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Test answers for Generally Accepted Accounting Principles (GAAP) Test 2016

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6 Answered Test Questions:

1. At what stage in the manufacturing cycle is Raw Materials?


• End of the manufacturing cycle, after processing is complete

• When materials have been ordered from the vendors

• When inventory has been received and is available to be issued to the manufacturing process

• When the materials have been issued to the shop floor

2. What did APB 14-1 issued in 2008 do to the accounting rules related to convertible debt?


• Restricted companies' abilities to issue convertible debt

• Made rules regarding the accounting of convertible debt less restrictive

• Laid down the requirement that companies account for the debt and equity components of convertible debt separately

• Forced companies to convert all debt

3. What did APB14-1 stipulate for retroactive reporting of convertible debt?


• No retroactive reporting is required.

• All convertible debt, both retired and active, is required to be retroactively restated.

• Companies can restate past financial reports if it is to their benefit.

• Any current outstanding convertible debt must be restated retroactively, any retired convertible debt does not have to be restated.

4. What is "Work in Progress"?


• Goods ready for sale

• Raw material which has just been received

• Inventory which is in the process of being completed at the end of the reporting period

• Raw material which has been unpacked and is ready to be utilized in the manufacturing process

5. What is "earnings per share"?


• The total earnings of the company

• The ratio of a company's earnings to the number of shares outstanding

• Earnings of the company less any dividends

• Earnings of the company divided by the number of preferred shares outstanding

6. What is "impairment"?


• Expensing of the cost of goods sold

• A revaluation of the assets on the books

• An asset becoming unusable

• Natural resources getting used up

81 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
7. How often are consolidated financial statements prepared?


• Whenever a company wishes

• At least yearly, can be monthly

• There is no requirement

• Once in a decade

8. Which FASB statement addresses the capitalization of interest?


• FASB 101

• FASB 144

• FASB 201

• FASB 34

9. What value should a contingency be booked at?


• Not be booked until it occurs, and then booked using the actual value

• At the actual amount, and retroactively

• Using the best estimate and then adding 10%

• Using the most likely estimated amount, factoring in conservatism

10. What is the purpose of a derivative instrument?


• Additional investment activity for companies to use their cash

• Allowing the firm to offer its staff a way to participate in the growth of the company

• Creating a guarantee of profit

• Mitigating risk on the changing value of the asset on which it is based

11. What FASB summary statement discusses the accounting treatment of income taxes?


• FASB 144

• FASB 201

• FASB 123

• FASB 109

12. What is a deferred tax asset?


• A tangible asset which is tax deductible in the current year

• A tangible asset which can be deducted in future years

• Temporary differences which will be deductible in future years for tax purposes, creating a positive tax benefit

• Permanent differences which can later be deducted

13. What is the date of abandonment?


• The day the asset is purchased

• The day the asset is fully depreciated

• The day the asset is sold

• The day the asset ceases to be utilized

14. When is the stock value of stock dividend determined?


• On the date of issuance

• On the date of declaration

• On the date of record

• On December 31st of the current year

15. What are "eliminating entries"?


• Accounting entries which hide negative items

• Accounting entries made on purpose to reduce tax expense

• Accounting entries made to reflect accruals

• Accounting entries made to cancel out the duplication of accounting impact on the books of two consolidating companies

16. Which FASB Statement addresses accounting for stock dividends?


• FASB 144

• FASB 201

• FASB 99

• FASB 123

17. What number of shares is used in calculating basic EPS?


• Weighted average number of shares outstanding for the period

• The closing number of shares outstanding

• The opening number of shares outstanding

• The total number of shares authorized

18. Why do firms distinguish income from continuing operations and income from discontinued operations?


• Because it makes the firm look smart for discontinuing an operation

• Because it increases the company's per share price

• Because it reduces the tax effect if it is reported separately

• Because it gives investors and stockholders insight into the impact that the sale of the discontinued operation will have on the company

19. Which FASB deals with the impairment of long lived assets?


• FASB 201

• FASB 144

• FASB 101

• FASB 99

20. What account is credited in accounting when impairment is booked?


• Telephone Expense

• Accumulated Depreciation

• Loss on Impairment

• The Asset itself

21. Which of the following words describes a situation when a contingent liability should be recorded?


• Remote

• Probable

• Possible

• Never

22. Which of the following would be considered a discontinued operation?


• A dog food manufacturer decides to stop offering low fat dog food because it doesn't make money.

• A library decides to stop carrying kids' novels.

• A stock brokerage goes out of business.

• A jacket manufacturer decides to sell its rain coat division which has its own plant.

23. Which of the following would qualify for capitalization of interest?


• An inventory item which takes 1 week to process

• A ship which is built over 2 years

• A loan taken by a company to fund general operations

• A mechanic's lien placed on the company

24. What is the effect of a stock split on a company's financial records?


• It depends on the value of the stock and the number of shares which are split.

• It creates a Credit to Common Stock.

• None; it changes the number of shares outstanding but not the value of the stock.

• It creates a Debit to Common Stock.

25. What is the alternative to the capitalization of interest costs?


• Do not account for them at all

• Expense interest costs

• Create an current asset

• Record them as equity

26. What is the general rule regarding the reporting of comprehensive income?


• That it should not be shown as it is misleading

• That comprehensive income should be calculated and prominently displayed on financial reports

• That it should be mailed in a letter to all shareholders

• That it should only be calculated yearly

27. Which of the following is not a part of inventory?


• Finished Goods

• Work in Progress

• Raw Materials

• Cost of Goods Sold

28. Which of the following would be included in comprehensive income?


• Interest expense on a loan

• Write off of an accounts receivable

• Accounts payable in dispute

• All of the above

29. How is the interest cost to be capitalized calculated?


• By taking into account the interest cost on the borrowings made to complete the asset

• By using the average market rate

• By following the Federal reserve rate

• By following the interest rate on the company's savings account

30. Which of the following would be booked as a contingency?


• Company A is close to acquiring Company B.

• Company B sells Company A.

• Company A pays for a large inventory order.

• Company B makes a large sale.

31. What is the proper financial reporting treatment for a discontinued operation?


• Just include a statement that the firm is going to discontinue an operation, but leave the accounting combined.

• Create an entirely separate entity for the discontinued operation if it is not already there, and put it into bankruptcy.

• Report it separately on the balance sheet and income statement.

• Expense all of the assets of the discontinued operation in the current period.

32. Under which of the following situations would prior financial reports not have to be restated?


• The change is due to a policy change and in writing.

• The change materially affects what EPS would have been last year.

• The change has no impact on previous accounting or financial reports.

• The change is due to an error in the interpretation of accounting GAAP law.

33. Which of the following would not be included in comprehensive income?


• Loss due to a bad management decision

• Revenue from a subsidiary company

• Management salaries

• Loss due to a hurricane for a company located in an area where hurricanes are not typical

34. What does the term derivative mean for accounting purposes?


• A financial instrument the value of which is derived from another financial instrument

• A financial instrument such as a stock or bond

• A liability of which the obligation is derived based on interest rates

• An asset the value of which is derived by the current trade in value

35. Why are direct costs added to the value of the inventory?


• They are costs directly related to the creating of an inventory item and without them, there would be no inventory.

• It is required by the IRS tax laws.

• It helps reduce expenses on the income statement.

• It inflates inventory values on the balance sheet which looks good to the investors.

36. Which of the FASB statements discusses the methodology to be applied when consolidating financial statements?


• FASB 160

• FASB 12

• FASB 144

• FASB 123

37. Which of the following is a method of testing for impairment?


• Net Income potential method

• Discounted cash flow value compared to carrying value

• Asking management what a fair value is

• Looking at the historical cost

38. Why would a company issue stock dividend?


• Because shareholders prefer stock to cash

• Because they can issue the stock of any corporation to the shareholders

• Because it involves lower tax impact to both the shareholders and the corporation

• Because no cash outlay is required while the shareholders are still rewarded

39. Which of the following would be a contingency needing to be booked?


• Sale of an asset

• Sale of inventory

• Management salaries for the following period

• Product warranty obligations

40. How are income taxes calculated in general for the current period?


• Using the highest tax bracket in the name of conservatism

• Using the taxable net income multiplied by the estimated tax rate for the company

• As an average for the year

• Based on previous year's tax amount for the same period

41. What are the 3 important dates pertaining to the issuance of stock dividend?


• Date of record, Date of payment, Date of distribution

• Date of issuance, Date of delivery, Date of record

• Date of payment, Date of record, Date of company formation

• Date of declaration, Date of record, Date of distribution

42. What is a special purpose entity?


• The same as a different product line

• A subsidiary entity created for a specific reason

• A subsidiary company in another country

• An entity created solely to avoid taxes

43. What is the accounting treatment of stock dividend when it is issued (not declared)?


• Dr: Cash, Cr: Stock Expense

• Dr: Stock Expense, Cr: Cash

• Dr: Equity, Cr: Dividend Payable

• Dr: Dividend Payable Cr: Common Stock

44. Why would a company want to discontinue the operations of a division?


• Because it generates too much income

• Because it is not profitable and won't be in the future

• Because it is located outside of the company's location

• Because the tax rate is too high

45. Why would a company issue convertible debt?


• The conversion factor makes the offering more attractive.

• It has less tax implications than normal debt.

• It gives the company more power to control its debt to equity structure.

• It limits the owners liability.

46. What are direct costs?


• Costs of management salaries

• Rent and utilities

• Costs which are directly attributable to the production of an inventory item

• General office costs which are then allocated to the inventory as burden

47. What is a "permanent difference"


• A difference in the management's perspective on all the earnings of the company

• A difference in tax law and GAAP which will never be resolved

• A difference in the tax rate between two different countries a firm operates in

• A difference in the GAAP principles used on the books

48. What interest rate would be used to calculate interest capitalization if there is no specific loan associated with the asset except just the overall company debt?


• The lowest rate of interest the company has on loans

• The highest rate of interest the company has on loans

• The Federal reserve rate

• A weighted rate based on the amounts of loans and rates carried by the company

49. Which of the FASB statements discusses the accounting treatment of discontinued operations?


• FASB 123

• FASB 144

• FASB 12

• FASB 201

50. What is a contingency in general?


• Typically an asset purchase which depends on the expenses for the period

• A pending lawsuit already filed

• Potential liabilities with a strong probability that it will happen

• Changes in equity

51. Which of the following would impairment not apply to?


• Land

• Intangible Assets

• Equipment

• Office Supplies

52. What is the purpose of consolidating financial statements?


• It hides the individual mistakes of different divisions.

• It reduces the tax burden of the corporation.

• It allows stockholders and investors to see the financial health of a company and all its divisions and subsidiary companies in one financial statement.

• It shows investors how much was spent on total salaries.

53. Which of the FASB statements discusses how accounting changes are to be handled?


• FASB 123

• FASB 99

• FASB 154

• FASB 144

54. What is the primary goal of accounting for income taxes?


• To demonstrate to the stockholders that the firm is tax savvy

• To determine how much money to put in savings for year end taxes

• To recognize the current year's tax obligation

• To find out how much would be owed so the firm can engage in tax evasion

55. Who does an error correction financial report restatement benefit?


• The company

• The investors

• The employees

• All of the above

56. Why would a shareholder want to know what diluted EPS as compared to basic EPS?


• Because it represents what a stock can be sold for currently

• Because it reduces the stockholder's tax liability

• Because it will reflect the potential dilution of the value of the company which can be excessive for companies with large numbers of options outstanding

• Because it represents how well the management is performing in comparison with the past management

57. What accounting principle(s) does the principle of impairment adhere to?


• Matching & Timeliness

• Matching & Conservatism

• Conservatism & Timeliness

• Materiality & Matching

58. What is another way of saying what comprehensive income is?


• Income including all extraordinary income and losses

• Normal income earned in the ongoing operations of the company

• Income before income taxes

• Income excluding salaries

59. What entries are made to correct an error?


• Dr: Revenue, Cr: COGS

• Depends on the correction, can impact any account

• Dr: Cash, Cr: Expense

• Dr: Equity, Cr: Liabilities

60. What is a "temporary difference"?


• A difference due to an error in accounting

• A difference in tax law and GAAP which creates a temporary difference in financial reporting

• A difference in the management's perspective on the current period's earnings

• A difference between the tax department's and accounting department's accounting systems

61. Which of the following would be an accounting change which would require a restatement of the previous financial reports?


• Change in how many stock options were issued to a director, made effective retrospectively from the previous year

• Paying arrears to a laid off employee

• The firing of an employee which has been planned for two months in advance

• Change in the management's salary going forward, but discussed last year

62. What is stock dividend as compared to cash dividend?


• The issuance of cash which can only be used to buy stock

• The issuance of additional stock to shareholders in lieu of cash

• The issuance of stock in the current period, traded for cash in a later period under contract

• A promise by the company that the stock price will increase

63. Which FASB Statement addresses accounting for earnings per share?


• FASB 128

• FASB 55

• FASB 144

• FASB 12

64. Which of the following is a requirement for interest costs to be capitalized?


• The rate must exceed 10%.

• The period of capitalization must be at least 2 years.

• The asset requires a period of time to ready it for use.

• The firm must have specific loans on the project.

65. What is the general rule for accounting for inventory?


• It should be accounted for at fair market value.

• It should be accounted for at cost.

• It should be accounted for at a set gross margin rate.

• The method can vary depending on the nature of the inventory item.

66. What impact may a financial report restatement have on the current share price?


• It always leads to an increase in the price.

• It depends on the nature and magnitude of the correction.

• It always leads to a decrease in the stock price.

• It has no impact at all.

67. What is meant by "hedging"?


• Selling of derivatives

• The activity of mitigating risk, using one instrument to lower the overall risk of a portfolio

• Purchasing stocks in several industries to mitigate risk

• Selling company stock at an inflated value

68. Which FASB statement addresses convertible debt?


• FASB 12

• FASB 101

• FASB 144

• FASB 150

69. What is meant by the term "dilution"?


• It is just another term for common stock.

• Common stock plus preferred stock

• The number of shares that would be outstanding if all options and other contracts related to shares were executed

• Common Stock and other equity

70. What is comprehensive income?


• Income less any taxes

• Income from the main product line, without clubbing the income from other product lines

• Income including all extraordinary items

• Normal income including revenues, cogs, expenses, gains and losses

71. What is convertible debt?


• Share issuance which can be converted into debt

• A debt issuance which can be converted into the shares of the issuing company

• The same as preferred stock

• A debt which can earn a higher interest rate

72. Why are uncollectible accounts receivable considered a contingency?


• Because they are an asset

• Because they are material

• Because they are not probable

• Because they can be estimated and it is probable not all accounts receivable will be collected

73. Which section of FASB deals with Accounting for Inventory Costs?


• FASB 401

• FASB 151

• FASB 10

• It is not covered by FASB

74. Which of the following would be a derivative instrument?


• Common stock

• Preferred stock

• Options contracts

• Debt instrument

75. What is a "mark to market" adjustment?


• Selling off assets

• Adjusting the price of a derivative once it is sold

• Buying offsetting derivatives to mitigate risk

• Adjusting the book value of a derivative to the current market rate

76. Which of the FASB statements discusses the accounting standard for reporting comprehensive income?


• FASB 201

• FASB 133

• FASB 144

• FASB 130

77. Which of the following is a requirement for the capitalization of interest?


• The amount must be material.

• The rate must be at least 5%.

• The loan must be made by a domestic company.

• The asset must be located domestically.

78. When should a contingent liability be reported financially?


• After legal documents obligating the firm are signed

• When the contingent liability becomes probable

• In the period that follows the documenting of the liability

• Retroactively

79. Which FASB Statement addresses the accounting for derivatives?


• FASB 12

• FASB 144

• FASB 133

• FASB 201

80. What is the definition of a "discontinued operation"?


• A part of a company that has been sold off or is being held out for sale

• When a company decides to no longer manufacture a certain product

• Operations which were not profitable last year

• When a company goes bankrupt

81. What is the conversion rate?


• The interest rate earned on the bond

• The number of people who convert the debt compared to those who don't

• The number of years the convertible debt is outstanding

• The rate at which each dollar of bond converts into shares

82. What is the purpose of stipulating exactly how earnings per share is calculated?


• It creates a level playing field for comparing all companies who adhere to the same guidelines.

• It forces the management to think about their earnings.

• It drives companies to higher profit levels.

• It generates more tax income for the government.

83. What is a contingent convertible bond issuance?


• A convertible debt instrument which can only be converted if the management says the holders can

• A convertible debt instrument which can only be converted if the share price reaches a specific level

• A debt conversion which is contingent on the level of earnings

• A debt conversion which is contingent on a board directive

84. What impact does an accounting change typically have?


• All statements going forward must be presented under the old method as well as the new method.

• All statements going forward must reflect the new policy but there is no other effect.

• Prior financial statements must be restated correctly given the change.

• The company must create several "what if" scenarios for any potential future changes also.

85. What are the tax implications of consolidation?


• It creates a higher tax burden.

• It reduces tax burden.

• Depends on the state the company is located in.

• None, if consolidation is for financial reporting purposes and not for tax purposes.

86. Why is the value of a derivative continually adjusted for accounting purposes?


• To reflect the current market value, since values fluctuate frequently

• To make accounting financial reports more attractive

• To increase earnings

• To lower liability until the derivative is written off

87. Which FASB statement addresses the proper accounting for contingent liabilities?


• FASB 201

• FASB 5

• FASB 99

• FASB 144


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Aahana July 30, 2015
good guys