E-FAR Flashcards
current market value
the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation.
Comprehensive income
all recognized changes in equity (net assets) of the entity during a period from transactions and other events and circumstances except those resulting from investments by owners and distributions to owners
Measurement methods:
- Long-term receivables
- Available for sale securities
- Equipment
- Warranty obligations
- Short-term payables
- Accounts receivable
- Bonds payable, due in ten years
- Trading securities
A. Historical cost or historical proceeds 3,5
B. Current cost N/A
C. Current market value 2,8
D. Net realizable value or settlement rate 4,6
E. Present value of future cash flows 1,7
1. Depreciation expense
Accumulated deprecation xx
2. Interest receivable
Interest revenue xx
3. Rent expense
Prepaid rent xx
4. Unearned revenue
Rent revenue xx
5. Wage expense
Wages payable xx- Deferral
- Accrual
- Deferral
- Deferral
- Accrual
Should a Quoted market prices be adjusted for a “blockage factor” when a firm holds a sizable portion of the asset being valued.
NO! A “blockage factor” occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market. Using a “blockage factor” would adjust the market value for the impact of such a large block of securities being sold, but is not permitted in determining fair value.
The methods and significant assumptions used to estimate fair value must be disclosed: 1 only in annual reports. 2 both annual and interim reports.
1 only in annual reports.
If other pronouncements require the use of fair value measurement and related disclosures, those disclosure requirements are superseded by fair value option disclosures.
False
What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobservable inputs (i.e., Level 3 inputs)
- Reconciliation of beginning and ending balances;
- Description of the valuation process used;
- Quantitative information about the unobservable inputs used;
- Narrative description of the sensitivity of fair value to changes in unobservable inputs;
- Unrealized gains/losses for the period and where reported.
What significant fair value disclosures are required only in annual statements?
The methods and significant assumptions used to estimate fair value.
What does the Securities and Exchange Commission (SEC) strive to do?
Ensure that there is adequate information in the public domain before a company issues or trades securities.
Define “Financial Reporting Releases (FRR)”.
Formal pronouncements that rank the highest in authority for public companies.
What purpose does Accounting and Auditing Enforcement Releases (AAER) serve?
Report the enforcement actions taken against accountants
Define “Staff Accounting Bulletins (SAB)
Bulletins that provide the Security and Exchange Commission’s current position on technical issues
How many divisions does the Securities and Exchange Commission (SEC) have?
Four: 1 The Division of Corporation Finance
- The Division of Enforcement,
- The Division of Trading and Markets, and
- The Division of Investment Management).
What are he main pronouncements published by the SEC
The Financial Reporting Releases (FRR) and
the Staff Accounting Bulletins (SAB)
The mission of the SEC is:
To protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. In order to carry out the mandates in the Securities Act of 1933, the SEC is ensuring that investors are provided with adequate information on which to base investment decisions
Where is Audited financial information included?
Audited financial information is included in Part II, Item 8 of Form 10-k.
What audited financial statements are provided upon initial registration of a security.
2 years balance sheets,
3 years income statement,
statements of cash flows, and
shareholders’ equity
What information does Management Discussion & Analysis (MD&A) provide?
A discussion of important aspects of the firm from the viewpoint of management
Define “exit price”.
The price that would be RECEIVED to SELL an ASSET or PAID to transfer a LIABILITY.
Describe the market approach for determining fair value for GAAP purposes.
This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.
Define “entry price”.
The price PAID to ACQUIRE an ASSET or the price RECEIVED to assume a LIABILITY.
What are the 3 valuation techniques (or approaches) that should be used in determining fair value for GAAP purposes?
- Market approach;
- Income approach;
- Cost approach.
List the situations where the entry price may not be the exit price.
- The transaction is between related parties;
- The transaction occurs when the seller is under duress;
- The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value;
- The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred.
List the dates when an entity may elect to use fair value option for an eligible item.
- When item is first recognized;
- When firm commitment occurs;
- When financial, an asset previously reported at fair value with unrealized gain/loss in earnings, no longer qualifies for that fair value treatment;
- When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation;
- When an item is measured at fair value at the time of an event, but does not require fair value measurement at subsequent reporting dates.
Describe the income approach for determining fair value for GAAP purposes.
This approach converts future amounts to a single present amount.
List the financial assets and financial liabilities that entities may NOT use fair value to measure and report.
- An investment in a subsidiary or variable interest to be consolidated;
- Employers’ and plans’ obligations for pension benefits, other postretirement benefits, post-employment benefits;
- Financial assets and liabilities under lease accounting;
- Demand deposit liabilities of financial institutions;
- Financial instruments classified by the issuer as a component of shareholders’ equity.
List the items that entities may elect to measure and report at fair value.
- Recognized financial assets or financial liabilities, (some exceptions);
- Firm commitments;
- Written loan commitments;
- Rights and obligations under insurance contracts and warranties;
- Other financial instruments embedded in non-financial derivative instruments.
Describe the cost approach for determining fair value for GAAP purposes.
This approach uses the amount currently required to REPLACE the service capacity of an asset.
Which regulation governs the form and content of financial statement disclosures?
Regulation S-X
A company that is a large accelerated filer must file its Form 10-Q with the US SEC within how many days after the end of the period?
40 days
A company is required to file quarterly financial statements with the SEC on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations, which could have a significant impact on its financial condition. In addition to the most recent quarter end, for which of the following periods is the company required to present Balance Sheets on Form 10-Q?
The end of preceding fiscal year.
The B/S for the end of the preceding fiscal year would have been the last audited B/S. This B/S is presented along with the current fiscal quarter.
A company is an accelerated filer that is required to file Form 10-K with the SE. What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?
60 days
Which of the following is NOT a required component of the 10-K filing? Product market share. Description of the business. Market price of common stock. Executive compensation.
Product market share.
A company is an accelerated filer that is required to file Form 10-K with the SEC. What is the MAXIMUM number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?
75 days
Retained earnings are calculated as follows:
R.E Beg. + NI = R.E. End.
Revenue [4,500] - Expenses [3,750] = EBT =750,000
Income taxes = 0.30 * 750, (225,)
Net income =525,000
Retained earnings, 1/1/Yr. 5 350,000
Retained earnings, 12/31/Yr. 5 875,000
What does the multiple-step income statement present?
Includes multiple subtotals of revenues, expenses, gains, and losses. (Sales - Cost of Goods Sold = Gross profit; Gross profit - operating expenses = income from operations; Income from operations + or − other income / expenses= Income B/F Taxes; IBT − taxes = Net Income.)
What does the single-step income statement present?
Total revenues and gains − total expenses and losses.
What is operating margin?
The excess of operating revenues over operating expenses. (OP Rev - OP Exp)
Total Revenue
In a single step income statement, total revenue is the sum of all revenues, including Net Sales Revenue + Interest Revenue+Gain on sale of equipment.Results from discontinued operations are reported at the end of the income statement. The cumulative change item is not reported in current year’s .income statement, as it was a one-time adjustment for the prior reporting period.
Cost of goods manufactured
COGM is the cost of goods brought to completion during the year. The following schedule shows how it is computed given the information in the question.
COGM?
+ finished goods beginning inventory $400,000
- finished goods ending inventory (360,000)
= cost of sales $240,000
The IFRS Foundation serves as the administrative umbrella for a group of bodies:
- International Accounting Standards Board.
- IFRS Interpretations Committee.
- IFRS Advisory Council.
What is a role of the trustees of the IFRS Foundation?
- Appoint the members of the IASB and establish their contracts of service and performance criteria.
- Appoint the members of the IFRS Interpretations Committee and the IFRS Advisory Council.
- Approve the annual budget of the IFRS Foundation and determine the basis for funding.
What is the 3rd objective of the IFRS Foundation?
To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.
What is the 1st objective of the IFRS Foundation?
The objective of the IFRS Foundation is to develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial reporting standards based upon clearly articulated principles. These standards should require high-quality, transparent, and comparable information in financial statements and other financial reporting to help investors, other participants in the world’s capital markets, and other users of financial information make economic decisions. There are NO MEMBER associations of the IASB. Rather, representatives of many associations do partake in an advisory capacity, through the IFRS Advisory Council.
IASB’s due process procedures includes the following steps.
1) Add the item to the Working Agenda (IV),
2) Discuss the issue (V),
3) Prepare the Discussion Paper (III),
4) Publish the discussion paper (VII)
5) Issue the Exposure Draft (II)
6) Analyze comments to the Exposure Draft and (I)
7) Issue the IFRS (VI)
The IFRS hierarchy:
as presented in IAS 8: 1. the requirements in IFRS dealings with similar or related issues; 2.the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework; 3.the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent that these do not conflict with IFRS or the Framework. IAS 8, para. 12.
5 elements of IASB Framework:
The IASB Framework has 5 elements: asset, liability, equity, income, and expense. Note that income includes both revenues and gains.
Comprehensive income disclosures include the changes during a period of the following components of other comprehensive income:
- unrealized gains and losses on available-for-sale investments and foreign currency items, including any reclassification adjustments, 2.the pension liability adjustment required to recognize the funded status of the plan. (Treasury stock is deducted from stockholders’ equity and not a component of other comprehensive income.)
Under ASC 220, Comprehensive Income, corrections of errors are reported in:
net of tax in retained earnings as an adjustment of the beginning balance.
(Comprehensive income = net income + other comprehensive income for the period)
Comprehensive income is defined as:
Comprehensive income = the net change in owners’ equity for the period other than from transactions with owners. (stockholder dividends are not a component of comprehensive income)
The purpose of reporting comprehensive income:
is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. An enterprise should continue to display an amount for net income with equal prominence to the comprehensive income amount displayed.
If the fair value option is not elected, are held-to-maturity securities decreases or increases in fair value reported on statement of OCI?
If the fair value option is not elected, held-to-maturity securities are reported at amortized cost. Any decreases or increases in fair value are reported neither in net income nor as part of other comprehensive income.
Where is Accumulated other comprehensive income reported?
The accumulated balance of other comprehensive income should be reported as a component of equity, separate from retained earnings and additional paid-in capital.
is Unrealized loss on trading securities a component of comprehensive income
Unrealized loss on trading securities is NOT a component of comprehensive income
The Statement of Changes in Equity:
Reconciles all of the beginning and ending balances in the equity accounts.
The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?
If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price=par value ($2)+ additional PIC ($10,000/1,000 shares, or $10), which totals $12.
The direct method of presenting “Cash Flows from Operating Activities” presents:
cash inflows and cash outflows based on the kind of sources that generated cash and the kind of recipients to which cash was paid.
When the direct method is used to present “Cash Flows from Operating Activities,” a separate reconciliation of net income with cash flow from operating activities must be provided.
YES
A company’s wages payable increased from the beginning to the end of the year. In the company’s statement of cash flows in which the operating activities section is prepared under the direct method, the cash paid for wages would be
Salary expense less the increase in wages payable from the beginning to the end of the year.In a statement of cash flows in which the operating activities section is prepared using the direct method, the cash paid for wages would be equal to the accrual-basis salary expense, plus/minus any decrease/increase in the wages payable account. (The logic is essentially the same as an accrual-basis to cash-basis adjustment.)
Why are Businesses encouraged to use the direct method of reporting operating activities
major classes of cash receipts and cash payments are shown. The minimum cash flows to be disclosed under this method are cash collected from customers, interest and dividends received, cash paid to employees and suppliers, income taxes paid, and interest paid.
On July 1, year 1, Dewey Co. signed a twenty-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its year 1 statement of cash flows?
An outflow equal to the year 1 principal payments only. Financing activities include the repayment of debt principal or, as in this case, the payment of the capital lease obligation. Thus, the cash outflow is equal to the year 1 principal payments only. The interest on the capital lease is classified as an operating cash outflow.
Noncash investing and financing activities are reported as supplemental information to the statement of cash flows: why?
because while they do not affect cash in the current year, they may have a significant effect on the prospective cash flows of the company. Therefore, conversion of debt to equity is disclosed as supplemental information to the statement of cash flows. However, cash flow per share should not be reported on the statement of cash flows because it may be misleading and may be incorrectly used as a measure of profitability.
Mend Co. purchased a three-month U.S. Treasury bill. Mend’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. How should this purchase be reported in Mend’s statement of cash flows?
NOT reported. The statement of cash flows is required to be prepared based on inflows and outflows of cash and cash equivalents during the period. The purchase of a cash equivalent using cash is not an outflow of cash and cash equivalents; it is merely a change in the composition of cash and cash equivalents. Cash has decreased and cash equivalents have increased, but total cash and cash equivalents is unchanged. Therefore this purchase is not reported in the statement of cash flows.
O-IFF The sum of the changes reported as cash flow from (1) Operating, (2) Investing, (3) Financing, and (4) Foreign currency effects should explain the change in cash for the period.
yes
In a statement of cash flows (using indirect approach for operating activities) an increase in inventories should be presented as a(n):
Deduction from net income.The objective of a statement of cash flows is to explain what caused the change in the cash balance. The first step in this process is to determine cash provided by operations. When presenting cash from operating activities under the indirect approach, net income must be adjusted for changes in current assets other than cash and in current liabilities. These adjustments are required because items that resulted from noncash events must be removed from accrual-based income. For example, when inventory increases during the period, inventory sold is less than inventory purchased. Considering only the increase in the inventory account, cost of goods sold on an accrual basis is less than it would have been if cash basis were being used. In converting to the cash basis, the increase in inventory must be subtracted from net income to arrive at cash from operations.
In adjusting net income to derive “Cash Flows from Operating Activities,” non-cash charges included in net income have to be:
added back (to net income).
If a liability (payable) increases and is related to an expense, then the amount of the increase must be ….. from the amount of the expense to derive cash outflow.
subtracted from the amount of the expense to derive cash outflow.
If accounts payable increases during a period, the amount of the increase will have to be……. to cost of goods sold to derive the cash effect.
subtracted from cost of goods sold to derive the cash effect.
The amortization of a premium or discount affects net income but does not affect cash flow. T/F
True
ABC Co. sold for $25,000 an asset which had cost $60,000 and on which there was accumulated depreciation of $40,000. As a result of the sale, $5,000 should be added back to net income to derive cash flow from operating activities under the indirect method. T/F
False
To derive cash paid to suppliers, cost of goods sold will have to be adjusted for changes in both inventory and accounts payable. T/F
True
If an asset (prepaid) increases and is related to an expense, then the amount of the increase must be added to the amount of the expense to derive cash outflow. T/F
True Accrual –> Cash for Expense
If an entity that appropriately uses the equity method recognizes its share of an investee’s loss, the amount of the loss must be added back to the investor’s net income to derive cash flow. T/F
True
An investor firm that appropriately uses the equity method will recognize its share of the investee’s net income as revenue. T/F
True
In adjusting net income to derive cash flow under the indirect method, depreciation expense should be added back to net income. T/F
True
ABC Co. owns 30% of XYZ Co. and appropriately uses the equity method to account for its investment. During 19X1, XYZ Co. reported net income of $60,000 and paid cash dividends of $20,000. ABC Co. will subtract $12,000 from its net income to derive cash flow.
NI-paid cash dividend*%ownership
60,000- 20,000*.3=12,000
Revenue recognized but not collected will cause a change in unearned revenues. T/F
?
The account “loans to employees” is a monetary asset account since its payment amount is fixed at some point in the future. The total value of monetary assets is the balance of the loans to employees account, or $20,000.
Conversely, merchandise inventory is considered a nonmonetary asset account since its value will change based on relative price levels in the future.
During a period of inflation in which a liability account balance remains constant, which of the following occurs?
A purchasing power gain or loss is the net gain or loss determined by restating in units of constant purchasing power the opening and closing balances of, and transactions in, monetary assets and liabilities. During a period of rising prices, monetary liabilities give rise to purchasing power gains because they will be settled with cash which can be used to purchase relatively fewer goods or services at a future time.
A monetary item is one that is fixed or determinable without reference to future prices. Accumulated depreciation is not a monetary item.
Advances to unconsolidated subsidiaries, allowance for doubtful accounts, and unamortized premium on bonds payable are all monetary items.
The summary of significant accounting policies footnote describes the important accounting choices made by the firm for financial reporting purposes. Such policies affect:
recognition, measurement, and disclosure.
GAAP requires disclosure of all significant concentrations of credit risk from receivables and other financial instruments in the notes. A concentration of credit risk occurs when receivables from different sources reflect common economic risks (for example, a group of receivables from several firms within the same industry).
GAAP requires disclosure of all significant concentrations of credit risk from receivables and other financial instruments in the notes. A concentration of credit risk occurs when receivables from different sources reflect common economic risks (for example, a group of receivables from several firms within the same industry).
How should a gain from the sale of used equipment for cash be reported in a Statement of Cash Flows using the indirect method?
In operating activities as a deduction from income. Operating section of Indirect method is the reconciliation of NI and net cash flow from operations. The gain on sale of eq. increased NI but did not provide any Operating cash inflow.
In a Statement of Cash Flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:
The investing cash inflow = BV-loss
How to get Beg. Inv if have COGS , purchases and End inv.
Cost of goods sold $ 900,000 \+ Ending inventory 180,000 Cost of goods available for sale $1,080,000 − Purchases − 960,000 Beginning inventory $ 120,000
Dividend payout ratio
Dividend payout ratio = Dividends per share/
Earnings per share
Earnings per share
Earnings per share =(Net income − Preferred dividends)/
Weighted-average number of shares outstanding
Debt Ratio
TL/TA
dividend payout rate for common shareholders
Annual dividend per share/EPS
Book Value Per Share of CS
CS+PIC+RE-TS/# of shares outstanding OR Total OE/# of shares outstanding
Accounts receivable turnover =10x during the year
Total assets turnover =2x
Average receivables during the year =$200,000
From the given information, (asset turnover) = 2 = sales/(average total assets). (AR turnover) = 10 = sales/(average AR). Therefore, (average total assets) are 5 times (average AR). (average total assets) = 5(average AR) = 5($200,000) = $1,000,000.
- Checking accounts
- Treasury stock
- Treasury bills
- Money market funds
- Petty cash
- Trading securities
- Savings account
- Sinking fund cash
- Compensating bal. against long-term borrowings
- Cash restricted for new building
- Postdated checks for customers
- Available-for-sale securities
- Cash
- Not cash
- Cash
- Cash
- Cash
- Not cash
- Cash
- Not cash
- Not cash
- Not cash
- Not cash
- Not cash
Balance per bank statement $18,050
Plus deposit in transit 3,250
Less outstanding checks (2,750)
Equals ending cash balance $18,550 (per book)
When the bank is the source of the info, the NSF check and the bank service charges are already reflected in the balance per bank statement and do not need to be adjusted.
If material amounts of cash discounts are expected to be forfeited by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the net method. T/F
False
If material amounts of cash discounts are expected to be forfeited by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the gross method. T/F
True
The gross method of accounting for cash discounts records receivables at gross invoice price, which is the price before applying the trade discount. T/F
False
When specific accounts are written off, bad debt expense is increased under the direct write-off method of accounting for uncollectible accounts. T/F
True
The entry to write off an account under the direct write-off method will have no effect on net income. T/F
False
Under the allowance method for uncollectible accounts what is that effect on B/S and NI?
Under the allowance method for uncollectible accounts there is no impact on the balance sheet or net income when the receivable is written off. The estimated uncollectible is recognized at the time of the sale; therefore, when the account is written, off the allowance and the accounts receivable are both reduced resulting in no effect on the income statement or balance sheet.
When the market rate of interest exceeds the stated rate on a note, the note is recorded at a discount.T/F
MR>SR=Discount
MR
The new carrying value of an impaired loan is the present value of the remaining payments expected to be received using the original interest rate in the loan. T/F
True
The loss on impairment of a loan is the difference between the note’s carrying value before recognizing the loss, and the present value of the remaining payments expected to be received using the original interest rate in the loan. T/F
True
Inventoriable costs include:
All costs necessary to prepare goods for sale:
- purchase price of the goods,
- freight-in,
- insurance,
- warehousing,
- any costs necessary to get the goods to the point of sale -Sales and other taxes paid on acquisition of inventory (Abnormal freight and handling should be charged to expense of the period).
- Purchase (if any) returns must be subrtracted
Per the Codification, what is considered the normal capacity of production facilities?
A range in production levels that will vary based on business and industry-specific factors. Normal capacity is the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.
When the shipping terms are FOB destination:
the seller bears all costs of transporting the goods to the buyer:Packaging for shipment;
Shipping;
Special handling charges
All costs that help to sell inventory are included in the inventory account. T/F
False
Beg. Inv. \+Net Purchases (Purch.+Freight-in+Tran. to consignees) -Write-off inv. -End. Inv. =COGS ........OR:
Beg. Inv. + Net purchases = End. Inv. +COGS OR
COGS is determined (in a periodic inventory system) as:
Beg. Inv.
+ Net Purchases
= Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
How is Freight-out, treated?
As a period cost. It is the cost of distributing the inventory to customers. The cost does not contribute to the process of placing the inventory in a salable condition.
If Inv is understated: what the impact on assets,COGS, net income, and retained earnings?
assets - understated
COGS - overstated
net income - understated
retained earnings - understated
Interest on inventory loans:
All costs necessary to prepare inventory for sale are capitalized to inventory. Freight-in is such a cost. The goods must be shipped to the seller’s location before they can be sold. Interest on inventory loans is a financing cost. It does not contribute to the process of making the inventory ready for sale
40% markup on selling price:
Cost+.4(selling price)=selling price
Ex: cost +.4(5)=5
let cost be X so X+2=5
X=3
Indicate whether each of the following is included in the cost of inventory.Yes No
- Merchandise purchased for resale
- Freight-out
- Direct materials
- Sales returns
- Packaging for shipment to customer
- Factory overhead
- Interest on inventory loan
- Purchase discounts not taken
- Freight-in
- Direct labor
Indicate whether each of the following is included in the cost of inventory.Yes: 1. Merchandise purchased for resale 3. Direct materials 6. Factory overhead 9. Freight-in 10. Direct labor No: 2. Freight-out 4. Sales returns 5. Packaging for shipment to customer 7. Interest on inventory loan 8. Purchase discounts not taken
The weighted-average method vs.The moving-average method
weighted-average: periodic
moving-average: perpetual
The weighted-average method computes a weighted-average unit cost of inventory for the entire period and is used with periodic records. The moving-average method requires that a new unit of cost be computed each time new goods are purchased and is used with perpetual records.
Under the weighted average method, if the beginning inventory of Year 2 had instead been sold in Year 1, and if prices have been steadily rising, the portion of cost of goods sold for Year 1 relating to these goods would be a smaller number than if the beginning inventory were sold in Year 2. T/F
True
A firm selling a highly perishable good must use FIFO. T/F
False
A periodic system is less expensive to administer than a perpetual system. T/F
True
In a periodic system, the balance in the inventory account is the January 1 amount throughout the entire year until December 31, for a calendar-fiscal year firm. T/F
True
In a period of steadily rising prices, LIFO will generally result in lower COGS in a perpetual system as compared to a periodic system T/F
True
The cost flow assumption that always yields the same results under both a periodic and perpetual system is LIFO. T/F
False….it’s FIFO
LIFO generally reports less illusory income relative to FIFO. T/F
True
Cost of goods sold under LIFO generally will be less than under FIFO when prices have been in decline. T/F
True
Liquidation is a reporting problem only for LIFO. T/F
True
Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.
True
The beginning inventory in the year of converting to LIFO is the ending inventory of the previous year measured at cost. T/F
True
The ending DV LIFO inventory balance for any year can be expressed as the sum of all layers expressed in terms of the current dollars for those years T/F
True
One of the main advantages of DV LIFO is that is reduces the cost of inventory administration under LIFO. T/F
True
Estimates of price-level changes for specific inventories are required for which of the following inventory methods? Conventional retail.
Dollar-value LIFO.
Weighted average cost.
Average cost retail.
Dollar-value LIFO. DV LIFO is based on price level indices. The End Inv at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The End Inv measured in base-year dollars is compared to Beg. Inv in base-year $. The difference is the increase in Inv measured in base-year $. This difference is then raised to the current-year price level and added to Beg Inv DV LIFO, yielding End Inv DV LIFO.Thus, price-level changes are used throughout this method.Price-level changes are used to estimate End Inv. Individual item costs are not maintained or used in the valuation of inventory.
Under LCM, market value can never be less than net realizable value less normal profit margin. T/F
True
Under LCM, market value can never be greater than net realizable value. T/F
True
The direct and allowance methods produce the same net ending inventory value and net income. T/F
True
Cost is less than both replacement cost and net realizable value. Replacement cost exceeds net realizable value. Therefore, the inventory item should be valued at cost. T/F
True
Capitalized vs. expensed costs:
Capitalized: if it improves the asset (or increases productivity)
Expensed: if it merely maintains the asset at its current level (Continuing and frequent repairs, repainting the plant building, partially replacing the roof tiles) These are ordinary, regularly occurring expenditures which maintain, rather than improve, the plant building.
Cost of land:
preparing land for its ultimate use (such as a factory site) purchase price + legal fees+title insurance+cost of demolition - proceeds from sale of scrap
DEFINITION of ‘Capitalize’
An accounting method used to delay the recognition of expenses by recording the expense as long-term assets. In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost over a specified period of time.
Cost of a machine (cost to be capitalized):
cost necessary to place the asset into its intended condition and location. purchase price + Shipping + Installation +Testing
Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
Part of continuing operations.
The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.
Lano Corp.’s forestland was condemned for use as a national park. Compensation for the condemnation exceeded the forestland’s carrying amount. Lano purchased similar, but larger, replacement forestland for an amount greater than the condemnation award.
As a result of the condemnation and replacement, what is the net effect on the carrying amount of the forestland reported in Lano’s Balance Sheet?
The amount is increased by the excess of the replacement forestland’s cost over the condemned forestland’s carrying amount.
The two transactions are not related. The land account is decreased by the book value of the land condemned and increased by the cost of the land purchased. The relative magnitudes of the book values are shown below:
award > book value of condemned land
cost of new land > award
Therefore: cost of new land > book value of condemned land
Thus, the land is increased by the net amount: cost of new land-book value of old land
The criterion for capitalizing post-acquisition costs:
(1) increase in useful life or
(2) increase in productivity or efficiency including cost reduction.
(The criterion for capitalizing post-acquisition costs is NOT whether the market value of the overall asset is increased. )
Land vs. building capitalized costs
Land: Purchase price of land Legal fees for contracts to purchase land Demolition of old building on site Sale of scrap from old building Building: Architects' fees Construction cost of new building
If the fair value of a self-constructed asset is less than the total cost of construction, then interest cannot be capitalized on the asset.
False
The cost of a self-constructed asset generally will equal its fair value.
False
The amount of interest cost which should be capitalized during building construction:
the lower of AVOIDABLE interest or ACTUAL interest. Avoidable interest =the interest computed on the weighted-average amount of accumulated expenditures on the building
Report as interest expense
Interest incurred after completion All interest incurred
For some assets if interest costs incurred in their production - capitalize: 1.assets constructed or otherwise produced for an enterprise’s own use AND 2.assets intended for sale or lease that are constructed or otherwise produced as discrete projects. The capitalization period ends when the asset is substantially complete and ready for its intended use - now EXPENSE. (the interest costs associated with the machinery for Bay’s own use should be capitalized during the construction period and expensed after completion. Additionally, all costs associated with the machinery held for sale should be expensed because the machinery does not meet the “discrete project” criterion.
Capitalized interest:Clay Company started construction of a new office building on January 1, year 4, and moved into the finished building on July 1, year 5. Of the building’s $2,500,000 total cost, $2,000,000 was incurred in year 4 evenly throughout the year. Clay’s incremental borrowing rate was 12% throughout year 4, and the total amount of interest incurred by Clay during year 4 was $102,000. What amount should Clay report as capitalized interest at December 31, year 4?
The requirements for capitalization of interest are met if: (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3) interest cost is being incurred. The amount to be capitalized is the lower of avoidable interest or actual interest. Avoidable interest is the average accumulated expenditures multiplied by the appropriate interest rate or rates. Since $2,000,000 was spent on the building evenly throughout the year, the average accumulated expenditures were $1,000,000 ($2,000,000 ÷ 2) and the avoidable interest was $120,000 ($1,000,000 × 12%). Since actual interest ($102,000) is less than avoidable interest, the actual interest cost is capitalized.
Estimating ending inventory using the gross margin method:applies the COST to SALES ratio to sales in order to derive an estimate of COGS. Subtracting the resulting estimate of COGS from the COG available for sale yields an estimate of ending inventory without counting the items
If markup on cost=40% What is % applied to SALES to get to COGS? C+.4C=S so 1.4C=S. Therefore COST to SALES ratio (%) is C/S –> 1/1.4=.71
Beginning inv. + Purchases = Ending inv. + COGS
OR Beg inv + Purchases=Goods Available for Sale- COGS= End Inv
(unrealized loss) on trading securities is recognized in earnings for the year.
(unrealized loss) on securities available for sale is recognized in owners’ equity, bypassing earnings.
trading securities are held for short-term price appreciation. If the value of the trading portfolio increases or decreases, that gain or loss should be recognized in earnings Securities available for sale held for purposes other than short-term price appreciation
Permanent losses on securities available-for-sale (AFS) are recognized in earnings as if they were realized. This is an example of conservatism. If the market value is not expected to recover, a loss is probable and therefore should be recognized in earnings.
Permanent losses on securities available-for-sale (AFS) are recognized in earnings as if they were realized. This is an example of conservatism. If the market value is not expected to recover, a loss is probable and therefore should be recognized in earnings.
On available-for-sale securities, only realized gains (from sale or reclassification) are recognized in the period.
These securities are not sold for the purpose of relatively quick sale. Rather, they are held for different purposes and may be held long-term. The unrealized changes in market value are recorded in owners’ equity.
On available-for-sale securities, only realized gains (from sale or reclassification) are recognized in the period.
These securities are not sold for the purpose of relatively quick sale. Rather, they are held for different purposes and may be held long-term. The unrealized changes in market value are recorded in owners’ equity.
Even though the investor owns 40% of the voting stock of an investee, if a standstill agreement exists between the investor and the investee, the investor cannot exercise significant influence over the investee and likely would use fair value to carry and report the investment.
A standstill agreement is a written agreement between two firms whereby certain actions between the firms are limited.
Under the equity method, the investor recognizes its share of the investee earnings in its own income.
Under the equity method, the investor recognizes its share of the investee earnings in its own income.
A dividend never increases the investment account under any accounting method.
cost method, the dividend is recorded as revenue.
equity method, the dividend is recorded as a decrease in the investment account.
Under the equity method of accounting for an investment, neither amortization of goodwill nor dividends from the investee affect the investor’s investment income.
Goodwill resulting from an investment in another entity (i.e., the excess of the cost of the investment over the investor’s share of the fair value of the investee’s identifiable assets) is not amortized. Dividends from the investee are not recognized as income; rather, they reduce the investment account.
Under the equity method of accounting, changes in the market value of the investee’s common stock are ignored.
Further, cash dividends received by the investor from the investee are not recognized as investment income; rather they are recognized as a debit to cash and a reduction in (credit to) the investor’s investment in investee account.
Only the dividends received on the preferred stock are recognized as revenue.
The common stock investment is accounted for under the equity method, which treats all dividends received as a return of capital. Dividends reduce the investment account under this method.
Are Stock dividends recognized as revenue?
Only cash or property dividends are recognized as income to the recipient. Stock dividends are not recognized as revenue.
The formula to compute life insurance expense is
Cash paid − (Ending CSV − Beginning CSV) − Cash divs. received……….CVS=cash surrender value
Legal fees and other costs incurred to successfully defend a patent should be amortized along with the acquisition cost over the remaining economic life of the patent.
Costs incurred in connection with securing a patent, as well as attorney’s fees and other unrecovered costs of a successful legal suit to protect the patent, can be capitalized as part of patent costs.
The determination and computation of impairment losses for definite life intangibles is the same as for plant assets held for use T/F
True
A perpetual franchise right is not subject to amortization.
True
Goodwill is not amortized nor is it subject to impairment.
False. Goodwill is Not amortized, but yes it is tested at least annually for impairment.
A copyright is most likely a definite life intangible.
True
This copyright has a definite life; the question is what is the length of that life?
The life assigned to the intangible asset is the shorter of its legal and useful life.
Are Indefinite life intangibles amortized?
Indefinite life intangibles are not amortized, but are tested for impairment on an annual basis.
Can losses on intangibles be reversed?
NO. Although impairment losses on plant assets held for disposal can be reversed to the extent of previous losses, this is not the case for intangibles.
In the past, firms capitalized and amortized organization costs. However, now, organization costs are expensed immediately. Such costs are internally generated.
Typically, only costs paid to outside entities are capitalized to intangible assets, and only those intangibles with definite lives are amortized.
Costs of start-up activities, including organization costs, should be expensed as incurred T/F
True
What is the amount of cost to be capitalized or deferred for development stage enterprise (same as for enterprises that have established themselves as on-going enterprises)
the amount of cost that is recoverable in future periods.
There are two steps in the test of impairment of goodwill:
1.compare the carrying value of the reporting unit to its fair value. If FV> CV there is no need to perform the second step of valuing the unit’s assets and liabilities. Goodwill is never tested at the entity level.
Goodwill is the only unidentifiable asset that can be capitalized T/F
True
Goodwill is the difference between the purchase price of and the fair market value of company’s net asset.
Goodwill is the portion of the purchase price not attributable to identifiable assets.
Goodwill is recognized and measured at the date of a business acquisition. Goodwill is measured as the difference between the consideration transferred in a business acquisition and the fair market value of the identifiable net assets acquired.
Goodwill is recognized and measured at the date of a business acquisition. Goodwill is measured as the difference between the consideration transferred in a business acquisition and the fair market value of the identifiable net assets acquired.
Accounts payable is also labeled: accounts payable, trade. The accounts payable account is used only for routine trade payables, typically for purchases of inventory and supplies.
Interest accrued is recorded in accrued interest payable, and secured debt is recorded in other specifically-labeled liability accounts.
Periodic payment of interest NO
Secured by collateral NO
The customer advances account is a liability.
Beg. Balance \+ advances received - advances applied - advances cancelled = End. Balance
The stated interest rate is fixed (remains constant) for the life of the bond. (SR) – What the issuer promises to pay (fixed payments)
stated interest rate also known as: (SR) coupon interest rate contractual interest rate face interest rate nominal interest rate
The effective interest rate is the true rate of interest earned (MR). Changes with market. What the buyer desires to get given the risks (what they can get on the market)
effective interest rate also known as: market interest rate, (MR) yield to maturity, (YTM) discount rate, internal rate of return, annual percentage rate (APR), targeted or required interest rate.
Bonds sell at Discount/Premium
SR>MR —Price>Face Value—-Premium
SR=MR —Price=Face Value—-Par
SR
When the fair value option is elected, At what amount should the discount on notes payable be presented on the balance sheet
When the fair value option is elected, any effects of discounts or premiums are REMOVED from the financial statements, and the accounting rules for reporting discounts and premiums no longer apply.
All noninterest-bearing notes are recorded at a discount from face value T/F
True
The only difference between the valuation of long-term debt at issuance and years after acquisition is the number of cash flows for which to compute the present value. T/F
True
if the stated rate and market rate are different how to calculate Interest expense and Cash paid (Interest payable)
Cash paid (interest payable)based on the stated rate (Face value * Stated rate===cash payment always the same) 1,000*.06=60 Interest expense is based on the market rate (BV*MR)
The book value of a long-term liability years after acquisition equals the present value of remaining cash flows using the original market rate at issuance date. T/F
True
Using the effective interest method, interest expense is computed as the carrying amount of the bonds multiplied by the effective rate of interest. Cash interest paid equals the face value of the bonds multiplied by the stated rate of interest. The difference between interest expense and cash interest paid is discount/premium amortization.
Interest Expense=BV*MR
Cash Interest Paid=FV*SR ….always the same amount
For the issuer of a ten-year term bond, the amount of amortization using the interest method would INCREASE each year if the bond was sold at a discount or premium?
when bonds are sold at either a discount or a premium, the amount of amortization using the interest method will increase each year.
Interest expense for bonds sold at a discount exceeds the cash interest paid. T/F
True
The ratio of interest expense to beginning book value of the bond over the bond term is constant under the effective interest method. T/F
True
The price of a bond issue is the present value of the face value AND interest payments using the effective interest rate. T/F
True
The carrying value of a bond issue=face value +unamortized premium.
The carrying value of a bond issue=face value -unamortized discount.
Bond issue costs are treated as a reduction of the proceeds on the bond. T/F
False
Two important items of information necessary to account for a bond issue are not listed in the bond itself. These are market rate and issue date.T/F
True
The straight-line method should not be used when the market and stated rates are very different. T/F
True
The net bond liability equals the face value -unamortized discount or +unamortized premium.T/F
True
Interest expense for bonds sold at a premium exceeds the cash interest paid.T/F
False
The proceeds on a bond issue is the sum of the bond price and accrued interest. T/F
True
Bond issue costs are capitalized as a deferred charge and amortized over the bond term to expense. T/F
True
Accrued interest on a bond issue increases the discount but reduces the premium. T/F
False
Total Bond Proceeds = Total Bond Price+ Accrued Interest
True
Under international accounting standards, bond issue costs increase the discount on the bond issue. T/F
True
Under the book value method, the sum of the amounts credited to capital stock and contributed capital in excess of par =the book value of the bonds immediately before the conversion of the bonds. T/F
True
Under the market value method, the sum of the amounts credited to capital stock and contributed capital in excess of par =the total market value of the stock issued on conversion. T/F
True
The conversion of convertible bonds can be recorded at either the market value of the stock issued on conversion, or at the book value of the bonds converted. T/F
True
- When the market values of both the bonds and detachable stock warrants are known, the allocation of total bond price is based on relative market values.
- When only one of the market values is known, that market value is the allocation to the relevant security, and the allocation to the other security is the remaining amount of the price to allocate.
Yes Yes
The allocation of the bond price to detachable stock warrants is recorded in an owners’ equity account.
True
A note payable due within one year of the balance sheet is extinguished by issuing long-term debt between the balance sheet date and the issuance of the financial statements. The note is classified as long-term.T/F
True
If a valid refinancing agreement is entered into before the financial statements are issued, but the refinancing actually does not take place until after the financial statements are issued, the current liability at the balance sheet date cannot be reclassified as noncurrent. T/F
False
short-term note that is scheduled to mature within one year is excluded from current liabilities and shown as a long-term liability if both the following conditions are met:
1)The company intends to refinance and,
2) The company demonstrates an ability to refinance.
One way a company can demonstrate the ability to refinance is by entering into a financing
What does FAS 47 require?
FAS 47 requires the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date. The detail for each year is disclosed by the amount of both the sinking fund requirement and the maturity.
The gain on early extinguishment of debt is the excess of the book value of the bonds at the time of retirement over the cash paid
BEG BV ($1,040,000)
-the amortization ($22,000)
=to determine the 7/1/Y6 book value of $1,018,000. The gain is $8,000 ($1,018,000 book value less $1,010,000 cash paid).
The correct equation for computing the gain or loss on retirement of debt is:
Loss = cash paid - book value + unamortized bond issue costs.
Gains or losses from the early extinguishment of debt, if material, should be
Recognized in income from continuing operations in the period of extinguishment.
A creditor cannot have a gain on a settlement troubled debt restructuring. T/F
True
The creditor in a modification of terms troubled debt restructuring has a loan impairment, regardless of the relationship between the sum of the restructured cash flows and the book value of the receivable T/F
True
The creditor in a settlement troubled debt restructuring has a loss equal to the book value of the receivable less the market value of assets received in settlement. T/F
True
The restructuring gain to the debtor in a troubled debt restructuring is the difference between the book value of the debt and the market value of consideration accepted by the creditor in full settlement. T/F
True
Settlements are treated the same way as under U.S. standards.
Both sets of standards treat settlements as extinguishments with a gain to the debtor for the difference between debt book value and fair value of consideration paid.
following actions helps a firm to maintain compliance with a debt covenant that includes a minimum current ratio and a minimum retained earnings balance:
(1) refinancing current debt on a long-term basis (reduces current liabilities (increases noncurrent debt) and increases the current ratio. ) (2) appropriating retained earnings (an action that typically signals a future reduction in dividends, albeit on a temporary basis. As a result, total retained earnings is maintained at a higher level.)
The number of common shares issued =
of shares outstanding + # of shares in the treasury.
Par value is the minimum issue price for capital stock. T/F
True
Subscriptions receivable on stock can be reported as an asset or contra OE account. T/F
True
When stock is issued in excess of par, the total increase in owners’ equity is equal to the issue price of the stock multiplied by the number of shares issued T/F
True
When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as
Additional paid-in capital when the subscription is recorded
This is one of the few examples of a recognized executory contract. Given that collectability is not an issue, the recording of a stock subscription is essentially the same as the entry for issuing stock for cash, except that a receivable stands in place of cash, and common stock subscribed stands in place of common stock.
Common stock subscribed is an owners’ equity account that is replaced by common stock upon issuance. Any additional paid-in capital is recorded when the contract is signed or recorded, just as if cash were received at that point.
When preferred stock is called or redeemed, retained earnings may be debited (decreased) but NOT credited (increased)
When a firm retires preferred stock, cash is paid to the shareholders reducing total owners’ equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.
It is possible for a firm to record a loss as a result of a treasury stock transaction. T/F
False
When treasury stock is purchased and recorded under the par value method, and the cost exceeds the original issue price of the stock, contributed capital from treasury stock transactions is debited for the difference before retained earnings
True
The balance in common stock is the same whether the cost or par value method of accounting for treasury stock is used. T/F
True
Under the cost method of accounting for treasury stock, the total reduction in OE resulting from the purchase of treasury stock is the total cost of treasury stock purchased. T/F
True
Under the par value method of accounting for treasury stock, the total reduction in OE resulting from the purchase of treasury stock is the total cost of treasury stock purchased T/F
True
In the balance sheet, treasury stock under the par value method is disclosed as a contra OE account and is measured at par.
True
Under the par value method of accounting for treasury stock, the treasury stock account always reflects the total par value of treasury stock held by the firm
True
In the balance sheet, treasury stock under the cost method is disclosed as a contra OE account and is measured at cost
True
When treasury stock is purchased and recorded under the par value method, the contributed capital in excess of par account is debited for the original amount recorded in that account when the stock was first issued.
True
The balance in treasury stock is the same whether the cost or par value method of accounting for treasury stock is used T/F
False
The reissuance of treasury stock under the par value method is recorded as a new issuance of common stock except that treasury stock is credited rather than common stock
True
A liquidating dividend reduces permanent capital rather than retained earnings
True
A liquidating dividend is a return OF capital, rather than a return ON capital
True
A property dividend should be recorded in retained earnings at the property’s
Market value at date of declaration.
When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of
Declaration.
A legal liability comes into existence at declaration. The firm has committed itself to paying resources to shareholders from retained earnings on that date.
A corporation issuing stock should charge retained earnings for the market value of the shares issued in a(an
10% stock dividend - Stock dividends, like all dividends, cause a decrease (debit or charge) in retained earnings. A stock dividend is a permanent capitalization of retained earnings to contributed capital. Stock dividends are made in lieu of cash dividends. Small stock dividends (those less than 20% to 25%) are capitalized at the market value of the shares issued.
Dividends in arrears are footnoted only. They are not recognized as a liability until they are declared
Dividends in arrears are footnoted only. They are not recognized as a liability until they are declared
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole
A liquidating dividend is a return of capital. Its source is not earnings, and, therefore, it is NOTretained earnings. The firm is liquidating part of its permanent capital. The usual account to debit for a liquidating dividend is additional paid-in capital.
Stock dividends do not result in a liability being recorded
True
In a LARGE stock dividend, (> 25%); retained earnings is reduced DR by the PAR VALUE of the stock issued
True
A stock dividend increases the number of shares outstanding
True
In a SMALL stock dividend, retained earnings is reduced by the MARKET value of the stock issued
True
The effect on outstanding shares of a 2-for-1 split is the same as for a 100% stock dividend
True
A small stock dividend is recorded at the market value at declaration date
True
A stock dividend reduces retained earnings
Yes
Retained earnings are debited in a stock dividend, and common stock and possibly additional paid-in capital are credited. Therefore, retained earnings are reduced, but total owners’ equity is unchanged, because all accounts affected by the stock dividend are owners’ equity accounts.
Retained earnings are debited in a stock dividend, and common stock and possibly additional paid-in capital are credited. Therefore, retained earnings are reduced, but total owners’ equity is unchanged, because all accounts affected by the stock dividend are owners’ equity accounts.
Retained earnings is debited when an appropriation is created
Retained earnings appropriated is credited when an appropriation is created
Dividends in arrears reduce book value per share
True
Book value per share is computed for preferred stock T/F
False
When a company goes through a quasi-reorganization, its balance sheet carrying amounts are stated at
Fair Value
The deferred gross margin under the installment method is the balance in gross accounts receivable times the gross margin percentage T/F
True
When would a company use the installment sales method of revenue recognition?
When installment sales are material, and there is no reasonable basis for estimating collectibility.
The installment method of revenue recognition is used when the realizability criterion of revenue recognition is not met. In other words, there is significant uncertainty that the receivable will be collected. Until cash is collected (realizability is therefore assured for the amount collected), no gross profit is recognized. The cost-recovery method, which is even more conservative, may also be used in this situation.
Drew Co. produces expensive equipment for sale on installment contracts. When there is doubt about eventual collectibility, the income-recognition method least likely to overstate income is
The cost recovery is the most conservative of the methods listed in the answer alternatives. It recognizes income slower than any other method listed.
This method recognizes no income until the cash collections exceed the cost of the equipment and would tend to overstate income the least. The cost recovery method is more conservative that the installment method, which recognizes profit on each dollar of cash collected
Both the installment method and cost recovery methods are more conservative than the point-of-sales method. T/F
True
The six criteria for recognizing revenue when a right of return is present are all met at year-end. Therefore, all sales during the year are recognized as revenue in the year of sale. T/F
False
How should plan investments be reported in a defined benefit plan’s financial statements?
At Fair Value Pension plan assets are accumulated for the purpose of paying retiree benefits under the plan. In assessing the ability of the plan to pay benefit payments, fair value is the most relevant reporting attribute. The bulk of pension plan assets are invested in financial instruments whose value varies over time. Measurement of these investments is most appropriate at fair value and is consistent with reporting projected benefit obligation at present value—both are current values as of the reporting date.
What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date only?
Accumulated benefit obligation: is the present value of all unpaid future retirement benefits as of the balance sheet date based on (1) service rendered to that date, and (2) current salary levels.
Even if the pension benefit formula incorporates future salaries, accumulated benefit obligation uses current salary levels only to provide a more current measure of the pension liability
Barrett Co. maintains a defined benefit pension plan for its employees. At each balance sheet date, Barrett should report pension liability equal to the
The reported liability for defined benefit pension plans is the unfunded projected benefit obligation. This is the projected benefit obligation, less pension plan assets at fair value. Projected benefit obligation is the fundamental measure of a firm’s pension liability, but is reported only in the footnotes.
The funded status of a defined benefit pension plan for a company should be reported in
B/S Funded status is the difference between projected benefit obligation and plan assets at fair value. Neither of these amounts is reported in the balance sheet (they appear in the notes only), but their difference is reported in the balance sheet as the reported pension liability for defined benefit plans. It is the amount the plan is “behind” in terms of having assets available for payment of benefits.
The recognition of prior service cost increases net pension liability because prior service cost is an immediate increase in PBO T/F
True
When actual and expected return are the same for a period, the return on asset component of pension expense reduces pension liability because assets are increased T/F
True
Amortization of prior service cost increases pension expense because that part of prior service cost is being recognized as a component of pension expense T/F
True
Amortization of net pension gain at January 1 for a calendar-fiscal year firm increases net income for the year and decreases accumulated other comprehensive income T/F
True
The journal entry to recognize prior service cost includes a credit to pension liability
True
Firms are required to make extensive disclosures about employer-sponsored pension plans.Those disclosures include:
(a) a description of the plan,
(b) the amount of pension expense by component (current service cost, interest cost, return on plan assets, etc.), and
(c) the weighted average discount rate used in pension calculations.
There is no requirement to provide estimates of future contributions.
The resulting immediate increase in projected benefit obligation (PBO) is $5mn at January 1.
The immediate increase of $5mn in PBO is recorded as a decrease in other comprehensive income. Therefore, comprehensive income (the sum of other comprehensive income and net income) is immediately decreased by the present value of the increase in the cost of the pension plan. The journal entry at January 1 debits other comprehensive income and credits pension liability.
Projected benefit obligation PBO=
Beg (PBO), January 1, 2005 \+ interest cost (growth in PBO), .10($72,000) \+ service cost - benefits paid in 2005 = EndPBO, December 31, 2005
The gain or loss for a pension plan settlement is the amount of net pension gain or loss which has not been recognized in pension expense due to delayed recognition
True
Service cost and interest cost increase postretirement benefit liability. T/F
True
On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
Date of grant…The fair value on the grant date is used for measuring compensation expense, because, on that date, the employer has given a resource of value to the employee.
Under the fair-value method of accounting for stock option plans, total compensation recognized
Is based on the value of the option at the grant date, adjusted for forfeitures.: The fair value of the option sets the compensation expense to be recognized for each option expected to be vested. Applying the forfeiture rate ensures that only options expected to be vested will be entered into the calculation
Income tax expense is a derived amount, based on the changes in deferred tax accounts and other tax-related accounts.
True
The income tax liability for a period equals the ending balance of income tax payable for a firm that makes no estimated income tax payments
True
The current tax liability is called the current provision for income tax and equals taxable income multiplied by the current tax rate
True
The current portion of income tax expense is the same as the income tax liability for the period.
True
Income tax is the income tax liability for the year plus or minus the net change in the deferred tax accounts for the year
True
The total amount of expense or revenue to be recognized under the two systems of reporting is the same for items causing temporary differences. Only the amounts recognized in particular periods are different.
True
The income tax liability for a period is the amount of income tax expense recognized for a period T/F
False
A permanent difference generally can be found in a balance sheet account T/F
False
If an item causing a permanent difference is not taxed, it also does not cause income tax expense to increase
True
A firm receives dividends from stock investments that qualify for the dividends received deduction. The permanent difference is 80% (amount subject to change) of the amount of dividends received.
True
Temporary differences cause deferred tax accounts
True
The ending deferred tax liability equals the sum of all future taxable differences, multiplied by the enacted FUTURE tax rate. (not current)
True
At the very end of the year, a firm received $10,000 in advance payment of service it would later provide to a customer. The total temporary difference is reported in unearned revenue.
True
The temporary differences that are of most concern in interperiod tax allocation are the future temporary differences.
True
Expenses that are recognized more quickly for financial reporting purposes cause future deductible differences.
True
Accounts receivable represents a future taxable difference.
True
Many temporary differences are reflected in balance sheet accounts
True
A firm has a prepaid rent account with a balance of $4,000 at the end of the period. Therefore, a future taxable temporary difference exists
True
A future taxable temporary difference causes pretax accounting income to be less than taxable income in the future
True
A temporary difference causes future pretax income to decrease relative to taxable income. The difference is classified as taxable
True
Expenses recognized more quickly for tax purposes cause future taxable differences
True
Taxable income=pretax accounting income +/- permanent differences +/- the current period’s temporary differences
True
A temporary difference will reverse next year. In the current year, the difference causes taxable income to increase relative to pretax accounting income.
Therefore, the difference will cause a deferred tax asset to be recorded at the end of the current year.
True
When accounting for income taxes, a temporary difference occurs when:
An item is included in the calculation of net income in one year and in taxable income in a different year
Hedge accounting is permitted for 4 types of hedges:
1Unrecognized firm commitments.
2Available-for-sale securities.
3Foreign currency denominated hedge forecasted transactions.
4Net investments in foreign operations.
(Trading securities is not one of the 4 types.)
Gains and losses on the hedged asset/liability and the hedged instrument for a fair value hedge will be recognized
In current earnings.
The general criteria for a hedging instrument are:
that sufficient documentation must be provided at the beginning of the process and
the hedge must be “highly effective” throughout its life
The following disclosures are required about credit risk for financial instruments with off-balance-sheet credit risk:
1The amount of accounting loss the entity would incur should any party to the financial instrument fail to perform according to the terms of the contract and the collateral, if any, is of no value.
2The class of financial instruments held.
3Categorization between instruments held for trading purposes and purposes other than trading.
Disclosures related to financial instruments that are used as hedging instruments must include the following information:
- Objectives and strategies for achieving them.
- Context to understand the instrument.
- Risk management policies.
- A list of hedged instruments.
Disclosure of the maximum potential accounting loss is only required for financial instruments with concentrations of credit risk.
Under IFRS, a cash flow hedge and a hedge of a net investment are accounted for by
Recognizing gains and losses in other comprehensive income
In deferred tax accounts, for balance sheet reporting purposes, current items are netted, and noncurrent items are netted. T/F
True
The current and noncurrent deferred tax liability amounts are netted to form one liability amount for external reporting purposes.T/F
False
Future deductible and taxable differences are merged to form a single deferred tax account at the end of the period. T/F
False
The deferred tax liability relating to a depreciable plant asset is classified current if the asset has only one year remaining in its useful life at the balance sheet date. T/F
False
At most, there are 4classifications of deferred tax accounts for internal purposes
A firm had 4 internal deferred tax accounts all in the same amounts and all classified differently. This firm would report no deferred tax accounts in the B/S
Realization of a deferred tax asset means that the deferred tax asset is credited in the future rather than income taxes payable of an equivalent amount.
True
Expected future taxable income is the most common support for the expectation that a deferred tax asset will be realized.
True
A deferred tax asset with better than 50% chance of being realized needs no valuation allowance
True
The entry to record a carryforward involves a credit to income tax benefit.
True
A firm has two options for net operating losses:
carryforward, and
carryback-carryforward
The ending deferred tax asset balance is the sum of all future deductible differences and net operating loss carryforwards, multiplied by the future tax rate
True
A firm has a net operating loss carryforward of $30,000. The tax rate is always 30%. The value to the firm of the net operating loss carryforward is
$9,000
A firm used $20,000 of its $30,000 Year 7 net operating loss in the carryback option. The carryback-carryforward option was chosen. In Year 8, the firm earned $14,000 in taxable income. The firm will pay tax only on $…of taxable income in Year 8
$4,000
A firm has a net operating loss and chooses the carryback option. The taxable income of the earliest of the two preceding years must be absorbed first
True
Correction of an error in prior year’s F/S does not result in retrospectively adjusted or restated financial statements of prior years financial statementsT/F.
False
A change from DDB to SL is not treated retroactively (retrospectively or restatement). T/F
True
Most accounting principle changes are recorded using the prospective approach T/F
False
Cumulative effects of changes in accounting principle are recorded net of tax T/F
True
The change TO LIFO generally requires a cumulative effect to be reported. T/F
False
The change to LIFO from FIFO uses the ending FIFO balance of the year before the change as the beginning LIFO balance in the year of the change
True
The change from LIFO generally does not require a cumulative effect to be reported. T/F
False
A firm changes from LIFO to FIFO. The firm must restate all prior year financial statements shown comparatively, to reflect FIFO, if practicableT/F
True
A change in depreciation method and a change in the useful life and residual value of equipment are both treated currently and prospectively T/F
True
Equipment with an estimated useful life of six years was purchased at the beginning of Year 1. During Year 3, the firm estimated that, as of the beginning of Year 3, the asset would have six years of service life remaining. DDB depreciation for Year 3 equals
DDB depreciation for Year 3 = the book value at the beginning of Year 3 multiplied by 2/6.
All prior period adjustments cause an adjustment to beginning retained earnings T/F
True
All error corrections require an adjustment to beginning retained earnings T/F
False
The amount recognized in an asset retirement obligation is also capitalized to the natural resources depletion base.
True
At the date of a business combination accounted for as an acquisition, the income of the combined entities will be the same as the income of the acquirerT/F
True
Only the acquisition method can be used currently to record a business combination. T/F
True
Following a legal acquisition, the separate entities will continue to keep separate accounting records and prepare separate financial statements T/F
True
Following a legal acquisition, the acquiring firm and the acquired firm remain separate legal entities T/F
True
If transferred as consideration in a business combination: generally the asset must be transferred at
non-cash asset - fair value.
, but if remains under the control of the acquirer - carrying value
Consideration used to effect a business combination generally should be measured at:
fair value (identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree are measured at fair value. A few exceptions exist for selected assets and liabilities.
Goodwill:Goodwill recognized in a business combination will be measured as the excess of investment value in the acquiree over the fair value of the net assets of the acquiree.
The investment value used in computing goodwill is the sum of the fair value of the consideration transferred by the acquirer and the fair value of the noncontrolling interest, if any, in the acquiree
Both goodwill and a bargain purchase can occur in the same business combination T/F
False
If a contingency recognized in a business combination is an asset recognized at fair value as of the acquisition date, it subsequently can be remeasured :
to a lower amount, but not to a higher amount
In the consolidated income statement for the period in which a business combination occurs, the revenue of the acquiree since the acquisition date must be separately disclosed
But not expenses
Only an acquisition form of business combination will require the preparation of consolidated financial statements.
In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.
Depreciation expense as shown on the consolidating worksheet (and consolidated income statement) can be greater than the sum of the parent’s depreciation expense plus the subsidiaries’ depreciation expense. T/F
True
An investment eliminating entry prepared at the end of an operating period will eliminate the parent’s investment in the subsidiary as of the beginning of the period against the subsidiary’s shareholders’ equity as of the beginning of the period T/F
True
When an intercompany inventory profit resulting from a sale by a PARENT to a subsidiary is eliminated, the full amount (100%) of the decrease in profit is deducted from consolidated net income available to the parent shareholders True
When an intercompany inventory profit resulting from a sale by a LESS than 100% owned SUB to its parent is eliminated, the full amount (100%) of the decrease in profit is deducted from consolidated net income available to the parent shareholders False
The amount of intercompany inventory profit eliminated on a consolidating worksheet is:
the amount of profit still in the buying affiliate’s inventory at year-end
If an intercompany fixed asset remains in use beyond its life expectancy, for depreciation purposes an entry will be required on the consolidating worksheet until:
the asset is written off
When a gain on the sale of a fixed asset by a less than 100% owned subsidiary to its parent is eliminated, a portion of the eliminated gain is allocated to:
reducing noncontrolling interest
If an intercompany gain or loss results from an intercompany fixed asset transaction, the depreciation expense of the buying affiliate will :
overstate:
understate:
overstate (gain) or understate (loss) depreciation expense for consolidated purposes
For consolidated reporting purposes, a fixed asset must be shown:
at its original cost from a non-affiliate
If the elimination of a gain or loss resulting from an intercompany fixed asset transaction is to be recorded on a balance sheet only (no income statement is provided), the elimination of the gain or loss will be recorded to:
retained earnings of the selling affiliate
The major difference under IFRS between measuring noncontrolling interest at full fair value or at proportional share of fair value is:
in the amount of goodwill recognized:If a parent elects to measure noncontrolling interest at proportional share of fair value as permitted under IFRS, the noncontrolling interest recognized in consolidated shareholders’ equity would be less than if full fair value measurement were used
The process of preparing combined financial statements is identical to the process of preparing consolidated financial statements T/F
False
Combined financial statements show the financial position and results of operations for a single controlling corporation T/F
False
In order to prepare consolidated financial statements, one of the firms being consolidated must have:
controlling ownership of the other firms
Combined statements may be used to present the results of operations of:
Unconsolidated subsidiaries; Companies under common management
In order for a contract to be a financial instrument, it must result in:
an exchange of cash or ownership interest in an entity
A probable contingent liability cannot be estimated. Therefore, it warrants only
footnote disclosure
A firm is a defendant in a suit. The legal staff estimates that the firm will be required to pay $300,000 in all probability. The firm should record
the loss and liability
All recognized contingent liabilities result in a future liability being recordedT/F
True
Under international accounting standards, “provision” refers to
a recognized liability. A provision that has a reasonably possible chance of requiring the outflow of benefits is treated as a contingent liability
The term “contingent liabilities” refers to recognized under U.S. standards
, but not under international accounting standards
When dividends are paid to common shareholders, the effect on EPS is
that neither basic nor diluted EPS are reduced
In computing EPS, assuming that dividends are declared in one period and paid in the next,
only declared dividends should be subtracted from the numerato
Only the amount of noncumulative preferred stock dividends PAID during the year is subtracted in the numerator of BEPS False
Only the amount of noncumulative preferred stock dividends DECLARED during the year is subtracted in the numerator of BEPS True
Preferred stock dividends reduce EPS True
Only income amounts on a per share basis are reduced by preferred stock dividends
A firm has no preferred stock outstanding. If EPS for a year is $4.00, this amount represents the dividend that could be paid for the year without reducing
the retained earnings balance below what it was at the beginning of the year
DEPS equals BEPS adjusted for
the effect of potential common stock. A dilutive potential common stock decreases EPS
If the ratio of numerator effect to denominator effect for a potential common stock is less than BEPS for income from continuing operations, and there is only such security, then DEPS
will be less than BEPS
The main difference between convertible bonds and convertible preferred stock when incorporated into DEPS is that the interest on convertible bonds is an after tax amount, whereas for dividends on preferred stock there is no tax effect T/F
True
In determining which potential common stock securities enter DEPS, the securities are ranked
from lowest to highest in terms of the ratio of numerator effect to denominator effect
…. is used for all DEPS calculations
The denominator of DEPS for income from continuing operations
For IFRS reporting purposes, currencies are defined as:
foreign, functional, and presentation currencies
IFRS requirement regarding foreign currency translation:
1 Nonmonetary items measured at historical cost are translated at the historical exchange rate.
2 Monetary items are translated at the year-end spot
3 If the functional currency is the same as the presentation currency gains or losses are reported in profit and loss for the period.
For IFRS reporting, the functional currency is
the currency of the primary economic environment in which the company operates.
IFRS the presentation of interim financial statements,
IFRS has no requirement for the presentation of interim financial statements, but if they are presented, four basic financial statements are required.
Gains and losses from foreign currency transactions are reported as
a component of income from continuing operations in the income statement
The EFFECTIVE portion of a hedge of a forecasted transaction should be deferred and reported as an item of “Other Comprehensive Income.” True
The ineffective portion of a hedge of a forecasted transaction should be deferred and reported as an item of “Other Comprehensive Income. False
A hedge of a net investment in a foreign operation is aclassified as a fair value hedge, but the effective gains and losses are recorded in
OCI, similar to the accounting for a cash flow hedge
If the change in fair value of an instrument which hedges a net investment in a foreign operation is > than the change in fair value of the net investment being hedged, the excess will be
recognized as a gain in net income for the period
If a hedge of a recognized asset is designated as a fair value hedge, the full amount of any gain or loss on the hedge instrument will be recognized in
current net income
A gain or loss that results from revaluing a forward exchange contract which hedges an investment held available-for-sale should be recognized in
the income statement
The net gain or loss to be recognized on a foreign currency available-for-sale investment and a related hedge of the investment is
the difference in their changes in fair value for a period
In recording the purchase of a forward contract for speculative purposes, the ……. exchange rate should be used
forward exchange rate
A gain or loss on a forward contract entered into as a hedge of a net investment in a foreign operation can be recognized
partly in other comprehensive income and partly in current income
gain or loss on a forward contract entered into as a cash flow hedge can be recognized
partly in current income and partly in other comprehensive income
A gain or loss on a forward contract entered into as speculation can be recognized partly in current income and partly in other comprehensive income T/F
False.A gain or loss that results from revaluing a forward exchange contract for speculative purposes should be recognized in the income statement. ALSO Gains and losses on forward contracts for speculative purposes are recognized in the period(s) in which the forward exchange rate changes
The weighted average exchange rate is used to convert revenues to the reporting currency when
the functional currency is the local currency
The amount needed to make a translated balance sheet balance is
the amount of the required translation adjustment
In converting financial statements using the translation process, paid-in capital items (common stock, additional paid-in capital, etc.) should be converted using
the exchange rate in effect when the investor acquired the entity
The recorded amount of an impairment loss for an asset in use is
book value- fair value
An impairment loss is reported as
part of income from continuing operations
The recoverable cost of an asset is less than its book value. Therefore,
an impairment loss should be recorded
The fair value of an asset in use is
book value - fair value
Only the lessee capitalizes a lease.
Both parties depreciate the asset
Interest expense for a period on a direct financing lease is
the beginning lease liability multiplied by the lessee’s interest rate
The sales to be recognized in a sales-type lease are
the market value or normal sales price of the asset leased
In a sales-type lease, the lessor………in computing interest revenue for the period
multiplies the implicit interest rate by the beginning net lease receivable balance
Executory costs are excluded from both the capitalized lease accounts and the minimum lease payments, for both parties
The initial direct costs in an operating lease are capitalized and expensed on a straight-line basis ( are accounted for only by the lessor)
hird party guarantee of residual would cause the present value of minimum lease payments for the lessor to exceed that of the lessee, assuming both parties used the same rate of inter T/F
True
In a direct financing lease, the lessee includes the lessee guarantee of residual in the lease liability at present value
In a sales-type lease, the lessor includes a lessee guarantee of residual value in the gross lease receivable
A lease that is properly treated as a capital lease and that has a bargain purchase option is for an asset with a fair value equal to its book value.
Both the lessee and lessor will capitalize the present value of the bargain purchase amount in their respective net lease liabilities and net lease receivables
Both the lessor and lessee include a bargain purchase option in their respective minimum lease payments T/F
True
The accounting procedures used by the lessor in a sale-leaseback capital lease are unaffected by the leaseback portion of the transaction T/F
True
The gain or loss on a nonmonetary exchange is initially computed as
the difference between the fair value of the asset exchanged and its book value
To be an operating segment, a subunit of the firm must be involved in
producing revenues, reviewed periodically, and generate financial information
The absolute value of the sum of the operating income for those segments with negative operating income > the absolute value of the sum of the operating income for those segments with positive operating income.
If the segment’s positive operating income is 10% or more of the absolute value of the sum of the operating income for those segments with negative operating income, then the segment is a reportable segment
Which computer software costs are amortized
Only capitalized computer software costs are amortized
IFRS does not require adjustment for share splits or reverse splits that occur after the reporting date but before the financial statements are issued T/F
True
A subsequent event for a period includes any event occurring after the balance sheet date for that period T/F
False
Which SEC form discloses information about material events?
Form -K
The maximum number of days for an accelerated filer to file a 10-K with the SEC is . However, a
large accelerated filer with $700 million of public float and nonaccelerated filers
75 days after the company’s fiscal year-end
has a deadline of 60 days,
have a deadline of 90 days.
According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is
Income. The IASB Framework has five elements: asset, liability, equity, income, and expense. Note that income includes both revenues and gains.
The accumulated balance of other comprehensive income should be reported as:
a component of equity, separate from retained earnings and additional paid-in capital.
