FAR 1 Flashcards
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of
Matching
Under the matching concept, some expenses are recognized in the same period the entity recognizes the revenues that result directly and jointly from the same transaction as the expenses. Uncollectible accounts expense results from selling goods or services on credit to another party that ultimately will not pay for them. As a result, the uncollectible accounts expense would be recognized in the same period as the revenue.
On September 25, 2014 Colson Corp. sold 200,000 widgetrons to Cavanaugh Corp at $5 per unit. Half of the units were delivered on November 15, 2014, and the remaining 100,000 units were delivered on January 20, 2015. At the time of sale Cavanaugh paid 40% of the contract price and agreed to pay the rest in equal installments on the two delivery dates. What amount of revenue should Colson recognize from this sale in 2014?
$500,000
Revenue is recognized when the earnings process is substantially complete and when the revenue is either realized or realizable. The earnings process is complete in regard to the first 100,000 units that were delivered in 2014. In addition, a portion of the money has been received and the remainder is receivable. Unless Colson has no basis for determining if the remainder of the sales price is collectible, the sales price is partially realized with the remainder realizable. As a result, Colson would recognize revenues on the 100,000 units delivered at $5 per unit for a total of $500,000.
The criteria for recognizing an element of financial reporting are that occurrence must be probable and measurement must be reliable under:
IFRS, not GAAP
The criteria for recognizing an element of financial reporting under IFRS are probability of occurrence and reasonable measurement. Under US GAAP, the criteria for recognition are that the item conforms to the definition of an element of financial reporting, that the item is capable of being measured in monetary terns, and that the item is relevant and it is faithfully represented.
According to the FASB conceptual framework, which of the following statements conforms to the realization concept?
Depreciated equipment was sold in exchange for a note receivable.
Realization is the conversion of an item or service into cash or a claim to cash as would be the case when equipment is sold for a note receivable. Realization occurs at the time that an entity converts goods or services into accounts receivable, and not necessarily when the receivable is collected.
On January 2, 20X3, Smith purchased the net assets of Jones’ Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy’s cash-basis financial statements for the year ended December 31, 20X3, Spiffy reported revenues in excess of expenses of $60,000. Smith’s drawings during 20X3 were $20,000. In Spiffy’s financial statements, what amount should be reported as Capital-Smith?
$390,000
Smith will recognize initial capital of $350,000 based on the amount paid for the business. This will be increased by the $60,000 by which revenues exceeded expenses and reduced by the $20,000 in drawings to give an ending balance of $390,000.
Which of the following assets or transactions is an element of comprehensive income?
a. Distributions to owners.
b. Deferred revenue.
c. Sale revenue.
d. Investments by owners
c. Sales Revenue
Comprehensive income consists of net income and other comprehensive income. Sales revenue is a component of net income and, therefore, is included in comprehensive income.
The FASB’s due process for setting accounting standards includes which of the following procedures
a. The FASB delegates topics to the Financial Accounting Foundation for research and reporting.
b. The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
c. The FASB obtains approval from the International Accounting Standards Board in setting its agenda.
d. The FASB’s Emerging Issues Task Force ratifies amendments to the Accounting Standards Codification.
b. The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
The FASB is responsible for setting accounting standards using a process under which potential standards are issued in exposure draft form and feedback is solicited by a variety of means, which might include public forums. The FASB is established by the Financial Accounting Foundation, which has oversight responsibility over the FASB. The Emerging Issues Task Force is a group established by the FASB that deliberates on matters and makes proposals to the FASB, which the FASB ratifies and incorporates into the Accounting Standards Codification. The International Accounting Standards Board is independent from the FASB and is responsible for International Financial Reporting Standards.
A company reported the following information for year 1:
Net income $34,000
Owner contribution $9,000
Deferred gain on an effective cash-flow hedge $8,000
Foreign currency translation gain $2,000
Prior service cost not recognized in net periodic pension cost $5,000
Considering only these items, what amount will be in accumulated other comprehensive income at the end of Year 1?
$5,000
Accumulated other comprehensive income will include the deferred gain on an effective cash flow hedge of $8,000 and the foreign currency translation gain of $2,000. This total of $10,000 will be reduced by prior service cost not recognized in pension expense, resulting in a net amount of $5,000. Net income is determined separately from other comprehensive income and contributions by owners are recognized as increases in contributed capital.
Which of the following is not true?
Information is material if omitting it or misstating it could influence decisions that users make.
Classifying, characterizing, and presenting information clearly and concisely makes it understandable.
Comparability and consistency are the same thing.
If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.
Comparability and consistency are the same thing.
Comparability indicates that the financial statements of one entity are prepared in a manner that is comparable to other entities operating in the same industry, or that the way one entity accounts for an event or transaction is similar, and therefore comparable, to how it is handled by other entities. Consistency, on the other hand, relates to the fact that an entity applies the same accounting principles from one year to the next. As a result, this answer choice is false.
Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. What amount is Palmyra’s comprehensive income?
$10,000
Only the unrealized loss on available-for-sale securities and the foreign currency translation adjustment have an effect on Palymyra Co.’s comprehensive income, the net effect of which is $10,000 (11,000 – 3,000 + 2,000 = 10,000). Neither the net cumulative effect of a change in accounting principle nor the increase in common stock has an effect on comprehensive income.
Sleeth Co. has an investment in shares of a public company that are temporarily restricted and may not be transferred or sold for a period of 18 months. Unrestricted shares of the public company are actively traded on the New York Stock Exchange and most analysts agree that the restriction would cause investors to discount the stock by 10%. The investment does not give Sleeth Co. control of the company or the ability to exercise significant influence over it. If Sleeth Co. reports this investment at fair value, what level of inputs will it indicate in its footnotes was used in the valuation?
Level II
Level I would indicate valuation based on observable market transactions for identical assets or liabilities in an active market. Since these shares are restricted, identical shares are not actively traded. Level II indicates valuation based on observable market transactions for similar assets or liabilities in an active market, which would be the case here since the restricted shares are similar to the actively traded unrestricted shares and there is consensus as to how they should be valued. Level III would be appropriate if the valuate was not based on observable market data. Although the equity method is generally applied when an investor has the ability to exercise significant influence over an investee, the fair value option may be elected and the investment may be reported at fair value.
Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?
a. Market
b. Income
c. Observable Inputs
d. Cost
b. Income
The income approach for measuring fair values involves evaluating the future benefit that will be derived from the asset and determining the appropriate amount of investment that would be justified to obtain such a return. A common application of this approach is to measure the present value of expected future positive cash flows.
According to the FASB conceptual framework, comprehensive income includes which of the following?
a. Loss on discontinued operations.
b. Loss on discontinued operations and investments by owner.
c. Neither loss on discontinued operations nor investments by owner.
d. Investments by owner.
d. Loss on discontinued operations.
Comprehensive income includes all changes to equity other than owner-related items. A loss on discontinued operations reduces net income, which is a component of comprehensive income. An investment by owners is an owner-related transaction, and is not included in comprehensive income.
Regarding a company’s reporting of assets on the balance sheet, which of the following statements is correct?
Highly valuable resources which provide benefits to the company may not be reported on the balance sheet.
