Accounting Fundamentals Flashcards
Waterworks Inc. reported maintenance service costs on a cash basis for 20X6 of $100,000. In 20X5, Waterworks paid $20,000 for maintenance services to be performed in 20X6. In 20X6, Waterworks paid $7,000 in advance for services to be provided in 20X7. Waterworks received maintenance services of $12,000 in 20X6, which were not paid until 20X7.
What amount should Waterworks report for maintenance services for 20X6, if it reports on an accrual basis?
a) $85,000
b) $105,000
c) $125,000
d) $139,000
Answer c) is correct.
The correct amount is $100,000 + $20,000 + $12,000 – $7,000 = $125,000.
Rogercom Inc. currently follows ASPE and is considering adopting IFRS for its 20X3 fiscal year. It has a December 31 year end.
Which of the following statements is correct for Rogercom as a first-time adopter of IFRS.
a) In preparing its statement of financial position for 20X3 under IFRS, Rogercom will show only one comparative statement as at December 31, 20X2, that is based on IFRS.
b) On transitioning to IFRS in 20X3, Rogercom will account prospectively for any changes in accounting policies resulting from the transition, from January 1, 20X2.
c) As a first-time adopter, Rogercom will follow the standards outlined in ASPE Section 1500 First-time Adoption.
d) Rogercom will qualify as a first-time adopter when it issues its first financial statements using IFRS for its 20X3 year end.
Answer d) is correct.
In 20X3, when Rogercom issues its first statements under IFRS, it will qualify as a first-time adopter.
Eastern Company follows ASPE. On November 1, 20X4, Eastern paid $12,000 for 24 months of insurance coverage. The company has a December 31, year end.
What is the prepaid insurance amount that should be reported at December 31, 20X5, on an accrual basis?
a) $1,000
b) $5,000
c) $6,000
d) $11,000
Answer b) is correct.
The prepaid insurance as at December 31, 20X5, is $12,000÷24 months × 10 months remaining = $5,000.
Which of the following is the correct definition of an element that is reported on financial statements?
a) Liabilities are obligations that will arise from future events and are expected to be settled with a future outflow of cash.
b) Expenses are costs that arise only from the ordinary activities of the business and exclude losses that may arise outside of the normal activities of the entity.
c) Assets are resources that the entity controls that result from past events and that will require a future outflow of cash.
d) Gains are increases in equity (net assets) resulting from incidental transactions.
Answer d) is correct.
Income is comprised of both revenue and gains. Gains may or may not arise from the ordinary activities of the entity.
Answer b) is incorrect.
Expenses also include losses that may or may not arise from the ordinary course of business.
For 20X5, Queen Company reported sales of $60,000 on a cash basis. This amount includes $8,000 that was collected during 20X5 but relates to sales made in 20X4. Also included in the cash collections is $4,000 for customer deposits made on future sales that will occur in 20X6. In addition, the company collected $10,000 in 20X6 for sales that occurred in 20X5.
What is the sales amount that should be reported in 20X5 on an accrual basis?
a) $48,000
b) $58,000
c) $62,000
d) $66,000
Answer b) is correct.
The sales amount on an accrual basis is $60,000 – $8,000 (cash collection for 20X4 sales) – $4,000 (deposits for 20X6 sales) + $10,000 (cash collected in 20X6 for 20X5 sales) = $58,000.
Which of the following financial statements is NOT required under ASPE?
a) Statement of comprehensive income
b) Statement of cash flows
c) Statement of profit and loss
d) Statement of retained earnings
a) Statement of comprehensive income
ASPE
Balance sheet iso Statement of financial position
Income statement iso Statement of profit or loss*
Statement of other comprehensive income* is N/A
Statement of retained earnings iso changes in equity
Cash flow statement
Notes to the financial statements
Which of the following is an example of the qualitative characteristic of comparability of financial statements?
a) A new standard of accounting is applied retrospectively in the financial statements.
b) The information provided in the financial statements is at a level of detail appropriate for the users.
c) Users are able to confirm their expectations regarding the outcome of a decision made previously.
d) The transactions included in the financial statements are free from bias.
Option a) is correct. Applying the standards retrospectively allows for comparability between the current and previous years.
Option b) is the enhancing characteristic of understandability. Financial statements must be of sufficient quality and clarity to allow reasonably informed users to understand the significance of the information provided in the statements. A contributing factor to understandability is to ensure that the level of detail provided is appropriate for the user.
Option c) Confirmatory value is a characteristic of relevance rather than comparability.
Option d) Neutrality, or freedom from bias, is a component of faithful representation.
According to the IFRS framework for the preparation and presentation of financial statements, freedom from error is a component of which fundamental qualitative characteristic of financial statements?
a) Verifiability
b) Relevance
c) Materiality
d) Faithful representation
Option d) is correct. Faithful representation is a fundamental qualitative characteristic. The framework for the preparation and presentation of financial statements indicates that, to be faithfully represented, financial statements should have three characteristics: completeness, neutrality, and freedom from error.
Option a) is incorrect. Verifiability is an enhancing (not fundamental) qualitative characteristic that helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Option b) is incorrect. To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present, or future events, or by confirming (or correcting) their past evaluations.
Option c) is incorrect. The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
LSJ Inc. has a December 31 fiscal year end. Based on past experience, 2% of LSJ’s credit sales are uncollectable. As at December 31, 20X1, the company had a credit balance of $10,000 in the AFDA. Sales for the three months ending March 31, 20X2 were $3,000,000, and 70% of the sales were credit sales.
Using the income statement approach, what credit balance should LSJ report for the AFDA on its March 31, 20X2, interim balance sheet?
a) $42,000
b) $52,000
c) $60,000
d) $70,000
Option b) is correct.
Option a) is incorrect. This is the amount of the bad debt expense to be recorded. It ignores that there was an opening balance of $10,000 in the AFDA.
Option c) is incorrect. This assumes that the entire amount of sales is on credit, and does not add in the opening balance.
Option d) is incorrect. This assumes that the entire amount of sales is on credit, and adds in the opening balance.
