Part 2 : 2- Special Issues

Question 1 - CIA 1188 P4 Q45 - Special Issues

A change from one generally accepted accounting principle to another generally accepted accounting principle should
be accounted for in comparative reports by
A. a line item below extraordinary items on the current income statement.
B. a cumulative adjustment to carrying amounts of assets and liabilities as of the beginning of the first period
presented, an offsetting adjustment to the opening balance of retained earnings of the same period, and by adjusting
prior periods' statements presented for the effects of the change in each period.
C. pro forma amounts for key figures shown supplementary on the income statement for all periods presented.
D. only a footnote disclosure in the current period.
A. No line item for any cumulative effect adjustment is to be used on the current or any prior income statement.
B. A change of accounting principle is to be accounted for by adjusting carrying amounts of assets and
liabilities as of the beginning of the first period presented for the cumulative effect of the change on periods
prior to those presented in the financial statements. The effect of this prior period adjustment is offset by
adjusting the opening balance of retained earnings of the first period presented. Financial statements for all
periods presented are adjusted for the effects of the change in each specific period, unless it is impracticable
to do so.
C. Pro forma amounts are not to be used for reporting accounting changes.
D. The financial statements in the period the change is made must include disclosure of the change, the reason for the
change, and an explanation of why the company's management believes the new accounting principle to be
preferable from the perspective of financial reporting (i.e., not merely because it will result in favorable income tax
consequences). However, footnote disclosure is not the only requirement.

Question 2 - CIA 1193 P4 Q45 - Special Issues

At December 31, a company has total assets at book value of $300,000. Liabilities are $120,000. Also, on December
31, the stock is selling at $20 per share, and there are 10,000 shares outstanding. As a result, the company should
take the difference between the carrying amount and market value of the stock and
A. capitalize as an asset (and amortize over the estimated useful life), with the offset to revenue.
B. capitalize as an asset (and amortize over the estimated useful life not to exceed 40 years), with the offset to equity.
C. not capitalize any asset, record any revenue, or change equity at this time.
D. capitalize as an asset (and amortize over 5 years), with the offset to equity.
A. Increases or decreases in the market value of the shares after they have been issued are not recorded on the
books of the issuing company. Therefore, this difference between the market value and book value of the shares
should not be capitalized.
B. Increases or decreases in the market value of the shares after they have been issued are not recorded on the
books of the issuing company. Therefore, this difference between the market value and book value of the shares
should not be capitalized.
C. Increases or decreases in the market value of the shares after they have been issued are not recorded on
the books of the issuing company. Therefore, no accounting entries should be recorded.
D. Increases or decreases in the market value of the shares after they have been issued are not recorded on the
books of the issuing company. Therefore, this difference between the market value and book value of the shares
should not be capitalized.

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Question 3 - CIA 593 P4 Q41 - Special Issues

The financial statements of a foreign subsidiary are to be measured by use of the subsidiary's functional currency. The
functional currency of an entity is defined as the currency of the
A. primary economic environment in which the entity operates.
B. United States.
C. geographic location in which the entity's headquarters are located.
D. parent company.
A. The functional currency is the currency of the primary economic environment in which the entity operates,
in other words, the currency in which the majority of that entity's transactions and financing takes place.
B. The U.S. dollar is not automatically the functional currency.
C. The geographic location of the headquarters of the company is not how the functional currency is determined.
D. The currency of the parent company is not the determinant of the functional currency.

Question 4 - CIA 597 4.35 - Special Issues

Which of the following is true about the impact of price inflation on financial ratio analysis?
A. Inflation has no impact on financial ratio analysis.
B. Inflation impacts comparative analysis of firms of different ages, but not financial ratio analysis for one firm over
time.
C. Inflation impacts financial ratio analysis for one firm over time, as well as comparative analysis of firms of different
ages.
D. Inflation impacts financial ratio analysis for one firm over time, but not comparative analysis of firms of different
ages.
A. Inflation badly distorts firms balance sheets, depreciation charges, inventory costs, and profits.
B. Inflation impacts both aspects.
C. Inflation impacts both aspects.
D. Inflation impacts both aspects.

Question 5 - CMA 0692 P2 Q14 - Special Issues

A change in the liability for warranty costs is an example of a(n)
A. accounting principle change.
B. accounting estimate change.
C. prior period adjustment.
D. accounting method change.
A. A change in the liability for warranty costs is not an accounting principle change.

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B. By definition, because warranty costs are estimated for future periods, a change in the liability for warranty
costs is a change in an estimate.
C. A change in the liability for warranty costs is not a prior period adjustment.
D. A change in the liability for warranty costs is not an accounting method change.

Question 6 - CMA 0693 P2 Q7 - Special Issues

When reporting a change in accounting principle,
A. the pro forma effects of retroactive application of the new principle upon income before extraordinary items and net
income are not to be disclosed on the face of the income statement or in the notes to the financial statements.
B. income before extraordinary items is reported in the year of the change reflecting the application of the new
principle, but on a basis that includes the cumulative adjustment.
C. the change is recognized by retrospectively adjusting the financial statements.
D. the change is recognized by including the cumulative effect of the change in the net income of the period of change.
A. This is not the way a change in accounting principle is accounted for. See the correct answer for a complete
explanation.
B. This is not the way a change in accounting principle is accounted for. See the correct answer for a complete
explanation.
C. A change from one generall accepted accounting principle to another generally accepted accounting
principle is recognized by including the cumulative effect of the change on periods prior to those presented in
the carrying amounts of assets and liabilities as of the beginning of the first period presented and adjusting
the opening balance of retained earnings as of the beginning of the earliest period presented. Financial
statements for each prior period presented are adjusted to reflect the period-specific effects of applying the
new accounting principle.
D. This is not the way a change in accounting principle is accounted for. See the correct answer for a complete
explanation.

Question 7 - CMA 0697 P2 Q25 - Special Issues

A change from the sum-of-the-years'-digits depreciation method to the straight-line depreciation method is an example
of a(n)
A. accounting principle change.
B. prior-period adjustment.
C. accounting estimate change.
D. error correction.
A. A change in the method of depreciation being used is a change in accounting principle, because the choice
of a depreciation method is a choice of an accounting principle. It is accounted for as if it were a change in
accounting estimate, but that does not change the fact that it is a change in accounting principle.
B. A change in the method of depreciation is a change in accounting principle.
C. A change in the method of depreciation is accounted for as if it were a change in accounting estimate. However,
the choice of a depreciation method is a choice of an accounting principle.
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D. A change in the method of depreciation is not an error correction. A change from a non-GAAP method of
accounting to a GAAP method of accounting would be a correction of an error. However, a change from one GAAP
method to another GAAP method, which is what a change of depreciation method is, is not a correction of an error.

Question 8 - CMA 0697 P2 Q26 - Special Issues

A change in the liability for warranty costs requires
A. reporting an adjustment to the beginning retained earnings balance in the statement of retained earnings.
B. presenting the effect of pro forma data on income and earnings per share for all prior periods presented.
C. reporting current and future financial statements on the new basis.
D. restating prior-period financial statements.
A. A change in the liability for warranty costs is a change in an accounting estimate. A change in accounting estimate
does not require an adjustment to beginning retained earnings.
B. A change in the liability for warranty costs is a change in an accounting estimate. Prior period financial statements
are not restated as a result of a change in accounting estimates, and pro forma data is never used. See the correct
answer for a complete explanation.
C. A change in the liability for warranty costs is a change in an accounting estimate. A change in accounting
estimate requires prospective treatment. No changes are made to prior period financial statements or
beginning retained earnings. The change in estimate is accounted for in the current period and in future
periods.
D. A change in the liability for warranty costs is a change in an accounting estimate. Prior period financial statements
are not restated as a result of a change in accounting estimates. See the correct answer for a complete explanation.

Question 9 - CMA 1288 P3 Q28 - Special Issues

The FASB requires that, in a highly inflationary economy, the financial statements of a foreign entity be remeasured as
if the functional currency were the reporting currency. For this requirement, a highly inflationary economy is one that
has
A. an inflation rate of at least 33% in the most recent past year.
B. a cumulative inflation rate of at least 100% over a 3-year period.
C. an inflation rate of at least 100% in the most recent past year.
D. an inflation rate of at least 50% in the most recent past year.
A. This is not the definition of a highly inflationary economy. See the correct answer for a complete explanation.
B. The FASB defines a highly inflationary economy as one in which the cumulative inflation rate over a
three-year period is 100% or more.
C. This is not the definition of a highly inflationary economy. See the correct answer for a complete explanation.
D. This is not the definition of a highly inflationary economy. See the correct answer for a complete explanation.

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Part 2 : 2- Special Issues

Question 10 - CMA 1288 P3 Q30 - Special Issues
Foreign currency transaction gains and losses should usually be included in income
A. for the period in which the transaction originated.
B. for the period in which the exchange rate changes.
C. if they are foreign currency transactions that are designated as economic hedges of a net investment in a foreign
entity.
D. if they are intercompany foreign currency transactions that are of a long-term investment nature.
A. The gains or losses associated with transactions denominated in a foreign currency are not reported in the period
in which the transaction originated. See the correct answer for a complete explanation.
B. The gains or losses associated with transactions denominated in a foreign currency are reported in income
from continuing operations in the period in which the currency fluctuates in value.
C. The gains or losses associated with foreign currency transactions that are designated as economic hedges of a net
foreign investment are not included in income.
D. Intercompany foreign currency denominated transactions are handled through the process of consolidation and
translation of financial statements. The effects of these transactions are not recorded in income.

Question 11 - CMA 1291 P2 Q5 - Special Issues

Transaction gains and losses have direct cash flow effects when foreign-denominated monetary assets are settled in
amounts greater or less than the functional currency equivalent of the original transactions. These transaction gains
and losses should be reflected in income
A. at the date the transaction originated.
B. in the period the exchange rate changes.
C. only at the year-end balance sheet date.
D. on a retroactive basis.
A. Transaction gains and losses are recognized in the period in which the exchange rate changes. There are no
restatements for the period in which the transaction originated.
B. When transactions are denominated in a foreign currency, at the end of each period the value of the
invoiced amount should be adjusted to its current value in dollars. The resulting gain or loss is reported each
period in which the exchange rate changes.
C. If the gain or loss occurs during an interim period, the gain or loss from the change in the exchange rate should be
recorded in that interim period.
D. Transaction gains and losses are recognized in the period in which the exchange rate changes. There is no
retroactive restatement of the period in which the transaction originated.

Question 12 - CMA 1292 1.12 - Special Issues

The definition of economic cost is
A. all the dollar costs employers pay for all inputs purchased.
B. the opportunity cost of all inputs minus the dollar cost of those inputs.
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C. the sum of all explicit and implicit costs of the business firm.
D. the difference between all implicit and explicit costs of the business firm.
A. Economic costs deal with more than just the dollar costs of all inputs purchased. Economic costs include the costs
of opportunities foregone, i.e. opportunity costs.
B. The opportunity costs are not the only costs that are included in the definition of an economic cost. Thus, we do not
want to subtract the opportunity costs of all the inputs minus the dollar costs of the inputs.
C. Economic costs take into account all the explicit and implicit costs of the business firm. That is, it is a sum
of all the dollar costs (explicit costs) as well as the opportunity costs (implicit costs) of production.
D. We do not want to take the difference between all implicit and explicit costs of the business firm since this will not
give a total economic cost, only a net cost.

Question 13 - CMA 1293 P2 Q21 - Special Issues

A change in realizability of accounts receivable is an example of a(n)
A. accounting principle change.
B. accounting method change.
C. accounting estimate change.
D. prior period adjustment.
A. A change in the estimated percentage of receivables that will be collected is not accounted for as an accounting
principle change. See the correct answer for a complete explanation.
B. A change in the estimated percentage of receivables that will be collected is not an accounting method change.
There is no such thing as an "accounting method change." See the correct answer for a complete explanation.
C. A change in the estimated percentage of receivables that will be collected is treated as a change in
accounting estimate. A change in accounting estimate is accounted for prospectively in the current and
future periods.
D. A change in the estimated percentage of receivables that will be collected is not accounted for by making a prior
period adjustment. See the correct answer for a complete explanation.

Question 14 - CMA 1295 P2 Q6 - Special Issues

Careful reading of an annual report will reveal that off-balance-sheet debt includes
A. debt guaranteed for another entity.
B. current portion of long-term debt.
C. amounts due in future years under capital leases.
D. amounts due in future years under operating leases.
A. Debt guaranteed for another entity is not off-balance sheet financing, though it should be disclosed in the notes to
the financial statements. See the correct answer for a complete explanation.
B. The current portion of long-term debt is not off-balance-sheet financing. See the correct answer for a complete
explanation.

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Part 2 : 2- Special Issues

C. Amounts due in future years under capital leases are not off-balance-sheet financing because these amounts are
recorded as a liability on the balance sheet of the lessee. See the correct answer for a complete explanation.
D. Off-balance-sheet debt is a liability that the company has assumed but has not recorded on the balance
sheet. The future payments on an operating lease are not recorded as a liability on the balance sheet and
therefore operating leases are a form of off-balance-sheet financing.

Question 15 - CMA 685 4.14 - Special Issues

Book value per common share represents the amount of shareholders' equity assigned to each outstanding share of
common stock. Which one of the following statements about book value per common share is correct?
A. Book value per common share is the amount that would be paid to shareholders if the company were sold to
another company.
B. A market price per common share that is greater than book value per common share is an indication of an
overvalued stock.
C. Book value per common share can be misleading because it is based on historical cost.
D. Market price per common share usually approximates book value per common share.
A. The amount that would be paid to a shareholder in the event that the company is sold to another would be
determined by the specifics of the transaction itself, not by the book value per share.
B. The market and book value of the shares may be different and a greater market price does not indicate an
overvalued share. This may happen if the company owns an asset that has appreciated greatly in value while the
company has held it. This asset will be recorded on the books at its lower cost of acquisition and this will lead to an
understated book value per share.
C. Because the calculation of book value per share is based on balance sheet amounts, it is very possible that
the book value per share will not reflect the current situation of the company. This is demonstrated by
assuming that a company owns an asset that has appreciated greatly in value while the company has held it.
This asset will be recorded on the books at its lower cost of acquisition, and this will lead to an understated
book value per share.
D. The market value and the book may approximate each other, but they do not have to. If the company has an asset
that has appreciated greatly in value, this increased value of the asset will not be reflected in book value per share,
but the market will have taken it into account when setting the market price of the shares.

Question 16 - CMA 688 4.16 - Special Issues

Which one of the following inventory cost flow assumptions will result in a higher inventory turnover ratio in an
inflationary economy?
A. Weighted average.
B. LIFO.
C. FIFO.
D. Specific identification.
A. The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. Therefore, the
inventory method that gives the lowest value of inventory will create the highest inventory turnover ratio. Weighted
average will give an ending inventory value that is between that of LIFO and FIFO, so it will not be either the lowest or
the highest inventory balance.

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B. The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. Therefore,
the inventory method that gives the lowest value of inventory will create the highest inventory turnover ratio.
In an inflationary economy, LIFO provides the lowest value for the inventory since it assumes that the newest
(most expensive) units are sold first and the oldest (cheapest) units are in inventory at the end of the period.
C. The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. Therefore, the
inventory method that gives the lowest value of inventory will create a higher inventory turnover ratio. In an
inflationary economy, FIFO provides the highest value for the inventory since it assumes that the oldest (cheapest)
units are sold first and the newest (most expensive) units are in inventory at the end of the period.
D. The inventory turnover ratio is calculated as cost of goods sold divided by average inventory. Therefore, the
inventory method that gives the lowest value of inventory will create a higher inventory turnover. Even under specific
identification, the inventory turnover will not be higher than LIFO. This is because LIFO assumes that all of the items in
inventory are the oldest whereas specific identification will have some old and some new units in ending inventory.

Question 17 - CMA 688 P4 Q20 - Special Issues

Foreign currency gains and losses included in the other comprehensive income section of a consolidated balance
sheet represent
A. the amount resulting from translating foreign currency financial statements into the reporting currency.
B. accounting not in accordance with generally accepted accounting principles.
C. foreign currency transaction gains and losses.
D. remeasurement gains and losses.
A. The gain or loss from the translation of foreign financial statements is reported in Other Comprehensive
Income.
B. Foreign currency gains and losses included in the other comprehensive income section of a consolidated balance
sheet do not represent accounting not in accordance with generally accepted accounting principles. See the correct
answer for a complete explanation.
C. Foreign currency transaction gains and losses are recorded in the income statement.
D. The gain or loss from the remeasurement of foreign financial statements is recorded in the income statement.

Question 18 - CMA 689 1.21 - Special Issues

The measurement of the benefit lost by using resources for a given purpose is
A. comparative advantage.
B. economic efficiency.
C. absolute advantage.
D. opportunity cost.
A. Comparative advantage the ability to produce something at a lower opportunity cost than others can do. Therefore,
comparative advantage uses opportunity costs to decipher whether or not a firm should produce a specific good. It
does not measure the benefits lost of engaging in the production of a product using the given resources.
B. Economic efficiency is when any change brings about greater value. It is a measure of benefit, not a measurement
of the benefit lost by using resources for a given purpose. Economic efficiency would measure the benefit and value
added by using the resources for the given purpose.
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Part 2 : 2- Special Issues

C. Absolute advantage is the ability for a firm to produce a good with fewer resources than other producers. Therefore,
this measurement does not measure the benefits lost of engaging in the production of a product using the given
resources.
D. An opportunity cost is the measurement of the benefit lost by using resources for a given purpose (and not
using them for another purpose). Opportunity cost should be a consideration in all decisions to be sure that
the project being undertaken is the best possible use for the given resources.

Question 19 - CMA 689 1.5 - Special Issues

The equity section of Allen Corporation's statement of financial position is presented as follows.
Preferred stock ($100 par value)$ 8,000,000
Common stock ($5 par value)
5,000,000
Paid-in capital in excess of par 12,000,000
6,000,000
Retained earnings
Net worth
$31,000,000
The book value of Allen Corporation's common stock is
A. $23.00.
B. $5.00.
C. $31.00.
D. $17.00.
A. The book value of common stock is calculated as the book value of common equity divided by the number
of common shares outstanding. The items given that constitute common equity in this question are common
stock ($5,000,000), additional paid-in capital ($12,000,000), and retained earnings ($6,000,000), for a total book
value of common equity of $23,000,000. There are 1,000,000 shares outstanding ($5,000,000 in common
stockwhich is the total par value of outstanding common stockdivided by the par value per share of $5).
The book value of the common equity of $23,000,000 divided by 1,000,000 common shares equals book value
per share of $23.
B. This answer does not include additional paid-in capital and retained earnings in the book value of the common
equity. See the correct answer for a complete explanation.
C. This answer incorrectly includes the par value of the preferred stock in the calculation of the book value of the
common stock. See the correct answer for a complete explanation.
D. This answer does not include retained earnings in the book value of the common equity. See the correct answer for
a complete explanation.

Question 20 - CMA 690 1.27 - Special Issues

A corporation's net income as presented on its income statement is usually
A. more than its economic profits because opportunity costs are not considered in calculating net income.
B. less than its economic profits because accountants include labor costs, while economists exclude labor costs.
C. equal to its economic profits.
D. more than its economic profits because economists do not consider interest payments to be costs.

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Part 2 : 2- Special Issues

A. Because accounting profit only takes into account explicit costs and economic profit also includes implicit
cost, economic profit will usually be lower than accounting profit.
B. Economists and accountants look at labor costs in much of the same way.
C. Economic profits always take into consideration the opportunity costs. That is, they take into account the forgone
opportunity from partaking in a specific activity. Net income on the income statement is accounting profit, and
accounting profit does not take into account the opportunity costs.
D. Economists do consider interest to be an expense.

Question 21 - CMA 692 P2 Q15 - Special Issues

The FASB Accounting Standards Codification provides specific guidelines for translating foreign currency financial
statements. The translation process begins with a determination of whether a foreign affiliate's functional currency is
also its local reporting currency. Which one of the following factors indicates that a foreign affiliate's functional
currency is the U.S. dollar?
A. Cash flows are primarily in foreign currency and do not affect the parent's cash flows.
B. Sales prices are responsive to short-term changes in exchange rates and worldwide competition.
C. Labor, materials, and other costs consist primarily of local costs to the foreign affiliate.
D. Financing is primarily obtained from local foreign sources and from the affiliate's operations.
A. If the cash flows of the subsidiary are in the foreign currency, that means it is generating and expending cash in its
local currency. That is an indication that the foreign entity's local currency should be designated as its functional
currency.
B.
The definition of a foreign entity's functional currency is that it is normally the currency in which the entity
generates and expends cash. If a company generates and expends cash in one currency only, then its
purchases and its sales will not be subject to exchange rate risk. Furthermore, a company that operates only
in the currency of its own economy will find that its selling prices are determined by its local market or its
local government's regulations. In this case, the entity's functional currency should be the currency it buys
and sells in, and that will be its local currency.
On the other hand, if the entity's sales prices are determined more by worldwide competition or by
international prices, that is an indication that it may be buying and selling goods in currencies other than its
own currency. And when the foreign entity is buying and selling goods in currencies other than its own
currency, then the FASB Accounting Standards Codification recommends that its functional currency be
designated as the U.S. parent's currency and not the foreign entity's local currency.
The reason for this is that the foreign entity is not operating in its local currency only. It is operating in
multiple currencies. Therefore, since it is necessary to choose one currency to be the functional currency, it
is better to just make the functional currency the U.S. dollar. That limits the number of currency conversions
that are necessary to convert the entity's financial statements into the parent's currency, which is assumed to
be the U.S. dollar.
Therefore, when sales prices are influenced by changes in the exchange rate between the dollar and the
foreign currency, this is an indication that the foreign entity is operating in multiple currencies, and thus the
dollar is the functional currency. Note that this is an indication and this is not the strongest indication that
could exist, but it is the best of the choices provided.
This question is easier to answer if you use the process of elimination. All of the other answer choices point

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to designating the foreign entity's local currency to be its functional currency rather than the U.S. dollar.
C. If labor, materials and other costs are primarily local costs, that means the foreign entity is expending cash in its
local currency. That is an indication that the foreign entity's local currency should be designated as its functional
currency.
D. If financing is obtained from local foreign sources and from its own operations, then the foreign entity is dealing in
its own currency for its financing needs. Financing is considered to be an activity that both generates and expends
cash, because the company borrows money and then repays it with interest. So that is an indication that the foreign
entity's local currency should be designated to be its functional currency.

Question 22 - CMA 692 P2 Q16 - Special Issues

If an entity's books of account are not maintained in its functional currency, the FASB Accounting Standards
Codification requires remeasurement into the functional currency prior to the translation process. An item that should
be remeasured by use of the current exchange rate is
A. an investment in bonds to be held until maturity.
B. a plant asset and the associated accumulated depreciation.
C. the revenue from a long-term construction contract.
D. inventories.
A. An investment in bonds is a monetary asset and it is remeasured at the current exchange rate. Most
monetary assets are remeasured using the current exchange rate.
B. Plant assets are nonmonetary assets and are therefore remeasured at the historical rates.
C. Revenue items are usually remeasured at the historical rate that was in effect on the date of the transaction.
D. Inventories are nonmonetary items. Nonmonetary items are remeasured at the historical exchange rate in effect
when each transaction occurred.

Question 23 - CMA 693 P2 Q21 - Special Issues

When converting financial statements originally recorded in a foreign currency,
A. a component of annual net income, "Adjustment from Foreign Currency Translation," should be presented in the
notes to the financial statements or in a separate schedule.
B. income taxes are ignored in calculating and disclosing the results of foreign currency translations.
C. an analysis of the changes in Accumulated Other Comprehensive Income due to translation gains/losses is to be
provided in the financial statements or in the notes to the financial statements.
D. the financial statements should be adjusted for a rate change that occurs after the financial statement date but prior
to statement issuance.
A. The gain or loss that arises from the translation of financial statements is recorded in Other Comprehensive
Income, which is an element of owners' equity. It is not recorded in the income statement.
B. Income taxes need to be taken into account when restating financial statements originally recorded in a foreign
currency.
C. Per Accounting Standards Codification 830-30-50-1, "If not provided in a separate financial statement or as
part of a statement of changes in equity, an analysis of the changes during the period in the accumulated
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amount of translation adjustments reported in equity shall be provided in notes to financial statements."
D. The financial statements should not be adjusted for rate fluctuations after year-end but prior to the issuance of the
financial statements.

Question 24 - ICMA 10.P2.020 - Special Issues

Stanford Company leased some special-purpose equipment from Vincent Inc. under a long-term lease that was
treated as an operating lease by Stanford. After the financial statements for the year had been issued, it was
discovered that the lease should have been treated as a capital lease by Stanford. All of the following measures
relating to Stanford would be affected by this discovery except the
A. accounts receivable turnover.
B. fixed asset turnover.
C. debt/equity ratio.
D. net income percentage.
A. The accounts receivable turnover ratio relates the average level of net accounts receivable to the level of
net credit sales. A lease would not affect either accounts receivable or sales, whether booked as an operating
lease or as a capital lease.
B. The fixed asset turnover ratio relates average total fixed assets to sales. If a lease were booked as an operating
lease, the leased asset(s) would not be on the balance sheet. If booked as a capital lease, the leased asset(s) would
be on the balance sheet and would increase fixed assets, which would affect the fixed asset turnover ratio.
C. The debt/equity ratio would be affected, because as a capital lease, the lease would be booked as long-term debt
and would increase total debt on the balance sheet. As an operating lease, it would not have been on the balance
sheet at all.
D. The net income percentage, or net profit margin percentage, would be affected because as an operating lease,
100% of the lease payments would have been expensed. As a capital lease, the leased asset(s) would be on the
balance sheet as an asset and the liability for the lease payments would be on the balance sheet in the liabilities
section. Only the portion of the lease payments classified as interest on the liability would be expensed, and the
remainder of each lease payment would be recorded as a decrease in lease liability outstanding. Thus as a capital
lease, net income would be greater and the net income percentage, or net profit margin percentage (net income
divided by net sales), would be higher.

Question 25 - ICMA 10.P2.103 - Special Issues

A change in the estimate for bad debts should be
A. treated as an error.
B. treated as affecting only the period of the change.
C. considered as an extraordinary item.
D. handled retroactively.
A. Restatement is used to correct an error. A change in an accounting estimate, such as the allowance for bad debts,
is not an error.
B. A change in the estimate for bad debts is a change of accounting estimate. Changes in accounting
estimates are made prospectively. That is, no change is made to previously reported results or to opening
balances. No attempt is made to catch up for prior periods. Instead, the effect of all changes is accounted
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for in (a) the period of change if the change affects that period only; or (b) the period of change and future
periods if the change affects both. A change in the estimate for bad debts would be accounted for in the
period of the change only, as the change would affect only that period.
C. A change in the estimate for bad debts is a change of accounting estimate. It is not an extraordinary item.
D. Retroactively is no longer a term used to describe any of the methods of making accounting changes and
corrections.

Question 26 - ICMA 10.P2.104 - Special Issues

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. The correct method of reporting this change on the financial statements is
A. prospectively.
B. disclosed in a note to the financial statements.
C. retrospective application.
D. restatement.
A. Prospective changes are used for changes in accounting estimate, such as a change in the expected useful life of a
long-lived asset. A change from one inventory cost flow assumption to another is not a change in accounting estimate.
It is a change in accounting principle.
B. This by itself is not an accepted method of accounting for any accounting change or correction.
C.
A change from one inventory cost flow assumption to another is a change of accounting principle. According
to the FASB Codification 250-10-45-5, a change of accounting principle shall be reported through
retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do
so. Retrospective application requires all of the following:
a. The cumulative effect of the change to the new accounting principle on periods prior to those presented
shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period
presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in the statement of financial position) for that period.
c. Financial statements for each individual prior period presented shall be adjusted to reflect the
period-specific effects of applying the new accounting principle.
D. Restatement is used only for error correction. A change in from one inventory cost flow assumption to another is a
change in accounting principle. A change in accounting principle is not a correction of an error, as long as the change
is from one generally accepted accounting principle to another generally accepted accounting principle.

Question 27 - ICMA 10.P2.107 - Special Issues

Which of the following costs, when subtracted from total revenue, yields economic profit?
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A. Opportunity costs of all inputs.
B. Variable costs.
C. Fixed and variable costs.
D. Recurring operating costs.
A.
Economic profit is calculated as follows:
Revenue Explicit Costs Implicit Costs = Economic ProfitImplicit costs are the opportunity costs of the
assets that are used in the operation of the business. Of the choices presented, this is the best choice.
B.
Economic profit is calculated as follows:
Revenue Explicit Costs Implicit Costs = Economic Profit
Variable costs are only part of the explicit costs of the company so this is not how economic profit is calculated.
C.
Economic profit is calculated as follows:
Revenue Explicit Costs Implicit Costs = Economic ProfitFixed and variable costs represent only the explicit costs
of the company so this is not how economic profit is calculated.
D.
Economic profit is calculated as follows:
Revenue Explicit Costs Implicit Costs = Economic ProfitRecurring operating costs are only part of the explicit
costs of the company so this is not how economic profit is calculated.

Question 28 - ICMA 10.P2.108 - Special Issues

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
A. $60,000.
B. $35,000.
C. $25,000.
D. $10,000.
A. Economic cost is calculated as the explicit and implicit costs of doing something. In this question, the
$25,000 that Williams pays for MBA studies is an explicit cost. Additionally, the $35,000 of lost salary is the
opportunity cost of his time. If he studies he does not have time to work and will therefore give up his salary.
Adding these together, the economic cost is $60,000. We can demonstrate it this way: If he worked, he would
have $35,000 of "income" at the end of the year and no educational expenses. If he studies, he will have no
revenue and $25,000 of "expenses." So, the difference in "income" between the two options is $60,000.
B. This is simply the implicit cost of not working if he studies he will lose his salary of $35,000. To calculate the
economic cost we also need to include the explicit cost of studying $25,000.

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Part 2 : 2- Special Issues

C. This is simply the explicit cost of studying. To calculate the economic cost we also need to include the implicit cost
of his time, or his lost salary if he studies, of $35,000.
D. This answer is the difference between Williams' annual salary and the annual tuition and fees for MBA studies. It is
not the annual total economic cost of Williams' MBA studies. See the correct answer for a complete explanation.

Question 29 - ICMA 10.P2.109 - Special Issues

The financial statements of Lark Inc. for last year are shown below.
Income Statement ($000)
Revenue
$4,000
2,900
Cost of sales
Gross margin
1,100
General & administrative
500
Interest
100
150
Taxes
Net income
$ 350
Balance Sheet ($000)
Current assets
$ 800Current liabilities$ 500
Plant & equipment 3,200Long-term debt $1,000
Common equity 2,500
Totals
$4,000 Totals
$4,000
If Lark's book values approximate market values and if the opportunity costs of debt and equity are 10% and 15%,
respectively, what was the economic profit for Lark last year?
A. ($125,000).
B. $0.
C. $350,000.
D. ($25,000).
A.
The purpose of calculating economic profit is to determine whether the company should actually continue to operate in
the business that it is operating in, or whether its owners could make more money by doing something else (such as
participating in the next best alternative). If the amount of profit that the company is making is less than what the
owners could make elsewhere, the company will have negative economic profit.
The cost of equity is the investors' required rate of return, i.e. the amount that the investors could earn elsewhere.
Therefore, in this problem, the cost of equity is the difference between the company's accounting profit (or net income)
and its economic profit.
This answer results from subtracting both the cost of equity and the cost of debt from the company's net income.
However, the cost of debt is not an adjustment to accounting profit in calculating economic profit. This is because the
10% interest on the long-term debt has already been accounted for in the calculation of net income. On the income
statement, we see "Interest $100,000." That is the 10% interest on the $1,000,000 long-term debt. So net income has
already been reduced by the interest on the debt. If we subtract it a second time, we are subtracting it twice.
B.
The purpose of calculating economic profit is to determine whether the company should actually continue to operate in
the business that it is operating in, or whether its owners could make more money by doing something else (such as
participating in the next best alternative). If the amount of profit that the company is making is less than what the
owners could make elsewhere, the company will have negative economic profit.
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Part 2 : 2- Special Issues

The cost of equity is the investors' required rate of return, i.e. the amount that the investors could earn elsewhere.
Therefore, in this problem, the cost of equity is the difference between the company's accounting profit (or net income)
and its economic profit.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
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materials better.
C.
$350,000 is Lark's net accounting profit (net income) for the year.
The purpose of calculating economic profit is to determine whether the company should actually continue to operate in
the business that it is operating in, or whether its owners could make more money by doing something else (such as
participating in the next best alternative). If the amount of profit that the company is making is less than what the
owners could make elsewhere, the company will have negative economic profit.
The cost of equity is the investors' required rate of return, i.e. the amount that the investors could earn elsewhere.
Therefore, in this problem, the cost of equity is the difference between the companys accounting profit (or net income)
and its economic profit.
D.
The purpose of calculating economic profit is to determine whether the company should actually continue to
operate in the business that it is operating in, or whether its owners could make more money by doing
something else (such as participating in the next best alternative). If the amount of profit that the company is
making is less than what the owners could make elsewhere, the company will have negative economic profit.
The cost of equity is the investors required rate of return, i.e. the amount that the investors could earn
elsewhere. Therefore, in this problem, the cost of equity is the difference between the company's accounting
profit (or net income) and its economic profit.
Common equity is $2,500,000, and the opportunity cost of equity is 15%. Thus, the cost of equity is $2,500,000
0.15, or $375,000. Net income is $350,000. Net income minus the cost of equity equals the companys
economic profit. $350,000 $375,000 = $(25,000).
Note that the cost of debt is not an adjustment to accounting profit in calculating economic profit. This is
because the 10% interest on the long-term debt has already been accounted for in the calculation of net
income. On the income statement, we see Interest $100,000. That is the 10% interest on the $1,000,000
long-term debt. So net income has already been reduced by the interest on the debt. If we were to subtract it a
second time, we would be subtracting it twice.

Question 30 - ICMA 13.P2.018 - Special Issues

A major difference between economic profit and accounting profit is that economic profit
A. allows for more accurate expense accruals.
B. minimizes the impact of accounting estimates.
C. reduces profits by associated cost of capital.
D. adjusts accounting profit by depreciation.

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Part 2 : 2- Special Issues

A. Economic profit does not allow for more accurate expense accruals than accounting profit. Economic profit does
mot have anything to do with expense accruals.
B. Economic profit and accounting profit both use estimates. In addition to estimates that are made in the calculation
of accounting profit, economic profit also requires estimates to be made to calculate the implicit costs.
C. Economic profit includes opportunity costs for the use of assets in its calculation. Therefore, economic
profit will reduce accounting profit by the cost of capital that was used by the company.
D. Both accounting profit and economic profit include depreciation.

Question 31 - ICMA 2013.2.P2.009 Adapted - Special Issues

Which one of the following statements best reflects the relationship between the results of financial ratios calculated in
a local currency versus those calculated after the local statements have been remeasured or translated into the
reporting currency?
A. Finacial ratio results are similar under translation and remeasurement, but ratios under translation are often
different from those in the local currency.
B. Financial ratio results are different under translation and remeasurement, and ratios under translation are also often
different from those in the local currency.
C. Financial ratio results are similar under translation and remeasurement, and ratios under translation are also often
similar to those in the local currency.
D. Financial ratio results are different under translation and remeasurement, but ratios under translation are often
similar to those in the local currency.
A.
Because various line items on the balance sheet and income statement of foreign financial statements are converted
using different exchange rates under translation and remeasurement, financial ratio results are different under the two
methods. In most cases, ratios computed after remeasurement differ markedly from both the local currency ratios and
those computed from translated financial statements.
If the local currency is also the functional currency of the subsidiary and thus the foreign financial statements can be
directly translated (i.e., without being first remeasured), pure income statement or pure balance sheet ratios maintain
the local currency relationships and thus are not different. However, ratios that use both income statement and
balance sheet items (such as return on assets or return on equity) are often different after translation from those in the
local currency statements because different exchange rates are used for translating income statement items and
equity items.
If the local currency is not the functional currency and thus the statements must be remeasured into the functional
currency and then translated into the reporting currency, all the ratios will be very different in the translated statements
than they were in the local currency statements.
B.
Because various line items on the balance sheet and income statement of foreign financial statements are
converted using different exchange rates under translation and remeasurement, financial ratio results are
different under the two methods. In most cases, ratios computed after remeasurement differ markedly from
both the local currency ratios and those computed from translated financial statements.
If the local currency is also the functional currency of the subsidiary and thus the foreign financial statements
can be directly translated (i.e., without being first remeasured), pure income statement or pure balance sheet
ratios maintain the local currency relationships and thus are not different. However, ratios that use both
income statement and balance sheet items (such as return on assets or return on equity) are often different
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Part 2 : 2- Special Issues

after translation from those in the local currency statements because different exchange rates are used for
translating income statement items and equity items.
If the local currency is not the functional currency and thus the statements must be remeasured into the
functional currency and then translated into the reporting currency, all the ratios will be very different in the
translated statements than they were in the local currency statements.
C.
Because various line items on the balance sheet and income statement of foreign financial statements are converted
using different exchange rates under translation and remeasurement, financial ratio results are different under the two
methods. In most cases, ratios computed after remeasurement differ markedly from both the local currency ratios and
those computed from translated financial statements.
If the local currency is also the functional currency of the subsidiary and thus the foreign financial statements can be
directly translated (i.e., without being first remeasured), pure income statement or pure balance sheet ratios maintain
the local currency relationships and thus are not different. However, ratios that use both income statement and
balance sheet items (such as return on assets or return on equity) are often different after translation from those in the
local currency statements because different exchange rates are used for translating income statement items and
equity items.
If the local currency is not the functional currency and thus the statements must be remeasured into the functional
currency and then translated into the reporting currency, all the ratios will be very different in the translated statements
than they were in the local currency statements.
D.
Because various line items on the balance sheet and income statement of foreign financial statements are converted
using different exchange rates under translation and remeasurement, financial ratio results are different under the two
methods. In most cases, ratios computed after remeasurement differ markedly from both the local currency ratios and
those computed from translated financial statements.
If the local currency is also the functional currency of the subsidiary and thus the foreign financial statements can be
directly translated (i.e., without being first remeasured), pure income statement or pure balance sheet ratios maintain
the local currency relationships and thus are not different. However, ratios that use both income statement and
balance sheet items (such as return on assets or return on equity) are often different after translation from those in the
local currency statements because different exchange rates are used for translating income statement items and
equity items.
If the local currency is not the functional currency and thus the statements must be remeasured into the functional
currency and then translated into the reporting currency, all the ratios will be very different in the translated statements
than they were in the local currency statements.

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