Financial Reporting I (ACC 307) -Midterm (Ch.1,2,4,6)

The financial Accounting Standards Board Accounting Standards Codification

- Does not create new GAAP - Eliminates nonessential information - Simplifies user access to all authoritative US generally accepted accounting principles

Accounting principles are "generally accepted" only when

- It has been established by an authoritative accounting rule-making body - A given practice has been accepted as appropriate because of its universal application over time

Which of the following would result if there was not a set of generally accepted and universally practiced accounting standards?

- It would be almost impossible to prepare statements that could be compared - Each company would have to develop its own standards - Readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices

An effective capital allocation process

- Promotes productivity - Encourages innovation - Provides an efficient and liquid market for buying and selling securities

Which of the following is a reason the trial balance may not contain up-to-date and complete data?

- Some items may be unrecorded - Some costs are not reordered during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions - Some events are not reordered daily because it's not efficient to do so

From the four statements that follow, which are true?

- Technical competence is not enough when encountering ethical decisions - The pressures "to bend the rules," "to play the game," "to just ignore it" can be considerable

Users finds information about financial position, income, cash flows, and investments in:

- The body of the financial statements - The notes to the financial statements - Supplementary information

Factors that shape an accounting information system include the

- Transactions in which the business engages - Informational demands of management - Volume of data to be handled

For a contract to be valid, it must

- have the commitment and approval of all parties -collection is determinable -represent a valid transaction

The IFRS approach to transferring of receivables focuses on which of the following?

- rewards -risks -loss of control

Notes receivable can be classifed as

-current -trade -notrade

If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)?

1% / [30 days-10 days)/360 days)] = 18%

A cash discount of 1/10, n/30 means the customer gets a:

1% discount if they pay within 30 days

On March 1,2021, Crane Pasta Company assigns $1404000 of its accounts receivable to Bank of China as collateral for a $1002400 note. Bank of China assesses a finance charge of 1% of the accounts receivable and interest on the note of 12%. Which of the following is correct regarding this transaction?

1,404,000*0.01= 14,040 On March 1, 2021, Bank of China will credit Interest Revenue for 14,040

Cullumber Company received a seven-year zero-interest bearing note on February 22, 2020, in exchange for property it sold to Bramble Company. There was no estbalished exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 6.5% on February 22,2020, 7.0% on December 31, 2020, 7.2% on February 22,2021, and 7.5% on December 31,2021. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2020 and 2021, respectively?

6.5% and 6.5%

In a transfer of receivables accounted for as a secured borrowing:

A finance charge is reordered

During the year, Sheridan Enterprises made an entry to write off an $8,640 uncollectible account. Before this entry was made, the balance in accounts receivable was $100,700 and the balance in the allowance account was $9,940 (credit balance). The net realizable value of accounts receivable before and after the write-off entry was

Accounts receivable (100,700)- allowance account credit (9,940) =90,760

Which one of the following guidelines regarding reversing entries is incorrect?

Adjusting entries for bad debts are reversed

Adjustments are often prepared

After the balance sheet date, but dated as the of the balance sheet date

The adjusting entry to record an accrued expense includes a debit to:

An expense account and a credit to a liability account

An accrued expense is

An expense that has been incurred but for which payment has not yet been made

Which a company transfers an amount of restricted retained earnings into a different account, what is the title of that account?

Apprpriated Retained earnings

In the single-step income statement:

just two groupings exist - revenues and expenses

Which of the following is not included in the summary of significant accounting policies?

length of operating cycle

Unearned revenues are:

liabilities

Which of the following help to reduce the size of a company's float?

lockbox accounts

Earnings per share is computed as net income:

minus preferred dividends divided by the weighted average of common shares outstanding.

All of the following are properly classified as temporary investments except:

money orders

Return on assets is computed as:

net income divided by average total assets

oriole company's average collection period is 52 days and its net sales are $2,434,600. What are oriole company's average accounts receivables for the period?

net sales (2,434,600)*(52.365) = 347,800

Under IFRS, bank overdrafts are

netted against cash balances

the worksheet

none correct

The accounts receivable turnover ratio measures the

number of times the average balance of accounts receivable is collected during the period

Major limitations of the balance sheet include all of the following except:

only amounts known with absolute certainty are reported

Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections:

operating activities

Non-trade receivables include all of the following except

oral promises of the purchaser to pay for goods and services

Gains and losses that bypass net income but affect stockholders' equity are referred to as:

other comprehensive income

Which of the following sections of the balance sheet is particularly difficult to prepare and understand?

owner's (stockholers') equity

The gain or loss from disposal of a component of a business is shown as a (an):

part of discontinued operations

On December 31, 2021 Cranee Company sold for $150,800 an old machine having an orginal cost of $174,100 and a book value of $124,700. The terms of the sale were as follows: $26,100 down payment $52,200 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 8% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2021 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 8% for 2 years is 1.78326)

payable (52,200) * present value (1.78326) = 93086

Cash dividends divided by net income describes which of the following ratios?

payout ratio

_________ is the process of transferring the accounts and amounts from the bank of original entry to the ledger accounts

posting

The balance sheet is useful for analyzing all of the following except

profitability

Which of the following represents a condition in a company's environment that could contribute to fraudulent reporting?

rapid changes in the business enviornment

Which of the following pairings of an item and a basis of valuation is correct?

receivables- lower-of cost-or-market

The statement of stockholder's equity

reports the change in each stockholders' equity account and in total stockholders' equity during the year.

Which of the following statements is true regarding income statement presentation under GAAP and IFRS?

requirements for minimum items presented on the income statement are set out under IFRS but not under GAAP

The major elements of the income statement are

revenue, cost of goods sold, operating expenses, non-operating section

Pharoah Corporation reported the following information for 2021: Sales revenue $1,015,000 Cost of goods sold $710,500 Operating expenses 111,650 Unrealized holding gain on available-for-sale securities 40,600 Cash dividends received on the securities 4,060 For 2021, Pharaoah would report comprehensive income of

sales revenue (1,015,000)- cost of goods sold (710,500)- operating expenses(111,650) + unrealized holding gain on available-for-sale-securities (40,600)+ cash dividends received on the securities(4,060) =237,510

Cash consists of all of the following except:

short-term paper with a maturity of 6 months.

The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time is the

statement of cash flows

Which of the following statements shows the amount of dividends paid or treasury stock purchased?

statement of stockholders' equity

Typical loss contingencies include all of the following except:

tax operating-loss carryforwards

Of the following conditions, which is only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale?

the transferor is obligated to make a genuine effort to identify those receivables that are uncollectible

Which of the following is a coverage ratio?

times interest earned

The single-step income statement emphasizes

total revenues and total expenses

Which of the following investments should always be reported as current assets?

trading securities

The ______ approach focuses on the income-related activities that have occurred during the period

transaction

Assets include all of the following subclassifications except

treasury stock

(T/F) Under the direct write-off method, bad debts are only recognized when an account is determined to be uncollectible.

true

T/F Indicators of poor financial flexibility include a low debt coverage ratio and negative free cash flow.

true

T/F: A company chooses an acceptable accounting method by determining which alternative provides the most useful information for decision-making purposes

true

T/F: After journalizing and posting all adjusting entries, a company prepares an adjusted trial balance that is the primary basis for preparation of the financial statements.

true

T/F: Cash can be classified as a current or long-term asset.

true

T/F: Financial Accounting Concepts are a major type of pronouncement issued by the FASB

true

T/F: Losses as a result of a strike are considered unusual and infrequent

true

T/F: Revenue, equity, and liability accounts have normal credit balances.

true

T/F: The Codification creates one level of GAAP which is considered authoritative.

true

T/F: The cash debt coverage ratio is equal to net cash provided by operating activities divided by average total liabilities.

true

T/F: The financial accounting standards advisory Council (FASAC) consults with the FASB on major policy and technical issues and helps select task force members

true

T/F: The passage of new FASB guidance in the form of an Accounting Standard Update requires the support of four of the seven Board members.

true

T/F: Transaction analysis is the same under GAAP and IFRS, but sometimes different standards impact how transactions are recorded.

true

T/F: When a merchandiser prepares closing entries, cost of goods sold is credited and income summary is debited.

true

T/F: after a company makes reversing entries, it debits subsequent cash payments related to the expense reversals to the related expense account.

true

T/F: the accounting cycle for a merchandiser is the same as the accounting cycle for a service firm.

true

T/F: when compared to the aging of account approach, the percentage-of-sales approach of estimating bad debts does a better job of matching revenues (sales) and expenses (bad debt expense) on the income statement

true

Which of the following is not an acceptable way of displaying the components of other comprehensive income under IFRS?

within the statement of retained earnings

Which of the following is not a major disclosure technique for the balance sheet?

worksheets

What is the accounting equation?

Assets = Liabilities + Stockholder's Equity

If an adjusting entry is not made for a deferred revenue which was initially credited to an unearned revenue account, which of the following results?

Assets are unaffected

Which of the following is a method used to generate cash from accounts receivable?

Assignment: yes, Factoring:yes

An adjusting entry would never include a:

Debit to an asset account and a credit to a liability account

Which of the following would be reported in a separate income statement category, separately from continuing operations, on the income statement?

Discontinued operations

Carla Vista, Inc. reports net income of $708,840. It declares and pays dividends of $990,000 for the year, one-half of which relate to the preferred shares. the weighted-average number of common shares outstanding during the year is 198,000 shares, and the weighted-average number of preferred shares outstanding during the year is 9,900 shares. Earnings per share for Carla Vista, Inc. is

EPS:(Net income - preferred dividends)/weighted average of common shares outstanding EPS: [708,840-(99,000*(1/2))]/198,000 EPS: $3.33

Which group selects members of the FASB?

FAF (Financial Accounting Foundation)

T/F Discontinued operations occur when a company eliminates the results of operations of a component of the business. The elimination of the component need not represent a strategic shift, having a major effect on the company's operations and financial results.

False

T/F: A strength of the balance sheet is that it omits many items that are of financial value to the business but cannot be recorded objectively, such as human resources, customer base, and reputation

False

T/F: Financial reports generally focus on soft assets such as Apple's brand image or Walmart's supply chain management system

False

T/F: IFRS is more "rules-based" in its approach to standards than US GAAP

False

T/F: Politics play no roles is establishing GAAP (Generally Accepted Accounting Principles):

False

T/F:The statement of owner's equity demonstrates how successful a company was in controlling expenses during the year

False

T/F: the balance sheet is sometimes referred to as the Statement of Net Resources

False, statement of financial position

Which of the following statements is incorrect?

GAAP identifies certain minimum items that should be presented on the income statement. IFRS has no minimum information requirements

Which of the following occur from peripheral or incidental transactions?

Gain on the sale of equipment

International Financial Reporting Standards (IFRS) are issued by the:

IASB

Which of the following statements is correct regarding income reporting under IFRS?

IFRS and GAAP both require unusual and infrequent items to be reported in Income before income taxes

All of the following are true regarding IFRS except:

IFRS includes standards referred to as International Auditing Standards (IAS)

The purpose of the International Accounting Standards Board (IASB) is to:

Improve standards of financial reporting for the guidance and education of the public, which includes issuers, auditors, and users of the financial statement

Which limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation?

Income numbers are affected by the accounting methods employed

Which of the following is true about intraperiod tax allocation?

Its purpose is to relate the income tax expense to the items that give rise to the amount of income tax provision

Carla Vista Co. reports the following information: Net cash provided by operating activities $434,000 Average current liabilities 317,000 Average long-term liabilities 217,000 Dividends paid 128,000 Capital expenditures 228,000 Purchase of treasury stock 22,800 Payments of debt 70,000 Carla Vista's free cash flow is

Net cash operating activities (434,000) - capital expenditures (228,000) - dividends paid (128,000) = 78,000

Clark Enterprises reports the following information: Net income $5,150,000 Depreciation expense. $700,400 Increase in accounts payable. $150,000 Increase in accounts receivable $334,000 Clark should report cash provided by operating activities of:

Net income (5,150,000) + Depreciation Expense (700,400) + increase in accounts payable (150,000) - (334,000) = 5,666,400

Taylor, Inc. reports: Cash provided by operating activities: 2,306,000 Cash used by investing activities 662,000 Cash used by financing activities 236,000 Beginning cash balance 332,000 What is Taylor's ending cash balance?

Operating activities (2,306,000)- investing activities (662,000) - financing activities (236,000) = 1,408,000 1,408,000+ beginning balance (332,000) =1,740,000

Which of the following describes an expense?

Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

If the entry to close income summary to retained earnings includes a debit to income summary:

Retained earnings will be increased by the current period's net income

Which of the following was established by the federal government to help develop and standardize financial information presented to stockholders?

SEC

Which of the following statements is incorrect? (Securitization)

Securitization requires the purchaser to service the receivables

When a corporation purchases a computer for cash:

The account cash will be credited

If the balances in both accounts receivable and accounts payable decrease by the same amount during the year:

The decrease in both the account receivable and account payable balances will result in no net change to cash for the period

The double-entry accounting system means

The dual effect of each transaction is reordered with a debit and a credit

The proper sequence of financial statement preparation is:

The income statement, the retained earnings statement, the balance sheet, and the statement of cash flows

All of the following are true regarding the FASB Codification except:

The purpose of the codification is to create new GAAP

Other assets include all of the following except:

Timberlands

The first step taken in the establishment of a typical FASB statement is:

Topics are identified and placed on the board's agenda

T/F The excess of current assets over current liabilities is referred to a net working capital.

True

T/F: A company generally allocates the transaction price to its separate performance obligations in proportion to stand-alone selling prices

True

T/F: A liability that is payable within the next year is sometimes included in long-term debt.

True

T/F: Capital allocation is the process of determining how and at what cost money is allocated among competing interests

True

T/F: Companies frequently use judgments and estimates in valuing items on the balance sheet.

True

T/F: Consistency is considered a form of comparability

True

T/F: Depreciation allocates the cost of long-lived assets to expense over the periods which benefit from their use (useful life)

True

T/F: Earnings per share (EPS) is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding.

True

T/F: Financial statements are usually prepared directly from the adjusted trial balance.

True

T/F: IFRS assumes that financial statements are prepared on an accrual basis.

True

T/F: Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid.

True

T/F: Simple adherence to GAAP and technical competence are not enough when encountering ethical decisions.

True

T/F: Some companies go to great lengths to present their results in the most favorable light, by implementing "non-GAAP" reporting to reporting to present figures that are most representative operating results.

True

T/F: The operating activities section is the first section of the statement of cash flows

True

T/F: Transactions are initially recorded in the general journal.

True

Pharoah Enterprises has an unusual or infrequent loss of $289,000, an unusual gain of $691,000, and a tax rate of 30%. At what amount should Pharoah report each item? Unusual loss Unusual gain 1. -$289,000 $691,000 2. -$289,000 $488,700 3. -$202,300 $691,000 4. -$202,300 $499,700

Unusual loss Unusual gain 1. -$289,000 $691,000

The role of the Securities and Exchange Commission (SEC) in the formulation of accounting standards can be best described as

Varied- the SEC relies on FASB to develop standards but gives advice and recommendations to the private sector as needed

Which of the following is an acceptable method of presenting the income statement?

a condensed income statement

Which of the following is not classified as an unusual and infrequent gain or loss?

a discontinued operation

A company with a _________________ is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities.

a high degree of financial flexibility

Which of the following disposals would be considered a strategic shift with respect to discontinued operations?

a major line of business

Which of the following is not an element of owners' equity?

accumulated capital

Which of the following ratios measure how effectively the company uses its assets?

activity ratios

Which of the following is included in an owner's equity section reported in the balance sheet?

additional paid-in capital

Prior period adjustments are reported as:

an addition to (or a deduction from) the beginning balance of retained earnings.

If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market,

an imputed interest rate is used to value the note

If a company employs the net method of recording accounts receivable from customers, then sales discounts forfeited (not taken) should be reported as

an item of "other revenue and gains" in the income statement

The required balance in Blossom's Allowance for Doubtful Accounts is $36,700, based on an aging of its accounts receivable. The Allowance for Doubtful Accounts currently has a debit balance of $4,000.. Blossom's bad debt expense for the period is

balance Allowance for Doubtful Accounts (36,700) + debt balance allowance for doubful accounts (4,000) =40,700

In preparing its Agust 31,2021 bank reconciliation, Pharoah Corp. has available the following information: Balance per bank statement, 8/31/21 $22,000 Deposit in transit, 8/31/21. $4,480 Return of customer's check for insufficient funds, 8/30/21. $800 Outstanding checks, 8/31/21 $3,220 Bank service charges for August $100 At August 31, 2021, Pharoah's correct cash balance is

balance per bank statement (22,000) + deposits in transit (4,480) - outstanding checks (3,220) = 23,260

The difference between the cost of a depreciable asset and its related contra account, accumulated depreciation is referred to as the asset's:

book value

Double-entry accounting system is the basis of accounting systems under

both GAAP and IFRS

Short-term paper with maturities of less than 3 months should be classified as

cash equivalents

The correct order to present current assets is

cash, accounts receivable, inventories, prepaid items

A change in the method of inventory pricing from FIFO to average-cost would be accounted for as a (an):

change in accounting principle

Which of the following items would require a retrospective adjustment?

change in accounting principle

Which of the following would not represent an accounting error?

change in the method of inventory pricing from FIFO to average-cost

The occurrence which most likely would have no effect on 2021 net income (assuming that all amounts involved are material) is the

collection in 2021 of a receivable from a customer whose account was written off in 2020 by a charge to the allowance account

Which of the following is not transferred to retained earnings at the end of the period?

common stock

The minimum cash amounts that banks often require customers to whom they lend money to maintain in checking accounts is called:

compensating balances

The income statement can be used to assess

creditworthiness

Companies use a __________ to show a direct relationship between an asset and a liability on the balance sheet?

cross-reference

The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average

current liabilities

Which of the following is an intangible asset?

customer lists

Adjusting entries can be classified as either:

deferrals or accruals

Which of the following methods of determining annual bad debt expense violates the expense recognition concept?

direct write-off

Which of the following is a nominal account?

dividends

If the adjusting entry for an accrued revenue is not made:

equity will be understated

Finance companies that buy receivables from businesses are called:

factors

T/F: A creditor bases an impairment loan loss on the difference between the present value of the future cash flows (using the historical effective-interest rate) and the fair value of the note

false

T/F: Borrowing money from creditors is considered an investing activity on the statement of cash flows.

false

T/F: The AICPA is responsible for setting the International Financial Reporting Standards (IFRS)

false

T/F: The use of the term "reserve" is discouraged in both U.S. GAAP and IFRS.

false

T/F: When preparing the report form of thr balance sheet, the assets and liabilities are show in side-by-side columns

false

T/F: Young Enterprises has an overdraft at one of its banks, Bank of Cleveland. Young has no other accounts at Bank of Cleveland. Young should report the bank overdraft as an offset against cash held at other banks.

false

T/F: a company considered a loan receivable impaired when it is probable, based on current information and events, that it will be successful at collecting all amounts due (both principal and interest)

false

T/F: aging account receivable is a variation of the percentage-of sales approach to recognizing bad debt expense

false

T/F: cost of goods sold appears on the income statement of a service form but not a merchandising firm

false

T/F: if a company receives a zero-interest bearing note, its present value is the equal to the face amount of the note

false

T/F: real accounts are periodically closed.

false

T/F: the accounts receivable turnover is computed by dividing gross sales by ending net receivables

false

Payment of dividends would come under which activity on the statement of cash flows?

financing

The hierarchy of accounting qualities identifies relevance and faithful representation as:

fundamental qualities

Lewis, Inc. has the following information is available: Cost of goods sold $148,000 Dividend revenue 3,700 Income tax expense 3,100 Operating expenses 81,700 Sales 260,000 Lewis's mutiple-step income statement, gross profit

gross profit:sales (260,000)- cost of goods sold (148,800) = 111,200 will be reported at $111,200

A multiple-step income statement

highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. -separates operating transactions from nonoperating transactions. -matches costs and expenses with related revenues.

Companies are not required to disclose information about:

identity of all stockholders

The interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note is the:

implicit rate

Unusual and infrequent gains and losses

include restructuring charges

Which of the following columns is generally found on a worksheet?

income statement

In the closing process, all of the revenue and expense account balances are closed to the:

income summary account

activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as:

investing activities

Swayer, Inc. consistently estimated its bad debt expense at 1% of credit sales. In 2021, however, Sawyer determines that it must reveise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2021 financial statements?

$500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet

To convert cash receipts from customers to revenue on an accrual basis, which of the following adjustments is necessary?

- Add ending accounts receivable - Subtract ending unearned service revenue - Subtract beginning accounts receivable