Flashcards in FAR 8 - Other FS Deck (30):
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. 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.
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
Both nontaxable income items (e.g., life insurance proceeds from the death of an officer) and nondeductible expenses (e.g., premium cost of life insurance on an officer) would be recognized in financial statements prepared using an income tax basis of accounting.
T/F: When financial statements are prepared using an income tax basis of accounting, nontaxable and nondeductible items related to permanent differences must be recognized separately in revenues and expenses, respectively.
Recognition of permanent differences would be made in one of the following ways:
1. As separate line items in the revenue and/or expense sections of the IS; most common.
2. As separate line items shown as additions to or deductions from the net revenues and expenses
3. The nature and amounts disclosed in the notes to the FS.
T/F: Amounts reported in income tax-based financial statements are subject to change as a result of IRS examination and determination.
T/F: The cash basis of accounting will always result in greater revenue than the accrual basis of accounting.
Depends on what accounts are involved and how they affect NI on accrual basis compared to cash basis.
T/F: When adjustments to income tax-based financial statements result from IRS determinations, all such adjustments are reported as current period income or expense.
Adjustments resulting from IRS determinations, are treated differently in the FS depending on the nature of the item adjusted.
T/F: In a pure cash basis of accounting, the only asset a balance sheet would report would be cash.
T/F: When a firm uses a modified cash basis of accounting, it can modify the cash basis in any way it chooses.
T/F: A modification to the cash basis of accounting must be consistent with the accrual basis of accounting.
Personal financial statements should report an investment in life insurance at the
A. Face amount of the policy less the amount of premiums paid.
B. Cash value of the policy less the amount of any loans against it.
C. Cash value of the policy less the amount of the premiums paid.
D. Face amount of the policy less the amount of any loans against it.
B. 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.
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. 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.
Personal financial statements should report assets and liabilities at
A. Estimated current values at the date of the financial statements and, as additional information, at historical cost.
B. Estimated current values at the date of the financial statements.
C. Historical cost and, as additional information, estimated current values at the date of the financial statements.
D. Historical cost.
B. Personal financial statements should report assets and liabilities at estimated current values (fair values) at the date of the financial statements.
T/F: For personal financial statements, assets should be presented in current and non-current categories on the statement of financial condition.
T/F: Noncancelable commitments may be presented at their discounted amounts as liabilities on the statement of financial position.
T/F: Personal financial statements must include a statement of changes in net worth.
T/F: For personal financial statements, a liability should be recognized for an excess of fair value of net assets over their tax basis.
T/F: For personal financial statements, liabilities should be presented in the order of their due date, beginning with the most current due.
T/F: For personal financial statements, a parcel of real estate held for market appreciation should be valued at historical cost on the property.
T/F: For personal financial statements, assets should be reported net of any costs that would be incurred in disposing of them.
Which of the following is the purpose of the Private Company Council?
A. To certify whether a company meets the definition of a public business entity.
B. To set auditing standards for private company audits.
C. To assist the FASB in identifying whether and when a private company accounting standard should be developed.
D. To provide input to the Emerging Issues Task Force regarding accounting issues faced by private companies.
C. The PCC works with the FASB to set private company accounting standards.
Which of the following is the tradeoff for setting GAAP by the Private Company Council?
A. Relevance versus cost-benefit.
B. Reliability versus cost-benefit.
C. Relevance versus materiality.
D. Reliability versus materiality.
A. The PCC sets standards for private companies by weighing the relevance of the information versus the cost benefit.
The Private Company Council has issued modified accounting for private companies for what aspect of Goodwill?
A. Goodwill impairment testing.
B. Goodwill amortization.
C. Goodwill measurement.
D. Goodwill reporting.
B. The PCC allows private companies to amortize goodwill over a period to not exceed 10 years.
T/F: A private company can use settlement value versus cash value to as a surrogate for fair market value for all interest rate swaps.
Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements?
Earnings per Share (EPS) Information by Segment
Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either U.S. GAAP or full IFRS.
Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence?
Cost Method Equity Method
Both. Under IFRS for SMEs, either the cost method or equity method may be used by an investor to account for an investment in another entity (called an "associate" in IFRS for SMEs) over which the investor has significant influence. Under U.S. GAAP, only the equity method may be used.
Which one of the following is a characteristic of accounting under IFRS for SMEs?
A. Interest incurred during construction must be capitalized.
B. Earnings per share must be provided in the financial statements.
C. Goodwill must be amortized.
D. The LIFO cost flow assumption can be used in valuing inventories.
C. Under IFRS for SMEs, goodwill is assumed to have a limited life and is amortized over that life, or a period not to exceed 10 years if the life cannot be reasonably estimated. Under U.S. GAAP, goodwill is assumed to have an unlimited life and is not amortized.
T/F: Reversals of impairment charges, if certain criteria are met, is allowed under IFRS for SMEs.
T/F: IFRS for SMEs constitute generally accepted accounting principles.
T/F: There are international standards for preparing personal financial statements.