Chapter 1 - Conceptual Framework (2)

Question 1

On Jan. 1st, 20X3, Smith purchased the net assets of Jones Cleaning, sole proprietorship, for $350,000 and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy’s cash basis financial statements for the year ended Dec. 31st, 20X3, Spiffy reported revenues in excess of expenses of $60,000. Smith’s drawings during 20X3 were $20,000. In Spiffy;s financial statements, what amount should be reported as Capital-Smith?

Answer 1

$350,000 Net Assets + $60,000 Revenue - $20,000 Drawings = $390,000

Question 2

Accumulated other comprehensive income is reported in which of the following financial statements?

Answer 2

The statement of financial statement

Accumulated other comprehensive income is the cumulative total of amounts reported in comprehensive income reduced by reclassification. It is a component of stakeholders equity and is reported in the statement of financial position.

Question 3

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 transaction gain: 2,000
Prior service cost not recognized in net periodic pension cost: $5,000

What is the amount of other comprehensive income for year 1?

Answer 3

Deferred gain on an effective cash-flow hedge: 8,000 +
Foreign currency transaction gain: 2,000 - Prior service cost not recognized in net periodic pension cost: $5,000 = $5,000

Question 4

Assumptions

Answer 4

Entity is a going concern

Entity uses the accrual basis of accounting

Question 5

Cost/Benefit

Answer 5

Cost of obtaining and presenting the information shouldn’t benefit

Costs don’t exceed benefits to be derived

Question 6

10 Key Elements of F/S

Answer 6

Assets, Liabilities, Equity or Financial Assets, Contributions/Investments by owners, Distribution of owners (Dividends), Comprehensive Income, Revenue, Expenses, Gains, Losses

Question 7

Objectives of financial reporting (which focuses on the USERS of F/S):

Answer 7

1. To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
2. Information about a reporting entity’s economic resources and claims against the entity (Financial Position –B/S)
3. Changes in economic resources and claims
4. Financial performance reflected by accrual accounting (provide a better basis for assing the entity;s past and future performance than does bash basis – I/S)
5. Financial performance reflected by past cash flow (cash flows)
6. Changes in economic resources and claims, NOT resulting from financial performance (ex: issuing additional stock)

Question 8

4 most authoritative GAAP

Answer 8

B Accounting Research Bulletins (ARBs)
O Accounting Principles Board Opinions (APBOs)
I FASB Interpretations (clarify GAAP)
S FASB Statements of Financial Accounting Standards (not concepts)

Question 9

Full Set of Financial Statements include

Answer 9

Statement of Financial Position (B/S)
Statement of Earnings & Comprehensive Income (I/S)
Statement of Cash Flows
Statement of Changes in Owners Equity

Question 10

Assets

Answer 10

probable future economic benefit; capable of generating revenue in the future

Question 11

Liabilities

Answer 11

Probable future sacrifices; economic obligation

Question 12

Contributions/Investments by Owners

Answer 12

not a revenue or gain (excluded from comprehensive income)

Question 13

Equity or financial asset

Answer 13

assets left over after deducting liabilities

Question 14

Distribution of owners

Answer 14

Dividends; not an expense or loss (excluded from comprehensive income)

Question 15

Revenue

Answer 15

inflows from an entity’s primary operations

recognize revenue at gross amount (less allowances for returns and discounts given)

Question 16

Expenses

Answer 16

outflows due to an entity’s primary operations;

incurred

Question 17

Gains

Answer 17

increases in equity from incidental transactions;

selling price or net realizable value > book value

Question 18

Losses

Answer 18

decreases in equity from incidental transactions;

selling price or net realizable value < book value; impairments and write downs

Question 19

Physical capital maintenance concept

Answer 19

only recognize an event when an assets is sold or liability is settled (measures the effects of price changes in nominal or constant dollars)

Question 20

Financial capital maintenance concept

Answer 20

recognize an event as a change in the value of an asset or liability occurs. (recognize holding gains and losses – current GAAP)