Wiley 2

Question 1

What disclosure is required by firms in hyperinflationary economies under International Financial Reporting Standards (IFRS)?

Answer 1

Disclosure of the impact of inflation on the financial statements is required.

Question 2

Under IFRS what should the summary of significant accounting policies include?

Answer 2

• Judgements and key assumptions made in applying those policies
• Measurements bases used for recognition (e.g. historical cost, fair value)
• Information enabling assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities which are point estimates in many cases

Question 3

Define “purchase power loss”

Answer 3

Losses that result from holding monetary assets during inflationary times or having monetary liabilities during deflationary times

Question 4

Define “purchasing power gain”

Answer 4

Gains that result from holding monetary assets during deflationary times or having monetary liabilities during inflationary times

Question 5

Define “nonmonetary items”

Answer 5

The specific price of nonmonetary items can change

Question 6

Define “monetary items”

Answer 6

The specific price of monetary items cannot change.

Question 7

Define “purchasing power”

Answer 7

The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.

Question 8

Define “specific price change.”

Answer 8

The change in the price of a specific good or service over a period of time.

Question 9

Define “constant dollars”

Answer 9

Measurements in the general price level as of a specific date

Question 10

Define “nominal dollars”

Answer 10

Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.

Question 11

Define “general prices”

Answer 11

The term general prices refers to a market basket of items that the typical consumer purchases.

Question 12

Define “inflation”

Answer 12

It is the increase in general prices for a period of time; deflation is the decrease in general prices.

Question 13

What is the management discussion & analysis (MD&A) section?

Answer 13

It is a narrative written by management that is an integral part of the disclosure of the financial statements.

Question 14

What is included in illegal acts for companies?

Answer 14

Illegal contributions and bribes

Question 15

What is the difference between errors and irregularities?

Answer 15

Errors are unintentional. Irregularities are intentional

Question 16

What are the disclosure requirements for noncurrent liabilities?

Answer 16

• Combined aggregate amount of maturities on borrowings 5+ years after balance sheet, sinking fund requirements
• The aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services
• The fair value of each financial debt instrument in the financial statements or in the notes.
• The nature of the firm’s liabilities, interest rates and maturity dates, conversion options, assets pledged as collateral, and restrictions

Question 17

WHat is a development stage enterprise?

Answer 17

An enterprise placing substantially all its efforts into the establishment of a new business.

Question 18

WHat is presented in the related party transaction disclosures?

Answer 18

• Nature of relationship
• Description of all transactions for years presented
• Dollar amounts of transactions
• Receivables to or from parties

Question 19

What does the first footnote typically cover?

Answer 19

Summary of significant accounting policies.

Question 20

What are teh general types of rations?

Answer 20

• Liquidity/Solvency
• Operational activity
• Profitability
• Equity/Investment leverage

Question 21

List the formula for working capital.

Answer 21

Current assets - current liabilities

Question 22

List the formula for the acid test or quick ratio.

Answer 22

(cash + net receivables + marketable securities)/ Current Liabilities

Question 23

List the formula for the times interest earned

Answer 23

(Net Income + Interest expense + Income tax expense) / Interest expense

Question 24

List the formula for times preferred dividend.

Answer 24

Net income/Annual preferred dividend obligation

Question 25

What do liquidity (or solvency) ratios measure?

Answer 25

They ensure the ability of the firm to pay its debts as they come due.

Question 26

What is the financial statement ratio analysis?

Answer 26

The development of quantitative relationships between various elements of a firm’s financial statements

Question 27

List the formula for the number of days’ sales in AR

Answer 27

365/ AR turnover

Question 28

List the formula for inventory turnover

Answer 28

COGS / Avg inventory

Question 29

List the formula for number days’ supply in inventory

Answer 29

365/ Inventory turnover

Question 30

What do operational activity ratios measure?

Answer 30

They measure the efficiency with which a firm carries out its operating activities

Question 31

List the formula for determining operating cycle length

Answer 31

Days’ sales in AR + Days’ supply in inventory

Question 32

List the working capital ratio formula

Answer 32

current assets / current liabilities

Question 33

List the accounts receivable turnover ratio formula

Answer 33

Net credit sales / Avg net AR

Question 34

List the cash availability or interval ratio formula

Answer 34

(cash + net receivables + Marketable securities) / Avg daily cash expenditures

Question 35

Describe the allowance method of accounting for bad debts.

Answer 35

Determine the amount uncollectible and provide an allowance to measure accounts receivable at net realizable value

Question 36

Describe the direct write-off method for bad debts

Answer 36

The direct write off method records bad debt expense only when a specific amount receivable is considered uncollectible and is written off. The direct write off method is rarely used.

Question 37

Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?

Answer 37

Allowance method

Question 38

What is the preferred method of accounting for uncollectible accounts receivable?

Answer 38

Allowance method

Question 39

Describe the income statement approach for bad debts

Answer 39

It estimates bad debt expense as a percentage of credit sales

Question 40

Describe the balance sheet approach for calculating an allowance balance

Answer 40

It’s a percentage to ending accounts receivable

Question 41

What purpose does analyzing ending accounts receivable serve?

Answer 41

It enables the auditor to determine of the needed or desired balance in the allowance account.

Question 42

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

Answer 42

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability

Question 43

When does loan impairment occur?

Answer 43

When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.

Question 44

what is the accounting treatment for loan impairment?

Answer 44

The receivable should be written down to:

1. Present value of future cash flows using original effective interest rate or
2. Market value, if this value can be determined

Question 45

How is the loan on impairment accomplished?

Answer 45

With a debit to bad debt expense and a credit to a contra-receivable account

Question 46

List the methods through which interest revenue is recognized after a write-down has occurred.

Answer 46

• Interest

- Cost recovery methods

Question 47

When a receivable is impaired what should it be written down to?

Answer 47

The present value of the future cash flows expected to be collected using the original effective interest rate for the loan or market value if more determinable.