CPA Exam Review Questions Financial Accounting & Reporting (FAR) – Flashcards

D. The following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other that GAAP: 1. income tax basis of accounting 2. cash basis of accounting 3. modified cash basis of accounting 4. basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency. 5. a definite set of criteria having substantial support that is applied to all material items in the financial statements. An other comprehensive basis of accounting (OCBOA) outside of the permitted bases listed above is prohibited. A basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution is not a permitted OCBOA.

A. A lease is classified as a capital lease if one of the following criteria is met: 1. the title is transferred to the lease at the end of the lease period. 2. a bargain purchase option exists 3. the lease period is a t least 75% of the asset's life. 4. the present value of the minimum lease payments is at least 90% of the fair value of the asset

A. Retained earnings is decreased and a current liability for the cash dividend is recorded on the declaration date, in this case, January 15, year 5

D. The company should use the effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter of the year because the interim period is considered an integral part of the accounting year

C. Serial bonds refer to bonds within an issue that mature at different points in time. Generally, serial bonds are retired according to their registration number. Note that bonds within a term bond issue all mature at the same time. Unsecured bonds are backed only by the general credit of the borrower and are not backed by any specific property. In the case of a bearer bond, there is no record of ownership - interest is paid to the holder of the bond.

A. Accelerated depreciation methods will increase the amount of depreciation expense in the early years of the asset's life, but the depreciation expense will be less in the latter years of the asset's life. All other answer options are true.

B. Factoring of receivables is a sale of the receivables to another party. "Without recourse" means that Gar Co. has transferred the risk for the uncollectible accounts to Ross Bank and Ross does not have any recourse against Gar Co. if the accounts are not collected. Thus, Gar has sold the accounts receivable to Ross Bank along with the risk associated with the uncollectible accounts.

D. Long-term debt and all liabilities are not required disclosures on segment data. All the other choices are required disclosures.

A. The minimum amount within the range must be accrued since an unfavorable outcome is probable.

B. Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.

C. This is a change in accounting entity which requires restatement of prior periods being presented.

D. The operating cycle is the average time for a company to expend cash for inventory, process and sell the inventory, and collect the resulting receivables, converting them back into cash. The number of days in the operating cycle (94) is equal to the number of days' sales in inventory (61), plus the number of days' sales in accounts receivable (33).

A. To be considered a capital lease, the lease term should be equal to 75 percent or more of the estimated economic life of the asset, not 90 percent.

C. When the stock of an entity is purchased specifically for retirement, it is no longer able to be reissued and therefore would NOT affect treasury stock. The entity would record the transaction by removing the common stock at its par value, with any additional paid-in capital that was originally recorded being removed as well. The difference between the original issue price and the reacquisition price requires a reduction in retained earnings because the entity repurchased the stock for an amount greater than the original issuance price. A reduction in the cash paid for the stock is recorded as well. The journal entry for the repurchase and retirement of one share of its outstanding stock would appear as follows: Debit: Common stock $100 Debit: Paid-in capital $100 Debit: Retained earnings $50 Credit: Cash $250

A. Interim statements are affected by estimates, cost allocations, seasonality and other factors which may affect the usefulness of the information. Therefore, the emphasis on timeliness over reliability.

B. The bond interest expense for St. Petersburg Glass Company would be $1,467.50. The amortized amount of the bond premium is subtracted from the annual payments. $5,325/10 = 532.50, $2,000 - 532.50 = $1,467.50.

A. The depreciation method used must be straight line because year 1 depreciation is $7,400 (($40,000 - $3,000) / 5 = $7,400). Year 2 depreciation would also be $7,400.

C. This can be solved with either the PV or FV of $1 equation; using the correct factor: PV = FV x PVfactor or FV = PV x FVfactor. So: $25,000 = FV x 0.7722 = %32,375. Or, FV = $25,000 x 1.295 = $32,375.

A. The beginning balance is added to the new provision of $180,000 (2% × $9,000,000) and is reduced for the write off of $325,000 (260,000 + 180,000) - 325,000 = 115,000.

D. According to FASB 158, an employer is required to recognize the overfunded or underfunded status of the pension plan. This amount is the difference between the Projected Benefit Obligation and the Plan Assets, or $249,000 ($829,000 - $580,000) in this case. It will be reported as a liability since the PBO exceeds the plan assets.

B. The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items. The main difference between the direct and indirect methods of calculating cash flows is the way that cash flow from operations is calculated. The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with income after taxes and adjusts backwards for noncash and other items. Both methods will have the same result for operating cash flows. The direct and indirect method calculates the financing and investing cash flows the same way, and both methods will result in the same cash flow figure.

A. Goodwill of $30,000 should be recorded as a result of this purchase. In creating a business combination, any amount attributed to the value of in-process research and development must be recognized. Any portion of the acquisition price in excess of the subsidiary's underlying book value that cannot be assigned to an identifiable asset or liability is reported as the intangible asset, Goodwill. Here, the purchase price was $900,000 and the book value was $700,000 so the excess was $200,000. Of that amount, $170,000 is assigned to in-process research and development. The remaining $30,000 is reported by the consolidated companies as goodwill. Goodwill is no longer amortized over a period of time but is rather checked periodically for impairment.

B. The increase in prepaid insurance in Year 6 creates a deductible amount for income tax reporting purposes for the insurance paid; however, for financial reporting purposes the expense is not recognized until years subsequent to Year 6. As a result, net taxable income for future years is increased; thus, the deferred tax liability increases. The increase in rent receivable in Year 6 also increases the deferred tax liability. For income tax purposes, rents are not included in income until received (i.e., years subsequent to Year 6). However, the amount of the receivable is earned and recognized in the income statement in Year 6. The increase in warranty obligations results in warranty expense for Year 6 and will provide future deductible amounts because tax rules do not allow a deduction for warranty cost until such a cost is incurred. Future deductible amounts lead to deferred tax assets.

C. As the potential winner, Smith will not recognize a gain until the process is substantially completed. That happens in Year 2. Therefore, the entire profit is recognized when the case is settled in Year 2. As the potential loser, West will recognize a loss as soon as the amount becomes probable. Here, that is in Year 1. When the amount can only be estimated to within a range, the most likely number in the range is used. If no number is most likely, the lowest number in the range is recognized. For that reason, West recognized a $160,000 loss in Year 1 which then had to be increased in Year 2 by $120,000 to arrive at the actual figure of $280,000.

B. Available-for-sale; Separate component of other comprehensive income securities In accordance with SFAS 115, marketable equity securities (MES) are classified as either trading (held for current resale) or available-for-sale (if not categorized as trading). Because Norina does not intend to sell these securities in the near term, they should be classified as available-for-sale. SFAS 115 requires MES to be carried at market value. The unrealized gains or losses of available-for-sale MES are reported as a separate component of other comprehensive income. It is important to note that unrealized gains or losses on trading securities would be reported as a component of continuing operations on the income statement. Thus, Answer B is correct because the securities would be classified as available-for-sale and unrealized gains or losses from these securities would be reported as other comprehensive income.

B. Total asset turnover = sales/total assets = 150/75 = 2 times Inventory turnover = COGS/average inventory = (150 - 45)/15 = 7 times

C. Consistency in financial presentation means the use of the same accounting procedures for presenting information in different periods. Because trend analysis is a strong element in projecting the future, investors and creditors find consistency important in making data useful, or relevant in formulating decisions. Consistent presentation also removes potential bias from presentation that might be caused by selecting the procedure each year that makes the company look best. A consistent presentation enhances the neutrality of the information, which is an element of reliability. Thus, consistency relates to both relevance and reliability. Verifiability means the development of information by an approach that would cause different people to arrive at the same figures. Verifiability makes information more reliable but does not tell us whether the information being developed happens to be relevant to the user.

B. If the car has a life of ten years and the lease is for eight years, the lease must be reported as a capital lease. The FASB has established four criteria for a capital lease. If any one of these is met, then the lease has to be recorded as a capital lease: The title transfers to the lessee There is a bargain purchase option (a bargain is viewed as an option price that is significantly below expected fair value so that it is reasonable to expect the lessee to acquire the asset). The life of the lease is 75% or more of the life of the asset. The present value of the minimum lease payments is 90% or more of the fair value of the asset. For a capital lease, the lessee only has one method of reporting (basically, the asset is being recorded as an acquisition using long-term financing). However, the lessor must classify the lease as a sales type lease or an operating lease based on certain factors.

A. Issuing a 15% stock dividend increases the number of shares outstanding but it does not impact stockholders' equity because there is neither an increase nor a decrease in the net assets of the company. Because the dividend was less than 20% to 25%, it is viewed as small stock dividend, and, hence, it is recorded at fair value. Because the fair value is greater than the par value, the amount in excess of par will be recorded as an increase to the additional paid-in capital account.

A. The requirement is to determine what time value of money concept would be used to determine the cost of a machine when a payment (principal plus interest) is to be made in two years. Answer A is correct because the cost of the machine is to be recorded immediately; therefore, the cost of the present value of a lump-sum payment would be used. Answer B is incorrect because a lump-sum payment is involved, not an annuity. Answer C is incorrect because a future amount would be used in computing the payment and not the cost of the machine. Answer D is incorrect because a future amount would be used in computing the payment and not the cost. Also, a lump-sum payment is involved and not an annuity.

D. When the budget is initially recorded for governmental accounting systems, the appropriations control account is credited for authorized expenditures. At year-end, the budget entry is reversed; thus the appropriations control account would be debited to close it out.