Intermediate Accounting I: Chapter 1

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McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.

Historical Cost (Original Transaction Value) Principle

Information is considered material to the financial statements if I. It falls within industry-specific quantitative guidelines published by the Financial Accounting Standards Board. II. Its omission could make a difference in the decisions made by a user relying on the financial statements. III. Its misstatement could make a difference in the decisions made by a user relying on the financial statement.

II and III only

National Bancorp, a publicly traded company, files quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings?

Timeliness

Equity is a residual amount representing the owner's interest in the assets of the business.

True

Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing operations.

True

The revenue/expense approach emphasizes determining the appropriate amounts of revenue and expense in each reporting period.

True

Relevance

pertinent to the decison at hand

Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith's personal residence and recorded a $150 expense.

the economic entity assumption

Economic Entity Assumption

the enterprise is separate from its owners and other entities

Going Concern Assumption

the entity will continue indefinitely

Assets, Liabilities and Equity

the financial position of a company

Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet.

the historical cost (original transaction value) principle

The underlying assumption that assumes the life of a company can be divided into artificial time periods.

Periodicity

SiriusXM Radio Inc. files its annual and quarterly financial statements with the SEC.

Periodicity Assumption

Revenue

inflow of an asset from providing a good or service

Confirmatory Value

information confirms expectations

Timeliness

information is available prior to the decision

Predictive Value

information is useful in predicting the future

Monetary Unit Assumption

a common denominator is the dollar

Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as follows: Cash collected from customers, $340,000; Cash paid for rent, $40,000; Cash paid to employees for services rendered during the year, $120,000; Cash paid for utilities, $50,000. In addition, you determine that customers owed the company $60,000 at the end of the year and no bad debts were anticipated. Also, the company owed the gas and electric company $2,000 at year-end, and the rent payment was for a two-year period. Calculate accrual net income for the year.

$208,000

Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as follows: Cash collected from customers, $350,000; Cash paid for rent, $42,000; Cash paid to employees for services rendered during the year, $122,000; Cash paid for utilities, $52,000. In addition, you determine that customers owed the company $62,000 at the end of the year and no bad debts were anticipated. Also, the company owed the gas and electric company $2,200 at year-end, and the rent payment was for a two-year period. Calculate accrual net income for the year.

$214,800

Alpaca Corporation had revenues of $270,000 in its first year of operations. The company has not collected on $18,700 of its sales and still owes $26,600 on $90,000 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $12,500 in salaries. Owners invested $16,000 in the business and $16,000 was borrowed on a five-year note. The company paid $2,900 in interest that was the amount owed for the year, and paid $7,300 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. Compute net income for the first year for Alpaca Corporation.

$96,570

At the beginning of its 2020 fiscal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi recorded the expenditure as an asset to be expensed equally over the two-year period of the lease.

Agree. Conforming to appropriate expense recognition

The Reliable Tire Company included a note in its financial statements that described a pending lawsuit against the company.

Agree. Conforming to the full disclosure principle

Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery.

Agree. Expense recognition

Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life.

Agree. Materiality

Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC.

Agree. Periodicity Assumption

Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance.

Agree. Revenue Recognition

Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer.

Agree. Revenue recognition

Probable future economic benefits owned by the company.

Assets

Jeff Brown is evaluating two companies for future investment potential. Jeff's task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jeff will be using possess?

Comparability

Applied Alliances, Inc., changed it's revenue recognition policies. Which characteristic is jeopardized by this change?

Consistency

A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe?

Cost Effectiveness

Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense.

Disagree. Expense Recognition

Winderl Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress.

Disagree. Full Disclosure Principle

Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements.

Disagree. Full disclosure principle

Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000.

Disagree. Historical cost (original transaction value) principle

Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar.

Disagree. Monetary unit assumption

Esquire Company provides financial statements to external users every three years.

Disagree. Periodicity assumption

At the end of its 2020 fiscal year, Dower, Inc., received an order from a customer for $45,350. The merchandise will ship early in 2021. Because the sale was made to a long-time customer, the controller recorded the sale in 2020.

Disagree. Violation of appropriate revenue recognition

The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase of an automobile to be used solely for personal use.

Disagree. Violation of the economic entity assumption

The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its recently appraised value of $3.5 million.

Disagree. Violation of the historical cost (original transaction value) principle

The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements.

Disagree. Violation of the periodicity assumption

Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

Economic Entity Assumption

The president of Applebee's International, Inc., travels on the corporate jet for business purposes only and does not use the jet for personal use.

Economic Entity Assumption

Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.

Expense Recognition

Lady Jane Cosmetics depreciates the cost of equipment over their useful lives.

Expense Recognition (Matching Principle)

When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?

Faithful Representation

Political pressure never affects the IFRS standard-setting program.

False

Financial statements generally include all of the following except -Income Statement -Federal Income Tax Return -Balance Sheet -Statement of Cash Flows -Statement of Shareholder's Equity

Federal Income Tax Return

Probable future sacrifices of economic benefits.

Liabilities

Decrease in equity from peripheral or incidental transactions.

Losses

Which component would allow a large company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset?

Materiality

Donald Kirk, former chairman of the FASB, once noted that "...there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests..." Which characteristic is implicit in Mr. Kirk's statement?

Neutrality

Consistency and feedback relate most closely to which two of the following accounting concepts, respectively?

Predictive Value and Confirmatory Value

In general, relevant information possesses which qualities?

Predictive and/or Confirmatory Values

The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is

Representation Faithfullness

Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications.

Revenue Recognition

Inflows of assets from ongoing, major activities.

Revenues

Faithful Representation

agreement between a measure and the phenomenon it purports to represent

Full Disclosure Principle

all information that could affect decisions should be reported

Asset

an item owned by the company representing probable future benefits

Investment by Owner

an owner's contribution of cash to a corporation in exchange for ownership shares of stock

Consistency

applying the same accounting practices over time

Materiality

concerns the relative size of an item and its effect on decisions

Materiality

concerns the relative size of an item and its effect on decisons

Not a qualitative characteristic, but a practical justification for some accounting choices.

conservatism

The benefits of providing accounting information should exceed the cost of doing so.

cost effectiveness

Revenue Recognition

criteria usually satisfied for products at point of sale

Distribution to Owners

decreases in equity resulting from transfers to owners

Distribution to Owners

dividends paid by a corporation to its shareholders

All economic events can be identified with a particular entity.

economic entity assumption

Recognizing expenses in the period they were incurred to produce revenue.

expense recognition

Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.

expense recognition; materiality

Information that could affect decision making should be reported.

full disclosure principle

The basis for measurement of many assets and liabilities.

historical cost principle

Verifiability

implies consensus among different measurers

Comparability

important for making interfirm comparisons

Comprehensive Income

increase in equity during a period from nonowner transactions

Gain

increase in equity from peripheral or incidental transaction

Gain

increases in equity from peripheral or incidental transactions of an entity

A consequence is that GAAP need not be followed in all situations.

materiality

Inflation causes a violation of this assumption.

monetary unit assumption

Liability

obligation to transfer cash or other resources as a result of a past transaction

Expense

outflow of an asset related to the production of revenue

Relates to the qualitative characteristics of timeliness.

periodicity assumption

Expense Recognition

record expenses in the period the related revenue is recognized

Cost Effectiveness

requires consideration of the costs and value of information

The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received.

revenue recognition

Net Income

revenues plus gains less expenses and losses

Loss

sale of an asset used in the operations of a business for less than the asset's book value

Neutrality

the absence of bias

Comprehensive Income

the change in equity from nonowner transactions

Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.

the full disclosure principle

Periodicity Assumption

the life of an enterprise can be divided into artificial time periods

Historical Cost Principle

the original transaction value upon acquisition

Equity

the owner's residual interest in the assets of a company

Atwell Corporation has not prepared financial statements for external users for over three years.

the periodicity assumption

Recognition

the process of admitting information into financial statements

Understandability

users understand the information in the context of the decision being made


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