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AICPA FAR Exam Questions

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Financial Accounting and Reporting

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AICPA FAR Sample Questions – Free Practice Test & Real Exam Prep

Question #1

On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and nosalvage. The machine was depreciated by the double declining balance method for both financialstatement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method forfinancial 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 atDecember 31, 20X5, would have been $420,000. PeII's enacted income tax rate for 20X6 and thereafter is30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to thestraight-line method should be: 

  • A. $98,000 debit.  
  • B. $98,000 credit.  
  • C. $140,000 credit.  
  • D. o. $0.  
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 refilected on the income statement any more. Choices "a",
and "c" are incorrect, per the above
Explanation: . 
Question #2

During 1990, Fuqua Steel Co. had the following unusual financial events occur:. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain.Fuqua has frequently retired bonds early when interest rates declined significantly.. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourthsimilar loss sustained in a 5-year period at that location.. A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.This was Fuqua's first divestiture of one of its operating segments.Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in1990? 

  • A. $0  
  • B. $5,000  
  • C. $(90,000)  
  • D. $(350,000)  
Answer: A 

Explanation:
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 "unusuaI 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). 
Question #3

During 1990, Fuqua Steel Co. had the following unusual financial events occur:. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain.Fuqua has frequently retired bonds early when interest rates declined significantly.. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourthsimilar loss sustained in a 5-year period at that location.. A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.This was Fuqua's first divestiture of one of its operating segments.Before income taxes, what amount of gain (loss) should be reported separately as a component ofincome from continuing operations in 1990? 

  • A. $260,000  
  • B. $5,000  
  • C. $(255,000)  
  • D. $(350,000)  
Answer: B  

Explanation:
Choice "b" is correct. $5,000.
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). 
Question #4

A transaction that is unusual, but not infrequent, should be reported separately as a(an):  

  • A. Extraordinary item, net of applicable income taxes. 
  • B. Extraordinary item, but not net of applicable income taxes.  
  • C. Component of income from continuing operations, net of applicable income taxes.  
  • D. Component of income from continuing operations, but not net of applicable income taxes.  
Answer: D  

Explanation:
Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a
component of continuing operations, (gross) but not net of applicable income taxes.
Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent."
Choice "c" is incorrect, per "d" above. 
Question #5

YIV, Inc. is a multidMsional corporation, which has both intersegment sales and sales to unaffiliated customers. YIV should report segment financial information for each dMsion meeting which of the following criteria?

  • A. Segment operating profit or loss is 10% or more of consolidated profit or loss.
  • B. Segment operating profit or loss is 10% or more of combined operating profit or loss of all company segments.
  • C. Segment revenue is 10% or more of combined revenue of all the company segments.
  • D. Segment revenue is 10% or more of consolidated revenue. 
Answer: C
Explanation:
Choice "c" is correct. Segment revenue is 10% or more of combined revenue of all the company segments.
Rule: To be significant enough to report on, a segment must be atleast 10% of:
1. Combined revenues (whether intersegment or affiliated customers) or
2. Operating profit (of all segments not having an operating loss), or
3. Identifiable assets.
Choice "a" is incorrect. Rule is 10% of "operating profit," not "consolidated profit."
Choice "b" is incorrect. Segments with "operating Iosses" are not combined with those having "operating profits" in determining a segment.
Choice "d" is incorrect. "Consolidated revenue" would not include "intersegment revenue." Rule is "combined revenue," not "consolidated revenue." 
Question #6

Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31, 1991, were $40,000,000. In its 1991 financial statements, Grum should disclose major customer data if sales to any single customer amount to atleast:

  • A. $300,000
  • B. $1,500,000
  • C. $4,000,000
  • D. $5,000,000 
Answer: D
Explanation:
Choice "d" is correct. $5,000,000 (10% x $50,000,000 revenue). If revenue from a single external customer is 10% or more of total revenue, then the company should disclose this fact, the total amount of revenue from the customer, and the segment or segments reporting the revenues. The identity of the customer need not be disclosed. 
Question #7

Deficits accumulated during the development stage of a company should be:

  • A. Reported as organization costs.. 
  • B. Reported as a part of stockhoIders' equity.
  • C. Capitalized and written off in the first year of principal operations.
  • D. Capitalized and amortized over a five year period beginning when principal operations commence
Answer: B
Explanation:
Choice "b" is correct. Deficits accumulated during the development stage of a company should be reported as a part of stockhoIders' 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", and "d" are incorrect, per the rule above. 
Question #8

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

  • A. Only.
  • B. And expense recognition principles only.
  • C. And revenue recognition principles only.
  • D. And revenue and expense recognition principles. 
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 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 #9

A statement of cash flows for a development stage enterprise: 

  • A. Is the same as that of an established operating enterprise and, in addition, shows cumulative amounts from the enterprise's inception.
  • B. Shows only cumulative amounts from the enterprise's inception.
  • C. Is the same as that of an established operating enterprise, but does not show cumulative amounts from the enterprise's inception.
  • D. Is not presented. 
Answer: A
Explanation:
Rule: Development stage enterprises should present financial statements in accordance with
GAAP and make additional disclosures such as cumulative amounts from inception for: net losses,
deficits, sales, expenses, and cash flows and supplementary data.
Choice "a" is correct, per the rule shown above.
Choice "b" is incorrect. Current amounts are shown as well as cumulative amounts.
Choice "c" is incorrect. Cumulative amounts from inception are shown.
Choice "d" is incorrect. A statement of cash flows is required. 
Question #10

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) 

  • A. Change in accounting principal.
  • B. Change in accounting estimate.
  • C. Correction of an error in previously presented financial statements. 
  • D. Neither an accounting change nor an accounting error. 
Answer: A
Explanation:
Choice "a" is correct. Switching from the completed-contract method of accounting to the percentage-of
completion method is a "change in accounting principIe." 
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