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

• Question 81:

  According to the FASB conceptual framework, predictive value is an ingredient of:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Choice "d" is correct. Yes - No. Predictive value is an ingredient of relevance but not of reliability.

  Memorize:

  Bud's relevance to "PFT."

  Bud's reliability to "VRN."

• Question 82:

  According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:

  A. The need for conservatism.

  B. Reporting on management's stewardship.

  C. Generally accepted accounting principles.

  D. The needs of the users of the information.

  Correct Answer: D

  Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting stem from the informational needs of the external users of the information. SFAC 1 para. 28 Choice "a" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97 Choice "b" is incorrect. Information concerning management's stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1 para. 50 Choice "c" is incorrect. Generally accepted accounting principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around.

• Question 83:

  A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?

  A. Change in accounting estimate.

  B. Change in accounting principle.

  C. Change in valuation technique.

  D. Error correction.

  Correct Answer: A

  Choice "a" is correct. A change in the valuation technique used to measure fair value is a change in accounting estimate. Choice "b" is incorrect. Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principal. Choice "c" is incorrect. Although a change from the cost approach to the market approach is a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate. Choice "d" is incorrect. Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error correction is not a type of accounting change.

• Question 84:

  There are multiple active markets for a financial asset with different observable market prices: There is no principal market for the financial asset. What is the fair value of the asset?

  

  A. $71

  B. $72

  C. $74

  D. $76

  Correct Answer: C

  Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the fair value measurement. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows:

  Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted Price - Transaction Costs = $74 - 2 = $72

  Because the net price in Market B is higher than the net price in Market A, Market B is the most advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect. This is the net price in Market A. Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B. This net price indicates that Market B is the most advantageous market, but the net price is not the fair value because fair value does not include transaction costs. Choice "d" is incorrect. If Market A were the principal market for the asset, then this would be the fair value of the asset. However, because there is no principal market, the price in the most advantageous market (Market B) is the price of the asset.

• Question 85:

  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.

  Correct Answer: C

  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 86:

  Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability?

  A. The market approach.

  B. The impairment approach.

  C. The income approach.

  D. The cost approach.

  Correct Answer: B

  Choice "b" is correct. The impairment approach is not used to measure the fair value of an asset or liability. Instead, when an entity is determining whether an asset has been impaired, the entity will use the market approach, the income approach or the cost approach to determine the fair value of the asset. Choice "a" is incorrect. The market approach is an accepted method of fair value measurement in which price and other market information from identical or comparable assets or liabilities is used to measure fair value. Choice "c" is incorrect. The income approach is an accepted method of fair value measurement in which future cash flows or earnings are discounted to determine fair value. Choice "d" is incorrect. The cost approach is an accepted method of fair value measurement in which current replacement cost is used to determine the fair value of an asset.

• Question 87:

  Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information?

  I. The segment's assets constitute more than 10% of the combined assets of all operating segments.

  II.

  The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: A

  Choice "a" is correct. For segment reporting, if an identified segment's assets constitute more than 10% of

  the combined assets of all operating segments, the segment should be reported. The same rule does not

  apply for the segment's liabilities. The candidate does have to remember the 10% and also the 10% of

  "what."

  Choice "b" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10%

  of the combined assets of all operating segments, the segment should be reported. The same rule does

  not apply for the segment's liabilities.

  Choice "c" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10%

  of the combined assets of all operating segments, the segment should be reported. The same rule does

  not apply for the segment's liabilities, so the correct answer cannot be "Both."

  Choice "d" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10%

  of the combined assets of all operating segments, the segment should be reported. The correct answer

  cannot be "Neither."

• Question 88:

  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.

  Correct Answer: A

  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 89:

  In financial reporting of segment data, which of the following must be considered in determining if an industry segment is a reportable segment?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Choice "a" is correct. A segment is considered reportable if its reported revenue, including sales to

  unaffiliated customers and intersegment sales, is 10% or more of the combined revenue (unaffiliated and

  intersegment) of all operating segments.

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

• Question 90:

  A development stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Choice "a" is correct. Development stage enterprises must use all the same principles as established enterprises including those of revenue recognition and deferral of expenses. The primary difference is that development stage enterprises must provide additional disclosures not required of established operating enterprises. SFAS #7, para. 10