ACC577 FAR Week 1 Quiz

According to ASC 820, the market that maximizes the price received for the asset is the a. Most advantageous market. b. Most relevant market. c. Independent market. d. Principal market.

a. Most advantageous market. This answer is correct because the most advantageous market is the market that maximizes the price received for the asset.

Which of the following is not an objective of using present value in accounting measurements? a. To capture the value of an asset or a liability in the context of a particular entity. b. To estimate fair value. c. To capture the economic difference between sets of future cash flows. d. To capture the elements that taken together would comprise a market price if one existed.

a. To capture the value of an asset or a liability in the context of a particular entity. According to SFAC 7, the objective of using present value in an accounting measurement is to capture, to the extent possible, the economic difference between sets of future cash flows. The objective of present value, when used in accounting measurements at initial recognition and fresh-start measurements, is to estimate fair value. Stated differently, present value should attempt to capture the elements that taken together would comprise a market price, if one existed, that is fair value. Value-in-use and entity-specific measurements attempt to capture the value of an asset or liability in the context of a particular entity. An entity-specific measurement substitutes the entity's assumptions for those that marketplace participants would make.

Garnett Co. shipped inventory on consignment to Hart Co. that originally cost $50,000. Hart paid $1,200 for advertising that was reimbursable from Garnett. At the end of the year, 40% of the inventory was sold for $32,000. The agreement stated that a commission of 10% will be provided to Hart for all sales. What amount should Garnett report as net income for the year? a. $0 b. $7,600 c. $10,800 d. $12,000

b. $7,600 This answer is correct. Garnett's net income is $7,600, as calculated below. Revenue$32,000Cost of goods sold ($50,000 × 40%)(20,000)Commission ($32,000 × 10%)(3,200)Advertising(1,200)Net income$ 7,600

TGR Enterprises provided the following information from its statement of financial position for the year ended December 31, year 1: January 1 December 31 Cash $ 10,000 $ 50,000 Accounts receivable 120,000 100,000 Inventories 200,000 160,000 Prepaid expenses 20,000 10,000 Accounts payable 175,000 120,000 Accrued liabilities 25,000 30,000 TGR's sales and cost of sales for year 1 were $1,400,000 and $840,000, respectively. What is the accounts receivable turnover in days? a. 26.1 b. 28.7 c. 31.3 d. 41.7

b. 28.7 This answer is correct. Accounts receivable turnover in days is calculated as 365 divided by the accounts receivable turnover ratio. The accounts receivable turnover ratio is calculated as credit sales/average accounts receivable. In this case, accounts receivable turnover is equal to 12.7273 [$1,400,000 credit sales/($120,000 + $100,000/2)]. Therefore, accounts receivable turnover in days is equal to 28.7 (365/12.7273).

On October 31, year 1, a company with a calendar year end paid $90,000 for services that will be performed evenly over a six-month period from November 1, year 1, through April 30, year 2. The company expensed the $90,000 cash payment in October, year 1, to its services expense general ledger account. The company did not record any additional journal entries in year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its year 1 financial statements? a. Debit prepaid services and credit services expense for $30,000. b. Debit prepaid services and credit services expense for $60,000. c. Debit services expense and credit prepaid services for $30,000. d. Debit services expense and credit prepaid services for $60,000.

b. Debit prepaid services and credit services expense for $60,000. This question is testing your knowledge of what portion of a cash outlay should be recognized as an asset and what portion should be recognized as an expense. The entire cost of the service is $90,000 for 6 months; therefore, the monthly cost is $15,000 a month. On October 31, the company expensed the entire $90,000, but will receive future benefit over 4 months in the next year. The adjusting entry would be to reduce service expense for $60,000 (4 × $15,000) and increase prepaid services for $60,000.

Which of the following are observable inputs used for fair value measurements? I. Bank prime rate. II. Default rates on loans. III. Financial forecasts. a. I only. b. I and II only. c. I and III only. d. I, II and III.

b. I and II only. The bank prime rate and the default rates are both observable inputs. A financial forecast is developed by an entity and is an unobservable input or Level 3 input.

When a component of a business has been discontinued during the year, this component's operating losses of the current period should be included in the a. Income statement as part of revenues and expenses. b. Income statement as part of the loss on disposal of the discontinued component. c. Income statement as part of the income (loss) from continuing operations. d. Retained earnings statement as a direct decrease in retained earnings.

b. Income statement as part of the loss on disposal of the discontinued component. The requirement is to determine how a discontinued component's operating losses for the current period should be classified in the financial statements. The "income (loss) from operations" is combined with the loss on disposal.

According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes a. Timeliness, predictive value, and feedback value. b. Neutrality, completeness, and free from error. c. Predictive value, confirmatory value, and materiality. d. Comparability and consistency.

b. Neutrality, completeness, and free from error. This answer is correct. The IASB Framework for the Preparation and Presentation of Financial Statements has converged with the FASB's SFAC 8. The concept of faithful representation, includes completeness, neutrality, and free from error.

The FASB's conceptual framework classifies gains and losses based on whether they are related to an entity's major ongoing or central operations. These gains or losses may be classified as Nonoperating Operating a. Yes No b. Yes Yes c. No Yes d. No No

b. Yes Yes This answer is correct. Per SFAC 6, gains and losses may be described or classified as "operating" or "nonoperating," depending on their relation to an entity's major ongoing or central operations.

The following information was taken from the 20X5 financial statements of Plant Corp.: Accounts receivable, January 1, 20X5 $ 21,600 Accounts receivable, December 31, 20X5 30,400 Sales on account and cash sales 438,000 Uncollectible accounts 1,000 No accounts receivable were written off or recovered during the year. If the direct method is used in the 20X5 Statement of Cash Flows, Planet should report cash collected from customers as a. $447,800. b. $446,800. c. $429,200. d. $428,200.

c. $429,200. Beginning AR+Sales−Collections=Ending AR$21,600+$438,000−Collections=$30,400Collections=$429,200 Although $1,000 of uncollectible accounts are indicated, the question states that no accounts were written off. The analysis includes cash sales in the "sales" term in the above equation. This is appropriate because cash sales can be considered increases and then immediate decreases in AR.

The following trial balance of Mint Corp. at December 31, year 1, has been adjusted except for income tax expense. DR: Cash $ 600,000 DR: Accounts receivable, net 3,500,000 DR: Cost in excess of billings on long-term contracts 1,600,000 CR: Billings in excess of costs on long-term contracts $ 700,000 DR: Prepaid taxes 450,000 DR: Property, plant, and equipment,net 1,480,000 CR: Note payable—noncurrent 1,620,000 CR: Common stock 750,000 CR: Additional paid-in capital 2,000,000 CR: Retained earnings—unappropriated 900,000 CR: Retained earnings—restricted for note payable 160,000 CR: Earnings from long-term contracts 6,680,000 DR: Costs and expenses 5,180,000 DR Total: $12,810,000 CR Total: $12,810,000 Other financial data for the year ended December 31, year 1, are · Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income tax purposes. All receivables on these contracts are considered to be collectible within twelve months. · During year 1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint's tax rate is 30%. In Mint's December 31, year 1 balance sheet, what amount should be reported as Total current assets? a. $5,000,000 b. $5,450,000 c. $5,700,000 d. $6,150,000

c. $5,700,000 Current assets listed in the trial balance are cash ($600,000), accounts receivable ($3,500,000), cost in excess of billings on long-term contracts ($1,600,000) and prepaid taxes ($450,000). However, income tax expense has not yet been recorded. Earnings ($6,680,000) less costs and expenses ($5,180,000) result in pretax income of $1,500,000. Since the tax rate is 30%, tax expense is $450,000 (30% × $1,500,000). Therefore, an adjustment is necessary to debit income tax expense and credit prepaid taxes for $450,000. Total current assets, after this adjustment, are $5,700,000. Cash$ 600,000Accounts receivable3,500,000Cost in excess of billings1,600,000$5,700,000

Which of the following statements best describes an operating procedure for issuing an Accounting Standard Update (ASU) by the Financial Accounting Standards Board? a. The Emerging Issues Task Force must approve a discussion memorandum before it is disseminated to the public. b. The Exposure Draft is modified per public opinion before issuing the discussion memorandum. c. An ASU is issued only after a majority vote by the members of the FASB. d. An ASU can be rescinded by a majority vote of the AICPA membership.

c. An ASU is issued only after a majority vote by the members of the FASB. This answer is correct because an ASU is issued after a majority vote of the members of FASB.

Which one of the following areas does not require disclosures about the risks and uncertainties that exist? a. Nature of operations. b. Use of estimates in preparation of financial statements. c. Current vulnerability due to a possible recession. d. Current vulnerability due to concentrations

c. Current vulnerability due to a possible recession. This answer is correct. Current vulnerability due to a possible recession is not a required disclosure regarding risks and uncertainties. The nature of operations, the use of estimates in preparation of financial statements, and current vulnerability due to concentrations are all required disclosures according to ASC Topic 275, Risks and Uncertainties.

Which of the following may not be disclosed on the income statement for a company that prepares its financial statements in accordance with IFRS? a. Gain or loss. b. Tax expense. c. Gain or loss from extraordinary items. d. Gain or loss from discontinued operations.

c. Gain or loss from extraordinary items. Gain or loss from extraordinary items is not allowed on an income statement prepared using IFRS.

Which of the following information should be disclosed as supplemental information in the statement of cash flows? Cash flow per share Conversion of debt to equity a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts. The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.

Which of the following is an appropriate cost approach for determining fair value measurements? a. Using relevant information from recent transactions b. Using present value techniques to discount cash flows c. Using the current replacement cost of the asset d. Using the undiscounted cash flows from the asset

c. Using the current replacement cost of the asset This answer is correct. Current replacement cost adjusted for obsolescence can be used for determining fair value measurements under the cost approach.

Abbey Corporation prepares its financial statements in accordance with IFRS. Abbey acquired equipment by signing a $100,000 note payable with the seller of the equipment. How should this transaction be reported on the statement of cash flows? a. As an outflow of cash from investing activities and an inflow of cash from financing activities b. As an inflow of cash from financing activities and an outflow of cash from operating activities c. At the bottom of the statement of cash flows as a significant noncash transaction d. In the notes to the financial statements as a significant noncash transaction

d. In the notes to the financial statements as a significant noncash transaction This answer is correct. This transaction did not involve an exchange of cash; therefore, it is not included on the statement of cash flows. IFRS requires that significant noncash transactions be reported in the notes to the financial statements.

Under which of the following circumstances does substantial doubt exist about an entity's ability to continue as a going concern? a. The entity is not in compliance with statutory capital requirements. b. The entity's CFO has retired, and there is no definitive succession plan in place. c. The entity projects that it will have negative cash flows from operating activities over the next 12 months. d. It is probable that the entity will be unable to meet its obligations coming due within 12 months of financial statement issuance.

d. It is probable that the entity will be unable to meet its obligations coming due within 12 months of financial statement issuance. Correct. There is uncertainty regarding going concern when there is substantial doubt about an entity's ability to meet maturing obligations as they become due.

An entity's current balance sheet is dated December 31, 20x7 and the 20x7 statements are issued Feb. 6, 20x8. Which of the following is a recognized subsequent event for 20x7? a. Issuance, in January 20x8, of debentures, which double the entity's total liabilities. b. Issuance, in March 20x8, of common stock, which doubles the entity's contributed capital. c. $4 million payment on February 2 in settlement of a lawsuit brought by a competitor for patent infringement occurring early January 20x8. d. Write-off of a customer receivable due to customer bankruptcy caused by conditions beginning in 20x7.

d. Write-off of a customer receivable due to customer bankruptcy caused by conditions beginning in 20x7. The conditions giving rise to the receivable loss were developing in 20x7. As such, the loss is a recognized subsequent event for 20x7. It is recognized in the 20x7 statements.