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):
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.

31

Depreciation is the reduction in value of an asset with the passage of time, mainly due to ______

Wear and tear.

32

The difference between the GAAP and IRS calculations is often not materially different.

 

True or False

True.

 

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

33

The Depreciation Expense account appears on which financial statement?

Depreciation Expense is an income statement (temporary) account.

34

When depreciation is computed for tax purposes, it is recorded in the books, and on the tax return as a deduction.

 

True or False

False.

 

Depreciation for the IRS purposes is not recorded in the books and only appears as a deduction on the company's tax return.

35

How is net book value calculated?

Original cost

- Accumulated depreciation

- Impairment charges (if any)

Net Book Value

36

When companies purchase fixed assets, the cost of the asset is

When companies purchase fixed assets, the cost of the asset is spread over the years the machine helps produce and generate revenue, which is governed by GAAP's matching principle.

37

Accumulated Depreciation is a contra-asset balance sheet account.

 

True or False

True.

38

The IRS requires companies to use the ______ tables,

 MACRS - Modified Accelerated Cost Recovery System

39

Most small companies are permitted to use the IRS depreciation rules for both their tax return and financial statements.

 

True or False

True.

 

Assuming the small company will not issue their financial statements to third parties and do not need an audit, they are allowed to use the IRS depreciation rules for both book and tax return purposes.

40

MACRS stands for

Modified Accelerated Cost Recovery System

41

When a compilation is performed, the independent CPA organizes the companies financial data and prepares the financial statements following the industry format. 

 

True or False

True.

 

When a compilation is performed, there is no inspection of the statements as the CPA’s job scope does not go beyond organizing the financial data. In essence, when a company hires a CPA for a compilation, their primary function is to prepare the financials using whatever facts and figures were provided by the company. A CPA does not express an opinion on the reliability of the statements and whether they conform to GAAP. 

42

When a ____ is performed, there is a limited inspection of the financial statements.

Review.

 

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.
 

43

How is depreciation calculated under MACRS?

Under IRS rules, the depreciation calculation is based on a staggered formula, where specific asset classes have a designated a lifespan, and each year a certain percentage of depreciation allowance is assigned to each year, as given in MACRS depreciation tables. 

44

There are two sets of depreciation rules companies must follow.

 

True or False

True.

 

There are two sets of depreciation rules companies must follow; one governed by the Internal Revenue Service (IRS), which must be used to compute depreciation for the tax return and rules under Generally Accepted Accounting Principles (GAAP) which must be used to compute depreciation for the Financial Statements. 

45

The balance in the Accumulated Depreciation account represents

The balance in the Accumulated Depreciation account reflects the total depreciation expense recognized since the asset has been placed in service.

46

Accumulated Depreciation is a contra-asset balance sheet account and increases the balance in the associated asset account.

 

True or False

False

 

When depreciation is recognized, and an amount is credited to the Accumulated Depreciation account, this increases the balance in the account and since it is a contra-asset account, the credit balance offsets (reduces) the balance in the associated asset account. For example, if there is an asset on the books with an original cost of $500, if the balance in the Accumulated Depreciation account is $200, the net book value of the asset is $300. As depreciation is recognized, the balance in Accumulated Depreciation is increased, further decreasing the net book value.

47

Companies are allowed to record their depreciation monthly as opposed to at the end of the year.

 

True or False.

True.

 

At minimum, companies are required to record annual depreciation, however some companies may choose to record depreciation more frequently, and may recognize the expense monthly or quarterly.
 

48

The purpose of spreading the cost of an asset over several years is to:

The purpose of spreading the cost of an asset over several years is to match the cost of the asset with the revenue it helps to produce and generate each year and is mandatory under the 'matching principle'

49

Fixed assets appear in the financial statements and are recorded in the books at net book value.

 

True or False

True

Fixed assets appear in the financial statements and are recorded in the books at its net book value, which is its original cost, minus accumulated depreciation, minus impairment charges if any.

50

What is materiality?

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.