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QUESTION:

C.P.A review

FAR A company buys a restaurant for $1 million with no residual value and a 20-year expected life. It is being depreciated on the straight-line method. At the beginning of the third year, the neighborhood around the restaurant starts to become dangerous and its fair value drops to $789,000. However, the restaurant still has many loyal customers and is able to generate $53,000 in net cash flows each year for its remaining life. What should be the net book value for the restaurant on the first day of the third year? A. B. C. D. $789,000 $900,000 $924,000 $954,000

Answer is B Depreciation is $50,000 per year ($1,000,000/20 years) so net book value at the end of Year Two is $900,000 ($1,000,000 less $50,000 and less $50,000). Although the fair value is only $789,000, the restaurant is not viewed as having its value impaired because the future cash flows of $53,000 for 18 years gives a total ($924,000) that is greater than the net book value of $900,000. As long as the expected cash flows are greater than net book value, the asset is not held to be impaired and remains reported at net book value. Regulation What is the Statute of Frauds? A. It sets out rules that indicate the time periods for rules and other laws to be in existence. B. It sets out rules that require certain contracts to be in writing. C. It sets out rules that indicate which actions are gross negligence and which are fraudulent. D. It sets out rules that spell out the actions that an agent can take on behalf of a principal. Answer is B.

Most contracts can either be established orally or in writing. However, the Statute of Frauds indicates which contracts must exist in writing and cannot be created orally. For example, according to the Statute of Frauds, a contract in which a surety agrees to answer for the debts of another must be in writing. Auditing The Ramsey Corporation is being audited by Keillor and Associates CPAs. The auditors discovered that Ramsey is reporting a note receivable from Lexington Corporation, a company that recently filed for bankruptcy. The note is still reported at its $250,000 face value although a reasonable estimation is that only $140,000 will be collected. If these amounts are considered material, which of the following statements is true? A. An unqualified opinion should be given but only with an added explanation of the problem. B. An unqualified opinion cannot be rendered and the scope paragraph must be modified. C. A disclaimer of opinion must be given. D. An unqualified opinion cannot be rendered but the scope paragraph should not be modified. Answer is D The account balance is materially misstated so, therefore, an unqualified opinion is not appropriate. A disclaimer is also not correct because the auditor does have an opinion. The problem here does not relate to the work of the auditor (which would be described in the scope paragraph). The work of the auditor seems to be complete and reasonable. Therefore, the scope paragraph is not changed. Instead, an explanatory paragraph is added to describe the problem and the opinion paragraph is changed. BEC The Drexel Donut Company produces 8,000 dozen donuts under normal circumstances but believes that 5,000 to 10,000 dozen donuts is a relevant range for its current production levels. Fixed costs within this relevant range are

$24,000. At 8,000 dozen, the company calculates that a dozen donuts has a total cost of $4.00. If the company manages to push production levels to 10,000 dozen donuts, what is the cost of a dozen? A. B. C. D. $3.40 $3.50 $3.80 $4.00

Answer is A At 8,000 dozen, the cost is $4.00 per dozen or $32,000 in total. Of that amount, $24,000 is fixed cost so the remaining $8,000 must be the variable cost. That is a variable cost of $1.00 per dozen ($8,000/8,000 dozen). Thus, within the relevant range, fixed costs will stay at $24,000 and variable costs will stay at $1.00 per dozen. For 10,000 dozen, the fixed cost will be $24,000 and the variable costs will be $1.00 per dozen or $10,000. The total is $34,000 for 10,000 dozen donuts or $3.40 per dozen. FAR The Lawson Corporation buys an inventory item for $321 that it plans to sell for $352. However, by the end of the year, the replacement cost of that inventory item has dropped to $270 because the market has been flooded with units. Lawson believes the net realizable value is now $318. If IFRS is being applied, what is reported for this inventory item on the companys balance sheet? A. B. C. D. $270 $318 $321 $352

Answer is B Both IFRS and US GAAP report inventory at the lower of cost or market. Under US GAAP, the computation of market is quite complex involving both replacement cost and net realizable value. In IFRS, market is simply the net realizable value. Since net realizable value ($318) is lower than cost ($321), the

$318 is reported. Furthermore, in US GAAP, if the reported value of this item is reduced and then ever increases, no removal of the loss is made. However, for IFRS, if the value rebounds, the loss (or a portion of the loss) is removed. Auditing An audit team is doing an engagement that requires the use of governmental auditing standards. Where can generally accepted government auditing standards be found? A. B. C. D. In the yellow book produced by the Government Accountability Office. In the white book produced by the US Treasury Department. In the blue book produced by the Office of the Controller General. In the red book produced by the Chief Accountant of the SEC.

Answer is A. According to Wikipedia, the Generally Accepted Government Auditing Standards (GAGAS), commonly referred to as the Yellow Book, are produced in the United States by the Government Accountability Office (GAO). The standards apply to bothfinancial and performance audits of government agencies. Five general standards are included: Independence, Due Care,Continuing Professional Education (CPE), Supervision, Quality Control. The Yellow Book standards are used by auditors who examine the federal government, . . . Regulation The Curry Corporation (an accrual based taxpayer) had sales in the current year of $500,000. The company wrote off $9,000 of its accounts receivable as uncollectible. At the end of the year, the company still had accounts receivable of $100,000. The companys accountant believes that roughly 2 percent of its sales for the year or 11 percent of its accounts receivable will eventually prove to be uncollectible. What amount can be deducted as bad debts for the year? A. Zero B. $9,000 C. $10,000

D. $11,000 Answer is B Corporations file a form 1120. According to the instructions for the form 1120, in determining bad debts, the company should enter the total debts that became worthless in whole or in part during the tax year. The government prefers the actual fact of the debt becoming worthless to any estimate of that amount. In this year, $9,000 in accounts were judged to be uncollectible. BEC A company is looking into making an investment and discovers that the net present value of that investment is a positive $6,000. What does that mean? A. The investment has a cost to the company of $6,000. B. The investment has an expected residual value at the end of its maturity of $6,000. C. The present value of the cash flows generated by the investment is greater than its cost by $6,000. D. The future cash to be generated by the investment is greater than its present value by $6,000. Answer is C One way to determine if an investment opportunity should be pursued is to determine the present value of those future cash flows that it will generate and compare that amount to its cost. The difference is known as the net present value. If that number is positive (the present value is higher than the cost), the investment is considered a wise one. In that case, the value of the future cash flows is greater than the current amount that must be spent. In computing the present value, a discount rate must be selected. Several possible rates can be applied although the companys weighted average cost of capital is frequently used.

On January 1, 2010, Heath Corp. established an employee stock ownership plan (ESOP). Selected transactions relating to the ESOP during 2010 were as follows: On April 1, 2010, Heath contributed $45,000 cash and 3,000 shares of its $10 par value common stock to the ESOP. On this date, the market price of the stock was $18 a share. On October 1, 2010, the ESOP borrowed $100,000 from Union National Bank and acquired 6,000 shares of Heath's common stock in the open market at $17 a share. The note is for one year, bears interest at 10%, and is guaranteed by Heath. On December 15, 2010, the ESOP distributed 8,000 shares of Heath's common stock to employees of Heath in accordance with the plan formula. On this date, the market price of the stock was $20 a share. In its 2010 income statement, what amount should Heath report as compensation expense relating to the ESOP? A) $99,000 B) $155,000 C) $199,000 D) $259,000

Correct Answer: A Explanation: A company records compensation expense based upon cash or stocks (at fair market value) contributed to the plan during the year. Therefore, the $45,000 cash and $54,000 value of the shares contributed to the plan are reported as compensation expense. The second and third transactions noted in the question do not result in any expense recognition.

On January 1, Year One, a company buys equipment for $60,000 and pays another $5,000 to have it assembled and installed. The equipment has an expected life of 10 years and a residual value of $10,000. What amount of depreciation expense is recognized for Year Two if the double-declining balance method is applied? Assume that the half-year convention is not being used. A $8,000 B $8,800 C $9,600 D $10,400 The correct answer was D.

The cost of this equipment is $65,000. The $5,000 is included because both assembly and installation are viewed as normal and necessary to get the item into position and condition to generate revenues. There is no accumulated depreciation for the first year so depreciation is $13,000 ($65,000 times 2/10). This expense reduces the book value to $52,000 for the second year so that the expense will be $10,400 ($52,000 book value times 2/10).

A company owns a warehouse that cost $1,200,000 and has accumulated depreciation of $500,000. At the present time, this asset has a remaining life of 10 years but is currently worth only $610,000. The company anticipates that this warehouse can be used to generate net cash inflows of $68,000 in each year for the remainder of its life. These cash flows have a present value of $517,000 using a reasonable interest rate. What loss should the company recognize in connection with the impaired value of this asset? A -0B $70,000 C $90,000 D $183,000

Answer: C In evaluating whether the value of an operational asset has been impaired, a preliminary test is made. If the future cash flows generated by the asset are expected to be less than its current book value, the book value is reduced to the fair value of the asset. For this warehouse, the current book value is $700,000 ($1.2 million less $500,000) but the future cash inflows are only $680,000 ($68,000 per year for 10 years). As a result, the company must reduce the $700,000 book value to the $610,000 fair value of the warehouse. That reduction creates a $90,000 loss. The Braxton Company holds equipment with a cost of $98,000. At the present time, accumulated depreciation of $40,000 is recorded in connection with this equipment. The asset has a fair value of $72,000. This equipment is traded for machinery that is viewed as entirely dissimilar in nature. It has a fair market value of $65,000. The parties go through intense negotiations. Braxton finally convinces the other party to give $8,000 in cash because the values are not the same. What is the capitalized cost of the new machinery? A $58,000 B $64,000 C $65,000 D $72,000

The Richmond Company has adopted the double-declining balance depreciation method for all of its equipment. It also uses the half-year convention. The company acquired equipment for $15,000 on August 1, Year One. This equipment has an estimated life of eight years and an expected salvage value of $3,000. This asset is eventually sold at the end of February in Year Three for $9,000 in cash. What is the impact on the company's reported net income for Year Three as a result of this sale (rounded)? A $445 loss B $658 loss C $387 gain D $523 gain The correct answer was C. Declining balance methods compute depreciation based on the book value of the asset for the period. For Year One, the cost of $15,000 cost minus zero accumulated depreciation gives a book value of $15,000 which is multiplied by 2/8 and then by 1/2 year to arrive at depreciation expense of $1,875. Although the asset was only held for five months in Year One, the half-year convention is applied. For Year Two, the $15,000 cost minus $1,875 accumulated depreciation equals a book value of $13,125 which is multiplied by 2/8 giving depreciation of $3,281 (rounded). For Year Three, the $15,000 cost minus accumulated depreciation of $5,156 ($1,875 plus $3,281) gives a book value of $9,844. That figure is multiplied by 2/8 and by 1/2 (since it was held for a partial year) so that depreciation expense for Year Three is $1,231 (rounded). Book value at the date of sale is the $15,000 cost less accumulated depreciation of $6,387 ($1,875 plus $3,281 plus $1,231) or $8,613. The asset was sold for $9,000 which is $387 more than book value so that a gain of that amount is appropriate.

On January 1, Year One, the Saxon Company bought an oil platform to use in drilling for oil in the Gulf of Mexico. The company paid $90 million for the platform and expects it to last for 10 years. When the oil has been removed from the site, the company is required legally to remove the platform from the area. The cost of that disposal is anticipated to be $18 million which, at a reasonable annual rate of 12 percent, has a present value of $6.3 million. The straight-line method will be used to determine depreciation. The effective rate method is used to determine interest. What is the total impact on the company's reported net income for Year One? A $9,630,000 B $10,386,000 C $10,542,500 D $11,012,000

The correct answer was B. This asset has a capitalized cost to Saxon of $96,300,000. That is the cost of buying the oil platform as well as the present value of the asset retirement obligation that will eventually have to be paid because it is a legal requirement. Based on the straight-line method and an expected life of 10 years, depreciation expense will be $9,630,000 each year. The obligation for the retirement is initially reported as a liability of $6,300,000. For Year One, interest expense (called accretion expense in connection with an asset retirement obligation since no debt instrument actually exists) is 12 percent of the $6,300,000 balance ($756,000). Saxon reports a total expense of $10,386,000 (depreciation of $9,630,000 plus accretion of $756,000).

FAR The FGCC Company had an enacted income tax rate of 28 percent. The company ended Year One with a deferred income tax liability of $40,000, a deferred income tax asset of $50,000 and a valuation allowance of $19,000. The enacted tax rate was raised at the start of Year Two to 30 percent. The company ended Year Two with a deferred income tax liability of $70,000, a deferred income tax asset of $40,000, and a valuation allowance of $24,000. On the companys Year Two income statement, what is the amount of income tax expense deferred that is reported?

A. $15,000 B. $25,000 C. $35,000 D. $45,000

Answer is D

A balance sheet approach is used for deferred taxes. The balance sheet totals are computed and an adjustment is made to move each previous year total to the newly computed amount. The balancing number for that entry is the income tax expense-deferred amount to be reported on the income statement. The expense is not computed directly but only as the amount that moves previous balance sheet accounts to their updated totals. Here, the liability is increased by a $30,000 credit (from $40,000 to $70,000), the asset is reduced by a $10,000 credit (from $50,000 to $40,000), and the valuation allowance is increased by a $5,000 credit (from $19,000 to $24,000). The balancing amount is a $45,000 debit which represents the income tax expense-deferred. Notice here that the enacted tax rates are not used in this calculation because the proper asset and liability balances have already been calculated.

Auditing The Cosby CPA firm is auditing the financial statements of Hamster, Inc. for the latest year. Hamster manufactures widgets in its factory located in Gaffney, South Carolina. The auditors are currently analyzing each of the entries made to the repair expense account. What is one of the purposes for doing this testing? A. The auditors hope to gain evidence that the companys liabilities are not overstated. B. The auditors hope to gain evidence that the companys net income is not understated. C. The auditors hope to gain evidence that the companys current assets are not overstated. D. The auditors hope to gain evidence that the companys current assets are not understated.

Answer is B.

The auditors are looking for the possibility of material misstatements. The repair expense account is studied to determine whether any costs that should have been added to an asset account were incorrectly added to this expense account. If that has taken place, the expense balance will be overstated and, as a result, reported net income will be understated. If that has occurred, the machinery and equipment balances will also be understated but they are not current assets.

Regulation

Mr. Wilson has placed his house on the market for $319,000. However, he sends a signed letter to Mr. Dennis offering to sell the property to him for only $300,000. Mr. Dennis responds with a signed letter agreeing to buy the house for $290,000. What is the best term for the letter written and sent by Mr. Dennis? A. An implied acceptance B. A purchase agreement C. A counteroffer

D. A promissory letter

Answer is C A counteroffer is a return offer made by a party who has rejected an offer. Mr. Dennis has basically
turned down the $300,000 offer made by Mr. Wilson but has then made an offer to buy the house for $290,000. Because this offer follows the rejection of Mr. Wilsons offer, it is referred to as a counteroffer.

BEC

An economist is hoping to see a future increase in gross domestic product. The economist is looking for evidence that might indicate this future change will happen. Which of the following is most likely to indicate this possibility? A. Increase in the hours worked each week by production workers B. Increase in the amount of imports C. Decrease in the rate of inflation D. Decrease in the monetary amounts in circulation.

Answer is A

According to Wikipedia, the gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. Thus, GDP is a measure of productivity. The more production workers work the more likely it is that the GDP will increase.

ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS

Problem: Assume you are the controller for the City of Havisham. The city has a fiscal year ending December 31, 2013. IF the city was to produce financial statements right now, the following figures would be included: --Governmental Activities: Assets = $800,000, Liabilities = $300,000, and Change in Net Assets for the period = increase of $100,000 --Business-Type Activities: Assets = $500,000, Liabilities = $200,000, and Change in Net Assets for the period = increase of $60,000 --Governmental Funds: Assets = $300,000, Liabilities = $100,000, and Change in Fund Balances = increase of $40,000 --Proprietary Funds: Assets = $700,000, Liabilities = $300,000, and Change in Net Assets for the period = increase of $70,000 Other information: The city council is viewed as the highest level of decision-making authority for the government. Where applicable, current financial resources are viewed by the government as available if collected within 75 days of the end of a fiscal year.

(1) TRUE or FALSE In the information provided above, an error has apparently been made that must be corrected because the amount of proprietary fund assets ($700,000) cannot be greater than the amount of business-type activity assets ($500,000). ANSWER: Proprietary funds contain both Enterprise Funds and Internal Service Funds. Business-type activities contain Enterprise Funds and possibly some of the Internal Service Funds. Therefore, the proprietary fund assets can be the same as (or bigger than) business-type activity assets. However, proprietary fund assets cannot be less than the amount of businesstype activity assets. The answer is FALSE. (2) TRUE or FALSE A separate governmental fund (such as money held for the construction of Highway 61) is holding assets totaling $32,000. Based on that information, this fund must be reported as a major fund.

ANSWER: The asset balance ($32,000) for this fund is larger than 10 percent of the total assets held by all governmental funds ($300,000) this is one of the criteria for being a major fund. (The same threshold can also be used with liabilities, revenues, or expenditures/expenses.)

However, a second criterion must also be met. The asset (or other) balance ($32,000) for this fund must be at least 5 percent of the total for both the governmental fund and the enterprise funds. There is not enough information available here to make that determination. Whether this fund is a major fund cannot be ascertained. The answer is FALSE. (3) TRUE or FALSE Investments are given to the city with a value of $5,000,000. All income earned from these investments must be used to construct a small library in one of the local neighborhoods but the investments must be held forever. When the investments are received, revenue of $5,000,000 is reported in the Permanent Fund.

ANSWER: This is a voluntary nonexchange transaction. As far as can be told from the problem, there are no eligibility requirements on the $5 million, only on the subsequent income. Because the money cannot be spent, it is recorded in a Permanent Fund. The income, though, will be reported in a Capital Projects Fund because it is held for construction. Answer is TRUE. (4) TRUE or FALSE Investments are given to the city with a value of $5,000,000. All income earned from these investments must be used to construct a small library in one of the local neighborhoods. If the money is not properly spent, it must be returned. Near the end of 2013, income of $600,000 is earned. Construction will not begin until 2015. Deferred revenue of $600,000 must be reported in a Capital Projects Fund. ANSWER: The income here must be used for construction so it is reported in a Capital Projects Fund. The income has an eligibility requirement imposed by the outside donor it must be spent on construction of the library or be returned. Therefore, until this eligibility requirement has been met, the income is reported as deferred revenue. The answer is TRUE.

(5) TRUE or FALSE The city starts a bus system to help eliminate traffic congestion. Passengers are charged a nickel for each trip although that fee will not come close to covering the cost of the bus system or pay for its debts. Because the fee will not cover the cost of this operation, the bus system is reported as a part of the General Fund rather than as a separate Enterprise Fund. ANSWER: Unless the revenue is the sole security for the debts of the bus system or the activitys costs are required to be recovered through the fee or the fees are set to recover the activitys costs, then an Enterprise Fund can be used but the city is not required to do so. That is the case here. If any of these standards is met, the use of an Enterprise Fund is required. Because none of them is met here, the city may record the bus service in the General Fund but is not required to do so. The answer is FALSE. (6) TRUE or FALSE The city council passes its annual budget for all General Fund activities. Revenues are expected to be $1,000,000 and approved expenditures are

$900,000. These budgetary amounts are recorded through a journal entry at the beginning of the year (an entry that is removed at the end of the year). In recording this budget, an estimated revenue account is debited for $1,000,000. ANSWER: To record a budget so that the projected increase or decrease in the fund balance will be obvious (a credit would be an anticipated surplus and a debit would be an anticipated deficit), estimated revenues are debited and appropriations are credited. Answer is TRUE. (7) TRUE or FALSE The city council passes its annual budget for all General Fund activities. Revenues are expected to be $1,000,000 and approved expenditures are $900,000. These budgetary amounts are recorded through a journal entry at the beginning of the year (that entry is removed at the end of the year). In recording this budget, an expenditures account is debited for $900,000. ANSWER: To record a budget so that the projected increase or decrease in the fund balance will be obvious (a credit would be an anticipated surplus and a debit would be an anticipated deficit), estimated revenues are debited and appropriations are credited. Expenditures are not recorded as part of the budget process. Answer is FALSE. (8) TRUE or FALSE In government-wide financial statements, pension trust funds are included within the governmental activities. ANSWER: Pension trust funds are fiduciary funds because the government is holding assets that go to an outside party. Fiduciary funds are not included in government-wide financial statements because government officials are not able to make use of them. Answer is FALSE. (9) TRUE or FALSE The government bought a three-year insurance policy on January 1, 2013 for its school system. If the purchases method had been used, the amount of expenditures reported by the city would be larger for that year than if the consumption method had been used. ANSWER: In the purchases method the amount of prepaid expenses or supplies that are acquired are recorded immediately as expenditures. In the consumption method, only the amount used up or consumed during the period is recorded as an expenditure. Here, three years of insurance has been bought but only one year has been used up. Answer is TRUE. (10) TRUE or FALSE An income tax is classified as derived tax revenue. ANSWER: Income taxes and sales taxes are both derived tax revenue because the tax is derived from a specific event (the earning of income or the making of a sale). Answer is TRUE. (11) TRUE or FALSE Assume that after the figures on page one of this test were determined, you learned that the city was entitled to $100,000 in income taxes on income earned during 2013. Starting on January 1, 2014, the city will collect $1,000 per day for the next 98 days (the final balance will prove uncollectible). As a result, the reported

change in net assets for the governmental activities in government-wide statements for 2013 will go up by $98,000. ANSWER: Accrual accounting is used for government-wide financial statements. Derived taxes like income taxes are recognized at the time of the underlying event (the earning of income). Therefore, the revenue is recognized in 2013 and is $98,000, the amount expected to be collected. Answer is TRUE.

(12) TRUE or FALSE Assume that after the figures on page one of this test were determined, you learned that the city was entitled to $100,000 in income taxes on income earned during 2013. Starting on January 1, 2014, the city will collect $1,000 per day for the next 98 days (the final balance will prove uncollectible). As a result, the reported liabilities for the governmental funds in the fund financial statements as of December 31, 2013, will go up by $23,000. ANSWER: Modified accrual accounting is used by the governmental funds for fund financial statements. Derived tax revenues (such as this income tax) are recognized in the same period as the underlying event. However, only the amount that is measurable and available can be recognized. Because government officials have chosen 75 days as their definition of available, the first $75,000 is revenue and the next $23,000 is deferred revenue (a liability). The remainder will not be collected and is recorded as an allowance. Answer is TRUE.

(13) TRUE or FALSE The police department ordered some equipment in October 2013 for $43,000. It was received on December 29, 2013, but at a cost of $44,000. In the General Fund, the encumbrance account was credited for $44,000 and the expenditure account was debited for $44,000 to indicate the switch from monetary commitment to a liability. ANSWER: The encumbrance (commitment) is removed and an expenditure and liability is then recognized. However, the encumbrance (along with the fund balance reserved for encumbrances) is removed at its $43,000 balance. The $44,000 expenditure and liability balances are then recorded. Answer is FALSE.

(14) TRUE or FALSE The police department ordered some equipment in October 2013 for $43,000. The equipment was not received prior to the end of 2013. The police chief authorized the department to accept and pay for the equipment when it arrived in 2014. In reporting fund financial statements at the end of 2013, a fund balance committed amount should be reported on the balance sheet for the governmental funds of $43,000.

ANSWER: "Fund balance committed is used when assets have been designated by the highest level of government authority. In other words, the $43,000 is being held for this purchase based on a decision of the highest level of authority. The city council has that authority here rather than the police chief so this amount should be recorded as a fund balance assigned. Answer is FALSE.

(15) TRUE or FALSE A cash amount of $32,000 is transferred from the General Fund to a Capital Projects Fund. On the statement of activities, for the government-wide financial statements, this transaction is shown as both a transfer in and a transfer out. ANSWER: This is an intra-activity transaction between two governmental funds. The total reported by the governmental activities is not affected in any way by the transfer. Therefore, no reporting is necessary in the government-wide financial statements. Answer is FALSE.

(16) TRUE or FALSE A cash amount of $32,000 is transferred from the General Fund to an Internal Service Fund to pay for some work that was done by the print shop for the school system. On the statement of revenues, expenditures, and other financing sources and uses for the Governmental Funds (in the fund financial statements), this transaction will be reported as an other financing use. ANSWER: This is an internal exchange transaction a transfer made to pay for work done. Because actual work was performed in the same manner as with an outside party, the transaction will be handled as if it took place with an outside party. It is recorded as an expenditure rather than an other financing use. Answer is FALSE.

(17) TRUE or FALSE Assume that after the figures on page one of this test were determined, you learned that the city was entitled to $100,000 in property taxes which were assessed on December 29, 2013, solely to finance government operations in 2014. Starting on January 1, 2014, the city will collect $1,000 per day for the next 98 days (the final balance will prove uncollectible). The reported change in net assets for the governmental activities in the government-wide statements reported at the end of 2013 will go up by $98,000. ANSWER: No revenues can be recognized in 2013 because this is an imposed nonexchange revenue that cannot be used until 2014. There is no change in net assets in 2013. Answer is FALSE.

(18) TRUE or FALSE Assume that after the figures on page one of this test were determined, you learned that the city was entitled to $100,000 in property taxes which were assessed on December 29, 2013 solely to finance government operations in 2014. Starting on January 1, 2014, the city will collect $1,000 per day for the next 98 days (the final balance will prove uncollectible). The change in fund balances reported for the Governmental Funds at the end of 2013 will go up by $60,000. ANSWER: No revenues can be recognized in 2013 because this is an imposed nonexchange revenue that cannot be used until 2014. There is no change in the fund balances in 2013. Answer is FALSE.

(19) TRUE or FALSE Assume that after the figures on page one of this test were determined, you learned that the city was entitled to $100,000 in property taxes which were assessed on December 29, 2013, solely to finance government operations in 2014. The government collected $5,000 on December 30, 2013 and the rest in the first four weeks of 2014. On government-wide financial statements for the governmental activities as of December 31, 2013, the total liability balance will be increased by $5,000. ANSWER: The $5,000 collected in 2013 cannot be used until 2014 and is, therefore, reported as a deferred revenue until 2014. That deferred revenue is a liability. Starting with the third testing window of 2013, the CPA Exam will test GASB 65 which would label this amount as a "deferred inflow of resources," which is shown separately from liabilities. Until then, either the old rule (liabilities) or the new rule (deferred inflow of resources" could be tested. I would be surprised if they get in a big hurry to test the new rule. I am going to assume the old rule here. Answer is TRUE.

(20) TRUE or FALSE Assume that after the figures on page one of this test were determined, you learned that the city was entitled to $100,000 in property taxes which were assessed on December 29, 2013, solely to finance government operations in 2014. The government collected $5,000 on December 30, 2013 but the rest will not be collected until June of 2014. On fund financial statements for the Governmental Funds as of December 31, 2013, the total liability balance will be increased by $5,000. ANSWER: The $5,000 collected in 2013 cannot be used until 2014 and is, therefore, reported as a deferred revenue until 2014. That deferred revenue is a liability. As with the previous question, starting with the third testing window of 2013, the CPA Exam will test GASB 65. That pronouncement requires this amount to be reported as a "deferred inflow of resources" rather than as a liability. Until then, either the old rule (it's a liability) or the new rule (it's a deferred inflow of resources) can both be tested. I am assuming that the old rule is tested. Answer is TRUE.

(21) TRUE or FALSE Investments are given to the city with a value of $5,000,000. All income earned from these investments must be used to construct a small library in one of the local neighborhoods but the investments must be held forever. In 2013, income of $480,000 was received from these investments. However, none of this money has yet been spent. On fund financial statements, the year-end balance sheet for the Governmental Funds must show a fund balance restricted of $5,000,000 and a fund balance committed of $480,000. ANSWER: The $5,000,000 cannot be spent so a fund balance nonspendable figure is appropriate on the balance sheet. The $480,000 has been restricted by an outside party so that a fund balance restricted should be reported on the balance sheet. Answer is FALSE.

(22) TRUE or FALSE The city bought some land several years ago for $220,000. At the very end of 2013, the land is sold for cash of $250,000. The net asset total in the government-wide financial statements goes up by $220,000 more than the fund balance total for the Governmental Funds. ANSWER: In government-wide financial statements, cash goes up $250,000 and land goes down $220,000 so the net assets increases by $30,000. In fund financial statements, cash goes up $250,000 so fund balances are increased by $250,000. The land was not a current financial resource and was not recorded as an asset. The last sentence in this question is backwards. The net asset total in the government-wide financial statements goes up by $220,000 LESS than the fund balance total for the Governmental Funds. Answer is FALSE.

(23) TRUE or FALSE The city incurs an expense on December 30, 2013, of $90,000 that will not be paid for 4 months. On the 2013 financial statements, there is a reconciliation that starts with the total change in fund balances for the Governmental Funds and works down to end with the total change in the net assets for the Governmental Activities. Because of differences between modified accrual accounting and accrual accounting, this $90,000 must be subtracted as part of this reconciliation. ANSWER: No expenditure is recognized in 2013 because current financial resources will not be used within 75 days. There is no change in fund balances for the Governmental Funds. However, under accrual account, an expense is recognized in 2013 so there is a reduction in net assets on the government-wide financial statements of $90,000. The reconciliation starts with zero and goes to a negative $90,000. That requires a subtraction of $90,000. Answer is TRUE.

(24) TRUE or FALSE On December 30, 2013, the city issues $400,000 in long-term bonds for face value to finance school operations. On the 2013 financial statements, there is a reconciliation that starts with the total change in fund balances for the Governmental

Funds and works down to end with the total change in the net assets for the Governmental Activities. As a result of the bond issuance, this $400,000 must be subtracted as part of this reconciliation. ANSWER: On the fund financial statements, the city debits cash and credits other financing sources which increases the fund balances by $400,000. On the government-wide financial statements, the city debits cash and credits bonds payable which does not change the amount of net assets. The reconciliation starts with a positive $400,000 and goes to a zero. That change (from $400,000 to zero) requires a subtraction of $400,000. Answer is TRUE.

(25) TRUE or FALSE On December 30, 2013, the city spends $900,000 on a sidewalk. On the 2013 financial statements, there is a reconciliation that starts with the total change in fund balances for the Governmental Funds and works down to end with the total change in net assets for the Governmental Activities. As a result of this acquisition, this $900,000 must be subtracted as part of this reconciliation. ANSWER: On the fund financial statements, the city debits expenditure and credits cash. The expenditure decreases the fund balances by $900,000. On the government-wide financial statements, the city debits capital assets and credits cash which does not change the amount of net assets. The reconciliation starts with a negative $900,000 and goes to a zero. That change (from negative $900,000 to zero) requires an addition of $900,000. Answer is FALSE.

(26) TRUE or FALSE A discretely presented component unit is shown in the government-wide financial statements as if it were one of the funds within the government. ANSWER: A blended component unit is shown as if it were one of the funds within the government. A discretely presented component unit is shown on the far right side of the government-wide financial statements. Answer is FALSE

(27) TRUE or FALSE All of the board of directors for a nature museum are appointed by the city. This fact alone makes this nature museum a component unit of the city. ANSWER: There are other requirements. The museum must be fiscally dependent on the city or city officials must be able to impose their will on the board or the museum must impose a financial burden on the city or provide a financial benefit. Answer is FALSE.

(28) TRUE or FALSE The city appoints none of the governing board of a parks commission. This fact alone prohibits this parks commission from being a component unit of the city. ANSWER: If the parks commission is fiscally dependent on the city and creates a potential financial burden or benefit, then it is a component unit even if someone else appoints the board. Answer is FALSE.

(29) TRUE or FALSE The city has a school system with a separately elected governing board (elected by the public). This fact alone makes the school system a special purpose government with its own financial reporting to be made. ANSWER: There are other requirements. To be a special purpose government, the activity must also be legally independent and fiscally independent. Answer is FALSE.

(30) TRUE or FALSE The city council officially passes a budget for its General Fund activities. In studying this budget as it is presented within the CAFR, a citizen will find the following three columns: the budgetary figures as initially passed, the budgetary figures as amended during the period, and the actual results for the period. ANSWER: In order to show citizens the ongoing budgetary process as well as actual results, the city shows its original budget, final amended budget, and actual results. A variance column is also recommended but not required. Answer is TRUE.

(31) TRUE or FALSE The modified approach applies only to infrastructure assets. ANSWER: Because infrastructure has a long life that is often extended indefinitely through appropriate maintenance, the recording of depreciation has often been questioned. It can be avoided by meeting the requirements of the modified approach. Answer is TRUE.

(32) TRUE or FALSE The modified approach has become widely used in state and local government accounting over the last few years. ANSWER: Because the modified approach requires significant recordkeeping to show that infrastructure assets are being properly maintained, it has not been widely used. The cost is not viewed as worth the achieved benefits. It can be found but is not in wide use. Answer is FALSE.

(33) TRUE or FALSE The state of Virginia requires the city to buy equipment to monitor its air quality. The state gives the city $100,000 to help pay for the equipment acquisitions. This grant is known as a voluntary nonexchange transaction so that revenue is recognized when all eligibility requirements are met. ANSWER: This grant is a government-mandated nonexchange transaction. Answer is FALSE.

(34) TRUE or FALSE The citys school system charges its students a $10 per person fee each year. In recording this revenue in the government-wide financial statements on the statement of activities, it should be shown as miscellaneous revenue directly under the general revenues. ANSWER: This revenue comes directly from the activity itself and is shown as program revenue along with the expenses of that activity in order to arrive at a net cost/benefit for the activity. It is not viewed as general revenue. Answer is FALSE.

(35) TRUE or FALSE The city receives a work of art worth $100,000 as a gift and also spends $70,000 in cash to buy a second art work. Both art works will be exhibited publicly and properly protected and preserved. The city council passes a resolution that if either item is ever sold the proceeds will be used to buy replacement art works. Both of the art works are viewed as inexhaustible. The city has the option to report both of these pieces of art as expenses rather than as assets in the government-wide financial statements. ANSWER: Both meet the three criteria. Therefore, because these art works provide limited future economic benefits, the city can record the $100,000 and the $70,000 as either assets or as expenses in the government-wide financial statements. Answer is TRUE.

(36) TRUE or FALSE A city constructs curbing for a neighborhood in a special assessment project in which the individuals whose property is being benefitted will pay the money for the work. The city has no legal responsibility at all for this work so it is recorded in an Agency Fund. The money collected should be reported as program revenues on the statement of activities in the government-wide financial statements. ANSWER: Agency Funds fall within the Fiduciary Funds. Fiduciary Funds are not included in the government-wide financial statements. Answer is FALSE.

(37) TRUE or FALSE Assume that the city issues 30 day tax anticipation notes on December 30, 2013, just to finance the government until new taxes are collected. These notes are issued at their face value of $500,000. On the 2013 financial statements, there is a reconciliation that starts with the total change in fund balances for the Governmental Funds and works down to end with the total change in the net assets for the Governmental Activities. As a result of the bond issuance, this $500,000 must be subtracted as part of this reconciliation. ANSWER: Because this debt will be paid within 75 days of the end of the year, it is recorded in the same manner on both the fund financial statements and the government-wide financial statements. In both cases, cash is debited and notes payable is credited. No reconciliation is needed. Answer is FALSE.

(38) TRUE or FALSE On January 1, 2013, assume that the city received a grant for $130,000 with the money to be used to supplement the salaries of the police and fire department workers. The money will not be received by the city until after the salaries have been paid. On December 30, 2013, all $130,000 is paid to appropriate workers and the city applies for reimbursement to receive the grant money. It will be received within the next month. The $130,000 revenue is recognized in the government-wide financial statements in 2013 but not in the fund financial statements for 2013. ANSWER: The eligibility requirements have been met and the money will be received within 75 days of the end of the year. It is revenue on both government-wide financial statements and fund financial statements. Answer is FALSE.

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