FAR Exam Brain Dumps - Study Notes and Theory [Oct-2023]
100% Guaranteed Results FAR Unlimited 165 Questions
NEW QUESTION # 96
According to the FASB conceptual framework, the process of reporting an item in the financial statements
of an entity is:
- A. Matching.
- B. Allocation.
- C. Recognition.
- D. Realization.
Answer: C
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 # 97
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 C
- B. Option A
- C. Option D
- D. Option B
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 # 98
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,
1 991, were $40,000,000.
Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of
Cott's total revenues and total assets as follows:
Which of these business segments are deemed to be reportable segments?
- A. Ebon, Fair, Gel, and Hak.
- B. Ebon, Fair, and Gel only.
- C. Ebon only.
- D. Ebon and Fair only.
Answer: A
Explanation:
Rule: A segment must be at least 10% of:
1 . Combined revenues (whether intersegment or unaffiliated customers), or
2 . Operating income (of all segments not having an operating loss), or
3 . Identifiable assets.
Choice "d" is correct. Ebon, Fair, Gel, and Hak, since all four companies meet at least one of the criteria.
NEW QUESTION # 99
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
During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the
period January 1, 1992, through January 1, 1994.
List A (Select one)
- A. Correction of an error in previously presented financial statements.
- B. Change in accounting estimate.
- C. Neither an accounting change nor an accounting error.
- D. Change in accounting principal.
Answer: A
Explanation:
Choice "c" is correct. Expensing insurance premiums when paid (rather than allocating them to the
periods benefited) is a correction of an error in previously presented financial statements.
NEW QUESTION # 100
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 estimate.
- B. Change in accounting principal.
- C. Neither an accounting change nor an accounting error.
- D. Correction of an error in previously presented financial statements.
Answer: B
Explanation:
Choice "a" is correct. Switching from the completed-contract method of accounting to the percentage-of
completion method is a "change in accounting principle."
NEW QUESTION # 101
According to the FASB conceptual framework, predictive value is an ingredient of:
- A. Option D
- B. Option C
- C. Option A
- D. Option B
Answer: A
Explanation:
Choice "d" is correct. Yes - No. Predictive value is an ingredient of relevance but not of reliability.
Memorize:
Bud's relevance to "PFT."
Bud's reliability to "VRN."
NEW QUESTION # 102
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. FASB Statements of Financial Accounting Concepts.
- B. AICPA Technical Practice Aids.
- C. FASB Technical Bulletins.
- D. AICPA Accounting Interpretations.
Answer: C
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 # 103
On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to
discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would
be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.
Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its
carrying amount in 20X3. Maxy's effective tax rate is 30%.
In its 20X2 income statement, what amount should Maxy report as loss from discontinued operations?
- A. $1,190,000
- B. $1,700,000
- C. $980,000
- D. $1,400,000
Answer: A
Explanation:
Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value,
there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000
impairment loss plus the $1,400,000 20X2 operating loss would be recognized in 20X2 net of tax. The
total loss would be $1,700,000 * 70% (100% - 30%) or $1,190,000. Choice "a" is incorrect. It includes the
2 0X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2
operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but not
the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax. Choice
"d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.
NEW QUESTION # 104
On January 1, 1991, Brecon Co. installed cabinets to display its merchandise in customers' stores.
Brecon expects to use these cabinets for five years. Brecon's 1991 multi-step income statement should
include:
- A. One-fifth of the cabinet costs in selling, general, and administrative expenses.
- B. All of the cabinet costs in cost of goods sold.
- C. One-fifth of the cabinet costs in cost of goods sold.
- D. All of the cabinet costs in selling, general, and administrative expenses.
Answer: A
Explanation:
Choice "b" is correct. One-fifth of the cabinet costs (depreciation expense) should be included in selling,
general, and administrative expenses for 1991.
Choice "a" is incorrect. Merchandise display cabinets in stores relate to selling activities, not to the
purchase cost of goods sold.
Choices "c" and "d" are incorrect. Merchandise display cabinets are fixed assets whose cost should be
allocated systematically over their five-year useful life.
NEW QUESTION # 105
Which of the following statements is incorrect regarding the inputs that can be used to measure fair
value?
I. Level I inputs are the most reliable fair value measurements and Level III inputs are the least reliable.
II. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities.
III. A fair value measurement based on management assumptions only (no market data) would not be
acceptable per GAAP.
IV. The level in the fair value hierarchy of a fair value measurement is determined by the level of the
highest level significant input.
- A. I, II, IV.
- B. II, III, IV.
- C. I only.
- D. I, II, III, IV.
Answer: B
Explanation:
Choice "c" is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is
incorrect because Level I measurements are quoted prices in active markets for identical assets or
liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs. Statement
III is incorrect because a fair value measurement based on management assumptions only is a Level III
measurement and is acceptable when there are no Level I or Level II inputs or when undo cost or effort is
required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value
hierarchy of a fair value measurement is determined by the level of the lowest level significant input.
NEW QUESTION # 106
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. Lion and Monk only.
- B. Lion, Monk, and Nevi.
- C. None.
- D. Lion 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 # 107
According to the FASB conceptual framework, an entity's revenue may result from:
- A. A decrease in an asset from primary operations.
- B. A decrease in a liability from primary operations.
- C. An increase in an asset from incidental transactions.
- D. An increase in a liability from incidental transactions.
Answer: B
Explanation:
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.
NEW QUESTION # 108
What is the purpose of information presented in notes to the financial statements?
- A. To present management's responses to auditor comments.
- B. To provide disclosures required by generally accepted accounting principles.
- C. To provide recognition of amounts not included in the totals of the financial statements.
- D. To correct improper presentation in the financial statements.
Answer: B
Explanation:
Choice "a" is correct. Information presented in notes to the financial statements have the purpose of
providing disclosures required by generally accepted accounting principles. SFAC 5 para. 7
NEW QUESTION # 109
A transaction that is unusual, but not infrequent, should be reported separately as a(an):
- A. Extraordinary item, net of applicable income taxes.
- B. Component of income from continuing operations, but not net of applicable income taxes.
- C. Extraordinary item, but not net of applicable income taxes.
- D. Component of income from continuing operations, net of applicable income taxes.
Answer: B
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.
NEW QUESTION # 110
According to the FASB conceptual framework, the usefulness of providing information in financial
statements is subject to the constraint of:
- A. Representational faithfulness.
- B. Consistency.
- C. Reliability.
- D. Cost-benefit.
Answer: D
Explanation:
Choice "b" is correct. The pervasive constraint on providing information in financial statements is that the
cost should be outweighed by the benefit to be derived from providing the information. SFAC 1 para. 23,
SFAC 2 para. 133 Choice "a" is incorrect. Consistency is an underlying concept for financial statements
(and a secondary quality of accounting information), but it is not a constraint on providing information.
SFAC 2 para. 120 Choice "c" is incorrect. Reliability is a primary quality of accounting information and an
underlying concept for financial statements, but it is not a constraint on providing information. SFAC 2
para. 58 Choice "d" is incorrect. Representational faithfulness is an underlying concept for financial
statements (as an element of reliability), but it is not a constraint on providing information. SFAC 2 para.
NEW QUESTION # 111
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 B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production
breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Cumulative effect approach.
- C. Prospective approach.
Answer: C
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior
periods, not retained earnings.
NEW QUESTION # 112
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 B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
Quo sells extended service contracts on its products. Because related services are performed over
several years, in 1993 Quo changed from the cash method to the accrual method of recognizing income
from these service contracts.
List B (Select one)
- A. Cumulative effect approach.
- B. Prospective approach.
- C. Retroactive or retrospective restatement approach.
Answer: C
Explanation:
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.
NEW QUESTION # 113
The effect of a change in accounting principle that is inseparable from the effect of a change in accounting
estimate should be reported:
- A. By restating the financial statements of all prior periods presented.
- B. As a correction of an error.
- C. As a component of income from continuing operations, in the period of change and future periods if the
change affects both. - D. As a separate disclosure after income from continuing operations, in the period of change and future
periods if the change affects both.
Answer: C
Explanation:
Choice "c" is correct. A change in accounting principle that is inseparable from a change in accounting
estimate should now be reported as a change in estimate and thus as a component of income from
continuing operations, in the period of change and future periods if the change affects both. Distinguishing
between a change in accounting principle and a change in accounting estimate is sometimes difficult. For
example, a company may change from deferring and amortizing a cost to recording it as an expense
when incurred because future benefits of the cost have become doubtful. The new accounting method is
adopted, therefore, in partial or complete recognition of the change in estimated future benefits. The effect
of the change in principle is inseparable from the effect of the change in estimate. Changes of this type
are often related to the continuing process of obtaining additional information and revising estimates and
are therefore considered as changes in estimates. Choice "a" is incorrect. Restating the financial
statements of all prior periods would be done in the case of prior period adjustments (corrections of
errors), changes in accounting principle (retrospective application), and changes in accounting entity
(retrospective application). Choice "b" is incorrect. Correction of an error would be treated as a prior
period adjustment. Choice "d" is incorrect. Separate disclosure after income from continuing operations
would be done in the case of extraordinary items or discontinued operations. However, this disclosure
would not be made "in the period of change and future periods if the change affects both" but only in the
period of the extraordinary item or discontinued operation.
NEW QUESTION # 114
In general, an enterprise preparing interim financial statements should:
- A. Disregard permanent decreases in the market value of its inventory.
- B. Defer recognition of seasonal revenue.
- C. Use the same accounting principles followed in preparing its latest annual financial statements.
- D. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred.
Answer: C
Explanation:
Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual
report of an enterprise should be applied to interim financial statements of the current year, unless a
change in accounting principle is adopted in the current year.
Choices "a", "b", and "c" are incorrect, per above.
NEW QUESTION # 115
During the first quarter of 1993, Tech Co. had income before taxes of $200,000, and its effective income
tax rate was 15%. Tech's 1992 effective annual income tax rate was 30%, but Tech expects its 1993
effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of
income tax expense should Tech report?
- A. $60,000
- B. $0
- C. $30,000
- D. $50,000
Answer: D
Explanation:
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.
NEW QUESTION # 116
Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the
proceeds over the carrying amount of the warehouse sold should be reported as a(an):
- A. Reduction of the cost of the new warehouse.
- B. Part of continuing operations.
- C. Gain from discontinued operations, net of income taxes.
- D. Extraordinary gain, net of income taxes.
Answer: B
Explanation:
Choice "b" is correct. Part of continuing operations.
Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations.
The amount of the gain or loss is equal to the difference between the proceeds from the sale and the
carrying amount (FMV) of the fixed asset sold.
Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax.
Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations.
Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.
NEW QUESTION # 117
Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as
follows: Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and
recurring part of Coffey's operations. Coffey prepares a multiple-step income statement for 1988.
Income from operations before income tax is:
- A. $190,000
- B. $230,000
- C. $200,000
- D. $240,000
Answer: D
Explanation:
Choice "d" is correct. $240,000 The gain on debt extinguishment does not meet the unusual and
infrequent criteria of APB 30 to be treated as an extraordinary item (per SFAS No. 145, extinguishments
of debt are no longer automatically extraordinary), so it is included as part of income from continuing
operations.
NEW QUESTION # 118
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