[UPDATED] AICPA FAR Certification Exam Questions
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NEW QUESTION 62
On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the
weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of
the change is determined:
- A. During the eight months ending August 31, 1992, by a weighted average of the purchases.
- B. During 1992 by a weighted average of the purchases.
- C. As of January 1, 1992.
- D. As of August 31, 1992.
Answer: C
Explanation:
Rule: The cumulative effect of a change in accounting principle equals the difference between retained
earnings at the beginning of period of the change and what retained earnings would have been if the
change was applied to all affected prior periods. Choice "a" is correct. As of January 1, 1992, the
beginning of the year. This assumes that the company is not presenting comparative financial statements.
If comparative financial statements are presented, then the adjustment is made to the beginning retained
earnings of the earliest year presented. Choice "b" is incorrect. The cumulative effect of the change is not
determined as of the date the decision is made. Choices "c" and "d" are incorrect. The cumulative effect of
the change is not determined by a weighted average. (A far out distractor.)
NEW QUESTION 63
The cumulative effect of a change in accounting estimate should be shown separately:
- A. On the income statement above income from continuing operations.
- B. On the retained earnings statement as an adjustment to the beginning balance.
- C. It should not be recorded separately on any financial statement.
- D. On the income statement after income from continuing operations and before extraordinary items.
Answer: C
Explanation:
Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is
made and no separate line item presentation is made on any financial statement. If a material change is
being made, appropriate footnote disclosure is necessary.
Choices "a", "b", and "c" are incorrect, per the above Explanation: .
NEW QUESTION 64
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. $360,000
- B. $100,000
- C. $450,000
- D. $170,000
Answer: D
Explanation:
Infrequent net gains not considered extraordinary include:
Choice "b" is correct. $170,000.
NEW QUESTION 65
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
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 B (Select one)
- A. Cumulative effect approach.
- B. Retroactive or retrospective restatement approach.
- C. Prospective approach.
Answer: B
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. Note that when an error is corrected, retroactive restatement is
used, and when there is a change in accounting principle, retrospective restatement is done. However,
this is only a difference in terminology.
NEW QUESTION 66
According to the FASB conceptual framework, which of the following relates to both relevance and
reliability?
- A. Timeliness.
- B. Feedback value.
- C. Comparability.
- D. Verifiability.
Answer: C
Explanation:
Choice "a" is correct. Comparability and consistency are secondary qualities of both relevance and
reliability. SFAC 2 para. 111-122
Choice "b" is incorrect. Feedback value is a key characteristic of relevance only.
Choice "c" is incorrect. Verifiability is a key characteristic of reliability only.
Choice "d" is incorrect. Timeliness is a key characteristic of relevance only.
NEW QUESTION 67
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds
and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions.
Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Assume the
transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.
Gold should report the:
- A. Net effect of the two transactions in income before extraordinary items.
- B. Net effect of the two transactions as an extraordinary gain.
- C. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond
transaction as an extraordinary loss. - D. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in
income before extraordinary items.
Answer: D
Explanation:
Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds
(an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not
a "refinancing" (where one would sell new bond debt to buy back old bond debt outstanding).
The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in
nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp.
transaction is a loss in "income before extraordinary items."
Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted.
Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before
extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the
provisions of APB Opinion No. 30.
NEW QUESTION 68
What is the purpose of information presented in notes to the financial statements?
- A. To present management's responses to auditor comments.
- B. To provide disclosures required by generally accepted accounting principles.
- C. To correct improper presentation in the financial statements.
- D. To provide recognition of amounts not included in the totals of the financial statements.
Answer: B
Explanation:
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
NEW QUESTION 69
During 1994, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted
average method. Inventory balances under each method were as follows:
Orca's income tax rate is 30%.
Orca should report the cumulative effect of this accounting change as a(n):
- A. Component of income from continuing operations.
- B. Adjustment to beginning retained earnings.
- C. Component of income after extraordinary items.
- D. Extraordinary item.
Answer: B
Explanation:
Choice "a" is correct. The cumulative effect of a change in accounting principle is shown as an adjustment
to beginning retained earnings.
Choice "b" is incorrect. The cumulative effect of a change in accounting principle is now presented as a
separate category on the retained earnings statement and is not a component of net income.
Choice "c" is incorrect. Extraordinary items are unusual and infrequent in nature. Extraordinary items
have nothing to do with changes in accounting principle.
Choice "d" is incorrect. A change in accounting principle affects retained earnings, not the income
statement, under SFAS No. 154.
NEW QUESTION 70
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 impairment approach.
- B. The cost approach.
- C. The income approach.
- D. The market approach.
Answer: A
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 71
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. $520,000
- C. $420,000
- D. $570,000
Answer: B
Explanation:
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:
NEW QUESTION 72
Tanker Oil Co., a development stage enterprise, incurred the following costs during its first year of
operations:
Tanker had no revenue during its first year of operation. What amount may Tanker capitalize as
organizational costs?
- A. $115,000
- B. $55,000
- C. $0
- D. $95,000
Answer: C
Explanation:
Choice "d" is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).
NEW QUESTION 73
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. Include additional pension costs associated with the decision to dispose.
- C. Exclude operating losses from the date the decision to dispose of the segment was made until the end
of 1992. - D. Include employee relocation costs associated with the decision to dispose.
Answer: C
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 74
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
1 989 are:
- A. $360,000
- B. $370,000
- C. $400,000
- D. $480,000
Answer: D
Explanation:
Note: Only one-half of rent for office space was used for sales office. Choice "a" is correct. $480,000.
NEW QUESTION 75
Taft Corp. discloses supplemental industry segment information. The following information is available for
1 992:
Additional 1992 expenses, not included above, are as follows:
Indirect operating expenses $7,200
General corporate expenses 4,800
Segment C's 1992 operating profit was:
- A. $2,000
- B. $5,000
- C. $2,600
- D. $3,200
Answer: B
Explanation:
Choice "a" is correct. $5,000 operating profit for Segment C.
Rule: Operating profit by segments is based on the measure of profit reported to the "Chief Operating
Decision Maker."
Interest expense, income taxes, and general corporate expenses are not allocated to the divisions solely
for the purposes of segment disclosures; they may be allocated if that is how the segments report to the
"Chief Operating Decision Maker."
NEW QUESTION 76
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 D
- B. Option B
- C. Option A
- D. Option C
Answer: C
Explanation:
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: .
NEW QUESTION 77
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 changed from FIFO to average cost to account for its raw materials and work in process inventories.
List A (Select one)
- A. Neither an accounting change nor an accounting error.
- B. Correction of an error in previously presented financial statements.
- C. Change in accounting principal.
- D. Change in accounting estimate.
Answer: C
Explanation:
Choice "a" is correct. Change in inventory pricing method from FIFO to average cost is a change in
accounting principle.
NEW QUESTION 78
Earnings per share data should be reported on the income statement for:
- A. Option D
- B. Option A
- C. Option B
- D. Option C
Answer: C
Explanation:
Choice "b" is correct. Yes - Yes.
Both the "extraordinary items" and "income before extraordinary items" should be shown with an earnings
per share number on the income statement.
NEW QUESTION 79
In 1990, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a
substantial increase in production costs caused when a major supplier's workers went on strike.
Which of these losses should be reported as an extraordinary item?
- A. Option D
- B. Option A
- C. Option B
- D. Option C
Answer: D
Explanation:
Choice "c" is correct. Yes - No. Rule: Losses arising from a company's first (and probably "last")
"anti-trust" action are unusual and extraordinary and should be reported as an extraordinary item. Losses
resulting from additional costs caused by a strike at a major supplier or even at one's own company are
not extraordinary and should be disclosed as a separate component of "income from continuing
operations."
NEW QUESTION 80
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