[Apr-2022] Dumps Practice Exam Questions Study Guide for the FAR Exam
FAR Dumps with Practice Exam Questions Answers
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Introduction to Financial Accounting and Reporting (FAR) Exam
The Standardized CPA Evaluation is the exam portion of the Financial Accounting and Reporting (FAR) which measures the expertise and skills that a newly qualified CPA must demonstrate in the financial accounting and reporting systems used by enterprise (public and non-public), non-profit, and state and local government agencies.
In the FAR portion of the test, the examination contains the requirements and regulations provided by:
- U.S. Securities and Exchange Commission (U.S. SEC)
- Financial Accounting Standards Board (FASB)
- American Institute of Certified Public Accountants (AICPA)
- International Accounting Standards Board (IASB)
- Governmental Accounting Standards Board (GASB)
The FAR section consists of questions that emphasize the conceptual structure and financial reporting, the selection of accounts of financial statements, the selection of transactions, and the application of state and local governments to accounting work. These sections can be overviewed from the FAR practice test. References at the end of this introduction provide a list of guidelines and regulations provided by these bodies and other reference materials that are available for evaluation in the FAR portion of the review.
NEW QUESTION 20
A change from the cost approach to the market approach of measuring fair value is considered to be what
type of accounting change?
- A. Change in accounting principle.
- B. Change in accounting estimate.
- C. Error correction.
- D. Change in valuation technique.
Answer: B
Explanation:
Choice "a" is correct. A change in the valuation technique used to measure fair value is a change in
accounting estimate. Choice "b" is incorrect. Per SFAS No. 157, a change in valuation technique is a
change in accounting estimate, not a change in accounting principal. Choice "c" is incorrect. Although a
change from the cost approach to the market approach is a change in valuation technique, a change in
valuation technique is not defined as a type of accounting change, but instead falls into the category of
changes in accounting estimate. Choice "d" is incorrect. Both the market approach and the cost approach
are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these
methods is not the correction of an error. Additionally, an error correction is not a type of accounting
change.
NEW QUESTION 21
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
1 992 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
1 992 financial statements.
Item to Be Answered
Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is
preferable, accounting for these long-term contracts was switched from the completed-contract method to
the percentage-of-completion method.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Cumulative effect approach.
- C. Prospective approach.
Answer: A
Explanation:
Choice "B" is correct. Changes in accounting principle are handled "retrospectively." Beginning retained
earnings of the earliest year presented is adjusted for the cumulative effect of the change and all prior
year financial statements are restated.
NEW QUESTION 22
Which of the following statements best describes an operating procedure for issuing a new Financial
Accounting Standards Board (FASB) statement?
- A. A new statement is issued only after a majority vote by the members of the FASB.
- B. The emerging issues task force must approve a discussion memorandum before it is disseminated to
the public. - C. A new FASB statement can be rescinded by a majority vote of the AICPA membership.
- D. The exposure draft is modified per public opinion before issuing the discussion memorandum.
Answer: A
Explanation:
Choice "c" is correct. A new statement from the FASB is issued only after a majority vote of the members
of the FASB.
Choice "a" is incorrect. There is no necessity for the EITF to approve a discussion memorandum
(presumably the question means a discussion memorandum of the FASB statement itself and not an EITF
statement) before it is disseminated to the public.
Choice "b" is incorrect. There is no necessity for an exposure draft to be modified per public option before
issuing the discussion memorandum (a question can be raised here as to "what" discussion
memorandum"). Exposure drafts are quite/most often modified before they are issued as FASB
statements, but they do not have to be. Whether they are or are not modified is a function of whether the
FASB thinks they should be modified, partly due to the public comments that have been received.
Choice "d" is incorrect. There is no way to rescind a new FASB statement, although, in reality, a FASB
statement can be rescinded by the issuance of a new statement on the same subject. However, even if
there was a way to rescind a new FASB statement, it would not be by a majority vote of the AICPA
membership, but by a majority vote of the members of the FASB. Reporting Net Income
NEW QUESTION 23
Which of the following is a generally accepted accounting principle that illustrates the practice of
conservatism during a particular reporting period?
- A. Reporting inventory at the lower of cost or market value.
- B. Accrual of a contingency deemed to be reasonably possible.
- C. Capitalization of research and development costs.
- D. Reporting investments with appreciated market values at market value.
Answer: A
Explanation:
Choice "d" is correct. The rule of conservatism states that revenues and gains should be recognized when
the earnings process is complete, but that expenses and losses should be expensed immediately.
Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when
market is lower than cost in the period the loss is sustained, rather than when the inventory is sold,
consistent with the rule of conservatism. Choice "a" is incorrect. Because the future benefits of R&D costs
are questionable, these cost should be expensed immediately, consistent with the rule of conservatism
and the matching principle. Choice "b" is incorrect. The rule of conservatism only requires the accrual of
"probable" losses. The accrual of a reasonably possible loss is not required and the accrual of any
contingent gain, whether probable, reasonably possible, or remote, is prohibited. Choice "c" is incorrect.
The reporting of marketable securities with appreciated values at market value requires the recording of a
gain on the asset before the gain is realized. This contradicts the rule of conservatism, but is allowed
because fair value is a more relevant measure of the value of marketable securities.
NEW QUESTION 24
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal
period, ordinarily should be deferred at the end of the first quarter if it is:
- A. Option C
- B. Option B
- C. Option A
- D. Option D
Answer: D
Explanation:
Choice "d" is correct. Yes - Yes.
Rule: Volume variances that are planned or expected to be absorbed by the end of the year should be
deferred at interim whether favorable or unfavorable.
NEW QUESTION 25
During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses
the units of production depletion method. As a result of the change, which of the following should be
reported in Krey's 1992 financial statements?
- A. Option C
- B. Option D
- C. Option B
- D. Option A
Answer: A
Explanation:
Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current
and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in
accounting principle" is only used for changes in "accounting principle."
NEW QUESTION 26
Which of the following should be disclosed for each reportable operating segment of an enterprise?
- A. Option D
- B. Option C
- C. Option B
- D. Option A
Answer: D
Explanation:
Choice "a" is correct. For each reportable segment of an enterprise, both profit or loss and total assets
should be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least.
Choice "b" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets
should be disclosed. Choice "c" is incorrect. For each reportable segment of an enterprise, both profit or
loss and total assets should be disclosed. Choice "d" is incorrect. For each reportable segment of an
enterprise, both profit or loss and total assets should be disclosed.
NEW QUESTION 27
During the first quarter of 1993, Tech Co. had income before taxes of $200,000, and its effective income
tax rate was 15%. Tech's 1992 effective annual income tax rate was 30%, but Tech expects its 1993
effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of
income tax expense should Tech report?
- A. $0
- B. $50,000
- C. $60,000
- D. $30,000
Answer: B
Explanation:
Choice "c" is correct. Interim period tax expense is the estimated annual effective tax rate (25% in this
case) applied to the year-to-date income before taxes minus the tax expense recognized in previous
interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% *
$ 200,000 = $50,000. FIN 18, para. 16
Choice "a" is incorrect. Income tax expense is reported in interim income statements.
Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used
to calculate income tax expense for interim statements.
Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used
to calculate income tax expense for interim statements.
NEW QUESTION 28
Which of the following statements regarding fair value is/are correct?
I. The fair value of an asset or liability is specific to the entity making the fair value measurement.
II. Fair value is the price to acquire an asset or assume a liability.
III. Fair value includes transportation costs, but not transaction costs.
IV. The price in the principal market for an asset or liability will be the fair value measurement.
- A. I & IV
- B. II & III
- C. III & IV
- D. I & II
Answer: C
Explanation:
Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a
market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an
exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c"
are incorrect, per the above Explanation: .
NEW QUESTION 29
A segment of Ace Inc. was discontinued during 1992. Ace's loss from discontinued operations should not:
- A. Exclude operating losses from the date the decision to dispose of the segment was made until the end
of 1992. - B. Include employee relocation costs associated with the decision to dispose.
- C. Include operating losses of the current period up to the date the decision to dispose of the segment
was made. - D. Include additional pension costs associated with the decision to dispose.
Answer: A
Explanation:
Choice "b" is correct. Ace's loss on discontinued operations should not exclude operating losses from the
date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses
should be included.
Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be
included in the loss from discontinued operations.
Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be
included in the loss from discontinued operations.
Choice "d" is incorrect. Ace's loss on discontinued operations should include operating losses of the
current period up to the date the decision to dispose of the segment was made and also after that date.
All 1992 operating losses should be included.
NEW QUESTION 30
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 A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an accounting
error.
Item to Be Answered
As a result of a production breakthrough, Quo determined that manufacturing equipment previously
depreciated over 15 years should be depreciated over 20 years.
List A (Select one)
- A. Change in accounting estimate.
- B. Correction of an error in previously presented financial statements.
- C. Neither an accounting change nor an accounting error.
- D. Change in accounting principal.
Answer: A
Explanation:
Choice "b" is correct. Change in lives of fixed assets is a change in accounting estimate.
NEW QUESTION 31
According to the FASB conceptual framework, which of the following situations violates the concept of
reliability?
- A. Management reports to stockholders regularly refer to new projects undertaken, but the financial
statements never report project results. - B. Financial statements are issued nine months late.
- C. Financial statements include property with a carrying amount increased to management's estimate of
market value. - D. Data on segments having the same expected risks and growth rates are reported to analysts
estimating future profits.
Answer: C
Explanation:
Choice "d" is correct. Management's estimate of market value lacks verifiability, which is a component of
reliability. SFAC 2 para. 89 Choice "a" is incorrect. Communicating data on segments to analysts does not
violate the concept of reliability. Choice "b" is incorrect. Issuing financial statements nine months late
violates timeliness, which is a component of relevance, not reliability. SFAC 2 para. 56 Choice "c" is
incorrect. Neglecting to report results of new projects violates full disclosure, not reliability.
NEW QUESTION 32
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:
- A. Component of income from continuing operations, without separate disclosure.
- B. Retrospective adjustment on the retained earnings statement, with separate disclosure.
- C. Component of income after continuing operations, with separate disclosure.
- D. Component of income from continuing operations, with separate disclosure.
Answer: B
Explanation:
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.
NEW QUESTION 33
Which of the following facts concerning fixed assets should be included in the summary of significant
accounting policies?
- A. Option C
- B. Option D
- C. Option B
- D. Option A
Answer: A
Explanation:
Choice "c" is correct. Yes - No.
Yes - "Depreciation methods" should be disclosed in the "summary of significant accounting policies."
No - Composition of fixed assets (or any other account) should not be disclosed in the "summary of
significant accounting policies."
NEW QUESTION 34
According to the FASB conceptual framework, the process of reporting an item in the financial statements
of an entity is:
- A. Recognition.
- B. Matching.
- C. Allocation.
- D. Realization.
Answer: A
Explanation:
Choice "d" is correct. Recognition is the process of recording an item in the financial statements of an
entity. SFAC 5 para. 6 Choice "a" is incorrect. Allocation is the accounting process of assigning or
distributing an amount according to a plan or a formulA. SFAC 6 para. 142 Choice "b" is incorrect.
Matching of costs and revenues is simultaneous or combined recognition of the revenues and expenses
that result directly and jointly from the same transactions or other events. SFAC 6 para. 146 Choice "c" is
incorrect. Realization is the process of converting noncash resources and rights into money. SFAC 6 para.
1 43
NEW QUESTION 35
During 20X5, Dale Corp. made the following accounting changes:
What amount should be shown in the 20X5 retained earnings statement as an adjustment to the
beginning balance?
- A. $0
- B. $98,000
- C. $128,000
- D. $30,000
Answer: B
Explanation:
Choice "c" is correct. $98,000.
The cumulative effect of a change in accounting principle is now shown on the retained earnings
statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative
effect can be calculated. A change from LIFO to FIFO for inventory valuation (costing) is a change in
accounting principle.
An exception is made however, for a change in depreciation method, since a change in depreciation
method is no longer considered to be a change in accounting principle. A change in depreciation method
is now considered to be both a change in principle and a change in estimate.
These changes should now be accounted for as a change in estimate and handled prospectively.
The new depreciation method should be used as of the beginning of the year of change and should start
with the current book value of the underlying asset. No retroactive or retrospective calculations should be
made, and no adjustment should be made to retained earnings.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
NEW QUESTION 36
Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the
proceeds over the carrying amount of the warehouse sold should be reported as a(an):
- A. Reduction of the cost of the new warehouse.
- B. Extraordinary gain, net of income taxes.
- C. Part of continuing operations.
- D. Gain from discontinued operations, net of income taxes.
Answer: C
Explanation:
Choice "b" is correct. Part of continuing operations.
Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations.
The amount of the gain or loss is equal to the difference between the proceeds from the sale and the
carrying amount (FMV) of the fixed asset sold.
Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax.
Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations.
Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.
NEW QUESTION 37
FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the
FASB:
- A. Statements of Financial Accounting Standards.
- B. Technical Bulletins.
- C. Emerging Issues Task Force Consensus.
- D. Statements of Financial Accounting Concepts.
Answer: A
Explanation:
Choice "d" is correct. FASB interpretations of the "statements of financial accounting standards" (SFAS)
have the same authority as the FASB statements of financial accounting standards (SFAS), which by
themselves determine GAAP. Choice "a" is incorrect. Statements of financial accounting concepts (FAC's)
have much less authority (fifth floor) and do not by themselves determine GAAP as is the case with
SFASs and interpretations of SFASs. Choice "b" is incorrect. Emerging issues task force (EITF)
consensus is in the nature of a "third floor" authority. The EITF was established in 1984 to aid the FASB in
identifying and implementing emerging issues before they become widespread and ultimately require
action by the FASB. After discussing the issues and the relevant accounting pronouncements, the group
can sometimes reach a consensus on an issue, in which case no action by the FASB is usually needed.
Choice "c" is incorrect. Technical bulletins of the FASB (second floor) do not by themselves determine
GAAP.
NEW QUESTION 38
......
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