CPA Financial Accounting and Reporting Practice Tests 2023 | Pass FAR with confidence!
Practice AICPA Certification FAR exam. Online Exam Practice Tests with detailed explanations!
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NEW QUESTION 76
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 cost approach.
- C. The income approach.
- D. The impairment approach.
Answer: D
Explanation:
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.
NEW QUESTION 77
During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses
the units of production depletion method. As a result of the change, which of the following should be
reported in Krey's 1992 financial statements?
- A. Option D
- B. Option A
- C. Option B
- D. Option C
Answer: D
Explanation:
Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current
and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in
accounting principle" is only used for changes in "accounting principle."
NEW QUESTION 78
Which of the following facts concerning fixed assets should be included in the summary of significant
accounting policies?
- A. Option D
- B. Option A
- C. Option B
- D. Option C
Answer: D
Explanation:
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."
NEW QUESTION 79
In general, an enterprise preparing interim financial statements should:
- A. Disregard permanent decreases in the market value of its inventory.
- B. Defer recognition of seasonal revenue.
- 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.
Answer: D
Explanation:
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.
NEW QUESTION 80
Kell Corp.'s $95,000 net income for the quarter ended September 30, 1990, included the following aftertax
items:
. A $60,000 extraordinary gain, realized on April 30, 1990, was allocated equally to the second, third, and
fourth quarters of 1990.
. A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized
on August 2, 1990.
In addition, Kell paid $48,000 on February 1, 1990, for 1990 calendar-year property taxes. Of this amount,
$ 12,000 was allocated to the third quarter of 1990.
For the quarter ended September 30, 1990, Kell should report net income of:
- A. $91,000
- B. $103,000
- C. $111,000
- D. $115,000
Answer: A
Explanation:
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.
NEW QUESTION 81
Which of the following should be disclosed for each reportable operating segment of an enterprise?
- A. Option D
- B. Option C
- C. Option A
- D. Option B
Answer: C
Explanation:
Choice "a" is correct. For each reportable segment of an enterprise, both profit or loss and total assets
should be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least.
Choice "b" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets
should be disclosed. Choice "c" is incorrect. For each reportable segment of an enterprise, both profit or
loss and total assets should be disclosed. Choice "d" is incorrect. For each reportable segment of an
enterprise, both profit or loss and total assets should be disclosed.
NEW QUESTION 82
According to the FASB's conceptual framework, the process of reporting an item in the financial
statements of an entity is:
- A. Realization.
- B. Recognition.
- C. Allocation.
- D. Matching.
Answer: B
Explanation:
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.
NEW QUESTION 83
Which of the following is correct concerning financial statement disclosure of accounting policies?
- A. Disclosures should duplicate details disclosed elsewhere in the financial statements.
- B. Disclosure of accounting policies is an integral part of the financial statements.
- C. Disclosures should be limited to principles and methods peculiar to the industry in which the company
operates. - D. The format and location of accounting policy disclosures are fixed by generally accepted accounting
principles.
Answer: B
Explanation:
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
NEW QUESTION 84
The following information pertains to Aria Corp. and its divisions for the year ended December 31, 1988:
Aria and all of its divisions are engaged solely in manufacturing operations. Aria has a reportable segment
if that segment's revenue exceeds:
- A. $264,000
- B. $260,000
- C. $204,000
- D. $200,000
Answer: B
Explanation:
Choice "b" is correct. $260,000 represents a reportable segment (10% of total sales):
Rule: To be significant enough to report on, a segment must be at least 10% of:
1 . Combined revenues (whether intersegment or unaffiliated customers), or
2 . Operating income, or
3 . Identifiable assets.
NEW QUESTION 85
An inventory loss from a permanent market decline of $360,000 occurred in May 1989. Cox Co.
appropriately recorded this loss in May 1989 after its March 31, 1989 quarterly report was issued. What
amount of inventory loss should be reported in Cox's quarterly income statement for the three months
ended June 30, 1989?
- A. $180,000
- B. $0
- C. $360,000
- D. $90,000
Answer: C
Explanation:
Choice "d" is correct. $360,000 inventory loss reported for the quarter ended 6-30-89.
Rule: Inventory losses from "permanent market declines" are recognized in the interim period, incurred
and later, if they "turn-around," are recognized as gains in a subsequent interim period only to the extent
of previously reported losses.
Rule: "Temporary" market declines need not be recognized at interim when a "turn-around" can
reasonably be expected to occur before the end of the fiscal year.
Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the
quarter interim period incurred (6-30-89).
NEW QUESTION 86
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 sells extended service contracts on its products. Because related services are performed over
several years, in 1993 Quo changed from the cash method to the accrual method of recognizing income
from these service contracts.
List A (Select one)
- A. Change in accounting estimate.
- B. Neither an accounting change nor an accounting error.
- C. Correction of an error in previously presented financial statements.
- D. Change in accounting principal.
Answer: C
Explanation:
Choice "c" is correct. Change from the cash method to the accrual method is a correction of an error in
previously presented financial statements.
NEW QUESTION 87
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:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production
breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List B (Select one)
- A. Cumulative effect approach.
- B. Retroactive or retrospective restatement approach.
- C. Prospective approach.
Answer: C
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior
periods, not retained earnings.
NEW QUESTION 88
A segment of Ace Inc. was discontinued during 1992. Ace's loss from discontinued operations should not:
- A. Include operating losses of the current period up to the date the decision to dispose of the segment
was made. - B. Exclude operating losses from the date the decision to dispose of the segment was made until the end
of 1992. - C. Include employee relocation costs associated with the decision to dispose.
- D. Include additional pension costs associated with the decision to dispose.
Answer: B
Explanation:
Choice "b" is correct. Ace's loss on discontinued operations should not exclude operating losses from the
date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses
should be included.
Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be
included in the loss from discontinued operations.
Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be
included in the loss from discontinued operations.
Choice "d" is incorrect. Ace's loss on discontinued operations should include operating losses of the
current period up to the date the decision to dispose of the segment was made and also after that date.
All 1992 operating losses should be included.
NEW QUESTION 89
Which of the following information should be included in Melay, Inc.'s 1992 summary of significant
accounting policies?
- A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the
straight-line method. - B. During 1992, the Delay component was sold.
- C. Future common share dividends are expected to approximate 60% of earnings.
- D. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
Answer: A
Explanation:
Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of
depreciation that should be described in the "summary of significant accounting policies." Choice "b" is
incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on
"discontinued operations" in the F1 class) but is not a "significant accounting policy."
Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting
policy."
Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for
the financial statements. They might be appropriate for the "presidents letter to shareholders."
NEW QUESTION 90
According to the FASB conceptual framework, comprehensive income includes which of the following?
- A. Option D
- B. Option C
- C. Option A
- D. Option B
Answer: D
Explanation:
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.
NEW QUESTION 91
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.
During 1993, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 1992, to 30%,
and acquired a seat on Worth's board of directors. As a result of its increased investment, Quo changed
its method of accounting for investment in Worth, Inc. from the cost method to the equity method.
List A
- A. Change in accounting principle.
- B. Correction of an error in previously presented financial statements.
- C. Change in accounting estimate.
- D. Neither an accounting change nor an accounting error.
Answer: D
Explanation:
Choice "d" is correct. A change from the cost method (less than 20% ownership) to the equity method
(20% or more ownership or a Board seat or other significant influence) of accounting for investment in an
investee is neither an accounting change nor an accounting error. If it is not an accounting change, it
cannot be a change in accounting principle or a change in accounting estimate since those two types of
changes are both accounting changes.
There is a considerable amount of controversy on this particular answer. Some people think that this
change is a change in accounting principle (something certainly changed, but was it the accounting
principle?), and others think it is a change in accounting entity (which is not one of the available answers;
anyway, did the accounting entity actually change or is it the same entity accounted for differently?).
Under SFAS No. 154, a change in accounting principle is treated retrospectively and a change in
accounting entity is treated retrospectively.
This kind of change (cost to equity) has never been specifically identified in any accounting literature as
either a change in accounting principle or a change in accounting entity. The words "cost method" were
never mentioned in APB 20 (other than the full cost method for oil & gas companies, which is an entirely
different subject), nor was it mentioned in SFAS No. 154. It was, however, discussed in APB 18 (the
pronouncement for the equity method) in Paragraph 19m (bold added): "An investment in common stock
of an investee that was previously accounted for on other than the equity method may become qualified
for use of the equity method by an increase in the level of ownership described in paragraph 17 (i.e.,
acquisition of additional voting stock by the investor, acquisition or retirement of voting stock by the
investee, or other transactions). When an investment qualifies for use of the equity method, the investor
should adopt the equity method of accounting. The investment, results of operations (current and prior
periods presented), and retained earnings of the investor should be adjusted retroactively in a manner
consistent with the accounting for a step-by-step acquisition of a subsidiary."
What does all this mean? It means that, when there is a change in the percentage of ownership that
changes accounting from the cost method to the equity method, the change is treated retroactively (just
like changes in accounting entity used to be treated, although they are now treated retrospectively). It
does not say that the change is a change in accounting principle or anything else. Nothing in SFAS
No.154 changed this treatment. So all this still makes Choice "d" correct. This whole issue might easily be
considered to be splitting hairs, at the very least. Some questions on the CPA exam are just that way.
Most are not.
NEW QUESTION 92
Which of the following should be disclosed in a summary of significant accounting policies?
I. Management's intention to maintain or vary the dividend payout ratio.
II. Criteria for determining which investments are treated as cash equivalents.
III. Composition of the sales order backlog by segment.
- A. II only.
- B. I only.
- C. I and III.
- D. II and III.
Answer: A
Explanation:
Choice "c" is correct. Il only.
The criteria for determining which investments are treated as "cash equivalents" is a method of
accounting policies that needs to be disclosed in the summary of significant accounting policies.
Choice "a" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an
"accounting policy."
Choices "b" and "d" are incorrect. Composition of the sales order backlog by segment is not an
"accounting policy."
NEW QUESTION 93
According to the FASB conceptual framework, which of the following attributes would not be used to
measure inventory?
- A. Replacement cost.
- B. Historical cost.
- C. Net realizable value.
- D. Present value of future cash flows.
Answer: D
Explanation:
Choice "d" is correct. The present value of future cash flows is used to measure long-term receivables or
payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows.
SFAC 5 para. 67 Choice "a" is incorrect. Historical cost can be used to measure inventory because it is a
relevant and reliable measurement attribute of current assets such as inventory. Choice "b" is incorrect.
Replacement (or current) cost can be used to measure inventory because it is a relevant and reliable
measurement attribute of current assets such as inventory. Choice "c" is incorrect. Net realizable value
can be used to measure inventory because it is a relevant and reliable measurement attribute of current
assets such as inventory.
NEW QUESTION 94
On December 2, 20X1, Flint Corp.'s board of directors voted to discontinue operations of its frozen food
division and to sell the division's assets on the open market as soon as possible. The division reported net
operating losses of $20,000 in December and $30,000 in January. On February 26, 20X2, sale of the
division's assets resulted in a gain of $90,000. Assuming that the frozen foods division qualifies as a
component of the business and ignoring income taxes, what amount of gain/loss from discontinued
operations should Flint recognize in its income statement for 20X2?
- A. $40,000
- B. $0
- C. $60,000
- D. $90,000
Answer: C
Explanation:
Choice "c" is correct. The $60,000 gain from discontinued operations would be reported in Flint's 20X2
income statement. The operating loss for January would offset the gain from disposal in February, and the
net amount would be reported as a gain (in this case) from discontinued operations. The operating losses
for December would have been reported in Flint's 20X1 income statement. Choice "a" is incorrect per the
above. It would be correct if all of the gains and losses were included in 20X1 instead of 20X2. However,
gains and losses from discontinued operations are included in the year they occur. Choice "b" is incorrect.
It includes the operating loss for December, 20X1 in with the 20X2 amounts. Choice "d" is incorrect. It
ignores the January operating loss. Operating losses are included in gain/loss from discontinued
operations, along with impairment losses and gains/losses on disposal.
NEW QUESTION 95
Adam Corp. had the following infrequent transactions during 1989:
. A $190,000 gain on reacquisition and retirement of bonds. This material event is also considered
unusual for Adam Corp.
. A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at
another location.
. A $90,000 loss on the abandonment of equipment.
In its 1989 income statement, what amount should Adam report as total infrequent net gains that are not
considered extraordinary?
- A. $450,000
- B. $100,000
- C. $170,000
- D. $360,000
Answer: C
Explanation:
Infrequent net gains not considered extraordinary include:
Choice "b" is correct. $170,000.
NEW QUESTION 96
An extraordinary item should be reported separately on the income statement as a component of income:
- A. Option D
- B. Option C
- C. Option A
- D. Option B
Answer: D
Explanation:
Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income
statement as a component of income:
Yes - net of income taxes.
No - after (not before) "discontinued operations of a segment of a business."
NEW QUESTION 97
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:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the
period January 1, 1992, through January 1, 1994.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Cumulative effect approach.
- C. Prospective approach.
Answer: A
Explanation:
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.
NEW QUESTION 98
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