Accounting Final Exam

(Net income - dividends): includes revenues, expenses, gains, losses

Obtain, analyze, record (journal), post (general ledger)

1. unadjusted trial balance (debits=credits), 2. adjust for prepayments, accured/incurred expenses, estimates (depreciation, bad debts), 3. adjusted trial balance 4. use info to prep IS/SCI, BS, SCF, 5. close temp accounts to RE (rev, ex, div)

Credit Expenses & Dividends -> Debit RE; Debit Revenues -> Credit RE

Ability to pay all liabiltiies, including long term

Ability to alter cash flows to respond to opportunities or need

Assets are recorded at historical costs not market value and many valuable resources are not recorded as assets

Cash (& cash equivalents), short-term investments, accts rec, inventory, prepaid expenses

Investments, PPE, operating lease assets, intangibale assets (patents, goodwill, trademarks, copyrights), other long term assets

Accounts payable, short-term notes payable, deferred revenues, accrued liabilities, current maturities of long-term debt

Bonds payable

SG&A, Marketing, COGS

Revenues, losses, gains, expenses related to primary, revenue generating activities

Those not related to primary activities (interest revenue)

Always recorded separately

Operations that have been sold or disposed of

(Total Net Income – Dividends) / Weighted Avg. of Common Shares Outstanding

Reduction in EPS as # of common shares increased (from convertible bonds, treasury stock, etc.)

Total change in equity due to nonowners transactions

Includes unrealized gains / losses for available for sale securities, foreign currency translation, derivative instruments and pension obligation

Direct and Indirect

Cash effect of each operating activity is reported directly into the statement

Start with net income, and work backwards to adjust to amount to a cash basis

Operating, Investing, Financing (in that order)

Main revenue-generating actions of the business (internal)

Current assets: add decreases, subtract increases. Current liabilties: subtract decreases, add increases

Acquisition or disposition of long-lived assets (notes rec, investments, PPE)

Borrowing, paying principal, issuing stock, buying treasury stock, paying dividends

Which of the following is considered a practical constraint on the qualitative characteristics?

The 2 primary decision specfific qualities that making accounting information useful are:

Recognizing revenue in the period in which it records an asset

A list of the general ledger accounts and their benefits at a particular date

The closing process involves

Chronological record of all economic events

Reason we post journal entries

= asset's original cost - accumulated depreciation since purchase

Long-lived assets used in the operaitons of business refer to

Recognize revenue when goods/services are transferred to customers in exchange for the amount entitled to receive, recognized when transfer is complete

Identify the contract, identify performance obligations, determine transaction price, allocate transaction price, recognize revenue

Commercial substance, collection is probable

Readily available to pay debts or for operations

Liquid, short term investments with maturity < 3 months

Not available for current use (set aside for a specific purpose)

Min balance required to stay in a bank acccount (loan agreement, inc EAR)

Current asset, legal right to receive cash from a customer due to credit sales. Usually due in 30-60 days.

Allowance method and estimation methods

Estimate uncollectible accounts in same period as related sales, uses uncollectible allowance contra-asset to reduce receivables

Balance sheet approach and income statement approach

Adjusting bank and book balance to correct mistakes made (bank vs. book balance)

Add deposits outstanding, deduct checks outstanding, add bank errors

Collections made by bank, deduct service and other charges, NSF, company errors (less) pmt on note

Finished goods ready for sale

Raw materials, WIP, finished goods

BUYER owns during transit

SELLER owns until delivery

Still owned by consignor until sold, consignee holds inv but not legal title

Lowest COGS, highest NI when prices are rising

Highest COGS, lowest NI when prices are rising

NRV < Cost = inventory write-down, can apply to individual items, categories, total

Use a floor and ceiling in identfifying lower cost, using replacement cost as benchmark

Compute cost to retail using goods available for sale to determine end inv at cost

Adjust affected accounts, revise prior financial statements (unless LIFO), disclosure

PPE, natural resources, intangible assets

Land improvements, buildings, machinery, used in operation

Oil, timber tracts, mineral deposits

Patents, copyrights, trademarks, franchises 

Impacts the asset’s value on the balance sheet instead of income statement recording

Equipment, land, buildings, natural resources

Purchase price, sales tax, transportation, installation, legal fees, condition and location costs (sum is capitalized)

 Purchase price, closing costs, real estate commission, back taxes, mortgages, expenditures like cleaning and prep, (less) proceeds from salvaged materials 

Establishing parking lots, driveways, private roads, depreciated

Must be brought up to suit the needs of the new owner, purchase price, commissions, legal fees, reconditioning costs to repurpose the building 

 Timber, mineral deposits, oil, gas, value is derived from their physical consumption and are depleted, costs include:

 Purchase price + costs necessary to bring to use

Acquisition: rights to acquire the ability to find them. Exploration: drilling, excavating, searching. Development: before production of the resources begins like tunels, wells, shafts. Restoration costs: restore land to original condition after resources have been found

Additional expense accrued as an operating expense, over the three year excavation period. (growth of assets and earnings due to expansion)

Lack physical substance, represent the ownership of exclusive rights to sell goods or services 

Similar to PPE: report at original cost plus other like legal fees to prepare for use. 

Internal development has expenses that are incurred in the period  like RND, because it is difficult to track their benefit to a specific time.

For 20 years, grants the right of use, manufacture, and sale

Exclusive protection to the creator of a published work, usually for the life of the creator + 70 years, costs are identical to patents

Word, slogan, symbol that distinctively identities a company or their services. Can be renewed for an indefinite number of 10 year periods 

Contractual agreement to operate a business

 Fair value of the consideration given to acquire the company (acquisition price ) minus the fair value of their identifiable net assets (fair value of all tangible and intangible assets minus fair value of liabilities of the acquired company assumed by the acquirer).

Must allocate price among all different assets. Made in proportion to relative fair values. (percentage of fair value times lump sum price)

Deferred payments, issuance of equity, donated assets, exchange of nonmonetary assets for other assets. Any noncash transaction, the asset is recorded at fair value

Over time it accrues interest and you would use present value to calculate the current value of it

Because common stock is not traded, the fair value of the assets received is a good indicator. 

The company receiving the donation is performing a service for the donor in exchange for the asset donated,record appriased value

Record the new asset at fair value, remove the book value of the nonmonetary asset given. Record any cash received or paid. Record any gain or los (on the sale of assets)

Future cash flows will change as a result of the exchange

Building requires time and financing to complete, is interest a factor?

Only interest that could have been avoided if the project wasn’t done. 

We then multiply this weighted expenditure by an interest rate (8%) to get 76K as the interest amount, added to the 1.5M

Planned search or investigation aimed at discovery of knowledge that may be useful in improving a product

Translation of research findings to design a product or improve existing service for sale

Point in time when the enterprise has completed all planning, designing, coding, testing necessary to establish that the product can run

Service life, allocation base, allocation method

Equal amount over service life. Take residual value out for first year

Multiply asset’s beginning year book value by double the straight-line rate

Denominator is constant, it is a sum of the periods, and the numerator increases each year. 

Measure service life of machine in terms of output (units produced) or input (hours in operation)

Amount of depreciation will differ if an asset was acquired during a fiscal year

When PPE sold for cash, difference in book value and consideration must be recorded as a gain (loss)

Management commits to a plan to sell, asset it available for immediate sale in present condition. Active plan to locate a buyer is initated. Completed sale of asset is probable and expected within a year. Asset is being offered for sale as a reasonable price at fair value. action by management indicate plan to sell is unlikely to be stopped

Assets, depreciation are removed from books. 

Allocation of cost of natural resources

 Allocation of cost of IA

Usually have 0 residual value, allocation method usually straight line to reflect the pattern of benefits

Prospectively, take the book value at the change point, add/subtract residual value to get new depreciable base, add any years remaining

How are Changes in Estimates Accounted For?

Prospectively, is the other method presents a better representation of asset consumption

Material errors are retrospectively restated, balances are corrected with a journal entry

held and used vs. held for sale

Recovery Test & Measurement: test for impairment if ecents change that the book value is not recoverable (decrease in market price, adverse change,etc.)

Qualitative Assessment, Measurement; goodwill is not separable, reporting unit

Measures at lower of book or cost to sell

Reduce earnings of current year but increase future earnings by increasing current depreciation

Expenditures related to assets increase future benefits by

Each of the following would be considered PPE/IA except

Which of the following situations would disqualify interest from being capitalized?

The initial cost of land does not include

Goodwill is