中级财务会计Chapter 01 Assignments and Answers.doc

Select the best answer for each of the following.M1-1 Accruing net losses on noncancelable purchase commitments for inventory is an example of a. Conservatism b. Realization c. Consistency d. MaterialityM1-2 The information provided by financial reporting pertains to a. Individual companies, rather than to industries or the economy as a whole or to members of society as consumers.b. Individual companies and industries, rather than to the economy as a whole or to members of society as consumers.c. Individual companies and the economy as a whole, rather than to industries or to members of society as consumers.d. Individual companies, industries, and the economy as a whole, rather than to members of society as consumers.M1-3 According to Statement of Financial Accounting Concepts No. 2, an interim earnings report is expected to have which of the following?PredictiveFeedbackvalue valuea. No Nob. Yes Yesc. Yes Nod. No YesM1-4 A patent, purchased in 2007 and being amortized over a 10-year life, was determined to be worthless in 2010. The write-off of the asset in 2010 is an example of which of the following principles?a. Associating cause and effectb. Immediate recognitionc. Systematic and rational allocationd. ObjectivityM1-5 An accrued expense is an expense a. Incurred but not paidc. Paid but not incurredb. Incurred and paid d. Not reasonably estimableM1-6 Which of the following accounting concepts states that an accounting transaction should be supported by sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures and conclusions?a. Matching b. Verifiability c. Periodicity d. Stable monetary unitM1-7 Which of the following is considered a pervasive constraint of providing financial information by Statement of Financial Accounting Concepts No. 2?a. Benefits/costs b. Conservatism c. Timeliness d. VerifiabilityM1-8 The valuation of a promise to receive cash in the future at present value on the financial statements of a company is valid because of the accounting concept ofa. Entity b. Materiality c. Going concernd. NeutralityM1-9 Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability?a. Timeliness b. Neutrality c. Feedback value d. ConsistencyM1-10 Under Statement of Financial Accounting Concepts No. 6, which of the following, in the most precise sense, means the process of converting noncash resources and rights into cash or claims to cash?a. Allocation b. Recordationc. Recognition d. RealizationC1-3 Accounting Assumptions and PrinciplesCertain accounting assumptions and principles have had an important impact on the development of generally accepted accounting principles. The following is a list of these assumptions and principles as well as a list of statements describing certain accounting practices.A. Entity E. Monetary unitB. Continuity F. RealizationC. Period of time G. MatchingD. Historical cost H. ConservatismA 1. The business, rather than its owners, is the reporting unit.G 2. Depreciation costs are expensed in the periods of use rather than at the time the asset is acquired.E 3. Accounting measurements are reported in dollars.C 4. The year is the normal reporting unit.B 5. In the absence of evidence to the contrary, the company will operate long enough to carry out its existing commitments.F 6. Revenue is usually recognized at the time of sale.D 7. Exchange price is retained in the accounting records.H 8. An accounting alternative is selected that is least likely to overstate assets and income.RequiredSelect the accounting assumption or principle that justifies each accounting practice and place the appropriate letter on the line preceding the statementC1-4 Qualitative CharacteristicsIn FASB Statement of Concepts No. 2, several qualitative characteristics of useful accounting information were identified. The following is a list of these qualities as well as a list of statements describing the qualities.A. Comparability H. VerifiabilityB. Understandability I. NeutralityC. Relevance J. Representational D. Reliability faithfulnessE. Predictive value K. ConsistencyF. Feedback value L. MaterialityG. TimelinessH 1. Ability of measurers to form a consensus that the selected accounting method has been used without error or bias.G 2. Making information available to decision makers before it loses its capacity to influence decisions.C 3. Capacity to make a difference in a decision.B 4. Overall qualitative characteristic.I 5. Absence of bias intended to influence behavior in a particular direction.D 6. Reasonably free from bias.E 7. Helps decision makers forecast correctly.J 8. Validity.A 9. Interactive quality; helps explain similarities and differences between two sets of facts.L 10. Quantitative “threshold” constraint.K 11. Conformity from period to period.F 12. Helps decision makers confirm or change prior expectations.RequiredPlace the appropriate letter identifying each term on the line in front of the statement describing the quality.C1-5 Cost and Expense RecognitionAn accountant must be familiar with the concepts involved in determining earnings of a company. The amount of earnings reported for a company is dependent on the proper recognition, in general, of revenue and expense for a given time period. In some situations costs are recognized as expenses at the time of product sale; in other situations guidelines have been developed for recognizing costs as expenses or losses by other criteria.Required1. Explain the rationale for recognizing costs as expenses at the time of product sale.2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.3. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on this basis.1. Some costs are recognized as expenses on the basis of a presumed direct association with specific revenue. This presumed direct association has been identified both as associating cause and effect and as the matching concept. Direct cause-and-effect relationships can seldom be conclusively demonstrated, but many costs appear to be related to particular revenue, and recognizing them as expenses accompanies recognition of the revenue. Generally, the matching concept requires that the revenue recognized and the expenses incurred to produce the revenue be given concurrent periodic recognition in the accounting records. Only if effort is properly related to accomplishment will the results, called income, have useful significance concerning the efficient utilization of business resources. Thus, applying the matching principle is a recognition of the cause-and-effect relationship that exists between expense and revenue. Examples of expenses that are usually recognized by associating cause and effect are sales commissions, freight-out on merchandise sold, and cost of goods sold or services provided.2. Some costs are assigned as expenses to the current accounting period because (a) their incurrence during the period provides no discernible future benefits; (b) they are measures of assets recorded in previous periods from which no future benefits are expected or can be discerned; (c) they must be incurred each accounting year, and no build-up of expected future benefits occurs; (d) by their nature they relate to current revenues even though they cannot be directly associated with any specific revenues; (e) the amount of cost to be deferred can be measured only in an arbitrary manner or great uncertainty exists regarding the realization of future benefits, or both; (f) uncertainty exists regarding whether allocating them to current and future periods will serve any useful purpose. Thus, many costs are called period costs and are treated as expenses in the period incurred because they have neither a direct relationship to revenue earned nor can their occurrence be directly shown to give rise to an asset. The application of this principle of expense recognition results in charging many costs to expense in the period in which they are paid or accrued for payment. Examples of costs treated as period expenses would include officers salaries, advertising, research and development, and auditors fees.3. In the absence of a direct basis for associating asset cost with revenue, and if the asset provides benefits for two or more accounting periods, its cost should be allocated to these periods (as an expense) in a systematic and rational manner. Thus, when it is impractical, or impossible, to find a close cause-and-effect relationship between revenue and cost, this relationship is often assumed to exist. Therefore, the asset cost is allocated to the accounting periods by some method. The allocation method used should appear reasonable to an unbiased observer and should be followed consistently from period to period. Examples of systematic and rational allocation of asset cost would include depreciation of fixed assets, amortization of certain intangibles, and allocation of rent and insurance.C1-9 Accruals and DeferralsGenerally accepted accounting principles require the use of accruals and deferrals in the determination of income.Required1. How does accrual accounting affect the determination of income? Include in your discussion what constitutes an accrual and a deferral, and give appropriate examples of each.2. Contrast accrual accounting with cash accounting.1. Accrual accounting recognizes and reports the effects of transactions and other events on the assets and liabilities of a company in the time periods to which they relate rather than only when cash is received or paid. Accrual accounting attempts to match revenues and the expenses associated with those revenues in order to determine net income for an accounting period. Revenues are recognized and recorded when earned. Expenses are recognized and recorded as follows: Associating Cause and Effect. Some expenses are recognized and recorded on a presumed direct association with specific revenue. Systematic and Rational Allocation. In the absence of a direct association with specific revenue, some expenses are recognized and recorded by attempting to allocate expenses in a systematic and rational manner among the periods in which benefits are provided. Immediate Recognition. Some costs are associated with the current accounting period as expenses because (1) costs incurred during the period provide no discernible future benefits, (2) costs recorded as assets in prior periods no longer provide discernible benefits, or (3) allocating costs either on the basis of association with revenues or among several accounting periods is considered to serve no useful purpose.An accrual represents a transaction that affects the determination of income for the period but has not yet been reflected in the cash accounts of that period. Accrued revenue is revenue earned but not yet collected in cash. An example of accrued revenue is accrued interest revenue earned on bonds from the last interest payment date to the end of the accounting period. An accrued expenses is an expense incurred but not yet paid in cash. An example of an accrued expense is salaries incurred for the last week of the accounting period that are not payable until the subsequent accounting period.A deferral represents a transaction that has been reflected in the cash accounts of the period but has not yet affected the determination of income for that period. Deferred (prepaid) revenue is revenue collected or collectible in cash but not yet earned. An example of deferred (prepaid) revenue is rent collected in advance by a lessor in the last month of the accounting period, which represents the rent for the first month of the subsequent accounting period. A deferred (prepaid) expense is an expense paid or payable in cash but not yet incurred. An example of a deferred (prepaid) expense is an insurance premium paid in advance in the current accounting period, which represents insurance coverage for the subsequent accounting period.2. In cash accounting, the effects of transactions and other events on the assets and liabilities of a company are recognized and reported only when cash is received or paid; while in accrual accounting, these effects are recognized and reported in the time periods to which they relate. Because cash accounting does not attempt to match revenues and the expenses associated with those revenues, cash accounting is not in conformity with generally accepted accounting principles.C1-10 Revenue RecognitionThe following are brief descriptions of several companies in different lines of business.A. Company A is a construction company. It has recently signed a contract to build a highway over a three-year period. A down payment was collected; the remaining collections will occur periodically over the construction period based upon the degree of completion.B. Company B is a retailer. It makes sales on a daily basis for cash and on credit cards.C. Company C is a health spa. It has recently signed contracts with numerous individuals to use its facilities over a two-year period. The contract price was collected in advance.D. Company D is a land development company. It has recently begun developing a “retirement community” and has sold lots to senior citizens. The sales contract requires a small down payment and peri