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

Correct Answer: D

Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes.

GAAP need not be followed for (internal) managerial accounting purposes.

Choice "a" is incorrect. Financial accounting is generally more precise.

Choice "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on

reporting past results. Choice "c" is incorrect. The emphasis of financial accounting is providing useful

information to financial statement users (including the characteristic of relevance), while the emphasis of

managerial accounting is providing timely information to management decision makers.

Correct Answer: C

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.

Correct Answer: A

Choice "a" is correct. The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings. Choice "b" is incorrect. Cash basis reporting is not an accounting principle under accrual accounting principles. Thus, the change from cash basis is not reported as a change in accounting principle. In addition, changes in accounting principle are not prior period adjustments; instead, they are treated retrospectively. Choices "c" and "d" are incorrect. Correction of prior period errors has no effect on the current year's income statement.

Correct Answer: A

Choice "a" is correct. The earliest period that a component of an entity can be reported in discontinued operations is when the component meets the following "held for sale" criteria:

1.

Management commits to a plan to sell the component.

2.

The component is available for immediate sale in its present condition.

3.

An active program to locate a buyer has been initiated.

4.

The sale of the component is probable and the sale is expected to be completed within one year.

5.

The sale of the component is being actively marketed.

6.

It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn. Choices "b", "c", and "d" are incorrect, per the Explanation: above.

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. Interim period tax expense is the estimated annual effective tax rate (25% in this case) applied to the year-to-date income before taxes minus the tax expense recognized in previous interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% ?$200,000 = $50,000. FIN 18, para. 16 Choice "a" is incorrect. Income tax expense is reported in interim income statements. Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used to calculate income tax expense for interim statements. Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used to calculate income tax expense for interim statements.

Correct Answer: A

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."

Correct Answer: B

Choice "b" is correct. Sales to other segments would be used in determining a segment's operating

income.

Rule: Equity in net income of another company, general corporate expenses, interest, income tax expense,

and gains or losses on discontinued operations are all not included in segment profit unless they are

included in the determination of segment profit reported to the "Chief Operating Decision Maker."

Correct Answer: A

Choice "b" is correct. Only publicly-traded enterprises are required to report on business segments. Choices "a", "c", and "d" are incorrect, per the Explanation: above.

Correct Answer: D

Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities

resulting from the entity's ongoing major operations, not from "incidental" operations.

Choice "d" is correct. An entity's revenue may result from a decrease in a liability from primary operations.

Correct Answer: C

Rule: Actual and estimated expenditures benefiting all interim periods equally should be expensed ratably throughout the year.

Choice "c" is correct. $72,500 total expense for the three months ended June 30, 1992.

Correct Answer: C

Choice "c" is correct. Change from the cash method to the accrual method is a correction of an error in previously presented financial statements.

Correct Answer: B

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.

Correct Answer: D

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 and 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.

Correct Answer: B

Choice "B" is correct. The equity method of accounting is applied retroactively when the investor has acquired 20% ownership. Prior to acquiring the ability to influence the investee, the cost method is proper. The retroactive restatement approach does not mean that this change is the correction of an error (which is now treated retroactively), a change in accounting principle (which is now treated retrospectively), or a change in accounting entity (which is now treated retrospectively). It just means that retroactive restatement is the proper treatment.