Basic Concepts & Financial Statements

Question 1

relevance

Answer 1

capable of making a difference in a user’s decision-making process. made up of Predictive value and Confirmatory value (Roger is PC)

Question 2

predictive value

Answer 2

helping decision makers predict or forecast future results

Question 3

confirmatory value (feedback value)

Answer 3

confirm or correct prior predictions

Question 4

materiality

Answer 4

• how significant an amount is in relation to the entire picture
• its omission or misstatement could influence a user’s decision
• materiality is an entity-specific aspect similar to relevance

Question 5

faithful representation

Answer 5

info depicts what it intends to represent. consists of Free from Error, Neutrality and Completeness. Mnemonic: FENCe

Question 6

neutrality

Answer 6

free from bias

Question 7

completeness

Answer 7

all info necessary to users is provided

Question 8

enhancing qualitative characteristics of accounting

Answer 8

CUT-V (CUT like a V):

• Comparability (consistency)
• Understandability
• Timeliness
• Verifiability

Question 9

comparability

Answer 9

same principles are being used with business enterprises in similar industry

Question 10

consistency

Answer 10

same accounting methods in diff periods

Question 11

understandability

Answer 11

classifying, characterizing and presenting info clearly & concisely

Question 12

timeliness

Answer 12

info is available early enough to influence decisions

Question 13

verifiability

Answer 13

independent knowledgeable observers would agree

Question 14

cost/benefit constraint

Answer 14

cost of obtaining & presenting info should not exceed the benefits

Question 15

summary overview of what makes info useful to users of financial statements

Answer 15

USEFUL (2 Primary Qualitative Characteristics SFAC-8)

Relevance (Rogers is PC)
Representation (FENCe)
-Predictive value from Error - FREE

• Confirmatory value (w/o bias)
  (feedback - confirm or changes) - NEUTRAL
• Completeness
• Or Both

ENHANCING QUALITATIVE CHARACTERISTICS (CUT like a V) (enhance the Usefulness of the info - Very desirable, but not required)

• Comparability (Consistency)
• Understandability (classified/characterized & presented clearly)
• Timeliness
• Verifiability

CONSTRAINTS

• Materiality - an entity-specific aspect similar to Relevance that applies at the individual entity level. Its omission or misstatement could influence a user’s decision
• Cost/benefit

Question 16

physical capital maintenance concept

Answer 16

an event recognized when an asset is sold or a liability is settled

Question 17

financial capital maintenance concept

Answer 17

an event is recognized as a change in the value of an asset or liability occurs (recognizes holding gains & losses)

Question 18

recognition

Answer 18

reporting an item in the financial statements (i.e. booking it)

Question 19

realization

Answer 19

converting noncash resources into cash or a claim to cash

Question 20

principal market

Answer 20

the market where the greatest volume and level of activity occurs

Question 21

market approach

Answer 21

a valuation technique that uses prices and relevant info from market transactions for identical or comparable assets/liabilites

Question 22

income approach

Answer 22

a valuation technique that converts future revenues and expenses or cash flows into a single current amount

Question 23

cost approach

Answer 23

a valuation technique that uses the current cost of replacing the service capacity of an asset

Question 24

generally accepted accounting principles (GAAP)

Answer 24

a general purpose financial reporting framework set forth by the FASB to be used for the preparation and presentation of financial statements

Question 25

financial accounting standards board (FASB)

Answer 25

the board responsible for maintaining the FASB Accounting Standards Codification, the only authoritative source of GAAP, through the issuance of Accounting Standards Updates (ASUs) and for issuing statements on financial accounting concepts (SFACs), the framework upon which GAAP is based

Question 26

emerging issues task force (EITF)

Answer 26

a board created by FASB to address new and unusual financial transactions

Question 27

ASU

Answer 27

Accounting Standards Update

Question 28

Consistency relates most closely with

Answer 28

predictive value

Question 29

On September 25, 2014 Colson Corp. sold 200,000 widgetrons to Cavanaugh Corp at $5 per unit. Half of the units were delivered on November 15, 2014, and the remaining 100,000 units were delivered on January 20, 2015. At the time of sale Cavanaugh paid 40% of the contract price and agreed to pay the rest in equal installments on the two delivery dates. What amount of revenue should Colson recognize from this sale in 2014?

Answer 29

$500k. Revenue is recognized when the earnings process is substantially complete and when the revenue is either realized or realizable. The earnings process is complete in regard to the first 100,000 units that were delivered in 2014. In addition, a portion of the money has been received and the remainder is receivable. Unless Colson has no basis for determining if the remainder of the sales price is collectible, the sales price is partially realized with the remainder realizable. As a result, Colson would recognize revenues on the 100,000 units delivered at $5 per unit for a total of $500,000. While $700,000 of the payments have been received, the earning process is substantially complete with regard to only half the order, so only half the revenue of the order is recognized.

Question 30

Bob Co. has a checking account at Home Bank and an interest–bearing savings account at Chasen Bank. On December 31, year 1, the bank reconciliations for Bob Co. are as follows:

Chasen Bank

 Bank Balance
   $150,000
 Deposit In Transit
       $5,000
 Book Balance
   $155,000

Home Bank

 Bank Balance
       $1,500
 Outstanding Checks    
     ($8,500)
 Book Balance
     ($7,000)

What amount should be classified as cash on Bob’s balance sheet at December 31, year 1?

Answer 30

$155k. Normally, both checking accounts and interest-bearing savings accounts are included in cash and reported in amounts equal to their reconciled balances, the book balances in this case. When an account is overdrawn, however, it may not be offset agains accounts with positive balances unless they are in the same institution with the right of offset. When that is not the case, as in this case, the overdraft is reported as a liability and only the positive balance of $155,000 will be reported as cash.

Question 31

A company reported the following information for Year 1:
Net income
$34,000
Owner contribution
9,000
Deferred gain on an effective cash-flow hedge
8,000
Foreign currency translation gain
2,000
Prior service cost not recognized in net periodic pension cost
5,000
Considering only these items, what amount will be in accumulated other comprehensive income at the end of Year 1?

Answer 31

$5k

Question 32

At year-end, Ande Co. uses an aging method to evaluate its accounts receivable for credit risk and records a corresponding adjustment to recognize a credit loss expense in the income statement. The practice follows the accounting concept of

Answer 32

Matching. It is the accrual based approach to recognize an expense or loss in the same period as its economic benefit (eg, revenue). Matching expenses to revenue (versus reporting expenses when paid) provides a more accurate reflection of an entity’s financial position. Ande Co. is evaluating AR for collectability and for each reporting period records an estimated credit loss expense (bad debt). As a result, the credit loss expense is recognized (matched) with the current period’s revenue