Generally Accepted Accounting Principles (GAAP) Test

Generally Accepted Accounting Principles (GAAP) Test

What is the purpose of a derivative instrument?

a. Additional investment activity for companies to use their cash

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

c. Creating a guarantee of profit

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

What is a "temporary difference"?

a. A difference due to an error in accounting

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

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

d. A difference between the tax department's and accounting department's accounting systems

Which FASB deals with the impairment of long lived assets?

a. FASB 201

b. FASB 144

c. FASB 101

d. FASB 99

Which of the following would be a derivative instrument?

a. Common stock

b. Preferred stock

c. Options contracts

d. Debt instrument

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

a. To reflect the current market value, since values fluctuate frequently

b. To make accounting financial reports more attractive

c. To increase earnings

d. To lower liability until the derivative is written off

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

a. Using the highest tax bracket in the name of conservatism

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

c. As an average for the year

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

Which FASB Statement addresses the accounting for derivatives?

a. FASB 12

b. FASB 144

c. FASB 133

d. FASB 201

What other characteristic does a component of a company have to have in order to be a true discontinued operation?

a. It is a product line which didn't work out.

b. It is a distinct, separate line of business for the company.

c. The manager in charge of the operation was fired.

d. The operation is located in another country.

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

a. FASB 201

b. FASB 133

c. FASB 144

d. FASB 130

What is the requirement regarding the format of financial reports and comprehensive income?

a. There is no requirement on the format of financial reports.

b. They must be font size 14 and not exceed 5 pages.

c. They should detail out every expense.

d. That expense categories be limited to no more than 10.

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

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

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

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

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

What is comprehensive income?

a. Income less any taxes

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

c. Income including all extraordinary items

d. Normal income including revenues, cogs, expenses, gains and losses

When should a contingent liability be reported financially?

a. After legal documents obligating the firm are signed

b. When the contingent liability becomes probable

c. In the period that follows the documenting of the liability

d. Retroactively

Which FASB Statement addresses accounting for earnings per share?

a. FASB 128

b. FASB 55

c. FASB 144

d. FASB 12

How is the interest cost to be capitalized calculated?

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

b. By using the average market rate

c. By following the Federal reserve rate

d. By following the interest rate on the company's savings account

Which of the following is not a part of inventory?

a. Finished Goods

b. Work in Progress

c. Raw Materials

d. Cost of Goods Sold

What is meant by the term "dilution"?

a. It is just another term for common stock.

b. Common stock plus preferred stock

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

d. Common Stock and other equity

Who does an error correction financial report restatement benefit?

a. The company

b. The investors

c. The employees

d. All of the above

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

a. The lowest rate of interest the company has on loans

b. The highest rate of interest the company has on loans

c. The Federal reserve rate

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

What is a "mark to market" adjustment?

a. Selling off assets

b. Adjusting the price of a derivative once it is sold

c. Buying offsetting derivatives to mitigate risk

d. Adjusting the book value of a derivative to the current market rate

Which FASB statement addresses the capitalization of interest?

a. FASB 101

b. FASB 144

c. FASB 201

d. FASB 34

What is the conversion rate?

a. The interest rate earned on the bond

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

c. The number of years the convertible debt is outstanding

d. The rate at which each dollar of bond converts into shares

Which of the following would impairment not apply to?

a. Land

b. Intangible Assets

c. Equipment

d. Office Supplies

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

a. That it should not be shown as it is misleading

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

c. That it should be mailed in a letter to all shareholders

d. That it should only be calculated yearly

What is the date of abandonment?

a. The day the asset is purchased

b. The day the asset is fully depreciated

c. The day the asset is sold

d. The day the asset ceases to be utilized

What are the tax implications of consolidation?

a. It creates a higher tax burden.

b. It reduces tax burden.

c. Depends on the state the company is located in.

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

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

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

b. Because it reduces the stockholder's tax liability

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

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

Which section of FASB deals with Accounting for Inventory Costs?

a. FASB 401

b. FASB 151

c. FASB 10

d. It is not covered by FASB

Why are uncollectible accounts receivable considered a contingency?

a. Because they are an asset

b. Because they are material

c. Because they are not probable

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

What is stock dividend as compared to cash dividend?

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

b. The issuance of additional stock to shareholders in lieu of cash

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

d. A promise by the company that the stock price will increase

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

a. FASB 123

b. FASB 144

c. FASB 12

d. FASB 201

What is "impairment"?

a. Expensing of the cost of goods sold

b. A revaluation of the assets on the books

c. An asset becoming unusable

d. Natural resources getting used up

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

a. Date of record, Date of payment, Date of distribution

b. Date of issuance, Date of delivery, Date of record

c. Date of payment, Date of record, Date of company formation

d. Date of declaration, Date of record, Date of distribution

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

a. Net Income potential method

b. Discounted cash flow value compared to carrying value

c. Asking management what a fair value is

d. Looking at the historical cost

What is "earnings per share"?

a. The total earnings of the company

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

c. Earnings of the company less any dividends

d. Earnings of the company divided by the number of preferred shares outstanding

What value should a contingency be booked at?

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

b. At the actual amount, and retroactively

c. Using the best estimate and then adding 10%

d. Using the most likely estimated amount, factoring in conservatism

Why would a company issue stock dividend?

a. Because shareholders prefer stock to cash

b. Because they can issue the stock of any corporation to the shareholders

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

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

What number of shares is used in calculating basic EPS?

a. Weighted average number of shares outstanding for the period

b. The closing number of shares outstanding

c. The opening number of shares outstanding

d. The total number of shares authorized

What does the term derivative mean for accounting purposes?

a. A financial instrument the value of which is derived from another financial instrument

b. A financial instrument such as a stock or bond

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

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

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

a. Because it generates too much income

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

c. Because it is located outside of the company's location

d. Because the tax rate is too high