Question #1 (AICPA.

080130FARFVF)

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)
The fair value hierarchy provided by GAAP in FASB # 157 is comprised of three (3) levels.
Which of these levels is/are based, either directly or indirectly, on observable data?
A. Level 1, only.
B. Level 3, only.
C. Levels 1 and 2, only.
Both level 1 and level 2 of the fair value hierarchy are based,
either directly or indirectly, on observable data.
D. Levels 1, 2 and 3.
Question #2 (AICPA.120618FAR)
Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting
future cash flows of the asset. Which of the following terms best describes this fair value
measurement approach?
A. Market.
B. Income.
The income approach to fair value measurement of an asset
measures fair value by converting future amounts to a single
present amount. Discounting future cash flows would be an
income approach to determining fair value.
C. Cost.
D. Observable inputs.
Question #3 (AICPA.910529FARP1-FA)

On July 1, 2003, Roxy Co. obtained fire insurance for a three-year period at an annual
premium of $72,000 payable on July 1 of each year.
The first premium payment was made July 1, 2003. On October 1, 2003, Roxy paid $24,000
for real estate taxes to cover the period ending September 30, 2004. This prepayment was
made to obtain a discount.
In its December 31, 2003, Balance Sheet, Roxy should report prepaid expenses of:
A. $60,000
B. $54,000

Unexpired fire insurance premium: $72,000(1/2) =

The premium covers only one year and 1/2 the year is
elapsed as of December 31.

$36,000

Unexpired property tax prepayment: $24,000(9/12)

Total prepaid expenses (asset) at December 31, 2003

18,000
$54,000

C. $48,000
D. $36,000
Question #4 (AICPA.920529FARTH-FA)

The effect of a transaction that is infrequent in occurrence but not unusual in nature should
be presented separately as a component of income from continuing operations when the
transaction results in a
Loss
Gain
Yes

Yes

Both gains and losses that are unusual or infrequent but not both are separately
disclosed as a component of continuing operations (when material).
If the item is both unusual and infrequent, it is classified as an extraordinary item.
When only one of the criteria is met, it warrants separate disclosure but is not
extraordinary.
No

Yes

No

No

Yes

No

Question #5 (AICPA.070778FAR
)

Which of the following is a generally accepted accounting principle that illustrates the
practice of conservatism during a particular reporting period?
A. Capitalization of research and development costs.
B. Accrual of a contingency deemed to be reasonably possible.
C. Reporting investments with appreciated market values, at
market value.
D. Reporting inventory at the lower of cost or market value.
Conservatism means that when there is doubt, the solution
that is least likely to overstate assets or income is chosen.
The lower of cost or market principle adheres to this
concept.
Question #6 (AICPA.931106FARTH-FA)

According to the FASB conceptual framework, which of the following statements conforms
to the realization concept?
A. Equipment depreciation was assigned to a production
department and then to product unit costs.
B. Depreciated equipment was sold in exchange for a note
receivable.
Equipment was sold for cash or a claim to cash. This is an
example of realization of the value of the equipment.
C. Cash was collected on accounts receivable.

D. Product unit costs were assigned to cost of goods sold when the
units were sold.
Question #7 (AICPA.920507FARTH-FA)

In a statement of cash flows, which of the following would increase reported cash flows
from operating activities using the direct method?
(Ignore income tax considerations.)
A. Dividends received from investments.
Dividends received are operating cash flows because most
dividends received are recognized in income.
B. Gain on sale of equipment.
C. Gain on early retirement of bonds.
D. Change from straight-line to accelerated depreciation.
Question #8 (AICPA.921106FARTH-FA)

White Co. wants to convert its 2001 financial statements from the accrual basis of
accounting to the cash basis. Both supplies inventory and office salaries payable increased
between January 1, 2001, and December 31, 2001.
To obtain 2001 cash basis net income, how should these increases be added to or deducted
from accrual basis net income?
Supplies
inventory

Office salaries payable

Deducted

Deducted

Deducted

Added

If supplies inventory increased, then more was spent on supplies (cash basis expense)
than was used during the period (accrual basis expense). Cash basis income is less
than accrual basis income by the difference. Therefore, the increase in supplies
inventory should deducted from accrual basis net income in deriving cash basis net
income. If office salaries payable increased, then more salaries were incurred during
the period (accrual basis expense) than paid (cash basis expense). Cash basis income
is greater by the difference. Therefore the increase in the payable should be added to
accrual basis net income in deriving cash basis net income.
Added

Deducted

Added

Added

Question #9 (AICPA.101050FAR
)

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.
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 2006 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.
C. 90 days.
D. 120 days.
Question #10 (AICPA.070801FAR)
During the current year, Ace Co. amortized a bond discount. Ace prepares its statement of
cash flows using the indirect method. In which section of the statement should Ace report
the amortization of the bond discount?
A. Financing activities.
B. Operating activities.
Interest expense is subtracted to arrive at net income (a
part of operating activities). The discount amortized on a
bond discount makes the interest expense greater than
the cash paid. Therefore, this amount must be added back
in the "Adjustments to reconcile net income to net cash."
portion of the Operating Activities section of the
statement of cash flows.
C. Investing activities.
D. Supplemental disclosures.
Question #11 (AICPA.08211247FARI.B.II)

Which of the following statements is correct regarding reporting comprehensive income?

A. Accumulated other comprehensive income is reported in the
stockholders' equity section of the balance sheet.
Accumulated other comprehensive income (AOCI) is the
net OE account into which each year's other comprehensive
income (OCI) items are closed. AOCI is to OCI as retained
earnings is to income. There are four items that cause OCI
to be recognized each year. Their net effect is added, (if a
credit) or subtracted (if a debit), to or from the beginning
balance of AOCI, which is a running OE account. Net OCI for
the year is added to net income yielding comprehensive
income for the year.
B. A separate statement of comprehensive income is required.
C. Comprehensive income must include all changes in
stockholders' equity for the period.
D. Comprehensive income is reported in the year-end statements
but not in the interim statements.
Question #12 (AICPA.061218FAR)
Which of the following is correct concerning financial statement disclosure of accounting
policies?

A. Disclosures should be limited to principles and methods

peculiar to the industry in which the company operates.
B. Disclosure of accounting policies is an integral part of the
financial statements.
Without such disclosures, the financial statements would
be much less understandable. GAAP allows considerable
latitude in choice among methods, each of which has a
different effect on the financial statements. The "rules" by
which firms apply GAAP must be known before the
resulting financial statements can be interpreted correctly.
C. The format and location of accounting policy disclosures are
fixed by generally accepted accounting principles.
D. Disclosures should duplicate details disclosed elsewhere in the
financial statements.
Question #13 (AICPA.930501FARTH-FA)

According to the FASB conceptual framework, which of the following situations violates the
concept of reliability?
A. Financial statements were issued nine months late.
B. Report data on segments having the same expected risks and
growth rates to analysts estimating future profits.
C. Financial statements included property with a carrying amount
increased to management's estimate of market value.
Management has an incentive to increase the market value
of property, to increase total assets. Assets may not be
increased in carrying value, simply due to management
estimate. Such reporting would be biased, and not
verifiable. As such, the basic tenets of reliability are
violated.
D. Management reports to stockholders regularly refer to new
projects undertaken, but the financial statements never report
project results.
Question #14 (AICPA051182FARFA)

Which of the following describes how comprehensive income should be reported?

A. Must be reported in a separate statement, as part of a
complete set of financial statements.
B. Should not be reported in the financial statements but should
only be disclosed in the footnotes.
C. May be reported in a separate statement, in a combined
statement of income and comprehensive income, or within a
statement of stockholders' equity.
FAS 130 allows all three methods of reporting
comprehensive income. Each distinguishes its two
components: net income as reported in the income
statement, and "other" comprehensive income items. The
second component includes items that are similar to income
items, but for which a specific accounting standard requires
reporting directly in owners' equity.
D. May be reported in a combined statement of income and
comprehensive income or disclosed within a statement of
stockholders' equity; separate statements of comprehensive
income are not permitted.

Question #15 (AICPA.920508FARTH-FA)

Which of the following cash flows per share should be reported in a statement of cash
flows?
A. Primary cash flows per share only.
B. Fully diluted cash flows per share only.
C. Both primary and fully diluted cash flows per share.
D. Cash flows per share should not be reported.
Cash flow per share is specifically prohibited by FAS 95.
The fear was the cash flow would be confused with
earnings per share, and that the reported cash flow per
share amount would be perceived as the amount of
dividends to be paid per share.
Question #16 (AICPA.940542FARFA)

Compared to the accrual basis of accounting, the cash basis of accounting understates
income by the net decrease during the accounting period of
Accounts
Accrued expenses
receivable
Yes

Yes

Yes

No

No

No

No

Yes

A net decrease in accounts receivable during the period indicates that more cash was
collected than was recognized in revenue under accrual accounting. This OVERSTATES,
rather than understates cash basis income relative to the accrual basis income. The
cash basis recognizes the higher amount of cash collected as revenue, which exceeds
sales (the revenue recognized under accrual accounting). A net decrease in accrued
expenses during the period indicates that more cash was paid than recognized as
expense under accrual accounting. This UNDERSTATES cash basis income relative to
accrual basis income. The cash basis recognizes the higher cash payment amount as
expense, which exceeds the expense recognized under the accrual basis.
Question #17 (AICPA.931142FAR
-TH-FA)

On July 1, 20x2, Dewey Co. signed a 20-year building lease that it reported as a capital
lease. Dewey paid the monthly lease payments when due. How should Dewey report the
effect of the lease payments in the financing activities section of its 20x2 statement of cash
flows?
A. An inflow equal to the present value of future lease payments
at July 1, 20x2, less 20x2 principal and interest payments.
B. An outflow equal to the 20x2 principal and interest payments
on the lease.
C. An outflow equal to the 20x2 principal payments only.
Only the principal portion of each lease payment is
classified as a financing cash outflow. This portion is a
principal payment on debt used to finance the acquisition
of an asset. The interest portion is classified as operating.
D. The lease payments should not be reported in the financing

activities section.
Question #18 (AICPA.931120FARTH-FA)

In a comparison of 2004 to 2003, Neir Co.'s inventory turnover ratio increased substantially
although sales and inventory amounts were essentially unchanged.
Which of the following statements explains the increased inventory turnover ratio?
A. Costs of goods sold decreased.
B. Accounts receivable turnover increased.
C. Total asset turnover increased.
D. Gross profit percentage decreased.
Inventory turnover = (cost of goods sold)/(average
inventory), and this ratio has increased substantially. If
sales and inventory amounts remained relatively constant,
then cost of goods sold must have increased for the
inventory turnover ratio to increase. Gross profit
percentage = (sales - cost of goods sold)/sales. With sales
remaining unchanged and cost of goods sold increasing,
the numerator of the gross profit percentage has
decreased, as has the entire ratio.
Question #19 (AICPA.921138FARTH-FA)

Heath Co.'s current ratio is 4:1. Which of the following transactions would normally
increase its current ratio?
A. Purchasing inventory on account.
B. Selling inventory on account.
Two current assets are affected: accounts receivable (increased)
and inventory (decreased). The other two accounts in the
transaction are sales and cost of goods sold, neither of which
affect the current ratio.
Inventory is normally sold for more than cost so current assets
have increased by the gross margin on the sale. The numerator
and therefore the entire current ratio increases.
C. Collecting an account receivable.
D. Purchasing machinery for cash.
Question #20 (080132FARFVF)

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)
Which of the following levels of the fair value hierarchy, if any, requires the most extensive
disclosures about fair value measurements?
A. Level I.

In level 1, fair value is based on observable unadjusted quoted prices in active markets
for assets and liabilities identical to those being valued and does not require the most
extensive disclosures.
B. Level II.
C. Level III.
In level 3, the lowest level in the hierarchy, fair value is based on unobservable inputs.
This level should be used only when observable inputs are not available for fair value
determination. Because the inputs used for fair value determination are unobservable,
more extensive disclosures are required at level 3 than at levels 1 or 2, including more
descriptive information and more quantitative information about changes in fair value.
D. None -- no level requires more disclosures than the others.