Exam Results

Question #1 (AICPA.950534FAR-FA)
Which of the following should be included in general and administrative expenses?
Interest Advertising
Yes Yes

Yes No

No Yes

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.
Question #2 (AICPA.101211FAR-SIM)
If the accountant forgets to record salary expense in the Statement of Income, what is the
result?
A. Net income is too high.

If the accountant forgets to record salary expense in the Statement of Income, then
net income is too high. Salary expense would be a decrease from revenues, resulting
in lower net income.
B. Net income is too low.

C. Retained earnings is too low.

D. Retained earnings is correctly stated, as the omission only affects the Income Statement.

Question #3 (AICPA.931153FAR-P1-FA)

In Yew Co.'s 2004 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

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.

B. $390,000

C. $410,000

D. $490,000
Question #4 (AICPA.120614FAR)
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.

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
incorrect because this lawsuit would be disclosed, but not accrued.
B. Accrued but NOT disclosed.

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.
D. No disclosure or accrual.

Question #5 (AICPA.101209FAR-SIM)
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.

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.
Question #6 (AICPA.931152FAR-P1-FA)

The following costs were incurred by Griff Co., a manufacturer, during 2004:

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
2004?

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.
B. $550,000

C. $635,000

D. $810,000

Question #7 (AICPA.120606FAR)
A company has the following items on its year-end trial balance:
Net sales $500,000
Common stock 100,000
Insurance expense 75,000
Wages 50,000
Cost of goods sold 100,000
Cash 40,000
Accounts payable 25,000
Interest payable 20,000

What is the company's gross profit?

A. $230,000

B. $275,000

C. $400,000

Gross profit is sales less cost of goods sold. In this case gross profit is $500,000 -
100,000 = $400,000.
D. $500,000

Question #8 (AICPA.101208FAR-SIM)
In a multi-step Income Statement:
A. Total expenses are subtracted from total revenues.

B. Gross profit (margin) is shown as a separate item.

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. Gross profit (margin) is shown as a separate item.
C. Cost of sales and operating expense are subtracted from total revenues.

D. Other income is added to revenue from sales.

Question #9 (AICPA.110580FAR)
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

This response is incorrect because it includes the $59,000 prior year adjustment to
amortization expense. The prior year adjustment to amortization expense is not part
of income, but is a retroactive adjustment to retained earnings.
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.
D. $1,316,000

Question #10 (AICPA.901140FAR-P1-FA)

Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2005 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 2005 are:

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.
B. $400,000

C. $370,000

D. $360,000

Question #11 (AICPA.940509FAR-FA)

Vane Co.'s trial balance of Income Statement accounts for the year ended December 31,
2004, 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, 2004 $400,000
December 31, 2004 360,000

Vane's income tax rate is 30%. In Vane's 2004 multiple-step Income Statement, what
amount should Vane report as the cost of goods manufactured?

A. $200,000

Cost of goods manufactured is the cost of goods brought to completion during the
year. The following schedule shows how it is computed given the information in the
question.

Thus, cost of goods manufactured must be $200,000.

Cost of goods manufactured ?

Plus finished goods beginning inventory $400,000
Less finished goods ending inventory (360,000)
Equals cost of sales $240,000
B. $215,000

C. $280,000
 The $40,000 decrease in finished goods inventory was added to cost of sales in the
calculation. It should have been subtracted.
D. $295,000

Question #12 (AICPA.901110FAR-P2-FA)

The following items were among those reported on Lee Co.'s Income Statement for the year
ended December 31, 2005:
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

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).
B. $325,000

C. $410,000

D. $500,000

Question #13 (AICPA.910503FAR-P1-FA)

In Baer Food Co.'s 2005 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 2005 Income Statement, Baer Food should have reported
total revenues of:
A. $216,300

B. $215,400

C. $203,700

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.
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.
Question #14 (AICPA.020508FAR-FA)
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

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
 The facts state that 5% of the (all) boxes sold would be returned. The fact that
[1]

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.
D. $200,000

D is not correct. Operating profit would be reduced by $10,000 (net) for expected
return boxes and $10,000 for processing of returned boxes.
Question #15 (AICPA.101215FAR-SIM)
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

In a single step income statement, total revenue is the sum of all revenues. In this
case, the results from discontinued operations are included in total revenues. Results
from discontinued operations are reported at the end of the income statement.
C. $203,400

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.