Classification and Measurement

Question 1

What is revenue recognition

Answer 1

companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to recieve in exchange

Question 2

When is revenue recognized?

Answer 2

when the performance obligation is satisified

Question 3

Step 1 revenue recognition

Answer 3

Identify the contract with a customer
-contract estabilshes the legal rights and obligation of the seller and the customer
-need to have. contract to have revenue

Question 4

Step 2 revenue recognition

Answer 4

Identify the performance obligation(s) in the contract
-seller can have 1 or more performance obligations

Question 5

Step 3 revenue recognition

Answer 5

determine the transaction price
-the transaction price is what the seller should receive from the customer

Question 6

Step 4 revenue recognition

Answer 6

allocate the transaction price to each performance obligation
-if there are multiple p.o.s the contract price is allocated among them

Question 7

Step 5 revenue recognition

Answer 7

recognize revenue when- or as - each performance obligation is satisfied
-at a point in time or over time depending on how the p.o. is satisfied

Question 8

Revenue recognition practice from lecture notes

Question 9

cash

Answer 9

money or currency a firm has on hand r in checking accounts, and items acceptable for deposit such as check and money orders

Question 10

cash equivalents

Answer 10

items such as money market funds, short-term certificates of deposit and treasury bills.
-typically investments with maturity dates of less than 3 months or less are considered cash equivalents

Question 11

Restricted Cash

Answer 11

cash not available for current use, usually reported as investments or other assets

Question 12

What are accounts receiveable?

Answer 12

-funds owed to a firm from the sale of goods and services

Question 13

sales on credit

Answer 13

when companies sell to other companies they offer credit terms (or credit sales or sales on account)

Question 14

what is the initial valuation of a/r?

Answer 14

the amount of the credit sales

Question 15

what is the subsequent valuation of a/r

Answer 15

at the amount expected to be received (net realizable value)

Question 16

what 2 things are estimated to determine the net realizable value?

Answer 16

1. the amount that won’t be collected because people don’t pay (called uncollectibles)
2. the amount that won’t be collected because of sales returns

Question 17

uncollectible a/r

Answer 17

bad debts: customers who don’t pay the amount they owe

Question 18

Allowance for uncollectible accounts (provision method) (4 things)

Answer 18

-estimate future bad debts and match the expense against the related revenues in the same period as the revenues are recognized
-write off accounts receivable when it becomes uncollectable
-the amount of expected uncollectible accounts is usually computed based on an aging analysis or a simple precentage
-matches expesns to the same period as revenues

Question 19

uncollectable accounts example (lecture notes)

Question 20

What is Inventory?

Answer 20

assets consisting of goods owned by the business and held for resale or for future use in the manufacturing of goods for sale

Question 21

what costs should be included in inventory?

Answer 21

should include costs of the goods plus all the costs required to btain physical posession and to put the merchandies in saleable condition

Question 22

two types of inventory?

Answer 22

merchandising inventories and manufacturing inventories

Question 23

merchandising inventories

Answer 23

physical form of the goods is not altered prior to sales

Question 24

cost of merchandising inventories

Answer 24

cost = purchase price + [taxes, duties, freight, storage, insurance during transit, etc] - [discounts and allowances, purchase returns, purchase discounts]

Question 25

What are manufactuing inventories?

Answer 25

physical form of the goods is altered prior to the sales

Question 26

categories of manufacturing inventories

Answer 26

1 raw materials
2 work in process inventory
3 finished good inventory

Question 27

manufacturing inventories cost

Answer 27

cost = raw materials + direct labor cost + indirect factor costs (electricity, depreciation of equipment and building, supervisory salaries, supplies, etc.)

Question 28

What are the Inventory cost flow assumptions

Answer 28

firms purchase or manufacture products at different times and different costs
-which units were sold and which are still in inventory?
-how should dollar amounts be assigned?
-most important issue in inventory accounting

Question 29

inventory costing methods

Answer 29

specific identification
FIFO
LIFO
Avg cost

Question 30

inventory costing -specific identification

Answer 30

keep track of each item individually

Question 31

inventory costing- FIFO

Answer 31

assumes that the first unis purchased are the first to be sold

Question 32

inventory costing - LIFO

Answer 32

last units purchased are the first sold (only in us - inaccurate)

Question 33

inventory costing - avg cost

Answer 33

units are sold without regard to order of purchase, instead computes cogs and ending inventories based on a simple weighted average

Question 34

COGS Equation

Answer 34

beginning inv + inv purchase = goods available for sale (ending inv + cogs)

Question 35

Inventory costing example from lecture

Question 36

What are Investments?

Answer 36

includes investments in other entities debt securities and equity securities.
-accounting for these can be wildly ddifferent

Question 37

6 ways of recording investments

Answer 37

-consolidation
-equity method
-fair value method
-held to maturity
-trading debt
-available for sale

Question 38

Attributes Property plant and equipment (ppe)

Answer 38

-actively used in operations
-long term periods of service utility
-physical substance
-often make up largest asset amounts
-PPE include natural resources

Question 39

How is ppe reported on the balance sheet

Answer 39

reported at historical cost less accumulated depreciation (book value)
-if impairment of value, write down to reflect lower fair market value

Question 40

which expenditures should we include in historical cost

Answer 40

all costs nescessary to acquire an asset and make it ready for use

Question 41

what does historical cost include

Answer 41

purchase price and other related costs like sales tax, transportation costs, installation, testing, legal fees to establish title, recording fees and any other costs to get asset ready for use

Question 42

What is the difference between Capitalization and expense in terms of financial reporting?

Answer 42

should long lived asseets be capitalzed (placed on balance sheet) or expensed (immediately reducing net income)

Question 43

Capitalization vs expense example from lecture

Question 44

What is Depreciation?

Answer 44

a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage, over the estimated life of the unit, in a systematic and rational manner
-process of allocation not valuation

Question 45

What estimates are needed for depreciation?

Answer 45

useful life
salvage value
depreciation rate

Question 46

depreciation estimates - useful life

Answer 46

period of time over which the asset is expected to generate cash inflows

Question 47

depreciation estimates-depreciation rate

Answer 47

depreciation rate - estimate of how the asset will be used up over its useful life

Question 48

depreciation estimates - salvage value

Answer 48

expected disposal amount for the asset at the end of its useful life

Question 49

Depreciation methods

Answer 49

Straight-line method
accelerated methods
activity based methods

Question 50

depreciation methods - straight line

Answer 50

depreciation expense is recognized evenly over the estimated useful life of the asset

Question 51

depreciation methods - accelerated methods

Answer 51

double declining-balance - depreciates assets twice as quickly

Question 52

depreciation methods - activity based methods

Answer 52

units of production

Question 53

Impariment of value

Answer 53

ppe should be written down if there has been a significant and permanent impairment of value
-most long term assets an impairment test id one whenever there is a triggering event

Question 54

triggering event

Answer 54

with impairment of value, a triggereing event is certain events or changes in cricustances that raise the possiblitiy that certain long-lived assets may be imparied

Question 55

What are Intangible assets?

Answer 55

-have no physical substance
-not financial instruments
-convey certain legal and economic rights
-uncertainty associated with future economic benefits
(very conservative with these estimates)

Question 56

Types of intangible assets and definitions

Answer 56

Identifiable - patents, copyrights, trademarks, franchises, license
unidentifiable- goodwill (only recognized with purchase of other business)

Question 57

How are intangibles acquired? When can you capitalize the costs?

Answer 57

externally - can capitalize purchase cost and other related costs
internally - can only capitalize direct costs like legal fees. all other related costs are expensed as incurred

Question 58

What are Current liabilities? (Time Periods)

Answer 58

probable future sacrifices of economic benefits arising from present obligations to other entities resulting from past transactions or events

Question 59

current liabilities are…

Answer 59

-obligations payable within 1 year or one operating cycle, whichever is longer
-expected to be satisfied with current assets or by the creation of other current liabilities
ex- accounts payable cash dividedns payable, accrued expesnses, unearned revenues, taxes payable, short-term notes payables
-current liabilities are considered more risky than noncurrent liabiliities
-usually reported at their maturity amounts

Question 60

Long term debt

Answer 60

obligations that extend beyond one year or the operating cycle, whichever is longer

Question 61

examples of long term debt

Answer 61

bonds payable, notes payable, mortgages payable, pensions, leases

Question 62

long term debt…

Answer 62

-signifies creditors interest in a companys assets
-requires the future payment of cash in specified amounts, at specified dates
-mirror image of an asset
-as time passes interest accrues on debt
-debt is reported at the present value of its related cash flows (principal and or interest payments, discounted at the effective rate of interest at issuance

Question 63

Most common type of corporate debt?

Answer 63

bonds

Question 64

One advantage of bonds?

Answer 64

they divide a large liability into many smaller liabilities

Question 65

How long on average does it take for bonds to mature?

Answer 65

10-40 year

Question 66

What payment and when are made on bonds?

Answer 66

bonds require the payment of the stated amount at maturity and interest at a stated rate

Question 67

Stated amount (bond) (principal, par value, face amount, maturity value)

Answer 67

the amount used to determine cash interest payments and the amount paid back at maturity

Question 68

Stated rate (coupon rate, nominal rate)

Answer 68

the interest rate used to determine cash interest payments

Question 69

Market rate (effective rate)

Answer 69

the going interest rate of simlarly risky debt

Question 70

Effective interest method

Answer 70

interest accrues on an outstanding debt at a contstant percentage of the debt each period. Interest each period is recorded as the effective market rate of interest multiplied by the outstanding balance of the debt (during the interest period)

-interest is recorded as expense to the issuer and revenue to the investor

Question 71

Bond example (s) from lecture

Question 72

Types of shareholders equity

Answer 72

by business structure
-sole proprietorship
-partnership
-corporation

Question 73

Common stock

Answer 73

-share proportionately in profits or losses
-owners of the company (voting rights)
-residual interest
-preemptive rights

Question 74

Common stock common values

Answer 74

par value
authorized
issued
outstanding

Question 75

common stock par value

Answer 75

somewhat arbitrary amount used to determine legal capital, stated in the charter. When stock is issued for more than par value, the excess is reported in the account, paid in capital in excess of par

Question 76

common stock authorized value

Answer 76

maximum number of shares distributed to stockholders (not retired)

Question 77

common stock outstanding value

Answer 77

number of shares currently held by stockholders outside the corporation

Question 78

preferred stock

Answer 78

-some rights of ownership
-preference over common stock (but not debt) in dividends and or liquidation

Question 79

Treasury stock

Answer 79

-represents reacquisition of the firms shares from shareholders
-a contra equity account

Question 80

Retained Earnings

Answer 80

Accumulation of earnings minus dividends
Dividends
-cash - only one that affects RE
-stock
-stock splits

Question 81

Capitalization

Answer 81

the process of recording an expense as an asset on a company’s balance sheet instead of an expense on the income statement

Question 82

-consolidation

Answer 82

• equity with control

Question 83

-equity method

Answer 83

• equity with significant influence

Question 84

-fair value method

Answer 84

• equity with significant influence

Question 85

-held to maturity

Answer 85

• debt with intention of holding to maturity

Question 86

-trading method

Answer 86

debt with intention of holding for short period to get a gain

Question 87

-available for sale

Answer 87

• debt without the previous intentions

Question 88

what are capitalized costs?

Answer 88

-costs included in asset account are called

Question 89

What is Capitalization?

Answer 89

an accounting method in which a cost is included in an asset’s value and expensed over the asset’s useful life, rather than expensed in the period the cost was incurred.

Question 90

What is periodic interest?

Answer 90

the effective interest rate (market rate) times the amounts of the debt outstanding during the interest period

Question 91

(known as the book value or
carrying value

Answer 91

Historical Cost less Accumulated Depreciation

Question 92

-periodic interest

Answer 92

is the effective interest rate (market rate) times the amounts of the debt outstanding during the interest period

Question 93

interest expense formula

Answer 93

carrying value * market rate of interest during period

Question 94

carrying value

Answer 94

Historical Cost less Accumulated Depreciation