ch.5

Do accountants typically measure accounts receivable by discounting them for the time value of​ money? Explain.

Accounts receivable are not usually discounted for the time value of money because they are​ short-term.

What are the five basic steps in revenue​ recognition? ​

Allocate the transaction price to the separate performance obligations Your answer is correct. B. Determine the transaction price Your answer is correct. C. Identify the separate performance obligations Your answer is correct. D. Recognize revenue​ when, or​ as, each performance obligation is satisfied Your answer is correct. F. Identify the contract with the customer

Will an investor earn more if interest is compounded semiannually or if the investment pays only simple​ interest? Explain.

An investor will earn more revenue if the investment compounds interest semiannually . Interest computed on both the principal and the interest left on deposit is referred to as compound interest . Any interest earned is then immediately included in the computation of the next period's interest . A compounding period can be over any time period such as a quarter or a day.

What do firms use to record the sales value of a transaction when a note receivable has either an unreasonable rate of interest or no interest rate​ stated?

An observed market price is the most reliable evidence of an​ asset's fair value. If a company receives a note in exchange for goods or​ services, assume the​ note's present value is the fair value of the goods or services provided. Fair value estimates are based on the market value of the goods or services​ provided, or the note. If a company cannot obtain the fair value of the goods or​ services, the present value of the note is found using the market rate of interes

Explain the difference between a​ single-step and​ multiple-step income statement. Which statement is more​ transparent?

A​ single-step income statement format combines all revenues and gains and all expenses and losses into single categories. Detailed classification and numerous subcategories are not reflected in a​ single-step income statement. A​ multiple-step income statement format reports several subtotals before computing income from continuing operations and net income. In​ addition, expenses are classified by function. The​ multi-step income statement is generally more transparent than the​ single-step income statement.

What are cash​ equivalents?

Cash equivalents are​ short-term, highly liquid investments with original maturities of three months or less. Treasury​ bills, commercial​ paper, certificates of​ deposit, and money market funds are examples of cash equivalents. These investments are cash substitutes that companies can easily convert back into cash if needed in the operating cycle.

Do companies always classify cash as a current asset on the balance​ sheet? Explain.

Cash is classified as current unless it is restricted from use in the current operating cycle. Restrictions on​ withdrawal, and therefore limitations on​ use, in the current operating cycle include foreign bank​ accounts, escrow​ accounts, collateral for certain​ obligations, and​ long-term debt sinking funds. When cash is legally restricted from use in the current operating​ cycle, it should be reclassified out of the regular cash line item on the balance sheet and disclosed in the footnotes.

How is cash held as a compensating balance reported on the balance​ sheet?

Cash must be segregated if it is held as a compensating balance. According to the​ SEC, if the compensating balances are legally​ restricted, similar to an escrow​ account, and held against​ short-term debt, the cash held as a compensating balance must be shown as a separate line item from unrestricted cash in the current assets section of the balance sheet. On the other​ hand, if the balance is held against​ long-term debt, the amount of cash held as a compensating balance must be reclassified as a noncurrent asset on the balance sheet.

What is commercial​ substance?

Commercial substance means that the​ risk, timing or amount of the​ entity's future cash flows is expected to change as a result of the contract.

What items are included in net​ income?

Companies present net income on the income statement after discontinued operations. Net income is the sum of the income from continuing​ operations, and gains or losses from discontinued operations.

How is a performance obligation​ defined?

Conceptually, a performance obligation is a promise to transfer a good or service that is distinct.​ Specifically, a performance obligation is​ either: 1.) a promise to transfer a good or​ service, or a bundle of goods or​ services, that is​ distinct, or,​ 2.) a promise to transfer a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

oes a business segment qualify as a discontinued​ operation? Explain.

Discontinued operations treatment applies to a component of the​ entity, which may or may not be a business segment. After a company has determined that a portion of a business is a component of an entity or a group of components of an​ entity, the disposal must represent a strategic shift that has or will have a major effect on the operations and financial results of the entity. If all of these conditions are​ met, then the disposal should be treated as a discontinued operation under U.S. GAAP

What management behavior does the term earnings management​ describe?

Earnings management refers to the use of discretion that is afforded managers under the accounting standards to inappropriately manipulate earnings to meet certain goals.

Earning Quality

Earnings quality captures the degree to which reported income provides financial statement users with useful information. This information is particularly effective in predicting future firm performance.

What is​ interest? Explain.

Interest is the price paid for the use of money. The amount earned on the initial investment is referred to as interest.

Are items of other comprehensive income included in the computation of net​ income? Explain.

Items of other comprehensive income are not included in the computation of net income. The elements of other comprehensive income​ (OCI) currently consist of unrealized gains and losses from the​ available-for-sale portfolio of investment securities and derivatives classified as cash flow​ hedges, foreign currency translation gains and​ losses, and unrecognized pension costs​ (benefits) from adjustments needed to bring the accounting pension asset or liability to the funded status of the pension plan. These items of revenue and expense are not reported on the statement of net​ income, but rather are considered part of other comprehensive income.

Can entities combine cost of goods​ sold, payroll​ costs, and administrative expenses when aggregating and summarizing expenses by function on the income​ statement? Explain.

No. A company cannot aggregate cost of goods​ sold, payroll​ costs, and administrative expenses. Payroll costs are not a functional expense as they do not relate to the use of an expense.​ Rather, they are a natural​ expense, relating to the source of an expense. Cost of goods sold and administrative expenses are functional expenses.

Can the terms net income and comprehensive income be used​ interchangeably? Explain.

No. Net income is a component of comprehensive income. Comprehensive income is the change in a​ company's equity during a​ period, resulting from transactions and other events and circumstances from​ non-owner sources. Comprehensive income includes net income and other comprehensive income.

Is the presentation of the statement of net income under IFRS and U.S. GAAP​ identical? Explain.

No. While U.S. GAAP and IFRS reporters could present the same statement of net​ income, IFRS requires 6 key items to be reported on the statement of net​ income: 1.​ Revenue, 2. Finance​ costs, 3. Share of ​ income/loss of​ associates, 4. Tax​ expense, 5.​ After-tax profit or loss on discontinued​ operations, and 6. Net​ Income, also called Profit or Loss.

Explain why operating income is an important measure of financial performance.

Operating income is a key financial measure of performance for three reasons.​ First, operating income reflects the results of the core operations of the business.​ Second, operating income also assists a financial statement user in comparing​ firms, regardless of their capital structure.​ Finally, operating income provides a measure of income available to all outside stakeholders.

What is the difference between permanent and transitory​ earnings?

Permanent earnings are earnings that are likely to continue into the future . Transitory earnings are earnings that are unlikely to continue in the future

If Procter​ & Gamble sells its Fabric Care and Home Care business​ segment, would it account for the sale as a discontinued​ operation? Explain.

Proctor​ & Gamble may be able to account for the sale as a discontinued operation. The segment must first be defined as a component of an entity. If the company determines that a portion of a business is a component of an entity or a group of components of an​ entity, the disposal must represent a strategic shift that has or will have a major effect on the operations and financial results of the entity. If all of these conditions are​ met, then the disposal should be treated as a discontinued operation under U.S. GAAP.

How do companies account for receivables that are​ factored?

Receivables that are factored either with or without recourse should be accounted for as a​ sale, or a secured borrowing. In order to be recognized as a​ sale, three conditions must be met.

Do entities report​ revenues, expenses,​ gains, and losses in net income or other comprehensive​ income? Explain

Revenues, expenses,​ gains, and losses can be included in net income. Other comprehensive income can include the same​ elements, although it would be unusual to report revenues in other comprehensive income.

Under the allowance​ method, will the actual​ write-off of an uncollectible account have a net effect on the financial​ statements? Explain.

The allowance account provides a cushion against future​ write-offs. The​ write-off under the allowance method reduces the allowance account and the balance of accounts receivable but has no effect on net realizable value.​ Thus, there is no balance sheet effect. There is no income statement impact from the​ write-off under the allowance method because income was already reduced by the estimated bad debt expense in the year of the sale.

Is the face value of a note receivable exchanged for goods and services always equal to the sales value of the​ transaction? Explain.

The face value equals the sales value if the stated rate of interest is reasonable when compared to the current market rate of interest​ or, if that is not the​ case, then if the sales value is determinable.​ However, if the stated rate is not reasonable compared to the market rate and the fair value of the goods or services provided is not​ determinable, then the present value will be computed using the market rate as the discount rate. The sales value of the transaction should equal the present value of the​ note, which may not equal the face value of the note. The face value of the note will not always equal the sales value of the transaction.

What factors may indicate that a promise to deliver a good or service is not separate from other​ promises?

The good or service is highly dependent or interrelated with another good or service promised in the contract. Your answer is correct. E. The good or service significantly modifies another good or service promised in the contract. Your answer is correct. F. The seller is using the good or service as an input to produce or deliver the combined output to the customer.

In what way is the income statement useful for financial statement​ users?

The income statement provides information to help financial statement users to evaluate past performance . In​ addition, it also provides information to help predict future performance and assess risks or uncertainties of achieving future cash flows.

What is the transaction price in a​ contract?

The transaction price is the amount of consideration that the entity expects to be entitled to as a result of providing goods or services to the customer. This is not necessarily the price stated in the​ contract, but rather the amount the seller expects to receive.

What are the primary issues involved in revenue​ recognition?

The two primary issues involved with revenue recognition are timing and measuremen

How does an entity record a subsequent recovery of an account previously written​ off?

There are two steps to account for the subsequent recovery of accounts previously written off against the allowance​ account: (1) reinstate the account receivable and restore the allowance account.​ (2) record the cash collection.

Must a company report operating income under​ IFRS?

Under​ IFRS, a company is allowed to report operating​ income, but is not required to present it.

What factors determine the transaction​ price?

Variable consideration and constraining estimates of variable consideration Your answer is correct. D. Noncash consideration Your answer is correct. E. The existence of a significant financing component in the contract Your answer is correct. F. Consideration payable to a customer

What is the difference between pledging accounts receivable and assigning accounts receivable in a secured borrowing​ transaction?

When a firm pledges accounts​ receivable, the receivables are collateral for a financing arrangement. When the company assigns accounts​ receivable, specifically designated receivables are collateral for the​ loan, but the receipts on collection of the receivables are directly used to pay down the debt.

What is the fundamental principle underlying the measurement of​ revenue?

With regard to​ measurement, the fundamental principle is that a company should recognize the amount of revenue that it expects to be entitled to receive in exchange for the goods or services.

What is the fundamental principle underlying the timing of revenue​ recognition?

With regard to​ timing, the fundamental principle of revenue recognition is that a company should recognize revenue when it transfers control of an asset to the customer.

What principles regarding timing and measurement determine​ when, and for how​ much, firms recognize​ revenue?

With regard to​ timing, the fundamental principle of revenue recognition is that an entity should recognize revenue when control of an asset is transferred to the customer. With regard to​ measurement, the fundamental principle is that an entity should recognize revenue in an amount that the entity expects to be entitled to in exchange for the goods or services.

If interest is compounded more than once a​ year, will the effective interest rate be higher than the annual stated interest​ rate? Explain.

Yes . When interest is compounded more than once per​year, we determine the interest rate used in computations by dividing the annual rate by the number of periods . If interest is compounded more than once a​year, then the effective interest​rate, which is the amount of interest actually earned ​, will be higher than the stated interest rate.

oes the aging of accounts receivable method of estimating the allowance for uncollectible accounts provide a more accurate measurement of net accounts receivable than bad debt​ expense? Explain.

Yes. The use of the aged trial balance of accounts receivable or any balance sheet approach attempts to determine the balance needed in the allowance for uncollectible accounts that will properly measure the accounts receivable at its net realizable value. The adjusting entry used to bring the allowance account to its​ "proper" value will force the bad debt expense. This bad debt expense may not provide for adequate matching of the bad debt expense with the current​ year's net credit sales. The aging method accurately measures the net accounts​ receivable, but does not accurately measure the bad debt expense.

What are the three limitations of the income​ statement?

certain rev, experience,gains,loss, cannot be measured reliably and therefore not reported on. the income statement the measurement of income is dependent upon the accounting methods selected. rev,exp,gains,losses can be manipulated by management

What are the two criteria to define a good or service as​ distinct?

o be​ distinct, a good or service must meet two​ conditions: 1.) the customer can benefit from the good or service on its own or in conjunction with other readily available resources to the​ customer, and,​ 2.) the promise of the seller to deliver that good or service is separately identifiable from other promises in the contract. Your answer is correct.

What are the six key items to be reported on the statement of net income under​ IFRS?

rev, finance costs, share of income/loss of discontent. op, net income