AICPA CPA-Financial CPA Exam Practice Test Instant Access

Question 1

On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies.

Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

This question represents one of Quo's transactions. List B represents the general accounting treatment required for these transactions. These treatments are:

* Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.

* Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992.

* Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.

Item to Be Answered

During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the period January 1, 1992, through January 1, 1994.

List B (Select one)

ACumulative effect approach.

BRetroactive or retrospective restatement approach.

CProspective approach.

Answer : B

Choice 'B' is correct. If comparative FS are issued, restate prior year's FS. If comparative FS are not issued, restate prior year-end's retained earnings account by 'adjusting' (net of tax) the opening balance of the current retained earnings statement.

Question 2

For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated:

AOption A

BOption B

COption C

DOption D

Answer : D

Choice 'd' is correct. Yes - Yes.

The effective income tax rates for operations for the full year should reflect anticipated foreign tax rates and available tax planning alternatives. In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.

Question 3

Conn Co. reported a retained earnings balance of $400,000 at December 31, 1991. In August 1992, Conn determined that insurance premiums of $60,000 for the three-year period beginning January 1, 1991, had been paid and fully expensed in 1991. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its 1992 statement of retained earnings?

A$420,000

B$428,000

C$440,000

D$442,000

Answer : B

Choice 'b' is correct. $428,000 net of tax.

Question 4

On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:

AAs of January 1, 1992.

BAs of August 31, 1992.

CDuring the eight months ending August 31, 1992, by a weighted average of the purchases.

DDuring 1992 by a weighted average of the purchases.

Answer : A

Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.

Choice 'a' is correct. As of January 1, 1992, the beginning of the year. This assumes that the company is not presenting comparative financial statements. If comparative financial statements are presented, then the adjustment is made to the beginning retained earnings of the earliest year presented.

Choice 'b' is incorrect. The cumulative effect of the change is not determined as of the date the decision is made.

Choices 'c' and 'd' are incorrect. The cumulative effect of the change is not determined by a weighted average. (A far out distractor.)

Question 5

On January 2, 1991, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in 1990 but did not do so. Air's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, Air should adjust the beginning balance of its retained earnings by a:

A$230,000 credit.

B$230,000 debit.

C$300,000 credit.

D$370,000 debit.

Answer : B

Choice 'b' is correct. $230,000 debit.

Question 6

In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brighton's financial statements as a:

ARetrospective adjustment on the retained earnings statement, with separate disclosure.

BComponent of income from continuing operations, with separate disclosure.

CComponent of income from continuing operations, without separate disclosure.

DComponent of income after continuing operations, with separate disclosure.

Answer : A

Choice 'a' is correct. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.

Choices 'b', 'c', and 'd' are incorrect. The cumulative effect of a change in accounting principle is now reported on the retained earnings statement, not the income statement. Most of these types of changes (changes in accounting principle) used to be reported on the income statement. SFAS No. 154 changed that.

Question 7

In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?

AEffect of a failure to provide for uncollectible accounts in the previous period.

BEffect of a decrease in the estimated useful life of depreciable equipment.

CCumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects.

DCumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.

Answer : B

Choice 'b' is correct. A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary.

Choice 'a' is incorrect. The correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error.

Choice 'c' is incorrect. This change is a change in accounting principle and is handled retrospectively.

With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.

Choice 'd' is incorrect. This change is a change in accounting principle and is handled retrospectively.

With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.

AICPA CPA-Financial CPA Financial Accounting and Reporting CPA Exam Practice Test