FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS Flashcards
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
Which of the following is one of the basic elements of financial reporting?
Losses.
Revenues.
Net assets.
Gains.
Net assets.
EXPLANATION:
The 3 basic elements of financial reporting are assets, liabilities, and equity or net assets.
Revenues, expenses, gains,
and losses are elements of comprehensive income, which is a component of equity.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
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
Substance over form
Going concern
Consistency
Matching
Matching
EXPLANATION:
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.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
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
$15,000
$43,000
$14,000
$5,000
EXPLANATION:
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 if
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.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000. What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balancesheet risk?
Risk of accounting loss/ Off-balance
sheet risk
$0 / $0
$230,000 / $20,000
$230,000 / $0
$250,000 / $20,000
$230,000 / $0
EXPLANATION:
If receivables were to become worthless, the asset would be written off and a loss would be recognized in the amount of the carrying value, which is accounts receivable of $250,000 minus the allowance for doubtful accounts of $20,000, for a net amount of $230,000, which is the risk of accounting loss.
Since the asset appears on the balance sheet in that amount, no portion of the loss would be considered off-balance-sheet.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has led all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as…
An expense.
A current asset.
A noncurrent asset.
A noncurrent liability
A noncurrent asset.
EXPLANATION:
The payment will be recovered at the end of five years, indicating it is an asset because it represents an economic resource that will provide a probable future benefit that is within the control of the entity and that results from an event or transaction that has already occurred.
It is noncurrent since the benefit will not be received for five years.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
Which of the following assumptions means that money is the common denominator of economic activity and
provides an appropriate basis for accounting measurement and analysis?
Economic entity
Monetary unit
Going concern
Periodicity
Monetary unit
EXPLANATION:
The monetary unit assumption recognizes that, in order to be useful, financial information should be described in both
qualitative and quantitative terms.
Under the monetary unit assumption, events and transactions are quantitatively measured in terms of the equivalent amount of money they represent or the equivalent amount of money that has been exchanged.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism
during a particular reporting period?
Reporting inventory at the lower of cost or market value
Accrual of a contingency deemed to be reasonably possible
Reporting investments with appreciated market values, at market value
Capitalization of research and development costs
Reporting inventory at the lower of cost or market value
EXPLANATION:
Reporting inventory at the lower of cost or market value illustrates the practice of conservativism because the reporting
entity chooses the accounting treatment, from two or more valid alternatives, which results in more conservative reporting of
assets or income.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
Which of the following defines
equity as it relates to a business entity?
Total assets less total liabilities
Total revenues less total expenses
Total assets and liabilities
Net revenues
Total assets less total liabilities
EXPLANATION:
Equity is defined as assets less liabilities.
The basic accounting equation, in the form of Assets – Liabilities = Equity,
expresses this relationship.
Equity, or net assets, is a balance sheet component.
Net revenues is an income statement component, equal to gross revenues less returns.
Total revenues less total expenses commonly is called operating income.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
According to the FASB conceptual framework, certain assets are reported in financial statements at the amount
of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?
Current market value
Net realizable value
Replacement cost
Historical cost
Replacement cost
EXPLANATION:
The amount, in terms of economic resources, that an entity would be required to give up in order to obtain an asset
that is the same or the equivalent to an existing asset is its replacement cost, which is one method by which assets may be
valued.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
Which of the following accounting pronouncements is the most authoritative?
FASB Statement of Financial Accounting Concepts.
AICPA Statement of Position.
FASB Statements of Financial Accounting Standards
FASB Technical Bulletin.
FASB Statements of Financial Accounting Standards
EXPLANATION:
Due to the large volume of pronouncements, it became necessary to determine which pronouncements would have a higher level of authority for circumstances where there appeared to be conflicts between published standards.
A hierarchy has been established which includes 4 types of pronouncements at the highest level of authority. In order of authority, these include…
- -FASB Statements of Financial Accounting Standards,
- -FASB Interpretations,
- -AICPA Accounting Principles Board Opinions, and
- -AICPA Accounting Research Bulletins.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
During 20X3, customers purchased gift cards from LatteBucks, all of which expire on December 31, 20X5. At the end of 20X4, some of the gift cards still have not been redeemed. How should the unredeemed gift cards be reported on LatteBucks’s 20X4 year-end financial
statements?
As a current liability on the balance sheet
As a prepaid asset on the balance sheet
As an expense on the income statement
As sales revenue on the income statement
As a current liability on the balance sheet
EXPLANATION:
Since gift cards represent the right of the customer to receive goods or services that have already been paid for, they
represent an obligation to the issuing company as it will either have to provide the goods or services or refund amounts received for the gift card.
As a result, any unused and unexpired gift cards outstanding on the balance sheet date are recognized as a liability, which will be current since the gift cards expire within one year of the balance sheet date.
They will not be recognized as revenue until the issuing entity has met its performance obligations.
Prepaid assets and expenses are associated with expenditures, not money received, as is the case with gift cards.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
The fair value for an asset or liability is defined as…
The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants
The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants
The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale
.
The appraised value of the asset or liability
The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants
EXPLANATION:
Fair value is the exit price of an asset or liability, which is the amount that would be received when disposing of an asset and the amount that would be required to be paid in order to transfer a liability.
FAR 1.03 - ELEMENTS OF FINANCIAL STATEMENTS
According to the FASB conceptual framework, comprehensive income includes which of the following?
Neither loss on discontinued operations nor investments by owner.
Investments by owner.
Loss on discontinued operations and investments by owner.
Loss on discontinued operations.
Loss on discontinued operations.
EXPLANATION:
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.
