FAR

Question 1

How are amendments incorporated into the FASB Accounting Standards Codification?

Answer 1

By releasing an accounting standards update

Question 2

What group currently writes the Generally Accepted Accounting Principles

Answer 2

Financial Accounting Standards Board

Question 3

The FASB is a(n)

Answer 3

Private Sector Body. It has no official connection to the US Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.

Question 4

The purpose of financial accounting is to provide information primarily for which group?

Answer 4

Investors and Creditors

Question 5

In reference to proposed accounting standards, the term “negative economic consequences” includes

Answer 5

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.

Question 6

The FASB has maintained that

Answer 6

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

Question 7

Which of the following will best protect investors against fraudulent financial reporting by corporations?

Answer 7

The requirement that financial statements be audited. The audit of financial statements by independent third parties provides assurance that the financial statements are fairly presented in all material respects.

Question 8

True or False: It is a violation of SEC regulations for publicly traded companies to depart from GAAP.

Answer 8

True

Question 9

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

Answer 9

A new statement is issued only after a majority vote by the members of the FASB. At least 4 of the 7 members of the FASB must vote in favor of a proposed Statement of Financial Accounting Standards.

Question 10

Accrual to Cash basis conversion

Answer 10

dCash = dL = dE - dOther Assets

Question 11

Cash to Accrual basis conversion

Answer 11

dCash + dOther Assets = dL + dE

Question 12

U Co. had cash purchases and payments on account for the current year totaling $455,000. U’s beginning and ending accounts payable balances for the year were $64,000 and $50,000 respectively. What amount represents U’s accrual basis purchases for the year?

Answer 12

Beginning AP ($64,000)
\+ Accrual Purchases (to be calculated)
- Cash payments ($455,000) 
-------------------------------
Ending AP ($50,000)

Solving for accrual purchases yields $441,000

Question 13

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 a-basis operating expenses what would be the operating expenses?

Answer 13

Cash based operating expenses $150,000
ADD beg. of the year prepaid expenses $10,000
LESS the end of the year prepaid expenses ($15,000)
LESS the beg. of the year accrued expenses ($5,000)
ADD the end of the year accrued expenses $25,000
———————————-
Accrual-based operating expenses $165,000

Question 14

A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative Balance Sheet information.

                                 Beg Year          End Year Accounts Payable       3,000              1,000 Unearned Revenue     300                 500 Wages payable            300                 400 Prepaid Rent                 1,200              1,500 Accounts Receivable    1,400              600

Answer 14

The general rule to convert from cash to accrual is to ADD: decreases in liabilities and increases in assets, and DECREASES: increases in liabilities and decreases in assets

Cash basis net income $70,000
ADD: Decrease in accounts payable $2,000
SUBTRACT: Increase in unearned revenue $200
SUBTRACT: Increase in wages payable $100
ADD: Increase in prepaid rent $300
SUBTRACT: Decrease in accounts receivable $800
-----------------------------
Accrual basis net income $71,200

Question 15

What is the definition of a Current Asset

Answer 15

Current Asset is defined as an “operating cycle or one year, whichever is longer.” An operating cycle of any length, not exceeding one year would still cause the current asset to be classified for a 1 year period.

Question 16

Doren Co.’s officer’s compensation expense account had a balance of $490,000 at December 31, 2014 before any appropriate year-end adjustment relating to the following:

• No Salary accrual was made for the week of December 25-31, 2014. Officer’s salaries for this period totaled $18,000 and were paid on January 5, 2015.
• Bonuses to officers for 2014 were paid on January 31, 2015 in the total amount of $175,000

The adjusted balance for officer’s compensation expense for the year ended December 31, 2014 should be

Answer 16

The total compensation expense should include the two adjusting items. Therefore, the total expense is $490,000
+ $18,000 + $175,000 = $683,000. The accrued, but unpaid, salaries, as well as the bonuses, relate to 2014. Officer bonuses are another form of employee compensation.

Question 17

Under the 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, 2015 is as follows:

Prepaid Insurance at 12/31/2014 $105,000
Charges to insurance expense in 2015 $437,500
Prepaid insurance at December 31, 2015 122,500

What was the total amount of insurance premiums paid by East during 2015

Answer 17

Beginning prepaid balance $105,000
\+ Premiums paid (x)
- Expense charges (437,500)
------------------
x = $455,000

Question 18

Zeta Co. reported sales revenue of $4,600,000 in it Income Statement for the year ended December 31, 2011. Additional information is as follows:

                                                          12/31/10         12/31/11 Accounts Receivable                            1,000,000    1,300,000     Allowance for uncollectible accounts (60,000)         (110,000)

Zeta wrote off uncollectible accounts totaling $20,000 during 2011. Under the cash basis of accounting, Zeta would have reported 2011 sales of:

Answer 18

Beginning balance $1,000,000
\+ Sales 4,600,000
- Collections (x)
- Write-offs (20,000)
-------------------
Ending balance 1,300,000

x = 4,280,000

Question 19

Which of the following defines equity as it relates to a business entity?

Answer 19

Total assets less total liabilities

Question 20

How should unearned rent that has already been paid for by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?

Answer 20

Current liability

Question 21

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?

Answer 21

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.

Question 22

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

Answer 22

Collection of a note receivable from a related party.

Question 23

A partial listing of a company’s accounts is presented below:

Revenues $80,000
Operating expenses 50,000
Foreign currency translation gain 4,000
Income tax expense 10,000

What amount should the company report as net income?

Answer 23

Net income is revenues less expenses

80,000-50,000-10,000 = 20,000

The foreign currency translation adjustment is part of comprehensive income.

Question 24

The FASB amends the Accounting Standards Codification through the issuance of:

Answer 24

Accounting Standards Updates

Question 25

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

Answer 25

The Codification is the sole source of US GAAP, for nongovernmental entities

Question 26

TRUE or FALSE: International accounting standards are not included in the FASB Accounting Standards Codification.

Answer 26

TRUE: IFRS is not US GAAP and not included in the codification

Question 27

Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

Answer 27

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

Question 28

What is the primary objective of financial reporting?

Answer 28

To provide information that is useful for economic decision making.

Question 29

What are the two primary qualitative characteristics of financial information?

Answer 29

Relevance & Faithful Representation

Question 30

According to the conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:

Answer 30

Predictive Value. It is the ingredient that helps users increase the likelihood of forecasting the outcome of events.

Question 31

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

Answer 31

Comparability. For information to be comparable, it must be both relevant (make a difference to the user) and faithfully represented.

Question 32

What are the components of Relevance

Answer 32

Predictive Value & Confirmatory Value

Question 33

What are the components of Faithful Representation

Answer 33

Completeness Free from material error Neutrality

Question 34

According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:

Answer 34

Recognition. It 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.

Question 35

According to the conceptual framework, the objective of financial reporting for business enterprises are based on:

Answer 35

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.

Question 36

What is the conceptual framework intended to establish?

Answer 36

The objectives and concepts for use in developing standards of financial accounting and reporting. It is a 'constitution' for developing specific accounting principles. The concepts statements are not GAAP, however.

Question 37

During the period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about

Answer 37

Enterprise performance but not directly provide information about management performance. The financial statements provide a wealth of information about the performance and financial position of the enterprise, but they do not directly allow an evaluation of management. There are too many factors that affect the firm's performance to be able to single out management's contribution.

Question 38

Conceptually, interim financial statements can be described as emphasizing

Answer 38

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.

Question 39

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of

Answer 39

Economic Entity: Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity.

Question 40

According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:

Answer 40

Recognition: Recognition is the strongest reporting action that can be taken. When an item is recognized, that means it will appear in the financial statements, perhaps not as an individual line item but will be part of one.

Question 41

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of this reporting concept.

Answer 41

Replacement Cost Replacement cost is the amount to be pad for an item at the current time. This concept is used int he lower-of-cost-or-market inventory valuation procedure. Replacement cost is an example of an entry price-the amount required to be paid currently to obtain an asset already held.

Question 42

On December 31, 2012 Brooks Co. decided to end operation and dispose of its assets within three months. At December 31, 2012, the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in Brook's December 31, 2012 Balance Sheet?

Answer 42

Net Realizable Value When a firm is in liquidation, historical cost and entry values (replacement cost) are no longer relevant. The going concern assumption supports the historical cost principle. The firm is no longer a going concern. The only amounts relevant are the amounts to be received on sale of the assets. Net realizable value is the net value to be received, after the costs of getting the asset ready for sale are deducted.

Question 43

Reporting inventory at the lower of cost or market is a departure from the accounting principle of:

Answer 43

Historical Cost: 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.

Question 44

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.

Answer 44

Monetary Unit: 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.

Question 45

What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?

Answer 45

Conservatism Gain Contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism.

Question 46

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:

Answer 46

Cost-benefit When the cost of information exceeds its benefit, it should not be reported, even if it might be useful.

Question 47

Which of the following statements is correct regarding fair value measurement?

Answer 47

Fair value is a market-based measurement, not an entity-specific measurement. A market-based measurement is the price the entity would receive to sell an asset or pay to transfer a liability and takes into consideration risk and restrictions.

Question 48

TRUE or FALSE: Establishing new measurement requirements for financial instruments, or for any other asset or liability, is one of the purposes of the fair value framework.

Answer 48

FALSE. It is not one of the purposes of the fair value framework. Measurement requirements or elections are determined by other pronouncements; the "Fair Value Measurement" pronouncement establishes standards to be followed in determining fair value when it is used.

Question 49

What is the benefit of the fair value framework with respect to fair value measurement and fair value reporting

Answer 49

The framework for the use of fair value in GAAP is intended to achieve both increased consistency and increased comparability in fair value measurement and reporting.

Question 50

TRUE or FALSE: Determination of the fair value of legal services received in exchange for an entity's common stock applies to the guidance for determining fair value, as provided in the fair value framework presented in ASC 820 "Fair Value Measurement", least likely to apply?

Answer 50

FALSE. The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity's common stock. ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.

Question 51

The determination of fair value may be for:

Answer 51

A stand-alone asset/liability AND a group of assets or liabilities. While the determination of fair value is for a particular asset or liability, that asset or liability, in fact may either be a stand-alone asset or liability (e.g. a financial instrument or an operating asset) or a group of assets or liabilities taken as a unit (e.g. an asset group or a line of business)

Question 52

Should the transaction cost and the transportation cost be considered when determining the fair value of an asset in the most advantageous market?

Answer 52

Transaction Cost - No Transportation Cost - Yes In determining the fair value of an asset in the most advantageous market, the market-based exit price would not be adjusted for transaction cost associated with executing the (hypothetical ) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.

Question 53

When determining the fair value of a non-financial asset, does assessing the highest and best use of the asset take into account how the reporting entity would use the asset?

Answer 53

No. In determining the fair value of a non-financial asset, how the reporting entity would use the asset would not be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by market participants, not by the reporting entity.

Question 54

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?

Answer 54

$81 When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. The second market is more advantageous because it has the higher selling price. in addition, fair value excludes transaction cost; therefore, the valuation of the asset would be $81 ($80 + $1).

Question 55

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?

Answer 55

Instrument-by-instrument basis When an entity elects to apply the fair value option to a financial instrument, the application can be on an instrument by instrument basis.

Question 56

On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able's fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by ASC 820 on which one of the following dates must Able elect to implement the fair value option?

Answer 56

January 15, 2008 If Able Co. intends to elect to implement the fair value option for its investment in Baker's debt, it must make its election on the date it first recognizes the investment, which is January 15, 2008.

Question 57

In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?

Answer 57

Asset Fair Value - Exit Price | Liability Fair Value - Exit Price

Question 58

Can you trust the the entry price to acquire an asset to represent fair value in the case that a significant amount of raw material is acquired for cash from a bankrupt supplier?

Answer 58

Since the raw material inventory was acquired from a supplier in bankruptcy, it is likely that the transaction occurred when the seller was under duress. Therefore, it is likely that the price paid (an entry price) does not represent fair value. Exit price is not representative of fair value when the item is sold under duress.

Question 59

Can a debt investment classified as held-to-maturity be measured at fair value at the option of the reporting entity?

Answer 59

An entity may elect to measure and report a debt investment classified as held-to-maturity at fair value. Traditionally, debt investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity.

Question 60

Which of the following statements concerning the determination of fair value at the date an asset is acquired or a liability is assumed is/are correct? 1. The exit price is conceptually different than the entry price. 2. The entry price and the exit price may be different amounts at the date an asset or liability is initially recognized.

Answer 60

Both Statement I and 2 are correct. An exit price and an entry price are conceptually different (Statement 1) and in practice an entry price and an exit price may be different amounts at the date an asset or liability is initially recognized (Statement II). Such a difference may come about, for example, because the entry price is based on a transaction between related parties or because the selling entity was under financial duress at the time of the sale.

Question 61

In which of the following circumstances, if any, would an auditor be concerned as to whether or not the price paid to acquire an asset was the fair value of the asset? 1. The asset was acquired from the acquiring firm's majority shareholder. 2. The asset was acquired in an active exchange market.

Answer 61

If an asset was acquired from the acquiring firm's majority shareholder, an auditor likely would be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset because an entity and its majority shareholder are related parties. Related party transactions may not be at arm's length and therefore may require An asset acquired in the active exchange market would not have any concerns.

Question 62

When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, which one of the following valuation techniques has been used?

Answer 62

Cost Approach When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (ie current replacement cost), the cost approach has been used.

Question 63

Marco has an investment that is traded in two different markets. Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year: Front Market: Selling Price: 52/sh Transaction Cost 6/sh Side Market Selling price: 50/sh Transaction Cost: 1/sh If the Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?

Answer 63

$52/sh Since Front market is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.

Question 64

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

Answer 64

Income The income approach to fair value measurement of an asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

Question 65

For the valuation technique used to measure the fair value of an asset, what level is an unobservable input for an asset

Answer 65

It is a level 3 input. Level 3 inputs are unobservable.

Question 66

Which of the following statements concerning inputs used in ascertaining fair value is/are correct? 1. Only observable inputs can be used? 2. Inputs that incorporate the entity's assumptions may be used.

Answer 66

2 only. An entity's assumptions may be used as inputs in determining fair value. Those assumptions would be level 3, unobservable inputs, but would be used when adequate observable inputs were not available to make fair value determinations.

Question 67

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct? 1. Quoted market prices should be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued. 2. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used.

Answer 67

Neither Statement 1 nor Statement 2 is correct. Quoted market prices should not be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued (Statement 1). A "blockage factor" occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market. Using a "blockage factor" would adjust the market value for the impact of such a large block of securities being sold, but is not permitted in determining fair value. Additionally, quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value (statement 2). Such prices would be considered level 2 factors, observable inputs but not in active markets.

Question 68

What is highest level of desirability for the fair value hierarchy and what is the lowest for determining fair value?

Answer 68

In the fair value hierarchy, level 1 is the highest or most desirable level, and level 3 is the lowest or least desirable.

Question 69

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

Answer 69

Quoted market prices on a stock exchange for an identical asset. These are level 1 inputs, the highest level in the hierarchy of inputs for valuation purposes, and the most reliable evidence of fair value.

Question 70

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value, except - Quoted prices for identical assets and liabilities in markets that are not active - Quoted prices for similar assets and liabilities in markets that are active. - Internally generated cash flow projections for a related asset or liability. - Interest rates that are observable at commonly quoted intervals

Answer 70

Internally generated cash flow projects for a related asset or liability. This response is a false statement - internally generated cash flow projection are not an observable input.

Question 71

For a firm that elects to use fair value to measure eligible financial assets and financial liabilities, specific disclosures are required for which of the following financial statements? Quarterly Financial Statements Annual Financial Statements

Answer 71

Both Firms which elect to measure financial assets and financial liabilities at fair value are required to make significant additional disclosures in both interim (quarterly, etc.) and annual financial statements.

Question 72

For a firm that elects to measure certain of its financial assets and financial liabilities at fair value, required financial statement disclosures are intended to facilitate which of the following comparisons? 1. Comparisons between entities that use different measurement methods for similar assets and liabilities 2. Comparisons between assets and liabilities of a single entity that uses different measurement methods for similar assets and liabilities

Answer 72

Both Statements 1 and 2 are correct. The intended purposes of financial statements disclosures required of a firm that elects to use fair value measurement are to facilitate comparisons both across firms and for differently measured financial assets and liabilities of a single firm.

Question 73

Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct? 1. The fair value hierarchy level within which fair value measurements fall must be disclosed. 2. Quantitative fair value measurement disclosures must be in tabular format.

Answer 73

Both 1 and 2 are correct. Fair value measurement disclosures require both that fair value amounts be disclosed separately for each level of the fair value hierarchy and that quantitative disclosures be provided in tabular format.

Question 74

Under US GAAP, the disclosure requirements when fair value measurement is used are differentiated by which of the following classifications?

Answer 74

Between items measured at fair value on a recurring basis and items measured at fair value on a non recurring basis. Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-tradiing. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.

Question 75

When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is NOT an expected outcome of the disclosures required of that entity?

Answer 75

Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value. The disclosures required when the fair value option is used are not intended to replace the kind and amount of information that would have been provided if the fair value option had not been used. Rather, the intent is to provide the same kind and amount of information that would have been provided if the fair value option had not been elected.

Question 76

TRUE or FALSE: Combined disclosures about fair value measurements required by all pronouncement are a REQUIRED disclosure in annual financial reports for an entity that uses fair value measurement.

Answer 76

False. Combined disclosures about fair value measurements required by all pronouncements are not required, but are encouraged.

Question 77

For a firm that elects to use fair value to measure eligible financial assets and financial liabilities, specific disclosures are required for which of the following financial statements? Statement of Financial Position (Balance Sheet) Income Statement

Answer 77

Both Firms which elect to measure financial assets and financial liabilities at fair value are required to make significant additional disclosures for both the statement of financial position (balance sheet) and for the income statement.

Question 78

Is SEC included when referring to the IFRS?

Answer 78

No. SEC is the abbreviation for the Securities and Exchange Commission, and as such, is not included in the definition of IFRS, International Financial Reporting Standards, IAS 8, para. 5.

Question 79

According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes

Answer 79

- Neutrality - Completeness - Free from error The IASM Framework has converged with the FASB SFAC 8.

Question 80

According to the IASB Framework, the process of reporting an item in the financial statements of an entity is:

Answer 80

Recognition According the IASB's Framework, recognition is "the process of incorporating in the Balance Sheet or Income Statement an item that meets the definition of an element and satisfies the criteria for recognition." The element must be both probable that any future economic benefit will flow to or from the entity and have a cost or value that can be measured with reliability. IASB Framework, para. 82-83

Question 81

Identify which of the following is an assumption(s) underlying the preparation and presentation of financial statements under the IASB Framework. Accrual Basis Going Concern

Answer 81

Both There are two assumptions underlying the preparation and presentation of financial statements: accrual basis and going concern. IASB Framework, para 22-23

Question 82

When should an item that meets the definition of an element be recognized?

Answer 82

The item has a cost or value that can be measured reliably. Recognition is the process of incorporating an item in the financial statements when it meets the definition of the element and satisfies the criteria for recognition. That criteria states that there is the probability of future economic benefit associated with the item that will flow to or from the entity and that the item has a cost or value that can be measured with reliability. IASB Framework, para. 82-83

Question 83

Which of the following is a fundamental (primary) qualitative characteristic of useful financial information included in IASB's Framework?

Answer 83

Relevance Relevance and Faithful representation are the two fundamental qualitative characteristics of financial information (IASB Framework 5-18)

Question 84

According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants is:

Answer 84

Income IASB framework has 5 elements: asset, liability, equity, income and expense. The definition given is that of income. Note that income includes both revenues and gains.

Question 85

Under IFRS for SMEs, which of the following cost flow assumptions can be used for inventory valuation purposes? FIFO LIFO Weighted Average Cost

Answer 85

FIFO - Yes LIFO - No WAC - Yes Under IFRS for SMEs, the FIFO and weighted average cost assumptions of cost flow may be used for inventory valuation purposes, but the LIFO cost flow assumption may not be used.

Question 86

Which one of the following is not an other comprehensive basis of accounting (OCBOA)? - Cash Basis - Modified cash basis - Income tax basis - IFRS for SMEs

Answer 86

IFRS for SMEs IFRS for SMEs is not an other comprehensive basis of accounting, but rather is one form of generally accepted accounting principles (GAAP). The cash basis of accounting, the modified cash basis, and the income tax basis are all regarded as an other comprehensive basis of accounting (OCBOA) systems.

Question 87

Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements? Earnings per share (EPS) Information by segment

Answer 87

None Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either US GAAP or full IFRS.

Question 88

Which of the following statements, if any, concerning IFRS for SMEs is/are correct? 1. IFRS for SMEs is based on accrual basis accounting 2. Generally, IFRS for SMEs may be used as an alternative to using OCBOA

Answer 88

Both Both statements are correct. IFRS for SMEs is based on accrual accounting (Statement 1) and generally, IFRS for SMEs may be used as an alternative to using OCBOA (Statement II)

Question 89

Which one of the following is a characteristic of accounting under IFRS for SMEs - interest incurred during construction must be capitalized - EPS must be provided in the financial statements. - Goodwill must be amortized - The LIFO cost flow assumption can be used in valuing inventories

Answer 89

Goodwill must be amortized Under IFRS for SMEs, goodwill is assumed to have a limited life and is amortized over that life, or a period not to exceed 10 years if the life cannot be reasonably estimated. Under the US GAAP, goodwill is assumed to have an unlimited life and is not amortized.

Question 90

Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence? Cost Method Equity Method

Answer 90

Both Under IFRS for SMEs, either the cost method or equity method may be used by an investor to account for an investment in another entity (called 'associate' in IFRS for SMEs) over which the investor has significant influence. Under US GAAP, only the equity method may be used.

Question 91

IFRS requires a classified Statement of Financial Position. What are the required classifications?

Answer 91

Current and non-current assets and liabilities? Under IFRS, the classified Statement of Financial Position has just two classifications: Current and Non-current. Both assets and liabilities are divided into these two classifications, with Non-current being the default category.

Question 92

Which of the following items would not appear on the Income Statement prepared using IFRS? - Discontinued Operations - Gross Profit - Depreciation and Amortization

Answer 92

All listed items appear on the Income Statement when using IFRS

Question 93

What is the general difference between managerial and financial accounting?

Answer 93

Managerial accounting ned not follow GAAP, while financial accounting must follow them.

Question 94

Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Year 5, Roro's unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro's financial statements for the thee months ended March 31, Year 5?

Answer 94

Prepaid Insurance: $7000 Insurance Expense: $500 The $300 of prepaid insurance on March 31 before adjustment represents the remaining unexpired portion of the insurance policy before renewal. This amount must have expired by March 31 because there is only one insurance policy, and that policy was renewed March 1. The $300 is included in insurance expense for the three months ended March 31. In addition, one month of coverage has been used on the renewed policy as of March 31. Therefore $7,200/36 months or $200 is included in insurance expense for the three months ended March 31. In total $500 of insurance expense is recognized. Prepaid insurance remaining at March 31 is 7,200 - 200 = 7000.

Question 95

In analyzing a company's financial statements, which financial statement would a potential investor use primarily to assess the company's liquidity and financial flexibility?

Answer 95

Balance Sheet The Balance Sheet discloses the assets and liabilities, usually classified by proximity to realization (assets) or payment (liabilities). The balance shows the relative magnitude of assets and liabilities and, therefore, the ability to pay obligations in the near and longer term. It also shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change. Much of the potential of the firm is disclosed in the Balance sheet. It is a statement of the wealth position of the firm and allows an assessment of the relative risk of the enterprise.

Question 96

Sanni CO. had $150,000 in cash-basis pretax income for the year. At the current year end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni's cash-basis pretax income is:

Answer 96

Higher by $36,000 The $20,000 AR decrease implies that cash received on account was $20,000 greater than accrual sales. Cash-basis income is, therefore, $20,000 greater than accrual income for this difference. The $16,000 accounts payable increase implies that more inventory was purchased and included in accrual cost of goods sold than was paid. Cash-basis income is, therefore, $16,000 more than accrual income for this difference. In total, cash-basis income is $36,000 greater than accrual income.

Question 97

In financial statements prepared on the income-tax basis, how should the nondeductible portion of expenses, such as meals and entertainment be reported?

Answer 97

Included in the expense category in the determination of income Despite the fact that these expenses are not deductible for tax purposes, they are still business expenses and need to be included int he determination of income on the financial statements. In addition, the income tax return requires information on the total meals and entertainment expense in order to calculate the deductible amount.

Question 98

The following information pertains to Eagle Co's Year 5 sales: Cash Sales Gross: $80,000 Returns and Allowances: $4,000 Credit Sales Gross: $120,000 Discounts: $6,000 On January 1, Year 5, Customers owed Eagle $40,000. On December 31, Year 5, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in Year 5. Under the cash basis of accounting, what amount of net revenue should Eagle report for Year 5?

Answer 98

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

Question 99

On February 12, Year 5, 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 Year 5. In its Year 5 Income Statement, what amount should VIP report as royalty expense?

Answer 99

$80,000

Question 100

An analysis of Thrift Corp's unadjusted prepaid expense account at December 31, Year 4 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, Year 3. A $3,200 annual insurance premium payment made July 1, Year 4 was unadjusted. A $2,000 advance rental payment for a warehouse Thrift leased for one year beginning January 1, Year 5 was included. In its December 31, Year 4, Balance Sheet, what amount should Thrift report as prepaid expenses?

Answer 100

$3,600 Opening balance $1,500 less amortization of remaining balance (1,500) Plus annual payment made July 1, Year 4 (3,200) Less 1/2 year's amortization to December 31, Year 4 (1,600) Plus warehouse prepayment 2,000 ---------------------- 3,600

Question 101

According to conceptual framework, neutrality is an ingredient of:

Answer 101

Faithful Representation: Neutrality is one of the ingredients of faithful representation, along with completeness and free from material error. Neutrality means lack of bias- that financial reporting does not have a preconceived objective or agenda.

Question 102

The fair value for an asset or liability is measured as

Answer 102

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants ie an exit price

Question 103

For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, "Fair Value Measurement" not apply

Answer 103

Inventory reported at lower of cost or market Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820 (Fair Value Measurement). The use of lower of cost or market valuation places ceiling and floor limits on the measurement of "market" that may not result in a true fair value measurement. Thus, the measurement of inventory at "market" is one of the few exceptions to the use of ASC 820 guidance for fair value measurement.

Question 104

The use of fair value measurement is required for some items in financial statements and optional for other items. Is the framework for determining fair value measurement, as set forth in ASC 820, "Fair Value Measurement," generally required to be followed in circumstances where fair value measurement is required and/or in circumstances where fair value measurement is elected by a firm? Fair Value Required Fair Value Elected

Answer 104

Both The framework for determining fair value provided in ASC 820 "Fair Value Measurement" must be followed (with very limited exception) whenever fair value measurement is used, either as required by GAAP or permitted by GAAP as an alternative that is elected by an entity.

Question 105

Can an Investment in a subsidiary that is to be consolidated be measured and reported at fair value at the election of an entity?

Answer 105

No. A firm may not use fair value to measure and report an investment in a subsidiary that is to be consolidated. The financial asset "investment subsidiary" will be eliminated in the consolidating process and be replaced by the subsidiary's assets and liabilities (and possibly goodwill) on the consolidated balance sheet.

Question 106

Multico is a securities dealer whose principal market is with other securities dealers. To take advantage of a perceived opportunity, on December 31, the end of its fiscal year, Multico acquired a financial asset in a market other than its principal market for $50,000. At that date, the identical instrument could be sold in Multico's principal market for $50,100 with a $200 transaction cost. Which of the following amounts would constitute fair value to Multico for the financial asset at December 31?

Answer 106

$50,100 Since fair value is based on on an exit price, the amount at which Multico could have sold the asset in its principal market is its fair value to Multico. Since the asset could have been sold by Multico in its principal market for $50,100, that is its fair value to Multico. The transaction cost to execute the sale should not be deducted from the market price to get fair value.

Question 107

Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by Alphaco. Alphaco and Betaco have elected to measure their respective debt investments held-to-maturity at fair value. Charlieco measures its debt investments held-to-maturity using amortized cost. In its consolidated financial statements, for which companies, if any, may Alphaco elect to report debt investment held-to-maturity at fair value?

Answer 107

Alphaco, Betaco, and Charlieco As a parent, Alphaco may elect to report all of the debt investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.

Question 108

If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?

Answer 108

As a change in accounting estimate The amount of change in fair value resulting from a change in the valuation approach used to determine fair value is reported as a change in accounting estimate. That means that the amount of the change, like the change in fair value resulting from market forces, will be reported in current income (as income from continuing operations).

Question 109

In the determination of fair value for GAAP purposes, is the Expense approach a valuation technique or approach specified in ASC 820, Fair Value Measurement?

Answer 109

No. The expense approach is not one of the approaches for the determination of fair value specified in ASC 820; it is an irrelevant distracter in this question.

Question 110

Which of the following valuation methods may be used to measure debt investments classified as held-to-maturity? Amortized Cost Fair Value

Answer 110

Both Both amortized cost and fair value may be used to measure and report investments classified as held to maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value which is permitted by the fair value option.

Question 111

Is Accumulated Depreciation, Equipment a contra account?

Answer 111

Yes. The asset account Equipment is reported on the Balance Sheet as the net of accumulated depreciation. As such, the accumulated depreciation account has a credit balance, reducing the Equipment account from its historical cost balance to its carrying or book value.

Question 112

The following trial balance of JB Company at December 31, Year 5, has been adjusted except for income taxes. The income tax rate is 30%. Dr Cr AR net 725,000 AP 250,000 Accum. Depr 125,000 Cash 185,000 Contrib. Capital 650,000 Expenses 3,750,000 Goodwill 140,000 Prepaid taxes 225,000 PPE 850,000 Ret. Earning 1/1/yr. 5 350,000 Revenues 450,000 ------------------ --------------- 5,875,000 5,875,000 During year 5, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year 5. Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and Sept 1. In JB Company's December 31, year five Balance Sheet, what amount should be reported as current assets?

Answer 112

$710,000 Current assets are as follows: Cash $185,000 AR net $725,000 Reclassification of o/s receivable (200,000) ------------------------------------------------------- Total current assets $710,000

Question 113

The following trial balance of JB Company at December 31, Year 5, has been adjusted except for income taxes. The income tax rate is 30%. Dr Cr AR net 725,000 AP 250,000 Accum. Depr 125,000 Cash 185,000 Contrib. Capital 650,000 Expenses 3,750,000 Goodwill 140,000 Prepaid taxes 225,000 PPE 850,000 Ret. Earning 1/1/yr. 5 350,000 Revenues 450,000 ------------------ --------------- 5,875,000 5,875,000 During year 5, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year 5. Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and Sept 1. In JB Company's December 31, year five Balance Sheet, what amount should be reported as total retained earnings?

Answer 113

Total retained earnings are calculated as follows: Revenue 4,500,000 LESS Expenses (3,750,000) ---------------------------------------------------------- 750,000 Income Taxes = .3*750,000 = (225,000) ---------------- Net Income 525,000 Retained Earnings 1/1/yr. 5 350,000 ------------------------------------------------------------ Retained earnings 12/31/yr 5 875,000

Question 114

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:

Answer 114

Historical cost Reporting A/R at net receivable is a departure from the principle of historical cost. Accounts receivable is usually aged by some method and reported at net realizable value.

Question 115

Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2015 included the following expense and loss accounts: Accounting and legal fees 120,000 Advertising 150,000 Freight-out 80,000 Interest 70,000 Loss on the sale of LT investments 30,000 Officer's Salaries 225,000 Rent for office space 220,000 Sales Salaries and Commissions 140,000 One-half of the rented premises is occupied by the sales department. Brock's total selling expenses for 2015 are:

Answer 115

$480,000 Advertising $150,000 Freight-out 80,000 Rent for office space 110,000 (220,000 x .50) Sales salaries and commissions 140,000 Equals total selling expenses 480,000 Advertising is part of the overall selling effort. Freight-out is delivery expense. Offering delivery service is also part of the overall sales effort. Only 1/2 the rent is included in selling expenses because the sales department occupies only 1/2 the premises.

Question 116

Should either Interest or Advertising be included in General and administrative expenses?

Answer 116

Interest - No Advertising - No Neither expense is normally included in G&A expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified.

Question 117

In Baer Food Co's 2015 single-step income statement, the section titled "Revenues' consisted of the following: Net sales revenue $187,000 Results from discontinued operations: Loss from operations of the segment (2,400) Gain on disposal of segment 14,400 12,000 --------- Interest revenue 10,200 Gain on the sale of equipment 4,700 Total revenues 213,900

Answer 117

$201,900 Net sales $187,00 Interest revenue 10,200 Gain on equipment 4,700 Total Revenues 201,900 This answer includes the gain on the sale of equipment. It is the best answer from among the four because this answer less the gain is not represented. However, many would argue that the gain is not a revenue. Discontinued operations is not a revenue; rather, it is a special item of disclosure found below income from continuing operations in the income statement.

Question 118

A company's activities for year two included the following Gross Sales $3,600,000 Cost of Goods Sold 1,200,000 Selling and administrative exp. 500,000 Adjustment for a prior-year understatement of amort. exp 59,000 Sales Returns 34,000 Gain on sale of available-for-sale securities 8,000 Gain on disposal of a discont. bus. segment 4,000 Unrealized gain on available for sale securities 2,000 The company has a 30% effective income tax rate. What is the company's net income for year two?

Answer 118

$1,314,600 All items are included in net income except the prior year adjustment to amortization expenses and the unrealized gain on the AFS securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.

Question 119

The following costs were incurred by Griff CO., a manufacturer, during 2014: Accounting and legal fees $25,000 Freight-in 175,000 Freight-out 160,000 Officer's salaries 150,000 Insurance 85,000 Sales representatives' salaries 215,000 What amount of these costs should be reported as general and administrative expenses for 2014?

Answer 119

$260,000 The only costs included in general and administrative costs are: Accounting and legal $25,000 Officer's salaries 150,000 Insurance 85,000 Total G&A cost 260,000

Question 120

If the accounting forgets to record salary expense in the Statement of Income, what is the result?

Answer 120

Net income is too high

Question 121

TRUE or FALSE: In a multistep income statement Gross profit (margin) is shown as a separate item

Answer 121

True In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Gross profit (margin) is shown as a separate item.

Question 122

In Yew Co.'s 2014 annual report, Yew described its social awareness expenditures during the year as follows: "The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company commitment to the environment, the Company spent $100,000to redesign product packaging." What amount of the above should be included in Yew's Income Statement as charitable contributions expense?

Answer 122

$310,000 The charitable contributions are limited to the $250,000 contribution and the portion of the $140,000 contribution paid for by the firm. Thus total charitable contributions are $310,000. The product packaging cost is a promotional cost.

Question 123

Rock Co's financial statements had the following balances at December 31: Gain on the sale of equipment $50,000 Foreign currency translation gain 100,000 Net Income 400,000 Unrealized gain on the available-for-sale 20,000 debt securities What amount should Rock report as comprehensive income for the year ended December 31?

Answer 123

$520,000 By definition, comprehensive income includes all changes in enterprise equity during a period except those changes resulting from transaction between the enterprise and its owners (e.g. investments by owners, dividends to owners, etc.). Therefore, comprehensive income includes net income plus/minus changes in equity that do not enter into the determination of net income (called items of "other comprehensive income) Net Income $400,000 Foreign currency 100,000 Unrealized gain 20,000 Comprehensive income 520,000

Question 124

What are the four possible items of Other Comprehensive Income

Answer 124

1. Minimum additional pension liability adjustment 2. Unrealized gains and losses on debt investments classified as available for sale 3. Gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges 4. Gains and losses on the effective portion of cash flow hedges

Question 125

A company reports the following information as of December 31: Sales Revenue $800,000 Cost of Goods Sold 600,000 Operating expenses 90,000 Unrealized holding gain on the available for sale debt securities 30,000 What should the company report as comprehensive income as of December 31?

Answer 125

$140,000 Comprehensive income (CI) is the sum of net income and other comprehensive income. In this case, net income = 800,000-600,000-90,000) = 110,000. The unrealized holding gain is an item of OCI. There are four types of OCI items in all. This firm has only one of them. Thus CI = 110,000 + 30,000 = 140,000

Question 126

What is the purpose of reporting comprehensive income?

Answer 126

To summarize all changes in equity from nonowner sources The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and non-owner sources.

Question 127

Which of the following is a component of other comprehensive income?

Answer 127

Cumulative currency-translation adjustments Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS debt securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

Question 128

Which of the following is included in other comprehensive income?

Answer 128

Foreign currency translation adjustments

Question 129

Burn Corp. had the following items: Sales Revenue $45,000 Loss early extinguishment of bonds 36,000 Realized gain on sale of available for sale debt securities 28,000 Unrealized holding loss on available for sale 17,000 Loss on write down of inventory 3,100 Which of the following amounts would the statement of comprehensive income report as other comprehensive income or loss?

Answer 129

$17,000 other comprehensive loss Other comprehensive income is comprised of unrealized gains/losses on available-for-sale debt securities, minimum pension liability adjustment, foreign currency translation adjustment, and unrealized gains/losses on cash flow hedges. The only comprehensive income item listed is the $17,000 unrealized gains/losses on available for sale debt securities.

Question 130

Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale debt securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. WHat amount is Palmyra's comprehensive income?

Answer 130

$10,000 The components of comprehensive are: Net income, unrealized gain/loss on AFS debt securities, foreign currency translation adjustment, unrecognized gain/loss on pension benefits, and deferred gain/loss on certain hedging transactions. Therefore, the Comprehensive Income of Palmyra Co is 11,000-3000+2000 = 10,000

Question 131

Under FASB US GAAP, which of the following items would cause net earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?

Answer 131

Unrealized loss on debt investments classified as available for sale Unrealized gains and losses on debt securities available for sale are among the few items that appear in comprehensive income but not in earnings. Assuming the current equity securities are at fair value, then unrealized gains and losses are reported in earnings. This is a change in owner's equity that is not included in earnings and is not the result of a transaction with owners. It is an 'other' comprehensive income item. "Other" refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.

Question 132

When a full set of general purpose financial statements are presented, comprehensive income and its components should

Answer 132

Be presented as part of the Income Statement or as a separate financial statement following the Income Statement US GAAP requires that for-profit entities report comprehensive income and its components for a period (unless the entity has no items of other comprehensive income) in one of two statements: 1. As a separate "statement of comprehensive income" or 2. Combined with the Income Statement to provide a "statement of Net Income and Comprehensive Income"

Question 133

The Statement of Changes in Equity:

Answer 133

Reconciles all of the beginning and ending balances in the equity accounts The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.

Question 134

Which of the following items would appear on the Statement of Owner's Equity? Notes Payable Treasury Stock Advertising Expense Retained Earnings

Answer 134

Notes Payable - No Treasury Stock - Yes Advertising Expense - No Retained Earnings - Yes All changes in items affecting equity on the Balance Sheet are reported in the Statement of Owner's Equity.

Question 135

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

Answer 135

$12 If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

Question 136

Which set of financial statements generally cannot be prepared directly from the adjusted trial balance?

Answer 136

Statement of Cash Flows This statement generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The statement of cash flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.

Question 137

Which of the following is not disclosed on the Statement of Cash Flows, either on the face of the statement or in a separate schedule, when prepared under the direct method?

Answer 137

A reconciliation of ending retained earnings to net cash flow from operations The direct method Statement of Cash Flows must be supported by the supplemental disclosure of a reconciliation, but the reconciliation is of net income to net cash flow from operations, not retained earnings to net cash flow from operations. The ending retained earnings balance is not related to, and does not affect, operating cash flow.

Question 138

New England CO. had net cash provided by operating activities of $351,000; net cash used by investing activities of $420,000 and cash provided by financing activities of $250,000. New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000 and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year?

Answer 138

$208,000 The cash balance at the end of the year equals the cash balance at the beginning of the year, $27,000, plus the net sum of the three categories of cash flows: $352,000 operating - $420,000 investing + $250,000 financing. The ending balance is $208,000. The $40,000 proceeds from land sale are included in the net cash outflow from investing activities.

Question 139

Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available: ``` Mortgage repayment $20,000 Available for sale debt securities purchased 10,000 increase Bonds payable issued 50,000 increase inventory 40,000 increase Accounts payable 30,000 decrease ``` What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year?

Answer 139

$0 Operating activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70,000 - $40,000 - $30,000 = $0

Question 140

Which of the following information should be disclosed as supplemental information in the statement of cash flows? Cash flow per share Conversion of debt to equity

Answer 140

Cash flow per share - no conversion of debt to equity - yes Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts. The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.

Question 141

The primary purpose of a statement of cash flows is to provide relevant information about

Answer 141

The cash receipts and cash disbursements of an enterprise during a period This question provides an example of the need to read each answer alternative very carefully before choosing. The statement of cash flows is a listing of cash flows for a period in meaningful categories. Thus it depicts the major cash receipts and disbursements during a period. Although such information may help a user to assess the ability of a firm to generate future cash flows, it does not necessarily say anything about the firm's ability to do so in the future. Similarly, the cash flow statement does not directly indicate the firm's ability to meet future cash operating needs. The reconciliation of income and net operating cash flows does indicate the differences between income and operating cash flows, but this is not the primary purpose of the statement.

Question 142

Bay Manufacturing Co. purchased a three month US Treasury bill. In preparing Bay's statement of cash flows, this purchase would

Answer 142

Have no effect The three month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the statement of cash flows.

Question 143

Mend Co. purchased a three month US Treasury bill. Mend's policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. How should this purchase be reported in Mend's statement of cash flows?

Answer 143

Not reported The reporting bases of the statement of cash flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus the total of cash and cash equivalents is unaffected. This treasury bill meets the definition of a cash equivalent. The statement of cash flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this treasury bill is not reported in the statement of cash flows.

Question 144

On December 31, 2011, Deal Inc. failed to accrue the December 2011 sales salaries that were payable on January 6, 2012. What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's 2011 financial statements?

Answer 144

Working Capital - Overstated Cash flows from operating activities - no effect Failure to accrue salaries at the end of 2011 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated. The accrued salaries at the end of 2011 would not have been paid in 2011, even if they had been accrued correctly. Therefore, 2011 operating cash flows are not affected by the failure to accrue the salaries.

Question 145

A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred: Dividends paid $300 Proceeds from the issuance of common stock $250 Borrowings under a line of credit $200 Proceeds from the issuance of convertible bonds $100 proceeds from sale of building $150 What is the company's increase in cash flows provided by financing activities for the year?

Answer 145

$250 Cash flows from financing activities are those associated with how the company is financed, such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock (250), convertible bonds (100), and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 - 300 = 250

Question 146

Abbott Co. is preparing its Statement of Cash Flows for the year. Abbott's cash disbursements during the year included the following: Payment of interest on bonds payable $500,000 Payment of dividends to stockholders $300,000 Payment to acquire 1,000 shares common stock 100,000 What should Abbott report as total cash outflows for financing activities in its Statement of Cash Flows?

Answer 146

$300,000 Dividends paid to shareholders are a financing activity. The payment of interest on bonds is an operating activity, and payments to acquire shares of Mark's Co. stock are investing activities.

Question 147

A company calculated the following data for the period: Cash received from customers $25,000 Cash received from sale of equipment 1,000 Interest paid to bank on note 3,000 Cash paid to employees 8,000 What amount should the company report as net cash provided by operating activities in its Statement of Cash Flows?

Answer 147

14,000 Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000- 3,000 - 8,000 = 14,000

Question 148

Which of the following items is included in the Financing Activities section of the Statement of Cash Flows?

Answer 148

Cash effects of transactions obtaining resources from owners from owners and providing them with a return on their investment Financing cash flows are those between the firm and the parties providing it with debt and equity financing. Financing cash flows are the major sources of nonoperating cash inflows and repayments of those amounts to the providers. For example, borrowings and proceeds form stock issuance, retirements of debt, treasury stock purchases and dividends paid are all financing cash flows. Interest paid, however, is an operating cash flow.

Question 149

How is a 'Gain on a sale of a plant asset' classified on a cash flow statement prepared using the indirect method?

Answer 149

Operating Activities Section The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

Question 150

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in investing activities for the above transaction?

Answer 150

Cash Payment The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, only cash amount paid is disclosed in the statement of cash flows. The non cash activity schedule would disclose the acquisition price and amount financed with the mortgage.

Question 151

In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities? 1. Payments to retire mortgage notes 2. Interest payments on mortgage notes 3. Dividend payments

Answer 151

1 & 3 Both 1 & 3 are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing. The dividends are a return to shareholders who have provided a considerable portion of total firm financing.

Question 152

The following information pertains to Ash Co., which prepares its statement of cash flows using the indirect method: Interest payable at beginning of year: $15,000 Interest expense during the year: $20,000 Interest payable at end of year: $5,000 What amount of interest should Ash report as a supplemental disclosure of cash flow information?

Answer 152

$30,000 The disclosure requires cash paid in interest during the period. The best way to answer this type of question is with a T-account: Interest Payable | $15,000 Beg. balance Interest paid (x) | 20,000 interest exp. ----------------------------------------------------------------------------- | 5,000 Ending balance 15,000 - x + 20,000 = 5,000 => x = 30,000

Question 153

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: Accrued interest payable $17,000 decrease Prepaid interest $23,000 decrease What amount of interest expense for the current year will Ness report inits income statement?

Answer 153

$76,000 Journal Entry: Interest Expense x Accrued interest payable 17,000 Prepaid Interest 23,000 Cash 70,000 x = 76,000 Verbal approach 1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and 2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense. The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 - accrued payable decrease of $17,000 + prepaid interest decrease $23,000.

Question 154

Payne Co. prepares its Statement of Cash Flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in the unamortized bond discount in its Statement of Cash Flows.

Answer 154

As an addition to net income in the operating activities section Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account. The semiannual journal entry is: Dr. Interest Expense Cr. Discount Cr. Cash Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount) Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow. Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

Question 155

How should the amortization of a bond discount on long-term debt be reported in a Statement of Cash Flows prepared using the indirect method?

Answer 155

In operating activities as an addition to income When bond discount is amortized, a portion of the discount is recognized as expense. The result is that interest expense exceeds the amount of cash paid with each interest payment. The discount is gradually amortized over the bond term as additional interest expense because the firm received less than the amount due at maturity. The operating activity section of the indirect method begins with net income and ends with net cash flow from operations. Income is reduced by the interest expense that exceeds the cash interest paid by the amount of discount amortization. Therefore, the discount amortization is added back, yielding a reduction in net cash flow from operations equal to the amount of cash interest paid.

Question 156

Baker Co. began its operation during the current year. The following is Baker's Balance Sheet at December 31: Assets Cash $192,000 Accounts Receivable 82,000 ---------------------------------------------------- 274,000 Liabilities & Stockholder's equity Accounts Payable 24,000 Common Stock 200,000 Retained Earnings 50,000 ---------------------------------------------------- Total liabilities and SE 274,000 Baker's net income for the current year was $78,000, and dividends were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its Statement of Cash flows for the current year?

Answer 156

$20,000 The accounts receivable increase represents sales included in net income but not yet collect and is subtracted because income was increased by an amount exceeding cash collections. The accounts payable increase represents purchases of inventory included in cost of goods sold not yet paid for. This amount is added because income was reduced by an amount exceeding cash payments.

Question 157

During 2011, Teb, Inc. had the following activities related to its financial operations: Payment for the early retirement of long-term bonds payable (carrying value $740,000) 750,000 Distribution in 2011 of cash dividends declared in 2010 to preferred shareholders 62,000 Carrying value of convertible preferred stock in Teb, converted into common shares 120,000 Proceeds from the sale of treasury stock (carrying value at cost, 86,000) 95,000 In Teb's 2011 Statement of Cash Flows, net cash used in financing activities should be

Answer 157

$717,000 Payment for the early retirement of long-term bonds payable ($750,000) DIstribution in 2011 of cash dividend declared in 2010 to preferred shareholders (62,000) Proceeds from the sale of treasury stock 95,000 --------------------------------------------------------- Net cash used in financing activities (717,000) The conversion of preferred stock is a non-cash activity, not a cash flow.

Question 158

The differences in Beal Inc's Balance Sheet accounts at December 31, 2014 and 2013 are presented below: Assets Cash and cash equivalents $120,000 ST Investments 300,000 Account receivable, net - Inventory 80,000 Long-term investments (100,000) Plant Assets 700,000 Accumulated depreciation - 1,100,000 Liabilities and Stockholder's Equity A/P and accrued liabilities (5,000) Dividends payable 160,000 ST Bank debt 325,000 Long-term debt 110,000 Common stock, $10 par 100,000 Additional paid-in capital 120,000 Retained Earnings 290,000 1,100,000 The following additional information relates to 2014 1. Net income was $790,000 2. Cash dividends of $500,000 were declared. 3. Building costing $600,000 with a carrying amount of $350,000 was sold for $350,000. 4. Equipment costing $110,000 was acquired through issuance of long-term debt. 5. A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. These investments are categorized as available for sale. 6. 10,000 shares of common stock were issued for $22 a share. 7. The short-term investments are classified as trading securities. In Beal's 2014 Statement of Cash Flows, net cash provided by operating activities was

Answer 158

$620,000 Net Income $790,000 Increase in inventory (80,000) Decerease in AP/Acc. liab. (5,000) Gain on sale of long-term inv. (135,000 - 100,000) (35,000) Increase in short-term invest. (300,000) Depreciation expense 250,000 ----------------------------------------------------------- = Net operating cash inflow 620,000 The accumulated depreciation account did not change during the year. Therefore, depreciation expense equals $250,000, which offsets the decrease in the account due to the sale of equipment.

Question 159

The differences in Beal Inc's Balance Sheet accounts at December 31, 2014 and 2013 are presented below: Assets Cash and cash equivalents $120,000 ST Investments 300,000 Account receivable, net - Inventory 80,000 Long-term investments (100,000) Plant Assets 700,000 Accumulated depreciation - 1,100,000 Liabilities and Stockholder's Equity A/P and accrued liabilities (5,000) Dividends payable 160,000 ST Bank debt 325,000 Long-term debt 110,000 Common stock, $10 par 100,000 Additional paid-in capital 120,000 Retained Earnings 290,000 1,100,000 The following additional information relates to 2014 1. Net income was $790,000 2. Cash dividends of $500,000 were declared. 3. Building costing $600,000 with a carrying amount of $350,000 was sold for $350,000. 4. Equipment costing $110,000 was acquired through issuance of long-term debt. 5. A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. These investments are categorized as available for sale. 6. 10,000 shares of common stock were issued for $22 a share. 7. The short-term investments are classified as trading securities. In Beal's 2014 Statement of Cash Flows, net cash used in investing activities was:

Answer 159

Proceeds from sale of securities $135,000 Proceeds from sale of building 350,000 Purchase of other plant assets (1,190,000) Net cash used in investing activities (705,000) The plant assets (gross) account increased $700,000. $700,000 increase = -$600,000 (sale of building) + $110,000 (equipment purchase) + X. X = additional purchase of plant assets. X = $1,190,000. The long-term investments were sold at a gain. That is why the change in the account (100,000) does not equal the cash inflow from the sale. The equipment purchased with long-term debt is not listed in the investing section because no cash was used on the purchase. (it is disclosed in the supplemental information) The purchase of debt securities classified as trading are classified as operating cash flow.

Question 160

How should a gain from the sale of used equipment for cash be reported in a Statement of Cash Flows using the indirect method?

Answer 160

In operating activities as a deduction from income The operating section of the indirect method Statement of Cash Flows is the reconciliation of net income and net cash flow from operations. The gain on the sale of equipment increased income but did not provide any operating cash flow. Therefore, it is subtracted from net income in the reconciliation.

Question 161

In preparing its cash flow statement for the year ended December 31, 2014, Reve Co. collected following data: Gain on the sale of equipment ($6,000) proceeds from the sale of equip. 10,000 purchase of A.S Inc bonds (180,000) Amortization of bond discounts 2,000 Dividends declared (45,000) Dividends paid (38,000) Proceeds from the sale of treasury stock 75,000 In its December 31, 2014, Statement of Cash Flows, what amount should Reve report as net cash provided by financing activities?

Answer 161

$37,000 Only the last two items are financing cash flows. The treasury stock sale of $75,000 less the dividends paid of $38,000 result in a net financing cash inflow of $37,000.

Question 162

Should the line "Property, plant and equipment is recorded at cost with depreciation computed principally by the straight-line method" be included in Melay Inc's 2014 summary of significant accounting policies?

Answer 162

Yes. The accounting policy footnote describes significant accounting methods and practices used by the company. The accounting policy footnote primarily discusses the accounting practices followed by the firm so that users can better understand the financial statements and other disclosures. Recording property at cost and using a specific depreciation method are examples of two significant accounting policies. The other answers indicate information that might possibly be disclosed in other footnotes.

Question 163

Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies? Depreciation Method Composition

Answer 163

Depreciation Method - Yes Composition - No The summary of significant accounting policies requires that the methods of depreciation used by a firm be disclosed. The composition of plant assets must also be disclosed, but not in the summary of significant accounting policies. The composition information typically is disclosed in another footnote.

Question 164

The summary of significant accounting policies should discloses

Answer 164

Both the methods of accounting used by the firm and other information useful for understanding the bases under which the financial statements were prepared. How the firm classifies investments as cash equivalents is one such basis; it is disclosed in the policy footnote. The other answer alternatives are disclosures about specific aspects of particular accounts.

Question 165

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of:

Answer 165

Concentration of credit risk This disclosure will give the financial statement reader information about concentration of credit risk related to the receivable that are all in the same industry.

Question 166

What must be included in the notes to the financial statements in a company's summary of significant accounting policies?

Answer 166

The summary of significant accounting policies footnote describes the important accounting choices made by the firm for financial reporting purposes. Such policies affect recognition, measurement, and disclosure.

Question 167

Which of the following is not an aspect of a firm's operations necessitating disclosure of risks and uncertainties? Principal markets Products and Services Pension Plan Geographical location

Answer 167

Pension Plan This is an internal policy matter and is not listed as a specific attribute for disclosure in the standard.

Question 168

Under what conditions is disclosure about risks and uncertainty pertaining to concentrations required?

Answer 168

Disclosures are required when the event is reasonably possible. The event is not required to be probably.

Question 169

Are effect of changes in government regulations a source or risk and uncertainty for which disclosures are required by GAAP?

Answer 169

This is not one of the four sources noted in the applicable standard. It is specifically noted as a source not included in the accounting standard.

Question 170

Do concentrations in investment in other firm's stock for which ownership is less than 20% in any specific investment require disclosures?

Answer 170

Although diversification may be lacking in a firm's investment portfolio, passive investments are not one of the concentration for which a firm is considered to be vulnerable. The fourth concentration is concentration in the volume of business with a particular customer or supplier.

Question 171

Are the old and new estimate in quantitative terms required to be disclosed?

Answer 171

No, the actual numerical estimates typically are not disclosed. Rather, it is the effect of the change which is of interest to financial statement users.

Question 172

On March 15, Year 2, a calendar-year company issued its Year 1 financial statements. On March 1, Year 2, a fire destroyed the company's only manufacturing plant. Which of the following statements is correct regarding the treatment of the loss in the December 31, Year 1, financial statements?

Answer 172

The loss should be disclosed and not recognized in the Year 1 financial statements. A significant event that occurs after the date of the financial statements but before the financial statements are issued should be disclosed. The condition leading to the destruction of the warehouse is a significant post-balance sheet event that did not exist at the balance sheet date.

Question 173

A large manufacturing firm made two significant acquisitions around the close of 2016. The first was to purchase all the outstanding voting stock of Pernod, Inc. in December 2016. The second was to purchase 40% of the outstanding voting stock of Weynod, Inc. in January 2017. The manufacturing firm's 2016 financial statements were issued in February 2017. Choose the correct statement regarding the accounting for these acquisitions in the 2016 financial statements of the manufacturing firm. Pernod Weynod

Answer 173

Pernod - Consolidated Weynod - described in the footnotes only The Pernod acquisition occurred before the balance sheet and thus reflects a transaction or condition existing as of the balance sheet date. The Weynod acquisition, although also significant, is footnoted only because the transaction had not yet occurred as of the balance sheet date. The footnote description meets the full disclosure requirement for the transaction.

Question 174

During the last quarter of 2014, a firm violated US securities laws, and 2014 revenues were overestimated as a result. Although no lawsuit was brought against the firm before the 2014 financial statements were released, management knows that in all likelihood the firm will be sued by shareholder groups and a range of possible loss amounts is estimated. Therefore,

Answer 174

The firm should recognize the estimated loss and liability. The firm faces a probably loss, and counsel has developed reasonable estimates. The condition leading to the future loss existed at the balance sheet date. Thus, the loss and liability should be recognized. Any difference between the estimated and actual loss is treated as a change in estimate in a future period. A footnote will describe the situation.

Question 175

In October 2012, a large US aircraft manufacturer signed a significant contract with the government of France to build 50 jumbo jets, with delivery scheduled for 2015. In February 2014, the firm signed a second contract with the government of Germany to build 35 jumbo jets. The 2012 financial statements were issued in early March 2013. The firm did not begin work on either contract before the issuance of the 2012 statements. Which contract(s) should be recognized in the accounts for the 2012 financial statements? Contract 1 (French) Contract 2 (German)

Answer 175

French - No German - No No transactions have taken place for either contract. Even though the French contract was signed before the balance sheet date, there is nothing to recognize. Footnotes will describe both contracts.

Question 176

Adel Inc. uses the allowance method for accounting for bad debts. During 2015, the financial condition of Botel CO., one of Adel's major customers, deteriorated rapidly due to accounting and other scandals. In February 2016, it has become clear that Botel will go out of business, although the firm has not declared or been forced into formal bankruptcy proceedings. Adel's receivable from Botel, 9 months old as of the issuance of Adel's 2015 financial statements, is 20 times the amount of bad debt expense otherwise reported by Adel. How should the Botel situation be reflected in Adle's 2015 financial statement?

Answer 176

A loss in the amount of the Botel receivable should be recognized along with appropriate footnote disclosure. Although bad debt expense has been recognized, it does not adequately account for the Botel loss, which is probable and estimable.

Question 177

Welnet Inc. was sued in October of 2018 for breach of contract. Based on the advice of counsel, Welnet recognized a $2 million estimated lawsuit loss and liability at December 31, 2018. The lawsuit was settled in February, 2019 in the amount of 2.2 million before welnet's 2018 financial statements were available to be issued. WHat is the appropriate accounting procedure for the 2018 statements?

Answer 177

Welnet recognized the entire $2.2 million in its 2018 statements. The breach of contract occurred before the 2018 balance sheet date. This is a recognized subsequent event. The o.2 million adjustment is simply part of the entire amount that is known before issuance of the 2018 statements. Note that if the settlement occurred after the issuance or availability of the 2018 statements, only the $2 million loss is recognized in the 2018 statements; the remaining 0.2 million is recognized in 2019.

Question 178

On March 21, year 2, a company with a calendar year end issued its year 1 financial statements. On February 28, year 2, the company's only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. THe amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company's year 1 financial statements?

Answer 178

Do NOT accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. This is a subsequent event that did not exist at the balance sheet date but occurred before the financial statements were issued. The company is required to make a footnote disclosure describing the nature of the event and estimate of the financial effect, or a statement that an estimate cannot be made. Recognition is inappropriate because the condition existed after the balance sheet date.

Question 179

What is Working Capital

Answer 179

Working capital = current assets - current liabilities working capital ratio = current assets/current liabilities measure the extent to which current assets exceed current liabilities and thus are uncommitted in the short term.

Question 180

What is another name for the Working Capital Ratio

Answer 180

Current Ratio Current assets/current liabilities

Question 181

What is the acid-test ratio

Answer 181

Also known as quick ratio, measures the quantitative relationship between highly liquid assets and current liabilities in terms of the 'number of times' that cash and assets that be converted quickly to cash cover current liabilities. Acid test/quick ratio = (Cash + net receivables + marketable securities)/current liabilities

Question 182

What is the securities defensive-interval ratio

Answer 182

measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs Ratio = (cash + net receivables + marketable securities)/ average daily cash expenditures

Question 183

What is the times interest earned ratio

Answer 183

measures the ability of current earnings to cover interest payments for a period (Net income + interest expense + income tax)/interest expense

Question 184

What is the times preferred dividend earned ratio?

Answer 184

measures the ability of current earnings to cover preferred dividends for a period. net income/annual preferred dividend obligation

Question 185

What is accounts receivable turnover?

Answer 185

measures the number of times that accounts receivable turnover (are incurred and collected) during a period. Indicates the quality of credit policy and the efficiency of collection procedures. (net) credit sales/ average (net) accounts receivable

Question 186

What is number of days sales in average receivables?

Answer 186

measures the average number of days required to collect receivables; it is a measure of the average age or receivables 365 (or other measure of business days in a year)/accounts receivable turnover

Question 187

What is inventory turnover

Answer 187

measures the number of times that inventory turnover (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory. Cost of Goods Sold/Average Inventory

Question 188

What is number of days' supply in inventory

Answer 188

measure the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management. 365 (or other measure of business days in a year) / inventory turnover

Question 189

What is operating number of cycle

Answer 189

measures the average length of time to invest cash in inventory, convert the inventory to receivable, and collect the receivables; it measure the time to go from cash back to cash days in operating = number of days sale in A/R length cycle number of days in supply in inventory

Question 190

ON December 30, 2004, Solomon CO. had a current ratio greater than 1:1 and a quick ratio less than 1:1. On December 31, 2004, all cash was used to reduce accounts payable. How did these cash payments affect the ratios? Current ratio Quick ratio

Answer 190

Current ratio - increased Quick ratio - decreased Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased. The current ratio was greater than 1.0 before the transaction. Therefore, the denominator decreased a greater percentage than the numerator causing the ratio to increase. The quick ratio was less than 1.0 before the transaction. Therefore, the numerator decreased a greater percentage than the denominator causing the ratio to decrease.

Question 191

The following information was taken from Baxter Department Store's financial statements: Inventory on January 1 $100,000 Inventory on December 31 300,000 Net sales 2,000,000 Net purchases 700,000 What was Baxter's inventory turnover for the year ending December 31?

Answer 191

2.5 CGS = beg inv. 100,000 + purchases 700,000 - ending inventory 300,000 = 500,000. average inventory = (100,000 + 300,000)/2=200,000 Turnover = 500,000/200,000 = 2.5

Question 192

How is the average inventory used in the calculation of each of the following? Acid Test (quick ratio) Inventory turnover rate

Answer 192

Acid test - not used Inventory turnover rate - denominator

Question 193

The following computations were made from Caly CO.'s 2005 books: Number of days sale in inventory 61 days number of days sales in trade accounts receivable 33 what was the number of days in Clasy's 2005 operating cycle?

Answer 193

94 61 + 33 = 94

Question 194

During 2005, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 2005 was $900,000 and the ending inventory on December 31, 2005 was $180,000 what was the inventory turnover for 2005?

Answer 194

6 Inventory turnover = COGS/avg inventory Avg inv = (beg inventory + 180,000)/2 Beg. inv + purchases = end. inv. + COGS x + 960,000 = 180,000 + 900,000 x = 180,000 + 900,000 - 960000 = 120,000 Average inventory = 180,000 + 120,000/2 = 150,000 Inventory turnover = 900,000/150,000 = 6

Question 195

Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent's debt-to-equity ratio?

Answer 195

1.08 First, compute the amount of debt. Since Assets = Liabilities + Stockholders' Equity, we have 760,000 = ? + (150,000 + 215,000). Thus, debt = $395,000. Debt to Equity is 395,000/(150,000 + 215,000) = 1.08

Question 196

Are the following ratios useful in assessing the liquidity position of a company? Defensive-Interval ratio Return on stockholder's equity

Answer 196

Defensive interval ratio - yes Return on stockholder's equity - no The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources. Thus, the measure is a liquidity measure. The return on stockholder's equity is the ratio of income to average owner's equity. This ratio is a profitability ratio, not a liquidity

Question 197

The following financial ratios and calculations were based on information from Kohl Co.'s financial statements for the current year. Accounts Receivable turnover ten times during the year Total assets turnover Two times during the year Average receivables during the year 200,000 What were Kohl's average total assets for the year?

Answer 197

$1,000,000 From the given information, asset turnover = 2 = Sales/total assets AR turnover = 10 = sales/average AR Therefore, average total assets are 5 times average AR. Avg. total assets = 5(avg AR) = 5(200,000) = $1,000,000

Question 198

The following is the stockholder's equity section of Harbor Co's balance sheet on December 31: Common stock $10 par, 100,000 shares authorized, 50,000 shares issued of which 5,000 have been reacquired, and are held in treasury - $450,000 Additional paid-in capital common stock - $1,100,000 Retained earnings - $800,000 Subtotal = $2,350,000 Less treasury stock = ($150,000) Total SE = $2,200,000 Harbor has insignificant amounts of convertible securities, stock warrants and stock options. What is the book value per share of Harbor's common stock?

Answer 198

$49 Book value per share, for this situation, is total owner's equity divided by the number of shares outstanding 2,200,000/(50,000-5,000) = 49.

Question 199

THe following data pertain to Cowl, Inc., for the year ended December 31, 2004: Net sales $600,000 Net income $150,000 Total assets, Jan 1, 2004 2,000,000 Total Assets Dec 31, 2004 3,000,000 WHat was Cowl's rate of return on assets for 2004

Answer 199

6% Rate of return on assets is the ratio of net income for a period to average total assets for the same period. $150,000/([$2,000,000 + 3,000,000)/2] = 6%

Question 200

For the purpose of consolidating financial interests, a majority voting interest is deemed to be

Answer 200

Greater than 50% of the directly or indirectly owned outstanding voting shares of another. Consolidation occurs for all entities under common control. Control is defined as more than 50% direct (or indirect) ownership of another entity.

Question 201

The preparation of consolidated statements likely will required the following information about the subsidiary's assets and liabilities at the date of acquisition: Book value? Fair value?

Answer 201

Book value - yes Fair Value - yes Both book values and fair values of a subsidiary's assets and liabilities will need to be determined at the date of acquisition in order to prepare consolidated financial statements after a business combination.

Question 202

Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers and prepare separate financial statements. Sun requires stand-alone financial statements. Who (if at all) should prepare consolidated financial statements?

Answer 202

Consolidated financial statements should only be prepared by Star and not by Sun. Consolidated statements should be prepared by Star, the parent, and not by Sun, the subsidiary. Star has an investment in and control of Sun, which is the basis for preparing consolidated statements; Sun does not have an investment in, or control of, Star. Thus, there is no basis for Sun to prepare consolidated statements.

Question 203

Which one of the following methods, if any, may a parent use on its books to carry an investment in a subsidiary that it will consolidate? Cost method Equity method

Answer 203

Cost method - yes Equity method - yes A parent may use the cost method, the equity method, or any other method on its books to carry an investment in a subsidiary that it will consolidate. The method that is used on its books will affect the consolidating process, but the consolidated financial statements will be the same regardless of the method the parents uses on its books.

Question 204

An investor will report an investment in its financial statements using a different method than it uses to carry the investment on its books if its minimum ownership of the investee is:

Answer 204

50+% If an investor owns 50+% (up to and including 100%) of an investee, it will normally carry the investment on its books using the cost method, the equity method, or some other method, but it will report the investment in its financial statements as a consolidated subsidiary. THe method used on the investor's books will be different than the method used to report the investment in financial statements.

Question 205

The choice of methods that a parents uses on its books to account for its investment in a subsidiary will affect the: Consolidating process? Consolidated Financial Statements?

Answer 205

Consolidating Process - Yes Consolidated Financial Statements - No While the method a parent uses on its books to account for its investment in a subsidiary will affect the consolidating process, the choice of methods will not affect the final consolidated financial statements. The final consolidated financial statements will be the same regardless of the method used by the parent on its books; only the details of the process of developing those statements will be different. The primary difference will be in the nature of the investment eliminating entry on the worksheet.

Question 206

Which one of the following levels of voting ownership is normally assumed to convey significant influence over an investee?

Answer 206

20% - 50% Between 20% and 50% voting ownership of an investee normally is assumed to give the investor significant influence over the investee. Ownership of 20% to 50% of the voting stock of an investee may not give the investor significant influence over the investee if additional special circumstances exist, but normally, it does.

Question 207

Consolidated financial statements are based on the concept that:

Answer 207

In the preparation of financial statements, economic substance takes precedence over legal form. In form, the corporations are separate legal entities, but in substance, they are under the common economic control of parent's shareholders.

Question 208

Aceco has significant investments in three separate entities. These investments are: 1. 40% ownership of the voting stock of Kapco 2. 60% ownership of the voting stock of Placo 3. 100% ownership of the voting stock of Simco Which of Aceco's investments would be consolidated with Aceco in its consolidated financial statements?

Answer 208

Placo and Simco In Aceco's consolidated financial statements, Kapco would be shown as an investment.

Question 209

Under GAAP, which of the following can be issued as the primary form of public financial statement disclosure for a parent and its subsidiaries? Parent only statement Separate Parent and Subsidiary Statements Consolidated Statements

Answer 209

Parent only statement - No Separate parents and subsidiary statements - no consolidated statements - yes Under GAAP, only consolidated financial statements may be issued as the primary form of public disclosure for a parent and its subsidiaries. Parent only statements and separate parent and subsidiary statements may not be issued in lieu of consolidated financial statements.

Question 210

THe results of the consolidating process are recorded in the books of the: Parent Subsidiary

Answer 210

Parent - No Subsidiary - No The consolidating process takes place on worksheets and schedules, and the results are presents in the form of consolidated financial statements. Some of the worksheet and schedule data is carried forward from period end to period end to facilitate the recurring consolidating process.

Question 211

Which one of the following kinds of eliminations, if any, will be required in every consolidating process? Intercompany receivables/payables Intercompany investment Intercompany revenues/expenses

Answer 211

receivables/payables - no investment - yes revenues/expenses - no an intercompany investment elimination will be required in every consolidating process (to eliminate the parent's investment against the subsidiary's shareholder's equity). Intercompany receivables/payables and intercoompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.

Question 212

Which of the following information that exists at the date of an acquisition will be needed to carry out the consolidating process? 1. book values of a subsidiary's assets and liabilities 2. fair values of a subsidiary's assets and abilities 3. parent's cost of its investment in the subsidiary

Answer 212

1,2, and 3

Question 213

Which one of the following kinds of accounts is least likely to be eliminated through an eliminating entry on the consolidating worksheet?

Answer 213

Goodwill Goodwill may be recognized by the entry that eliminates the parent's investment in the subsidiary against the parent's share of the subsidiary's shareholder's equity, but goodwill will not be eliminated through an eliminating entry.

Question 214

Consolidated financial statements can be prepared for a business combination that was accounted for using which of the following accounting methods? Acquisition method pooling of interests method

Answer 214

acquisition method - yes pooling of interests method - yes Consolidated statements can be prepared when a business combination was accounted for using either the acquisition method or the pooling of interests method. Although the pooling of interests method can no longer be used (since June 30, 2001) to account for new business combinations, business combinations carried out under the pooling of interests method prior to that time still require the preparation of consolidated financial statements.

Question 215

Penn, Inc. a manufacturing company, owns 75% of the common stock of Sell, Inc., an investment company. Sell owns 60% of the common stock of Vane, Inc., an insurance company. In Penn's consolidated financial statements, should consolidation accounting or equity method accounting be used for Sell and Vane?

Answer 215

Consolidation used for both Sell and Vane. Sells owns 60% of Vane, it controls Vane and would need to consolidate Vane. Because Penn owns 75% of Sell, it controls Vane and would need to consolidate Sell, which consolidated Vane. Thus, all three would be consolidated, making this response correct.

Question 216

A subsidiary, acquired for cash in a business combination, owned inventories with a market value different from the book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would include this difference as part of:

Answer 216

Inventories The difference between (fair) market value and book value of inventories would be recognized by adjusting inventories to fair value on the consolidated balance sheet.

Question 217

Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination?

Answer 217

Whether the parent carries its investment in the subsidiary using the cost method or the equity method. Whether the parent carries its investment in the subsidiary using the cost method or the equity method would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination but would not be of concern in preparing financial statements immediately following the combination. When consolidated financial statements are prepared immediately following a combination, there has been no period over which the pparent has "carried" the investment on its books. Therefore, the method it WILL (going forward) use is not of concern immediately after the combination.

Question 218

On November 30, 2004, Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw Co. On November 30, 2004, Shaw's balance sheet showed a carrying amount of net assets of $3,000,000. On that date, the fair value of Shaw's property, plant and equipment exceeded its carrying amount by $400,000. In its November 30, 2004, consolidated balance sheet, what amount should Parlor report as Goodwill?

Answer 218

$350,000 Goodwill is the difference between the purchase price of $3,750,000 (250,000 * 15) and the fair value of the net assets (3,000,000 + 400,000) or $350,000

Question 219

A parent company may use which of the following methods to carry an investment in its subsidiary on the parent's books? Cost Method Equity Method

Answer 219

Cost Method - Yes Equity Method - Yes A parent company may use the cost method or the equity method to carry an investment in a subsidiary on the parent's books. Since a subsidiary will be consolidated with the parent (and possibly other subsidiaries) for reporting purposes, the method the parent uses to carry the investment on its books will not impact the consolidated statements. The consolidated statements will be the same regardless of the method the parent uses on its books to carry a subsidiary; only the consolidating process will be different.

Question 220

Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination? Cost method Equity method

Answer 220

Cost method - No Equity method - Yes If the parent uses the equity method to carry on its books the investment in a subsidiary, the carrying value of the investment will change as the equity of the subsidiary changes. However, if the parent uses the cost method, the carrying value on its books normally will not change.

Question 221

What is goodwill

Answer 221

Purchase price - Fair Value = goodwill

Question 222

Which of the following financial statements, if any, prepared by a parent immediately after a business combination is likely to be different from financial statements it prepares immediately before the business combination? Balance Sheet Income Statement

Answer 222

Balance Sheet - Yes Income Statement - No

Question 223

Which of the following financial statements, if any, prepared by a parent following an operating period that occurred after a business combination is likely to be different from financial statements it prepares immediately before the business combination? Balance Sheet Income Statement

Answer 223

Balance Sheet - Yes Income Statement - Yes

Question 224

On January 1, 2011, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for cash equal to the book value of the stock. The carrying amount of Scarp's assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim's 2011 consolidated income statement, which of the following adjustments would be made?

Answer 224

Depreciation expense would be decreased, and goodwill would be recognized. Although the cost of the investment was equal to book values, the cost of the investment was greater than the fair values, because the carrying amount of Scarp's building was more than its fair value. For consolidated statement purposes, the building would be written down to its lower fair value, and the excess of cost over fair values would be assigned to recognize goodwill. Since for consolidated purposes the building has a lower fair value than its carrying value, the depreciation expense taken on the carrying value would be greater than the depreciation expense for consolidated purposes. Thus, depreciation expense would be decreased in the consolidating process and goodwill would be recognized.

Question 225

If the parent uses the cost method to account for its investment in a subsidiary, the parent will recognize:

Answer 225

The parent's share of the subsidiary's dividends.

Question 226

Thyme, Inc. owns 16,000 of Sage Co's 20,000 outstanding common shares. The carrying value of Sage's equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for $200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling interest after the additional shares are issued.

Answer 226

$252,000 The NCI ownership after the issuance of shares is 36% (9,000/25,000) multiplied by the total equity of Sage of $700,000 (500,000 + 200,000) or 252,000.