1E - Financial Statements of Employee Benefit Plans && 1F - Special Purpose Frameworks

Question 1

The statement of net assets available for benefits of an employee benefit plan must include the following, except:

net assets available for benefits.

total liabilities.

net assets reflecting all investments at cost.

total assets.

Answer 1

net assets reflecting all investments at cost.

The statement of net assets available for benefits of the plan must include the following:

• Total assets
• Total liabilities
• Net assets reflecting all investments at fair value
• Net assets available for benefits

Question 2

The statement of net assets available for benefits of the plan must include the following:

1. Total ___
2. Total ___
3. Net assets reflecting all investments at ___ ___
4. Net assets available for ___

Answer 2

Assets

Liabilities

Fair Value

Benefits

Question 3

The statement of changes in net assets available for benefits of the plan must include the following:

1. The change in fair value (or estimated fair value) of each significant type of ____,
2. ___income
3. Contributions from ___
4. Contributions from ___
5. Contributions from other ___ ___
6. ___paid to participants
7. Payments to ___entities to purchase contracts that are excluded from plan assets
8. ___expenses

Answer 3

investment

Income

employers

participants

identified sources

Benefits

insurance

Administrative

Question 4

At the end of year 1, a defined benefit pension plan reported net assets available for benefits of $650,000. During year 2, the following items were recorded:

Investment income $ 300,000
Contributions 1,350,000
Administrative expenses 150,000
Benefits paid directly to participants 900,000

What amount should the plan report as year-end net assets available for benefits in the year 2 statement of changes in net assets available for benefits?

$2,300,000

$1,250,000

$1,650,000

$600,000

Answer 4

$1,250,000

The year-end net assets can be found by deducting payouts and expenses and adding contributions, income, and other additions to the beginning net asset balance as follows:

Beginning net assets $ 650,000
Add: Contributions 1,350,000
Add: Investment income 300,000
Less: Benefits paid (900,000)
Less: Administrative expenses (150,000)
Ending net assets $1,250,000

Question 5

What are the two required financial statements of a defined contribution retirement plan?

A statement of net assets available for benefits of the plan and a statement of changes in fiduciary net assets

A statement of fiduciary net assets and a statement of changes in fiduciary net assets

A statement of financial position and a statement of activities

A statement of net assets available for benefits of the plan and a statement of changes in net assets available for benefits

Answer 5

A statement of net assets available for benefits of the plan and a statement of changes in net assets available for benefits

Employee benefit plans and trusts, such as defined contribution retirement plans and defined benefit retirement plans, must prepare two financial statements according to GAAP that are separate from the statements prepared by the companies that offer them: (1) a statement of net assets available for benefits of the plan as of the end of the plan year and (2) a statement of changes in net assets available for benefits of the plan for the year then ended. These statements are filed separately from the consolidated financial statements of their companies.

Question 6

Employee benefit plans and trusts must prepare two financial statements according to GAAP:

1. A statement of net assets ___for ___of the plan as of the end of the plan year
2. A statement of ___in net assets available for benefits of the plan for the year then ended

Answer 6

Available for Benefits

changes

Question 7

Which of the following would be reported as a decrease in the statement of changes in net assets available for benefits of an employee benefits plan?

Contributions from participants, including those transmitted by the sponsor

Benefits paid to participants

Contributions from employers, segregated between cash and noncash contributions

Contributions from other identified sources (for example, state subsidies or federal grants)

Answer 7

Benefits paid to participants

The statement of changes in net assets available for benefits of an employee benefit plan must include the following:

• The change in fair value (or estimated fair value) of each significant type of investment, including participant-directed and self-directed investments held in brokerage accounts. Gains and losses from investments sold need not be segregated from unrealized gains and losses relating to investments held at year-end. Realized gains and losses on investments that were both bought and sold during the period should be included. This information may be presented in the accompanying footnotes.
• Investment income, exclusive of changes in fair value described above
• Contributions from employers, segregated between cash and noncash contributions (a noncash contribution shall be recorded at fair value; the nature of noncash contributions shall be described either parenthetically or in a note) (This would be an increase.)
• Contributions from participants, including those transmitted by the sponsor (This would be an increase.)
• Contributions from other identified sources (for example, state subsidies or federal grants) (This would be an increase.)
• Benefits paid to participants (This would be a decrease.)
• Payments to insurance entities to purchase contracts that are excluded from plan assets
• Administrative expenses

Question 8

Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except:

contributions from the employer and participants.

the net change in fair value of each significant class of investments.

benefits paid to participants.

the net change in the actuarial present value of accumulated plan benefits.

Answer 8

the net change in the actuarial present value of accumulated plan benefits..

The statement of changes in net assets must include the following:

• The change in fair value of each significant type of investment
• Investment income
• Contributions from employers
• Contributions from participants
• Contributions from other identified sources
• Benefits paid to participants
• Payments to insurance entities to purchase contracts
• Administrative expenses

Only the net change in the actuarial present value of accumulated plan benefits is not included in this lis

Question 9

In the financial statements of employee benefit pension plans and trusts, the plan investments are reported at:

net realizable value.

fair value.

historical cost.

lower of historical cost or market.

Answer 9

fair value.

The statement of net assets of a pension plan must include net assets reflecting all investments at fair value.

Question 10

A defined benefit pension plan had the following activity during the fiscal year:

Dividends and interest received $ 92,000
Contributions received from employers and employees 340,000
Administrative expenses 45,400
Investments purchased 155,000
Increase in fair value of investments at year-end 36,750

What should be reported as the total additions in the pension plan’s statement of changes in net assets available for benefits?

$423,350

$313,750

$468,750

$432,000

Answer 10

Question 11

How can forfeited nonvested accounts of an employee benefit plan be used?

For expenses

To reduce future employer contributions

Forfeited nonvested accounts could be used for any of the other answer choices, in accordance with plan documents.

To be reallocated to participant’s accounts

Answer 11

Forfeited nonvested accounts could be used for any of the other answer choices, in accordance with plan documents.

Required disclosure includes, among other items, the amount and disposition of forfeited nonvested accounts—specifically, identification of those amounts that are used to reduce future employer contributions, expenses, or reallocated to participant’s accounts, in accordance with plan documents.

Question 12

Which of the following would be reported as an increase in the statement of changes in net assets available for benefits of an employee benefits plan?

Administrative expenses

Benefits paid to participants

Contributions from other identified sources (for example, state subsidies or federal grants)

Payments to insurance entities to purchase contracts that are excluded from plan assets

Answer 12

Contributions from other identified sources (for example, state subsidies or federal grants)

The statement of changes in net assets available for benefits of an employee benefit plan must include the following:

• The change in fair value (or estimated fair value) of each significant type of investment, including participant-directed and self-directed investments held in brokerage accounts. Gains and losses from investments sold need not be segregated from unrealized gains and losses relating to investments held at year-end. Realized gains and losses on investments that were both bought and sold during the period should be included. This information may be presented in the accompanying footnotes.
• Investment income, exclusive of changes in fair value described above
• Contributions from employers, segregated between cash and noncash contributions (a noncash contribution shall be recorded at fair value; the nature of noncash contributions shall be described either parenthetically or in a note)
• Contributions from participants, including those transmitted by the sponsor
• Contributions from other identified sources (for example, state subsidies or federal grants)
• Benefits paid to participants (this would decrease the statement)
• Payments to insurance entities to purchase contracts that are excluded from plan assets (this would decrease the statement)
• Administrative expenses (this would decrease the statement)

Question 13

A company operates a defined contribution plan for its employees. At the end of the year, the plan had investments with a cost of $5 million and a fair value of $10.25 million. Loans made to employees had a balance of $1 million. After year-end, one of the stocks in its portfolio, a pharmaceutical stock valued at $150,000 at year-end, lost half its value after a new drug was denied regulatory approval. What amount should the defined contribution plan financial statements report as investments as of year-end?

$11,250,000

$10,250,000

$10,175,000

$5,000,000

Answer 13

$10,250,000

Defined benefit contribution plans managed by employers are reported at fair value. At year-end, the fair value of the plan was $10.25 million. The original cost and change in value of one investment are not relevant to the year-end value. Note that this treatment is substantially different from defined benefit plans.

Question 14

According to GAAP, which of the following financial statements must be filed by employee benefit plans and trusts?

Only a statement of net assets available for benefits of the plan as of the end of the plan year

Only a statement of changes in net assets available for benefits of the plan for the year then ended

None of the answer choices are correct.

Both a statement of net assets available for benefits of the plan as of the end of the plan year and a statement of changes in net assets available for benefits of the plan for the year then ended must be filed.

Answer 14

Both a statement of net assets available for benefits of the plan as of the end of the plan year and a statement of changes in net assets available for benefits of the plan for the year then ended must be filed.

Employee benefit plans and trusts must prepare two financial statements according to GAAP:

1. A statement of net assets available for benefits of the plan as of the end of the plan year
2. A statement of changes in net assets available for benefits of the plan for the year then ended

Question 15

How should plan investments be reported in a defined benefit plan’s financial statements?

At actuarial present value

At cost

At net realizable value

At fair value

Answer 15

At fair value

Question 16

START OF SECTION 1F

Answer 16

FUCK YEAH

Question 17

In financial statements prepared on an income-tax basis, how should the nondeductible portion of expenses, such as meals and entertainment, be reported?

Included in the expense category in the determination of income

Excluded from the determination of income, but included in the determination of retained earnings

Excluded from the financial statements

Included in a separate category in the determination of income

Answer 17

Included in the expense category in the determination of income

Taxable income is an amount resulting from the application of tax rules governing revenues and expenses. Some revenues/expenses are specifically excluded or subjected to limitation(s).

When determining net income using the income-tax basis, a fair determination necessitates using the nondeductible (for taxes) portion of expenses (such as meals and entertainment) as long as they are legitimate business expenses.

Question 18

The income tax basis of accounting is the basis of accounting that the entity uses to file its ___ ___for the period covered by the financial statements.

There are three acceptable methods to report taxable income: cash basis, accrual basis, and the ___method.

Answer 18

Tax Return

Hybrid

Question 19

Under the cash basis method—or cash receipts method—property or services received are included in gross income when actually or constructively ___.

Under the cash basis of accounting, ___ are deductible only when actually paid with cash or other property.

There is no current deduction for capital expenditures. T/F

The expense for capital expenditures will be recognized in the form of depreciation, amortization, or depletion. T/F

Answer 19

Received

expenses

True

True

Question 20

For the accrual method, a deduction can be recognized when:

1. all the events have occurred to create the ___ and
2. the ___of the liability can be determined with reasonable accuracy.

Answer 20

liability

amount

Question 21

Which of the following statements regarding the cash basis of accounting is true?

Cash basis financial statements are sometimes provided for investors or creditors.

All of the answer choices are true.

Net operating cash flow is the difference between cash receipts and cash disbursements.

The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method.

Answer 21

All of the answer choices are true.

The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method. However, cash basis financial statements are sometimes provided for investors or creditors.

Cash basis accounting results in a measure similar to net income called net operating cash flow. Net operating cash flow is the difference between cash receipts and cash disbursements.

The cash basis is an acceptable method for the preparation of tax returns.

Question 22

Bailey Co. changed the accounting for insurance expense from the cash basis to the accrual basis in the current year. In January of the prior year, Bailey recorded insurance expense of $240,000 for the cash purchase of a 4-year insurance policy. How should Bailey report the insurance transaction in the current year’s financial statements?

As a $180,000 debit to insurance expense, a $120,000 credit to prepaid asset, and $60,000 credit to retained earnings

As a $60,000 debit to insurance expense

As a $60,000 debit to insurance expense, a $120,000 debit to prepaid asset, and $180,000 credit to retained earnings

As a $180,000 debit to prepaid insurance

Answer 22

As a $60,000 debit to insurance expense, a $120,000 debit to prepaid asset, and $180,000 credit to retained earnings

Under the cash basis of accounting, Bailey would have recorded the full $240,000 cash payment as insurance expense, which would have been closed to retained earnings at the end of Year 1. Under accrual accounting, Bailey would have recognized the full $240,000 payment as a prepaid asset, reclassifying $60,000 to insurance expense at the end of each year ($240,000 ÷ 4 years).

To make this adjustment at the end of Year 2, Bailey would recognize Year 2 insurance expense ($60,000), record the two years remaining on the prepaid asset ($120,000), and adjust retained earnings, ignoring income taxes, for the over-recognized expense in Year 1 ($180,000).

Question 23

he presentation of financial statements must be applied within an identifiable framework (AU-C 800). Normally, the framework is provided by generally accepted accounting principles (GAAP). However, in some circumstances, a different framework may be used. Which of the following would not be indicative of an acceptable framework for the presentation of financial statements?

Presenting the financial statements under the same basis that the entity uses to file its income tax return

Reporting on cash basis but capitalizing fixed assets and recording depreciation

Modifying select items on the cash flow statement based on definite criteria

Ignoring accrued income and expenses

Answer 23

Modifying select items on the cash flow statement based on definite criteria

Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles (often referred to as a special purpose framework). Examples given by AU-C 800.07 are as follows:

1. “Cash basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets).
2. “Tax basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements.
3. “Regulatory basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission).
4. “Contractual basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor.
5. “Other basis. A basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements.”

Modifications to some items on the cash flow statement without including all material items on the other financial statements would not qualify as a special purpose framework. Reporting on a cash basis but capitalizing fixed assets and ignoring accrued income and expenses would represent an acceptable cash basis or modified cash basis reporting framework. Filing statements based on the framework under which the entity prepares its tax returns would be an appropriate tax basis reporting framework.

Question 24

Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles such as:

1. “___basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets).
2. “___basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements.
3. “___basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission).
4. “___basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor.
5. “___basis. A basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements.”

Modifications to some items on the cash flow statement without including all material items on the other financial statements would not qualify as a special purpose framework. Reporting on a cash basis but capitalizing fixed assets and ignoring accrued income and expenses would represent an acceptable cash basis or modified cash basis reporting framework. Filing statements based on the framework under which the entity prepares its tax returns would be an appropriate tax basis reporting framework.

Answer 24

Cash

Tax

Regulatory

Contractual

Other

Question 25

Which of the following is not a special-purpose framework?

Modified cash basis of accounting where some fixed assets are capitalized while others are expensed

Cash receipts and disbursements basis of accounting

Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency

Basis of accounting used by an entity to file its income tax return

Answer 25

Modified cash basis of accounting where some fixed assets are capitalized while others are expensed

Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles (often referred to as a special purpose framework). Examples given by AU-C 800.07 are as follows:

1. “Cash basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets).
2. “Tax basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements.
3. “Regulatory basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission).
4. “Contractual basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor.
5. “Other basis. A basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements.”

For the modified cash basis to be an acceptable form, the modifications must be applied logically and consistently. Capitalizing some fixed assets while expensing others would not represent a consistent or logical application of the framework.

Question 26

Income is constructively received and included in gross income under the income tax basis of accounting if:

None of the answer choices are necessary for the income to be included in gross income.

it is readily available to the taxpayer.

actual receipt is not subject to substantial limitations or restrictions.

it is readily available to the taxpayer and actual receipt is not subject to substantial limitations or restrictions.

Answer 26

it is readily available to the taxpayer and actual receipt is not subject to substantial limitations or restrictions.

Income that is constructively received is included in gross income. An example is interest income credited to an account by a financial institution. Income is constructively received if:

• it is readily available to the taxpayer and
• actual receipt is not subject to substantial limitations or restrictions.

Question 27

Income that is constructively received is included in gross income. An example is interest income credited to an account by a financial institution. Income is constructively received if:

• it is readily ___to the taxpayer and
• actual receipt is not subject to substantial ___or ___.

Answer 27

available

limitations or restrictions

Question 28

Hahn Co. prepared financial statements on the cash basis of accounting. The cash basis was modified so that an accrual of income taxes was reported. Are these financial statements in accordance with the modified cash basis of accounting?

Yes

No, because the modifications are illogical

No, because there is no substantial support for recording income taxes

No, because the modifications result in financial statements equivalent to those prepared under the accrual basis of accounting

Answer 28

Yes

The modified cash basis, as the name implies, is a combination of the cash basis and the accrual basis. The modified cash basis is acceptable and is regularly used by professional service companies.

The cash basis is modified for items that have substantial support, such as recording income tax expense in the year in which the income was earned and capitalizing the purchase of assets even though cash was paid for the asset.

The modifications must be logical and applied consistently.

Question 29

Ward, a consultant, keeps her accounting records on a cash basis. During 20X2, Ward collected $200,000 in fees from clients. On December 31, 20X1, Ward had accounts receivable of $40,000. On December 31, 20X2, Ward had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Ward’s services revenue for 20X2?

$180,000

$215,000

$175,000

$225,000

Answer 29

$215,000

In order to convert from cash basis to accrual basis, one must add to cash receipts any increases in net assets.

Cash collected in 20X2 $200,000
Less December 31, 20X1, receivables 40,000
Fees collected in 20X2 160,000
Add December 31, 20X2, receivables 60,000
Subtotal 220,000
Less unearned fees on December 31, 20X2 5,000
Accrual basis fees earned in 20X2 $215,000

Question 30

Wright Co. is a small, privately held entity established at the beginning of year 1. Wright decided to prepare cash-basis financial statements. At the end of year 1, the company recorded receivables of $2,000,000 and accrued expenses of $900,000, which were included in the total expenses incurred for the year of $2,200,000, with $1,300,000 paid during the year. Cash sales of $1,200,000 were fully recognized for the year. What is the company’s cash-basis income/loss from operations at the end of year 1?

Income of $1,000,000

A loss of $1,000,000

A loss of $1,900,000

A loss of $100,000

Answer 30

A loss of $100,000

The cash basis of accounting merely compares cash receipts to cash disbursements. Wright Co received $1,200,000 in cash sales and paid $1,300,000 in cash expenses for a net loss from operations under the cash basis of $100,000 ($1.2 million − $1.3 million).

The accruals and receivable balances would be needed under accrual accounting, not cash-basis accounting.

Question 31

Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of:

accrued expenses.

neither accounts receivable nor accrued expenses.

accounts receivable.

both accounts receivable and accrued expenses.

Answer 31

accrued expenses.

The cash basis of accounting, as compared to accrual-basis accounting, will understate income when accrued expenses decrease because that decrease must have been the result of paying out more cash than expenses incurred. A decrease in accounts receivable would have the opposite effect. This decrease would occur as more cash was collected than sales made, producing a higher cash basis income.

In summary, cash basis income is:

• higher when accounts receivable decrease.
• lower when accrued expenses decrease.

Question 32

A company reports on the cash basis. During the company’s first year of business, it had sales on account of $1,000,000, inventory purchases on account of $400,000, and other expenses of $200,000.

At the end of the year, the company had accounts receivable, inventory, and inventory-related accounts payable of $100,000, $10,000, and $50,000, respectively. What is the company’s cash-basis income for its first year of operations?

$400,000

$300,000

$350,000

$450,000

Answer 32

$350,000

The company had cash sales of $900,000 ($1,000,000 sales on account − $100,000 remaining), cash cost of goods sold (COGS) of $350,000 ($400,000 purchased − $50,000 remaining owed), and other cash expenses of $200,000 for a cash income amount of $350,000 ($900,000 sales − $350,000 COGS − $200,000).

Note that the $10,000 remaining in inventory isn’t relevant to the problem as it doesn’t impact the amount spent in cash.

Question 33

Which of the following statements about the hybrid basis of determining taxable income is true?

Generally, a company using the cash method must use the accrual method for the accounts involved in computing cost of goods sold and gross profit if inventory is a material income-producing factor.

The cash method can be used for all accounts not related to cost of goods sold and gross profit.

The hybrid method is a combination of the cash and accrual methods.

All of the answer choices are true statements regarding the hybrid method.

Answer 33

All of the answer choices are true statements regarding the hybrid method.

The hybrid method is a combination of the cash and accrual methods.

Generally, a company using the cash method must use the accrual method for the accounts involved in computing cost of goods sold and gross profit if inventory is a material income-producing factor. The cash method can be used for all other accounts.

Question 34

Which of the following statements regarding the modified cash basis of accounting is true?

None of the answer choices are correct.

The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP and the modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.

Answer 34

Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP and the modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

The modified cash basis is a hybrid method which combines features of both the cash basis and the accrual basis. Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes. If these modifications are made, the resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes. The income statement would report depreciation expense and income tax expense. Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.

The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

Question 35

___ ___ basis: The modified cash basis is a hybrid method that combines features of both the cash basis and the accrual basis. It must use logical and consistent modifications to events originated by cash receipts or cash disbursements.

This method complies with GAAP T/F

Answer 35

Modified Cash

False - it does NOT comply w/ gaap

Question 36

The following information pertains to Spee Co.’s 20X1 sales:

Cash Sales
Gross $40,000
Returns and allowances 2,000
Credit Sales
Gross 60,000
Discounts 3,000

On January 1, 20X1, customers owed Spee $20,000. On December 31, 20X1, customers owed Spee $15,000. Spee uses the direct write-off method for bad debts. No bad debts were recorded in 20X1. Under the cash basis of accounting, what amount of revenue should Spee report for 20X1?

$100,000

$95,000

$85,000

$38,000

Answer 36

$100,000

Question 37

The following information pertains to Eagle Co.’s 20X1 sales:

Cash Sales
Gross $ 80,000
Returns and allowances 4,000
Credit Sales
Gross 120,000
Discounts 6,000

On January 1, 20X1, customers owed Eagle $40,000. On December 31, 20X1, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in 20X1. Under the cash basis of accounting, what amount of net revenue should Eagle report for 20X1?

$76,000

$170,000

$190,000

$200,000

Answer 37

$200,000

Question 38

Which of the following adjustments is necessary to convert cash receipts to revenues as reported on an accrual basis?

Subtract ending contract liability from cash receipts from customers.

Subtract beginning contract liability from cash receipts from customers.

Subtract ending accounts receivable from cash receipts from customers.

Add beginning accounts receivable to cash receipts from customers.

Answer 38

Subtract ending contract liability from cash receipts from customers.

Revenue on an accrual basis is reported when earned, while the cash basis is reported when received. Contract liability is a deferred revenue account representing cash received for work not yet performed. Therefore, if we subtract the ending liability from cash receipts, we can determine the amount of revenue earned.

For example, if a company receives $10 and only performs $2 worth of work, they will have a liability of $8 ($10 − $2). Subtracting the liability of $8 from the $10 received indicates revenue earned was $2 ($10 − $8). Subtracting the beginning balance would not help as that would have related to cash received in the prior period, not the current period.

We would need to add the ending accounts receivable to cash receipts, not subtract it, as accounts receivable represents revenue earned but not yet received in cash. It must be combined with the cash received to determine accrual revenue.

Question 39

Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles (also known as a special purpose framework)?

1. Basis of accounting used by an entity to file its income tax return
2. Cash receipts and disbursements basis of accounting

Neither I nor II

Both I and II

I only

II only

Answer 39

Both I and II

AU-C 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, identifies five comprehensive bases of accounting other than generally accepted accounting principles (AU-C 800.07):

1. Cash basis
2. Tax (income) basis
3. Regulatory basis
4. Contractual basis
5. Other basis

Note: Both the income tax (tax (income) basis) and cash (cash basis) bases are on this list.

Question 40

A company provides the following information:

Year 1 Year 2 Year 3
Cash receipts from customers:
From Year 1 sales $95,000 $120,000
From Year 2 sales 200,000 $ 75,000
From Year 3 sales 50,000 225,000

What is the accrual-based revenue for Year 2?

$370,000

$275,000

$200,000

$320,000

Answer 40

$275,000

Accrual-based revenue for Year 2 is the row titled, “From Year 2 sales” ($200,000 + $75,000) regardless of when cash is received.

Question 41

Which of the following statements about the cash basis of determining taxable income is true?

None of the answer choices is a true statement regarding the cash method.

A deduction can be recognized when all the events have occurred to create the liability, and the amount of the liability can be determined with reasonable accuracy.

There is no current deduction for capital expenditures.

An item is included in gross income for the year in which it is earned.

Answer 41

here is no current deduction for capital expenditures.

Under any basis of accounting for income taxes, expenses are deductible only when paid or accrued. There is no current deduction for capital expenditures. The expense for capital expenditures will be recognized in the form of depreciation, amortization or depletion.

Question 42

A company’s cash-basis net income for the year ended December 31 was $75,000. The following information is from the company’s accounting records:

January 1__December 31
Accounts receivable $15,000 $20,000
Prepaid expenses 7,000 4,000
Accrued liabilities 2,500 2,000

What is the accrual-basis net income?

$72,500

$83,500

$75,000

$77,500

Answer 42

$77,500

Accrual accounting recognizes revenue at the point of sale and is generally accepted as opposed to the cash basis of accounting, which records revenues in the period during which cash is received. The accrual basis of accounting correctly matches the revenue from the sale of goods with the historical cost of the inventory sold, the salesperson’s salary, and other applicable costs and expenses.

The following journal entries reflect the activity in the company’s accounts under the accrual basis:

Accounts Receivable 5,000
Sales 5,000

Expense 3,000
Prepaid Expense 3,000

Accrued Liabilities 500
Accrued Expense 500

Net income under the accrual basis of accounting would be $77,500 ($75,000 + $5,000 − $3,000 + $500).

Answer 43

$77,500

Question 44

Which of the following statements about the accrual basis of determining taxable income is true?

Property or services received are included in gross income when actually or constructively received.

An item is included in gross income for the year in which it is earned.

None of the answer choices are true statements regarding the accrual method.

Increases in accounts receivable are not included in gross income.

Answer 44

An item is included in gross income for the year in which it is earned.

The accrual method for tax purposes is, for the most part, the same as the accrual method required by GAAP. An item is included in gross income for the year in which it is earned. A deduction can be recognized when:

• all the events have occurred to create the liability and
• the amount of the liability can be determined with reasonable accuracy.

Question 45

Dannon Co. mistakenly reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information:

Beginning prepaid expense $1,300
Beginning accrued expense 1,650
Ending prepaid expense 1,800
Ending accrued expense 1,200

What amount of expense should Dannon report on its books under the accrual basis?

$34,250

$35,150

$35,300

$36,150

Answer 45

One way to solve this question is use the journal entry required to book the net difference between beginning and ending balances. Prepaid expenses increased $500, so debit Prepaid and credit Cash for $500. That $500 represents excessive recognition of expense under the cash basis.

Accrued expenses decreased $450, so debit Accrued Expenses and credit Cash $450. The credit to cash represents excessive expensive recognition under the cash basis, for a total excess expense recognition of $950.

Dannon should report accrued expenses of $34,250 ($35,200 − $950).

Question 46

Which of the following statements regarding the cash basis of accounting is true?

Revenue is recognized when cash is received.

Expenses are recognized when cash is disbursed.

No income or expense is accrued.

All of the answer choices are true.

Answer 46

All of the answer choices are true.

Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed. No income or expense is accrued.

The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method. However, cash basis financial statements are sometimes provided for investors or creditors. Cash basis accounting results in a measure similar to net income called net operating cash flow. Net operating cash flow is the difference between cash receipts and cash disbursements.

The cash basis is an acceptable method for the preparation of tax returns.

Question 47

Compared to its current-year cash basis net income, Potoma Co.’s current-year accrual basis net income increased when it:

had lower accrued expenses on December 31 than on January 1 of the current year.

sold used equipment for cash at a gain in the current year.

declared a cash dividend in the previous year that it paid in the current year.

wrote off more accounts receivable balances than it reported as uncollectible accounts expense in the current year.

Answer 47

had lower accrued expenses on December 31 than on January 1 of the current year.

When accrued expenses decrease during the year, it implies that the company paid more in expenses than it recorded because it would have paid for all accrued expenses since January 1 and then also paid for accrued expenses that existed as of January 1. Therefore, the company would have paid more cash for expenses than it recognized under accrual accounting.

Question 48

Savor Co. had $100,000 in accrual basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances. Under the cash basis of accounting, what amount of pretax income should Savor report for the year?

$96,000

$116,000

$84,000

$104,000

Answer 48

$84,000

Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed; income and expense items are not accrued. Cash basis accounting results in a measure similar to net income called net operating cash flow, which is the difference between cash receipts and cash disbursements.

Savor should report cash-basis pretax income of $84,000 ($100,000 accrual income less the $10,000 accounts receivable accrual increase, less the $6,000 cash paid for payables). Note that the cash method is not an allowable method under GAAP unless there is no material difference from the accrual method.

Question 49

Sussman Co. prepared cash-basis financial statements for the month ended January 31. A summary of Sussman’s January activities follows:

• Credit sales of $5,600
• Collections of $1,900 relating to January credit sales
• Accrued salaries of $1,200

By what amount will Sussman’s cash-basis income for the month ended January 31 increase as a result of restating these activities to the accrual basis of accounting?

$2,500

$4,400

$4,900

$3,700

Answer 49

$2,500

Sussman’s cash-basis accounting income would be $1,900 ($1,900 Cash in − $0 Cash out). Sussman’s accrual basis income would be $4,400 ($5,600 Credit sales − $1,200 Accrued salary expense). Restating the income from cash to accrual would result in net income increasing $2,500 ($4,400 Accrual income − $1,900 Cash-basis income).

Question 50

Savor Co. had $100,000 in cash-basis pretax income for 20X2. At December 31, 20X2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 20X1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is:

lower by $4,000.

lower by $16,000.

higher by $16,000.

higher by $4,000.

Answer 50

lower by $16,000.

An increase in accounts receivable means that sales revenue has been included in net income but not yet received.

A decrease in accounts payable means that cash has been paid for expenses but these cash payments have been deducted in arriving at net income.

Net income $116,000
Increase in accounts receivable (10,000)
Decrease in accounts payable (6,000)
Cash-basis/taxable income $100,000

Question 51

Which of the following is an acceptable method to report taxable income?

The hybrid method

Cash basis

Accrual basis

All of the answer choices are acceptable methods to report taxable income.

Answer 51

All of the answer choices are acceptable methods to report taxable income.

There are three acceptable methods to report taxable income: cash basis, accrual basis, and the hybrid method.

Question 52

Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements:

do not include nontaxable revenues and nondeductible expenses in determining income.

contain no disclosures about finance and operating lease transactions.

recognize certain revenues and expenses in different reporting periods.

include detailed information about current and deferred income tax liabilities.

Answer 52

recognize certain revenues and expenses in different reporting periods.

Both income tax-basis and GAAP-basis financial statements recognize all the financial activities of a company’s business. However, it is the timing of this recognition that differs between the two methods.

For income tax-basis financial statements, taxable revenues and tax-deductible expenses are recognized in the financial statements in the same period they are reported in the tax return.

For financial statements prepared in accordance with GAAP, all revenues and expenses are recognized using the accrual method of accounting.

Question 53

Which of the following statements would most likely be included among a set of financial statements prepared in conformity with a special purpose framework?

The statement of operations

The statement of comprehensive income

The statement of cash receipts and disbursements

The statement of financial position

Answer 53

The statement of cash receipts and disbursements

The statement of cash receipts and disbursements would likely be found in a set of financial statements prepared under the cash basis of accounting, a special purpose framework.

A statement of operations, financial position, and statement of comprehensive income would all likely be found in financial statements prepared under accrual accounting following U.S. GAAP.

Question 54

Reid Partners, Ltd., which began operations on January 1, 20X1, has elected to use cash-basis accounting for tax purposes and accrual-basis accounting for its financial statements. Reid reported sales of $175,000 and $80,000 in its tax returns for the years ending December 31, 20X2 and 20X1, respectively. Reid reported accounts receivable of $30,000 and $50,000 in its balance sheets as of December 31, 20X2 and 20X1, respectively. What amount should Reid report as sales in its income statement for the year ending December 31, 20X2?

$205,000

$145,000

$195,000

$155,000

Answer 54

$155,000

Question 55

Which of the following statements regarding the modified cash basis of accounting is true?

All of the answer choices are true.

Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes

The resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes.

The modified cash basis is a hybrid method that combines features of both the cash basis and the accrual basis.

Answer 55

All of the answer choices are true.

The modified cash basis is a hybrid method that combines features of both the cash basis and the accrual basis. Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes. If these modifications are made, the resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes.

The income statement would report depreciation expense and income tax expense. Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.

The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

Question 56

Young & Jamison’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?

$165,000

$135,000

$175,000

$125,000

Answer 56

$165,000

In converting expenses from a cash basis to an accrual basis, a prepaid expense increase of $5,000 must be deducted because it is an expense on a cash basis and an asset on an accrual basis. An increase of $20,000 in accrued liabilities must be added because it is an expense incurred but not paid.

• $150,000 - $5,000 + $20,000 = $165,000

Question 57

A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative balance sheet information:

Beginning of Year__End of Year
Accounts payable $ 3,000 $ 1,000
Unearned revenue 300 500
Wages payable 300 400
Prepaid rent 1,200 1,500
Accounts receivable 1,400 600

What amount should the company report as its accrual-based net income for the current year?

$68,800

$73,200

$70,200

$71,200

Answer 57

$71,200