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Flashcards in FAR 7 Deck (25):
1

When a set of financial statements is prepared using the cash basis or the modified cash basis of accounting, which one of the following is least likely to be an appropriate financial statement title?
A. Statement of Cash Receipts and Cash Disbursements.
B. Balance Sheet.
C. Income Statement.
D. Statement of Financial Position.

C. Income Statement.

When the cash basis or the modified cash basis of accounting is used, the title Income Statement, which is appropriate when the accrual basis of accounting is used, should be replaced by the title Statement of Cash Receipts and Cash Disbursements. This helps distinguish that the statement is not based on full accrual accounting consistent with U.S. GAAP.

2

Financial Statements prepared on a modified cash basis of accounting would contain items measured on which, if either, of the following bases?
Cash Basis Accrual Basis
Yes Yes
Yes No
No Yes
No No

Cash Basis Accrual Basis
Yes Yes

A modified cash basis of accounting would contain items (accounts) measured under both the cash basis of accounting and the accrual basis of accounting. The modified cash basis of accounting uses cash basis accounting modified to incorporate accrual basis accounting for certain types of transactions/events. Modifications must be logical and consistent with accrual basis accounting under U.S. GAAP.

3

Which one of the following is not an other comprehensive basis of accounting?
A. Pure cash basis.
B. Modified cash basis.
C. Pure accrual basis.
D. Income tax basis.

C. Pure accrual basis.

Pure accrual basis accounting is not an other comprehensive basis of accounting. The concept of “other comprehensive basis” means a comprehensive basis of accounting other than pure (or full) accrual accounting.

4

Alco, Inc., a small manufacturing company, prepares its financial statements using its income tax basis of accounting. In December, 2012, it determined that an error had been made in the amount of rent expense reported in its 2011 tax return. How should Alco account for the amount of the rental expense error in its 2012 financial statements?
A. As an adjustment to 2012 rental income.
B. As an income tax expense in 2012.
C. As a prior period adjustment.
D. No reporting in 2012 required.

C. As a prior period adjustment.

The amount of the rental expense error made in the tax return (and financial statements) of the prior period would be reported as a prior period adjustment in Alco's 2012 financial statements.

5

Which of the following items would be recognized in financial statements prepared using an income tax basis of accounting relating to permanent differences?
Nontaxable Income Nondeductible Expenses
Yes Yes
Yes No
No Yes
No No

Nontaxable Income Nondeductible Expenses
Yes Yes

6

Which of the following does not constitute financial statements prepared based on an other comprehensive basis of accounting?
A. Modified cash basis financial statements.
B. Regulatory-based financial statements.
C. Price-level or inflation adjusted financial statements.
D. U.S. GAAP-based financial statements.

U.S. GAAP-based financial statements are not prepared using an other comprehensive basis of accounting. The concept of “other comprehensive basis” means a comprehensive basis of accounting other than pure (or full) accrual accounting under U.S. GAAP.

7

On May 31, 20X7, Quay owned a $10,000 whole-life insurance policy with a cash-surrender value of $4,500, net of loans of $2,500. In Quay's May 31, 20X7, personal statement of financial condition, what amount should be reported as investment in life insurance?
A. $4,500
B. $7,000
C. $7,500
D. $10,000

A. $4,500

In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any loan(s) outstanding against the policy. The facts in this question state that the policy has "a cash-surrender value of $4,500, net of loans of $2,500." So, although the policy has a $2,500 loan outstanding against it, that amount already has been deducted (net of loans) in determining the $4,500 value.

8

Which statements are usually included in a set of personal financial statements?
A. A statement of net worth and an income statement.
B. A statement of financial condition and a statement of changes in net worth.
C. A statement of net worth, an income statement, and a statement of cash flows.
D. A statement of financial condition, a statement of changes in net worth, and a statement of cash flows.

B. A statement of financial condition and a statement of changes in net worth.

A set (per se) of personal financial statements would include a statement of financial condition (i.e., a balance sheet) and a statement of net worth. A set of personal financial statements usually does not include an income statement or a statement of cash flows.

9

The estimated values of Lane's personal assets on December 31, 20X0, totaled $1,000,000 with tax bases aggregating $600,000. Included in those assets was a vested interest in a deferred profit-sharing plan with a current value of $80,000 and a tax basis of $70,000. The estimated current amounts of Lane's personal liabilities equaled their tax bases on December 31, 20X0. Lane's 20X0 effective income tax rate was 30%. In Lane's personal statement of financial condition on December 31, 20X0, what amount should be provided for estimated income taxes relating to the excess of current values over tax bases?
A. $120,000
B. $117,000
C. $3,000
D. $0

A. $120,000

The estimated income taxes on the excess of current values over tax bases should be determined as the effective tax rate applied to the difference between the current values of net assets (assets "liabilities") and the tax bases of the net assets. Since, in this question, there is no difference between the estimated current amount of liabilities and their tax bases, the estimated tax would be based solely on the excess current values of assets over the tax bases of those assets. The current estimated values of personal assets is $1,000,000 and the tax bases is $600,000, resulting in an excess (taxable amount) of $400,000 multiplied by the effective tax rate of 30% for an estimated tax liability of $400,000 x .30 = $120,000, the correct answer. The difference between the current value of the deferred profit-sharing plan ($80,000) and its tax bases ($70,000) is included in the total excess of current values over tax bases and does not have to be treated separately.

10

Jen has been employed by Komp, Inc. since February 1, 2009. Jen is covered by Komp's Section 401(k) deferred compensation plan. Jen's contributions have been 10% of salaries. Komp has made matching contributions of 5%. Jen's salaries were $21,000 in 2009, $23,000 in 2010, and $26,000 in 2011. Employer contributions vest after an employee completes three years of continuous employment. The balance in Jen's 401(k) account was $11,900 on December 31, 2011, which included earnings of $1,200 on Jen's contributions. What amount should be reported for Jen's vested interest in the 401(k) plan in Jen's December 31, 2011, personal statement of financial condition?
A. $11,900
B. $8,200
C. $7,000
D. $1,200

B. $8,200

Jen's personal statement of financial condition should report only the contributions and earnings to which Jen has a claim (i.e., that have vested). Thus, the correct answer is Jen's salaries of $21,000 + $23,000 + $26,000 = $70,000 x Jen's contribution rate of 10% = $7,000, plus the earnings on those contributions of $1,200 (given) = $8,200, the correct answer. Since Jen was employed on February 1, 2009, as of December 31, 2011, the employer's (Komp's) contributions have not vested and, therefore, do not "belong" to Jen and should not be included in Jen's personal statement of financial condition.

11

The following information pertains to an insurance policy that Barton owns on his life:
Face amount $100,000
Accumulated premiums paid up to December 31, 2011 8,000
Cash value at December 31, 2011 12,000
Policy loan 3,000
In Barton's personal statement of financial condition at December 31, 2011, what amount should be reported for the investment in life insurance?

A. $97,000
B. $12,000
C. $9,000
D. $8,000

C. $9,000

Assets should be reported at estimated current value (fair value), which for a life insurance policy is the current cash value, less the settlement amount of any loans against the life insurance policy. Thus, the correct answer is cash value of $12,000 less the loan against the policy of $3,000, which results in a reportable fair value of $9,000.

12

December 31, 20X0. During the calendar year 20X1, Harvey had earned income of $68,000. For 20X1, his broker's reports showed that his investments had increased by $23,000. In addition, for the year, his credit card debt increased $6,000 and his home mortgage principal balance decreased by $24,000. There were no other changes in Harvey's financial condition during 20X1. Which one of the following is Harvey's net worth as of December 31, 20X1?
A. $934,000
B. $878,000
C. $866,000
D. $830,000

C. $866,000

The correct answer ($866,000) is computed as beginning balance $825,000 + increase in investments $23,000 - increase in credit card debt $6,000 + increase resulting from decrease in mortgage $24,000 = $866,000, the correct answer.

13

In personal financial statements, how should estimated income taxes on the excess of the estimated current values of assets over their tax bases be reported in the statement of financial condition?
A. As liabilities.
B. As deductions from the related assets.
C. Between liabilities and net worth.
D. In a footnote disclosure only.

C. Between liabilities and net worth.

Estimated income taxes (i.e., provision for income taxes) on the excess of the estimated current values of assets over their tax bases should be reported as a separate line item between liabilities and net worth sections of the personal financial statement.

14

Clint owns 50% of Vohl Corp.'s common stock. Clint paid $20,000 for this stock in 2006. As of December 31, 2011, Clint's 50% stock ownership in Vohl had a fair value of $180,000. Vohl's cumulative net income and cash dividends declared for the five years ended December 31, 2011, were $300,000 and $40,000, respectively. In Clint's personal statement of financial condition on December 31, 2011, what amount should be shown as the investment in Vohl?
A. $20,000
B. $150,000
C. $170,000
D. $180,000

D. $180,000

Assets should be reported in a personal statement of financial condition at estimated current value (fair value), which for the Vohl stock is $180,000 on December 31, 1991. The cumulative income earned and cash dividends paid by Vohl since it was acquired by Clint would enter into the determination of Clint's annual income during the prior 5 years, but would not enter into the determination of the estimated current value of the investment on December 31, 2011.

15

Shea, a calendar-year taxpayer, is preparing a personal statement of financial condition as of April 30, 20X2. Shea's 20X1 income tax liability was paid in full on April 15, 20X2. Shea's tax on income earned from January through April 20X2 is estimated at $30,000. In addition, $25,000 is estimated for income tax on the differences between the estimated current values of Shea's assets, the current amount of liabilities, and their tax bases on April 30, 20X2. No withholdings or payments have been made toward the 20X2 income tax liability. In Shea's statement of financial condition on April 30, 20X2, what is the total of the amount or amounts that should be reported for income taxes?

A. $0
B. $25,000
C. $30,000
D. $55,000

D. $55,000

Since no taxes have been withheld and no estimated payments made during 20X2, Shea will have an obligation on April 30 both for the income earned from January through April 20X2 (estimated amount = $30,000) and for the excess of current values of net assets (assets - liabilities) over the tax bases of those net assets (estimated amount = $25,000). Thus, Shea should report an income tax liability of $55,000 in a personal statement of financial condition as of April 30, 20X2.

16

Quinn is preparing a personal statement of financial condition as of April 30, 20X5. Included in Quinn's assets are the following:
50% of the voting stock of Ink Corp. A stockholders' agreement restricts the sale of the stock and, under certain circumstances, requires Ink to repurchase the stock. Quinn's tax basis for the stock is $430,000, and on April 30, 20X5, the buyout value is $675,000.
Jewelry with a fair value aggregating $70,000 based on an independent appraisal on April 30, 20X5, for insurance purposes. This jewelry was acquired by purchase and gift over a 10-year period and has a total tax basis of $40,000.
What is the total amount at which the Ink stock and jewelry should be reported in Quinn's April 30, 20X5 personal statement of financial condition?

A. $470,000
B. $500,000
C. $715,000
D. $745,000

D. $745,000

Both the Ink stock and the jewelry should be measured at fair value. Thus, the correct answer is $745,000, which is the sum of the buyout value (fair value) of the stock ($675,000) and the fair value of the jewelry ($70,000).

17

Which of the following is the purpose of the liquidation basis accounting?
A. To report the amount of net cash flows expected to be received in the process of bankruptcy.
B. To distinguish which assets the entity will sell and which assets will be kept.
C. To inform the financial statement users that liquidation is imminent.
D. To help management decide which assets are valuable.

C. To inform the financial statement users that liquidation is imminent.

Liquidation basis of accounting is focused on informing the financial statement users that liquidation is imminent.

18

Which of the following is a member of the Monitoring Board?
A. Global Accounting Technical Officer of the World Bank.
B. CEO of the Financial Executives International.
C. Chair of the CFA Institute.
D. Chair of the U.S. Securities and Exchange Commission.

D. Chair of the U.S. Securities and Exchange Commission.

The Chair of the U.S. Securities and Exchange Commission is a member of the Monitoring Board. The Monitoring Board provides a formal link between the Trustees and public authorities. The U.S. Securities and Exchange Commission is the primary overseer and regulator of the U.S. securities markets. Its mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

19

Which of the following is an objective of the IFRS Foundation?
A. To enforce the use and rigorous application of those standards.
B. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.
C. To develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial-reporting standards (IFRSs) through its member associations.
D. To require adoption of international financial reporting standards (IFRSs) globally.

B. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings

The objective of the IFRS Foundation is to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.

20

Which of the following is responsible for fund raising for entire operations involving the IASB?
A. IFRS Interpretations Committee.
B. IFRS Advisory Council.
C. IFRS Foundation.
D. Standard Advisory Council.

C. IFRS Foundation.

The IFRS Foundation, as the legal entity of the entire organization, has the responsibility to ensure that the operations are sufficiently funded in order to ensure the fulfillment of the standard-setting objectives without compromising the independence and objectivity of the standard-setting process.

21

Which of the following is not a role of the trustees of the IFRS Foundation?
A. Appoint the members of the IASB and establish their contracts of service and performance criteria.
B. Appoint the members of the IFRS Interpretations Committee and the IFRS Advisory Council.
C. Approve the annual budget of the IFRS Foundation and determine the basis for funding.
D. Annually review the strategy of the IFRS Foundation and the IASB and its effectiveness, including the determination of the IASB's agenda.

D. Annually review the strategy of the IFRS Foundation and the IASB and its effectiveness, including the determination of the IASB's agenda.

The Trustees do not determine the agenda of the IASB. Rather, the Trustees annually review the strategy of the IFRS Foundation and the IASB and its effectiveness, including the consideration, but not the determination, of the IASB's agenda.

22

The IFRS Foundation serves as the administrative umbrella for a group of bodies. Which of the following bodies are NOT included under the IFRS Foundation umbrella?
A. International Federation of Accountants (IFAC).
B. International Accounting Standards Board.
C. IFRS Interpretations Committee.
D. IFRS Advisory Council.

A. International Federation of Accountants (IFAC).

The International Federation of Accountants (IFAC) is a global organization for the accounting profession. Its members are accounting and auditing organizations throughout the world. It is an independent organization not under the IFRS Foundation umbrella, but it does support the activities of the IFRS Foundation by encouraging high-quality practices by the world's accountants and auditors.

23

According to the IFRS for Small and Medium-sized Entities (IFRS for SMEs), the intended user is an SME. Which of the following, if any, is (are) included in the definition of that user?

An entity that does not have public accountability. An entity that publishes general purpose financial statements for external users.
Yes Yes
Yes No
No Yes
No No

Yes Yes

The IASB uses a broad definition of an SME. Rather than restrict it by revenue or number of employees, as other organizations, such as the World Bank and U.S. government, have done; the Board simply states that the entity does not have public accountability and that the entity publishes general purpose financial statements for external users, such as owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. IFRS for SME, para. 1.2.

24

Which of the following best describes the term "public accountability" according to IFRSs and IFRS for SME?
I. Entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.

II. Entity holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund, or investment banking entity.

A. I. only.
B. II Only.
C. Both I and II.
D. Neither I nor II.

C. Both I and II.

Both statements are included in the definition of the term "public accountability." The entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market, and the entity holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund, or investment-banking entity. IFRS for SMEs, para. 1.3.

25

When referring to IFRS, which of the following are NOT included?
A. IASs.
B. SEC.
C. IFRICs.
D. IFRS Interpretations.

B. SEC.