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AICPA CPA-Financial Exam
CPA Financial Accounting and Reporting (Page 2 )

Updated On: 26-Jan-2026
Page 2 of 34
PDF with 163 Questions

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on:

  1. Generally accepted accounting principles.
  2. Reporting on management's stewardship.
  3. The need for conservatism.
  4. The needs of the users of the information.

Answer(s): D

Explanation:

Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting stem from the informational needs of the external users of the information. SFAC 1 para. 28 Choice "a" is incorrect. Generally accepted accounting principles (GAAP) are derived from and based on the objectives of financial reporting, not the other way around. Choice "b" is incorrect. Information concerning management's stewardship is only one aspect of the information financial statements are intended to provide. SFAC 1 para. 50 Choice "c" is incorrect. Conservatism is an underlying concept for financial accounting but is not the basis for the objectives. SFAC 2 para. 91-97



Thorpe Co.'s income statement for the year ended December 31, 1990, reported net income of $74,100. The auditor raised questions about the following amounts that had been included in net income:



The loss from the fire was an infrequent but not unusual occurrence in Thorpe's line of business. Thorpe's December 31, 1990, income statement should report net income of:

  1. $65,000
  2. $66,100
  3. $81,600
  4. $87,000

Answer(s): D

Explanation:

Net income before adjustments



Rule: Unrealized losses (or gains) resulting from changes in market value of available-for-sale investments should be reported as a component of other comprehensive income in shareholders' equity.
Unrealized gains and losses on investments held for trading would be included in net income. Correction of errors of prior periods should be reported as an adjustment to beginning retained earnings, not as an item of net income.
Choice "d" is correct. $87,000.



A transaction that is unusual, but not infrequent, should be reported separately as a(an):

  1. Extraordinary item, net of applicable income taxes.
  2. Extraordinary item, but not net of applicable income taxes.
  3. Component of income from continuing operations, net of applicable income taxes.
  4. Component of income from continuing operations, but not net of applicable income taxes.

Answer(s): D

Explanation:

Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a component of continuing operations, (gross) but not net of applicable income taxes. Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent." Choice "c" is incorrect, per "d" above.



During 1990, Fuqua Steel Co. had the following unusual financial events occur:
· Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. · A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. · A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount of gain (loss) should be reported separately as a component of income from continuing operations in 1990?

  1. $260,000
  2. $5,000
  3. $(255,000)
  4. $(350,000)

Answer(s): B

Explanation:

Choice "b" is correct. $5,000.
The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).



During 1990, Fuqua Steel Co. had the following unusual financial events occur:
· Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. · A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. · A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in 1990?

  1. $0
  2. $5,000
  3. $(90,000)
  4. $(350,000)

Answer(s): A

Explanation:

Choice "a" is correct. $0.
Note: The sale of the steel transportation component resulted in a loss from discontinued operations and is reported after "income from continuing operations." The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).



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