FAR 4-5 - Sheet1 Flashcards
Q1501. The Return on Sales = Net Income / Sales and tells you what?
A1501. How much the company profits from each dollar of sales.
Q1502. The Asset Turnover = Sales / Total Assets and tells you what?
A1502. It gives an overall measure of the company’s efficiency (For each dollar of assets, how many dollars does it generate in sales?)
Q1503. Return on Equity = Net Income / Stockholder’s Equity and tells you what?
A1503. Number of pennies earned during the year on each dollar invested
Q1504. Price Earnings Ratio = Market Value of Shares / Net Income
A1504. Amount investors are willing to pay for each dollar of earnings; indication of growth potential
Q1505. The _________ ratio is the single measure that summarizes the financial status of a company.
A1505. Return on Equity = net income / equity
Q1506. DuPont framework breaks down Return on Equity how?
A1506. ROE = profitability x efficiency x leverage return on sales x asset turnover x assets to equity ratio net income/sales x sales/assets x assets/equity
Q1507. When the DuPont framework shows a problem with profitability, where should you look to find expenses to manage?
A1507. The Common Size income statement can provide a year over year look at expense that may be growing and thus driving down profitability.
Q1508. Average Collection Period
A1508. Average receivables / average daily sales
Q1509. Average daily sales
A1509. Sales / 365
Q1510. Average receivables
A1510. Beginning receivables balance + ending balance / 2
Q1511. The Number of days’ sales in inventory is average inventory / average daily cost of goods sold and tells you what?
A1511. The average number of days of sales that can be made using only the supply of inventory on hand.
Q1512. Fixed Asset Turnover is computed as sales / average fixed assets and tells you what?
A1512. The number of dollars in sales generated by each dollar of fixed assets.
Q1513. Return on Assets is computed as net income / total assets and tells you what?
A1513. The number of pennies made on each dollar of assets.
Q1514. What is another name for a company’s Profit?
A1514. Margin
Q1515. The degree to which assets are used to generate sales is called…
A1515. turnover
Q1516. These are an indication of the extent to which a company is using other people’s money to purchase assets…
A1516. Leverage Ratios
Q1517. What do you call borrowing that allows a company to purchase more assets than its stockholders are able to pay for through their own investments?
A1517. Leverage
Q1518. Debt ratio = total liabilities / total assets and tells you what?
A1518. the percentage of total funds, both borrowed and invested that a company acquires through borrowing.
Q1519. Debt to Equity ratio = total liabilities / total equity and tells you what?
A1519. the number of dollar of borrowing for each dollar of equity investment.
Q1520. Times interest earned = income / interest expense for the period and tells you what?
A1520. The number of times the company can make its interest payments - a higher number reflects a greater likelihood that the company can meet future interest obligations.
Q1521. There are two factors that help make financial ratios useful - what are they?
A1521. When ratios can be benchmarked to comparable values for the same company in prior years Ratio values for other companies in the same industry are available.
Q1522. In the US, what usually is the first asset listed on the Balance Sheet?
A1522. cash
Q1523. Around the world, what usually is the first asset listed on the balance sheet?
A1523. long term assets
Q1524. Accountants use their judgment to report two items on the balance sheet - what are they?
A1524. Recognition - what is listed and what isn’t? Valuation - what dollar amounts to associate with the listed items
Q1525. What do you call a listing of an organization’s assets and of its liabilities at a certain time?
A1525. Balance Sheet
Q1526. What do you call the difference between assets and liabilities?
A1526. Equity
Q1527. Define a current Asset
A1527. Assets expected to be used and liabilities expected to be paid or otherwise satisfied, within a year are current items. The most common are cash, accounts receivable and inventory.
Q1528. What do you call amounts owed to a business by its credit customers that are usually collected in cash within 10 to 60 days?
A1528. Accounts receivable
Q1529. What do you call goods held for sale in the normal course of business?
A1529. Inventory
Q1530. Why would a company pre-pay an expense?
A1530. By paying for an expense in advance now, a business is able to conserve cash that otherwise would have had to be spend in the future.
Q1531. Name some common long-term assets
A1531. investments; property, plant and equipment; intangible assets
Q1532. What is depreciation?
A1532. The wear and tear of items since they were originally purchased.
Q1533. What are intangible assets?
A1533. assets that have no physical or tangible characteristics: agreements, contracts, rights that provide economic benefits to a company by permitting the use of a certain production process; trade name or similar item. patents, trademarks, copyrights, franchises, and goodwill.
Q1534. What is goodwill?
A1534. When one company buys another and pays more than the value of the identifiable assets of the acquired company.
Q1535. What are current liabilities?
A1535. Those obligations to be paid within one year, the most common being accounts payable.
Q1536. What are short-term loans payable?
A1536. formal, interest bearing loans that are expected to be paid back within one year.
Q1537. Is the current portion of long-term debt considered a short term liability?
A1537. Yes. The portion of the liability that is payable within the 12 months from the balance sheet date is classified as a current liability.
Q1538. What is unearned revenue?
A1538. A company’s obligation to provide service to customers who have paid the company for a service they have not yet received.
Q1539. Name some examples of long-term debt
A1539. long term notes, bonds, mortgages, and similar obligations.
Q1540. Explain deferred income tax liability
A1540. A liability that can be thought of as the income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed.
Q1541. What is minority interest?
A1541. A long-term liability that represents that a corporation has subsidiaries that are not 100% owned by the corporation. For Example, Sears only owns 54% of Sears Canada.
Q1542. What do you call the difference between assets and liabilities?
A1542. Stockholder’s equity
Q1543. What are the differences between common and preferred stock?
A1543. Common stock holders can be thought of as true owners of the company because if the company does poorly, the common stockholders are likely to lose some or all of their investment because they can receive cash from the corporation only after the claims of all other parties are satisfied. Preferred stock holders aren’t better, just different. They surrender some rights (like voting) to be first in line when the company pays its liabilities. The preferred stockholders would be paid before common stockholders.
Q1544. What is “additional paid-in capital?”
A1544. The amount invested by stockholders that exceeds the par value of the issued shares.
Q1545. When it is determined that an item should be listed in the financial statements, what do you call the process of assigning a dollar value to the item?
A1545. Valuation
Q1546. What do you call the process of determining how an economic event impacts the financial statements?
A1546. Transaction analysis
Q1547. What is a company’s “asset mix?”
A1547. The proportion of total assets in each asset category and is determined to a large degree by the industry in which the company operates
Q1548. What is a company’s “Financial mix?”
A1548. The percentage of total financing (liabilities plus equity) in each individual category.
Q1549. The process of analyzing business events, collecting and processing information relating to those events, and summarizing that information is called - what?
A1549. The Accounting cycle
Q1550. There are 4 steps to the accounting cycle, what are they?
A1550. 1 - analyze transactions 2 - record the effect of the transactions in a journal entry 3 - Summarize the effects of the transaction (a - post journal entries to the ledger, b - prepare a trial balance) 4 - Prepare reports a) make adjusting entries, b) prepare financial statements c) close the books
Q1551. What is the accounting equation?
A1551. Assets = liabilities + owner’s equity
Q1552. What is the name for the accounting system devised 500 years ago and its still used today?
A1552. T accounts
Q1553. What is on the left side of the T account, what is on the right?
A1553. Left/Debit - Right/Credit
Q1554. When an asset grows and decreases, what is the debit, what is the credit?
A1554. Asset grows - debit Asset shrinks - credit
Q1555. When a liability grows and decreases, what is the debit, what is the credit?
A1555. Liability grows - credit Liability shrinks - debit
Q1556. When equity grows and decreases, what is the debit, what is the credit?
A1556. Equity grows - debit Equity Shrinks - credit
Q1557. When you credit a revenue account, what else are you also increasing?
A1557. Retained Earnings
Q1558. When you debit an expense account, you are increasing the amount of expense that in turn reduces what?
A1558. Retained Earnings
Q1559. When listing transactions, what is listed first?
A1559. The account being debited is listed first and the account being credited is listed second
Q1560. What are the three steps involved in a journal entry?
A1560. 1 - Identify which accounts are involved. 2 - for each account, determine if it is increased or decreased. 3 - for each account, determine by how much it changed
Q1561. What processed is used so you don’t have to sort through all of the journal entries to determine an account’s balance?
A1561. Posting
Q1562. What do you call the collection of all of a company’s accounts?
A1562. Ledger
Q1563. When you collate all of a company’s ledger accounts and their balances, what is that?
A1563. Trial Balance
Q1564. What action do you take to transfer all revenue, expense, and dividend amounts to the retained earnings account and reset the income statement and dividend accounts to zero in preparation for accumulating new information for the same period?
A1564. Closing
Q1565. What are the two considerations used for adjusting entries?
A1565. 1 - Determine whether the amounts recorded for all assets and liabilities are correct. If not, debit or credi the appropriate asset or liability. (Basically - fix the balance sheet.) 2- Determine what revenue or expense adjustments are required because of the changes in recorded amounts of assets and liabilities. Debit or credit the appropriate revenue or expense. In short, fix the income statement.
Q1566. There are two occasions to adjust the closing entries
A1566. 1) new information requires an adjustment to a transaction that has already been recorded. 2) No transaction has been recorded even though a business event has occurred. ((chemical cleanup closets, Interest earned but not collected as cash, wages earned at the end of a year but not paid until the first of the new year.)
Q1567. There are 4 reasons asserted in the text that may tempt a manager to manipulate earnings, what are they?
A1567. 1- Meet internal targets 2 - Meet external expectations 3 - income smoothing 4 - Window dressing for an IPO or a loan
Q1568. The practice of thoughtfully reporting earnings to meet expectations is called
A1568. Earnings management
Q1569. What do you call the practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next?
A1569. Income smoothing
Q1570. What do you call timing large one-time gains or losses in the same quarter, resulting in a smooth upward trend in reported earnings?
A1570. Strategic Matching
Q1571. The earnings management continuum moves from savvy timing on the left to fraud on the right. In order, what are the example methods displayed?
A1571. Strategic matching, Change in methods with full disclosure, change in methods without full disclosure, Non GAAP accounting, Fictitious transactions.
Q1572. What is a pro forma earnings number?
A1572. The regular GAAP earnings number with some revenue, expenses, gains or losses excluded. (The exclusions are held out because the companies claim that GAAP doesn’t accurately reflect the company’s performance.
Q1573. Proforma numbers have earned a knickname because of their ability to show the company in a positive light.
A1573. EBS - Everything but the bad stuff.
Q1574. What is the GAAP Oval?
A1574. The GAAP oval represents the flexibility a manager has, within GAAP, to report one earnings number from among many possibilities based on different methods and assumptions. The best case and worst case numbers that fall outside the gaap Oval would be unethical to report.
Q1575. What is the cost of capital?
A1575. The cost of capital is the cost a company bears to obtain external financing.
Q1576. Why is the cost of capital important?
A1576. A company’s cost of capital is critical because it determines which long-term projects are profitable to undertake.
Q1577. What determines the cost of capital?
A1577. A key factor is the risk associated with the company.
Q1578. Who do you estimate the amount you should allocated for bad debts?
A1578. 1) estimate the percentage of sales 2) Aging.
Q1579. What is the phrase that accountants use to refer to the recording of a sale in the formal accounting records?
A1579. Revenue Recognition
Q1580. What are the two criteria for revenue recognition?
A1580. You have the cash or a valid promise of future payment OR The promised work has been substantially completed
Q1581. In general, is revenue recognized prior to the point of sale?
A1581. No - because either the valid promise of payment has not been made OR The company has not provided the service
Q1582. What do you call it when you clients don’t pay their bills?
A1582. Bad Debts
Q1583. Costs in approving a potential customer for credit requiring into their credit history and verifying their income and preexisting conditions
A1583. Book Keeping Costs
Q1584. What do you call the real costs associated with having cash tied up in the form of receivables?
A1584. Carrying Costs
Q1585. Define “net 30”
A1585. A credit term stating that the net amount of an invoice is due within 30 days of the date of sale.
Q1586. Define 2/10, n/30
A1586. 2/10 - A 2 percent discount is allowed if the payment is made within 10 days of the invoice. If the discount is not taken, the full amount is due in 30 days
Q1587. What do you call the process of estimating the amount of bad debts created by credit sales during a year?
A1587. Allowance Method
Q1588. How is a Bad Debt Expense reported?
A1588. As an Operating Expense in the Income statement.
Q1589. What do you call the method using historical or industry data to estimate what fraction of total credit sales that will be uncollectable?
A1589. Percentage of Sales Method
Q1590. What do you call the process where, at the end of the year, you examine the age and collectability of your accounting receivable?
A1590. Aging Method
Q1591. Using a credit (or reduction) of accounts receivable, this method accounts for bad debt.
A1591. A write off
Q1592. The revenue cycle is not complete until…
A1592. All promises related to the sale of a product or service have been satisfied.
Q1593. What safeguarding tool assigns two different individuals to handle cash and record cash?
A1593. Separation of duties, it makes it more difficult to steal cash if two people are involved.
Q1594. What disciplined, rigid process ensures that personal responsibility for the handling of cash occurs each day?
A1594. Daily Cash deposits
Q1595. What cash control procedure is used with company checks?
A1595. Company checks are pre-numbered.
Q1596. What is it called to use existing receivables as collateral for a loan?
A1596. Assignment.
Q1597. What is it called when once company sells some of its receivables to another company?
A1597. Factoring
Q1598. What is it called when a US company makes a sale and accepts payment in a foreign currency?
A1598. Foreign Currency Transaction
Q1599. If a company makes a foreign currency transaction for $10 and on the exchange date the value is only $9.50 how would it be recorded?
A1599. The company would record a .50 exchange loss.
Q1600. What two ratios are most commonly used to evaluate how a company is managing its accounts receivable?
A1600. Accounts receivable turnovers: sales/average accounts receivable Average Collection period: 365 / accounts receivable turnover
Q1601. Generally, the bad debt allowance (as a percentage of total receivables) should be steady. If it fluctuates, what could that signify?
A1601. 1) The company has is accepting a different type of credit customer 2) A change in economic circumstances of existing customers
Q1602. What do you call the name given to goods that are either manufactured or purchased for resale in the normal course of business?
A1602. Inventory
Q1603. What do you call the costs removed from the asset classification (inventory) on the balance sheet and reported on the income statement as an expense?
A1603. Cost of goods sold
Q1604. There are 3 types of inventory, name them
A1604. Raw Materials, Work in process, Finished goods
Q1605. There are two types of delivery, what are they?
A1605. FOB - Free on Board, FOB Shipping Point
Q1606. Describe FOB - Free on Board shipping
A1606. The seller is paying the shipping costs and thus owns the inventory until it is delivered. Ownership changes hands when the goods reach their destination
Q1607. Describe FOB Shipping Point
A1607. The buyer is paying the shipping costs and as a result, owns the inventory while it is in transit
Q1608. Describe Goods on Consignment delivery
A1608. A supplier will ship the inventory to a dealer on consignment. This transfer is not a sale, the supplier still owns the inventory and the dealer is under no obligation to pay for the inventory. In effect, the dealer is offering to sell the consigned goods on behalf of the supplier.
Q1609. True / False - Inventory cost consists of all costs involved in buying the inventory and preparing it for sale.
A1609. True
Q1610. Name some cost examples that would NOT be included in the cost of inventory.
A1610. Cost of maintaining the finished goods warehouse or retail showroom - salesperson’s salaries - advertising cost - cost of the corporate headquarters - company president’s salary
Q1611. Describe ABC cost system
A1611. The ABC (Activity based cost system) strives to allocate overhead based on clearly identified cost drivers - characteristics of the production process that are known to create overhead costs.
Q1612. What do you call the inventory purchased or manufactured during the period when it is added to beginning inventory and that group’s total cost?
A1612. The cost of goods available for sale.
Q1613. What do you call the inventory system that continuously tracks changes in inventory levels?
A1613. Perpetual Inventory system
Q1614. What do you call the inventory system that counts the inventory every once in a while (maybe quarterly)
A1614. Periodic
Q1615. What do you call inventory that is lost, stolen or spoiled during a period?
A1615. Inventory Shrinkage
Q1616. There are 4 inventory valuation methods, what are they?
A1616. FIFO (First in first out) LIFO (Last in first out) Average cost method Specific identification
Q1617. Describe the Average Cost Method
A1617. Each unit is assigned the same cost. The method is based on the assumption that each unit should be charged at an average cost, with the average being weighted by the number of units acquired at each price.
Q1618. Describe FIFO
A1618. First in First Out assumes that the oldest units are the first ones sold. Units are charged at the price of the oldest units.
Q1619. Describe LIFO
A1619. LIFO - Last in First out assumes that the newest units are the first ones sold. Units are charged at the price of the newest units.
Q1620. In a time of generally rising inventory prices the cost of goods sold is highest with what method and lowest with what method?
A1620. Highest with LIFO (the last units purchased were most likely purchased at the newer, higher price.) Lowest with FIFO (The older units were probably purchased at the older, lower price.)
Q1621. Why would a company use LIFO and most likely expense each unit at a higher per unit cost?
A1621. TAXES. If a company uses LIFO in a time of rising prices, the reported cost of goods sold is higher, reported taxable income is lower and cash paid for income taxes is lower.
Q1622. Describe a LIFO Layer
A1622. A LIFO layer is when the number of purchased units exceeds the number of unit sold creating a LIFO Layer in Ending Inventory. Picture a company that sells coal. The newest coal is put on top of the pile and the older coal continues to sit on the bottom of the pile
Q1623. What is the LIFO Reserve?
A1623. The difference between the LIFO ending inventory amount and the amount obtained using another inventory valuation method.
Q1624. What do you call the simplest inventory estimation technique that is based on the observation that the relationship between sales and costs of goods sold is usually fairly stable.
A1624. The Gross Profit Method
Q1625. What is this equation? (sales - cost of goods sold / sales)
A1625. Gross profit percentage
Q1626. Describe the “lower of cost or market” theory
A1626. Accounting conservatism dictates that INCREASES in inventory values are not recognized until the inventory is actually sold. The same conservatism causes accountants to recognize DECREASES in inventory as soon as they occur.
Q1627. What do you call the value expected to be received when the inventory is sold, composed of the selling price less any costs associated with selling the inventory?
A1627. The Net Realizable Value
Q1628. An alternative to Net realizable value, this measure of the market value uses the wholesale cost to buy equivalent new inventory items
A1628. Inventory’s Replacement Cost
Q1629. What do you call the measure of how many times a company turns over or replenishes its inventory during a year?
A1629. Inventory Turnover
Q1630. Inventory Turnover equation is?
A1630. Inventory Turnover = cost of goods sold / average inventory
Q1631. Inventory turnover can also be converted into the number of days’ sales in inventory. How?
A1631. Number of days’ sales in inventory = 365 / Inventory turnover
Q1632. How does the use of LIFO affect the company’s cost of goods sold and inventory values?
A1632. HIGHER cost of goods sold / LOWER inventory values
Q1633. You can learn about a company’s use of its operating cash flow by computing the number of days’ purchases in accounts payable. How?
A1633. Number of days’ purchases in accounts Payable = 365 days / (purchases / average accounts payable)
Q1634. Name the employee compensation timeline
A1634. payroll / compensated absences / stock options & bonuses / postemployment benefits / pensions and postretirement bonuses
Q1635. Payroll seems simple, but gets messy. Why?
A1635. Taxes. FICA (Federal insurance contributions act - social security tax) FUTA (federal unemployment taxes) - Federal and state withholding taxes
Q1636. The company obligates itself to pay employees for a certain number of days in the future even when the employee does not produce any economic input - under what method?
A1636. Compensated absences
Q1637. Where is the expense associated with compensated absences recorded?
A1637. The expense for compensated absences is recognized in the period in which those days are EARNED, not when they’re used.
Q1638. There are two methods for accounting for employee stock options - what are they?
A1638. Intrinsic value method - based on the assumption that the value of an option is measured by whether there is any value in recognizing the option on the day it is granted. If the option is for $40 and the stock is at $50, there is a $10 intrinsic value. 2) Fair value method - the real value of the option lies in the chance that the stock price may increase above the option exercise prices some time during the life of the option.
Q1639. What do you call benefits incurred after an employee has ceased to work for an employer but before that employee retires?
A1639. Post Employment benefits. (severance package, retraining costs, education costs, etc.)
Q1640. What do you call a cash compensation after you retire?
A1640. Pension
Q1641. There are two types of pensions - what are they?
A1641. Defined contribution plan - requiring the company to insert a certain amount into the pension each year. Defined Benefit plan - the company promises employees a certain monthly cash amount after they retire based on the factors like # of years worked for company, highest salary, etc.
Q1642. Name an example of a “postretirement benefit other than pension”
A1642. Health plan after retirement
Q1643. There are two reasons why reported income tax payments for a company may differ from the actual amount paid - why?
A1643. 1 - as with many other expenses, income taxes are not necessarily pain in cash in the year in which they are incurred. 2- the difference between reported income tax expense and the actual amount of cash paid for taxes is that income tax expense is based on reported financial accounting income whereas the amount of cash paid for income taxes is dictated by the applicable government tax law.
Q1644. US Corporations run two sets of books, why?
A1644. One for financial information for shareholders, one for taxes
Q1645. Define a deferred tax asset
A1645. The expected benefit of a tax deduction for an expense item that has already been incurred and reported to shareholders but is not yet deductible according to IRS rules.
Q1646. Why would rapid depreciation help a company for tax purposes?
A1646. Rapid depreciation allows a company to reduce its taxable income and its income tax payments in the early years of the life of an asset, thus making it easier to buy the building or machinery in the first place.
Q1647. When considering between listing an expenditure as an expense or an asset, what is the determining question?
A1647. Will this expenditure offer an economic benefit for future period? If so, then its an asset. If it is simply going to be used up and not provide future benefit then its an expense (like office supplies)
Q1648. Software development withheld, how should you record ALL R&D expenses?
A1648. The FASB concluded that R&D should be listed as an expense in the period incurred.
Q1649. As a special exception for software R&D, how does technical feasibility work?
A1649. The special accounting standard for software development states all costs up to the point where technological feasibility is established are to be expensed as research and development.
Q1650. There are two methods of recording expenses for oil/gas drilling - what are they?
A1650. Full-cost method. All exploratory costs are capitalized because the cost of drilling dry wells is part of the cost of finding productive wells. 2- The successful efforts method states that dry holes are expensed and only successful holes are capitalized.
Q1651. What do you call an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs?
A1651. Contingency
Q1652. There are three classes of contingencies - what are they?
A1652. Probable, possible and remote
Q1653. Depreciation Expense Amortization Expense Loss on Impairment are found on what Finan doc?
A1653. Income Statement
Q1654. Operating Asset depreciation (indirect method) Financing Cash paid (received) to purchase (from sale of) long-term assets Cash paid to acquire another company Are found on what Financial doc?
A1654. Statement of cash flows
Q1655. Long-term Assets Property, Plant, & Equipment Accumulated Depreciation Intangible Assets are found on what financial doc?
A1655. Balance sheet
Q1656. What exhibits these traits: not held for resale to customers are used by a business to generate revenues
A1656. Long Term operating assets Including Property, plant, and equipment Intangible assets
Q1657. Name some examples of PPE
A1657. Tangible, long-lived assets Acquired for use in business operations Land Buildings Machinery Equipment Furniture
Q1658. Name three characteristics of Intangible Assets
A1658. Long-lived assets Used to facilitate the operation of a business Do not have physical substance Patents Trademarks Licenses Franchises Goodwill
Q1659. What are the Long term Asset stages?
A1659. Evaluate / Acquire / Estimate & Recognize / Monitor / Dispose
Q1660. What process is this?The process of evaluating a long- term project that may include purchasing property, plant, and equipment
A1660. Capital Budgeting Common capital budgeting models: Payback period Accounting rate of return Net present value
Q1661. Define Payback Period
A1661. The time it takes for a company to recover its original investment in cash PP = Initial Invest / Annual Cash flow
Q1662. How do you find Rate of Return?
A1662. Annual Accounting income / Initial Investment
Q1663. Define the cost of PP&E
A1663. includes any costs necessary to bring the asset to the condition and location for its intended use
Q1664. How do you account for Subsequent expenditures after a PPE purchase?
A1664. Normal repairs and maintenance are expensed in the current period Expenditures which extend the useful life or increase the productive capacity are capitalized Asset book value is increased Annual depreciation is revised
Q1665. Define a Lease
A1665. A lease is a contract whereby one party (lessee) is granted the right to use property owned by another party (lessor) for a specified period of time for a specified cost
Q1666. What are the differences between an operating lease and a capital lease?
A1666. Operating lease - equivalent to a rental Lease payments charged to expense Capital lease – equivalent to a purchase The asset acquired is recorded in property, plant and equipment The leased asset is depreciated over the lease period A lease liability is shown in the liability section of the balance sheet
Q1667. What is this? The acquisition price of the asset is equal to fair market value of noncash consideration plus any cash given
A1667. Acquisition by Exchange
Q1668. How do you record an acquisition through donation?
A1668. The asset is recorded at its fair market value at time it is received Debit Land / Credit Gain - donated asset
Q1669. How do you record an acquisition with a basket purchase?
A1669. Fixed assets purchased for a lump sum need to be recorded separately The total purchase price must be allocated among individual assets received in proportion to their appraised values
Q1670. How do you record an acquisition of an entire company?
A1670. All acquired assets are recorded on the books of the acquiring company at their fair values as of the acquisition date The excess of the purchase price over the fair value of the identifiable assets represents goodwill
Q1671. How do you record an acquisition through self construction?
A1671. Self-constructed assets are recorded at cost, including all expenditures necessary to build the asset and make it ready for its intended use Costs include: Materials and labor used directly in construction A reasonable share of general overhead If interest is included it is called capitalized interest Interest should be included equal to the amount that could have been saved if the money used on the construction had instead been used to repay loans
Q1672. Define the characteristics of an intangible asset
A1672. Long-term Nonmonetary Generate revenues Grant a right to use of a product, process, name, image, customer list, or business practice Uncertainty about future benefits greater than that of tangible assets Specifically identifiable Except goodwill
Q1673. Define a Patent
A1673. An exclusive right to use, manufacture, process, or sell a product granted by the U.S. Patent Office. Patents have a legal life of 17 years, but their economic life may be shorter
Q1674. Define a Copyright
A1674. The exclusive right of the creator or heirs to reproduce and/or sell an artistic or published work. Granted by the U.S. government for a period of 50 years after the death of the creator. Amortized over the shorter of its economic life or legal life.
Q1675. Define a trade name
A1675. A symbol or name that allows the holder to use it to identify or name a specific product or service. A legal registration system allows for an indefinite number of 20- year renewals
Q1676. What is this? An exclusive right to use a formula, design, technique, or territory.
A1676. Franchise
Q1677. Define Goodwill
A1677. The ability of a company to earn above-normal income. Recorded goodwill is the excess amount paid to acquire a company, over and above the fair market value of the company’s identifiable assets.
Q1678. A business combination occurs when one company buys all of the assets of the another…how do you account for the combination?
A1678. The combination is accounted for using the purchase method (as if one company is buying the other)
Q1679. Describe the Purchase Method
A1679. The identifiable assets and liabilities are recorded at their fair values The excess of the purchase price over the fair value of the identifiable net assets is recorded as goodwill Goodwill represents the company’s reputation, superior business practices, and market position Goodwill is only recorded when it is purchased
Q1680. Is this depreciation? The systematic allocation of an asset’s cost to the periods of benefit
A1680. Yes
Q1681. Is this Depreciation? Accumulation of a cash fund for asset replacement A determination of an asset’s current value
A1681. No
Q1682. Name two factors that cause depreciation
A1682. Causes of depreciation: Physical deterioration Due to use, passage of time, and exposure to the elements Obsolescence Outdated, outmoded, or inadequate
Q1683. What is this? An estimate of the asset’s worth at the time of its disposal
A1683. Residual value (salvage value)
Q1684. What is this? The original cost minus the residual value Estimated useful life A measure of the service potential in terms of years or units produced
A1684. Depreciable Cost
Q1685. What are the three depreciation methods?
A1685. Straight-line Allocates an equal amount of asset cost per year Units-of-production Allocates cost based on the productive output of the asset Declining balance An accelerated method which allocates more cost to depreciation in the early years than the later years
Q1686. What depreciation method is this: An equal amount of depreciation expense is allocated to each period
A1686. Straight-line method
Q1687. What depreciation method is this? Annual depreciation is determined by applying a fixed percentage to the remaining book value at the beginning of each year
A1687. Declining balance 1/life x rate = percentage rate
Q1688. The straight line method is appropriate for what type of assets?
A1688. assets whose benefits diminish on a fairly uniform basis Most companies use the straight-line method due to its simplicity
Q1689. The double-declining-balance method is appropriate for what type of assets?
A1689. assets that give up a greater portion of their benefits in the early years
Q1690. What is this called? Property is depreciated for half the taxable year in which it is placed in service, regardless of when use actually begins
A1690. The Half Year Convention
Q1691. What happens to salvage value for tax purposes
A1691. it’s ignored
Q1692. Is Depreciation a source of cash?
A1692. Depreciation is not a source of cash; it is a noncash expense Depreciation indirectly affects cash flow depreciation reduces taxable income results in lower income taxes being paid
Q1693. If later events require a change in economic life and residual value, what happens?
A1693. A change in estimate is not an error correction A change in estimate is reflected by spreading the remaining depreciable cost over the remaining useful life of the asset
Q1694. With finite life intangible assets, name 3 characteristics
A1694. Amortize over the economic useful life or legal life, whichever is shorter Not to exceed 40 years Direct subtraction from the asset account
Q1695. What is this called? Occurs when an event happens after the purchase of an asset that reduces its value Recognized in the financial statements as a reduction in the value of the asset on the balance sheet and a loss on the income statement
A1695. Impairment of an asset value
Q1696. What do you call the difference between the book value of the asset and the fair value
A1696. Impairment
Q1697. When are gains in PPE recognized?
A1697. Gains are recognized in income only when assets are sold
Q1698. When you compare US and International accounting standards, what is one of the key differences in accounting for PPE?
A1698. Conservatism controls the US and gains are only recognized at sale. The IAS allows upward revaluation.
Q1699. Name 3 ways to dispose of long-term assets
A1699. retirement, sale, or trade-in of operating assets
Q1700. What method of disposal is this? Occurs when an operating asset is removed from service and is disposed of without the company receiving any proceeds An difference between the cost and balance in the accumulated depreciation account results in a loss on this activity
A1700. Retirement