Intermediate Accounting I: Chapter 1
McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.
Historical Cost (Original Transaction Value) Principle
Information is considered material to the financial statements if I. It falls within industry-specific quantitative guidelines published by the Financial Accounting Standards Board. II. Its omission could make a difference in the decisions made by a user relying on the financial statements. III. Its misstatement could make a difference in the decisions made by a user relying on the financial statement.
II and III only
National Bancorp, a publicly traded company, files quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings?
Timeliness
Equity is a residual amount representing the owner's interest in the assets of the business.
True
Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing operations.
True
The revenue/expense approach emphasizes determining the appropriate amounts of revenue and expense in each reporting period.
True
Relevance
pertinent to the decison at hand
Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith's personal residence and recorded a $150 expense.
the economic entity assumption
Economic Entity Assumption
the enterprise is separate from its owners and other entities
Going Concern Assumption
the entity will continue indefinitely
Assets, Liabilities and Equity
the financial position of a company
Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet.
the historical cost (original transaction value) principle
The underlying assumption that assumes the life of a company can be divided into artificial time periods.
Periodicity
SiriusXM Radio Inc. files its annual and quarterly financial statements with the SEC.
Periodicity Assumption
Revenue
inflow of an asset from providing a good or service
Confirmatory Value
information confirms expectations
Timeliness
information is available prior to the decision
Predictive Value
information is useful in predicting the future
Monetary Unit Assumption
a common denominator is the dollar
Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as follows: Cash collected from customers, $340,000; Cash paid for rent, $40,000; Cash paid to employees for services rendered during the year, $120,000; Cash paid for utilities, $50,000. In addition, you determine that customers owed the company $60,000 at the end of the year and no bad debts were anticipated. Also, the company owed the gas and electric company $2,000 at year-end, and the rent payment was for a two-year period. Calculate accrual net income for the year.
$208,000
Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as follows: Cash collected from customers, $350,000; Cash paid for rent, $42,000; Cash paid to employees for services rendered during the year, $122,000; Cash paid for utilities, $52,000. In addition, you determine that customers owed the company $62,000 at the end of the year and no bad debts were anticipated. Also, the company owed the gas and electric company $2,200 at year-end, and the rent payment was for a two-year period. Calculate accrual net income for the year.
$214,800
Alpaca Corporation had revenues of $270,000 in its first year of operations. The company has not collected on $18,700 of its sales and still owes $26,600 on $90,000 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $12,500 in salaries. Owners invested $16,000 in the business and $16,000 was borrowed on a five-year note. The company paid $2,900 in interest that was the amount owed for the year, and paid $7,300 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. Compute net income for the first year for Alpaca Corporation.
$96,570
At the beginning of its 2020 fiscal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi recorded the expenditure as an asset to be expensed equally over the two-year period of the lease.
Agree. Conforming to appropriate expense recognition
The Reliable Tire Company included a note in its financial statements that described a pending lawsuit against the company.
Agree. Conforming to the full disclosure principle
Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery.
Agree. Expense recognition
Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life.
Agree. Materiality
Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC.
Agree. Periodicity Assumption
Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance.
Agree. Revenue Recognition
Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer.
Agree. Revenue recognition
Probable future economic benefits owned by the company.
Assets
Jeff Brown is evaluating two companies for future investment potential. Jeff's task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jeff will be using possess?
Comparability
Applied Alliances, Inc., changed it's revenue recognition policies. Which characteristic is jeopardized by this change?
Consistency
A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe?
Cost Effectiveness
Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense.
Disagree. Expense Recognition
Winderl Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress.
Disagree. Full Disclosure Principle
Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements.
Disagree. Full disclosure principle
Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000.
Disagree. Historical cost (original transaction value) principle
Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar.
Disagree. Monetary unit assumption
Esquire Company provides financial statements to external users every three years.
Disagree. Periodicity assumption
At the end of its 2020 fiscal year, Dower, Inc., received an order from a customer for $45,350. The merchandise will ship early in 2021. Because the sale was made to a long-time customer, the controller recorded the sale in 2020.
Disagree. Violation of appropriate revenue recognition
The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase of an automobile to be used solely for personal use.
Disagree. Violation of the economic entity assumption
The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its recently appraised value of $3.5 million.
Disagree. Violation of the historical cost (original transaction value) principle
The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements.
Disagree. Violation of the periodicity assumption
Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.
Economic Entity Assumption
The president of Applebee's International, Inc., travels on the corporate jet for business purposes only and does not use the jet for personal use.
Economic Entity Assumption
Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.
Expense Recognition
Lady Jane Cosmetics depreciates the cost of equipment over their useful lives.
Expense Recognition (Matching Principle)
When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?
Faithful Representation
Political pressure never affects the IFRS standard-setting program.
False
Financial statements generally include all of the following except -Income Statement -Federal Income Tax Return -Balance Sheet -Statement of Cash Flows -Statement of Shareholder's Equity
Federal Income Tax Return
Probable future sacrifices of economic benefits.
Liabilities
Decrease in equity from peripheral or incidental transactions.
Losses
Which component would allow a large company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset?
Materiality
Donald Kirk, former chairman of the FASB, once noted that "...there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests..." Which characteristic is implicit in Mr. Kirk's statement?
Neutrality
Consistency and feedback relate most closely to which two of the following accounting concepts, respectively?
Predictive Value and Confirmatory Value
In general, relevant information possesses which qualities?
Predictive and/or Confirmatory Values
The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is
Representation Faithfullness
Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications.
Revenue Recognition
Inflows of assets from ongoing, major activities.
Revenues
Faithful Representation
agreement between a measure and the phenomenon it purports to represent
Full Disclosure Principle
all information that could affect decisions should be reported
Asset
an item owned by the company representing probable future benefits
Investment by Owner
an owner's contribution of cash to a corporation in exchange for ownership shares of stock
Consistency
applying the same accounting practices over time
Materiality
concerns the relative size of an item and its effect on decisions
Materiality
concerns the relative size of an item and its effect on decisons
Not a qualitative characteristic, but a practical justification for some accounting choices.
conservatism
The benefits of providing accounting information should exceed the cost of doing so.
cost effectiveness
Revenue Recognition
criteria usually satisfied for products at point of sale
Distribution to Owners
decreases in equity resulting from transfers to owners
Distribution to Owners
dividends paid by a corporation to its shareholders
All economic events can be identified with a particular entity.
economic entity assumption
Recognizing expenses in the period they were incurred to produce revenue.
expense recognition
Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.
expense recognition; materiality
Information that could affect decision making should be reported.
full disclosure principle
The basis for measurement of many assets and liabilities.
historical cost principle
Verifiability
implies consensus among different measurers
Comparability
important for making interfirm comparisons
Comprehensive Income
increase in equity during a period from nonowner transactions
Gain
increase in equity from peripheral or incidental transaction
Gain
increases in equity from peripheral or incidental transactions of an entity
A consequence is that GAAP need not be followed in all situations.
materiality
Inflation causes a violation of this assumption.
monetary unit assumption
Liability
obligation to transfer cash or other resources as a result of a past transaction
Expense
outflow of an asset related to the production of revenue
Relates to the qualitative characteristics of timeliness.
periodicity assumption
Expense Recognition
record expenses in the period the related revenue is recognized
Cost Effectiveness
requires consideration of the costs and value of information
The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received.
revenue recognition
Net Income
revenues plus gains less expenses and losses
Loss
sale of an asset used in the operations of a business for less than the asset's book value
Neutrality
the absence of bias
Comprehensive Income
the change in equity from nonowner transactions
Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.
the full disclosure principle
Periodicity Assumption
the life of an enterprise can be divided into artificial time periods
Historical Cost Principle
the original transaction value upon acquisition
Equity
the owner's residual interest in the assets of a company
Atwell Corporation has not prepared financial statements for external users for over three years.
the periodicity assumption
Recognition
the process of admitting information into financial statements
Understandability
users understand the information in the context of the decision being made