FAR 1

Question 1

current assets

Answer 1

cash and equivalents
available-for-sale debt securities
trading debt securities
accounts receivable
notes receivable
inventories
prepaid expenses

Question 2

noncurrent assets

Answer 2

equity-method investments
property, plant, and equipment
minus: accumulated depreciation
goodwill

Question 3

current liabilities

Answer 3

accounts payable
accrued interest on note
current maturities of long-term debt
accrued salaries and wages
income taxes payable

Question 4

noncurrent liabilities

Answer 4

bonds payable
long-term notes payable
employee-related obligations
deferred income taxes

Question 5

equity

Answer 5

common stock $1 par
additional paid-in capital
accumulated OCI
retained earnings

Question 6

success tip

Answer 6

The AICPA has previously tested candidates on their knowledge of what the classification of current liabilities entails. Potentially, candidates could see a list of fixed accounts with a question on the amount of current liabilities of the firm.

Question 7

Decrease in AR
Increase in AP

Answer 7

Both increase Cash income

Question 8

Issuance of stock +
Net income +
- Cash Dividend

Answer 8

= Equity

Question 9

Separate component of income

Answer 9

Material, unusual in nature, infrequent, or both

Question 10

Separate component of income, taxes

Answer 10

Do not report items net of taxes

Question 11

Income statement order of presentation

Answer 11

1. Income from continuing operations
2. discontinued operations

Question 12

purpose of reporting comprehensive income

Answer 12

to summarize all changes in equity from nonowner sources

Question 13

Intraperiod tax allocation is required for:

Answer 13

1) continuing operations
2) discontinued operations
3) other comprehensive income
4) items debited or credited directly to Shareholder’s Equity (SE)

Question 14

Purpose of statement of SE

Answer 14

aka statement of changes in equity
reconciliation of beginning and ending balances
1 - totals
2 - comprehensive income
3 - retained earnings
4 - accumulated OCI
5 - common stock
6 - additional paid-in capital

Question 15

purpose of reporting comprehensive income

Answer 15

to summarize all changes in equity from nonowner sources

Question 16

D/C ADE LER

Debit normal balance Assets Draw Expenses

Credit normal balance Liabilities Equity Revenue

Answer 16

D/C ADE LER

Debit normal balance Assets Draw Expenses

Credit normal balance Liabilities Equity Revenue

Question 17

DEALER

Answer 17

debit: dividend, expense, asset
credit: liability, equity, revenue

Question 18

A = L + OE

Answer 18

Own = Owe

Question 19

balance sheet - temporary or permanent

Answer 19

The accounts presented on the balance sheet are real or permanent accounts. They report an entity’s resources and financing elements that exist from period to period.

Question 20

income statement - temporary or permanent

Answer 20

The accounts presented on the income statement are nominal or temporary accounts. They are reported for a period of time, closed at the end of the period, and reopened at the beginning of the next period with zero balances.

Question 21

The transactions not included in net income are

Answer 21

Transactions with owners,
Error corrections,
Items reported initially in other comprehensive income,
Transfers to and from appropriated retained earnings, and
Effects on prior periods of accounting changes.

Question 22

Any recognized amounts not included in continuing operations are reported in a separate section for

Answer 22

discontinued operations.

Question 23

Condensed Income Statement

Answer 23

Net sales $1,050,000
Cost of goods sold (820,000)
Gross profit $ 230,000
Selling expenses (70,000)
General and administrative expenses (78,000)
Income from operations $ 82,000
Other revenues and gains 1,075,000
Interest expense (124,000)
Other expenses and losses (198,000)
Income before taxes* $ 835,000
Income tax expense (85,000)
Net income* $ 750,000
Earnings per common share (simple capital structure) –
assuming 20,000 shares issued and outstanding $37.50

Question 24

Cost of goods sold

Answer 24

beginning finished goods inventory
+purchases or COGM
=Goods available for sale
-ending FG inventory
=cost of goods sold

Question 25

cost of goods manufactured

Answer 25

*manufacturing costs adjusted for the change in work-in-process. *cost of goods sold adjusted for the change in finished goods inventory

Question 26

cost of goods manufactured (WIP)

Answer 26

beginning work in process +sum of periodic manufacturing costs -ending work-in-process =cost of goods manufactured

Question 27

cost of goods manufactured (FG)

Answer 27

ending FG inventory +cost of goods sold -beginning FG inventory =cost of goods manufactured

Question 28

Selling expenses are incurred in selling or marketing.

Answer 28

sales representatives' salaries, commissions, and travelling expenses sales department rent, salaries, and depreciation communications (e.g. internet) costs shipping costs may be selling advertising costs (expenses when incurred or when ads first occur)

Question 29

sellers may agree to reimburse customers for customers advertising costs (cooperative advertising)

Answer 29

revenues are recognized before reimbursement obligations must be accrued and ad costs expensed when related revenues are recognized

Question 30

General and administrative expenses are incurred for the direction of the entity as a whole and are not related entirely to a specific function,

Answer 30

accounting, legal, and other fees for professional services officers' salaries insurance wages of office staff miscellaneous supplies office occupancy costs

Question 31

unusual in nature, infrequent in occurrence, or both are reported as a separate component of income from continuing operations

Answer 31

These items must not be reported net of taxes. Gains or losses of a similar nature that are not individually material must be aggregated. The nature and financial effect of each item is disclosed in the notes to the financial statements or reported in the income statement. The effects of such items on earnings per share must not be presented on the income statement.

Question 32

discontinued operation

Answer 32

separately net of tax after the results of continuing operations

Question 33

discontinued operation - held for sale

Answer 33

measured at the lower of carrying amount or fair value minus cost to sell

Question 34

discontinued operations misc

Answer 34

includes profit/loss incurred for entire period (before/after the component is held for sale)

Question 35

discontinued operations (misc2)

Answer 35

include any loss for a write-down to FV minus cost to sell

Question 36

discontinued operations (misc 3)

Answer 36

intraperiod tax allocation is required

Question 37

comprehensive income includes

Answer 37

all changes in equity (expect investments and distributions to owners) =net income and other comprehensive income (OCI)

Question 38

Other comprehensive income (OCI)

Answer 38

unrealized holding gains/losses on available-for-sale debt securities gains/losses on derivatives (cash flow hedges) foreign currency translation adjustments for a foreign operation changes in FV due to credit risk of financial liabilities

Question 39

OCI

Answer 39

net of tax tax effect on each component must be disclosed

Question 40

presentation of statement of oci

Answer 40

net income components of oci total oci total of comprehensive income

Question 41

components of OCI is temporary. it is closed to:

Answer 41

accumulated OCI, permanent account reported on the equity section of the balance sheet

Question 42

OCI income/loss effect on balance sheet

Answer 42

income=increases accumulated OCI loss=decreases accumulated OCI

Question 43

oci tax presentation

Answer 43

1 - net of related tax effects 2-pretax, with one amount shown for the aggregate tax effect

Question 44

statement of changes in equity

Answer 44

Net income for the period (close to retained earnings) OCI for the period (close to accumulated other comprehensive income) Common stock issued (common stock, additional paid-in capital) Dividends declared (retained earnings) Repurchase of common stock (treasury stock)

Question 45

The changes in retained earnings can result from the following adjustments

Answer 45

Net income/loss Any prior-period adjustments, net of tax Dividends declared Certain other rare items: reissuance of treasury stock under the cost method

Question 46

cash collected from customers (accrual to cash)

Answer 46

beginning accounts receivable xx sales (accural basis) xx ending accounts receivable (xx) cash collected from customers xx

Question 47

interest paid during the period (accural to cash)

Answer 47

beginning interest payable xx interest expense (accural basis) xx ending interest payable (xx) interest paid during the period xx

Question 48

cash paid to suppliers

Answer 48

beginning accounts payable xx purchases (accrual basis) xx ending accounts payable (xx) cash paid to suppliers

Question 49

expenses paid during the period

Answer 49

ending prepaid expenses xx current-period expense (accrual basis) xx beginning prepaid expenses (xx) expenses paid during the period

Question 50

income tax basis

Answer 50

Modified accelerated cost recovery system (MACRS) is allowed, but is not recognized under GAAP

Question 51

G&A

Answer 51

G&A expenses are incurred for the entity as a whole and are not related to any specific function (i.e. selling or manufacturing)

Question 52

G&A

Answer 52

is a nonoperating item included under other expenses

Question 53

accrued expenses

Answer 53

current liabilities

Question 54

freight out

Answer 54

part of selling expenses

Question 55

cash flow $70k interest Accrued interest payable decr $17k Prepaid Interest decr $23k

Answer 55

current interest expense is $76k $70k -$17k +$23k =$76k

Question 56

cash basis net income = $70k ap decr 2k unearned rev incr 200 wages payable incr 100 prepaid rent incr 300 AR decrease 800

Answer 56

cash net income $70k ap decr add 2k unearned rev incr minus 200 wages payable incr minus 100 prepaid rent incr add 300 AR decr minus 800 Accrual net income = $71,200

Question 57

decrease in AP

Answer 57

cash paid to suppliers exceeds purchases

Question 58

increase in liability for unearned revenue

Answer 58

cash inflow increased cash but not accrual NI

Question 59

increase in wages payable

Answer 59

implies an accrual expense not recognized in cash basis NI

Question 60

increase in prepaid rent

Answer 60

reduced cash-basis with no effect on accrual-basis NI

Question 61

decrease in AR

Answer 61

implies cash collections exceeded accrual basis revenue

Question 62

cash to accrual explanation

Answer 62

The decrease in accounts payable implies that cash paid to suppliers exceeded purchases. The decrease ($3,000 – $1,000 = $2,000) is included in the calculation of cash-basis net income but not accrual-basis net income. The increase in the liability for unearned revenue ($500 – $300 = $200) implies a cash inflow that increased cash-basis net income but not accrual-basis net income. The increase in wages payable ($400 – $300 = $100) implies an accrual-basis expense not recognized in cash-basis net income. The increase in prepaid rent ($1,500 – $1,200 = $300) implies reduced cash-basis net income with no effect on accrual-basis net income. The decrease in accounts receivable ($1,400 – $600 = $800) implies that cash collections exceeded accrual-basis revenue. Accrual-basis net income based on these adjustments is therefore $71,200. Cash-basis net income $70,000 A/P decrease 2,000 Unearned revenue increase (200) Wages payable increase (100) Prepaid rent increase 300 A/R decrease (800) $71,200

Question 63

unusual in nature or infrequent in occurrence should be reported as

Answer 63

component of income from continuing operations reported as a separate component of income from continuing operations such items must not be reported on the face of the income statement net of income taxes

Question 64

advertising expense method must stay consistent

Answer 64

146k ad expense account included in above is: $15k cost of printing for campaign in Y2 not included: $9k ads in Y1, billed in Y2 ad expense should include $15k plus $9k for 155k total