CPA Financial Accounting and Reporting (FAR) : CPA Financial Accounting and Reporting (FAR)
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #4 : Cost Method
The valuation of goodwill is a calculation in a business calculation:
Of all of the unlimited life intangible assets
Of all of the increases in market valuation of the intangible assets acquired
Of the residual paid above the fair value of the identifiable net assets
To offset the bargain purchase cost
Of the residual paid above the fair value of the identifiable net assets
The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
Example Question #5 : Cost Method
A company has a 24% investment in another firm that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
The company's accounting policy for the investment
Whether the investee company is involved in any litigation
The reason for the company's decision to invest in the investee company
The names and ownership percentages of the other stockholders in the investee company
The company's accounting policy for the investment
A company owning between 20-50% in another firm in which the investment is accounted for using the equity method is considered as having significant influence over the company and is required to disclose the company's accounting policy for the investment.
Example Question #1 : Cost Method
Of the following values, which should be disclosed for the purposes of reporting financial instruments such as debt or equity securities?
Carrying value
Both
Fair value
Neither
Both
Both of these values must be reported for a company that holds financial instruments otherwise users of the statements would not be able to see gain or losses that the company incurs.
Example Question #1 : Derivatives, Hedging, And Foreign Currency Transactions
Giant Company buys all outstanding shares of Little Company on October 1, Year 1 for $450,000. In Year 1, Little earned revenue of $15,000 per month and incurred expenses of $12,000 per month. On the date of the sale, Little had only one asset, a piece of land, with a book value of $350,000 and a fair value of $400,000. It had no liabilities. By the end of Year 1, the land had appreciated in value and was worth $410,000. Which of the following statements is true regarding the consolidated financial statements at the end of Year 1?
The land owned by Little will be reported in the Year 1 balance sheet at $410,000
Goodwill at the end of Year 1 is reported as $45,000
Consolidated net income will include $9,000 earned by Little
A gain of $160,000 will be reported in Year 1 on the land owned by Little
Consolidated net income will include $9,000 earned by Little
Little had net income of $3K per month ($15K in revenue - $12K in expenses). The consolidated financial statements will only include the net income earned after the purchase of the business, which will include October-December. The net income of Little included in the consolidated statements will be $3K per month x 3 months.
Example Question #2 : Derivatives, Hedging, And Foreign Currency Transactions
During Year 1, the James Company buys all outstanding shares of the Holmes company for $4 million even though Holmes has net assets with a fair value of only $3.5 million. One reason for this excess payment is that Homes owns land worth $1.5 million with a book value of only $800,000. Prior to the purchase of Holmes, James owned its own land with a book value of $400,000 and a fair value of $700,000. Two years later, both companies still own this land and both have acquired additional acreage. James reports land at a book value of $1 million and fair value of $1.1 million; Holmes reports land with a book value of $2 million and a fair value of $2.5 million. At what amount will land be reported at the end of Year 3 in the consolidated balance sheet?
$3.1 million
$3.5 million
$3.6 million
$3 million
$3 million
The consolidated statements will include the combined book values of the land owned by each company ($1M in land owned by James + $2M in land owned by Holmes).
Example Question #3 : Derivatives, Hedging, And Foreign Currency Transactions
Hope Company owns 100% of the outstanding shares of Howard Company. During the current year, Hope sold inventory costing $80,000 to Howard for $90,000. This inventory has since been sold to a third party and Howard has not paid Hope for the purchase. At the balance sheet date, Hope has total current assets of $850,000 and Howard has total current assets of $550,000. Assume that there were no allocations established at the date of acquisition. What is the total amount of current assets reported in the consolidated balance sheet?
$1,320,000
$1,400,000
$1,310,000
$850,000
$1,310,000
The consolidated statements will include the combined book values of each company's current assets, but outstanding intercompany balances will be removed. Thus the consolidated statements include $850K owned by Hope + $550K owned by Howard - $90K receivable due for the inventory.
Example Question #4 : Derivatives, Hedging, And Foreign Currency Transactions
Which of the following financial instruments is not considered a derivative financial instrument?
Interest rate swaps
Bank certificate of deposit
Stock index options
Currency futures
Bank certificate of deposit
A bank certificate of deposit is not a derivative financial instrument. The other options are.
Example Question #5 : Derivatives, Hedging, And Foreign Currency Transactions
A derivative financial instrument is best described as:
A contract that conveys to a second entity a right to receive cash from a first entity
Evidence of an ownership interest in an entity such as shares of common stock
A contract that conveys to a second entity a right to future collections on A/R from a first entity
A contract that has its settlement value tied to an underlying notional amount
A contract that has its settlement value tied to an underlying notional amount
A derivative is an instrument that derives its value from the value of some other instrument.
Example Question #6 : Derivatives, Hedging, And Foreign Currency Transactions
Of the following hedge examples, which would likely be a fair value hedge?
Both
None of the answer choices are correct
Insurance on inventory obsolescence
Flood insurance on building
Insurance on inventory obsolescence
A fair value hedge protects the user from decreases in the fair value of an asset such as their inventory. Obsolescence is a common decrease in fair value.
Example Question #1 : Consolidated Financial Statements
On December 1, Year 1, the Fairfax Company signs a contract to receive 1 million Euros on January 31, Year 2 at a price of $1.1 million in a two month forward contract. On December 1, the spot rate for Euros is $1.1 in US dollars. Why would Fairfax enter into this contract?
Fairfax believes that the value of Euros will increase at the same rate as the US dollars
Fairfax could be hedging a future need to make a payment in Euros or speculating that Euros will increase in value
Fairfax believes that the value of Euros will decrease in relation to the US dollar
Fairfax believes that the European economy will grow at a rate faster than that of the US economy
Fairfax could be hedging a future need to make a payment in Euros or speculating that Euros will increase in value
If a company enters into a forward contract to pay a fixed price for a currency on a future date, they are hoping that the market price on that date is higher than the price they are agreeing to pay. They may also be looking to lock in a fixed price to reduce the risk of exchange rate fluctuation on an existing obligation.
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