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

• Question 41:

  Conn Co. reported a retained earnings balance of $400,000 at December 31, 1991. In August 1992, Conn determined that insurance premiums of $60,000 for the three-year period beginning January 1, 1991, had been paid and fully expensed in 1991. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its 1992 statement of retained earnings?

  A. $420,000

  B. $428,000

  C. $440,000

  D. $442,000

  Correct Answer: B

  

  Choice "b" is correct. $428,000 net of tax.

• Question 42:

  Which of the following is true regarding the presentation of "comprehensive income."

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Choice "c" is correct. No - Yes.

  Comprehensive income may be shown on the face of a combined "statement of income and

  comprehensive income" a separate section below net income, or in:

  1.

  Separate "statement of comprehensive income," or as a

  2.

  Component of the "statement of changes of owners' equity."

  The income tax expense or benefit allocated to components must be disclosed, either on the face of the

  statement or in notes to the statement.

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

• Question 43:

  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.

  Correct Answer: C

  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 44:

  While preparing its 1991 financial statements, Dek Corp. discovered computational errors in its 1990 and 1989 depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements: Dek's 1991 net income is correctly reported at $180,000. Which of the following amounts should be reported as prior period adjustments and net income in Dek's 1991 and 1990 comparative financial statements?

  

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Choice "c" is correct. 1990 ($25,000) $125,000 1991 -- 180,000

  Because these are comparative financial statements, prior period adjustments require retroactive treatment for the years presented. Because 1989 is not presented, the 1989 correction is shown as a prior period adjustment of $25,000 to retained earnings statement of 1990.

• Question 45:

  During 20X5, Dale Corp. made the following accounting changes:

  

  What amount should be shown in the 20X5 retained earnings statement as an adjustment to the beginning balance?

  A. $0

  B. $30,000

  C. $98,000

  D. $128,000

  Correct Answer: C

  Choice "c" is correct. $98,000. 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. A change from LIFO to FIFO for inventory valuation (costing) is a change in accounting principle. 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 principle 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. Choices "a", "b", and "d" are incorrect, per the above Explanation: .

• Question 46:

  Earnings per share data should be reported on the income statement for:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Choice "b" is correct. Yes - Yes.

  Both the "extraordinary items" and "income before extraordinary items" should be shown with an earnings

  per share number on the income statement.

• Question 47:

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

  A. By restating the financial statements of all prior periods presented.

  B. As a correction of an error.

  C. As a component of income from continuing operations, in the period of change and future periods if the change affects both.

  D. As a separate disclosure after income from continuing operations, in the period of change and future periods if the change affects both.

  Correct Answer: C

  Choice "c" is correct. A change in accounting principle that is inseparable from a change in accounting estimate should now be reported as a change in estimate and thus as a component of income from continuing operations, in the period of change and future periods if the change affects both. Distinguishing between a change in accounting principle and a change in accounting estimate is sometimes difficult. For example, a company may change from deferring and amortizing a cost to recording it as an expense when incurred because future benefits of the cost have become doubtful. The new accounting method is adopted, therefore, in partial or complete recognition of the change in estimated future benefits. The effect of the change in principle is inseparable from the effect of the change in estimate. Changes of this type are often related to the continuing process of obtaining additional information and revising estimates and are therefore considered as changes in estimates. Choice "a" is incorrect. Restating the financial statements of all prior periods would be done in the case of prior period adjustments (corrections of errors), changes in accounting principle (retrospective application), and changes in accounting entity (retrospective application).

  Choice "b" is incorrect. Correction of an error would be treated as a prior period adjustment. Choice "d" is incorrect. Separate disclosure after income from continuing operations would be done in the case of extraordinary items or discontinued operations. However, this disclosure would not be made "in the period of change and future periods if the change affects both" but only in the period of the extraordinary item or discontinued operation.

• Question 48:

  In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?

  A. Effect of a failure to provide for uncollectible accounts in the previous period.

  B. Effect of a decrease in the estimated useful life of depreciable equipment.

  C. Cumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects.

  D. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.

  Correct Answer: B

  Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate

  handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The

  correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The

  opening balance of retained earnings would be adjusted to correct the error.

  Choice "c" is incorrect. This change is a change in accounting principle and is handled retrospectively.

  With retrospective application, the opening balance of retained earnings would be adjusted to reflect the

  cumulative effect of the changes.

  Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively.

  With retrospective application, the opening balance of retained earnings would be adjusted to reflect the

  cumulative effect of the changes.

• Question 49:

  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.

  Correct Answer: A

  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.

• Question 50:

  Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Choice "b" is correct. The cumulative effect of a change in accounting principle is now reported as an adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative effect. When making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively. A change from LIFO to weighted average, there is no such impracticability. The cumulative effect is computed and the change is handled retrospectively. Choices "a", "c", and "d" are incorrect, per the above Explanation: .