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

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

• Question 71:

  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.
  A. Only.

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  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 72:

  According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is:

  A. Recognition.
  B. Realization.
  C. Allocation.
  D. Matching.
  A. Recognition.

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  Choice "a" is correct. Recognition.

  According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is recognition.

• Question 73:

  In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold's gain on the purchase of

  its own bonds exceeded its loss on the sale of the Iron bonds. Assume the transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.

  Gold should report the:

  A. Net effect of the two transactions as an extraordinary gain.
  B. Net effect of the two transactions in income before extraordinary items.
  C. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond transaction as an extraordinary loss.
  D. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in income before extraordinary items.
  D. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in income before extraordinary items.

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  Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds (an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not a "refinancing" (where one

  would sell new bond debt to buy back old bond debt outstanding).

  The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp. transaction is a loss in "income before

  extraordinary items."

  Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted.

  Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the provisions of APB Opinion No. 30.

• Question 74:

  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.

  B. Retroactive or retrospective restatement approach.

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  Choice "B" is correct. The equity method of accounting is applied retroactively when the investor has acquired 20% ownership. Prior to acquiring the ability to influence the investee, the cost method is proper. The retroactive restatement approach does not mean that this change is the correction of an error (which is now treated retroactively), a change in accounting principle (which is now treated retrospectively), or a change in accounting entity (which is now treated retrospectively). It just means that retroactive restatement is the proper treatment.

• Question 75:

  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

  Quo changed from LIFO to FIFO to account for its finished goods inventory.

  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.
  A. Change in accounting principal.

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  Choice "a" is correct. Change from LIFO to FIFO is a change in accounting principle.

• Question 76:

  Which of the following types of entities are required to report on business segments?

  A. Nonpublic business enterprises.
  B. Publicly-traded enterprises.
  C. Not-for-profit enterprises.
  D. Joint ventures.
  A. Nonpublic business enterprises.

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  Choice "b" is correct. Only publicly-traded enterprises are required to report on business segments. Choices "a", "c", and "d" are incorrect, per the Explanation: above.

• Question 77:

  Kell Corp.'s $95,000 net income for the quarter ended September 30, 1990, included the following aftertax items:

  A. $91,000
  B. $103,000
  C. $111,000
  D. $115,000

  A. $91,000

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  Choice "a" is correct. $91,000 net income for the third quarter ended 9-30-90.

  Rules: The entire amount of an "extraordinary" item should be reported during the period incurred.

  A "cumulative effect" type accounting change is not included in the net income of the period of change; instead, the beginning of the year retained earnings is restated.

  Expenses, which benefit more than one interim period, such as property taxes, are allocated among the periods benefited.

  

• Question 78:

  Opto Co. is a publicly-traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?

  A. The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues.
  B. The identity of any external customer providing 10% or more of a particular operating segment's revenue.
  C. The identity of any external customer considered to be "major" by management.
  D. Information on major customers is not required in segment reporting.
  A. The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues.

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  Choice "a" is correct. In order to conform to GAAP, financial statements for public business enterprises must report segment information about a company's major customers if that customer provides 10% or more of the combined revenue,

  internal and external, of all operating segments.

  Choice "b" is incorrect. Revenue is 10% of ALL operating segments not "a particular" segment.

  Choice "c" is incorrect. Disclosure is not at management's discretion.

  Choice "d" is incorrect. Disclosure is required.

• Question 79:

  Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The tax rate is 30%. The following data relate to the warehouse:

  Current carrying amount $ 300,000 Replacement cost 1,100,000

  What amount of gain should Ocean report as a separate component of income before extraordinary items?

  A. $1,030,000
  B. $780,000
  C. $730,000
  D. $0
  C. $730,000

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  Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary items.

  

• Question 80:

  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.

  B. Retroactive or retrospective restatement approach.

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  Choice "B" is correct. If comparative FS are issued, restate prior year's FS. If comparative FS are not issued, restate prior year-end's retained earnings account by "adjusting" (net of tax) the opening balance of the current retained earnings statement. Note that when an error is corrected, retroactive restatement is used, and when there is a change in accounting principle, retrospective restatement is done. However, this is only a difference in terminology.