ACC 340 Exam 1

Question 1

Enhancing Characteristics of accounting

Answer 1

Comparability - ability to compare with similar information reported by other entities and
by the same entity across time periods. (Yr 1 – Yr 2 – Yr 3). This quality includes
consistency.

Verifiability – two independent parties using the same information would come to the
same conclusions…therefore it can be relied on

Timeliness – must report the information in a timely manner before it loses its value.

Understandability – understandable to users with reasonable financial knowledge & willingness to study the information.

Economic Entity Assumption – the owner and the business are separate & distinct entities. Furthermore, it means that
all economic activities of an entity can be identified with one accountable unit (i.e. the Parent Company is responsible for reporting the aggregated results of all of its subsidiaries)

Going Concern Assumption - the company will continue to operate into the foreseeable future.

Monetary Unit Assumption - financial statements are reported in the U.S. Dollar and the dollar is considered to be stable (i.e. The monetary unit assumption ignores price level changes due to inflation/deflation)

Periodicity (Time Period) Assumption – a company must report their results before the information loses its value (i.e.
quarterly, annually)

Measurement – the two most common measurements are based on Historical Cost or Fair Value. Therefore, this is called a “mixed attribute” model

Revenue Recognition – states when revenue should be recognized. The timing of revenue recognition is a key element of correctly
measuring periodic income

Expense Recognition – An expense represents “using up” a resource, so we record an expense when using up the resource contributes toward generating revenue. So, expenses are “matched” with revenue, to determine income for the period

Question 2

What is included in the income statement, balance sheet, statement of retained earnings

Answer 2

Income Statement: Revenues and expenses. Make sure to read closely as to what is what. Closed at period end.

Balance Sheet: Assets, Liabilites, and Shareholder Equity. NOT closed at the end of the time period. Assets = Liabilities + Stockholders Equity. Must balance

Retained Earnings: Retained earnings at start of year. Dividends closed RE not.

Question 3

How to work on T accounts.

Answer 3

Simply debit and credit appropriate columns. REMEMBER: You must both DEBIT AND CREDIT FOR ONE ENTRY.

Question 4

How to calculate service revenue and operating expenses given last years and current years numbers

Answer 4

Read the question carefully here.

KEY: Increase in Prepaid expenses: decreases operating expenses.

Question 5

How to calculate loss on discontinued operations with the earnings per share

Answer 5

Make sure you subtract on both the loss and gain on the taxes for loss on discontinued operations.

For income for continuing operations, ONLY USE COMMON STOCK, NOT PREFERRED.
Include
Income from continuing operations: (continuing ops -(preferred shares outstanding x part value x % of preferred stock)/common stock outstanding
Loss from discontinued operations: (Loss from discontinued operations/common shares outstanding)
Net income ((net income*1-tax rate)-(preferred shares outstanding x part value x % of preferred stock)/common stock outstanding

Question 6

LIFO V FIFO

Answer 6

Be able to adjust income understatement or overstatement, and include the tax in that as well, which is whatever tax rate listed.

Net income is adjusted up when understanded, and down when overstated.

Question 7

Accounting Error Change

Answer 7

Must be first corrected with a prior period adjustment. That includes
1. Taking the years before and getting the sum, of all over and understatement(s)
2. Calculating that net of tax
3. Dividing that by total number of years to get additional revenue recognized for year in question

Question 8

Be able to use deprecation methods appropriately.

Answer 8

Straight line: (cost of the asset – estimated salvage value) ÷ estimated useful life of an asset
Double Declining: 2*((Asset cost-Accumulated Depreciation)/Useful life of asset).

IF SWITCHING: Subtract one from the other to find its affect, then say if it is overstating or understating, and make sure to include the tax.

Question 9

Loss on foreign currency transaction…

Answer 9

Should be included in other comprehensive income, not income from continuing operations. Increase ICO, decrease OCI.

Question 10

Dividends are…

Answer 10

Not included on income statement, but retained earnings