Final Exam (Balance Sheet & Income Statement)

Rule are necessary to minimize overstatement/understatement of net income and for this reason__________.

The accrual basis of accounting allocates many transactions and events producing cash flows to periods other than those in which cash flows occur.

What does measuring performance by matching cash inflows with cash outflows fail to do?

To recognize the timing and matching problems.

For mineral reserve, how is the depletion rate derived?

Total investment costs divided by estimated recoverable reserves (resources). The difference between depreciation and depletion is that depletion is dependent on production and is estimated as: The ratio of current production over the estimated reserves multiplied by the investment costs.

Under what accepted valuation methodologies are current replacement costs, adjusted for obsolescence?

Cost Approach

Assets that may be reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of the business or one year, whichever is longer are known as ___________.

Current Assets

Assets are divided into what two major categories?

Current Assets & Lon-Term Assets.

__________________ are obligations that are expected to be liquidated within the normal operating cycle of the business. In most cases ____________ will be paid/discharged within one year by using the assets classified as current.

Current Liabilities

What are liabilities broken down into on the balance sheet?

Current Liabilities & Long-Term Liabilities

Cash is measured using what basis?

Current Value

Inventory is measured using what basis?

Current or Past Value

Prepaid Items are measured using what basis?

Historical Cost

_________ is widely accepted as being more objective and determinable. Typically, a deviation from ____________ measures is permissible when alternative measures provide more accurate and objective representation of the object/event being measured.

Historical Cost Concept

______ of a firm are the amount of earnings that can be distributed as dividends without changing the value of the firm

Distribution Earnings

Why can cost allocation (as opposed to direct assignment) affect the reported expenses?

Due to the problems in accounting measurement procedures and managers' incentives for income manipulation.

_______ refers to the net cash flow plus the change in the market value of a firm's net assets over a given period.

Economic Income

_________________ assumption maintains that contracts for which accrual entries are made should be reasonably enforceable.

Enforceability of Contracts

Because businesses involving inventory assets are not allowed to use cash basis accounting for income tax purposes by the IRS, cash basis accounting is often used by _________.

Entities that carry small inventories.

Is cash held for some designated purpose, such as the cash held in a fund for eventual retirement of a bond issue included or excluded from current assets?

Excluded from current assets.

Accounts Receivable is measured using what basis?

Expected Future Value

___________ are outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

Expenses

__________ and ________ are resources and service potentials consumed, spent, or lost in the pursuit or production of revenues and gains.

Expenses & Losses

___________ are outflows or consumption or using up of assets or incurrence of liabilities resulting from a company's ongoing central operations.

Expenses (or expired costs)

Marketable Securities is measured using what basis?

Fair Value

The ____________________ prioritizes the inputs used to measure fair value into three broad Levels (Levels 1, 2 and 3), moving from quoted prices in active markets in Level 1 to unobservable inputs in Level 3.

Fair Value Hierarchy

Investments are measured using what basis?

Fair Value, Amortized Cost, or Equity Method

One of the economic consequences of financial reporting is?

Financial information can affect how capital and investment resources are allocated among firms.

More profitable firms may benefit from more favorable lending terms and lending rates; financial information may determine the amount available for incentive payouts and particular persons eligible for incentive payouts. This is describing what economic consequence of financial reporting?

Financial information can affect terms & enforcement of contracts among a firm's contracting parties.

Under what accepted valuation methodologies are valuation techniques used to convert future amounts (e.g. cash flows or earnings) to a single present amount (discounted), based on values indicated by current market expectations.

Income Approach

More profitable firms may be targets of public scrutiny, political costs, and/or government intervention. This is describing what economic consequence of financial reporting?

Financial information can affect the demand that outsiders & owners place on the firm.

More informed investors, or investors employing security analysts, may be able to increase their wealth at the expense of less informed investors. This is describing what economic consequence of financial reporting?

Financial information can affect the distribution of wealth among investors.

Focusing on short-term, less risky projects may have long-term detrimental effects. Financial information can also highlight potential risks and growth opportunities. This is describing what economic consequence of financial reporting?

Financial information can affect the level of risk accepted by a firm.

Reallocation of wealth between consumption and investment within the economy is caused by what economic consequence of financial reporting?

Financial information can affect the rate of capital formation in the economy.

What principle dictates that accounting reports must disclose all facts that may influence the judgment of an informed reader?

Full Disclosure Principle **This is an elusive concept because determination of facts that may influence the judgment of an informed reader is a judgment call, and disclosure also comes at a cost to the firm. **The principle is sufficiently vague to permit the accountant wide discretion in financial reporting and to provides basis for lawsuits against business entities and accountants for non- and/or misleading disclosures).

______________ are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.

Gains

The entity being accounted for is in business for indefinite period rather than for a determinate period. This is known as ____________.

Going Concern Concept

________ assumption maintains that a business entity will continue its business activities into the foreseeable future. This assumption allows users of financial statements to have confidence that a company will be in existence to complete activities (especially for those activities and transactions that largely rely on accrual assumptions and estimates).

Going-Concern Assumption

What are some important assumption underlying accrual accounting?

Going-Concern Assumption & Enforceability of Contracts

A summary of all revenues of a business over a period as well as the expenses incurred in generating the revenues is known as _______?

Income Statement (Profit & Loss Statement)

In many instances, sellers provide discounts to buyer as an __________.

Inducement for prompt payment for purchases.

What type of long-term asset are fixed assets that lack physical substance?

Intangible Assets

________________ are goods that are available for sale, product that are in a partial stage of completion, and raw materials that will be sued to create finished products. The costs of purchasing merchandise and materials and the cost of manufacturing various product lines are accumulated in the accounting records and are identified with either the COGS during the fiscal period or as the cost of the inventories remaining at the end of the period. Are valued at their current or past value.

Inventories

What does Non-Monetary assets include?

Inventory and PPE

What type long-term assets are known as cash funds or securities a firm holds for a designated purpose for an indefinite period of time?

Investments

What are some examples of long-term debt?

Long-tern notes, bonds, mortgages; these debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.

__________ are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners.

Losses

___________ are decreases in a company's net assets from peripheral or incidental transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distribution to owners

Losses

What type of expenses are charges related to the goods produced. These costs typically include direct materials costs, direct labor costs, and overhead expenses. Overhead expenses are production costs that are neither direct materials or direct labor expenses. Rather, they are all other expenses in production that cannot be directly traced to the products. In the financial statements, the costs associated with the goods sold are often listed explicitly.

Manufacturing Expenses

What do common classes of expenses include?

Manufacturing expenses, marketing expenses, and administrative expenses.

Under what accepted valuation methodologies are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities i.e. observable prices?

Market Approach

What type of investments are temporary and are made from excess funds that a firm does not immediately need to conduct operations? They are invested temporarily to earn a return, but can be converted into cash easily.

Marketable Securities

The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as ___________

Principal Market

______________ are the accumulated earnings of the business net of dividend distributions to owners and stock repurchases

Retained Earnings ** use to reinvest in the business, pay dividend, and repurchase stock.**

________________ allows it to capitalize buildings & equipment (record as assets) when they are purchased, and expense a portion of the acquisition costs (depreciate the assets) in each period. The expenses will bemused in computing the operation performance for each period.

The Modified Cash Basis

In some cases, an entity that has long-term assets such as buildings and equipment uses _______.

The Modified Cash Basis

Monetary liabilities are shown at what measurement basis?

Present Value

At what measurement basis are monetary assets shown on the balance sheet?

Present or Current Cash-Equivalent Values.

Why does a timing problem occur in cash accounting?

Because cash flows do not always occur at the same time as the activity or economic performance that yields the cash flows.

What are some other features that help identify assets?

- Assets may be acquired at a cost -Assets may be tangible -Assets may be exchangeable -Assets may be legally enforceable. *** The absence of one or more of these qualities DOES NOT disqualify an item as an asset**

What are the various criteria used in practice for revenue recognition?

-Point of Sale -End of Production -Receipt of Cash -During Production -Cost Recovery

In what order should current assets be listed in order of liquidity?

1. Cash & cash equivalents 2. Investments 3. Accounting receivables 4. Inventories 5. Self-constructed assets 6. Prepaid expenses 7 Deferred charges (e.g., start-up costs, deferred income taxes)

Why do matching problems occur?

Because, for example, cash inflows from the sale of a product or service are not always matched in time with the costs or cash outflows for the product or service.

What are some types of revenue measurement?

1. Credit sales & Uncollectible Accounts 2. Sales Discounts, Allowances, and Returns. 3. Credit Sales & Delay in Cash Collection

What are some disadvantages of cash basis accounting?

1. Expenses are not properly matched with the revenues they generate. 2. Cash inflows for one period may relate to revenues of a prior period (e.g., cash collected this period that relates to credit sales made in the previous year) or future period (e.g., cash from magazine subscribers collected in the current period for deliveries that will be made in future years). 3. Similarly, cash outflows in the current operating period may relate to operating activities of a different operating period. This means the income statement and balance sheet paint erroneous pictures of business activities and conditions.

What are the three essential characteristics of a liability?

1. It embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand. 2. The duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice. 3. The transaction or other event obligating the entity has already happened.

What are the three essential characteristics that an asset has?

1. It embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows. 2. A particular entity can obtain the benefit and control others' access to it. 3. The transaction or other event giving rise to the entity's right to or control of the benefit

What are some advantages of cash basis accounting?

1. It is easy to do. 2. It is objective, with few choices to make. Cash either comes in or goes out, period!

The Standard sets out what three accepted valuation methodologies?

1. Market Approach 2. Income Approach 3. Cost Approach

What are other common features that help to identify a liability?

1. Most liabilities require the obligated entity to pay cash to one/more identified other entities. 2. Most liabilities are legally enforceable. *** These features are, however, not essential for an obligation to be classified as a liability.**

What are some examples of non-monetary liabilities?

1. Product warrant liability 2. Un-earned or deferred revenue

What characteristics does a long-term asset have?

1. They have a useful life of more than one year. 2. They are acquired for use in the business. 3. They are NOT intended for resale to customers. 4. They must be capable of repeated use for a period of at least one year. 5. They support the operating cycle instead of being part of it. 6. They are reported at carrying (book) value (i.e., the unexpired part of the asset cost).

For assets and liabilities measured at a fair value on a recurring basis, the reporting entity must disclose the following information:

1. The fair value measurement at the reporting date. 2. The Level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair Level 1, Level 2 and Level 3 (see below).

The balance sheet presents _________.

1. The value of assets held by a firm (derived using the applicable accounting valuation method) 2. The mix of liabilities and equity used to finance those assets, at a point in time.

Why are the accounting rules established guidelines for the points at which revenues are recognized necessary?

1. To prevent the recording of revenues prematurely or belatedly (assigning the revenue to the wrong period). 2. To prevent revenues being recorded before there is reasonable certainty that it will be actually recognized.

In what order are the liabilities presented on a balance sheet?

1.Demand note (requires borrower to pay periodic interest and principal on demand). 2. Accounts payable (amounts owed to suppliers of goods & services that must be paid with a year) 3. Notes payable (promissory note in connection with a loan that is payable within a year) 4. Accrued expenses (interests payable, dividends payable, taxes payable, customer advances payable) 5. Long-term liabilities 6. Other long-term liabilities

Current Liabilities include:

1.Demand notes 2.Accounts payable 3. Notes payable 4.Interest on long-term debts 5. Dividends payable 6. Taxes payable

In what order are components of stockholder's equity usually presented?

1.Preferred stock 2.Common stock 3.Additional paid-in capital 4.Retained earnings 5.Accumulated other comprehensive income 6.Treasury stock

What does a balance sheet typically represent?

A listing of the forms in which an economic entity holds the resources and a listing of the people or entities that have claims on those resources.

___________ method accelerates the charges against operation in the initial periods an asset is in service and allocates smaller charges in subsequent periods. As can be expected, income is smaller initially under the method. The method thus defers income and the applicable income taxes to later periods.

Accelerated Method

Generally speaking, accruals are the sum of___________.

Accounting adjustments that make net income different from net cash flow. **Adjustments include** 1. Those that affect income when there is no cash flow impact (e.g., credit sale) 2. Those that isolate cash flows effect from income (e.g., asset purchase).

Debts owed to suppliers for the purchase of goods and services on an open account are known as ___________.

Accounts Payable

What is the most pervasive item in the current liability section of the balance sheet?

Accounts Payable

________________ are the amounts billed to customers and owed to the firm on the balance sheet's date. They are usually collectible with three months and are thus classified as current assets on the balance sheet. Are valued at its expected future value and in this approach the unstated goal is to estimate the net realizable value.

Accounts Receivable

The Statement of Financial Accounting Concepts No. 1 states that the "information about enterprise earnings based on ______________ generally provides a better indication of enterprises' present and continuing ability to generate cash flows than information limited to the financial aspects of cash receipts and payments."

Accrual Accounting

The absence of cash transfer during a transaction does not diminish the economic impact of such transaction under what method of accounting?

Accrual Basis Accounting

Which accounting concept recognizes that cash does not always accompany business transactions and businesses often sell goods to customers or buy parts from suppliers on credit, service organizations (e.g. utility companies) generally receive payments for their services after the service period.

Accrual Basis Accounting

__________ reduce both problems (timing & matching) by measuring financial effects of business activities and by matching expenses with the associated revenues.

Accruals, they provide information about business performance in a timely fashion and also provides a better measure of a firm's financial position (balance sheet) and change in wealth.

When salaries are eared by the employees but but have not been paid to the employees is an example of ________. *Must be recorded with the amount to be paid as salaries expense on the income statement and salaries payable on the balance sheet.

Accrued Expenses

When the construction work has been done but cash payment for the construction work has not been received is an example of ________. *Must be reported as construction revenue on the income statement & A/R on the balance sheet.

Accrued Revenue

What type of information makes it easier to predict future income and financial position?

Accurate and Current Information

What method adjusts the straight-line depreciation by the productivity factor (or intensity-of-use factor) of the asset in the current period?

Activity Method

What type of expenses are also period expenses and are charged against revenues in the period that they are incurred.

Administrative Expenses

What do other assets consist of?

Advances made to the company officers, the cash surrender value of life insurance on officers, the cost of buildings in the process of construction, and the miscellaneous funds held for special purposes.

_________ is the specific amount of depreciation expense allocated to every period over the estimated useful life depends on the allocation method adopted. Presently, GAAP allows certain alternative allocation procedures

Allocation Method

When an activity being accounted for spans more than one accounting period, what adjustment is needed?

An adjustment is needed at the end of the first period to assure that the revenue is recorded when earned and the expenses are matched with the associated revenues/benefits.

What is fair value defined as in the current standard?

As the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

What is the information provided in the income statement relevant for?

Assessing changes in enterprise resources and in predicting the future prospects of a business entity.

_________ are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Assets

In most cases when are revenues recognized?

At the time of sale (i.e., goods and services are delivered to the customer who pays cash or whose ability to pay is reasonably assured.

At what measurement basis are non-monetary assets shown on the balance sheet?

At their acquisition costs (with appropriate adjustments for any permanent declines in its market value and/or for partial expiration of the value of the assets through use)

What is the important question when discussing accrual income?

At what point should revenues be recognized?

__________ expenses are estimated and recorded to match revenue and expense in the period of sale.

Bad Debt

_________ is a snap shot of the resources an entity holds and the claims against those resources.

Balance Sheet

What are examples of liabilities?

Bank loans, debts to suppliers and employees.

The link between the Balance Sheet & Income Statement follow from the fact that_______.

Beginning retained earnings (from balance sheet) + Current earnings (from income statement) - Dividends (owners' equity) = Ending Retained earnings. This mean that current earnings (from the income statement) reconcile to retained earnings shown in the balance sheet net of dividend payments and stock repurchases.

The business for which financial statements are prepared is separate and distinct from the owners of the entity. This is known ___________.

Business Entity Concept

_____________ is simply the money on hand and/or on deposit that is available for general business purposes. It is always listed first on a balance sheet.

Cash

What do current assets include?

Cash and other assets that in normal course of events are converted into cash within the operating cycle or one year

Under what basis of accounting does a firm report an expense when cash is paid to suppliers of goods/services, and records an income when cash is received from customers?

Cash basis of accounting.

What do current assets usually consist of?

Cash, marketable securities, accounts receivable, inventories (merchandising firms hold merchandise inventory, whereas manufacturing firms hold raw materials inventory, work-in-progress inventory, and finished goods inventory), pre-paid expenses, and other current assets.

What method recognizes revenue from inventory (of finished goods) as the current selling price less estimated costs of disposition (otherwise, when production is complete). The method is often used by producers of precious metals that have ready markets.

Completion (end) of Production

Under what concept are future probable losses (such as a probable impairment of an asset) are charged against income in the current period (such actions result in asset write-downs)?

Conservatism Concept

_____________ dictates that the accounting measurement with the least favorable effect on net income and financial position in the current period be selected over competing measurements.

Conservatism Concept

What concept requires the entity to give the same treatment to comparable transactions from period to period to enhance decision-usefulness (comparability) of financial statements.

Consistency Principle

Situations where cash is received or paid and the income statement is not affected is known as?

Deferrals

__________ have been paid in advance even though the benefit has not been received.

Deferred Expenses

Liability insurance for one year is paid in March and coverage begins in April. This is an example of _________.

Deferred Expenses, which are reported as an asset or prepaid insurance on the balance sheet. (INCOME STATEMENT IS NOT AFFECTED)

Advanced payments made by customers for merchandise or services (e.g. subscription fee for magazine ) is known as ___________.

Deferred Revenues

What are revenues that have been received in advance of delivering or performing the service for which the advantage payments received is known as ________.

Deferred Revenues

Revenue from a two year magazine subscription is received in advance and the first magazine will not be send until next year. This is an example of __________.

Deferred revenues, which are reported as the liability or unearned subscription revenue on the balance sheet. (INCOME STATEMENT IS NOT AFFECTED)

The allocation of the cost of natural resources on the basis of rate of extraction or production is known as ________.

Depletion

__________ is the periodic allocation of the cost of property, plant, and equipment (PPE) over its useful life. The objective is to charge the cost of an asset against the operations provided by the asset.

Depreciation Expense

Property, Plant & Equipment are measured using what basis?

Depreciation Past Value

Managers who wish to put a positive spin on operating performance for a given period can delay cash payments to suppliers near the end of the operating period, and thus book smaller cash outflow and higher cash inflow. Conversely, a firm that wishes to show poor operating performance in a period can accelerate cash expenditures in that period to achieve high cash outflows and low cash inflows in that period. These are examples of _______?

How cash basis accounting provides opportunities for managers to manipulate operating performances.

How are current assets usually listed?

In order of their liquidity.

In what order are liabilities ordinarily presented?

In the order of maturity current and long-term:

How may the asset value of a recently purchased item be computed?

Invoice Cost of Equipment Less: Discount for Prompt Pmt Net Invoice Cost Add: Shipping Cost Add: Handling Chargers

What do the original costs of the assets include?

Invoice cots and any additional costs incurred in the readying the asset for its intended use by the firm.

What is one objective of income measurement?

Is linking revenues and gains to the associated expenses and losses during a period.

What is it appropriate to do when a firm expects to receive the payment from a credit sale in a distant future period?

It is appropriate to adjust the revenue for the period by the estimated effect of time delay on the collection.

Nearly all assets except ______ are subject to physical deterioration?

Land

US government and agency securities, foreign government debt, listed equities and money market securities are all examples of what level of the fair value hierarchy?

Level 1

Corporate bonds (investment grade, high yield), mortgage-backed securities, bank loans, loan commitments, less liquid listed equities, municipal bonds and certain OTC derivatives are all examples of what level of the fair value hierarchy?

Level 2

Distressed debt, private equity, exotic or non-standard derivatives are all examples of what level of the fair value hierarchy?

Level 3

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 are known as _________.

Liabilities

Current Liabilities are measured using what basis?

Liquidation Value

Long-Term Liabilities are measured using what basis?

Liquidation Value or Present Value

Other Liabilities are measured using what basis?

Liquidation Value or Present Value

What is the most common form of a long-term liability?

Loans a company take out that have maturities that exceed one year.

______________________ assets are enterprise resources that have a useful life of more than one year and are acquired for using the operation of a business.

Long-Term (LT) Assets

______________ relate to depreciation and amortization, which represent the expensing of long-term assets.

Long-Term Accruals

_______________ is an obligation of an entity as described in the definition of liabilities to be discharged at a future period greater than one year.

Long-Term Liabilities

___________ is a cost-recognition principle that attempts to match revenues recognized with the costs expended to generate the revenues.

Matching Principle **Proper alignment of revenues with the associated costs is necessary for proper measurement of changes in wealth (income) of an entity.**

What principle requires the accountant to assess the relative size and importance of an item to a firm and determine the propriety of disclosure?

Materiality Principle **The guideline is that an item is material if disclosure of such item will influence the decision of an informed reader of the financial statement

Liabilities are largely _______________, requiring payment of specified amount of cash to the creditors.

Monetary

What are the two types of purposes of asset valuation?

Monetary & Non-Monetary Assets

_____________________ assets include cash and claims to specified amount of cash to be received in the future (e.g. amount to be received from customers to whom goods were sold on credit, amount to be received from officers to whom the firm gave loans, etc.)

Monetary Assets

______________ is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, considering transaction costs in the respective markets.

Most Advantageous Market

A measure of the amount by which the revenues exceed (fall below) the expenses is known as _____?

Net Income (Loss)

The relationship between accruals and net income can be understood from_____.

Net Income = Operating Cash Flows + Accruals

Why type of expenses associated with selling. All such expenses are charged against sales in the period they are incurred for purposes of income/loss measurement. Because this class of expenses is charged against sales in the period they are incurred, they regarded as period expenses.

Non-Manufacturing Expenses (Marketing/Selling Expenses)

_________________ that require delivering goods or rendering services rather than paying cash to third parties are shown at the estimated cost of the goods to be delivered or services to be rendered.

Non-Monetary Liabilities

What is the Level 1 Inputs of the Fair Value Hierarchy?

Observable, quoted prices for identical assets or liabilities in active markets.

What does the determination of useful life depend on?

On management's judgment about economic conditions, engineering studies, assets physical and productive properties, speed of technological innovation, expected maintenance effort, and prior experience with similar assets.

The cash purchase of an expensive computer will all be charged in the year of purchase, although the computer will last a number of years. In such a case, income will be understated in the year of purchase and overstated in the following years. This is an example of________?

One of the disadvantages of cash basis accounting.

Assets that cannot be classified as current assets, investments, plant assets, or intangible assets are known as ________________.

Other Asse

What do valuable assets include?

Patents, franchises, organization costs, and good will.

What method recognizes revenues and costs in proportion to the work completed? Typically, the amount of revenues to be recognized is obtained as: Expenses and Loss Accruals

Percentage of Completion Method

____________ refers to that amount that can be normally earned given the firm's assets.

Permanent Earnings

____________________ expenses are payments made for services that will be received in the near future. They are a form of deferred charges that provide future benefits.

Pre-Paid

What type of long-term asset is often classified as fixed assets, or as property and equipment, include land, buildings, machinery, and equipment that are to be used in business operations over a relatively long period of time? The firm does not expect to sell these assets and convert them into cash.

Property, Plant, & Equipment (PPE) ** Simply produces income indirectly through their use in operations***

What is the Level 2 inputs of the Fair Value Hierarchy?

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices e.g. interest rates and yield curves.

What is measures as the amount expected to be collected, can be recognized when goods or services have bee provided and their cost can be reliably determined?

Realization

What principle provides guidelines on when revenues should be recognized?

Realization Principle

___________ refers to the process of converting non-cash resources and rights into money (the sale of assets for cash or claims to cash).

Realization Principle

This is the process of formally recording an item in the financial statements of an entity. The revenue __________ rule is that (1) the earnings process is virtually complete & (2) the exchange value can be reasonably determined. This is known as what principle?

Recognition Principle

_______ are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations

Revenues

What are the 4 major concepts that characterize the income statement?

Revenues, Expenses, Gains, and Losses.

What type of agreement occurs when a seller transfers goods to a buyer and concurrently contracts to repurchase the goods at a later date? In this case, legal title passes but economic risk associated with the goods remain with the seller. Such arrangements amount to product financing and no revenues should be recognized.

Sales with Buy-Back Agreements

________________ is the value of a business to its owners after all of its obligations have been met. It is formally defined as "the owners' residual interest in the assets of an entity that remains after deducting its liabilities."

Shareholder's Equity

___________ relate to non-cash transactions involving working capital items (e.g., accounts receivables and accounts payable, which arise from the transfer of goods/services between a company and its customers on credit)

Short-Term Accruals

What are the most common accruals?

Short-term & Long-term accruals.

What doe investments include?

Stocks or the bonds a firm may hold for another company, real estate or mortgages that the firm is holding for income-producing purposes. Investments also include money that a business holds for a pension fund.

What are the two most common methods of depreciation?

Straight Line & Accelerated Cost-Recovery Methods

What depreciation method allocates the cost of an asset equally across the periods spanned by the asset's useful life. It assumes that physical deterioration of an asset occurs uniformly over its useful life. In reality, asset's productivity declines over time and maintenance costs go up, violating the method's basic premise.

Straight Line Method.

What is the strength of accrual accounting?

That it produces a more meaningful measurement of operating performance and a better indicator of future performance. In particular, it records the financial effects of a business activity in the period the effect occurs.

In what type of sales do receipts represent an obligation to the publisher to provide periodic delivery of publication? In such instances, revenues are recognized in proportion to the issues delivered. The outstanding receipts for which delivery has not been made is shown in the balance sheet as a liability to the customers.

Subscription-Type Sales **Often, magazine publishers receive subscription payments in advance of magazine delivery to customers**

________ refers to the level of income that can be maintained in the future given a firm's stock of capital investments (in fixed assets and inventory).

Sustainable Income

What does the shareholder's equity reflect?

The amount of capital the owners invested plus any profits the company generates that are subsequently reinvested in the company

In general, monetary liabilities due within one year are shown at ____________.

The amount of cash the firm expects to pay to discharge the obligation; long-term monetary liabilities such as bonds are shown at their present values

What does accrual accounting aim to inform users about and how is it accomplished?

The consequences of business activities for a company's cash flows as soon as possible with a reasonable level of certainty. This is accomplished by recognizing revenues earned and expenses incurred, regardless of whether or not cash flows occur contemporaneously.

Under the credit sales & uncollectible account, what must a firm adjust when it does not expect to collect the full price of the products/services it sold on credit?

The firm must adjust the revenues for the amount it does not expect to collect from customers. **The adjustment is made in the operating period in which the sale is recognized (rather than in the period in identifies the specific accounts that not collectible).

What do all fair value measurements assume?

The highest and best use of the asset by market participants.

In the case that a customer may return goods for refund or for purchase credit what must the seller do?

The seller must estimate the amounts of the discount, allowances, and returns and reduce the revenues by the estimated amounts.

When are costs often incurred?

They are often incurred well in advance of the associated benefit.

To facilitate timely and relevant accounting information for decision-making, the accounting reports are to be prepared periodically (quarterly/annually). Although accounting for an entity over short periods carries the danger of inaccuracies (because certain transactions and events take long periods to complete), periodic reports allows users timely access to the financial conditions of the business. The shorter (longer) the accounting period, the more relevant (reliable/accurate) the information is likely to be. This is known as__________.

Time Period

What is some significant issues in the accounting for expenses and losses?

Timing and measurement (how much is involved and what period is covered).

What capacity does a non-monetary asset have?

To generate cash or benefits in the future. However, unlike monetary assets, the amount of cash or benefits they will generate in the future is uncertain.

What is the Level 3 inputs of the Fair Value Hierarchy?

Unobservable inputs for the asset or liability. These should be based on the best information available. The company should utilize all reasonably available information, but need not incur excessive cost or effort to do so. As such, the reporting entity's own data should be adjusted if information is reasonably available without undue cost and effort.

The period over which the asset is expected to be in use is known as ______.

Useful Life

For a business entity, depreciation decision involves what two basic issues?

Useful Life & Allocation Method

What do intangible assets consist of?

Valuable rights, privileges or advantages.

When is the cash basis accounting not allowed for income tax purposes by the Internal Revenue Service?

When business activity involves inventory assets.

When are accruals needed?

When something has affected the income statement but cash does not accompany the transaction.

When is the measurement and allocation of expenses difficult?

When the time between acquisition of assets and cash payment for the asset is long. The longer the time, the more difficult and more speculative the cost allocation becomes.

Sellers may grant certain allowances to buyers for ______.

defective items.