Module 9 Quiz Flashcards
On March 3, 2022, Phillips Inc.’s began preparing financial statements and the accompanying notes for the year ended December 31, 2021.
On February 25, 2022, Allen Corporation, Phillips Inc.’s largest customer, informed Phillips that it was filing bankruptcy and would be unable to pay its balance due to Phillips. Phillips found that Allen Corporation owed $250,000 in accounts receivable as of December 31, 2021.
Phillips Inc.’s CFO, Kellyn, has asked her four interns to determine how the information provided by Allen Corporation should be treated.
Sarah indicates that the information did not require an adjustment but, instead, should be discussed only in the MD&A (Management’s Discussion and Analysis) section of the annual report.
Josh suggests that the issue should be disclosed only in the Notes to the Financial Statements.
George recommends that the information should be used to record an adjustment on the December 31, 2021 financial statements.
Maggie advises that the information should be used to record an adjustment directly to the Retained Earnings account on February 25, 2022.
Which intern is correct?
George
George correctly inferred that Phillips, Inc had received the information after the balance sheet date, but before the financial statements were issued. Additionally, the information provided additional evidence about conditions that existed on the balance sheet date. Therefore, this is a recognized subsequent event that requires an adjustment to the December 31, 2021 financial statements.
Which would be included in the Summary of Significant Accounting Policies note?
Inventory valuation method used
The summary of significant accounting policies describes policies used to value assets and liabilities. The summary does not describe the specific composition of those assets and liabilities. Therefore, the Inventory Valuation policy (ie: LIFO vs FIFO) would be included in the financial notes, but the description of specific assets, inventory, and policies not controlled by the company (ie: tax reporting) would not be included in the financial notes.
Rondelli Manfuacturing Company employs a standard cost system. In December 2017, the company is working on the budgets for 2018 and plan a volume variance for the first quarter of 2018.
If the variance is expected to be absorbed by the end of 2018, how would the planned volume variance be described in the 2017 financial statements?
As a nonrecognized subsequent event that should be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable
Because this is a planned production variance, it has not yet occurred. Therefore, the condition did not exist at the balance sheet date and is referred to as a nonrecognized subsequent event.
Jackson, Inc reports financial statements on the calendar year ending December 31, 2020. They issue their financial statements on April 5, 2021.
What is Jackson’s subsequent events period?
January 1, 2021 to April 5, 2021
What does the term “big GAAP versus little GAAP” refer to?
The assertion that certain types of companies should not have to follow complex requirements such as deferred expenses
