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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:
- Governmental Accounting Standards Board (GASB)
- International Accounting Standards Board (IASB)
- Financial Accounting Standards Board (FASB)
- U.S. Securities and Exchange Commission (U.S. SEC)
- American Institute of Certified Public Accountants (AICPA)
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.
The benefit of obtaining the Financial Accounting and Reporting (FAR) Exam Certification
This qualification helps both new and seasoned accountants to test their qualifications, develop their abilities, and enhance their understanding of the overall discipline. Via their local state board, prospective applicants can learn more about the licensing process specifics and visit the NASBA website for information about the standardized CPA test. The growing demand for CPAs across the job market is motivated by many factors, so the trend is likely to continue soon. Accountants winning their FAR earn 10 percent more on average than non-FAR colleagues and have more chances to grow their careers. In job searching, being FAR certified can also be a big boon as it shows professional dedication and makes the candidate stand out from others. Among several other specialist fields, FAR certification demonstrates qualification for auditing, business strategy, bookkeeping, and forensic accounting. Becoming accredited opens the doors to hundreds of various career paths and is essential for foreign positions in particular.
Many accountants joining the profession are curious about the advantages of being Financial Accounting and Reporting (FAR) certified so that they can determine if the time and energy to undertake this achievement are worth devoting. The certification process may undoubtedly be rigorous and difficult, but for those employed in industry or finance, success offers some notable advantages. In the US, several states have their board that regulates the certification in their jurisdiction of public accountants.
NEW QUESTION 37
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
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 A (Select one)
- A. Change in accounting estimate.
- B. Change in accounting principal.
- C. Correction of an error in previously presented financial statements.
- D. Neither an accounting change nor an accounting error.
Answer: B
Explanation:
Choice "a" is correct. Switching from the completed-contract method of accounting to the percentage-of
completion method is a "change in accounting principle."
NEW QUESTION 38
If a company is not presenting comparative financial statements, the correction of an error in the financial
statements of a prior period should be reported, net of applicable income taxes, in the current:
- A. Income statement after income from continuing operations and after extraordinary items.
- B. Income statement after income from continuing operations and before extraordinary items.
- C. Retained earnings statement after net income but before dividends.
- D. Retained earnings statement as an adjustment of the opening balance.
Answer: D
Explanation:
Choice "b" is correct. The correction of an error in the financial statements of a prior period should be
reported, net of tax, in the current statement of retained earnings as an adjustment of the opening
balance.
Choice "a" is incorrect. The adjustment is before net income, not after net income.
Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not
affect the income statement.
NEW QUESTION 39
Taft Corp. discloses supplemental industry segment information. The following information is available for
1 992:
Additional 1992 expenses, not included above, are as follows:
Indirect operating expenses $7,200
General corporate expenses 4,800
Segment C's 1992 operating profit was:
- A. $2,000
- B. $2,600
- C. $5,000
- D. $3,200
Answer: C
Explanation:
Choice "a" is correct. $5,000 operating profit for Segment C.
Rule: Operating profit by segments is based on the measure of profit reported to the "Chief Operating
Decision Maker."
Interest expense, income taxes, and general corporate expenses are not allocated to the divisions solely
for the purposes of segment disclosures; they may be allocated if that is how the segments report to the
"Chief Operating Decision Maker."
NEW QUESTION 40
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. $50,000
- B. $30,000
- C. $60,000
- D. $0
Answer: A
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 41
A material loss should be presented separately as a component of income from continuing operations
when it is:
- A. An extraordinary item.
- B. A cumulative effect type change in accounting principle.
- C. Not unusual in nature but infrequent in occurrence.
- D. Unusual in nature and infrequent in occurrence.
Answer: C
Explanation:
Choice "d" is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are
presented as a component of income from continuing operations. Choice "a" is incorrect. Extraordinary
items are shown net of tax in a separate section of the income statement after income from continuing
operations. Choice "b" is incorrect. Cumulative effects of changes in accounting principle are now shown
net of tax as an adjustment to the opening balance of retained earnings in the retained earnings statement.
This treatment is called retrospective application. There really are no longer any cumulative effect types of
changes in accounting principle. The cumulative effect is merely how the amount of the change is
measured.
Choice "c" is incorrect. This is the definition of an extraordinary item.
NEW QUESTION 42
According to the FASB conceptual framework, an entity's revenue may result from:
- A. An increase in an asset from incidental transactions.
- B. An increase in a liability from incidental transactions.
- C. A decrease in a liability from primary operations.
- D. A decrease in an asset from primary operations.
Answer: C
Explanation:
Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities
resulting from the entity's ongoing major operations, not from "incidental" operations. Choice "d" is correct.
An entity's revenue may result from a decrease in a liability from primary operations.
NEW QUESTION 43
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 sells extended service contracts on its products. Because related services are performed over
several years, in 1993 Quo changed from the cash method to the accrual method of recognizing income
from these service contracts.
List B (Select one)
- A. Prospective approach.
- B. Retroactive or retrospective restatement approach.
- C. Cumulative effect approach.
Answer: B
Explanation:
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. Note that when an error is corrected, retroactive restatement is
used, and when there is a change in accounting principle, retrospective restatement is done. However,
this is only a difference in terminology.
NEW QUESTION 44
Which of the following is true regarding the comparison of managerial to financial accounting?
- A. Managerial accounting is generally more precise.
- B. Managerial accounting need not follow generally accepted accounting principles (GAAP) while
financial accounting must follow them. - C. Managerial accounting has a past focus and financial accounting has a future focus.
- D. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is
timeliness.
Answer: B
Explanation:
Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes.
GAAP need not be followed for (internal) managerial accounting purposes.
Choice "a" is incorrect. Financial accounting is generally more precise.
Choice "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on
reporting past results.
Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial
statement users (including the characteristic of relevance), while the emphasis of managerial accounting
is providing timely information to management decision makers.
NEW QUESTION 45
In financial reporting of segment data, which of the following items is always used in determining a
segment's operating income?
- A. Gain or loss on discontinued operations.
- B. Income tax expense.
- C. Sales to other segments.
- D. General corporate expense.
Answer: C
Explanation:
Choice "b" is correct. Sales to other segments would be used in determining a segment's operating
income. Rule: Equity in net income of another company, general corporate expenses, interest, income tax
expense, and gains or losses on discontinued operations are all not included in segment profit unless they
are included in the determination of segment profit reported to the "Chief Operating Decision Maker."
NEW QUESTION 46
According to the FASB conceptual framework, the process of reporting an item in the financial statements
of an entity is:
- A. Matching.
- B. Recognition.
- C. Allocation.
- D. Realization.
Answer: B
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 47
Which of the following should be reported as a prior period adjustment?
- A. Option C
- B. Option B
- C. Option D
- D. Option A
Answer: B
Explanation:
Choice "b" is correct. No - Yes Change in estimated lives of depreciable assets is a "change in estimate."
They affect only current and future periods (not "prior periods," not retained earnings). Change from
unaccepted principle to accepted principle is an example of an error of a prior period that should be
reported as a "prior period adjustment."
NEW QUESTION 48
According to the FASB conceptual framework, the objectives of financial reporting for business
enterprises are based on:
- A. The need for conservatism.
- B. The needs of the users of the information.
- C. Generally accepted accounting principles.
- D. Reporting on management's stewardship.
Answer: B
Explanation:
Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting
stem from the informational needs of the external users of the information. SFAC 1 para.
Choice "a" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis
for the objectives. SFAC 2 para. 91-97 Choice "b" is incorrect. Information concerning management's
stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1
para. 50 Choice "c" is incorrect. Generally accepted accounting principles (GAAP) are derived from and
based on the objectives of financial reporting, not the other way around.
NEW QUESTION 49
In which of the following situations should a company report a prior-period adjustment?
- A. A switch from the straight-line to double-declining balance method of depreciation.
- B. The scrapping of an asset prior to the end of its expected useful life.
- C. A change in the estimated useful lives of fixed assets purchased in prior years.
- D. The correction of a mathematical error in the calculation of prior years' depreciation.
Answer: D
NEW QUESTION 50
How should the effect of a change in accounting principle that is inseparable from the effect of a change in
accounting estimate be reported?
- A. By restating the financial statements of all prior periods presented.
- B. By footnote disclosure only.
- C. As a component of income from continuing operations.
- D. As a correction of an error.
Answer: C
Explanation:
Choice "a" is correct. When the effect of a change in accounting principle is inseparable from the effect of
a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate.
Thus, the effect is reported prospectively as a component of income from continuing operations. Under
SFAS No. 154, this type of change is now called a change in accounting estimate affected by a change in
accounting principle. Choice "b" is incorrect. Restatement of all prior periods is the retroactive accounting
treatment that is applied to the correction of an error and the retrospective accounting treatment given to
changes in accounting principle. However, a change in accounting principle that is inseparable from the
effect of a change in accounting estimate is now treated as a change in accounting estimate. Choice "c" is
incorrect. Correction of an error is given retroactive treatment as a prior period adjustment to retained
earnings with restatement of prior periods. This is not the treatment appropriate for the effect of a change
in accounting principle that is inseparable from the effect of a change in accounting estimate. Choice "d"
is incorrect. While footnote disclosure is always appropriate for an accounting change, such disclosure
alone is never the appropriate accounting treatment.
NEW QUESTION 51
Which of the following factors determines whether an identified segment of an enterprise should be
reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information?
I. The segment's assets constitute more than 10% of the combined assets of all operating segments.
II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.
- A. I only.
- B. Both I and II.
- C. II only.
- D. Neither I nor II.
Answer: A
Explanation:
Choice "a" is correct. For segment reporting, if an identified segment's assets constitute more than 10% of
the combined assets of all operating segments, the segment should be reported. The same rule does not
apply for the segment's liabilities. The candidate does have to remember the 10% and also the 10% of
"what." Choice "b" is incorrect. For segment reporting, if an identified segment's assets constitute more
than 10% of the combined assets of all operating segments, the segment should be reported. The same
rule does not apply for the segment's liabilities. Choice "c" is incorrect. For segment reporting, if an
identified segment's assets constitute more than 10% of the combined assets of all operating segments,
the segment should be reported. The same rule does not apply for the segment's liabilities, so the correct
answer cannot be "Both." Choice "d" is incorrect. For segment reporting, if an identified segment's assets
constitute more than 10% of the combined assets of all operating segments, the segment should be
reported. The correct answer cannot be "Neither."
NEW QUESTION 52
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
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production
breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Prospective approach.
- C. Cumulative effect approach.
Answer: B
Explanation:
Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior
periods, not retained earnings.
NEW QUESTION 53
Chester Corp. was a development stage enterprise from its inception on September 1, 1987 to December
3 1, 1988. The following information was taken from Chester's accounting records for the above period:
For the period September 1, 1987 to December 31, 1988, what amount should Chester report as net
loss?
- A. $350,000
- B. $ 50,000
- C. $450,000
- D. $150,000
Answer: C
Explanation:
Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to DeC. 31, 1988.
Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional
disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
NEW QUESTION 54
A transaction that is unusual, but not infrequent, should be reported separately as a(an):
- A. Extraordinary item, but not net of applicable income taxes.
- B. Extraordinary item, net of applicable income taxes.
- C. Component of income from continuing operations, net of applicable income taxes.
- D. Component of income from continuing operations, but not net of applicable income taxes.
Answer: D
Explanation:
Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a
component of continuing operations, (gross) but not net of applicable income taxes.
Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent."
Choice "c" is incorrect, per "d" above.
NEW QUESTION 55
Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial
statements for
- A. Option C
- B. Option B
- C. Option D
- D. Option A
Answer: B
Explanation:
Choice "b" is correct. The cumulative effect of a change in accounting principle is now reported as an
adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative
effect. When making a change to LIFO, it is generally considered impracticable to calculate the
cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a
change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect
adjustment is made. The change is accounted for prospectively. A change from LIFO to weighted average,
there is no such impracticability. The cumulative effect is computed and the change is handled
retrospectively. Choices "a", "c", and "d" are incorrect, per the above Explanation: .
NEW QUESTION 56
......
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