Section 1 - Depreciation on the Financial Statements vs. Tax Return Flashcards Preview

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Flashcards in Section 1 - Depreciation on the Financial Statements vs. Tax Return Deck (50)
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1

When a _____ is performed, the CPA does not express an opinion on the reliability of the statements and whether they conform to GAAP. 

Compilation.

 

When a compilation is performed, the independent CPA organizes the companies financial data and prepares the financial statements following the industry format. A compilation is nothing more compiling the data, there is no inspection of the statements as the CPA’s job scope does not go beyond organizing the financial data.

2

The matching principle requires:

The matching principle requires requires that revenues earned in an accounting period be matched with related expenses.

3

The 'fixed' in fixed assets means

The word fixed in fixed asset means the asset will not be used up, consumed or sold within one year or accounting period and does not mean the item cannot be moved.

4

Fixed assets, are those that

Fixed assets, also referred to as Property (land), Plant (buildings) and Equipment (machine and trucks) are considered long-term assets and provide benefits to the company for more than one year, or accounting cycle.

5

Fixed assets are also referred to as

Property (land), Plant (buildings) and Equipment (machine and trucks)

6

When does a CPA performing a review or audit not have to make sure that the tax depreciation expense is the same amount recorded for GAAP depreciation?

If the difference between the two is immaterial, it can be ignored.

 

For example, if a company has book depreciation of $33,000 and tax depreciation is 29,000, so long as the CPA deems that the $4,000 is not material, depreciation can be presented on the reviewed or audited financial statements as $29,000.

7

Accumulated depreciation is used to determine an asset's net book value.

 

True or False

True.

 

Net book value is found using the accumulated depreciation account balance as follows:

 

Original Cost

- Accumulated Depreciation

- Impairment charges (if any)

Net book value

8

GAAP depreciation rules are required when

GAAP depreciation rules are required when a company's financial statements are prepared for use by third parties.

 

Example: Used to obtain a bank loan, potential investors, or company looking to acquire.

9

Many of the tax depreciation rules are based on the same concepts as GAAP depreciation rules. 

 

True or False

True.

10

Depreciation must be recorded on a yearly basis regardless of whether the company follows a calendar or fiscal year.

 

True or False.

True.

11

All publicly traded companies must use GAAP for the preparation of their financial statements.

 

True or False

True.

12

The materiality concept varies based on the size of the entity and often based on the net impact on 

Materiality is generally based on the impact on reported profits, or the percentage or dollar change in a specific line item in the financial statements.

13

 Intangible assets are

Intangible assets are those things of value that a company owns that cannot be physically seen or touched.

 

Examples of Intangible assets include: Goodwill, patents, and copyrights are an example of intangible assets.

14

When an audit is performed, the independent CPA examines the company’s financial statements and expresses an opinion on whether the financial statements ________ conform to GAAP rules.

Materially.

 

Materiality is an accounting concept that sets a threshold for which missing or incorrect information in the financial statements is substantial enough to affect the judgment and decision making of users. 
 

15

The general entry to record depreciation expense is:

Depreciation Expense (DR.)

Accumulated Depreciation (CR.)

 

The debit to depreciation expense increases the Depreciation expense balance and the credit to the contra-asset account Accumulated Depreciation increases the balance.

16

For companies subject to GAAP, depreciation is computed twice.

 

True or False

True.

 

For companies subject to GAAP, depreciation is computed twice; once under GAAP for their financial statements and once under the IRS rules for the preparation of their federal tax return.

17

Fixed assets are purchased with the intent of immediate resale.

 

True or False

False.

 

Fixed assets are not purchased with the intent of immediate resale, but instead for productive use within the company for more than one year.
 

18

The fundamental difference between GAAP and IRS depreciation is?

The fundamental difference is how the depreciation is calculated. For one, the IRS requires companies to use the MACRS tables which specifies the assets recovery period (useful life) and assumes that there is no residual value as compared to GAAP which allows companies to choose one of four methods, Straight-line, units of production, declining balance method and the sum of the year's digits, allows management to estimate the useful life, as well as estimate the asset's residual value.
 

19

Depreciation is governed by which GAAP principle?

Matching principle

 

20

Current assets are those that will be

Current assets are those that will be used up or converted into cash within a year or one accounting cycle, whichever is longer. 

21

When an audit is performed, the independent CPA examines the company’s financial statements and expresses an opinion on whether the financial statements materially conform to GAAP rules.
 

True or False

True.

22

With MACRS, all assets are depreciated to zero and assume there is no residual or "salvage" value associated with the asset.

True.

 

As compared to the GAAP depreciation rules which allow companies to estimate the useful life and residual value, the IRS rules which require MACRS assumes that assets have no residual value, therefore, all assets are depreciated to zero.

23

A CPA’s preparation of a company’s income tax return is considered involvement with the financial statements

 

True or False 

False.

 

A CPA’s preparation of a company’s income tax return is not considered involvement with the financial statements and, much like a compilation, does not require the CPA to use GAAP depreciation rules
 

24

Which methods are allowed under GAAP depreciation?

GAAP allows companies to choose one of four methods: 

  1. Straight-line
  2. Units of production
  3. Declining balance method (125%, 150%, 200%)
  4. Sum-of-the-years digits.
     

25

If a company has book depreciation of $23,000 and tax depreciation is 19,000, so long as the CPA deems that the $4,000 is not material, depreciation can be presented on the reviewed or audited financial statements as $19,000.

 

True or False

True.

 

So long as the $4,00 difference in the financial statements is not substantial enough to affect the judgment and decision making of users, the company is allowed to use the same amount for both book and tax purposes.

26

When an audit is performed, the independent CPA provides a report describing his or her findings after performing a limited inspection of the financial statements and stating whether her or she found any material differences from the GAAP rules.

 

True or False.

False

 

When a review is performed, the independent CPA provides a report describing his or her findings after performing a limited inspection of the financial statements and stating whether her or she found any material differences from the GAAP rules. When an audit is performed, the independent CPA examines the company’s financial statements and expresses an opinion on whether the financial statements materially conform to GAAP rules.

27

Depreciation is defined as

Depreciation is defined as a system for allocating or spreading the cost of 'fixed assets' over their estimated useful life in a rational and systematic manner.

28

Depreciation Expense is an income statement account.

 

True or False

True.

29

A company that prepare their financial statements for third parties under GAAP can have an independent CPA perform one of the following three services

  1. Compilation
  2. Review
  3. Audit

30

Depreciation is an example of an accrual.

 

True or False

False.

 

Although made at the end of the period with other adjusting entries, depreciation is not an accrual or deferral, but simply one of the other end of period adjustments.