Present value of future cash flows.

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  Choice "d" is correct. The present value of future cash flows is used to measure long-term receivables or payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows. SFAC 5 para. 67 Choice "a" is incorrect. Historical cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "b" is incorrect. Replacement (or current) cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "c" is incorrect. Net realizable value can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory.

• Question 15:

  Dean Co. acquired 100% of Morey Corp. prior to 1989. During 1989, the individual companies included in their financial statements the following: What amount should be reported as related party disclosures in the notes to Dean's 1989 consolidated financial statements?

  

  A. $150,000
  B. $155,000
  C. $175,000
  D. $330,000
  C. $175,000

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  Choice "c" is correct. The only related party transaction that would require disclosure (assuming that all amounts are material to the financial statements) would be the loans to officers since they are outside of the ordinary course of business. Choices "a", "b", and "d" are incorrect. Officers' salaries, officers' expenses and intercompany sales (between entities included in a consolidated set of financial statements) are all transactions in the ordinary course of business and generally would not require disclosure.

• Question 16:

  In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the following:

  

  In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of:

  A. $216,300
  B. $215,400
  C. $203,700
  D. $201,900
  D. $201,900

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  Choice "d" is correct. $201,900.

  

  The various amounts from discontinued operations should be included in discontinued operations, not in revenues.

• Question 17:

  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.
  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.
  C. II, III, IV.

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  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 18:

  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.
  B. Reported as a part of stockholders' equity.

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  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 19:

  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 A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial

  statements, or neither an accounting change nor an accounting error.

  Item to Be Answered

  As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.

  List A (Select one)

  A. Change in accounting principal.
  B. Change in accounting estimate.
  C. Correction of an error in previously presented financial statements.
  D. Neither an accounting change nor an accounting error.
  B. Change in accounting estimate.

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  Choice "b" is correct. Change in lives of fixed assets is a change in accounting estimate.

• Question 20:

  In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brighton's financial statements as a:

  A. Retrospective adjustment on the retained earnings statement, with separate disclosure.
  B. Component of income from continuing operations, with separate disclosure.
  C. Component of income from continuing operations, without separate disclosure.
  D. Component of income after continuing operations, with separate disclosure.
  A. Retrospective adjustment on the retained earnings statement, with separate disclosure.

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  Choice "a" is correct. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an

  example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is

  called retrospective application.

  Choices "b", "c", and "d" are incorrect. The cumulative effect of a change in accounting principle is now reported on the retained earnings statement, not the income statement. Most of these types of changes (changes in accounting principle)

  used to be reported on the income statement. SFAS No. 154 changed that.