A4 Special Issues in Accounts

A4- Special Issues
Question 1:
1A2-W001
An extract of the footnotes of McGee Systems Inc., with 10 subsidiaries across 5
countries, reads as follows:
"The company uses the temporal method for translation of subsidiary accounts. All
nonmonetary balances and the expenses associated with them have been translated
using historical exchange rates. Monetary assets and liabilities and other assets and
liabilities measured at current values have been translated at the current exchange rate
on the balance sheet date. Income statement accounts, other than nonmonetary
accounts, have been translated using the historical exchange rate."
The company's CFO did not approve the financial statements, stating that the
accounting policies followed are not in line with U.S. GAAP. Which of the following
statements support the CFO's decision?
Income statement accounts should be translated based on the current exchange

rate on the balance sheet date.
Income statement accounts, other than nonmonetary accounts, should be translated

based on the average rate for the current year.
All assets and liabilities should be translated using the average rate for the current
year.
All assets and liabilities should be translated based on the spot rate for the current
year.
Under the temporal method, nonmonetary balances (all balance sheet items other than
cash, claims to cash, and cash obligations) are translated using historical exchange
rates, and the expenses associated with them should be translated at the historical
exchange rate in effect when the item was originally recorded. Monetary assets and
liabilities (cash, receivables, and payables) and other assets and liabilities measured at
current values (market values or discounted cash flows) are translated at the current
exchange rate on the balance sheet date. Income statement accounts other than
nonmonetary accounts are translated using the average exchange rate for the current
year (quarter or month) for simplicity.
Question 2:
2A4-LS13
A business entity that is owned, operated, and controlled by a small group of investors
with a specific business purpose, common goal, and is created specifically to keep the
liabilities associated with a specific project off the parent company's books is commonly
called a:
Joint venture.
Special purpose entity.
Horizontal merger.
Conglomerate.
An Special purpose entity is an entity created with a special sometimes undisclosed
business purpose where the entity is often times created specifically to keep the
liabilities associated with a specific project off the parent company's books.
Question 3:
2A4-LS24
The correct definition of economic profit is:
The excess of equity over liabilities.
The excess of revenues over the costs of land, labor, and capital.
The excess net assets available to shareholders.
The excess of revenues over expenses.

Economic profit is the excess of revenues over the costs of land, labor, and capital.
Question 4:
2A4-LS31
Finer Foods Inc., a chain of supermarkets specializing in gourmet food, has been using
the average cost method to value its inventory. During the current year, the company
changed to the first-in, first-out method of inventory valuation. The president of the
company reasoned that this change was appropriate since it would more closely match
the flow of physical goods. This change should be reported on the financial statements
as a:
*Source: Retired ICMA CMA Exam Questions.
cumulative-effect type accounting change.
change in an accounting estimate.
correction of an error.
retroactive-effect type accounting change

A change in inventory method is reported as a cumulative-effect type accounting
change per SFAS 154. All prior period statements presented must be restated to reflect
the change in accounting principle.
Question 5:
2A4-LS07
The currency of the primary environment in which the entity operates is commonly
called the:
Historical currency.
Reporting currency.
Floating currency.
Functional currency.
For foreign subsidiaries the firms are required to identify a functional currency as the
currency of the primary environment in which the entity operates.
Question 6:
2A4-CQ05
Paulson Incorporated acquired all of the common stock of Sampson Company on

January 1, 20x1 for $80,000 LCU, which was equal to the fair value of the company.
Paulson continued to operate Sampson as a subsidiary in the foreign country. On
January 1, 20x1 Sampson borrowed $200,000 LCU and signed a 5 year note agreeing
to pay 10% annual interest beginning on January 1, 20x2. Sampson purchased a
building for $280,000 LCU and estimated its useful life as 20 years with no salvage
value. The building will be depreciated using the straight-line method. The subsidiary
rents the building for $10,000 LCU per month and as of December 31, 20x1, they
received 11 payments for the year. During the year, $8,000 in maintenance expenses
were paid evenly throughout the year to maintain the building. Sampson issued at
$7,500 cash dividend to Paulson at the end of the year. The functional currency for the
subsidiary is the LCU. Exchange rates for 1 LCU were as follows:
January 1, 20x1 $1.90

December 31, 20x1 $2.00
Average for 20x1 $1.95
The accountant in the local country prepared the following income statement, balance
sheet, and statement of retained earnings for the year in LCU and forwarded it to
Paulson Incorporated.
What is amount of translation adjustment reported on the balance sheet when Paulson
translates Sampson's accounts into U.S. dollars?
$3,900.
$8,000.
$11,900.
$15,600.
Please note the following:
Question 7:
2A4-LS21
Consider the statements below regarding accounting treatments for business
combinations. Which statement is incorrect?
Under IFRS, a subsidiary must be consolidated when it is under control of the

parent.
Under U.S. GAAP, a subsidiary must be consolidated when the parent owns a
majority of voting interest in the subsidiary.
Under IFRS, a subsidiary must be consolidated when the parent owns a majority of
voting interest in the subsidiary.
Under U.S. GAAP, a subsidiary must be consolidated when it is under control of the
parent.
Accounting treatments for business combinations include the requirements of
consolidation of subsidiaries under the control of a parent (IFRS and U.S. GAAP),and
majority ownership by a parent (IFRS).
Question 8:
2A4-LS04
A European company provides annual reports for U.S. investors purchasing ADRs of
the company's stock in the United States. The company reports 1,500,000 net income.
The exchange rate between the euro and the U.S. dollar is 1.19/$1. Which of the
following statements is true?
Annual statements sent to U.S. investors will show net income as $1,260,504.
Annual statements sent to U.S. investors will show net income as 1,500,000.
Financial statements generally do not make adjustments for foreign currency exchange
rates, as this would show wild fluctuations due to the exchange rate rather than
company performance.
Question 9:
2A4-LS09
SFAS 52 permits two different methods for converting the financial statements of foreign
subsidiaries into U.S. dollars. When the functional currency is the local currency of the
foreign entity, the foreign financials are translated into U.S. dollars using the:
Temporal method.
Current rate method.
Historical cost method.
Functional currency method.

When the functional currency is the local currency of the foreign entity, the foreign
financials are translated into U.S. dollars using the current rate method.
Question 10:
2A4-CQ01
At the end of its fiscal year on December 31, 2000, Merit Watches had total
shareholders' equity of $24,209,306. Of this total, $3,554,405 was preferred equity.
During the 2001 fiscal year, Merit's net income after tax was $2,861,003. During 2001,
Merit paid preferred share dividends of $223,551 and common share dividends of
$412,917. At December 31, 2001, Merit had 12,195,799 common shares outstanding
and the company did not sell any common shares during the year.
What was Merit Watch's book value per share on December 31, 2001?
$1.91.
$2.17.
$1.88.
$2.20.
Book value per share is calculated as:
Book value per share = (common stock equity) / (average number of common stock
shares outstanding)
The common stock equity at December 31, 2001 is equal to the total stock equity at
December 31, 2000 plus the net income for 2001, less the 2001 dividends, less the
preferred equity.
Common stock equity at 12/31/01 = (total stock equity at 12/31/00) + (2001 net income)
(2001 dividends) (preferred equity)
Common stock equity at 12/31/01 = $24,209,306 + $2,861,000 $223,552 $412,917
$3,554,405
Common stock equity = $22,879,436
Book value per share = $22,879,436 / 12,195,799 shares = $1.88 per share.
Question 11:
2A4-LS23
The correct definition of accounting profit is:
The excess net assets available to shareholders
The excess of equity over liabilities
The excess of revenues over the costs of land, labor, and capital.
The excess of revenues over expenses.

Accounting profits are earned when the income of an organization exceeds the
expenses.
Question 12:
2A4-AT05
Two companies, Alpha and Beta, have exactly the same facilities and financing. Both
lease their equipment at the same rate and for the same period of time. Because of
differing assumptions allowed under GAAP, however, Alpha capitalizes its lease, while
Beta reports its lease as an operating lease.
Which of the following statements is true?
Alpha and Beta have exactly the same debt-to-equity ratio.
The terms of the lease agreement must be known in order to determine either
company's debt-to-equity ratio.
Alpha has a higher debt-to-equity ratio.
Beta has a higher debt-to-equity ratio.
Since Alpha capitalized its lease, it will have a lease liability on its balance sheet, which
increases its debt and therefore, its debt-to-equity ratio. An operating lease has no
effect on the balance sheet.
Question 13:
2A4-LS30
A change in the estimate for bad debts should be:
treated as an error.
treated as affecting only the period of the change.

considered as an extraordinary item.
handled retroactively.
A change in the estimate for bad debts should be treated as affecting only the period of
the change. Changes in estimates are made prospectively, not retroactively.
Question 14:
2A4-LS33
Economic costs often differ from costs shown in a firm's financial statements. For a
corporation, a major difference would arise due to:
salary and wage costs.
opportunity costs.
state and local tax costs.
interest costs.
The economic cost of a decision depends on both the cost of the alternative chosen and
the benefit that the best alternative would have provided if chosen. Economic cost
differs from accounting cost because it includes opportunity cost.
Question 15:
2A4-AT03
Which one of the following best describes why the market value of a company may be
significantly higher than the book value?
The company may still be using machinery which has been fully depreciated.
The current growth in revenue may be difficult to maintain in coming years.
The company may have recorded goodwill for an acquisition that has been
unexpectedly difficult to merge with existing operations.
The company may have recorded in the current period revenues for sales which
may be returned in future periods.
The book value of a firm is primarily based upon amortized historical costs. Its equity
book value is the book value of its assets less the book value of its liabilities. The book
value of the assets, in this case, may be depressed due to the use of fully depreciated
assets. The market value of the company is the market value of its assets less its
liabilities. In this case, the market values of the fully depreciated assets will most likely
exceed their fully depreciated book values.
Question 16:
2A4-AT02
The credit manager of Weatherton Men's Wear Manufacturing is comparing the financial
statements of two retailers who buy the men's wear on credit terms. A summary of the
accounting policies of the two retailers is shown below.
Which retailer is more conservative in its reporting of income?
Retailer A.
Each retailer is conservative in one policy, less conservative in the other.
Both are equally conservative.
Retailer B.
Conservatism involves showing the least possible net income for a given set of
circumstances. Assuming that prices are rising, last-in, first-out (LIFO) would report a
higher cost of goods sold than if first-in, first-out (FIFO) were used, and the use of LIFO
would also show a lower net income than if FIFO were used. Declining balance
depreciation, assuming the company is growing, increases depreciation expenses,
resulting in a decrease in net income. Since Retailer B uses both LIFO and declining
balance depreciation, it is being more conservative than Retailer A.
Question 17:
2A4-LS03
Financial statements need not make adjustments for inflation, as earnings

automatically reflect the higher prices.
Financial statements generally make adjustments for inflation, so earnings may be

clearly represented over time.
Financial statements generally do not make adjustments for inflation, so earnings

may be significantly compounded over time.
Financial statements make adjustments for inflation every year and state the inflation
rate for the year in the footnotes of the annual report.
Financial statements generally do not make adjustments for inflation, so earnings may
be significantly compounded over time.
Question 18:
2A4-LS18
Consider the statements below regarding accounting classifications for leases under
U.S. GAAP and IFRSs. Which statements are correct?
I. IFRS does not allow classification of a lease as an operating lease regardless the
substance of the transaction.
II. IFRSs does not allow classification of a lease as a finance (capital) lease.
III. U.S. GAAP does not allow classification of a lease as a leveraged lease.
IV. U.S. GAAP allows classification of a lease by the lessor as either a; sales-type,
direct financing, or operating lease based on the substance of the transaction.
I and IV, only.
I, II, and III, only.
I and III, only.
II, III and IV, only.

IFRSs allows classification of a lease as an operating lease or finance (capital lease)
based on the substance of the transaction. IFRSs does not allow a lease to be classified
as a leveraged lease. U.S. GAAP allows classification of leases as either capital lease,
sales-type, financing, or leveraged lease.
Question 19:
2A4-LS08
FAS 52 permits two different methods for converting the financial statements of foreign
subsidiaries into U.S. dollars. When the functional currency is U.S. dollars, the foreign
currency financial statements are re-measured into U.S. dollars using the:
Historical cost method.
Current rate method.
Functional currency method.
Temporal method.
When the functional currency is U.S. dollars, the foreign currency financial statements
are re-measured into U.S. dollars using the temporal method.
Question 20:
1A2-W025
An extract of the footnotes of Chavez Inc., with 13 subsidiaries across 4 countries,
reads as follows:
"The company uses the current rate method for translation of subsidiary accounts. Paid-
in capital accounts have been translated using the historic rate. All assets and liabilities
have been translated using the current exchange rate on the balance sheet date,
whereas income statement accounts have been translated using the end-of-year rate."
The CEO of the company did not approve the financial statements, stating that the
accounting policies followed are not in line with U.S. GAAP. Which of the following
statements support the CEO's decision?
Income statement accounts should be translated based on the current exchange

rate on the balance sheet date.
Income statement accounts should be translated based on the average rate for the
current year.
All assets and liabilities should be translated using the average rate for the current
year.
Paid-in capital accounts should be translated using the end-of-year rate.

In the current rate method, all assets and liabilities are translated using the current
exchange rate on the balance sheet date. Paid-in capital accounts are translated using
the historic rate. For simplicity, ASC 830 Foreign Currency Matters (formerly SFAS No.
52, Foreign Currency Translation) requires translation of income statement accounts
based on the average rate for the current year.
Question 21:
2A4-LS12
All of the following are forms of off-balance sheet financing except:
Completing a horizontal merger.
Creating a special purpose entity.
Factoring accounts receivable.
Forming a joint venture.

The four common techniques used by companies to engage in off-balance sheet
financing are; factoring of receivables, creating a special purpose entity, operating
leases and joint ventures.
Question 22:
2A4-AT04
The Meade Corporation reports the following financial results.
Which of the following is correct?
Over the four year period, reported sales increased by 12%, but 10% was caused by
inflation.
Over the four year period, sales increased faster than cost of goods sold.
Inflation increased reported sales more than it increased reported cost of goods
sold.
The rate of inflation exceeded the increase in reported sales between Year 2 and
Year 3.
From the given information, the inflation rate over the 4 years can easily be computed
as 10%.
Change in inflation = (inflation, year 4 inflation, year 1) / inflation, year 1

Change in inflation = (1.10 1.00)/1.00 = 0.10/1.00 = 0.1 or 10%
The increase in the inflation rate alone would have caused the sales to increase only to
$1,375,000, which is calculated as $1,250,000 1.10.
From the given information, the increase in sales can be computed as 12%, which is
calculated as:
Change in sales = (sales, year 4 sales, year 1) / sales, year 1)

Change in sales = ($1,400,000 $1,250,000)/$1,250,000
Change in sales = $150,000/$1,250,000 = 0.12 or 12%
Therefore, sales increased by 12% over the 4 year period, with 10% of the increase
being attributed to inflation.
Question 23:
2A4-LS06
If the books of a foreign entity are maintained in a currency other than the functional
currency, foreign currency amounts must be re-measured into the functional currency.
All of the following items should be re-measured at the current rate except:
Prepaid expenses.
Accounts payable.
Inventory carried at market value.
Accounts receivable.
Nonmonetary balance sheet items and related revenues, expenses, gains, and losses
are re-measured at the historical rate. Monetary items are re-measured at the current
rate.
Question 24:
2A4-LS19
Consider the statements below regarding accounting treatments for goodwill under
IFRSs. Which statement describes the correct accounting treatment for goodwill under
IFRSs?
IFRSs tests goodwill for impairment but goodwill is not amortized.
IFRSs allows goodwill to be amortized for a period not to exceed 20 years.
IFRSs allows goodwill to be amortized for a period not to exceed 40 years.
IFRSs does not allow the amortization of goodwill.
Like U.S. GAAP goodwill is never amortized but it should be tested annually for
impairment.
Question 25:
2A4-LS17
Consider the statements below regarding accounting treatments under U.S. GAAP and
IFRSs. Which statements are correct?
I. U.S. GAAP permits the recording of extraordinary items on the income statement.
II. IFRS does not permit the use of LIFO to account for inventory.
III. Under IFRS, fair value accounting for property, plant and equipment is only allowed
when fair value is reliably measurable.
IV. Under U.S. GAAP research and development costs are capitalized as incurred.
I, II, and III, only.
I and III, only.
II and IV, only.

Answers I, II, and III are all true statements. Answer IV is not a correct statement. Under
U.S. GAAP research and development costs are expensed as incurred, not capitalized.
Question 26:
2A4-LS20
Consider the statements below regarding accounting treatments for goodwill under U.S.
GAAP. Which statement is the most correct description of the accounting treatment for
goodwill under U.S. GAAP?
U.S. GAAP allows goodwill to be amortized for a period not to exceed 40 years.
U.S. GAAP does not allow the amortization of goodwill.
U.S. GAAP tests goodwill for impairment but goodwill is not amortized.
U.S. GAAP allows goodwill to be amortized for a period not to exceed 20 years.
U.S. GAAP considers goodwill to have an indefinite life and as such does not permit
periodic amortization. Companies are required to adjust the carrying value of its
goodwill whenever it is determined that impairment has occurred.
Question 27:
2A4-LS11
When a company attempts to make use of an asset without showing the corresponding
obligation, this is commonly called:
Off-balance sheet financing.
Hedging.
Factoring.
Cost assignment.
When a company attempts to use an asset or borrow cash without showing the
corresponding liability, it is commonly termed, off-balance sheet financing.
Question 28:
2A4-CQ04

January 1, 20x1 Sampson borrowed $200,000 LCU and signed a 5-year note agreeing
January 1, 20x1 $1.90

December 31, 20x1 $2.00
What is amount of income reported on the income statement when Paulson translates
these accounts into U.S. dollars?
$156,000.
$152,100.
$165,000.
$148,200.
Please note the following income statement.
Question 29:
2A4-LS02
Economic profits are accounting profits minus implicit costs.
Economic profits are accounting profits minus explicit costs.
Accounting profits are economic profits minus explicit costs.
Accounting profits are economic profits minus implicit costs.

Economic profits are the ability to make more than normal profits. Economic profits are
calculated by subtracting implicit costs, such as opportunity costs, from accounting
profits.
Question 30:
2A4-LS26
At the end of a fiscal year a parent company translates the financial statements for their
foreign subsidiary. A net liability balance sheet position exists and the foreign currency
has depreciated over the past year. Which of the following statements is true?
There is no translation adjustment.
There is no transaction gain or loss.
There is a negative translation adjustment.
There is a positive translation adjustment.

When a parent company translates the financial statements for a foreign subsidiary and
the foreign currency has depreciated over the past year, a positive translation
adjustment will occur when there is a net liability position on the balance sheet.
Question 31:
2A4-CQ03
On December 8, 20X1, ATI Corporation, based in the United States, sold inventory to
BMZ, an unaffiliated foreign entity, in Europe for 10,000 Euros when the spot rate was
1.25 Dollars / Euro. The spot rate was 1.15 Dollars / Euro on December 31, 20X1. BMZ
paid the invoice on January 8, 20X2, when the spot rate was 1.10 Dollars / Euro. What
amount should ATI report as a foreign currency transaction gain or loss in its December
31, 20X1 income statement?
$1,000 loss.
$1,500 loss.
$1,000 gain.
$1,500 gain.
$10,000 (1.15 1.25) = $1,000 loss as of December 31, 20X1.
Question 32:
2A4-LS28
The functional currency of an entity is defined as the currency:
of the entity's parent company.
of the primary economic environment in which the entity operates.
in which the books of record are maintained for all entity operations.
of the primary country in which the entity is physically located.

The functional currency is the currency of the primary environment in which the entity
operates.
Question 33:
2A4-LS14
An equity ownership of less than 50% in a business entity that is owned, operated, and
controlled by a small group of investors with a specific business purpose is commonly
called a:
Horizontal merger.
Conglomerate.
Joint venture.
Special purpose entity.

Joint ventures are often equity investments by a small group of investors in a business
entity where ownership by any one of them is less than 50%.
Question 34:
2A4-LS32
The concept of economic profit is best defined as total:
revenue minus all accounting costs.
revenue minus all explicit and implicit costs.

income minus the sum of total fixed and variable costs.
revenue minus the sum of total fixed and variable costs.

Economic profit is best defined as total revenue minus all explicit and implicit costs.
Question 35:
2A4-CQ09
At the end of a fiscal year a parent company translates the financial statements for their
foreign subsidiary. A net asset balance sheet position exists and the foreign currency
has depreciated over the past year. Which of the following statements is true?
There is no transaction gain or loss.
There is no translation adjustment.
There is a negative translation adjustment.
There is a positive translation adjustment.

When a parent company translates the financial statements for a foreign subsidiary and
the foreign currency has depreciated over the past year, a negative translation
adjustment will occur when there is a net asset position on the balance sheet.
Question 36:
2A4-LS01
Which of the following are elements of earnings quality?
I. Management's discretion in choosing from among accepted accounting principles

II. Management compensation in relation to net earnings
III. The degree to which assets are maintained
IV. The effect of cyclical and other economic forces on the stability of earnings
I and III only.
I, III, and IV only.
I, II, III, and IV.
II and IV only.
The basic factors of earnings quality are management and accountants' discretion in
choosing accounting principles, the degree to which maintenance of assets has been
provided for, and the effect of cyclical and other economic forces on the stability of
earnings.
Question 37:
2A4-LS25
Which statements describe indicators of earnings quality?
I. Consistency in reporting policies is an indication of earnings quality.

II. A company with stable earnings levels is an indication of earnings quality.
III. More conservative accounting policies are an indicator of earnings quality.
IV. A company with widely varying earnings levels from year to year is an indication of
earnings quality.
I and II, only.
I, III, and IV, only.
I, II and III, only.

Consistent and conservative accounting reporting policies and stable earnings are
indicators of earnings quality. Companies with widely varying year to year earnings
levels may indicate a low level of earnings quality.
Question 38:
2A4-LS29
If a company uses off-balance-sheet financing, assets have been acquired:
with operating leases.
with a line of credit.
for cash.
with financing leases.

Companies make use of an asset without showing the corresponding obligation. Four of
the common techniques employed to achieve off-balance sheet financing are: factoring
of accounts receivables; special purpose entities; operating leases; and joint ventures.
Question 39:
2A4-LS22
Consider the statements below comparing financial ratios based on historical cost to
those based on fair value. Which statements are correct?
I. Fair Value disclosures can supplement historical cost ratio analysis.

II. If market prices decline, then ratios using fair value prices will show better results
than those using historical cost.
III. If market prices decline, then ratios using fair value prices will show worse results
than those using historical cost.
IV. If market prices increase, ratios using fair value prices will show higher ratios than
those using historical cost.
I, III, and IV, only.
I and III, only.
I, II and IV, only.

Fair Value disclosures can supplement historical cost ratio analysis. If market prices
decline, then ratios using fair value prices will show worse results than those using
historical cost. If market prices increase, ratios using fair value prices will show higher
ratios than those using historical cost.
Question 40:
2A4-LS15
All of the following are popular reasons that companies may use off-balance sheet
financing except:
To improve certain financial ratios.
To increase assets and debt on the balance sheet.
To mitigate or transfer risk.
To make use of an asset without showing the corresponding liability on the balance
sheet.
By definition, off-balance sheet financing activities are structured to minimize the
recording of assets and / or liabilities on a company's balance sheet which would make
"to increase assets and debt on the balance sheet" contrary to their use.
Question 41:
2A4-CQ08

subsidiary is the LCU.
Exchange rates for 1 LCU were as follows:
January 1, 20x1 $1.90

December 31, 20x1 $2.00
What is the impact on return on equity when Paulson translates Sampson's accounts
into U.S. dollars?
Return on equity increases from 50.5% to 52.6%.
Return on equity decreases from 51.8% to 50.5%.
There is no effect; return on equity remains the same.
Return on equity decreases from 52.6% to 50. 5%.

Return on Equity in LCU = 51.8% (78,000/150,500) and decreases to 50.5%
($152,100/$301,000) when the financial statements are translated. . Net Income
changes from 78,000LCU times 1.95 to U.S. $152,100 and equity changes from
150,500LCU times 2.0 to U.S. $301,000.
Question 42:
2A4-LS27
A firm's functional currency should be:
the currency of the foreign environment in which the firm primarily generates and
expends cash.
selected on the basis of several economic factors including cash flow, sales price,
and financing indicators.
the currency of the parent organization as the firm operates as an extension of the
parent's operations.
selected on the basis of cost-benefit analysis and ease of preparing consolidated

financial statements.
A firm's functional currency is the currency used in conducting the subsidiary's
operations.
Question 43:
2A4-LS05
If the books of a foreign entity are maintained in a currency other than the functional
currency, foreign currency amounts must be re-measured into the functional currency.
All of the following items should be re-measured at the historical rate except:
Prepaid expenses.
Property, plant, and equipment.
Accounts receivable.
Cost of goods sold.

Nonmonetary balance sheet items and related revenues, expenses, gains, and losses
are re-measured at the historical rate. Monetary items are re-measured at the current
rate.
Question 44:
2A4-CQ07

January 1, 20x1 $1.90

December 31, 20x1 $2.00
What is the impact on return on assets when Paulson translates Sampson's accounts
into U.S. dollars?
Return on assets increases from 20.5% to 22.6%.
There is no effect; return on assets remains the same.
Return on assets increases from 20.5% to 21. 1%.
Return on assets decreases from 21.1% to 20.5%.

Return on Assets in LCU = 21.1% (78,000LCU/370,500LCU) and decreases to 20.5%
($152,100/$741,000) when the financial statements are translated. Net Income changes
from 78,000LCU times 1.95 to U.S. $152,100 and assets change from 370,500LCU
times 2.0 to U.S. $741,000.
Question 45:
2A4-CQ23
Williams makes $35,000 a year as an accounting clerk. He decides to quit his job to
enter an MBA program full-time. Assume Williams doesn't work in the summer or hold
any part-time jobs. His tuition, books, living expenses, and fees total $25,000 a year.
Given this information, the annual total economic cost of Williams' MBA studies is:

$60,000.
$10,000.
$25,000.
$35,000.
The economic cost of a decision depends on both the cost of the alternative chosen and
the benefit that the best alternative would have provided if chosen. Economic cost
differs from accounting cost because it includes opportunity cost. The total economic
cost in this scenario is the $35,000 salary + $25,000 tuition, books, living expenses, and
fees = $60,000.
Question 46:
2A4-CQ02
On December 8, 20X1, Andrews Corporation purchased component parts from an
unaffiliated foreign entity in Europe for $20,000 Euro when the spot rate was 1.25. The
spot rate was 1.15 on December 31, 20X1. Andrews paid the invoice on January 8,
20X2, when the spot rate was 1.10. What amount should Andrews report as a foreign
currency transaction gain in its December 31, 20X1 income statement?
$0.
$2,000.
$1,000.
$3,000.
$20,000 (1.25 1.15) = $2,000 gain as of December 31, 20X1.
Question 47:
2A4-LS16
The IASB has been working closely with the FASB to harmonize the international
standards with U.S. GAAP. Differences in accounting treatment exist for all of the
following except:
Accounting for impairment of assets.
Accounting for inventory using last-in-first out (LIFO).
Accounting for inventory using first-in-first out (FIFO).
Accounting for development costs.

Both IAS and U.S. GAAP allow accounting for inventory using FIFO; therefore there is
no difference using this method.

A4 Special Issues in Accounts

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A4 Special Issues in Accounts

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A4- Special Issues

Income statement accounts should be translated based on the current exchange

Income statement accounts, other than nonmonetary accounts, should be translated

Special purpose entity.

The excess of equity over liabilities.

The excess net assets available to shareholders.

The excess of revenues over expenses.

*Source: Retired ICMA CMA Exam Questions.

cumulative-effect type accounting change.

change in an accounting estimate.

retroactive-effect type accounting change

Paulson Incorporated acquired all of the common stock of Sampson Company on

January 1, 20x1 $1.90

Please note the following:

Under IFRS, a subsidiary must be consolidated when it is under control of the

Current rate method.

Historical cost method.

Functional currency method.

Book value per share is calculated as:

The excess net assets available to shareholders

The excess of equity over liabilities

The excess of revenues over expenses.

Which of the following statements is true?

Alpha and Beta have exactly the same debt-to-equity ratio.

Alpha has a higher debt-to-equity ratio.

Beta has a higher debt-to-equity ratio.

*Source: Retired ICMA CMA Exam Questions.

treated as affecting only the period of the change.

*Source: Retired ICMA CMA Exam Questions.

salary and wage costs.

state and local tax costs.

The current growth in revenue may be difficult to maintain in coming years.

Each retailer is conservative in one policy, less conservative in the other.

Both are equally conservative.

Financial statements need not make adjustments for inflation, as earnings

Financial statements generally make adjustments for inflation, so earnings may be

Financial statements generally do not make adjustments for inflation, so earnings

I, II, and III, only.

I and III, only.

II, III and IV, only.

Historical cost method.

Current rate method.

Functional currency method.

Income statement accounts should be translated based on the current exchange

Paid-in capital accounts should be translated using the end-of-year rate.

Completing a horizontal merger.

Creating a special purpose entity.

Factoring accounts receivable.

Forming a joint venture.

Which of the following is correct?

Change in inflation = (inflation, year 4 inflation, year 1) / inflation, year 1

Change in sales = (sales, year 4 sales, year 1) / sales, year 1)

Inventory carried at market value.

IFRSs tests goodwill for impairment but goodwill is not amortized.

IFRSs allows goodwill to be amortized for a period not to exceed 20 years.

IFRSs allows goodwill to be amortized for a period not to exceed 40 years.

IFRSs does not allow the amortization of goodwill.

I, II, and III, only.

I and III, only.

II, III and IV, only.

II and IV, only.

U.S. GAAP does not allow the amortization of goodwill.

Off-balance sheet financing.

Paulson Incorporated acquired all of the common stock of Sampson Company on