Optional Questions

Question 1

concept of maintenance of capital or recovery of cost

Answer 1

is a prerequisite for separating return on capital from return of capital because only inflows in excess of the amount needed to maintain capital are a return on equity. Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept (which is often expressed in terms of maintaining operating capability; that is, maintaining the capacity of an enterprise to provide a constant supply of goods or services). The major difference between them involves the effects of price changes on assets held and liabilities owed during a period. Under the financial capital concept, if the effects of those price changes are recognized, they are called “holding gains and losses” and are included in return on capital. Under the physical capital concept, those changes would be recognized but called “capital maintenance adjustments” and would be included directly in equity and would not be included in return on capital. Under that concept, capital maintenance adjustments would be a separate element rather than gains and losses.
The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income, as defined in paragraph 70, is a return on financial capital.

Question 2

entity’s revenue may result from

Answer 2

Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity’s ongoing major operations, not from “incidental” operations.

Question 3

Revenues (single step income statement)

Answer 3

include: Net sales revenue (of goods & services)
Interest revenue (and dividends earned)
Gain on sale of equipment
The various amounts from discontinued operations should be included in discontinued operations, not in revenues.

Question 4

Weighted average

to LIFO

Answer 4

Under U.S. GAAP, when making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively.

Question 5

LIFO to

weighted average

Answer 5

is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements

Question 6

Double Declining Method

Answer 6

disregard salvage value

(Basis - AD) *2/Useful Life

Question 7

Reporting Sufficiency Test

Answer 7

External Sales only are 75% or more of total external sales