Chapter 5: The Income Statement and the Statement of Cash Flows
55. When an entity reports on a sale of a component of the business
a.
any income or loss from operations of the component should be reported in the income from continuing
operations section, but any gain or loss on the sale of the component should be presented below the income
from continuing operations section.
b.
current operating income or loss of the component and any gain or loss on sale of the component should be
presented in a separate section of the income statement.
c.
any gain or loss on the sale should always be presented as a component of other comprehensive income.
d.
all information related to the sold component should be reported solely in the footnotes accompanying the
financial statements.
b
1
Moderate
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Reporting
56. Which of the following is a required disclosure in the income statement when reporting the sale of a component of the
business?
a.
The gain or loss on sale should be reported as a component of other comprehensive income
b.
Both the results of operations of the discontinued component and also the gain or loss on the sale should be
reported as components of other comprehensive income.
c.
Earnings per share from both income from continuing operations and net income should be disclosed on the
face of the income statement.
d.
Revenue and expenses applicable to the discontinued operations should be disclosed in the income statement.
c
1
Moderate
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
57. Which is least likely to be classified as a sale of a component?
a.
sale by a communications company of its radio stations, but none of its television stations
b.
sale by a food distributor of its wholesale supermarket division while maintaining its wholesale fast-food
restaurants division
c.
sale by an apparel manufacturer of a woolen suit manufacturing plant in order to concentrate on the
manufacture of suits from synthetic products
d.
sale by a meat-packing company of its (entire) 20% interest in a professional football team
c
1
Easy
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
58. Gregory Company is disposing of a component of its company. The net loss from the sale is estimated to be $600,000.
Included in the $600,000 is termination pay of $100,000, which is directly associated with the decision to dispose of
the component; and net losses from component asset write-downs of $400,000. Ignoring taxes, Gregory’s income
statement should report a loss on sale of a business component of
a.
$100,000
b.
$400,000
c.
$500,000
d.
$600,000
d
1
Moderate
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Chapter 5: The Income Statement and the Statement of Cash Flows
Exhibit 5-1
The following condensed income statement of Ranger Corporation is presented for the two years ended December 31,
2016 and 2015:
2015
Net sales
$9,000,000
Cost of sales
6,000,000
Gross profit
$3,000,000
Operating expense
2,000,000
Operating income
$1,000,000
Gain on sale of a component
—
$1,000,000
Income tax expense
300,000
Net income
$ 700,000
On January 1, 2016, Ranger entered into an agreement to sell one of its separate operating divisions for $2,000,000. The
sale resulted in a gain on disposition of $900,000 on November 12, 2016, and qualifies as a discontinued component. This
division’s contribution to Ranger’s reported income before income taxes for each year was as follows:
2016
$700,000 loss
2015
$400,000 loss
Assume an income tax rate of 30%.
59. Refer to Exhibit 5-1. In the preparation of a revised comparative income statement, Ranger should report income from
continuing operations after income taxes for 2016 and 2015, respectively, amounting to
a.
$1,540,000 and $700,000.
b.
$1,540,000 and $980,000.
c.
$1,680,000 and $700,000.
d.
$1,680,000 and $980,000.
b
1
Challenging
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
60. Refer to Exhibit 5-1. In the preparation of a revised comparative income statement, Ranger should report under the
caption “Discontinued Operations” for 2016 and 2015, respectively,
a.
income of $140,000 and a loss of $280,000.
b.
income of $140,000 and a loss of $0.
c.
income of $200,000 and a loss of $400,000.
d.
a loss of $700,000 and a loss of $400,000.
a
1
Challenging
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPORG: Analytic
61. Nelly Company sold its cattle ranching component on June 30, 2016, for a gain of $1,000,000. From January through
June, the component had sustained operating income of $300,000. The income tax rate is 35%. How should Nelly
report the income and the sale on its income statement?
a.
as $300,000 operating income and a $1,000,000 gain on sale of component
b.
as a $1,300,000 gain in operating income
c.
as a net of tax gain of $845,000 after income from continuing operations
d.
as $195,000 operating income and a $650,000 gain on sale of the component shown before extraordinary items
d
1
Moderate
ACCT.WHAL.16.5.6 – LO: 5.6
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
62. Which of the following is required to be disclosed, pursuant to GAAP?
a.
operating income or loss from discontinued component reported on the income statement
b.
a description of facts and circumstances leading up to the sale of a discontinued component within the notes of
the financial statements
c.
all gains or losses from sale of the component reported on the income statement or in the footnotes
d.
All of these answer choices are correct.
d
1
Moderate
ACCT.WHAL.16.5.6 – LO: 5.6
United States – OH – Default City – AICPA: FN-Decision Modeling
Chapter 5: The Income Statement and the Statement of Cash Flows
63. How should the gain or loss that is considered infrequent but not unusual in nature be disclosed?
a.
separately in the income statement immediately after income from continuing operations
b.
on a net-of-tax basis in the income statement immediately after income from continuing operations
c.
as an contingency item in the footnotes
d.
separately in the income statement as a component of income from continuing operations
d
1
Moderate
ACCT.WHAL.16.5.7 – LO: 5.7
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Reporting
64. Earnings per share is an important disclosure because
a.
it provides information relevant to the common shareholders.
b.
net income disclosed in the financial statements can fluctuate based upon management’s intentions.
c.
it forces common and preferred shareholders to read the financial statements.
d.
it uses net income.
a
1
Easy
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
65. The numerator in the earnings per share calculation is
a.
only the amount available to common shareholders.
b.
net income attributable to common shareholders.
c.
net income minus declared preferred stock dividends.
d.
All of these answer choices are correct.
d
1
Easy
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
66. Morgan Company reported the following information for the year ended December 31, 2015:
Net income
$ 600,000
Preferred dividends declared and paid
60,000
Common dividends declared and paid
90,000
Average common shares outstanding
90,000
Ending market price per share
45
Net sales
5,100,000
What was Morgan’s earnings per share for 2015?
a.
$6.67
b.
$6.00
c.
$5.11
d.
$0.15
b
1
Moderate
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
67. Lester Company reported the following information for the year ended December 31, 2015:
Net income
$ 1,000,000
Preferred dividends declared and paid
160,000
Common dividends declared and paid
90,000
Average common shares outstanding
100,000
Ending market price per share
35
Net sales
3,100,000
What was Lester’s earnings per share for 2015?
a.
$8.40
b.
$10.00
c.
$7.50
d.
$31.00
a
1
Moderate
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
68. IFRS content in the income statement is similar to U.S. GAAP in all of the following areas except the disclosure of
a.
revenues.
b.
finance costs.
c.
comprehensive income disclosure in a statement of shareholders’ equity.
d.
tax expense.
c
1
Moderate
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
69. Differences that currently exist between IFRS and U.S. GAAP with regard to the presentation of information on the
income statement include all of the following except
a.
different acceptable terminology relating to revenue items.
b.
depreciation measures differ when equipment has been revalued.
c.
different performance measures such as EBITDA are permitted under IFRS.
d.
differences resulting because IFRS does not require the use of accrual accounting under the historical cost
framework.
d
1
Moderate
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
70. IFRS reporting requires all of the following items except
a.
earnings per share disclosure.
b.
comprehensive income disclosure in a statement of shareholders’ equity.
c.
disclosure of the results of discontinued operations.
d.
operating expenses disclosure.
b
1
Moderate
ACCT.WHAL.16.5.8 – LO: 5.8
United States – BUSPORG: Analytic
71. Comprehensive income is an important concept in accounting because it represents
a.
all changes in equity.
b.
changes in equity from nonowner sources.
c.
changes in liabilities minus assets.
d.
the impact on equity of all transactions.
b
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
72. Comprehensive income includes the following changes in equity in a company during a period except
a.
transactions with nonowners.
b.
events relating to nonowner sources.
c.
circumstances relating to nonowner sources.
d.
distributions to owners.
d
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
73. Comprehensive income consists of
a.
operating income + other income and losses.
b.
net income + other adjustments to retained earnings.
c.
net income + other comprehensive income.
d.
other comprehensive income + unrealized changes in the value of available-for-sale securities.
c
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
74. Which of the following is not part of other comprehensive income?
a.
unrealized changes in the value of trading securities
b.
certain pension plan gains, losses, and prior service cost adjustments
c.
certain gains and losses in derivatives
d.
currency translation adjustments
a
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
75. Which of the following is not considered part of comprehensive income?
a.
translation adjustments from financial statement conversions
b.
gains and losses on derivative financial instruments
c.
gains and losses associated with the sale of a business component
d.
gain and losses associated with adjustments to pension plan assets and liabilities
c
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
76. Which of the following is included in comprehensive income?
a.
gains and losses associated with derivative financial instruments that hedge future cash flows
b.
translation adjustments from converting foreign statements into U.S. dollars
c.
unrealized gains or losses associated with fair value of available-for-sale securities
d.
All of these answer choices are included in comprehensive income.
d
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
77. When is a company not required to report comprehensive income?
a.
when it has a net operating loss
b.
when it has no other comprehensive income items
c.
when it has no liability items
d.
when it has no prior period adjustments
b
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
78. Which of the following is an acceptable way of reporting a company’s comprehensive income?
a.
on the face of the income statement only
b.
in a separate, consecutive, statement of comprehensive income only
c.
in the statement of changes in shareholders’ equity only
d.
both a and b are acceptable
d
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
79. The primary purpose of a company’s statement of cash flows is to provide information about the company’s
a.
operations.
b.
dividend policy.
c.
financing and investing activities.
d.
cash receipts and cash payments during the period.
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
80. The statement of cash flows is least likely to help external users assess
a.
a company’s ability to generate positive future cash flows.
b.
the amount of a company’s future accrual-based sales revenue.
c.
a company’s ability to meet its obligations and pay dividends.
d.
a company’s need for external financing.
b
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
81. Which of the following sections will not appear in the statement of cash flows?
a.
operating activities
b.
investing activities
c.
financing activities
d.
selling activities
d
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
82. Which of the following events would be classified as an operating activity in a statement of cash flows?
a.
receipt of a cash dividend from an equity investment
b.
sale of a long-term investment
c.
issuing notes payable
d.
payment of cash dividends
a
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
83. Which of the following events would be classified as an investing activity on a statement of cash flows?
a.
payment of interest on a loan
b.
receipt of cash dividends on an available-for-sale investment
c.
purchase of inventory
d.
sale of an office building at a gain
d
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
84. In a statement of cash flows, the payment of a cash dividend on preferred stock outstanding should be classified as
cash outflows for
a.
operating activities.
b.
investing activities.
c.
lending activities.
d.
financing activities.
d
1
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
85. In a statement of cash flows, which of the following events would be classified as a financing activity?
a.
purchase of a trading security
b.
payment of interest on a loan
c.
payment of cash dividends to shareholders
d.
All of these answer choices are correct.
c
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
86. Which of the following statements regarding a statement of cash flows is false?
a.
The most common method used by most companies for reporting operating activities is the direct method.
b.
Operating activities include all transactions and other events related to the earnings process.
c.
It requires a reconciliation of beginning and ending cash balances.
d.
It helps users assess a company’s need for external financing.
a
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
87. Financial flexibility is generally defined as
a.
the ability of a company to adapt to unexpected needs and opportunities.
b.
the uncertainty or unpredictability of the future results of a company.
c.
a measure of overall company performance.
d.
a company’s ability to maintain a given level of operations.
a
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
88. Which ratios are the most commonly analyzed from the income statement?
a.
gross profit margin
b.
net profit margin
c.
operating profit margin
d.
All of these ratios are commonly analyzed from the income statement.
d
1
Easy
ACCT.WHAL.16.5.11 – LO: 5.11
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Chapter 5: The Income Statement and the Statement of Cash Flows
Exhibit 5-2
The following is an income statement from the financial records of Peace, Love and Joy Company for the year ended
December 31, 2015:
Income Statement
Sales (net)
$ 245,675
Cost of Goods Sold
(67,500)
Gross Profit
$ 178,175
Operating expenses
(125,000)
Operating Income
$ 53,175
Interest revenue
5,600
Interest expense
(8,750)
Income before taxes
$ 50,025
Income tax expense
(15,008)
Net Income
$ 35,017
89. Refer to Exhibit 5-2. Compute the gross profit margin for Peace, Love, and Joy Company.
a.
52%
b.
138%
c.
72.5%
d.
143%
c
1
Moderate
ACCT.WHAL.16.5.11 – LO: 5.11
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
90. Refer to Exhibit 5-2. Compute operating margin for Peace, Love, and Joy Company.
a.
14.25%
b.
19.65%
c.
20.36%
d.
21.64%
d
1
Moderate
ACCT.WHAL.16.5.11 – LO: 5.11
United States – OH – Default City – AICPA: FN-Measurement
91. Refer to Exhibit 5-2. Compute net profit margin for Peace, Love, and Joy Company.
a.
14.25%
b.
20.36%
c.
23.92%
d.
29.84%
a
1
Moderate
ACCT.WHAL.16.5.11 – LO: 5.11
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
92. Refer to Exhibit 5-2. Compute earnings-based interest coverage for Peace, Love, and Joy Company.
a.
5.72 times
b.
16.88 times
c.
6.72 times
d.
6.08 times
d
1
Moderate
ACCT.WHAL.16.5.11 – LO: 5.11
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
93. Which is the most commonly computed coverage ratio?
a.
debt ratio
b.
interest coverage ratio
c.
return on common equity
d.
net profit margin
b
1
Easy
ACCT.WHAL.16.5.11 – LO: 5.11
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Chapter 5: The Income Statement and the Statement of Cash Flows
94. An operating segment is a component of a company
a.
that engages in business activities to earn revenues and incur expenses.
b.
whose operating results are regularly reviewed by the company’s chief operating officer for budgeting and
evaluation purposes.
c.
for which financial information is available.
d.
All of these types of companies would have an operating segment as a component.
d
1
Easy
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
95. An operating segment is a component of a company that does all of the following except
a.
has financial information available.
b.
engages in business activities to earn revenues and incur expenses.
c.
is part of a publicly held company.
d.
has operating results that are regularly reviewed by the company’s chief operating officer.
c
1
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
96. An operating segment is a reportable segment if it
a.
satisfies the revenue, profit, and asset tests.
b.
satisfies the revenue, profit, or asset tests.
c.
operates predominately within a single industry.
d.
satisfies the net income test.
b
1
Easy
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
97. An operating segment is significant and reportable if it satisfies at least one of three tests. Which of the following is
not one of those three tests?
a.
profit test
b.
revenue test
c.
asset test
d.
ratio test
d
1
Easy
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
98. Under GAAP for segment reporting, a company must report
a.
a measure of profit or loss for each reportable segment.
b.
factors used to identify its reportable segments.
c.
the types of products and services from which each reporting segment derives its revenues.
d.
All of these must be reported.
d
1
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
99. Information reported or disclosed about the profit or loss of reportable segments consists of
a.
a measure of operating profit or loss.
b.
segment revenues (separated into sales to external customers and intersegment sales).
c.
interest revenue and interest expense.
d.
All of these are included as information disclosed about the profit or loss of a reportable segment.
d
1
Easy
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
100. Which of the following is not true about interim financial statements?
a.
Interim financial statements are reports for periods of less than one year.
b.
GAAP must be applied to the interim financial statements.
c.
Each interim period is viewed as an integral part of an annual period.
d.
Interim financial statements are not issued by all publicly held companies.
d
1
Easy
ACCT.WHAL.16.5.12 – LO: 5.12
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101. Expenses that affect the operating activities of more than one interim period are allocated among the periods based
on an estimate of
a.
time expired.
b.
benefit received.
c.
activity associated with the periods.
d.
All of these answer choices are possible estimate bases.
d
1
ACCT.WHAL.16.5.12 – LO: 5.12
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Chapter 5: The Income Statement and the Statement of Cash Flows
102. The following information relates to Zhulu Corporation (in thousands):
Sales revenue
$1,190
Net assets, end of year
170
Net income, capital maintenance method
125
Additional investment by shareholders
115
Net assets, beginning of year
135
Required:
Compute the amount of dividends paid during the year, using the financial capital maintenance approach.
1
Challenging
ACCT.WHAL.16.5.2 – LO: 5.2
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
103. The following information relates to Peter Company (in thousands):
Additional investment by Mr. Peter
$ 15
Sales revenue
150
Net assets, beginning of year
1,100
Distribution to Mr. Peter
110
Cost of goods sold
125
Net assets, end of year
1,180
Required:
Compute net income, using the capital maintenance approach.
$175 ($1,180 – $1,100 – $15 + $110 = Net Income; Net income = $175)
1
Challenging
ACCT.WHAL.16.5.2 – LO: 5.2
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
104. Listed below are the three expense recognition principles followed by a series of expense items.
a.
association of cause and effect
b.
systematic and rational allocation
c.
immediate recognition
____
1.
Amortization
____
2.
Sales commissions
____
3.
Cost of goods sold
____
4.
Administrative salaries
____
5.
Allocation of prepaid insurance
____
6.
Utilities
____
7.
Product warranty costs
____
8.
Depreciation
____
9.
Transportation-out
____
10.
Travel and entertainment
Required:
Match the expense recognition principles to their corresponding expenses by placing the appropriate letter in the
space provided.
1.
b
6.
2.
a
7.
3.
a
8.
4.
c
9.
5.
b
10.
United States – OH – Default City – AICPA: FN-Decision Modeling