Flashcards in MIDTERM II REVIEW Deck (219):
What would be the first step for a change in inventory methods? (i.e. LIFO to FIFO)
Step #1: Revise Comparative Financial Statements
(i.e. Make those statements appear as if the newly adopted accounting method, FIFO, had been applied all along)
What would be the second step for change in inventory methods?
Step #2: The appropriate accounts are adjusted.
What would be the third step for change in inventory methods?
Step #3: A disclosure note provides additional information. (i.e. must provide clear justification that the change is appropriate)
The disclosure note also would indicate the effects of the change on:
1. items not reported on the face of the primary statements
2. any per share amounts affected for the current period and all prior periods
3. the cumulative effect of the change on retained earnings or other components of equity as of the beginning of the earliest period presented
Accounting records usually are __________ for a company changing to LIFO to report the change retrospectively.
Changes in inventory methods, other than a change to LIFO, are accounted for __________.
retrospectively (In other words, this means reporting all previous periods' financial statements as if the new method had been used in all prior periods.)
Define Property, Plant, and Equipment:
Productive assets that derive their value from long-term use in operations rather than from resale.
What are the typical acquisition costs for Property, Plant, and Equipment?
All expenditures necessary to get the asset in condition and location for its intended use.
Broad term that includes machinery, computers and other office equipment, vehicles, furniture, and fixtures.
What are the typical acquisition costs of equipment?
Purchase price (less discounts), taxes, transportation, installation, testing, trial runs, and reconditioning.
Real property used in operations (land held for speculative investment or future use is reported as investments or other assets).
What are the typically acquisition costs for land?
Purchase price, attorney's fees, title, recording fees, commissions, back taxes, mortgages, liens, clearing, filing, draining, and removing old buildings.
Define Land Improvements:
Enhancements to property such as parking lots, driveways, private roads, fences, landscaping, and sprinkler systems.
What are the typical acquisition costs for land improvements?
Separately identifiable costs
Structure that include warehouses, plant facilities, and office buildings.
What are typical acquisition costs for buildings?
Purchase price, attorney's fees, commissions, and reconditioning.
Define Natural Resources:
Productive assets that are physically consumed in operations such as timber, mineral deposits, and oil and gas reserves.
Define intangible assets:
Productive assets that lack physical substance and have long-term but typically uncertain benefits.
What are the typical acquisition costs for intangible assets?
All expenditures necessary to get the asset in condition and location for its intended use.
Exclusive 2-year right to manufacture a product or use a process.
What are the typical acquisition costs for patents?
Purchase price, legal fess, filing fees, not including internal R&D
Exclusive right to benefit from a creative work such as a song, film, painting, photograph, or book.
What are typical acquisition costs for copyrights?
Purchase price, legal fees, filing fees, not including internal R&D
Define Trademarks (tradenames):
Exclusive right to display a word, a slogan, a symbol, or an emblem that distinctly identifies a company, product or a service.
What are the typical acquisition costs for trademarks?
Purchase price, legal fees, filing fees, not including internal R&D
A contractual arrangement under which a franchisor grants the franchisee the exclusive right to use the franchisor's trademark or tradename and certain product rights.
What are typical acquisition costs for franchises?
Franchise fee plus any legal fees.
The unique value of the company as a whole over and above all identifiable assets.
What are the typical acquisition costs of goodwill?
Excess of fair value of the consideration exchanged for the company over the fair value of the net assets acquired.
The cost of a major improvement to a delivery truck that extends its useful life generally would be __________. On the other hand, the cost of an engine tune-up for the delivery truck simply allows the truck to continue its productive activity but does not increase future benefits would be __________.
The costs of land improvements are __________ and __________.
The cost of a natural resource includes the __________ costs for the use of land, the __________ and __________ costs incurred before production begins, and __________ costs incurred during or at the end of extraction.
exploration & development
What are acquisition costs?
The amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.
What are exploration costs?
Are expenditures such as drilling a well, or excavating a mine, or any other costs of searching for natural resources.
What are development costs?
They are incurred after the resource has been discovered but before production begins. They include a variety of costs such as expenditures for tunnels, wells, and shafts.
What are restoration costs?
The are costs to restore land or other property to its original condition after extraction of the natural resource ends.
What are asset retirement obligations (ARO)?
Obligations associated with the disposition of an operational asset.
How do we measure an asset retirement obligation (ARO)?
It is measured at fair value and is recognized as a liability and corresponding increase in asset valuation.
AROs arise only from __________ obligations associated with the retirement of tangible long-lived asset that result from the acquisition, construction, or development and (or) normal operation of a long-lived asset.
A retirement obligation might arise at the __________ of an asset's life or during its __________ life.
A company recognizes the fair value of an ARO in the period it's __________.
What is the expected cash flow approach?
adjust the cash flows, not the discount rate, for the uncertainty or risk of those cash flows
What is depletion?
allocation of the cost of natural resources
What is an accretion expense?
the increase in asset retirement obligation (ARO) that accrues as an operating expense
__________ costs are one example of asset retirement obligations.
__________ could result from the acquisition of many different types of tangible assets, not just natural resources.
Asset retirement obligations (ARO)
Intangible assets generally represent:
exclusive rights that provide benefits to the owner
Intangible assets with finite useful lives are __________; intangible assets with indefinite useful lives are __________.
Companies can either __________ or __________ intangible assets.
Purchased intangible assets are valued at their __________ cost.
Trademarks or tradenames often are considered to have __________ useful lives.
__________ operations are among the most common ways of doing business.
When a patent is __________ __________, the research and development costs of doing so are expensed as incurred.
Most purchased intangibles are __________ __________. That is, cost can be directly associated with the specific intangible right.
__________ can only be purchased through the acquisition of another company.
How do we measure goodwill?
Goodwill is the excess of the fair value of consideration exchanged over the fair value of the net assets acquired.
Goodwill, along with other intangible assets with indefinite useful lives, is not __________.
U.S. GAAP makes it mandatory that assets and liabilities acquired in a business combination be valued at their __________ values. Any negative goodwill is reported as a __________ in the year of the combination.
In a business combination, an intangible asset must be recognized as a an asset apart from __________ if it arises from contractual or other legal rights or is separable.
Under the new standard update, sellers are allowed to capitalize, as an intangible asset:
the incremental costs of obtaining and fulfilling a long-term (longer than one year) contract. (e.g. sales commission)
In a __________ __________, the total purchase price is allocated in proportion to the relative fair values of the assets acquired.
The controlling principle in each of these situations is that in any noncash transaction (not just those dealing with property, plant, and equipment and intangible assets):
the components of the transaction are recorded at their fair values
Assets acquired in noncash transactions are valued at the fair value of the assets __________ or the fair value of the assets __________, whichever is more clearly evident.
Some portion of the payment(s) required by a non-interest bearing note in reality is __________.
Noncash transactions are recorded at the __________ value of the items exchanged.
On January 2, 2013, The Midwestern Steam Gas Corporation purchased an industrial furnace. In payment, Midwestern signed a noninterest-bearing note requiring $50,000 to be paid on December 31, 2014. If Midwestern had borrowed cash to buy the furnace, the bank would have required an interest rate of 10%. What is the journal entry to record this transaction?
Debit: Furnace [PV: ($50,000 * 0.82645)] = $41,323
Debit: Discount on note payable (difference) = $8,677
Credit: Note payable (face amount) = $50,000
Assuming that Midwestern's fiscal year-end is December 31 and that adjusting entries are recorded only at the end of each year, the company would record the following entries at the end of 2013 and 2014 to accrue interest and payment of the note:
December 31, 2013
Debit: Interest Expense ($41,323 * 10%) = $4,132
Credit: Discount on note payable = $4,132
December 31, 2014
Debit: Interest Expense ([$41,323 + $4,132] * 10%) = $4,545
Credit: Discount on not payable = $4,545
Debit: Note payable = $50,000
Credit: Cash = $50,000
Assets acquired by issuing common stock are valued at the fair value of the __________ or the fair value of the __________, whichever is more clearly evident.
__________ __________ are recorded at their fair values.
Revenue is __________ for the amount paid by an unrelated party.
GAAP requires that donated assets be recorded as __________.
What are government grants?
Grants awarded for the purchase or production of fixed assets (grants related to assets) are generally offset against the acquisition or production costs of the respective assets and reduce future depreciations accordingly.
Both U.S. GAAP and IFRS require that companies value donated assets at their __________ values.
Unlike U.S. GAAP, donated assets are not recorded as revenue under IFRS. IFRS requires:
government grants to be recognized in income over the periods necessary to match them on a systematic basis with the related costs that are intended to compensate.
IAS No. 20 allows two alternatives for grants related to assets:
1. Deduct the amount of the grant in determining the initial cost of the asset.
2. Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the asset's useful life.
What is capital budgeting?
The process of evaluating the purchase of operational assets.
If the present value is higher than the __________ cost, the asset is acquired.
The fixed-asset turnover ratio measures:
a company's effectiveness in managing property, plant, and equipment.
Fixed-asset turnover ratio = Net Sales/Average Fixed Assets
A gain or loss is recognized for the difference between:
the consideration received and the asset's book value.
Property, plant, and equipment and intangible assets to be disposed of by sale are classified as __________ and measured at the __________.
"held for sale"
lower of book value or fair value less cost to sell
If the fair value less cost to sell is below book value, we recognize an __________ __________.
Assets classified as "held for sale" are not __________ or _________.
Occasionally companies dispose of property, plant, and equipment and intangible assets unintentionally. These so-called __________ __________ include destruction by fire, earthquake, flood, or other catastrophe and expropriation by a government body.
An asset received in exchange of non-monetary assets generally is valued at:
A __________ is recognized when the fair value of an asset given is more than its book value.
Gain or loss is the difference between:
fair value and book value of the asset given
T/F: The amount of cash given or received has no effect on the amount of gain or loss recognized.
A __________ is recognized when the fair value of an asset given is less than its book value.
If we can't determine the fair value of either asset in the exchange, the asset is valued at the __________ value of the asset given.
__________ __________ is present when future cash flows change as a result of the exchange.
When the fair value of the asset given is less than its book value, we always use __________ value to record the exchange.
The cost of a self-constructed asset includes:
identifiable materials and labor and a portion of the company's manufacturing overhead costs
What is the full-cost approach?
All overhead costs are allocated both to production and to self-constructed assets based on the relative amount of chosen cost driver (i.e. labor hours) incurred.
In keep with both the __________ __________ principle and the __________ concept, all costs during this period, including interest, should be capitalized and then allocated as depreciation during later periods when the assets are providing benefits.
Only assets that are constructed as __________ projects qualify for interest capitalization.
Only interest incurred during the __________ period is eligible for capitalization.
The interest capitalization period begins when:
construction begins and the first expenditure is made as long as interest costs are actually being incurred.
__________ __________ __________ approximate the average debt necessary for construction.
Average accumulated expenditures
Average accumulated expenditures is determined by:
Loans * Portion of Year Outstanding
$400,000 * (9/12) = $300,000
The amount of interest capitalized is determined by:
Average accumulated expenditures * Annual interest rate
[Loans * Portion of Year Outstanding] * Annual interest rate
[$500,000 * (12/12)] * 8% = $40,000
Interest capitalized is limited to interest __________.
What is the specific interest method?
For interest capitalization, rates from specific construction loans to the extent of specific borrowings are used before the average rate of other debt.
What is the weighted-average interest method?
For interest capitalization, weighted-average rate on all interest-bearing debt, including all construction loans, is used.
If material, the amount of interest capitalized during the period must be __________.
U.S. GAAP requires all research and development costs to be:
expensed in the periods incurred
R&D costs entail a high degree of uncertainty of future __________ and are difficult to match with future __________.
Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about significant improvement to and existing product or process.
Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
What are some examples of R&D costs?
1. Laboratory research aimed at discovery of new knowledge
2. Searching for applications of new research findings or other knowledge
3. Design, construction, and testing of preproduction prototypes and models
4. Modification of the formulation or design of a product or process
What are some examples of Non-R&D costs?
1. Engineering follow-through in an early phase of commercial production
2. Quality control during commercial production including routine testing of products
3. Routine ongoing efforts to refine, enrich, or otherwise improve on the qualities of an existing product
4. Adaption of an existing capability to a particular requirement or customer's need as a part of a continuing commercial activity
R&D expense includes the __________ and __________ of assets used in R&D activities.
Costs incurred before the start of commercial production are all expensed as __________.
Costs incurred after commercial production begins would be either be expensed or included in the __________.
cost of inventory (manufacturing overhead)
General and administrative costs (should/should not) be included R&D costs.
Should NOT be included unless they are clearly related to the R&D activity.
__________ and __________ costs for patents, copyrights, and other developed intangibles are capitalized and amortized in future periods.
U.S. GAAP requires __________ of total R&D expense incurred during the period.
disclosure (either as a line item in the income statement or in a disclosure note)
__________ costs are expensed in the period incurred.
What are development stage enterprises?
A new business that has either not commenced its principal operations or has begun its principal operations but has not generated significant revenues.
U.S. GAAP requires the capitalization of software development costs incurred after __________ __________ is established.
What is technological feasibility?
established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements
Between the start of R&D activity and technological feasibility, costs are __________.
expensed as R&D
Between technological feasibility and date of product release, costs are __________.
After the date of product release, costs are __________.
not R&D expenditures
U.S. GAAP requires all research and development expenditures:
to be expensed in the period incurred
IFRS requires research expenditures to be __________ in the period incurred. However, development expenditures that meet specified criteria are __________ as an intangible asset.
U.S. GAAP requires that the fair value of in-process research and development is:
capitalized as an indefinite-life intangible asset
The percentage we use to amortize computer software development costs under U.S. GAAP is greater of:
1. the ratio of current revenues to current and anticipated revenues
2. the straight-line percentage over the useful life of the software
This approach is allowed under IFRS, but not required.
Cost allocation is known as __________ for plant and equipment, __________ for natural resources, and __________ for intangibles.
Depreciation, depletion, and amortization are processes that attempt to satisfy the __________ principle.
Depreciation is a process of __________ __________, not __________.
Depreciation, depletion, and amortization for an asset used to manufacture a product are included in the:
cost of inventory
When a __________ cost is reported as expense depends on when the product is sold; when a __________ cost is reported as an expense depends on the reporting period in which it is incurred.
What is service life?
The estimated use that the company expects to receive from the asset
What is the allocation base?
the value of the usefulness that is expected to be consumed
What is the allocation method?
the pattern in which the usefulness is expected to be consumed
The service life, or useful life, can be expressed in units of __________ or in units of __________.
Expected __________ can shorten service life below physical life.
How do we measure allocation base?
Difference between asset's acquisition cost and its residual value
What is residual (salvage) value?
the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.
The allocation method used should be __________ and __________ and correspond to the pattern of asset use.
What are time-based methods?
allocates the cost base according to the passage of time
What are activity-based methods?
Allocation of an asset's cost base using a measure of the asset's input or output
The Hogan Manufacturing Company purchased a machine for $250,000. The company expects the service life of the machine to be 5 years. During that time the machine will produce 140,000 units. The anticipated residual value is $40,000. Calculate the depreciation per year using the straight-line method:
($250,000 - $40,000)/5 years = $42,000 per year
__________ depreciation methods are appropriate when the asset is more useful in its earlier years.
For accelerated depreciation methods, the early years incur ___________ depreciation and __________ repairs and maintenance expense, while the later years have __________ depreciation and __________ repairs and maintenance.
How do we calculate depreciation using the sum-of-the-years' digits method (SYD)?
Depreciable base * Declining Fraction = Depreciation
($250,000 - $40,000) * (5/15) = $70,000
($250,000 - $40,000) * (4/15) = $56,000
($250,000 - $40,000) * (3/15) = $42,000
How do we calculate depreciation using the double-declining-balance method (DDB)?
Book Value @ Beg. of Year * Annual Depr. Rate = Depreciation
$250,000 * 40% = $100,000
$150,000 * 40% = $60,000
$90,000 * 40% = $36,000
It is not uncommon for a company to switch from __________ to __________ approximately halfway through an asset's useful life as part of the company's planned depreciation approach.
__________ depreciation methods estimate service life in terms of some measure of productivity.
How do we calculate depreciation using the units-of-production method?
Calculate Average depreciation rate per unit = Depreciable base/# of units
($250,000 - $40,000)/140,000 units = $1.50 per unit
Units Produced * Average depreciation rate per unit = Depreciation
24,000 units produced * $1.50 per unit = $36,000
However, __________ methods quite often are either infeasible or too costly to use. That's why most companies use __________ methods.
__________ method produces a higher net income than __________ methods in the early years of an asset's life.
Depreciation is provided over the estimated useful lives of the assets, principally using the __________ method. For tax purposes, __________ methods are used.
T/F: A company does have to use the same depreciation method for both financial reporting and income tax purposes.
False (it does not have to)
The IFRS requires that each component of an item of property, plant, and equipment must be:
depreciated separately if its cost is significant in relation to the cost of the item.
U.S. GAAP and IFRS determine depreciable base in the same way, by:
Cost - Residual Value
However, IFRS requires a review of residual values at least annually.
__________ and __________ depreciation methods aggregate assets to reduce the record-keeping costs of determining periodic depreciation.
What is the group depreciation method?
collection of assets defined as depreciable assets that share similar service lives and other attributes
What is the composite depreciation method?
Physically dissimilar assets are aggregated to gain the convenience of group depreciation
How do we calculate the group depreciation rate?
Depreciation per year (straight-line)/Total Cost
How do we calculate average service life?
Total depreciable base/Depreciation per year (straight-line)
No gain or loss is recorded when a group or composite asset is:
retired or sold
How does U.S. GAAP and IFRS value property, plant, and equipment?
U.S. GAAP reports PP&E in the balance sheet at (Cost - Accumulated Depreciation) = Book Value (using the cost model)
IFRS can report it at book value (same as above) or at fair value using the revaluation model.
Under IFRS, if fair value is higher than book value, the difference is reported as:
Other Comprehensive Income (OCI) which then accumulates in a "revaluation surplus"
Under IFRS, if book value is higher than fair value, the difference is reported as:
an expense in the income statement
Unless revaluation surplus account relating to same asset has a balance from previous increase in fair value, that balance is eliminated before debiting revaluation expense
Depletion of the cost of natural resources usually is determined using the __________ method.
The units-of-production method is often used to determine __________ and __________ on assets used in the extraction of naturals resources.
What are biological assets?
Living animals and plants, including trees in a timber tract or in a fruit orchard.
Under U.S. GAAP, a timber tract is valued at cost less accumulated __________ and a fruit orchard at cost less accumulated __________.
Under IFRS, biological assets are valued at:
their fair value less estimated costs to sell, with changes in fair value included in the calculation of net income
The cost of an intangible asset with a finite useful life is __________.
The cost of an intangible asset with an indefinite useful life is __________.
__________ is an intangible asset whose cost is not expensed through periodic amortization.
IFRS allows a company to value an intangible asset subsequent to initial valuation at:
1. cost less accumulated depreciation
2. fair value, if fair value can be determined by reference to an active market
Goodwill, however, cannot be __________.
What is the half-year convention?
record 1/2 of a full year's depreciation in the year of acquisition and another half year in the year of disposal
A change in estimate should be reflected in the:
financial statements of the current period and future periods
Changes in depreciation, amortization, or depletion methods are accounted for the same way as a change in:
What is the proper treatment of material errors occurring in a previous year?
1. Previous years' financial statements are retrospectively restated
2. Account balances are corrected
3. If Retained Earnings requires correction, the correction is reported as a prior period adjustment.
4. A note describes the nature of the error and the impact of the correction on income
An asset held for use should be written down if there has been a:
significant impairment of value
Property, plant, and equipment and finite-life intangible assets are test for impairment only when:
events or changes in circumstances indicate book value may not be recoverable
Measurement of Impairment Loss
STEP 1 - An impairment loss is required only when the undiscounted sum of future cash flows is __________ than book value.
STEP 2 - The impairment loss is the __________ of book value over fair value.
The present value of future cash flows often is used as a measure of:
When does U.S. GAAP test for impairment of PP&E?
When events or changes in circumstances indicate that book value may not be recoverable.
When does the IFRS test for impairment for PP&E?
Assets must be assessed for indicators of impairment at the end of each reporting period. Indicators of impairment are similar to U.S. GAAP.
Under U.S. GAAP, an impairment loss is required when:
an asset's book value exceeds the undiscounted sum of the asset's estimated future cash flows
Under IFRS, an impairment loss is required when:
an asset's book value exceeds the higher of the:
1. asset's present value of estimated future cash flows
2. fair value less costs to sell
Under U.S. GAAP, the impairment loss is the difference between:
book value and fair value
Under IFRS, the impairment loss is the difference between:
book value and the "recoverable amount" (the higher of the asset's present value of estimated future cash flows and fair value less costs to sell)
Under U.S. GAAP, subsequent reversal of loss is:
Under IFRS, subsequent reversal of loss is:
required if the circumstances that caused the impairment are resolved
IFRS requires that intangible assets with indefinite useful lives should be tested for impairment at least __________.
Unlike other assets, goodwill cost:
1. can't be directly associated with any specific identifiable right
2. is not separable from the company as a whole
STEP 1 - A goodwill impairment loss is indicated when the fair value of the reporting unit is __________ than its book value.
STEP 2 - A good will impairment loss is measured as the ___________ of the book value of the goodwill over its "implied" fair value.
A __________ ___________ is an operating segment of a company for which discrete financial information is available and segment management regularly reviews the operating results of that component.
The "implied" fair value of goodwill is a residual amount measured by:
subtracting the fair value of all identifiable net assets from the unit's fair value
What is the level of testing for U.S. GAAP?
Reporting unit - a segment or a component of an operating segment for which discrete financial information is available
What is the level of testing for IFRS?
Cash-generating unit (CGU) - the lowest level at which goodwill is monitored by management. A CGU can't be lower than a segment.
Under U.S. GAAP, how do we measure impairment of value for goodwill?
1. Compare the fair value of the reporting unit with its book value. A loss is indicated if fair value is less than book value.
2. The impairment loss is the excess of book value over implied fair value.
Under IFRS, how do we measure the impairment of value for goodwill?
1. Compare the recoverable amount of the CGU to book value. If the recoverable amount is less, reduce goodwill first, then other assets. The recoverable is the higher of fair value less costs to sell and present value of estimated future cash flows.
IFRS requires goodwill to be tested for impairment at least __________. U.S. GAAP allows a company to avoid annual testing by making __________ __________ of the likelihood of goodwill impairment to determine if step one is necessary.
Both U.S. GAAP and IFRS prohibit:
the reversal of goodwill impairment loss
For assets held for sale, if book value exceeds fair value less cost to sell, an __________ __________ is recognized for the difference.
The FASB and IASB have identified impairment as a topic for longer-term __________.
Expenditures related to assets can increase future benefits in the following ways:
1. An extension of the useful life of the asset
2. An increase in operating efficiency of the asset resulting in either an increase in the quantity of goods or services produced or a decrease in future operating costs.
3. An increase in the quality of goods or services produced by the asset.
Many companies do not capitalize any expenditure unless it exceeds a predetermined amount that is considered __________.
What are repairs and maintenance?
Expenditures to maintain a given level of benefits
Expenditures for repairs and maintenance generally are:
expensed when incurred
What are additions?
The addition of a new major component to an existing asset.
The costs of additions are usually __________.
What are improvements?
The replacement of a major component
The costs of improvements usually are __________.
Give examples of additions:
1. Adding a refrigeration unit to a delivery truck increases the capability of the truck, thus increasing future benefits.
2. Construction of a new wing on a building
3. Addition of a security system on an existing building
What are the three methods used to record the cost of improvements?
2. Capitalization of new cost
3. Reduction of accumulated depreciation
What are rearrangements?
Expenditures to restructure an asset without addition, replacement, or improvement.
The cost of material rearrangements should be:
capitalized if they clearly increase future benefits
The costs incurred to successfully defend an intangible right should be __________.
The costs incurred to unsuccessfully defend an intangible right should be __________.