FAR 4-5 - Sheet1

Question 1

Q1501. The Return on Sales = Net Income / Sales and tells you what?

Answer 1

A1501. How much the company profits from each dollar of sales.

Question 2

Q1502. The Asset Turnover = Sales / Total Assets and tells you what?

Answer 2

A1502. It gives an overall measure of the company’s efficiency (For each dollar of assets, how many dollars does it generate in sales?)

Question 3

Q1503. Return on Equity = Net Income / Stockholder’s Equity and tells you what?

Answer 3

A1503. Number of pennies earned during the year on each dollar invested

Question 4

Q1504. Price Earnings Ratio = Market Value of Shares / Net Income

Answer 4

A1504. Amount investors are willing to pay for each dollar of earnings; indication of growth potential

Question 5

Q1505. The _________ ratio is the single measure that summarizes the financial status of a company.

Answer 5

A1505. Return on Equity = net income / equity

Question 6

Q1506. DuPont framework breaks down Return on Equity how?

Answer 6

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

Question 7

Q1507. When the DuPont framework shows a problem with profitability, where should you look to find expenses to manage?

Answer 7

A1507. The Common Size income statement can provide a year over year look at expense that may be growing and thus driving down profitability.

Question 8

Q1508. Average Collection Period

Answer 8

A1508. Average receivables / average daily sales

Question 9

Q1509. Average daily sales

Answer 9

A1509. Sales / 365

Question 10

Q1510. Average receivables

Answer 10

A1510. Beginning receivables balance + ending balance / 2

Question 11

Q1511. The Number of days’ sales in inventory is average inventory / average daily cost of goods sold and tells you what?

Answer 11

A1511. The average number of days of sales that can be made using only the supply of inventory on hand.

Question 12

Q1512. Fixed Asset Turnover is computed as sales / average fixed assets and tells you what?

Answer 12

A1512. The number of dollars in sales generated by each dollar of fixed assets.

Question 13

Q1513. Return on Assets is computed as net income / total assets and tells you what?

Answer 13

A1513. The number of pennies made on each dollar of assets.

Question 14

Q1514. What is another name for a company’s Profit?

Answer 14

A1514. Margin

Question 15

Q1515. The degree to which assets are used to generate sales is called…

Answer 15

A1515. turnover

Question 16

Q1516. These are an indication of the extent to which a company is using other people’s money to purchase assets…

Answer 16

A1516. Leverage Ratios

Question 17

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?

Answer 17

A1517. Leverage

Question 18

Q1518. Debt ratio = total liabilities / total assets and tells you what?

Answer 18

A1518. the percentage of total funds, both borrowed and invested that a company acquires through borrowing.

Question 19

Q1519. Debt to Equity ratio = total liabilities / total equity and tells you what?

Answer 19

A1519. the number of dollar of borrowing for each dollar of equity investment.

Question 20

Q1520. Times interest earned = income / interest expense for the period and tells you what?

Answer 20

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.

Question 21

Q1521. There are two factors that help make financial ratios useful - what are they?

Answer 21

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.

Question 22

Q1522. In the US, what usually is the first asset listed on the Balance Sheet?

Answer 22

A1522. cash

Question 23

Q1523. Around the world, what usually is the first asset listed on the balance sheet?

Answer 23

A1523. long term assets

Question 24

Q1524. Accountants use their judgment to report two items on the balance sheet - what are they?

Answer 24

A1524. Recognition - what is listed and what isn’t? Valuation - what dollar amounts to associate with the listed items

Question 25

Q1525. What do you call a listing of an organization’s assets and of its liabilities at a certain time?

Answer 25

A1525. Balance Sheet

Question 26

Q1526. What do you call the difference between assets and liabilities?

Answer 26

A1526. Equity

Question 27

Q1527. Define a current Asset

Answer 27

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.

Question 28

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?

Answer 28

A1528. Accounts receivable

Question 29

Q1529. What do you call goods held for sale in the normal course of business?

Answer 29

A1529. Inventory

Question 30

Q1530. Why would a company pre-pay an expense?

Answer 30

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.

Question 31

Q1531. Name some common long-term assets

Answer 31

A1531. investments; property, plant and equipment; intangible assets

Question 32

Q1532. What is depreciation?

Answer 32

A1532. The wear and tear of items since they were originally purchased.

Question 33

Q1533. What are intangible assets?

Answer 33

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.

Question 34

Q1534. What is goodwill?

Answer 34

A1534. When one company buys another and pays more than the value of the identifiable assets of the acquired company.

Question 35

Q1535. What are current liabilities?

Answer 35

A1535. Those obligations to be paid within one year, the most common being accounts payable.

Question 36

Q1536. What are short-term loans payable?

Answer 36

A1536. formal, interest bearing loans that are expected to be paid back within one year.

Question 37

Q1537. Is the current portion of long-term debt considered a short term liability?

Answer 37

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.

Question 38

Q1538. What is unearned revenue?

Answer 38

A1538. A company’s obligation to provide service to customers who have paid the company for a service they have not yet received.

Question 39

Q1539. Name some examples of long-term debt

Answer 39

A1539. long term notes, bonds, mortgages, and similar obligations.

Question 40

Q1540. Explain deferred income tax liability

Answer 40

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.

Question 41

Q1541. What is minority interest?

Answer 41

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.

Question 42

Q1542. What do you call the difference between assets and liabilities?

Answer 42

A1542. Stockholder’s equity

Question 43

Q1543. What are the differences between common and preferred stock?

Answer 43

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.

Question 44

Q1544. What is “additional paid-in capital?”

Answer 44

A1544. The amount invested by stockholders that exceeds the par value of the issued shares.

Question 45

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?

Answer 45

A1545. Valuation

Question 46

Q1546. What do you call the process of determining how an economic event impacts the financial statements?

Answer 46

A1546. Transaction analysis

Question 47

Q1547. What is a company’s “asset mix?”

Answer 47

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

Question 48

Q1548. What is a company’s “Financial mix?”

Answer 48

A1548. The percentage of total financing (liabilities plus equity) in each individual category.

Question 49

Q1549. The process of analyzing business events, collecting and processing information relating to those events, and summarizing that information is called - what?

Answer 49

A1549. The Accounting cycle

Question 50

Q1550. There are 4 steps to the accounting cycle, what are they?

Answer 50

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

Question 51

Q1551. What is the accounting equation?

Answer 51

A1551. Assets = liabilities + owner’s equity

Question 52

Q1552. What is the name for the accounting system devised 500 years ago and its still used today?

Answer 52

A1552. T accounts

Question 53

Q1553. What is on the left side of the T account, what is on the right?

Answer 53

A1553. Left/Debit - Right/Credit

Question 54

Q1554. When an asset grows and decreases, what is the debit, what is the credit?

Answer 54

A1554. Asset grows - debit Asset shrinks - credit

Question 55

Q1555. When a liability grows and decreases, what is the debit, what is the credit?

Answer 55

A1555. Liability grows - credit Liability shrinks - debit

Question 56

Q1556. When equity grows and decreases, what is the debit, what is the credit?

Answer 56

A1556. Equity grows - debit Equity Shrinks - credit

Question 57

Q1557. When you credit a revenue account, what else are you also increasing?

Answer 57

A1557. Retained Earnings

Question 58

Q1558. When you debit an expense account, you are increasing the amount of expense that in turn reduces what?

Answer 58

A1558. Retained Earnings

Question 59

Q1559. When listing transactions, what is listed first?

Answer 59

A1559. The account being debited is listed first and the account being credited is listed second

Question 60

Q1560. What are the three steps involved in a journal entry?

Answer 60

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

Question 61

Q1561. What processed is used so you don’t have to sort through all of the journal entries to determine an account’s balance?

Answer 61

A1561. Posting

Question 62

Q1562. What do you call the collection of all of a company’s accounts?

Answer 62

A1562. Ledger

Question 63

Q1563. When you collate all of a company’s ledger accounts and their balances, what is that?

Answer 63

A1563. Trial Balance

Question 64

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?

Answer 64

A1564. Closing

Question 65

Q1565. What are the two considerations used for adjusting entries?

Answer 65

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.

Question 66

Q1566. There are two occasions to adjust the closing entries

Answer 66

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.)

Question 67

Q1567. There are 4 reasons asserted in the text that may tempt a manager to manipulate earnings, what are they?

Answer 67

A1567. 1- Meet internal targets 2 - Meet external expectations 3 - income smoothing 4 - Window dressing for an IPO or a loan

Question 68

Q1568. The practice of thoughtfully reporting earnings to meet expectations is called

Answer 68

A1568. Earnings management

Question 69

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?

Answer 69

A1569. Income smoothing

Question 70

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?

Answer 70

A1570. Strategic Matching

Question 71

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?

Answer 71

A1571. Strategic matching, Change in methods with full disclosure, change in methods without full disclosure, Non GAAP accounting, Fictitious transactions.

Question 72

Q1572. What is a pro forma earnings number?

Answer 72

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.

Question 73

Q1573. Proforma numbers have earned a knickname because of their ability to show the company in a positive light.

Answer 73

A1573. EBS - Everything but the bad stuff.

Question 74

Q1574. What is the GAAP Oval?

Answer 74

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.

Question 75

Q1575. What is the cost of capital?

Answer 75

A1575. The cost of capital is the cost a company bears to obtain external financing.

Question 76

Q1576. Why is the cost of capital important?

Answer 76

A1576. A company’s cost of capital is critical because it determines which long-term projects are profitable to undertake.

Question 77

Q1577. What determines the cost of capital?

Answer 77

A1577. A key factor is the risk associated with the company.

Question 78

Q1578. Who do you estimate the amount you should allocated for bad debts?

Answer 78

A1578. 1) estimate the percentage of sales 2) Aging.

Question 79

Q1579. What is the phrase that accountants use to refer to the recording of a sale in the formal accounting records?

Answer 79

A1579. Revenue Recognition

Question 80

Q1580. What are the two criteria for revenue recognition?

Answer 80

A1580. You have the cash or a valid promise of future payment OR The promised work has been substantially completed

Question 81

Q1581. In general, is revenue recognized prior to the point of sale?

Answer 81

A1581. No - because either the valid promise of payment has not been made OR The company has not provided the service

Question 82

Q1582. What do you call it when you clients don’t pay their bills?

Answer 82

A1582. Bad Debts

Question 83

Q1583. Costs in approving a potential customer for credit requiring into their credit history and verifying their income and preexisting conditions

Answer 83

A1583. Book Keeping Costs

Question 84

Q1584. What do you call the real costs associated with having cash tied up in the form of receivables?

Answer 84

A1584. Carrying Costs

Question 85

Q1585. Define “net 30”

Answer 85

A1585. A credit term stating that the net amount of an invoice is due within 30 days of the date of sale.

Question 86

Q1586. Define 2/10, n/30

Answer 86

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

Question 87

Q1587. What do you call the process of estimating the amount of bad debts created by credit sales during a year?

Answer 87

A1587. Allowance Method

Question 88

Q1588. How is a Bad Debt Expense reported?

Answer 88

A1588. As an Operating Expense in the Income statement.

Question 89

Q1589. What do you call the method using historical or industry data to estimate what fraction of total credit sales that will be uncollectable?

Answer 89

A1589. Percentage of Sales Method

Question 90

Q1590. What do you call the process where, at the end of the year, you examine the age and collectability of your accounting receivable?

Answer 90

A1590. Aging Method

Question 91

Q1591. Using a credit (or reduction) of accounts receivable, this method accounts for bad debt.

Answer 91

A1591. A write off

Question 92

Q1592. The revenue cycle is not complete until…

Answer 92

A1592. All promises related to the sale of a product or service have been satisfied.

Question 93

Q1593. What safeguarding tool assigns two different individuals to handle cash and record cash?

Answer 93

A1593. Separation of duties, it makes it more difficult to steal cash if two people are involved.

Question 94

Q1594. What disciplined, rigid process ensures that personal responsibility for the handling of cash occurs each day?

Answer 94

A1594. Daily Cash deposits

Question 95

Q1595. What cash control procedure is used with company checks?

Answer 95

A1595. Company checks are pre-numbered.

Question 96

Q1596. What is it called to use existing receivables as collateral for a loan?

Answer 96

A1596. Assignment.

Question 97

Q1597. What is it called when once company sells some of its receivables to another company?

Answer 97

A1597. Factoring

Question 98

Q1598. What is it called when a US company makes a sale and accepts payment in a foreign currency?

Answer 98

A1598. Foreign Currency Transaction

Question 99

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?

Answer 99

A1599. The company would record a .50 exchange loss.

Question 100

Q1600. What two ratios are most commonly used to evaluate how a company is managing its accounts receivable?

Answer 100

A1600. Accounts receivable turnovers: sales/average accounts receivable Average Collection period: 365 / accounts receivable turnover

Question 101

Q1601. Generally, the bad debt allowance (as a percentage of total receivables) should be steady. If it fluctuates, what could that signify?

Answer 101

A1601. 1) The company has is accepting a different type of credit customer 2) A change in economic circumstances of existing customers

Question 102

Q1602. What do you call the name given to goods that are either manufactured or purchased for resale in the normal course of business?

Answer 102

A1602. Inventory

Question 103

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?

Answer 103

A1603. Cost of goods sold

Question 104

Q1604. There are 3 types of inventory, name them

Answer 104

A1604. Raw Materials, Work in process, Finished goods

Question 105

Q1605. There are two types of delivery, what are they?

Answer 105

A1605. FOB - Free on Board, FOB Shipping Point

Question 106

Q1606. Describe FOB - Free on Board shipping

Answer 106

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

Question 107

Q1607. Describe FOB Shipping Point

Answer 107

A1607. The buyer is paying the shipping costs and as a result, owns the inventory while it is in transit

Question 108

Q1608. Describe Goods on Consignment delivery

Answer 108

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.

Question 109

Q1609. True / False - Inventory cost consists of all costs involved in buying the inventory and preparing it for sale.

Answer 109

A1609. True

Question 110

Q1610. Name some cost examples that would NOT be included in the cost of inventory.

Answer 110

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

Question 111

Q1611. Describe ABC cost system

Answer 111

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.

Question 112

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?

Answer 112

A1612. The cost of goods available for sale.

Question 113

Q1613. What do you call the inventory system that continuously tracks changes in inventory levels?

Answer 113

A1613. Perpetual Inventory system

Question 114

Q1614. What do you call the inventory system that counts the inventory every once in a while (maybe quarterly)

Answer 114

A1614. Periodic

Question 115

Q1615. What do you call inventory that is lost, stolen or spoiled during a period?

Answer 115

A1615. Inventory Shrinkage

Question 116

Q1616. There are 4 inventory valuation methods, what are they?

Answer 116

A1616. FIFO (First in first out) LIFO (Last in first out) Average cost method Specific identification

Question 117

Q1617. Describe the Average Cost Method

Answer 117

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.

Question 118

Q1618. Describe FIFO

Answer 118

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.

Question 119

Q1619. Describe LIFO

Answer 119

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.

Question 120

Q1620. In a time of generally rising inventory prices the cost of goods sold is highest with what method and lowest with what method?

Answer 120

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.)

Question 121

Q1621. Why would a company use LIFO and most likely expense each unit at a higher per unit cost?

Answer 121

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.

Question 122

Q1622. Describe a LIFO Layer

Answer 122

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

Question 123

Q1623. What is the LIFO Reserve?

Answer 123

A1623. The difference between the LIFO ending inventory amount and the amount obtained using another inventory valuation method.

Question 124

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.

Answer 124

A1624. The Gross Profit Method

Question 125

Q1625. What is this equation? (sales - cost of goods sold / sales)

Answer 125

A1625. Gross profit percentage

Question 126

Q1626. Describe the “lower of cost or market” theory

Answer 126

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.

Question 127

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?

Answer 127

A1627. The Net Realizable Value

Question 128

Q1628. An alternative to Net realizable value, this measure of the market value uses the wholesale cost to buy equivalent new inventory items

Answer 128

A1628. Inventory’s Replacement Cost

Question 129

Q1629. What do you call the measure of how many times a company turns over or replenishes its inventory during a year?

Answer 129

A1629. Inventory Turnover

Question 130

Q1630. Inventory Turnover equation is?

Answer 130

A1630. Inventory Turnover = cost of goods sold / average inventory

Question 131

Q1631. Inventory turnover can also be converted into the number of days’ sales in inventory. How?

Answer 131

A1631. Number of days’ sales in inventory = 365 / Inventory turnover

Question 132

Q1632. How does the use of LIFO affect the company’s cost of goods sold and inventory values?

Answer 132

A1632. HIGHER cost of goods sold / LOWER inventory values

Question 133

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?

Answer 133

A1633. Number of days’ purchases in accounts Payable = 365 days / (purchases / average accounts payable)

Question 134

Q1634. Name the employee compensation timeline

Answer 134

A1634. payroll / compensated absences / stock options & bonuses / postemployment benefits / pensions and postretirement bonuses

Question 135

Q1635. Payroll seems simple, but gets messy. Why?

Answer 135

A1635. Taxes. FICA (Federal insurance contributions act - social security tax) FUTA (federal unemployment taxes) - Federal and state withholding taxes

Question 136

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?

Answer 136

A1636. Compensated absences

Question 137

Q1637. Where is the expense associated with compensated absences recorded?

Answer 137

A1637. The expense for compensated absences is recognized in the period in which those days are EARNED, not when they’re used.

Question 138

Q1638. There are two methods for accounting for employee stock options - what are they?

Answer 138

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.

Question 139

Q1639. What do you call benefits incurred after an employee has ceased to work for an employer but before that employee retires?

Answer 139

A1639. Post Employment benefits. (severance package, retraining costs, education costs, etc.)

Question 140

Q1640. What do you call a cash compensation after you retire?

Answer 140

A1640. Pension

Question 141

Q1641. There are two types of pensions - what are they?

Answer 141

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.

Question 142

Q1642. Name an example of a “postretirement benefit other than pension”

Answer 142

A1642. Health plan after retirement

Question 143

Q1643. There are two reasons why reported income tax payments for a company may differ from the actual amount paid - why?

Answer 143

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.

Question 144

Q1644. US Corporations run two sets of books, why?

Answer 144

A1644. One for financial information for shareholders, one for taxes

Question 145

Q1645. Define a deferred tax asset

Answer 145

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.

Question 146

Q1646. Why would rapid depreciation help a company for tax purposes?

Answer 146

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.

Question 147

Q1647. When considering between listing an expenditure as an expense or an asset, what is the determining question?

Answer 147

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)

Question 148

Q1648. Software development withheld, how should you record ALL R&D expenses?

Answer 148

A1648. The FASB concluded that R&D should be listed as an expense in the period incurred.

Question 149

Q1649. As a special exception for software R&D, how does technical feasibility work?

Answer 149

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.

Question 150

Q1650. There are two methods of recording expenses for oil/gas drilling - what are they?

Answer 150

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.

Question 151

Q1651. What do you call an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs?

Answer 151

A1651. Contingency

Question 152

Q1652. There are three classes of contingencies - what are they?

Answer 152

A1652. Probable, possible and remote

Question 153

Q1653. Depreciation Expense Amortization Expense Loss on Impairment are found on what Finan doc?

Answer 153

A1653. Income Statement

Question 154

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?

Answer 154

A1654. Statement of cash flows

Question 155

Q1655. Long-term Assets Property, Plant, & Equipment Accumulated Depreciation Intangible Assets are found on what financial doc?

Answer 155

A1655. Balance sheet

Question 156

Q1656. What exhibits these traits: not held for resale to customers are used by a business to generate revenues

Answer 156

A1656. Long Term operating assets Including Property, plant, and equipment Intangible assets

Question 157

Q1657. Name some examples of PPE

Answer 157

A1657. Tangible, long-lived assets Acquired for use in business operations Land Buildings Machinery Equipment Furniture

Question 158

Q1658. Name three characteristics of Intangible Assets

Answer 158

A1658. Long-lived assets Used to facilitate the operation of a business Do not have physical substance Patents Trademarks Licenses Franchises Goodwill

Question 159

Q1659. What are the Long term Asset stages?

Answer 159

A1659. Evaluate / Acquire / Estimate & Recognize / Monitor / Dispose

Question 160

Q1660. What process is this?The process of evaluating a long- term project that may include purchasing property, plant, and equipment

Answer 160

A1660. Capital Budgeting Common capital budgeting models: Payback period Accounting rate of return Net present value

Question 161

Q1661. Define Payback Period

Answer 161

A1661. The time it takes for a company to recover its original investment in cash PP = Initial Invest / Annual Cash flow

Question 162

Q1662. How do you find Rate of Return?

Answer 162

A1662. Annual Accounting income / Initial Investment

Question 163

Q1663. Define the cost of PP&E

Answer 163

A1663. includes any costs necessary to bring the asset to the condition and location for its intended use

Question 164

Q1664. How do you account for Subsequent expenditures after a PPE purchase?

Answer 164

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

Question 165

Q1665. Define a Lease

Answer 165

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

Question 166

Q1666. What are the differences between an operating lease and a capital lease?

Answer 166

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

Question 167

Q1667. What is this? The acquisition price of the asset is equal to fair market value of noncash consideration plus any cash given

Answer 167

A1667. Acquisition by Exchange

Question 168

Q1668. How do you record an acquisition through donation?

Answer 168

A1668. The asset is recorded at its fair market value at time it is received Debit Land / Credit Gain - donated asset

Question 169

Q1669. How do you record an acquisition with a basket purchase?

Answer 169

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

Question 170

Q1670. How do you record an acquisition of an entire company?

Answer 170

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

Question 171

Q1671. How do you record an acquisition through self construction?

Answer 171

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

Question 172

Q1672. Define the characteristics of an intangible asset

Answer 172

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

Question 173

Q1673. Define a Patent

Answer 173

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

Question 174

Q1674. Define a Copyright

Answer 174

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.

Question 175

Q1675. Define a trade name

Answer 175

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

Question 176

Q1676. What is this? An exclusive right to use a formula, design, technique, or territory.

Answer 176

A1676. Franchise

Question 177

Q1677. Define Goodwill

Answer 177

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.

Question 178

Q1678. A business combination occurs when one company buys all of the assets of the another…how do you account for the combination?

Answer 178

A1678. The combination is accounted for using the purchase method (as if one company is buying the other)

Question 179

Q1679. Describe the Purchase Method

Answer 179

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

Question 180

Q1680. Is this depreciation? The systematic allocation of an asset’s cost to the periods of benefit

Answer 180

A1680. Yes

Question 181

Q1681. Is this Depreciation? Accumulation of a cash fund for asset replacement A determination of an asset’s current value

Answer 181

A1681. No

Question 182

Q1682. Name two factors that cause depreciation

Answer 182

A1682. Causes of depreciation: Physical deterioration Due to use, passage of time, and exposure to the elements Obsolescence Outdated, outmoded, or inadequate

Question 183

Q1683. What is this? An estimate of the asset’s worth at the time of its disposal

Answer 183

A1683. Residual value (salvage value)

Question 184

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

Answer 184

A1684. Depreciable Cost

Question 185

Q1685. What are the three depreciation methods?

Answer 185

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

Question 186

Q1686. What depreciation method is this: An equal amount of depreciation expense is allocated to each period

Answer 186

A1686. Straight-line method

Question 187

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

Answer 187

A1687. Declining balance 1/life x rate = percentage rate

Question 188

Q1688. The straight line method is appropriate for what type of assets?

Answer 188

A1688. assets whose benefits diminish on a fairly uniform basis Most companies use the straight-line method due to its simplicity

Question 189

Q1689. The double-declining-balance method is appropriate for what type of assets?

Answer 189

A1689. assets that give up a greater portion of their benefits in the early years

Question 190

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

Answer 190

A1690. The Half Year Convention

Question 191

Q1691. What happens to salvage value for tax purposes

Answer 191

A1691. it’s ignored

Question 192

Q1692. Is Depreciation a source of cash?

Answer 192

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

Question 193

Q1693. If later events require a change in economic life and residual value, what happens?

Answer 193

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

Question 194

Q1694. With finite life intangible assets, name 3 characteristics

Answer 194

A1694. Amortize over the economic useful life or legal life, whichever is shorter Not to exceed 40 years Direct subtraction from the asset account

Question 195

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

Answer 195

A1695. Impairment of an asset value

Question 196

Q1696. What do you call the difference between the book value of the asset and the fair value

Answer 196

A1696. Impairment

Question 197

Q1697. When are gains in PPE recognized?

Answer 197

A1697. Gains are recognized in income only when assets are sold

Question 198

Q1698. When you compare US and International accounting standards, what is one of the key differences in accounting for PPE?

Answer 198

A1698. Conservatism controls the US and gains are only recognized at sale. The IAS allows upward revaluation.

Question 199

Q1699. Name 3 ways to dispose of long-term assets

Answer 199

A1699. retirement, sale, or trade-in of operating assets

Question 200

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

Answer 200

A1700. Retirement

Question 201

Q1701. Where are Gains/Losses reported on the Income Statement?

Answer 201

A1701. In the “other” category

Question 202

Q1702. What ratio is used to evaluate the appropriateness of the level of a company’s PP&E?

Answer 202

A1702. FAT - Fixed Asset Turnover = Sales / Average PPE Can be interpreted as the number of dollars in sales generated by each dollar of fixed assets

Question 203

Q1703. Chapter 12 review slide - over

Answer 203

A1703. Long-term assets provide the infrastructure for production and distribution Capital budgeting models include the payback period, accounting rate of return, and net present value analysis Patents, franchises, licenses, and goodwill are intangible assets. Straight-line and declining balance are common depreciation methods Recognizing impairment for PPE is a two-step process Gain (loss) on asset disposal occurs if proceeds received are greater (less) than the asset’s book value at date of sale

Question 204

Q1704. What are the steps in the life cycle of a security issue?

Answer 204

A1704. Determine / purchase / classify / earn / monitor / sell

Question 205

Q1705. Name the 5 reasons that companies invest in other companies

Answer 205

A1705. Safety cushion; Cyclical cash needs; A return on investment; Influence; Control - Safety cushion: Investments are sometimes made to give a company a ready source of funds as a margin of safety - Cyclical cash needs: Some companies have a seasonal business cycle requiring large amounts of cash for inventory buildup followed by increased sales and cash collections - A return on investment: Companies invest simply to earn a rate of return - Influence: Companies can invest to Ensure a supply of raw materials, Influence a board of directors, Diversify their product offerings - Control: An investment resulting in over 50% ownership of a company’s shares of stock produces a controlling interest The investing company can control the other company’s operating, investing, and financing decisions

Question 206

Q1706. What involves a promise of interest payments and repayment of the principal amount of the debt?

Answer 206

A1706. Debt Securities - Debt security investors have priority over equity investors in terms of interest payments and principal in the event of a corporate liquidation

Question 207

Q1707. What represents an actual ownership interest in a corporation

Answer 207

A1707. Equity Securities Equity investors have the right to vote in corporate matters such as election of directors Equity investors may receive a rate of return from dividends and appreciation of stock price

Question 208

Q1708. What are those debt and equity securities purchased with the intent to take advantage of short-term price changes

Answer 208

A1708. Trading Securities

Question 209

Q1709. What are those debt and equity securities purchased for safety, to hold temporarily excess cash, or to earn a normal long-run return

Answer 209

A1709. Available-for-sale securities

Question 210

Q1710. What are are debt securities purchased with the intent of holding the securities until they mature

Answer 210

A1710. Held to Maturity Securities

Question 211

Q1711. What are equity securities purchased in order to exercise ownership influence (at least 20% of the shares) over another company

Answer 211

A1711. Equity method securities

Question 212

Q1712. At what price are investment securities recorded?

Answer 212

A1712. Cost Cost includes The market price Any additional expenditures required in making the purchase E.g., stockbroker’s fee

Question 213

Q1713. Where are Realized gains and losses from the sale of securities are included?

Answer 213

A1713. Income Statement A gain or loss is realized when it is confirmed and verified through the actual sale of the security

Question 214

Q1714. Where are Changes in the market value (unrealized gains and losses) are recognized?

Answer 214

A1714. income statement The market value is reported on the balance sheet as an asset

Question 215

Q1715. How are available for sale securities recorded on the balance sheet?

Answer 215

A1715. The market value is reported on the balance sheet as an asset The accumulated unrealized gain/loss is treated as a stockholders’ equity adjustment

Question 216

Q1716. How do you compute the overall rate of return?

Answer 216

A1716. Portfolio return / portfolio beginning balance

Question 217

Q1717. How are unrealized gain/losses measured?

Answer 217

A1717. Measured from beginning of year to end of year Asset adjusted to end-of-year market value Gain (Loss) reported Trading portfolio: on income statement Available-for-Sale portfolio: on Balance Sheet (Equity Section) in Accumulated Other Comprehensive Income

Question 218

Q1718. How are realized gains/losses measured?

Answer 218

A1718. Measured as the difference between historical cost and the sale proceeds Gain (Loss) reported Trading portfolio: on income statement Available-for-Sale portfolio: on income statement

Question 219

Q1719. What type of Securities have these traits: Debt securities Intent to hold until maturity date Cash inflows While owned, interest At maturity date, maturity value Reported at amortized cost Unrealized gains and losses are not measured or recognized

Answer 219

A1719. Held to Maturity Securities

Question 220

Q1720. If the purchase price of a bond is LESS than the face value, what is it?

Answer 220

A1720. Discount, because the market’s interest rate is HIGHER than the bond’s

Question 221

Q1721. If the purchase price of a bond is Equal to the face, what is it?

Answer 221

A1721. Par

Question 222

Q1722. If the purchase price of a bond is GREATER than the face value, what is it?

Answer 222

A1722. Premium

Question 223

Q1723. What is the equity method when discussion securities?

Answer 223

A1723. The equity method is used when an investor company has significant influence over an investee company Significant influence is presumed if a company owns between 20% and 50% of the company

Question 224

Q1724. Describe the accounting for equity method securities

Answer 224

A1724. The investment asset is originally recorded at its acquisition cost Account for activity using the accrual method: Record revenue as earned, not paid Accrual method prevents manipulation of income by investor entity.

Question 225

Q1725. How does the investor account for the investee’s reported net income?

Answer 225

A1725. Reported as revenue and increases the carrying value of the Investment account on the balance sheet Cash dividends received are recorded as an increase to Cash and a decrease to the Investment account (return of investment)

Question 226

Q1726. What needs to be done with the books when an investor owns a controlling interest (over 50% ownership of the voting stock of the investee)

Answer 226

A1726. The investor/parent is able to determine both the financial and operating policies of investee/subsidiary Consolidated financial statements are required

Question 227

Q1727. What do you call the interest of other shareholders for subsidiaries that are not 100% owned by the parent

Answer 227

A1727. Minority Interest

Question 228

Q1728. Ch 13 summary

Answer 228

A1728. Companies make investments in securities for a variety of reasons Equity investments are classified as trading, available-for-sale, or equity-method; debt security investments are classified as trading, available-for-sale, or held-to-maturity Trading and available-for-sale securities are carried at market value; held-to-maturity bond investments are carried at amortized cost; equity-method investments are carried at adjusted-cost Consolidated financial statements are prepared if the parent owns more than 50% of a subsidiary; minority interest reports the equity of other investors in subsidiaries that are not wholly- owned

Question 229

Q1729. What is a liability?

Answer 229

A1729. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Question 230

Q1730. There are two types of liabilities, what are they?

Answer 230

A1730. Monetary liabilities are obligations payable in a fixed sum of money Examples: accounts payable, accruals Nonmonetary liabilities are obligations to provide fixed amounts of goods and services Example: revenues received in advance of providing a service

Question 231

Q1731. There are two types of liabilities, what are they?

Answer 231

A1731. Current liabilities are obligations expected to be satisfied within one year of the balance sheet date Examples: accounts payable, accrued liabilities, current maturity of mortgage Long-term liabilities are obligations expected to be satisfied after one year from the balance sheet date Examples: bonds payable, remainder of mortgage

Question 232

Q1732. What is the Current ratio?

Answer 232

A1732. Measures the ability to repay debt in the short run Current ratio = current assets / current liabilities

Question 233

Q1733. What current ratio is considered indicative of liquidity concerns? Historically and now?

Answer 233

A1733. Historically, less than 2:1 indicative of liquidity concerns Now, due to advances in technology, frequently less than 1:1

Question 234

Q1734. When are contingent liabilities recognized?/

Answer 234

A1734. Contingent liabilities are recognized if Probable and Can be reasonably estimated

Question 235

Q1735. Current liabilities are shown at face value, how are long- term liabilities shown?

Answer 235

A1735. Present day value. (what it would cost to completely pay off the obligation today

Question 236

Q1736. There are 5 common types of short term operating liabilities, what are they?

Answer 236

A1736. Accts Payable, Accrued liabilities, short term debt, promissory notes (commercial paper), line of credit

Question 237

Q1737. What do you call A loan backed by an asset whose title is pledged to the lender

Answer 237

A1737. Mortgage A mortgage is payable in equal installments (an annuity) Each payment is comprised of interest and principal Interest is charged on the declining principal balance

Question 238

Q1738. What do you call a loan backed by certain assets as collateral?

Answer 238

A1738. secured loan

Question 239

Q1739. What is a written agreement between a borrower and a lender in which the borrower agrees to

Answer 239

A1739. Bond - Repay a stated sum on a future date Make periodic interest payments at specified dates After issuance, bonds may be publicly traded on a bond exchange

Question 240

Q1740. There are four names for the denomination of a bond - what are they?

Answer 240

A1740. The denomination is also called the Principal Face value Maturity value Par value

Question 241

Q1741. What do you call the date on which a bond matures?

Answer 241

A1741. Maturity Date

Question 242

Q1742. What are two other names for the bond’s stated interest rates

Answer 242

A1742. Face Rate or Coupon rate Is specified on the bond at issuance Is set as close as possible to the market rate established by the money market depends on the prevailing interest rates and perceived risk of the company Remains constant over the life of the bond Is applied to the face of the bond to calculate interest payments to bondholders Most bonds pay interest semiannually Stated interest rate is always an annual amount

Question 243

Q1743. What type of bonds don’t pay interest periodically?

Answer 243

A1743. zero coupon bonds - Are issued at a deep discount The discount represents interest to be earned over the life of the bond Are a popular form of issue with governmental units

Question 244

Q1744. What type of bonds have all principle due on a single date?

Answer 244

A1744. Term Bonds

Question 245

Q1745. What type of bonds have bonds payable at specific intervals

Answer 245

A1745. serial bonds

Question 246

Q1746. Also called debentures, these are issued without any security to back them

Answer 246

A1746. Unsecured Bonds

Question 247

Q1747. Also called mortgage bonds, these are secured by the borrower’s collateral or specified assets

Answer 247

A1747. Secured Bonds

Question 248

Q1748. What type of bonds may at some future, specified date be exchanged for, or converted into, the company’s common stock

Answer 248

A1748. Convertible Bonds

Question 249

Q1749. What types of bonds allow the borrower, or issuer, to call or redeem the bonds prior to their maturity

Answer 249

A1749. Callable Bonds

Question 250

Q1750. What are the 4 factors that influence bond prices?

Answer 250

A1750. Stated interest rates, Prevailing market rates, length of time to maturity, perceived risk of investment

Question 251

Q1751. How are Bonds recorded and recognized in the financial statements?

Answer 251

A1751. at the present value of future cash flows Interest annuity (face × stated rate × time) Maturity value

Question 252

Q1752. Depending on the relationship between the stated interest rate and the yield rate, how are bonds valued?

Answer 252

A1752. par value par value minus a discount par value plus a premium

Question 253

Q1753. When bonds are repaid at maturity, Bonds Payable is decreased and Cash is decreased

Answer 253

A1753. Cash -10000 bond pay -100000

Question 254

Q1754. What is collection of cash and short-term securities that is set aside for repayment of the principal of the bonds

Answer 254

A1754. A bond sinking fund is an asset reported in the investment section of the balance sheet

Question 255

Q1755. What occurs when a firm’s long-term debt is retired before maturity

Answer 255

A1755. Early extinguishment of debt. A gain or loss occurs when there is a difference between the reacquisition price and the carrying value of the debt The gain or loss is reported as a component of income from continuing operations on the income statement

Question 256

Q1756. What are the economic advantages of leasing for the LESEE

Answer 256

A1756. No (or low) down payment Avoid risks associated with ownership Technological obsolescence Physical deterioration Changing economic conditions Flexibility

Question 257

Q1757. What are the economic advantages for the lessor

Answer 257

A1757. Increased sales Ongoing business relationship with the lessee Residual value retained

Question 258

Q1758. What type of lease is accounted for as if the lease agreement transfers ownership of the asset to the lessee The lease is equivalent to a financed purchase An asset and liability must be recorded on lessee’s books

Answer 258

A1758. Capital Lease

Question 259

Q1759. What type of lease is accounted for as rental agreements, with no transfer of effective ownership associated with the lease Lease payments are recorded as rent expense by the lessee and rent revenue to the lessor

Answer 259

A1759. Operating Lease

Question 260

Q1760. If any one of the following criteria are met, then the lease is classified as a capital lease

Answer 260

A1760. The lease transfers ownership of the property to the lessee by the end of the lease term The lease contains a bargain purchase option The lease term is equal to 75% or more of the estimated economic life of the leased property The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the property

Question 261

Q1761. What do you call Obligations of a company that are not disclosed on the financial statements

Answer 261

A1761. Off-balance sheet financing Three common types of off-balance sheet financing are Operating leases Unconsolidated subsidiaries Joint ventures

Question 262

Q1762. What is a subsidiary that is accounted for using the equity method

Answer 262

A1762. Unconsolidated subsidiary Companies that purchase less than 50% of an investee do not have to prepare consolidated financial statements The investee’s debt is kept off the balance sheet

Question 263

Q1763. What occurs occur when companies join forces to share the costs, risks, and benefits associated with specifically defined projects

Answer 263

A1763. Joint Venture A joint venture is carefully structured to ensure that the liabilities of the venture are not disclosed in the balance sheets of the companies They are often just a special type of unconsolidated subsidiary

Question 264

Q1764. What do you call Using debt to finance asset purchases

Answer 264

A1764. leverage

Question 265

Q1765. What is debt ratio equation?

Answer 265

A1765. debt ratio = total liabilities / total assets Rule of thumb: Most large U.S. companies borrow about half the funds they use to purchase assets

Question 266

Q1766. What is the debt to Equity ratio?

Answer 266

A1766. DEQ = total liabilities / total equity

Question 267

Q1767. ch 14 summary

Answer 267

A1767. Liabilities are existing obligations for future economic sacrifice Accounts payable and other short-term operating accruals are generally non-interest-bearing Long-term liabilities are reported at the present value of future cash flows Bonds are issued to borrow funds from multiple sources. Bonds can be issued at par, at a discount, or at a premium. Leases are either rental in nature (operating) or in essence, purchases (capital). Four specific criteria exist for capital leases Off-balance-sheet financing arises with operating leases, unconsolidated subsidiaries, and joint ventures Debt-related financial ratios indicate the degree of leverage and the extent of a company to make period interest payments.

Question 268

Q1768. The first body of the accounting profession who determine GAAP

Answer 268

A1768. Committee on Accounting Procedure and they developed Accounting Research Bulletins (ARB)

Question 269

Q1769. The second body of the accounting profession who determine GAAP

Answer 269

A1769. Accounting Principles Board and they developed Opinions (APBO)

Question 270

Q1770. The third body of the accounting profession who determine GAAP

Answer 270

A1770. Financial Accounting Standards Board (FASB) developed Statements of Financial Accounting Standards (SFAS) to define specific methods and procedures for various accounting issues. FASB interpretations clarify GAAP. Technical Bulletins further clarify GAAP

Question 271

Q1771. Statements of Financial Accounting Concepts (SFAC)

Answer 271

A1771. intended to establish the objectives and concepts to use by the FASB in developing accounting and reporting standards. Provide common foundation and basic reasoning, however they do not establish GAAP

Question 272

Q1772. Hierarchy of Sources of GAAP (BOSSII)

Answer 272

A1772. B - Accounting Research Bulletins O - Accounting Principles Board Opinions S - FASB Statements of Financial Accounting Standards S - FASB Staff Positions I - FASB Interpretations I - FASB Statement Implementation Issues

Question 273

Q1773. Objectives of Financial Reporting by Business Enterprises

Answer 273

A1773. Disclose entities performance, focus in on the informational needs to external users. Objectives provide: - Investment and credit decisions - Assessing future cash flow prospect (value) - Enterprise’s resource, the debt equity claims (Risk/required return)

Question 274

Q1774. Qualitative Characteristics of Accounting Information

Answer 274

A1774. Financial Information must be: - Understandable to decision makers - Relevant (timely info) - Reliable (verifiable and neutral) - Comparable - Consistent - Material - Less costly than the benefit provided

Question 275

Q1775. What is the hierarchy of accounting qualities

Answer 275

A1775. (BUD) - Benefits > Cost - Understandability (understandable to a wide variety of users who possess a reasonable amount of knowledge about the economy) - Decision Usefulness - Materiality

Question 276

Q1776. What are the primary decision specific qualities

Answer 276

A1776. Relevance (Passing Feels Terrific) - Predictive Value - Feedback Value - Timeliness Reliability (Nobody Relies on Financials unless Verified) - Neutrality - Representational Faithfulness - Verifiability

Question 277

Q1777. What are the secondary and interactive qualities

Answer 277

A1777. - Comparability (coke vs pepsi) - Consistency (2009 vs 2008), consistent accounting policies and procedures must be applied by the company from period to period, unless the new method more fairly presents the information

Question 278

Q1778. Constraints of accounting qualities

Answer 278

A1778. - Benefits must outweigh the cost of obtaining the information Materiality, the information could make a difference in decision made by the users

Question 279

Q1779. What consists of the full set of financial statements

Answer 279

A1779. - Statement of financial position (balance sheet) - Statement of earnings (the income statement) - Statement of comprehensive income - Statement of cash flows - Statement of changes in owner’s equity

Question 280

Q1780. What is the historical cost assumption

Answer 280

A1780. The general rule is the financial information is accounted for and based on cost and not current market value except for a few exceptions

Question 281

Q1781. Revenue Recognition Principle

Answer 281

A1781. General rule is revenue should be recognized when it is earned and when it is realized or realizable Earned happens when goods are transferred or risk of loss happens and with service, when the service is substantially complete Realized is when cash is exchanged Realizable is claims to cash

Question 282

Q1782. What is the matching principle

Answer 282

A1782. In accordance with the matching principle, all expenses incurred to generate a specific amount og revenue in a period are matched against that revenue

Question 283

Q1783. What is accrual accounting

Answer 283

A1783. Accrual simply means to record without the exchange of cash, revenues are recognized when they are earned and expenses are recognized in the same period as the related revenue

Question 284

Q1784. Conservatism Principle

Answer 284

A1784. When selecting the GAAP method, select the method that is least likely to overstate assets and understate liabilities. GR: Defer est. gains until realized Record probable est. losses immediately

Question 285

Q1785. Comprehensive Income

Answer 285

NAME?

Question 286

Q1786. Revenues and Expenses are an example of …

Answer 286

A1786. Recurring Operations

Question 287

Q1787. Gains and Losses are …

Answer 287

A1787. Non operating unusual or infrequent

Question 288

Q1788. Assets

Answer 288

A1788. probable future economic benefit

Question 289

Q1789. Liabilities

Answer 289

A1789. Probable future sacrifices of economic benefits

Question 290

Q1790. Equity (Net Assets)

Answer 290

A1790. Simply Assets minus the liabilities

Question 291

Q1791. What is the basic value asset/ liabilities formula

Answer 291

A1791. CF1(future cash flows)/(1+r)

Question 292

Q1792. Five Elements of Present Value Measurement

Answer 292

A1792. (a) Estimate of future cash flows (b) Expectations about timing variations of future cash flows (c) Time value of money (risk free rate of interest) (effects discount rate) (d) The price for Bearing Uncertainty(effects discount rate) (e) Other factors (liquidity issues, market imperfections) (effects discount rate)

Question 293

Q1793. What are the two methods to compute present value

Answer 293

A1793. - Traditional Approach, bonds when scheduled payments are known - Expected cash flow approach, warranties, when uncertain about future payments

Question 294

Q1794. What are the uses of the income statement

Answer 294

A1794. To determine profitability, value, and credit worthiness

Question 295

Q1795. What is Cost

Answer 295

A1795. Cost and expense is not synonymous. Cost is the amount actually paid for something

Question 296

Q1796. When do you expense and when do you capitalize?

Answer 296

A1796. Expense to the Income Statement if you reasonably believe it will not generate revenue in future periods Capitalize to the balance sheet if you reasonably believe the asset will generate revenue in future periods

Question 297

Q1797. Unexpired Costs

Answer 297

A1797. Can generate revenue in the future so treated like an asset. Allocated in a systematic and rational manner or matched.

Question 298

Q1798. Ex. Unexpired Costs: Inventory———-> Unexpired prepaid cost of insurance—> Net book value of fixed assets—–> Unexpired cost of patents———->

Answer 298

A1798. Expired Costs: Cost of goods sold Insurance expense Depreciation expense Patent expense (amortization)

Question 299

Q1799. Revenues

Answer 299

A1799. Selling price for services or inventory. Revenues are reported at their gross amounts.

Question 300

Q1800. Expenses

Answer 300

A1800. COGS, selling general & administrative. Expenses reported at their gross amount

Question 301

Q1801. Net Concept Gain or Losses

Answer 301

A1801. SP(NRV)-Net Book Value (Cost - accumulated depreciation)= Gain or Loss “Net” Gains and losses are reported on their net amount. Gains come from sales other than inventory such as PPE and investments Losses come from sales of PPE, Investments, and also writedowns and write offs

Question 302

Q1802. What is reported on the Income Statement

Answer 302

A1802. - Income (or loss) from continued operations (gross of tax) - Income (or loss) from discontinued operations (net of tax) -Extraordinary item (report net of tax)

Question 303

Q1803. What is included in Income (or loss) from continued operations (gross of tax)

Answer 303

A1803. Income from continuing operations includes operating activities (revenue, COGS, other expenses) and also non operating activities (gains, losses, other revenues), and income taxes

Question 304

Q1804. What is included in Income (or loss) from discontinued operations (net of tax)

Answer 304

A1804. Income from discontinued operations ins presented net of tax

Question 305

Q1805. What is extraordinary items

Answer 305

A1805. Extraordinary items are presented net of tax and include items that are unusual in nature and infrequent in occurrence.

Question 306

Q1806. Cumulative effect of change in accounting principle

Answer 306

A1806. General rule is to report net of tax on the statement of retained earnings. record the cumulative effect, and it must be a change from one acceptable method if accounting to another because the new method presents the financial information more fairly than the old method

Question 307

Q1807. Reporting Rules

Answer 307

A1807. - Line items above “income from continuing operations” are shown gross (before tax), and line items below are shown net of tax

Question 308

Q1808. What does the mnemonic “IDEA” stand for

Answer 308

A1808. - Income from continuing operations (reported both gross and then net on the income statement) - Discontinued operations (reported net and also on the income statement) - Extraordinary items (net and on the income statement) - Accounting principle change (net and on the retained earnings statement)

Question 309

Q1809. What is the single step income statement

Answer 309

A1809. IIn the single step income statement presentation of income from continuing operations, total expenses (including income tax expenses) are subtracted from total revenue.

Question 310

Q1810. COGS includes …

Answer 310

A1810. freight in

Question 311

Q1811. Selling expense includes…

Answer 311

A1811. freight out

Question 312

Q1812. What is the COGS formula?

Answer 312

A1812. Beginning Inventory + Purchases / Cost of Goods Manufactured ________________________ Cost of goods available for sale - Ending Inventory ________________________ COGS

Question 313

Q1813. What is the flow of information for Net Income

Answer 313

A1813. In a single step income statement, the net income from the income statement is then added to the beginning retained earnings in the statement of retained earnings. The retained earnings at the end of the period is then carried over to the balance sheet and apart of stockholders equity.

Question 314

Q1814. What is the multiple step income statement?

Answer 314

A1814. The multiple step income statement reports operating revenues and expenses separately from non operating revenues and expenses and other gains and losses. Provides enhanced user information

Question 315

Q1815. How do u find Net Sales if not given?

Answer 315

A1815. Gross - (Returned + Discounts)

Question 316

Q1816. What is Advertising expense considered?

Answer 316

A1816. It is considered part of the selling expense

Question 317

Q1817. Discontinued Operations

Answer 317

A1817. Discontinued operations are still reported separately from continuing operations in the income statement according to the IDEA mnemonic, net of tax. The (normally) loss from discontinued operations can consist of an IMPAIRMENT LOSS, A GAIN/LOSS FROM ACTUAL OPERATIONS, AND A GAIN/LOSS ON DISPOSAL. all of these amounts are included in discontinued operations in the period in which they occur

Question 318

Q1818. Component of an entity

Answer 318

A1818. is part of an entity for which operations and cash flows can be distinguished. Component may be: - Operating segment - Reportable segment - A reporting unit - A subsidiary - An Asset group

Question 319

Q1819. What is an asset group

Answer 319

A1819. a asset group is a collection of assets to be disposed of together as a group in a single (disposal) transaction and the liabilities directly associated with those assets that will be transferred in that same transaction.

Question 320

Q1820. How do you consider something “held for sale”

Answer 320

A1820. All of these requirements must be met: - 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 complete within one year - The sale of the component is being actively marketed - Actions required to complete the sale make it unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Question 321

Q1821. Will be reported in discontinued operations if either the component:

Answer 321

A1821. - Has been disposed of , or - Is classified as held for sale ( must meet all six requirements)

Question 322

Q1822. Both the following conditions must be met in order to report in discontinued operations the results of the operations of the component that has been disposed of or is held for sale

Answer 322

A1822. - Eliminated from ongoing operations - No significant continuing involvement

Question 323

Q1823. What type of items are included in the results of discontinued operations

Answer 323

A1823. - Results of operations of the component (for that period) - Gain of Loss on disposal of the component (reported in period of sale) - Impairment Loss (and subsequent increases in fair value) of the component

Question 324

Q1824. Anticipated future gains or losses

Answer 324

A1824. Not recognized until they occur

Question 325

Q1825. Present as a Separate Component if Income

Answer 325

A1825. The results of discontinued operations, net of tax, are reported as a separate component of income before extraordinary items.

Question 326

Q1826. Extraordinary Items

Answer 326

A1826. Unusual, infrequent, and material

Question 327

Q1827. How do you disclose extraordinary items

Answer 327

A1827. Extraordinary items must be separately disclosed in the income statement, net of any related tax effects, after discontinued operations.

Question 328

Q1828. Examples of extraordinary items

Answer 328

A1828. - The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood - An appropriation of a plant by the government - A prohibition of a product line by a newly enacted law or regulation - Certain gain or losses from extinguishment of long-term debt, provided they are not part of the entity’s recurring operations and thus must say unusual and infrequent

Question 329

Q1829. Non Extraordinary items

Answer 329

A1829. Normal Recurring or Non operating (unusual or infrequent) Reported before tax (gross) not net of tax - gain or loss from sale of PPE - writedown, writeoffs of: receivables, inventories, intangibles, long term securities - gain or loss from foreign currency transaction or translation - losses from employee strikes - long term debt extinguishments

Question 330

Q1830. Material Unusual OR infrequent items (non operating)

Answer 330

A1830. If material, these items should be reported as a separate line item as part of income from continuing operations (and not net of tax)

Question 331

Q1831. What are the three accounting changes and how are they classified

Answer 331

A1831. - Changes in accounting estimate (prospective) - Changes in accounting principle (GR —> “Retro”) - Changes in accounting entity (Restate)

Question 332

Q1832. Changes in accounting estimate

Answer 332

A1832. (prospectively) a change in accounting estimate occurs when it is determined that the estimate previously used by the company is incorrect, when there’s new information available.

Question 333

Q1833. Changes in accounting principle

Answer 333

A1833. A change in accounting principle is a change in accounting from one acceptable method of GAAP to another acceptable method of GAAP. - Only change principles if the new principle more fairly presents the information

Question 334

Q1834. Direct effects of change in accounting principles

Answer 334

A1834. The direct effects of a change in accounting principle are adjustments that would be necessary to restate the financial statements of prior periods

Question 335

Q1835. Indirect effects of change in accounting principles

Answer 335

A1835. differences in non discretionary items based on earnings (bonuses) that would have occurred if the new principle had been used in prior periods.

Question 336

Q1836. Cumulative effects of change in the accounting principles

Answer 336

A1836. If non-comparative financial statements are being presented, then the cumulative effect of a change in accounting principle is equal to the difference between the amount of beginning retained earnings in the period of change and what the retained earnings would have been if the accounting change had been retrospectively applied to all prior affected periods.

Question 337

Q1837. Reporting Changes in an accounting principle

Answer 337

A1837. Changes should be mentioned in the retained earnings. The general rule is that such changes should be recognized by adjusting the beginning retained earnings in the earliest period presented for the cumulative effect of the change, and, if prior period financial statements are presented, they should be restated (retrospective application)

Question 338

Q1838. Exceptions to the general rule of reporting changes in accounting principle.

Answer 338

A1838. Exceptions to the general rule include changes to LIFO and changes in depreciation, amortization and depletion. When these two occur, you prospectively change it, treat it like a estimate change.

Question 339

Q1839. Changes in Accounting Entity

Answer 339

A1839. Retrospective application. Occurs when the entity being reported on has changed composition. Examples include consolidated or combined financial statements that are presented in place of statements of the individual companies.

Question 340

Q1840. Prior period adjustments

Answer 340

A1840. (Restatement) Corrections of errors in the financial statement of prior periods. (changes from non GAAP to GAAP is correction of error. If comparative financial statements presented, correct the information, if year is presented. If not presented, adjust the beginning retained earnings of the earliest year presented, if the year is not presented (NET OF TAX)

Question 341

Q1841. What is comprehensive income

Answer 341

A1841. Non owner transactions. Change in equity (net assets) of business enterprise during a period from transactions and other events and circumstances from non owner sources. Net Income (per the income statement) + Other comprehensive income (PUFE) ___________________________ comprehensive income

Question 342

Q1842. Where is PUFE reported

Answer 342

A1842. PUFE is not reported in the income statement, directly to equity adjustments

Question 343

Q1843. What does PUFE stand for ?

Answer 343

A1843. - Pension changes in funded status - Unrealized Gains and Losses (available for sale) - Foreign currency items - Effective portion of the cash flow hedge

Question 344

Q1844. Reclassification Adjustments

Answer 344

A1844. Once displayed as part of other comprehensive income but now reclassified and now flow through the income statement

Question 345

Q1845. Accumulated Other Comprehensive Income

Answer 345

A1845. Shown in stockholders equity, a component of equity that includes the total other comprehensive income for the period and previous periods.

Question 346

Q1846. What are the three ways to present comprehensive income?

Answer 346

A1846. First, comprehensive income should not be presented on a per share basis. 1. Below the total for net income in a statement that reports results of operations (start with revenue) 2.In a separate statement of comprehensive income that begins with net income 3. In a statement of changes in equity

Question 347

Q1847. What are the required disclosures from the three formats ?

Answer 347

A1847. - The tax effects of each component included in current “Other Comprehensive Income” - The accumulated balances of components of “Other Comprehensive Income” (the accumulated balances by component may be shown on the balance sheet, in the statement of changes in equity, or in the notes to the financial statements - Total accumulated other comprehensive income in the balance sheet as an item of equity - The reclassification adjustments

Question 348

Q1848. What are the two key components of the balance sheet?

Answer 348

A1848. Assets and Liabilities and Stockholder’s Equity

Question 349

Q1849. What main components make up Assets?

Answer 349

A1849. Current assets investments, property plant and equipment, intangible assets, other assets, and that finally makes up the total assets.

Question 350

Q1850. What are considered current assets

Answer 350

A1850. Cash an cash equivalents Trading securities at fair value Accounts receivable, net allowance for uncollectible accounts Notes receivable Merchandise inventory, at lower of cost or market Prepaid expenses

Question 351

Q1851. What are considered investments

Answer 351

A1851. Available for sale securities at fair value Held to maturity securities Land held for future plant site

Question 352

Q1852. Property, plant, and equipment

Answer 352

A1852. Land building equipment Less: Accumulated depreciation

Question 353

Q1853. Intangible assets

Answer 353

A1853. Goodwill Patents, net of amortization

Question 354

Q1854. Other assets

Answer 354

A1854. Bond issue cost Pension and other post-retirement benefit assets

Question 355

Q1855. What main components make up Liabilities and stockholders’ equity

Answer 355

A1855. Current Liabilities Long term liabilities TOTAL LIABILITIES Stockholders Equity TOTAL STOCKHOLDERS EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

Question 356

Q1856. Current Liabilities

Answer 356

A1856. Long-term debt due within one year Accounts payable Notes payable Interest payable Salaries payable Income tax payable Advances from customers (unearned revenue) Unearned rent revenue

Question 357

Q1857. Long term liabilities

Answer 357

A1857. Bond payable (10%, due December 31, 2009) Plus: Unamortized premium on bonds or Less: Unamortized discount on bonds Deferred income tax liability Pension and other postretirement benefit liabilities TOTAL LIABILITIES

Question 358

Q1858. Stockholders’ equity

Answer 358

A1858. Capital stock, (preferred and common stock, must state the par value, how many share authorized, how many issued and how many outstanding) Paid in capital in excess of par Total paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock at cost (# shares) TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

Question 359

Q1859. What are disclosures ?

Answer 359

A1859. GAAP requires that a description of all significant policies should be included as an integral part of the financial statements. Should be the first or second note to the financial statements

Question 360

Q1860. What are identified and described in the disclosures ?

Answer 360

A1860. Principles and methods Criteria Policies Pricing

Question 361

Q1861. Remaining Notes

Answer 361

A1861. The remaining notes contain all other information relevant to decision makers. These notes are used to disclose facts not presented in either the body of the financial statements or in the “Summary of Significant Accounting Policies” EXAMPLES Changes in stockholders equity Required marketable securities Contingency losses Contractual obligations Pension plan description Post balance sheet disclosures Discontinued segment

Question 362

Q1862. Interim Financial Statements

Answer 362

A1862. Quarterly reports required for publicly traded companies. Matching of revenue and expenses by quarter Timeliness over reliability Integral part of the annual financial statements

Question 363

Q1863. Segment Reporting

Answer 363

A1863. - The objective is to provide information on the business activities to help users of the financial statements - Must use same accounting principles as main financial statements - Intercompany transactions not eliminated for reporting - Segment reporting applies to public companies only

Question 364

Q1864. What are the required disclosures for all public enterprises when it comes to segment reporting?

Answer 364

A1864. -Operating segments (annual and interim) -Products and services -Geographic areas -Major customers

Question 365

Q1865. Segment Reporting

Answer 365

A1865. - Required disclosures to provide information on the business activities to help users of the financial statements - Intercompany transactions are not eliminated - Public companies only

Question 366

Q1866. What are the required disclosures for all public enterprises (concerning segment reporting)

Answer 366

A1866. - Operating segments (annual and interim) - Products and services - geographic areas - Major customers

Question 367

Q1867. What is the definition of an operating segment

Answer 367

A1867. An operating segment is a component of an enterprise -engages in business activities from which it may earn revenue and incur expenses -Operating results are regularly reviewed by the enterprise’s “Chief operating decision maker” -Traceable cash flow

Question 368

Q1868. Quantitative thresholds for reportable segments (Materiality tests)

Answer 368

A1868. 10% “size” test (must only meet one) - is 10% or more of the combined revenue, internal and external, of all operating segments - Absolute amount o its reported profit or loss is 10% or more of the greater, in absolute amount - Segment meets the size test if its assets are 10% or more of the combined assets of all operating segments

Question 369

Q1869. 75% “reporting sufficiency” test

Answer 369

A1869. If the total of external revenue reported by operating segments constitute less than 75% of external revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three test, until at least 75% of external revenue is included in reportable segments

Question 370

Q1870. Segment Profit (or loss) formula

Answer 370

A1870. Revenue(for that segment internal and external sales) - Directly traceable costs - Reasonably allocated costs (by ceo) ____________________________ Operating profit (or loss)

Question 371

Q1871. Items normally excluded from segment profit

Answer 371

A1871. - general corporate expenses and revenues - Interest expense (unless bank) - income taxes - equity in earnings and losses of an unconsolidated subsidiary - gains or losses from discontinued operations - extraordinary items - minority interest- non controlling

Question 372

Q1872. Development Stage Enterprises

Answer 372

A1872. Start ups, pioneering development -Start up/ organizational costs, expense immediately under GAAP

Question 373

Q1873. Disclosure for development stage enterprise

Answer 373

A1873. Developmental stage enterprise must issue the same financial statements as any other enterprise. prepared in conformity with GAAP. Additional required disclosures are as follows - identify the financial statements as those of a development stage enterprise (in heading) - In the balance sheet, describe cumulative net losses as “deficit accumulated during the development stage” - In the income statement, show revenue and expenses for each period being presented and present a cumulative amount (generally of losses) from the company’s inception - In the statement of cash flows, include cumulative amounts of cash inflows and outflows from the company’s inception and currents amounts of cash inflows and outflows for each period presented

Question 374

Q1874. SFAS No. 157 applies to all fair value measurement except

Answer 374

A1874. 1. Share based payment and related interpretative pronouncements 2. Inventory pricing

Question 375

Q1875. What is fair value

Answer 375

A1875. Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date

Question 376

Q1876. Stuff to be familiar with with fair market

Answer 376

A1876. - Fair value is measured for a specific asset or liability, or a group of assets and or liabilities - Fair value is a market specific measure, not entity specific - Fair market is measured in the principal, or most advantageous, market for the asset or liability - Fair value is an exit price - A fair value measure should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk - Fair value does not include transaction costs, but may include transportation costs if location is an attribute of the asset or liability - The fair value of an asset assumes the highest and best use of the asset - The fair value of a liability should include the liability’s nonperformance risk

Question 377

Q1877. Orderly transaction

Answer 377

A1877. The asset or liability is exposed to the market for a period before the measurement date long enough to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities. Cannot be a forced transaction (basically not a fire sale)

Question 378

Q1878. Market participants

Answer 378

A1878. Buyers and sellers who are independent (not related parties). Able and willing to transact for the asset or liability

Question 379

Q1879. Principal market

Answer 379

A1879. The market with the greatest volume or level of activity for the asset or liability

Question 380

Q1880. Most advantageous market

Answer 380

A1880. Use if there is no principal market. the best price for the asset or liability after considering transaction cost, although transaction cost are used to determine the most advantageous market, transaction costs are not included in the final value measurement.

Question 381

Q1881. Valuation techniques

Answer 381

A1881. - Market approach - The income approach - The cost approach

Question 382

Q1882. Market approach

Answer 382

A1882. Uses prices and other relevant information from the market transactions involving identical or comparable assets or liabilities to measure fair value (real estate)

Question 383

Q1883. Income approach

Answer 383

A1883. Converts future amounts, including cash flows or earnings, to a single discontinued amount to measure fair value (Rent, future cash flows)

Question 384

Q1884. The cost approach

Answer 384

A1884. The cost approach uses current replacement cost to measure the fair value of assets

Question 385

Q1885. Hierarchy of inputs

Answer 385

A1885. There are 3 level of inputs , level 1,2, and 3 inputs.

Question 386

Q1886. Level 1 inputs

Answer 386

A1886. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has access to on the measurement date.

Question 387

Q1887. When is revenue from sales of products recognized?

Answer 387

A1887. Recognized on date of sales

Question 388

Q1888. When is revenue that stems from allowing others the use of the entity’s assets recognized?

Answer 388

A1888. Recognized as the time passes

Question 389

Q1889. When is revenue from the performance of services is recognized

Answer 389

A1889. In the period the services have rendered and are able to be billed

Question 390

Q1890. What four criteria must be met for each element of the contract before any revenue can be recognized

Answer 390

A1890. - Persuasive evidence of an arrangement exists (Signed contract) - Delivery has occurred or services have been rendered (risks & rewards transfer) - The price is fixed and determinable (no price contingency) - Collection is reasonably assured (Standard collection terms)

Question 391

Q1891. Deferred Credits

Answer 391

A1891. Deferred credits are essentially liabilities. You either earn it, or have to return it. Deferred credits (unearned revenue) are recognized as income through the passage of time.

Question 392

Q1892. When should expenses be recognized

Answer 392

A1892. Expenses should be recognized according to the matching principle utilizing association of cause and effect, systematic and rational approach, or expense when no future benefit can be measured

Question 393

Q1893. Realization

Answer 393

A1893. Realization occurs when the entity obtains cash or the right to receive cash or has converted a noncash resource into cash (Real World)

Question 394

Q1894. Recognition

Answer 394

A1894. Recognition is the actual recording of transactions and events in the financial statements (Record)

Question 395

Q1895. Matching

Answer 395

A1895. One of the most important principles in financial accounting is the matching principle, which indicated that expense must be recognized in the same period in which the related revenue is recognized. Matching of revenues and costs is the simultaneous or combined recognition of the revenues and expenses that results directly and jointly from the same transactions or events

Question 396

Q1896. Accrual

Answer 396

A1896. Accrual accounting is required by GAAP and is the process of employing the matching principle to the recognition of revenues and expenses( Income statement impact (no current cash impact))

Question 397

Q1897. Deferral

Answer 397

A1897. Deferral of revenues or expenses will occur when cash is received or expended but is not recognizable for financial statement purposes. Deferral typically results in the recognition of a liability or prepaid expense (NO current income statement impact (Balance sheet only, cash impact))

Question 398

Q1898. Accrued Assets (or Accrued Revenues)

Answer 398

A1898. Recognized or earned through the passage of time but not yet paid to the entity DR: A/R CR: Accrued Revenue

Question 399

Q1899. Accrued Liabilities

Answer 399

A1899. Expenses recognized or incurred through the passage of time but not yet paid by the entity DR: Accrued expense CR: Accrued liabilities A/P

Question 400

Q1900. Estimated Liabilities

Answer 400

A1900. Estimated liabilities represent the recognition of probable future charges that result from a prior act (warranties, coupons) DR: Accrued expense CR: Accrued liabilities

Question 401

Q1901. Expired Costs

Answer 401

A1901. Expense on income statement, have no future benefit - Insurance expense (pro rate portion) - Costs of goods sold are directly allocated to the periods in which the sales take place - Period costs

Question 402

Q1902. Unexpired costs

Answer 402

A1902. Stay on the balance sheet (for now) EX (fixed assets and inventory)

Question 403

Q1903. What does prepaid expenses (current assets) result in down the road?

Answer 403

A1903. They result in expired costs DR: prepaid expense CR: Cash

Question 404

Q1904. What does deferred charges result in down the road?

Answer 404

A1904. They result in unexpired costs DR: Deferred charges CR: Cash/ Assets

Question 405

Q1905. Revenue recognition: Deferred credits (deferred income or unearned revenue)

Answer 405

A1905. Deferred credits are located in the liability section of the balance sheet, just above shareholder’s equity DR: CASH CR: Unearned revenue/ deferred revenue B/S only

Question 406

Q1906. Royalty income

Answer 406

A1906. Royalty revenue is recognized when earned

Question 407

Q1907. Revenue recognition when the right of return exists

Answer 407

A1907. Revenue from a sales transaction where the buyer has the right to return the product shall be recognized at the time of sale only if all the required conditions are met - The sales price is substantially fixed at the date of sale - The buyer assumes all risks of loss bc the goods are considered in the buyer’s possession - The buyer has paid some form of consideration - The amount of future returns can be reasonably estimated.

Question 408

Q1908. Initial Franchise fees

Answer 408

A1908. Revenue when “substantially performed”

Question 409

Q1909. Continuing Franchise fees

Answer 409

A1909. Revenue when earned. These fees are received for ongoing services provided by the franchisor to the franchisee

Question 410

Q1910. Franchisor Accounting (Franchise Fee Revenue) Unearned Revenue

Answer 410

A1910. Unearned revenue is recognized once substantial performance on such future services has occurred. - Initial franchise fee (not yet earned) - Prepaid continuing franchise fee

Question 411

Q1911. Franchisor Accounting (Franchise Fee Revenue) Earned Revenue

Answer 411

A1911. Franchisor report revenue from initial franchise fees when substantially performed.

Question 412

Q1912. Substantial Performance Conditions

Answer 412

A1912. - Franchisor has no obligation to refund any payment (cash otherwise) received - Initial services required of the franchisor have been performed - All other conditions of the sale have been met

Question 413

Q1913. Classification of intangible assets

Answer 413

A1913. Intangible assets may be either specifically identifiable(patents, copyrights, franchise) or not specifically identifiable (goodwill)

Question 414

Q1914. How do you record purchased intangible assets

Answer 414

A1914. Recorded at cost

Question 415

Q1915. how do you record internally Developed Intangible Asset

Answer 415

A1915. Expense

Question 416

Q1916. What are the exceptions of recording internally developed intangible assets

Answer 416

A1916. These items may be capitalized - Legal fees and other costs related to a successful defense of the asset - Registration or consulting fees -Design costs - Other direct costs to secure the asset

Question 417

Q1917. Capitalization of Costs is measured by

Answer 417

A1917. - The amount of cash disbursed or the fair market value of other assets distributed - The present value of amounts to be paid for liabilities incurred - The fair value of consideration received for stock issued

Question 418

Q1918. Amortization

Answer 418

A1918. The value of intangible assets eventually disappears; therefore, the cost of each type of intangible asset (except goodwill and assets with indefinite lives) should be amortized by systematic charges to income over the period estimated to be benefited. Candidates should be aware that a patent is amortized over the shorter of its estimated life or remaining legal life. - Straight line method of amortization should be applied unless a company demonstrates that another systematic method is more appropriate

Question 419

Q1919. Worthless

Answer 419

A1919. write off entire remaining cost to expense

Question 420

Q1920. Impairment

Answer 420

A1920. Write down the intangible asset and recognize lost if an intangible asset becomes impaired.

Question 421

Q1921. Changes in useful life

Answer 421

A1921. Recalculate and amortize

Question 422

Q1922. Sale

Answer 422

A1922. Calculate gain or loss

Question 423

Q1923. Initial franchise fee for the franchisee

Answer 423

A1923. Intangible asset, amortize over the expected period of benefit of the franchise

Question 424

Q1924. Continuing Franchise Fees

Answer 424

A1924. Expense as incurred

Question 425

Q1925. Start up costs

Answer 425

A1925. Start up cost including organizational costs should be expense when incurred

Question 426

Q1926. Legal Fees

Answer 426

A1926. Capitalize fees to obtain intangible assets such as legal and registration fees incurred to obtain an intangible asset.

Question 427

Q1927. Legal fees incurred in defending an intangible asset

Answer 427

A1927. Successful = Capitalize Unsuccessful = Expense

Question 428

Q1928. Goodwill

Answer 428

A1928. Goodwill is the representation of intangible resources and elements connected with an entity

Question 429

Q1929. How many ways to calculate goodwill?

Answer 429

A1929. There are two ways to calculate goodwill, Purchase of assets and, Purchase of equity

Question 430

Q1930. Purchase of assets

Answer 430

A1930. Compares the cost of the acquired business with the fair value of the net tangible and identifiable intangible assets. The excess of cost over the FV of the nets assets is goodwill

Question 431

Q1931. Purchase of equity

Answer 431

A1931. This method involves the purchase of a company’s capital stock. Goodwill is the excess of the stock purchase price over the fair market value of the net assets acquired.

Question 432

Q1932. Maintaining goodwill

Answer 432

A1932. cost associated with maintaining, developing, or restoring goodwill are not capitalized as goodwill instead they are expensed . Goodwill generated internally or not purchased is not capitalized as goodwill

Question 433

Q1933. Research and Development

Answer 433

A1933. General Rule = expense Exceptions: - Materials, equipment, or facilities that have alternate future uses (depreciate assets) - R&D costs of any nature undertaken on behalf of others under a contractual arrangement

Question 434

Q1934. Computer software development costs (developed to be sold, leased, or licensed)

Answer 434

A1934. Expense cost incurred until technological feasibility has been established for the product Capitalize costs incurred after technological feasibility has been established for the product

Question 435

Q1935. What is technological feasibility

Answer 435

A1935. A detailed program design or Completion of working model

Question 436

Q1936. Annual amortization of capitalized software costs

Answer 436

A1936. greater of percentage of revenue = Total capitalized amount X (current gross revenue for period/ total projected gross revenue for period) Straight line= total capitalized cost/ estimate of economic life

Question 437

Q1937. What are the 3 methods of accounting for equity securities?

Answer 437

A1937. 1. Cost 2. Equity 3. Consolidated FS

Question 438

Q1938. What are 2 Equity Method Criteria?

Answer 438

A1938. 1. Significant influence 2. Between 20% and 50% ownership

Question 439

Q1939. What are the JE’s for earnings and dividends under the equity method?

Answer 439

A1939. Earnings: DR Investment CR Investment Income Dividends: DR Receivable CR Investment

Question 440

Q1940. How are intercompany profits and losses eliminated for the equity method?

Answer 440

A1940. E’s profit on sale of inv. to R / Sale price = E’s gross margin ratio x E’s inv. still in R’s end. inv. = E’s recorded profit on R’s ending inv. DR Investment income (profit x ownership) CR Investment

Question 441

Q1941. What must be done when changing to the equity method?

Answer 441

A1941. The investment acct, results of operations, & RE must be retroactively adjusted.

Question 442

Q1942. What are the 3 categories of investments in marketable securities?

Answer 442

A1942. 1. Held-to-Maturity (HTM) 2. Trading 3. Available-for-Sale (AFS)

Question 443

Q1943. What are 3 Held-to-Maturity (HTM) Security Characteristics?

Answer 443

A1943. 1. Reported at amortized cast, FV must be disclosed 2. Not adjusted for unrealized holding gains/losses 3. Investor has intent & ability to hold to maturity

Question 444

Q1944. What are 3 Trading Security Characteristics?

Answer 444

A1944. 1. Debt or equity securities w/ purpose of selling in near future 2. Reported at FV, if determinable. 3. Unrealized holding gains/losses included in current earning.

Question 445

Q1945. What are 3 Available-for-Sale (AFS) Security Characteristics?

Answer 445

A1945. 1. Debt or equity securities not classified as Trading or HTM 2. Reported at FV, if determinable. 3. Unrealized holding gains/losses reported in OCI.

Question 446

Q1946. How is a decline in FV that is other than temporary accounted for under AFS or HTM?

Answer 446

A1946. Write down the investment to FV & a realized loss is recognized in current earnings.

Question 447

Q1947. Under the cost method, is the investment acct for earnings or dividends adjusted?

Answer 447

A1947. No. Except for liquidating dividends

Question 448

Q1948. What is an example of a liquidating dividend?

Answer 448

A1948. A dividend distribution in excess of earnings after acquisition.

Question 449

Q1949. If a partial disposal of an Equity Method investment makes it less than 20%, should you stop accruing your share of the investee income?

Answer 449

A1949. Yes. A change in the method of accounting must be made to the cost method.

Question 450

Q1950. When a security is transferred TO Trading, what is done with unrealized holding G or L?

Answer 450

A1950. Recognize in earnings immediately.

Question 451

Q1951. What happens when a security is transferred FROM Trading?

Answer 451

A1951. Previously recognized unrealized holding G or L are NOT reversed. Security is transferred at FV with G or L recognized upon transfer.

Question 452

Q1952. When a debt security is transferred from HTM to AFS, what happens to unrealized holding G or L?

Answer 452

A1952. Recognize in OCI

Question 453

Q1953. When a debt security is transferred from AFS to HTM, what happens to unrealized holding G or L?

Answer 453

A1953. Report in OCI & amortize over security’s remaining life.

Question 454

Q1954. Upon disposal of an Equity Method investment, what is the G or L?

Answer 454

A1954. Difference between the carrying amount at the date of disposal and its sale price.

Question 455

Q1955. Upon disposal of a Cost Method investment, what is the G or L?

Answer 455

A1955. Difference between the carrying amount and the proceeds.

Question 456

Q1956. Do changes in the common stock market value affect an Equity Method investment?

Answer 456

A1956. No.

Question 457

Q1957. For AFS or HTM, what is the G or L from a sale?

Answer 457

A1957. Difference between net proceeds and the cost or unamortized cost of the security.

Question 458

Q1958. For Trading, what is the G or L from a sale?

Answer 458

A1958. Difference between net proceeds and the FV at the most recent balance sheet date.

Question 459

Q1959. For AFS, is regard given to previously recognized unrealized losses or recoveries?

Answer 459

A1959. No regard given.

Question 460

Q1960. What is a financial instrument?

Answer 460

A1960. Cash, evidence of ownership interest in an entity, or a contract w/ obligation and rights

Question 461

Q1961. What are the 3 characteristics of a derivative instrument?

Answer 461

A1961. 1. Underlying & notional amount or payment provision 2. Zero or small investment 3. Net settlement

Question 462

Q1962. What is an underlying?

Answer 462

A1962. A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable.

Question 463

Q1963. What is a notional, or face, amount?

Answer 463

A1963. A number of currency units, shares, pounds, or other units.

Question 464

Q1964. How can a derivative be an asset or a liability?

Answer 464

A1964. Because it is both a right & obligation.

Question 465

Q1965. How are changes in FV of non-hedge derivatives reported?

Answer 465

A1965. Gains or losses in earnings.

Question 466

Q1966. What 3 ways are unrealized G or L’s from changes in FV of hedge derivatives is accounted for?

Answer 466

A1966. 1. FV Hedge - reporting in earnings. 2. Cash Flow Hedge - effective portion in OCI, ineffective portion in earnings. 3. Foreign Currency Hedge - same as 2.

Question 467

Q1967. What are the characteristics of the 3 types of Hedging Derivatives?

Answer 467

A1967. 1. FV Hedge - exposure to changes in FV of A or L. 2. Cash Flow Hedge - exposure to variable cash flows on existing, recognized A or L. 3. Foreign Currency Hedge - exposure of net investment in foreign operation.

Question 468

Q1968. What are the JE’s to record the commodity futures at (1) the current date, and (2) the date of acquisition?

Answer 468

A1968. 1. DR Investment in Futures CR Due to Broker 2. DR Investment in Futures CR Unrealized Gain on Derivative-OCI

Question 469

Q1969. What is the JE to record the summary entry for (1) the purchase of inventory and, (2) the realization of gain on commodity furtures?

Answer 469

A1969. 1. DR Inventory CR Investment in Futures 2. DR Unrealized Gain on Derivative-OCI CR Gain on Derivatives

Question 470

Q1970. Who pays for freight charges when shipped FOB Shipping Point? When is title passed?

Answer 470

A1970. The buyer. Title passes when goods are shipped.

Question 471

Q1971. Who pays for freight charges when shipped FOB Destination Point? When is title passed?

Answer 471

A1971. The seller. Title passes when goods are received by the buyer.

Question 472

Q1972. When more than one trade discount is given, what is the proper accounting?

Answer 472

A1972. Apply to the declining balance successively. (i.e. price = $100, discounts = 20%, 10%) $100 - 20%(100) = $80 - 10%(80) = $72

Question 473

Q1973. What are the two allowance methods of estimating uncollectible receivables?

Answer 473

A1973. 1. Percentage-of-Sales Method. (based on credit sales) 2. Percentage-of-Outstanding-Receivables Method.

Question 474

Q1974. What are the JE’s for (1) recording bad debt expense, and (2) recording accounts written off? (same for both allowance methods)

Answer 474

A1974. 1. DR Bad Debt Expense CR Allowance for Uncollectible Accts 2. DR Allowance for Uncollectible Accts CR Accounts Receivable - John Doe

Question 475

Q1975. Notes Receivable can be classified as two types, what are they?

Answer 475

A1975. 1. Interest-bearing (interest paid in addition to face amount). 2. Noninterest-bearing (interest included in face amount).

Question 476

Q1976. How are notes receivable valued?

Answer 476

A1976. At present value

Question 477

Q1977. How are noninterest-bearing notes valued?

Answer 477

A1977. PV or the FV of the property, good, or service exchanged, whichever is more clearly determinable.

Question 478

Q1978. For noninterest-bearing notes, how should the discount or premium be accounted for?

Answer 478

A1978. Amortized over the life of the note by use of the Interest Method.

Question 479

Q1979. What are the 3 methods of measuring impairment on a receivable?

Answer 479

A1979. 1. PV Method 2. Market Price Method 3. FV of Collateral Method

Question 480

Q1980. How is the PV Method of receivable impairment measured?

Answer 480

A1980. PV of future principal & interest cash inflows.

Question 481

Q1981. How is the Market Price Method of receivable impairment measured?

Answer 481

A1981. Loan’s observable market price.

Question 482

Q1982. How is the FV of Collateral Method of receivable impairment measured?

Answer 482

A1982. FV of collateral pledged, if the loan is collateral-dependent. Method used for foreclosures.

Question 483

Q1983. What are the 4 methods of converting receivables immediately into cash?

Answer 483

A1983. 1. Discounting 2. Assignment 3. Factoring 4. Pledging

Question 484

Q1984. When converting receivables immediately into cash, what does “with recourse” mean?

Answer 484

A1984. The seller of the note is liable to the buyer for its maturity value. Seller has all the risk.

Question 485

Q1985. What is the difference between a Periodic Inventory System and a Perpetual Inventory System?

Answer 485

A1985. Periodic: Inventory on hand is periodically determined by physical count. Perpetual: A continuous record is maintained of items going in or out of inventory.

Question 486

Q1986. What is the Relative Sales Value Method?

Answer 486

A1986. A group of varying units are purchased at a single lump- sum price (basket purchase), total cost of the units is based on their relative sales value.

Question 487

Q1987. What costs are included in Finished Goods Inventory?

Answer 487

A1987. Direct materials Direct labor Variable overhead Fixed overhead

Question 488

Q1988. What costs are included in Merchandise Inventory?

Answer 488

A1988. Cost, net of: discounts, freight-in, taxes, insurance while in transit, warehousing, etc.

Question 489

Q1989. Are interest costs capitalized for inventories?

Answer 489

A1989. Not interest costs for items that are routinely manufactured or otherwise produced in large quantities on a repetitive basis.

Question 490

Q1990. During periods of rising prices, how is the LIFO inventory cost-flow method affected?

Answer 490

A1990. Higher cost of sales and a lower amount for ending inventory than FIFO.

Question 491

Q1991. What is the calculation to determine the cost of ending inventory under FIFO?

Answer 491

A1991. 1. The # of units in ending inventory. 2. Segregate ending inventory into price layers, w/ most recent purchase prices. 3. The cost of each layer (unit cost x # of units) 4. Add up the cost of all the layers.

Question 492

Q1992. Do perpetual & periodic systems of inventory result in the same dollar value under FIFO?

Answer 492

A1992. Yes.

Question 493

Q1993. For D-V LIFO, how do you calculate the price index?

Answer 493

A1993. Ending Inventory valued at current year costs ————————————————– Ending Inventory valued at base year costs

Question 494

Q1994. How is the base year dollar cost determined for D-V LIFO?

Answer 494

A1994. In the year of adoption: Total inventory cost —————————— # of units

Question 495

Q1995. When is a layer of inventory added in D-V LIFO?

Answer 495

A1995. When ending inventory exceeds the beginning inventory (both stated in base year dollars)

Question 496

Q1996. Which LIFO method requires that records of separate lot prices be kept for each item?

Answer 496

A1996. Quantity LIFO

Question 497

Q1997. In LCM, what does market mean? What are the exceptions?

Answer 497

A1997. Replacement cost. Exceptions: 1. Market should not exceed the net realizable value (ceiling), 2. Market should not be less than the net realizable value minus normal profit (floor),

Question 498

Q1998. In LCM, what is net realizable value?

Answer 498

A1998. Estimated selling price less reasonably predicable costs of completion and disposal.

Question 499

Q1999. What 4 steps are used to find LCM?

Answer 499

A1999. 1. Compare ceiling w/ floor & replacement costs. 2. Use the middle amount for market. 3. Compare that middle amount w/ cost (historical). 4. Use the lower of the two.

Question 500

Q2000. When the utility of inventory is impaired or otherwise reduced by damage, or any other cause, what inventory method should be used?

Answer 500

A2000. LCM.