Standard Setting, Income Statement, and Reporting Requirements

Question 1

What are the attributes used to measure inventory?

Answer 1

Replacement Cost
Historical Cost
Net Realizable Value
(NOT Present Value of future cash flows)

Question 2

What is the underlying concept that supports the immediate recognition of a contingent loss?

Answer 2

Conservatism

Question 3

According to FASB conceptual framework, does this statement conforms to the realization concept?
“Depreciated equipment was sold in exchange for a note receivable”

Answer 3

Yes; Revenues and gains are realized when assets are exchanged for cash or claims to cash.

Question 4

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?

Answer 4

Net Realizable Value

Question 5

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?

Answer 5

Net Realizable Value

Question 6

What is replacement cost?

Answer 6

The amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost.

Question 7

Give one example of a operating procedure for issuing a new International Financial Reporting Standard.

Answer 7

An exposure draft is issued after approval by at least nine members of the IASB

Question 8

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?

Answer 8

Net Realizable Value

Historical cost would have been appropriate if the business was continuing.

Question 9

Give one example of a operating procedure for issuing a new International Financial Reporting Standard.

Answer 9

An exposure draft is issued after approval by at least nine members of the IASB

Question 10

What document is issued as part of the due-process activities of the FASB for amending the FASB Accounting Standards Codification?

Answer 10

A proposed accounting standards update.

Question 11

Reporting inventory at the lower of cost or market value illustrates what accounting principle?

Answer 11

Rule of conservatism

Question 12

Capitalization of research and development costs illustrates what accounting principle?

Answer 12

Conservatism and matching principle

Question 13

Capitalization of research and development costs illustrates what accounting principle?

Answer 13

Conservatism and matching principle

Question 14

Change from cash basis of accounting to the accrual basis of accounting should be reported as:

Answer 14

Prior period adjustment resulting from the correction of an error.

Question 15

Change from cash basis of accounting to the accrual basis of accounting adjustment should be reported as:

Answer 15

Prior period adjustment resulting from the correction of an error.

Question 16

Change in accounting estimate adjustment should be reported as:

Answer 16

Trick question

It is handled PROSPECTIVELY therefore no cumulative adjustment needed.

Question 17

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?

Answer 17

True

Question 18

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?

Answer 18

True

Question 19

A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an):

Answer 19

Component of income from continuing operations, but NOT net of applicable income taxes.

Question 20

What is the accounting treatment for a change from the direct recognition method to the installment method?

Answer 20

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.

Question 21

Extraordinary items:

Answer 21

• 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.

Question 22

Transaction that qualifies as a discontinued operation?

Answer 22

Planned and approved sale of a segment

Question 23

Costs associated with exit and disposal activities?

Answer 23

Costs to relocate employees

Question 24

General and administrative expenses include:

Answer 24

Accounting and Legal expenses
Officer’s salaries
Insurance

Question 25

Freight-In, Freight-out, and sales rep salaries are a part of what line item in the income statement?

Answer 25

Freight-In = Cost of sales/inventory
Freight-Out = Selling expense
Sales Rep. Salary = Selling expense

Question 26

Costs associated with exit and disposal activities?

Answer 26

Costs to relocate employees

Additional Pension costs

Question 27

Freight-In, Freight-out, and sales rep salaries are a part of what line item in the income statement?

Answer 27

Freight-In = Cost of sales/inventory
Freight-Out = Selling expense
Sales Rep. Salary = Selling expense

Question 28

Extraordinary items:

Answer 28

• 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

Question 29

Costs associated with exit and disposal activities?

Answer 29

Costs to relocate employees
Cost to terminate a lease
Additional Pension costs

Question 30

Freight-In, Freight-out, and sales rep salaries are a part of what line item in the income statement?

Answer 30

Freight-In = Cost of sales/inventory
Freight-Out = Selling expense
Sales Rep. Salary = Selling expense

Question 31

Research and Development expense include:

Answer 31

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.

Question 32

How are the legal costs between successful and unsuccessful case treated?

Answer 32

Unsuccessful legal cases - Expensed

Successful legal cases - Capitalized and amortized over the patent’s remaining economic life.

Question 33

Equipment used in research and development activities that has alternate future uses are…..

Answer 33

Capitalized and depreciated over its useful life.

Question 34

Goodwill is recognized in the balance sheet when….

Answer 34

Has been created from a business acquisition.

Question 35

Research expense include:

Answer 35

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.

Question 36

Amortization of capitalized cost is:

Answer 36

The greater of straight-line amortization or sales revenue from the software for the period divided by total projected sale

Question 37

Costs incurred for MAINTAINING and DEVELOPING Goodwill are:

Answer 37

EXPENSED

Question 38

How to calculate from cash basis to accrual basis…

Answer 38

Cash-basis pretax income
\+Increase in Accts. Receivable
\+Reduction in Accts. Payable
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Accrual basis pretax income

Question 39

Franchise Initial fee

Answer 39

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.

Question 40

Revenue Recognition

Answer 40

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

Question 41

Software package question.

Answer 41

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.

Question 42

After development stage, training employees to use the program is capitalized or expensed?

Answer 42

Expensed

Question 43

GAAP requires start-up costs including organizational costs, be….

Answer 43

expensed as incurred, without exception.

Question 44

If the patent has been permanently impaired (Government removed the product, etc.) then…..

Answer 44

a loss equal to its carrying amount should be recorded. (Net of Accumulated amortization)

Question 45

Under US GAAP, Goodwill is tested for impairment at what level?

Answer 45

The reporting level

Question 46

Under US GAAP, what is prohibited for impairment losses?

Answer 46

Subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.

Question 47

Examples of capitalization for US GAAP

Question 48

The matching principle:

Answer 48

Matches expenses against revenue in the same accounting period.

Question 49

For accounting (GAAP) purposes, costs to develop computer software for ultimate sale:

Answer 49

should be expensed if they are relevant design costs incurred before technological feasibility is established.

Question 50

Under IFRS, patent costs include:

Answer 50

• Purchase price of the patent
• The VAT Taxes
• Legal costs to register the patent

Question 51

Examples of capitalization for IFRS:

Answer 51

Development costs incurred in designing a product that has just been granted a patent.

Question 52

The minimum operating cycle for purposes of reporting a “prepaid” current asset is

Answer 52

one year/12 months

Question 53

Equipment used in research and development activities that has alternate future uses is

Answer 53

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.

Question 54

Patents:

Answer 54

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

Question 55

Gross profit equation

Answer 55

Net Sales - Cost of sales = Gross Profit

Question 56

Goodwill

Answer 56

Only capitalized when purchasing another entity.

Costs incurred for MAINTAINING and DEVELOPING goodwill are expensed.

Question 57

Warrantly expense

Answer 57

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.