ACCT 313 CHP 22, 23, 24 & 8

Identify the types of accounting changes

The three different types of accounting changes are as follows: 1. Change in accounting principle - a change from one GAAP to another GAAP 2. Change in accounting estimate - a change that occurs as the result of new info or as additional experience is acquired. 3. Change in reporting entity - a change from reporting as one type of entity to another type of entity.

How should significant noncash transactions be reported in the statement of cfs according to FASB statement No. 95?

These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials.

Contrast the direct and indirect methods of calculating net cash flow from operating activities

Under the direct approach, companies calculate the major classes of operating cash receipts and cash disbursements. Companies summarize the computations in a schedule of changes from accrual to the cash-basis income statement. Presentation of the direct approach of reporting net cash flow from operating activities takes the form of a condensed cash basis income statement. The indirect method adds back to net income the noncash expense and losses and subtracts noncash revenues and gains.

When should an average amount be used for the numerator or denominator?

When a ratio consist of an income statement item and a balance sheet item.

What is an operating segment?

a component of an enterprise" 1. that engages in business activities from which it earns revenues and incurs expense. 2. whose operating results are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions, and 3. for which discrete financial info is available.

The word disaggregated refers to...

a whole that has been broken apart. Thus, disaggregated financial info is the data of a reporting unit that has been broken down into components so that the separate parts can be identified and studied.

A financial forecast per professional pronouncements presents to the best of the responsible party's knowledge and beleif...

an entity's expected financial position, results of operations, and cash flows.

Dolan Co. reports its income from investments under the equity method and recognized income of 25,000 from its investment in Moss co during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cfs (indirect method), the 25,000 should...

be shown as a deduction from net income in the cash flows from operating activities section.

Describe techniques of comparative analysis

companies present comparative data, which generally consist of two years of b/s and three years of I/S info. In addition, many companies include in their annual reports five to ten year summaries of pertinent data that permit the reader to analyze trends.

When preparing a statement of cfs indirect method, and increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because...

cost of goods sold on an accrual basis is lower than on a cash basis.

Which of the following ratios measures long-term solvency?

debt to assets.

The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as an...

deduction from net income

To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by...

eliminating the effect of income statement transactions that did not result in a corresponding increase or decrease in cash.

The MD&A section of a company's annual report is to cover the following three items

liquidity , capital resources, and results of operations.

An example of an inventory accounting policy that should be disclosed in a summary of significant accounting policies is the...

method used for valuing inventory

Which of the following should be disclosed in a summary of significant accounting policies?

Depreciation method followed

When preparing a statement of cfs, a decrease in a/rec during a period would cause which one of the following adjustments in determining cash flow from operating activities..

Increase in both direct and indirect method

Identify economic motives for changing accounting methods

Managers might have varying motives for income reporting, depending on economic times and whom they seek to impress. Some of the reasons for changing accounting methods are (1) political costs, (2) capital structure, (3) bonus payments, and (4) smoothing of earnings.

Accounting principles are modified for the following at interim dates...

Revenue = no Expense = no

Which of the following best characterizes the difference between a financial forecast and financial projection?

A forecast attempts to provide info on what is expected to happen, whereas a projection may provide info on what is not necessarily expected to happen.

Identify changes in a reporting entity

An accounting change that results in financial statements that are actually the statements of a different entity should be reported by restating the financial statements of all periods presented, to show the financial info for the new reporting entity for all periods.

In considering interim financial reporting, how does the profession conclude that such reporting should be viewed?

As reporting for an integral part of an annual period.

Identify the major classifications of cash flows

Companies classify cash flows as follows: 1. Operating activities - transactions that result in revenues, expense, gains and losses that determine net income. 2. Investing activities - lending money and collecting on those loans, and acquiring and disposing of investments, plant assets, and intangible assets. 3. Financing activities - obtaining cash from creditors and repaying loans, issuing and reacquiring capital stock, and paying cash dividends.

APB opinion No. 28 indicates that...

the same accounting principles used for the annual report should be employed fro interim reports.

A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10% of the...

total revenues of all the enterprise's industry segments.

The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This info is important to financial statement readers in determining...

whether accounting policies are consistently applied from year to year.

If a business entity entered into certain related party transactions, it would be required to disclose all of the following...

- nature of the relationship between the parties to the transaction - dollar amount of the transactions for each of the periods for which an income statement is presented. - amounts due from or to related parties as of the date of each balance sheet presented.

Describe the accounting for correction of errors

Companies must correct errors as soon as they discover them, by proper entries in the accounts and report them in the f/s. The profession requires that a company treat corrections of errors as prior period adjustments, record them in the year in which it discovered the errors, and report them in the financial statements in the proper periods. If presenting comparative statements, a company should restate the prior statements affected to correct for the errors. The company need not repeat the disclosures in the f/s of subsequent periods.

Describe the accounting for changes in estimate

Companies report changes in estimate prospectively. That is, companies should make no changes in previously reported results. They do not adjust opening balances nor change financial statements of prior periods.

The full disclosure principle as adopted by the accounting profession, is best described by which of the following?

Disclosure of any financial facts significant enough to influence the judgement of an informed reader.

declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows:

Outflow for both indirect and direct

The profession requires disaggregated info in the following ways:

Products or services geographic areas major customers.

Describe the purpose of the statement of cash flows

The primary purpose of the statement of cash flows is to provide info about the cash receipts and cash payments of an entity during a period. A secondary objective is to report the entity's operating, investing, and financing activities during the period.

Of the following questions, which would be answered by the statement of cashflows?

Where did the cash come from during the period? What was the cash used for during the period? What was the cgange in the cash balance during the period?

Understand how to account for retrospective accounting changes

The general requirement for changes in accounting principle is retrospective application. Under retrospective application, companies change prior years' f/s on basis consistent with the newly adopted principle. They treat any part of the effect attributable to years prior to those presented as an adjustment of the earliest retained earnings presented.

Explain the limitations of ratio analysis

Ratios are based on historical cost which can lead to distortions is measuring performance. Also, where estimated items are significant, income ratios lose some of their creditability. In addition, comparability problems exist because companies use different accounting principles and procedures. Finally, analysts must recognize that a substantial amount of important info is not included in a company's f/s.

Required to be disclosed by both an operating segment and a geographical segment...

Revenues from external customers. Long-lived assets

All of the following about each operating segment must be reported except...

SHOULD: Unusual items, interest revenue, and depreciation & amortization expense. SHOULD NOT: CGS

Companies should disclose all of the following in interim reports except?

SHOULD: basic and diluted earnings per share, changes in accounting principle, seasonal revenue, cost or expenses. SHOULD NOT: post-balance sheet events

According to the FASB, the objective of segment reporting is to provide info to help users of financial statements:

1. Better the understand the enterprise's performance 2. better assess its prospects for future net cash flows, and... 3. make more informed judgements about the enterprise as a whole.

Describe the three tests to identify reportable operating segments

1. THE REVENUE TEST - an operating segment is separately reportable is its total revenues amount to 10% or more of the combined total revenues of all operating segments. 2. THE PROFIT OR LOSS TEST - an operating segment is separately reportable if its profit or loss is 10% or more of the greater of the combined profits of all profitable segments of the combined losses of all segments reporting a loss. 3. THE ASSET TEST - an operating segments is separately reportable if its assets comprise 10% or more of combines assets of all operating segments.

Describe the accounting for changes in accounting principle

A change in accounting principle involves a change from one generally accepted accounting principle to another. A change in accounting principle is not considered to result from the adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial. If the accounting principle previously followed was not acceptable or if the principle was applied incorrectly, a change to a generally accepted accounting principle is considered a correction of an error.

Understand the approach to financial statement analysis

Basic financial statement analysis involves examining relationships between items on the statements (ratio and percentage analysis) and identifying trends in these relationships (comparative analysis). Analysis is used to predict the future, but ratio is limited because the data are from the past. Also, ratio analysis identifies present strengths and weaknesses of a company, but it may not reveal WHY they are as they are. Although single ratios are helpful, they are not conclusive. For maximum usefulness, analysts must compare them with industry averages, past years, planned amounts and the like.

Rondelli Manu Co employs a standard cost system. A planned volume variance in the first quarter of 2015, which is expected to be absorbed by the end of the fiscal year, ordinarily should....

Be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable.

Errors and irregularities are defined as intentional distortions of facts...

Errors=No Irregularities=Yes

Required to be disclosed by an operating segment, but not a geographical segment...

Factors used to identify segments. Types of products and services from which each segment derives its revenues. Revenues from transactions with other segments. Interest revenue. Discontinued operations and extraordinary items, when applicable. Income tax expense or benefit. Cash flow information.

The following methods of estimating inventory can be used at interim dates for inventory pricing. May they also be used at year end?

Gross Profit Method = No Retail Inventory Method = Yes

An increase in a/pay during a period would require which of the following adjustments in determining cash flows from operating activities?

Increase for Indirect Decrease for direct

a decrease in prepaid insurance during a period would require which of the following adjustments in determining cash flows from operating activities?

Increase for indirect Decrease for direct

Which of the following subsequent events (post-balance sheet events) would require adjustment of the accounts before issuance of the financial statements?

Loss on a lawsuit, the outcome of which was deemed uncertain at year end.

Not required to be disclosed by an operating segment or a geographical segment...

Names of major customers.

Consolidation presents...

the account balances of a business combination without regard for the individual component units that comprise the organization. Thus, no distinction can be drawn as to the financial position or operations of the separate enterprises that form the corporate structure. Without a method by which to identify the various individual operations, financial analysis cannot be well defined.

When changing to the equity method...

the company adjusts the accounts to be on the same basis as if the equity method had always been used for that investment.

When a company changes from the equity method to the fair value method...

the cost basis for accounting purposes is the carrying amount of the investment at the date of the change.

Two items of information must be reported for...

the domestic country, for all foreign countries in total, and for each foreign country in which the company has material operations: (1) revenues from external customers, and (2) long-lived assets.

Events that occur after the Dec 31, 2013 balance sheet date (but before the b/s is issued) and provide additional evidence about conditions that existed at the b/s date and affect the realizability of a/rec should be...

used to record an adjustment to bad debt expense for the year ending Dec 31. 2013.

The minimum number of countries to be reported separately is one:

the domestic country. If no single foreign country is material, then all foreign countries would be combined and two lines of info would be reported; one for the U.S. and one for all the foreign countries. U.S. GAAP doe not proved any guidelines related to the maximum number of countries to be reported.

Cash equivalents are...

treasury bills, commercial paper, and money market funds purchased with excess cash. Investments with original maturities of three months or less. Readily convertible into known amounts of cash.

The return on common stock equity is calculated by dividing...

net income less preferred dividends by averaging common stockholders' equity.

The calculation of the times interest earned involves dividing...

net income plus income taxes and interest expense by annual interest expense.

An objective of the statement of cash flows is to...

provide info about the operating, investing and financing activities of an entity during a period.

If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be...

qualified

Revenue of a segment includes...

sales to unaffiliated customers and intersegment sales.

Error correction (none of the three)

-Change due to charging a new asset directly to an expense account. -Change due to failure to recognize an accrued revenue. -Change due to failure to recognize and accrue income. -Change from unacceptable to acceptable principle. -Change due to failure to recognize prepaid asset. -Change due to understatement of inventory.

Change in accounting principle

-Change from FIFO to LIFO inventory procedures. -Change from one acceptable accounting principle to another acceptable principle.

Change in accounting estimate

-Change from expensing to capitalizing certain cost, due to a change in periods benefited. -Change in amortization period for an intangible asset. -Change in loss rate on warranty costs. -Change in residual value of a depreciable plant asset. -Change in both estimate and acceptable principle. -Change from S/L to sum of years digits method. -Change in life of a depreciable plant asset. -Change in expected recovery of an account receivable.

Change in reporting entity

-Change in presenting nonconsolidated to consolidated f/s -Changing the companies included in combined f/s

The management approach requires a firm to define segments on the basis of its internal organization structure. What are the advantages in defining segments on this basis?

Defining segments on the basis of a company's organizational structure removes much of the flexibility and subjectivity associated with defining industry segments under prior standards. In addition, the incremental cost of providing segment info externally should be minimal because that info is already generated for internal use. Analysts should benefit from this approach because it reflects the risks and opportunities considered important by management and allows the analyst's ability to predict management actions that can significantly affect future cash flows.

Which of the following should be disclosed in a Summary of Significant Accounting Policies?

Depreciation method followed

Describe techniques of percentage analysis

Percentage analysis consists of reducing a series of related amounts to a series of percentages of a given base. Analysts use two approaches. 1. Horizontal analysis - indicates the proportionate change in f/s items over a period of time; such analysis is most helpful in evaluating trends. 2. Vertical analysis - (common size analysis) is a proportional expression of each item on the financial statements in a given period to a base amount. It analyzes the composition of each of the f/s from different years (a) to detect trends not evident from the comparison of absolute amounts and (b) to make intercompany comparisons of different-sized enterprises.

Identify major analytic ratios and describe their calculation

Ratios are classified as liquidity ratios, activity ratios, profitability ratios, and coverage ratios. 1. Liquidity ratios analysis - measures the short-run ability of a company to pay its currently maturing obligations. 2. Activity ratio analysis - measures how effectively a company is using its assets. 3. Profitability ratio analysis - measures the degree of success or failure of a company to generate revenues adequate to cover its costs of operation and provide a return to the owners. 4. Coverage ratio analysis - measures the degree of protection afforded long-term creditors and investors.

Understand how to account for impracticable changes

Retrospective application is impracticable if the prior period effect cannot be determined using every reasonable effort to do so. For example, in changing to LIFO, the base-year inventory for all subsequent LIFO calculations is generally the opening inventory in the year the company adopts the method. There is no restatement of prior years' income because it is often too impractical to do so.

Not required to be disclosed by an operating segment, but required to disclose a geographical segment...

Revenues for the domestic country