WGU D105
Intermediate Accounting III
OA2 (Units 5-9)
Actual Questions with Verified Answers
Pass the Exam with Confidence
What You Will Get:
➢142 OA Exam Questions w/ Answers
➢Complete Units 5, 6, 7, 8, and 9
➢Expert Rationales Included
Take and pass the OA :)
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,1. Which needs to be eliminated from operating activities to determine net cash
flow from operating activities?
A. Cash dividends and stock issuances
B. Purchases and sales of long-term assets
C. Noncash expenses and noncash revenues from net income
D. All changes in shareholders’ equity
CORRECT ANSWER:
C. Noncash expenses and noncash revenues from net income
Expert Rationale:
Under the indirect method, net income must be adjusted for items that affected reported
income but did not involve operating cash. Examples include depreciation, amortization,
and gains or losses on asset sales.
2. To arrive at net cash provided by operating activities, it is necessary to report
revenues and expenses on a cash basis. How is this accomplished?
A. By eliminating the effects of income statement transactions that did not result in a
corresponding increase or decrease in cash
B. By removing all investing transactions from the balance sheet
C. By adding all financing cash inflows to net income
D. By replacing accrual-basis revenue with gross sales
CORRECT ANSWER:
A. By eliminating the effects of income statement transactions that did not result
in a corresponding increase or decrease in cash
Expert Rationale:
The indirect method converts accrual-basis net income to operating cash flow by
adjusting for noncash items and changes in operating assets and liabilities. These
adjustments remove the timing differences between income recognition and cash
movement.
3. A company acquired a building, paying a portion of the purchase price in cash
and issuing a mortgage note payable to the seller for the balance. In a statement
,How many of the above items will appear as a cash inflow from investing
activities on a statement of cash flows for the current year?
A. One item
B. Two items
C. Four items
D. Three items
CORRECT ANSWER:
D. Three items
Expert Rationale:
The investing cash inflows are the sale of the delivery truck, sale of the investment
security, and collection of the loan receivable. The inventory sale is operating, while the
stock issuance and note payable are financing activities.
10. A company needs to determine the order to use when presenting information
in the statement of cash flows. Which section should be presented third?
A. Financing activities
B. Operating activities
C. Investing activities
D. Supplemental disclosures
CORRECT ANSWER:
A. Financing activities
Expert Rationale:
The standard order is operating activities first, investing activities second, and financing
activities third. Supplemental information and noncash disclosures generally follow
these sections.
11. An individual is reading a company’s statement of cash flows in order to
better understand the company. Which question is able to be answered from this
information?
A. What is the current market price of the company’s shares?
B. What accounting method was used for inventory?
C. Where does the company generate cash inflows?
D. How many employees does the company have?
,A. The nature of the relationship involved
B. Only the names of the parties’ attorneys
C. The personal income of each party
D. All unrelated transactions completed during the year
CORRECT ANSWER:
A. The nature of the relationship involved
Expert Rationale:
Related-party disclosures generally include the nature of the relationship, a description
of the transactions, relevant dollar amounts, and amounts due to or from related parties.
This information helps users evaluate whether transactions occurred on normal market
terms.
24. Rondelli Manufacturing Company employs a standard cost system. In
December 2017, the company is working on the budgets for 2018 and plans a
volume variance for the first quarter of 2018. If the variance is expected to be
absorbed by the end of 2018, how would the planned volume variance be
described in the 2017 financial statements?
A. As a recognized subsequent event requiring an immediate loss
B. As a prior-period accounting error
C. As a change in accounting estimate applied retrospectively
D. As a nonrecognized subsequent event that should be deferred at the end of the first
quarter, regardless of whether it is favorable or unfavorable
CORRECT ANSWER:
D. As a nonrecognized subsequent event that should be deferred at the end of the
first quarter, regardless of whether it is favorable or unfavorable
Expert Rationale:
The planned variance relates to future production activity and does not provide
additional evidence about a condition existing at the 2017 balance-sheet date. It is
therefore not recognized in the 2017 accounts.
25. On March 3, 2022, Phillips Inc. began preparing financial statements and the
accompanying notes for the year ended December 31, 2021. On February 25,
2022, Allen Corporation, Phillips Inc.’s largest customer, informed Phillips that it
was filing for bankruptcy and would be unable to pay its balance due to Phillips.
Phillips found that Allen Corporation owed $250,000 in accounts receivable as of
,Expert Rationale:
Users need information about the cost-flow method, the basis used to measure
inventory, and any restrictions or pledges affecting the inventory. These matters may
influence liquidity and the interpretation of reported inventory amounts.
37. During the current year, a manufacturer was served with a lawsuit, and the
company’s attorney predicts that it will most likely result in a loss, but the dollar
amount is not estimable. The company has a large line of credit available that it
believes could cover any amount of loss. Additionally, the manufacturer
guaranteed $1,000,000 in indebtedness of a smaller company in which it holds
50% stock, although the manufacturer does not think the smaller company will
default. Which partial disclosure note for contingent liabilities is appropriate for
this manufacturer?
A. Recognition of a $1,000,000 lawsuit liability
B. No disclosure because a line of credit is available
C. An explanation that an estimate of the lawsuit contingency is unpredictable
D. Recognition of the maximum line of credit as an asset
CORRECT ANSWER:
C. An explanation that an estimate of the lawsuit contingency is unpredictable
Expert Rationale:
A probable loss that cannot be reasonably estimated is disclosed rather than accrued.
The availability of credit does not remove the contingency. The guarantee may also
require disclosure even when default is not considered probable.
38. A company is determining if a major disclosure must be made in the notes
included with its financial statements. Which tax item requires this treatment?
A. Deferred taxes
B. Payroll tax paid during the month
C. Sales tax collected from customers
D. Property tax included in inventory
CORRECT ANSWER:
A. Deferred taxes
Expert Rationale:
Deferred-tax assets and liabilities involve timing differences, future tax effects, valuation
,A. The employer’s customers
B. The pension trustee exclusively
C. The employee
D. The company’s creditors
CORRECT ANSWER:
C. The employee
Expert Rationale:
The employee’s retirement benefit is based on the accumulated contributions and
investment returns in the individual account. Therefore, the employee benefits from
gains and bears the risk of investment losses.
52. What is the purpose of a pension plan?
A. To provide short-term loans to employees
B. For an employer to provide benefits to retired employees
C. To replace workers’ compensation insurance
D. To finance current inventory purchases
CORRECT ANSWER:
B. For an employer to provide benefits to retired employees
Expert Rationale:
Pension plans are designed to provide employees with income or other benefits after
retirement. The plan may define either the employer’s contributions or the benefits
employees will receive.
53. In a defined benefit plan, what is meant by the process of funding?
A. Recording pension expense without transferring assets
B. Estimating future employee salaries
C. Paying benefits directly from current sales revenue
D. Making periodic contributions to a funding agency to ensure funds are available to
meet retirees’ claims
CORRECT ANSWER:
D. Making periodic contributions to a funding agency to ensure funds are
available to meet retirees’ claims
,67. Which disclosure is required for a change from the sum-of-the-years’-digits
depreciation method to the straight-line depreciation method?
A. Restatement of all prior-period financial statements
B. Adjustment of the earliest retained-earnings balance
C. Recognition as an extraordinary loss
D. Recomputation of current and future years’ depreciation
CORRECT ANSWER:
D. Recomputation of current and future years’ depreciation
Expert Rationale:
A change in depreciation method is treated as a change in accounting estimate effected
by a change in principle. It is applied prospectively by recomputing depreciation for the
current and future periods.
68. Stone Company changed its method of pricing inventories from FIFO to LIFO.
Stone judges it impracticable to retrospectively apply the new pricing method.
What type of accounting change does this represent?
A. A change in accounting principle inseparable from a change in accounting estimate,
with prior comparative periods presented as previously reported
B. A prior-period error requiring full restatement
C. A change in reporting entity
D. A change requiring recognition entirely in other comprehensive income
CORRECT ANSWER:
A. A change in accounting principle inseparable from a change in accounting
estimate, with prior comparative periods presented as previously reported
Expert Rationale:
When retrospective application is impracticable, the change is applied prospectively
from the earliest practicable date. Prior periods that cannot be restated remain as
previously reported.
69. On December 31, 2020, Dodd Inc. appropriately changed its inventory
valuation method to FIFO cost from weighted-average cost for financial statement
purposes. The change will result in an increase in the Inventory account at
January 1, 2020. The amount of the change, net of tax, is $2,300,000. What is the
cumulative effect of this accounting change that should be reported by Dodd Inc.
in 2020?
,Expert Rationale:
The failure to record depreciation is a material accounting error. It should be corrected
retrospectively by adjusting affected asset accounts and beginning retained earnings,
net of tax.
92. What is a reason why companies prefer certain accounting methods?
A. Bonus payments
B. Elimination of all taxes
C. Prevention of financial-statement audits
D. Avoidance of required disclosures
CORRECT ANSWER:
A. Bonus payments
Expert Rationale:
Management compensation arrangements may be tied to reported income or other
accounting measures. Managers may therefore prefer accounting methods that affect
the timing or amount of reported earnings, although methods must remain within
applicable accounting standards.
93. A company using periodic inventory methods discovered it had understated
inventory by $8,000,000 after the books had been closed for Year 1. The
company’s tax rate is 18%. Which partial entry should be included to correct this
error in the financial statements for Year 2?
A. Debit Retained Earnings for $8,000,000
B. Credit Income Tax Payable for $8,000,000
C. Debit Inventory for $6,560,000 only
D. Credit Retained Earnings for $6,560,000
CORRECT ANSWER:
D. Credit Retained Earnings for $6,560,000
Expert Rationale:
The after-tax effect is $8,000,000 × 82% = $6,560,000. Because ending inventory was
understated, cost of goods sold was overstated and prior net income and retained
earnings were understated. Retained earnings must therefore be credited.
94. Which item is considered an accounting error in accrual accounting?
, 115. In an operating lease, what does the lessee record?
A. Lease expense
B. Sales revenue
C. Cost of goods sold
D. Interest income
CORRECT ANSWER:
A. Lease expense
Expert Rationale:
A lessee recognizes a single lease expense for an operating lease, generally on a
straight-line basis. A right-of-use asset and lease liability are also normally reported on
the balance sheet.
116. Which of the following would be included in the Lease Receivable account
on the lessor’s books?
I. Guaranteed residual value
II. Unguaranteed residual value
III. Overhead costs
IV. Rental payments
A. I and III only
B. II and IV only
C. I, II, III, and IV
D. I, II, and IV
CORRECT ANSWER:
D. I, II, and IV
Expert Rationale:
Lease receivable or net-investment measurement includes rental payments and
relevant residual values. General overhead costs are not amounts contractually
receivable from the lessee.
117. How should the lease-liability balance be disclosed on the balance sheet of
the lessee?
A. Entirely as a current liability
B. Current portions in current liabilities and the remainder in noncurrent liabilities
Intermediate Accounting III
OA2 (Units 5-9)
Actual Questions with Verified Answers
Pass the Exam with Confidence
What You Will Get:
➢142 OA Exam Questions w/ Answers
➢Complete Units 5, 6, 7, 8, and 9
➢Expert Rationales Included
Take and pass the OA :)
, Preview Pages Below
Get the Complete PDF After Purchase
"If you require further clarification or in need of any study resources,
feel free to Message me."
Digital preview sample - complete document available after purchase
,1. Which needs to be eliminated from operating activities to determine net cash
flow from operating activities?
A. Cash dividends and stock issuances
B. Purchases and sales of long-term assets
C. Noncash expenses and noncash revenues from net income
D. All changes in shareholders’ equity
CORRECT ANSWER:
C. Noncash expenses and noncash revenues from net income
Expert Rationale:
Under the indirect method, net income must be adjusted for items that affected reported
income but did not involve operating cash. Examples include depreciation, amortization,
and gains or losses on asset sales.
2. To arrive at net cash provided by operating activities, it is necessary to report
revenues and expenses on a cash basis. How is this accomplished?
A. By eliminating the effects of income statement transactions that did not result in a
corresponding increase or decrease in cash
B. By removing all investing transactions from the balance sheet
C. By adding all financing cash inflows to net income
D. By replacing accrual-basis revenue with gross sales
CORRECT ANSWER:
A. By eliminating the effects of income statement transactions that did not result
in a corresponding increase or decrease in cash
Expert Rationale:
The indirect method converts accrual-basis net income to operating cash flow by
adjusting for noncash items and changes in operating assets and liabilities. These
adjustments remove the timing differences between income recognition and cash
movement.
3. A company acquired a building, paying a portion of the purchase price in cash
and issuing a mortgage note payable to the seller for the balance. In a statement
,How many of the above items will appear as a cash inflow from investing
activities on a statement of cash flows for the current year?
A. One item
B. Two items
C. Four items
D. Three items
CORRECT ANSWER:
D. Three items
Expert Rationale:
The investing cash inflows are the sale of the delivery truck, sale of the investment
security, and collection of the loan receivable. The inventory sale is operating, while the
stock issuance and note payable are financing activities.
10. A company needs to determine the order to use when presenting information
in the statement of cash flows. Which section should be presented third?
A. Financing activities
B. Operating activities
C. Investing activities
D. Supplemental disclosures
CORRECT ANSWER:
A. Financing activities
Expert Rationale:
The standard order is operating activities first, investing activities second, and financing
activities third. Supplemental information and noncash disclosures generally follow
these sections.
11. An individual is reading a company’s statement of cash flows in order to
better understand the company. Which question is able to be answered from this
information?
A. What is the current market price of the company’s shares?
B. What accounting method was used for inventory?
C. Where does the company generate cash inflows?
D. How many employees does the company have?
,A. The nature of the relationship involved
B. Only the names of the parties’ attorneys
C. The personal income of each party
D. All unrelated transactions completed during the year
CORRECT ANSWER:
A. The nature of the relationship involved
Expert Rationale:
Related-party disclosures generally include the nature of the relationship, a description
of the transactions, relevant dollar amounts, and amounts due to or from related parties.
This information helps users evaluate whether transactions occurred on normal market
terms.
24. Rondelli Manufacturing Company employs a standard cost system. In
December 2017, the company is working on the budgets for 2018 and plans a
volume variance for the first quarter of 2018. If the variance is expected to be
absorbed by the end of 2018, how would the planned volume variance be
described in the 2017 financial statements?
A. As a recognized subsequent event requiring an immediate loss
B. As a prior-period accounting error
C. As a change in accounting estimate applied retrospectively
D. As a nonrecognized subsequent event that should be deferred at the end of the first
quarter, regardless of whether it is favorable or unfavorable
CORRECT ANSWER:
D. As a nonrecognized subsequent event that should be deferred at the end of the
first quarter, regardless of whether it is favorable or unfavorable
Expert Rationale:
The planned variance relates to future production activity and does not provide
additional evidence about a condition existing at the 2017 balance-sheet date. It is
therefore not recognized in the 2017 accounts.
25. On March 3, 2022, Phillips Inc. began preparing financial statements and the
accompanying notes for the year ended December 31, 2021. On February 25,
2022, Allen Corporation, Phillips Inc.’s largest customer, informed Phillips that it
was filing for bankruptcy and would be unable to pay its balance due to Phillips.
Phillips found that Allen Corporation owed $250,000 in accounts receivable as of
,Expert Rationale:
Users need information about the cost-flow method, the basis used to measure
inventory, and any restrictions or pledges affecting the inventory. These matters may
influence liquidity and the interpretation of reported inventory amounts.
37. During the current year, a manufacturer was served with a lawsuit, and the
company’s attorney predicts that it will most likely result in a loss, but the dollar
amount is not estimable. The company has a large line of credit available that it
believes could cover any amount of loss. Additionally, the manufacturer
guaranteed $1,000,000 in indebtedness of a smaller company in which it holds
50% stock, although the manufacturer does not think the smaller company will
default. Which partial disclosure note for contingent liabilities is appropriate for
this manufacturer?
A. Recognition of a $1,000,000 lawsuit liability
B. No disclosure because a line of credit is available
C. An explanation that an estimate of the lawsuit contingency is unpredictable
D. Recognition of the maximum line of credit as an asset
CORRECT ANSWER:
C. An explanation that an estimate of the lawsuit contingency is unpredictable
Expert Rationale:
A probable loss that cannot be reasonably estimated is disclosed rather than accrued.
The availability of credit does not remove the contingency. The guarantee may also
require disclosure even when default is not considered probable.
38. A company is determining if a major disclosure must be made in the notes
included with its financial statements. Which tax item requires this treatment?
A. Deferred taxes
B. Payroll tax paid during the month
C. Sales tax collected from customers
D. Property tax included in inventory
CORRECT ANSWER:
A. Deferred taxes
Expert Rationale:
Deferred-tax assets and liabilities involve timing differences, future tax effects, valuation
,A. The employer’s customers
B. The pension trustee exclusively
C. The employee
D. The company’s creditors
CORRECT ANSWER:
C. The employee
Expert Rationale:
The employee’s retirement benefit is based on the accumulated contributions and
investment returns in the individual account. Therefore, the employee benefits from
gains and bears the risk of investment losses.
52. What is the purpose of a pension plan?
A. To provide short-term loans to employees
B. For an employer to provide benefits to retired employees
C. To replace workers’ compensation insurance
D. To finance current inventory purchases
CORRECT ANSWER:
B. For an employer to provide benefits to retired employees
Expert Rationale:
Pension plans are designed to provide employees with income or other benefits after
retirement. The plan may define either the employer’s contributions or the benefits
employees will receive.
53. In a defined benefit plan, what is meant by the process of funding?
A. Recording pension expense without transferring assets
B. Estimating future employee salaries
C. Paying benefits directly from current sales revenue
D. Making periodic contributions to a funding agency to ensure funds are available to
meet retirees’ claims
CORRECT ANSWER:
D. Making periodic contributions to a funding agency to ensure funds are
available to meet retirees’ claims
,67. Which disclosure is required for a change from the sum-of-the-years’-digits
depreciation method to the straight-line depreciation method?
A. Restatement of all prior-period financial statements
B. Adjustment of the earliest retained-earnings balance
C. Recognition as an extraordinary loss
D. Recomputation of current and future years’ depreciation
CORRECT ANSWER:
D. Recomputation of current and future years’ depreciation
Expert Rationale:
A change in depreciation method is treated as a change in accounting estimate effected
by a change in principle. It is applied prospectively by recomputing depreciation for the
current and future periods.
68. Stone Company changed its method of pricing inventories from FIFO to LIFO.
Stone judges it impracticable to retrospectively apply the new pricing method.
What type of accounting change does this represent?
A. A change in accounting principle inseparable from a change in accounting estimate,
with prior comparative periods presented as previously reported
B. A prior-period error requiring full restatement
C. A change in reporting entity
D. A change requiring recognition entirely in other comprehensive income
CORRECT ANSWER:
A. A change in accounting principle inseparable from a change in accounting
estimate, with prior comparative periods presented as previously reported
Expert Rationale:
When retrospective application is impracticable, the change is applied prospectively
from the earliest practicable date. Prior periods that cannot be restated remain as
previously reported.
69. On December 31, 2020, Dodd Inc. appropriately changed its inventory
valuation method to FIFO cost from weighted-average cost for financial statement
purposes. The change will result in an increase in the Inventory account at
January 1, 2020. The amount of the change, net of tax, is $2,300,000. What is the
cumulative effect of this accounting change that should be reported by Dodd Inc.
in 2020?
,Expert Rationale:
The failure to record depreciation is a material accounting error. It should be corrected
retrospectively by adjusting affected asset accounts and beginning retained earnings,
net of tax.
92. What is a reason why companies prefer certain accounting methods?
A. Bonus payments
B. Elimination of all taxes
C. Prevention of financial-statement audits
D. Avoidance of required disclosures
CORRECT ANSWER:
A. Bonus payments
Expert Rationale:
Management compensation arrangements may be tied to reported income or other
accounting measures. Managers may therefore prefer accounting methods that affect
the timing or amount of reported earnings, although methods must remain within
applicable accounting standards.
93. A company using periodic inventory methods discovered it had understated
inventory by $8,000,000 after the books had been closed for Year 1. The
company’s tax rate is 18%. Which partial entry should be included to correct this
error in the financial statements for Year 2?
A. Debit Retained Earnings for $8,000,000
B. Credit Income Tax Payable for $8,000,000
C. Debit Inventory for $6,560,000 only
D. Credit Retained Earnings for $6,560,000
CORRECT ANSWER:
D. Credit Retained Earnings for $6,560,000
Expert Rationale:
The after-tax effect is $8,000,000 × 82% = $6,560,000. Because ending inventory was
understated, cost of goods sold was overstated and prior net income and retained
earnings were understated. Retained earnings must therefore be credited.
94. Which item is considered an accounting error in accrual accounting?
, 115. In an operating lease, what does the lessee record?
A. Lease expense
B. Sales revenue
C. Cost of goods sold
D. Interest income
CORRECT ANSWER:
A. Lease expense
Expert Rationale:
A lessee recognizes a single lease expense for an operating lease, generally on a
straight-line basis. A right-of-use asset and lease liability are also normally reported on
the balance sheet.
116. Which of the following would be included in the Lease Receivable account
on the lessor’s books?
I. Guaranteed residual value
II. Unguaranteed residual value
III. Overhead costs
IV. Rental payments
A. I and III only
B. II and IV only
C. I, II, III, and IV
D. I, II, and IV
CORRECT ANSWER:
D. I, II, and IV
Expert Rationale:
Lease receivable or net-investment measurement includes rental payments and
relevant residual values. General overhead costs are not amounts contractually
receivable from the lessee.
117. How should the lease-liability balance be disclosed on the balance sheet of
the lessee?
A. Entirely as a current liability
B. Current portions in current liabilities and the remainder in noncurrent liabilities
