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Following are multiple choice questions recently released by the AICPA. These questions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanations. Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and content may or may not be representative of questions you may see on any upcoming exams.

FINANCIAL AICPA Newly-Released Questions 1. Reed Co.'s 2001 statement of cash flows reported cash provided from operating activities of $400,000. For 2001, depreciation of equipment was $190,000, amortization of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed's 2001 statement of cash flows, what amount was reported as net income? a. b. c. d.

$105,000 $205,000 $305,000 $595,000

Answer: Choice "b" is correct. Start with cash flows from operating activities and subtract depreciation and amortization expenses. Dividends paid are not included because dividends paid are included in financing activities. Cash flows from operating activities Depreciation on equipment Amortization of goodwill Net Income

$400,000 (190,000) (5,000) $205,000

2. An unrestricted cash contribution should be reported in a nongovernmental not-for-profit organization's statement of cash flows as an inflow from: a. b. c. d.

Operating activities. Investing activities. Financing activities. Capital and related financing activities.

Answer: Choice "a" is correct. Cash flows from Operating Activities in a non governmental not-for-profit organization include applicable agency transactions; including unrestricted cash contributions, program income, and interest income or dividend income from investments. Choices "b", "c", and "d" are incorrect, per above.

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FINANCIAL AICPA Newly-Released Questions 3. Community Enhancers, a nongovernmental not-for-profit organization, received the following pledges: Unrestricted Restricted for capital additions

$400,000 300,000

All pledges are legally enforceable. However, Community's experience indicates that 5% of all pledges prove to be uncollectible. What amount should Community report as pledges receivable, net of any required allowance account? a. $700,000 b. $665,000 c. $380,000 d. $285,000 Answer: Choice "b" is correct. An allowance for uncollectible pledges should be recorded in accordance with commercial accounting principles for accounts receivable. Unrestricted pledges Restricted TOTAL PLEDGES Less allowance (5% x 700,000) Net Pledges Receivable

$400,000 300,000 700,000 (35,000) $665,000

4. On June of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report? a. $6,000 b. $8,000 c. $12,000 d. $14,000 Answer: Choice "d" is correct. Interest expense is calculated from the date the bond is issued. Interest would be calculated from June 1 through December 31 (7 months). $300,000 x 8% = $24,000 annual interest cost $24,000 /12

= $2,000 per month

$2,000 x 7

= $14,000 interest expense

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FINANCIAL AICPA Newly-Released Questions 5. In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: Accrued interest payable Prepaid interest

$17,000 23,000

In its income statement for the current year, what amount should Ness report as interest expense? a. $30,000 b. $64,000 c. $76,000 d. $110,000 Answer: Choice "c" is correct. Interest expense is reported on a cash basis in the Statement of Cash Flows, and on the accrual basis in the Income Statement. Convert from accrual basis to cash basis: Cash basis interest expense Add decrease in prepaid interest Sub total Subtract decrease in interest payable Accrual basis interest expense

$70,000 23,000 93,000 (17,000) $76,000

6. Where in its financial statements should a company disclose information about its concentration of credit risks? a. b. c. d.

No disclosure is required. The notes to the financial statements. Supplementary information to the financial statements. Management's report to shareholders.

Answer: Choice "b" is correct. Concentration of credit risk is required disclosure in the notes to the Financial Statements. Choice "a" is incorrect. Disclosure of concentration of credit risk is required. Choice "c" is incorrect. Disclosure is in the Notes not supplementary information. Choice "d" is incorrect. Disclosure is in the Notes not in management's report.

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FINANCIAL AICPA Newly-Released Questions 7. At year-end, Rim Co. held several investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000, and equity securities purchased for $35,000. At year-end, the bonds were selling on the open market for $105,000 and the equity securities had a market value of $50,000. What amount should Rim report as trading securities in its year-end balance sheet? a. $50,000 b. $127,000 c. $142,000 d. $155,000 Answer: Choice "d" is correct. Trading securities, both debt and equity, are to be reported at fair value at the end of the current reporting period. Bonds FMV at year end Equities FMV at year end

$105,000 50,000

Total reportable amount

$155,000

8. The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of: a. Costs incurred in year 3 to total billings. b. Costs incurred in year 3 to total estimated costs. c. Total costs incurred to date to total billings. d. Total costs incurred to date to total estimated costs. Answer: Choice "d" is correct. The formula to calculate the percentage of completion is: Total cost to date Total estimated cost of contract Choices "a", "b", and "c" are incorrect, per formula.

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FINANCIAL AICPA Newly-Released Questions 9. For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable's effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)? a. $40,000 asset. b. $40,000 liability. c. $45,000 asset. d. $45,000 liability. Answer: Choice "b" is correct. Pre-tax GAAP income was $100,000 more than taxable income for the current period, resulting from the timing difference which is to be settled next year. Next years enacted tax rate will be 40%. Cable must recognize a $40,000 ($100,000 x 40%) tax liability in the current period which will be paid (settled) next year. Choice "a" is incorrect. Taxes were not paid in advance. Choice "c" is incorrect. Taxes were not paid in advance. Choice "d" is incorrect. Liability will be settled when tax rate is 40% not current 45%.

10. In general, an enterprise preparing interim financial statements should: a. Defer recognition of seasonal revenue. b. Disregard permanent decreases in the market value of its inventory. c. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred. d. Use the same accounting principles followed in preparing its latest annual financial statements. Answer: Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year. Choices "a", "b", and "c" are incorrect, per above.

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FINANCIAL AICPA Newly-Released Questions 11. On January 2, Basketville City purchased equipment with a useful life of three years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset? a. Record the purchase of the equipment as an expenditure. b. Capitalize; depreciation is optional. c. Capitalize; depreciation is required. d. Capitalize; depreciation is not permitted. Answer: Choice "c" is correct. Enterprise funds record and depreciate their own fixed assets in a manner consistent with the economic resources measurement focus and accrual accounting. Choice "a" is incorrect. Enterprise funds record and depreciate their own fixed assets. Enterprise funds are proprietary funds and they apply the economic resources measurement focus and use accrual accounting. To record the purchase of capital equipment as an expenditure would be consistent with the current financial resources measurement focus used by governmental funds and would represent an application of the modified accrual basis of accounting. Choice "b" is incorrect. Enterprise funds record and depreciate their own fixed assets in a manner consistent with the economic resources measurement focus and accrual accounting. Depreciation is not optional. Choice "d" is incorrect. Enterprise funds record and depreciate their own fixed assets in a manner consistent with the economic resources measurement focus and accrual accounting. Depreciation is required.

12. Sig City used the following funds for financial reporting purposes: General fund Internal service fund Airport enterprise fund Pension trust fund

Capital projects fund Special revenue fund Debt service fund

How many of Sig's funds use the accrual basis of accounting? a. Two. b. Three. c. Four. d. Five.

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FINANCIAL AICPA Newly-Released Questions Answer: Choice "b" is correct. Three of Sig City's reported funds would use the accrual basis of accounting: the Internal Service Fund, the Airport enterprise fund and the Pension trust fund. We remember the basis of accounting used by each of our funds with the GRaSPPSEPAPI mnemonic an apply it to Sig City as follows: Governmental GRaSPP Modified Accrual General Special Revenue Debt service Capital projects

Proprietary SE Accrual Internal Service Airport enterprise

Fiduciary PAPI Accrual Pension trust

Funds which complete the mnemonic but are not used by Sig City include: Permanent Agency Private purpose Investment trust Choices "a", "c", and "d" are incorrect per above.

13. On January 2, City of Walton issued $500,000, 10-year, 7% general obligation bonds. Interest is payable annually, beginning January 2 of the following year. What amount of bond interest is Walton required to report in the statement of revenue, expenditures, and changes in fund balance of its governmental funds at the close of this fiscal year, September 30? a. b. c. d.

$0 $17,500 $26,250 $35,000

Answer: Choice "a" is correct. The City of Walton would not record any interest expenditures in it's current year financial statements. Interest expenditures should be recorded when legally payable per the bond agreement. Interest expenditures should not be accrued between payment dates. Bonds were issued January 2, the balance sheet date is September 30 and the payment date is the following January 2. No interest expenditure would be recognized. Choice "b" is incorrect. The City of Walton pays interest annually according to the fact pattern. Although it is not unusual for bonds to required payment of interest twice a year, six months of interest expenditures, $17,500, ($500,000 x 7% x 6/12) would not be recorded unless actually paid. Choice "c" is incorrect. The City of Walton would not accrue interest expenditures. Nine months of interest expenditures suggested by this answer, $26,250, ($500,000 x 7% x 9/12) would not be recorded. Choice "d" is incorrect. The City of Walton would not record interest expenditures as they are paid. Recognition of a full year of interest, $35,000, ($500,000 x 7%) would not be appropriate.

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FINANCIAL AICPA Newly-Released Questions 14. Opto Co. is a publicly-traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers? a. The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues. b. The identity of any external customer providing 10% or more of a particular operating segment's revenue. c. The identity of any external customer considered to be "major" by management. d. Information on major customers is not required in segment reporting. Answer: Choice "a" is correct. In order to conform to GAAP, financial statements for public business enterprises must report segment information about a company's major customers if that customer provides 10% or more of the combined revenue, internal and external, of all operating segments. Choice "b" is incorrect. Revenue is 10% of ALL operating segments not "a particular" segment. Choice "c" is incorrect. Disclosure is not at management's discretion. Choice "d" is incorrect. Disclosure is required.

15. Which of the following statements regarding inventory accounting systems is true? a. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts. b. A disadvantage of the periodic inventory system is that the cost of good sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages. c. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple. d. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance. Answer: Choice "b" is correct. With a periodic inventory system, the quantity of inventory is determined only by physical count, usually at least annually. Therefore, units of inventory and the associated costs are counted and valued at the end of the accounting period. With a perpetual inventory system, the inventory record for each item of inventory is updated for each purchase and each sale as they occur. The actual cost of goods sold is determined and recorded with each sale. Choices "a", "c", and "d" are incorrect, per above.

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FINANCIAL AICPA Newly-Released Questions 16. The following financial ratios and calculations were based on information from Kohl Co.'s financial statements for the current year: Accounts receivable turnover Ten times during the year Total assets turnover Two times during the year Average receivables during the year $200,000 What was Kohl's average total assets for the year? a. $2,000,000 b. $1,000,000 c. $400,000 d. $200,000 Answer: Choice "b" is correct. By formula: Total asset turnover = Average total assets = 1,000,000 =

Net sales Average total assets Net sales Total asset turnover 200,000 × 10 2

17. According to the FASB conceptual framework, what does the concept of reliability in financial reporting include? a. Effectiveness. b. Certainty. c. Precision. d. Neutrality. Answer: Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality, representational faithfulness and verifiability. Choices "a", "b", and "c" are incorrect, per the above.

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FINANCIAL AICPA Newly-Released Questions CPA-04772 18. During the current year, Mill Foundation, a nongovernmental not-for-profit organization, received $100,000 in unrestricted contributions from the general public. Mill's board of directors stipulated that $75,000 of these contributions would be used to create an endowment. At the end of the current year, how should Mill report the $75,000 in the net assets section of the statement of financial position? a. b. c. d.

Permanently restricted. Unrestricted. Temporarily restricted. Donor restricted.

Answer: Choice "b" is correct. Mills Foundation would report internally designated but otherwise unrestricted net assets as unrestricted in its statement of financial position. Internally board designated funds are considered unrestricted. Only donor imposed restrictions are recognized on the financial statement. Choice "a" is incorrect. Permanent restrictions can only be created by a donor. They can not be internally stipulated for financial statement purposes. Choice "c" is incorrect. Temporary restrictions can only be created by a donor. They can not be internally stipulated for financial statement purposes. Choice "d" is incorrect. Donor restrictions can only be created by a donor. They can not be internally stipulated for financial statement purposes.

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FINANCIAL AICPA Newly-Released Questions 19. During the current year, Knoxx County levied property taxes of $2,000,000, of which 1% is expected to be uncollectible. The following amounts were collected during the current year: Prior year taxes collected within the 60 days of the current year Prior year taxes collected between 60 days and 90 days into the current year Current year taxes collected in the current year Current year taxes collected within the first 60 days of the subsequent year

$ 50,000 120,000 1,800,000 80,000

What amount of property tax revenue should Knoxx County report in its entity-wide statement of activities? a. $1,800,000 b. $1,970,000 c. $1,980,000 d. $2,000,000 Answer: Choice "c" is correct. Knoxx County would report revenue from its governmental funds on the full accrual basis in its entity wide (government-wide) statement of activities. As such, Knoxx County would recognize revenues from property taxes, net of estimated refunds and estimated uncollectible amounts in the period in which they are levied. The examiners provide additional irrelevant data necessary to compute earnings on the modified accrual basis. Earnings on the accrual basis are computed as follows: Property tax levy Estimated uncollectible (1%) Revenue recognized

$2,000,000 (20,000) $1,980,000

Choice "a" is incorrect. The amount collected from the current year levy ($1,800,000) would not be the amount recognized as property tax revenue on the accrual basis. Choice "b" is incorrect. The total of all amounts collected in the current year from both prior year and current year levies ($1,970,000 = $50,000 + $120,000 + $1,800,000) would not be the amount recognized as property tax revenue on the accrual basis. Choice "d" is incorrect. The total amount of the levy ($2,000,000) or the revenue computed on the modified accrual basis (also $2,000,000 representing the sum of the $120,000 collected after the 60 day availability criteria from the prior year, the $1,800,000 in current year collections and the $80,000 collected within 60 days of the current year) would not be the amount recognized as property tax revenue on the accrual basis.

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FINANCIAL AICPA Newly-Released Questions 20. Tomson Co. installed new assembly line pro...