M4,M5,M6

Question 1

Restatements are required for changes in entity(of subsidiaries)

Answer 1

Restatements are required for changes in entity (of subsidiaries); including all prior period financial statements presented and a note disclosure. Retrospective application

Question 2

What does a change from the cost method require?

Answer 2

A change from the cost method to the equity method requires a restatement

Question 3

What does a change from the Equity Method require?

Answer 3

A change from the equity method to the cost method does not require restatement and is accounted for prospectively

Question 4

Prospective application

Answer 4

When we have a change in estimate (prospective application) we are not restating prior years; the changes are implemented in the current period and continue in future periods

Question 5

If a company makes a correction to the financial statements of a prior period and is not presenting comparative financial statements

Answer 5

Then the correction should be reported net of applicable income taxes in the current statement of retained earnings as an adjustment to the opening balance

Question 6

Error Correction

Answer 6

A company should report a prior period adjustment for error corrections. An error correction (such as a mathematical error) is accounted for by adjusting prior period financial statements in retained earnings of the opening balance to correct the error.

Question 7

Salvage Value

Answer 7

If an asset is determined to have salvage value; the save value is subtracted from the book value

Question 8

Retrospectively

Answer 8

If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.

Question 9

Discontinued Operations & Reporting Operating Losses

Answer 9

if someone has a business unit that has been at a loss all year and at the end of the year ( say Nov or Dec) they sign a contract to sell the loss unit, the full year of operating losses is reported on the income statement in the loss from discontinued operations. It wouldn’t include the subsequent years losses/projected operating losses

Question 10

A change from the income tax basis of accounting (Non-GAAP) to the accrual basis (GAAP) is an error correction and requires what kind of adjustment

Answer 10

prior-period adjustment/a.k.a. restatement of prior years financial statements

Question 11

The cumulative effect of a change in accounting principle is shown as

Answer 11

as an adjustment to beginning retained earnings net of tax.

Question 12

When a company decides to change their periodic inventory system say from FiFO to the Lifo (weight average) and the affect takes place towards the end of the year, the cumulative effect of the change is determined as of January 1, (a.k.a) the beginning of the year. The adjustment is

Answer 12

the adjustment is made to the BEGINNING RETAINED EARNINGS OF THE EARLIEST YEAR PRESENTED

Question 13

Explain Consignment and how revenue and inventory is recorded for the company holding the inventory (consignee)

Answer 13

In a consignor/consignee relationship, the consignor maintains the inventory on the books. The consignee does not record the full revenue amount, but rather a commission based on the agreement with the consignor. In this case, even though two rugs have not sold, the two rugs that remain unsold are reported on the books of Oriental Rug Company (the consignor). The revenue recorded on Consign Design’s books from the sale of the four rugs is based on the agreed upon commission of 10 percent; therefore, $3,800 is the revenue recorded. The $34,200 (90 percent of the total sales) will be payable to Oriental Rug Company and will be recorded as revenue on its books.

Question 14

A change from LIFO to FIFO for inventory valuation is a change in

Answer 14

accounting principle and a change in accounting principle is show on the retained earnings statement as an adjustment to the beginning balance of retained earnings

Question 15

True or False: Shareholders have the right to use entities resources

Answer 15

False; governing board has the right and the financial information in a company’s reports should include claims against the entity and resources of the entity

Question 16

What are the components of the fundamental qualitative characteristic relevance?

Answer 16

Materiality, Confirmatory Value, Predictive Value

Question 17

Selling expense examples include

Answer 17

rent (only the part used by the sales team); sales salaries and commission, advertising, freight out

Question 18

A significant loss in sales due to changes in the market would result in a write down of

Answer 18

The write down would occur as income from continuing operations; specifically in the unusual or infrequent items section since the loss is material and probably infrequently recurring

Question 19

True or False: If a U.S. company is embarking in a foreign transactions and has accounting questions they should refer to IFRS

Answer 19

False: The FASB Accounting Standards Codification is the single source of U.S. GAAP. U.S. public companies are required to follow U.S. GAAP.

Question 20

True or False; A company that uses U.S. GAAP and has an income tax rate of 30% and is reporting a gain on debt extinguished but has an infrequent loss due to a hurricane SHOULD NOT deduct tax from their net income

Answer 20

False: After calculating the Net income from continuing operations you deduct the net income by the tax rate of 30% to get your net income balance

Question 21

A sale of a fixed asset is NOT a discontinued operation instead it is

Answer 21

A gain or loss is recognized as part of income from continuing operations. The amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount of the fixed asset.

Question 22

If per the contract company (seller) produces a product that has customization and the company (buyer) is not ready to receive the product due to issues within the company but has paid for the product can the company recognize revenue?

Answer 22

Yes the company can recognize revenue because they have fulfilled the requirements of the contract and made the product according the the customers (buyer) customization (bill and hold exceptions)

Question 23

If a construction company is building a standard home and doesn’t allow the customer to make changes to the look of the home can the company recognize revenue at the time of closing even if the home isn’t completed yet?

Answer 23

The company can actually recognize revenue once the closing takes place and not have to wait until the house is completed because the house is homogeneous and doesn’t have significant customizations

Question 24

Freight in for accounting purposes

Answer 24

Freight in is the transportation cost associated with the delivery of goods from a supplier to the receiving entity. For accounting purposes, the recipient adds this cost to the cost of the received goods/a.k.a inventory. (COGS)

Question 25

Changes in Estimate immediately mean

Answer 25

Prospective Approach and you DON’T change prior years; affects current and future income from continuing operations

Question 26

Changes in estimate includes

Answer 26

Change to depreciation, CHANGING FROM FIFO TO LIFO, adjustments of year end accrual of officers salaries, write-downs of obsolete inventory, material non recurring IRS adjustments, settlement of litigations, revisions of estimates regarding discontinued operations and are treated prospectively

Question 27

True or False Changes in ordinary accounting estimates do not have to be disclosed

Answer 27

True: Unless they are material

Question 28

Going from Non-GAAP to GAAP is

Answer 28

an error; it is not a change in accounting principle

Question 29

Prospectively

Answer 29

means reporting a change in estimate

Question 30

True or Fales: An accounting principle may only be changed if required by GAAP

Answer 30

True: the change your making must be justified

Question 31

If you change accounting methods from weighted avg to FIFO you have a cumulative effect that only occurs in the year you are presenting so only occurs in 2020 then

Answer 31

you would adjust the retained earnings at the beginning of the earliest period (so Jan 2020) presented in the opening balance sheet net of tax

Question 32

If you change accounting methods from weighted avg to FIFO and its 2020 but your showing me 2018 through 2020 then

Answer 32

you would adjust the retained earnings at the beginning of the earliest period (so Jan 2018) presented in the opening balance sheet net of tax and then 2018, 2019, and 2020 will be restated using the new method

Question 33

Restate should be applied when you see the the words

Answer 33

error correction/prior period adjustment

Question 34

If you are showing comparative financials for lets say 2018,2019, 2020 and an error occurred in 2019 then you would

Answer 34

correct the information in the year it is presented (i.e.) 2019 and that would role through your 2020 financials and you would just adjust the 2020 retained earning net of tax

Question 35

If you are showing comparative financials for lets say 2018,2019, 2020 and an error occurred in 2013 then you would

Answer 35

Adjust beginning retained earning in the earliest year presented (2020) net of tax

Question 36

Changing from LIFO to FIFO is

Answer 36

retrospective

Question 37

True or False; Net of tax needs to be used for discontinued operations

Answer 37

True: discontinued operations are calculated net of tax

Question 38

For a construction contact, Raw materials, direct labor and overhead are or are not capitalized?

Answer 38

capitalized, they are expensed with the revenue

Question 39

For a contract what are Incremental cost?

Answer 39

cost that would not have been incurred if the contract had not been obtained. So in other words if the contract wouldn’t have gone through and been signed these cost wouldn’t exist. These cost are recognized as an asset (capitalized or amortized) examples include legal fees and commissions

Question 40

Revenue cannot be recognized in a bill-and-hold arrangmentment until the customer obtains control of the product unless

Answer 40

There is a substantive reason from the arrangement (customer requested the arrangement because they do not have space for the product); product has been separately identified as belonging to the company (buy house); product is currently ready for transfer to customer; entity cannot use the product or direct to another customer

Question 41

Percentage of completion is

Answer 41

Considered for Long-Term constuction contracts to recognize revenue over time. U.S. GAAP and IFRS

Question 42

When is it appropriate to use percentage of completion

Answer 42

if the entity’s accounting can reasonably estimate profitability; provide reliable measures of progress toward completion

Question 43

cost incurred/total expected cost equals

Answer 43

cost incurred a.k.a. work done/total expected work = % of job “earned”

Question 44

What is the construction gross profit calculation

Answer 44

Step 1 Contract price - estimated total cost= GP; Step 2 Total Cost to date/Total estimated cost of contract; Step 3 is Step 1 x Step 2; Step 4 PTD at current FYE - PTD at beginning of period = Current year to date GP

Question 45

Ture of False: The completed contract method is allowed by US GAAP and IFRS

Answer 45

FALSE: US GAAP only

Question 46

Completed contract method can only be used when

Answer 46

its difficult to estimate, many contracts, short duration. In addition; losses should be recognized in full in the year they are discovered

Question 47

Under which method is no gross profit recognized until the contract is completed

Answer 47

The Completed contract method

Question 48

When you have a loss with a completed contract and you haven’t completed the contract yet you recognize the loss when

Answer 48

Immediately in the year it occurred