Acct 312 Final

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Acct 312 Final

When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are

earned.

realized.

recognized.

all of these.

earned.

A sale should not be recognized as revenue by the seller at the time of sale if

payment was made by check.

the selling price is less than the normal selling price.

the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated.

none of these.

the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated.

When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable?

Installment-sales method

Percentage-of-completion method

Completed-contract method

None of these

Percentage-of-completion method

How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?

As a receivable in the noncurrent asset section of the balance sheet.

In a note to the financial statements until the customer is formally billed for the portion of work completed.

As construction in process in the current asset section of the balance sheet.

As construction in process in the noncurrent asset section of the balance sheet.

As construction in process in the current asset section of the balance sheet.

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be

recognized in the current period under the completed-contract method, but the percentage-of-completion method should defer the loss until the contract is completed.

recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.

recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer recognition of the loss to the time when the contract is completed.

deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed

For which of the following products is it appropriate to recognize revenue at the completion of production even though no sale has been made?

Large appliances

Single family residential units

Precious metals

Automobiles

Precious metals

Deferred gross profit on installment sales is generally treated as a(n)

deduction from installment accounts receivable.

deduction from installment sales.

deduction from gross profit on sales.

unearned revenue and classified as a current liability

unearned revenue and classified as a current liability

The installment-sales method of recognizing profit for accounting purposes is acceptable if

the method is consistently used for all sales of similar merchandise.

collections in the year of sale do not exceed 30% of the total sales price.

an unrealized profit account is credited.

collection of the sales price is not reasonably assured.

collection of the sales price is not reasonably assured.

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?

At the date of delivery (sales method)

At the time of completion of the equipment (completion of production method)

The installment-sales method

The cost-recovery method

The cost-recovery method

Under the cost-recovery method of revenue recognition,

income is recognized on a proportionate basis as the cash is received on the sale of the product.

income is recognized when the cash received from the sale of the product is greater than the cost of the product.

income is recognized immediately.

none of these.

income is recognized when the cash received from the sale of the product is greater than the cost of the product.

The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.

A landlord collects some rents in advance. Rents received are taxable in the period when they are received.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.

Expenses are incurred in obtaining tax-exempt income

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(3) A permanent difference

Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.

Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.

Interest is received on an investment in tax-exempt municipal obligations.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(3) A permanent difference

For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets' lives are shorter for tax purposes.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.

Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(3) A permanent difference

The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(3) A permanent difference

Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.

Expenses on stock options are accrued for financial reporting purposes.

indicate whether it involves:

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference

(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.

In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be (greater than/less than) pretax financial income.

greater than

An increase in the Deferred Tax Liability account on the balance sheet is record by a (debit/credit) to the Income Tax Expense account.

debit

Deferred taxes (are/are not) recorded to account for permanent differences.

are not

If a taxable difference originates in 2011, it will cause taxable income for 2011 to be (greater than/less than) pretax financial income for 2011.

less than

A valuation account is needed whenever it is judged to be (more likely/more likely than not) that a portion of a deferred tax asset (will be/will not be) realized

more likely than not, will not be

If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is refered to as deferred tax (benefit/liability).

benefit

Taxable income of a corporation

differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.

is reported on the corporation's income statement.

differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.

is based on generally accepted accounting principles.

differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.

The deferred tax expense is the

increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.

decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.

increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.

increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.

A temporary difference arises when a revenue item is reported for tax purposes in a period


After it is reported in financial income (yes/no)
Before it is reported in financial income (yes/no)

Yes; Yes

A major distinction between temporary and permanent differences is

permanent differences are not representative of acceptable accounting practice.

temporary differences occur frequently, whereas permanent differences occur only once.

once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

An example of a permanent difference is

proceeds from life insurance on officers.

interest expense on money borrowed to invest in municipal bonds.

insurance expense for a life insurance policy on officers.

all of these.

all of these.

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?

Type of difference (Temporary/Permanent)
Deferred Tax (Asset/Liability)

Temporary; Asset

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

handled retroactively in accordance with the guidance related to changes in accounting principles.

reported as an adjustment to tax expense in the period of change.

considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.

applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

reported as an adjustment to tax expense in the period of change.

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

the future tax rates have been enacted into law.

it appears likely that a future tax rate will be greater than the current tax rate.

it appears likely that a future tax rate will be less than the current tax rate.

it is probable that a future tax rate change will occur.

the future tax rates have been enacted into law.

Uncertain tax positions

Are positions for which the tax authorities may disallow a deduction in whole or in part.

Include instances in which the tax law is clear and in which the company believes an audit is likely.

Give rise to tax expense by increasing payables or increasing a deferred tax liability.

Are positions for which the tax authorities may disallow a deduction in whole or in part.

Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2010 financial statements?

The refund claimed should be shown as a reduction of the loss in 2010.

The refund claimed should be reported as a deferred charge and amortized over five years.

The refund claimed should be reported as revenue in the current year.

The reduction of the loss should be reported as a prior period adjustment.

The refund claimed should be shown as a reduction of the loss in 2010.

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary:

retirement and mortality rate.

interest rates.

benefit provisions of the plan.

all of these factors.

all of these factors.

In a defined-benefit plan, the process of funding refers to

determining the accumulated benefit obligation.

determining the projected benefit obligation.

making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

determining the amount that might be reported for pension expense.

making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

In all pension plans, the accounting problems include all the following except

disclosing the status and effects of the plan in the financial statements.

determining the level of individual premiums.

measuring the amount of pension obligation.

allocating the cost of the plan to the proper periods.

determining the level of individual premiums.

In a defined-contribution plan, a formula is used that

requires an employer to contribute a certain sum each period based on the formula.

ensures that pension expense and the cash funding amount will be different.

ensures that employers are at risk to make sure funds are available at retirement.

defines the benefits that the employee will receive at the time of retirement.

requires an employer to contribute a certain sum each period based on the formula.

In a defined-benefit plan, a formula is used that

defines the benefits that the employee will receive at the time of retirement.

defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.

requires that pension expense and the cash funding amount be the same.

defines the benefits that the employee will receive at the time of retirement.

Which of the following is not a characteristic of a defined-contribution pension plan?

The accounting for a defined-contribution plan is straightforward and uncomplicated.

The benefits to be received by employees are usually determined by an employee's three highest years of salary defined by the terms of the plan.

The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.

The employer's contribution each period is based on a formula.

The benefits to be received by employees are usually determined by an employee's three highest years of salary defined by the terms of the plan.

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

Vested benefit obligation

Projected benefit obligation

Accumulated benefit obligation

Restructured benefit obligation

Projected benefit obligation

The accumulated benefit obligation measures

an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.

the shortest possible period for funding to maximize the tax deduction.

the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.

the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

The projected benefit obligation is the measure of pension obligation that

requires the longest possible period for funding to maximize the tax deduction.

is required to be used for reporting the service cost component of pension expense.

is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.

requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.

is required to be used for reporting the service cost component of pension expense.

Vested benefits

usually require a certain minimum number of years of service.

are those that the employee is entitled to receive even if fired.

are not contingent upon additional service under the plan.

are defined by all of these.

are defined by all of these.

Which of the following is an advantage of leasing?

Off-balance-sheet financing

Less costly financing

100% financing at fixed rates

All of these.

All of these.

Which of the following best describes current practice in accounting for leases?

Leases are not capitalized.

Leases similar to installment purchases are capitalized.

All long-term leases are capitalized.

All leases are capitalized.

Leases similar to installment purchases are capitalized.

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

No impact as the option does not enter into the transaction until the end of the lease term.

The lessee must increase the present value of the minimum lease payments by the present value of the option price.

The lessee must decrease the present value of the minimum lease payments by the present value of the option price.

The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

The lessee must increase the present value of the minimum lease payments by the present value of the option price.

The amount to be recorded as the cost of an asset under capital lease is equal to the

present value of the minimum lease payments plus the present value of any unguaranteed residual value.

present value of the minimum lease payments or the fair value of the asset, whichever is lower.

carrying value of the asset on the lessor's books.

present value of the minimum lease payments.

present value of the minimum lease payments or the fair value of the asset, whichever is lower.

In computing depreciation of a leased asset, the lessee should subtract

a guaranteed residual value and depreciate over the life of the asset.

an unguaranteed residual value and depreciate over the term of the lease.

a guaranteed residual value and depreciate over the term of the lease.

an unguaranteed residual value and depreciate over the life of the asset.

a guaranteed residual value and depreciate over the term of the lease.

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

asset's remaining economic life.

term of the lease.

life of the asset or the term of the lease, whichever is shorter.

life of the asset or the term of the lease, whichever is longer.

asset's remaining economic life.

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Transfers Ownership By End Of Lease? (yes/no)
Contains Bargain Purchase Option? (yes/no)
Collectibility of Lease Payments Assured? (yes/no)
Any Important Uncertainties? (yes/no)

No, Yes, Yes, No

The primary difference between a direct-financing lease and a sales-type lease is the

amount of the depreciation recorded each year by the lessor.

recognition of the manufacturer's or dealer's profit at the inception of the lease.

allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

manner in which rental receipts are recorded as rental income.

recognition of the manufacturer's or dealer's profit at the inception of the lease.

In a lease that is recorded as a sales-type lease by the lessor, interest revenue

should be recognized in full as revenue at the lease's inception.

should be recognized over the period of the lease using the straight-line method.

should be recognized over the period of the lease using the effective interest method.

does not arise.

should be recognized over the period of the lease using the effective interest method.

Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as

a deferred gain.

operating income.

an extraordinary item, net of income tax.

a separate component of stockholders' equity.

a deferred gain.

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change from FIFO to average cost inventory method.

Retrospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change due to overstatement of inventory.

Retrospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change from sum-of-the-years'-digits to straight-line method of depreciation.

Prospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change from presenting unconsolidated to consolidated financial statements.

Retrospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change from LIFO to FIFO inventory method.

Retrospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change in the rate used to compute warranty costs.

Prospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change from an unacceptable accounting principle to an acceptable accounting principle.

Retrospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change in a patent's amortization period.

Prospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change from completed-contract to percentage-of-completion method on construction contracts.

Retrospectively

For each change or error, indicate how it would be accounted for. (Retrospectively/Prospectively)

Change in a plant asset's salvage value.

Prospectively

Which of the following is not treated as a change in accounting principle?

A change to a different method of depreciation for plant assets

A change from full-cost to successful efforts in the extractive industry

A change from completed-contract to percentage-of-completion

A change from LIFO to FIFO for inventory valuation

A change to a different method of depreciation for plant assets

Which of the following is accounted for as a change in accounting principle?

A change in the estimated useful life of plant assets.

A change from expensing immaterial expenditures to deferring and amortizing them as they become material.

A change from the cash basis of accounting to the accrual basis of accounting.

A change in inventory valuation from average cost to FIFO.

A change in inventory valuation from average cost to FIFO.

A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a

debit to Deferred Tax Asset.

credit to Deferred Tax Liability.

credit to Accumulated Depreciation.

debit to Retained Earnings in the amount of the difference on prior years.

credit to Accumulated Depreciation.

Which of the following disclosures is required for a change from LIFO to FIFO?

The cumulative effect on prior years, net of tax, in the current retained earnings statement

The justification for the change

Restated prior year income statements

All of these are required.

All of these are required.

Which type of accounting change should always be accounted for in current and future periods?

Change in reporting entity

Change in accounting estimate

Correction of an error

Change in accounting principle

Change in accounting estimate

The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

continue to depreciate the building over the original 50-year life.

depreciate the remaining book value over the remaining life of the asset.

adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

depreciate the remaining book value over the remaining life of the asset.

Which of the following describes a change in reporting entity?

Changing the companies included in combined financial statements.

A company acquires a subsidiary that is to be accounted for as a purchase.

A manufacturing company expands its market from regional to nationwide.

A company divests itself of a European branch sales office.

Changing the companies included in combined financial statements.

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?

Assets (Over/Under/No effect)
Liabilities (Over/Under/No effect)
Stockholders' Equity (Over/Under/No effect)
Net Income (Over/Under/No effect)

Understatement, Understatement, No effect, No effect

Pension expense exceeds amount funded.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

operating-add to net income;

Redemption of bonds payable.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

financing;

Sale of building at book value.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

investing;

Depreciation.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

operating-add to net income;

Exchange of equipment for furniture.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

Significant noncash investing and financing activities

Issuance of capital stock

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

financing;

Amortization of intangible assets.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

operating-add to net income;

Purchase of treasury stock.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

financing

Issuance of bonds for land

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

operating-deduct from net income;

Payment of dividends.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

financing

Increase in interest receivable on notes receivable.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

operating-deduct from net income;

Purchase of equipment.

Classify the items as (1) operating-add to net income; (2) operating-deduct from net income; (3) investing; (4) financing; or (5) Significant noncash investing and financing activities. Use the indirect method.

investing;

The primary purpose of the statement of cash flows is to provide information

about the cash receipts and cash payments of an entity during a period.

about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.

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

that is useful in assessing cash flow prospects.

about the cash receipts and cash payments of an entity during a period

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

re-recording all income statement transactions that directly affect cash in a separate cash flow journal.

eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions.

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

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

An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)

cash outflow from investing activities.

addition to net income in arriving at net cash flow from operating activities.

cash outflow from financing activities.

deduction from net income in arriving at net cash flow from operating activities.

deduction from net income in arriving at net cash flow from operating activities.

A statement of cash flows typically would not disclose the effects of

cash dividends paid.

stock dividends declared.

a purchase and immediate retirement of treasury stock.

capital stock issued at an amount greater than par value.

stock dividends declared.

In a statement of cash flows, the cash flows from investing activities section should report

a major repair to machinery charged to accumulated depreciation.

the issuance of common stock in exchange for a factory building.

the assignment of accounts receivable.

stock dividends received.

a major repair to machinery charged to accumulated depreciation.

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 a(n)

addition to net income.

investing activity.

deduction from net income.

financing activity.

deduction from net income.

Which of the following statements is correct?

The indirect method starts with income before extraordinary items.

The direct method is known as the reconciliation method.

The direct method is more consistent with the primary purpose of the statement of cash flows.

All of these.

The direct method is more consistent with the primary purpose of the statement of cash flows.

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

They should be handled in a manner consistent with the transactions that affect cash flows.

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.

They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions."

Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major component of the transaction.

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.

1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

adjust

Introduction of a new product line.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

neither

Loss of assembly plant due to fire.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

disclose

Sale of a significant portion of the company's assets.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

disclose

Retirement of the company president.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

neither

Issuance of a significant number of shares of common stock.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

disclose

Loss of a significant customer.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

neither

Prolonged employee strike.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

neither

Material loss on a year-end receivable because of a customer's bankruptcy.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

adjust

Hiring of a new president.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

neither

Settlement of prior year's litigation against the company.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

adjust

Merger with another company of comparable size.

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

disclose

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

Claims of equity holders.

Types of executory contracts.

Amount for cumulative effect of change in accounting principle.

Depreciation method followed.

Depreciation method followed.

Errors and irregularities are defined as intentional distortions of facts.

Errors (yes/no)
Irregularities (yes/no)

No, Yes

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

All information related to an entity's business and operating objectives is required to be disclosed in the financial statements.

Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.

Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.

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

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

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

dollar amount of the transactions for each of the periods for which an income state-ment is presented.

amounts due from or to related parties as of the date of each balance sheet presented.

nature of any future transactions planned between the parties and the terms involved.

nature of the relationship between the parties to the transactions.

nature of any future transactions planned between the parties and the terms involved.

Events that occur after the December 31, 2011 balance sheet date (but before the balance sheet is issued) and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be

used to record an adjustment to Bad Debt Expense for the year ending December 31, 2011.

disclosed only in the Notes to the Financial Statements.

discussed only in the MD&A (Management's Discussion and Analysis) section of the annual report.

used to record an adjustment directly to the Retained Earnings account.

used to record an adjustment to Bad Debt Expense for the year ending December 31, 2011.

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

Loss on an uncollectible account receivable resulting from a customers major flood loss.

Loss of plant as a result of fire.

Changes in the quoted market prices of securities held as an investment.

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

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

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

total export and foreign sales.

combined net income of all segments reporting profits.

total combined revenues of all segments reporting profits.

total revenues of all the enterprise's industry segments.

total revenues of all the enterprise's industry segments.

The profession requires disaggregated information in the following ways:

products or services.

geographic areas.

major customers.

All of these.

All of these.

The required approach for handling extraordinary items in interim reports is to

prorate them over all four quarters.

disclose them only in the notes.

prorate them over the current and remaining quarters.

charge or credit the loss or gain in the quarter that it occurs.

charge or credit the loss or gain in the quarter that it occurs.

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

income statement, balance sheet, and statement of cash flows.

liquidity, capital resources, and results of operations.

changes in the stock price, mergers, and acquisitions.

income statement, balance sheet, and statement of owners' equity.

liquidity, capital resources, and results of operations.

What is revenue recognition principle?

The revenue recognition principle provides that companies should recognize revenue (1) when it is realized or realizable and (2) when it is earned. Therefore, proper revenue recognition revolves around three terms:

Revenues are realized when a company exchanges goods and services for cash or claims to cash (receivables).

Revenues are realizable when assets a company receives in exchange are readily convertible to known amounts of cash or claims to cash.

Revenues are earned when a company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues—that is, when the earnings process is complete or virtually complete.

Revenue recognition for precious metals

Revenue recognition for precious metals is recognized at the completion of production even though no sale has been made. Precious metals have assured prices

When do you record revenue vs. defer revenue?

Defer revenue until it is realized.

Percentage completed vs. completed project

Percentage Completed - Companies recognize revenues and gross profits each period based upon the progress of the construction. The company accumulates construction costs plus gross profit earned to date in an inventory account, and it accumulates progress billings in a contra inventory account.

Completed-Contract - Companies recognize revenues and gross profit only when the contract is completed. The company accumulates construction costs in an inventory account, and it accumulates progress billings in a contra inventory account.

Deferred gross profit on installment sales

Under the installment-sales method of accounting, companies defer income recognition until the period of cash collection. They recognize both revenues and cost of sales in the period of sale, but defer the related gross profit to those periods in which they collect the cash. Thus, instead of deferring the sale, along with related costs and expenses, to the future periods of anticipated collection, the company defers only the proportional gross profit.

Cost-recovery method

Under the cost recovery method, a company recognizes no profit until cash payments by the buyer exceed the cost of the merchandise sold. After the seller has recovered all costs, it includes in income any additional cash collections.

Difference between taxable income and pre-tax financial income and why they might be different

Taxable income - is a tax accounting term. It indicates the amount used to compute income tax payable. Companies determine taxable income according to the IRS. Income taxes provide money to support government operations.

Pretax financial income is a financial reporting term. It also is referred to as income before taxes, income for financial reporting purposes, or income for book purposes. Companies determine pretax financial income according to GAAP. They measure it with the objective of providing useful information to investors and creditors.

Why are deferred tax liability & deferred tax asset accounts created?

A deferred tax liability is deferred tax consequence attributable to taxable temporary differences. A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences exisint at the end of the current year.

A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. A deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.

Difference between temporary and permanent differences

Temporary - Taxable temporary differences are differences that will result in taxable amounts in future years when the related assets are recovered. Deductible temporary differences are temporary difference that will result in the deductible amounts in future years, when the related book liabilities are settled.

Permanent - Permanent differences result from items that (1) enter into pretax financial income but never into taxable income, or (2) enter into taxable income but never into pretax financial income.

What tax rate is used for deferred calculations?

If new rates are not yet enacted for future years, you should use the current rate.

What does an actuary consider when determining PBO?

Actuaries make predictions of mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, and any other factors necessary to operate a pension plan.

Difference between defined benefit and defined contribution pension plans

Defined benefit - A defined benefit plan outlines the benefits that employees will receive when they retire. The employer is the beneficiary of a defined-benefit trust.

Defined contribution - The employer agrees to contribute to a pension trust a certain sum each period, based on a formula. The plan defines only the employer's contribution. Example 401(k)

Definition of PBO

Projected benefit obligation - Pension benefits payable to employees because of their services rendered during the current year. Companies use the projected benefit obligation as an input in determining service cost of a pension plan.

Definition of vested benefits

Compensation rights that exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Vested rights are not contingent on an employees future service.

Definition of actual return on plan assets

The increase in pension funds from interest, dividends, and realized and unrealized changes in the fair-market value of the plan assets. If the actual return on the plan assets is positive (a gain) during the period, a company subtracts it when computing pension expense; if the actual return is negative (a loss) during the period, the company adds it when computing pension expense.

How are PSC (prior service cost) recorded

The employer initially records the PSC as an adjustment to other comprehensive income. The employer then recognizes the PSC as a component of pension expense over the remaining service lives of the employees who are expected to benefit from the change in the plan.

Difference between capital and operating leases

Capital Lease - Agreement that allows one party (the lessee) to use the asset of another party (the lessor) and to account for the transaction as a purchase. The lease must be noncancelable and must meet one or more of four capitalization criteria.

Operating Lease - Lease that does no9t meet any of the criteria for a capital lease. An operating lease essentially allows the lessee to account for the use of the lessor's asset as a rental, with payments recorded as rent expense.

What amount to record as cost of asset under capital lease?

The present value of the rental payments

Definition of minimum lease payment

A measure, the present value of which is determined and used as part of the recovery of investment (90 percent) test. Minimum lease payments include minimum rental payments, a guaranteed residual value, a penalty for failure to renew the lease, and a bargain-purchase option. The lessee does not include executory costs in computing the present value of the minimum lease payments.

Definition of executory costs

Costs for insurance, maintenance, and tax expenses during the economic life of a leased asset. Executory costs do not represent payment on or reduction of the lease obligation. Many lease agreements specify that the lessee directly pays executory costs to the appropriate third parties.

What rate to use in PV minimum lease payment calculations

A lessee generally computes the PV of the minimum lease payments using its incremental borrowing rate. This rate is defined as the rate that, at the inception of the lease, the lessee would have incurred to borrow the funds necessary to buy the leased asset on a secured loan with repayment terms similar to the payment schedule called for in the lease.

How is depreciation calculated on equipment recorded under capital lease

If the lease agreement transfers ownership of the asset or contains a bargain-purchase option, depreciation is consistent with its normal depreciation policy using the economic life of the asset.

If the lease does not transfer ownership or does not contain a bargain purchase option , then it is depreciated over the term of the lease.

Difference between change in accounting principle and change in estimate and how we record each

Change in Accounting Principle - A change from one GAAP to another one. For example a company may change its valuation method from LIFO to average cost. You can report changes currently, retrospectively or prospectively.

Change in Accounting Estimate - A change that occurs as the result of new information or additional experience. For example, a company my change its estimate of the useful lives of depreciable assets. Report prospectively.

Disclosure for an Accounting principle change

If it is impracticable to determine the prior period effect, you disclose the effect of the change on the current year, and the reasons for omitting the computation of the cumulative effect and pro forma amounts for prior years.

Disclosure for inventory accounting policies

Companies should report the basis upon which inventory amounts are stated (lower-of-cost-or-market) and the method used in determining cost (LIFO, FIFO, average cost, etc.). Manufacturers should report, either in the balance sheet or in a separate schedule in the notes, the inventory composition (finished goods, work in process, raw materials). Unusual or significant financing arrangements relating to inventories that may require disclosure include transactions with related parties, product financing arrangements, firm purchase commitments, involuntary liquidation of LIFO inventories, and pledging of inventories as collateral.

What is full disclosure principle?

The full disclosure principle calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader.

Related parties disclosure

Related-party transactions arise when a company engages in transactions in which one of the parties has the ability to significantly influence the policies of the other. GAAP requires the following disclosures of material related-party transactions:
1. The nature of the relationship(s) involved.
2. A description of the transactions (including transactions to which no amounts or nominal amounts were ascribed) for each of the periods for which income statements are presented.
3. The dollar amounts of transactions for each of the periods for which income statements are presented.
4. Amounts due from or to related parties as of the date of each balance sheet presented.

How are subsequent events handled?

Events that provide additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements, require adjustments to financial statements.

Events that provide evidence about conditions that did not exist at the balance sheet date but arise subsequent to that date do not require adjustment of the financial statement.

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