FAR 2.1 MCQ

25 July 2022
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Question CPA-00104 What is the purpose of information presented in notes to the financial statements? A. To provide disclosures required by generally accepted accounting principles. B. To correct improper presentation in the financial statements. C. To provide recognition of amounts not included in the totals of the financial statements. D. To present management's responses to auditor comments.
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Explanation Choice "A" is correct. Information presented in notes to the financial statements have the purpose of providing disclosures required by generally accepted accounting principles. SFAC 5 para. 7
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Question CPA-05189 Which of the following should be disclosed in a summary of significant accounting policies? A. Basis of profit recognition on longterm construction contracts. B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years. C. Depreciation expense. D. Composition of sales by segment.
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Explanation Choice "A" is correct. The summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on longterm construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies. Choice "B" is incorrect. The future minimum lease payments should be disclosed, but not in the summary of significant accounting policies. Choice "C" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of significant accounting policies. Choice "D" is incorrect. The composition of sales by segment should be disclosed, but not in the summary of significant accounting policies.
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Question CPA-05210 Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements? A. Description of current year equity transactions. B. Summary of longterm debt outstanding. C. Schedule of fixed assets. D. Revenue recognition policies.
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Explanation Choice "D" is correct. The summary of significant accounting policies should include "policies." The only policy in the choices listed is the revenue recognition policies. Choice "A" is incorrect. A description of current year equity transactions is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies. Choice "B" is incorrect. A summary of longterm debt outstanding is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies. Choice "C" is incorrect. A schedule of fixed assets is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies.
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Question CPA-05214 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. 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.
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Explanation Choice "B" is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements. Choice "A" is incorrect. For disclosure of accounting policies, disclosure should not be limited to principles and methods peculiar to the industry in which the company operates. All material accounting policies should be disclosed. Choice "C" is incorrect. For disclosure of accounting policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It does make sense to disclose the "why" before the "what." Choice "D" is incorrect. Disclosure of accounting policies should not duplicate details disclosed elsewhere in the financial statements.
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Question CPA-06073 Which of the following is not a disclosure requirement related to risks and uncertainties under U.S. GAAP? A. Disclosure of significant estimates when it is probable that the estimate will change in the near term, even if the effect of the change will be immaterial. B. Disclosure of an entity's major products or services and its principle markets. C. Disclosure of the use of estimates in the preparation of the financial statements. D. Disclosure of concentrations when it is reasonably possible that a concentration could cause a severe impact in the near term.
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Explanation Choice "A" is correct. Significant estimates should be disclosed when it is reasonably possible (not probable) that the estimate will change in the near term and that the effect of the change will be material. Immaterial items are not disclosed. Choice "B" is incorrect. This is a disclosure requirement. Choice "C" is incorrect. This is a disclosure requirement. Choice "D" is incorrect. This is a disclosure requirement.
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Question CPA-08589 Which of the following should be disclosed in a summary of significant accounting policies? A. Basis of consolidation. B. Concentration of credit risk of financial instruments. C. Composition of plant assets. D. Adequacy of pension plan assets in relation to vested benefits.
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Explanation Choice "A" is correct. The summary of significant accounting policies is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc. Choice "B" is incorrect. Concentration of credit risk relating to financial instruments will be described in a specific note related to financial instruments. Choice "C" is incorrect. Plant asset composition will be described in a specific note related to property, plant, and equipment. Choice "D" is incorrect. Pension plan assets and vested benefits will be described in a specific note related to pensions.
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Question CPA-00103 Which of the following information should be disclosed in the summary of significant accounting policies? A. Refinancing of debt subsequent to the balance sheet date. B. Guarantees of indebtedness of others. C. Criteria for determining which investments are treated as cash equivalents. D. Adequacy of pension plan assets relative to vested benefits.
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Explanation Choice "C" is correct. The method of determining which assets are considered to be cash equivalents is a significant accounting policy. Choice "A" is incorrect. Debt refinancing would be disclosed in a separate indebtedness note. Choice "B" is incorrect. Guarantees of other entity's indebtedness would be disclosed in a separate commitments and contingencies note. Choice "D" is incorrect. Information about pension plan assets and pension plan liabilities is disclosed in a separate pensions note.
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Question CPA-00202 Which of the following should be disclosed in a summary of significant accounting policies? I. Management's intention to maintain or vary the dividend payout ratio. II. Criteria for determining which investments are treated as cash equivalents. III. Composition of the sales order backlog by segment. A. I only. B. I and III. C. II only. D. II and III.
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Explanation Choice "C" is correct. Il only. The criteria for determining which investments are treated as "cash equivalents" is a method of accounting policies that needs to be disclosed in the summary of significant accounting policies. Choice "A" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an "accounting policy." Choices "B" and "D" are incorrect. Composition of the sales order backlog by segment is not an "accounting policy."
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Question CPA-00203 The summary of significant accounting policies should disclose the: A. Maturity dates of noncurrent debts. B. Terms for convertible debt to be exchanged for common stock. C. Concentration of credit risk of all financial instruments by geographical region. D. Criteria for determining which investments are treated as cash equivalents.
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Explanation Choice "D" is correct. The criteria for determining which investments are treated as cash equivalents would be part of the summary of significant accounting policies. Choice "A" is incorrect. The maturity dates of noncurrent debts are required disclosures, but are not a part of the summary of significant accounting policies. Choice "B" is incorrect. The terms for convertible debt to be exchanged for common stock are not accounting policies; they would be disclosed separately. Choice "C" is incorrect. The concentration of credit risk of all financial instruments by geographic region may be a required segment disclosure, especially for financial institutions. However, it would not be a part of the summary of significant accounting policies.
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Question CPA-00205 Which of the following information should be included in Melay, Inc.'s summary of significant accounting policies? A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straightline method. B. During the current period, the Delay component was sold. C. Business segment sales are Alay $1M, Belay $2M, and Celay $3M. D. Future common share dividends are expected to approximate 60% of earnings.
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Explanation Choice "A" is correct. Computing depreciation principally by the straightline method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "B" is incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "C" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting policy." Choice "D" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "president's letter to shareholders."
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Which of the following is a required disclosure under IFRS but not under U.S. GAAP? I. Statement of compliance with applicable accounting principles. II. Disclosure of all significant accounting policies. III. Disclosure of judgements made in the preparation of the financial statements. a. I and III. b. I, II, and III. c. I and III d. I only.
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c. I and III IFRS requires that a statement of compliance with IFRS be included in the financial statements; U.S. GAAP does not require inclusion of a statement of compliance with U.S. GAAP. Both IFRS and U.S. GAAP require disclosure of all significant accounting policies. Likewise, both IFRS and U.S. GAAP require the disclosure of estimates made in the preparation of financial statements; however, IFRS also requires disclosure of judgements made (e.g., whether a financial asset is categorized as "held-to-maturity" or "available-for-sale") but U.S. GAAP does not require disclosure of judgements made.
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Which of the following should be disclosed in the summary of significant accounting principles? a. Refinancing of debt subsequent to the balance sheet date. b. Criteria for determining which investments are treated as cash equivalents. c. Guarantees of indebtedness of others. d. Adequacy of pension plan assets in relation to vested benefits.
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Which of the following should be disclosed in the summary of significant accounting principles? a. Refinancing of debt subsequent to the balance sheet date. b. Criteria for determining which investments are treated as cash equivalents. c. Guarantees of indebtedness of others. d. Adequacy of pension plan assets in relation to vested benefits.
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Which of the following would not be disclosed in the footnotes to the financial statements? a. Gross unrealized gains and losses on the company's marketable securities. b. Excerpts from the minutes of a board of directors' meeting in which a proposed acquisition was discussed but rejected. c. Descriptions of the company's pension plans. d. Material information regarding the company's reported inventory.
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b. Excerpts from the minutes of a board of directors' meeting in which a proposed acquisition was discussed but rejected. Information that is not pertinent to a company's financial statements is not included in the footnotes. Furthermore, even if this meeting took place during the subsequent events evaluation period, no disclosure would be necessary because no event actually occurred.
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Which of the following is not a criterion in determine whether to disclose information in the footnotes to the financial statements about vulnerability to a concentration? a. The concentration pertains to a specific geographic region. b. It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term. c. The concentration exists as of the financial statement date. d. The concentration makes the entity vulnerable to the risk of a near-term severe impact.
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a. The concentration pertains to a specific geographic region. Disclosure of vulnerability to concentration is required if all of the following criteria are met: - The concentration exists as of the financial statement date. - The concentration makes the entity vulnerable to the risk of a near-term severe impact. - It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term.
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A public entity sells steel for use in construction. One of its customers accounts for 43 percent of sales, and another customer accounts for 40 percent of sales. What should the entity disclose in its annual financial statements about theses two customers? a. The amount of the entity's revenue from each of the two customers. b. The financial condition of the two customers. c. The names of the two customers. d. The payment terms of accounts receivable due from each of the two customers.
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a. The amount of the entity's revenue from each of the two customers. Concentrations in the volume of business transacted with a particular customer should be disclosed in the notes to the financial statements because these two customers individually contribute to significant sales. Theses concentrations increase the risk of loss, and information stating that fact should be disclosed to the financial statement user.