Chapter 2 - Intermediate Accounting

Comparability
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Terms in this set (50)
Comparability
Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena.
Timeliness
Having information available to users before it loses its capacity to influence decisions.
predictive value
Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future.
Relevance
Information that is capable of making a difference in the decisions of users in their capacity as capital providers.
Neutrality
Absence of bias intended to attain a predetermined result or to induce a particular behavior.
Faithful Representation
Quality of information that assures users that information represents the economic phenomena that it purports to represent.
Confirmatory Value
Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.
Free from Error
The extent to which information is accurate in representing the economic substance of a transaction.
Completeness
Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
Understandability
Quality of information that allows users to comprehend its meaning.
The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.Requires recognition in the CPA's audit report as to consistency.The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.Does not require recognition in the CPA's audit report as to consistency.The estimated remaining useful life of plant property was reduced because of obsolescence.Does not require recognition in the CPA's audit report as to consistency.The annual reports of Best Buy Co. are audited by certified public accountants.VerifiabilityBlack & Decker and Cannondale Corporation both use the FIFO cost flow assumption.ComparabilityStarbucks Corporation has used straight-line depreciation since it began operations.Comparability or ConsistencyMotorola issues its quarterly reports immediately after each quarter endsTimelinessDo you classify this transaction as material? Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net incomeyesDo you classify this transaction as material? Hindi Co. has an unusual gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.'s income for the current year was $10 million.yesDo you classify this transaction as material? Damon Co. expenses all capital equipment under $2,500 on the basis that it is immaterial. The company has followed this practice for a number of years.noWhat category of elements in the financial statement does RETAINED EARNINGS belong?EquityWhat category of elements in the financial statement does SALES belong?RevenuesWhat category of elements in the financial statement does ADDITIONAL PAID-IN CAPITAL belong?EquityWhat category of elements in the financial statement does INVENTORY belong?AssetsWhat category of elements in the financial statement does DEPRECIATION belong?ExpensesWhat category of elements in the financial statement does LOSS ON SALE OF EQUIPMENT belong?LossesWhat category of elements in the financial statement does INTEREST PAYABLE belong?LiabilitiesWhat category of elements in the financial statement does DIVIDENDS belong?Distributions to OwnersWhat category of elements in the financial statement does GAIN ON SALE OF INVESTMENT belong?GainsWhat category of elements in the financial statement does ISSUANCE OF COMMON STOCK belong?Investments by OwnersLegal fees paid in connection with the purchase of land are $1,500.AssetEduardo, Inc. paves the driveway leading to the office building at a cost of $21,000.AssetA meat market purchases a meat-grinding machine at a cost of $3,500.AssetOn June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.May be eitherSmith's Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business.AssetAlvarez's Florists pays wages of $2,100 for the month to an employee who serves as driver of their delivery truck.ExpenseThe economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.PeriodicitySolectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.Monetary UnitWalgreen Co. reports current and noncurrent classifications in its balance sheet.Going ConcernThe economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.Economic EntityNorfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.Revenue RecognitionYahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.Expense RecognitionOracle Corporation reports information about pending lawsuits in the notes to its financial statements.Full DisclosureGap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.Measurement (historical cost)Where will this investment be reported in the fair value hierarchy? Purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model.Level 3Where will this investment be reported in the fair value hierarchy? Purchased 2,000 shares of GE stock, which trades on the NYSE.Level 1Where will this investment be reported in the fair value hierarchy? Invested $10,000 in local development authority bonds. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.Level 2Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.Full DisclosureTarget allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.Expense RecognitionTarget records the purchase of a new Dell PC at its cash equivalent price.Historical Cost