Question 1

Under FASB Statement of Financial Accounting Concepts #5, which of the following items would
cause earnings to differ from comprehensive income for an enterprise in an industry not having
specialized accounting principles?

Accepted Answer

A

Explanation: 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.

Question 2

Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to footnote disclosures:

Accepted Answer

A

Explanation: 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."

Question 3

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 manufactures heavy equipment to customer specifications on a contract basis. On the basis that
it is preferable, accounting for these long-term contracts was switched from the completed-contract
method to the percentage-of-completion method.
List A (Select one)

Accepted Answer

A

Explanation: Choice "a" is correct. Switching from the completed-contract method of accounting to the percentage-ofcompletion method is a "change in accounting principle."

Question 4

In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in
applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should
be reported in Brighton's financial statements as a:

Accepted Answer

A

Explanation: 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.

Question 5

During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its
effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year
was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%.
The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what
amount of income tax expense should Worth report?

Accepted Answer

B

Explanation: 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

Question 6

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 manufactures heavy equipment to customer specifications on a contract basis. On the basis that
it is preferable, accounting for these long-term contracts was switched from the completed-contract
method to the percentage-of-completion method.
List A (Select one)

Accepted Answer

B

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

Question 7

What are the Statements of Financial Accounting Concepts intended to establish?

Accepted Answer

C

Explanation: 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.

Question 8

Which of the following is true regarding the comparison of managerial to financial accounting?

Accepted Answer

D

Explanation: 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.

Question 9

On December 2, 20X1, Flint Corp.'s board of directors voted to discontinue operations of its frozen
food division and to sell the division's assets on the open market as soon as possible. The division
reported net operating losses of $20,000 in December and $30,000 in January. On February 26, 20X2,
sale of the division's assets resulted in a gain of $90,000. Assuming that the frozen foods division
qualifies as a component of the business and ignoring income taxes, what amount of gain/loss from
discontinued operations should Flint recognize in its income statement for 20X2?

Accepted Answer

C

Explanation: 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.

Question 10

Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of
its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third
quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience
any other declines in market value during the fiscal year. What amounts of loss and/or gain should
Wilson report in its interim financial statements for the first and third quarters?
CPA-Financial practice exam questions

Accepted Answer

A

Explanation: 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.

Question 11

For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated: https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-FINANCIAL/page_72_img_1.jpg

Accepted Answer

D

Explanation: Choice "d" is correct. Yes - Yes. The effective income tax rates for operations for the full year should reflect anticipated foreign tax rates and available tax planning alternatives. In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.

Question 12

Arpco, Inc., a for-profit provider of healthcare services, recently purchased two smaller companies
and is researching accounting issues arising from the two business combinations. Which of the
following accounting pronouncements are the most authoritative?

Accepted Answer

D

Explanation: Choice "d" is correct. Since Arpco is a for-profit provider of healthcare services, it is covered under normal GAAP. Thus, the most authoritative pronouncements are the FASB Statements of Financial Accounting Standards (SFAS). Choice "a" is incorrect. AICPA Statements of Position are not the most authoritative pronouncement for almost anything (other than for some issues that only they cover). They are normally "merely" the opinion of the AICPA. Choice "b" is incorrect. AICPA Industry and Audit Guides are not the most authoritative pronouncement for almost anything (other than for some issues that only they cover). Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are not authoritative pronouncements except where they have been incorporated by reference into an SFAS. They are the basis on which SFAS can be constructed.

Question 13

On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and
no salvage. The machine was depreciated by the double declining balance method for both financial
statement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method for
financial statement reporting but not for income tax reporting. Accumulated depreciation at
December 31, 20X5, was $560,000. If the straight-line method had been used, the accumulated
depreciation at December 31, 20X5, would have been $420,000. Pell's enacted income tax rate for
20X6 and thereafter is 30%. The amount shown in the 20X6 income statement for the cumulative
effect of changing to the straight-line method should be:

Accepted Answer

D

Explanation: Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes 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. And, certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a", "b", and "c" are incorrect, per the above Explanation: .

Question 14

If a company is not presenting comparative financial statements, the correction of an error in the
financial statements of a prior period should be reported, net of applicable income taxes, in the
current:

Accepted Answer

B

Explanation: Choice "b" is correct. The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance. Choice "a" is incorrect. The adjustment is before net income, not after net income. Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not affect the income statement.

Question 15

According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is:

Accepted Answer

A

Explanation: Choice "a" is correct. Recognition. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is recognition.

Free AICPA CPA-Financial Actual Exam Questions