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

• Question 71:

  Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?

  A. Unrealized loss on investments in noncurrent marketable equity securities available for sale.

  B. Unrealized loss on investments in current marketable equity securities held for trading.

  C. Loss on exchange of nonmonetary assets without commercial substance.

  D. Loss on exchange of nonmonetary assets with commercial substance.

  Correct Answer: A

  Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles. Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and other non-owner changes in equity (such as changes in market value of marketable securities available for sale) that are included in comprehensive income for a period.

• Question 72:

  FASB's conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Choice "c" is correct. Financial capital - Financial capital.

  Financial capital maintenance is considered to be an element of both "currently reported net income" and

  "comprehensive income." This was a rare instance in which this type of information was asked on the

  exam.

• Question 73:

  According to the FASB conceptual framework, which of the following is an essential characteristic of an asset?

  A. The claims to an asset's benefits are legally enforceable.

  B. An asset is tangible.

  C. An asset is obtained at a cost.

  D. An asset provides future benefits.

  Correct Answer: D

  Choice "d" is correct. An asset provides future benefits.

  Rule: According to the FASB conceptual framework, assets are probable future economic benefits

  obtained or controlled by a particular entity as a result of past transactions or events.

• Question 74:

  According to the FASB conceptual framework, an entity's revenue may result from:

  A. A decrease in an asset from primary operations.

  B. An increase in an asset from incidental transactions.

  C. An increase in a liability from incidental transactions.

  D. A decrease in a liability from primary operations.

  Correct Answer: D

  Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities

  resulting from the entity's ongoing major operations, not from "incidental" operations.

  Choice "d" is correct. An entity's revenue may result from a decrease in a liability from primary operations.

• Question 75:

  Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Choice "c" is correct. Yes - No.

  Yes - "Depreciation methods" should be disclosed in the "summary of significant accounting policies."

  No - Composition of fixed assets (or any other account) should not be disclosed in the "summary of

  significant accounting policies."

• Question 76:

  Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 1989 included the following expense and loss accounts: One-half of the rented premises is occupied by the sales department. Brock's total selling expenses for 1989 are:

  

  A. $480,000

  B. $400,000

  C. $370,000

  D. $360,000

  Correct Answer: A

  

  Note: Only one-half of rent for office space was used for sales office. Choice "a" is correct. $480,000.

• Question 77:

  The following items were among those that were reported on Lee Co.'s income statement for the year ended December 31, 1989:

  

  The office space is used equally by Lee's sales and accounting departments. What amount of the abovelisted items should be classified as general and administrative expenses in Lee's multiple-step income statement?

  A. $290,000

  B. $325,000

  C. $410,000

  D. $500,000

  Correct Answer: A

  

  Note: 1/2 of the office space of $240,000 was used by the sales department, which should be allocated to

  "selling expenses" (not general and administrative).

  Choice "a" is correct. $290,000.

• Question 78:

  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

  Correct Answer: D

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

  

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

• Question 79:

  FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB:

  A. Statements of Financial Accounting Concepts.

  B. Emerging Issues Task Force Consensus.

  C. Technical Bulletins.

  D. Statements of Financial Accounting Standards.

  Correct Answer: D

  Choice "d" is correct. FASB interpretations of the "statements of financial accounting standards" (SFAS) have the same authority as the FASB statements of financial accounting standards (SFAS), which by themselves determine GAAP. Choice "a" is incorrect. Statements of financial accounting concepts (FAC's) have much less authority (fifth floor) and do not by themselves determine GAAP as is the case with SFASs and interpretations of SFASs. Choice "b" is incorrect. Emerging issues task force (EITF) consensus is in the nature of a "third floor" authority. The EITF was established in 1984 to aid the FASB in identifying and implementing emerging issues before they become widespread and ultimately require action by the FASB. After discussing the issues and the relevant accounting pronouncements, the group can sometimes reach a consensus on an issue, in which case no action by the FASB is usually needed. Choice "c" is incorrect. Technical bulletins of the FASB (second floor) do not by themselves determine GAAP.

• Question 80:

  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.

  Correct Answer: A

  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.