CPA-FINANCIAL Practice Questions

Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale

would cause earnings to differ from comprehensive income for an enterprise in an industry not

having specialized accounting principles.

Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and

other non-owner changes in equity (such as changes in market value of marketable securities

available for sale) that are included in comprehensive income for a period.

Choice "a" is correct. Financial reporting by a development stage enterprise differs from financial

reporting for an established operating enterprise in regard to (more extensive) footnote disclosures

only.

Choices "b", "c", and "d" are incorrect. Revenue and expense recognition principles are the same.

Rule: Development stage enterprises should present financial statements in accordance with GAAP

and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity),

cumulative sales and expenses (as part of the income statement), cumulative statement of cash

flows and supplementary "shareholders equity."

Choice "a" is correct. Switching from the completed-contract method of accounting to the

percentage-ofcompletion method is a "change in accounting principle."

Choice "a" is correct. A change in the composition of the elements of cost such as changing from the

individual item approach to the aggregate approach in applying the lower of FIFO cost or market to

inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative

effect of the change in accounting principle should now be shown on the retained earnings

statement as an adjustment to the beginning balance of retained earnings, in what is called

retrospective application.

Choices "b", "c", and "d" are incorrect. The cumulative effect of a change in accounting principle is

now reported on the retained earnings statement, not the income statement. Most of these types of

changes (changes in accounting principle) used to be reported on the income statement. SFAS No.

154 changed that.

Choice "b" is correct. When preparing interim financial statements, income tax expense is estimated

each quarter using the effective tax rate expected to apply to the entire year.

Choice "a" is incorrect. Worth should use the effective annual tax rate, not the effective tax rate for

the quarter only.

Choice "c" is incorrect. Worth should use the effective annual tax rate expected to apply to the

current year, not the prior year's effective tax rate.

Choice "d" is incorrect. Worth should use the effective annual tax rate, not the statutory tax rate.

Segment Reporting

Choice "b" is correct. Change in lives of fixed assets is a change in accounting estimate.

Choice "c" is correct. Statements of Financial Accounting Concepts are intended to establish the

objectives and concepts that the Financial Accounting Standards Board will use in developing

standards of financial accounting and reporting. SFAC 1 para. 3

Choice "a" is incorrect. The Statements of Financial Accounting Concepts do not specify financial

accounting standards prescribing accounting procedures or practices. SFAC 1 para. 3

Choice "b" is incorrect. Auditing standards develop the meaning of "Present fairly in accordance with

generally accepted accounting principles."

Choice "d" is incorrect. The hierarchy of sources of generally accepted accounting principles is

determined by GAAP.

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.

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.

Choice "a" is correct. Temporary market declines in inventory need not be recognized at interim

when a turn-around can reasonably be expected to occur before the end of the fiscal year.