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Flashcards in FAR 1 Deck (19):
1

Which of the following statements best describes the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement?

A. The emerging issues task force must approve a discussion memorandum before it is disseminated to the public.
B. The exposure draft is modified per public opinion before issuing the discussion memorandum.
C. A new statement is issued only after a majority vote by the members of the FASB.
D. A new FASB statement can be rescinded by a majority vote of the AICPA membership.

C. A new statement is issued only after a majority vote by the members of the FASB.

2

The FASB has maintained that:

A. The interests of the reporting firms will be a primary consideration when developing new GAAP.
B. GAAP should have little or no cost of compliance.
C. New GAAP should be neutral and not favor any particular reporting objective.
D. GAAP should result in the most conservative possible financial statements.

C. New GAAP should be neutral and not favor any particular reporting objective.

3

In reference to proposed accounting standards, the term "negative economic consequences" includes:

A. The cost of complying with GAAP.
B. The inability to raise capital.
C. The cost of government intervention when not in compliance with GAAP.
D. The failure of internal control systems.

B. The inability to raise capital.

A proposed standard may cause firm earnings to fall, for example when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans.
As a result, negative economic consequences become a focal point for arguments against the proposed standard

4

Kent Co.'s advertising expense account had a balance of $292,500 at December 31, 20X3, before any necessary year-end adjustment relating to the following:

Included in the $292,500 is the $30,000 cost of printing catalogs for a sales promotional campaign in January 20X4.

Radio advertising spots broadcast during December 20X3 were billed to Kent on January 2, 20X4. Kent paid the $17,500 invoice on January 11, 20X4.
What amount should Kent report as advertising expense in its Income Statement for the year ended December 31, 20X3?

B. $280,000

The correct advertising expense amount is $292,500 - $30,000 + $17,500 = $280,000. The catalog printing is subtracted because the cost relates to 20X4, not to 20X3. The benefit of this cost will be received in 20X4. The radio advertisements are added because they benefit 20X3, but they were not included in the $292,500 because they were paid in 20X4. Kent was apparently unaware of the cost before 12/31/03 because the firm was not billed until 20X4.

5

Savor Co. had $100,000 in cash-basis pretax income for 1999. At December 31, 1999, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 1998, balances. Compared to the accrual-basis method of accounting, Savor's cash pretax income is:
A. Higher by $4,000.
B. Lower by $4,000.
C. Higher by $16,000.
D. Lower by $16,000.

cash-basis income is $100,000. The journal entries for an increase and a decrease in accounts payable respectively are:
DR: Accounts receivable 10,000
CR: Sales 10,000
DR: Accounts payable 6,000
CR: Cash 6,000
The increase in accounts receivable should be added to the cash income as it was not considered and is recognized as earned for accrual income. The decrease in accounts payable was subtracted for cash-basis income. This is not a reduction in accrual income, and as a result, should be added back to the cash income. The computation is: 100,000+10,000+6,000 = 116,000, or a $16,000 increase from cash to accrual. In other words, the cash-basis income is $16,000 LOWER than accrual income.





A.R ^ then Cash method gets lower - Inverse relationship to Accrual
A.P ^ the Cash method would be higher - Direct relationship to Accrual

Eg:

Cash Balance: 100,000
AR ^ 10,000
A.P v 6,000

Accrual method would add the A.R to the balance because they recognize A.R as cash. But, Cash wouldn't because no cash was received. Yet, if A.R went down that would mean that you received cash. (aka cash balance would go up)

For A.P, if A.P went up that would mean that Cash method would be higher because in the Accrual method they would recognize that increase as a reduction to cash. Meanwhile, cash doesn't recognize that.


6

Zeta Co. reported sales revenue of $4,600,000 in its Income Statement for the year ended December 31, 20X1. Additional information is as follows:

12/31/00 12/31/01
A.R $1,000,000 $1,300,000
Allowance for uncollectible accounts (60,000) (110,000)
Write off 20X1 $20,000
Under the cash basis of accounting, Zeta would have reported 20X1 sales of:

The question requires a solution for cash collected on accounts receivable. Using the information for accounts receivable, the collections amount can be found:

Beginning balance + sales - collections - write offs = ending balance
$1,000,000 + $4,600,000 - collections - $20,000 = $1,300,000
collections = $4,280,000

A/R
Dr. Cr.
Rev. 4,600 20 Write Off
BOY 1,000 4,280 (Collected AKA Reported Sales)
----------------------------------
EOY1,300


Under the cash basis of accounting, sales equal cash collections.

7

Under East Co.'s accounting system, all paid insurance premiums are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance.
Additional information for the year ended December 31, 20X5, is as follows:

Prepaid insurance at December 31, 20X4 $105,000
Charges to insurance expense during 20X5 (including a year-end adjustment of 17,500) 437,500
Prepaid insurance at December 31, 20X5 122,500
What was the total amount of insurance premiums paid by East during 20X5?

A. $322,500
B. $420,000
C. $437,500
D. $455,000

D. $455,000

Beginning prepaid balance + Premiums paid - Expense charges = Ending prepaid balance
$105,000 + Premiums paid - $437,500 = $122,500
Premiums paid = $455,000

8

An analysis of Thrift Corp.'s unadjusted prepaid expense account at December 31, 20X4, revealed the following:

Thrift had an opening balance of $1,500 for its comprehensive insurance policy. Thrift had paid an annual premium of $3,000 on July 1, 20X3.

A $3,200 annual insurance premium payment made July 1, 20X4 was unadjusted.

A $2,000 advance rental payment for a warehouse Thrift leased for one year beginning January 1, 20X5 was included.

In its December 31, 20X4, Balance Sheet, what amount should Thrift report as prepaid expenses?

The X3 payment doesn't count for the current year because it expired.

The X4 pymt is recognized as half. $3.6/2= 1.6 + 2 (Warehouse) = 3.6

9

On February 12, 20X5, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 in 20X5.

In its 20X5 Income Statement, what amount should VIP report as royalty expense?

80,000!

Now, they said that the minimum is 60,000. Which for some reason I wanted the add the two together to get a Total Expense. But 10% of the sales are the total expense.

10

PLEASE SLOW DOWN AND READ THE QUESTIONS

I'm Serious

11

On July 1, 20X3, Roxy Co. obtained fire insurance for a three-year period at an annual premium of $72,000 payable on July 1 of each year.
The first premium payment was made July 1, 20X3. On October 1, 20X3, Roxy paid $24,000 for real estate taxes to cover the period ending September 30, 20X4. This prepayment was made to obtain a discount.

In its December 31, 20X3, Balance Sheet, Roxy should report prepaid expenses of:

You probably thought to divide 72,000 by 3 years to get the expense amount per month.

Cause you're a cutie.

BUT YOUR WRONG! READ THE QUESTION YOU POTATOE WITH EYES!

It's a 3 year insurance plan, with an ANNUAL PREMIUM, Not some 1 shot deal.

So, Unexpired fire insurance premium: $72,000(1/2) =

The premium covers only one year and 1/2 the year is elapsed as of December 31.

$36,000
Unexpired property tax prepayment: $24,000(9/12)
18,000
Total prepaid expenses (asset) at December 31, 20X3
$54,000

12

Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales.
Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31, 20X2, were $15,000,000. The unadjusted balance in the commissions expense account on March 31, 20X2, was $400,000. March advances were paid on April 3, 20X2.

In its Income Statement for the year ended March 31, 20X2, what amount should Zach report as commission expense?

Commission expense is 3% of sales or $450,000 (.03 x $15,000,000). The information about advances is irrelevant because it pertains to how commissions are paid, not recognized.


BBBEEE CAREFUL

13

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as an expense:

Under accrual accounting, expenses are recognized when incurred

14

Young & Jamison's modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?

Modified Cash Basis Operating Expense: 150,000
Accrued Liabilities (Increased): +20
(since cash basis doesn't recognize theses expenses as part of O.E)
Prepaid Expenses (increased): -5
(since the cash method would've recognized this amount in O.Expenses on the I/S, but it should've been recognized on the B/S as Dr. Prepaid Expense Cr. Cash).

BoOm.

EAT YO VEGETABLES BABY GURL!




=

15

The following information pertains to Eagle Co.'s 20X5 sales:
Cash Sales
Gross
$ 80,000
Returns and allowances
4,000
Credit sales
Gross
120,000
Discounts
6,000
On January 1, 20X5, customers owed Eagle $40,000. On December 31, 20X5, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in 20X5. Under the cash basis of accounting, what amount of net revenue should Eagle report for 20X5?

*Hey Princess, which basis was it under?

hm... not sure?

It was in the last sentence?

CASH
YES CASH
not accural

So, you have to subtract the amount out of gross sales.

*Also, you might have looked at that A.R detail, and thought, don't come at me with irrelevant garbagio sir.

Which, you sweet carrot cake, would've been accurate. IF! they would've given you Sales Revenue. Because S.R includes the A.R already. Close, but no bananas.

Revenue
Cash 80 4 Returns
Credit Sales 120 6 Disc.
Increase in $ sale
due to reduction of A.R 10

= 200$


CPA's Explanation:


Net cash sales collected $80,000 - $4,000
$76,000
Plus cash collections from credit sales:
Beginning accounts receivable
$40,000
Plus net credit sales $120,000 - $6,000
114,000
Less ending accounts receivable
(30,000)
Equals cash collections from credit sales
124,000
Equals revenue recognized under the cash basis of accounting $200,000

16

Ina Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts for the current year:
Prepaid expenses Accrued liabilities
Beginning balance $ 5,000 $ 8,000
Ending balance 10,000 20,000
Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?

An increase in prepaid expenses indicates that more cash was paid than expensed (5,000). An increase in accrued liabilities indicates that more expense was accrued than paid (12,000). The reconciliation of operating expense to cash paid is: 100,000 + 5,000 - 12,000 = 93,000.

93,000

17

Compared to its 20X4 cash-basis net income, Potoma Co.'s 20X4 accrual-basis net income increased when it:
A. Declared a cash dividend in 20X3 that it paid in 20X4.
B. Wrote off more accounts receivable balances than it reported as uncollectible accounts expense in 20X4.
C. Had lower accrued expenses on December 31, 20X4, than on January 1, 20X4.
D. Sold used equipment for cash at a gain in 20X4.

C. Had lower accrued expenses on December 31, 20X4, than on January 1, 20X4.


If the accrued expenses account (a current liability, often called accrued expenses payable) decreased during 20X4, then a greater amount of cash was paid for those expenses in 20X4 than were accrued in 20X4. This would cause cash-basis net income to be less than accrual-basis net income. Cash-basis net income reflects expenses paid; accrual-basis net income reflects expenses recognized (accrued).

18

Based on 20X0 sales of compact discs recorded by an artist under a contract with Bain Co., the artist earned $100,000 after an adjustment of $8,000 for anticipated returns.
In addition, Bain paid the artist $75,000 in 20X0 as a reasonable estimate of the amount recoverable from future royalties to be earned by the artist.
What amount should Bain report in its 20X0 Income Statement for royalty expense?

A. $100,000


The adjustment is irrelevant information. (They like to do that)

The 75,000 is a prepaid expense- Not a royalty expense.

Therefore, the 100$ is the only one to record.


CPA's Words:

The net amount earned by the artist is also the royalty expense to the firm. Royalty expense is recognized on the basis of the sales of the CD. Adjustments to the final amount earned for 20X0, after all return information is known, will be treated as an adjustment to royalty expense in 20X1. New information in 20X1 will require a change in estimate, not retroactive application. The $100,000 amount is the best estimate of the royalty cost to Bain in 20X0 that will ultimately be paid on 20X0 sales.

19

Bird Corp.'s trademark was licensed to Brian Co. for royalties of 15% of the sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year.
Bird received the following royalties from Brian:
March 15 September 15
20X4 $5,000 $7,500
20X5 6,000 8,500

Brian estimated that the sales of the trademarked items would total $30,000 for July through December 20X5.
In Bird's 20X5 Income Statement, the royalty revenue should be:
A. $13,000
B. $14,500
C. $19,000
D. $20,500

(Sales) 30 * (% of sales).15=4.5
+ X5 royalties received 8.5
________________________
13

A. $13,000

20X5 royalty revenue is the amount earned in 20X5, regardless of when it is received. The September receipt of $8,500 accounts for the royalties earned the first half of 20X5. Royalties for the second half are estimated to be .15($30,000) = $4,500. Although this is an estimate, if reliable, it provides relevant information. Waiting for the exact amount is not justified in this case. The small increase in reliability does not justify postponing recognition in 20X5. Thus, total royalty revenue for 20X5 is $13,000, which equals $8,500 + $4,500.