FAR

Question 1

What should a full set of financial statements include?

Answer 1

1. Statement of Financial Position (Balance Sheet)
2. Statement of Earnings (Income Statement)
3. Statement of Comprehensive Income
4. Statement of Cash Flows
5. Statement of Changes in Owners’ Equity

Question 2

What is meant by a “classified” balance sheet?

Answer 2

A classified balance sheet distinguishes current and non-current assets and liabilities.

Question 3

Name the expense that each of the following unexpired costs turn into as they expire:
1. Inventory
2. Unexpired (prepaid) cost of insurance
3. Net book value of fixed assets
4. Unexpired costs of patents
5. CIP

Answer 3

1. COGS
2. Insurance expense
3. Depreciation expense
4. Amortization expense
5. Construction expense

Question 4

Are gains and losses on the disposal of assets shown on “gross basis” (i.e., where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (i.e., where only the difference between the sale price and the net book value of the disposed asset is reported)?

Answer 4

Gains and losses are reported at their net amounts

Question 5

How does a “multiple-step” income statement differ from a “single-step” income statement?

Answer 5

Multiple-step: separates operating revenues and expenses from non-operating revenues and expenses and other gains and losses

Single-step: doesn’t separate operating and non-operating revenues and expenses

Question 6

The gain (loss) from discontinued operations can consist of:

Answer 6

• Impairment loss
• A gain (loss) from actual operations
• A gain (loss) on disposal

Question 7

How do we account for subsequent increases in the fair value of a discontinued component?

Answer 7

A gain is recognized for the subsequent increase in fair value - cost to sell
- Gain is reported in the period of increase

Question 8

What conditions must be present for a disposal to be reported in discontinued operations?

Answer 8

A disposal of a component, group of components, business activity, nonprofit activity is reported in discontinued operations if disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results

Question 9

State two types of foreign currency transactions

Answer 9

1. Operating transactions (import, export, borrow, lending, invest)
2. Forward exchange contracts: exchange two different currencies at a specific future date and at a specific rate

Question 10

Where are foreign currency transactions gains or losses reported in the financial statements?

Answer 10

Foreign currency transaction gains or losses are included in determining net income for the period (OCI)

Question 11

For operating transactions in foreign currency, detail the recording process

Answer 11

1. Record original transaction at exchange or spot rate on date of transaction
2. At balance sheet date, compute gain/loss on transaction by recalculating using current exchange or spot rate
3. On payment date, compute gain/loss on the transaction by using exchange rate on payment date

Question 12

Define comprehensive income

Answer 12

Changes in equity (net assets) that results from transactions and other events and circumstances from nonowners sources

Question 13

List some disclosure requirements for comprehensive income

Answer 13

• Tax effects of each component included in OCI
• Changes in accumulated balances of components of OCI
• Total accumulated OCI
• Reclassification adjustments between OCI and net income

Question 14

List the two formats acceptable for reporting comprehensive income

Answer 14

1. Single-statement approach: statement of comprehensive income
2. Multi-statement approach: statement of income followed by separate statement of comprehensive income

Question 15

Identify 4 items included in OCI

Answer 15

P: Pension adjustments
U: Unrealized gains/losses on AFS debt securities and hedges
F: Foreign currency translation adjustments and gains/losses on certain foreign currency translations
I: Instrument-specific credit risk for liabilities (using fair value) and their changes in fair value

Question 16

What is the basic formula for calculating EPS?

Answer 16

(Net income - pref dividends) / WACSO

Question 17

Name the potentially dilutive securities or instruments

Answer 17

1. Stock optiosn and warrants and their equivalents
2. Convertible securities (bonds or preferred stock)
3. Contracts that may be settled in stock or cash
4. Contingent issuable shares

Question 18

Compare basic and diluted EPS

Answer 18

Basic: only common stock outstanding
(Net income - pref dividends) / WACSO

Diluted: complex capital structure
Income available to common shareholders assuming conversion of all dilutive securities / WACSO after conversion of all dilutive securities

Question 19

What is the antidilution rule?

Answer 19

Any conversion, exercise, or contingent issuance that has an antidilutive effect (increases EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met

Each potential common share is considered separately in sequence from most to least dilutive, with in-the-money options and warrants generally included first

Question 20

List the reporting requirements for EPS

Answer 20

Face of income statement, with equal prominence for basic and diluted EPS, for income from continuing operations and net income

Per-share amounts for discontinued oeprations can be reported on the face of the income statement or in the notes to the financial statements

Question 21

Describe Form 10K and Form 10Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 21

Form 10K: filed annually by US registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using US GAAP

Form 10Q: filed quarterely by US registered companies. Includes unaudited financial statements, interim MD&A, and certain disclosures

Question 22

Define common stock and list the basic properties

Answer 22

Common stock: residual ownership interest

Basic rights include:
- Voting rights
- Dividend rights
- Rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims

Question 23

List some common properties of preferred stock

Answer 23

• Convertible, callable
• Redeemable
• Dividends can be cumulative and/or participating

Question 24

What are the two alternative methods of accounting for treasury stock?

Answer 24

Cost method: treasury stock is debited at cost of shares repurchased

Par method: treasury stock is debited at par value of shares repurchased

No gains/losses are recognized on the income statement. Income and retained earnings may never increase by the transaction. APIC - t/s account used to record “gains” and absorb “losses”

Treasury stock is not an asset. Cash and property dividends are not paid on treasury stock. Stick dividends may be paid on treasury stock.

Question 25

Summarize the cost method of accounting for treasury stock

Answer 25

Treasury stock is recorded at the cost paid to repurchase it. Used by 95% of firms. When treasury stock is reissued: - Gains: excess credit to APIC t/s, retained earnings are not affected - Losses: debit to APIC t/s, but if no balance, debit to retained earnings. APIC t/s cannot be negative.

Question 26

Summarize the par value method of account for treasury stock

Answer 26

- Recorded at par value with cost of stock that is in excess of par value When treasury stock is reissued: - Gains: credit to APIC t/s - Losses: debit to retained earnings. APIC t/s not used.

Question 27

List the significant dates with respect to cash dividends

Answer 27

- Date of declaration: becomes a liability and reduces retained earnings - Date of records: no JE, memorandum entry only - Date of payment: actually paid

Question 28

List the 5 types of dividends

Answer 28

1. Cash 2. Liquidating: return of investment 3. Property: FMV of assets given up with gain/loss recognized 4. Scrip: promise to pay in the future 5. Stock: results in capitalizing part of retained earnings, increasing legal capital; if <20-25%: record at market value, if >20-25%: record at par value

Question 29

What is the threshold for treating stock dividends as large vs. small stock dividends?

Answer 29

Small stock dividend: <20-25% Large stock dividend: >20-25% The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend

Question 30

What is the accounting treatment of small stock dividends?

Answer 30

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital

Question 31

What is the accounting treatment of large stock dividends?

Answer 31

Par value of additional shares issued is transferred from retained earnings from retained earnings to capital stock

Question 32

What happens when a stock splits (or reverse splits) to total equity? Prior to the split, 10K shares at $10 par. What is the par after the split?

Answer 32

When a stock splits (or reverse splits), there's no change to equity as a result of the transaction. Prior to the split, 10K shares at $10 par. If a stock splits 5 for 1, 10K shares becomes 50K shares. In order to keep equity $100K, then par must be $2.

Question 33

Are net gain or loss reported in the period they occur or end of fiscal year?

Answer 33

Each gain/loss are reported in the period it occured.

Question 34

What is a fair value hedge?

Answer 34

Fair value hedge are included as part of income from continuing operations on the income statement. Fair value hedge gainss/losses are immediately recognized as earnings and not included in OCI. Cash flow hedges are included in OCI.

Question 35

What are the components of the income statement?

Answer 35

Income statement has: - Operating Revenue and Expenses: reported in gross amounts to allow users to see the tax effects and have consistency with income statements - Income from continuing operations and gains — reported before tax since the items are aggregated in income tax expense line (rather than shown separately) - Discontinued Operations are reported net of tax — to not it confused with continued operations; the discontinued operations will get disposed of so we want to know the actual impact to shareholders (including any tax benefits associated with disposal)

Question 36

If discontinued operations results in a loss, what happens to taxable income and taxes that need to be paid?

Answer 36

Discontinued Operations at a LOSS: the company loses money as part of closing the business -> reduce taxable income -> pay less in taxes (tax savings)

Question 37

If discontinued operations results in a gain, what happens to taxable income and taxes that need to be paid?

Answer 37

Discontinued Operations at a GAIN: the company makes money as part of closing the business -> increase taxable income -> pay more in taxes

Question 38

How are OCI disclosed?

Answer 38

- Can either be disclosed: before tax basis with an aggregate tax amount reported after these items OR individually on a net of tax basis - Does not have to be on the face of financial statements, can be disclosed in the footnotes

Question 39

How are foreign transaction gains/losses different from foreign translation gains/losses?

Answer 39

Foreign transaction gains/losses: go on the income statement Foreign translation gains/losses: go to OCI

Question 40

How are retained earnings and AOCI similar?

Answer 40

Net income (temporary account) is closed to retained earnings (permanent account). Net income tracks cumulative profits and losses. OCI (temporary account) is closed to AOCI (permanent account). OCI tracks cumulative OCI items over time.

Question 41

What is the difference between freight in vs. freight out?

Answer 41

Freight out: selling expense; directly affects income statement Freight in: increases inventory cost for retail inventory and other inventory as freight in is a cost of inventory; materials cost; affects the balance sheet (inventory) and later the income statement (COGS)

Question 42

What are the differences between temporary and permanent accounts?

Answer 42

Temporary accounts: reset to zero at the end of each accounting period. They include amounts that track periodic activity. Examples of temporary accounts: revenue, expenses, gains/losses, dividends declarared Permanent accounts: carry their balances forward across accounting periods. Examples of permanent accounts: assets, liabilities, equity (include retained earnings, AOCI)

Question 43

What is prior service cost not recognized in net periodic pension cost?

Answer 43

Prior service cost not recognized in net periodic pension cost: portion of costs related to changes in pension plan (such as amendments that increase benefits) that haven't been included in company's periodic pension expense. These costs are recorded as OCI and gradually amortized over time into net income. Unamortized pension cost = OCI Amortized pension cost = Net income

Question 44

What is the difference between fair value hedge vs. cash flow hedge?

Answer 44

Fair value hedge (immediate protection): recognized in income statement, protection in something you already own - Fair value hedge: gains/losses directly impact current financial performance -> income statement Cash flow hedge (insurance): recognized in OCI, protection in future cash flows or something you'll buy/sell in the future - Cash flow hedge: risk affects future earnings, so OCI is temporary holding place

Question 45

What is net income composed of?

Answer 45

Net income includes: - Income from continuing operations (operating, non-operating, income tax expense) - Income from discontinued operations (net of tax) Net income excludes: comprehensive income items

Question 46

What is the Statement of Comprehensive Income?

Answer 46

Statement of Comprehensive Income: summarize all changes in equity from non-owner sources - Broader view and focus on changes driven by external market factors and operational performance (not dividends or stocks, but PUFI) - Shows fluctuations in equity that aren't realized in cash flows - "Not a real loss" related to ongoing business operations OCI = gains/loss from PUFI Comprehensive Income = Net Income + OCI

Question 47

What does comprehensive income does not include?

Answer 47

Since comprehensive income focuss on all changes in equity solely driven by external market factors and operational performence, OCI does not include owner investments and distributions (cash, equipment, stock purchases, treasury stock repurchases) - "hey this happened, but not because we are good/bad at our business but because PUFI changed" -- nothing related to treasury or stock dividends

Question 48

Are Statement of Comprehensive Income reported gross or net of tax?

Answer 48

Statement of Comprehensive Income are reported in net amounts because Statement of Comprehensive Income is to show economic substance (irrespective of market conditions and tax effects), allow for comparability, makes financial statements easy to interpret

Question 49

What is the P in PUFI?

Answer 49

P: Pension Adjustments Pension adjustments are certain gains and losses from a defined pension plan before they are amortized on income statement

Question 50

What is the U in PUFI?

Answer 50

U: Unrealized gains and losses on AFS debt secrutiies and cash flow hedges - Reported in OCI until securities are sold or cash flow associated with hedged item is realized - Unrealized gains/loss from HTM -> AFS

Question 51

What is the F in PUFI?

Answer 51

F: Foreign currency transaction gain/loss - Transaction: one transaction - Translation: an entire translation, more than 1 journal entry

Question 52

For a receivable, if a foreign currency spot rate goes up, what happens to assets, liability, equity?

Answer 52

If foreign currency spot rate increases, the value of receivable increases Asset = increases Liabilities = no change Equity = increases (foreign currency gain)

Question 53

For a receivable, if a foreign currency spot rate goes down, what happens to assets, liability, equity?

Answer 53

If foreign currency spot rate decreases, the value of receivable increases Asset = decreases Liabilities = no change Equity = decreases (foreign currency loss)

Question 54

For a payable, if a foreign currency spot rate goes up, what happens to assets, liability, equity?

Answer 54

If foreign currency spot rate increases, the value of payable increases Asset = no change Liabilities = increases Equity = decreases (foreign currency loss)

Question 55

For a payable, if a foreign currency spot rate goes down, what happens to assets, liability, equity?

Answer 55

If foreign currency spot rate decreases, the value of payable decreases Asset = no change Liabilities = decreases Equity = increases (foreign currency gain)

Question 56

What is the I in PUFI?

Answer 56

I: Instrument-specific credit risk Likelihood the issuer of financial instrument may default or face financial difficulties -- this could cause their liabilities to change - Higher risk —> higher discount rate —> lower value of liability (because it is worth less) —> a gain incurred - Lower risk —> lower discount rate —> higher value of liability (because it is worth more) —> a loss incurred

Question 57

When is the earliest period that a component of an entity can be reported in discontinued operations?

Answer 57

Earliest is when the discontinued operations is "held for sale" * Management commits to a plan to sell the component. * The component is available for immediate sale in its present condition. * An active program to locate a buyer has been initiated. * The sale of the component is probable and the sale is expected to be completed within one year. * The sale of the component is being actively marketed. * It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.

Question 58

Do sales returns increase or reduce sales?

Answer 58

Sales returns reduce sales

Question 59

How will adjustment for prior year understatement of amortization expense be reflected in balance sheet or income statement?

Answer 59

Adjustment for prior year understatement of amortization expense is a prior period adjustment that will be reflected in beginning retained earnings, not income statement

Question 60

Do unrealized gains/losses on debt securities affect OCI or Net Income?

Answer 60

Unrealized gains/losses on debt securities affect OCI since bonds are a long-term investment and their changes don't immediately affect net income.

Question 61

Do realized gains/losses on trading securities affect OCI or Net Income?

Answer 61

Realized gains/losses on trading securities affect NI because their changes are immediate.

Question 62

Do unrealized gains/losses on trading securities affect OCI or NI?

Answer 62

Unrealized gains/losses on trading securities affect NI since their changes are immediate.

Question 63

Do HTM securities affect OCI or NI?

Answer 63

Neither - does not impact Income Statement or Comprehensive Income until it matures.

Question 64

What companies are required to disclose EPS?

Answer 64

All companies with publicly traded common stock or potential common stock (stock options, stock warrants, convertible securities, contingent stock agreements). It is required by companies that have been a filing or are in the process of filing with a SEC in preparation for a public sale of common stock.

Question 65

How do reporting for basic and diluted EPS differ between continuing operations and discontinuing operations?

Answer 65

For continuing operations: basic and diluted EPS amounts and net income should be presented on the face of the Income Statement (or Statement of Comprehensive Income if using a one-statement approach) For discontinuing operations: the entity presents the basic and diluted EPS on face of income statement or notes of financial statements

Question 66

For 10K, how do the financial statement filing different between balance sheet, income statement, statement of cash flows, changes of owners' equity?

Answer 66

Balance sheet: file 3 most recent years Everything else: file 2 of 3 most recent years

Question 67

For 10K, how do the filing deadlines differ from large accelerated filer vs. accelerated filer vs. other?

Answer 67

Large accelerated filer: 60 days Accelerated filer: 75 days Other: 90 days

Question 68

For 10Q, how do filing deadlines differ from large accelerated filer and accelerated filer vs. other

Answer 68

Large accelerated filer and accelerated filer: 40 days Other: 45 days

Question 69

What are the steps to see if convertible bonds are dilutive or anti-dilutive?

Answer 69

(x% convertible bonds * par * $ bond) / # of shares of common stock If that is bigger than basic EPS, then anti-dilutive If that is smaller than basic EPS, then dilutive

Question 70

What is the formula for calculating impairment loss/gain?

Answer 70

Impairment loss/gain = Fair value - Book value of equity

Question 71

What is a scrip dividend?

Answer 71

Scrip dividends are note payables where a company is committed to pay the dividend, but not now since they don't have the cash. Scrip dividend is recorded as a liability when declared, similar to a cash dividend

Question 72

What is a liquidating dividend?

Answer 72

Liquidating dividend is the extent that the dividend exceeds retaiend earnings. It is not paid from profits, it comes from the company's capital (like assets or start-up costs).

Question 73

What is a stock dividend?

Answer 73

Stock dividends are additional compensation in form of stock that can be redeemed later. No cash is paid out. Stock dividends has no effect on assets or shareholders' equity. Only retained earnings decrease and number of stock outstanding increases. Small stock dividend (< 20%): debit r/e at FMV; Large stock dividend (> 25%): debit r/e at PAR

Question 74

What are stock splits?

Answer 74

Stock splits/reverse stock splits changes the number of shares outstanding. It doesn't change total equity.

Question 75

How does a debit to accumulated depreciation affect asset, liability, equity?

Answer 75

Debit to accumulated depreciation reduces accumulated depreciation balance.

Question 76

What is the relationship between accumulated depreciation, depreciation expense, and net book value of asset?

Answer 76

When recording depreciation, the goal is to allocate the cost of tangible asset over its useful life. Depreciation reduces the value of the asset on the balance sheet through accumulated depreciation (contra-asset) and records an expense on the income statement. Debit: Depreciation expense Credit: Accumulated depreciation Net book value = equipment cost - acccumulated depreciation

Question 77

What is a contract asset?

Answer 77

Contract asset is the amount of revenue a company has earned by performing its obligations, but cannot yet bill because the payment is conditional on future events. It is an asset because the company expects to collect the amount in the future once the conditions are met.

Question 78

What costs related to obtaining a contract should be expensed vs. amortized?

Answer 78

Expensed: anything that would have been incurred even if the developer didn't get the contract, selling/general/admin expenses Amortized: costs of obtaining the contract

Question 79

What are the indicators of a lease?

Answer 79

Lease is if control of the asset is transferred to the buyer for a specific period of time, but seller retains ownership.

Question 80

What are the indicators of a financing arrangement?

Answer 80

A financing arrangement is if the seller is obligated to repurchase the asset at a price that is equal to or greater than its original selling price and greater than or equal to the expected market value. A financing arrangement is at a higher price because it includes additional money (interest money). The item is not for sale.

Question 81

How does estimated loss/gain recorded in operating income differ between revenue recognition over time vs. revenue recognition at point in time?

Answer 81

In both cases, the entire estimated loss/gain for a contract in progress is recognized.

Question 82

What are all of the criteria for a customer to have obtained control of a product in a bill-and-hold arrangement?

Answer 82

- There must be substantive reason for the arrangement (e.g., the customer has requested the arrangement because it doesn't have space for the product) - The product has been separately identified as belonging to the customer - The product is currently ready for transfer to the customer - The entity cannot use the product or direct it to another customer

Question 83

What balance sheet account is deferred revenues?

Answer 83

Deferred revenue is a liability until the service has been performed

Question 84

What balance sheet account is unearned rent?

Answer 84

Unearned rent (cash received in advance of earning the revenue) is reported as a liability. Depending on whether the liability is satisified within a year, it will be a current liability. If greater than a year, it's a long-term liability.

Question 85

When the total consideration for a contract with multiple embedded obligations reflects a discount, the most appropriate way to assign that discount is to:

Answer 85

Allocate it proportionally to all obligations within the contract

Question 86

What are the differences between call, forward, put options?

Answer 86

Call option ("come up"): right to buy when prices rise Forward contract ("fix the price"): lock in a price, regardless if prices rise/fall Put option ("put down"): right to sell when prices fall

Question 87

What are the differences between input and output methods for recognizing revenue?

Answer 87

Input method: recognize revenue based on the efforts/resources consumed relative to total expected effort/resources to satisfy the performance obligation (e.g., resources consumed, labor hours expended, costs incurred to total expected costs) Output method: recognize results delivered or outputs achieved that the customer can benefit from (e.g., milestones achieved, units delievered, appraisals of results)

Question 88

When recognizing income over time, does income previously recognized and/or progress billings affect income recognition?

Answer 88

Only income previously recognized. Income recognized = gross profit to date - income previously recognized. "Recognize progress, ignore billings" Progress billings are irrelevant to revenue recognition because revenue is based on performance progress, not invoicing

Question 89

What happens in a consignor vs. consignee relationship?

Answer 89

Consignor: owns the inventory and reports it on their books. Records revenue for the rugs sold and pays consignee a commission for facilitaing the sale. Consignee: doesn't own the inventory. Records only the commission as revenue and reports no inventory on its books.

Question 90

What happens when you have a change in accounting estimate?

Answer 90

Change in accounting estimate means it's not an error and use propsective approach; not reported net of tax; reported in the current year income from continuing operations Impacts Income Statement and Balance Sheet. You don't have to change in retained earnings, but if it is material - you need to talk about it in the financial statements.

Question 91

What happens when you go to LIFO?

Answer 91

Change in estimate - prospective approach

Question 92

What happens when you change depreciation method?

Answer 92

Change in estimate - prospective approach

Question 93

What happens when you have a change in accounting principle?

Answer 93

Retrospective approach means adjusting beginning retained earnings, net of tax

Question 94

An accounting principle may be changed only if:

Answer 94

- Required by GAAP - Alternative principle is preferred and presents the information more fairly

Question 95

How to calculate the cumulative effect of noncomparative financial statements?

Answer 95

1. Use new method in the year presented 2. Calculate what earnings would have been if the new method had always been used 3. Adjust beginning retained earnings net of tax (Adjustment * (1-tax rate))

Question 96

In what cases do the changes in accounting entity apply to? What approach does the change in accounting entity use?

Answer 96

Changes may be the result of: mergers, acquisitions, diverstitures Change in accounting entity uses the retrospective approach and previous financial statements must be restated. Adjustments only apply to consolidated entity from the acquisition date forward. Full disclosure is necessary.

Question 97

What are examples of error corrections?

Answer 97

Correction of errors in recognition, measurement, presentation, or disclosure in financial statements resulting from: mathematical mistakes, mistakes in the application of US GAAP, oversight/misuse of facts that existed at the time the financial statements were prepared Error correction is prior period adjustment; retrospective

Question 98

How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

Answer 98

When the effect of accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is change in estimate. Let's assume that a company pays $12,000 for a 12-month insurance policy on January 1, Year 1. As of December 31, Year 1, the company has used up 12 months of insurance coverage. **Adjusting Journal Entry on December 31, Year 1:** Insurance Expense (Income Statement Account) — $12,000 Prepaid Insurance (Balance Sheet Account) — $12,000 **Journal Entry:** Debit Insurance Expense — $12,000 Credit Prepaid Insurance — $12,000

Question 99

When correcting an accounting error, is there an offsetting adjustment to the cumulative effect of the error in the comprehensive income statement to correct the error?

Answer 99

No - there is no offsetting adjustment to the cumulative effect of the error to comprehensive income. Since it's an error correction, financial statements are restated. At the beginning of the current year, the cumulative effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.

Question 100

Tell me about the accumulated depreciation account.

Answer 100

Accumulated depreciation is a contra-asset account, represents the total amount of depreciation expense charged to an asset since the acquisition. It is in gross amounts. Net book value = historical cost - accumulated depreciation

Question 101

What is the difference between retrospective vs. restating prior periods?

Answer 101

Retrospective: adjusting prior period financial statements as if the new accounting principle has always been in use; adjust opening retained earnings Restating prior periods: correct the errors previously affected by the error; to increase reliability of financial statements

Question 102

Do adjusting journal entries hit the cash account?

Answer 102

No - adjusting journal entries never involve the cash account. All adjusting journal entries will hit one income statement account and one balance sheet account.

Question 103

What is a valuation account?

Answer 103

Valuation account is a contra-asset account that adjusts the gains/loss from AFS to their fair value Fair value of AFS securities = investments (asset) + valuation account (contra-asset) Unrealized gains/losses get stored in OCI Examples of valuation accounts: allowance for doubtful accounts, accumulated depreciation, discount on bonds payable, sales returns and allowances

Question 104

Write the JE and impact on financial statements: If a company has $100,000 in accounts receivable, but expects 5% of that to be uncollectible, the company would record an allowance for doubtful accounts of $5,000.

Answer 104

Journal Entry: Debit: Bad Debt Expense — $5,000 Credit: Allowance for Doubtful Accounts — $5,000 Impact on Financial Statements: The accounts receivable on the balance sheet is shown net of the allowance, so the net amount reflects what the company realistically expects to collect.

Question 105

Write the JE and impact on financial statements: If a machine was purchased for $100,000 and has accumulated depreciation of $20,000, its net book value would be $80,000.

Answer 105

Journal Entry (Year 1 Depreciation): Debit: Depreciation Expense — $20,000 Credit: Accumulated Depreciation — $20,000 Impact on Financial Statements: The accumulated depreciation is subtracted from the original cost of the asset on the balance sheet to show the net book value.

Question 106

Write the JE and impact on financial statements: If a company issues $1,000,000 worth of bonds at $950,000, the discount on bonds payable would be $50,000.

Answer 106

Journal Entry (at issuance): Debit: Cash — $950,000 Debit: Discount on Bonds Payable — $50,000 Credit: Bonds Payable — $1,000,000 Impact on Financial Statements: The discount reduces the carrying amount of the bonds payable on the balance sheet.

Question 107

Write the JE and impact on financial statements: If a company has $200,000 in sales for the year and customers return $10,000 worth of goods, the sales returns and allowances account would have a balance of $10,000.

Answer 107

Journal Entry (Return of Goods): Debit: Sales Returns and Allowances — $10,000 Credit: Accounts Receivable — $10,000 Impact on Financial Statements: The revenue on the income statement is reported net of sales returns and allowances, which helps present a more accurate picture of actual sales.

Question 108

Suppose a company owns AFS securities with an intial cost of $1500 and the fair value increases to $2000 at the reporting date. The unrealized gain is $500. Write the JE.

Answer 108

Debit: Valuation account, $500 Credit: Unrealized gain (OCI), $500

Question 109

What is the difference between salary advance and prepaid salary?

Answer 109

Salary advance: short-term loan requested by the employee; deducted from future earnings Prepaid salary: payment for work being performed in the future; expensed over time

Question 110

What is the purpose of information presented in the notes to the financial statements?

Answer 110

To provide disclosures required by GAAP

Question 111

What should be included in the summary of significant accounting policies?

Answer 111

- Measurement bases used in the financial statements - Specific accounting principles and methods used during the period

Question 112

What specific accounting principles and methods should be included in the second footnote?

Answer 112

- Depreciation methods - Amortization of intangibles - Inventory pricing - Use of estimates - Fiscal year definition - Special revenue recognition issues

Question 113

What items are not included in significant accounting principles footnote?

Answer 113

- Composition and detailed dollar amounts of account balances - Details relating to changes in accounting principles - Dates of maturity and amounts of long-term debt - Yearly computation of depreciation, depletion, and amortization

Question 114

What are examples of relevant notes information?

Answer 114

- Material information and details about specific assets or liabilities - Infomration about the nature of changes in stockholders' equity - Information about the required marketable securities disclosure - Fair value estimates - Information about contingency losses, gains, commitments, and contractual obligations - Descriptions related to pension plans - Segment disclosures dealing with subsequent events - Information related to the changes in accounting principles or implementation of new accounting standards updates

Question 115

What should the footnotes describe?

Answer 115

- The risks and uncertainties around major operations, products, and geographic distributions - The relative importance of each business, if the entity operates multiple businesses - The use of accounting estimates in the preparation of financial statements - Changes in asset, liability, or stockholders' equity

Question 116

When should significant estimates be disclosed?

Answer 116

Significant estimates should be disclosed when it is reasonably possible (not probable) that the estimate will change in the near term and that the effect of the change will be material.

Question 117

Disclosure of vulnerability to concentration is required if all of the following crtieria are met:

Answer 117

- The concentration exists as of the financial statement date - The concentration makes the entity vulnerable to the risk of a near-term severe impact - It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term

Question 118

Suppose the employee is returning a $1K salary advance from his $3K salary paycheck?

Answer 118

Debit: Salary expense, $3K Credit: Salary advance (account receivable), $1K Credit: Cash, $2K

Question 119

When do you adjust beginning retained earnings balance?

Answer 119

You adjust beginning retained earnings balance when the issue relates to prior periods: - Change in accounting principle (change from one method to another) - Steps: you find the cumulative effect (adjustment after the prior periods) and apply it to beginning retained earnings of the earliest period presented - Error correction: restate beginning retained earnings and adjust comparative financial statements

Question 120

When do you adjust the current earnings only?

Answer 120

You adjust current earnings only when the issue pertains solely to the current period such as new information arises from better judgement or transactions from one-time events

Question 121

How do you correct an error if the books already closed for the year (Year 3)?

Answer 121

You need to make the adjustment to retained earnings for Year 4.

Question 122

What is the difference between issued shares and outstanding shares?

Answer 122

Issued shares: total shares that have been sold or otherwise issued, including shares held as treasury stock. Outstanding shares: total shares issued minus treasury stock. These shares are held by investors.

Question 123

Will gains and losses from treasury stock transactions affect net income under the cost method and par value method?

Answer 123

No - net income is not affected by gains or losses from treasury stock transactions. Although gains on treasury stock transactions will not impact retained earnings, losses may affect retained earnings.

Question 124

A property dividend should be recorded in retained earnings at the property's: market value at date of declaration or book value at date of issuance (payment) or book value at date of declaration or market value at date of issuance (payment)

Answer 124

A property dividend should be recorded in retained earnings at the property's market value at date of declaration. The book value at date of declaration is used to measure gain or loss.

Question 125

Are retained earnings increased or decreased as a consequence of dividend declaration and distribution?

Answer 125

Retained earnings are decreased when property dividends are declared. They are reduced at fair market value of asset.

Question 126

Should amounts from discontinued operations be included in revenues for single-step income statement?

Answer 126

The various amounts from discontinued operations should not be included in the single-step income statement Revenues (in single step income statement) include: net sales revenue + interest revenue + gain on sale of equipment

Question 127

What is a subsequent event?

Answer 127

Subsequent event is after the balance sheet date, but before the financial statements are issued

Question 128

What are the two categories of subsequent events?

Answer 128

Recognized subsequent events and nonrecognized subsequent events

Question 129

What is a recognized subsequent event?

Answer 129

Recognized subsequent event are type 1 subsequent events, conditions that existed as of the balance sheet date. It must be recognized in financial statements.

Question 130

What is a nonrecognized subsequent event?

Answer 130

Nonrecognized subsequent event are type 2 subsequent events. Financial statements aren't adjusted. It should only be disclosed if disclosure is necessary to keep financial statements from being misleading.

Question 131

How do subsequent event evaluation periods differ between public and private companies?

Answer 131

Public companies must evaluate subsequent events through the date the financial statements are issued; widely distributed to users. Entities that file financial statements with the SEC are not required to disclose the date through which subsequent events have been evaluated. Private companies must evaluate subsequent events through the date the financial statements are available to be issued.

Question 132

If the entity is not an SEC filer, how should an entity deal with revised financial statements?

Answer 132

If an entity is not an SEC filer, the entity should disclose in its revised financial statements the dates through which subsequent events have been evaluated, in both its issued/available to be issued financial statements and its revised financial statements.

Question 133

If the resulting liability is larger than the liability originally recorded, how would it affect a debt to equity ratio?

Answer 133

If the resulting liability is larger than the liability originally recorded, there would be a detrimental effect on the company's debt-to-equity ratio (the company's debt would be higher and its equity would be lower because of the additional loss recorded along with the additional liability).

Question 134

Does fair value include transaction costs or transportation costs?

Answer 134

Fair value doesn't include transaction costs, but may include transportation costs if location is an attribute of the asset or liability

Question 135

How do you determine the fair value of a nonfinancial asset?

Answer 135

The fair value of a nonfinancial asset assumes the highest and best use of the asset

Question 136

What is the definition of most advantageous market for asset vs. liability?

Answer 136

Asset: maximizes selling price of the asset Liability: minimizes payment to transfer liability

Question 137

How to find the net realizable value?

Answer 137

NRV = Stock price - Transaction costs

Question 138

What is the market approach in determining fair value?

Answer 138

Market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.

Question 139

What is the income approach in determining fair value?

Answer 139

Income approach converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value. It can be applied to assets or liabilities.

Question 140

What is the cost approach in determining fair value?

Answer 140

Cost approach uses current replacement cost to measure the fair value of assets.

Question 141

What is the hierarchy of inputs? Level 1, Level 2, Level 3

Answer 141

Level 1: quoted in active markets such as stock exchange Level 2: observable, similar asset, comparable Level 3: unobservable, based on assumptions, biased, least reliable

Question 142

How do you report dividends in arrears for cumulative preferred stock?

Answer 142

When the dividend is paid (even for a previous year), it is reported as part of the current year's income. Do not treat it as a reroactive change or adjustment to past financial statements.

Question 143

What is Regulation S-X?

Answer 143

Regulation S-X: sets forth the form and content of and requirements for interim and annual financial statements to be filed by SEC

Question 144

What is Regulation S-T?

Answer 144

Regulation S-T: rules governing electronic filings

Question 145

What is Regulation S-K?

Answer 145

Regulation S-K: non-financial reporting requirements for various SEC filings used by public companies

Question 146

What is Regulation S-B?

Answer 146

Regulation S-B: disclosure requirements for small business issuers

Question 147

What is OCBOA?

Answer 147

OCBOA is Other Comprehensive Basis of Accounting; widely understood special purpose framework - Cash basis / modified cash basis - Tax basis - Statement of Cash Flows are not required

Question 148

What is a modified cash basis of accounting?

Answer 148

- Capitalizing and depreciating fixed assets - Accural of income taxes - Recording liabilities for long-term and short-term borrowings and the related interest expense - Capitalizing inventory - Reporting investments at fair value and recognizing unrealized gains and losses

Question 149

How is the balance sheet used in ratio analysis?

Answer 149

Balance sheet shows financial risk and capacity to produce; focus on liquidity (short-term risk) and solvency (long-term risk)

Question 150

How is the income statement used in ratio analysis?

Answer 150

Income statement shows efficiency turnover (sales) and how quickly you turn sales into profit.

Question 151

How to find gross (profit) margin?

Answer 151

Gross (profit) margin = (Sales - COGS) / Sales

Question 152

How to find profit margin?

Answer 152

Profit margin = Net income / Sales

Question 153

How do you find EBIT?

Answer 153

EBIT = Sales - COGS - Selling/General Admin - Depreciation

Question 154

How do you find operating margin?

Answer 154

Operating margin = EBIT / Sales

Question 155

How do you find return on assets?

Answer 155

Return on assets = Net income / Average total assets

Question 156

What is the DuPont return on assets?

Answer 156

DuPoint return on assets = (Net income / Sales) * (Sales / Avg total assets)

Question 157

What is return on equity?

Answer 157

Return on equity = Net income / Avg total equity

Question 158

What is operating cash flow ratio?

Answer 158

Operating cash flow raito = Cash flow from operations / Current liabiltiies

Question 159

What is the current ratio?

Answer 159

Current ratio = current assets / current liabilities

Question 160

What is included in current assets?

Answer 160

Current assets = cash + marketable securities + accounts receivable + inventory + prepaids

Question 161

What is a quick ratio?

Answer 161

Quick ratio is current ratio less inventory and prepaids Quick ratio = (cash + marketable securities + receivables) / current liabilities

Question 162

What is the cash ratio?

Answer 162

Cash ratio = (cash + marketable securities) / current liabilties

Question 163

What is accounts receivable turnover?

Answer 163

Accounts receivable turnover shows if you have problem collecting cash from your customers Accounts receivable turnover = sales / average accounts receivable

Question 164

What is days sales in accounts receivable?

Answer 164

Days sales in accounts receivable = ending accounts receivable / (sales / 365)

Question 165

What is inventory turnover?

Answer 165

Inventory turnover = COGS / average inventory

Question 166

What is days in inventory?

Answer 166

Days in inventory = ending inventory / (COGS / 365) Too high of inventory turnover means surplus/demand decreases Too low means selling price is too low, high demand

Question 167

What is accounts payable turnover?

Answer 167

Accounts payable turnover = COGS / average accounts payable

Question 168

What is days of payables outstanding?

Answer 168

Days of payables outstanding = ending accounts payable / (COGS / 365) Too low: paying too quickly (poor cash management) or quick payment discount accepted Too high: difficulty paying on time

Question 169

What is the cash conversion cycle?

Answer 169

Cash conversion cycle = days sales in accounts receivable + days in inventory - days of payables outstanding

Question 170

What is the debt-to-equity ratio?

Answer 170

Debt-to-equity ratio = total liabilties / total equity

Question 171

What is the debt ratio?

Answer 171

Total debt ratio = total liabilities / total assets

Question 172

What is the equity multiplier?

Answer 172

Equity multiplier = total assets / total equity

Question 173

What is times interest earned?

Answer 173

Times interest earned = EBIT / interest expense

Question 174

What is dividend payout?

Answer 174

Dividend payout = (dividend per share * number of shares outstanding) / net income

Question 175

What is contribution margin?

Answer 175

Contribution margin is the money you have available to cover fixed costs. CM = sales - variable costs

Question 176

What is the definition of cash?

Answer 176

Cash is actual, unrestricted cash and cash equivalents defined as short-term, liquid investments that are so near maturity (original maturity date was within 3 months of the purchase date) that the risk of changes in the value because of the interest rate changes is insignificant. Included in cash: petty cash Not included in cash: sinking funds (restricted), CDs maturity for 6+ months, marketable equity security, marketable debt security

Question 177

What is a bank reconciliation?

Answer 177

Bank reconciliation: differences between the cash balance reported by the bank and the cash balance per the depositor's records

Question 178

For simple bank reconcilaition, what are the adjustments to the bank? BINS

Answer 178

B: Bank collections (add) I: Interest income (add) N: NSF checks (subtract) S: Service charge (subtract)

Question 179

For simple bank reconciliation, what are the adjustments to the book? DO

Answer 179

D: Deposits in transit (add) O: Outstanding checks (subtract)

Question 180

What are A/R?

Answer 180

Oral promise, current asset, sources (trade receivables or nontrade receivables), measured by net realizable value

Question 181

What is net realizable value?

Answer 181

Net realizable value means the amount to be collected but can be adjusted for: discounts, uncollectible amounts, credits to customers for sales returns

Question 182

What is the BASE mnemonic?

Answer 182

B: Beg balance (allowance for credit losses) A: Additions (credit loss expense) S: Subtractions (cash collected, write-offs, conversion to note) E: Ending balance (allowance for credit losses)

Question 183

What is the direct write-off method?

Answer 183

The direct write-off method is used in federal income tax purposes. The account is written off and the bad debt (or credit loss) is recognized when the account becomes uncollectible. It doesn't properly match the bad debt (or credit loss) expense with the revenue. A/R is overstated

Question 184

What is the Current Expected Credit Loss (CECL) method?

Answer 184

The balance in the allowance for uncollectibles should be based on: past experience, current conditions, future expectations The allowance should take into account the possibility of credit losses over the entire life of each receivable

Question 185

What is the JE to record receivable credit loss adjustment due to bankruptcy?

Answer 185

Debit: Allowance for credit loss Credit: A/R

Question 186

What is the JE to reclassify recoveries from collection agency?

Answer 186

Debit: Cash Credit: Credit loss expense

Question 187

What does it mean when you 'factor an A/R'?

Answer 187

When you factor a receivable, you are converting the receivable into cash by assigning it to a factor. Can be done with or without recourse.

Question 188

What does factoring with recourse mean?

Answer 188

Factoring a receivable means you can have access to the money that the people owe you right away through a factoring company. Instead of waiting for your customers to pay in the future, you sell your receivable to a factoring company for a upfront payment. With recourse: means that you are still responnsible for the total accounts receivable if your customer doesn't pay even though you got a portion of the money upfront; cheaper for the person who needs the money Without recourse: if the customer doesn't pay, then the factoring company is responsible for it

Question 189

What does it mean to securitize the receivable?

Answer 189

When you securitize the receivable: 1. Accounts receivable are transferred to a different entity, such as a trust or subsidiary 2. The entity then sells securities collateralized by the accounts receivable 3. Investors receive cash as the accounts receivable are paid

Question 190

What does it mean to discount a note?

Answer 190

Discount a note means selling it to a bank before maturity for cash, but at a discount rate set by the bank. The bank buys the remaining value of the note, but applies a discount based on the time left and the bank's required interest rate

Question 191

What is the CECL method?

Answer 191

CECL: Current Expected Credit Loss CECL: a way of estimating how much a company might lose from customers who don't pay their debts (bad debts) CECL focuses on asset valuation rather than just recording when a loss happens. Aging the receivables follows the CECL method because it categorizes the accounts based on how long they've been unpaid

Question 192

Tell me why the in order to increase the allowance for credit loss, you need to expense the credit loss expense account?

Answer 192

Allowance for credit loss account: contra-asset account that offsets the A/R on the balance sheet. When a company estimates that some receivables will not be collected, it records an expense to reflect this expected loss. On income statement: the credit loss expense reduces net income On balance sheet: Allowance for credit loss reduce A/R

Question 193

A company entered into a loan with a lender for $100K and pledged $120K of the company's A/R as collateral. The lender does not have the right to sell or repledge the A/R. When the company receives the cash for the loan proceeds, what is the journal entry?

Answer 193

Debit: Cash $100K Credit: Note payable $100K A/R is not affected.

Question 194

What are inventories for a retailer?

Answer 194

Finished goods: inventory that is resold in substantially the same form in which it was purchased

Question 195

What are inventories for a manufacturer? Hint: 3 steps

Answer 195

1. Raw materials (freight in): inventory that is held for use in the production process 2. Work-in-process (WIP): inventory that is in production but incomplete 3. Finished goods: production inventory that is complete and ready for sale

Question 196

What is the difference between FOB shipping point vs. FOB destination?

Answer 196

FOB shipping point: buyer gets thet title when the seller loads the goods to the common carrier (in the truck) -> buyer gets the inventory (even though they don't have possession yet) FOB destination: seller loads the goods in the truck -> seller retains the inventory until the goods are received by the buyer from the common carrier

Question 197

What is an installment sale?

Answer 197

Installment sale: sale when the seller lets the buyer take goods home, but keeps legal ownership until the buyer finishes paying (like you buy a phone with a payment plan). The buyer has possesion, but the seller legally owns it. If the seller can't predict how much money they will lose from unpaid installemnts, good stay in seller's inventory. If the seller can estimate how many buyers won't pay, goods go to buyer's inventory and assume the buyer will own it.

Question 198

How are precious metals and farm products valued?

Answer 198

Precious metals (gold, silver, etc.) and farm products (meat, ag products, etc.) are valued at net realizable value Net realizable value = selling price - cost to sell

Question 199

How do you value inventory if you use FIFO or weighted average?

Answer 199

Lower of: cost and net realizable value NRV = selling price - costs to sell If cost of inventory is higher than NRV, use NRV Used for FIFO and weighted average since these methods usually show higher inventory values

Question 200

How do you value inventory if you use LIFO or retail?

Answer 200

Lower of cost or market 1. Replacement cost = cost to purchase item as of the valuation date 2. Market floor = net realizable value - normal profit margin 3. Middle value (market) = net realizable value - cost - normal profit margin 4. Lower of original cost or market

Question 201

What is FIFO?

Answer 201

FIFO: assumes oldest inventory (first purchased) is sold first

Question 202

What is the effect of FIFO to COGS and profits?

Answer 202

In times of rising prices, FIFO shows higher ending inventory Lower COGS: because cheaper, older inventory is used to calculate costs Lower COGS = higher profits

Question 203

What is LIFO?

Answer 203

LIFO: assumes the newest inventory is sold first

Question 204

What is the effect of LIFO to COGS and profits?

Answer 204

In times of rising prices, LIFO shows lower ending inventory Higher COGS: because latest, more expensive inventory is used to calculate costs Higher COGS = lower profits

Question 205

What is the weighted average cost inventory method?

Answer 205

Weighted average cost is the average cost of all inventory available during the period. COGS and ending inventory are calculated using this average

Question 206

What is the effect of weighted average cost inventory method?

Answer 206

Weighted average cost smooths out price flunctuations, giving moderate profits and inventory valuation

Question 207

What is the retail inventory method?

Answer 207

1. Find cost-to-retail percentage = total cost / total retail price 2. Find ending inventory at retail = goods available for sale at retail - sales at retail 3. Convert ending inventory at retail to cost = ending inventory * cost-to-retail percentage

Question 208

What is an identified concentration? What are the 3 criteria?

Answer 208

Identified concentration: where a company has a significant level of exposure to a particular risk, such as reliance on a major customer, supplier, geographic region, market segment 3 criteria: 1. Concentration exists at financial statement date 2. Concentration makes entity vulnerable to risk of a near-term severe impact 3. It is at least reasonable possible that the events causing the severe impact will occur in the near term

Question 209

What are the two types of inventory systems?

Answer 209

1. Periodic 2. Perpetual

Question 210

What is the perpetual inventory system?

Answer 210

The inventory record for each item of inventory is updated for each purchase and each sale as they occur - When buying inventory: debit inventory, credit cash - When selling inventory: debit COGS, credit: inventory | debit: cash, credit: revenue

Question 211

What is the periodic inventory system?

Answer 211

Periodic inventory system is debit purchases, not inventory - When buying inventory: debit purchases, credit: cash - When selling inventory: debit: cash, credit: sales

Question 212

What if ending inventory is overstated?

Answer 212

COGS understated -> profits overstated -> retained earnings overstated -> equity overstated

Question 213

What is the specific identification method for inventory?

Answer 213

Specific identification is when the cost of each item in inventory is uniquely identified to that item. The cost follows the physical flow of the item in and out of inventory to COGS. This is for high-value goods.

Question 214

What are the PP&E costs for property?

Answer 214

PP&E costs for property include: purchase price, brokers' commissions, title, recording, and legal fees, draining swamps and clearning brush and trees, site development (e.g., grading mountain tops, filing holes, and leveling), existing obligations assumed by the buyer (e.g., mortgages and back taxes), costs of removing an old building Less: proceeds from building and natural resources from land

Question 215

How are land improvements accounted for?

Answer 215

Land improvements are capitalized and depreciated

Question 216

What are the PP&E costs for plant?

Answer 216

Plant includes: purchase price, deferred maintenance (repair charges neglected from the previous owner), alterations and improvements, architects' fees, digging a hole for the foundation (building cost vs. filing a hole or levelinv land), construction-period interest (potentially)

Question 217

When do you capitalize equipment costs?

Answer 217

If old asset's carrying value is known, write off asset and record new asset. If old asset's carrying value is unknown, debit accumulated depreciation for the cost of the new asset and credit cash/accounts payable. AIR (Addition, Improvement, Replacement) is extraordinary so capitalize it.

Question 218

What gets capitalized, what gets expensed, what gets depreciated?

Answer 218

Improvements get capitalized. Repairs and maintenance get expensed. Depreciation is a systematic expense for all capitalized assets over time.

Question 219

Should in-transit insurance premium be included in inventory costs?

Answer 219

Yes, in-transit insurance premium should be included in inventory costs because it is a cost necessary to bring the goods to the locatioin.

Question 220

Should advanced commissions be included in inventory costs?

Answer 220

No, advanced commissions should not be included in inventory costs because they do not add "time" or "place" utility to the inventory. They are classified as prepaid expense that will become commissions expense when the goods are sold.

Question 221

Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?

Answer 221

Inventory turnover = COGS / average inventory Under FIFO, COGS would be lower and ending inventory will be higher --> higher average inventory

Question 222

Are sales commissions included in gross profit or how is sales commissions factored in income statement?

Answer 222

Sales commissions are excluded in gross profit calculation and is a selling expense

Question 223

What are items that are included in the cost of land?

Answer 223

Cost of land includes all costs necessary to put the land in place and condition for construction of the plant. Any proceeds from the sale of any existing buildings (or standing timber or soil) are deducted from the cost of the land. Purchase price, brokers' commissions, title and recording fees, legal fees, draining of swamps, clearing of brush and trees, site development, existing obligations assumed by buyer including mortgages, costs of tearing down an old building LESS: proceeds from sale of existing buildings, standing timber Note: Interest should only be capitalized in connection with a "discrete manufacturing activity," so interest incurred to acquire land should be expensed when incurred. Architect's fees should be charged to 'Buildings'. Sewage system should be charged to 'Land Improvement'. Debt issuance costs are presented in the balance sheet as direct reduction to the carrying amount of the bond and not included in land.

Question 224

What is the rule on capitalized interest?

Answer 224

You take the LOWER of amount of computed capitalized interest and the actual interest cost incurred

Question 225

How should plant assets be valued when they are purchased requiring fixed payments extending beyond one year?

Answer 225

Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at the present value of all future payments.

Question 226

How would you calculate the capitalized interest on the construction if borrowings are not tied specifically to the construction of an asset? What if the borrowings are tied to an asset?

Answer 226

If borrowings aren't tied to a asset: use weighted average interest rate If borrowings are tied to a asset: use the rate on specific borrowings If the asset is funded by specific loan and not labeled loan, use the specific interest rate first.

Question 227

When the expenditures were spent uniformly throughout the year, then the formula to compute average accumulated expenditures is...?

Answer 227

AAE = total expenditures / 2

Question 228

Can remodeling related interest costs be capitalized?

Answer 228

Yes! Interest capitalization applies if the remodeling project takes a significant amount of time before the asset is ready to use. Capitalizing interest is different than expensing interest because capitalizing interest adds the interest cost to the cost of a long-term asset, and depreciated over time. Unlike expensing interest which hits net income immediately, the capitalized interest gets depreciated alongside the asset over time.

Question 229

Interest is an expense, UNLESS you are...

Answer 229

borrowing to build something

Question 230

What is the difference between depreciation, amortization, and depletion?

Answer 230

Depreciation: tangible assets Amortization: intangible assets (copyright, trademark, patent) Depletion: natural resources

Question 231

What is the difference between salvage value and estimated useful life?

Answer 231

Salvage value: estimate of the amoutn that will be realized at the end of the useful life of a depreciable asset. Asset should not be depreciated below salvage value (minimum net book value you can have on the balance sheet) Estimated useful life: period over which an asset's cost will be depreciated. Revisions is a change in estimate

Question 232

What is the difference between component depreciation and composite depreciation?

Answer 232

Component depreciation: separate depreciation of each part of an item of PP&E that is significant to the total cost of the fixed asset Composite depreciation: the proecss of averaging economic lives of a number of PP&E units and depreciating the entire class of assets over a single life

Question 233

What are the different methods of depreciation?

Answer 233

1. Straight-line depreciation 2. Double-declining balance 3. Sum-of-years-digits 4. Units of production

Question 234

What is the formula for straight-line depreciation?

Answer 234

Depreciation = (cost - salvage value) / estimated useful life

Question 235

What is the formula for sum-of-years-digits depreciation?

Answer 235

Depreciation = (cost - salvage value) * (remaining life of asset / SOYD)

Question 236

What is units-of-production depreciation?

Answer 236

1. rate per unit or hour = (cost - salvage value) / estimated hours 2. depreciation expense = rate per unit * number of units produced

Question 237

What is double-declining balance depreciation?

Answer 237

DDB = (2 / useful life) * (cost - accumulated depreciation)

Question 238

What are the two depletion methods?

Answer 238

1. Cost depletion method 2. Percentage depletion method

Question 239

How do you calculate the cost depletion method?

Answer 239

Depletion base = Cost to purchase property Plus: development costs Plus: restoration costs Less: residual value of land Depletion rate = depletion base / removable stuff Depletion rate * # of sold = depletion amount

Question 240

How do you calculate the percentage depletion method?

Answer 240

Based on percentage of sales

Question 241

What happens during an impairment loss?

Answer 241

- If the sum of undiscounted future cash flows is less than carrying amount, then there is an impairment loss - The impairment is recognized by reducing the carrying value of the asset to its lower fair value. - The impairment loss is reported as a component of income from continuing operations before income taxes

Question 242

What is half-year convention?

Answer 242

Half-year convention is for assets where it is placed in service or disposed of in the middle of the year, so the first-year depreciation is 1/2 and last year depreciation is 1/2

Question 243

When is: present value of $1 used vs. present value of an ordinary annuity used?

Answer 243

Present value of $1: when discounting a single lump sum payment occurring in the future Present value of an ordinary annuity: when discounting a series of equal periodic payments

Question 244

When should a long-lived asset be tested for recoverability?

Answer 244

When events or changes in circumstances indicate that its carrying amount may not be recoverable

Question 245

Should impairment loss be added or subtracted to accumulated depreciation?

Answer 245

Impairment loss should be added to accumulated depreciation because the point of accumulated depreciation is that it reduces the asset's value You need accumulated depreciation to bring the asset to what it is actually worth

Question 246

How should an old building being actively marketed for sale be valued: historical cost or lower of book value or net realizable value?

Answer 246

The old building being actively marketed for sale will be valued at the lower of its book value (what it can sell it for) or net realizable value. Historical cost is not relevant for held-for-sale assets because the asset is no longer being used in operations. Since the company intends to sell the asset, its value should reflect what the company expects to recover from the sale.

Question 247

How to calculate the depletion per unit?

Answer 247

Depletion per unit = (total cost - salvage value) / total amount of extraction

Question 248

How should internally developed intangible assets not acquired from others be accounted for?

Answer 248

Cost of intangible assets not acquired from others should be expensed when incurred because GAAP prohibits capitalization of R&D costs

Question 249

What is amortization?

Answer 249

Amortization is a systematic way to reduce the value of intangible asset when it disappears. It aligns with the matching principle. It gets amortized the shorter of - legal life or economic life

Question 250

When calculating impairment loss, if fair value is not given, what should you use?

Answer 250

If fair value is not given, use the sum of the present value future cash flows (discounted cash flows) as estimate for fair value. The present value of future cash flows represents the asset’s value in use, which is the expected economic benefit the asset will generate. Discounting the future cash flows adjusts for the time value of money, making it a reasonable substitute for fair value. This method ensures that the impairment test reflects the real economic worth of the asset rather than just book values.

Question 251

What are the three phases of cloud computing arrangements?

Answer 251

1. Preliminary project phase 2. Application development phase 3. Post implementation phase

Question 252

What is the preliminary project phase?

Answer 252

Preliminary project phase: involves determining the system requirements for software. The costs incurred during this phase are expensed as incurred.

Question 253

What is the application development phase?

Answer 253

Application development phase: involves work performed to customize or change infrastructure or configurations. Capitalize implementation costs: involving software, software licensing, third-party software development fees, external materials, coding fees, and testing fees. Expense: training, manual data conversion, maintenance costs, support costs.

Question 254

What is the post implementation phase?

Answer 254

The post implementation phase begins when the software is placed in service and includes maintenance, additional training, enhancements, and upgrades. The costs incurred during this phase are expensed as incurred.

Question 255

How do you account for initial franchise fees?

Answer 255

Initial franchisee fees: present value of the amount paid (or to be paid) by a franchisee is capitalized Cash paid + present value of any note issued + fair market value of any stock issued Recorded as an intangible asset on the balance sheet and amortized over the expected period of benefit of the franchise (i.e., the expected life of the franchise)

Question 256

How do you account for continuing franchise fees?

Answer 256

Continuing franchise fees are expensed as incurred in the period incurred. Received for ongoing services provided by the franchisor to the franchise (often referred to as a franchise royalties) Calculated based on % of franchise revenues. Such services include: management training, promotion, legal assistance

Question 257

How should start-up costs be accounted for?

Answer 257

Start-up costs are expensed when incurred. Examples are: organizing a new entity, opening a new facility, introducing a new product or service, conducting business in a new territory or with a new class of customer, initiating a new process in an existing facility

Question 258

When should legal fees (for patents) be capitalized and when should legal fees be expensed?

Answer 258

For defending a patent, the accounting for the legal fees will depend on entirely on whether the defense is sucessful. If defense is successful, then the costs are capitalized. If defense is unsuccessful, then the costs are expensed.

Question 259

What is a crypto asset?

Answer 259

Crypto assets are digital representations of value or rights that use blockchain technology and reside on a distributed ledger. Examples are Bitcoin, Ethereum. Crypto assets do not provide the asset holder with enforceable rights or claims to an underlying good.

Question 260

How are crypto assets accounted for?

Answer 260

Crypto assets are classified as indefinite-lived intangible assets. They are measured at fair value in each reporting period with changes from remeasurement reflected in current period net income.

Question 261

Regarding patents, which costs are capitalized vs. expensed?

Answer 261

Capitalized: legal fees and costs to defend the patent Expensed: R&D costs of a new product idea

Question 262

When a company acquires an intangible asset (such as trademark), should it amortize it at purchase price or seller's book value?

Answer 262

When a company acquires an intangible asset, it must amortize the asset using its purchase price rather than the seller's book value

Question 263

How should you amortize intangible assets?

Answer 263

Intangible assets should be amortied over the lesser of the useful life or the economic life.

Question 264

What amortization method should be applied for intangible assets with finite life?

Answer 264

For intangible assets with a finite life, amortization expense should be recorded each year to account for the loss in value of the asset. The straight-line method should be applied, unless there is another method which is deemed more appropriate by the company.

Question 265

How much amortization should be recorded for intangible assets with indefinite lives?

Answer 265

0

Question 266

Why is the depreciation for research and development expense recorded as 'research and development expense' instead of 'depreciation expense?'

Answer 266

Per GAAP: normally depreciation of equipment is recorded as depreciation expense. However, when equipment is used in R&D activities, its depreciation is classified as R&D expense. R&D costs must be expensed as incurred.

Question 267

Why does R&D costs must be expensed as incurred?

Answer 267

R&D activities involve experimentation and innovation, and there is no guarantee that they will lead to a commercially successful product. If a company capitalizes R&D costs, it would be recognizing an asset before knowing if the asset will generate future economic benefits, which goes against the definition of an asset. By capitalizing, R&D would be recorded as intangible asset, increasing total assets. This leads to higher net income on financial statements. Since there are lower expenses in the short-term, it may look like the company is doing well. Also - there is no reliable useful life to amortize against, which leaves no choice but amortize.

Question 268

How can I company accrue or pay for taxes?

Answer 268

Two ways: 1. Accrued prior to receipt of the tax invoice and matched in the year for which the invoice pertains 2. Recorded as payable upon receipt of the tax invoice and expensed in the year of receipt

Question 269

What is the difference between payroll taxes and payroll deductions?

Answer 269

Payroll taxes: expense to the employer Payroll deductions: not an expense for the employer, not a corporate expense; they hold it and send it to the government

Question 270

What conditions must be met for vacation accruals?

Answer 270

Vacation accruals are recorded in the year earned if all of the following conditions are met: - S: Services have already been rendered by employees - O: Obligation relates to rights that vest or accumulate - C: Compensation is probable - R: Reasonably estimated If only the first three conditions are met, disclosure in a note to the financial statements is adequate

Question 271

Should estimated future operating losses be recorded?

Answer 271

No, estimated future operating losses should not be recorded until they actually occur

Question 272

What things should be disclosured during an exit/disposal activity?

Answer 272

- Disclose the total amount expected to be incurred in connection with the activity - Reconcile the beginnnig and ending liability balances showing the changes during the period

Question 273

What time frame must exceed to start discounting the termination benefit?

Answer 273

The termination benefit must exceed a year to start discounting

Question 274

What are asset retirement obligations?

Answer 274

ARO: legal obligations associated with the retirement of tangible long-lived assets. Examples: nuclear power plant decommissioning, restoring mining site after minerals are extracted, asbestos removal before demolishing a building, properly disposing an aircraft, etc.

Question 275

What is the journal entry when an ARO exists and qualifies for recognition?

Answer 275

Debit: ARO cost (asset that gets depreciated over time) Credit: ARO (liability)

Question 276

What is accretion?

Answer 276

Accretion is an expense (yearly) that increases the ARO liability due to the passage of time calculated using the appropriate accretion rate. Instead of paying the ARO expense upfront, companies gradually pay the ARO obligationi over tiem and slap on the "interest" which is the accretion expense At the end of the accretion period, the ARO liability reported on the balance sheet should be equal to the ARO to be paid Since accretion is an expense, net income decreaese, retained earnings decreases, equity decreases, and ARO obligation liability increases

Question 277

How is accretion expense calculated?

Answer 277

Accretion expense = beginning ARO liability * discount rate ARO liability is like a loan; accretion expense is like the interest

Question 278

What is a contingency?

Answer 278

Contingency is an existing condition or set of circumstances involving uncertainty. Results in possible gain (gain contingency) or loss (loss contingency)

Question 279

What are examples of loss contingencies?

Answer 279

Loss contingencies examples: collectability of receivables, product warranties, unredeemed coupons, risk of loss of property by fire, explosion or other hazards, threat of expropriation of assets, pending or threatened litigation, enviornmental damages, actual or possible claims and assessments, risk of loss from catatrophes assumed by property and casulty insurance companies, guarantees of indebtedness of others, obligations of commerical banks under standby letters of credit, agreements to repurchase receivables (or related property) that have been sold

Question 280

What are gain contingencies?

Answer 280

Gain contingencies apply the rule of conservatism -> no accrual -> no journal entry. Can be disclosed in the notes of the financial statements.

Question 281

What are examples of gain contingencies?

Answer 281

Gain contingency examples: expected favorable settlement from pending court case, possible refunds from tax disputes, possible insurance reimbursement

Question 282

Do we disclose a gain contingency in the footnotes?

Answer 282

Depends on the probability of remote: - Yes, remote: don't disclose - No, not remote: no gain recognized but disclose it in the footnotes When disclosing a gain contingency in the footnotes of the financial statements, be careful to avoid misleading implications about the likelihood of realization.

Question 283

A loss contingency should be accrued if both of the conditions exist...

Answer 283

1. Asset has been impaired; or a liability incurred prior to the issuance of the financial statements 2. Amount of loss can be reasonably estimated If the amount cannot be reasonably estimated, then disclose it in the notes. Ensure that you have a good reason why you can't estimate it.

Question 284

What is the DOG guarantee-type remote loss?

Answer 284

D: Debt of others guaranteed (officers, related party, another company) O: Obligations of commerical banks under standby letters of credit G: Guarantees of repurchases receivables (or related property) that have been sold or assigned

Question 285

How do we appropriate retained earnings?

Answer 285

Unapproprirated retained earnings - utilized funds + approrpriated retained earnings

Question 286

What type of accounting treatment (accrue or disclose) for "reasonably possible"?

Answer 286

Only footnote disclosure because it is not reasonably probable

Question 287

What is the difference between ordinary annuity and annuity due?

Answer 287

Ordinary annuity: end of the period Annuity due: beginning of the period

Question 288

Is present value greater than or less than future value?

Answer 288

Present value will always be less than future value since it is worth more in the future (TVM)

Question 289

How to find the present value factor?

Answer 289

PVF = 1 / (1 + r)^n

Question 290

How to find the future value factor?

Answer 290

FVF = (1 + r)^n

Question 291

How to calculate the present value of an ordinary annuity?

Answer 291

Present value of an ordinary annuity = annuity payment * (present value of an ordinary annuity of $1 for an appropriate n and r)

Question 292

How to find the present value of annuity due from present value of ordinary annuity?

Answer 292

Present value of annuity due = present value of ordinary annuity * (1 + interest rate)

Question 293

How to find the present value of ordinary annuity from present value of annuity due?

Answer 293

Present value of annuity due = present value of ordinary annuity / (1 + interest rate)

Question 294

How do you find the ending balance of a note payable?

Answer 294

The ending balance of a note payable = Beg balance - principal Principal = payment - interest

Question 295

What is the installment note receivable balance at any time?

Answer 295

Installment note receivable balance at any time is the present value of the remaining monthly payments discounted at 12%

Question 296

What is the exception to the rule of "when a note carries no interest or below-market interest rate, we must impute interest by recording the note at its present value using the market rate?"

Answer 296

The exception to this rule is for short-term trade payables and receiables that arise in the normal course of business when the trade terms do not exceed one year

Question 297

How do you find tangible net worth?

Answer 297

Tangible net worth = total stockholders' equity - intangible assets

Question 298

How do you find free cash flow?

Answer 298

Free cash flow = operating cash flow - total capital expenditures

Question 299

When will the coupon paid equal the interest expense?

Answer 299

The only way the coupon paid will equal the interest expense is if the bond is issued at par

Question 300

Discount or premium: when market rate is greater than stated rate

Answer 300

Discount = stated rate + discount effect

Question 301

Discount or premium: when market rate is less than stated rate

Answer 301

Premium = stated rate - premium effect

Question 302

What is a debenture?

Answer 302

Debentures are unsecured bonds with high risk and high yield

Question 303

What are mortgage bonds?

Answer 303

Mortgage bonds are secured by real property

Question 304

What are collateral trust bonds?

Answer 304

Collateral trust bonds are secured bonds with less risk and low yield

Question 305

What is convertible bonds?

Answer 305

Convertible bonds convert into common stock of the debtor (generally) at the option of the bondholder

Question 306

What are warrants in convertible bonds? What is the difference between non-detachable warrants and detachable warrants?

Answer 306

Warrants: gives the bondholder the right (but not the obligation) to purchase a company's stock at a specified price within a certain time period , Non-detachable warrant: the warranty cannot be sold seprately from the bond; tie the investor to the bond for the entire term and limits trading options Detachable warrant: the holder has the option to sell the warrant separately from the bond; offer more flexibility and potential for profit to the investor

Question 307

What are participating bonds?

Answer 307

Participating bonds are bonds that investors can earn regular interest, and if the financial performance reaches a certain threshold, it can receive extra payments

Question 308

What are term bonds?

Answer 308

Term bonds have a single fixed maturity date, where the entire principal is paid at the end of the term/period

Question 309

What are serial bonds?

Answer 309

Serial bonds are prenumbered bonds that the issuer may call and redeem a portion by serial number; serial bonds mature in installments; they do not all mature on the same date

Question 310

What are income bonds?

Answer 310

Income bonds are bonds you only pay interest if certain income objectives are met; interest payments are contingent on the issuer's ability to generate income; come w/ lower interest rates; higher yields

Question 311

What are zero coupon bonds?

Answer 311

Zero coupon bonds are deep discount bonds. These bonds do not have periodic interest payments.

Question 312

What are commodity-backed bonds?

Answer 312

Commodity-backed bonds are "asset-linked bonds;" bonds that are redeemable in cash or stated volume of commodity (whichever is greater)

Question 313

What are the differences between bonds and notes?

Answer 313

Bonds: more standardized which allows them to be publicly traded; interest payments are made over the life of the bond; all of the principal is paid at maturity Notes (like a loan): customized and privately placed; every monthly payment can be principal and interest; payments are negotiated and there is an agreement between the borrower and the lender

Question 314

Are unamortized discounts a loss or a gain?

Answer 314

Unamortized discounts are a loss (market rate > coupon)

Question 315

Are unamortized premium a loss or a gain?

Answer 315

Unamortized premium are a gain (market rate < coupon)

Question 316

What are bond issuance costs?

Answer 316

Bond issuance costs are costs incurred to issue bonds: legal fees, underwriting fees, accounting fees, printing and registration fees, etc.

Question 317

How are bond issuance costs treated?

Answer 317

Bond issuance costs are deferred charges and amortized over the life of the bond using straight-line method or effective interest method

Question 318

A company issued bonds with detachable common stock warrants. The issue price exceeded the sum of the warrants' fair value and the face value of the bonds. The fair value of the bonds cannot be determined. What value, should be assigned to the warrants?

Answer 318

Because the warrants are detachable, the issue price of the bonds and warrants together should be allocated based on each component's fair values on the issuance date. Because the warrants' fair value is known, the remainder of the issuance price not allocated to the warrants is allocated to the bonds.

Question 319

A 15-year bond was issued in Year 1 at a discount. During Year 11, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond's face amount over the 15-year bond's:

Answer 319

Carrying value The long-term liabiltiies will increase by the difference between the carrying amount of the old 15-year bond and the face amount (issuing price) of the new 10-year bond If the bond is gone, any remaining unamortized part (discount, premium, issuance costs, loss/gain) must hit the income statement now

Question 320

Example: - Bond face value: $1M - Unamortized discount: $30K - Carrying amount: $970K - Bond retirement price: $990K

Answer 320

Debit: Bonds payable (remove full face value) = $1M Debit: Discount on bonds payable (remove unamortized discount) = $30K Credit: Cash = $990K (amount paid to retire the bond) Debit: Loss on retirement = $20K (plug to balance)

Question 321

Example: - Bond face value: $1M - Unamortized premium: $40K - Carrying value: $1.04M - Bond retirement price: $500K

Answer 321

Debit: Bonds payable = $1M Debit: Premium on bonds payable = $40K Credit: Cash = $500K Credit: Gain on retirement = $540K

Question 322

What is the market rate if the bonds are issued at par?

Answer 322

The market rate is the same as the coupon rate. There is no premium or discount to amortize. Interest expense is equal to the interest payable each period. The present value of interest payments will not equal to the present value of the principal, but together they add up to the par value of the bond.

Question 323

What describes the relationship between interest expense related to bonds payable when a discount on bonds payable has been recorded using the effective interest method?

Answer 323

Interest expense on bond payable is the combination of interest paid and the amortization of iether the discount or premium. The interest payments (assuming a fixed-rate bond) will be the same every period. Due to amortization the carrying value of the discount bond gets closer and closer to the face value every year, which means it gets larger each year. Interest expense is calculated by multiplying the market interest rate at the time of issuance by the beginning carrying value of the period. With an increasing carrying value each period, interest expense will increase by a larger amount every year (the increase in interest expense is larger in the later years than in the earlier years).

Question 324

If a discount on bonds payable is not amortized, what are the effects on interest expense and total stockholders' equity?

Answer 324

Discount is not amortized, interest expense is lower than what it should be -- understated; total SE: overstated If a discount is not amortized, interest expense is understated (because we are missing the additional interest from the discount)

Question 325

If a bond discount is amortized using the straight-line method, what is the effect on reported interst expense over time compared to the effective interest method?

Answer 325

Equal in all periods The straight-line method allocates equal amounts of discount/premium amortization each period, making interest expense equal over time (unlike the effective interest method -- which varies)

Question 326

If a company fails to amortize a bond discount, what is the effect on liabilities and interest expnese?

Answer 326

Discount isn't amortized so carrying value is lower than what it should be (liabilities = understated); interest expense is overstated (the company is not increasing bond liability appropriately, causing them to calculate too high of a market rate-based expense)

Question 327

If a bond is issued at a premium and the premium is properly amortized, what happens to the carrying value of the bond and interest expense over time?

Answer 327

Carrying value: decreases | Interest expense: decreases When a premium is amortized, the carrying value of the bond decreases over time. Because we are amortizing (reducing) the premium, interest expense decreases over time (since the carrying value multiplied by market rate is declining)

Question 328

If a bond is issued at a discount and the discount is amortized properly using the effective interest method, what happens to the carrying value of the bond and interest expense over time?

Answer 328

Carrying value: increases | Interest expense: increases As a discount is amortized, carrying value of the bond increases over time. Since the bond liability is growing, interest expense increases over time (using effective interest method, since it's based on the growing carrying value)

Question 329

What are the two methods to amortize a bond premium or bond discount?

Answer 329

1. Straight-line method: constant dollar amount for the coupon paid and the interest expense 2. Effective interest method: constant rate - dollar amount varies, the coupon paid is constant, interest expense varies

Question 330

What date does the bond start to amortize?

Answer 330

The date the bonds are sold

Question 331

Under the effective interest method, what vairies and what stays constant: interest expense and/or coupon payment?

Answer 331

Interest expense: varies Coupon payment: stays the same

Question 332

On July 1, Year 5, Dean issued, at a premium, bonds with a due date of July 1, Year 12. Dean incorrectly used the straight-line method instead of the effective interest method to amortize the premium. How were bond carrying amount and retained earnings affected by the error at June 30, Year 12?

Answer 332

Bond carrying amount: no effect Retained earnings: no effect

Question 333

How is pension costs interest reported as?

Answer 333

Pension cost interest is reported as a component of net periodic pension cost

Question 334

How is amortization of discount of a note reported as?

Answer 334

When a discount on a bond or note is amortized, the discount amortization increases interest expense for the period

Question 335

How is deferred compensation plan interest reported as?

Answer 335

Deferred compensation plan interest is reported as a component of deferred compensation plan expense

Question 336

How is interest incurred to finance a software development for internal use reported as?

Answer 336

Interest incurred to finance software development for internal use is capitalized as a component of computer software development costs

Question 337

What is interest expense?

Answer 337

Interest expense: the cost of borrowing based on the carrying amount of the bond and the market (effective) rate at issuance; it is what the borrowing costs you economically It appears on the income statement

Question 338

What is interest paid?

Answer 338

Interest paid: the actual cash paid to bondholders based on the face value of the bond and the stated coupon rate It is shown in the cash flow (financing activities) and as a liability if accrued

Question 339

What happens if a debt is being modified (assuming the debtor is facing financial difficulty)?

Answer 339

Under the modification terms, the debt hasn't been extinguished. The terms have been adjusted, so that the debtor has a greater ability to fulfill its obligation. No interest payments are recognized if carrying value of liability is written down.

Question 340

In troubled debt restructuring: what are the two components of the gain?

Answer 340

1. Adjusting the land to market value = FMV - NBV 2. Relieving the debtor = carrying value of liability - FMV

Question 341

What is an in-substance defeasance?

Answer 341

An in-substance defeasance doesn't extinguish the liability itself; it merely "freezes" the payments of principal and interest until a later time. The debtor is still primary obligor, so the liability remains on the debtor's books

Question 342

How do you find gain/loss on bond extinguishment before maturity?

Answer 342

Face value + unamortized premium - unamortized discount - unamortized costs

Question 343

What is the 3-step process for retirement of bonds?

Answer 343

1. Find the cash part - how much money goes out the door to retire the bond 2. Debit bonds payable and debit premium or credit discount 3. Credit gain or debit loss for the plug

Question 344

What is a lease?

Answer 344

Lease is a contractual agreement between a lessor and a lessee Lessor: owns the asset; Lessee: agrees to pay to use the asset

Question 345

What 2 criteria must be met in order for a contract to be a lease or contain a lease?

Answer 345

1. Contract must depend on an identifiable asset in which the lessor doesn't have a substantive substitution right 2. Contract must convey the right to control the use of the asset over the lease term to the lessee

Question 346

What criteria must be met to combine contracts?

Answer 346

1. One or more contracts contains or is a lease 2. Contracts are entered into at approx the same time 3. Parties to the contract are the same or related parties 4. One or more of the following: performance or price of one contract affects the consideration paid in other contracts, contracts have the same commerical objectives and were negotiated as part of a package, regarding the use of underlying assets - the right to use them don't meet the accounting criteria for separate lease componets

Question 347

What are the 5 criteria for a finance lease (only need 1)?

Answer 347

Note: OWNES criteria only applies for leases greater than 12 mo O ownership W written option N net present value is equal or exceeds fair value E (majority) economic life is still remaining S specialized in nature - no alternative use

Question 348

What are the two sets of journal entries for finance leases?

Answer 348

1. Pay down the liability (amount owed per month) 2. Pay the amortization expense - straight-line

Question 349

At the beginning of the year, a lessee signs a five-year lease that contains a written purchase option, which the lessee is reasonably certain to exercise. In preparing the annual cash flow statement after year-end, the lessee's cash flow from operations will be:

Answer 349

Negatively impacted by variable lease payments not included in the lease liability -- because you have to pay additional amounts. Principal payments are part of the financing section of Statement of Cash Flows. For a finance lease, the interest portion of the lease payment will serve to reduce cash flow from operations and the portion of the lease payment that represents principal is cash flow from financing outflow.

Question 350

What is the commencement date for a lease?

Answer 350

The commencement date for a lease is the date the underlying asset is made available for the lessee to use (regardless of when the lessee wants to move-in)

Question 351

At the inception of a finance lease, the residual value expected to be owed at the end of the lease term should be:

Answer 351

Included as part of minimum lease payments at present value

Question 352

When you have a implicit rate vs. incremental borrowing rate, which one do you use?

Answer 352

IMPLICIT RATE

Question 353

How do you record interest for operating lease?

Answer 353

Operating lease reocrds straight-line, no interest component

Question 354

How do you calculate ROU asset for finance lease after year 1 under GAAP?

Answer 354

1. Start with PV of lease payments + indirect costs 2. Amortize ROU asset over straight-line lease term 3. Payments reduce the liability, not asset

Question 355

When a company makes leasehold improvements on leased property, how should the amortization period be determined?

Answer 355

Amortize leasehold improvements over the shorter of: the estimated useful life of the improvement or the remaining lease term Always choose the shorter period -- lease term vs. useful life -- unless the renewal is certain

Question 356

Under an operating lease, if annual payments increase by 10% every 5 years, will lease and interest expenses increase in year 6 compared to year 5?

Answer 356

No - under operating lease, lease and interest stays the same regardless of inflation

Question 357

When calculating the lease liability to finance a lease, the lessee includes, which 2 pieces:

Answer 357

1. present value of required lease payments 2. present value of written purchase option that is certain, what is stated (not estimated value)

Question 358

Why is the estimated residual value not used when calculating lease liability for finance lease w/ a purchase option?

Answer 358

Because the purchase option amount specified in the lease (if reasonably certain to be exercised) is used -- not machine's estimated fair value Only contractual obligations are included in lease liability

Question 359

When do you amortize a leased asset over the lease term vs. useful life?

Answer 359

Useful life: if ownership transfers or if the lessee will keep the asset Lease term: ownership doesn't transfer

Question 360

Do you use fair value of equipment to measure ROU asset under GAAP?

Answer 360

No - use the present value of lease payments and purchase options that are reasonably certain to be exercised, not the equipment's fair value

Question 361

What criteria must be met in order to recognize revenue on a contract?

Answer 361

- All parties have approved the contract and are committed to performing their obligations - The rights of each party are identified - Payment terms can be identified - Future cash flows are expected to change as a result of the contract - It is probable that the entity will collect substantially all of the consideration

Question 362

What criteria must be met in order for a performance obligation to be considered distinct?

Answer 362

1. The promise to transfer the good/service is separately identifiable from other goods or services in the contract 2. The customer can benefit from the good/service independently or when combined with the customer's own available resources

Question 363

What factors should be accounted for when determining the transaction price?

Answer 363

The price should take in account (if applicable): variable consideration, signficant financing, noncash considerations, consideration payable to customer

Question 364

What is the criteria to recognize revenue when performance is satisfied at a point in time?

Answer 364

In order to recognize revenue when performance is satisfied at a point in time, the customer must obtain control of the asset

Question 365

State the formula for recognizing the gain/loss on long-term construction-type contracts over time

Answer 365

Total costs to date * total estimated gross profit - gross profit recognized to date

Question 366

Distinguish between the treatment of costs incurred in obtaining a contract as assets or as expenses

Answer 366

If an entity expects to recover these costs through the performance of the contract, the entity will treat them as assets. If the costs are incurred regardless of whether the contract is obtained, they are treated as expenses

Question 367

Describe the accounting treatment for forwards and call options related to repurchase agreements

Answer 367

Repurchase price < original price (lease) Repurchase price > = original price (financing arrangement)

Question 368

Describe the accounting treatment for put options related to repurchase agreements

Answer 368

A put option in a repurchase agreement (repo) gives the buyer the right to sell the asset back to the original seller at a predetermined price and time. This means the buyer can require the seller to repurchase the asset. It is a liability for the seller and recorded at fair value when the seller has to repurchase the agreement.

Question 369

Identify indicators of a consignment arrangement

Answer 369

- Entity controls the product until specified event occurs - Dealer doesn't have unconditional obligation to pay the entity for the product - Entity has authorization to require the return of the product to another party

Question 370

Under GAAP, how is the change in accounting entity reported?

Answer 370

All current and prior period financial statements presented are restated

Question 371

What four situations require adjusting journal entries in order to properly present financial statements on the accrual basis?

Answer 371

1. Cash is received before the performance obligation is met (deferred revenue) 2. Cash is paid before the expense is incurred (prepaid expenses) 3. Cash is received after the performance obligation has been met (receivables) 4. Cash is paid after the expense has been incurred (accrued expenses)

Question 372

What are 3 rules for recording adjusting journal entries?

Answer 372

1. Adjusting journal entries must be recorded by end of entity's fiscal, before financial statements 2. Adjusting journal entries never involve the cash account 3. All adjusting entries will hit one income statement account and one balance sheet account

Question 373

What does the Summary of Significant Accounting Policies note entail?

Answer 373

1. Measurement bases used in preparing financial statements 2. Specific accounting principles and methods used

Question 374

What are the GAAP disclosure requirements for risks and uncertainties?

Answer 374

Nature of operations, use of estimates in preparing the financial statements, significant estimates, current vulnerability due to certain concentrations

Question 375

What are the two categories of subsequent events?

Answer 375

1. Recognized subsequent events: existed before balance sheet date 2. Nonrecognized subsequent events: after the balance sheet date

Question 376

What is the cash conversion cycle?

Answer 376

Cash conversion cycle = days in inventory + days sales in AR - days of payables outstanding

Question 377

Name two methods for estimating credit losses

Answer 377

1. Percentage of accounts receivable at year-end 2. Aging of accounts receivable at year-end

Question 378

Notes receivable may be discounted "with" or "without" recourse. What is the difference?

Answer 378

W/ recourse: the seller is liable if the note is not paid; the seller of the note records a contingent liability W/o recourse: the seller transfers all the risk to the bank. If the note is not paid, the bank is responsible for it. The note is fully removed from the seller's books. The bank records a note receivable as an asset. There is no liability since the bank is not borrowing money -- it's acquiring a financial asset with the expectation of collection.

Question 379

When does the title to goods pass for each of the following?

Answer 379

FOB destination: when received by the buyer FOB shipping point: when given to a common carrier Consigned goods: when sold to a third party by consignee

Question 380

Under GAAP, how is market calculated in lower of cost or market method?

Answer 380

Current replacement cost doesn't exceed the market ceiling or fall below the market floor

Question 381

During periods of rising prices, the use of LIFO vs FIFO has what effect on the valuation of ending inventory and reported net income?

Answer 381

LIFO = lowest

Question 382

How is fixed-asset carrying value computed under GAAP?

Answer 382

Carrying value = historical cost - accumulated depreciation - impairment

Question 383

State two rules concerning capitalizing interest

Answer 383

1. Only capitalize interest on money actually spent, not amount borrowed 2. The amount capitalized is the lower of: actual interest cost incurred or computed capitalized interest

Question 384

How to calculate depletion of nature resources? (REAL)

Answer 384

REAL - depletion of natural resources R residual value (subtract) E extraction cost A anticipated restoration cost L land purchase price Depletion = land + extraction costs + anticipated restoration costs - residual value

Question 385

What two-step impairment test for impairment of intangible assets with finite lives under GAAP?

Answer 385

1. Carrying amt compared with sum of undiscounted cash flows 2. If carrying amt exceeds undiscounted cash flows, then asset is impaired Impairment loss = carrying amt - fair value

Question 386

When a company pays weekly and the pay period spans two accounting periods (e.g., year-end), what adjusting journal entry is required at the end of the first period?

Answer 386

Wages expense must be recorded for the portion of payroll earned, but unpaid at period-end

Question 387

What is the fair value of a nonfinancial asset?

Answer 387

Fair value of a nonfinancial asset is the price that would be received to sell the asset in an orderly transaction between market participants at measurement date Based on the highest and best use of the asset, regardless of current use or historical cost

Question 388

When a company changes its inventory costing method from LIFO to FIFO, how is the cumulative effect of the change reported?

Answer 388

As an adjustmnet to beginning retained earnings, net of tax, in the earliest year presented WHY: to ensure comparability across periods, companies must adjust prior periods as if the new method had always been used -- retrospective application If comparative statements are not presented, only the current year's beginning retained earnings need to be adjusted

Question 389

How do you determine "the most advantageous market" for fair value measurement?

Answer 389

To determine the most advantageous market, follow these steps: (1) Identify the price per unit and transaction costs per unit for each market (2) Calculate net proceeds for each market: net price = price paid per unit - transaction costs per unit (3) Choose the market with the highest net price - the most advantageous market

Question 390

What are the 3 kinds of debt?

Answer 390

1. Trading security 2. AFS 3. HTM

Question 391

How do you account for trading security?

Answer 391

Trading security: fair value, with holding gains and losses including earnings, through P&L, straight to the income statement If the trading security is classified as a current asset, buying/selling trading securities is classified as operating cash flows. Interest on the bond and unrealized gains/losses are recognized on the income statement

Question 392

How do you account for AFS?

Answer 392

AFS: fair value through OCI, classified as investing cash flows AFS is classfied as a non-current asset. Any realized loss is recognized on the income statement. Any unrealized gain/loss goes direct to equity (OCI). Interest on bond is recognized on the income statement.

Question 393

How do you account for HTM?

Answer 393

HTM: amortized cost, when you don't sell it until maturity, classified as investing cash flows HTM is non-current asset, no realized gains/losses Interest on the bond is recognized on the income statement

Question 394

For the lender, are debt securities assets or liabilities?

Answer 394

Assets!

Question 395

What is CECL?

Answer 395

CECL: current expected credit loss model Current credit loss is recognized on the income statement

Question 396

How do you calculate gain/loss on AFS securities?

Answer 396

Gain/loss on income statement = selling price - original cost

Question 397

Under the fair value method, how are dividends recognized?

Answer 397

Under the fair value method: - Dividends received are recognized as dividend revenue to the extent of the investor's share of cumulative earnings since acquisition (profit in excess of investor's investment) - Dividends received in excess of the investor's share cumulative earnings as a return of capital

Question 398

Are leases available for the fair value option? Or how are leases accounted for?

Answer 398

The fair value option only applies to financial assets (e.g., debt and equity securities) and liabilities (notes payable). Leases are excluded from fair value option.

Question 399

In Year 1, Lee acquired at a premium, Enfield. 10-year bonds classified as a HTM investment. At December 31, Year 2, Enfield's bonds were quoted at a small discount. What is the most likely cause of the decline in the bonds' market value?

Answer 399

Interest rates have increased since Lee purchased the bonds If interest rates have increased, then the bonds' interest rate would be less attractive to investors now than when the bonds were originally issued. This would most likely cause a decline in the bonds' market value. Since bonds is HTM, the bonds is reported at amortized cost (not fair value).

Question 400

On July 1, Year 1, York Co. purchased as a held-to-maturity investment $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, Year 1, balance sheet, what amount should York report as investment in bonds?

Answer 400

946,000 paid 40,000 interest revenue 906,000 amount left the bank on date of purchase 45300 interest revenue 40000 interest receivable 911,300

Question 401

For an available-for-sale security transferred into the trading category, the portion of the unrealized holding gain or loss at the date of the transfer that has not been previously recognized in earnings shall be:

Answer 401

Recognized in earnings immediately

Question 402

Using the current expected credit losses (CECL) model, when an available-for-sale debt security has a fair value that is below amortized cost, what happens?

Answer 402

The asset must be written down to the lower fair value by recording a credit loss that is recognized on the income statement. Even though the fair value is above the present value of expected cash flows, an available-for-sale security can be sold at any time so the credit loss is limited to the difference between amortized cost and fair value. It is recorded under: earnings section of the income statement and writing down the cost basis to fair value

Question 403

Are disclosures required for 'concentration of credit risk' and/or 'market risk' for all financial instruments in the notes of the financial statements?

Answer 403

Concentraction of credit risk: Yes Market risk: No

Question 404

When is the equity method used?

Answer 404

The equity method is used when there is signficant influence exercised by the investor over the investee Recognizes proportionate share of investee's net income, dividends, and reduce investment balance

Question 405

Is land amortized?

Answer 405

No!!

Question 406

Inventory is amortized thorugh COGS, how does the excess in inventory fair value affect net income?

Answer 406

Net income decreases

Question 407

How to calculate the amount of goodwill associated with acquisition?

Answer 407

Since the fair value of assets is greater than book value, the goodwill is the excess of the purchase price over the fair value. Purchase price - (% ownership & fair value of asset) = goodwill

Question 408

Why does the fair value method does not recognize equity earnings?

Answer 408

The fair value method is used when investor doesn't have significant influence and holds less than 20% of common stock. It is the passive investor who recognizes dividends received as income. . Unrealized gains and losses are marked to market, meaning their value is adjusted to reflect the changes in fair value each reporting period.

Question 409

How is goodwill treated under the equity method?

Answer 409

Under the equity method, goodwill is ignored - neither amortized nor tested for impairment. The entire investment is evaluated for impairment annually.

Question 410

When an investor owns both common and preferred stock in an investee, how are dividends treated under the equity method?

Answer 410

Common Stock Dividends (Equity Method): If the investor has significant influence (owns 20-50%), the equity method is used. Common stock dividends are NOT recorded as income; instead, they reduce the investment account. Preferred Stock Dividends: Preferred stock dividends are recorded as income when received. If the preferred stock is noncumulative, dividends are recorded as income only when declared. Dividend income = Investor’s ownership % × Preferred dividends declared.

Question 411

Are liquidating dividends a return to capital or income?

Answer 411

Return to capital, not dividend income

Question 412

What happens when an investor's equity method investment reaches zero?

Answer 412

When an investor's equity method investment reaches zero due to recording its share of the investee's losses, the investor must suspend further application of the equity method. However, if the investee later returns to profitability, the investor can resume applying the equity method—but only after recovering the unrecognized losses from the suspension period.

Question 413

What determines majority control?

Answer 413

Greater than 50% -> consolidation

Question 414

What are the two characteristics for acquisition method?

Answer 414

1.) 100% of net assets acquired (regardless of ownership percentage) are recorded at fair value with any unallocated balance creating goodwill 2) When the companies are consolidated, the subsidiary's entire equity (including its common stock, APIC, and retained earnings) is eliminated

Question 415

What are some commonly tested intercompany transactions?

Answer 415

- Intercompany merchandise transactions: if parent/subsidiary are consolidated, we need to eliminate this since this is one company - intercompany bond transactions - intercompany sale of land - intercompany profit on sale of depreciable fixed assets

Question 416

What accounting needs to happen for intercompany transactions prior to preparing consolidated financial statements?

Answer 416

- The total amount of this intercompany sale and cost of goods sold should be eliminated prior to preparing consolidated financial statements - The intercompany profit must be eliminated from the ending inventory and the COGS of the purchasing affiliate 100% of profit should be eliminated regardless of parent's ownership interest NO INTERCOMPANY PAYABLES/RECEIVABLES are reported at year end in consolidated financials

Question 417

When the financial statements of a parent and its subsidiary are consolidated, what happens to the dividends of the parent?

Answer 417

Only the parent will be reported in retained earnings. The subsidiary's dividends will be part of the noncontrolling interest. The subsidiary's entire equity is eliminated under the acquisition method.

Question 418

What are the steps to determine the amount of dividends declared and paid in a consolidated statement of retained earnings?

Answer 418

1) Identify dividends paid by each company 2) Determine how much subsidiary's dividends are included in consolidated dividends 3) Compute consolidated dividends Consolidated dividends = parent dividends + dividends paid to noncontroling interest

Question 419

What happens to intercompany payables and receivables in a consolidated balance sheet?

Answer 419

On consolidated balance sheet, the parent and subsidiary assets and liabilities are combined into a single statement. Any payables and receivables between the parent and subsidiary must be eliminated to avoid double-counting. However, on the subsidiary's own balance sheet: any payables and receivables from transactions with the parent company should be reflected.

Question 420

How to determine the intercompany profit that must be eliminated from ending inventory?

Answer 420

1) Find the original intercompany sales = cost * markup*100 2) Compute intercompany profit = intercompany sales - cost 3) Determine ending inventory % = ending inventory / total purchased 4) Multiply % * intercompany profit

Question 421

How do you determine a subsidiary’s payable to the parent company for intercompany sales in consolidated financial statements?

Answer 421

1) Identify intercompany sales – The difference between total combined revenues and consolidated revenues represents sales between parent and subsidiary that must be eliminated. 2) Check for unpaid balances – The difference between the parent’s accounts receivable, the subsidiary’s accounts payable, and the consolidated accounts receivable helps determine how much is still owed. 3) Eliminate intercompany transactions – Only transactions with external parties should remain in consolidated financial statements, so any intercompany payables/receivables must be removed.

Question 422

How to account for intercompany sale of land?

Answer 422

Step 1: Eliminate intercompany gain/loss in consolidation. Step 2: Record land at its original cost until sold externally. Step 3: Recognize the gain when the land is finally sold to an outside party.

Question 423

How are dividends reported in intercompany transactions?

Answer 423

Dividends paid to noncontrolling shareholders are reported in the financing section of the statement of cash flows Dividends paid to the parent company aren't report since they are eliminated during consolidation

Question 424

What are the 3 methods to calculate the creation of a new partnership with investment of additional capital?

Answer 424

1) Exact method: purchase price can be equal to book value 2) Bonus method: purchase price can be less than book value 3) Goodwill method: purchase price can be more than book value

Question 425

What are the two methods that can be used if a partner leaves a partnership?

Answer 425

1) Bonus method: allocated among the remaining partners' capital accounts in accordance with their remaining profit/loss ratios; reallocatiing the excess to previous partners' capital based off of profit/loss ratios 2) Goodwill method: records a 'goodwill' account that formally recognizes the excess paid in NBV; increasing the previous partners' capital

Question 426

What are the rules for partnership liquidation? (CLAP)

Answer 426

C: Claim against deficient partner - the partnership has a claim against any partner w/ a negative balance L: Loss allocation before distribution - remaining partners absorb losses based on profit/loss ratio before cash is distributed A: Allow defiicent partner to pay - the deficient partner can pay their deficiency in cash to avoid burdening others P: Partnership isn't closed until all claims are paid

Question 427

When a partnership incorporates, are assets and liabilities valued at book value or fair value?

Answer 427

Fair value since this is how much they are actually worth

Question 428

When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner's capital account?

Answer 428

Fair value at the date of contribution Partners' contributions to the partnership are valued at the fair market value at the date of contribution of the noncash property contributed. The partners' capital account would be credited for the FMV of the property.

Question 429

What are operating assets?

Answer 429

Operating assets: all current assets except cash and cash equivalents

Question 430

What are operating liabilities?

Answer 430

Operating liabilities: all non-interest bearing obligations

Question 431

What are financing liabiltiies?

Answer 431

Financing liabilities are interest-bearing debt

Question 432

How do you calculate the operating cash flows using indirect method?

Answer 432

Indirect method: shows why net income different than operating cash flows Net income + Noncash expenses/losses (depreciation, amortization, bad debt expense) - Noncash income/gains (amortization of bond premium) + increases(decreases) in operating liabilities (assets) - increases (decreaess) in operationg assets (liabilities)

Question 433

If you are paying the interest on debt...

Answer 433

operating outflow

Question 434

If you are receiving the interest...

Answer 434

operating inflow

Question 435

Is recording depreciation, amortization, or depletion part of Statement of Cash Flows?

Answer 435

No, no net cash flow

Question 436

Is recording income of equity method affiliates part of Statement of Cash Flows?

Answer 436

No, no net cash flow

Question 437

If you are paying principal on debt...

Answer 437

financing outflow

Question 438

When the indirect method is used, what does the supplemental disclosures include?

Answer 438

1) Cash paid for interest (net of amounts capitalized) 2) Cash paid for income taxes 3) Dividends paid on preferred stock

Question 439

How are proceeds from the sale of land accounting for in statement of cash flows?

Answer 439

The proceeds from the sale of land are already included in the net cash from investing activiites. It doesn't have to be considered separately and doesn't have to be added.

Question 440

What are cash equivalents?

Answer 440

Cash eqiuvalents are highly liquid, short-term investments that can be easily converted to cash and have an original maturity date of 3 months or less. Examples: T-Bills, money market funds, CDs (less than 3 mo)

Question 441

Are cash equivalents included in statement of cash flows?

Answer 441

No - cash equivalents are excluded from Statement of Cash Flows because they don't affect the total cash balance.

Question 442

What is the primary puprose of Statement of Cash Flows?

Answer 442

The Statement of Cash Flows is used to track and report actual cash movements during a specific accounting period. It provides a detailed breakdown of how cash is received and spent through operating, investing, and financing activiites.

Question 443

What does the operating activities section of Statement of Cash Flow entail?

Answer 443

Operating: cash generated from core business operations

Question 444

What does the investing activities section of Statement of Cash Flow entail?

Answer 444

Investing: cash spent on or received from investments (e.g., property, equipment, securities)

Question 445

What does the financing activities section of Statement of Cash Flow entail?

Answer 445

Financing: cash raised from or returned to investors (e.g., issuing stock, repaying debt)

Question 446

When the indirect method is used to prepare the Statement of Cash Flows, how is the amortization of bond discount factored in?

Answer 446

Bond discount amortization increases interest expense, which reduces net income. But since this is a non-cash expense, this is added back to net income.

Question 447

Why do you add back the bond discount amortization in the indirect method?

Answer 447

When the bond is issued at a discount, the company receives less cash than face value. The full discount isn't immediately expensed, but is amortized over the bond's life. Siince the amortization reduces net income but doesn't use cash, it is added back in the operating section of the Statement of Cash Flows. The purpose of this is to reconcile accural accounting with cash accounting -- to ensure they match.

Question 448

Is the indirect method used in investing and financing activities?

Answer 448

No - indirect method is only used in operating activities

Question 449

What supplemental disclosure is not required when the indirect method is used?

Answer 449

Reconciliation of net income to net cash provided by operating activities is not required under indirect method; it is required under direct method.

Question 450

Why do we subtract the gain on sale of equipment in the operating section?

Answer 450

When using the indirect method for the statement of cash flows, we start w/ net income. Since net income includes the gain on sale of equipmenet, we need to remove it from the operating section since it's reported in the investing section. This is to avoid double-counting.

Question 451

Do you add/subtract increase in accounts payable?

Answer 451

Add it: if AP increased, it means the company hasn't paid its bills yet, so it kept the cash. This boost operating cash flow.

Question 452

What section does capital expenditures belong in?

Answer 452

Investing activities CapEx: acquiring or upgrading PPE

Question 453

In a statement of cash flows, if equipment is sold at a gain, the amount shown as a cash infklow from investing activities equals the carrying amount of the equipment:

Answer 453

plus the gain the tax part is part of the operating activities

Question 454

What activities fall under financing activities?

Answer 454

Transactions that involve raising capital (debt or equity) or returning capital to investors Financing cash inflow: issuance of stock, issuance of bonds or notes payable, borrowing from banks, borrowing under line of credit Financing cash outflow: dividends paid to shareholders, repayment of debt, treasury stock repurchases, principal (not interest) payments on notes payable

Question 455

What activities fall under investing activities?

Answer 455

Transactions related to acquiring or disposing of long-term assets, note receivable (since you are the lender) Investing cash inflow: sale of PPE, sale of long-term investments (AFS, HTM) Investing cash outflow: purchasing property, purchasing long-term investments, purchase of bonds payable

Question 456

Why is the conversion of preferred stock into common stock a noncash financing disclosure?

Answer 456

The conversion of preferred stock into common stock a noncash financing disclosure because it doesn't involve the actual movement of cash. It just reclassifies it from preferred stock to common stock.

Question 457

How is an increase in capital lease payable treated in Statement of Cash Flows?

Answer 457

This is a non-cash financing transaction and is only disclosed in the statement of cash flows. It doesn't affect the financing section of cash's balance.

Question 458

How does the indirect method adjust for gains and losses when preparing the operating section of Statement of Cash Flows?

Answer 458

The indirect method starts with net income and adjusts for non-cash items. Gains: subtracted because they increased net income, but didn't generate cash Losses: added back because they reduced net income, but didn't use cash

Question 459

Why are cash paid for interest and cash paid for income tax a supplemental disclosure?

Answer 459

Interest paid and income taxes are included in net income under accrual accounting, but the actual cash payments are not always evident in operating cash flows.

Question 460

Why are cash paid for interest and cash paid for income tax positive in supplemental disclosure?

Answer 460

The positive number for cash paid for income taxes in supplmental disclosure are presented as absolute value to provide additional clarity without affecting the actual calculation

Question 461

Is compensation expense (stock options as part of compensation) a cash event?

Answer 461

Compensation expense reduces net income. The indirect method starts with net income and anything (depreciation expense, compensation expense, etc.) that doesn't actually reduce net income (where no cash actually leaves) needs to be added back.

Question 462

Where in the statement of cash flows if someone pays for land in stock shares?

Answer 462

Supplementary disclosures

Question 463

Does an interest payment have an adjustment to net income?

Answer 463

Operating, and no because it was already deducted from net income on the income statement

Question 464

Does dividends received have an adjustment to net income? Where in the Statement of Cash Flows is it listed?

Answer 464

Operating, and no because it was already included in net income as part of the income statement

Question 465

Does dividends paid have an adjustment to net income? Where in the Statement of Cash Flows is it listed?

Answer 465

Financing (because it's part of the deal for people to invest in your company), and no because it is not an expense -- it is a distribution of profits

Question 466

Why does capital expenditure not have an adjustment to net income?

Answer 466

Capex: acquire, upgrade, extend life of PPE. They are not recorded as an immediate expense on the income statement. They are capitalized as an asset and gradually amortized or depreciated, affecting net income over time. Examples of CAPEX: new machinery. When the new machinery is purchased, debit PPE and credit cash. As time goes on, debit Depreciation Expense and credit Acc. Dep. The $5K depreciation expense is what reduces net income.

Question 467

What does intraperiod tax allocation involve?

Answer 467

Intraperiod tax allocation involves the total tax provision for financial accounting purposes in a period between the income and loss from IDA PUFI

Question 468

What are the differences between permanent differences vs temporary differences?

Answer 468

Permanent differences: only affect current period Temporary differences: first recognized for tax purposes and then recognized for GAAP purposes

Question 469

How do you find the total tax expense for the finanical statements?

Answer 469

Total tax expense = current tax +/- deferred taxes

Question 470

Permanent differences are either...

Answer 470

Permanent differences are either a) nontaxable (municipal, state income; life insurance premium) b) nondeductible (dividends-received deduction; avoid triple-taxation) c) special tax allowances

Question 471

What are DTL?

Answer 471

You Like DTL TAX < BOOK DTL: pay tax later or deduct expense sooner; current taxable income < current book income; future taxable income> future book income (when temporary differences reverses) You recognize the tax on the book first, but you pay it later.

Question 472

What are examples of DTL (income vs. expenses)?

Answer 472

DTL income examples: installment sales, contractors accounting, undistributed dividends DTL expense examples: depreciation expense, prepaid expenses, amortization of a franchise

Question 473

What are DTA?

Answer 473

You don't like DTA TAX > BOOK You pay tax first, but it is on the books later

Question 474

What are examples of DTA (income vs. expenses)?

Answer 474

DTA income examples: prepaid rent, prepaid interest, prepaid royalties DTA expense examples: bad debt expense, warranty expense

Question 475

Why would you want your taxable income to be less in your earlier years?

Answer 475

1. improve cash flow - cash used to pay taxes can be reinvested into the business 2. tax deferral strategy - in later years, when depreciation is lower, it might put the business in a lower tax bracket

Question 476

Is money today worth more today or in the future?

Answer 476

TODAY - you can invest your money today and earn returns. $1 today is worth less in the future because of inflation

Question 477

What is the purpose of a DTA valuation allowance account?

Answer 477

Valuation allowances reduce DTA when the company won't utilize the DTA in the future. If circumstances change, the amount of the valuation allowance may need to be adjusted . The effect of a change in opening balance of a valuation allowance is recognized as a chagne in income from continuning operations.

Question 478

What is the asset and liability approach?

Answer 478

The asset and liability approach is used to determine income tax expense. The asset and liability approach is used to squeeze out the amount of income tax expense after the amount of deferred tax assets and liabilities have been determined.

Question 479

How do you find the deferred tax expense?

Answer 479

Deferred tax expense = DTL - DTA

Question 480

How do you calculate effective tax rate?

Answer 480

Effective tax rate = tax expense / net income before taxes

Question 481

What is a temporary difference?

Answer 481

Temporary = TIMING Temporary difference occurs when income or expenses are recognized at different tiems for book purposes vs. tax purposes.

Question 482

Why does accruing warranty costs for financial reporting purposes create a deferred tax asset?

Answer 482

Accruing warranty costs for financial reporting purposes creates a DTA because the costs are expensed earlier under GAAP than they are deductible for tax purposes.

Question 483

How do you find income tax expense if you have a DTL and income tax payable?

Answer 483

Income tax expense = income tax payable + DTL You add it because you pay more tax in the future

Question 484

How do you find income tax expense if you have a DTA and income tax payable?

Answer 484

Income tax expense = income tax payable - DTA You subtract it because you pay less tax in the future

Question 485

What is the enacted tax rate useful for?

Answer 485

The current tax rate is for the current year. The enacted tax rate is the rate used for temporary differences (DTA and DTL)

Question 486

If a company loses money, does it create a DTL or DTA?

Answer 486

If a company incurs a loss, it may be able to use the loss to offset future taxable income --> creating a DTA

Question 487

DTA arises when taxable income is expected to be higher or lower, in future?

Answer 487

DTA arises when taxable income is expected to be lower in the future due to deductible temporary differences

Question 488

Explain DTA in the context of prepaids

Answer 488

Prepaids for book: initally recorded as an asset and expensed over time as the asset is used Prepaids for tax: prepaids are expensed in full in the current year, leading to a lower taxable income in current period and higher taxable income in future periods (the expense was already deducted in current period) --> creating a DTA

Question 489

What is the relationship between DTA and income tax payable?

Answer 489

DTA can reduce future income tax payable

Question 490

What is the relationship between DTA and income tax expense?

Answer 490

DTA can reduce future income tax payable, thus reducing income tax expense

Question 491

What is the relationship between DTL and income tax payable?

Answer 491

DTL can increase future income tax payable (postponing the tax liability to the future)

Question 492

What is the relationship between DTL and income tax expense?

Answer 492

DTL can increase future income tax payable, thus increasing future income tax expense

Question 493

What is the basic journal entry when there is an operating loss?

Answer 493

Debit: DTA Credit: income tax benefit

Question 494

Where on the balance sheet is income tax receivable classfied as?

Answer 494

Current asset

Question 495

What is the more-likely-than-not standard?

Answer 495

Greater than 50%

Question 496

What are the tax rules for NOL created in 2018, 2019, 2020?

Answer 496

Carried back: 5 years Carried forward: indefinitely Not subject to taxable income limitation

Question 497

What are the NOL rules beginning 2021?

Answer 497

NOLs carried forward limited to 80% of taxable income

Question 498

How to find income tax refund or due?

Answer 498

Gross income - above-the-line deductions = AGI AGI - standard or itemized deductions = Taxable income Taxable income * tax bracket = Tax due Tax due - tax credits = final tax liability Final tax liability - taxes paid/withheld = tax refund or due

Question 499

What is the difference beteween above-the-line deductions and below-the-line deductions?

Answer 499

Above-the-line deductions: reduce AGI, may lower tax bracket and unlock more tax benefits Below-the-line deductions: reduce taxable income and directly reduce tax liability

Question 500

What balance sheet account should be income tax refund receivable?

Answer 500

Current asset

Question 501

What is dividend received deduction?

Answer 501

An exclusion of dividends being taxed based on % ownership of company to avoid triple taxation

Question 502

What are the DRD tax brackets?

Answer 502

Ownership 0-19% -> 50% exclusion Ownership 20-80% -> 65% exclusion Ownership over 80% -> 100% exclusion

Question 504

Is a DRD a permanent difference?

Answer 504

Yes

Question 505

Senlo, which uses a one-year operating cycle, recognized profits for both financial statement and tax purposes during its 2 years of operation. Depreciation for tax purposes exceeded depreciation for financial statement purposes in each year. These temporary differences are expected to reverse in Year 3, 4, and 5. At the end of Year 2, the deferred tax liability shown as a non-current liability is based on:

Answer 505

Enacted tax rate expected to apply to annual income for years 3, 4, and 5 (the years when the liability is settled).

Question 506

Can NOLs be applied to future (not completed) transactions?

Answer 506

No- NOLs cannot be applied to transactions that have not been completed

Question 507

A carryback results in what balance sheet account?

Answer 507

NOL carryback results in a claim for refund for past taxes, which is income tax receivable (not DTA)

Question 508

How do you calculate income tax benefit for carryforwards?

Answer 508

Tax benefit = carryforward * appropriate tax rate

Question 509

What do you do the NOL carryforward after 2021?

Answer 509

1. Limited to 80% taxable income 2. Determine taxable income before NOL 3. Calculate maximum taxable income to be used 4. Determine taxable income after applying NOL 5. Calculate tax benefit

Question 510

How do you find temporary difference?

Answer 510

Temporary difference = book income - taxable income

Question 511

How to find DTL?

Answer 511

DTL = temporary difference * future tax rate

Question 512

Why is warranty expense a DTA?

Answer 512

Book: expense is recorded when product is sold Tax: expense is only deductible when warranty work is performed You pay more tax now, but will pay less tax later (DTA)

Question 513

On the Balance Sheet, how do you find the DTA or DTL to report?

Answer 513

- All DTA and DTL must be offset (netted) - Presented as one-amount, either a net non-current DTA or DTL - Start with the greater and subtract the smaller

Question 514

Is the DRD permanent or temporary?

Answer 514

Permanent

Question 515

Is installment sales DTL or DTA?

Answer 515

DTL

Question 516

What balacne sheet account is the valuation allowance account?

Answer 516

Contra-asset A decrease in valuation allowance means that the company is doing well and won't use the deferred tax assets in the future. A decrease in valuation allowance -> increase in income tax expense

Question 517

Where do non-for-profits get revenue?

Answer 517

Contributions from donors, members, others who provide resources

Question 518

What are the 4 types of not-for-profits?

Answer 518

1. Health care orgs 2. Education institutions 3. Voluntary health and welfare orgs 4. Not-governmental orgs

Question 519

What should be provided in not-for-profit financial statements?

Answer 519

1. Statement of Financial Position: amount/nature of orgs, A, L and NET ASSETS 2. Statement of Activities: effects that change net assets, inflows/outflows within a period, relationship between inflows/outflows 3. Statement of Cash Flows: how it spends cash 4. Statement of activities or notes in the financial statements: service efforts of an organization

Question 520

What are net assets without donor restrictions?

Answer 520

Contributions not restricted by donors Examples like endowment funds

Question 521

What are net assets w/ donor restrictions?

Answer 521

Specific and externally-imposed

Question 522

How should operating expenses for nongovernmental not-for-profit organization be reported?

Answer 522

Change in net assets w/o donor restrictions

Question 523

When are reclassifications of net assets done?

Answer 523

When donor restrictions are either satisfied or withdrawn

Question 524

What is a quasi-endowment?

Answer 524

Quasi-endowment: a fund that is not permanetly restricted by the donor, but it's treated like an endowment. For accounting purposes, it is w/o restrictions

Question 525

Do conditional promises represent receivable revenue or net assets before the conditions are met?

Answer 525

Conditional promises do not represent a receivable revenue or net assets until the conditions are met. For example, the promise to provide funding contingent upon securing operating funding is conditional and would not be recorded.

Question 526

What are the two restrictions that must be met for nonprofits to record the fair value of donated services?

Answer 526

1. Specialized skills 2. Otherwise purchased if not donated Recorded as revenue and expenses

Question 527

Do donor restrictions apply to expenses?

Answer 527

No - donor restrictions only apply to revenues. If the money it spent, the net amount is w/o restrictions

Question 528

Do endowment funds released from restrictions have value?

Answer 528

No - endowment funds were not and usually not released from restrictions. This is not a financial statement classification

Question 529

What are investing activities for non-profits?

Answer 529

Include: proceeds from sale of long lived assets or insurance proceeds associated with loss of long lived assets

Question 530

How should not-for-profits report amounts paid for interest in a statement of cash flows prepared using the indirect method?

Answer 530

As supplemental disclosure of cash flow information

Question 531

What statement of cash flow is this account: proceeds from sale of investments?

Answer 531

investing

Question 532

What statement of cash flow is this account: purchase of PPE?

Answer 532

investing

Question 533

What statement of cash flow is this account: proceeds from long-term debt?

Answer 533

financing

Question 534

What statement of cash flow is this account: loss on sale of investment?

Answer 534

non-cash item, added back in operating

Question 535

What are investing activities?

Answer 535

Related to acquisition or disposal of long-term assets (property, investments)

Question 536

What are financing activities?

Answer 536

Related to obtaining and repaying funding (debt, donor-contributions)

Question 537

When is a contribution recognized as revenue vs. gain?

Answer 537

Revenue: part of core business; Gain: not part of core business

Question 538

Are conditional contributions recognized?

Answer 538

No

Question 539

What is a pledge?

Answer 539

Pledge is a promise to give

Question 540

What is a good faith deposit and what is the JE?

Answer 540

Good faith deposit: accompany a conditional promise and are accounted for as a refundable advance in the liability section of the Balance Sheet. Debit: Cash Credit: Refundable advance (liability)

Question 541

What are split-interest agreements?

Answer 541

the not-for-profits receives benefits that are shared w/ other beneficiaries

Question 542

How are expenses used to get volunteers classified?

Answer 542

Fundraising expenses

Question 543

Donated collection items are not required to be recorded by the recipient not-for-profit organization if all of the following requirements are met: (3 conditions)

Answer 543

1. the item is part of a collection, which is held for: public viewing, exhibition, education, research 2. collection must be cared for and preserved by the org 3. must have a policy that the item made from the item must be reinvested into the not-for-profit

Question 544

What are gifts-in-kind?

Answer 544

nonfinancial contributions, such as land, buildings, materials, supplies, intangible assets, services, or use of facilities - Recognized as a contribution at the date of donation

Question 545

How to find gross revenue from tuition and fees?

Answer 545

Gross revenue from tuition and fees = assessed student tuition and fees - cancelled classes - scholarships - tuition waivers

Question 546

What is capitation agreement?

Answer 546

A fixed amount provided as compensation for a period

Question 547

Healthcare revenue has 3 categories

Answer 547

1. Patient service revenue 2. Operating revenue (gift shops, cafeteria, donated supplies) 3. Non-operating revenue (investments, donated services)

Question 548

How are provision for credit loss accounted for?

Answer 548

Operating expense; revenues the hospital anticipates earning

Question 549

Can you pay out money from restricted net assets?

Answer 549

No - you can only pay out money from unrestricted net assets

Question 550

Contribution revenue recognition for not-for-profit organizations is based on the concept of:

Answer 550

satisfying conditions

Question 551

How are exchange transactions accounted for?

Answer 551

Increases in net assets w/o donor restrictions

Question 552

Is charity care included in revenues?

Answer 552

No!

Question 553

How should unconditional pledges received by nongovernmental not-for-profit organizations that will be collected over more than 1 year be reported?

Answer 553

Pledges receivables, valued at their present value

Question 554

How is revenue from educational programs from a hospital classified on the income statement?

Answer 554

other operating revenues

Question 555

How is gifts w/o donor restrictions from a hospital classified on the income statement?

Answer 555

nonoperating revenues

Question 556

Proceeds from cafeteria meals is in what revenue account: anciliary service revenues or other revenues

Answer 556

Other revenues; anciliary service revenues doesn't exist

Question 557

What is the difference between interest earned vs interest received?

Answer 557

interest earned = accural; interest receieved = cash

Question 558

Can major fundraising events be shown in netted amounts?

Answer 558

No - Annual fundraising events (e.g., galas, auctions, or major donation drives) represent a significant, ongoing source of revenue for many nonprofits. Because these events are core activities, nonprofits must show gross revenues and expenses separately to give a clearer picture of fundraising efficiency.

Question 559

What are the characteristics of financially interrelated orgs?

Answer 559

Must share BOTH characteristics: 1) Has the ability to influence the operating and financial decisions of the other 2) Ongoing economic interest in net assets of the other

Question 560

How are debt securities for not-for-profits reported?

Answer 560

Fair value

Question 561

How are realized and unrealized gains and losses on investments reported on Income Statement?

Answer 561

Increases/decreases in net assets w/o donor restrictions

Question 562

What is the exception for how realized and unrealized gains and losses are to be reported in w/o donor restrictions?

Answer 562

If the use of the investment is donor-restricted by explicit donor stipulations or by law

Question 563

What if donor-restricted gains and losses happen in the same period?

Answer 563

They can be reported w/o donor restrictions

Question 564

What are some restrictions place on endowment funds?

Answer 564

Duration, if the endowment value changes, purpose (you need to use it to fund something specific)

Question 565

Underwater endowments must disclose how hard it is for their intended beneficiaries to be FED

Answer 565

F: Fair value of underwater endowment E: Endowment gift's original amount D: Deficiency

Question 566

Are works of art or historical treasures depreciated?

Answer 566

No, they are treated like land.

Question 567

When you have a foundation who is a beneficiary of a university and is financially interrelated, how would the receipts of the foundation be reported on the university's financial statements?

Answer 567

A change in the university's interest in the foundation's statement of activities

Question 568

Should brokerage fees be included in the receiving not-for-profit's statement of financial position?

Answer 568

No, they should only be recorded at fair value. Brokerage fees are reported in the donor's financial statement

Question 569

In the balance sheet of a not-for-profit hospital, marketable equity securities should be reported at:

Answer 569

Fair value with gains and losses reported in the statement of activities Gains and losses on investments are reported in the statement of activities as increases or decreases in net assets without donor restrictions unless their use is restricted by explicit donor stipulations or law.

Question 570

At what value should a nongovernmental not-for-profit organization record shares of stock when received?

Answer 570

Fair value on date of donation Donated shares of stock are measured at their fair value on the date of donation.

Question 571

Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongovernmental not-for-profit health organization. How should Belle record these funds?

Answer 571

Increase in assets and increase in liabilities. Debit: Cash (asset) Credit: Due to health-care organization (liability)

Question 572

What are the 3 fund categories?

Answer 572

1. Governemental 2. Proprietory 3. Fiduciary

Question 573

What type of accounting is governmental fund accounting?

Answer 573

Modified accrual basis

Question 574

What are the fund types of governmental funds? There are 5.

Answer 574

1. General fund 2. Special revenue fund 3. Debt service fund 4. Capital project fund 5. Permanent fund (endowment)

Question 575

What are special revenue funds?

Answer 575

Special revenue funds are fully expendable -- both principal and interest

Question 576

What are permanent funds?

Answer 576

Permanent funds are used to report resources legally restricted to extent income; like endowments

Question 577

What is the purpose of debt service fund?

Answer 577

Principal and interest is paid down by debt service fund; resources are restricted for purposes of debt service

Question 578

What is the capital project fund used for?

Answer 578

Holding money to build something or buy something that is a capital expenditure

Question 579

What are proprietary funds?

Answer 579

Business-type funds; full accrual basis

Question 580

What are the fund types of proprietary funds?

Answer 580

1. Internal service fund (internal billing) 2. Enterprise fund (customers are external; self-supported like airports)

Question 581

Enterprise funds are required when ANY of the 3 conditions are met:

Answer 581

1. Activity of the fund is financed by debt secured by pledge of fee revenue 2. Laws require collection fees adequate to recover costs 3. Pricing policies are established to produce fees to recover costs

Question 582

What is the Statement of Net Position?

Answer 582

Balance Sheet for governments

Question 583

What is Statement of Revenues, Expenses, and Changes in Fund Net Position?

Answer 583

Income Statement for governments

Question 584

What are fiduciary funds?

Answer 584

Assets where government has control over in the form of trust; full accrual

Question 585

What are the fund types of fiduciary funds?

Answer 585

1. Custodial funds: temporary custody 2. Investment trust fund 3. Private purpose trust fund: assets designated to provide purpose in form of trust 4. Pension or employee benefit fund

Question 586

For fund accounting: when do you use modified accural basis of accounting vs. accrual basis of accounting?

Answer 586

Modified accrual: current financial resrouces measurement focus Accrual: economic resources measurement focus

Question 587

What does available mean for modified accrual?

Answer 587

Under modified accrual, available means collectible within the current period or soon enough thereafter to be used to pay current period liabilities (generally within 60 days after year-end)

Question 588

For proprietary and fiduciary funds, why do they use accrual accounting?

Answer 588

Because financial reporting centers ont he costs and services which invested capital is being used

Question 589

How are governmental activities reflected on government-wide financial statements?

Answer 589

Full accrual

Question 590

What is the major difference between modified accrual and accrual when it comes to revenue recognition?

Answer 590

Modified accrual: recognize revenue in accounting period in which they become available and measurable Accrual: recognize revenue in accounting period they are earned

Question 591

What is fund accounting?

Answer 591

Enables service and mission-driven organizations to demonstrate fiscal accountability Non-profits run by governements use governmental accounting

Question 592

What is a fund?

Answer 592

A pool of money segregated for the purpose of carrying on a specific activity or attaining certain objectives in accordance w/ specific regulations, restrictions, or limitations, constituting an independent fiscal and accounting entity

Question 593

Since governmental and proprietary/fiduciary funds use different accounting, what needs to be presented?

Answer 593

Reconciliation

Question 594

What are the 3 groups that use external financial reports from government?

Answer 594

1. Citizens within the state 2. Legislative/oversight groups within the state 3. Investors/creditors within the state

Question 595

What does relevance mean?

Answer 595

It must bear logical relationship with the needs for its purpose

Question 596

What is the accounting equation for non-profits?

Answer 596

Assets + Liabilities = Net Assets

Question 597

How is purchase of equity securities classified on the Statement of CF?

Answer 597

investing - Acquisition of equity of another organization is an investing activity consistent with commercial accounting.

Question 598

What are debt covenants?

Answer 598

Debt covenants are to protect elnders and ensure their borrower can pay back the amount

Question 599

What is avoidable interest?

Answer 599

amount of interest that would have been avoided if the construction project had not taken place

Question 600

When purchasing a bond, the present value of the bond 's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

Answer 600

Price

Question 601

Can you accrue a loss that cannot be reasonably estimated?

Answer 601

No

Question 602

Do you need to include a note disclosure for non-DOG guarantee?

Answer 602

No

Question 603

Are gain contingencies accrued?

Answer 603

No because they might reverse

Question 604

What is the nominal or stated value of a bond, which is typically the amount the issuer agrees to pay the bondholder at maturity?

Answer 604

Par

Question 605

What is the periodic coupon payments made by the bond issuer to the bond holder, typically expressed as a percentage of the bond's par value?

Answer 605

Interest

Question 606

What is the return an investor can expect to earn from the bond, based on its price, coupon payments, and maturity?

Answer 606

Yield

Question 607

Explain the difference between net method and gross method of recording accounts payable

Answer 607

Gross method of AP: records a purchase w/o regard to the discount. When invoices are paid within the discount period, a purchase discount is credited. Net method: purchases and AP are recorded net of discount. If payment is made w/in discount period, no adjustment is necessary.

Question 608

What types of costs are associated with exit and disposal activities?

Answer 608

- Involuntary employee termination benefits - Costs to terminate a contract that is not a capital base - Costs to consolidate facilites - Costs to relocate employees

Question 609

Define an Asset Retirement Obligation (ARO)

Answer 609

a legal obligation associated with the retirement of a tangible long-lived asset that results from acquisition, construction, development, and/or normal operation of a long-lived asset

Question 610

How is ARO measured?

Answer 610

At fair value as an asset and liability

Question 611

What is the accounting treatment of gain contingencies?

Answer 611

Gain contingencies aren't reflected on the balance sheet, but are disclosed as their nature and amount if likelihood is probable and to do so wouldn't be misleading

Question 612

Identify the 3 ranges of likelihood that a future event will confirm a contingent liability

Answer 612

1. Probable 2. Reasonably possible 3. Remote

Question 613

When are contingent liabilities accrued?

Answer 613

- When a loss is both probable and can be reasonably estimated, then record and disclose - Financial statement disclosure only for reasonably possible contingent losses - Remote contingent losses aren't disclosed unless they are 'guarantee-type' contingent losses, which must be disclosed

Question 614

Premiums, warranties, and service contracts are examples of estimated liabilities. When are the liabilities for these types of expenses recorded and why?

Answer 614

Recorded in the same period as the revenue associated with various transactions in order to accomplish matching costs and revenues

Question 615

What is the equation to calculate the PV of $1?

Answer 615

PV = FV / (1+r)^n

Question 616

What is the difference between ordinary annuity and annuity due?

Answer 616

Ordinary: end of period Annuity due: beg of period

Question 617

How are notes payable recorded in the financial statements?

Answer 617

PV at date of issuances If a note is non-interest bearing or the interest rate is below market, the value of note must be the effective interest method

Question 618

What is the effective interest rate method?

Answer 618

Each payment on note would be divided as an interest component and principal componet as though the note had a constant effective stated rate

Question 619

How are premiums or discounts resulting from recording notes payables and notes receiables at present value be presented in the financial statements?

Answer 619

Premium or discount are added to (or deducted from) their related asset or liability on the balance sheet

Question 620

Why do creditors use debt covenants in lending agreements and how could this impact the issuer?

Answer 620

Debt covenants are used to protect the lender and it may restrict certain management activities (i.e., selling assets)

Question 621

When is a bond issued at a discount? A premium?

Answer 621

Discount: coupon rate < market rate Premium: coupon rate > market rate

Question 622

How is the bond selling price computed?

Answer 622

Price = sum of present value of future principal payment + present value of periodic interest payments discounted using effective interest rate method on the date the bonds are issued

Question 623

What is the preferred method of accounting for bond issuance costs under GAAP?

Answer 623

Deducted from the carrying amount of the liability and amortized using the effective interest method

Question 624

Name 2 methods of amortizing bond premium (discount)

Answer 624

1. Straight-line method: premium (discount) / # of periods outstanding 2. Effective rate method: premium (discount) amortized = (carrying value * effective rate) - (face value * stated rate) interest expense = (face value * stated rate) + discount amortized - premium amortized = carrying value * effective rate

Question 625

What are the major disclosures for long-term debt?

Answer 625

1. Maturity dates 2. Interest rates 3. Call and conversion privileges 4. Assets pledged as security 5. Borrower-imposed restrictions

Question 626

Name 4 types of restructurings involving debt

Answer 626

1. Transfer of assets 2. Transfer of equity interest 3. Modification of terms 4. A combination of the above three

Question 627

How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?

Answer 627

1. Restate the assets transferred to fair value and recognize a gain or loss in ordinary income 2. Recognize a gian for the difference between the fair value of assets transferred and the carrying amount of the debt forgiven

Question 628

How is the gain (loss) measured in a troubled debt restructuring involving the modification of terms?

Answer 628

Difference between carrying amount of the obligation prior to the restructuring and undiscounted total future cash flows required after restructuring, if undiscounted future cash flows are less than the carrying amount

Question 629

When is a loan considered impaired?

Answer 629

When it is probable that all amounts due under the original contract will not be received when due

Question 630

How is the loss incurred as a result of a modification of terms of an impaired loan reported by the creditor?

Answer 630

Amount of loss = present value of the loan's expected future cash flows discounted at the loan's effective interest rate minus the carrying value of the loan before the modification of terms Debit: Bad Debt Expense Credit: Allowance for Credit Losses

Question 631

When is a liability considered extinguished?

Answer 631

When either one of the following conditions are met: 1. Debtor pays the creditor and is relieved of its obligations for the liability 2. Debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor

Question 632

Define in-substance defeasance

Answer 632

An arrangement in which a company places purchased securities into an irrevocable trust and pledges them for the future principal and interest payments on its long-term debt Company remains the primary obligor; therefore the liability isn't considered extinguished

Question 633

How is gain or loss on an early extinguishment of debt treated?

Answer 633

Gain or loss on the income statement, shown as a separate line item, if material, in income from continuing operations Gain or loss = net carrying value (incl unamortized bond issuance costs and premium or discount) - reacquisition price of debt

Question 634

Identify and define a lease and the parties to a lease

Answer 634

Lease: contract, asset, which the lessor doesn't have a substantive substitution right, gives the lessee the right to use it and obtain the economic benefits from the asset over the lease term Parties of a lease: lessor conveys the right to use the asset to the lessee, who agrees to pay consideration for this right over the lease term

Question 635

Describe the two options that the lessee has for accounting for a contract that has lease and nonlease components

Answer 635

Option 1) treated as separate units of account from nonlease components within the same contract Option 2) may be combined with a related nonlease component within the same contract to be treated as a single unit of account

Question 636

Name the different types of lease classifications application to lessees

Answer 636

Operating or finance lease

Question 637

Name the criteria for determining whether a lease is a finance lease for the lessee

Answer 637

Any of the OWNES critera - ownership, written, net persent value, economic life

Question 638

Describe the classification of a lease for a lessee if none of the OWNES criteria are met

Answer 638

operating; also if lease is short-term, operating

Question 639

How long is the period covered by a lease and how are options to extend or terminate a lease handled?

Answer 639

Lease begins at commencement date (when the asset is available for use) and extends till the end of the noncancelable period Lease term will account for an: - option to extend if lessee is reasonably certain to exercise the option - option to terminate if the lessee is reasonably certain not to exercise - option to extend (or not to terminate) if the decision is controlled by the lessor

Question 640

What components will be included and excluded from lease payments?

Answer 640

Lessee lease payments will include: REPORT - required contractual fixed payments - exercise option - purchase price at end of the lease - only indexed or rate variable payments - residual guaranteed likely to be owed - termination penalties Lessee lease may or may not include: nonlease components Lessee lease specifically exclude: guarantees of lessor debt by lessee

Question 641

What rates should the lessee use to calculate the present value of minimum lease payments?

Answer 641

implicit rate; if implicit rate not known, use borrowing rate

Question 642

Which initial direct costs are included/excluded in the valuation of ROU asset?

Answer 642

include: initial direct costs incurred as a resutl of execution of the lease exclude: costs incurred prior to signing the lease (document preparation, credit checks, etc.)

Question 643

How does a lessee account for an operating lease?

Answer 643

W/ an operating lease, the lessee will record a ROU asset and a lease liability on the balance sheet ROU asset will be amortized as the lease liability is paid down over the life of the lease On the income statement, lease expense will be recognized each lease over the lease term

Question 644

List the initial and subsequent journal entries recorded by a lessee when the lease qualifies as an operating lease

Answer 644

Initial Entry Debit: ROU asset Credit: Lease liability Subsequent Entries Debit: Lease expense Credit: Cash/lease liability

Question 645

How does a lessee account for a finance lease?

Answer 645

W/ a finance lease: lessee will record both an ROU asset and a lease liability on its balance sheet. Each lease payment will consist of interest and principal pay down. Interest expense will be shown on the income statement and the reduction of the liability will be reflected on the balance sheet.

Question 646

List the initial and subsequent journal entries recorded by a lessee when the lease qualifies as an finance lease

Answer 646

Initial Entry Debit: ROU asset Credit: Lease liability Subsequent Entries Debit: Interest expense Credit: Lease liability

Question 647

Over what period will the lessee depreciated the leased asset under a finance lease?

Answer 647

Asset's useful life (if any of the O or W criteria is met): if ownership transfers to the lessee or if the lease is reasonably certain to exercise an option to purchase the asset Shorter of the lease term or asset's useful life: if any of the NES criteria is met

Question 648

Describe the accounting policy election that lessees can make regarding the balance sheet treatment of leases

Answer 648

For leases w/ terms 12 mo or less: lessee cna make an accounting policy election and choose not to recognize ROU assets or lease liabilities The election must be made by class of underlying asset, and leases falling into this category cannot include purchase options for the asset that the lessee would reasonably certain to exercise

Question 649

For finance and operating leases, which cash flows are treated as operating cash flows?

Answer 649

Finance: interest paymetns or any variable or short-term lease payments not included in the lease liability (principal payments are in the financing category) Operating: lease payments, variable lease paymetns, short-term lease payments are all treated as cash flow from operations

Question 650

What is the formula for COGS?

Answer 650

COGS = beg inventory + purchases - ending inventory

Question 651

Are multi-year pledges w/ donor restrictions or w/o donor restrictions

Answer 651

w/ donor restrictions

Question 652

Is permanent endowment w/ donor restrictions or w/o donor restrictions?

Answer 652

w/ donor restrictions: A permanent endowment would be classified on the financial statements as with donor restrictions. The corpus (principal) cannot be touched. Although the Accounting Standards Codification refers to this arrangement as an endowment fund for accounting purposes, the reporting classification on the financial statements would be with donor restrictions.

Question 653

What is the amortization expense for assets w/o finite useful life?

Answer 653

0, but tested for impairment

Question 654

What is the JE for purchase of a trademark?

Answer 654

Debit: Intangible asset - trademark Credit: Cash or AP

Question 655

What is the JE for research and development costs?

Answer 655

Debit: R&D Expense Credit: Cash or AP

Question 656

What is the JE for costs related unsuccessful defense of a patent?

Answer 656

Debit: Legal expense Credit: Cash or AP

Question 657

What is the JE for internally generated goodwill?

Answer 657

Debit: Marketing expense Credit: Cash or AP

Question 658

In what situations can litigation costs be capitalized?

Answer 658

If the patent right is successfully defended and captialized + amortized over the patent's remaining economic life

Question 659

What is the weighted average accumulated expenditures method?

Answer 659

Used to figure out how much interest is capitalized under GAAP WAAE = (construction expense) * (months outstanding) If a Specific Loan Exists: If the company has a loan specifically for the construction project, it applies that loan’s interest rate to the amount of WAAE up to the loan amount. If WAAE Exceeds the Specific Loan Amount: Any excess WAAE (above the specific loan amount) is financed using general company borrowings (such as other loans or bonds). The company applies a weighted average interest rate of these general borrowings.

Question 660

Should costs incurred to install or improve an asset be capitalized or expensed?

Answer 660

Capitalized because they provide future eocnomic benefits

Question 661

What is the formula to calculate DV-LIFO index?

Answer 661

Index = ending inventory at current costs / ending inventory at base year cost

Question 662

When can a short-term obligation be excluded from current liabilities and classified as noncurrent debt?

Answer 662

A short-term obligation is classified as noncurrent debt if: 1) The company intends to refinance it on a long-term basis 2) The intent is supported by either: noncancelable financing agreement or actual refinancing before the financial statements are issued

Question 663

Are probable gains accrued or disclosed?

Answer 663

Probable gains are only disclosed, not accrued

Question 664

What is the principal payment amount?

Answer 664

Principal payment amount is the face value of the bond

Question 665

Is disposal of land and buildings an exit cost?

Answer 665

No

Question 666

How does a company increase their EPS?

Answer 666

They increase treasury stock shares (buy back their own stock)

Question 667

When is a warrant in the money vs out of the money?

Answer 667

In the money: market price > strike price Out of the money: market price < strike price

Question 668

How are investments in debt securities reported when the company has positive intent and ability to hold them to maturity, and the market value exceeds carrying amount at year-end? (Specify for long-term and short-term marketable debt securities.) Options: A. Carrying amount / Carrying amount B. Carrying amount / Market value C. Market value / Market value D. Market value / Carrying amount

Answer 668

✅ Answer: A. Carrying amount / Carrying amount Explanation: Debt securities intended to be held to maturity are reported at carrying amount (amortized cost), not market value. This applies to both long-term and short-term holdings. Exception: If there’s a permanent decline in value, then the carrying amount would be adjusted.

Question 669

How are multiyear unconditional pledges recorded and recognized by nonprofits? (Think about revenue timing, donor restrictions, and future payments.)

Answer 669

Multiyear unconditional pledges are recorded at net present value when the pledge is made (Year 1). Revenue is fully recognized in the year the pledge is made, not when payments are received. Future payments are classified as with donor restrictions and reclassified when collected — reclassifications are not new revenue. No additional revenue is recognized in later years unless for discount accretion (a separate accounting entry).

Question 670

How should donated property be recorded by a nonprofit organization? (What value is used, and how is it reported in the financial statements?)

Answer 670

Donated property is recorded at its fair market value. The value is recognized as support (not revenue). It is reported as an increase in assets on the Statement of Financial Position and as support on the Statement of Activities.

Question 671

What does net patient service revenue compose of?

Answer 671

Net patient service revenues reported on a hospital statement of activities are comprised of gross earnings net of contractual allowances and exclude charity care.

Question 672

When is the fair value method used for investments in non-voting stock?

Answer 672

The fair value method is used when investing in non-voting stock because non-voting shares do not allow the investor to exercise significant influence. Without significant influence, the equity method cannot be applied.

Question 673

Which method of treasury stock accounting is used 95% of the time?

Answer 673

The cost method is used approximately 95 percent of the time by firms accounting for treasury stock transactions.

Question 674

Why should unbilled fees be accrued at year-end?

Answer 674

Unbilled fees must be accrued because they relate to services performed during the current year (Year 1), even if billed later. Under accrual accounting, expenses are recorded when incurred, not when paid or billed.

Question 675

Is freight-in or freight-out included in inventory cost? Which one is a selling expense?

Answer 675

Freight-in → Included in inventory cost (cost to get goods ready for sale) Freight-out → Selling expense (cost to deliver goods to customers) Memory trick: "Freight-IN" = INventory "Freight-OUT" = OUT to customer → Selling Expense

Question 676

When are consigned goods counted as sales?

Answer 676

Consigned goods are counted as sales only when the consignee sells them to an external customer. Until then, they remain part of the consignor’s inventory and are not recognized as sales.

Question 677

When accumulated expenditures exceed available borrowing funds, how is capitalized interest computed?

Answer 677

When accumulated expenditures exceed available borrowing funds, the weighted average interest rate on the entity’s other debt is applied to the excess amount.

Question 678

What is the method for determining capitalized interest cost?

Answer 678

Capitalized interest cost is determined by applying an interest rate to the average amount of accumulated expenditures on the qualifying asset for the period.

Question 679

Can interest income from unused portions of a construction loan offset capitalized interest costs?

Answer 679

No, interest income from unused portions of a specific loan cannot be used to reduce capitalized interest costs for a period.

Question 680

Can capitalized interest on a qualifying asset exceed the actual interest cost incurred during the period?

Answer 680

No, capitalized interest on a qualifying asset cannot exceed the actual interest costs incurred during the period.

Question 681

When measuring a firm’s ending inventory, why is the dollar-value LIFO be greater than the comparable base-year value?

Answer 681

When the price index is greater than 1.0, dollar-value LIFO will be greater than the comparable base-year amounts.

Question 682

With DV-LIFO, is this true?

Answer 682

Yes - True, the beginning inventory in Year 1 is the same amount under dollar-value LIFO and the base-year cost.

Question 683

On November 1, Year 1, Davis Co. discounted with recourse at 10% a one-year, noninterest bearing, $20,500 note receivable maturing on January 31, Year 2. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, Year 1? A. $20,333 B. $0 C. $20,000 D. $20,500

Answer 683

Answer: D. $20,500 Explanation: The note was discounted with recourse, meaning Davis Co. is contingently liable for the full amount of the note. Therefore, the full face value of the note, $20,500, must be disclosed as a contingent liability in the financial statements for the year ended December 31, Year 1.

Question 684

What is the installment method?

Answer 684

The installment method is a method of revenue recognition for tax purposes where gross profit is recognized only when cash is collected. It defers taxable income over the periods when payments are received, rather than recognizing all the income at once (like accrual accounting). For financial reporting (GAAP), companies usually use the accrual method, recognizing revenue when earned, not when collected.

Question 685

What is the JE for a lawsuit loss that is probable and can reasonably estimated ($190K)?

Answer 685

Debit: Lawsuit Loss (Expense) = $190K Credit: Lawsuit Liability (Accrued Liability) = $190K

Question 686

Are progress billings and/or income previous recognized used to calculate revenue recognized?

Answer 686

Only income previous recognized are needed to calculate revenue recognized Progress billings are not needed to calculate revenue recognized

Question 687

Are shipping and installation costs are capitalized or expensed?

Answer 687

Capitalized.

Question 688

Do shipping costs, installation costs, and down payment need to be discount to present value or do you pay it without putting it down to present value?

Answer 688

You only discount future payments that you haven't paid yet — payments you will make over time (like long-term notes, leases, or future installments). Immediate payments (like shipping, installation, down payment) are not discounted.

Question 689

Do dividends reduce net income or retained earnings or both?

Answer 689

Dividends only reduce retained earnings You earn money -> that's net income You choose to pay some of that to owners -> that's dividends What's leftover is retained earnings

Question 690

For a manufacturing company, what 3 components do COGS entail?

Answer 690

1. Raw materials used 2. Direct labor 3. Factory overhead