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

• Question 101:

  Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?

  A. Ratably over the second, third, and forth [sic] quarters.

  B. Ratably over the third and fourth quarters.

  C. In the second quarter only.

  D. In the fourth quarter only.

  Correct Answer: D

  Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full.

  This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the

  year-end at the lower of cost or market, recognizing the loss at that time.

  Choice "a" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable

  and not ratably over several quarters. Choice "b" is incorrect. Expected losses must be recorded in full

  when the loss is probable and estimable and not ratably over several quarters. Choice "c" is incorrect.

  Since the loss is not probable at the end of the second quarter, no amount should be recognized at that

  time.

• Question 102:

  In general, an enterprise preparing interim financial statements should:

  A. Defer recognition of seasonal revenue.

  B. Disregard permanent decreases in the market value of its inventory.

  C. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred.

  D. Use the same accounting principles followed in preparing its latest annual financial statements.

  Correct Answer: D

  Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual

  report of an enterprise should be applied to interim financial statements of the current year, unless a

  change in accounting principle is adopted in the current year.

  Choices "a", "b", and "c" are incorrect, per above.

• Question 103:

  During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year was 30% . Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report?

  A. $15,000

  B. $25,000

  C. $30,000

  D. $35,000

  Correct Answer: B

  Choice "b" is correct. When preparing interim financial statements, income tax expense is estimated each

  quarter using the effective tax rate expected to apply to the entire year.

  Choice "a" is incorrect. Worth should use the effective annual tax rate, not the effective tax rate for the

  quarter only.

  Choice "c" is incorrect. Worth should use the effective annual tax rate expected to apply to the current

  year, not the prior year's effective tax rate.

  Choice "d" is incorrect. Worth should use the effective annual tax rate, not the statutory tax rate.

• Question 104:

  Terra Co.'s total revenues from its three operating segments were as follows: Which operating segment(s) is (are) deemed to be reportable segments?

  

  A. None.

  B. Lion only.

  C. Lion and Monk only.

  D. Lion, Monk, and Nevi.

  Correct Answer: D

  Choice "d" is correct. A reportable operating segment is one having 10% of all revenue, including revenue

  from unaffiliated sales and from intersegment sales:

  Lion's revenue percentage is 66.7% [$100,000/150,000].

  Monk's revenue percentage is 17.3% [$26,000/150,000].

  Nevi's revenue percentage is 16% [$24,000/150,000].

  Thus, all three segments meet the 10% of total revenues test and are reportable as operating segments.

  SFAS 14 para. 10 and 15 as amended by SFAS 131 Choice "a" is incorrect. All segments with revenue

  percentages exceeding 10% of total revenues are reportable operating segments.

  Choice "b" is incorrect. Lion is not the only segment with revenue percentages exceeding 10% of total

  revenues.

  Choice "c" is incorrect. Nevi has a revenue percentage exceeding 10% of total revenues.

• Question 105:

  Conceptually, interim financial statements can be described as emphasizing:

  A. Timeliness over reliability.

  B. Reliability over relevance.

  C. Relevance over comparability.

  D. Comparability over neutrality.

  Correct Answer: A

  Choice "a" is correct. Interim financial statements emphasize timeliness (an element of relevance) by providing financial information based on actual performance to date and estimates prior to year end. Information must be available when it is needed to be useful. Reliability is impeded by the extensive use of estimates; however, the lag until verifiability is obtained detracts from usefulness. SFAC 2 para. 56 Choice "b" is incorrect. Relevance (particularly timeliness) of information in interim financial statements is emphasized more than reliability. Reliability is impeded by the extensive use of estimates in interim data. Choice "c" is incorrect. Since comparability is a secondary quality of information, there should be no need to trade off comparability for relevance (a primary quality). Choice "d" is incorrect. Neutrality is an element of reliability (a primary quality of information. There should be NO need for a trade-off for comparability over neutrality.

• Question 106:

  Which of the following is correct concerning financial statement disclosure of accounting policies?

  A. Disclosures should be limited to principles and methods peculiar to the industry in which the company operates.

  B. Disclosure of accounting policies is an integral part of the financial statements.

  C. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles.

  D. Disclosures should duplicate details disclosed elsewhere in the financial statements.

  Correct Answer: B

  Choice "b" is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements. Choice "a" is incorrect. For disclosure of accounting policies, disclosure should not be limited to principles and methods peculiar to the industry in which the company operates. All material accounting policies should be disclosed. Choice "c" is incorrect. For disclosure of accounting policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It does make sense to disclose the "why" before the "what." Choice "d" is incorrect. Disclosure of accounting policies should not duplicate details disclosed elsewhere in the financial statements. Interim Financial Reporting

• Question 107:

  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

  Correct Answer: C

  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 108:

  According to the FASB conceptual framework, comprehensive income includes which of the following?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.

• Question 109:

  Which of the following describes how comprehensive income should be reported?

  A. Must be reported in a separate statement, as part of a complete set of financial statements.

  B. Should not be reported in the financial statements but should only be disclosed in the footnotes.

  C. May be reported in a separate statement, in a combined statement of income and comprehensive income, or within a statement of stockholders' equity.

  D. May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders' equity; separate statements of comprehensive income are not permitted.

  Correct Answer: C

  Choice "c" is correct.

  Comprehensive income must be presented in one of three formats:

  1.

  In a combined statement of income and comprehensive income;

  2.

  In a separate statement of comprehensive income that begins with net income; or

  3.

  In a statement of changes in equity.

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

  Balance Sheet and Disclosures Overview

• Question 110:

  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.

  Correct Answer: A

  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