Chapter 13 Flashcards Preview

Intermediate Accounting II > Chapter 13 > Flashcards

Flashcards in Chapter 13 Deck (82):
1

From a financial reporting perspective, a liability has three essential characteristics:

1. Are probable, future sacrifices of economic benefits
2. Arise from present obligations to other entities
3. Result from past transactions or events

2

__________ are expected to require current assets and usually are payable within one year.

Current liabilities

3

Classifying liabilities as either current or long-term helps investors and creditors assess:

the relative risk of a business's liabilities

4

Current liabilities ordinarily are reported at their:

maturity amounts

5

Accounts payable are obligations to suppliers of merchandise or of services purchased on:

open account

6

Buying merchandise on account in the ordinary course of business creates:

accounts payable

7

Trade notes payable differ from accounts payable in that they are formally recognized by a:

written promissory note

8

A _________ allows a company to borrow cash without having to follow formal loan procedures and paperwork.

line of credit

9

Interest on notes is calculated as:

Face Amount * Annual Rate * Time to Maturity

10

Non interest-bearing loans actually do bear interest, but the interest is:

deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower

11

When interest is discounted from the face amount of a note, the effective interest rate is __________ than the stated discount rate.

higher

12

__________ or __________ often are pledged as security for short-term loans.

Inventory
Accounts Receivable

13

Large, highly rated firms sometimes sell commercial paper to:

borrow funds at a lower rate than through a bank loan

14

Liabilities accrue for expenses that are:

incurred but not yet paid

15

What are the conditions for accrual of paid future absences?

1. The obligation is attributable to employee's services already performed.
2. The paid absence can be taken in a later year - the benefits vests (will be compensated even if employment is terminated) or the benefit can be accumulated over time.
3. Payment is probable.
4. The amount can be reasonably estimated.

16

When the necessary conditions are met, compensated future absences are accrued in:

the year the compensation is earned

17

__________ should be considered when deciding whether an obligation exists.

Customary practice

18

Accrual of __________ is not required, but may be appropriate in some circumstances.

sick pay

19

__________ sometimes take the place of permanent annual raises.

Bonuses

20

When a deposit becomes nonrefundable, inventory should be:

reduced to reflect the fact that the inventory won't be returned

21

A customer advance produces an obligation that is satisfied when:

the product or service is provided

22

Sales taxes collected from customers represent __________ until __________.

liabilities
remitted

23

Amounts collected from employees in connection with __________ also represent liabilities until remitted.

payroll

24

The currently maturing portion of a __________ must be reported as a current liability.

long-term debt

25

Short-term obligations can be reported as non current liabilities if the company:

1. intends to refinance on a long-term basis
2. demonstrates the ability to do so by a refinancing agreement or by actual financing

26

Under __________, liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before the date of issuance of the financial statements.

U.S. GAAP

27

Under __________, liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before the balance sheet date.

IFRS

28

A __________ involves an existing uncertainty as to whether a loss really exists, where the uncertainty will be resolved only when some future event occurs.

loss contingency

29

Likelihood that a Liability Exists:
__________. Confirming event is likely to occur.
__________. The change of the confirming event will occur is more than remote but less than likely.
__________. The chance the confirming event will occur is slight.

Probable
Reasonably possible
Remote

30

Journal Entry for Accrual of a Loss Contingency - Liability:

Debit: Loss (or expense)
Credit: Liability

31

Journal Entry for Accrual of a Loss Contingency - Asset Impairment:

Debit: Loss (or expense)
Credit: Asset (or valuation account)

32

A loss contingency is disclosed in notes to the financial statements if there is:

at least a reasonable possibility that the loss will occur

33

If the likelihood of a loss contingency is probable and the dollar amount of potential loss is known, what is the appropriate accounting treatment?

Liability accrued and disclosure note

34

If the likelihood of a loss contingency is probable and the dollar amount of potential loss is reasonably estimable, what is the appropriate accounting treatment?

Liability accrued and disclosure note

35

If the likelihood of a loss contingency is probable and the dollar amount of potential loss is not reasonably estimable, what is the appropriate accounting treatment?

Disclosure note only

36

If the likelihood for a loss contingency is reasonably possible, what is the appropriate accounting treatment?

Disclosure note only

37

If the likelihood of a loss contingency is remote, what is the appropriate accounting treatment?

No disclosure required

38

Most consumer products are accompanied by a __________.

guarantee

39

The contingent liability for product warranties almost always is __________.

accrued

40

The costs of satisfying guarantees should be recorded as expenses in the same accounting period the:

products are sold

41

SFAC No. 7 provides a framework for:

using future cash flows in accounting measurements

42

Some __________ are not contractual obligations and may not be payable in cash.

liabilities

43

Probabilities are associated with possible:

cash outcomes

44

The probability-weighted cash outcomes provide the:

expected cash flows

45

The present value of the expected cash flows is the:

estimated liability

46

Because the earnings process for an extended warranty continues over the entire warranty period, revenue should be recognized:

over the same period

47

The purpose of premium offers is to:

stimulate sales

48

The costs of promotional offers should be recorded as expenses in the:

same accounting period the products are sold

49

The alternative for reporting contingencies is __________, which does not incorporate probability into determining whether to recognize a loss but rather considers probability when:

fair value
measuring the amount of loss

50

U.S. GAAP views guarantees in two parts:

1. a certain "stand ready obligation" to meet the terms of the guarantee
2. the uncertain contingent obligation to make future payments depending on future events

51

The "stand ready obligation" is recorded initially at __________, while the contingent obligation i handled as:

fair value
an ordinary contingent loss

52

While companies may accrue estimated layer fees and other legal costs, the usually do not record a litigation loss until:

after the ultimate settlement has been reached or negotiations for settlement are substantially completed

53

Accounting Period Timeline:

Cause of Loss Contingency
Fiscal Year Ends
____________________
Financial Statements

Clarification (clarifying event can be used to determine how the contingency is reported)

54

If an event giving rise to a contingency occurs after the year-end, a liability should:

not be accrued (because it didn't exist at the end of the year)

55

After the acquisition of a company, the contingent liabilities the acquirer takes on should be measured at __________ if it can be determined.

fair value

56

If the acquirer cannot determine the __________, the contingent liability is accrued if:

fair value

1. available information indicates that it is probable a liability has been incurred as of the acquisition date
2. the amount of the liability can be reasonably estimated

57

It must be probable that an unasserted claim or assessment or an unfiled lawsuit will occur before considering:

whether and how to report the possible loss

58

IFRS refers to accrued liabilities as __________ and refers to possible obligations that are not accrued as __________.

provisions
contingent liabilities

59

The term __________ is used for all of these obligations in U.S. GAAP.

contingent liabilities

60

IFRS requires disclosure (but not accrual) of two types of contingent liabilities:

1. possible obligations whose existence will be confirmed by some uncertain future events that the company does no control
2. a present obligation for which either it is not probable that a future outflow will occur or the amount of the future outflow cannot be measured with sufficient reliability

61

IFRS defines "probable" as ___________, which is a lower threshold than typically associated with "probable" in U.S. GAAP.

more likely than not (greater than 50%)

62

If a liability is accrued, IFRS measures the liability as:

the best estimate of the expenditure required to settle the present obligation

63

If there is a range of equally likely outcomes, __________ would use the midpoint of the range, while __________ requires use of the low end of the range.

IFRS
U.S. GAAP

64

If the effect of the time value of money is material, IFRS requires the liability to be stated at __________.

present value

65

U.S. GAAP allows using __________ under some circumstances, but liabilities for loss contingencies like litigation typically are not:

present values

discounted for the time value of money

66

IFRS recognizes provisions and contingencies for __________.

"onerous" contracts (defined as those in which the unavoidable costs of meeting the obligations exceed the expected benefits)

67

Under U.S. GAAP we generally don't disclose or recognize losses on such money-losing contracts, although there are some exceptions such as:

1. losses on long-term construction contracts are accrued
2. losses on contracts that have been terminated are accrued

68

The FASB recently removed from its agenda a project to reconsider the _____________________, and has postponed further work on a project intended to:

recognition and measurement of contingent losses

enhance note disclosure of contingent losses

69

The IASB has a project ongoing that would eliminate the requirement that:

an amount be "probable" to be recognized, such that amounts now are only disclosed in the notes would be accrued and included as expenses and liabilities

70

_________ contingencies are not accrued.

Gain

71

Under __________, gain contingencies are never accrued.

U.S. GAAP

72

Under __________, gain contingencies are accrued if their future realization is "virtually certain" to occur.

IFRS

73

Both U.S. GAAP and IFRS disclose contingent gains when future realization is __________.

probable

74

__________ refers to a company's cash position and overall ability to obtain cash in the normal case of business.

Liquidity

75

A risk analyst should be concerned with a company's ability to:

meet its short-term obligations

76

A manager should actively monitor a company's __________.

liquidity

77

A __________ ratio is but on indication of a company's liquidity.

liquidity

78

By eliminating current assets such as inventories and prepaid expenses, the __________ ratio provides a more rigorous indication of a company's short-term solvency than does the __________ ratio.

acid-test
current

79

__________ is probably the best long-run indication of liquidity.

Profitability

80

Some companies maintain a relatively high __________ as part of a cash-management strategy.

current liabilities

81

Analysts should be alert for efforts to:

manipulate measures of liquidity

82

Changes in __________ provide information about future revenue, and may be used to manipulate it.

unearned revenue