Area I D. public company reporting

Question 1

forms10-Q, 10-K and 8-K that a U.S. registrant is required to file with the

Answer 1

U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934

Question 2

10Q, 10K and 8K forms serve a distinct purpose in the realm of

Answer 2

financial reporting and corporate disclosure

Question 3

Form 10-Q:

Answer 3

● Purpose: This form is a quarterly report providing a continuing view of a company’s financial position during the year.
● Contents: It includes unaudited financial statements and provides a view of the company’s financial performance over
the previous three months (quarter). The form includes information about the company’s liquidity, capital resources, operations, market risk, and controls.
● Frequency: It must be filed by public companies with the SEC on a quarterly basis, three times a year.

Question 4

Form 10-K:

Answer 4

● Purpose: This is an annual report and provides a comprehensive overview of the company’s business and financial condition. It is more detailed than the quarterly reports.
● Contents: The 10-K includes audited financial statements, management’s discussion and analysis (MD&A), disclosures about market risk, internal control over financial reporting, and other pertinent information. It also includes a section on the company’s operations, products/services, and risks it faces.
● Frequency: It must be filed annually by public companies.

Question 5

10-Q (Part I Items 1 through 3)

Answer 5

Part I
Item 1 - Financial Statements: This section includes the company’s unaudited interim financial statements. These typically consist of:
● The balance sheet (statement of financial position) as of the end of the latest fiscal quarter.
● Income statements for both the most recent quarter and the year to date.
● A statement of cash flows for the same periods.
● A statement of stockholders’ equity.
● Notes to the financial statements, providing details and context to the figures presented.
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A): This part offers
management’s perspective on the financial condition and operational results of the company. Key aspects include:
● Discussion of the results of operations for the recent quarter and year-to-date periods.
● Analysis of the company’s liquidity and capital resources.
● A look at off-balance sheet arrangements and aggregate contractual obligations.
● Forward-looking statements and potential risks.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk: This section addresses the company’s exposure to
market risks like interest rate risk, foreign currency exchange risk, commodity price risk, and other relevant market risks. It should include:
● A discussion on how these risks are managed.
● Quantitative data about the potential impacts of these risks when possible.

Question 6

Form 10-K (Part II items 7, 7A, and 8)

Answer 6

Part II
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A): Similar to the 10-Q but more comprehensive, this includes:
● A detailed analysis of the company’s fiscal year, discussing results of operations.
● Insight into the company’s liquidity, capital resources, and market risks.
● Off-balance sheet arrangements and contractual obligations.
● Any forward-looking statements and potential risks and uncertainties.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk: This is an extension of Item 7 but focuses specifically on market risk. It requires:
● Detailed information on exposure to market risk (e.g., interest rate, foreign exchange rates, commodity prices).
● How the company manages these risks, including use of financial instruments and derivatives.
Item 8 - Financial Statements and Supplementary Data: This section includes the company’s audited financial statements for the fiscal year. These typically encompass:
● Balance sheets for the last two fiscal years.
● Income statements, statements of comprehensive income, statements of cash flows, and statements of stockholders’ equity for the last three fiscal years.
● Notes to the financial statements.
● A report from an independent auditor.

Question 7

Basic Earnings Per Share (EPS) is a fundamental metric used in financial analysis to gauge

Answer 7

a company’s profitability on a per-share basis. It’s calculated by dividing the net income of a company by the weighted average number of common shares outstanding during a specific period

𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑔 # 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Question 8

Dilutive Securities are

Answer 8

financial instruments like stock options, warrants, convertible preferred shares, and convertible bonds, which can potentially be converted into common stock.

Question 9

Diluted Earnings Per Share (EPS) is a calculation that shows

Answer 9

a company’s earnings per share if all convertible securities were converted into common stock. It provides a more conservative measure of the company’s profitability since it accounts for all potential shares that could be in circulation

𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠/𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑔. # 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 + 𝐷𝑖𝑙𝑢𝑡𝑖𝑣𝑒 𝑆ℎ𝑎𝑟𝑒𝑠 𝑓𝑟𝑜𝑚 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

Question 10

Subtract preferred dividends (if any) from

Answer 10

net income since they are not available to common shareholders

Question 11

Stock Options and Warrants: Use the treasury stock method,

Answer 11

where you assume that the company uses the proceeds from exercise of options/warrants to buy back common shares at the average market price.
Stock Options (Treasury Stock Method):
○ Total proceeds from exercise: 10,000 shares* $10 exercise price = $100,000.
○ Number of shares that could be bought back with these proceeds at the average market price: $100,000 / $20 =
5,000 shares.
○ Net increase in shares due to options: 10,000 - 5,000 = 5,000 shares

Question 12

The net increase in shares, i.e.,

Answer 12

shares issued minus shares bought back is added to the weighted average number of shares

Question 13

FAR1B10015

Which of the following is true about recognizing donated services in the financial statements of a non-profit?

A. They are always recognized as revenue and an expense.
B. They are recognized if they create or enhance non-financial assets.
C. They are never recognized in the financial statements.
D. They are recognized as revenue only if they are from a government entity.

Answer 13

B. They are recognized if they create or enhance non-financial assets.

Donated services are recognized if they (1) create or enhance non-financial assets, or (2) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. The other options do not fully comply with accounting standards for non-profits.

Question 14

FAR1F10060

To determine the efficiency in the use of direct materials, which variance is most relevant?

A. Direct Material Price Variance
B. Direct Material Quantity Variance
C. Total Material Variance
D. Direct Labor Efficiency Variance

Answer 14

B. Direct Material Quantity Variance

Direct Material Quantity Variance is most relevant for assessing the efficiency in the use of direct materials. It compares the actual quantity used to the standard quantity for actual production. A relates to price, not quantity, C is a broader measure including both price and quantity, and D pertains to labor efficiency.

Question 15

FAR2J003nsim

Kolby Inc entered into an agreement with Kory Inc to sell Kory a product for $100,000. Kory paid the $100,000 in advance to Kolby. The product costs Kolby $70,000 to produce.

On the day that Kolby delivers the product to Kory and the obligation is fulfilled, what two accounts will Kolby credit?

A. Revenue and inventory
B. Revenue and cash
C. Contract liability and COGS
D. COGS and cash

Answer 15

A. Revenue and inventory

When Kolby was paid the $100,000 upfront, Kolby would debit cash and credit “contract liability” for $100,000 each.

When Kolby delivers the product, Kolby would first debit contract liability for $100,000 to reverse it, and then credit revenue for the $100,000.

The second part of the entry would be to debit COGS for $70,000, and credit inventory for $70,000 to remove the product from inventory.

Question 16

FAR3C10008
What happens if there is uncertainty about the collectability of consideration in a contract?

A. Revenue is recognized in full, and any uncollectable amounts are treated as an expense.
B. Revenue recognition is constrained until it is highly probable that a significant reversal will not occur.
C. The contract is not recognized in the financial statements.
D. The transaction price is adjusted to reflect the expected uncollectable amount.

Answer 16

B. Revenue recognition is constrained until it is highly probable that a significant reversal will not occur.

When there is uncertainty about the collectability of consideration, revenue recognition is constrained. This means the entity recognizes revenue only to the extent that it is highly probable that a significant reversal will not occur.

Question 17

FAR1A70007
When adjusting notes to include additional information about a company’s lease obligations, which qualitative characteristic of financial reporting is primarily being addressed?
A. Timeliness
B. Comparability
C. Relevance
D. Verifiability

Answer 17

C. Relevance

Adding detailed information about lease obligations enhances the relevance of the financial statements, as it provides critical information that can affect the decisions of users regarding the company’s long-term commitments and financial health.

Question 18

Which of the following is a component of other comprehensive income?

A. Minimum accrual of vacation pay.
B. Cumulative currency-translation adjustments.
C. Changes in market value of inventory.
D. Unrealized gain or loss on trading securities.

Answer 18

B. Cumulative currency-translation adjustments.
There are several main types of OCI items:
- Unrealized gains and losses on AFS(available-for-sale) investments
- Foreign currency translation adjustments
- Certain unrecognized gains and losses on pension benefits
- Certain gains and losses on derivatives

The other responses are items that would appear on the income statement

trading securities should be non-trading to be included in answer

Question 19

FAR2E012nsim
Adell Corp. is a manufacturer of paper products with a December 31 year end.
For the transaction below, provide the correct classification and how should it be reported in the company’s balance sheet.
100 shares of ABC Co. were purchased as an investment on June 1, year 1, for $20 per share. The company intends to sell all of the shares within 30 days of the year end. The market value per share at December 31, year 1, is $22 per share.

A. Available-for-sale security
B. Held-to-maturity security
C. Trading security
D. None of the above

Answer 19

D. None of the above

When it comes to equity securities held as investments, all equity securities are carried at fair value, unless the equity method is used due to having ‘significant influence’. The ‘trading’ and ‘available-for-sale’ classifications are no longer used for equity securities.

However, the ‘trading’ and ‘AFS’ classifications are still used for debt securities.

Since the company intends to sell all of the shares within a near future, it is a current asset.

Question 20

FAR1F10057
How is the Fixed Overhead Budget Variance calculated?
A. Actual Fixed Overhead - Budgeted Fixed Overhead
B. Budgeted Fixed Overhead - Actual Fixed Overhead
C. (Actual Volume x Standard Rate) - Budgeted Fixed Overhead
D. Budgeted Fixed Overhead - (Actual Volume x Standard Rate)

Answer 20

A. Actual Fixed Overhead - Budgeted Fixed Overhead

The Fixed Overhead Budget Variance is the difference between the actual and budgeted fixed overhead expenses. It assesses how well the fixed costs were controlled.

Question 21

FAR1A40029

The initial statement of changes in equity showed a dividend payment of $30,000. It was later found that the dividend declared was actually $35,000. What is the impact on retained earnings?

A) Increase by $5,000
B) Decrease by $5,000
C) No change
D) Decrease by $35,000

Answer 21

B) Decrease by $5,000

The impact on retained earnings is the difference between the initially reported and the actual dividend declared. The calculation is:

Impact on retained earnings = Actual dividend – Initially reported

Impact = $35,000 – $30,000 = Decrease by $5,000

Question 22

FAR2H10020
In a troubled debt restructuring, the modification of terms is usually made with the intention of:
A. Increasing the total return to the creditor
B. Helping the debtor avoid default
C. Transferring ownership of the debtor to the creditor
D. Restructuring the entire industry

Answer 22

B. Helping the debtor avoid default

The primary intention of modifying terms in a troubled debt restructuring is to help the debtor avoid default by making the debt obligations more manageable.

Question 23

Materiality and relevance are both defined by:

A. What influences or makes a difference to a decision marker.
B. Quantitative criteria set by the Financial Accounting Standards Board.
C. The consistency in the application of methods over time.
D. The perceived benefits to be denied that exceed the perceived costs associated with it.

Answer 23

A. What influences or makes a difference to a decision marker.

Materiality and relevance are both based on an amount or a detail that’s “big enough to matter” to a decision maker.

Question 24

FAR2G002n
Andy Company ordered raw material from its supplier on November 30th of the previous year. The terms were FOB shipping point. The materials shipped on December 5th of the previous year. Andy received the materials January 2nd of the current year. When should Andy record the account payable?

A. November 30th of the previous year
B. December 5th of the previous year
C. December 31st of the previous year
D. January 2nd of the current year

Answer 24

B. December 5th of the previous year

Since the terms were FOB shipping point, the title to the materials passed to Andy on December 5th when they were shipped. Therefore Andy would record the payable on December 5th of the previous year.

Question 25

FAR3C10030
When a not-for-profit entity receives a transfer with the explicit instruction to use it to pay a specific expense on behalf of a designated beneficiary, how should it record this transaction?
A. As a contribution
B. As a liability until paid
C. As an increase in net assets
D. It should not be recorded in the financial statements

Answer 25

D. It should not be recorded in the financial statements

When a not-for-profit entity receives a transfer with explicit instruction to use it to pay a specific expense on behalf of a designated beneficiary, this transaction is not recorded in the financial statements, as the entity acts as an intermediary.

Question 26

FAR1A70008
What is the rationale behind adjusting the financial statement notes to correct an overstatement of inventory?

A. To ensure compliance with the lower of cost or market rule
B. To align with the revenue recognition principle
C. To comply with the matching principle
D. To adjust for seasonal variations in inventory levels

Answer 26

A. To ensure compliance with the lower of cost or market rule

Adjusting the notes to correct an overstatement of inventory is typically to align with the lower of cost or market rule, ensuring that inventory is reported at the lower of its cost or its current market value. This prevents overstatement of assets and income.

Question 27

FAR2D10044
What should be done when the selling price of an asset held for sale is renegotiated to a value higher than its carrying amount?
A. The carrying amount should be adjusted to the higher selling price
B. Recognize a gain immediately
C. No adjustment to the carrying amount is necessary
D. Record an impairment reversal

Answer 27

C. No adjustment to the carrying amount is necessary

If the selling price is renegotiated to a higher value than the carrying amount, no adjustment to the carrying amount is made.

Question 28

FAR1A10020
A company discovered that equipment depreciation was not recorded. What is the correct adjustment?
A) Increase assets
B) Decrease assets and increase expenses
C) Increase liabilities
D) Increase revenues

Answer 28

B) Decrease assets and increase expenses

Failure to record depreciation results in overstated assets and understated expenses. The correction involves decreasing the equipment’s book value (asset) and increasing depreciation expense.
Options A, C, and D are incorrect as they do not address the issue of unrecorded depreciation.

Question 29

FAR2D10005
How does a revaluation of an asset upward affect the accounting equation?
A. Increases assets and decreases equity
B. Increases assets and increases equity
C. Decreases assets and decreases liabilities
D. Increases liabilities and increases equity

Answer 29

B. Increases assets and increases equity

A revaluation upward increases the carrying amount of the asset, thus increasing total assets. It also increases equity, as the revaluation surplus is recognized in other comprehensive income and accumulated in equity.

Question 30

FAR1B30009
What role does the statement of cash flows play in assessing the sustainability of a not-for-profit entity?
A. It indicates the profitability of the entity.
B. It shows the entity’s ability to meet its long-term financial obligations.
C. It provides an analysis of the entity’s market expansion.
D. It details the entity’s stock performance.

Answer 30

B. It shows the entity’s ability to meet its long-term financial obligations.

The statement of cash flows is critical in assessing a not-for-profit entity’s ability to generate cash and meet its long-term financial obligations, indicating its financial sustainability.

Question 31

FAR1E10033
What is the treatment of bad debts in income tax basis accounting?
A) Recognized when identified as uncollectible.
B) Recognized using an allowance for doubtful accounts.
C) Recognized when written off for tax purposes.
D) Not recognized until the debtor declares bankruptcy.

Answer 31

C) Recognized when written off for tax purposes

Bad debts are recognized in income tax basis accounting when they are written off for tax purposes. This may not coincide with when they are identified as uncollectible or when an allowance is made (accrual accounting).

Question 32

FAR3F10037
How should a lessee account for a lease incentive received at the commencement of the lease?
A. Recognize as income in the period received.
B. Deduct from the right-of-use asset and reduce depreciation expense.
C. Treat as a reduction in lease payments.
D. Recognize as a deferred income and amortize over the lease term.

Answer 32

B. Deduct from the right-of-use asset and reduce depreciation expense.

Lease incentives are deducted from the right-of-use asset, resulting in a lower asset value and consequently lower depreciation expense over the lease term, which impacts the lease cost recognized in the income statement.

Question 33

FAR2A10009
A company has a petty cash fund of $500. At the end of the month, the fund has $100 in cash and $400 in receipts for expenses. How should the company account for the petty cash fund in its financial statements?
A. Report $500 as part of cash
B. Report $100 as part of cash and $400 as expenses
C. Report $400 as part of cash and $100 as receivables
D. Report $500 as an expense

Answer 33

A. Report $500 as part of cash

The petty cash fund, regardless of how much cash is on hand versus receipts for expenses, should be reported as $500 as part of cash (A). The fund’s total does not change; it’s merely an exchange of cash for receipts.

It is not appropriate to report $100 as part of cash and $400 as expenses (B) or $400 as part of cash and $100 as receivables (C). The fund is not reported as an expense (D) since expenses have already been recognized when incurred.

Question 34

FAR2C10016
A company’s inventory has a cost of $150, a net realizable value of $140, and a normal profit margin of $10. What is the carrying amount using the LCNRV method?
A. $130
B. $140
C. $150
D. $160

Answer 34

B. $140

The LCNRV method requires the inventory to be reported at the lower of cost or net realizable value. Here, the cost is $150, and the net realizable value is $140, so the inventory should be reported at $140.

Question 35

FAR1A20048
If the income statement reflects lower administrative expenses than the supporting documents, what could be the likely cause?
A) Misclassification of administrative expenses as cost of goods sold.
B) Overstatement of revenue.
C) Understatement of sales discounts.
D) Errors in recording asset disposals.

Answer 35

A) Misclassification of administrative expenses as cost of goods sold.

Misclassification of expenses is a common error causing such discrepancies. B), C), and D) are less likely to cause this specific discrepancy.

Question 36

FAR1B002aicpa
Abbott Co. is preparing its statement of cash flows for the year. Abbott’s cash disbursements during the year included the following:
Payment of interest of bonds payable: $500,000
Payment of dividends to stockholders: $300,000
Payment to acquire 1,000 shares of Mark’s Co. common stock: $100,000
What should Abbott report as total cash outflows for financing activities in its statement of cash flows?
A. $0
B. $300,000
C. $800,000
D. $900,000

Answer 36

B. $300,000

Interest on bonds payable is an operating activity, and buying stock of another company is an investing activity. Only the payment of dividends to shareholders is a financing activity.

Question 37

FAR3C10050
What is the journal entry for expensing the incremental costs of obtaining a contract when they are deemed to be immaterial?
A. Debit Contract Costs; Credit Cash or Accounts Payable
B. Debit Cash or Accounts Payable; Credit Contract Costs
C. Debit Expense; Credit Cash or Accounts Payable
D. Debit Revenue; Credit Expense

Answer 37

C. Debit Expense; Credit Cash or Accounts Payable

When the incremental costs of obtaining a contract are deemed to be immaterial, they are expensed immediately with an entry debiting Expense and crediting Cash or Accounts Payable.

Question 38

Which of the following is one of the three standard sections of a governmental comprehensive annual financial report?

A. Investment
B. Actuarial
C. Statistical
D. Single audit

Answer 38

C. Statistical

The 3 sections of a comprehensive annual financial report (CAFR) are:

1. Introductory
2. Financial
3. Statistical

Question 39

FAR2E20006
Which of the following best describes the amortized cost method of accounting for investments?
A) Recording investments at their market value at each reporting date.
B) Recording investments at their historical cost with periodic impairment tests.
C) Amortizing the premium or discount on the acquisition cost over the life of the investment.
D) Revaluing investments at each reporting date to reflect current interest rates.

Answer 39

C) Amortizing the premium or discount on the acquisition cost over the life of the investment.

The amortized cost method involves amortizing the premium or discount on the acquisition cost of a debt investment over its life. This method reflects the gradual reduction in the principal amount of the debt and the accumulation of interest income.

Question 40

FAR1B40007
What is a key reason for adjusting the notes to financial statements when there is a change in accounting policy?
A) To reflect changes in management.
B) To account for changes in market dynamics.
C) To ensure consistency and comparability over time.
D) To highlight the company’s future strategic plans.

Answer 40

C) To ensure consistency and comparability over time.

Adjusting notes for changes in accounting policy is essential to ensure consistency and comparability of financial information over time. This helps stakeholders understand financial trends and make accurate comparisons across periods.

Question 41

10K and 10Q provide

Answer 41

10K annual report provides a
comprehensive overview of the company’s business and financial condition. It is more detailed than the quarterly reports.

10Q quarterly report provides a continuing view of a company’s financial position during the year

Question 42

10Q is filed quarterly three times a year because

Answer 42

in the fourth quarter 10K is going to be filed

Question 43

FAR3E10012
What is the primary focus of the cost approach in fair value measurement?
A. Estimating the income an asset will generate.
B. Estimating the current market value of an asset.
C. Estimating the replacement cost of an asset.
D. Estimating the historical cost of an asset.

Answer 43

C. Estimating the replacement cost of an asset.

The cost approach in fair value measurement focuses on estimating the amount it would cost to replace the asset in its current state (i.e., the replacement cost), often factoring in depreciation. Option A is incorrect as it describes the income approach. Option B is incorrect because the market approach focuses on current market value. Option D is incorrect as historical cost is not relevant in fair value measurement.

Question 44

FAR3E10020
What is the primary criterion for a fair value measurement to be classified as Level 1 in the fair value hierarchy?
A. The use of significant unobservable inputs.
B. The availability of observable market data for identical assets or liabilities in active markets.
C. The valuation is based on the entity’s own assumptions about what market participants would assume.
D. The use of quoted prices for similar assets in inactive markets.

Answer 44

B. The availability of observable market data for identical assets or liabilities in active markets.

Level 1 in the fair value hierarchy is characterized by the use of observable market data, specifically quoted prices for identical assets or liabilities in active markets. This provides the most reliable and objective evidence of fair value.

Question 45

FAR2B003n
If a previously written-off account ends up being collected, which of the following is true?
A. Net income would increase
B. There is no effect on the allowance for doubtful accounts
C. The allowance for doubtful accounts will be increased
D. The allowance for doubtful accounts will be decreased

Answer 45

C. The allowance for doubtful accounts will be increased

The first entry would be to reverse the writeoff:
Debit to accounts receivable(increase)
Credit to allowance for doubtful accounts (increase)

The next entry is to record the collection:
Debit to cash
Credit to accounts receivable

Question 46

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be

A. Allocated on a pro rata basis to the nonmonetary assets acquired.
B. Capitalized as part of goodwill and tested annually for impairment.
C. Capitalized as an other asset and amortized over five years.
D. Expensed as incurred in the current period.

Answer 46

D. Expensed as incurred in the current period.

According to ASC 805, acquisition costs related to a business combination are expensed in the period incurred.

Question 47

Accumulated other comprehensive income is reported in which of the following financial statements?

A. The income statement.
B. The statement of comprehensive income.
C. The statement of cash flows.
D. The statement of financial position.

Answer 47

D. The statement of financial position.

Accumulated other comprehensive income is an account in the shareholders’ equity section of the balance sheet. It accumulates unrealized gains and losses from OCI.

Question 48

FAR2E10020
A company has a derivative used for hedging purposes. The initial fair value was recorded as a liability of $20,000. At year-end, the fair value of the derivative is a liability of $25,000. What is the carrying amount of this derivative?
A) $20,000
B) $5,000
C) $25,000
D) $45,000

Answer 48

C) $25,000

The carrying amount of a derivative is its fair value at the reporting date, which is a liability of $25,000 in this case.

Question 49

FAR2E20018
What is the journal entry to record interest income on a bond held at amortized cost?
A) Debit Interest Receivable and credit Interest Income.
B) Debit Cash and credit Bond Investment.
C) Debit Interest Income and credit Cash.
D) Debit Cash and credit Interest Income.

Answer 49

D) Debit Cash and credit Interest Income.

The journal entry to record interest income involves debiting Cash (for the amount received) and crediting Interest Income.

Question 50

FAR1F10044
How is Asset Turnover calculated?
A. Net Sales / Average Total Assets
B. Cost of Goods Sold / Average Total Assets
C. Average Total Assets / Net Sales
D. Total Assets at Year-End / Net Sales

Answer 50

A. Net Sales / Average Total Assets

Asset Turnover is calculated by dividing Net Sales by Average Total Assets. It measures how efficiently a company uses its assets to generate sales. Option B uses an incorrect numerator, C is the inverse of the correct formula, and D does not use average assets, which is necessary for a proper period comparison.

Question 51

FAR1D008n

What is the primary difference between basic earnings per share and diluted earnings per share?

A. Diluted EPS factors in interest expense
B. Diluted EPS is an “as if” calculation based on all potential common stock
C. Diluted EPS is an “as if” calculation based on all debt and equity held by a company
D. Diluted EPS benchmarks potential bond yield coefficients with stock price forecasting

Answer 51

B. Diluted EPS is an “as if” calculation based on all potential common stock

Diluted earnings per share or DEPS is calculating the lowest possible earnings per share based on all the outstanding securities at the balance sheet date. The basic idea is that the calculation includes not only the outstanding common stock in the denominator, but all potential common stock, such as potential shares as a result of convertible bonds or stock options and warrants.

Question 52

FAR2E20025
Which of the following is not an appropriate method to measure the amount of an impairment loss on a debt investment at amortized cost?
A) Discounting the future cash flows at the market interest rate.
B) Discounting the future cash flows at the investment’s original effective interest rate.
C) Using the fair value of the investment as a proxy.
D) Estimating the cash flows that the entity expects to receive and discounting them at the original effective interest rate.

Answer 52

A) Discounting the future cash flows at the market interest rate.

For impairment of debt investments at amortized cost, the correct approach is to use the original effective interest rate, not the current market rate.

Question 53

FAR1A20037
A company with a foreign currency denominated asset will experience a transaction gain when:
A) The foreign currency strengthens and the domestic currency weakens.
B) The foreign currency weakens and the domestic currency strengthens.
C) Both currencies strengthen.
D) Both currencies weaken.

Answer 53

A) The foreign currency strengthens and the domestic currency weakens.

A gain occurs when the foreign currency in which the asset is denominated strengthens relative to the domestic currency or when the domestic currency weakens relative to the foreign currency.

Question 54

FAR2E30016
An investor uses the equity method for an investment in an investee. During the year, the investee reports a net loss of $8,000 and pays dividends of $3,000. The investor owns 20% of the investee. What is the correct journal entry for the investor’s share of the loss?
A. Debit Investment $1,600; Credit Loss from Investment $1,600
B. Debit Loss from Investment $1,600; Credit Investment $1,600
C. Debit Investment $1,600; Credit Income from Investment $1,600
D. Debit Loss from Investment $3,000; Credit Investment $3,000

Answer 54

B. Debit Loss from Investment $1,600; Credit Investment $1,600

The investor’s share of the loss (20% of $8,000 = $1,600) decreases the investment’s carrying value (credit) and is recognized as a loss (debit).

Question 55

FAR1B20019
When adjusting the trial balance to prepare the statement of activities, how should ‘Depreciation Expense’ be treated?
A) Added back to net assets
B) Deducted from revenue
C) Recognized as an expense
D) Classified as a liability

Answer 55

C) Recognized as an expense

‘Depreciation Expense’ should be recognized as an expense in the statement of activities, reflecting the allocation of the cost of fixed assets over their useful life.