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ACC-320: Intermediate Accounting II > Final Exam - Part 2 (CONCEPTUAL) > Flashcards

Final Exam - Part 2 (CONCEPTUAL) Flashcards

21 Conceptual Problems

1
Q

When an interest rate is called “Stated, Coupon, or Nomial,” what does this mean?

A

rate written in the terms of the bond indenture

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2
Q

When an interest rate is called “Effective, Yield, or Market,” what does this mean?

A

rate that provides an acceptable return commensurate with the issuer’s risk; rate of interest ACTUALLY earned by the bondholders

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3
Q

When are Bond Interest Payments usually made? And how are interest rates expressed?

A

payments made semi-annually

interest rates expressed as an ANNUAL rate

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4
Q

What is the valuation of:

Market rate = Stated rate

A

Par

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5
Q

What is the valuation of:

Market rate > Stated rate

A

Discount

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6
Q

What is the valuation of:

Market rate < Stated rate

A

Premium

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7
Q

If a bond is issued at DISCOUNT, what is amortization doing to interest expense, and how is this reported on the Balance Sheet?

A

amortization INCREASES interest expense

reported as “net reduction” of bond’s face amount

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8
Q

If a bond is issued at PREMIUM, what is amortization doing to interest expense, and how is this reported on the Balance Sheet?

A

amortization DECREASES interest expense

reported as “net increase” of bond’s face amount

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9
Q

What is the difference between the Straight-Line and Effective Interest methods for amortization?

A

Straight-Line:
Discount or Premium / # of periods

Effective Interest:
Amortization Amount = Bond Int. Exp - Bond Interest paid

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10
Q

If a bond is issued between interest dates, what does the BUYER OF THE BOND do?

A

pay the seller the INTEREST ACCRUED from the last interest payment date to the date of the issue

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11
Q

What are the 2 categories of Stockholders’ Equity?

A
  1. Contributed Capital: stock and additional paid-in-capital
  2. Earned Capital: retained earnings
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12
Q

TRUE/FALSE:

The maximum number of shares that can be issued (sold) to the public are known as AUTHORIZED.

A

True

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13
Q

Which of the Issued stocks are dividends paid on?

A

Outstanding common stock

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14
Q

Which of the Issued stocks are issued, sold, and reacquired by the company?

A

Treasury common stock

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15
Q

What does Treasury stock do to the SE of a company?

A

DECREASES SE

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16
Q

Stock that is referred to as “Unissued” is what?

A

never been sold

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17
Q

What is the Cost Method?

(when referring to the purchase of treasury stock)

A

Company purchases stock back at COST (not par value)

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18
Q

Which of the following requires a JE regarding dividends?

Date of Declaration
Date of Record
Date of Payment

A

Date of Declaration - JE

Date of Record - NO JE

Date of Payment - JE

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19
Q

What are the two types of dividends?

A
  1. Cash - reduced SE
  2. Stock - distributes no asset; reclassification of SE
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20
Q

What are the two main reasons for companies to issue convertible debt?

A
  1. to RAISE equity capital without giving up ownership control
  2. to OBTAIN debt financing at cheaper rates
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21
Q

What are Convertible Preferred Stock?

A

conversion of preferred stock into common stock
-requires par value of CS issued over the carrying amount of the preferred being converted REDUCED retained earnings

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22
Q

What are Convertible Stock Warrants?

A

long-term options to buy common stock at a FIXED PRICE
-allocated using FMV

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23
Q

What is the difference between the Proportional Method and the Incremental Method?

(regarding convertible stock warrants)

A

Proportional: FV of each class of security is known

Incremental: CANNOT determine FV of ALL classes of securities; know one FV, allocate remainder of purchase price to security whose FV is not known

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24
Q

What are Convertible Stock Options?

A

compensation expense based on FV on grant date

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25
Q

For Stock Compensation Plans, GAAP requires companies to recognize compensation expense using what method?

A

FMV

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26
Q

In general, a company recognizes compensation expense in what period?

A

Service Period
-periods in which its employees perform the service

27
Q

What does “dilutive” refer to in EPS?

A

ability to influence the EPS in a DOWNWARD DIRECTION

28
Q

In a Simple Capital Structure, are there any potentially dilutive securities?

A

No - it is just common stock

29
Q

What is the formula for Basic EPS?

A

Net Income - Preferred Dividends / Weighted-Average Number of Shares O/S

30
Q

Preferred Stock can either be Cumulative or Non-cumulative.

Which of these do you deduct the annual preferred dividend only if declared?

A

Non-cumulative = only if declared

Cumulative = always, whether declared or not

31
Q

In Equity Securities, the valuation is FAIR VALUE when the holding is ____________.

A

<20% and no significant influence
-records only dividend income when investee declares a dividend
-AFS - adjust to FV at year-end

32
Q

In Equity Securities, the valuation is EQUITY when the holding is _________________.

A

between 20-50% and significant influence exists
-records a % of investee’s income as an INCREASE to investment account
-records a % of dividend declared as a REDUCTION to investment account

33
Q

In Equity Securities, the valuation is CONSOLIDATION when the holding is _________.

A

> 50%

34
Q

With the new FASB/IASB Standard, what approach was adopted for Revenue Recognition?

A

asset-liability approach

35
Q

What are the 5 Steps in the Revenue Recognition Process?

(HINT: “ISTAR”)

A
  1. IDENTIFY the contract with customers
  2. Identify the SEPARATE performance obligations in the contract
  3. Determine the TRANSACTION price
  4. ALLOCATE the transaction price to the separate performance obligations
  5. RECOGNIZE revenue when each performance obligation is satisfied
36
Q

When does the Completed Contract method recognize revenue and gross profit?

A

ONLY when the contract is COMPLETED

37
Q

When does the Percentage of Completion method recognize revenue and gross profit?

A

EACH PERIOD based upon the progress of the construction

38
Q

What method do companies use in financial reporting (GAAP)?

A

full accrual method (“pretax financial income”)

39
Q

What method do companies use in tax reporting?

A

modified cash basis (“taxable income”)

40
Q

What is the difference between Temporary and Permanent timing differences?

A

Temporary = reverse themselves in subsequent accounting periods

Permanent = DO NOT reverse

41
Q

What is a Deferred Tax Liability (DTL)?

A

Financial Income > Taxable Income
-Revenue is deferred for TAX PURPOSES, but not financial reporting purposes
-Expense is deferred for FINANCIAL REPORTING PURPOSES, but not tax purposes

42
Q

What is Deferred Tax Asset (DTA)?

A

Financial Income < Taxable Income
-Revenue is deferred for FINANCIAL REPORTING PURPOSES, but not tax purposes
-Expense is deferred for TAX PURPOSES, but not financial reporting purposes

43
Q

What must Pension Plans account for?

A

-Measuring the AMOUNT of pension obligation
-Disclosing the STATUS and EFFECTS of the plan in the financial statements
- Allocating the COST of the plan to the proper periods

44
Q

TRUE/FALSE:

Pension expense may be equal to, greater than, or less than the amount funded

A

True

45
Q

What are the components of Pension Expense?

A

Service Cost
+ Interest on PBO
- Return on Plan Assets
+ Amortization of Prior Service Costs

46
Q

If PBO > FV of plan assets, the pension is ________.

A

Underfunded

47
Q

If PBO < FV of plan assets, the pension is ________.

A

Overfunded

48
Q

What is a lease?

A

contractual agreement between a lessor and a lessee that gives the LESSEE the RIGHT to use specific property owned by the lessor for a specified period of time

49
Q

Are ALL long-term leases (>12 months) recorded on the balance sheet?

A

YES

50
Q

What are the two classifications of leases?

A
  1. Finance (must meet at least 1 of the classification tests to be this)
  2. Operating
51
Q

In which section would the CURRENT PORTION (<12 months) of disclosure for lease receivable/liability be found in the financial statement?

A

current receivable/liability section (lease and interest)

52
Q

In which section would the REMAINDER of disclosure for lease receivable/liability be found in the financial statement?

A

long-term asset/liability section (>12 months, noncurrent)

53
Q

PROBLEM III: (MATCHING): Changes in Principle

What are examples of changes in principles, and how are they reported?

A

-LIFO to FIFO
-Completed Contract Method to Percentage of Completion Method

RETROSPECTIVELY
-must adjust financial statements for each prior period presented
-adjusts beginning retained earnings balance

54
Q

PROBLEM III: (MATCHING): Changes in Accounting Estimates

What are examples of changes in accounting estimates, and how are they reported?

A
  1. Uncollectible receivables
  2. Inventory obsolescence
  3. Useful life and salvage value of assets
  4. Periods benefited by deferred costs
  5. Liabilities for warranty costs and income taxes
  6. Recoverable mineral reserves
  7. Change in depreciation methods

PROSPECTIVELY
-changes in CURRENT year and future periods

55
Q

PROBLEM III: (MATCHING): Changes in Accounting Errors

What are examples of changes in accounting errors, and how are they reported?

A
  1. Change from an accounting principle that is NOT generally accepted to an accounting policy that is acceptable (e.g., cash basis to accrual basis)
  2. Mathematical mistakes
  3. Changes in estimates that occur because a company did not prepare the estimates in good faith
  4. Failure to accrue or defer certain expenses ore revenues
  5. Misuse of facts
  6. incorrect classification of a cost as an expense instead of an asset (vice versa)

-reported as a PRIOR PERIOD ADJUSTMENT

-restate PRIOR YEAR (retrospective) by ADJUSTING beginning Retained Earnings balance

56
Q

Broadly, what does the Operating section of the Statement of Cash Flows show a change in?

A

Current Assets and Current Liabilities

57
Q

Broadly, what does the Investing section of the Statement of Cash Flows show a change in?

A

Long Term Assets

58
Q

Broadly, what does the Financing section of the Statement of Cash Flows show a change in?

A

Long-Term Liabilities and Stockholders’ Equity

59
Q

Per FASB, what are Cash Equivalents?

A

short-term, highly liquid investments that are:
-readily convertible to known amounts of cash
-so near their maturity that they present an insignificant risk of changes in interest rates (i.e. 3 months or less)

60
Q

What does the Full Disclosure Principle call for in financial reporting?

A

financial reporting of ANY financial facts SIGNIFICANT enough to INFLUENCE the judgement of an informed reader

61
Q

One of the Notes to Financial Statements is a “Summary of Significant Accounting Policies” (Footnote 1).

What are some examples that would be shown here?

A

-Allowance for Doubtful Accounts
-Inventory valuation
-PP&E
-Revenue Recognition
-Intangible Assets

62
Q

What are the two types of Subsequent events?

A

TYPE 1: events that provide additional evidence about conditions that existed AT THE BALANCE SHEET DATE, which requires an adjustment to the financial statements if material

TYPE 2: events that provide additional evidence about conditions that existed SUBSEQUENT TO THE BALANCE SHEET DATE (i.e., following), which requires a disclosure if material

63
Q

What are examples of Type 1 and Type 2 Subsequent Events?

A

Type 1: loss on a lawsuit after year-end that was uncertain at year-end; material loss on a year-end receivable due to customer bankruptcy

Type 2: loss of plant or inventories from a fire after year-end; merger with another company; issuance of a significant number of ordinary shares

ACC-320: Intermediate Accounting II (7 decks)

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