Summary

Question 1

A1. Identify issues related to the valuation of accounts receivable, including timing of recognition and estimation of uncollectible accounts.

Answer 1

a1. GAAP requires that accounts receivable be carried on the balance sheet at net realizable value (NRV). NRV is gross accounts rec. less the allowances of uncollectible accounts, returns and allowances, and discounts.

Question 2

B1. Determine the financial statements effect of using the percentage of sales (income statement) opposed to percentage of receivables (balance sheet) in calculating the allowance of uncollectible accounts.

Answer 2

b1. GAAP allows either approach to determine uncollectible expense or allowance for uncollectible accounts. The percentage of sales method calculates the uncollectible expense and credits the allowance to determine the balance in the allowance account. The percentage of receivables method calculates the ending balance in the allowance accounts and “backs” into the uncollectible expense.

Question 3

C1. Distinguish between receivables sold (factoring) on a with-recourse basis and those sold on a without recourse basis, and determine the effect on the balance sheet.

Answer 3

c1. Factoring without recourse transfers the ownership of the receivable to the factor and removes it from the balance sheet. When factoring with recourse, rights of ownership remain with the original owner if the receivables are not transferred to the factor. The receivable then remains in the original owner’s balance sheet.

Question 4

D1. Identify issues in inventory valuation including which goods to include, what costs to include, and which cost assumptions to use.

Answer 4

d1. All goods available for sale and still owned be the company are included in inventory. This would include goods out on consignment, goods in transit shipped FOB destination (title transfers at the destination) as well as owned goods on hand.

Question 5

E1. Identify and compare cost flow assumptions used in accounting for inventories.

Answer 5

e1. The cost flow assumptions used for inventory valuation are FIFO, LIFO, average cost (weighted average for periodic inventory moving average for a perpetual inventory). FIFO values the ending inventory at the newest costs, and the cost of goods sold at the oldest costs. LIFO values the ending inventory at the oldest cost, and cost of goods sold at the newest costs. Weighted average cost values both ending inventory and cost of goods sold at the weighted average cost of the goods for the period. The moving average method recomputes the average cost of the inventory whenever a shipment is received and uses the recomputed average to determine the cost of the next sale.

Question 6

F1. Demonstrate an understanding of the lower of cost or market rule for inventories.

Answer 6

f1. GAAP requires that inventories be valued and carried at lower of cost or market (LCM). Cost may be one of the following :FIFO, LIFO, average cost, or specific identification. Market is defined as replacement cost. There is however, a ceiling and a floor on replacement cost. The ceiling is NRV (replacement cost less costs to complete and dispose of). The floor is NRV reduced by normal profit margin.

Question 7

G1. Calculate the effect on income and on assets of using different inventory methods.

Answer 7

g1. When inventory costs are rising , FIFO = highest net income due to the lowest cost of sales and the highest inventory value on the balance sheet. LIFO results in the lowest net income due to the highest cost of sales and lowest inventory value in the balance sheet. Average cost results would be between FIFO and LIFO. When inventory costs are falling FIFO and LIFO would be reversed.

Question 8

H1. Analyze the effects of inventory errors.

Answer 8

h1. An error in the end if period inventory will affect the cost of goods sales for the period net income for the period, ending retained earnings for the period, beginning inventory for the next period, cost of sales for the next period, and net income for the next period. The cost of sales and net income errors in the next period would be would be in the opposite direction from those in the first period. The retained earnings at the end of the next period would be correct. For example, a dollar over stated in this period’s inventory will understate this periods cost of sales, overstate its net income by a dollar, and overstate its retained earnings by a dollar. The error will overstate the next periods beginning inventory by a dollar, overstate its cost of sales by a dollar, understate net income by a dollar, and restore retained earnings to where it should have been if the error did not occur.

Question 9

I1. Identify advantages and disadvantages of the different inventory methods. FIFO

Answer 9

i1. FIFO generates an ending inventory valuation close to current (replacement) cost. It minimizes income taxes when prices are consistently falling. One disadvantage of FIFO is that it matches older costs in cost of sales to revenue in income determination. Second, it results in higher income taxes than either LIFO or average cost when inventory costs are considerately rising.

Question 10

I1. Identify advantages and disadvantages of the different inventory methods. LIFO

Answer 10

i2. LIFO matches the most current costs (through cost of sales) to revenue in income determination. It minimizes income taxes when inventory costs are consistently rising. Its main disadvantage is that the inventory valuation in the balance sheet could be years out of date. Since LIFO become available prior to WWII, the inventory valuation could be 70 years old. Extremely complex when used with perpetual inventory system.

Question 11

I1. Identify advantages and disadvantages of the different inventory methods. Average cost

Answer 11

i3. Average cost is an easy to use and understand method. It provides little tax advantage when cost are consistently rising or falling.

Question 12

J1. Recommend the inventory method and cost flow assumption that should be used for a firm given a set of facts.

Answer 12

j1. LIFO is recommended system when prices are consistently rising and the inventory level is constant or rising. FIFO would be best when prices are constantly falling it the inventory is being depleted. Average cost is recommended when the inventory level fluctuates materially and or the prices fluctuate. Average cost is the best for commodities and fungible goods.

Question 13

K1. Demonstrate an understanding of the following security types: trading, available for sale, and held to maturity.
Trading

Answer 13

k1. Trading securities are bought and sold to generate profit on short term price changes. They consist of debt securities with maturities less than one year as well as equity securities. Typical trading securities are Treasury bills, commercial paper, money market and euro deposits, and short term certificates of deposit (CDs) purchased with excess short term cash. Trading securities are carried on the balance sheet at fair market value (market to market). Holding gains and losses when marking to market are reported directly in the income statement.

Question 14

K1. Demonstrate an understanding of the following security types: trading available for sale, and held to maturity.
available for sale

Answer 14

k2. Available for sale securities are those debt and equites securities that are neither trading securities nor held to maturity securities. They may be short term or long term, and are marked for market, as are trading securities. Holding gains and losses are carried in other comprehensive income rather that in net income.

Question 15

K1. Demonstrate an understanding of the following security types: trading, available for sale, and held to maturity.
Held to maturity

Answer 15

k3. Held to maturity securities are either debt securities intended to be held to maturity or equity securities purchased with the intent to acquire the issuing corporation. Held to maturity debt securities are carried at amortized historical cost. A typical held to maturity security would be a corporate bond. Held to maturity equity investments are accompanied for by the fair value method (same as available for sale securities) if they represent less than 20% of the outstanding stock of the issuer or by the equity method if they represent 20% or more.

Question 16

L1. Demonstrate understanding of the fair value method, equity method, and consolidated method for equity securities.

Answer 16

l1. Fair value is covered under available for sale securities. The Equity method is used by an investor when ownership of 20% or more of the issuers voting’s stock is considered sufficient to influence the issuer’s operations. The main features of the equity method are:
- the owner original investment is recorded at cost in the investment account.
- the owner /investor records its percentage share of the investment/issuer’s periodic net income as an increase in the investment account and as a credit to the equity is earnings accounts. The investor records its share of a periodic investee loss as a decrease in the investment account and a debit to the equity in loss account.
- when the investor receives a cash dividend from the investee, cash is increased and the investment account is decreased the amount of the dividend.

Question 17

M1. Determine the effect on the financial statements of using different depreciation methods.

Answer 17

m1. Depreciation is the systematic rational allocation of a tangible asset’s cost less its estimated residual (net salvage) value over the estimated life of the asset. The periodic depreciation is debited to depreciation expense shown on the income statement and credited to the accumulated depreciation account (an offset or contra account to the asset account).

Question 18

M1. Determine the effect on the financial statements of using different depreciation methods.
straight line depreciation

Answer 18

m2. Straight line depreciation produces a declining amount of depreciation per period calculated as cost less estimated residual divided by the estimated asset life.

Question 19

M1. Determine the effect on the financial statements of using different depreciation methods.
accelerated depreciation

Answer 19

m3. Accelerated depreciation produces a declining amount of depreciation per period calculated as the declining balance percentage divided by the estimated life times the net book value of the asset as the beginning of the period. Estimated residual value is ignored in the calculation. The net book value is cost less accumulated depreciation. Care must be taken to depreciate the asset down to its estimated residual value but not below it.

Question 20

M1. Determine the effect on the financial statements of using different depreciation methods.
units of production

Answer 20

m4. Units of production or activity depreciation produces a varying amount of depreciation per period calculated as the cost less estimated residual value divided be the estimated production or activity level expected over the life of the asset times the amount of actual production or activity for the period.

Question 21

N1. Recommend a depreciation method foe a govenset of data
Cost of the asset: 100,000
Estimated residual value: 10,000
Estimate useful life : 5 years or 200,000 units of production
straight line

Answer 21

Actual production for the five years: 50,000, 42,000, 36,000, 32,000 34,000
n1. The stright line method would be 18,000 per year
{(100,000 -10,000)/5 = 90,000/5}

Question 22

N1. Recommend a depreciation method foe a govenset of data
Cost of the asset: 100,000
Estimated residual value: 10,000
Estimate useful life : 5 years or 200,000 units of production
n2. The double declining method (200%) balance method would produce the following

Answer 22

1. Year 1 40,000 (2/5)(100,000)
2. Year 2 24,000 (2/5)(100,000-40,000) = .4(60,000)
3. Year 3 14,400 (2/5)(36,000-14,400 (2/5)(60,000 -24,000), =.4(36,000)
4. Year 4 8,640 (2/5)(36,000-14,000) =.4(21600)
5. Year 5 2,960 to get to accumulated depreciation to 90,000 (cost – estimated residual)

Question 23

N1. Recommend a depreciation method for a govenset of data
Cost of the asset: 100,000
Estimated residual value: 10,000
Estimate useful life : 5 years or 200,000 units of
n3. The production/activity method utilizes a rate of .45 per unit (100,000-10,000)/200,000 = 90,000/200,000 = .45) and would produce the following annual depreciation

Answer 23

1. Year 1 22,500 .45(50,000)
2. Year 2 18,900 .45(42,000)
3. Year 3 15,300 .45(34,000)
4. Year 4 16,200 .45(36,000)
5. Year 5 17,100 to get to accumulated depreciation of 90,000 (cost – estimated residual)

Question 24

O1. Demonstrate an understanding of the accounting for impairment of the long term assets.

Answer 24

o1. The determination of impairment of a long term asset requires two steps. The first is a recoverability test, where the carrying (net book) value of the asset is compared with the expected undiscounted cash flows from the asset’s use and disposal. If the carrying value exceeds the expected cash flows, in impairment loss calculation is required, The impairment loss is the amount by which the carrying value exceeds the fair value of the asset. The fair value of the asset would be the net proceeds from selling the asset in an orderly market.

Question 25

P1. Demonstrate an understanding of the accounting for impairment of intangible assets, including goodwill.

Answer 25

p1. The impairment of an intangible other than goodwill involves determining if the carrying value of the intangible exceeds its fair value. If it does an impairment loss equal to the difference has occurred and must be recognized
p2. The impairment of goodwill involves three steps. First the company performs qualitative assessment to determine whether it is likely that the fair value of the reporting unit to which the goodwill is attached is less than its carrying value. Then, if it is, a recoverability test need be performed. The test involves comparison of the carrying amount of the reporting unit with the fair value of the reporting unit. If the carrying value amount exceeds the fair value, an impairment loss equal to that difference has occurred, and must be recognized.

Question 26

Q1. Identify the classification issues of short term debt expected to be refinanced.

Answer 26

q1. ASR no. 148 requires that short term debt be classified as a current liability unless the refinancing would extend the maturity date beyond one year.

Question 27

R1. Compare the effect on financial statements when using either the expense warranty approach or the sales warranty approach for accounting for warranties’.
expense warranty
 

Answer 27

r1. The expense warranty method is the generally accepted method of accounting for warranty expense and liability and should be used whenever the warranty is an integral and inseparable part of the sale that creates a warranty loss contingency. The estimated warranty expense and associated liability are recorded in the year of the sale of the product for which the warranty applies. Actual warranty expenditures when they occur are charged to the estimated liability. The expense method provides for the proper matching of warranty expense to the product revenue through accrual accounting.

Question 28

R1. Compare the effect on financial statements when using either the expense warranty approach or the sales warranty approach for accounting for warranties’.
sales warranty
 

Answer 28

r2. The sales warranty approach defers a portion of the original sales price (the estimated warranty expense) until the actual warranty costs are incurred. At that time the revenue and expense equal to the amount deferred are recognized. The result is a type of cash basis accounting that does not provide a proper match of revue and expense.

Question 29

S1. Define off balance sheet financing, and identify different forms of this type of borrowing.
 

Answer 29

s1. Off balance sheet financing is a form of financing whereby liabilities are kept off the organizations balance sheet. It is often used to keep the organizations debt/equity and equity multiplier (leverage) ratios low to avoid debt covenant violations. Examples of off balance sheet financing are joint borrowing ventures where each partner has 50% and operating lease obligations.

Question 30

T1. Demonstrate un understanding of inter period tax allocation /deferred income taxes.
 

Answer 30

t1. Deferred income tax liabilities or assets are created by the temporary differences between the handling of revenues and expenses for financial purposes (books) as opposed to for income tax purposes. Income tax expense is based on the financial statement handling of revenues and expenses. Income tax payable is calculated based on the internal revenue service (IRS) rules and regulations. The deferred income tax liability or asset is basically the difference between the income tax expense and the income tax payable.

Question 31

U1. Define and analyze temporary differences, operating carrybacks and operating loss carryforwards.
operating carrybacks

Answer 31

u1. Temporary differences between book and tax are those that will reverse in the future. There are four types of temporary differences. They are:
1. Revenues or gains taxable after book recognition
2. Expenses or losses tax deductible before book recognition.
3. Revenues or gains taxable before book recognition
4. Expenses or losses deductible after book recognition.
Items 1 and 2 create deferred tax liabilities while 3 and 4 create deferred tax assets.

Question 32

U1. Define and analyze temporary differences, operating carrybacks and operating loss carryforwards.
operating losses

Answer 32

u2. Operating losses that offer no tax benefit in the year of occurrence may be carried back or carried forward to offset either prior or future tax liabilities. operating losses may be carried back two years and carried forward 20 years. An operating loss carryback is recognized in the year of the loss since it is realizable and measurable. operating loss carryforwards create need future tax liabilities to offset against and create a deferred tax asset.

Question 33

V1. Distinguish between deferred tax liabilities and deferred tax assets.

Answer 33

v1. Deferred tax liabilities represent future tax liabilities and ensure from deferring taxes to be paid into the future. Deferred tax assets represent future benefits (reduction) that ensure from deferring tax benefits into the future.

Question 34

W1. Differentiate between temporary differences and permanent differences, and identify examples. (deferred tax)
temporary

Answer 34

w1. Examples of temporary differences creating deferred tax liabilities are :
- using the cash basis of tax recognition of profit from installment sales
- using the cash basis for recognition of earnings of subsidiaries
- using modified accelerated cost recovery system (MACRS) depreciation for taxes and straight line for book

Question 35

W2. Examples of temporary differences creating deferred tax assets

Answer 35

w2. using the cash basis for tax recognition of rental properties
- using the cash basis for recognition of warranty expenses
- using the direct write-off method for bad debt recognition or tax purposes and the allowance method for books

Question 36

X1. Indicate the proper income statement and balance sheet presentation of income tax expense and deferred taxes

Answer 36

x1. income tax expense is presented on the income statement in two ways. Income taxes expense related to continuing operations may be shown as one of the continuing operations expenses deducted from continuing operations revenues to obtain net income, or preferably, it could be shown as a deduction from continuing operations earnings before taxes. Income taxes related to discontinued operations or extraordinary items are netted with the gain or loss from discontinued operations or extraordinary item.
- deferred tax assets and liabilities are shown on the balance sheet

Question 37

Y1. Explain the issues in determining the amount and classification of tax assets and liabilities.

Answer 37

The amount of the deferred tax assets and liabilities are calculated using the rav rates enacted as the time of the calculation. Deferred tax assets may be current assets or other long term assets, depending on when the tax benefits is expected to be realized. Current is one year or less while long term is greater than one year. Similarly, deferred tax liabilities may be current or long term liabilities, depending on when they are expected to be paid.

Question 38

Z1. Distinguish between an operating lease and a capital lease.
Operating (finance) Lease

Answer 38

z1. A lessee has an operating lease if the long term lease does not meet any of the following criteria:
- Title transfers to the lessee at the end of the lease term.
- A bargain purchase option is available to the lessee.
-The lease term is greater than or equal to 75% of the leased asset’s useful life.
- The present value of the lease payments at the lessee’s borrowing rate is greater than or equal to 90% of the fair market value (FMV).
Meeting any one of these criteria makes the lease a capital lease for financial accounting purposes

Question 39

Z2. Distinguish between an operating lease and a capital lease.
Capital lease

Answer 39

z2. In order for the lessor to consider as a capital lease, two additional criteria must be met:
- The rental collections are reasonably assured.
- Future costs are reasonably predictable; that is, there are no expected unreimbursed costs.

Question 40

AA1. Explain why an operating lease is a form of off balance sheet financing.

Answer 40

aa1. An operating lease is a form of off balance sheet financing because the lease creates a liability for the present value of the expected lease payments that is not shown on the balance sheet. The lease payment commitment, however, should be disclosed in the appropriate footnote.

Question 41

BB1. Demonstrate an understanding of why lessees may prefer accounting for a lease an an operating lease as opposed to a capital lease.

Answer 41

bb1. The lessee would prefer that leases be operating as opposed to capital in order to keep the lease liability of the balance sheet and to show the interest porting of the lease payment. Treating a lease as an operating lease would improve the organizations solvency ratios, such as debt or debt/equity, as well as its interest coverage (number of times interest is earned). The improved solvency ratios make it less likely that the organization will violate debt covenants or restrictions.

Question 42

CC1. Recognize the correct financial statement presentation of operating and capital lease.
Operating lease

Answer 42

cc1. Operating lease payments are shown as an expense in the income statement, as dictated by accrual accounting. There is no balance sheet presentation of the lease,

Question 43

CC2. Recognize the correct financial statement presentation of operating and capital lease.
Capital lease

Answer 43

cc2. A capital lease creates a liability in the balance sheet equal at the lease’s inception to the present value of the future lease payments at the lessee’s borrowing rate. The lease payments, therefore, consist of an interest portion and a reduction in the lease liability. The interest portion is equal to the lessee borrowing rate times the amount if lease liability at the beginning of the period covered by the payment. The splitting of the lease payments into interest and liability reduction requires the lessee to set up a lease amortization table similar to a mortgage amortization table. The lessee treats the leased asset as part of a long term assets and depreciates the asset as appropriate. The depreciation is included with other depreciation on the income statement.

Question 44

DD1. Identify transactions that affect paid in capital and those that affect retained earnings.
paid in capital

Answer 44

dd1. Paid in capital or capital received consists of capital stock par or stated value plus capital received in excess of par or stated value. Transactions affecting paid in capital include proceeds from the issuance of shares, retirement or repurchased shares, stock splits, stock dividends, and the conversion of debt to equity.

Question 45

DD2. Identify transactions that affect paid in capital and those that affect retained earnings.
retained earnings

Answer 45

dd2. Retained earnings are the “running” record of net incomes minus dividend since the inception of the corporation. In addition to net income and dividends, retained earnings are affected by the appropriation of retained earnings or the removal of an appropriation.

Question 46

EE1. Determine the affect on shareholder equity of large and small stock dividends and stock splits.
large stock dividend

Answer 46

ee1. Stock dividends occur when the corporation issues shares to existing shareholders on a pro rata basis. A large stock dividend occurs when the number of shares issued exceeds 25% of the outstanding shares. The accounting for a large stock dividend requires the capitalization of retained earnings at the par or stated value of the stock. An amount equal to said value is transferred from retained earnings to common stock par or stated value.

Question 47

EE2. Determine the affect on shareholder equity of large and small stock dividends and stock splits.
small stock dividend

Answer 47

ee2. A small stock dividend occurs when the number of shares issued is less than 20% of the outstanding shares. In this case, retained earnings are capitalized at the market value of the stock at the time of the stock dividend issue. An amount equal to that value is transferred from retained earnings to capital received (par or stated value of the shares and doubling the number of shares authorized, issued and outstanding and in the treasury).

Question 48

EE3. Determine the affect on shareholder equity of large and small stock dividends and stock splits.
stock split

Answer 48

ee3. A stock split involves the recall and reissue of all shares to reflect a change in the par or stated value caused by the split. For example, a two for one stock split would involve halving the par or stated value of the shares and doubling the number of shares authorized, issued, and outstanding and in the treasury.

Question 49

FF1. Identify reasons for the appropriation of retained earnings.

Answer 49

ff1. The appropriation (restriction or reservations) of retained earnings puts shareholders on notice that the portion of retained earnings appropriated is no longer available for dividend distribution. Reasons for the appropriation of retained earnings include plant expansion, sinking funds for debt retirement, and treasury stock acquisition.

Question 50

GG1. Apply revenue recognition principles to carious types of transactions.

Answer 50

gg1. The basic revenue recognition principle states that revenue us recognized when the following criteria are met.
-The earnings process is complete or virtually complete
-A measurable exchange has taken place
-The collectability of cash is reasonably assured
In other words, it is earned , measurable, and collectible, and an exchange has taken place. This describes the point of sale method.

Question 51

HH1. Identify issues involved with revenue recognition at point of sale, including sales with buyback agreements, sales when right to return exists, and trade loading (or channel surfing).
buyback and right to return

Answer 51

hh1. A sale with a buy back agreement may not be recognized as a sale (revenue) until the buy back period expires. The earnings process is not complete. A sale with a right of return may be recorded as a sale (revenue) as long as sales returns and an allowance for returns are presented on the income statement and balance sheet, respectively, Again, the earnings process is not complete.

Question 52

HH2.Identify issues involved with revenue recognition at point of sale, including sales with buyback agreements, sales when right to return exists, and trade loading (or channel surfing).
channel surfing

Answer 52

hh2. Trade loading or channel surfing involves shipping to your customers without a customer order. It is normally done at year end to inflate revenues. Since there is no customer order, there is no agreement with the customer, and consequently, a sale should not be recognized. As before, the earnings process is not complete.

Question 53

II1. Identify instances where revenue is recognized before delivery and when it is recognized after delivery.
before delivery

Answer 53

ii1. The recognition of revenue before delivery occurs with either the percentage-of-completion method for recording long term contracts the production method for handling the mining of precious metals such as platinum and gold that have a ready market with a determinable price. The production method also applies to diamonds.

Question 54

II2. Identify instances where revenue is recognized before delivery and when it is recognized after delivery.
after delivery

Answer 54

ii2. The recognition of revenue after delivery occurs in two cases. The first occurs when there are “strings” attached to the sale, such as buy back provision or right to return. The second occurs case, revenue is recognized by a cash method called the installment sales method.

Question 55

JJ1. Distinguish between percentage of completion and completed contract methods for recognizing revenue.

Answer 55

jj1. Both the percentage of completion method and the completed contract method apply to the recognition of revenue and expenses related to long term construction contracts. The percentage of completion method recognizes construction revenue and expenses as the construction project progresses over time. The completed contract recognizes all of the revenue and expenses related to the project at the projects completion.

Question 56

KK1. Compare and contrast the recognition of costs of construction, progress billings, collections, and gross profit under the two long term contract accounting methods.
completed contract method

Answer 56

kk1. When using the completed contract method, the progress billings and collections are recorded in construction receivables on the balance sheet. Costs of construction are carried on the balance sheet in an inventory account called “construction in progress” and are expensed to the income statement when the project is completed and the revenue is recognized.

Question 57

KK2. Compare and contrast the recognition of costs of construction, progress billings, collections, and gross profit under the two long term contract accounting methods.
percentage of completion method

Answer 57

kk2. Under the percentage of completion method, the progress billings, collections, and construction in progress are handled in the same fashion as with completed contract method. Revenue is recognized by the percentage of completion of the project in a given period. The credit to revenue is offset by debits to costs of revenue equal to the construction in progress. The debit to construction in progress is equal to the difference between the revenue and costs of revenue. It is the gross profit from the project for the period.

Question 58

LL1. Identify situations in which each of the following revenue recognition methods would be used. installment sales method, cost recovery method, and deposit method.

Answer 58

ll1. There are three methods of recognizing revenue after delivery, the installment sales method, the cost recovery method, and the deposit method. The installment sales method is used when the collectability of cash is spread over a long period of time. This is common for real estate and franchise contracts. the revenue is recognized on a pro rata basis through the gross profit of the contract. The cost recovery method does not recognize revenue until all of the costs related to the sale have been collected. It is used when the collectability if highly uncertain. The deposit method is used when the seller receives cash before the transfer of ownership occurs. Since the risks and rewards of ownership have not transferred the deposits are recorded as unearned revenue (a performance obligation). Revenue is recognized upon the transfer of ownership.

Question 59

MM1. Discuss issues and concerns that have been identified with respect to revenue recognition practices.

Answer 59

mm1. The issues related to revenue recognition were presented in the coverage of the revenue recognition principle in GG. The issues were:
- has the revenue been earned?
- is the revenue measurable?
- has an exchange taken place?
- is the collectability of cash reasonably assured?

Question 60

NN. Demonstrate an understanding of the matching principle with respect to the revenues and expenses, and be able to apply it to specific situations.

Answer 60

nn1. the matching principle states that expenses are either to be matched to the revenues they create, as in matching cost of sales to sales, construction costs of revenue to construction revenue, or gross profits in the installment sales method, or matched to the period to which they pertain.
Matching to the period would include such expenses as advertising, promotion, research and development, interest, and utilities.

Question 61

OO1. Define gains and losses, and indicate the proper financial statement presentation.

Answer 61

oo1. A gain is the excess of revenue over cost from a transaction that is outside the normal course of business. Examples would be the gain from the sale of fixed assets or investments or the gain from early retirement of debt. A loss is the expiration of an asset without creating revenue. It occurs when there is a excess of cost over revenue from a transaction outside the normal course of business. Examples would be a fire loss, loss on sale of fixed assets or investments, or loss on early debt retirement. Gains and losses are preferably shown in other revenues, expenses, gains, and losses are shown below operating income on the income statement.

Question 62

PP1. Demonstrate an understanding of the proper accounting for losses on long term contracts.

Answer 62

pp1. Expected losses on a long term contracts are to be recorded in the period in which the loss becomes apparent.

Question 63

QQ1. Demonstrate an understanding of the treatment of gain or loss on the disposal of fixed assts.

Answer 63

qq1. The gain or loss on the disposal of a fixed asset should be shown in the income statement as part of other revenue, expenses, gains, and losses below operating income as noted in 001.

Question 64

RR1. Demonstrate an understanding of of expense recognition practices.

Answer 64

rr1. expense recognition practices and principles were covered under the matching principle in NN

Question 65

SS1. Define and calculate comprehensive income

Answer 65

ss1. Comprehensive income includes net income from the income statement and other comprehensive net income. Other comprehensive net income includes, for the most part, unrealized gains and losses on investments, foreign currency translation gains and losses on investments, and unrealized gains and losses on hedging transactions. Other comprehensive income may be appended to the income statement or shown as a separate statement of comprehensive net income. It cannot be buried in the statement of stockholder’s equity or retained earnings.

Question 66

TT1. identify correct treatment of extraordinary items and discontinued operations.
discontinued operations

Answer 66

tt1. Discontinued operations are shown net of tax in the income statement after the after-tax net income from continuing operations. The net gain or loss from discontinued operations is split between the gain and loss from the operations as it was running and the gain or loss from the disposal of the discontinued operations.

Question 67

TT2. identify correct treatment of extraordinary items and discontinued operations.
Extraordinary items

Answer 67

tt2. Extraordinary items are shown net of tax after discontinued operations (if they exist) in the income statement. For an item to be extraordinary it must meet three requirements. It has to be unusual, infrequent, and outside management control.

Question 68

IFRS vs GAAP

revenue recognition with respect to the sale of goods, services, deferred receipts, and construction contracts.

Answer 68

IFRS requires revenue recognition based on a contract with the customer. Revenue is recognized as contract milestones are met. IFRS allows only the percentage of completion method for the recognition of revenue for long term or multiyear contracts. GAAP allows both percentage of completion and completed contract methods.

Question 69

IFRS vs GAAP

intangible asset with respect to development costs and revaluation

Answer 69

Both IFRS and GAAP require the expensing of basic research expenditures. GAAP allows the capitalization of development costs when the project is technically feasible only. IFRS requires the intention to complete the project, the ability to sell the resulting products, and the availability of resources to complete the project as well as technical feasibility. IFRS allows the revaluating of intangibles to fair value less accumulated amortization. GAAP does not.

Question 70

IFRS vs GAAP

inventories with respect to costing methods, valuation, and write downs (e.g. LIFO).

Answer 70

IFRS does not allow the use of LIFO for inventory valuation while GAAP does. IFRS dose not have the ceiling (net realized value - NRV) and floor (NRV reduced by the normal profit margin) rules for LCM. It only uses NRV.

Question 71

IFRS vs GAAP

leases with respect to leases of land and buildings

Answer 71

IFRS requires the disclosure of the net present value (NPV) of operating leases. Operating leases are recorded as liabilities if there are long term provisions. under IFRS, when leasing real estate (land and buildings) the land and buildings must be considered separately. GAAP considers them separately only when the land value at inception of the lease exceeds 25% of the fair value of the leased real estate. Capital lease treatment in IFRS and GAAP is basically the same.

Question 72

IFRS vs GAAP

long loved assets with respect to revaluation, depreciation, and capitalization of borrowing costs.

Answer 72

IFRS allows the revaluation of long lived assets (property, plant, and equipment - PP&E) to fair value less accumulated depreciation. GAAP does not. Both IFRS and GAAP require the capitalization of interest during construction (IDC) when borrowed funds are used in connection with expenditures for self constructed assets.

Question 73

IFRS vs GAAP

impairment of assets with respect to determination, calculation, and reversal of loss

Answer 73

GAAP, the amount of impairment loss on long lived assets is the amount by which its carrying value exceeds its fair value. IFRS calculates the impairment less as the amount which the carrying value exceeds the recoverable amount. The recoverable amount is the higher of: (1) fair value less cost to sell and (2) value in use (the present value of the future cash flows in use, including disposal value). IFRS allows the reversal of impairment losses not to exceed the initial carrying amount of the asset. GAAP prohibits reversal of any impairment losses. IFRS prohibits the reversal of good will.

Question 74

IFRS vs GAAP

financial statement presentation with respect to extraordinary items and changes to equity

Answer 74

IFRS prohibits the separate presentation of extraordinary items in the income statement. GAAP allows presentation of extraordinary items. Extraordinary items are those that are unusual, infrequent, and outside management control. All three criteria must be met.

Question 75

Allowances for doubtful accounts 
Receivables method (%)

Answer 75

2011: 500,000
2012: 1,200,000
% uncollectible: 1%

AFDA T account (credit)
5,000: beg (1%500,000)
[7,000] : adj (looking for, beg-end=adj)
12,000 : end (1% 1,200,000)

Question 76

Allowances for doubtful accounts

percentage of sales

Answer 76

2011: credit sales 500,000
2012: credit sales 1,200,000
% uncollectible: 1%

income statement account (so gets reset every year)
AFDA is 2011: 5,000, 2012:12,000 respectively

Question 77

A1. Discuss how strategic planning determines the path an organization chooses for attaining its long term goals and mission.

Answer 77

a1. an organizations strategic planning determines the path is a long term plan that flows directly from the organizations vision and mission. The strategic plan is used to develop long term goals for the organization. The organization sets long term objectives as milestones to be achieved on the way to attaining the objectives.

Question 78

B1. Identify the time frame appropriate for a strategic plan.

Answer 78

b1. The time frame for strategic planning is normally five to ten years. It may, however be longer.

Question 79

C1. Identify the external factors that should be analyzed during the strategic planning process , and understand how this analysis leads to recognition of organizational opportunities , limitations, and threats.

Answer 79

c1. The external factors to consider are the external or environmental opportunities and threats that face the organization. Opportunities are those things that would enhance the organizations competitive position and profitability. Threats are risks that, if they occur, would be detrimental to the organizations competitive position or profitability.

Question 80

D1. Identify the internal factors that should be analyzed during the strategic planning process, and explain how this analysis, leads to recognition of organizations strengths, weakness, and competitive advantage.

Answer 80

d1. The internal factors to consider are th organizations strengths adn weakness. Strengths are those that would enhance the organiozations competitive position and profitability

Question 81

E. Demonstrate an understanding of how mission leads to the formation of long term business objectives, such as business diversification, the addition or deletion of product lines, or the penetration of new market lines.

Answer 81

e1. Long term goals and objectives include such things as
- business diversification
- product lines
- cost leadership
- new markets

Question 82

F1. Explain why short term objectives, tactics for achieving these objectives, and operational planning (master budget) must be congruent with the strategic plan and contribute to the achievement of long term strategic goals.

Answer 82

f1. Short term objectives and the tactics to achieve them should flow directly from the organizations strategic plan and should be designed to achieve the goals and objectives set forth in the strategic plan. The short term objectives would be milestones along to the road to the achievement of the long term goals.

Question 83

G1. Identify the characteristics of a successful strategic plan.

Answer 83

g1. A successful strategic plan is one that assist the organization in achieving its long term goal and objectives. It has well define goals consistent with the strategic plan and the mission from which the plan we derived. It also has SMART objectives, objectives that are:
Specific
Measurable
Achievable
Realistic
Timely

Question 84

H1. Describe Porters generic strategies, including cost leadership, differentiation. and focus.

Answer 84

h1. -Cost leadership implies that the company has the lowest product costs in either the entire industry or within an industry segment.
- Differentiation implies that the company produces better products or services in the industry /segment
- Focus implies attention to an industry’s segment