09.23 Flashcards
Dannon Co. reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information:
Beg pp exp $1,300 Beg accr exp 1,650 End pp exp 1,800 End accr exp 1,200 What amount of expense should Dannon report on its books under the accrual basis?
$34,250
The best way to approach this question is by thinking through the effect on cash basis expenses for the change in the prepaid and accrued expenses. The expenses reported on a cash basis are 35,200. Prepaid expenses increased by 500; which means that more cash was paid than expense incurred. Therefore, the 500 should be deducted from the cash basis expense to derive accrual basis expense. Accrued expenses decreased by 450; which means more cash was paid than expenses incurred. Therefore, the 450 should be deducted from the cash basis expense to derive the accrual basis expense. The correct answer is 35,200 – 500 – 450 = 34,250.
U Co. had cash purchases and payments on account during 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?
$441,000
**Using an equation, or a T-account, to analyze accounts payable (AP) yields accrual purchases: Beginning AP ($64,000) + Accrual purchases—Cash payments ($455,000) = Ending AP ($50,000). Solving for accrual purchases yields $441,000.
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:
- Confirmatory value.
- Predictive Value.
- Representational faithfulness.
- Faithful representation.
Predictive Value.
**Predictive value is the ingredient that helps users increase the likelihood of forecasting the outcome of events. Financial statement information is useful if it helps users make decisions about investing and extending credit. These decisions involve predictions of a firm’s future financial performance, position, and cash flows.
On December 31, 20X2, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 20X2, the net realizable value of the equipment was below historical cost.
What is the appropriate measurement basis for equipment included in Brooks’ December 31, 20X2, Balance Sheet?
Historical cost.
Current reproduction cost.
Net realizable value.
Current replacement cost.
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.
What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies? Conservatism. Relevance. Consistency. Faithful representation
Conservatism.
**Gain contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.
According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of: Consistency. Cost-benefit. Relevance. Representational faithfulness.
Cost-benefit.
**Cost-benefit is the only constraint among the four answer alternatives. When the cost of information exceeds its benefit, it should not be reported, even if it might be useful.
Which of the following statements is correct regarding fair value measurement?
Fair value is a market-based measurement.
Fair value is an entity-specific measurement.
Fair value measurement does not consider risk.
Fair value measurement does not consider restrictions.
Fair value is a market-based measurement.
**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.
A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial asset in each of the four markets:
Market Quoted Price A $20,000 B 25,000 C 30,000 D 35,000 What is the fair value of the financial asset?
$35,000
**In the absence of a principal market, the entity would use the most advantageous market to determine the fair value for an asset or liability. The most advantageous market is the one in which the entity could sell the asset at a price that maximizes the amount that would be received for the asset. Market D has a quoted price of $35,000, which is the highest price for the asset. Therefore, it is the most advantageous.
According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes
- Timeliness, predictive value, and feedback value.
- Neutrality, completeness, and free from error.
- Predictive value, confirmatory value, and materiality.
- Comparability and consistency.
Neutrality, completeness, and free from error.
**The IASB Framework for the Preparation and Presentation of Financial Statements has converged with the FASB’s SFAC 8. The concept of faithful representation, includes completeness, neutrality, and free from error.
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
- Accrual Basis-YES
- Going Concern-YES
**There are two assumptions underlying the preparation and presentation of financial statements: accrual basis and going concern. IASB Framework, para 22-23.
Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements?
- Earnings per Share (EPS)
- Information by Segment
- Earnings per Share (EPS)-NO
- Information by Segment-NO
**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 U.S. GAAP or full IFRS.
Which of the following statements, if any, concerning IFRS for SMEs is/are correct?
I. IFRS for SMEs is based on accrual basis accounting.
II. Generally, IFRS for SMEs may be used as an alternative to using OCBOA.
Both I and II.
**IFRS for SMEs is based on accrual basis accounting (Statement I) and, generally, IFRS for SMEs may be used as an alternative to using OCBOA (Statement II).
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-basis operating expenses, what would be the amount of operating expenses?
$165,000
**The approach on this question is to first calculate the cash-based operating expenses. Cash-based operating expenses are $150,000. The next step is to adjust the cash-based expense for the prepaid and accrued expenses. Beginning of the year prepaid expenses were paid in the prior year, but the expense was incurred (or consumed) in the current year, and end of the year prepaid expenses were paid this year but will be consumed next year. Therefore, you add the beginning of the year prepaid and subtract the end of the year prepaid expenses from the cash-based number.
Cash-based expenses will also be adjusted for the accrued expense. Beginning of the year accrued expenses were not paid last year, but were last year’s expense item paid this year. End of the year accrued expenses were not paid this year, but are this year’s expense paid next year. Therefore, you subtract beginning of the year accrued and add end of the year accrued expenses to the cash-based number.
Cash-based operating expenses $150,000
Add the beginning of the year prepaid expenses 10,000
Subtract the end of the year prepaid expenses (15,000)
Subtract the beginning of the year accrued expenses ( 5,000)
Add the end of the year accrued expenses 25,000
Accrual-based operating expenses $165,000
On July 1, 20X3, Roxy Co. obtained fire insurance for a three-year period at an annual premium of $72,000 payable on July 1 of each year.
The first premium payment was made July 1, 20X3. On October 1, 20X3, Roxy paid $24,000 for real estate taxes to cover the period ending September 30, 20X4. This prepayment was made to obtain a discount.
In its December 31, 20X3, Balance Sheet, Roxy should report prepaid expenses of:
$54,000.
Unexpired fire insurance premium: $72,000(1/2) = $36,000
The premium covers only one year, and half the year is elapsed as of December 31.
Unexpired property tax prepayment: $24,000(9/12) 18,000
Total prepaid expenses (asset) at December 31, 2003 $54,000
Under 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, 20X5, is as follows:
Prepaid insurance at December 31, 20X4 $105,000
Charges to insurance expense during 20X5 (including a year-end adjustment of 17,500) 437,500
Prepaid insurance at December 31, 20X5 122,500
What was the total amount of insurance premiums paid by East during 20X5?
$455,000
**
Beginning prepaid balance + Premiums paid − Expense charges = Ending prepaid balance
$105,000 + Premiums paid − $437,500 = $122,500
Premiums paid = $455,000
