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Select thebest answerfor eachof the following.Ml-1Accruing netlosses onnoncancelable purchasecommitments forinventory is an目.example ofConservatism b.Realizationc.Consistencyd.MaterialityMl-2The informationprovided byfinancial reportingpertains toIndividual companies,rather thanto industriesor theeconomy asa wholeor to membersof societyas consumers.b.Individual companiesand industries,rather thanto theeconomy asa wholeor tomembersof societyas consumers.c.Individual companiesand theeconomy asa whole,rather thanto industriesor tomembersof societyas consumers.d.Individualcompanies,industries,and theeconomy asa whole,rather thantomembersofsociety asconsumers.Ml-3According toStatement of Financial Accounting Concepts No.2,an interimearningsPredictive Feedbackvaluea.value NoNo®Yes YesNoc.Yes d.YesNoreport isexpected tohave which of the followingMl-4A patent,purchased in2007and beingamortized overa10-year life,was determinedtobe worthlessin
2010.The write-off of the assetin2010is anexample ofwhich of thefollowing principlesa.Associating cause and effectM・Immediate recognitionc.Systematic and rational allocationd.ObjectivityMl-5An accruedexpense is an expenseIncurredbut notpaidc.Paid but not incurredb.Incurred andpaidd.Not reasonablyestimableMl-6Which of the followingaccounting conceptsstates thatan accountingtransactionshould besupported bysufficient evidence to allowtwo ormore qualifiedindividuals toarriveat essentiallysimilar measuresand conclusionsa.MatchingG Verifiabilityc.Periodicityd.Stable monetaryunitMl-7Which of thefollowingis considereda pervasiveconstraint ofproviding financialinformationby Statementof FinancialAccounting ConceptsNo.2Benefits/costsb.Conservatismc.Timelinessd.VerifiabilityMl-8The valuationof apromise toreceive cashin thefuture atpresent valueon thefinancialstatements of a companyis validbecause of the accountingconcept of a.Entity b.曰Materiality Goingconcern d.NeutralityMl-9Under Statementof FinancialAccounting ConceptsNo.2,which of the followingrelatesto bothrelevance andreliabilitya.Timelinessb.Neutralityc.Feedback valueConsistencyMl-10Under StatementofFinancialAccountingConceptsNo.6,whichof thefollowing,inthe mostprecise sense,means theprocess ofconverting noncashresources andrights intocashor claimsto casha.Allocation同.b.Recordation c.Recognition RealizationCl-3Accounting Assumptionsand PrinciplesCertain accounting assumptionsand principleshave hadan importantimpact on thedevelopment ofgenerally acceptedaccounting principles.The followingis a list ofthesepractices.A.Entity E.Monetary unitB.Continuity F.RealizationC.Period oftime G.MatchingD.Historical costH.Conservatismassumptions andprinciples as well asalist of statementsdescribing certainaccountingA
1.The business,rather thanits owners,is thereporting unit.G
2.Depreciation costsare expensedin theperiods ofuse ratherthan at the time the assetisacquired.E
3.Accounting measurementsare reportedin dollars.C
4.The yearis thenormal reportingunit.B
5.In theabsence ofevidenceto the contrary,the companywill operatelong enoughtocarry outits existingcommitments.F
6.Revenue isusually recognizedat the time of sale.D
7.Exchange priceis retainedin theaccounting records.H
8.An accountingalternative isselected thatis leastlikely tooverstate assetsand income.RequiredSelect theaccounting assumptionor principlethat justifieseach accountingpractice andplacethe appropriate letter on the linepreceding thestatementCl-4Qualitative CharacteristicsInFASB Statementof ConceptsNo.2,several qualitativecharacteristics ofusefulaccounting informationwere identified.The followingis alistofthese qualitiesaswellas alistof statementsdescribing thequalities.A.Comparability H.VerifiabilityB.Understandability I.NeutralityC.Relevance J.Representational faithfulnessD.Reliability K.ConsistencyE.Predictive valueL.MaterialityF.Feedback valueG.TimelinessH
1.Ability ofmeasurers toform aconsensus that the selectedaccounting methodhas beenusedwithout erroror bias.G
2.Making informationavailable todecision makersbefore itloses itscapacity to influencedecisions.C
3.Capacity tomake adifference ina decision.B
4.Overall qualitativecharacteristic.I
5.Absence ofbias intendedtoinfluencebehavior ina particulardirection.D
6.Reasonably freefrom bias.E
7.Helps decisionmakers forecastcorrectly.J
8.Validity.A
9.Interactive quality;helps explainsimilarities anddifferences betweentwo setsof facts.L
10.Quantitative“threshold constraint.K
11.Conformity fromperiod toperiod.F
12.Helps decisionmakers confirmor changeprior expectations.RequiredPlace theappropriateletteridentifying eachterm on the linein frontofthestatementdescribing thequality.Cl-5Cost andExpense RecognitionAnaccountant must be familiarwith theconcepts involvedin determiningearnings ofacompany.The amount of earningsreported for a companyis dependentontheproperrecognition,in general,of revenueand expenseforagiven timeperiod.In somesituationscosts are recognized as expenses atthe time of product sale;in othersituations guidelineshavebeen developedfbr recognizing costs as expenses orlosses byother criteria.Required
1.Explain the rationale forrecognizingcostsas expensesatthe timeofproductsale.
2.What istherationaleunderlying theappropriateness oftreating costsas expensesof aperiod instead ofassigning thecosts toan assetExplain.
3.Some expensesare assignedto specificaccounting periodsonthe basis ofsystematic andrationalallocation ofasset cost.Explain theunderlying rationalefbr recognizingexpenseson thisbasis.
1.Some costsare recognizedas expensesonthebasis ofa presumeddirect association withspecific revenue.This presumeddirect associationhas beenidentified bothas“associatingcause andeffect and as the matching concept.0Direct cause-and-effect relationshipscanseldom beconclusively demonstrated,but many costs appearto berelated toparticularrevenue,and recognizingthem asexpenses accompaniesrecognition ofthe revenue.Generally,thematchingconcept requiresthatthe revenue recognized and theexpensesincurred toproduce the revenue begiven concurrentperiodic recognitionin theaccountingrecords.Only ifeffort isproperly relatedto accomplishmentwill theresults,called income,have usefulsignificance concerningthe efficientutilization of business resources.Thus,applying thematching principleis arecognition ofthe cause-and-effect relationshipthatexists betweenexpense andrevenue.Examples ofexpenses that are usuallyrecognized byassociatingcauseandeffect aresales commissions,freight-out onmerchandise sold,andcost ofgoods soldor servicesprovided.
2.Some costsare assignedasexpensestothe current accounting period becausea theirincurrenceduring theperiod providesno discerniblefuture benefits;b theyare measuresofassets recordedin previousperiods fromwhich nofuture benefitsare expectedor canbediscerned;c theymustbeincurred eachaccounting year,and nobuild-up ofexpectedfuture benefitsoccurs;d bytheir naturethey relateto currentrevenues eventhough theycannotbe directlyassociated withany specificrevenues;etheamountofcost tobedeferred canbe measuredonly inan arbitrarymanner orgreat uncertaintyexists regardingtherealization offuture benefits,or both;f uncertaintyexists regardingwhether allocatingthemto currentand futureperiods willserve anyuseful purpose.Thus,manycostsare calledperiodcosts andare treated asexpenses in theperiod incurredbecause theyhave neitheradirect relationshipto revenueearned norcan theiroccurrence bedirectly shownto giveriseto anasset.The applicationof thisprinciple ofexpense recognitionresults incharging manycoststo expensein theperiodinwhich theyare paidor accruedfbr payment.Examples ofcoststreatedasperiod expenseswould includeofficers salaries,advertising,research anddevelopment,and auditors*fees.
3.In theabsence ofa directbasis forassociating asset cost withrevenue,and ifthe assetprovidesbenefits fbrtwo ormore accounting periods,its costshould beallocated totheseperiods asan expenseinasystematic andrational manner.Thus,when itis impractical,orimpossible,to finda closecause-and-effect relationshipbetween revenueand cost,thisrelationship isoften assumedto exist.Therefore,the assetcost is allocated tothe accountingperiodsby somemethod.The allocationmethod usedshould appearreasonable toanunbiased observerand shouldbe followedconsistently fromperiod toperiod.Examples ofsystematicandrationalallocation ofassetcostwould includedepreciation offixed assets,amortization ofcertain intangibles,and allocationof rentand insurance.Cl-9Accruals andDeferralsGenerally acceptedaccounting principlesrequire theuse ofaccruals anddeferrals in thedetermination of income.Required
1.How doesaccrual accountingaffect the determination ofincome Includein yourdiscussionwhat constitutesan accrualandadeferral,and giveappropriate examplesof each.
2.Contrast accrual accounting withcash accounting.
1.Accrual accountingrecognizes andreports the effects of transactions and other events onthe assetsand liabilitiesofa company inthe time periods towhich theyrelate ratherthanonly whencash isreceived orpaid.Accrual accountingattempts to match revenues and theexpenses associated with those revenuesin orderto determinenet income fbr anaccountingperiod.Revenues are recognizedand recorded whenearned.Expenses are recognized andrecordedas follows:•Associating Causeand Effect.Some expensesare recognizedand recordedon apresumeddirect associationwith specificrevenue.•Systematic andRational Allocation.In theabsence ofa directassociationwithspecificrevenue,some expensesarerecognizedandrecordedby attemptingto allocateexpensesinasystematic andrational manneramong theperiods inwhich benefitsare provided.•Immediate Recognition.Some costsare associatedwith thecurrent accounting period asexpensesbecause1costs incurredduring theperiod provideno discerniblefuture benefits,2costs recordedas assetsin priorperiods nolonger providediscernible benefits,or3allocating costseither onthebasisof associationwith revenuesor amongseveral accountingperiodsis consideredto serveno usefulpurpose.An accrualrepresents atransaction thataffects thedetermination ofincomefbr the periodbuthas not yet beenreflected inthe cashaccounts ofthat period.Accrued revenue is revenueearnedbut not yet collected in cash.An exampleof accruedrevenue is accrued interestrevenueearned onbonds fromthe lastinterest paymentdate tothe endoftheaccountingperiod.An accruedexpenses is an expenseincurred butnot yetpaid in cash.An exampleofan accruedexpense issalaries incurredfbr the last weekoftheaccounting periodthatarenotpayable untilthe subsequentaccountingperiod.A deferralrepresents atransaction thathas beenreflected inthe cashaccounts ofthe periodbuthas notyet affectedthedeterminationofincomefbr thatperiod.Deferred prepaidrevenueis revenuecollected orcollectible incash butnotyetearned.An exampleofdeferred prepaidrevenueisrent collectedin advanceby alessor inthelastmonth oftheaccounting period,which representsthe rentfbrthefirst monthofthesubsequent accountingperiod.A deferred prepaid expense isanexpense paidor payableincashbutnotyetincurred.An exampleofadeferredprepaidexpenseisan insurancepremium paidinadvance inthecurrentaccountingperiod,which representsinsurance coveragefor thesubsequentaccountingperiod.
2.In cash accounting,theeffectsoftransactionsandothereventsonthe assetsandliabilities ofacompanyarerecognizedand reportedonly whencash isreceived orpaid;while inaccrualaccounting,these effectsarerecognizedand reportedinthetimeperiodstowhich theyrelate.Because cashaccounting doesnot attempttomatchrevenuesandtheexpensesassociatedwiththoserevenues,cashaccountingis notin conformitywithgenerally acceptedaccounting principles.Cl-10Revenue RecognitionThefollowing arebrief descriptionsof severalcompanies indifferent linesofbusiness.A.Company Aisaconstruction company.It hasrecently signeda contractto buildahighway overa three-year period.A downpayment wascollected;the remainingcollectionswill occurperiodically overthe constructionperiod based upon thedegree of completion.B.Company Bisaretailer.It makessales ona dailybasis fbrcash andon creditcards.C.Company Cisahealth spa.It hasrecently signedcontracts withnumerous individualstouse itsfacilities overa two-year period.The contractprice wascollectedinadvance.D.Company Disaland developmentcompany.It hasrecently begundeveloping aretirementcommunity andhas soldlots tosenior citizens.The salescontract requiresasmall downpayment andperiodic paymentsuntil completionofthe roads anda clubhouse,after whichthe remainderofthepurchase priceis due.Prior to this point,a purchasermaycancel thecontract andreceive arefund ofall payments.RequiredDescribe whenrevenue shouldbe recognizedby eachcompany.If revenueshould notberecognized atthetimeof sale,indicate whatmethod shouldbe usedto recognizethe revenue.Justify yourdecision.A.Company Ashould recognizerevenue under the percentage ofcompletionmethodduring productionbasedupon the percentageofthehighway completedeach period.Thisapproach isreasonable because realization takesplace baseduponthedegree completed,andat thatpoint apercentageoftherevenue has been earned.B.Company Bshould recognizerevenue atthetimeofsalebecause realizationhas occurredandrevenuehasbeen earned because the earning processis substantiallycomplete.C.Company Cshould recognizerevenue periodicallyunder theproportional performancemethodbased onthe servicescompleted todate.Although realizationoccurred atthe timethecontracts weresigned,revenue wasnotyetearnedbecause theearningprocess hadnotbeen completed.D.Company Dshould recognizerevenue periodicallyundertheinstallment methodor costrecoverymethod untiltheroadsand clubhouseare completed.This isbecauserealizationisuncertain uptothispoint andtherevenuehas not beenearnedbecausetheearning processhasnotbeensubstantially completed.。