CPA Exam : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, and Disclosures

Study concepts, example questions & explanations for CPA Exam

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Example Questions

Example Question #1 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

Zeta Automotive ordered transmissions from the Alpha Transmission Company on May 7, 1990. The terms of sale were FOB destination. The Alpha Company shipped the transmissions on May 22, 1990, and Zeta Automotive received them on June 1, 1990. When should Zeta Automotive record the account payable?

Possible Answers:

June 8, 1990

May 22, 1990

Cannot be determined

May 7, 1990

June 1, 1990

Correct answer:

June 1, 1990

Explanation:

FOB stands for free onboard destination. This means that goods in transit should be considered as the seller's inventory because they have not yet reached the buyer. In other words, if issues were to incur during sipping, then responsibility would fall on the shipper rather than the buyer; therefore, the buyer would record the account payable upon arrival. 

Example Question #2 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

Which of the following are considered to be cash equivalents?

Possible Answers:

Treasury bills

All of these

None of these

Money market funds 

Commercial paper

Correct answer:

All of these

Explanation:

In order for an asset to be considered as cash equivalent, it needs to be readily convertible into cash; furthermore, they must be near maturity so that they carry little to no risk of value alteration due to changes in interest rates. Generally, cash equivalents include investments with maturities of three months or less from the date of purchase. All of these—Treasury bills, commercial paper, and money market funds—are cash equivalents. 

Example Question #3 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

All of the following conditions except which of the following must be met in order for an employer to accrue liability for employee compensation for future absences?

Possible Answers:

The amount can be reasonably estimated 

The obligation relates to rights that vest or accumulate

The employer's obligation is related to employee's rights to receive compensation for future absences is attributable to the employee's services already rendered

Payment of the compensation is probable

The employer's obligation is related to employee's rights to receive compensation for previous absences is attributable to the employee's services already rendered

Correct answer:

The employer's obligation is related to employee's rights to receive compensation for previous absences is attributable to the employee's services already rendered

Explanation:

In relation to compensated absences, the knowledge of the conditions that must be met in order to accrue loss contingency is helpful in accounting for compensated absences such as vacation, sick pay, and leave. In order for an employer to accrue liability for employee's compensation for future absences, several conditions must be met. These conditions include the following: the employer's obligation is related to employee's rights to receive compensation for future absences is attributable to the employee's services already rendered; the obligation relates to rights that vest or accumulate; payment of the compensation is probable; and the amount can be reasonably estimated.

Example Question #4 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

The Beta Company—consignee—paid the freight costs for goods shipped from the Foxtrot Incorporated—consigner. The freight costs are to be deducted from the Beta Company's payment to the Foxtrot Incorporated when the goods are sold. Until the Beta Company sells the goods, the freight costs should be included in which of the following?

Possible Answers:

Cost of goods sold

Freight-out costs

Accounts receivable 

Freight expense

Selling expense

Correct answer:

Accounts receivable 

Explanation:

In a consignment, the manufacturer—Foxtrot Incorporated—is known as the consignor and the retailer is the consignee—Beta Company. In this type of arrangement, title to the goods remains with the manufacturer until they are sold to a third or unrelated party; thus, the Beta Company's payment of reimbursable freight costs results in an account receivable from Foxtrot Incorporated. 

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