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Doren Co.'s officers' compensation expense account had a balance of $490,000 at December 31, 20X4, before any appropriate year-end adjustment relating to the following:

No Salary accrual was made for the week of December 25-31, 20X4. Officers' salaries for this period totaled $18,000 and were paid on January 5, 20X5.
Bonuses to officers for 20X4 were paid on January 31, 20X5 in the total amount of $175,000.
The adjusted balance for officers' compensation expense for the year ended December 31, 20X4 should be:

A. $683,000

Total compensation expense should include the two adjusting items. Therefore, the total expense is $490,000 + $18,000 + $175,000 = $683,000. The two adjusting items are not included in the expense account balance because the adjustments have not yet been made. The accrued, but unpaid, salaries, as well as the bonuses, relate to 20X4. Officer bonuses are another form of employee compensation.


On January 1, 20X5, Layton Co. acquired the copyright to a book owned by Garner for royalties of 15% of future book sales. Royalties are payable on September 30 for sales in January through June of the same year, and on March 31 for sales in July through December of the preceding year.
During 20X5 and 20X6, Layton remitted royalty checks to Garner as follows:
March 31 September 30
20X5 $ - $25,000
20X6 22,000 40,000

Layton's sales of the Garner book totaled $300,000 for the last half of 20X6. In its 20X6 Income Statement, Layton should report royalty expense of:



You do not include the March 31st payment as Expense in the current period because it was accrued in the prior year due to prior year sales. Therefore, you take the September Payment + Any sales from the last have the year * 15%.


Royalty expense for 20X6 equals 15% of sales for the year 20X6, regardless of when the royalties are paid. The $40,000 paid on September 30, 20X6 applies to the sales in the first half of 20X6 (January - June). Sales for the second half of 20X6 were $300,000. The royalty expense associated with these sales is .15($300,000) = $45,000. Therefore, total royalty expense for the year 20X6 is $40,000 + $45,000 = $85,000.


How are Operating Expenses affected by an increase in Accrued Liabilities?

How are operating expenses affected by a decrease in Prepaid Expenses?

Accrued Liabilities:
An increase means that they've already received services but no money was paid out. Therefore, you increase the expense in the period, Operating Expense.

Journal Entry:
Dr. Operating Expense
Cr. Accrued Liabilities

So if Accured Liabilites goes up, then no cash was paid out for the Operating Expenses.

Prepaid Expenses
If prepaid expenses go down, then the expense was paid. But, it's if it doesn't then that means that cash was paid and recognized as an asset, not an expense. So you have to add it back into Operating Expenses.


Which of the following would be reported as an investing activity in a company's statement of cash flows?
A. Collection of proceeds from a note payable.
B. Collection of a note receivable from a related party.
C. Collection of an overdue account receivable from a customer.
D. Collection of a tax refund from the government.

Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.


In Dart Co.'s year two single-step Income Statement, as prepared by Dart's controller, the section titled "Revenues" consisted of the following:
Sales $250,000
Purchase discounts 3,000
Recovery of accounts written off 10,000
Total revenues $263,000
In its year two single-step Income Statement, what amount should Dart report as total revenues?

A. $250,000
B. $253,000
C. $260,000
D. $263,000


* be careful with purchase discounts and sales discounts

Revenues are inflows of economic resources. The purchase discounts would be netted against purchases, not sales. The recovery of accounts written off is not revenue, it is an adjustment to the allowance for uncollectible accounts. Therefore the total revenue reported should be $250,000


Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB Accounting Standards Codification.

The Codification includes only FASB Statements.

The Codification is the sole source of U.S. GAAP, for nongovernmental entities.

The Codification significantly modified the content of GAAP when it became effective.

An accountant can be sure that all SEC rules are included in the Codification.

The Codification includes all authoritative GAAP for nongovernmental entities.


The Codification includes all authoritative GAAP for nongovernmental entities.

B. A proposed accounting standards update
Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).


Conceptually, interim financial statements can be described as emphasizing:
A. Timeliness over faithful representation.
B. Faithful representation over relevance.
C. Relevance over comparability.
D. Comparability over neutrality.

A. Timeliness over faithful representation.

Interim reporting emphasizes timeliness over faithful representation. Interim reports are generally more aggregate and reflect estimates that are of a more approximate nature than those found in annual reports. The objective is to provide reasonable information in a timely fashion, rather than exact information. The cost to provide the latter would often be prohibitive on a quarterly basis.


According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:
A. Recognition.
B. Realization.
C. Allocation.
D. Matching.

Recognition is the process of formally recording and reporting an item as one of the elements of financial statements. It is the "strongest" application an item can receive.
Footnote disclosure may report an item, but it does not include the item in an account balance. When an item is recognized, it affects an account balance reported in the financial statements. The item may not be separately listed, but it will be reflected in one of the accounts in the statements.


According to the conceptual framework, the objectives of financial reporting for business enterprises are based on:
A. The need for conservatism.
B. Reporting on management's stewardship.
C. Generally Accepted Accounting Principles.
D. The needs of the users of the information.

D. The needs of the users of the information.

User needs define the objectives of financial statements. Financial statements exist solely to satisfy the information needs of users. One of these information needs might be an evaluation of how well management has carried out its stewardship responsibility to owners for the use of enterprise resources entrusted to it.

However, that is just one of many information needs. More important are the information needs concerning the assessments of future performance and cash flow generation. The objectives of financial statements are more involved with forward-looking purposes than with evaluation of the past.


What is the conceptual framework intended to establish?
A. Generally Accepted Accounting Principles in financial reporting by business enterprises.
B. The meaning of "present fairly in accordance with Generally Accepted Accounting Principles."
C. The objectives and concepts for use in developing standards of financial accounting and reporting.
D. The hierarchy of sources of Generally Accepted Accounting Principles.

C. The objectives and concepts for use in developing standards of financial accounting and reporting.

The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a "constitution" for developing specific accounting principles. The concepts statements are not GAAP, however.


According to the FASB conceptual framework, predictive value is an ingredient of:

Relevance Faithful representation
No No
Yes Yes
No Yes
Yes No

Yes No

Predictive value is one of the ingredients of relevance, one of the primary characteristics of accounting information. The other ingredient of relevance is confirmatory value.
Predictive value is not an ingredient of faithful representation. Faithful representation is the other primary characteristic of accounting information. Its three main ingredients are completeness, free from material error, and neutrality.


According to the FASB conceptual framework, which of the following is not an enhancing qualitative characteristic?
A. Comparability.
B. Confirmatory value.
C. Verifiability.
D. Timeliness.

B. Confirmatory value.

Confirmatory- is similar is form or value.

Confirmatory value is an ingredient of relevance.

It does not relate to faithful representation.
Faithful representation can be broken down into completeness, free from material error, and neutrality.


Which of the following characteristics relates to both accounting relevance and faithful representation?

Free from material error.




Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and reliable (be accurate and trustworthy).


Reporting inventory at the lower of cost or market is a departure from the accounting principle of:
A. Historical cost.
B. Consistency.
C. Conservatism.
D. Full disclosure.

A. Historical Costs

LCM departs from historical cost because it provides an ending valuation below cost when market value is below cost. The inventory is actually written down to a value below what was originally paid. This is one of the few such departures.


Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?
A. Going concern.
B. Periodicity.
C. Monetary unit.
D. Economic entity.

The monetary unit assumption provides the basis for using the home-country currency as the reporting basis in the financial statements and also tends to imply that the unit of currency is stable (little or no inflation or deflation).


Going concern.

the corporate entity has an indefinite existence- there is no foreseeable end to the entity under current circumstances.



The periodicity assumption states that in order for financial statement information to be useful, it must be available on a periodic basis rather than at the end of the reporting entity's existence.


Also known as the separate entity assumption, this concept recognizes that the corporation is the reporting entity, not the owners. The financial statements are those of the corporation. The shareholders are separate from the corporation. The reporting firm is a separate legal entity.

D. Economic entity.


Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of:

A. Consistency.
B. Going concern.
C. Matching.
D. Substance over form.

The matching principle requires that we recognize and match expenses with the revenues generated. For all sales in a given period, some will be uncollectible. The cost of those uncollectible accounts is matched in the period that the revenue is recognized.