Standard Setting, Income Statement, and Reporting Requirements Flashcards
What are the attributes used to measure inventory?
Replacement Cost
Historical Cost
Net Realizable Value
(NOT Present Value of future cash flows)
What is the underlying concept that supports the immediate recognition of a contingent loss?
Conservatism
According to FASB conceptual framework, does this statement conforms to the realization concept?
“Depreciated equipment was sold in exchange for a note receivable”
Yes; Revenues and gains are realized when assets are exchanged for cash or claims to cash.
What measurement basis is appropriate when the decision to end operations and quickly dispose of its assets within 3 months? Historical or Net Realizable Value?
Net Realizable Value
What measurement basis is appropriate when the decision to end operations and quickly dispose of its assets within 3 months? Historical or Net Realizable Value?
Net Realizable Value
What is replacement cost?
The amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost.
Give one example of a operating procedure for issuing a new International Financial Reporting Standard.
An exposure draft is issued after approval by at least nine members of the IASB
What measurement basis is appropriate when the decision to end operations and quickly dispose of its assets within 3 months? Historical or Net Realizable Value?
Net Realizable Value
Historical cost would have been appropriate if the business was continuing.
Give one example of a operating procedure for issuing a new International Financial Reporting Standard.
An exposure draft is issued after approval by at least nine members of the IASB
What document is issued as part of the due-process activities of the FASB for amending the FASB Accounting Standards Codification?
A proposed accounting standards update.
Reporting inventory at the lower of cost or market value illustrates what accounting principle?
Rule of conservatism
Capitalization of research and development costs illustrates what accounting principle?
Conservatism and matching principle
Capitalization of research and development costs illustrates what accounting principle?
Conservatism and matching principle
Change from cash basis of accounting to the accrual basis of accounting should be reported as:
Prior period adjustment resulting from the correction of an error.
Change from cash basis of accounting to the accrual basis of accounting adjustment should be reported as:
Prior period adjustment resulting from the correction of an error.
Change in accounting estimate adjustment should be reported as:
Trick question
It is handled PROSPECTIVELY therefore no cumulative adjustment needed.
Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate. True or False?
True
Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate. True or False?
True
A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an):
Component of income from continuing operations, but NOT net of applicable income taxes.
What is the accounting treatment for a change from the direct recognition method to the installment method?
A change from the Direct recognition to the installment method is a change in accounting principle INSEPARABLE from a change in accounting estimate that is treated like a change in accounting estimate, prospectively.
Extraordinary items:
- A foreign government takes possession of a company’s only plant
- Damage to a factory due to an earthquake in an area that had not previously experienced earthquakes.
Transaction that qualifies as a discontinued operation?
Planned and approved sale of a segment
Costs associated with exit and disposal activities?
Costs to relocate employees
General and administrative expenses include:
Accounting and Legal expenses
Officer’s salaries
Insurance
Freight-In, Freight-out, and sales rep salaries are a part of what line item in the income statement?
Freight-In = Cost of sales/inventory
Freight-Out = Selling expense
Sales Rep. Salary = Selling expense
Costs associated with exit and disposal activities?
Costs to relocate employees
Additional Pension costs
Freight-In, Freight-out, and sales rep salaries are a part of what line item in the income statement?
Freight-In = Cost of sales/inventory
Freight-Out = Selling expense
Sales Rep. Salary = Selling expense
Extraordinary items:
- A foreign government takes possession of a company’s only plant
- Damage to a factory due to an earthquake in an area that had not previously experienced earthquakes.
- Loss on early retirement of long-term debt
Costs associated with exit and disposal activities?
Costs to relocate employees
Cost to terminate a lease
Additional Pension costs
Freight-In, Freight-out, and sales rep salaries are a part of what line item in the income statement?
Freight-In = Cost of sales/inventory
Freight-Out = Selling expense
Sales Rep. Salary = Selling expense
Research and Development expense include:
Under U.S. GAAP, it is EXPENSED
- R&D contracted out to a third party
- Preproduction prototypes and models costs
- Costs for searching for new products or new process alternatives are reported as R&D expense.
How are the legal costs between successful and unsuccessful case treated?
Unsuccessful legal cases - Expensed
Successful legal cases - Capitalized and amortized over the patent’s remaining economic life.
Equipment used in research and development activities that has alternate future uses are…..
Capitalized and depreciated over its useful life.
Goodwill is recognized in the balance sheet when….
Has been created from a business acquisition.
Research expense include:
Laboratory research aimed at discovery of new knowledge
Design of tools, jigs, molds, and dies involving new technology
Equipment acquired two years ago, having an estimated useful life of five years with no salvage value, used in various R&D projects
Research and development services performed by Stone Co. for Metal Inc.
Amortization of capitalized cost is:
The greater of straight-line amortization or sales revenue from the software for the period divided by total projected sale
Costs incurred for MAINTAINING and DEVELOPING Goodwill are:
EXPENSED
How to calculate from cash basis to accrual basis…
Cash-basis pretax income \+Increase in Accts. Receivable \+Reduction in Accts. Payable \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Accrual basis pretax income
Franchise Initial fee
Initial franchise fee are not revenue until all material conditions of the sale have been “substantially performed”. Even if received installment payments.
The whole initial fee is recognized as revenue when the work is complete.
Revenue Recognition
When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are as followed:
The sales price is substantially fixed
The buyer assumes all risk of loss
The buyer has paid some form of consideration
The amount of returns can be reasonably estimated
Software package question.
For software developed internally, costs incurred in the preliminary project stage are expensed under US GAAP. If it is after the preliminary stage, then it is CAPITALIZED over the economic life of the product. Not on the life of the equipment the software package is being used on.
After development stage, training employees to use the program is capitalized or expensed?
Expensed
GAAP requires start-up costs including organizational costs, be….
expensed as incurred, without exception.
If the patent has been permanently impaired (Government removed the product, etc.) then…..
a loss equal to its carrying amount should be recorded. (Net of Accumulated amortization)
Under US GAAP, Goodwill is tested for impairment at what level?
The reporting level
Under US GAAP, what is prohibited for impairment losses?
Subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
Examples of capitalization for US GAAP
The matching principle:
Matches expenses against revenue in the same accounting period.
For accounting (GAAP) purposes, costs to develop computer software for ultimate sale:
should be expensed if they are relevant design costs incurred before technological feasibility is established.
Under IFRS, patent costs include:
- Purchase price of the patent
- The VAT Taxes
- Legal costs to register the patent
Examples of capitalization for IFRS:
Development costs incurred in designing a product that has just been granted a patent.
The minimum operating cycle for purposes of reporting a “prepaid” current asset is
one year/12 months
Equipment used in research and development activities that has alternate future uses is
Capitalized and depreciated over it’s useful life.
Equipment purchased for current projects only must be expensed as research and development cost. Only the equipment purchased for current and future projects will be capitalized and depreciated.
Patents:
Development costs of a new product idea - Direct expense
Legal fees incurred to apply for a patent - Capitalize
Legal fees spent to successfully defend the patent - capitalize
Gross profit equation
Net Sales - Cost of sales = Gross Profit
Goodwill
Only capitalized when purchasing another entity.
Costs incurred for MAINTAINING and DEVELOPING goodwill are expensed.
Warrantly expense
If contracts were signed earlier in the year than before, more warrantly work would have been performed by year-end, thus reducing the deferred revenue balance more than in prior years.
