3 Flashcards
Which of the following circumstances will most likely require application of the effective interest method of allocation?
The interest method is mostly likely to be applied when (1) the transaction is a borrowing and a lending; (2) assets or liabilities similar to those being accounted for are allocated using the interest method; (3) the asset or liability has closely related, reasonably estimable cash flows; or (4) the initial measurement was at present value. A typical example of the interest method is the amortization of the discount or premium on bonds.
According to the FASB’s conceptual framework, asset valuation accounts are
Asset valuation accounts are separate items sometimes found in financial statements that reduce or increase the carrying amount of an asset. The conceptual framework considers asset valuation accounts to be part of the related asset account. They are not considered to be assets or liabilities in their own right.
The reporting model described in the guidance on not-for-profit financial statements applies to
The reporting model for financial accounting and reporting by nongovernmental not-for-profit entities (NFPs) recognizes that the information needs of resource providers of NFPs differ from those of resource providers of business entities. The first set of resource providers are primarily concerned about financial return, but the second set of resource providers are primarily concerned about the services rendered by the NFP and its continuing ability to render those services.
Deb Co. records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB’s conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the
Under the installment method, a credit sale is recorded by debiting a receivable and crediting inventory and deferred gross profit. Revenue is recognized only when cash is collected. Because the essence of an installment sale is an equal change in receivables and inventory, the deferred gross profit account serves to reduce the asset valuation to the unrecovered cost of goods sold. Accordingly, deferred gross profit functions as an asset valuation (contra) account. The installment receivables (and related valuation accounts) should be classified in the current assets section of the balance sheet if they are collectible within the operating cycle. All of Deb Co.’s installment contracts are for 36 months. They are apparently related to normal operations and should be classified as current.
A Midwestern public utility reports noncurrent assets as the first item on its statement of financial position. This practice is an example of the
Assets are normally listed in the order of their importance, with current assets typically being the most important. For a public utility, the physical plant is the most important asset. Thus, public utilities often report their noncurrent assets as the first item on the balance sheet. This departure from the customary presentation in accordance with GAAP is justified by the unique operating characteristics of the industry.
Which of the following is not a characteristic of the governmental reporting environment?
State and local governments report net position or fund balances, not equity
Under the FASB Accounting Standards Codification, updates to GAAP are made as
The FASB issues Accounting Standards Updates (ASUs) as part of the process of amending the Codification. ASUs are not authoritative until they are included in the Codification. However, ASUs include materials (e.g., background information and basis for conclusions) not included in the Codification. Prior to issuing updates, the FASB follows due process procedures.
Which of the following is(are) a necessary element(s) of present value measurement?
A measurement based on present value should reflect uncertainty so that variations in risks are incorporated. Accordingly, the following are the necessary elements of a present value measurement:
Estimates of future cash flows,
Expected variability of their amount and timing,
The time value of money (risk-free interest rate),
The price of uncertainty inherent in an asset or liability, and
Other factors, such as liquidity or market imperfections.
Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is
Expenses should be recognized when a benefit has been consumed. The consumption of benefit may occur when (1) the expenses are matched with the revenues, (2) they are allocated on a systematic and rational basis to the periods in which the related assets are expected to provide benefits, or (3) the cash is spent or liabilities are incurred for goods and services that are used up either simultaneously with the acquisition or soon after. An example of a cost that (1) cannot be directly related to particular revenues but (2) is incurred to obtain benefits that are exhausted in the same period in which the cost is incurred is salespersons’ monthly salaries.
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?
The FASB follows a due-process procedure before issuing final pronouncements: (1) After discussing the issues and considering input from interested parties (e.g., business, academia, and the profession), the FASB votes on a final draft proposal. If a majority of the board members approves, an Accounting Standard Update (ASU) is issued. (2) Once an ASU has been incorporated into the FASB’s Accounting Standards Codification, it has the status of U.S. GAAP.
Financial information is most likely to be verifiable when an accounting transaction occurs that
Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm’s-length transaction between independent interests suggests that the transaction is verifiable.
The information provided by financial reporting pertains to
Financial reporting pertains essentially to individual economic entities. Information about industries and economies in which an industry operates is usually provided only to the extent necessary for understanding the individual business enterprise.
