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Flashcards in FAR 59 - Interim Financial Reporting Deck (22):
1

On March 15, 2004, Krol Co. paid property taxes of $90,000 on its office building for the calendar year 2004.
On April 1, 2004, Krol paid $150,000 for unanticipated repairs to its office equipment. The repairs will benefit operations for the remainder of 2004.
What is the total amount of these expenses that Krol should include in its quarterly income statement for the three motnhs ended June 30, 2004?

$72,500
One-fourth of the property taxes should be recognized for the second quarter income statement: $22,500 = $90,000/4. Although the entire annual amount was paid in the first quarter, only 1/4 of the total annual amount should be recognized in each quarter. This allocation is based on benefits received (the benefits that flow from payment of property taxes). It is reasonable to assume that each quarter benefits the same amount.
The repair cost benefits three quarters on an equal basis because it was paid at the beginning of the second quarter. Therefore, 1/3 of the cost, or $50,000, should be reported in the income statement for the second quarter.
Thus, the total expense to be recognized in the second quarter is $72,500 ($22,500 + $50,000).

2

APB Opinion No. 28, Interim Financial Reporting, concluded that interim financial reporting should be viewed primarily in which of the following ways?
A. As useful only if activity is spread evenly throughout the year.
B. As if the interim period were an annual accounting period.
C. As reporting for an integral part of an annual period.
D. As reporting under a comprehensive basis of accounting other than GAAP.

C. The fundamental principle underlying interim reporting is that interim reports should be considered an integral part of the annual reporting period. This has important implications for interim reporting. There are exceptions to this principle, however.

3

For interim financial reporting, a company's income tax provision for the second quarter of 2004 should be determined using the:
A. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the first quarter of 2004.
B. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004.
C. Effective tax rate expected to be applicable for the second quarter of 2004.
D. Statutory tax rate for 2004.

B. To ensure the most current information, an estimate of the applicable tax rate for the entire year is made at the end of each quarter. Also at the end of each quarter, the tax for the entire portion of the year elapsed is computed, including previous quarters of that year. Finally, the previous quarters' tax is subtracted, yielding the income tax for the latest quarter.

4

How are discontinued operations and extraordinary items that occur at midyear initially reported?
A. Disclosed only in the notes to the year-end financial statements.
B. Included in net income and disclosed in the notes to the year-end financial statements.
C. Included in net income and disclosed in the notes to interim financial statements.
D. Disclosed only in the notes to interim financial statements.

C. Discontinued operations and extraordinary items are not related to any other interim period. Therefore, it would be erroneous to allocate their financial statement effects to more than one interim period.

5

For interim financial reporting, an extraordinary gain occurring in the second quarter should be:
A. Recognized ratably over the last three quarters.
B. Recognized ratably over all four quarters with the first quarter being restated.
C. Recognized in the second quarter.
D. Disclosed by footnote only in the second quarter.

C. There is no rational basis for allocating an extraordinary item to periods. Such items are infrequent and relate to specific events; in this case, events of the second quarter.
APB Opinion 28 requires that such items be recognized in the quarter in which they occur.

6

A corporation issues quarterly interim financial statements and uses the lower cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?
A. Inventory losses generally should be recognized in the interim statements.
B. Temporary market declines should be recognized in the interim statements.
C. Only the cost method of valuation should be used.
D. Gains from valuations in previous interim periods should be fully recognized.

A. Only temporary losses expected to be recovered are not recognized in interim periods. Because most inventory losses are permanent, this is the best answer of the four.

7

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year, the decline had not reversed. When should the loss be reported in Petal's interim income statements?
A. Ratably over the second, third, and fourth quarters.
B. In the second quarter only.
C. Ratably over the third and fourth quarters.
D. In the fourth quarter only.

D. Temporary declines in inventory value are not recognized in the interim period in which they occur. This decline was expected to be temporary, i.e. it was expected to reverse. Therefore, it is not recorded until the fourth quarter, at which time the normal annual LCM valuation is applied because the decline had not reversed. Had the decline in the second quarter been deemed permanent, it would have been recognized in the second quarter.

8

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?

$6,000 Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) - $1,500 = $6,000.

9

T/F: Income tax expense for an interim period is computed as if the period were a separate period.

False.
The estimated annual effective tax rate is applied to income from continuing operations and is reestimated each quarter.

10

T/F: Interim expenses that benefit more than one interim period are allocated to those interim periods that benefit.

TRUE

11

T/F: Interim periods are reported as if they were separate periods so that investors can understand the events in those periods alone.

False.
When invesotrs read an interim report, they are intersted in evaluating the interim period as it relates to the annual period.

12

T/F: The anticipated annual income tax rate is 35% as estimated at the end of quarter 2. Pretax income in quarter 1 was $20,000, and at that time, the estimated annual income tax rate was 30%. Pretax income in quarter 2 was $100,000. The income tax expense to be reported in quarter 2 is $36,000.

TRUE

13

T/F: An extraordinary loss, a gain from discontinued operations, and an unusual but not infrequent loss were incurred in quarter 2. All 3 of these items will be reported in full in quarter 2's income statement.

TRUE

14

T/F: When LCM is applied to inventory for interim periods, losses are recognized in the interim period if loss is temporary.

False.
No loss is expected for the year, therefore, a temporary loss should not be recognized in a specific quarter.

15

T/F: In May, a firm paid the full annual rental on its premises covering quarters 2, 3, and 4 of the current year and quarter 1 of the following year. 1 /4 of the amount paid should be recognized as rent expense in quarter 2 of the current year.

TRUE

16

T/F: All items reported in an interim report reflect the view that the interim period is an integral part of the annual period.

False.
Most are, but there are exceptions to the principle.

17

A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is:
Favorable
Unfavorable

Yes, yes
Paragraph 14.d. of APB Opinion 28 states: "Purchase price variances or volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period, should ordinarily be deferred at interim reporting dates."
The reason for the deferral is that, from the point of view of the entire reporting year, there will be no volume variance. The Opinion requires the integral view of interim reporting for most items - that an interim period is an integral part of the annual period. Recognizing, rather than deferring, the variance in the first quarter would cause the reporting of the first quarter results to be unrepresentative of the annual period of which it is a part.

18

T/F: A firm wants to use the gross margin method to estimate its inventory. Interim reporting, and estimation of loss on inventory fire are acceptable uses of the gross margin method.

TRUE

19

T/F: When an interim period LIFO liquidation is expected to be restored, the expected cost of the replacement inventory is used for that portion of interim cost of goods sold.

TRUE

20

T/F: If a cumulative effect of an accounting principle change is determined in quarter 2, that quarter's income statement as well as quarter 1's income statement will reflect the new principle.

TRUE

21

T/F: Cost accounting variances are recognized in full if they will not be absorbed later in the year, whether they are favorable or unfavorable.

TRUE

22

T/F: If a cumulative effect of an accounting principle change is determined in quarter 2, quarter 1's beginning retained earnings balance will reflect the cumulative effect.

False.
The begining of that interim period is adjusted and the change is retrospectively adjusted.

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