areaIII D. accounting for income taxes Flashcards

1
Q

FAR2G10034
Which of the following best describes the process of reconciling accrued liabilities?
A) Matching the total accrued liabilities in the subledger with the cash payments made.
B) Ensuring that the accrued liabilities in the general ledger match the subledger total.
C) Reconciling the accrued liabilities with the related revenue accounts.
D) Comparing accrued liabilities with the corresponding asset accounts.

A

B) Ensuring that the accrued liabilities in the general ledger match the subledger total.

Reconciling accrued liabilities involves ensuring that the total amount recorded in the subledger matches the amount reported in the general ledger. This confirms the accuracy of recorded accruals.

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2
Q

FAR2E10006
An investment in a bond is required to be reported at fair value in which of the following situations?
A) The bond is a government bond held until maturity.
B) The bond is actively traded on a public market.
C) The bond is a private placement with restricted sale conditions.
D) The bond is part of a sinking fund.

A

B) The bond is actively traded on a public market.

Bonds that are actively traded on a public market are generally required to be reported at fair value because their market value can be reliably determined.
A) Government bonds held to maturity are reported at amortized cost. C) Private placements with restricted sale conditions are often reported at amortized cost due to difficulties in determining fair value. D) Bonds in a sinking fund are typically reported at amortized cost.

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3
Q

FAR2B10027
During a rollforward analysis, an adjustment for a write-off of uncollectible accounts under the allowance method would primarily involve:
A) An increase in trade receivables
B) A deduction from the allowance for doubtful accounts
C) A deduction from trade receivables
D) No adjustment to trade receivables

A

D) No adjustment to trade receivables

Under the allowance method, write-offs are accounted for within the allowance for doubtful accounts and do not affect the trade receivables balance directly in a rollforward analysis

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4
Q

FAR3D10014
How should changes in a valuation allowance for a deferred tax asset be reflected in the financial statements?
A. As an adjustment to retained earnings.
B. In the statement of comprehensive income.
C. In the income statement as part of tax expense or benefit.
D. Directly in the equity section.

A

C. In the income statement as part of tax expense or benefit.

Changes in a valuation allowance for a deferred tax asset should be reflected in the income statement as part of the tax expense or benefit. This reflects the impact of changes in the assessment of the company’s ability to realize the deferred tax asset in future periods.

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5
Q

FAR2F10014
How is the carrying amount of a finite-lived intangible asset calculated?
A. Original cost minus accumulated amortization and impairment losses.
B. Original cost plus accumulated amortization and impairment losses.
C. Fair value at each reporting date.
D. Original cost only.

A

A. Original cost minus accumulated amortization and impairment losses.

The carrying amount of a finite-lived intangible asset is calculated as the original cost of the asset minus any accumulated amortization and any impairment losses that have been recognized.

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6
Q

FAR2B009n

ABC corp transferred financial assets to DEF corp. The transfer meets all the conditions to be considered a sale. Which of the following is true?
A. Both ABC and DEF should measure the assets received and liabilities incurred at fair value.
B. ABC should measure any assets received at cost.
C. DEF should measure any assets received at cost.
D. Both ABC and DEF should measure the assets received and liabilities incurred at historical cost.

A

A. Both ABC and DEF should measure the assets received and liabilities incurred at fair value.

Both ABC and DEF should measure the assets received and liabilities incurred at fair value.

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7
Q

FAR4C001aicpa
In preparing Chase City’s reconciliation of the statement of revenues, expenditures, and changes in fund balances to the government-wide statement of activities, which of the following items should be subtracted from changes in fund balances?
A. Capital assets purchases.
B. Payment of long-term debt principal.
C. Internal service fund increase in net assets.
D. Book value of capital assets sold during the year.

A

D. Book value of capital assets sold during the year.

Under government fund accounting, the full proceeds from the sale of a capital asset is available for the fund to use, so they record all of it. When fund balances are transferred over to the government-wide statements, only the gain or loss on the sale would be recorded, so you would subtract the book value of the capital assets sold during the year.

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8
Q

FAR1F10027
To calculate the number of days it takes for a company to collect its accounts receivable, which formula should be used?
A. 365 / Accounts Receivable Turnover
B. Accounts Receivable Turnover / 365
C. 365 / Inventory Turnover
D. Inventory Turnover / 365

A

A. 365 / Accounts Receivable Turnover

The formula 365 / Accounts Receivable Turnover gives the average number of days it takes for a company to collect its receivables.

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9
Q

FAR3D001aicpa
Neron Co. has two derivatives related to two different financial instruments, instrument A and instrument B, both of which are debt instruments. The derivative related to instrument A is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. Neron experienced gains in the value of instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?
A. Gain in A: Yes. Gain in B: Yes.
B. Gain in A: Yes. Gain in B: No.
C. Gain in A: No. Gain in B: Yes.
D. Gain in A: No. Gain in B: No.

A

B. Gain in A: Yes. Gain in B: No.

On a fair value hedge, gains or losses are recognized in current income.

On a cash flow hedge, gains or losses are recognized in other comprehensive income.

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10
Q

FAR1A40033
When a discrepancy is found in dividend payments recorded in the statement of changes in equity, what supporting document should be primarily checked?
A) The income statement.
B) Bank statements confirming dividend payments.
C) The balance sheet.
D) The cash flow statement.

A

B) Bank statements confirming dividend payments.

For discrepancies in dividend payments, bank statements confirming the actual payments made are the most relevant supporting documents.

The income statement (Option A) records revenues and expenses, not dividend payments. The balance sheet (Option C) and cash flow statement (Option D) provide broader financial information but are not as directly relevant to verifying dividend payment amounts as bank statements

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11
Q

FAR3G10019
If a company’s key supplier goes out of business after the balance sheet date, how should this be reported in the financial statements?
A) Adjust the cost of goods sold to reflect potential future increases in costs.
B) Create a provision for potential losses due to the supplier’s closure.
C) Disclose the event in the notes to the financial statements.
D) No action required as the event does not directly impact the financial statements.

A

C) Disclose the event in the notes to the financial statements.

The closure of a key supplier after the balance sheet date is a Type II subsequent event. It is a significant event that occurred after the balance sheet date and does not provide additional evidence about conditions existing at that date. The appropriate action is to disclose the event in the notes to the financial statements, as it may have implications for the company’s future operations.

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12
Q

FAR2B10008
A company’s beginning balance in Allowance for Doubtful Accounts is a $2,000 credit. During the year, it writes off $1,500 in bad debts and recovers $500 previously written off. What is the ending balance in the Allowance for Doubtful Accounts?
A) $1,000 credit
B) $2,000 credit
C) $1,000 debit
D) $3,000 credit

A

A) $1,000 credit

The ending balance is calculated as Beginning Balance – Write-offs + Recoveries. Here, $2,000 – $1,500 + $500 = $1,000 credit.

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13
Q

FAR3D10020
What is the impact on deferred tax assets if future taxable income is projected to be lower than previously estimated?
A. There is no impact on deferred tax assets.
B. The deferred tax assets are increased.
C. A valuation allowance may be increased.
D. The deferred tax assets are reclassified as current.

A

C. A valuation allowance may be increased.

If future taxable income is projected to be lower than previously estimated, there may be an increased need for a valuation allowance against the deferred tax assets. This reflects the decreased likelihood of realizing the full benefit of those assets.

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14
Q

FAR1A50040
When a company amortizes intangible assets, how is this reflected in the statement of cash flows?
A. Increases cash flows from operating activities.
B. Decreases cash flows from operating activities.
C. No immediate impact on the statement of cash flows.
D. Increases cash flows from investing activities.

A

C. No immediate impact on the statement of cash flows.

Amortization of intangible assets is a non-cash transaction and does not affect the cash flow statement directly.

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15
Q

When it comes to uncertainty in income taxes, there are concepts and steps for the accounting treatment:
Key Concepts

A

● Uncertain Tax Positions: These are positions taken in a tax return that may not be sustained upon examination by tax
authorities due to uncertainties in tax law.
● Recognition Threshold: A tax benefit from an uncertain tax position can be recognized in the financial statements only if it’s “more likely than not” (a likelihood of more than 50%) that the position will be sustained based on its technical merits.
● Measurement: If the recognition threshold is met, the tax benefit should be measured as the largest amount that is
more than 50% likely to be realized upon settlement.
● Subsequent Measurement and Changes: Changes in judgment related to the expected outcome of a tax position
must be recognized in the period in which the change occurs.
● Disclosure: Entities must disclose information about the nature of their uncertain tax positions, including a tabular
reconciliation of the total amounts unrecognized in the financial statements

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16
Q

Steps for uncertain tax position Accounting Treatment

A

● Step 1: Identify Uncertain Tax Positions
○ Review all tax positions and identify those that are uncertain.
● Step 2: Apply the “More Likely Than Not” Threshold. Evaluate if it’s more likely than not that each uncertain position will be sustained upon examination.
● Step 3: Measure the Tax Benefit: Determine the amount of benefit to be recognized, based on the largest amount that has a greater than 50% likelihood of being realized.
● Step 4: Recognition and Financial Statement Presentation.
Recognize the measured tax benefit as a reduction in income tax expense.
○Present the unrecognized tax benefits as a liability on the balance sheet.
● Step 5: Disclosures: Disclose the total amounts of unrecognized tax benefits, movements in these amounts during the period, and the nature of the uncertainties

17
Q

FAR1A50022
If a cash flow statement shows a cash outflow for equipment purchase, but the equipment account in the balance sheet does not change, what could be the reason?
A. The equipment was fully depreciated in the same year.
B. The purchase was financed by a capital lease.
C. The equipment was exchanged for another fixed asset.
D. The equipment was recorded in the wrong fiscal year.

A

B. The purchase was financed by a capital lease.

If equipment is acquired under a capital lease, it does not immediately affect the equipment account in the balance sheet but shows as a cash outflow in the cash flow statement.

18
Q

FAR1A70003
What is the primary reason for adjusting notes to reflect a change in accounting estimate?
A. To correct an error
B. To comply with a change in accounting standards
C. To provide updated information based on new estimates
D. To reflect a change in management

A

C. To provide updated information based on new estimates

Changes in accounting estimates are a natural part of the accounting process as new information becomes available. Adjusting notes for these changes ensures that the financial statements reflect the most current and accurate estimates.

19
Q

FAR2H507

How is the bond interest expense affected by the following?

A. Premium: Increase, Discount: Increase
B. Premium: Decrease, Discount: Decrease
C. Premium: Increase, Discount: Decrease
D. Premium: Decrease, Discount: Increase

A

D. Premium: Decrease, Discount: Increase

The bond premium or discount affects the bond’s interest expense because it changes the effective interest rate of the bond. The effective interest rate takes into account the total interest payments over the life of the bond, as well as the initial issue price.

When a bond is issued at a premium, the effective interest rate is lower than the stated coupon rate, and the interest expense is lower than it would be if the bond had been issued at face value. This is because the issuer is receiving more cash upfront, reducing the amount of interest that needs to be paid over the life of the bond. As a result, the issuer will record a lower interest expense on their financial statements.

Conversely, when a bond is issued at a discount, the effective interest rate is higher than the stated coupon rate, and the interest expense is higher than it would be if the bond had been issued at face value. This is because the issuer received less cash upfront, requiring more interest to be paid over the life of the bond. As a result, the issuer will record a higher interest expense on their financial statements.

20
Q

FAR2F001n

Ruby Inc. purchased equipment A for future and current projects, and equipment B for current projects only. Both pieces of equipment are for research and development projects. How will the accounting differ for the two pieces of equipment?

A. The costs of both pieces of equipment will be expensed as R&D in the period they were purchased.
B. Equipment A will be capitalized and depreciated, with the depreciation classified as R&D expense. Equipment B will be fully expensed as R&D.
C. Equipment A will be fully depreciated as R&D expense. Equipment B will be capitalized and depreciated, with the depreciation classified as R&D expense.
D. Since they are PP&E, they will both be capitalized and depreciated like normal PP&E.

A

B. Equipment A will be capitalized and depreciated, with the depreciation classified as R&D expense. Equipment B will be fully expensed as R&D.

R&D equipment that is used for more than one project is capitalized and depreciated like other PPE, except that the depreciation is an R&D expense instead of depreciation expense. R&D equipment that is only used for one project is expensed as part of R&D entirely in the period it was purchased.

21
Q

FAR2A10026
If a company notes that a deposit made near the end of the month is not reflected on the bank statement, what should be the treatment in the cash reconciliation?
A. Deduct the deposit amount from the bank statement balance
B. Add the deposit amount to the general ledger balance
C. Treat the deposit as a deposit in transit
D. Ignore the deposit since it’s a timing issue

A

C. Treat the deposit as a deposit in transit

A deposit made near the end of the month but not reflected on the bank statement should be treated as a deposit in transit (C), which is a timing difference.

There’s no need to adjust the general ledger balance (B) as the deposit is already recorded there. Deducting the amount from the bank statement balance (A) is not correct. Ignoring the deposit (D) is not advisable as it needs to be accounted for in the reconciliation.

22
Q

income Tax Expense: This represents the sum of current tax expense or benefit and deferred tax expense or benefit.
● Current Tax Expense/Benefit: The amount of income taxes payable or refundable for the current year.
● Deferred Tax Expense/Benefit: The changes in the deferred tax assets and liabilities.

A
23
Q

Book to tax basis differences typically arise when the timing of income or expense recognition differs

A

between accounting principles (for financial reporting) and tax laws (for income tax filing)

24
Q

The tax provision typically includes current tax expense or benefit, deferred tax expense or benefit, and any changes in valuation allowance

A
25
Q

The tax provision typically includes current tax expense or benefit, deferred tax expense or benefit, and any changes in valuation allowance

A
26
Q

FAR1F10016

To determine a company’s efficiency in generating profit from operations before financing and taxes, which ratio is used?

A. Gross Profit Margin
B. Operating Margin
C. Net Profit Margin
D. Return on Assets

A

B. Operating Margin

Operating Margin is calculated by dividing Operating Income (income from operations before interest and taxes) by Revenue. It assesses how much profit a company makes on a dollar of sales before interest and taxes. A focuses on cost of goods sold, C includes all income and expenses, and D measures asset efficiency.

27
Q

FAR1A50023
How should a discrepancy between the cash flow statement’s reported cash inflow from issuing bonds and the increase in the long-term debt account in the balance sheet be investigated?
A. Review the interest expense account for discrepancies.
B. Check for bond premium or discount accounts.
C. Verify the cash received from issuing bonds with bank statements.
D. Confirm the maturity date of the bonds.

A

B. Check for bond premium or discount accounts.

A discrepancy can arise if the bonds were issued at a premium or discount, affecting the long-term debt account differently from the cash inflow.

28
Q

FAR1C006aicpa
At which of the following amounts should a nongovernmental not-for-profit organization report investments in debt securities?
A. Potential proceeds from liquidation sale.
B. Discounted expected future cash flows.
C. Quoted market prices.
D. Historical cost.

A

C. Quoted market prices.

Nonprofits don’t use debt investment classifications such as available-for-sale or held-to-maturity. Everything is valued at market price (fair value).

29
Q

FAR3D10013
What does a valuation allowance against a deferred tax asset indicate?
A. The company will pay more taxes in the future.
B. The company is likely to have more taxable income than previously estimated.
C. The company may not be able to realize some or all of the deferred tax asset.
D. The company is conserving cash for future use.

A

C. The company may not be able to realize some or all of the deferred tax asset.

A valuation allowance against a deferred tax asset indicates that the company may not be able to realize some or all of the deferred tax asset due to uncertainty regarding future profitability. It is a conservative approach to ensure that the assets are not overstated.

30
Q

FAR2F10010
What is the impact of amortizing an intangible asset on a company’s financial statements?
A. It increases net income in the income statement.
B. It decreases the carrying value of the asset on the balance sheet.
C. It increases the asset’s residual value.
D. It has no impact on the income statement or balance sheet.

A

B. It decreases the carrying value of the asset on the balance sheet.

Amortizing an intangible asset decreases its carrying value on the balance sheet over time, as the cost of the asset is allocated over its useful life. This process reflects the consumption of the asset’s economic benefits.

31
Q

What is a debt covenant?
A. A government regulation on corporate borrowing
B. A condition set by a creditor in a debt agreement
C. A legal requirement for public companies
D. A financial strategy for debt repayment

A

B. A condition set by a creditor in a debt agreement

A debt covenant is a condition set by a creditor in a debt agreement. It is meant to protect the creditor by ensuring that the borrowing company maintains certain financial standards.

32
Q

FAR3C10017
What happens when a conditional promise to give becomes unconditional?
A. It is recognized as revenue in the period it becomes unconditional
B. It is reclassified as a long-term receivable
C. It remains as a conditional promise until the funds are received
D. It is recorded as a liability

A

A. It is recognized as revenue in the period it becomes unconditional

When a conditional promise to give becomes unconditional, it is recognized as revenue in the period the change occurs.