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NEW QUESTION # 13
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 B
- B. Option A
- C. Option D
- D. Option C
Answer: B
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 # 14
How should the effect of a change in accounting estimate be accounted for?
- A. In the period of change and future periods if the change affects both.
- B. As a prior period adjustment to beginning retained earnings.
- C. By reporting pro forma amounts for prior periods.
- D. By restating amounts reported in financial statements of prior periods.
Answer: A
Explanation:
Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future)
periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is
incorrect. Restating prior years' financial statements is required when comparative financial statements
are shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in
accounting principle. Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect
prior periods.
NEW QUESTION # 15
Which of the following should be disclosed in a summary of significant accounting policies?
- A. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
- B. Basis of profit recognition on long-term construction contracts.
- C. Depreciation expense.
- D. Composition of sales by segment.
Answer: B
Explanation:
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.
NEW QUESTION # 16
According to the FASB conceptual framework, what does the concept of reliability in financial reporting
include?
- A. Precision.
- B. Certainty.
- C. Neutrality.
- D. Effectiveness.
Answer: C
Explanation:
Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality, representational
faithfulness and verifiability.
Choices "a", "b", and "c" are incorrect, per the above.
NEW QUESTION # 17
The following costs were incurred by Griff Co., a manufacturer, during 1992: What amount of these costs
should be reported as general and administrative expenses for 1992?
- A. $635,000
- B. $260,000
- C. $550,000
- D. $810,000
Answer: B
Explanation:
Choice "a" is correct. $260,000. General and administrative
"Freight-in" is part of "cost of goods sold."
"Freight-out" is a "selling" expense.
Sales representative salaries is a selling expense.
NEW QUESTION # 18
Which of the following qualifies as an operating segment?
- A. North American segment, whose assets are 12% of the company's assets of all segments, and
management reports to the chief operating officer. - B. Eastern Europe segment, which reports its results directly to the manager of the European division,
and has 20% of the company's assets, 12% of revenues, and 11% of profits. - C. South American segment, whose results of operations are reported directly to the chief operating
officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits. - D. Corporate headquarters, which oversees $1 billion in sales for the entire company.
Answer: A
Explanation:
Choice "b" is correct. Assets of the North American segment exceed 10% combined assets of all
operating segments.
Choice "a" is incorrect. Corporate headquarters in not considered a segment.
Choice "c" is incorrect. The South American segment does not meet any of the 10% minimums (Revenue,
P&L or Assets).
Choice "d" is incorrect. Eastern Europe segment does not report to the chief operating officer.
NEW QUESTION # 19
Terra Co.'s total revenues from its three operating segments were as follows:
Which operating segment(s) is (are) deemed to be reportable segments?
- A. None.
- B. Lion, Monk, and Nevi.
- C. Lion only.
- D. Lion and Monk only.
Answer: B
Explanation:
Choice "d" is correct. A reportable operating segment is one having 10% of all revenue, including revenue
from unaffiliated sales and from intersegment sales:
Lion's revenue percentage is 66.7% [$100,000/150,000].
Monk's revenue percentage is 17.3% [$26,000/150,000].
Nevi's revenue percentage is 16% [$24,000/150,000].
Thus, all three segments meet the 10% of total revenues test and are reportable as operating segments.
SFAS 14 para. 10 and 15 as amended by SFAS 131
Choice "a" is incorrect. All segments with revenue percentages exceeding 10% of total revenues are
reportable operating segments.
Choice "b" is incorrect. Lion is not the only segment with revenue percentages exceeding 10% of total
revenues.
Choice "c" is incorrect. Nevi has a revenue percentage exceeding 10% of total revenues.
NEW QUESTION # 20
According to the FASB conceptual framework, comprehensive income includes which of the following?
- A. Option D
- B. Option B
- C. Option C
- D. Option A
Answer: B
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 # 21
The following items were among those that were reported on Lee Co.'s income statement for the year
ended December 31, 1989:
The office space is used equally by Lee's sales and accounting departments. What amount of the above
listed items should be classified as general and administrative expenses in Lee's multiple-step income
statement?
- A. $410,000
- B. $325,000
- C. $500,000
- D. $290,000
Answer: D
Explanation:
Note: 1/2 of the office space of $240,000 was used by the sales department, which should be allocated to
"selling expenses" (not general and administrative).
Choice "a" is correct. $290,000.
NEW QUESTION # 22
FASB's conceptual framework explains both financial and physical capital maintenance concepts. Which
capital maintenance concept is applied to currently reported net income, and which is applied to
comprehensive income?
- A. Option B
- B. Option D
- C. Option C
- D. Option A
Answer: C
Explanation:
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.
NEW QUESTION # 23
In 1992, hail damaged several of Toncan Co.'s vans. Hailstorms had frequently inflicted similar damage to
Toncan's vans. Over the years, Toncan had saved money by not buying hail insurance and either paying
for repairs, or selling damaged vans and then replacing them. In 1992, the damaged vans were sold for
less than their carrying amount. How should the hail damage cost be reported in Toncan's 1992 financial
statements?
- A. The expected average hail damage loss in continuing operations, with no separate disclosure.
- B. The actual 1992 hail damage loss in continuing operations, with no separate disclosure.
- C. The actual 1992 hail damage loss as an extraordinary loss, net of income taxes.
- D. The expected average hail damage loss in continuing operations, with separate disclosure.
Answer: B
Explanation:
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.
NEW QUESTION # 24
According to the FASB conceptual framework, which of the following attributes would not be used to
measure inventory?
- A. Net realizable value.
- B. Historical cost.
- C. Present value of future cash flows.
- D. Replacement cost.
Answer: C
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 # 25
According to the FASB conceptual framework, the process of reporting an item in the financial statements
of an entity is:
- A. Allocation.
- B. Realization.
- C. Matching.
- D. Recognition.
Answer: D
Explanation:
Choice "d" is correct. Recognition is the process of recording an item in the financial statements of an
entity. SFAC 5 para. 6 Choice "a" is incorrect. Allocation is the accounting process of assigning or
distributing an amount according to a plan or a formulA. SFAC 6 para. 142 Choice "b" is incorrect.
Matching of costs and revenues is simultaneous or combined recognition of the revenues and expenses
that result directly and jointly from the same transactions or other events. SFAC 6 para. 146 Choice "c" is
incorrect. Realization is the process of converting noncash resources and rights into money. SFAC 6 para.
1 43
NEW QUESTION # 26
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting
principle. Which of the following should the auditor consider the most authoritative?
- A. AICPA Technical Practice Aids.
- B. AICPA Accounting Interpretations.
- C. FASB Statements of Financial Accounting Concepts.
- D. FASB Technical Bulletins.
Answer: D
Explanation:
Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB
Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions,
and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate
guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting
Guides, AICPA Statements of Position, and FASB Technical Bulletins. Choice "b" is incorrect. AICPA
Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the
fourth floor. Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice
Aids are among the least authoritative of accounting literature (fifth floor).
NEW QUESTION # 27
According to the FASB conceptual framework, which of the following statements conforms to the
realization concept?
- A. Depreciated equipment was sold in exchange for a note receivable.
- B. Equipment depreciation was assigned to a production department and then to product unit costs.
- C. Product unit costs were assigned to cost of goods sold when the units were sold.
- D. Cash was collected on accounts receivable.
Answer: A
Explanation:
Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to
cash. SFAC 5 para. 83.
Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating
overhead. There is no realization associated with the assignment.
Choice "c" is incorrect. The realization concept is integral to accounting for revenues and expenses and is
not connected to collection of receivables.
Choice "d" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an
example of matching. There is no realization associated with this assignment.
NEW QUESTION # 28
Deficits accumulated during the development stage of a company should be:
- A. Capitalized and written off in the first year of principal operations.
- B. Reported as a part of stockholders' equity.
- C. Capitalized and amortized over a five year period beginning when principal operations commence.
- D. Reported as organization costs.
Answer: B
Explanation:
Choice "b" is correct. Deficits accumulated during the development stage of a company should be
reported as a part of stockholders' equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional
disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales &
expenses (part of I/S), cumulative statement of cash flows and supplementary "shareholders equity."
Choices "a", "c", and "d" are incorrect, per the rule above.
NEW QUESTION # 29
On November 1, 20X2, Smith Co. contracted to dispose of an industry segment. Throughout 20X2 the
segment had operating losses. These losses were expected to continue until the segment's disposition.
If a loss is projected on final disposition, how much of the operating losses should be included in the loss
from discontinued operations reported in Smith's 20X2 income statement?
I. Operating losses for the period January 1 to October 31, 20X2.
II. Operating losses for the period November 1 to December 31, 20X2.
III. Estimated operating losses for the period January 1 to February 28, 20X3.
- A. II and III only.
- B. I and II only.
- C. II only.
- D. I and III only.
Answer: B
Explanation:
Choice "d" is correct. The operating losses to be included in Smith's 20X2 income statement would be the
total 20X2 operating losses, regardless of whether those losses occurred before or after the date the
decision to dispose of the component was made, and not any 20X3 operating losses. Projected operating
losses are not anticipated and accrued. Choice "a" is incorrect. The operating losses to be included in
Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those
losses occurred before or after the date the decision to dispose of the component was made, and not any
2 0X3 operating losses. Choice "b" is incorrect. The operating losses to be included in Smith's 20X2
income statement would be the total 20X2 operating losses, regardless of whether those losses occurred
before or after the date the decision to dispose of the component was made, and not any 20X3 operating
losses. Choice "c" is incorrect. The operating losses to be included in Smith's 20X2 income statement
would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the
date the decision to dispose of the component was made, and not any 20X3 operating losses.
NEW QUESTION # 30
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