Area 1 Examples

Question 1

What is “offsetting” between two bank accounts and when is it allowed?

Answer 1

If you have 2 bank accounts at the same institution and there is an offsetting agreement, you can have one balance be negative as long as the other account has enough to cover the negative amount and still be positive.

Question 2

How do you treat bank overdrafts on the balance sheet, and what would be the journal entry to record it?

Answer 2

They are treated as short-term loans and should be presented as such on the balance sheet. The entry would be a debit to the bank account in question - because the funds are available in the account, and the credit would be to a “current finance obligations” account, because you still owe the amount back to the bank.

Question 3

When stock is issued for land, two noncash items are exchanged. How is this reported on the Statement of Cash Flows?

Answer 3

Cash is unaffected and therefore is not reported on the face of the cash flows statement. Instead, the transaction is disclosed in the statement’s supplementary information; this can be disclosed in a separate schedule or as a significant noncash financing and investing activty. This disclosure is necessary because the transaction is relevant information which the statement’s users should be aware

Question 4

Executive compensation is covered what type of activity on the statement of cash flows?

Answer 4

Operating activity

Question 5

Investing activities

Answer 5

Relate to transactions involving long-term assets such as PP&E and available-for-sale debt securities

Question 6

Financing activities

Answer 6

Relate to transactions involving long-term debt and equity; typically include debt transaction such as borrowing funds to finance the company and repaying debt principal; typically include equity transaction suhc as issuance or stock or dividend payments

Question 7

How to calculate bond interest payments

Answer 7

Par value * stated rate * time period = bond interest payments

Question 8

When should revenue and expenses be recognized under accrual-basis?

Answer 8

Revenue is recognized when earned and expenses are recognized as incurred under the accrual-basis regardless of when cash is received.

Question 9

When should revenue and expenses be recognized under accrual-basis?

Answer 9

Revenue is recognized when earned and expenses are recognized as incurred under the accrual-basis regardless of when cash is received.

Question 10

Weighted average balance of a partner’s capital account

Answer 10

Beginning balance * (# months outstanding/12)
New balance * (# months outstanding/12)
Ending balance * (# months outstanding/12)
= Weight average balance

Question 11

Cash-to-accrual conversion of an expense

Answer 11

Cash basis expense
Add: increase in payable
Add: decrease in prepaid
Deduct: decrease in payable
Deduct: increase in prepaid
= accrual-basis expense

Question 12

How should a nongovernmental, not-for-profit report donor-restricted cash contributions for long-term-purposes in its statement of cash flows?

Answer 12

Financing activity inflow

Question 13

Examples of current assets include:

Answer 13

Cash
Receivables
Temporary investments (trading securities)
Inventory
Prepaid expenses

Question 14

Recognizing elements of a discontinued operation

Answer 14

Operating income(loss) -> recognized in the period it was earned
Gain on sale -> recognized in the year of disposal
Loss on sale -> recognized immediately even if disposal has not yet occurred

Note: recognition is net of tax

Question 15

Fair value for an asset or liabilitiy is defined as

Answer 15

Fair value is the price to sell an asset or transfer a liability in an orderly transaction on a specific measurement date