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Flashcards in FAR 5 Deck (30):
1

Since 2008, the SEC has permitted foreign private issuers to file their financial statements using:
A. U.S. GAAP.
B. FASB Standards.
C. IFRS as adopted by the European Union.
D. IFRS as issued by the IASB.

D. IFRS as issued by the IASB.

Foreign private issuers in the U.S. markets can file their financial statements using IFRS issued by the IASB since 2008.

2

The SEC is comprised of five commissioners, appointed by the President of the United States, and four divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
A. Division of Corporate Finance.
B. Division of Enforcement.
C. Division of Trading and Markets.
D. Division of investment management.

A. Division of Corporate Finance.

The Division of Corporate Finance oversees the compliance with the securities acts and examines all filings made by publicly held companies.

3

A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company's fiscal year end that the company has to file Form 10-K with the SEC?
A. 60 days.
B. 75 days.
C. 90 days.
D. 120 days.

B. 75 days.

An accelerated filer has an aggregate worldwide market value of the voting and nonvoting common stock held by nonaffiliates of $75 million or more, but less than $700 million on the last business day of the issuer's most recently completed second fiscal quarter. A large accelerated filer has market capitalization (as described) of $700 million or more. Beginning in 20X6 the SEC changed the 10-K filing deadline for large accelerated filers to be 60 days from the fiscal year end. Accelerated filers still have 75 days to file their 10-K.

4

Which of the following is not a required component of the 10-K filing?
A. Product market share.
B. Description of the business.
C. Market price of common stock.
D. Executive compensation.

A. Product market share

The market share of the company's product is not a required disclosure. The company may chose to voluntarily present this information, but it is not a required disclosure.

5

A company is required to file quarterly financial statements with the United States Securities and Exchange Commission on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations, which could have a significant impact on its financial condition. In addition to the most recent quarter end, for which of the following periods is the company required to present Balance Sheets on Form 10-Q?
A. The end of the corresponding fiscal quarter of the preceding fiscal year.
B. The end of the preceding fiscal year and the end of the corresponding fiscal quarter of the preceding fiscal year.
C. The end of preceding fiscal year.
D. The end of the preceding fiscal year and the end of the prior two fiscal years.

C. The end of preceding fiscal year.

The Balance Sheet for the end of the preceding fiscal year would have been the last audited Balance Sheet. This Balance Sheet is presented along with the current fiscal quarter.

6

Which of the follow is required by Regulation S-K to be included in the Management's Discussion and Analysis (MD&A) that is part of the 10-K?

A.
The Balance Sheet.

B.
Discussion of risks and uncertainties.

C.
Accounting fees and services.

D.
Executive compensation.

B.
Discussion of risks and uncertainties.

The SEC requires that the MD&A provide a "discussion and analysis" on operating results, liquidity, and capital resources, trends, and risks and uncertainties. Where there are significant increases in sales, management must discuss the extent that price, volume, or new products contributed to the increase.

7

Which regulation governs the form and content of financial statement disclosures?

A.
Regulation S-X.

B.
Sarbanes Oxley.

C.
Regulation S-K.

D.
Regulation S-Q.

A.
Regulation S-X.

Regulation S-X governs the form and content of financial statements and financial statement disclosures.

8

A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?
A. 30 days.
B. 40 days.
C. 45 days.
D. 60 days.

B. 40 days.

A large accelerated filer is a company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more. A large accelerated filer must file its 10Q within 40 days after quarter end.

9

The following trial balance of JB Company at December 31, Year five, has been adjusted except for income taxes. The income tax rate is 30%.
DR CR
Accounts receivable, net $725,000
Accounts payable 250,000
Accumulated depreciation 125,000
Cash 185,000
Contributed capital 650,000
Expenses 3,750,000
Goodwill 140,000
Prepaid taxes 225,000
Property, plant, and equipment 850,000
Retained earnings, 1/1/year five 350,000
Revenues __________ 4,500,000
5,875,000 5,875,000
During year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.

Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.

In JB Company's December 31, year five Balance Sheet, what amount should be reported as current assets?

A. 710,000
B. 910,000
C. 935,000
D. 1,135,000

A. 710,000

Current assets are calculated as follows:
Cash 185,000
Accounts receivable, net 725,000
Reclassification of o/s receivable (200,000)
Total current assets 710,000

10

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:
A. Conservatism.
B. Fair value.
C. Market value.
D. Historical cost.

D. Historical cost.

Reporting accounts receivable at net realizable value is a departure from the principle of historical cost. Accounts receivable is usually aged by some method and reported at net realizable value.

11

The following trial balance of JB Company at December 31, year five, has been adjusted except for income taxes. The income tax rate is 30%.
DR CR
Accounts receivable, net 725,000
Accounts payable 250,000
Accumulated depreciation 125,000
Cash 185,000
Contributed capital 650,000
Expenses 3,750,000
Goodwill 140,000
Prepaid taxes 225,000
Property, plant and equipment 850,000
Retained earnings, 1/1/Yr. 5 350,000
Revenues 4,500,000
5,875,000 5,875,000
During year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.

Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.

In JB Company's December 31, year five Balance Sheet, what amount should be reported as total retained earnings?

A. 225,000
B. 525,000
C. 750,000
D. Some other amount.

D. Some other amount.

Retained earnings are calculated as follows:
Revenue [4,500,000] - Expenses [3,750,000] 750,000
Income taxes = 0.30 * 750,000 (225,000)
Net income 525,000
Retained earnings, 1/1/Yr. 5 350,000
Retained earnings, 12/31/Yr. 5 875,000

12

The following trial balance of JB Company at December 31, year five, has been adjusted except for income taxes. The income tax rate is 30%.
DR CR
Accounts receivable, net $725,000
Accounts payable 250,000
Accumulated depreciation 125,000
Cash 185,000
Contributed capital 650,000
Expenses 3,750,000
Goodwill 140,000
Prepaid taxes 225,000
Property, plant, and equipment 850,000
Retained earnings, 1/1/Year five 350,000
Revenues __________ 4,500,000
5,875,000 5,875,000
During Year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.

Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.

In JB Company's December 31, Year five Balance Sheet, what amount should be reported as total assets?

A. 1,575,000
B. 1,775,000
C. 2,000,000
D. 5,875,000

B. 1,775,000

Total assets are calculated as follows:
Cash 185,000
Accounts receivable, net 725,000
Property, plant, and equipment 850,000
Accumulated depreciation (125,000)
Goodwill 140,000
Total assets 1,775,000

13

Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 20X5 included the following expense and loss accounts:
Accounting and legal fees $120,000
Advertising 150,000
Freight-out 80,000
Interest 70,000
Loss on the sale of long-term investments 30,000
Officers' salaries 225,000
Rent for office space 220,000
Sales salaries and commissions 140,000
One-half of the rented premises is occupied by the sales department.

Brock's total selling expenses for 20X5 are:

A. $480,000
B. $400,000
C. $370,000
D. $360,000

A. $480,000

Advertising $150,000
Freight-out 80,000
Rent for office space ($220,000 x .50) 110,000
Sales salaries and commissions 140,000
Equals total selling expenses $480,000
Advertising is part of the overall selling effort. Freight-out is delivery expense. Offering delivery service is also part of the overall sales effort. Only 1/2 the rent is included in selling expenses because the sales department occupies only 1/2 the premises.

14

A company's activities for year two included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of amortization expense 59,000
Sales returns 34,000
Gain on sale of available-for-sale securities 8,000
Gain on disposal of a discontinued business segment 4,000
Unrealized gain on available-for-sale securities 2,000
The company has a 30% effective income tax rate. What is the company's net income for year two?

A. $1,267,700
B. $1,273,300
C. $1,314,600
D. $1,316,000

C. $1,314,600

All items are included in net income except the prior year adjustment to amortization expense and the unrealized gain on the AFS securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.

15

In Yew Co.'s 20X4 annual report, Yew described its social awareness expenditures during the year as follows:

"The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company's commitment to the environment, the Company spent $100,000 to redesign product packaging."
What amount of the above should be included in Yew's Income Statement as charitable contributions expense?

A. $310,000
B. $390,000
C. $410,000
D. $490,000

A. $310,000

The charitable contributions are limited to the $250,000 contribution and the portion of the $140,000 contribution paid for by the firm (which amounted to $60,000 or $140,000 - $80,000 paid by the employees). Thus total charitable contributions are $310,000.
The product packaging cost is a promotional cost.

16

In Baer Food Co.'s 20X5 single-step Income Statement, the section titled "Revenues" consisted of the following:
Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of the segment (net of $1,200 tax effect) $(2,400)
Gain on the disposal of segment (net of $7,200 tax effect) 14,400 12,000
Interest revenue 10,200
Gain on the sale of equipment 4,700
Total revenues $213,900
In the revenues section of the 20X5 Income Statement, Baer Food should have reported total revenues of:
A. $216,300
B. $215,400
C. $203,700
D. $201,900

Net sales $187,000
Interest revenue 10,200
Gain on equipment 4,700
Total revenues $201,900

This answer includes the gain on the sale of equipment. It is the best answer from among the four because this answer less the gain is not represented. However, many would argue that the gain is not a revenue. Discontinued operations is not a revenue; rather, it is a special item of disclosure found below income from continuing operations in the Income Statement.

This answer does not subtract the discontinued operations.
Total revenues may be found as:
Net sales $187,000
Interest revenue 10,200
Gain on equipment 4,700
Total revenues $201,900
This answer includes the gain on the sale of equipment. It is the best answer from among the four because this answer less the gain is not represented.
However, many would argue that the gain is not a revenue. Discontinued operations is not a revenue; rather, it is a special item of disclosure found below income from continuing operations in the Income Statement.

17

The following items were among those reported on Lee Co.'s Income Statement for the year ended December 31, 20X5:
Legal and audit fees $170,000
Rent for office space 240,000
Interest on inventory floor plan 210,000
Loss on abandoned data processing equipment used in operations 35,000
The office space is used equally by Lee's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Lee's multiple-step Income Statement?
A. $290,000
B. $325,000
C. $410,000
D. $500,000

A. $290,000

General and administrative expenses include expenses that are not related to significant specifically identifiable activities. G & A costs benefit the entire firm rather than one specific function.
The $170,000 of legal and audit fees are included in G & A expenses and are 1/2 of the rent for the office space ($120,000 = .5 x $240,000). The portion of rent related to accounting is G & A. The other half of the rent is a selling expense, a significant separate activity. The interest and loss are also separately reported. Thus total G & A expense is $290,000 ($170,000 + $120,000).

18

Which of the following should be included in general and administrative expenses?
Interest Advertising
Yes Yes
Yes No
No Yes
No No

No No

Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified

19

The following costs were incurred by Griff Co., a manufacturer, during 20X4:

Accounting and legal fees
$ 25,000
Freight-in
175,000
Freight-out
160,000
Officers' salaries
150,000
Insurance
85,000
Sales representatives' salaries
215,000
What amount of these costs should be reported as general and administrative expenses for 20X4?

A. $260,000
B. $550,000
C. $635,000
D. $810,000

The only costs included in general and administrative costs are:

Accounting and legal
$ 25,000
Officers' salaries
150,000
Insurance
85,000
Total G&A cost
$ 260,000
The remaining costs are classified (in order of appearance) as product cost, distribution cost, and sales/promotional costs.

A. $260,000

20

Lew Co. sold 200,000 corrugated boxes for $2 each. Lew's cost was $1 per unit.
The sales agreement gave the customer the right to return up to 60% of the boxes within the first six months, provided an appropriate reason was given.
It was immediately determined, with appropriate reason, that 5% of the boxes would be returned. Lew absorbed an additional $10,000 to process the returns and expects to resell the boxes.

What amount should Lew report as operating profit from this transaction?

A. $170,000
B. $179,500
C. $180,000
D. $200,000

C. $180,000

Lew's operating profit is computed and explained as follows:

Sales 200,000 units x $2 selling price =
$400,000
Less: Provision for returns 200,000 x .05 x $2 = 20,000[1]
Net Sales = $380,000
COGS 200,000 units x $1 cost = $200,000
Less: Provision for returns 10,000 x $1 = 10,000
Net COGS 190,000 units x $1 = 190,000
Gross Profit $190,000
Less: Return processing cost 10,000[2]
Operating profit $180,000
[1] The facts state that 5% of the (all) boxes sold would be returned. The fact that 60% could be returned only established the maximum returnable rate, whereas 5% is the expected return rate.

[2] Since Lew has "absorbed" $10,000 to process returns, it has charged that amount to sales. The fact that Lew expects to resell the boxes is not recognized until the boxes are actually resold.

21

In LM's single-step income statement, the section titled Revenues consisted of the following:
Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of segment, net of $1,200 tax effect $ 2,400
Gain on disposal of segment, net of $7,200 tax effect 14,400 12,000
Interest revenue 10,200
Gain on sale of equipment 4,700
Cumulative change in previous year's income due to change
In depreciation method, net of $750 tax effect 1,500
Total revenues $215,400
In the revenues section of the income statement, LM should have reported total revenues of

A. $217,800
B. $215,400
C. $203,400
D. $201,900

D. $201,900

In a single step income statement, total revenue is the sum of all revenues, including Net Sales Revenue ($187,000) plus Interest Revenue ($10,200) plus Gain on sale of equipment ($4,700), or $201,900. Results from discontinued operations are reported at the end of the income statement. The cumulative change item is not reported in current year's income statement, as it was a one-time adjustment for the prior reporting period.

22

Blythe Corp. is a defendant in a lawsuit. Blythe's attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?
A. Accrued and disclosed.
B. Accrued but NOT disclosed.
C. Disclosed but NOT accrued.
D. No disclosure or accrual.

C. Disclosed but NOT accrued.

Contingencies are accrued and recognized as a liability when the occurrence of the liability is probable and the amount can be reasonably estimated. This lawsuit is reasonably possible, but not probable. Reasonably possible is typically a 50/50 chance of occurrence, where probable is a higher likelihood of occurrence. This answer is correct because this lawsuit would be disclosed, but not accrued.

23

The following costs were incurred by Griff Co., a manufacturer, during 20X4:

Accounting and legal fees
$ 25,000
Freight-in
175,000
Freight-out
160,000
Officers' salaries
150,000
Insurance
85,000
Sales representatives' salaries
215,000
What amount of these costs should be reported as general and administrative expenses for 20X4?

A. $260,000
B. $550,000
C. $635,000
D. $810,000

A. $260,000


The only costs included in general and administrative costs are:

Accounting and legal
$ 25,000
Officers' salaries
150,000
Insurance
85,000
Total G&A cost
$ 260,000
The remaining costs are classified (in order of appearance) as product cost, distribution cost, and sales/promotional costs.

24

A multi-step Income Statement is prepared:
A. By all corporations.
B. By a company whose main activity is sales.
C. Because it is required by FASB.
D. Because it is more meaningful presentation of revenue and expenses.

D. Because it is more meaningful presentation of revenue and expenses.

A multi-step Income Statement is not required but is prepared because it is a more meaningful presentation of revenue and expenses. In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations.

25

In Yew Co.'s 20X4 annual report, Yew described its social awareness expenditures during the year as follows:

"The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company's commitment to the environment, the Company spent $100,000 to redesign product packaging."
What amount of the above should be included in Yew's Income Statement as charitable contributions expense?

A. $310,000
B. $390,000
C. $410,000
D. $490,000

A. $310,000

The charitable contributions are limited to the $250,000 contribution and the portion of the $140,000 contribution paid for by the firm (which amounted to $60,000 or $140,000 - $80,000 paid by the employees). Thus total charitable contributions are $310,000.
The product packaging cost is a promotional cost.

26

A company's activities for year two included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of amortization expense 59,000
Sales returns 34,000
Gain on sale of available-for-sale securities 8,000
Gain on disposal of a discontinued business segment 4,000
Unrealized gain on available-for-sale securities 2,000
The company has a 30% effective income tax rate. What is the company's net income for year two?

A. $1,267,700
B. $1,273,300
C. $1,314,600
D. $1,316,000

Gross sales $3,600,000
Cost of goods sold -1,200,000
Selling and administrative expense -500,000
Sales returns -34,000
Gain on sale of available-for-sale securities +8,000
Gain on disposal of a discontinued business segment +4,000


C. $1,314,600

All items are included in net income except the prior year adjustment to amortization expense and the unrealized gain on the AFS securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.

The unrealized gain should be included in other comprehensive income.

27

Which of the following should be included in general and administrative expenses?
Interest Advertising
Yes Yes
Yes No
No Yes
No No

No No

Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified.

28

Legal and audit fees $170,000
Rent for office space 240,000
Interest on inventory floor plan 210,000
Loss on abandoned data processing equipment used in operations 35,000
The office space is used equally by Lee's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Lee's multiple-step Income Statement?
A. $290,000
B. $325,000
C. $410,000
D. $500,000

A. $290,000

General and administrative expenses include expenses that are not related to significant specifically identifiable activities. G & A costs benefit the entire firm rather than one specific function.
The $170,000 of legal and audit fees are included in G & A expenses and are 1/2 of the rent for the office space ($120,000 = .5 x $240,000). The portion of rent related to accounting is G & A. The other half of the rent is a selling expense, a significant separate activity. The interest and loss are also separately reported. Thus total G & A expense is $290,000 ($170,000 + $120,000).

29

Vane Co.'s trial balance of Income Statement accounts for the year ended December 31, 20X4, included the following:
Debit Credit
Sales $575,000
Cost of sales 240,000
Administrative expenses 70,000
Loss on the sale of equipment 10,000
Sales commissions 50,000
Interest revenue 25,000
Freight out 15,000
Loss on the early retirement of long-term debt 20,000
Uncollectible accounts expense 15,000
_________ _________
Totals $420,000 $600,000
======== ========
Other information
Finished goods inventory:
January 1, 20X4 $400,000
December 31, 20X4 360,000
Vane's income tax rate is 30%. In Vane's 20X4 multiple-step Income Statement, what amount should Vane report as the cost of goods manufactured?

A. $200,000
B. $215,000
C. $280,000
D. $295,000

COGM is the stuffed the went from WIP to FG.
FG
-----------------------
BOY 400
COGS 240
COGM 200
EOY 360

30

In LM's single-step income statement, the section titled Revenues consisted of the following:
Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of segment, net of $1,200 tax effect $ 2,400
Gain on disposal of segment, net of $7,200 tax effect 14,400 12,000
Interest revenue 10,200
Gain on sale of equipment 4,700
Cumulative change in previous year's income due to change
In depreciation method, net of $750 tax effect 1,500
Total revenues $215,400
In the revenues section of the income statement, LM should have reported total revenues of

A. $217,800
B. $215,400
C. $203,400
D. $201,900

D. $201,900

In a single step income statement, total revenue is the sum of all revenues, including Net Sales Revenue ($187,000) plus Interest Revenue ($10,200) plus Gain on sale of equipment ($4,700), or $201,900. Results from discontinued operations are reported at the end of the income statement. The cumulative change item is not reported in current year's income statement, as it was a one-time adjustment for the prior reporting period.