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AICPA CPA-Financial Exam
CPA Financial Accounting and Reporting (Page 5 )

Updated On: 26-Jan-2026
Page 5 of 34
PDF with 163 Questions

In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brighton's financial statements as a:

  1. Retrospective adjustment on the retained earnings statement, with separate disclosure.
  2. Component of income from continuing operations, with separate disclosure.
  3. Component of income from continuing operations, without separate disclosure.
  4. Component of income after continuing operations, with separate disclosure.

Answer(s): A

Explanation:

Choice "a" is correct. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to
inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.
Choices "b", "c", and "d" are incorrect. The cumulative effect of a change in accounting principle is now reported on the retained earnings statement, not the income statement. Most of these types of changes (changes in accounting principle) used to be reported on the income statement. SFAS No.
154 changed that.



While preparing its 1991 financial statements, Dek Corp. discovered computational errors in its 1990 and 1989 depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:



Dek's 1991 net income is correctly reported at $180,000. Which of the following amounts should be reported as prior period adjustments and net income in Dek's 1991 and 1990 comparative financial statements?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): C

Explanation:

Choice "c" is correct. 1990 ($25,000) $125,000
1991 -- 180,000
Because these are comparative financial statements, prior period adjustments require retroactive treatment for the years presented. Because 1989 is not presented, the 1989 correction is shown as a prior period adjustment of $25,000 to retained earnings statement of 1990.



Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): B

Explanation:

Choice "b" is correct. The cumulative effect of a change in accounting principle is now reported as an adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative effect. When making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively. A change from LIFO to weighted average, there is no such impracticability. The cumulative effect is computed and the change is handled retrospectively.
Choices "a", "c", and "d" are incorrect, per the above .



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):

  1. Extraordinary gain, net of income taxes.
  2. Part of continuing operations.
  3. Gain from discontinued operations, net of income taxes.
  4. Reduction of the cost of the new warehouse.

Answer(s): B

Explanation:

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.



Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:



Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. The hurricane is considered an unusual and infrequent event. Coffey prepares a multiple-step income statement for 1988.
Net income is:

  1. $140,000
  2. $161,000
  3. $168,000
  4. $200,000

Answer(s): A

Explanation:

Choice "a" is correct. $140,000.
Net income is the "bottom line" amount after all has been considered on the income statement. Without showing all the line items as required for the income statement, the "bottom line" amount of $140,000 is derived as follows:



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