Exam Flashcards

Question

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of: a. Consistency b. Cost-benefit c. Relevance d. Representational Faithfulness

Answer 1

b. Cost-benefit

Answer 2

Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Answer 3

a. Fair value is a market-based measurement

Answer 4

d. $180,000

Answer 5

c. Determination of the fair value of legal services received in exchange for an entity's common stock.

Answer 6

c. $81 When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. The second market is more advantageous because it has the higher selling price. In addition, fair value excludes transaction cost; therefore, the valuation of the asset would be $81. The response of $80 is incorrect because it includes transaction costs.

Answer 7

Entity performance for the period

Answer 8

Reports all non-owner changes in equity for the period; includes net income (or loss) and items included in comprehensive income that are not part of net income

Answer 9

Financial position at reporting date

Answer 10

Changes in the owners' equity for the period

Answer 11

Describes major changes in cash (including restricted cash) by meaningful category

Answer 12

Income statement, statement of comprehensive income, balance sheet, statement of stockholders' equity, statement of cash flows, footnote disclosures and supplementary schedules, and auditor's opinion

Answer 13

Observable inputs for the exact same item

Answer 14

Observable inputs for a similar item

Answer 15

Unobservable inputs for items that cannot be validated

Answer 16

Inputs used in pricing an asset, liability, or equity item that are developed based on market data obtained from sources independent of the reporting entity

Answer 17

Inputs that reflect the reporting entity's own assumptions used in pricing the asset, liability, or equity item that are developed based on the best information available in the circumstances.

Answer 18

c. Unobservable inputs for the asset.

Answer 19

a. $400,000

Answer 20

b. II only

Answer 21

d. Neither I nor II Quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value. Such prices would be considered level 2 factors, observable inputs but not in active markets.

Answer 22

c. Quoted market prices on a stock exchange for an identical asset.

Answer 23

c. Internally generated cash flow projections for a related asset or liability.

Answer 24

Market Approach, Income Approach, and Cost Approach

Answer 25

d. Both I and II

Answer 26

a. Both I and II are correct

Answer 27

c. Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value

Answer 28

c. Between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis

Answer 29

c. Combined disclosures about fair value measurements required by all pronouncements

Answer 30

b. Neutrality, completeness, and free from error.

Answer 31

a. Recognition

Answer 32

a. The item has a cost or value that can be measured reliably.

Answer 33

c. Relevance

Answer 34

FIFO and Weighted Average Cost NO LIFO

Answer 35

d. IFRS for SMEs

Answer 36

Earnings per Share and Information by Segment

Answer 37

c. Both I and II

Answer 38

c. Goodwill must be amortized

Answer 39

Under IFRS for SMEs, both the cost and equity method may be used by an investor to account for an investment in another entity (called an "associate" in IFRS for SMEs) over which the investor has significant influence. Under U.S. GAAP, the cost method may not be used; the equity method is required.

Answer 40

d. 0 This is an example of a question where you would rely on logic and reasoning to think through the viability of capitalizing costs. Since these costs are associated with an advertising campaign, and advertising occurs on a continual basis, the costs should be expensed as incurred. In addition, it is difficult to measure the benefit from any advertising campaign. Even though the company believes there is a “likely” future benefit, there is not enough evidence to justify capitalization over a two-year period.

Answer 41

d. Current and non-current assets and liabilities.

Answer 42

d. All items would appear on the Income Statement when using IFRS.

Answer 43

d. Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.

Answer 44

Prepaid Insurance $700 | Insurance Expense $500

Answer 45

a. Balance Sheet

Answer 46

c. Higher by $36,000 The $20,000 AR decrease implies that cash received on account was $20,000 greater than accrual sales. Cash-basis income is, therefore, $20,000 greater than accrual income for this difference. The $16,000 accounts payable increase implies that more inventory was purchased and included in accrual cost of goods sold than was paid. Cash-basis income is, therefore, $16,000 more than accrual income for this difference. In total, cash-basis income is $36,000 greater than accrual income.

Answer 47

d. $200,000

Answer 48

c. $80,000

Answer 49

b. Debit prepaid services and credit services expense for $60,000.

Answer 50

Faithful representation

Answer 51

c. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

Answer 52

Fair Value Required and Fair Value Elected The framework for determining (measuring) fair value provided in ASC 820, "Fair Value Measurement," must be followed (with very limited exceptions) whenever fair value measurement is used, either as required by GAAP or permitted by GAAP as an alternative that is elected by an entity.

Answer 53

c. Investment in a subsidiary that is to be consolidated A firm may elect to use fair value to measure and report the financial asset "Investment in debt securities to be held to maturity," instead of using the traditionally required amortized cost method.

Answer 54

b. $50/sh Since neither market is the principal market for the security, Marco must determine the most advantageous market, which is the market in which the asset could be sold at a price that maximizes the amount that would be received. Marco would receive $52/sh − $6/sh = $46/sh in Front market and would receive $50/sh − $1/sh = $49/sh in Side market. Therefore, Side market is its most advantageous market, and fair value would be determined in that market as the price at which the security could be sold, or $50/sh. The market selling price would not be adjusted for the related direct transaction cost, even though it enters into determining the most advantageous market.

Answer 55

d. $50,100

Answer 56

c. Alphaco, Betaco, and Charlieco As the parent, Alphaco may elect to report not just its own debt investments held-to-maturity at fair value, but all of the debt investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes

Answer 57

c. As a change in accounting estimate

Answer 58

c. Expense approach

Answer 59

Amortized Cost and Fair Value Both amortized cost and fair value may be used to measure and report investments classified as held-to-maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value, which is permitted by the fair value option.

Answer 60

(Predictive Value) SFAC 5 states that "Relevance is a primary qualitative characteristic. To be relevant, information about an item must have feedback value or predictive value (or both) for users and must be timely."

Answer 61

(Gains) SFAC 6 states that "Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners."

Answer 62

(Realization) SFAC 5 states that "Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash."

Answer 63

(Comparability) SFAC 8 states that "Comparability, including consistency, is an enhancing quality that interacts with relevance and faithful representation to contribute to the usefulness of information."

Answer 64

(Recognition) SFAC 5 states that "Recognition is the process of formally recording or incorporating an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like." SFAC 5 continues the recognition concept by stating, "An item and information about it should meet four fundamental recognition criteria to be recognized and should be recognized when the criteria are met, subject to a cost-benefit constraint and a materiality threshold."

Answer 65

(Comprehensive Income) SFAC 5 states that "Comprehensive income is a broad measure of the effects of transactions and other events on an entity, comprising 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."

Answer 66

(Revenues) SFAC 6 defines revenues as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."

Answer 67

(Current Market Value) SFAC 5 defines current market value as "the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation."

Answer 68

(Predictive Value) Predictive value is the quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events (SFAC 8).

Answer 69

(Earnings) SFAC 5 states that "Earnings is a measure of performance during a period that is concerned primarily with the extent to which asset inflows associated with cash-to-cash cycles substantially completed (or completed) during the period exceed (or are less than) asset outflows associated, directly or indirectly, with the same cycles."

Answer 70

b. Current liability

Answer 71

d. It decreased by $57,000

Answer 72

a. $250,000

Answer 73

b. Collection of a note receivable from a related party. Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.

Answer 74

a. $20,000 Net income is revenues less expenses, or $80,000 – 50,000 – 10,000 = $20,000. The foreign currency translation adjustment is part of comprehensive income.

Answer 75

a. $480,000

Answer 76

Neither should be included in general and administrative expenses. Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified. Interest is identified with specific financing activities, and advertising with specific promotional activities (selling expenses).

Answer 77

d. $201,900 Net sales $187,000 Interest revenue 10,200 Gain on equipment 4,700 Total revenues $201,900 This answer includes the gain on the sale of equipment. It is the best answer from among the four because this answer less the gain is not represented. However, many would argue that the gain is not a revenue. Discontinued operations is not a revenue; rather, it is a special item of disclosure found below income from continuing operations in the Income Statement.

Answer 78

c. $1,314,600 All items are included in net income except the prior year adjustment to amortization expense and the unrealized gain on the AFS debt portfolio securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.

Answer 79

a. $260,000

Answer 80

Noncurrent liability with note disclosure

Answer 81

d. Historical cost

Answer 82

a. $710,000 Current assets are calculated as follows: Cash 185,000 Accounts receivable, net 725,000 Reclassification of o/s receivable (200,000) Total current assets 710,000

Answer 83

d. Some other amount Retained earnings are calculated as follows: ``` Revenue [4,500,000] - Expenses [3,750,000] 750,000 Income taxes = 0.30 * 750,000 (225,000) Net income 525,000 Retained earnings, 1/1/Yr. 5 350,000 Retained earnings, 12/31/Yr. 5 875,000 ```

Answer 84

a. Accumulated depreciation, equipment.

Answer 85

b. 12 months At the end of 20X2, two years of coverage remains. The cost of coverage for 20X3 is a current asset because it will be consumed within a year of the 20X2 Balance Sheet. The definition of a current asset uses the period "operating cycle or one year, whichever is longer." An operating cycle of any length, not exceeding one year, would yield the same answer to this question. The fact that the operating cycle is only six months versus, for example eight months, has no effect on the classification of the prepaid insurance into a current component (to expire within a year of the 20X2 Balance Sheet) and a long-term component (the portion to expire after 20X3).

Answer 86

c. $520,000 The gain on the sale of equipment ($50,000) is already included in net income ($400,000) and would be included in comprehensive income as part of net income.

Answer 87

c. $140,000 Comprehensive income (CI) is the sum of net income (NI) and other comprehensive income (OCI). In this case, NI = $110,000 ($800,000 sales − $600,000 CGS − $90,000 expenses). The unrealized holding gain is an item of OCI. There are four types of OCI items in all. This firm has only one of them. Thus, CI = $110,000 NI + $30,000 OCI = $140,000.

Answer 88

a. To summarize all changes in equity from nonowner sources

Answer 89

b. Currency-translation adjustments

Answer 90

c. $17,000 other comprehensive loss Other comprehensive income is comprised of unrealized gains/losses on available-for-sale debt securities, minimum pension liability adjustment, foreign currency translation adjustment, and unrealized gains/losses on cash flow hedges. The only other comprehensive income item listed is the $17,000 unrealized gains/losses on available-for-sale debt securities

Answer 91

b. $10,000 The components of comprehensive income are: Net Income, Unrealized gain/loss on AFS debt securities, foreign currency translation adjustment, unrecognized gain/loss on pension benefits, and deferred gain/loss on certain hedging transactions. Therefore, the Comprehensive income of Palmyra Co is $11,000 − 3,000 + 2,000 = $10,000.

Answer 92

a. Unrealized loss on debt investments classified as available-for-sale.

Answer 93

``` Provides beginning balances, changes during the year, and ending balances for: Stock (common and preferred) Additional paid-in-capital (APIC) Retained Earnings Treasury stock Accumulated other comprehensive income ```

Answer 94

d. Reconciles all of the beginning and ending balances in the equity accounts.

Answer 95

Treasury Stock and Retained Earnings

Answer 96

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 is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

Answer 97

c. Statement of Cash Flows

Answer 98

d. A reconciliation of ending retained earnings to net cash flow from operations

Answer 99

c. $208,000

Answer 100

c. $20,000

Answer 101

Cash flow per share should not, but conversion of debt to equity should be disclosed as supplemental information in the statement of cash flows.

Answer 102

c. The cash receipts and cash disbursements of an enterprise during a period.

Answer 103

a. Have no effect The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

Answer 104

d. Not reported The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.

Answer 105

Working capital will be overstate and there is no effect on cash flows from operating activities. Failure to accrue salaries at the end of 20X1 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated. The accrued salaries at the end of 20X1 would not have been paid in 20X1, even if they had been accrued correctly. Therefore, 20X1 operating cash flows are not affected by the failure to accrue the salaries.

Answer 106

c. $250 Cash flows from financing activities are those associated with how the company is financed, such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock (250), convertible bonds (100), and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 − 300 = 250.

Answer 107

b. $300,000 Dividends paid to shareholders are a financing activity. The payment of interest on bonds is an operating activity, and payments to acquire shares of Marks Co. stock are investing activities.

Answer 108

a. $14,000 Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000 − 3,000 − 8,000 = $14,000.

Answer 109

c. Cash effects of transactions obtaining resources from owners and providing them with a return on their investments. Financing cash flows are those between the firm and the parties providing it with debt and equity financing. Financing cash flows are the major sources of nonoperating cash inflows and repayments of those amounts to the providers. For example, borrowings and proceeds from stock issuance, retirements of debt, treasury stock purchases, and dividends paid are all financing cash flows. Interest paid, however, is an operating cash flow.

Answer 110

a. Gain on sale of plant asset The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

Answer 111

a. Cash payment The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, only the cash amount paid is disclosed in the statement of cash flows. The noncash activity schedule would disclose the acquisition price and amount financed with the mortgage.

Answer 112

d. I and III Both I and III are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing. The dividends are a return to shareholders who have provided a considerable portion of total firm financing.

Answer 113

d. International accounting standards are not included in the FASB Accounting Standards Codification. IFRS are not U.S. GAAP and thus are not included in the Codification.

Answer 114

b. A proposed accounting standards update. Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).

Answer 115

d. To provide information that is useful for economic decision making.

Answer 116

d. Relevance The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.

Answer 117

c. Enterprise performance but not directly provide information about management performance.

Answer 118

a. Timeliness over faithful representation.

Answer 119

a. Relevance

Answer 120

b. Predictive Value

Answer 121

d. Comparability Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and faithfully represented.

Answer 122

c. The objectives and concepts for use in developing standards of financial accounting and reporting. The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a "constitution" for developing specific accounting principles. The concepts statements are not GAAP, however.

Answer 123

c. $30,000 The disclosure requires cash paid in interest during the period. The best way to answer this type of question is with a T-account: Interest Payable 15,000 Beginning balance (given) Interest paid (solve for) 30,000 20,000 Interest expense (given) 5,000 Ending balance (given)

Answer 124

a. $0 The sale of a building is not a financing activity, so zero would be included in the financing section. The gain of $20,000 would be a reconciling item in the operating section and the cash received of $100,000 would be in the investing section, but nothing would be reported in the financing section as it relates to this transaction.

Answer 125

c. $76,000 A summary journal entry is helpful to sort out what happened with interest during the period: Interest expense 76,000 Accrued interest payable 17,000 Prepaid interest 23,000 Cash 70,000 The interest expense amount for the year is the derived amount in the entry. Also, a more verbal approach works: (1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and (2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense. The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 − accrued payable decrease of $17,000 + prepaid interest decrease $23,000.

Answer 126

c. As an addition to net income in the operating activities section Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account. The semiannual journal entry is: dr. Interest expense; cr. Discount; cr. Cash. Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount). Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow. Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

Answer 127

d. In operating activities as an addition to income When bond discount is amortized, a portion of the discount is recognized as expense. The result is that interest expense exceeds the amount of cash paid with each interest payment. The discount is gradually amortized over the bond term as additional interest expense because the firm received less than the amount due at maturity. The operating activity section of the indirect method begins with net income and ends with net cash flow from operations. Income is reduced by the interest expense that exceeds the cash interest paid by the amount of discount amortization. Therefore, the discount amortization is added back, yielding a reduction in net cash flow from operations equal to the amount of cash interest paid.

Answer 128

a. $20,000 The accounts receivable increase represents sales included in net income but not yet collected and is subtracted because income was increased by an amount exceeding cash collections. The accounts payable increase represents purchases of inventory included in cost of goods sold not yet paid for. This amount is added because income was reduced by an amount exceeding cash payments.

Answer 129

a. $717,000 Payment for the early retirement of long-term bonds payable ($750,000) Distribution in 20X1 of cash dividend declared in 20X0 to preferred shareholders (62,000) Proceeds from the sale of treasury stock 95,000 Net cash used in financing activities ($717,000) The conversion of preferred stock is a non-cash activity, not a cash flow.

Answer 130

c. $620,000 Net income $790,000 Increase in inventory (80,000) Decrease in AP/accrued liabilities ( 5,000) Gain on sale of long-term investments ($135,000 − $100,000) (35,000) Increase in short-term investments (from purchase) (300,000) Depreciation expense 250,000 Equals net operating cash inflow $620,000 The accumulated depreciation account did not change during the year. Therefore, depreciation expense equals $250,000, which offsets the decrease in the account due to the sale of the equipment.

Answer 131

a. $705,000 Proceeds from sale of securities $ 135,000 Proceeds from sale of building 350,000 Purchase of other plant assets (1,190,000) Net cash used in investing activities $( 705,000) The plant assets (gross) account increased $700,000. $700,000 increase = -$600,000 (sale of building) + $110,000 (equipment purchase) + X. X = additional purchases of plant assets. X = $1,190,000. The long-term investments were sold at a gain. That is why the change in the account ($100,000) does not equal the cash inflow from the sale. The equipment purchased with long-term debt is not listed in the investing section because no cash was used on the purchase (it is disclosed in the supplemental information). The purchase of debt securities classified as trading are classified as operating cash flow.

Answer 132

c. In operating activities as a deduction from income The operating section of the indirect method Statement of Cash Flows is the reconciliation of net income and net cash flow from operations. The gain on the sale of equipment increased income but did not provide any operating cash inflow. Therefore, it is subtracted from net income in the reconciliation.

Answer 133

d. $37,000 Only the last two items are financing cash flows. The treasury stock sale of $75,000 less the dividends paid of $38,000 result in a net financing cash inflow of $37,000.

Answer 134

a. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method. The accounting policy footnote describes significant accounting methods and practices used by the company. The accounting policy footnote primarily discusses the accounting practices followed by the firm so that users can better understand the financial statements and other disclosures. Recording property at cost and using a specific depreciation method are examples of two significant accounting policies. The other answers indicate information that might possibly be disclosed in other footnotes.

Answer 135

The depreciation method should be included in the summary of significant accounting policies, but composition should not. The summary of significant accounting policies requires that the methods of depreciation used by a firm be disclosed. The composition of plant assets must also be disclosed, but not in the summary of significant accounting policies. The composition information typically is disclosed in another footnote.

Answer 136

b. Basis of profit recognition on long-term construction contracts. The summary of significant accounting policies conveys information regarding the important accounting methods and policies chosen by the firm, when a choice is available. Knowledge of the methods is critical to an understanding of the amounts disclosed in the financial statements. The method of accounting for long-term contracts may be the percentage of completion or completed contract method. Disclosure of this method assists the user in understanding the meaning of reported revenue and gross profit. The other answer alternatives give data on specific accounts or the result of applying specific accounting principles. They do not indicate what choices the firm has made for accounting and reporting.

Answer 137

d. Criteria for determining which investments are treated as cash equivalents. The accounting policy footnote discloses both the methods of accounting used by the firm and other information useful for understanding the bases under which the financial statements were prepared. How the firm classifies investments as cash equivalents is one such basis; it is disclosed in the policy footnote. The other answer alternatives are disclosures about specific aspects of particular accounts.

Answer 138

a. Concentration of credit risk. This disclosure will give the financial statement reader information about concentration of credit risk related to the receivables that are all in the same industry.

Answer 139

d. Revenue recognition policies. 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. For example, in some areas of revenue recognition, GAAP allows a choice from among several methods of recognition and measurement. This footnote discloses the choices made by the firm to help users understand the reported amounts of revenue and affected accounts in the Income Statement and Balance Sheet. Different methods produce different reported amounts.

Answer 140

a. Basis of profit recognition on long-term construction contracts. The summary of significant accounting policies footnote presents information that helps assist users in understanding the recognition, measurement, and disclosure decisions made by the firm. GAAP allows many choices. In the long-term construction contracts area, GAAP allows both the completed contract and percentage of completion methods. The result of applying each method significantly affects both the Income Statement and Balance Sheet. A user is much better equipped to evaluate the firm's financial performance and position with the knowledge of the revenue recognition method used by the firm.

Answer 141

c. Criteria for determining which investments are treated as cash equivalents. All four answers reflect information that should be disclosed in the footnotes, but only information about general accounting policies (measurement and recognition) should appear in the footnote referred to in the question. The policy concerning which investments are treated as cash equivalents is an accounting policy.