Acct 382 - Intermediate Accounting 1
An item typically included in the income from continuing operations section of the income statement is: a) discontinued operations b) restructuring costs d) prior period adjustments d) all of the above
b) restructuring costs
Other long-term assets
balance sheet item that is a catch-all classification of noncurrent assets (long-term prepaid expenses, noncurrent investments that are not material)
internal controls for cash is the
bank reconciliation
Non-GAAP earnings are calculated
based on management's assumptions of permanent earning
accrued receivable occures when revenue is earned
before cash flow
related-pary transactions
borrowing or lending money at an interest rate significantly different from the market interest rate
when a specific account receivable is determined to be uncollectible
both the allowance amount and account receivable is reduced
Ways management can use accounts receivable to manipulate earnings resulting in diminished earnings quality
building large allowances for bad debts in good periods and then reducing those allowances in bad periods selling products at large discounts to retailers before they would normally buy and then holding the products for later delivery
Earnings per share should be reported for each of the following income statement captions except: a) income from continuing opereations b) discontinued operations c) operating income d) net income
c) operating income
which of the following would more likely be found in a multi-step income statement? a) total expenses b) total revenues and gains c) operating income d) all of the above
c) operating income
Which of the following items would not be included as a cash flow from operating activities in a statement of cash flow? a) collections from customers b) interest on note payable c) purchase of equipment d) purchase of inventory
c) purchase of equipment
Management Discussion and Analysis section includes a perspective on:
capital resources, operations and liquidity
In a cash receipts journal, the debit column is for:
cash
petty cash fund should always have ________ and ______ that together equal the amount of the fund
cash receipts
Order of current assets on balance sheet
cash and cash equivalents accounts receivable inventory prepaid expenses
compensating balance may be disclosed in the financials as
cash and cash equivalents noncurrent assets current assets
current assets
cash and other assets that are expected to be converted to cash or consumed within a year or the current operating cycle (temporary investment, short-term marketable security)
short-term, highly liquid investments such as money market funds or treasury bills are classified as
cash eqivalents
The new expected cash flow approach requires that the probability adjustment for uncertainty is applied to what amount when calculating expected cash flows?
cash flow
IFRS for determining whether risks and rewards have been transferred is evaluated by comparing how variability in the amounts and timing of the _______________ ________________ of the transferred assets affects the company before and after transfer
cash flows
Other assets
catch all category of noncurrent assets
Income statement classification shifting
categorizing operating expenses as nonoperating expesenes
Change in accounting principle
change from one acceptable accounting method to another change from percent-off-completion to completed contract method change from LIFO to FIFO
factors considered when estimating sales returns
change in customer base overall economic conditions
For internal control purposes, which responsibilities should be seperated for cash dispursements
check signing and check writing check writing and check mailing
internal control procedures for cash disbursements (other than small disbursements from petty cash) should include
checks signed by authorized individuals all expenditures are authorized all disbursements (other than petty cash) are made by check
when a previously written off account is collected, what happens after the reinstatment
collection is recorded with a debit to cash and credit to accounts receivable
ratio analysis
common method of analysis is to express a relationship between the two financial statement items and compare this relationship with previous years
Shareholders' equity includes?
common stock and retained earnings
Common disclosures on the face of the financials
common stock information allowance for uncolletible accounts
Paid-in capital
common stock, paid-in capital in excess of par
Which of the following are providers of financial information? a) customers b) companies c) households d) investors e) schools
companies, households, schools
a restriction of cash wherein the borrower is required to maintain a specific amount in a low-interest or non-interest-bearing account at the bank is called a(n) _______________ balance.
compensating
discontinued operation is reported when a ____________ of an entity either has been disposed of or is classified as held for sale
component
Two types of adjustments to net income for indirect method
components of net income that do not affect cash changes in operating assets and liabilities during the period that affected cash and were not in net income
FASB expanded view of income is included in
comprehensive income
The "accounting constitution", a coherent system of interrelated objectives and fundamentals that lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting is referred to as the ______________ framework.(enter only one word)
conceptual
Companies have considerable flexibility in reporting income from __________ operations, but the reporting of income from ___________________ operations is strictly mandated
continued discontinued
an allowance for sales return accounts is classified as a(n)
contra account to accounts receivable
When a company discovers an Immaterial error in a year subsequent to the year the error is made, what is the proper course of action?
correct the error in the year discovered
Cost index for layer year
cost in layer year/cost in base year
periodic inventory system disadvantage
cost of goods equation assumes all inventory not on hand at the end of the period was sold and does not account for damages or stolen merchandise
product costs
cost that are included in inventory direct materials, direct labor, manufacturing overhead
LIFO liquidation profits occur when
costs are rising and inventory quantity declines
direct write-off method
could result in a mismatching of expenses and revenue
A credit balance in the income summary account is closed with a ___________ to retained earnings
credit
The adjusting entry required to record depreciation includes a(n) ________ entry to accumulated depreciation
credit
The normal balance in a contra asset account is:
credit
The normal balance of the contra asset accumulated depreciation account is a(n) _________
credit
The adjusting entry to record deferred revenue originally recorded as sales revenue includes:
credit to deferred revenue debit to sales revenue
Accruing interest at year-end on a note receivable journal entry includes
credit to interest revenue
On November 1, 2017, Thomasson paid rent on its building for 2 years in the amount of $12,000. When the transaction was initially recorded, the full $12,000 was recorded as an expense using an alternative approach to record the prepayment. The adjusting journal entry on December 31, 2017 requires:
credit to rent expense $11,000
To increase the accumulated depreciation account, you would _________ the account, and to increase depreciation expense, you would _______ the account
credit, debit
The interest rate used in the expected cash flow approach to estimating the value of assets or liabilities is the
credit-adjusted risk-free rate
Revenues are $1,000. Expenses are $1,800. The journal entry required to close the income summary account will require a ________ to income summary and a _______ to retainted earnings
credit; debit
To close the dividend account, the journal entry would require a(n) ___________ entry to the dividend account and a ______ entry to retained earnings
credit; debit
A company debits cash to increase its cash account. A bank _______ the customer's checking account because the customer account represents a liability on the bank's balance sheet
credits
Balance sheet - how are assets classified
current and noncurrent
classified balance sheet, supplies would be classified among __________
current assets
Working capital
current assets minus current liabilities
ending balance of accumulated other comprehensive income is calculated by adding this amount to the beginning balance of accumulated other comprehensive income
current year other comprehensive income
journal entry, the amount to be _________ is entered in the first column, and the amount to be ____________ is entered in the second column
debied; credited
The adjusting journal entry required when deferred revenue is recognized includes a ______ entry to a liability
debit
To close the dividend account, the journal entry would require a(n) ______ entry to retained earnings
debit
Smith Corporation began 2016 with a difference of $50,000 between inventory valued internally using FIFO and inventory valued using LIFO. At the end of 2016, this difference increased to $75,000. The journal entry to record this increase would include
debit COGS $25,000 credit to LIFO reserve $25,000
previously written off account is collected in full, the entry to reinstate the account would require
debit accounts receivable credit allowance for uncollectible accounts
Western company begins the year with $50,000 of inventory on hand. During 2018, Western purchases additional inventory for $100,000 cash. Sales for the year, all on account, totaled $70,000 and cost of the inventory sold was $40,000. Assuming Western uses a periodic inventory system, the journal entry to record the sale and cost of inventory during the year includes which of the following
debit accounts receivable $70,000 credit sales revenue $70,000
Kilroy uses the net method to record sales on account. Kilroy sells goods on account for $1,000 with terms 2/10, n/30. the journal entry to record this transaction will include
debit accounts receivable $980 credit sales $980
Oswego Clay Pipe Company sold $45,500 of pipe to Southeast Water District #45 on April 12 of the current year with terms 4/15, n/60. Oswego uses the gross method of accounting for cash discounts. What entry would Oswego make on April 12?
debit accounts receivable 45,500 credit sales 45,500
Burton Corp. is owed $100,000 by Gem Corp. under a note payable for $100,000 with a 10% interest rate. The carrying value of the note is $40,000, but the previous year's interest of $4,000 had not been received. Burton settles the debt by accepting land with a fair value of $30,000. The journal entry to record this transaction will include:
debit bad debt expense $14,000 debit land $30,000
Marson Corp. has a note receivable from a client. The carrying value of the note is $100,000. Due to the clients financial situation, Marston modifies the terms of the note. The present value of the future cash flows for principle and interest on the modified note are $96,000. The journal entry for the loan modification will include
debit bad debt expense $4,000 credit allowance for uncollectible accounts $4,000
Sully corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a
debit bad debt expense for $2,000 credit allowance for uncollectible accounts for $2,000
interest-bearing note receivable collection
debit cash credit interest revenue credit note receivable
Rascal Corp. borrows $500,000 by signing a 1-year, 12% promissory note from General Finance Company and assigns $600,000 of its accounts receivable as collateral for the loan. General Finance charges a financing fee of 1% of the receivables assigned. The journal entry for Rascal to record the borrowing will include
debit cash debit finance charge $6,000 credit to liability financing arragements
journal entry required for a note receivable transferred as a sale
debit cash debit loss on sale of note (to balance) credit not receivable (face amount) credit interest receivable (accrued interest)
sale with recours
debit cash debit loss on sale of receivable to balance debit factor on receivables credit recourse liability credit accounts receivable (book value when sold)
factoring without recorse
debit cash debit loss on sale of receivables (to balance) debit receivable from factor credit accounts receivable (book value sold)
On November 10 of the current year, Flores Mills sold carpet to a customer for $7,300 with credit terms 3/10, n/30. Flores uses the gross method of accounting for cash discounts. What is the correct entry for Flores on November 17, assuming the correct payment was received on that date?
debit cash $7,081 debit sales discounts 219 credit accounts receivable 7,300
When inventory is sold in a perpetual inventory system:
debit cost of goods sold credit inventory debit cash credit sales
Revenue earned
debit cost of goods sold credit sales
On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require
debit interest receivable $2,000 credit interest revenue $2,000
Purchase inventory on account
debit inventory credit accounts payable
Prepaid rent
debit prepaid rent credit cash
On May 1, 2017 Garcia Company paid $1,200 for 12 months rent and recorded the transaction in an income statement account. The adjusting journal entry required on December 31, 2017 will require:
debit prepaid rent $400 credit rent expense $400 Garcia recorded the full amount as rent expenses in the income statement on May 1. At the end of the year, the rent expense must be reduced by the remaining four months
Western company begins the year with $50,000 of inventory on hand. During 2018, Western purchases additional inventory for $100,000 cash. Sales for the year, all on account, totaled $70,000 and cost of the inventory sold was $40,000. A physical count determined the cost of inventory a the end of the year to be $110,000. Assuming Western uses a periodic inventory system, the journal entry to record the purchase of inventory during the year includes:
debit purchases $100,000 credit cash $100,000
To close revenue accounts
debit revenue credit income summary
A company uses the gross method to account for cash discounts offered to its customers. If payment is made before the discount period expires:
debit sales discounts for the discount taken by customer
A company believes its sales returns will be material. What is the journal entry required
debit sales returns credit allowance for sales returns
Warner Corp sells goods on account for $10,000. The customer pays the invoice in full on April 15, but on April 20, the customer returns $3,000 of the merchandise and receives a refund. What is the entry Warner will make on April 20 when the goods are returned?
debit sales returns credit cash
Regland Corp. purchases supplies on account for $1,000 and appropriately records the transaction in an asset account. A count of inventory at year-end indicates that $300 of supplies are remaining. The Adjusting journal entry required at year-end includes:
debit supplies expense $700 credit supplies on hand $700
Joyce determines that a customer accout of $20,000 should be written off as uncollectible. The journal entry to write off the account using the allowance method will include
debit to allowance for uncollectible accounts credit to accounts receivable
shannon corp. determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account includes
debit to allowance for uncollectible accounts and credit to accounts receivable
The following information is taken from Connor Corp.'s accounting records accounts receivable beginning balance 100,000 ending balance 140,000 allowance for uncollectible accounts beginning balance 15,000 ending balance 18,000 during the year, Connor wrote off $17,000 of accounts receivable that were uncollectible the adjustment to record bad debt expense at the end of the period was
debit to bad debt expenses for $20,000 credit to allowance for uncollectible accounts for $20,000 18,000+17,000-15,000 = 20,000
journal entry to record the borrowing of cash and the signing of a note payable involves:
debit to cash credit to note payable
On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end and principal and interest are due at maturity. The entry required on Lights books on April 1 when the note is due requires:
debit to cash $104,000 credit to interest revenue $2,000 100,000 x .08 x3/12 credit to note receivables $100,000 credit to interest receivable $2,000
Klondike Inc sold goods to customers for $5,000 cash. The cost of goods was $3,000. The journal entries to record this transaction are:
debit to cash $5000 credit to sales $5000 debit to cost of goods sold $3000 credit to inventory $3000
On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On December 31, when Song records Interest for the year, Song will record
debit to discount on note receivable $9,566 credit to interest revenue $9,566 n= 2, i=12%, the present value factor is .79179 x 100,000 = 79,719 79,719 x 12% = 9,566
Kendall Corp. purchases equipment for $100,000 by paying $20,000 in cash and signing a note payable for $80,000. The journal entry to record this transaction would include:
debit to equipment credit to cash credit to notes payable
Adjusting entry needed to record use of prepaid expense
debit to expense account credit to prepaid asset account
On October 1, Calloway signs a 5-year interest-bearing note payable for $4,000. The note bears interest of 10%. The journal entry required on December 31 to accrue interest will include:
debit to interest expense $100 4000 x .10 x (3/12) = 100
On October 1, Callison accepts a 5-year interest bearing not receivable for $1,000.The note bears interest of 12%. Both principal and interest are received at maturity. The journal entry required on December 31, Year 1, to accrue interest will include:
debit to interest receivable $30 credit to interest revenue $30 1000 x .12 x (3/12) = 30
Carly Corp. factored accounts receivable that had a book value of $100,000 to First Bank. The transfer was made without recourse. First Bank charged a 4% factoring fee and retained $5,000 to provide a reserve against potential sales returns and allowances. Management estimates the fair value of the last 9% of receivables to be equivalent to the book value. The journal entry Calry will make to record the factoring arrangement will include
debit to loss on sale of receivables for $4,000
On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On January 1, when Song receives the note from the customer, Song will record:
debit to notes receivables $100,000 credit to sales revenue $79,719 n=2, i=12%, present value factor is .79719 x 100,000 credit to discount on note receivables $20,281 n=2, i=12$, present value factor is .79719 x 100,000
Brunson Company pays employees $4000 for work performed in the current month. The journal entry to record the transaction will include
debit to salary expense credit to cash
Accrued salary is recorded by:
debit to salary expense credit to salary payable
A(n) ______ represents the left side of the account, whereas a(n) _______ represents the right side of the account
debit; credit
Revenues are $1,000. Expenses are $200. The journal entry required to close the income summary account will require a _______ to income summary and a ______ to retained earnings
debit; credit
Supplies expense is ______ and supplies is _____ for the amount of supplies used during the period that were originally recorded as an asset when purchased
debited; credited
The overriding objective in the hierarchy of qualitative characteristics of financial reporting information is:
decision usefulness
Liabilities impact of debits and credits:
decrease by debit increase by credit
Expenses will ____________ retained earnings and revenues will ____________ retained earnings
decrease; increase
Paying for supplies purchased in a previous month has what effect on the accounting equation for the payment of supplies?
decreases assets decreases liabilities
Adjusting journal entries are necessary for three situations:
deferrals, accruals and estimates
current liabilities
deferred revenues and accrued salaries payable
Comparative financial statements purpose
detect and predict trends compare year-to year data
Cost approach
determines fair value by estimating the amount that would be required to buy or construct an asset of similar quality and condition
Private Company Council (PCC)
determines whether changes to existing GAAP are necessary to meet the needs of users of private company financials
First step in measuring inventory and cost of goods sold
determining the physical quantities of goods
The two methods for preparing the Statement of Cash Flows are:
direct and indirect methods
pledging receivables requires
disclosure in the notes to financial statements
Gross method of accounting for purchase discounts
discount not taken is recorded as Purchase
Net method of accounting for purchase discounts
discount not taken is recorded as interest expense
The treatment of discontinued operations and unusual items in interim reporting under U.S. GAAP is more consistent with the _______ view
discrete
management approach to segment reporting requires that _______________ financial information is available
discrete
Interim financial Earnings per share is consistent with which view
discrete view and follow same procedures as annual calculations calculations are based on what is happening in that quarter rather than conditions estimated to exist at end of fiscal year
a trade discount is a reduction from the list price, which is to:
disguise real prices from competitors give quantity discounts to customers change prices without publishing a new catalog
earnings may be distorted by the transfers of receivables because companies may
distort fair value estimates in recording securitizations
To solve for present value
divide FV by (1 +i)^n
Which accounts are closed at the end of the period?
dividends, sales and salary expense (not cash accounts)
Liability - characterisitcs
due to a past transaction or event, it is a probable future sacrifice of an economic benefit, it is a present obligation
Each economic event, or transaction, affecting the accounting equation has a(n) _______ effect because resources must always equal claims
duel
perpetual LIFO
each time inventory is purchases or sold, the layers are adjusted
Which of the following are among the basic assumptions underlying U.S. GAAP? (select all that apply) a) periodicity b) neutrality c) revenue recognition d) going concern e) fulldisclosure f) economic entity g) monetary unit
economic entity, going concern, periodicity and monetary unit
an application where the interest rate stays the same over time, but interest revenue increases as the rate is multiplied by a receivable balance that increases is referred to as
effective interest method
statement of cash flows, International Financial Reporting Standards allow companies to report interest paid as:
either an operating or financing cash flow
IFRS comprehensive income must be presented in
either one or two statements (same as GAAP)
Objectives-oriented accounting standard setting
emphasizes the use of professional judgment when choosing how to account for a transaction
Internal control consists of plans to:
enhance the accuracy of accounting data enhance the reliability of accounting data and promote operational efficiency
When a transaction is recorded incorrectly or is not recorded at all, this is treated as an accounting ________________
error
Change in residual value of a depreciable asset is treated as a change in accounting _________________
estimate
A change in depreciation method is treated as a change in accounting ___________ that is achieed by a change in accounting ____________
estimate principle
Three types of accounting changes are a change in accounting principle, a change in accounting ______________, and a change in reporting __________
estimates entity
susequent events
event that affects a loss contingency, sale of the business, issuance of debt securities
An internal event
events that affect the financial position, but do not involve an exchange transaction with another entity
Vertical analysis
examines the relationship of items on the financials of one year
What type of expenditures should be included in the cost of inventory of a manufacturing company?
expenditures necessary to acquire inventory, and bring inventory to sales location
Some ____________ recognition is modified in interim reporting to cause interim statements to relate better to annual statements
expense
A gain from discontinued operations will result in an income tax _________, whereas a loss from discontinued operations will result in an income tax __________
expense benefit
Failure to record depreciation expenses has what effect on the financials
expenses are understated assets are overstated
Failure to record an adjusting entry for accrued interest on a note payable has what effect of financials:
expenses are understated retained earnings is over stated
Accrued liabilities are ___________________
expenses incurred before cash was paid (interest payable, warranty liabilities, salary payable)
Adjusting journal entries are needed to record:
expenses incurred, but not yet paid and revenue earned, but not yet received
Carradine Company prepares an adjusting journal entry to accrue salaries at year-end. What effect will this entry have on the financials?
expenses will increase
Most states require ________ to become a licensed certified public accountant
experience, education and testing
The primary role of financial accounting is to provide useful financial information to users __________ to the business enterprise.
external
interest calculation formula
face value x annual interest rate x fraction of the annual period
advantages of one global accounting framework:
facilitate access to capital improve comparability
alternative method for valuing notes receivable
fair value method
Qualitative characteristic of FASB conceptual framework
faithful representation relevance
To be useful for decision making, information should possess the fundamental decision-specific qualities of:
faithful representation, relevance
Accounts receivable results from the sale of good or services for cash true/false
false
At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond true/false
false
Cash basis accounting is the required accounting method for most profit-oriented companies. true/false
false
Retained earnings equals net income plus distributions to shareholders. true/false
false
a note receivable is considered impaired when payment is not received on the due date true/false
false
an interest-bearing note earns interest, whereas a noninterest-bearing note does not earn interest true/false
false
Economic Events cause changes in the:
financial position of a company
Disclosure is the process of including additional pertinent information in?
financial statements and notes to the financial statements
statement of cash flows, cash received from the issuance of common stock would be classified as a ________________
financing activity
annuity due
first payment is due at signing of agreement
ordinary annuity
first payment is due at the end of the first month after signing the agreement
annuity
fixed payment at fixed intervals
Income Approach
for measuring fair value estimates value by estimating future amounts of earnings or cash flows and then mathematically converting these amounts to a single present value
SEC does not agree with a standard issued by the private sector it can:
force a change in the standard
note receivable
formal credit arrangement between borrower and lender
The majority of productive resources are privately owned in a ________ enterprise economy
free
perpetual inventory system
freight is added directly to the inventory account
The __________ ___________ principle requires that any information useful to decision makers be provided in the financial statements, subject to the cost effectiveness constraint
full disclosure
IFRS allows expenses to be classified by
function or nature
Clara invests $1,000 in a savings account earning 3% interest. At the end of the first year, Clara has $1,030 in the account. The $1,030 Clara has at the end of year 1 is the __________ value
future
The calculation of ____________ value requires the addition of interest, while the calculation of ______________ value requires the removal of interest
future present
Future value of an ordinary annunity
future value of a series of equal-sized cash flows with the first payment taking place at the end of the first period
Future value of an ordinary annuity table is used when calculating
future value of a series of payments example: depositing an amount to a savings account each month that will grow to purchase a car in 5 years
Chen Corp. wishes to deposit $10,000 in the bank at the beginning of each year, a nd would like to know how much money it will have at the end of year 10. Which table should Chen use to make this calculation?
future value of an annuity due
The future value of a series of equal-sized cash flows with the first payment taking place at the beginning of the first period is __________________
future value of an annuity due
Discontinued operations reported income
gain or loss on disposal of the components assets and operating income or loss of the component from the beginning of the reporting period to the disposal date
Other comprehensive income includes net income as well as other _________ and __________ that change shareholders' equity but are not included in traditional net income
gains losses
Costs of providing financial information
gathering, processing and disseminating information
IASB is dedicated to developing a set of high-quality, understandable, and enforceable ________ accounting standards
global
Ownership of inventory at the end of the accounting period is determined for:
goods shipped by suppliers goods shipped to customers
A bond will be issued at a discount when the market rate of interest is ___________
greater than the stated rate
the ___________ of recording sales revenue recognized the discount not taken as part of the sale
gross method
two methods used for recording sales discounts are
gross method and net method
gross profit ratio
gross profit/net sales
IFRS primary purpose of the conceptual framework is to provide
guidance to both standard setters and practitioners
double entry system of accounting means each transaction _______
has a dual effect on the accounting equation
compensating balance results in an effective interest on the loan that is ___________ than the stated rate on the debt
higher
Based on the Dupont model an equity multiplier greater than 1 will produce a return on equity that is higher than the return on assets. What is the trade-off to this effect?
higher leverage results in higher probability of default
Operational Risk
how adept a company is at withstanding various events that might impair its ability to earn profits
Financial Statement Presentation project addresses:
how items are displayed in the financials, classifications and subclassifications of items, the aggregation of items in the financials
EIFT - Emerging Issues Task Force was formed to
identify potential problem areas and provide a timely response to issues
Impairment loss
if book value (carrying value) of an asset is more than fair value minus cost to sell the asset
dollar-value LIFO
if prices have changed, use cost indexes to determine whether an observed increase in inventory is an actual increase in the quantity of inventory or one caused by an increase in prices
Reporting comprehensive income:
in a single statement of comprehensive income or in two consecutive statements - income statement and comprehensive income statement
LIFO
in period of declining costs would result in the highest ending inventory
LIFO
in period of rising prices - results in higher cost of goods sold, lower net income and lower tax liability
LIFO inventory method
in the absence of changes in costs, the results of using LIFO would be identical to those obtained by FIFO LIFO will provide a close matching of current revenues with current cots since the most recent costs are expensed first In periods of declining costs, cost of goods sold using LIFO will produce a lower cost of goods sold than FIFO
GAAP allows that any significant noncash investing and financial activities may be reported
in the notes to financials on the face of the statement of cash flows
Restructuring cost are recognized on the income statement
in the period the exit or disposal obligation is incurred (based on fair value)
estimated future sales returns
included in ending inventory and deducted from cost of goods sold
Raw Materials Inventory
includes items acquired for the purpose of processing into finished goods
Summary of significant accounting policies
includes method of depreciation, choice between LIFO AND FIFO, items included in cash and cash equivalents
Statement of Cash Flows
includes operating, investing and financial activities reports the changes in a companys cash balance during a period purpose is to provide information about cash receipts and cash disbursement during a period
Income from Continuing Operations
includes the revenues, expenses (including income taxes), gains and losses from operations that are more likely to continue into the future. 3 Components: Operating Income Nonoperating Income Income tax expenses
Disclosure refers to the process of?
including additional information in the financial statements and notes
Earnings per share is disclosed at the bottome of the
income statement
When a company uses a special charge such as restructuring costs and shows a loss on the income statement, income may be manipulated through
income statement classification shifting
CECL - Current Expected Credit Loss model will ________ the amount of bad debt expense companies have to recognize on receivable impairments in comparison to current GAAP
increase
Assets impact of debits and credits:
increase by debit decrease by credit
Providing services and sales on account has what effect on the balance sheet equation?
increases assets
Purchasing supplies on account has what effect on the balance sheet equation
increases liabilities increases assets
Accruing a receivable _________ accounts receivable on the balance sheet and ___________ revenues on the income statement
increases; increases
Purchasing supplies on account ____________ the supplies account and _____________ accounts payable
increases; increases
Unqualified audit opinion
indicates the financials have been prepared according to U.S. GAAP
gross profit margin
indicates the percentage of each sales dollar available to cover other expenses
Two acceptable methods under U.S. GAAP for preparing the statement of cash flows are
indirect and direct methods
restriction on cash may be
informal arising from management intent and formal by contract
account receivable
informal credit agreement with trade customers
Worksheet
informal tool used to organize the accounting information and to prepare adjusting and closing entries at the end of the period
ERP - Enterprise Resource Planning system
integrates the information of departments and functions of a company into a single computer system
compound interest
interest on initial investment plus interest calculated on previously earned interest
Munchen Company prepays $89,000 for inventory to be delivered in two years. The applicable interest rate is 6%. One year after the prepayment. Munchen should recognize:
interest revenue of 5,340 89,000*.06 = 5340
A perpetual system requires that merchandise purchases be recorded in the _____________ account
inventory
In a perpetual system, each time goods are sold, cost of goods sold is debited and __________ is credited
inventory
affect earnings quality
inventory write-downs choice of inventory method change in inventory method
Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests is a(n) ________________ by owners.
investments
Noncurrent assets
investments, property and machines
Capital markets is a composite of all:
investors and creditors
The cost of freight-in
is commonly included in the cost of inventory
DVL Pool
is made up of items likely to have similar cost change pressures
Net operating cash flow
is the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers.
Statement of Cash flows financial activities
issuance of common stock to investors borrowing from bank
financing activity on the statement of cash flows
issue stock pay dividends, borrowing on a note payable
An advantage of historical cost measurement is
it is objective and verifiable
Multi-step income statement advantages
it reports expenses by function it reports the relationship between various items it provides more information than a single-step income statement
DVL method
layers can only be added during the current year if inventory at base year cost has increased
A bond will be issued at a premium when the market rate of interest is ________ the stated rate
less than
Over a 5-year period, simple interest is __________ compound interest on the same note
less than
a bond will be issued at a premium when the market rate of interest is ___________ the stated rate
less than
GAAP typically requires that bank overdrafts be treated as _______________ on the balance sheet where IFRS allows them to offset other cash accounts
liabilities
Deferred revenue is a(n)
liability on the balance sheet
a company that has sufficient cash or is capable of converting assets to cash in a short period of time so that it can meet its current needs is considered to be
liquid
current ratio and quick ratio measure
liquidity
a petty cash fund is an efficient way to handle what type of payments
low cost office supply purchases
A high inventory turnover ratio could be caused by:
low ending inventory levels a superior sales force
IFRS, bad debt accruals will be __________ and will occur ________ than under GAAP
lower later
Responsibility for the financials and other information found in the annual report lies with ____________
management
Choosing perpetual or periodic inventory system considerations
management control and cost of implementation
fair value approach that uses current information from recent transactions or exchanges in active trading on the stock exchanges is the ____________ approach
market
Secondary Market
market in which stocks and bonds are traded among individual and institutional investors
specific identification inventory cost flow method
matches each unit on hand at the end of the period with its actual cost
FASB conceptual framework concepts includes:
measurement concepts, concepts regarding types ofevents to be accounted for and undelrying concepts of accounting
Activity Ratios
measures efficiency in managing/using assets Include: asset turnover, receivables turnover, average collection period, inventory turnover, average days in inventory
cash basis accounting
measures the difference between cash receipts and payments during a reporting period.
Accrual accounting model measures
measures the entity's accomplishments and resource sacrifices during the period regardless of when cash is received or paid
perpetual inventory system
merchandise returned to a supplier - credit inventory
Property, plant and equipment
mineral mines, oil wells, furniture, machines, buildings
The assumption that financial statement elements should be measured in terms of the U.S. dollar for U.S. financial reporting is referred to as the _______________ unit assumption.
monetary
Time value of money concept
money can be invested today to earn interest and grow to a larger amount in the future
An investment that has higher risk also has
more uncertainty of returns
Simply interest
multiply initial investment x both the applicable interest rate and period of time for which the money is used
related-party transaction disclosure requirements
nature of the relationship, amounts due to or from related parties
To calculate Present Value Of a known future amount
need: future value interest rate number of compounding periods
the income statement approach for estimating bad debts uses a percentage of
net credit sales
Return on Assets (ROA)
net income + interest expense (1-tax rate)/average total assets or: ROA = Profit Margin x asset turnover Measures how profitably a company uses its assets. Net income / Average total assets. (expresses income as a percentage of average total assets)
Failure to accrue salaries at year-end has what effect of financials
net income is overstated
Failure to recognize revenue in the period earned has what effect on the financials:
net income may be over or understated and the income statement would not report the accomplishments of the period
Failure to record an accrual for salaries at year-end has what effects on the financials
net income overstated expense is understated liabilities are understated
Return on shareholders' equity (ROE)
net income/average shareholders equity amount of profit management can generate from the assets that owners provide.
Profit Margin Ratio
net income/net sales (before deducting cost of goods) measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales indicates the amount of net income achieved for each dollar of sales
purchase discount methods
net method gross method
Gross Method vs. Net method of accounting for purchase discounts
net method results in a higher gross margin than the gross method if discounts are not taken financial statements do not differ under the gross and net methods if discounts are always taken
Acceptable measurement attributes for certain financial statement items:
net realizable value, present value, historical cost and fair value
Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet
no effect on total assets
purpose of the statement of comprehensive income is to report current period changes in equity that arose from?
non-owner transactions
Interest expenses is classified on the income statement as
nonoperating item
purchase discounts
not taken are reported as interest expense under net method of accounting for purchase discounts under perpetual inventory system, treated as a reduction in the inventory account
a formal credit arrangement between a creditor and debtor is called a(n)
note receivable
the transfer of a(n) _____ to a financial institution is called discounting
notes receivable
SFAC 8 of the conceptual framework focuses on
objective and qualitative characteristics
monetary liabilities
obligation to pay amounts of cash, the amount which is fixed or determinable bond payable note payable accounts payable (not advances from customers)
Disclaimer
occurs when the auditor does not have sufficient information to express an opinion
Collection from customers is classified as an
operating activity
Depreciation expense is classified on the income statement as
operating item
Revenue and expenses on the income statement are classified as:
operating items and non-operating items
statement of cash flows categories
operating, investing and financing activities
Auditors examine financial statements to express a professional, independent ___________________ on the financial statements.(enter one word per blank)
opinion
AICPA - american institute of certified public accountants
organization is currently the national professional organization for certified professional public accountants
restricted cash not available for current use may be reported in the balance sheet as
other assets or investments and funds or noncurrent asset
compensating balance is recorded as
other current asset,
Financial accounting is chiefly concerned with providing information to various _________ users.
outside
when adjusting the bank balance in a bank reconciliation, which item must be subtracted from the bank balance
outstanding checks
IFRS cash reporting
overdrafts in one cash account can typically be offset against positive balance in other cash account
Failure to record an adjusting entry for deferred revenue results in:
overstated liabilities
FOB shipping point
ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
FOB destination
ownership of the goods remains with the seller until the goods reach the buyer seller usually responsible for shipping
Stockholders' equity sources:
paid in from shareholders, earned by the corporation (retained earnings)
Time value of money calculations are required for which topics?
pensions, long-term notes payable, leases
A temporary purchases account is used when the _____________ inventory system is used
periodic
Allowing the life of a company to be divided into artificial time periods in order to provide timely information is referred to as the _______________ assumption.
periodicity
A(n) ______ account represents the basic financial position elements of the accounting equation and a ______ account keeps track of the changes in the retained earnings component of shareholders' equity.
permanent; temporary
secured borrowing occurs when accounts receivables are _________ or __________________ as collateral for a loan
pledged assigned
According to the conceptual framework, for accounting information to be relevant, what qualities must it possess?
predictive value and confirmatory value
The formula "future value divided by the quantity (1+i)^n is the formula for ___________ value
present
We value most receivables and payables at the _________ value of _______________ cash flows, reflecting an appropriate time value of money.
present future
Present value of annuity four variables
present value interest rate number of periods payment amount
The present value of a series of equal-sized flows with the first payment taking place at the beginning of the first period is a ______________________
present value of an annuity due
Harold would like to deposit a sum of money today that will grown to $20,000 in year 8. Which table should Harold use when making this calculation?
present value of single amount
Balance sheet
presents the financial position of the company on a particular date provides useful information about a company's liquidity and long-term solvency purpose: report a company's financial position on a specific date
The most recent issue in implementing the fair value accounting standards is:
pressure to reduce the extent to which fair value changes are reported in net income
fair value
price that would be received in an orderly market transaction
accumulated interest formula
principal x interest x (# of moths/12)
assets
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Intraperiod tax allocation
process of associating income tax effects with the income statement components that create those effects
method for determining if an item is material and requires separate disclosure relies on:
professional judgement
Which organizations provide financial information to external users?
profit-oriented businesses and charitable organizations
internal control system is designed to
promote operational efficiency safeguard assets encourage adherence to company policies
Sarbanes-Oxley Act requires that if non-GAAP earnings are included in a report of any public disclosure, the company must
provide a reconciliation with earnings according to GAAP
Initial market transactions
provide for new cash by the issuance of stocks and bonds by the corporation.
Interim reporting objectives
provide information about seasonality enhance the timeliness of finanacials
main focus of accounting information is to?
provide useful information for decision making
GAAP impairment indicator guidance
provides an illustrative list of information to consider in evaluating receivables for impairment
IFRS impairment indicator guidance
provides an illustrative list of loss events
Financial reporting is the process of ______________
providing information to outside users
when a buyer returns goods to the seller, the buyer records a(n) ______________
purchase return
what ratios measure liquidity
quick ratio and current ratio
effect rate
rate at which money will actually grow during a full year
Inventory includes
raw materials, work in process, finished goods
ability to continue to generate a high level of sales and collect its receivables can be measured with
receivable turnover ratio and average collection period
Bad debts written off as bad debt expense (no allowance method) results in
receivables will likely be overstated
During the prior year, Marian Company recognized an impairment loss on its notes receivables. During the current year, the amount of estimated future cash flows improved. Marian sould
recognize a gain
the required accounting treatment for transfer of receivables as a sale includes which of the following
record proceeds recognize gain or loss remove receivables
Freight out (or transportation out)
recorded as either selling expense or cost of goods sold
Depreciation expense adjusting entry has what effect on the balance sheet
reduce total assets
Securities and Exchange Commission
regulatory oversight U.S. GAAP
what happens when a receivable previously written off is collected in full
reinstate the receivable and the allowance for uncollectible account
permanent earnings
relate to operations that are expected to generate similar profits in the future. (usually begin with income from continuing operations (not all of this is actually from continuing operations)
Nonoperating Income (Other Income (expense))
relates to peripheral or incidental activities of the company
Gross Profit
relationship between sales revenue and cost of goods sold
Proponents of fair value accounting point out that it will enhance the ____________ of the information provided
relevance
hierarchy of qualitative characteristics of financial information require that, in order to be useful for decision making, information should possess the fundamental characteristics:
relevance and faithful representation
For accounting information to be ____________________,it must possess predictive value and/or confirmatory value.
relevant
Sale of accounts receivable requires
remove the accounts receivable from the balance sheet and recognize the fair value of assets acquired or liabilities assumed
A prepayment may be recorded in prepaid rent, a balance sheet account. The alternative method to record the prepayment is to debit the _______ _____ account.
rent expense
cash flows may be distored by the transfer of receivables because companies may
report sale of receivables in the operating section of the statement of cash flows
Income Tax Expense (provision for income taxes)
reported in a separate line in the income statement Income taxes are levied on taxpayers in proportion to the amount of taxable income that is reported to taxing authorities
retained earnings
represents the net income earned by a corporation and not yet paid to shareholders
Compensation disclosure
required by SEC for Executives and directors
Subsequent event disclosure
required for any event having a material effect on operations that occurs after a company's year-end but before the financials are issued (issuance of debt or equity securities)
change in depreciation method
requires a justification in the notes to financials
Sarbanes-Oxley act, Section 404
requires companies must document internal controls and asses their adequacy
Full-disclosure principle
requires financials to provide all material relevant information regarding the company (pension plans, long-term debt, leases)
The accounting treatment required for a material error in financials that have already been issued is to ______________
restate the financial statements of the previous periods affected
temperary earnings
result from transactions or events that are not likely to occur again in the foreseeable future or that are likely to have a different impact on earnings in the future
FIFO perpetual inventory system and FIFO periodic inventory system
result in the same ending inventory and cost of goods sold
Temporary accounts are periodically closed, and the net effect is recorded in the permanent ____________ ___________ accout
retained earnings
The balance in the _______ ________ account after all the temporary accounts have been closed equals net income or net loss
retained earnings
When dividends are declared, a debit is made to a dividends declared account or the _________ _________ account
retained earnings
Interim accounting changes are reported _________
retrospectively
DuPont Formula
return on equity = Profitability (profit margin): net income/total sales x (times) Activity (asset turnover): total sales (net sales)/average total assets x (times) Financial Leverage (equity multiplier): average total assets/average total equity or ROA (return on asset) x equity multiplier
Temporary accounts include:
revenue and expense accounts
Expense recognition often matches _________ and ___________ that arise from the same transaction
revenue and expenses
The revenue/expense approach focuses on the income statement because it relies on ________________ accounting princile
revenue recognition and matching
items are removed from continuing operations and reported separately for discontinued operations
revenue, expenses, gains, losses, tax expense
Accrual accounting model's measure of resources provided by business operations is called _____________.
revenues
Financial statement elements are measured and reported as a result of providing goods and services
revenues and expenses
Operating Income on income statement
revenues and expenses directly related to the primary revenue-generating activities of the company. Provides a measure of profitability for core (or normal) operations, a key performance measure for predicting the furture profit generating ability
GAAP disclosure requirements for geographic areas include
revenues from external customers, long-lived assets
default risk
risk that a company will not be able to pay its obligations when they become due
Auditor
role is to attest to the fairness of the financials they have examined
A reversing entry is used after accruing 3 days of salaries at year-end. To make the reversing entry, the accountant would debit which account?
salaries payable
serves to relay important information about a transaction to the accountant?
sales invoices, bills from suppliers, cash register tapes
when merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) _________ _________
sales return
Under which approach to financing with receivables does the borrower act like it borrowed money from the lender, with the receivables remaining on the borrowers balance sheet and serving as collateral
secured borrowing
financing receivables can be done by
secured borrowing, sale of receivables
In a consignment, a company arranges for another company to:
sell its products
periodic inventory system
separate freight-in account is used
internal control system critical aspect
seperation of duties
FASB and IASB already developed converged accounting standards for:
share-based compensation, non-monetary exchanges and Earnings per share
participating interest
sharing proportionally in the cash flows of the receivables and having equal rights with respect to the receivables
Companies finance with their receivables to
shorten the operating cycle increase cash flow and receive cash before customers would pay amounts due
Statement of Shareholders' equity
shows the sources of the changes in the various permanent equity accounts
LIFO disadvantages
significant recordkeeping costs, possibility of LIFO liquidation
the dollar-value LIFO (DVL)
simplifies record keeping reduces the risk of liquidation of layers
LIFO inventory pools
simplifies recordkeeping and reduces the risk of LIFO liquidation by grouping inventory units into pools based on physical similarities of the individual units.
A JIT inventory system allows companies to maintain ________ inventory levels
smaller
As the number of periods increase, present value factors become ________________
smaller
business organizations
sole proprietorship, partnership and corporation
Repetitive transactions such as sales or purchases are usually recorded in a(n) ________ _______ rather than the general journal
special journal
IASB's main objective is to develop a single set of global accounting _____________ that are high-quality, understandable, and enforceable.
standards
Indirect method of statement of cash flows
start with net income and works backward to calculate net cash flow from operating activities adds back depreciation expense adjusts for changes in liabilities to reconcile the difference between accrual net income and cash paid or received adjusts for changes in assets to reconcile the difference between accrual net income and cash paid or received
IFRS steps in determining the impairment of receivables
step 1 - consider whether individual significant receivables are impaired step 2 - group individual significant receivables for which impairment is not indicated with other receivables of similar risk characteristics step 3 - perform impairment test
gross method of purchase discounts
subtracts the discount from total purchases to determine net purchases
Income Statement (Statement of Operations)
summarizes revenues and expenses for a period of time Used to predict future profitability and future cash-generating ability
Who are the external users of financial information?
suppliers, creditors, investors and government agencies
management should hold the minimum amount of cash to:
take advantage of opportunities, conduct business operations and meet its obligations
Plant, property and equipment characteristics
tangible, used long-term in production
FIFO inventory method
tends to approximate replacement cost because units are priced using the most recent acquisition costs
Difference in CECL model and current GAAP
the "probable" threshold for identifying impaired receivables is removed and Bad debt estimates will be based on predictions about the future
Donald company purchases and sells inventory f.o.b. destination. On December 31, the company sells 10,000 units and receives notice that 40,000 units have been shipped by its supplier. Which units should be included in Donald company's ending inventory?
the 10,000 units sold are included as they have not not reached their destination
earnings quality
the ability of reported earnings (income) to predict a company's future earnings
Auditor is required to evaluate:
the ability to continue for a reasonable time as a going concern
liquidity
the ability to converts assets to cash to pay current obligations readiness to pay short-term debts as they come due measured by current ratio and quick ratio
The type of information included in an account includes:
the account number, columns for increases and decreases, and account title
a good internal control system for cash would require that those who handle cash should not be involved with
the accounting records the reconciliation of bank balances
justification for a company initially recording prepaid rent in either an income statement or balance sheet account is that:
the accounts are adjusted at year-end to reflect the correct balances
Net realizable value
the amount of cash into which an asset is expected to be converted in the ordinary course of business
Present value of a single amount
the amount of money today that is equivalent to a given amount to be received or paid in the future
Interest
the amount paid for the use of money for some period of time
The average collection period indicates
the average number of days it takes to collect on account
the reconciliation process for cash receipts requires that the amount received from customers should agree with
the bank-generated deposit slip and the accounting records
If a note with an unrealistic interest rate is received solely in exchange for cash, the present value of the note is considered to be
the cash paid
IFRS qualifications for transfer of receivables as a sale
the company transfers substantially all of the risks and rewards of ownership
Current Cost
the cost that would be incurred to purchase or reproduce the asset today
inventory costs include
the cost to bring inventory to its desired condition expenditures to acquire the inventory the cost to bring inventory to its desired location
at what amount are accounts receivable initially recorded
the exchange price agreed on by the buyer and seller
Sarbanes-Oxley act, corporate management is responsible for:
the financials and internal control
Disclosure notes for discontinued operations must include
the identity of the component the major classes of assets and liabilities of the component the reason for the discontinuance
When recording noninterest-bearing notes receivable, the discount on a noninterest-bearing note receivable reprsents
the interest to be earned on the note receivable
Discontinued operations held for sale reported on balance sheet at
the lower of the book value or fair value less costs to sell
Present value
the measurement attribute that is based on future cash flows discounted for the time value of money
when a note receivable is impaired, it is remeasured based on what
the present value of currently expected cash flows
The price of a bond includes _________________________
the present value of the face amount plus present value of the periodic interest payments
Closing process
the process in which temporary accounts are reduced to zero balances and transferred to retained earningssal
what occurs when petty cash is used to pay for an item
the receipts is placed in the petty cash fund
Direct method and indirect method of preparing the statement of cash flows result in _______________
the same net cash flows from operating activities and the same presentation of investing and financing activities
Operating Cycle
the time period necessary to convert cash to raw materials, convert raw materials into finished products, sell the products, and collect the accounts receivable (time to convert cash to raw materials and then back to cash)
the difference between the gross method and net method of recording sales revenue, in terms of the effect on income is what
the timing of the recognition of any discounts not taken varies and could occur in different reporting periods
The n value is present and future value tables refers to what?
the total number of compounding periods
a company is allowed to account for the transfer of receivables as a sale if what occurs?
the transferor has surrendered control over the assets transferred
Why is the sale approach preferred over the secured borrowing approach for the transferor
the transferor seems more profitable, more liquid and less leveraged
Present Value of an Ordinary Annuity
the value today of a series of equal-size cash flows with the first payment taking place at the end of the first compounding period The value today, given a discount rate, of a series of future payments.
Present Value of an Ordinary Annuity
the value today of a series of equal-sized cash flows with the first payment taking place at the end of the first compounding period
Faithful presentation exists when?
there is agreement between a measure or description and the phenomenon it purports to represent
gains and losses from the sale of investments can affect earnings quality because
they are often nonrecurring
The difference between $100 invested now and $105 at the end of year 1 represents the
time value of money
differences between the book balance and bank balance occur due to ______________ differences and ___________
timing errors
Financial accounting provides investors with information that should help them to evaluate the:
timing of the firms future cash flow and uncertainty of the firms future cash flow and amounts of the firms future cash
Disclosures purpose
to assist in underestanding the financial statements
In a deferred annuity, a two-step process can be used to calculate the present value of the annuity. The first step requires the calculation of the present value of he annuity a t the beginning of the annuity period. The second step involves discounting the amount calculated in step 1
to its present value as of today
Debt to equity ratio
total liabilities / shareholders equity (including retained earnings) the higher the ratio, the higher the risk
A recently issued FASB standard requires that companies recognize revenue when goods or services are _____________ to customers for the amount the company expects to be entitled to receive in exchange for those goods and services
tranferred
Step 3 of the accounting processing cycle
transaction is recorded in a journal
Prepayments are:
transactions in which cash flow precedes revenue recognition and/or expense recognition
Chane in estimate
treated on a prospective basis because the change affects the current period and future periods
for a note receivable, if the original terms of the debt are changed due to financial difficulties of the borrower, this is referred to as a _________________ ________________ restructuring
troubled debt
CECL model broadens information that creditors should consider when estimating credit losses true/false
true
Inventory that is expected to be returned in the future is included on the balance sheet of the company expecting the return true/false
true
Management can influence the collection of receivables based on the terms they offer true/false
true
Political pressure has deterred the FASB from issuing particular standard changes. True/false
true
Present value calculations are used in calculating pension contributions for defined benefit plans true/false
true
When pricing a bond, the present value of the annuity of the coupon payments is added to the present value of the maturity value of the bond true/false
true
long-term notes receivable are accounted for the same way as short-term notes receivable, but the time value of money has a larger effect true/false
true
sale of accounts receivables results in removing the accounts receivable from the balance sheet true/false
true
Risk refers to the __________ of an investment
uncertainty
Karel sells goods to customers in exchange for a $100,000 noninterest-bearing note due in 2 year. The interest rate on this type of loan is 8%. What is the present value of the note?
use present value table number 2 - 8% factor .85734 100,000 x .85734 = 85,734
Special Journals
used to capture the dual effect of the transaction in debit/credit form examples: cash receipts journal, cash disbursements journal, sales journal and purchases journal
Income before taxes
useful for comparing the performance of companies in different tax jurisdictions or comparing corporations with sole-proprietorships or partners
Horizontal analysis
uses ratio analysis or trend analysis of financials across multiple years
asset/liability approach to accounting
uses the measurement of balance sheet accounts to drive revenue and expense recognition
Purpose of a post-closing trial balance
verify that closing entries were prepared and posted correctly and that the accounts are now ready for next years transactions
perpetual inventory system
weighted-average cost becomes a moving-average cost
accounting error
when a transaction is recorded incorrectly or not recorded at all
Adverse opinion
when auditor finds exceptions that are so material that the financials may be misleading
FASB recently issued a standard that requires companies recognize revenue:
when goods or services are transferred to customers and at a point in time or over a period of time, for the amount the company expect to be entitled to receive
deferred annuity
when the first cash flow occurs more than one period after the date the agreement begins
qualified
when there is an exception to the standard opinion but not of sufficient seriousness to invalidate the whole of the financials
IFRS accounting for transfers of receivables
whether the risks and rewards of ownership have been transferred is sometimes the key factor for determining how to account for a transfer of receivables
consigned goods inventory
who carries the risk of loss determines who includes consigned goods in inventory
If revenues exceed expenses for the accounting period, the income summary account ______________________
will have a credit balance prior to closing
long-term liability
will not be satisfied within 12 months or the operating cycle, whichever is longer (pension obligations, lease obligations longer than 1 year and notes due in more than 1 year)
In a factoring arrangement made ___________ recourse, the seller bears the risk of uncollectibility
with
the buyer assumes the risk of uncollectibility when accounts receivable are sold __________ recourse
without
Glaser corp does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements
year 1 net income is overstated
The correct amount of prepaid insurance shown on a company's December 31, 2018, balance sheet was $900. On July 1, 2019, the company an additional insurance premeium of $600. In the December 31, 2019, balance sheet, t he amount of prepaid insurance was correctly shown as$500. The amount of insurance expense that should appear in the company's 2019 income statement is:
$1,000 900 + 600 = 1500 - 500 = 1000
The following information relates to Halloran Co.'s accounts receivable for 2018: 1/1/18 account receivable balance: $853,000 credit sales for 2018: 3,450,000 Accounts receivable written off during 2018: 50,000 Collections form customers in 2018: 3,040,000 Allowance for uncollectible accounts balance 12/31/18: 206,000 What amount should Halloran report for accounts receivable, before allowances at December 31, 2018?
$1,213,000 853,000+3,450,000 - 50,000 - 3,040,000 = 1,213,000
Calistoga Produce estimates bad deb expense at .50% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $489,000 and $1,590 respectively, at December 31, 2017. During 2018, Calistoga's credit sales and collections were $329,000 and $316,000, respectively, and $1,830 in accounts receivable were written off. Calistoga's final balance in its allowance for uncollectivle accounts at December 31, 2018 is:
$1,405 329,000 * .50% = 1645 expense 1830 - 1590 = 240 1645 - 240 = 1405
Davenport Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $48,000 at the date of employment and another $68,000 two years later. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make her indifferent between the two options?
$104,199 The lump-sum equivalent would be $48,000 + the present value of $68,000 where n = 2 and i = 10%. That is, $48,000 + ($68,000 x 0.82645 from Table 2 PV of $1) = $104,198.6
Goliath Corp has beginning accounts receivable of $2,000. During the year, Goliath sold goods to customers on account for $10,000. During the year, Goliath also sold goods to customers for cash in the amount of $2,000. At the end of the year, the balance in Goliath's accounts receivable is $3,000. What is accrual basis sales for the year?
$12,000 10,000 + 2,000 = 12,000
At the end of each quarter, Patti deposits $800 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in four years?
$16,126 n=16 (4x4=16) i=12/4 = 3% 800 x 20.1569 = 16,126 FVA of $1
Enchill Company accrues bad debt expense during the year at an amount equal to 3% of credit sales. At the end of the year, a journal entry adjusts the allowance for uncollectible accounts to a desired amount based on an aging of accounts receivable. At the beginning of 2018, the allowance account had a credit balance of $18,000. During 2018, credit sales totaled $480,000 and receivables of $14,000 were written off. The year-end aging indicated that a $21,000 allowance for uncollectible accounts was required. Enchill's bad debt expense for 2018 would be:
$17,000 Focusing on the allowance account 18,000 - 14,000 + total bad debt expense = 21,000 bad debt expense = 17,000
Spielberg Inc. signed a $260,000 noninterest-bearing note due in three years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. At what amount should this debt be valued at its inception?
$190,109 PV = $260,000 × 0.73119* = $190,109 *PV of $1: n = 3; i = 11%
Adam company has 100 units costing $300 in beginning inventory. During the year, the company purchases 900 units for a total cost of $2,880. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, cost of goods sold will be
$2,540 2,880/900 = 3.2 3.2 x 700 = 2,240 2,240 + 300 = 2,540
the balance in accounts receivable at the beginning of 2018 was $700. During 2018, $2,200 of credit sales were recorded. If the ending balance in accounts receivable was $170 and $100 in accounts receivable were written off during the year, the amount of cash collected from customers during 2018 was:
$2,630 700 receivables beginning yr 2,200 credit sales 170 receivables end yr 100 wrote off 700 + 2200 - 170 - 100 = 2630
The Reingold Hat Company uses the allowance method to account for bad debts. During 2018, the company recorded $800,000 in credit sales. At the end of 2018, account balances were: Accounts receivable $120,000, Allowance for uncollectible accounts $3,000 (credit). If bad debt expense is estimated to be 3% of credit sales, the appropriate adjusting entry will include a debit to bad debt expense of
$24,000 800,000 x3% = 24,000
Rosie's Florist borrows $350,000 to be paid off in eight years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?
$27,864 350,000/12.56110 PVA of $1
Ajax Company purchased a two-year certificate of deposit for its building fund in the amount of $250,000. How much should the certificate of deposit be worth at the end of two years if interest is compounded at an annual rate of 9%?
$297,025 250,000 x 1.18810 = 297,025 FV of $1
Bill wants to give Maria a $510,000 gift in 6 years. If money is work 6% compounded semiannually, what is Maria's gift worth today?
$357,704 n=12 (6x2 = 12) i=6/2 = 3 510,000 x .70138 = 357,705 PV of $1
In the balance sheet at the end of the first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $83,600. During the year, Dinty wrote off $30,900 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,240,000, and cash collections from credit customers totaled $1,750,000. What accounts receivable balance would Dinty report in its first year-end balance sheet?
$459,100 2,240,000 - 1,750,000 = 490,000 - 30,900 = 459,100
Mary Alice just won the lottery and is trying to decide between the annual cash flow payment option of $350,000 per year for 30 years beginning today and the lump sum option. Mary Alice can earn 5 percent investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives?
$5,649,374 $350,000 x 16.14107* = $5,649,374.5 *PVAD of $1: n = 30; i = 5%
Bern Corp, a merchandising company, utilizes the net method in accounting for purchase discounts. The company usually pays during the discount period, when discounts are offered by the vendor. Bern's net income for the year ended was $500,000. Purchase discounts taken during the year totaled $5,000. If Bern had used the gross method, its net income would have been
$500,000
Ireland Corporation obtained a $56,000 note receivable from a customer on June 30, 2018. The note, along with interest at 5%, is due on June 30, 2019. On September 30, 2018, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 9%. What amount of cash did Ireland receive from Cloverdale Bank
$54,831 56,000 + (interest to maturity) 56,000 x 5% = 2800 56,000 + 2,800 = 58,800 58,800 x.09 x 9/12= 3,969 58,800 - 3,969 = 54,831
Frasquita acquired equipment from the manufacturer on 6/30/18 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $572,000 on 4/30/19 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2018 year-end financial statements, at what amount would it record the equipment on its 6/30/18 balance sheet?
$547,000 ($15,000 was interest for 6 months in 2018. The note lasts 10 months, so 10/6*15000= $25000, $547,000 (572000-25000) is the principal which is the cost of the equipment purchased.
At the end of June, the Marquess Company factored $200,000 in accounts receivable with Homemark Finance. The transfer is made without recourse. Homemark charges a fee of 3% of receivables factored. During July, $150,000 of factored receivables are collected. What amount of loss on sale of receivables would Marquess record in June?
$6,000 200,000 x .03 = 6,000
Adams company utilizes LIFO inventory pools. Current period beginning inventory cost was $5,500. At the end of the period, the company determines that a layer of 100 units has been added. Average current year purchase price per unit was $6,000. The most recent cost per unit was $6.50. The amount of ending inventory should be:
$6,100 The LIFO layer is added at the average cost of purchases made during the period $6 x 100= 600+5500 = 6,100
Harmon Sporting Goods received a $60,000, 6-month, 10% note from a customer. Four months after receiving the note, it was discounted at a local bank at a 12% discount rate. The cash proceeds received by Harmon were:
$61,740 face amount + interest to maturity 60,000 x .10 x 1/12= 3,000 = 63,000 maturity value - discount discount 63,000 x .12 x 2/12 = 1,260 63,000 - 1,260 = 61,740
False Value Hardware began 2018 with a credit balance of $31,200 in the allowance for sales returns account. Sales and cash collections from customers during the year were $670,000 and $630,000, respectively. False Value estimates that 8% of all sales will be returned. During 2018, customers returned merchandise for credit of $23,000 to their accounts. What is the balance in the allowance for sales returns account at the end of 2018?
$61,800 670,000 x .08 = 53,600 31,200 + 53,600 - 23,000 = 61,800
Carol wants to invest money in a 6% CD account that compounds semiannually. Carol would like the account to have a balance of $80,000 four years from now. How much must Carol deposit to accomplish her goal?
$63,153 i = 6/3 = 3% n=4x2 = 8 80,000x.78941 = 63,153 PV of $1
Western company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016 was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?
$758,200 $815,400/1.08 = 755,000 giving 2 layers of $715,000 and 40,000 715,000 x 1.0 = 715,000 40,000 x 1.08 = 43,200 715,000 + 43,200 = 758,200
Lassiter Corp. uses the periodic inventory method. During the year, Lassiter purchases $10,000 of inventory. Ending inventory is $6,000. Cost of goods sold is $12,000. Beginning inventory was: __________
$8,000 purchases 10,000, less cost of goods 12,000, less ending inventory 10,000 - 12,000 - 6,000 = 8,000
At the end of June, the Marquess Company factored $200,000 in accounts receivable with Homemark Finance. The transfer is made with recourse. Homemark charges a fee of 3% of receivables factored. Estimated recourse liability is $2,000. During July, $150,000 of factored receivables are collected. What amount of loss on sale of receivables would Marquess record in June?
$8,000 recourse liability adds a credit of $2,000 increasing the loss 200,000 x .03 + 2,000 = 8,000
On May 31, 2018, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. The assets of the component were sold on October 13, 2018, for $1,120,000. The component generated operating income from January 1, 2018, through disposalof $300,000. In its income statement for the year ended December 31, 2018, the company reported before-tax income from operations of a discontinued component of $620,000. What was the book value of the assets of the cosmetics component?
$800,000 620,000 - 300,000 = 320,000 1,120,000 - 320,000 = 800,000
Jasper Company uses the allowance method to account for bad debts. During 2018, the company recorded bad debt expense of $9,000 and wrote off as uncollectible accounts receivable totaling $5,000. These transactions caused a decrease in working capital (current assets minus current liabilities) of:
$9,000 bad debt expense will credit allowance for bad debts for $9,000 writing off bad debts will debit allowance for bad debts for $5,000 as well as crediting accounts receivable net decrease in working capital will be 9,000 + 5,000 - 5,000 = 9,000
Times interest earned ratio
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense Provides the creditor with an indication of the ability to pay interest on debts
Quick Ratio or Acid Test Ratio
(current assets - inventory - prepaid items - restricted cash - deferred taxes) / current provides a more rigorous indication of liquidity than the current ratio
Crimson Corp. has a component that is a discontinued operation. The revenues and expenses of the component were $200,000 and $240,000 respectively. The component was sold with a resulting loss of $160,000. The tax rate is 30%. What is the total gain or loss on discontinued operations (net-of-tax effects) that will be reported on the income statement?
-200,000 x (1-.3) = 140,000 loss net of tax
FASB's standard setting process begins when th board adds a project to its technical agenda. List the steps in order in the FASB's accounting standard setting process.
.
Private accounting standard setting bodies in chronological order:
1) Committee on Accounting Procedure 2) Accounting Principles Board 3) Financial Accounting Standards Board
2012, the SEC issued its Final Staff Report in which it concluded that it is not feasible for the US to simply adopt IFRS given:
1) a need for the US to have strong influence on the standard setting process 2) the fact that many laws, regulations and private contracts reference US GAAP 3) the high costs to companies of converting to IFRS
Comprehensive income reporting options:
1) a single, continuous statement of comprehensive income 2) two separate but consecutive statements
FASB standard setting process:
1) board adds a project to its technical agenda 2) the board deliberates at one or more public meetings 3) the board issues an Exposure Draft or Discussion Paper 4) the staff analyzes comment letters 5) the board issues an Accounting Standards Update (research, discussion paper, exposure draft, accounting standard update)
Ethical decision making steps:
1) determine the facts of the situation 2) identify the ethical issue and stakeholders 3) identify the values related to the situation 4) specify the alternative courses of action 5) evaluate the courses of action in terms of their consistency
2011, the SEC recognizes that:
1) different application methods of IFRS could lead to financial statements not being comparable across countries 2) U.S. GAAP provides significantly more guidance about particular transactions or industries than IFRS
Common arguments against the creation of a single set of global accounting standards include:
1) maintaining competition between accounting standard-setting bodies improves quality 2) implementation and enforcement of IFRS varies among nations 3) accounting under IFRS will appear more uniform than it actually is
What would indicate net operating cash flow may not be a good predictor of long-run cash-generating ability
1) pay cash to purchase a 2 year insurance policy 2) customer pays for services provided in a prior perid
Steps at the end of the accounting period
1) prepare an unadjusted trial balance 2) record adjusting entries 3) prepare an adjusted trial balance 4) prepare financials 5) close the temorary accounts
Financial accounting objectives
1) provide information to investors 2) provide information used to evaluate future cash flows
Sarbanes-Oxley act key provisions include:
1) restricting activities of auditors to prevent conflects of interest 2) requiring that corporate executives certify financials 3) requiring documentation and assessing effectiveness of internal controls
SFAC 5 the four criteria that must be met for an item to be recognized in the basic financial statements are:
1) the information about the item is relevant to decision making 2) the item has relevant attributes that are measurable 3) the item meets the definition of an element 4) the information about the item is reliable
Kevin borrows $8,000 from Second National Bank at 10% interest. Kevin will repay the loan in six equal payments beginning at the end of year 1. What is the annual amount that Kevin will pay the bank each year.
1,837
Present value factors formula
1/(1+i)^n
threshold of revenues, assets, or income that qualifies a segment to be disclosed
10%
If the future value of an amount is $40,000 at the end of 4 years, the present value today is $27,320, and the interest is compounded annually, the interest rate is approximately ________
10% 27,320/40,000 = .06830 look at PV table, this ratio is approximately the same PV factor as 10% interest for four periods
Smith sells goods to customers in exchange for a note requiring payment of $100,000 in one year plus interest at 10%. At what amount is the note payable reflected on the customers balance sheet?
100,000
Munchen Company prepays $89,000 for inventory to be delivered in two years. The applicable effective interest rate is 6%. Upon delivery, Munchen should recognize the purchase of inventory at:
100,000 prepayment 89,000 reflects present value of 100,000 at 6% (factor is .89). The difference between the prepayment and the inventory cost is interest revenue
Selected information from the 2018 accounting records of Dunn's Auto Dealers is as follows: Cost of furniture purchased for cash $8,000 Proceeds from bank loan $100,000 Repayment of bank loan (includes interest of $4,000) $44,000 Proceeds from sale of equipment $5,000 Cash collected from customers $320,000 Purchase of stock of another corporation as an investment $20,000 Common stock issued for cash $200,000 In its 2018 statement of cash flows, Dunn's should report net cash inflows from financing activities of
100,000 - 40,000 (repayment of principal on bank loan) + 200,000 = 260,000
Riley has a $100,000 note receivable from a customer. The note receivable is an 8% note, due in 9 months. Three months after accepting the note, Riley discounts the note receivable at Third Bank at a discount rate of 10%. What are the cash proceeds of the discounted note?
100,700 (100,000 x .08 x9/12) = 6,000 interest Maturity value of $106,000 x .10 x 6/12 = 5,300 discount Maturity value 106,000 - 5,300 = 100,700
Rudy company reports gross sales revenue of $5.2 million, net sales of $5 million, and cost of goods sold $3 million. Its inventory balance was $250,000 at the beginning of the accounting period and $300,000 at the end of the accounting period. The company's inventory turnover ratio is closest to
11 3 mill/(250,000+300,000/2)=10.9
Shirley borrows $3,605 from Second National Bank. Shirley will repay the loan in five equal payments of $1,000 each beginning at the end of year 1. What is the annual interest rate implicit in this agreement?
12% 3605/1000 = 3.605 looking at the present value of an ordinary annuity table in the row for 5 periods, find the factor closest to 3.605
Sanfillipo, Inc. had 800 units of inventory on hand March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: March 8 - sold 600 units March 15 - purchased 400 units at $22 each March 22 - purchased 400 units at $24 each March 27 sold 400 units Sanfillipo uses the periodic inventory system. Accourding to a physical count, 600 units were on hand at the end of March. The cost of inventory at the end of March applying the LIFO method is:
12,000 600 x 20=12,000
Sanfillipo, Inc. had 800 units of inventory on hand March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: March 8 - sold 600 units March 15 - purchased 400 units at $22 each March 22 - purchased 400 units at $24 each March 27 sold 400 units Sanfillipo uses the periodic inventory system. Accourding to a physical count, 600 units were on hand at the end of March. The cost of inventory at the end of March applying the average cost method is
12,900 average cost of purchases: [(800 x 20) + (400 x 22)+(400 x 24)]/1600 = 21.50 21.50 x 600 = 12,900
Sanfillipo, Inc. had 800 units of inventory on hand March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: March 8 - sold 600 units March 15 - purchased 400 units at $22 each March 22 - purchased 400 units at $24 each March 27 sold 400 units Sanfillipo uses the periodic inventory system. Accourding to a physical count, 600 units were on hand at the end of March. The cost of inventory at the end of March applying FIFO method is:
14,400 (400 x 24)+(200 x 22)= 14,400
Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilizes FIFO assumption for internal purposes. Based on this information, we can conclude that at the end of 2016, Pernell's ending inventory would have been
150,000 higher if it had used FIFO
Sondra deposits $3,000 in an IRA account on April 15, 2018. Assume the account will earn 3% annually. If she repeats this for the next 5 years, how much will she have on deposit on April 14, 2024?
19,988 3000 x 6.6625 = 19,987.5 FVAD of $1 n=6
Compute the inventory turnover ratio using the following information: Net sales $100,000 for the year,cost of goods sold $40,000, last years assets in place were $900,000, and this years assets in place are $1,100,000. Receivables for both years are $50,000. Inventory changed from $30,000 last year to $10,000 this year
2
Gerhard company has 300 units costing $10 per unit in beginning inventory. During the year the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company used LIFO inventory method for the past 5 years. If the company had purchased at least 1,2000 units, COGS would have been
2,000 higher
The Esquire Company reported sales of $1,600,000 and cost of goods sold of $1,122,000 for the year ended December 31, 2018. Ending inventory for 2017 and 2018 was $420,000 and $460,000, respectively. Esquire's inventory turnover for 2018 is:
2.55 Inventory turnover: cost of goods sold / average inventory 420,000 + 460,000/2 = 440.000 1,122,000/440,000 = 2.55
Parker company reports gross sales revenue of $7.5 million, net sales revenue of $7 million and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closet to
20 3.5 mil/(150,000 + 200,000/2)
Ronald signs a lease agreement that requires him to pay $4,000 at the end of each year for 7 years. The interest rate on this type of lease is 8%. Calculate the present value off the lease payments
20,825
Norwalk Agreement
2002, FASB and IASB formalized their commitment to remove existing differences between US GAAP and IFRS
Sanfillipo, Inc. had 800 units of inventory on hand March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: March 8 - sold 600 units March 15 - purchased 400 units at $22 each March 22 - purchased 400 units at $24 each March 27 sold 400 units Sanfillipo uses the periodic inventory system. Accourding to a physical count, 600 units were on hand at the end of March. If Sanfillipo instead used the perpetual inventory system, cost of goods sold for the month of March applying the LIFO inventory method would be:
21,600 (600 x 20)+(400 x 24) = 21,600
Neumann company has 100 units with a $2.00 weighted-average cost per unit in beginning inventory. Neumann sells 40 units and then purchases 100 additional units for $2.20 per unit. After the purchase, Neumann sells another 100 units. What is the amount of cost of goods sold for the second sale if Neumann company uses the perpetual inventory system?
213 (100-40) units x $2 = 120 100 units x 2.20 = 220 120+220 = 340 340/160 units = 2.125 per unit 2.125 x 100 = 212.50
Selected information from the 2018 accounting records of Dunn's Auto Dealers is as follows: Cost of furniture purchased for cash $8,000 Proceeds from bank loan $100,000 Repayment of bank loan (includes interest of $4,000) $44,000 Proceeds from sale of equipment $5,000 Cash collected from customers $320,000 Purchase of stock of another corporation as an investment $20,000 Common stock issued for cash $200,000 In its 2018 statement of cash flows, Dunn's should report net cash outflows from investing activities as:
23,000 5000 - 8000 - 20,000 = 23,000
On June 1, 2017, Oxian Corp. receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Oxian should recognize on the income statement for 2017?
24,000/24 = 1,000 1,000 x 7 = 7,000
The Compton Press Company reported income before taxes of $250,000. This amount included a $50,000 loss on discontinued operation. The amount reported as income from continuing operations, assuming a tax rate of 40% is
250,000 + 50,000 = 300,000 300,000 x (1-.40) = 180,000
Compute present value of the following annuity: Interest rate per compounding period 8% Number of periods 12 Payment at the end of the period $500
3,768
Carol expects to receive $1,000 at the end of each year for 5 years. The annuity has an interest rate of 10%. The present value of this annuity at Time Zero, the inception o f the annuity is
3,791 PVA (present value ordinary annuity) factor of 10% for 5 periods is 3.79079 1000 x 3.79079 = 3,791
Rhonda expects to receive an annuity that pays $500 at the beginning of each year for 10 years. Assuming the interest ae is 6%, what is the present value of this annuity?
3,901 PVAD factor of 6% for 10 years 7.80169 x 500 = 3,901
Titanic Corporation leased executive limos under terms of $110,000 down and three equal annual payments of $1200,000 on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be:
32.257 PVA = $120,000 × 2.44371* = $293,245.2 $293,245.2 × 11% = $32,256.97 *PVA of $1: n = 3; i = 11%
Symington Corp uses the periodic inventory system. At December 31, 2018, the end of the company's fiscal year, a physical count of inventory revealed an ending inventory balance of $320,000. The following items were not included in the physical count: Goods held on consignment at murphy corp: 23,000 merchandise shipped to customer on 12/30 f.o.b. desination (customer received 1/3/17) 12,000 merchandise shipped to customer on 12/29 f.o.b. shipping point (arrived at customer on 1/2/17) 6,000 merchandise purchased from supplier shipped f.o.b. destination on 12/29, in transit at year end 24,000 Symington's 2018 ending inventory should be:
355,000 320,000 + 12,000 + 23,000 = 355,500
Average Collection Period Ratio
365/accounts receivable turnover tells approximate # of days the average receivable balance is outstanding (average age of receivables)
average days in inventory
365/inventory turnover ratio
J.T. Rider and Sons uses the dollar-value LIFO inventory method. At the end of 2019 the cost index is 1.25 and the ending inventory at base year cost is $360,000. If 2019 beginning inventory at base year cost was $300,000, 2019 ending inventory at dollar-value LIFO cost is:
375,000 300,000 + [(360,000 - 300,000) x 1.25]
Beth will deposit $1,000 at the end of each year for 4 years. Assuming an 8% rate of interest, how much will Beth have in the bank at the end of year 4?
4,506
For its 2018 fiscal year, the King Pharmaceutical Company reported sales of $10,500,000, cost of goods sold of $6,300,000, and net income of $525,000. The company's gross profit ratio for the year is:
40% (10,500,000 - 6,300,000) / 10,500,000
Rudy company reports gross sales revenue of $5.2 million, net sales of $5 million, and cost of goods sold $3 million. Rounding to the nearest percent, the company's gross profit ratio would be:
40% 5 million - 3 million/5 million gross profit/net sales
The Esquire Clothing Company borrowed a sum of cash on October 1, 2018, and signed a note payable. The annual interest rate was 12% and the company's year 2018 income statement reported interest expenses of $1,260 related to this note. What was the amount borrowed?
42,000 1260/.03 = 42,000
Sarbanes-Oxley Act requires lead audit partners are required to rotate every ________ years
5
The present value is $29,650, the future value is $50,000, and the interest rate is 11%. The number of periods is approximately
5 29,650/50,000 = .593 PV table - find 11% column, find factor .593
On January 1, year 1, Dennis borrows $20,000 at 6% interest compounded semi-annually. What is the amount of interest Dennis will pay at the end of year 4?
5,335 [20,000 x (1.03)] - 20,000 = 5,335
Excerpts from Huckabee Company's December 31, 2018 and 2010, financial statements are presented below: 2018 2017 A/R 81,000 73,000 Inventory 59,000 73,000 Net Sales 401,000 373,000 COGS 241,000 221,000 Huckabee's 2018 receivables turnover (rounded to 2 decimal places) is
5.21 (81,000 + 73,000)/2 = 77,000 401,000/77,000 = 5.207 or 5.21
Chez Fred Bakery estimates the allowance for uncollectible accounts at 2% of the ending balance of accounts receivable. During 2018, Chez Fred's credit sales and collections were $110,000 and $131,000, respectively. What was the balance of accounts receivable on January 1, 2018, if $250 in accounts receivable were written off during 2018 and if the allowance account had a balance of $630 on 12/31/18?
52,750 A/R 1/1/2016 ? Collections (131,000) Write-offs (250) Credit sales 110,000 A/R 12/31/2016 $39,000 [$630 = 2% of AR; so AR = $630 ÷ 0.02 = $31,500] Therefore, A/R, 1/1/2016 = $81,100
The following items appeared in the 2018 year-end trial balance for the Brown Coffee Company: Revenue CR 600,000 operating expenses DB 420,000 Income on discontinued operations CR 200,000 Restructuring costs DB 100,000 Interest Expense DB 20,000 Gain on Sale of Investments CR 30,000
54,000 (600,000 - 420,000 - 100,000 -20,000 + 30,000) x (1-.40) = 54,000
Smith Company earns a 12% return on assets. If net income is $720,000, average total assets must be
6,000,000 720,000 / .12 = 6,000,000 ROA = net income / assets so 12% = 720,000/ assets = 6,000,000
Lakeland Corp. Calculates that in the current year its employees earned an additional annuity of $10,000 for 20 years commencing with their retirement 12 years from today. Lakeland assumes a future interest rate of 6%. If the value of the annuity is $121,581 on the date the employees retire, what amount should be contributed today to fully fund the pension plan?
60,422
Smith Company has 150 units costing $450 in beginning inventory. During the year, the year, the company purchases 1,000 units for a total cost of $3,300. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the periodic LIFO method, ending inventory will be:
615 150 units at $450 3,300/1000 = 3.30 x 50 = 165 165 + 450 = 615
Jose wants to cash in his winning lottery ticket. He can either receive seven, $10,000 annual payments starting today, or he can receive a lump-sum payment now based on a 3% annual interest rate. What would be the lump-sum payment?
64,172 10,000 x 6.41719 = 64,171.9 PVAD of $1 table 6
On December 31, 2018, the Charlie Company adopted the dollar value LIFO inventory method. Inventory at the end of 2018 for its only inventory pool was $500,000 under the dollar-value LIFO method. At the end of 2019 inventory at year-end cost is $672,000 and the cost index is 1.05. Inventory at the end of 2019 at dollar-value LIFO cost is:
647,000 End-of 2019 inventory at end-of-2018 year cost = 640,000 (672,000/1.05) The increase in the end-of-2018 inventory at end-of-2018 dollars is $140,000 (640,000 - 500,000) Adjusting this to end-of-2018 cost is $147,000 (140,000 x 1.05) adding this to the beginning balance = 647,000 500,000 + 147,000
On January 1, year 1, Mary borrows $30,000 at 8% interest compounded semi-annually. What is the amount of interest Mary will pay at the end of year 3?
7,960 [30,000 x (1.04^n)] - 30,000 = 7,960
Debbie has $192,516 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?
7.0 years 192,516/30,000 = 6.4172 look on PVAD of $1 table and fine 6.4172 in the 3% column
On January 1, year 1, Klondike issued a 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds.
88,699 (5.65022 x 10,000) + (.32197 x 100,000) = 88,699
Paul borrows $5,000 from the bank and wishes to repay the amount in equal installments of $800 per year over a period of years. The payments will be made at the end of each year. The bank wishes to earn interest on this loan at 8%. Approximately how many years will it take for Paul to repay the loan?
9 years
The Wazoo Times Newspaper Company reported an $11,200 liability in its 2018 balance sheet for subscription revenue received in advance. During 2019, $62,000 was received from customers for subscriptions and the 2019 income statement reported subscription revenue of $63,700. What is the liability amount fore deferred subscription revenue that will appear in the 2019 balance sheet?
9,500 beginning balance + additional receipts - subscription revenue recognized 11,200 + 62,000 - 63700 = 9,500
ethics
A code or moral system that provides criteria for evaluating right and wrong behavior
verifiability
A consensus among different individuals appraising the value of land describes which qualitative accounting characteristic
unearned revenues
A customer pays in advance for services to be performed in a future period are recorded in what account
fair value
A standard setting focus on the asset/liability approach supports measurement of assets and liabilities at:
accounting change occurs during an interim period, the change is applied retrospectively. In subsequent interim periods of the same fiscal year, which of the following are disclosed?
Affect on income from continuing operations Affect on net income Affect on related per share amounts
comparability
An enhancing qualitative characteristic of accounting information that allows users to better understand similarities and differences in the financial reports across different companies
Asset
An item owned by the company representing probable future benefits. A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events
Accounting Equation
Assets = Liabilities + Owner's Equity
failure to record the adjusting entry for depreciation expense is omitted ____________________
Assets will be overstated and income overstated
In developing standards, the FASB considers the:
Both of the following: 1) concerns and opinions of constituents 2) economic transactions that standards will address
Inventory Turnover Ratio
COGS/Average Inventory shows how many times the average inventory balance is sold during the current reporting period
framework for designing an internal control system is provided by
COSO - Committee of Sponsoring Organizations of the Treadway Commission
Matching cost of goods sold with the revenues generated during the period is an example of which approach to expense recognition?
Cause-and-effect relationship
Western company begins the year with $50,000 of inventory on hand. During 2018, Western purchases additional inventory for $100,000 cash. Sales for the year, all on account, totaled $70,000. A physical count determined the cost of inventory at the end of the year to be $110,000. Assuming Western uses a periodic inventory system, the journal entry at the end of the year once the physical count occurs includes:
Deb cost of goods sold $40,000 debit inventory (ending) $110,000 credit purchases $100,000 credit inventory (beginning) $50,000
Western company begins the year with $50,000 of inventory on hand. During 2018, Western purchases additional inventory for $100,000 cash. Sales for the year, all on account, totaled $70,000 and cost of the inventory sold was $40,000. Assuming Western uses a perpetual inventory system, the journal entry to record the sale and cost of inventory during the year includes which of the following
Debit cost of goods sold $40,000 debit accounts receivable $70,000 credit sales revenue $70,000 credit inventory $40,000
expense accounts are closed to income summary with:
Debit entry to income summary credit entry to expenses
Purchase supplies on account requires what journal entries
Debit supplies on hand credit accts payable
Distribution to owners
Decreases in equity of a particular enterprise resulting from transfers to owners. Dividends paid by a corporation to its shareholders.
Adjusting entries
Entries made at the end of an accounting period before the financial statements are prepared to ensure that the revenue recognition and expense recognition principles are followed. necessary for three situations: deferrals, accruals and estimates
The citation used to reference generally accepted accounting principles is
FASB ASC followed by the appropriate number
The __________ and the __________ are jointly working on the Financial Statement Presentation project
FASB and IASB
Future Value (FV)
FV = $1(1+i)^n the amount an investment is worth after one or more periods
Formula to calculate future value of an amount "I"
FV = I(1+i)^n
Future value formula
FV = PV(1+i)^n
Voluntary changes in accounting principle
GAAP requires to be accounted for retrospectively
GASB
Government Accounting Standards Board
Emerging Issues Task Force
Group dealing with emerging issues - US GAAP
International Accounting Standards Committee issued international Accounting Standards (IAS), whereas the International Accounting Standards Board currently issues:
IFRS - international financial reporting standards
Revaluation surplus
IFRS only - reported as other comprehensive income fair value is higher than book value - difference in revaluation surplus
Both IFRS and GAAP permit the fair value option for accounting for receivables. What is a difference
IFRS restricts the circumstances for applying the fair value option
Troubled debt restructuring
If a receivable becomes impaired, it is remeasured at the discounted present value of currently expected cash flows If a receivable is remeasured, the discount rate is based on the loan's original effective rate Sometimes receivables are settled outright at the time of a restructuring Modification of terms typically results in some loss that needs to be recorded
Investing activities
Includes cash transactions involving the purchase and sale of long-term assets and current investments
financial statements most frequently provided to external users
Income statement, balance sheet, state of cash flows, statement of shareholders equity
Income from Discontinued Operations
Income that will not continue in the future
Gain
Increase in equity from peripheral or incidental transactions. Result from changes in equity that do not result directly from operations but nonetheless are related to those activities. (sale of equipment, buildings, etc also included)
asset turnover ratio
Indicates how efficiently a company uses its assets to generate sales; net sales/average total assets.
Revenue
Inflow of an asset (resources) from providing a good or service. Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods,rendering services, or other activities that constitute the entity's ongoing major or central operations.
Which of the following is most likely an accrued liability? a) depreciation b) interest c) cost of goods sold d) office supples
Interest accrued liabilities arises when all or part of an expense is recognized before the associated cash disbursement
Average Cost Method (Weighted- Average Method)
Inventory method costing method, based on the average cost of inventory during the period assumes that the cost of goods sold consists of a mixture of all the goods available for sale determined by dividing cost of goods available for sale by quantity of goods available for sale
relationship among management, auditors, investors and creditors that tends to preclude the "What would you like it to be?" attitude?
It is the responsibility of management to apply accounting standards when communicating with investors an creditors through financials. Auditors serve as independent intermediaries to help ensure that the management-prepared statements are presented fairly in accordance with GAAP. In providing this assurance, the auditor precludes the "What would you like it to be?" attitude.
operating segment characteristics
It operating results are regularly reviewed by the chief operating decision maker, it engages in business to earn revenues and incur expenses discrete financial info is available
IFRS does not allow which inventory valuation method
LIFO
if a company uses __________ to measure taxable income, they msut use the same method for external financial reporting
LIFO
level of the fair value hierarchy includes inputs other than quoted prices that are observable for the asset or liability?
Level 2
1934 Securities and Exchange Act
Mandates reporting requirements for companies whose stock is publicly traded
Receivables Turnover Ratio
Net credit sales / avg net accounts receivable
Earnings per share (EPS) basic
Net income (less dividends to preffered stock holders) / weighted average number of common shares outstanding weighted average example: 1 million shares outstanding beginning of period, 1 mill shares sold March 31, 2018 1,000,000 + 1,000,000(9/12)
Two statement approach:
Net income statement immediately followed by a statement of comprehensive income Comprehensive income statement begins with net income, followed by OCI items to arrive at comprehensive income there is a seperate income statement
Liabilities
Obligation to transfer cash or other resources as a result of a past transaction. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
economic and political environment in which standard setting occurs?
Often characterized as a political process. Standards, particularly changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups. A change in an accounting standard or the introduction of a new standard can result in a substantial redistribution of wealth within our economy. The FASB's due process is designed to obtain information from all interested parties to help determine the appropriate accounting approach, but standards are supposed to be neutral with respect to the interests of various parties. Both the FASB and IASB sometimes come under political pressure that sways the results of the standard-setting process
Expenses
Outflow of an asset (resources) related to the production of revenue. Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations
Kate expects to receive an annuity that pays $5,000 at the beginning of each year for 10 years. Assuming the interest rate is 5%, what is the present value of this annuity?
PVAD factor of 5% for 10 periods, 8.10782 x 5000 = 40,539
International Organization of Securities
Regulatory oversight IFRS
FASB Accounting Standards Codification project purpose
Reorganize all relevant accounting pronouncements in the U.S. GAAP
Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as follows: Cash collected from customers $345,000; Cash paid for rent $41,000; Cash paid to employees for services rendered during the year $121,000; Cash paid for utilities $51,000 In addition, you determine that customers owed the company $61,000 at the end of the year and no bad debts were anticipated. The company owed the gas and electric company $2,100 at year-end, and the rent payment was for a two-year period. Calculate accrual net income for the year
Revenue (345,000 + 61,000) = 406,000 less expenses: Rent (41,000 / 2) = (20,500) Salaries = (121,000) Utilities (51,000 + 2,100) = (53,100) 406,000 - 20,500 - 121,000 - 53,100 = 211,400
Net Income
Revenues plus gains less expenses and losses. The difference between revenue and expenses when revenue is greater
authority to set accounting standards for companies, but has delegated the task to the private sector
SEC
Three groups that participate in the process of establishing GAAP are users, preparers, and auditors. These groups are represented by various organizations. Indicate which of these groups it primarily represents:
SEC (Securities and Exchange Commission) - users Financial Executives International - preparers American Institute of Certified Public Accountants - Auditors Institute of Management Accountants - Preparers Association of Investment Management and Research - users
Loss
Sale of an asset used in the operations of a business for less than the asset's book value. A decrease in equity from peripheral or incidental transactions of an entity.
1933 Securities Act
Sets forth accounting and disclosure requirements for initial public offerings of securities
Income Statement Formats
Single-step format groups all revenues and gains together, then expenses and losses are grouped, subtotaled, and subtracted - in a single-step from revenues/gains to derive income from continuing operations. Operating and nonoperating items are not separately classified Income tax is usually reported in a seperate line Multi-step format includes a number of intermediate subtotals before arriving at income from continuing operations
iASB
Standard setting board IFRS
Steps in ethical decision making:
Step 1: Determine the facts of the situation Step 2: Identify the ethical issue and stakeholders Step 3: identify the values related to the situation Step 4: Specify the alternative courses of action Step 5: Evaluate the courses of action in terms of their consistency
Analyze the income summary: Income Summary ________________________ 36,333 38750 _______________________ 2417
The $38,750 represents :revenue The $36,333 represent expenses The $2,417 represents net income
Political pressure in International standard setting comes from:
The European Union and politicians from countries utilizing IFRS
posting
The Process of transferring debit and credit information from the journal to ledger
understandability
The accounting characteristic that requires a user to comprehend the information within the context of the decision being made
going concern
The assumption that a business entity will continue to operate indefinitely in the future refers to what assumption?
Comprehensive income
The change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Includes net income as well as other gains and losses that change shareholders' equity but are not included in traditional net income
conceptual framework that underlies accounting principles (in generan)?
The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting. The fundamentals are the underlying concepts of accounting, concepts that guide the selection of events to be accounted for, the measurement of those events, and the means of summarizing and communicating them to interested parties.
Equity
The owners residual interest in the assets of a company. The residual interest in the assets of an entity that remains after deducting its liabilities total assets minus total liabilities
Income smoothing
The practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next.
historical cost principle
The principle stating that asset and liability measurements should be based on the amount given or received in the original transaction
Financial Accounting Standards Board (FASB)
The private sector organization that is currently responsible for setting accounting standards in the U.S. is the?
recognition
The process of admitting or recording an item into the basic financial statements
measurement
The process of associating numerical amounts to the elements in the financial statements
transaction analysis
The process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved
consistency concept
The qualitative characteristic of using the same accounting method each period over time refers
economic entity accounting assumption
The requirement that the economic activities of a business owner should be separated from the activities of the business
LIFO liquidation
The result of selling more units than are purchased during the period, which can have negative tax consequences if a company is using LIFO.
closing process involves ___________________________
Transferring revenue and expense balances to retained earnings
Cash equivalents
US treasury bills, money markets, commercial paper with a 3 month maturity date or less from date of purchase
cost index
Used to convert ending inventory at year-end cost to base year cost.
What should you tell your friend about the presence of accounting standards in the U.S.? Who has the authority for standard setting? Who has the responsibility?
We have a set of standards known as generally accepted accounting principles (GAAP). GAAP is a dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financials and related notes. The Securities and Exchange Commission has the authority to set accounting standards for companies whose securities are publicly traded but it relies on the private sector to accomplish that task. At the present, the Financial Accounting Standards Board is the private sector body responsible for standard setting
The Stibbe Construction Company switched from the completed contract method to the percentage-of-completion method of accounting for its long-term construction contracts. This is an example of:
a change in accounting principle
discontinued operations qualifications
a component of the entity has been sole, disposed of,or held for sale and a strategic shift is represented that will have a major effect on financial results
Accumulated depreciation is:
a contra asset account, a balance sheet account
The replenishment of a petty cash fund might include
a debit to office supplies expense recording expenses occurs at the time the petty cash fund is replenished
factors
a financial institution that buys receivables for cash and charges a fee for this service
After preparing closing entries, the last step in the accounting process is to prepare ___________________
a post-closing trial balance
when a company has a claim to receive assets in the future, ow is this recorded on the balance sheet
a receivable
note receivable
a receivable supported by a formal agreement that specifies payment terms
what does a sales discount represent
a reduction in the amount to be paid if paid within a specified period of time
which method of financing with receivables has the transferee recognize the receivables as assets in its balance sheet
a sales of receivables
Requires an explanatory paragraph required (even though auditors report is unqualified)
a significant matter concerning the financial statements and a related-party transaction, and uncertainty regarding a contingency for which a loss is material in amount
securitization
a special purpose entity is created for the purpose of purchasing pools of receivables
Net income and comprehensive income are identical __________
a statement of comprehensive income is not required
Which of the following adjusting entries causes an increase in liabilities? a) accruing unrecorded interest expense b) recording the amount of expired prepaid insurance c) accruing unrecorded interest revenue d) recording depreciation expense
a) accruing unrecorded interest expense
Who has the responsibility for preparing financial statements in accordance with generally accepted accounting principles? a) corporate management b) CPA firms who audit the company c) SEC staff auditors d) audit committee
a) corporate management
Which of the following are enhancing characteristics of financial information? (select all that apply) a) timeliness b) decision usefulness c) cost effectiveness d) comparability
a) timeliness and d) comparability
The involvement of accounting professionals and management in accounting scandals resulted in Congress passing the Sarbanes-Oxley Act. What is the purpose of the Sarbanes-Oxley Act? (select all that apply) a) provide penalties for violators b) prevent conflicts of interests c) issue capital requirements for companies d) require CEO accountability e) regulate auditors
a, b, d and e
Financial Flexibility
ability to alter cash flows in order to take advantage of unexpxected investment opportunities and needs
Solvency
ability to pay long-term debts as they become due measured by Debt to equity ratio and Times Interest earned ratio
potential benefits of offering cash discounts to customers
accelerated customer payments, reduction in bad debt and increased sales volume
Earnings quality is affected by:
accelerating revenue recognition losing a major custore
GAAP stands for generally ___________ accounting principles.
accepted
Accounting changes - 3 types
accounting principle accounting estimate reporting entity
Elements of the accounting equation are represented by _________ which are contained in the general ledger
accounts
in a perpetual inventory system, when inventory is returned which accounts will the purchaser adjust to reflect the effect of the return
accounts payable and inventory
When a sales journal is used, at the end of the period the total amount sold on credit is debited to __________________
accounts receivable
a(n) ________ _____________ is an informal credit arrangement to receive cash from a credit sale and represents an asset of the company
accounts receivable
Monetary assets
accounts receivable cash note receivable (not inventory)
accouts that could be examined to detect potential low earnings quality
accounts receivable and allowance for bad debts
accounting model best meets the primary goal of users of financial reporting
accrual basis
Other comprehensive income is reported in the current reporting period on the income statement or as an addition to the income statement, and _____________ other comprehensive income is reported on the balance sheet
accumulated
factors that influence choice of inventory cost flow assumption
actual physical flow of inventory tax implications of choice financial statement effect
The effect of salaries and wages incurred but not yet paid would be reflected in the account balances shown on the:
adjusted trial balance
in a bank reconciliations, which items will require journal entries by the company
adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books
perpetual inventory system
adjusts for each change caused by a purchase, a sale or a return of merchandise allows management to determine the amount of goods on hand on any date without having to take a physical count a new weighted-average unit cost is calculated after each purchase
purpose of a sales journal is to record
all credit sales
Profitability Ratios
all numerators is net income
LIFO inventory pools
all purchases during the period are considered to be made: at the same time and same cost grouped according to physical similarities a single layer is added at the average cost of purchases during the period is added to beginning inventory if the quantity of ending inventory increased
periodic inventory system
allocates cost of goods available for sale only at the end of each reporting period
a contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the _______ method of accounting for bad debts
allowance
Accounts receivable contra account
allowance for sales returns
The objectives for determining the present value of future cash flows associated with an asset or liability requires that the uncertainty concerning the ____________ and timing of the cash flows be taken into consideration
amounts
Recognizing revenue before cash flow is an example of ____________
an accrual adjusting entry
Prepaid expense
an asset recorded when an expense is paid in advance, (paid but not yet incurred - asset acquired in one period and expensed in a future period)
intangible asset
an asset that has no physical substance
cash equivalent
an investment that is readily convertible to a known amount of cash and has an original maturity to the investor of three months or less
At the end of the accounting period, before the adjusting entries are recorded:
an unadjusted trial balance is prepared
SEC requires to submit financial information how frequently
annually and quarterly
In a(n) ___________________ the payment is received or made at the beginning of the period, whereas in a(n) __________________ the payment is received at the end of each period
annuity due ordinary annuity
On a financial calculator, the PMT key is used to input the ____________
annuity payment
required disclosure regarding asset transfers
any cash flows occurring between the transferor and transferee the amount of receivables that are past due and any related credit losses during the period how fair values were estimated when recording the transaction the transfer any continuing involvement with the transferred assets any ongoing risks to the transferor how any continuing involvement in the transferred assets will be accounted for on an ongoing basis
asset impairment
any long-lived asset, whether tangible or intangible, should have its balance reduced if there has been a significant impairment of value
FASB mandated changes implementation ways
apply new standard to the current and future periods with an adjustment to the beginning balance of retained earnings in the year of adoption apply new standards in the current period and all future periods with no change to prior financial statements apply new standard to all periods presented in the financial statements
the balance sheet approach to measuring bad debt expense focuses on
appropriate carrying value of accounts receivable
Interim reporting periods
are periods when financials are produced other than at the end of the fiscal year
restricted cash is usually reported in the balance sheet
as a noncurrent asset
fair value option for a financial asset or financial liability, how are the changes in fair value reported in the financial statements
as gains or losses on the income statement
how do sellers typically account for returns:
as return occurs and using an adjusting entry at the end of the period for any remaining future expected returns
The accumulated depreciation account is a contra (valuation) account to ___________________
asset account
When rent is paid in advance for 2 years, it is appropriately recorded as a(n) ______, whereas when rent is paid and used during one month, it is appropriately recorded as a(n) _______
asset; expense
effect on the accounting equation from using supplies which had been previously recorded as an asset
assets decrease and owners' equity decreases
Book value of a company
assets minus liabilities
Balance sheet limitations
assets minus liabilities is not representative of the company's true market value, the balance sheet is heavily reliant on estimates rather than determinable amounts
investments
assets not used directly in the operations of the business (cash set aside for future plant expansion, 3 year note receivable, land held for speculation, noncurrent receivables)
The application of conservatism leads to:
assets tending to be biased downwards and losses being recognized quicker than gains
First-in, first-out (FIFO) method
assumes that items in ending inventory are the most recently acquired most closely approximates the actual physical flow of inventory
Last-in, first-out (LIFO) method
assumes that the units sold are the most recent units purchased if prices rise over time, results in the lowest ending inventory provides better matching of current revenues with current inventory cost
Cost flow ____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.
assumptions
perpetual inventory system
average cost method is applied by computing a moving average unit cost each time inventory is purchased
The organization responsible for the Code of Professional Conduct for accountants providing auditing services to their own organization is the: a) Accounting Principles Board b)Institute of Internal Auditors c) Public Accounting Standards Oversight Board d) Institute of Management Accountants e) American Institute of Certified Public Accountants
b) Institute of Internal Auditor
The application of intraperiod income taxes requires that income taxes be apportioned to each of the following items except: a) income from continuing operations b) operating income c) discontinued operations d) all of the above
b) operating income
Which of the following adjusting entries causes a decrease in assets? a) recognizing the portion of revenue collected in advance b) recording depreciation expense c) accruing unrecorded salaries expense d) accruing unrecorded interest revenue
b) recording depreciation expense