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The questions for CPA-Financial were last updated on Feb 18, 2025.
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According to the FASB conceptual framework, an entity's revenue may result from:
Rule: Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity's ongoing major operations, not from 'incidental' operations.
Choice 'd' is correct. An entity's revenue may result from a decrease in a liability from primary operations.
Tanker Oil Co., a development stage enterprise, incurred the following costs during its first year of operations:
Tanker had no revenue during its first year of operation. What amount may Tanker capitalize as organizational costs?
Choice 'd' is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).
Fair Value Measurements
Which of the following statements is incorrect regarding the inputs that can be used to measure fair value?
i. Level I inputs are the most reliable fair value measurements and Level III inputs are the least reliable.
ii. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities.
iii. A fair value measurement based on management assumptions only (no market data) would not be acceptable per GAAP.
IV. The level in the fair value hierarchy of a fair value measurement is determined by the level of the highest level significant input.
Choice 'c' is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is incorrect because Level I measurements are quoted prices in active markets for identical assets or liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs.
Statement III is incorrect because a fair value measurement based on management assumptions only is a
Level III measurement and is acceptable when there are no Level I or Level II inputs or when undo cost or effort is required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input.
Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
Choice 'b' is correct. Part of continuing operations.
Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. The amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount (FMV) of the fixed asset sold.
Choice 'a' is incorrect. The gain is not extraordinary and is shown gross - not net of tax.
Choice 'c' is incorrect. The gain is part of continuing operations - not discontinued operations.
Choice 'd' is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.
Which of the following statements best describes an operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement?
Choice 'c' is correct. A new statement from the FASB is issued only after a majority vote of the members of the FASB.
Choice 'a' is incorrect. There is no necessity for the EITF to approve a discussion memorandum
(presumably the question means a discussion memorandum of the FASB statement itself and not an EITF statement) before it is disseminated to the public.
Choice 'b' is incorrect. There is no necessity for an exposure draft to be modified per public opinion before issuing the discussion memorandum (a question can be raised here as to 'what' discussion memorandum'). Exposure drafts are quite/most often modified before they are issued as FASB statements, but they do not have to be. Whether they are or are not modified is a function of whether the FASB thinks they should be modified, partly due to the public comments that have been received.
Choice 'd' is incorrect. There is no way to rescind a new FASB statement, although, in reality, a FASB statement can be rescinded by the issuance of a new statement on the same subject. However, even if there was a way to rescind a new FASB statement, it would not be by a majority vote of the AICPA membership, but by a majority vote of the members of the FASB.
Reporting Net Income
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