FINANCIAL-ACCOUNTING-AND-REPORTING Online Practice Questions and Answers

Correct Answer: C

Choice "c" is correct. A new statement from the FASB is issued only after a majority vote of the members of the FASB.

Choice "a" is incorrect. There is no necessity for the EITF to approve a discussion memorandum (presumably the question means a discussion memorandum of the FASB statement itself and not an EITF statement) before it is disseminated to the public.

Choice "b" is incorrect. There is no necessity for an exposure draft to be modified per public opinion before issuing the discussion memorandum (a question can be raised here as to "what" discussion memorandum"). Exposure drafts are quite/most often modified before they are issued as FASB statements, but they do not have to be. Whether they are or are not modified is a function of whether the FASB thinks they should be modified, partly due to the public comments that have been received.

Choice "d" is incorrect. There is no way to rescind a new FASB statement, although, in reality, a FASB

statement can be rescinded by the issuance of a new statement on the same subject. However, even if there was a way to rescind a new FASB statement, it would not be by a majority vote of the AICPA membership, but by a majority vote of the members of the FASB. Reporting Net Income

Correct Answer: D

Choice "d" is correct. Income tax-basis financial statements recognize events when taxable income or deductible expenses are recognized on the entity's tax return. Non-taxable income and non-deductible expenses are shown on the financial statement and included in the determination of income (and become M-1 adjustments to arrive at taxable income). Please Note: This question appeared in the releases for 1999 in FARE; however, it may also apply to OCBOA financial statements discussed in the Auditing textbook. The question did not apply well to any FARE CSO line item, so we included it here so that you could read the Explanation: and learn from it.

Correct Answer: A

Choice "a" is correct. Extraordinary items are reported as a component of net income, after income from continuing operations and discontinued operations. Choice "b" is incorrect. An extraordinary gain (or loss) only indirectly affects comprehensive income as a component of net income. Choice "c" is incorrect. Extraordinary items are reported net of tax after income from continuing operations and discontinued operations. Choice "d" is incorrect. Extraordinary items are reported net of tax after income from continuing operations and discontinued operations.

Correct Answer: C

Choice "c" is correct. $50,000. The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated. An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment. Choices "a", "b", and "d" are incorrect, per the above Explanation: .

Correct Answer: B

Choice "b" is correct. Actual hail damage must be reported. Since the hailstorms are frequent, the damage

is not considered an extraordinary gain/loss. Thus, the damages would be shown in continuing operations.

No separate disclosure is necessary since hail damage is a common occurrence.

Choice "a" is incorrect. Hailstorms are not unusual and infrequent so the loss could not be classified as

extraordinary. APB 30 para. 20 Choice "c" is incorrect. Actual hail damage must be reported. Estimated

hail damage may be probable but is not estimable; so it should not be included in income calculations.

Choice "d" is incorrect. Estimated hail damage may be probable but is not estimable; so it should not be

included in income calculations.

Correct Answer: A

Choice "a" is correct. The summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies. Choice "b" is incorrect. The future minimum lease payments should be disclosed, but not in the summary of significant accounting policies. Choice "c" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of significant accounting policies. Choice "d" is incorrect. The composition of sales by segment should be disclosed, but not in the summary of significant accounting policies.

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.

Correct Answer: A

Choice "a" is correct. $140,000.

Net income is the "bottom line" amount after all has been considered on the income statement. Without

showing all the line items as required for the income statement, the "bottom line" amount of $140,000 is

derived as follows:

Correct Answer: B

Choice "b" is correct. Part of continuing operations.

Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations.

The amount of the gain or loss is equal to the difference between the proceeds from the sale and the

carrying amount (FMV) of the fixed asset sold.

Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax.

Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations.

Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.

Correct Answer: A

Choice "a" is correct. $0. Note: The sale of the steel transportation component resulted in a loss from discontinued operations and is reported after "income from continuing operations." The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).