Review for Exam 1  

25 multiple choice questions and 4 problems covering the material in units 1-4 Topic Accrual Accounting What to Know Be able to state a given transaction for cash-basis or accrual-basis accounting. Understand advantages of accrual-basis accounting Be able to adjust from accrual-basis to cash-basis accounting and vice versa. Appendix 3A (Page 195) Most companies use accrual-basis accounting  Recognize revenue when it is earned and  Expenses in the period incurred Without regard to the time of receipt or payment of cash Under the strict cash-basis, companies  Record revenue only when they receive cash, and  Record expenses only when they disperse cash Cash basis financial statements are not in conformity with GAAP. Pages 196-201 Adjust from accrual-basis to cash-basis and vice versa Advantages to accrual basis accounting: a) Today’s economy is considerably more lubricated by credit than cash b) The accrual basis recognizes all aspects of the credit phenomenon c) Investors, creditors, and other decision makers seek timely information about an enterprise’s future cash flows Transaction Processing Understand the accounting cycle and its documents and procedures. Record business events in journal entry form. Chapter 3 Accounting Cycle Summarized – page 191
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Review for Exam 1  

Adjusting Entries

Be able to record the four types of adjusting journal entries and understand their role in the accounting cycle. Chapter 3 (Objective 5) Illustration 3-20 (Page 149) Pages 149-180 Journal Entries & Examples Be able to create Trial Balances: unadjusted, adjusted, and closing. Be able to use Trial Balances to create financial statements. Chapter 3 (Objective 4) Be able to record closing entries & understand their role in the accounting cycle Closing entries are used to reduce the balance of the income statement (revenue and expense) accounts to zero.    to transfer net income or net loss to owner’s equity balance sheet (asset, liability and equity) accounts are not closed dividends are closed directly to retained earnings account

Trial Balances

Closing Entries

Page 187-188 Chapter 3 (Objective 7) Income Statement Be able to prepare in well structured form: Single-step vs. multi-step statements Subtotals of Gross profit, selling expenses, administrative expenses, operating expenses, operating income, income from continuing operations, net income Special items: Discontinued Operations (Page 239-241), Extraordinary Items (Page 242-247), Net of Tax presentation: Be able to allocate tax expense to discontinued operations, extraordinary items and income from continuing operations. Earnings per share Single-step income statement emphasizes total revenues and total
2   

Review for Exam 1  

expenses Multi-step income statement (1) separates operating transactions from non-operating transactions (2) matches costs and expenses with related revenues (3) highlights certain intermediate components of income that analysts use. Intermediate components of the Income Statement: 1. 2. 3. 4. 5. 6. Operating section Non-operating section Income Tax Discontinued operations Extraordinary items Earnings per share

Reporting Irregular Items (when both Discontinued Operations and Extraordinary Items is present): Page 248 Earnings per share = Net Income – Preferred Dividends / Weighted average number of shares outstanding  Important business indicator  Measures the dollars earned by each share of common stock  Must be disclosed on the income statement Chapter 4 Single-Step Income Statement (Pages 229) Multi-Step Income Statement (Page 234) Unit 3 Homework and Practice (online) Be able to prepare in well-structured form: Understand where prior period adjustments are placed (Change in Accounting Principle and Correction of Error). Be able to use net of tax presentation of prior period adjustments. Chapter 3 Unit 2 Homework and Practice (online) Be able to prepare in well-structured form: Classified vs. unclassified balance sheets

Statement of Retained Earnings

Balance Sheet

3   

Review for Exam 1  

Chapter 5 Unit 3 Homework and Practice (online) Purpose and major categories on the statement Chapter 5 Purpose of statement of cash flows: To provide relevant information about the cash receipts and cash payments of an enterprise during a period. The statement provides answers to the following questions: 1) Where did the cash come from? 2) What was the cash used for? 3) What was the change in the cash balance? Three different activities: a) Operating – cash inflows and outflows that enter into the determination of net income b) Investing – cash inflows and outflows from non-current assets c) Financing – cash inflows and outflows from non-current liabilities and equity The statement’s value is that it helps users evaluate liquidity, solvency and financial flexibility. Illustration 5-18 (Page 338 of Textbook Slides for Exam 1) The accounting institutions: FASB, SEC, AICPA and their components and impact on current GAAP FASB: Financial Accounting Standards Board AICPA: American Institute of Certified Public Accountants SEC: Securities and Exchange Commission GAAP: Generally Accepted Accounting Principles The accounting standard setting process Stakeholders in the accounting standard-setting process.

Statement of Cash Flows

Context of Accounting

4   

Review for Exam 1  

The role of GAAP in an economy Structure of the FASB Codification System FASB/IFRS state of convergence and some common differences. Chapter 1 The purpose of accounting, the qualitative characteristics of accounting information, the definition of elements of accounting, the principles / assumptions used in recognition and measurement. Chapter 2 Purpose of accounting: to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
 

Conceptual Framework

5   

Intermediate Accounting

1-1

Prepared by Coby Harmon University of California, Santa Barbara

1

Financial Accounting and Accounting Standards

Intermediate Accounting 14th Edition

Kieso, Weygandt, and Warfield
1-2

Learning Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9.
1-3

Identify the major financial statements and other means of financial reporting. Explain how accounting assists in the efficient use of scarce resources. Identify the objective of financial reporting. Explain the need for accounting standards. Identify the major policy-setting bodies and their role in the standardsetting process. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe the impact of user groups on the rule-making process. Describe some of the challenges facing financial reporting. Understand issues related to ethics and financial accounting.

Financial Accounting and Accounting Standards

Financial Statements and Financial Reporting
Accounting and capital allocation Objectives Need to develop standards

Parties Involved in Standard-Setting

Generally Accepted Accounting Principles
FASB Codification

Issues in Financial Reporting
Political environment Expectations gap Financial reporting challenges International accounting standards Ethics

Securities and Exchange Commission American Institute of CPAs Financial Accounting Standards Board Changing role of the AICPA

1-4

Financial Statements and Financial Reporting
Essential characteristics of accounting are:
(1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties.

1-5

LO 1 Identify the major financial statements and other means of financial reporting.

Financial Statements and Financial Reporting
Economic Entity
Financial Information Accounting? Identifies and Measures and Communicates

Financial Statements
Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures

Additional Information
President’s letter Prospectuses Reports filed with governmental agencies News releases Forecasts Environmental impact statements Etc.

GAAP
1-6

LO 1 Identify the major financial statements and other means of financial reporting.

To provide disclosure required by generally accepted accounting principles. d. b. To present management’s responses to auditor comments. To correct improper presentation in the financial statements. To provide recognition of amounts not included in the totals of the financial statements. c. .Financial Statements and Financial Reporting Review Question What is the purpose of information presented in notes to the financial statements? a. 1-7 LO 1 Identify the major financial statements and other means of financial reporting.

Illustration 1-1 Capital Allocation Process 1-8 LO 2 Explain how accounting assists in the efficient use of scare resources.Financial Statements and Financial Reporting Accounting and Capital Allocation Resources are limited. . Efficient use of resources often determines whether a business thrives.

which a. promotes productivity. . d. 1-9 LO 2 Explain how accounting assists in the efficient use of scare resources. b. c.Accounting and Capital Allocation Review Question An effective process of capital allocation is critical to a healthy economy. All of the above. encourages innovation. provides an efficient and liquid market for buying and selling securities.

and other creditors in making decisions in their capacity as capital providers. 1-10 LO 3 Identify the objectives of financial reporting.Financial Statements and Financial Reporting Objectives of Financial Reporting Provide financial information about the reporting entity that is useful to    present and potential equity investors. . lenders.

 Equity Investors and Creditors Investors are the primary user group. . Provide the most useful information possible at the least cost. 1-11 LO 3 Identify the objectives of financial reporting.Objective of Financial Accounting General-Purpose Financial Statements  Provide financial reporting information to a wide variety of users.

Decision-Usefulness Investors are interested in assessing the company’s 1.Objective of Financial Accounting Entity Perspective Companies viewed as separate and distinct from their owners. 1-12 . LO 3 Identify the objectives of financial reporting. ability to generate net cash inflows and 2. management’s ability to protect and enhance the capital providers’ investments.

Need to Develop Standards Various users need financial information Financial Statements Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. . 1-13 Generally Accepted Accounting Principles (GAAP) LO 4 Explain the need for accounting standards.

.Parties Involved in Standard Setting Three organizations:   Securities and Exchange Commission (SEC).  Financial Accounting Standards Board (FASB). 1-14 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. American Institute of Certified Public Accountants (AICPA).

Parties Involved in Standard Setting Securities and Exchange Commission (SEC)   Established by federal government. Enforcement Authority.gov/ Encouraged private standard-setting body. LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. Securities Act of 1933     1-15 Securities Act of 1934 http://www. . SEC requires public companies to adhere to GAAP. Accounting and reporting for public companies. SEC Oversight.sec.

aicpa.Parties Involved in Standard Setting American Institute of CPAs (AICPA)   National professional organization Established the following: http://www.org/ Committee on Accounting Procedures    Accounting Principles Board    1939 to 1959 Issued 51 Accounting Research Bulletins (ARBs) Problem-by-problem approach failed 1959 to 1973 Issued 31 Accounting Principle Board Opinions (APBOs) Wheat Committee recommendations adopted in 1973 1-16 LO 5 .

Exercises general oversight. Funds their activities.   Consult on major policy issues. Mission to establish and improve standards of financial accounting and reporting. LO 5 . Financial Accounting Foundation Financial Accounting Standards Board Financial Accounting Standards Advisory Council 1-17    Selects members of the FASB.Parties Involved in Standard Setting Financial Accounting Standards Board (FASB) Wheat Committee’s recommendations resulted in creation of FASB.

Remunerated Membership.fasb. Increased Independence. Greater Autonomy.org/ 1-18 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. Differences between FASB and APB include:      Smaller Membership. .Financial Accounting Standards Board Missions is to establish and improve standards of financial accounting and reporting. Broader Representation. Full-time. http://www.

d. Topics are identified and placed on the board’s agenda. The board conducts research and analysis and a discussion memorandum is issued. The board evaluates the research and public response and issues an exposure draft. A public hearing on the proposed standard is held. 1-19 .Financial Accounting Standards Board Review The first step taken in the establishment of a typical FASB statement is a. LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. b. c.

.Financial Accounting Standards Board Illustration 1-3 The Due Process System of the FASB 1-20 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process.

Financial Accounting Standards Board Types of Pronouncements    Standards. Interpretations. . Financial Accounting Concepts. Emerging Issues Task Force Statements. 1-21 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process. and Staff Positions.

Types of Pronouncements CA1-14 (Accounting Pronouncements): Standard setting bodies have issued a number of authoritative pronouncements. below. with a description of these pronouncements on the right. A list is provided on the left. (d) (f) (c) (e) (a) (b) 1-22 LO 5 .

. Practice Bulletins. AICPA and AcSEC no longer issues authoritative accounting guidance for public companies.Parties Involved in Standard Setting Changing Role of AICPA The AICPA established the Accounting Standards Executive Committee (AcSEC):    Audit and Accounting Guides. Statements of Position (SOP). PCAOB oversees the development of auditing standards. 1-23 LO 5 Identify the major policy-setting bodies and their role in the standard-setting process.

and Staff Positions. . Interpretations.Generally Accepted Accounting Principles Principles that have substantial authoritative support. AICPA Accounting Research Bulletins. APB Opinions. Major sources of GAAP:    FASB Standards. 1-24 LO 6 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.

Generally Accepted Accounting Principles Illustration 1-4 GAAP Documents 1-25 LO 6 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. .

.Generally Accepted Accounting Principles Review Which of the following accounting pronouncements is the most authoritative? a. AICPA Statement of Position. 1-26 LO 6 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. FASB Technical Bulletins. c. FASB Statement of Financial Accounting Concepts. b. d. AICPA Accounting Principles Board Opinion.

Generally Accepted Accounting Principles
FASB Codification

Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic. Creates one level of GAAP, which is considered authoritative. All other accounting literature is considered non-authoritative.
FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification.

 

1-27

LO 6

Generally Accepted Accounting Principles
Illustration 1-5 FASB Codification Framework

1-28

LO 6

Issues in Financial Reporting
GAAP in a Political Environment
GAAP is as much a product of political action as they are of careful logic or empirical findings.
Illustration 1-6 User Groups that Influence the Formulation of Accounting Standards

1-29

LO 7 Describe the impact of user groups on the rule-making process.

Issues in Financial Reporting
Expectation GAAP
What the public thinks accountants should do vs. what accountants think they can do.
  

Difficult to close in light of accounting scandals. Sarbanes-Oxley Act (2002). Public Company Accounting Oversight Board (PCAOB).

1-30

LO 7 Describe the impact of user groups on the rule-making process.

Issues in Financial Reporting
Financial Reporting Challenges
   

Non-financial measurements. Forward-looking information. Soft assets. Timeliness

1-31

LO 8 Describe some of the challenges facing financial reporting.

Issues in Financial Reporting
International Accounting Standards
Two sets of standards accepted for international use:
 

U.S. GAAP, issued by the FASB. International Financial Reporting Standards (IFRS), issued by the IASB.

FASB and IASB recognize that global markets will best be served if only one set of GAAP is used.
1-32

LO 8 Describe some of the challenges facing financial reporting.

Issues in Financial Reporting
CA1-9 (GAAP Terminology): With accounting and finance, it often helps to be fluent in abbreviations and acronyms. Instructions: Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term. (a) AICPA (b) CAP (c) ARB (d) APB
1-33

(e) FAF (f) FASAC (g) SOP (h) GAAP

(i) CPA (j) FASB (k) SEC (l) IASB

LO 8 Describe some of the challenges facing financial reporting.

Issues in Financial Reporting
Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical dilemmas.
 

GAAP does not always provide an answer. Doing the right thing is not always easy or obvious.

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LO 9 Understand issues related to ethics and financial accounting.

RELEVANT FACTS

International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB). Recent events in the global capital markets have underscored the importance of financial disclosure and transparency not only in the United States but in markets around the world. As a result, many are examining which accounting and financial disclosure rules should be followed. U.S standards, referred to as generally accepted accounting principles (GAAP), are developed by the Financial Accounting Standards Board (FASB). The fact that there are differences between what is in this textbook (which is based on U.S. standards) and IFRS should not be surprising because the FASB and IASB have responded to different user needs.

1-35

RELEVANT FACTS

The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is a continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation. Debate about international companies (non-U.S.) adopting SOX-type standards centers on whether the benefits exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive. The textbook mentions a number of ethics violations, such as WorldCom, AIG, and Lehman Brothers. These problems have also occurred internationally, for example, at Satyam Computer Services (India), Parmalat (Italy), and Royal Ahold (the Netherlands).

1-36

RELEVANT FACTS

IFRS tends to be simpler in its accounting and disclosure requirements; some people say more “principles-based.” GAAP is more detailed; some people say more “rules-based.” This difference in approach has resulted in a debate about the merits of “principlesbased” versus “rules-based” standards. The SEC allows foreign companies that trade shares in U.S. markets to file their IFRS financial statements without reconciliation to GAAP.

1-37

ABOUT THE NUMBERS Illustration IFRS1-1 Global Companies 1-38 .

Standards used by foreign companies listing on U. IFRS used in over 115 countries.    1-39 . Standards used on most foreign exchanges. securities exchanges.International Standard-Setting Organizations: International Accounting Standards Board (IASB)  Issues International Financial Reporting Standards (IFRS).S.

iosco. Dedicated to ensuring that global markets can operate in an efficient and effective basis.International Organization of Securities Commissions (IOSCO)   Does not set accounting standards. http://www.org/ 1-40 .

Standards Advisory Council.iasb.  http://www.International Accounting Standards Board (IASB) Composed of four organizations—  International Accounting Standards Committee Foundation (IASCF). International Accounting Standards Board (IASB).org   1-41 . International Financial Reporting Interpretations Committee (IFRIC).

Illustration IFRS1-2 International Standard-Setting Structure 1-42 .

Review Question IFRS stands for: a. Independent Financial Reporting Standards. c. 1-43 . b. d. International Financial Reporting Standards. International Federation of Reporting Services. Integrated Financial Reporting Services.

1-44 .Review Question The major key players on the international side are the: a. IOSCO and the SEC. b. c. IASB and IOSCO. d. SEC and FASB. IASB and FASB.

S.Review Question Which body from the U. c. SEC. b. FASC. FAF. FASB. side is similar to the IASB? a. 1-45 . d.

Framework for financial reporting. International financial reporting interpretations. 1-46 .Types of Pronouncements    International Financial Reporting Standards.

2. Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC). and 3.Hierarchy of IFRS Companies first look to: 1. International Financial Reporting Standards. International Accounting Standards. 1-47 .

Review Question IFRS is comprised of: a. b. FASB financial reporting standards and International Accounting Standards. International Accounting Standards. c. International Financial Reporting Standards. 1-48 . International Accounting Standards and international accounting interpretations. and international accounting interpretations. d. International Financial Reporting Standards and FASB financial reporting standards.

Illustration IFRS1-3 SEC Roadmap 1-49 . assuming that certain conditions are met.International Convergence The SEC appears committed to move to IFRS.

International Convergence The SEC will decide. sometime in 2011. 1-50 . but there would be a transition period in which this would be accomplished. whether to mandate the use of IFRS. It is likely that not all companies would be required immediately to change to IFRS.

or damages. Request for further information should be addressed to the Permissions Department. The Publisher assumes no responsibility for errors. Inc. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. John Wiley & Sons. 1-51 . omissions. Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale.Copyright Copyright © 2012 John Wiley & Sons. caused by the use of these programs or from the use of the information contained herein. All rights reserved.

Santa Barbara .Intermediate Accounting 2-1 Prepared by Coby Harmon University of California.

2 Conceptual Framework for Financial Accounting Intermediate Accounting 14th Edition Kieso. Weygandt. and Warfield 2-2 .

Describe the impact that constraints have on reporting accounting information. 8. Describe the FASB’s efforts to construct a conceptual framework. 6. 2.Learning Objectives 1. Define the basic elements of financial statements. 7. Describe the basic assumptions of accounting. Understand the objectives of financial reporting. 2-3 . 4. Identify the qualitative characteristics of accounting information. Describe the usefulness of a conceptual framework. Explain the application of the basic principles of accounting. 3. 5.

Conceptual Framework For Financial Accounting Conceptual Framework First Level: Basic Objectives Second Level: Fundamental Concepts Qualitative characteristics Basic elements Third Level: Recognition and Measurement Basic assumptions Basic principles Constraints Summary of the structure Need Development Overview 2-4 .

. 2-5 LO 1 Describe the usefulness of a conceptual framework. To solve new and emerging practical problems.Conceptual Framework The Need for a Conceptual Framework   To develop a coherent set of standards and rules.

True 2-6 LO 1 Describe the usefulness of a conceptual framework.Conceptual Framework Review Question (true or false): A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature. . function. and limits of financial accounting and financial statements.

Conceptual Framework Review Question (true or false): A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary. . False 2-7 LO 1 Describe the usefulness of a conceptual framework.

SFAC No.Qualitative Characteristics of Accounting Information.Objectives of Financial Reporting. SFAC No.5 .Elements of Financial Statements.3 .Development of Conceptual Framework The FASB has issued seven Statements of Financial Accounting Concepts (SFAC) for business enterprises.Elements of Financial Statements (replaces SFAC No. SFAC No.7 . SFAC No.The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful Financial Information (replaces SFAC No. SFAC No. SFAC No. SFAC No.2 .Using Cash Flow Information and Present Value in Accounting Measurements.8 . 1 and No.Recognition and Measurement in Financial Statements. 3). 2) 2-8 LO 2 .1 .6 .

and Disclosure Concepts. Measurement. 2-9 LO 2 Describe the FASB’s efforts to construct a conceptual framework. .Conceptual Framework Overview of the Conceptual Framework   First Level = Basic Objectives Second Level = Qualitative Characteristics and Elements  Third Level = Recognition.

Illustration 2-7 Conceptual Framework for Financial Reporting 2-10 LO 2 .

LO 2 Describe the FASB’s efforts to construct a conceptual framework. The hierarchy of sources of generally accepted accounting principles.” The objectives and concepts for use in developing standards of financial accounting and reporting. c. The meaning of “Present fairly in accordance with generally accepted accounting principles. 2-11 . Generally accepted accounting principles in financial reporting by business enterprises.Conceptual Framework Review What are the Statements of Financial Accounting Concepts intended to establish? a. b. d.

.First Level: Basic Objectives Objective of general-purpose financial reporting is: To provide financial information about the reporting entity that is useful to present and potential equity investors. lenders. and other creditors in making decisions about providing resources to the entity. 2-12 LO 3 Understand the objectives of financial reporting.

The needs of the users of the information. Generally accepted accounting principles b. The need for conservatism. Reporting on management’s stewardship. . d. c. the objectives of financial reporting for business enterprises are based on? a. 2-13 LO 3 Understand the objectives of financial reporting.First Level: Basic Objectives Review According to the FASB conceptual framework.

” 2-14 LO 4 Identify the qualitative characteristics of accounting information. .Second Level: Fundamental Concepts Qualitative Characteristics “The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.

Second Level: Qualitative Characteristics Illustration 2-2 Hierarchy of Accounting Qualities 2-15 LO 4 Identify the qualitative characteristics of accounting information. .

Relevance Illustration 2-7 Conceptual Framework for Financial Reporting 2-16 LO 4 .

2-17 LO 4 Identify the qualitative characteristics of accounting information. accounting information must be capable of making a difference in a decision. .Second Level: Qualitative Characteristics Fundamental Quality—Relevance To be relevant.

. 2-18 LO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative Characteristics Fundamental Quality—Relevance Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future.

. 2-19 LO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative Characteristics Fundamental Quality—Relevance Relevant information also helps users confirm or correct prior expectations.

Second Level: Qualitative Characteristics Fundamental Quality—Relevance Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information. 2-20 LO 4 Identify the qualitative characteristics of accounting information. .

Faithful Representation Illustration 2-7 Conceptual Framework for Financial Reporting 2-21 LO 4 .

.Second Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Faithful representation means that the numbers and descriptions match what really existed or happened. 2-22 LO 4 Identify the qualitative characteristics of accounting information.

.Second Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Completeness means that all the information that is necessary for faithful representation is provided. 2-23 LO 4 Identify the qualitative characteristics of accounting information.

.Second Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Neutrality means that a company cannot select information to favor one set of interested parties over another. 2-24 LO 4 Identify the qualitative characteristics of accounting information.

2-25 LO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative Characteristics Fundamental Quality—Faithful Representation An information item that is free from error will be a more accurate (faithful) representation of a financial item. .

Second Level: Qualitative Characteristics Enhancing Qualities Information that is measured and reported in a similar manner for different companies is considered comparable. 2-26 LO 4 Identify the qualitative characteristics of accounting information. .

. 2-27 LO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative Characteristics Enhancing Qualities Verifiability occurs when independent measurers. using the same methods. obtain similar results.

.Second Level: Qualitative Characteristics Enhancing Qualities Timeliness means having information available to decisionmakers before it loses its capacity to influence decisions. 2-28 LO 4 Identify the qualitative characteristics of accounting information.

.Second Level: Qualitative Characteristics Enhancing Qualities Understandability is the quality of information that lets reasonably informed users see its significance. 2-29 LO 4 Identify the qualitative characteristics of accounting information.

Basic Elements Illustration 2-7 Conceptual Framework for Financial Reporting 2-30 LO 5 .

6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise. “Moment in Time”    “Period of Time”        Assets Liabilities Equity Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses 2-31 LO 5 Define the basic elements of financial statements.Second Level: Basic Elements Concepts Statement No. .

(d) Declares and pays cash dividends to owners.Second Level: Basic Elements Exercise 2-5: Identify the element or elements associated with items below. Elements (a) Arises from peripheral or incidental transactions. (e) Increases in net assets in a period from nonowner sources. Assets (b) (c) (d) (e) (c) Liabilities Equity Investment by owners Distribution to owners Comprehensive income Revenue Expenses (a) (a) 2-32 Gains Losses LO 5 . (b) Obligation to transfer resources arising from a past transaction. (c) Increases ownership interest.

2-33 Liabilities Equity Investment by owners Distribution to owners (g) (h) (h) Comprehensive income Revenue Expenses Gains Losses LO 5 . Elements (f) Assets (f) Items characterized by future economic benefit.Second Level: Basic Elements Exercise 2-5: Identify the element or elements associated with items below. (g) Equals increase in net assets during the year. (h) Arises from income statement activities that constitute the entity’s ongoing major or central operations. after adding distributions to owners and subtracting investments by owners.

(l) Changes in equity during the period. Elements (i) Residual interest in the net assets of the enterprise.Second Level: Basic Elements Exercise 2-5: Identify the element or elements associated with items below. except those from investments by owners and distributions to owners. (k) Decreases assets by purchasing the company’s own stock. 2-34 Assets Liabilities (i) (k) (l) (j) Equity Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses LO 5 . (j) Increases assets through sale of product.

d. An increase in an asset from incidental transactions. . an entity’s revenue may result from a. An increase in a liability from incidental transactions.Second Level: Basic Elements Review: According to the FASB conceptual framework. b. c. 2-35 LO 5 Define the basic elements of financial statements. A decrease in a liability from primary operations. A decrease in an asset from primary operations.

” Illustration 2-7 Conceptual Framework for Financial Reporting 2-36 LO 5 .Third Level: Recognition and Measurement The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. “Recognition and Measurement in Financial Statements of Business Enterprises. 5.

money is the common denominator. Periodicity . . Going Concern . Monetary Unit .company can divide its economic activities into time periods.Third Level: Basic Assumptions Economic Entity – company keeps its activity separate from its owners and other businesses.company to last long enough to fulfill objectives and commitments. 2-37 LO 6 Describe the basic assumptions of accounting.

(c) Walgreen Co. does not adjust amounts in its financial statements for the effects of inflation. (b) Solectron Corporation. . 2-38 Periodicity Monetary Unit Going Concern Economic Entity LO 6 Describe the basic assumptions of accounting.Third Level: Assumptions Brief Exercise 2-7: Identify which basic assumption of accounting is best described in each item below. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. (a) The economic activities of KC Corporation are divided into 12-month periods for the purpose of issuing annual reports. reports current and noncurrent classifications in its balance sheet. Inc.

Third Level: Basic Principles Measurement Principle – The most commonly used measurements are based on historical cost and fair value. Recently the FASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities. Reporting of fair value information is increasing.    2-39 . Fair value information may be more useful. LO 7 Explain the application of the basic principles of accounting. Issues:  Historical cost provides a reliable benchmark for measuring historical trends.

Third Level: Basic Principles Revenue Recognition .generally occurs (1) when realized or realizable and (2) when earned. . Exceptions: Illustration 2-5 Timing of Revenue Recognition 2-40 LO 7 Explain the application of the basic principles of accounting.

.” Illustration 2-6 Expense Recognition 2-41 LO 7 Explain the application of the basic principles of accounting.Third Level: Basic Principles Expense Recognition .“Let the expense follow the revenues.

Provided through:    Financial Statements Notes to the Financial Statements Supplementary information 2-42 LO 7 Explain the application of the basic principles of accounting. .Third Level: Basic Principles Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user.

(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. . even though the estimated fair market value is greater. (a) KC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it. Inc. (b) Yahoo. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. 2-43 Revenue Recognition Expense Recognition Full Disclosure Measurement LO 7 Explain the application of the basic principles of accounting.Third Level: Basic Principles Brief Exercise 2-8: Identify which basic principle of accounting is best described in each item below.

Third Level: Constraints Cost Constraint – cost of providing information must be weighed against the benefits that can be derived from using it.the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory. Industry Practice . 2-44 LO 8 Describe the impact that constraints have on reporting accounting information. .

(c) Willis Company does not disclose any information in the notes to the financial statements unless the value of the information to users exceeds the expense of gathering it. 2-45 Industry Practice Cost Constraint Cost Constraint Industry Practice LO 8 . Inc. (d) A broker-dealer records all assets and liabilities at fair value.Third Level: Constraints Brief Exercise 2-10: What accounting constraints are illustrated by the items below? (a) KC. (b) Rafael Corporation discloses fair value information on its loans because it already gathers this information internally. reports agricultural crops on its balance sheet at market value.

Illustration 2-7 Conceptual Framework for Financial Reporting Summary of the Structure 2-46 .

In this first phase. they agreed on the objective of financial reporting and a common set of desired qualitative characteristics.   2-47 . it is unlikely that the basic structure related to the concepts will change.RELEVANT FACTS  In 2010. unlike the two conceptual frameworks that presently exist. The converged framework should be a single document. the IASB and FASB completed the first phase of a jointly created conceptual framework. The existing conceptual frameworks underlying GAAP and IFRS are very similar.

7. based on historical cost and fair value. GAAP has a concept statement to guide estimation of fair values when market-related data is not available (Statement of Financial Accounting Concepts No.RELEVANT FACTS  Both the IASB and FASB have similar measurement principles. Although both GAAP and IFRS are increasing the use of fair value to report assets. “Using Cash Flow Information and Present Value in Accounting”). the unit of measure will vary depending on the currency used in the country in which the company is incorporated. The IASB is considering a proposal to provide expanded guidance on estimating fair values. However. at this point IFRS has adopted it more broadly. The monetary unit assumption is part of each framework.   2-48 .

2-49 .RELEVANT FACTS  The economic entity assumption is also part of each framework although some cultural differences result in differences in its application. For example. in Japan many companies have formed alliances that are so strong that they act similar to related corporate divisions although they are not actually part of the same company.

the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.ABOUT THE NUMBERS International Standard-Setting Organizations: While the conceptual framework that underlies IFRS is very similar to that used to develop GAAP. Liabilities may be legally enforceable via a contract or law. but need not be.e. i. A present obligation of the entity arising from past events. 2-50 . A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Liabilities. the elements identified and their definitions under IFRS are different.. Assets. The IASB elements and their definitions are as follows. they can arise due to normal business practice or customs.

Equity. Decreases in economic benefits that result in decreases in equity (other than those related to distributions to shareholders). Expenses. Increases in economic benefits that result in increases in equity (other than those related to contributions from shareholders).ABOUT THE NUMBERS International Standard-Setting Organizations: While the conceptual framework that underlies IFRS is very similar to that used to develop GAAP. Income includes both revenues (resulting from ordinary activities) and gains. 2-51 . Expenses includes losses that are not the result of ordinary activities. Income. A residual interest in the assets of the entity after deducting all its liabilities. The IASB elements and their definitions are as follows. the elements identified and their definitions under IFRS are different.

The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors. The existing IASB and FASB conceptual frameworks are organized in similar ways. d. The IASB conceptual framework does not identify the element comprehensive income. c. 2-52 . IFRS does not allow use of fair value as a measurement basis.IFRS SELF-TEST QUESTION Which of the following statements about the IASB and FASB conceptual frameworks is not correct? a. b.

The FASB and IASB are working on a joint conceptual framework project. Under IFRS. 2-53 . The monetary unit assumption is used under IFRS. b.IFRS SELF-TEST QUESTION Which of the following statements is false? a. companies may use fair value for property. there are the same number of financial statement elements as in GAAP. Under IFRS. d. and equipment. c. plant.

Should the common framework lead to standards that are principles-based or rules-based? d. Should the characteristic of relevance be traded-off in favor of information that is verifiable? b. Should the role of financial reporting focus on stewardship as well as providing information to assist users in decisionmaking? 2-54 .IFRS SELF-TEST QUESTION The issues that the FASB and IASB must address in developing a common conceptual framework include all of the following except: a. Should a single measurement method be used? c.

omissions. The Publisher assumes no responsibility for errors. Inc. caused by the use of these programs or from the use of the information contained herein. Request for further information should be addressed to the Permissions Department. Inc. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. John Wiley & Sons. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. All rights reserved. 2-55 .Copyright Copyright © 2012 John Wiley & Sons. or damages.

Intermediate Accounting 3-1 Prepared by Coby Harmon University of California. Santa Barbara .

and Warfield 3-2 .3 The Accounting Information System Intermediate Accounting 14th Edition Kieso. Weygandt.

3-3 . and prepare a trial balance. 7. Prepare financial statement from the adjusted trial balance.Learning Objectives 1. 4. Explain double-entry rules. Explain the reasons for preparing adjusting entries. 3. 2. Understand basic accounting terminology. 5. Record transactions in journals. post to ledger accounts. Identify steps in the accounting cycle. 6. Prepare closing entries.

The Accounting Information System Accounting Information System Basic terminology Debits and credits Accounting equation Financial statements and ownership structure The Accounting Cycle Identifying and recording Journalizing Posting Trial balance Adjusting entries Adjusted trial balance Preparing financial statements Closing Post-closing trial balance Reversing entries Financial Statements for Merchandisers Income statement Statement of retained earnings Balance sheet Closing entries 3-4 .

3-5 .Accounting Information System Accounting Information System (AIS)   Collects and processes transaction data. Disseminates the information to interested parties.

Accounting Information System Helps management answer such questions as:       How much and what kind of debt is outstanding? Were sales higher this period than last? What assets do we have? What were our cash inflows and outflows? Did we make a profit last period? Are any of our product lines or divisions operating at a loss? Can we safely increase our dividends to stockholders? Is our rate of return on net assets increasing?   3-6 .

Accounting Information System Basic Terminology       Event Transaction Account Real Account Nominal Account Ledger       Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries 3-7 LO 1 Understand basic accounting terminology. .

 3-8 DEBITS must equal CREDITS.Accounting Information System Debits and Credits  An Account shows the effect of transactions on a given asset.   Double-entry accounting system (two-sided effect). equity. or expense account. LO 2 Explain double-entry rules. . liability. Recording done by debiting at least one account and crediting another. revenue.

.   An Account can be illustrated in a T-Account form. Debit = “Left” Credit = “Right” Account Name Debit / Dr.Debits and Credits Account  An arrangement that shows the effect of transactions on an account. 3-9 LO 2 Explain double-entry rules. Credit / Cr.

000 Transaction #2 Balance $15.000 $3.000 3-10 LO 2 Explain double-entry rules. the account will have a debit balance.Debits and Credits If Debit entries are greater than Credit entries. . Credit / Cr.000 8. Account Name Debit / Dr. Transaction #1 Transaction #3 $10.

the account will have a credit balance.Debits and Credits If Credit entries are greater than Debit entries. Credit / Cr. Account Name Debit / Dr.000 $3. Transaction #1 $10. .000 8.000 3-11 LO 2 Explain double-entry rules.000 Transaction #2 Transaction #3 Balance $1.

Normal Balance Normal Balance Chapter 3-27 Chapter 3-26 3-12 LO 2 Explain double-entry rules. Normal Balance Normal Balance Chapter 3-23 Expense Debit / Dr. Chapter 3-24 Debit / Dr.Debits and Credits Summary Liabilities Normal Balance Debit Assets Debit / Dr. Credit / Cr. Normal Balance Credit / Cr. . Chapter 3-25 Revenue Debit / Dr. Normal Balance Credit Equity Debit / Dr. Credit / Cr. Credit / Cr. Credit / Cr.

Expense = Debit Credit 3-13 LO 2 Explain double-entry rules.Debits and Credits Summary Balance Sheet Income Statement Asset = Liability + Equity Revenue . .

The Accounting Equation Relationship among the assets. For every Debit there must be a Credit. . liabilities and stockholders’ equity of a business: Illustration 3-3 The equation must be in balance after every transaction. 3-14 LO 2 Explain double-entry rules.

000 in exchange for common stock.000 + 40. Assets = Liabilities + Stockholders’ Equity + 40.Double-Entry System Illustration 1. Owners invest $40.000 3-15 LO 2 Explain double-entry rules. .

600 (expense) 3-16 LO 2 Explain double-entry rules.Double-Entry System Illustration 2. Disburse $600 cash for secretarial wages.600 . . Assets = Liabilities + Stockholders’ Equity .

.200 + 5. Purchase office equipment priced at $5.200 3-17 LO 2 Explain double-entry rules. giving a 10 percent promissory note in exchange. Assets = Liabilities + Stockholders’ Equity + 5.200.Double-Entry System Illustration 3.

Double-Entry System Illustration 4. Assets = Liabilities + Stockholders’ Equity + 4.000 cash for services rendered. .000 (revenue) 3-18 LO 2 Explain double-entry rules.000 + 4. Received $4.

000.Double-Entry System Illustration 5.7. . Pay off a short-term liability of $7.7.000 . Assets = Liabilities + Stockholders’ Equity .000 3-19 LO 2 Explain double-entry rules.

Assets = Liabilities + Stockholders’ Equity + 5.000 3-20 LO 2 Explain double-entry rules.000.5. Declared a cash dividend of $5.000 . .Double-Entry System Illustration 6.

000 + 80.80. .000 3-21 LO 2 Explain double-entry rules. Assets = Liabilities + Stockholders’ Equity .000 into common stock. Convert a long-term liability of $80.Double-Entry System Illustration 7.

3-22 LO 2 Explain double-entry rules. Assets = Liabilities + Stockholders’ Equity . Pay cash of $16.000 Note that the accounting equation equality is maintained after recording each transaction.000 + 16.Double-Entry System Illustration 8. .16.000 for a delivery van.

Proprietorship or Partnership   Corporation Capital Account Drawing Account     Common Stock Additional Paid-in Capital Dividends Declared Retained Earnings 3-23 LO 2 Explain double-entry rules. .Financial Statements and Ownership Structure Ownership structure dictates the types of accounts that are part of the equity section.

.Financial Statements and Ownership Structure Balance Sheet Stockholders’ Equity Common Stock (Investment by stockholders) Illustration 3-4 Retained Earnings (Net income retained in business) Net income or Net loss Dividends (Revenues less expenses) Income Statement Statement of Retained Earnings 3-24 LO 2 Explain double-entry rules.

. Adjustments 5. Financial Statements 4. Reversing entries 1. Post-closing trail balance 2. Trial balance 6.The Accounting Cycle Illustration 3-6 Transactions 9. Posting 7. Closing entries Work Sheet 3. Adjusted trial balance 3-25 LO 3 Identify steps in the accounting cycle. Journalization 8.

Identify and Recording Transactions What to Record? FASB states. Internal – event occurring entirely within a business.” Types of Events:   External – between a business and its environment. . “transactions and other events and circumstances that affect a business enterprise. 3-26 LO 3 Identify steps in the accounting cycle.

Journal Entries are recorded in the journal. Illustration 3-7 3-27 LO 4 Record transactions in journals. . post to ledger accounts. September 1: Stockholders invested $15.000 cash in the corporation in exchange for shares of stock. and prepare a trial balance.1. Journalizing General Journal – a chronological record of transactions.

. and prepare a trial balance.2. Illustration 3-7 Illustration 3-8 3-28 LO 4 Record transactions in journals. post to ledger accounts. Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

Illustration 3-8 3-29 LO 4 .2. Posting Posting – Transferring amounts from journal to ledger.

Keep in mind that every journal entry affects one or more of the following items: assets. or expense. stockholders’ equity. Posting Expanded Example The purpose of transaction analysis is (1) to identify the type of account involved. . revenues. 3-30 LO 4 Record transactions in journals. and prepare a trial balance. liabilities.2. post to ledger accounts. and (2) to determine whether a debit or a credit is required.

October 1: Stockholders invest $100.000 100.000 Credit 100.000 3-31 LO 4 Record transactions in journals.000 Common Stock Debit Credit 100. 1 Cash Common stock Cash Debit 100. Posting 1. . and prepare a trial balance. Oct.2.000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc. post to ledger accounts.

post to ledger accounts. October 1: Pioneer Advertising purchases office equipment costing $50. $50.000 Credit Notes Payable Debit Credit 50. 1 Equipment Notes payable Equipment Debit 50. .000 50.000 50. and prepare a trial balance. 12%. Oct. Posting 2.000 note payable.2.000 3-32 LO 4 Record transactions in journals.000 by signing a 3-month.

for advertising services that are expected to be completed by December 31. post to ledger accounts.2.000 Unearned Service Revenue Debit Credit 12. 2 Cash Unearned service revenue Cash Debit 100. October 2: Pioneer Advertising receives a $12.000 3-33 LO 4 Record transactions in journals. .000 cash advance from KC.000 Credit 12. Posting 3. Oct.000 12.000 12. a client. and prepare a trial balance.

Posting 4. October 3: Pioneer Advertising pays $9. Oct. 3 Rent expense Cash 9.000 Cash Debit 100. for October.000 Credit 9.2. . and prepare a trial balance. in cash.000 9.000 Credit 3-34 LO 4 Record transactions in journals.000 office rent. post to ledger accounts.000 12.000 Rent Expense Debit 9.

000 Credit 3-35 LO 4 Record transactions in journals. Posting 5.000 Cash Debit 100. post to ledger accounts. . 4 Prepaid insurance Cash 6.000 12.2.000 for a one-year insurance policy that will expire next year on September 30.000 Prepaid Insurance Debit 6.000 Credit 9.000 6. Oct.000 6. October 4: Pioneer Advertising pays $6. and prepare a trial balance.

000 25. Oct.000 Accounts Payable Debit Credit 25. and prepare a trial balance. post to ledger accounts. . Posting 6.000 Credit 25.000 3-36 LO 4 Record transactions in journals. an estimated 3-month supply of advertising materials from Aero Supply.000 on account.2. 5 Supplies Accounts payable Supplies Debit 25. for $25. October 5: Pioneer Advertising purchases.

000 is due following delivery of the Sunday papers containing the flyers.2. Posting 7. LO 4 3-37 Record transactions in journals. post to ledger accounts. Pioneer will start work on the content of the flyers in November. . Payment of $7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. and prepare a trial balance.

Posting 8.000 5.000 Credit 9. 20 Dividends Cash 5. .000 Cash Debit 100.000 5.000 12. Oct.2. October 20: Pioneer Advertising’s board of directors declares and pays a $5. and prepare a trial balance.000 Credit 3-38 LO 4 Record transactions in journals. post to ledger accounts.000 cash dividend to stockholders.000 6.000 Dividends Debit 5.

000 Credit LO 4 Record transactions in journals.000 per day.000 Salaries Expense Debit 40. Oct. and prepare a trial balance.000 being paid.000 5. October 26: Employees are paid every four weeks.000 3-39 40. with salaries of $40.2.000 40.000 40. October 26.000 Credit 9.000 12. post to ledger accounts. Posting 9. The total payroll is $2.000 6. 26 Salaries expense Cash Cash Debit 100. . The pay period ended on Friday.

000 Service Revenue Debit Credit 100.000 100.000 in cash and bills Copa Company $72.000 6.000 Credit .2. Posting 10.000 5.000 Accounts Receivable Credit 9.000 40.000 12. October 31: Pioneer Advertising receives $28.000 3-40 28.000 Debit 72.000 provided in October. 31 Cash Accounts receivable Service revenue Cash Debit 100.000 80.000 72.000 28.000 for advertising services of $100. Oct.

Trial Balance Illustration 3-19 Trial Balance – A list of each account and its balance.3. used to prove equality of debit and credit balances. 3-41 LO 4 .

Adjusting Entries Makes it possible to:  Report on the statement of financial position the appropriate assets. Report on the income statement the proper revenues and expenses for the period. Expenses are recognized in the period in which they are incurred. ► 3-42 LO 5 Explain the reasons for preparing adjusting entries. liabilities. and equity at the statement date.4. . ►  Revenues are recorded in the period in which they are earned.

Unearned Revenues. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. Expenses paid in cash and recorded as assets before they are used or consumed. Accruals 3. Revenues earned but not yet received in cash or recorded. Accrued Revenues. . 2. Prepaid Expenses. Revenues received in cash and recorded as liabilities before they are earned.Types of Adjusting Entries Illustration 3-20 Prepayments 1. 4. 3-43 LO 5 Explain the reasons for preparing adjusting entries.

Adjusting Entries for Deferrals Deferrals are either  prepaid expenses or unearned revenues. .  Illustration 3-21 3-44 LO 5 Explain the reasons for preparing adjusting entries.

. Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to:    insurance supplies advertising   rent buildings and equipment 3-45 LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses” Payment of cash that is recorded as an asset because service or benefit will be received in the future.

000 Credit Debit Cash Credit 25.000 25.Adjusting Entries for “Prepaid Expenses” Supplies. Pioneer purchased advertising supplies costing $25. Prepare the journal entry to record the purchase of the supplies.000 3-46 LO 5 Explain the reasons for preparing adjusting entries.000 on October 5. 5 Supplies Cash Supplies Debit 25. Oct. .000 25.

000 3-47 15.000 of the advertising supplies are still on hand.000 Credit Credit 15. Oct. An inventory count at the close of business on October 31 reveals that $10.Adjusting Entries for “Prepaid Expenses” Supplies.000 Supplies Expense Debit 15.000 10.000 15. .000 LO 5 Explain the reasons for preparing adjusting entries. 31 Supplies expense Supplies Supplies Debit 25.

Illustration 3-35 3-48 Illustration 3-35 .Adjusting Entries for “Prepaid Expenses” Statement Presentation: Supplies identifies that portion of the asset’s cost that will provide future economic benefit.

. Illustration 3-35 3-49 LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses” Statement Presentation: Supplies expense identifies that portion of the asset’s cost that expired in October.

Pioneer paid $6. 4th.Adjusting Entries for “Prepaid Expenses” Insurance. Oct.000 Credit Debit Cash Credit 6.000 6. Show the entry to record the purchase of the insurance.000 for a one-year fire insurance policy. 4 Prepaid insurance Cash Prepaid Insurance Debit 6. On Oct.000 6. beginning October 1. .000 3-50 LO 5 Explain the reasons for preparing adjusting entries.

500 3-51 500 500 Insurance Expense Debit 500 Credit Credit 500 LO 5 Explain the reasons for preparing adjusting entries.000 5. Oct. 31 Insurance expense Prepaid insurance Prepaid Insurance Debit 6. . An analysis of the policy reveals that $500 ($6.Adjusting Entries for “Prepaid Expenses” Insurance. Pioneer makes the following adjusting entry. Thus.000 / 12) of insurance expires each month.

Illustration 3-35 3-52 Illustration 3-35 .Adjusting Entries for “Prepaid Expenses” Statement Presentation: Prepaid insurance identifies that portion of the asset’s cost that will provide future economic benefit.

Illustration 3-35 3-53 LO 5 Explain the reasons for preparing adjusting entries. .Adjusting Entries for “Prepaid Expenses” Statement Presentation: Insurance expense identifies that portion of the asset’s cost that expired in October.

Pioneer Advertising estimates depreciation on its office equipment to be $400 per month. Accordingly. . Pioneer recognizes depreciation for October by the following adjusting entry. 31 Depreciation expense Accumulated depreciation Depreciation Expense Debit 400 Credit 400 400 Accumulated Depreciation Debit Credit 400 3-54 LO 5 Explain the reasons for preparing adjusting entries. Oct.Adjusting Entries for “Prepaid Expenses” Depreciation.

Illustration 3-35 3-55 Illustration 3-35 .Adjusting Entries for “Prepaid Expenses” Statement Presentation: Accumulated Depreciation—is a contra asset account.

Adjusting Entries for “Prepaid Expenses” Statement Presentation: Depreciation expense identifies that portion of the asset’s cost that expired in October. . Illustration 3-35 3-56 LO 5 Explain the reasons for preparing adjusting entries.

. Cash Receipt BEFORE Revenue Recorded Unearned revenues often occur in regard to:    rent airline tickets school tuition   magazine subscriptions customer deposits 3-57 LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Unearned Revenues” Receipt of cash that is recorded as a liability because the revenue has not been earned.

Oct.Adjusting Entries for “Unearned Revenues” Unearned Revenue.000 12. Show the journal entry to record the receipt on Oct. .000 on October 2 from KC for advertising services expected to be completed by December 31. 2 Cash 12.000 Credit Unearned Rent Revenue Debit Credit 12. 2nd.000 Unearned advertising revenue Cash Debit 12.000 3-58 LO 5 Explain the reasons for preparing adjusting entries. Pioneer Advertising received $12.

000 8. 31 Unearned service revenue Service revenue Service Revenue Debit Credit 100. Analysis reveals that Pioneer earned $4.000 4.000 4.000 Credit 12.000 Unearned Service Revenue Debit 4. Pioneer makes the following adjusting entry.000 3-59 LO 5 Explain the reasons for preparing adjusting entries.000 4. . Thus. Oct.Adjusting Entries for “Unearned Revenues” Unearned Revenues.000 of the advertising services in October.

Adjusting Entries for “Unearned Revenues” Statement Presentation: Unearned service revenue identifies that portion of the liability that has not been earned. Illustration 3-35 3-60 Illustration 3-35 .

Adjusting Entries for “Unearned Revenues” Statement Presentation: Service Revenue includes the portion of unearned service revenue earned in October. Illustration 3-35 3-61 LO 5 Explain the reasons for preparing adjusting entries. .

 Illustration 3-27 3-62 LO 5 Explain the reasons for preparing adjusting entries. .Adjusting Entries for Accruals Accruals are either  accrued revenues or accrued expenses.

Adjusting entry results in: Revenue Recorded BEFORE Cash Receipt Accrued revenues often occur in regard to:    rent interest services performed LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Accrued Revenues” Revenues earned but not yet received in cash or recorded. 3-63 .

000 106.000 2.000 3-64 2.000 2.000 74.000 4. 31 Accounts receivable Service revenue Accounts Receivable Debit 72.000 Service Revenue Debit Credit 100. Thus. Oct.Adjusting Entries for “Accrued Revenues” Accrued Revenues. Pioneer makes the following adjusting entry. In October Pioneer earned $2.000 2.000 for advertising services that it did not bill to clients before October 31.000 LO 5 Credit .

Adjusting Entries for “Accrued Revenues” Illustration 3-35 Illustration 3-35 3-65 LO 5 .

Adjusting Entries for “Accrued Expenses” Expenses incurred but not yet paid in cash or recorded. . if any* Accrued expenses often occur in regard to:    rent interest taxes   salaries bad debts* 3-66 LO 5 Explain the reasons for preparing adjusting entries. Adjusting entry results in: Expense Recorded BEFORE Cash Payment.

Pioneer signed a three-month. The note requires interest at an annual rate of 12 percent. note payable in the amount of $50. Three factors determine the amount of the interest accumulation: 1 2 3 Illustration 3-29 3-67 LO 5 Explain the reasons for preparing adjusting entries.000 on October 1. 12%.Adjusting Entries for “Accrued Expenses” Accrued Interest. .

31 Interest expense Interest payable Interest Expense Debit 500 Credit Interest Payable Debit Credit 500 500 500 3-68 LO 5 Explain the reasons for preparing adjusting entries. note payable in the amount of $50. 31 to record the accrual of interest.Adjusting Entries for “Accrued Expenses” Accrued Interest. 12%. Oct. . Prepare the adjusting entry on Oct.000 on October 1. Pioneer signed a three-month.

Adjusting Entries for “Accrued Expenses” Illustration 3-35 Illustration 3-35 3-69 LO 5 .

The employees receive total salaries of $10.000 for a five-day work week. 3-70 LO 5 Explain the reasons for preparing adjusting entries.000 per day. or $2. At October 31.Adjusting Entries for “Accrued Expenses” Accrued Salaries. . the salaries for these days represent an accrued expense and a related liability to Pioneer.

or $2.Adjusting Entries for “Accrued Expenses” Accrued Salaries.000 46. 31 to record accrual for salaries. . Employees receive total salaries of $10. 31 Salaries expense Salaries payable Salaries Expense Debit 40.000 Credit LO 5 Explain the reasons for preparing adjusting entries.000 Salaries Payable Debit Credit 6.000 3-71 6.000 per day. Prepare the adjusting entry on Oct. Oct.000 for a five-day work week.000 6.000 6.

23 Salaries payable Salaries expense Cash Salaries Expense Debit 34.000 3-72 LO 5 Explain the reasons for preparing adjusting entries.000 Credit 6. On November 23. Nov. . Prepare the entry to record the payment of salaries on November 23.000 34. Pioneer will again pay total salaries of $40.Adjusting Entries for “Accrued Expenses” Accrued Salaries.000 Credit 6.000 40.000 Salaries Payable Debit 6.000.

Adjusting Entries for “Accrued Expenses” Illustration 3-35 Illustration 3-35 3-73 LO 5 .

Adjusting Entries for “Accrued Expenses” Bad Debts. It makes the adjusting entry for bad debts as follows. .600. Assume Pioneer reasonably estimates a bad debt expense for the month of $1. Illustration 3-32 3-74 LO 5 Explain the reasons for preparing adjusting entries.

Adjusting Entries for “Accrued Expenses” Illustration 3-35 Illustration 3-35 3-75 LO 5 .

after adjusting entries. at the end of the accounting period. 3-76 Illustration 3-33 . Adjusted Trial Balance Shows the balance of all accounts.5.

Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Trial Balance. .6. Income Statement Retained Earnings Statement Balance Sheet 3-77 LO 6 Prepare financial statement from the adjusted trial balance.

Preparing Financial Statements Illustration 3-34 3-78 LO 6 .6.

Preparing Financial Statements Illustration 3-35 3-79 LO 6 .6.

liability. and equity) accounts are not closed.7. . Balance sheet (asset. Closing Entries  To reduce the balance of the income statement (revenue and expense) accounts to zero.    3-80 LO 7 Prepare closing entries. To transfer net income or net loss to owner’s equity. Dividends are closed directly to the Retained Earnings account.

Closing Entries Illustration 3-33 Closing Journal Entries: Retained earnings Dividends Service revenue Supplies expense Rent expense Insurance expense Interest expense Depreciation expense Bad debt expense Retained earnings 5.000 Salaries & wages expense 46.000 500 500 400 1.000 5.000 9.7.600 33.000 3-81 LO 7 Prepare closing entries.000 15.000 106. .

Closing Entries Illustration 3-37 Illustration 3-37 3-82 .7.

8. Post-Closing Trial Balance Illustration 3-38 3-83 LO 7 .

. 3-84 LO 7 Prepare closing entries. a company may reverse some of the adjusting entries before recording the regular transactions of the next period. Reversing Entries After preparing the financial statements and closing the books.9.

Accounting Cycle Summarized 1. 7. Prepare adjusting journal entries and post to the ledger(s). Take a trial balance after adjusting (adjusted trial balance). Prepare reversing entries (optional) and post to the ledger(s). Take a trial balance after closing (post-closing trial balance). 3-85 LO 7 Prepare closing entries. 4. Take an unadjusted trial balance (trial balance). 2. Enter the transactions of the period in appropriate journals. Prepare closing journal entries and post to the ledger(s). Prepare the financial statements from the second trial balance. Post from the journals to the ledger (or ledgers). 6. 3. . 9. 5. 8.

Financial Statements of a Merchandising Company Illustration 3-39 3-86 LO 7 .

Financial Statements of a Merchandising Company Illustration 3-40 3-87 LO 7 .

Financial Statements of a Merchandising Company Illustration 3-41 3-88 LO 7 .

without regard to the time of receipt or payment of cash. 3-89 . Under the strict cash-basis. LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Most companies use accrual-basis accounting   recognize revenue when it is earned and expenses in the period incurred. and record expenses only when they disperse cash. companies   record revenue only when they receive cash. Cash basis financial statements are not in conformity with GAAP.

In January. incurs costs of $18. Illustration 3A-1 3-90 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. In February. Quality collects $22. Quality begins construction. Quality pays the $18.000 on credit. In March. .000. and by the end of January delivers a finished garage to the buyer.APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Illustration: Quality Contractor signs an agreement to construct a garage for $22.000 cash from the customer.000 due the creditors.

Quality pays the $18. Quality collects $22. In March.000 due the creditors. and by the end of January delivers a finished garage to the buyer. incurs costs of $18.APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Illustration: Quality Contractor signs an agreement to construct a garage for $22.000.000 on credit. In January. Quality begins construction. Illustration 3A-2 3-91 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. . In February.000 cash from the customer.

At January 1 and December 31.000 for operating expenses. keeps her accounting records on a cash basis. Windsor received $300. and prepaid expenses as shown in Illustration 3A-5. like many small business owners.000). unearned service revenue. Diane Windsor.$170.000 ($300. Illustration 3A-5 3-92 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. 2010. she has accounts receivable.000 from her patients and paid $170.APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Conversion From Cash Basis To Accrual Basis Illustration: Dr.000 . Dr. . accrued liabilities. In the year 2010. resulting in an excess of cash receipts over disbursements of $130.

APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Conversion From Cash Basis To Accrual Basis Illustration: Calculate service revenue on an accrual basis. Illustration 3A-8 Illustration 3A-5 3-93 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. .

Illustration 3A-11 Illustration 3A-5 3-94 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. .APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Conversion From Cash Basis To Accrual Basis Illustration: Calculate operating expenses on an accrual basis.

APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Conversion From Cash Basis To Accrual Basis Illustration 3A-12 3-95 LO 8 .

Investors. creditors. and other decision makers seek timely information about an enterprise’s future cash flows. not the cash basis. recognizes all aspects of the credit phenomenon. .APPENDIX 3A CASH-BASIS ACCOUNTING VERSUS ACCRUAL-BASIS ACCOUNTING Theoretical Weaknesses of the Cash Basis Today’s economy is considerably more lubricated by credit than by cash. 3-96 LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting. The accrual basis.

APPENDIX 3B USING REVERSING ENTRIES Illustration of Reversing Entries—Accruals Illustration 3B-1 3-97 LO 9 Identifying adjusting entries that may be reversed. .

.APPENDIX 3B USING REVERSING ENTRIES Illustration of Reversing Entries—Deferrals Illustration 3B-2 3-98 LO 9 Identifying adjusting entries that may be reversed.

Recognize that reversing entries do not have to be used. All accruals should be reversed. Adjusting entries for depreciation and bad debts are not reversed. 3. 3-99 LO 9 Identifying adjusting entries that may be reversed. . All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed.APPENDIX 3B USING REVERSING ENTRIES Summary of Reversing Entries 1. 2. Therefore. some accountants avoid them entirely.

A company uses the worksheet to adjust   account balances and to prepare financial statements. 3-100 LO 10 Prepare a 10-column worksheet.APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED A company prepares a worksheet either on   columnar paper or within an electronic spreadsheet. .

.APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED Worksheet Columns A company prepares a worksheet either on   columnar paper or within an electronic spreadsheet. 3-101 LO 10 Prepare a 10-column worksheet.

APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED Illustration 3C-1 Worksheet 3-102 LO 10 .

Sorts data into appropriate columns. which facilitates the preparation of the statements.APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED Preparing Financial Statements from a Worksheet The Worksheet:  provides information needed for preparation of the financial statements.  3-103 LO 10 Prepare a 10-column worksheet. .

APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED Illustration 3-39 3-104 LO 10 .

APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED Illustration 3-40 3-105 LO 10 .

APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED Illustration 3-41 3-106 LO 10 .

  3-107 . Transaction analysis is the same under IFRS and GAAP but. different standards sometimes impact how transactions are recorded. Thus.S. European companies rely less on historical cost and more on fair value than U. as you will see in later chapters. the material in Chapter 3 is the same under both GAAP and IFRS. the double-entry accounting system is the basis of accounting systems worldwide. For example. Rules for accounting for specific events sometimes differ across countries.RELEVANT FACTS  International companies use the same set of procedures and records to keep track of transaction data. Despite the differences. companies.

RELEVANT FACTS  Both the IASB and FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements. revenues. A trial balance under IFRS follows the same format as shown in the textbook. assets.   3-108 . Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. that is. exchanges. equity. many have never completely documented them nor had an independent auditor attest to their effectiveness. Both of these actions are required under SOX. and expenses. liabilities.S. Enhanced internal control standards apply only to large public companies listed on U. While most companies have these systems in place.

provide a suitable starting point. 3-109 . be transparent.IFRS SELF-TEST QUESTION Information in a company’s first IFRS statements must: a. c. b. All the above. have a cost that does not exceed the benefits. d.

IFRS SELF-TEST QUESTION The transition date is the date: a. when the company issues its most recent financial statement under IFRS. three years prior to the reporting date. when a company no longer reports under its national standards. None of the above. b. 3-110 . c. d.

d.IFRS SELF-TEST QUESTION When converting to IFRS. recast previously issued financial statements in accordance with IFRS. a company must: a. use GAAP in the reporting period but subsequently use IFRS. b. use GAAP in the transition year but IFRS in the reporting year. c. 3-111 . prepare at least three years of comparative statements.

Inc. or damages. The Publisher assumes no responsibility for errors.Copyright Copyright © 2012 John Wiley & Sons. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. omissions. Inc. All rights reserved. 3-112 . Request for further information should be addressed to the Permissions Department. John Wiley & Sons. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. caused by the use of these programs or from the use of the information contained herein.

Intermediate Accounting 4-1 Prepared by Coby Harmon University of California. Santa Barbara .

and Warfield 4-2 .4 Income Statement and Related Information Intermediate Accounting 14th Edition Kieso. Weygandt.

7. Explain how to report irregular items. 4-3 .Learning Objectives 1. Explain how to report other comprehensive income. Prepare a multiple-step income statement. 3. 4. Prepare a retained earnings statement. Understand the uses and limitations of an income statement. 6. Prepare a single-step income statement. 8. 2. Explain intraperiod tax allocation. Identify where to report earnings per share information. 5.

Income Statement and Related Information Income Statement Usefulness Limitations Quality of Earnings Format of the Income Statement Elements Single-step Multiple-step Condensed income statements Reporting Irregular Items Discontinued operations Extraordinary items Unusual gains and losses Changes in accounting principles Changes in estimates Corrections of errors Special Reporting Issues Intraperiod tax allocation Earnings per share Retained earnings statement Comprehensive income 4-4 .

 Predicting future performance.  Help assess the risk or uncertainty of achieving future cash flows.Income Statement Usefulness  Evaluate past performance. . 4-5 LO 1 Understand the uses and limitations of an income statement.

Income Statement Limitations  Companies omit items that cannot be measured reliably.  Income is affected by the accounting methods employed. .  Income measurement involves judgment. 4-6 LO 1 Understand the uses and limitations of an income statement.

. Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows. so that   market price of stock increases and value of stock options increase.Income Statement Quality of Earnings Companies have incentives to manage income to meet or beat Wall Street expectations. 4-7 LO 1 Understand the uses and limitations of an income statement.

Examples of Revenue Accounts    Sales Fee revenue Interest revenue   Dividend revenue Rent revenue 4-8 LO 1 Understand the uses and limitations of an income statement. .Format of the Income Statement Elements of the Income Statement Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations.

Format of the Income Statement Elements of the Income Statement Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. . Examples of Expense Accounts   Cost of goods sold Depreciation expense Interest expense   Rent expense Salary expense  4-9 LO 1 Understand the uses and limitations of an income statement.

write-offs of assets. Gains and losses can result from    4-10 sale of investments or plant assets.Format of the Income Statement Elements of the Income Statement Gains – Increases in equity (net assets) from peripheral or incidental transactions. Losses .Decreases in equity (net assets) from peripheral or incidental transactions. . LO 1 Understand the uses and limitations of an income statement. settlement of liabilities.

000 43.000 247.000 $ 55.000 24.000 302.000 $ 0.000 17.000 SingleStep 4-11 LO 2 Prepare a single-step income statement. .Single-Step Format Single-Step Income Statement Revenues Expenses Net Income No distinction between Operating and Non-operating categories.000 21. Income Statement (in thousands) Revenues: Sales Interest revenue Total revenue Expenses: Cost of goods sold Selling expense Administrative expense Interest expense Income tax expense Total expenses Net income Earnings per share 149.000 10.75 $ 285.

960 63.690 7. 31.580 1.730 4-12 LO 2 Prepare a single-step income statement.500 7. 2012 Administrative expense: Officers' salaries Depreciation Cost of goods sold Rental revenue Selling expense: Transportation-out Sales commissions Depreciation Sales Income tax expense Interest expense 2.570 17.580 99.480 96.500 17.980 6.230 Revenues: Sales Rental revenue Total revenues Expenses: Cost of goods sold Selling expense Administrative exense Interest expense Income tax expense Total expenses Net income $ 63.570 17.860 $ 4.150 8.900 3.230 113.020 14.E4-4: Prepare an income statement from the data below. Single-Step Format Income Statement For the year ended Dec.860 7. .710 $ 96.860 1.

Single-Step Format Review
The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items more than it is emphasized in the multiple-step income statement. d. the various components of income from continuing operations.

4-13

LO 2 Prepare a single-step income statement.

Format of the Income Statement
Multiple-Step Income Statement

Separates operating transactions from nonoperating transactions.

 

Matches costs and expenses with related revenues. Highlights certain intermediate components of income that analysts use.

4-14

LO 3 Prepare a multiple-step income statement.

Multiple-Step Format
Intermediate Components of the Income Statement
1. Operating section 2. Nonoperating section 3. Income tax 4. Discontinued operations 5. Extraordinary items 6. Earnings per share

4-15

LO 3 Prepare a multiple-step income statement.

Multiple-Step Format
The presentation divides information into major sections.
1. Operating Section
Income Statement (in thousands) Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expense Income from operations Other revenue (expense): Interest revenue Interest expense Total other Income before taxes Income tax expense Net income $ 285,000 149,000 136,000 10,000 43,000 53,000 83,000 17,000 (21,000) (4,000) 79,000 24,000 55,000

2. Nonoperating Section 3. Income tax
4-16

$

LO 3 Prepare a multiple-step income statement.

Illustration (E4-4): Prepare an income statement from the data below.
Administrative expense: Officers' salaries Depreciation Cost of goods sold Rental revenue Selling expense: Transportation-out Sales commissions Depreciation Sales Income tax expense Interest expense 2,690 7,980 6,480 96,500 7,580 1,860 $ 4,900 3,960 63,750 17,230

Multiple-Step Format
Income Statement For the year ended Dec. 31, 2012 Sales Cost of goods sold Gross profit Operating Expenses: Selling expense Administrative exense Total operating expenses Income from operations Other revenue (expense): Rental revenue Interest expense Total other Income before tax Income tax expense Net income $ 17,230 (1,860) 15,370 22,110 7,580 14,530 17,150 8,860 26,010 6,740 $ 96,500 63,750 32,750

4-17

Multiple-Step Format Review
A separation of operating and non operating activities of a company exists in a. both a multiple-step and single-step income statement. b. a multiple-step but not a single-step income statement. c. a single-step but not a multiple-step income statement. d. neither a single-step nor a multiple-step income statement.

4-18

LO 3 Prepare a multiple-step income statement.

Reporting Irregular Items
Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company. Illustration 4-5
Number of Irregular Items Reported in a Recent Year by 500 Large Companies

4-19

LO 4 Explain how to report irregular items.

Reporting Irregular Items
Irregular items fall into six categories
1. Discontinued operations. 2. Extraordinary items. 3. Unusual gains and losses. 4. Changes in accounting principle. 5. Changes in estimates. 6. Corrections of errors.

4-20

LO 4 Explain how to report irregular items.

Reporting Irregular Items
Discontinued Operations
Occurs when,
(a) company eliminates the
 

results of operations and cash flows of a component.

(b) there is no significant continuing involvement in that component. Amount reported “net of tax.”
4-21

LO 4 Explain how to report irregular items.

Reporting Discontinued Operations
Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 for the year. During the year, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 for the year. Assume a tax rate of 30%. Prepare a partial income statement for KC.
Income from continuing operations Discontinued operations: Loss from operations, net of $135,000 tax Loss on disposal, net of $81,000 tax Total loss on discontinued operations Net income
4-22

$55,000,000 315,000 189,000 504,000 $54,496,000

LO 4 Explain how to report irregular items.

Reporting Discontinued Operations
Discontinued Operations are reported after “Income from continuing operations.”
Income Statement (in thousands) Sales Cost of goods sold Gross profit
Interest expense Total other Income before taxes Income tax expense Income from continuing operations Discontinued operations: Loss from operations, net of tax Loss on disposal, net of tax Total loss on discontinued operations Net income

$ 285,000 149,000 136,000
(21,000) (4,000) 79,000 24,000 55,000 315 189 504 $ 54,496

Previously labeled as “Net Income”.

Moved to

4-23

LO 4

Amount reported “net of tax.Reporting Irregular Items Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities. Extraordinary Item must be both of an   Unusual Nature and Occur Infrequently Company must consider the environment in which it operates. .” 4-24 LO 4 Explain how to report irregular items.

is the only security investment the company has ever owned. . (b) A citrus grower's Florida crop is damaged by frost.Reporting Extraordinary Items Are these items Extraordinary? (a) A large portion of a tobacco manufacturer’s crops are destroyed by a hail storm. Severe damage from hail storms in the locality where the manufacturer grows tobacco is rare. 4-25 YES NO YES LO 4 Explain how to report irregular items. The block of shares. (c) A company sells a block of common stock of a publicly traded company. which represents less than 10% of the publicly-held company.

Earthquakes are rare in this geographical location. (e) An earthquake destroys one of the oil refineries owned by a large multi-national oil company. This is the first sale from its portfolio of securities. NO YES NO 4-26 LO 4 .Reporting Extraordinary Items Are these items Extraordinary? (d) A large diversified company sells a block of shares from its portfolio of securities which it has acquired for investment purposes. The company regularly repurchases bonds of this nature. (f) A company experiences a material loss in the repurchase of a large bond issue that has been outstanding for 3 years.

000 tax) 4-27 $55.000.000 $54. Income from continuing operations Extraordinary loss. .000 tax Net income ($770.000. net of $231. The corporation’s tax rate is 30%.000 during the year.000 LO 4 Explain how to report irregular items.000 x 30% = $231. Prepare a partial income statement for KC Corporation beginning with income from continuing operations. In addition.000 from a volcano eruption. it suffered an unusual and infrequent pretax loss of $770.Reporting Extraordinary Items Illustration: KC Corporation had after tax income from continuing operations of $55.461.000 539.

000) 79.000 149.000 55. net of tax Net income $ 285.Reporting Extraordinary Items Extraordinary Items are reported after “Income from continuing operations.000) (4.000 24. Moved to 4-28 17.000 539 $ 54.” Income Statement (in thousands) Sales Cost of goods sold Gross profit Other revenue (expense): Interest revenue Interest expense Total other Income before taxes Income tax expense Income from continuing operations Extraordinary loss.000 (21.000 136.461 LO 4 .000 Previously labeled as “Net Income”.

Reporting Extraordinary Items Illustration 4-8 Income Statement Presentation of Extraordinary Items 4-29 LO 4 .

net of tax Loss on disposal. net of tax Net income $ 285.000 149. Income Statement (in thousands) Sales Cost of goods sold Gross profit Income before taxes Income tax expense Income from continuing operations Discontinued operations: Loss from operations.000 24. net of tax Total loss on discontinued operations Income before extraordinary item Extraordinary loss.000 55.000 79.Reporting Irregular Items Reporting when both Discontinued Operations and Extraordinary Items are present.000 315 189 504 54.000 136.496 LO 4 Discontinued Operations Extraordinary Items 4-30 .496 539 $ 54.

LO 4 Explain how to report irregular items. c. 4-31 . neither a single-step nor a multiple-step income statement. b. a single-step income statement only. d. both a single-step and multiple-step income statement.Reporting Irregular Items Review Irregular transactions such as discontinued operations and extraordinary items should be reported separately in a. a multiple-step income statement only.

Reporting Irregular Items Unusual Gains and Losses Material items that are unusual or infrequent. 4-32 LO 4 Explain how to report irregular items. but not both. should be reported in a separate section just above “Income from continuing operations before income taxes. .” Examples can include:   Write-downs of inventories Foreign exchange transaction gains and losses The Board prohibits net-of-tax treatment for these items.

.Reporting Irregular Items Unusual Gains and Losses Illustration 4-9 Income Statement Presentation of Unusual Charges 4-33 LO 4 Explain how to report irregular items.

Approach preserves comparability. LO 4 Explain how to report irregular items. Examples include: ► ►   change from FIFO to average cost.Reporting Irregular Items Changes in Accounting Principles   Retrospective adjustment. Cumulative effect adjustment to beginning retained earnings. 4-34 . change from the percentage-of-completion to the completed-contract method.

Pretax Income Data Illustration 4-10 Calculation of a Change in Accounting Principle Illustration 4-11 Income Statement Presentation of a Change in Accounting Principle (Based on 30% tax rate) 4-35 LO 4 Explain how to report irregular items.000. decided in March 2012 to change from FIFO to weighted-average inventory pricing.Reporting Irregular Items Change in Accounting Principle: Gaubert Inc. using the new weightedaverage method in 2012. is $30. . Gaubert’s income before taxes.

Inventory obsolescence.Reporting Irregular Items Changes in Estimate     Accounted for in the period of change and future periods. 4-36 . Not handled retrospectively. LO 4 Explain how to report irregular items. Not considered errors or extraordinary items. Allowance for uncollectible receivables. Examples include: ► ► ► Useful lives and salvage values of depreciable assets.

Change in Estimate Example Change in Estimate: Arcadia HS. Questions:  What is the journal entry to correct the prior years’ depreciation? Calculate the depreciation expense for 2012. purchased equipment for $510. Depreciation has been recorded for 7 years on a straight-line basis.000 which was estimated to have a useful life of 10 years with a salvage value of $10. In 2012 (year 8).000 at the end of that time. it is determined that the total estimated life should be 15 years with a salvage value of $5. LO 4 Explain how to report irregular items.  4-37 .000 at the end of that time.

000 First. 31.000 $160. 2011) Fixed Assets: Equipment Accumulated depreciation Net book value (NBV) 4-38 $510.000 at date of change in estimate.000 350.000 LO 4 Explain how to report irregular items.000 10 years $ 50.Change in Estimate Example Equipment cost Salvage value Depreciable base Useful life (original) Annual depreciation After 7 years $510.000 Balance Sheet (Dec.10. . establish NBV . 500.000 x 7 years = $350.

375 19.375 LO 4 Explain how to report irregular items.000 8 years $ 19. $160.000 155. .Change in Estimate Example Net book value Salvage value (new) Depreciable base Useful life remaining Annual depreciation Journal entry for 2012 Depreciation expense Accumulated depreciation 4-39 After 7 years Depreciation Expense calculation for 2012.375 19.000 5.

Adjustment to the beginning balance of retained earnings.Reporting Irregular Items Corrections of Errors  Result from: ► ► ► mathematical mistakes. .   Corrections treated as prior period adjustments. oversight or misuse of facts. mistakes in application of accounting principles. 4-40 LO 4 Explain how to report irregular items.

Retained earnings Accounts receivable 100.000 4-41 LO 4 Explain how to report irregular items.Reporting Irregular Items Corrections of Errors: To illustrate. Hillboro makes the following entry to correct for this error (ignore income taxes). determined that it incorrectly overstated its accounts receivable and sales revenue by $100. In 2013. .000 in 2010.000 100. Hillsboro Co. in 2013.

4-42 LO 5 Explain intraperiod tax allocation. (2) Discontinued operations.Special Reporting Issues Intraperiod Tax Allocation Relates the income tax expense to the specific items that give rise to the amount of the tax expense. . (3) Extraordinary items. Income tax is allocated to the following items: (1) Income from continuing operations before tax.

has income before income tax and extraordinary item of $250. It has an extraordinary gain of $100.Special Reporting Issues Intraperiod Tax Allocation Extraordinary Gain: Schindler Co.000 from a condemnation settlement received on one its properties. .000. Assuming a 30 percent income tax rate. Illustration 4-13 4-43 LO 5 Explain intraperiod tax allocation.

has income before income tax and extraordinary item of $250.Special Reporting Issues Intraperiod Tax Allocation Extraordinary Loss: Schindler Co. Assuming a 30 percent income tax rate. It has an extraordinary loss from a major casualty of $100. Illustration 4-14 4-44 LO 5 Explain intraperiod tax allocation.000.000. .

573 4-45 LO 5 Explain intraperiod tax allocation. oper.957 Calculation of Total Tax $24. before taxes Income tax expense Income from continuing operations Discontinued operations: Loss on operations.Example of Intraperiod Tax Allocation Income Statement (in thousands) Sales Cost of goods sold $ 285.000 Note: losses reduce the total tax Total other Income from cont.000 24.000) 79. net of $135 tax Loss on disposal.496 539 $ 53.000 149. net of $61 tax Total loss on discontinued operations Income before extraordinary item Extraordinary loss.000 315 189 504 54. net of $231 tax Net income (4.000 (135) (61) (231) $23.000 55. .

Preferred dividends Weighted average number of shares outstanding   An important business indicator.Special Reporting Issues Earnings Per Share Net income .  4-46 LO 6 Identify where to report earnings per share information. . Measures the dollars earned by each share of common stock. Must be disclosed on the the income statement.

000.000 190.000 4-47 = $3.Special Reporting Issues Earnings Per Share (BE4-8): In 2012.000 common shares outstanding. Net income . Hollis had a weighted average of 190. Hollis Corporation reported net income of $1. Compute Hollis’s 2012 earnings per share.000. During 2012.Preferred dividends Weighted average number of shares outstanding $1. It declared and paid preferred stock dividends of $250.95 per share LO 6 Identify where to report earnings per share information.000 $250.000.000. .

Special Reporting Issues Illustration 4-17 Divide by weightedaverage shares outstanding EPS 4-48 LO 6 .

Special Reporting Issues Retained Earnings Statement Increase   Decrease    Net income Change in accounting principle Error corrections Net loss Dividends Change in accounting principles Error corrections   4-49 LO 7 Prepare a retained earnings statement. .

Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? 4-50 LO 7 Prepare a retained earnings statement. Inc.050. you discover a $50.000 360. January 1 Net income Dividends Balance.000) 1. . 2012. 2012 Balance. Statement of Retained Earnings For the Year Ended December 31.110.000 $ Before issuing the report for the year ended December 31.Special Reporting Issues Woods. December 31 $ 1.000 (300.000 error (net of tax) that caused 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011).

Inc.000.000 (300.050.Special Reporting Issues Woods. January 1 (restated) Net income Dividends Balance. . December 31 $ 1.000) 1. 2012 Balance.000 360.060.000 $ 4-51 LO 7 Prepare a retained earnings statement.error correction Balance.000 (50. Statement of Retained Earnings For the Year Ended December 31. January 1 Prior period adjustment .000) 1.

As Appropriated Retained Earnings. . 4-52 LO 7 Prepare a retained earnings statement.Special Reporting Issues Restrictions on Retained Earnings Disclosed   In notes to the financial statements.

expenses and losses reported in net income. Includes:  all revenues and gains.  4-53 LO 8 Explain how to report other comprehensive income. .Special Reporting Issues Comprehensive Income All changes in equity during a period except those resulting from investments by owners and distributions to owners. and all gains and losses that bypass net income but affect stockholders’ equity.

000 $ 55. Translation gains and losses on foreign currency.000 83.000 + Other Comprehensive Income  Unrealized gains and losses on available-forsale securities.000 Net income 4-54  Reported in Stockholders’ Equity LO 8 Explain how to report other comprehensive income. .000 149.000 43.000 53.Special Reporting Issues Comprehensive Income Income Statement (in thousands) Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expense $ 285.000 Income tax expense 24.000 136.000) Income before taxes 79.000 10. Plus others  Income from operations Other revenue (expense): Interest revenue 17.000) Total other (4.000 Interest expense (21.

other comprehensive income. b. prior period income. d. . c. unusual gains and losses. 4-55 LO 8 Explain how to report other comprehensive income.Special Reporting Issues Review Gains and losses that bypass net income but affect stockholders' equity are referred to as a. comprehensive income.

A combined income statement of comprehensive income.Special Reporting Issues Companies must display the components of other comprehensive income in one of three ways: 1. or 3. . 2. As part of the statement of stockholders’ equity 4-56 LO 8 Explain how to report other comprehensive income. A second separate income statement.

Special Reporting Issues Comprehensive Income Second income statement Illustration 4-19 4-57 LO 8 .

Special Reporting Issues Comprehensive Income Combined statement V.000 110.000 600.000 200. Combined Statement of Comprehensive Income For the Year Ended December 31.000 $ 140.000 90.000 30. net of tax Comprehensive income $ 800. Gill Inc. 2012 Sales revenue Cost of goods sold Gross profit Operating expenses Net income Unrealized holding gain.000 4-58 LO 8 .

Special Reporting Issues Comprehensive Income – Statement of Stockholder’s Equity Illustration 4-20 4-59 LO 8 Explain how to report other comprehensive income. .

the accumulated other comprehensive income of $90. 4-60 LO 8 Explain how to report other comprehensive income.000 is reported in the stockholders’ equity section of the balance sheet. .Special Reporting Issues Comprehensive Income – Balance Sheet Presentation Illustration 4-21 Presentation of Accumulated Other Comprehensive Income in the Balance Sheet Regardless of the display format used.

c. b.Special Reporting Issues Review The FASB decided that the components of other comprehensive income must be displayed a. Any of these options is permissible. as a part of the statement of stockholders‘ equity. 4-61 LO 8 Explain how to report other comprehensive income. d. in a second separate income statement. in a combined income statement of comprehensive income. .

  4-62 . Under IFRS. SEC requires a functional presentation. GAAP does not have that requirement. IFRS does not mention a singlestep or multiple-step approach. IFRS identifies certain minimum items that should be presented on the income statement. GAAP has no minimum information requirements. companies must classify expenses by either nature or function. However. but the U. Extraordinary items are prohibited under IFRS. the SEC rules have more rigorous presentation requirements.RELEVANT FACTS  Presentation of the income statement under GAAP follows either a single-step or multiple-step format.S.

but IFRS defines a discontinued operation more narrowly.   4-63 . GAAP and IFRS follow the same presentation guidelines for discontinued operations.setters have indicated a willingness to develop a similar definition to be used in the joint project on financial statement presentation. SEC regulations define many key measures and provide requirements and limitations on companies reporting nonGAAP/IFRS information. GAAP does not require companies to indicate the amount of net income attributable to non-controlling interest.RELEVANT FACTS  IFRS does not define key measures like income from operations. Both standard.

RELEVANT FACTS  Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. revaluation of property. IFRS allows a separate statement of comprehensive income or a combined statement. combined statement of comprehensive income. plant. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income. GAAP provides three possible formats for presenting this information: single income statement. in the statement of stockholders’ equity. Most companies that follow GAAP present this information in the statement of stockholders’ equity. and equipment. Under IFRS. and intangible assets is permitted and is reported as other comprehensive income.  4-64 .

Extraordinary items. Cost of goods sold. Discontinued operations. d. b. Income tax. 4-65 .IFRS SELF-TEST QUESTION Which of the following is not reported in an income statement under IFRS? a. c.

b. and equipment.IFRS SELF-TEST QUESTION Which of the following statements is correct regarding income reporting under IFRS? a. IFRS does not permit revaluation of property. and intangible assets. c. Companies must classify expenses either by nature or function. IFRS provides a definition for all items presented in the income 4-66 . IFRS provides the same options for reporting comprehensive income as GAAP. plant. d. statement.

c. b. 4-67 . All of the above are acceptable. Second income statement.IFRS SELF-TEST QUESTION Which of the following is not an acceptable way of displaying the components of other comprehensive income under IFRS? a. d. Within the statement of retained earnings. Combined statement of comprehensive income.

omissions. caused by the use of these programs or from the use of the information contained herein. Inc. The Publisher assumes no responsibility for errors. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. or damages. John Wiley & Sons. Inc.Copyright Copyright © 2012 John Wiley & Sons. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department. 4-68 . All rights reserved.

Santa Barbara .Intermediate Accounting 5-1 Prepared by Coby Harmon University of California.

5 Balance Sheet and Statement of Cash Flows Intermediate Accounting 14th Edition Kieso. Weygandt. and Warfield 5-2 .

Prepare a classified balance sheet using the report and account formats. 2. Prepare a statement of cash flows. 6. 8. Indicate the purpose of the statement of cash flows. . 9. 7. 5. Identify the major classifications of the balance sheet. Identify the content of the statement of cash flows.Learning Objectives 1. Describe the major disclosure techniques for the balance sheet. Understand the usefulness of the statement of cash flows. 4. Determine which balance sheet information requires supplemental disclosure. 5-3 Explain the uses and limitations of a balance sheet. 3.

Balance Sheet and Statement of Cash Flows Balance Sheet Usefulness Limitations Classification Statement of Cash Flows Purpose Content and format Preparation Usefulness Additional Information Supplemental disclosures Techniques of disclosure 5-4 .

3. 5-5 LO 1 Explain the uses and limitations of a balance sheet. timing. also referred to as the statement of financial position: 1. . liabilities.Balance Sheet Balance Sheet. and uncertainty of future cash flows. and equity at a specific date. Provides information about resources. Helps in predicting amounts. and equity in net resources. obligations to creditors. Reports assets. 2.

Assess risk and future cash flows. Analyze the company’s: ► ► ► Liquidity. Evaluating the capital structure. LO 1 Explain the uses and limitations of a balance sheet. Solvency. 5-6 . and Financial flexibility.Balance Sheet Usefulness of the Balance Sheet     Computing rates of return.

  5-7 LO 1 Explain the uses and limitations of a balance sheet. Many items of financial value are omitted. . Use of judgments and estimates.Balance Sheet Limitations of the Balance Sheet  Most assets and liabilities are reported at historical cost.

.Balance Sheet Classification 5-8 LO 2 Identify the major classifications of the balance sheet.

. 5-9 LO 2 Identify the major classifications of the balance sheet.Balance Sheet Classification Illustration 5-1 In practice you usually see little departure from these major subdivisions.

whichever is longer. Illustration 5-2 5-10 LO 2 Identify the major classifications of the balance sheet.Classification in the Balance Sheet Current Assets Cash and other assets a company expects to convert into cash. . sell. or consume either in one year or in the operating cycle.

inventories.Classification in the Balance Sheet Review The correct order to present current assets is a. d. . prepaid items. prepaid items. b. accounts receivable. inventories. prepaid items. accounts receivable. 5-11 LO 2 Identify the major classifications of the balance sheet. Cash. inventories. Cash. inventories. accounts receivable. c. Cash. Cash. accounts receivable. prepaid items.

” Cash equivalents .short-term highly liquid investments that mature within three months or less.Balance Sheet – “Current Assets” Cash   Generally any monies available “on demand. Restrictions or commitments must be disclosed. Illustration 5-3  5-12 LO 2 .

Balance Sheet – “Current Assets” Cash Illustration 5-4 Balance Sheet—Restricted Cash 5-13 LO 2 Identify the major classifications of the balance sheet. .

.Balance Sheet – “Current Assets” Short-Term Investments Portfolios Held-toMaturity Trading Availablefor-Sale Type Debt Debt or Equity Debt or Equity Valuation Amortized Cost Fair Value Fair Value Classification Current or Noncurrent Current Current or Noncurrent 5-14 LO 2 Identify the major classifications of the balance sheet.

.Balance Sheet – “Current Assets” Short-Term Investments Illustration 5-5 Balance Sheet Presentation of Investments in Securities 5-15 LO 2 Identify the major classifications of the balance sheet.

Receivables used as collateral.Balance Sheet – “Current Assets” Receivables Major categories of receivables should be shown in the balance sheet or the related notes. A company should clearly identify    Anticipated loss due to uncollectibles. Amount and nature of any nontrade receivables. 5-16 LO 2 Identify the major classifications of the balance sheet. .

Balance Sheet – “Current Assets” Receivables Illustration 5-6 Balance Sheet Presentation of Receivables 5-17 LO 2 Identify the major classifications of the balance sheet. .

lower-of-cost-or-market). Illustration 5-6 5-18 LO 2 ..Balance Sheet – “Current Assets” Inventories Disclose: ► ► Basis of valuation (e.g. FIFO or average cost).. Cost flow assumption (e.g.

. that is recorded as an asset because service or benefit will be received in the future.Balance Sheet – “Current Assets” Prepaid Expenses Payment of cash. Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to:    5-19 insurance supplies advertising   rent taxes LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Current Assets” Prepaid Expenses Illustration 5-9 5-20 LO 2 Identify the major classifications of the balance sheet. .

980 $ 285. whichever is longer. .Balance Sheet – “Current Assets” Current Assets .000 convert into cash.000 777.“Summary” Cash and other assets a company expects to    Balance Sheet (in thousands) Current assets Cash ST Investments Accounts receivable Inventory Prepaid expenses Total current assets Investments: Invesment in ABC bonds Investment in UC Inc.000 170.000 402. 5-21 LO 2 Identify the major classifications of the balance sheet. sell.774.000 1.000 140. or consume either in one year or in the operating cycle. 321.657 253.

Special funds (sinking fund. . Securities (bonds. Tangible fixed assets not currently used in operations (land held for speculation). pension fund.Classification in the Balance Sheet Non-Current Assets Long-term Investments 1. 4. 5-22 LO 2 Identify the major classifications of the balance sheet. or long-term notes). Non-consolidated subsidiaries or affilated companies. common stock. or plant expansion fund. 3. 2.

.Balance Sheet – “Noncurrent Assets” Long-Term Investments Portfolios Held-toMaturity Trading Availablefor-Sale Type Debt Debt or Equity Debt or Equity Valuation Amortized Cost Fair Value Fair Value Classification Current or Noncurrent Current Current or Noncurrent 5-23 LO 2 Identify the major classifications of the balance sheet.

Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. 5-24 LO 2 .657 253.000 Investments: Invesment in ABC bonds Investment in UC Inc.Balance Sheet – “Noncurrent Assets” Long-Term Investments Securities    Balance Sheet (in thousands) Current assets Cash $ 285.375. Sub. and Equip.798 84.000 225. Building Land 1. Total investments Property.980 150. and long-term notes For marketable securities.000 550. stock.592 bonds.696.836 2.000 653.000 321.321 457. management’s intent determines current or noncurrent classification.778 975. Plant.

000 550.000 225.778 975. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Total investments Property.Balance Sheet – “Noncurrent Assets” Long-Term Investments Fixed Assets  Balance Sheet (in thousands) Current assets Cash $ 285.000 Investments: Invesment in ABC bonds Investment in UC Inc. and Equip.696.321 457.000 653. Building 5-25 321.836 2.980 150. Sub.375.798 84.592 1.000 Land held for speculation LO 2 Land .657 253. Plant.

375.Balance Sheet – “Noncurrent Assets” Long-Term Investments Special Funds    Balance Sheet (in thousands) Current assets Cash $ 285.000 550.592 1. and Equip.000 Sinking fund Pensions fund Cash surrender value of life insurance LO 2 Land .778 975. Building 5-26 321.798 84.980 150. Plant.000 225.321 457.000 653.836 2. Total investments Property. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon.657 253.696.000 Investments: Invesment in ABC bonds Investment in UC Inc. Sub.

Building LO 2 Land .592 1.000 550.000 225.375.798 84.778 975.980 150. and Equip.Balance Sheet – “Noncurrent Assets” Long-Term Investments Balance Sheet (in thousands) Current assets Cash $ 285. Total investments Property.000 Investments: Invesment in ABC bonds Investment in UC Inc.696.657 253.000 Nonconsolidated Subsidiaries or Affiliated Companies 5-27 Pension fund Cash surrender value Investment in Uncon.836 2. Sub.321 457. Notes receivable Land held for speculation Sinking fund 321.000 653. Plant.

.Balance Sheet – “Noncurrent Assets” Long-Term Investments Illustration 5-10 Balance Sheet Presentation of Long-Term Investments 5-28 LO 2 Identify the major classifications of the balance sheet.

..g. tools. buildings) or depletes (e. 5-29 LO 2 Identify the major classifications of the balance sheet.  With the exception of land.. oil reserves) these assets. and wasting resources (minerals).Balance Sheet – “Noncurrent Assets” Property. buildings. a company either depreciates (e.  Physical property such as land. machinery.g. Plant. furniture. and Equipment Tangible long-lived assets used in the regular operations of the business.

170.000) 2.000 234.696. Plant.000 177.000 40.386 3. Building Land Machinery and equipment Capital leases Leasehold improvements Accumulated depreciation Total PP&E Intangibles Goodwill Patents Trademarks 2. Plant.650 175.958 384.000 Total investments Property.000.592 1. and Equipment Tangible assets used in the regular operations of the business. and Equip.000 5-30 LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Property. Current assets Cash $ 285. .000 (975.778 975.375.

. Plant. and Equipment 5-31 LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets” Illustration 5-11 Balance Sheet Presentation of Property.

000 133.978 LO 2 5-32 .  Total PP&E Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other Total Assets 2.000 173.000.000 $ 9.000 Limited life intangibles amortized.  Current assets Cash $ 285.000 125.000 40.000 40.210.000 2.170. Indefinite-life intangibles tested for impairment.000 177.Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Intangibles Lack physical substance and are not financial instruments.386 2.397.000 55.

000.000.000.000 47.000. Intangibles Goodwill Franchises Patents Trademarks Total 5-33 $ 50.000. 2012: Prepaid Rent $12. Trademarks $10.000. Franchise Fees Receivable $2. Franchises $47. Goodwill $50.000 33. .000 $140.000 LO 2 Identify the major classifications of the balance sheet. Prepare the intangible assets section of the balance sheet.Balance Sheet – “Noncurrent Assets” Intangibles (BE5-6): Patrick Corporation adjusted trial balance contained the following asset accounts at December 31. Patents $33.000 10.

Balance Sheet – “Noncurrent Assets” Intangible Assets Illustration 5-12 Balance Sheet Presentation of Intangible Assets 5-34 LO 2 Identify the major classifications of the balance sheet. .

Balance Sheet – “Noncurrent Assets”
Other Assets
Items vary in practice. Can include:
    

Long-term prepaid expenses Non-current receivables Assets in special funds Property held for sale Restricted cash or securities

5-35

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)

Other Assets
This section should include only unusual items sufficiently different from assets in the other categories.

Current assets Cash $ 285,000

Total PP&E Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other Total Assets

2,170,386 2,000,000 177,000 40,000 125,000 55,000 2,397,000 133,000 40,000 173,000 $ 9,210,978
LO 2

5-36

Classification in the Balance Sheet
Current Liabilities
“Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”
Balance Sheet (in thousands) Current liabilities Notes payable Accounts payable Accrued compensation Unearned revenue Income tax payable Current maturities LT debt Total current liabilities Long-term liabilities Long-term debt Obligations capital lease Deferred income taxes Total long-term liabilities Stockholders' equity $ 233,450 131,800 43,000 17,000 23,400 121,000 569,650 979,500 345,800 77,909 1,403,209

5-37

LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet
Current Liabilities
Illustration 5-13 Balance Sheet Presentation of Current Liabilities

5-38

LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet
Long-Term Liabilities
“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.” All covenants and restrictions must be disclosed.
5-39

Balance Sheet (in thousands) Current liabilities Notes payable Accounts payable Accrued compensation Unearned revenue Income tax payable Current maturities LT debt Total current liabilities Long-term liabilities Long-term debt Obligations capital lease Deferred income taxes Total long-term liabilities Stockholders' equity $ 233,450 131,800 43,000 17,000 23,400 121,000 569,650 979,500 345,800 77,909 1,403,209

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Long-Term Liabilities”
Long-Term Liabilities (BE5-9): Included in Adams Company’s
December 31, 2012, trial balance are the following accounts: Accounts Payable $220,000; Pension Asset/Liability $375,000; Discount on Bonds Payable $29,000; Unearned Revenue $41,000; Bonds Payable $400,000; Salaries and Wages Payable $27,000; Interest Payable $12,000; Income Taxes Payable $29,000. Prepare the long-term liabilities section of the balance sheet. Long-term liabilities Pension Asset/liability Bonds payable Discount on bonds payable Total
5-40

$375,000 400,000 (29,000) 746,000

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Long-Term Liabilities”
Non-Current Liabilities
Illustration 5-14 Balance Sheet Presentation of Non-Current Liabilities

5-41

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Owner’s Equity”
Owners’ Equity

5-42

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Owner’s Equity”
Owners’ Equity
Illustration 5-15 Balance Sheet Presentation of Stockholders’ Equity

5-43

LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet
Account
(a) Investment in preferred stock (b) Treasury stock (c) Common stock (d) Cash dividends payable (e) Accumulated depreciation (f) Interest payable (g) Deficit (h) Trading securities (i) Unearned revenue
5-44

Classification
(a) Current asset/Investment (b) Stockholders’ Equity (c) Stockholders’ Equity (d) Current liability (e) Contra-asset (f) Current liability (g) Stockholders’ Equity (h) Current asset (i) Current liability

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Format
Classified Balance Sheet
 

Account form Report form

Accounting Trends and Techniques—2009 (New York: AICPA) indicates that all of the 500 companies surveyed use either the “report form” (438) or the “account form” (62), sometimes collectively referred to as the “customary form.”

5-45

LO 3 Prepare a classified balance sheet using the report and account formats.

.Balance Sheet Format Account Form Illustration 5-16 5-46 LO 3 Prepare a classified balance sheet using the report and account formats.

Balance Sheet Format Report Form Illustration 5-16 5-47 LO 3 .

and uncertainty of cash flows.Statement of Cash Flows One of the three basic objectives of financial reporting is “assessing the amounts. .” 5-48 LO 4 Indicate the purpose of the statement of cash flows. timing.

The statement provides answers to the following questions: 1. 2.Statement of Cash Flows Purpose of the Statement of Cash Flows To provide relevant information about the cash receipts and cash payments of an enterprise during a period. . 3. 5-49 Where did the cash come from? What was the cash used for? What was the change in the cash balance? LO 4 Indicate the purpose of the statement of cash flows.

 Investing.Statement of Cash Flows Content and Format Three different activities:  Operating. .  Financing Illustration 5-17 Basic Format of Cash Flow Statement 5-50 LO 5 Identify the content of the statement of cash flows.

solvency. 5-51 LO 5 Identify the content of the statement of cash flows. The statement’s value is that it helps users evaluate liquidity. and financial flexibility. Investing Cash inflows and outflows from non-current assets. Financing Cash inflows and outflows from non-current liabilities and equity.Statement of Cash Flows Content and Format Operating Cash inflows and outflows that enter into the determination of net income. .

.Statement of Cash Flows Illustration 5-18 5-52 LO 5 Identify the content of the statement of cash flows.

(2) the current income statement. and (3) selected transaction data. .Preparation of the Statement of Cash Flows Sources of Information Information obtained from several sources: (1) comparative balance sheets. 5-53 LO 6 Prepare a basic statement of cash flows.

Telemarketing Inc. Illustration 5-19 shows the company’s comparative balance sheets at the beginning and end of 2012.000 shares of $1 par value common stock for $50. and telecommunications equipment and performed marketing services throughout the first year.Statement of Cash Flows Statement of Cash Flows: On January 1. in its first year of operations. . In June 2012 the company purchased land for $15.000. furniture. 5-54 LO 6 Prepare a basic statement of cash flows. The company rented its office space. 2012.000 cash. issued 50.

Statement of Cash Flows Illustration 5-19 Illustration 5-20 5-55 LO 6 .

Cash provided by or used in investing and financing activities. Cash provided by (or used in) operating activities. 3. 2. Determine the change (increase or decrease) in cash during the period. 5-56 LO 6 Prepare a basic statement of cash flows. . 4. Reconcile the change in cash with the beginning and the ending cash balances.Statement of Cash Flows Preparing the Statement of Cash Flows Determine: 1.

Statement of Cash Flows Illustration 5-19 Illustration 5-20 Cash provided by operating activities Illustration 5-21 5-57 LO 6 Prepare a basic statement of cash flows. .

Illustration 5-21 5-58 .Illustration 5-19 Illustration 5-20 Statement of Cash Flows Next. the company determines its investing and financing activities.

000 8.000 5. 5-59 LO 6 Prepare a basic statement of cash flows.Statement of Cash Flows Statement of Cash Flows (BE 5-12): Keyser Beverage Company reported the following items in the most recent year.000 20.000 10. Activity Net income Dividends paid Increase in accounts receivable Increase in accounts payable Purchase of equipment Depreciation expense Issue of notes payable $40. .000 4.000 7.000 Operating Financing Operating Operating Investing Operating Financing Required: Compute net cash provided by operating activities.

Noncash charge to expenses. LO 6 Prepare a basic statement of cash flows.000) 15.000 (10.Statement of Cash Flows Statement of Cash Flows (BE 5-12) Statement of Cash Flow (in thousands) Operating activities Net income Increase in accounts receivable Increase in accounts payable Depreciation expense Cash flow from operations Investing activities Purchase of equipment Financing activities Proceeds from notes payable Dividends paid Cash flow from financing Increase in cash 5-60 $ 40.000 75.000 $ 82.000) 20.000 Noncash credit to revenues.000) 5.000 (5. .000 40.000 (8.

Statement of Cash Flows Review
In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. b. c. d. Sale of equipment at book value Sale of merchandise on credit Declaration of a cash dividend Issuance of bonds payable at a discount receivable.

5-61

LO 6 Prepare a basic statement of cash flows.

Statement of Cash Flows
Significant Noncash Activities
Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes. Examples include:
   
5-62

Issuance of common stock to purchase assets. Conversion of bonds into common stock. Issuance of debt to purchase assets. Exchanges on long-lived assets.
LO 6 Prepare a basic statement of cash flows.

Statement of Cash Flows

Illustration 5-23 Comprehensive Statement of Cash Flows

5-63

Usefulness of the Statement of Cash Flows
Without cash, a company will not survive. Cash flow from Operations:

High amount - company able to generate sufficient cash to pay its bills. Low amount - company may have to borrow or issue equity securities to pay bills.

5-64

LO 7 Understand the usefulness of the statement of cash flows.

Usefulness of the Statement of Cash Flows
Financial Liquidity
Current Cash Debt Coverage Ratio Net Cash Provided by Operating Activities Average Current Liabilities

=

Ratio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good.

5-65

LO 7 Understand the usefulness of the statement of cash flows.

Usefulness of the Statement of Cash Flows
Financial Liquidity
Cash Debt Coverage Ratio Net Cash Provided by Operating Activities Average Total Liabilities

=

This ratio indicates a company’s ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations.

5-66

LO 7 Understand the usefulness of the statement of cash flows.

Usefulness of the Statement of Cash Flows
Free Cash Flow
Illustration 5-28

The amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity.
5-67

LO 7 Understand the usefulness of the statement of cash flows.

Usefulness of the Statement of Cash Flows Review
The current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.

5-68

LO 7 Understand the usefulness of the statement of cash flows.

Supplemental Disclosures
Four types of information that are supplemental to account titles and amounts presented in the balance sheet:

5-69

LO 8 Determine which balance sheet information requires supplemental disclosure.

Techniques of Disclosure
    

Parenthetical Explanations Notes Cross-Reference and Contra Items Supporting Schedules Terminology

5-70

LO 9 Describe the major disclosure techniques for the balance sheet.

APPENDIX

5A

Ratio Analysis—A Reference

Using Ratios to Analyze Performance
Analysts and other interested parties can gather qualitative information from financial statements by examining relationships between items on the statements and identifying trends in these relationships.

5-71

LO 10 Identify the major types of financial ratios and what they measure.

.APPENDIX 5A Ratio Analysis—A Reference Using Ratios to Analyze Performance Illustration 5A-1 A Summary of Financial Ratios 5-72 LO 10 Identify the major types of financial ratios and what they measure.

.APPENDIX 5A Ratio Analysis—A Reference Using Ratios to Analyze Performance Illustration 5A-1 A Summary of Financial Ratios 5-73 LO 10 Identify the major types of financial ratios and what they measure.

.APPENDIX 5A Ratio Analysis—A Reference Using Ratios to Analyze Performance Illustration 5A-1 A Summary of Financial Ratios 5-74 LO 10 Identify the major types of financial ratios and what they measure.

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-75 .

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-76 .

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-77 .

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-78 .

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-79 .

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-80 .

APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 5-81 .

public companies must follow SEC regulations. under GAAP cash is listed first. However under GAAP. specific GAAP standards mandate certain forms of reporting this information. but under IFRS it is listed last. IFRS requires a classified statement of financial position except in very limited situations. which require specific line items. In addition.RELEVANT FACTS  IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet. current assets are usually listed in the reverse order of liquidity. For example. Under IFRS. IFRS follows the same guidelines as this textbook for distinguishing between current and noncurrent assets and liabilities.   5-82 .

  5-83 .RELEVANT FACTS  IFRS has many differences in terminology that you will notice in this textbook. Comparative prior period information must be presented and financial statements must be prepared annually. but there is no such prohibition in IFRS. Use of the term “reserve” is discouraged in GAAP. and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Both IFRS and GAAP require disclosures about (1) accounting policies followed. (2) judgments that management has made in the process of applying the entity’s accounting policies.

in the reverse order of their expected conversion to cash. 5-84 .IFRS SELF-TEST QUESTION Current assets under IFRS are listed generally: a. by importance. c. alphabetically. by longevity. b. d.

do not have any guidelines as to what should be reported on the statement of financial position. may report all their assets on the statement of financial position at fair value.IFRS SELF-TEST QUESTION Companies that use IFRS: a. b. 5-85 . may report noncurrent assets before current assets on the statement of financial position. d. c. are not allowed to net assets (assets 2 liabilities) on their statement of financial positions.

the land should be reported as: a. Under IFRS. plant. an intangible asset. land expense. and equipment. a long-term investment. the land will be idle. c. d. property. 5-86 . b. During the 5 years before construction.IFRS SELF-TEST QUESTION A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years.

omissions. All rights reserved. 5-87 . caused by the use of these programs or from the use of the information contained herein.Copyright Copyright © 2012 John Wiley & Sons. Request for further information should be addressed to the Permissions Department. The Publisher assumes no responsibility for errors. Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. or damages. John Wiley & Sons. Inc. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful.

Thus. (p. were to be based mainly on research studies and be supported by reasons and analysis. called APB Opinions. Standards issued by the FASB are considered generally accepted accounting principles (GAAP). The APB issued 31 opinions in its lifetime. 9). staff position. 7). expectations gap The difference between what the public thinks accountants should do and what accountants think they can do. 9). Financial Accounting Standards Board (FASB) The major organization of the standard-setting structure for financial accounting. Examples include the president’s letter or supplementary schedules in the corporate annual report. established by the Sarbanes-Oxley Act. The CAP issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board in 1959. 19). (p. 13). Subsequently. prospectuses. American Institute of Certified Public Accountants (AICPA) The national professional organization of practicing Certified Public Accountants (CPAs). (p. sections. real-time database that provides easy access to the Codification. 10). 9). whose mission was to develop an overall conceptual framework. financial reporting Reporting of financial information other than in formal financial statements. 6). Financial Accounting Standards Board Codification (Codification) Developed by the FASB. Accounting Standards Update The process by which a new FASB standard. the AICPA created the Accounting Principles Board to provide a structured body of accounting principles. The FASB reviews and approves all EITF consensuses.Glossary—Chapter 1 Accounting Principles Board (APB) Private standard-setting organization from 1959 to 1973. (p. entity perspective The view that companies are distinct and separate from their owners (present shareholders). Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. Accounting Research Bulletins Fifty-one bulletins from the Committee on Accounting Procedure (CAP) during the years 1939 to 1959. 12). and the SEC views consensus solutions as preferred accounting. Its official pronouncements. is included in the FASB Codification. issued to deal with accounting problems as they arose.. (p. and paragraphs. The Public Company Accounting Oversight Board. 14). now oversees the development of auditing standards. a company recognizes revenues when it earns them rather than when it receives cash. (p. . (p. Between its inception in 1959 and its dissolution in 1973. 6). whose various committees and boards have been an important contributor to the development of GAAP. APB Opinions The official pronouncements of the Accounting Principles Board. (p. (p. (p. (p. through a topically organized structure. financial accounting The accounting process that culminates in the preparation of financial reports for use by both internal and external parties. 9). in which a company records events that change its financial statements in the periods in which the events occur. etc. it provides in one place all the authoritative literature related to a particular topic. Committee on Accounting Procedure (CAP) Committee established by the AICPA in 1939 at the urging of the SEC to deal with accounting problems. intended to be based mainly on research studies and be supported by reasons and analysis. 14). subdivided into topics. Auditing Standards Board The arm of the AICPA that had been responsible for developing auditing standards. (p. (p. regardless of the form in which such guidance may have been issued. accrual-basis accounting Accounting approach. and it recognizes expenses when it incurs them rather than when it pays them. Financial Accounting Standards Board Codification Research System (CRS) An online. using a numerical index system. rather than only in the periods in which it receives or pays cash. subtopics. 4). decision-usefulness Approach that requires that financial reporting be useful to investors by helping them assess (1) the company’s ability to generate net cash inflows and (2) management’s ability to protect and enhance the capital providers’ investments. Emerging Issues Task Force (EITF) Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. Updates are also issued for amendments to the SEC content in the Codification. 14). appointed for five-year terms by the Financial Accounting Foundation. The FASB consists of five members. (p. (p. (p. The update includes the background and basis for conclusions for the new pronouncement in a common format. the APB issued 31 opinions. 9).

chaired by Francis Wheat. 18).reports filed with government agencies. lenders. exposure draft). and other creditors in decisions about providing resources to the entity. (p. and final summarization of the accounting data. and make sweeping changes to the institutional structure of the accounting profession. quality control. management’s forecasts. financial statements The principal means through which a company communicates its financial information. Standards Statement Statements issued by the FASB that are considered GAAP and thereby binding in accounting practice. staff positions Issued by the FASB. (p. (p. and independence standards and rules. a given practice has been accepted as appropriate because of its universal application. (p. Wheat Committee The Study Group on Establishment of Accounting Principles. curb poor reporting practices. International Financial Reporting Standards (IFRS) All the accounting rules accepted for international use. (p. this cohesive set of interrelated concepts is intended to be a conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner. news releases. Note disclosures are an integral part of a company’s financial statements. 12). Unlike a Standards Statement. (p. enacted by the U. based in London. The Study Group submitted its recommendations to the AICPA Council in the spring of 1972. . intended to combat accounting fraud. or over time. Securities and Exchange Commission (SEC) Federal agency established to help develop and standardize financial information presented to stockholders. The statements most frequently provided are (1) the balance sheet. (2) the income statement. 4). Although many of these international standards are similar to U. 5). (p. These statements go through a rigorous due process system (discussion memo. (p. general-purpose financial statements Provide financial reporting information to a wide variety of users at the least cost. (p. these provide interpretive guidance and also minor amendments to standards and interpretations. these statements of concepts do not establish GAAP. (3) the statement of cash flows. 10). 11). and social or environmental impact statements. GAAP. 12).S. Statement of Financial Accounting Concepts A series of statements by the FASB that set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. established by the accounting profession. that sets accounting standards accepted for international use. for which either an authoritative accounting rule-making body has established a principle of reporting in a given area. Public Company Accounting Oversight Board (PCAOB) Organization established by the SarbanesOxley Act of 2002 that has oversight and enforcement authority for accounting practices and that establishes auditing. which adopted the recommendations in total and implemented them by early 1973. and (4) the statement of owners’ or stockholders’ equity. International Accounting Standards Board (IASB) The organization. which is to provide information about the reporting entity that is useful to present and potential to equity investors. (p. tabulation. The SEC also has broad powers to prescribe the accounting practices and standards to be employed by companies that fall within its jurisdiction. Congress. 7). These statements reflect the collection. issued by the International Accounting Standards Board (p. 8). Interpretations have the same authority as standards for purposes of determining GAAP. 5). (p. Sarbanes-Oxley Act of 2002 Legislation. 12). (p. generally accepted accounting principles (GAAP) The common set of accounting standards and procedures. 20). However. that examined the organization and operation of the Accounting Principles Board and determined the changes needed to attain better productivity and more timely correction of accounting abuses. The passage of a new Standards Statement requires the support of three of the five board members. 20). public hearing. (p.S. It administers the Securities Exchange Act of 1934 and several other acts. Most companies that issue securities to the public are required to file audited financial statements with the SEC. 18). 4). objective of financial reporting Goal for financial accounting and reporting. (p. the FASB and the IASB are currently working on a convergence project to result in one set of high-quality standards. interpretations Statements issued by the FASB that modify or extend existing standards.

indicates the point at which a company recognizes revenue and verifies the amount of revenue earned. These terms constitute the language of business and accounting. There are four basic assumptions: (1) economic entity. which indicates that a company applied the same accounting treatment to similar events from period to period. basic Definitions of the items that make up any theoretical structure. such as a sale. but it must first demonstrate that the newly adopted method is preferable to the old and then must disclose in the financial statements the nature and effect of the accounting change. a concept that the accounting profession assumes as foundational for the financial accounting structure. cost constraint (cost-benefit relationship) An accounting constraint that requires that the costs of providing financial information be weighed against the benefits that can be derived from using it. confirmatory value One of the ingredients of the fundamental quality of relevance. expenses. because being prudent or conservative can lead to bias in the reported financial position and financial performance. “let the expense follow the revenues. (p. revenues. Generally. 51). entities. 58). 63). The entity assumption refers to economic. elements. comparability An enhancing qualitative characteristic of accounting information. and limits of financial accounting and which lead to consistent accounting standards. statement of cash flows. function. conceptual framework For the accounting profession. the basic elements are the many terms with distinctive and specific meanings. (3) monetary unit. which determine the nature. liabilities. 54). fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. . 44). (p. free from error View that information that is accurate will be more representationally faithful. choose the solution that will be least likely to overstate assets and income. 52). gains. (p. 56).Glossary—Chapter 2 assumption One of the parts in the third level of the conceptual framework. (p. (p. financial statements The structured means of communicating financial information. distributions to owners. The constraint applies to informational requirements established by standard-setting bodies and governmental agencies as well as to companies reporting financial information. 58). A company can change methods. 61). earned (revenue) Revenue is considered earned when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. (p. (p. fair value option The choice allowed by the FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. an objective test. (p. equity. fair value principle GAAP-based principle that calls for the use of fair value measurements in the financial statements. 52). Under the fair value option. (p. through the balance sheet. (p. 62). and unrealized holding gains or losses are reported as part of net income. 56). conservatism The convention in accounting that dictates that when in doubt. The conceptual framework indicates that prudence or conservatism is generally in conflict with the quality of neutrality. which describes information that is measured and reported in a similar manner for different companies. expense recognition principle Accounting principle that dictates that the recognition of expenses is related to net changes in assets and earning revenues.” (p. economic entity assumption An assumption that economic activity can be identified with a particular unit of accountability. that is. completeness One of the ingredients of the fundamental quality of faithful representation. it helps to confirm or correct prior expectations based on previous evaluations of financial reporting information. income statement. rather than legal. (p. and (4) periodicity. and losses. faithful representation One of the qualitative characteristics of accounting information. 51). 49). which indicates that a company’s accounting numbers and descriptions match what really existed or happened. (p. (p. (2) going concern. Completeness means that all the information necessary for faithful representation is provided. (p. (p. comprehensive income. 64)(n)). investments by owners. and statement of owners’ equity. (p. (p. 59). the item is recorded at fair value at each reporting date. 51). consistency An aspect of comparable information. For accounting. 60). There are ten basic accounting elements: assets. a coherent system of objectives and fundamentals established by the FASB. by keeping an enterprise’s economic activity separate and distinct from that of its owners and any other business unit. Comparability enables users to identify the real similarities and differences in economic activities between companies.

monetary unit assumption Accounting assumption that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. even though benefits associated with these costs may occur in the future. labor. (p.” (p. but the most common are monthly. and overhead. 62). Unbiased information must be the overriding consideration. it is immaterial. 47). The point involved is one of relative size and importance. Historical cost is verifiable and neutral and therefore contributes to reliability. quarterly. Examples are material. Period costs are not included as part of inventory cost. (p. 57). matching principle Accounting principle that dictates that efforts (expenses) be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. predictive value One characteristic of relevant information. they are matched with revenue of a specific time period and expensed as incurred. 61). lenders. 63). 49). neutrality One of the ingredients of the fundamental quality of faithful representation. 57). (p. and yearly. (3) expense recognition. established by the accounting profession. For example. (p. The accounting profession generally uses four basic principles of accounting to record transactions: (1) measurement. (p. The additional information provided in the notes does not have to be quantifiable. 58). notes to financial statements A set of disclosures in a company’s financial statements that further explain the items presented in the main body of the statements. materiality A company-specific aspect of relevance. and other creditors in decisions about providing resources to the entity. Notes to the financial statements are considered an integral part of the statements. agricultural companies often report crops at fair value because it is costly to develop accurate cost figures on individual crops. that is. Examples are officers’ salaries and other administrative expenses. (p. 58). This linking of expense recognition to revenue recognition is popularly expressed as. 61n). (p. 47). (p. Companies carry product costs into future periods if they recognize the revenue from the product in subsequent periods. periodicity (time period) assumption Accounting assumption that implies that a company can divide its economic activities into artificial time periods. period costs Costs that attach to a specific accounting period. historical cost principle An accepted accounting principle that companies account for and report most assets and liabilities on the basis of acquisition price. sufficient condensation to make the information understandable. industry practices Peculiarities of some industries and business concerns that cause variations from basic accounting theory or practice. and the costs and benefits of providing the information. if it would have no impact on a decision-maker. prudence The convention in accounting that dictates that when in doubt. product costs Costs that attach to a specific product. principles of accounting One of the parts in the third level of the conceptual framework. (p. (p. both quantitative and qualitative factors should be considered. and future events. (p. Only in situations in which liquidation appears imminent is the assumption inapplicable. The conceptual framework indicates that prudence or . (p. “Let the expense follow the revenues. going concern assumption Accounting assumption that a company will continue in operation for the foreseeable future. These time periods vary. an item is said to be material if its inclusion or omission would influence or change the judgment of a reasonable person. companies follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user. nor does it need to qualify as an accounting element. 49). 51). Companies charge off such period costs in the immediate period. objective of financial reporting Goal for financial accounting and reporting. and (4) full disclosure. which is to provide information about the reporting entity that is useful to present and potential to equity investors.full disclosure principle Accounting principle that dictates that in deciding what information to report. (2) revenue recognition. 62). present. (p. and therefore irrelevant. general-purpose financial reporting The format for providing information to decision-makers at the least cost. indicating that information must help users predict the ultimate outcome of past. instead. which details recognition and measurement concepts. choose the solution that will be least likely to overstate assets and income. (p. It recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs between sufficient detail that makes a difference to users. neutrality indicates that a company cannot select information to favor one set of interested parties over another. 61). 57). (p.

The primary qualitative characteristics are relevance and faithful representation. when they are sold or traded in an active market at readily determinable prices without significant additional cost. which includes details or amounts that present a different perspective from that adopted in the financial statements. (p. because being prudent or conservative can lead to bias in the reported financial position and financial performance. verifiability An enhancing qualitative characteristic of accounting information. which dictates that companies recognize revenue when it is realized or realizable and when it is earned–that is. 53). Generally. (p. (p. which describes information capable of making a difference in a decision. (p. 60). (p. 60). the characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes. 48). 64)(n). 62).g. understandability An enhancing qualitative characteristic of accounting information that lets reasonably informed users see its significance. qualitative characteristics Part of the second level of the conceptual framework of accounting. 48). (p. when they are salable or interchangeable in an active market at readily determinable prices without significant additional cost. indicating that similar results will occur when independent third parties (e. when assets are salable or interchangeable in an active market at readily determinable prices without significant additional cost and when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. It may be quantifiable information that is high in relevance but low in reliability and may include management’s explanation of the financial information and its discussion of the significance of that information. relevance One of the qualitative characteristics of accounting information. To be relevant. revenues are realizable when assets received or held are readily convertible into cash or claims to cash—that is. (p. indicating that information should be available to decision-makers before it loses its capacity to influence their decisions. 53). realized (revenue) When assets received or held are converted into cash or claims to cash—that is. revenue recognition principle One of the basic principles of accounting. (p. recognition at the time of sale provides a uniform and reasonable test.. (p. realizable (revenue) Part of the first test of the revenue recognition principle. (p. 52). supplementary information Information included in the notes to financial statements. Information with no bearing on a decision is irrelevant.conservatism is generally in conflict with quality of neutrality. 60). timeliness An enhancing qualitative characteristic of accounting information. . information needs predictive or feedback value and needs to be presented on a timely basis. auditors) measure using the same methods.

depending on the company’s form of organization). and salaries. the volume of data to be handled. (p. depending on the nature of the business and its transactions. which generally is the source or cause of changes in assets. accounting information system A system that collects and processes transaction data and then disseminates the financial information to interested parties. 104). and expense. 89. 114). 108). (p. Events may be external or internal. commissions and fees). If a company records every transaction with equal debits and credits. accrued revenues Revenues earned but not yet received in cash or recorded at the statement date. and for capital (stockholders’ equity). 89. 111). taxes. 88). 89). (p.. (p. the company transfers revenue and expense account balances to Income Summary. In the closing process. Examples are interest. debit The left side of an account. An accrued expense on the books of one company is often an accrued revenue to another company. (p. (p. Book value of an asset generally differs from its market value because depreciation is a means of cost allocation. book value The difference between a depreciable asset’s cost and its related accumulated depreciation. the size of the company. 107). 89). tabulation. liability. (pp..Glossary—Chapter 3 account A systematic arrangement that shows the effect of transactions and other events on a specific element (asset. . event A happening of consequence. and (4) the statement of owners’ or stockholders’ equity. that it has followed the revenue recognition and expense recognition principles. financial statements The principal means through which a company communicates its financial information. Commonly abbreviated as Dr. Accounting information systems vary widely from one business to another. and final summarization of the accounting data. 93). closing entries Journal entries made at the end of a company’s annual accounting period to transfer the balances of temporary accounts to a permanent owners’ equity account (retained earnings or a capital account. Companies often prepare adjustments after the balance sheet date but date the entries as of the balance sheet date. An example is the accumulated depreciation account. (p. closing process Accounting process at the end of the accounting period that reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period’s transactions. not of valuation. These statements reflect the collection. (3) the statement of cash flows. contra asset account An account that offsets an asset account on the balance sheet. 100). credit The right side of an account. (p. (p. 105). The statements most frequently provided are (1) the balance sheet. accrued expenses Expenses incurred but not yet paid or recorded at the statement date. and so on). Accrued revenues result from the passing of time (e. (p. 113). and owners’ equity. 90). (p. Companies keep a separate account for each asset. liabilities. 88). 88). Note disclosures are an integral part of a company’s financial statements. (p. interest revenue and rent revenue) or from unbilled or uncollected services that a company performed (e. depreciation The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. revenue. (pp. which companies use in order to disclose both the original cost of an asset and the total expired cost to date. then the sum of all the debits to the accounts must equal the sum of all the credits. double-entry accounting The universally used accounting system in which a company records the dual (two-sided) effect of each transaction in appropriate accounts. adjusted trial balance A trial balance prepared from a company’s ledger accounts after journalizing and posting all adjusting entries. Commonly abbreviated as Cr.g. and equity. (p. (2) the income statement. (p. liability. and the informational demands.g. which matches expenses and revenues. 105). It shows the effects of all financial events that occurred during the accounting period. accounting cycle Standard set of accounting procedures to record transactions and prepare financial statements. (p. (pp. rent. 89. liabilities. balance sheet Financial statement that shows the financial condition of a company at the end of a period by reporting its assets. adjusting entry Adjustments made at the end of the accounting period to ensure that a company has recorded revenues in the period in which it earns them and recognized expenses in the period in which it incurs them—in other words. 89). 89).

posting The process of transferring the essential facts and figures from the book of original entry (the journal) to the ledger accounts. 116). statement of cash flows Financial statement that reports the cash provided and used by operating. general ledger A list of all of a company’s asset. (p. (p. (p. and the expenses in the period incurred. (pp. also called permanent accounts. cash payments. and their balances. magazine subscriptions. and expense accounts. investing. rent and insurance) or through use and consumption (e. stockholders’ equity. prepaid expenses Assets paid for and recorded before a company uses them. and dividend accounts. and expense accounts. (pp. 89. (p. that are the exact opposite of the adjusting entries made in the previous period. with modifications that have substantial support. special journals Records of transactions possessing a common characteristic. using debits and credits made to accounts. subsidiary ledger A list that contains the details related to a given general ledger account.g. 89. (p. these accounts appear on the balance sheet. and expense accounts. ledger The book (or computer printouts) containing the accounts. purchases. revenue. 89). liability. (pp. The trial balance proves the mathematical equality of debits and credits after posting and also uncovers errors in journalizing and posting. 89. 89). 123). except for dividends. 95). owners’ (stockholders’) equity. (p. (p. expense. 89). T-account Basic account form. reversing entries Journal entries. and customer deposits for future service. consists only of asset. journalizing The process of entering transaction data in the journal. income statement Financial statement that measures the results of operations during a particular period and presents those results in terms of net income or net loss. Companies typically recognize prepaid expenses by making adjusting entries to record the expenses that apply to the current accounting period and to show the unexpired costs in the asset accounts. (p. supplies). such as cash receipts. (p. stockholders’ equity. 102). (p. liability. and financing activities during the period. Appendix 3A: accrual basis The recognition of revenue when it is earned. 88). Appendix 3C: worksheet An informal device for accumulating and sorting information needed for the financial . (p.. though they usually do so at the end of an accounting period. (p. (p. real accounts Asset. made at the beginning of the next accounting period. revenue. 89). (p. (p. Prepaid expenses expire either with the passage of time (e. without regard to the time of receipt or payment of cash. The company transfers that information from the journal to the ledger. that shows the effect of transactions on particular asset. transaction An external event involving a transfer or exchange between two or more entities. in the sequence in which they appear in the ledger. 96). 106). strict cash basis Companies record only when they receive cash. (pp. trial balance The list of all open accounts. 89). such as capitalizing and depreciating plant assets or recording inventory. Companies do not close real accounts. journal The “book of original entry” where the company initially records transactions and selected other events. Using such journals reduces bookkeeping time. 96). post-closing trial balance The trial balance after closing entries are made.. 89). 121). 89). these accounts appear on the income statement. at the end of the accounting period. 89). and equity accounts. 95). Examples are rent.general journal A complete record of a company’s transactions or other financial events. Unearned revenues are the opposite of prepaid expenses. modified cash basis A mixture of the accrual basis and cash basis. Companies close nominal accounts. also called temporary accounts. (p. liability. (p. and owners’ equity accounts (the real accounts). A subsidiary ledger contains the details related to a given general ledger account. revenue. 116). liability. liability. listed chronologically and expressed in terms of debits and credits made to accounts. (p. (p. 89. shaped like the letter T.g. 100). Making reversing entries is an optional step in the accounting cycle. sales. A general ledger is a collection of all the asset. 122). Companies may prepare a trial balance at any time. 89). unearned revenues Revenues received in cash and recorded as liabilities before a company earns them. and they record expenses only when they disburse cash. statement of retained earnings Financial statement that reconciles the balance of the retained earnings account from the beginning to the end of the period. nominal accounts Revenue. 89).

The worksheet typically provides columns for the first trial balance.statements. (p. income statement. Completing the worksheet provides considerable assurance that a company properly handled all of the details related to the end-of-period accounting and statement preparation. adjusted trial balance. . 129). and balance sheet. adjustments.

modified all-inclusive concept Approach. (4) changes in accounting principle. Comprehensive income includes all revenues and gains. These latter amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions. companies report separately from continuing operations the results of operations of a component that has been. (p. 161). comprehensive income Income measure that includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. (3) unusual gains and losses. Such allocation relates the income tax expense of the fiscal period to the specific items that give rise to the amount of the tax provision. in income. 169). indicating the gain or loss from disposal of a business. or will be. 169). irregular items Income-statement components for which the FASB has established special reporting rules. 169). and that companies must highlight irregular items in the financial statements. In addition. (p. that dictates that companies record just about all items. (2) extraordinary items. expenses and losses reported in net income. (p. Appropriated Retained Earnings A retained earnings account that is restricted for a specific use. An alternative to the transaction approach for income measurement. multiple-step income statement Income statement format that separates operating transactions from . earnings management The planned timing of revenues. capital maintenance approach An income measurement approach in which a company determines income for the period based on the change in equity. and (6) corrections of errors. It is also often called the statement of income or statement of earnings. 183). (p. They are distinguished by their unusual nature and by the infrequency of their occurrence. or in the period of change and future periods if the change affects both. 160). 182). extraordinary items Nonrecurring material items that differ significantly from a company’s typical business activities. These amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions. intraperiod tax allocation Reporting of irregular items within an accounting period on the income statement or statement of retained earnings net of tax. adopted by the accounting profession. discontinued operation Occurs for a company when two things happen: (1) a company eliminates the results of operations and cash flows of a component from its ongoing operations. (p. 162) (n). (p. or current necessity. 175). (5) changes in estimates. Companies account for changes in estimates in the period of change if they affect only that period. They do not carry back such changes to prior years. These items fall into six general categories: (1) discontinued operations. expenses. 178). but not irregular items. and all gains and losses that bypass net income but affect stockholders’ equity. gains. 168). and it discourages statement readers from using pretax measures of performance when evaluating financial results. including irregular ones. (p. and (2) there is no significant continuing involvement in that component after the disposal transaction. disposed of. usually to comply with contractual requirements. (p. board of directors’ policy. income statement The financial report that measures the success of company operations for a given period of time. after adjusting for capital contributions or distributions (dividends). (p. It helps financial statement users better understand the impact of income taxes on the various components of net income. as part of net income.Glossary—Chapter 4 accumulated other comprehensive income An entry in the stockholders’ equity section of the balance sheet that reports the cumulative amounts of Other Comprehensive Income. Companies report a discontinued operation (in a separate income statement category). (p. (p. changes in estimates Adjustments or changes that companies must make because financial circumstances did not turn out as expected. Changes in estimate are not considered errors or extraordinary items. (p. 180). current operating performance approach Income-reporting approach that advocates reporting only regular and recurring revenue and expense elements. and losses to smooth out bumps in earnings. (p. 177). divided by the weighted average of common shares outstanding. (p. Other Comprehensive Income measures the amounts of all gains and losses in a period that bypass the income statement but affect stockholders’ equity. Companies must disclose earnings per share on the face of the income statement. earnings per share (EPS) A distilled and important income figure. calculated as net income minus preferred dividends (income available to common stockholders). 170).

Thus. (p. 164). (p. Expenses are deducted from revenues to arrive at net income or loss. higher-quality earnings exhibit higher levels of relevance and faithful representation. and balances at the end of the period. Earnings of high quality boost investors’ confidence in the financial statements. Companies correct such errors by making proper entries in the accounts and reporting the corrections in the financial statements (as an adjustment to the beginning balance of retained earnings) in the year in which they are discovered. (p. (p. and loss transactions—that have occurred during the period. prior period adjustments Corrections of accounting errors made in previous accounting periods. These amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions. 162). expense.nonoperating transactions. 182). (p. and matches costs and expenses with related revenues. 183). 175). it should restate the prior statements for the effects of the error. . 161). It typically shows balances at the beginning of the period. If a company prepares comparative financial statements. single-step income statement Income statement format that consists of just two groupings: revenues and expenses. Companies that use the single-step income statement in financial reporting typically do so because of its simplicity. (p. 163). other comprehensive income Measure of the amounts of all gains and losses in a period that bypass the income statement but affect stockholders’ equity. quality of earnings The extent to which earnings is useful to investors and creditors in making resource allocation decisions. Companies disclose changes in the separate accounts either in separate statements or in the basic financial statements or notes thereto. It highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. transaction approach Method of income measurement that focuses on the income-related activities— revenue. statement of stockholders’ equity One of the basic financial statements. which reports the changes in each stockholders’ equity account and in total stockholders’ equity during the year. additions and deductions. generally in terms of predicting future earnings and cash flows. (p. Earnings management negatively affects the quality of earnings when it distorts the information in a way that does not accurately predict future earnings and cash flows. gain.

Examples include Accumulated Depreciation—Equipment and Discount on Bonds Payable. environmental issues. This concept includes payables resulting from the acquisition of goods and services. 222). Use of contra accounts enables readers of financial statements to see the original cost of the asset. 218). or government investigations. Computed as the ratio of cash provided by operating activities to total debt. describes the total bond liability of the company. 233). 218). held-to-maturity investments Debt securities that a company has the positive intent and ability to hold to maturity. current cash debt coverage ratio Measure of liquidity that indicates a company’s ability to pay its shortterm debts. Computed as cash provided by operating activities divided by average current liabilities. when added to the Bonds Payable account. current assets Cash and other assets a company expects to convert into cash. or consume either in one year or in the operating cycle. Intangible assets derive their value from the rights and privileges granted to the company using them. (2) collections received in advance for the delivery of goods or performance of services. (p. The uncertainty can involve a possible gain (gain contingency) or possible loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur. 238). liabilities. current liabilities The obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. Interest on available-for-sale securities is recorded when earned. (p. 217). (p. (p. liability. (p. Companies report available-for-sale securities at fair value. whichever is longer. an ownership interest. (p. or owners’ equity account. but do not report changes in fair value as part of net income until after they sell the security. Companies present current assets in the balance sheet in order of liquidity. financial instruments Assets consisting of cash. liability. Some analysts prefer free cash flow to the measure of cash provided by operating activities because free cash flow takes into account the outflows needed to maintain current operations. or a contractual right to receive or obligation to deliver cash or another financial instrument. 234). sell. which. An example is Premium on Bonds Payable. (p.Glossary—Chapter 5 account form Presentation in a classified balance sheet that lists assets by sections on the left side and liabilities and stockholders’ equity by sections on the right side. 229). free cash flow Measure of the cash remaining from operating activities after adjusting for capital expenditures and dividends paid. Typical gain contingencies are tax operating loss carryforwards or company litigation against another party. 236). (p. (p. adjunct account An account that increases either an asset. (p. 225). Companies write off (amortize) limited-life intangible assets over their useful lives. and (3) other liabilities whose liquidation will take place within the operating cycle. intangible assets Assets that lack physical substance and that are not financial instruments. (p. liability. and they periodically assess indefinite-life intangibles (including goodwill) for impairment. 215). A company’s liquidity and solvency affect its financial flexibility. financing activities Cash flow activities that include (1) obtaining cash from issuing debt and repaying the amounts borrowed. 241). contra account An account that reduces either an asset. possible tax assessments. balance sheet Financial statement that shows the financial condition of a company at the end of a period by reporting its assets. (p. available-for-sale investments Debt or equity securities not classified as held-to-maturity or trading securities. or owners’ equity account as well as the changes in the account to date. cash debt coverage ratio Measure of solvency that indicates a company’s ability to repay its liabilities from cash generated from operations (without having to liquidate productive assets). and (2) obtaining cash from stockholders and paying them dividends. Unrealized holding gains and losses on available-for-sale securities are recognized as other comprehensive income and as a separate component of stockholders’ equity. contingency Material events with an uncertain future. financial flexibility The ability of a company to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. They are normally classified as long-term assets. (p. (p. 234). as represented by average total liabilities. 222). or owners’ equity account. . accounts receivable. (p. 241). 214). Typical loss contingencies relate to litigation. and stockholders’ equity (p.

(3) investments set aside in special funds. rate of return on assets. such as land held for speculation. Partners show separately their permanent capital accounts and the balance in their temporary accounts (drawing accounts). trading investments Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences. long-term liabilities Obligations that a company expects to pay at some date beyond the normal operating cycle. (p. and the net change in cash resulting from the operating. the lower its risk of failure. report form Presentation in a classified balance sheet that lists liabilities and stockholders’ equity directly below assets on the same page. reserve An appropriation of retained earnings. Examples are: (1) investments in securities.investing activities Cash flow activities that include (1) purchasing and disposing of investments and productive long-lived assets using cash. 214). With the exception of land. cash payments. (p. 244). and (2) lending money and collecting the loans. profitability ratios Measures of the degree of success or failure of a given company or division for a given period of time. 224). and retained earnings. (p. A company with a high level of longterm debt relative to assets has lower solvency than a similar company with a low level of long-term debt. or a simple proportion. Common liquidity ratios are the current ratio.. in a format that reconciles the beginning and ending cash balances. statement of cash flows A basic financial statement that provides information about cash receipts. (p. Also called appropriated earnings. (p. the cash debt coverage ratio. liquidity The amount of time that is expected for an asset to be realized or otherwise converted into cash or until a liability has to be paid. 242). and the current cash debt coverage ratio. working capital The excess of total current assets over total current liabilities. Companies provide a great deal of supplementary disclosure for long-term liabilities because they often are subject to covenants and restrictions for the protection of lenders. 244). 225). (p. the greater a company’s liquidity. long-term investments Investments that companies expect to hold for many years. 221).g. investing. and thus enter into the determination of net income. 218). 244). and the payout ratio. Examples are bonds payable. earnings per share. (p. a rate. buildings) or depletes (e. 223). (p. property. and (4) investments in nonconsolidated subsidiaries. 244). such as bonds or common stock. solvency The ability of a company to pay its debts as they mature. rate of return on common stock equity. . ratio analysis An evaluation of the relationship among selected financial statement data.. additional paid-in capital. and pension obligations. (2) investments in tangible fixed assets not currently used in operations. plant. 229). expressed in terms of either a percentage. 226). These assets consist of physical property (such as land. (p. Appendix 5A: activity ratios Measures of how effectively a company is using its assets. operating activities Cash flow activities include the cash effects of transactions that create revenues and expenses. Common profitability ratios are profit margin on sales. a company either depreciates (e. Common activity ratios are receivables turnover. The owners’ equity section of the corporate balance sheet consists of capital stock. (p. times interest earned. and asset turnover. (p. In general. (p. 228). 244). The ownership accounts (stockholders’ equity) in a corporation differ considerably from ownership accounts in a partnership or proprietorship. owners’ (stockholders’) equity The ownership claim on a company’s total assets. Proprietors ordinarily use a single capital account that handles all of the owner’s equity transactions. (p. represents the net amount of a company’s relatively liquid resources. 220). (p. (p. such as a pension fund. Common coverage ratios are debt to total assets. inventory turnover. liquidity ratios Measures of a company’s short-run ability to pay its maturing obligations. Companies usually present long-term investments on the balance sheet just below current assets. the price-earnings ratio. Also called net working capital. and book value per share. buildings. notes payable. 215). 227). coverage ratios Measures of the degree of protection for long-term creditors and investors. machinery) and wasting resources (timberland. and financing activities of a company during the period. minerals). (p. Also referred to as long-term debt. and equipment Assets of a durable nature used in the regular operations of the business. the quick or acid-test ratio.g. some deferred income tax amounts. lease obligations. (p. (p. oil reserves) these assets.

Technical Bulletins. a public hearing on the proposed standard is held. The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS). The first step taken in establishing financial accounting standards is a topic is identified and placed on the board's agenda. International Financial Reporting Standards (IFRS) are issued by the: A. B. B. GAAP. The most authoritative source of GAAP among the following is FASB: A. D. C. B. Companies would make it easier to compare them with foreign companies. Implementation Guides. C. Interpretations. 3.S. SEC. IFRS includes standards referred to as International Auditing Standards (IAS). 4. All of the following are true regarding IFRS except: A.. FASB. IFRS is more “principle-based than U.S. 2/15/2012 . D. Emerging Issues Task Force Statements. the board evaluates the research and public Feedback and issues an exposure draft.Chapter 1 Financial Accounting and Accounting Standards Results Page 1 of 7 0% (0 out of 26 correct) Responses to questions are indicated by the symbol. The adoption of IFRS by U.wiley. 1. 2. http://higheredbcs. C.html?. B. FASB Interpretations (and standards) are the most authoritative source of GAAP. IASF. C. the board conducts research and analysis and a discussion memorandum is issued. IASB. topics are identified and placed on the board's agenda.com/legacy/college/kieso/0470587237/addtl_selftests/ch01.. D. The first step taken in the establishment of a typical FASB statement is: A.

8. http://higheredbcs. rather than International Auditing Standards. True B. False Financial Accounting Concepts are one of the three major types of pronouncements issued by the FASB. stock exchange are required to file audited financial statements with the Financial Accounting Standards Board. A. The Codification eliminates the hierarchy of GAAP so that all documents included are considered authoritative..com/legacy/college/kieso/0470587237/addtl_selftests/ch01. False Public corporations are required to file audited statements with the Securities Exchange Commission. Corporations whose securities are listed on a U. False The Codification creates one level of GAAP which is considered authoritative. Financial Accounting Concepts are a major type of pronouncement issued by the FASB.wiley.Chapter 1 Financial Accounting and Accounting Standards Results Page 2 of 7 D. GAAP and IFRS.S.. All of the options are true except that IFRS includes standard referred to as International Financial Reporting Standards.html?. IFRS are developed by the IASB. True B. 6. 2/15/2012 . True B.S. 5. False The Norwalk Agreement address the issue of convergence of U. A. 7. A. True B. The Norwalk Agreement between the FASB and the IASB address the issue of ethics in financial reporting A.

False http://higheredbcs. 2/15/2012 ..S. True B.html?. exchanges are required to use U. 11.Chapter 1 Financial Accounting and Accounting Standards Results Page 3 of 7 9. 10. Section 404 of the Sarbanes Oxley-Act requires public companies to attest to the effectiveness of their internal controls. A. True B. A.. Financial reports generally focus on soft assets such as Apple's brand image or Wal-Mart's supply chain management system. False Section 404 requires public companies to document and test the effectiveness of their internal controls systems for financial reporting.wiley.com/legacy/college/kieso/0470587237/addtl_selftests/ch01. GAAP. False FASB Standards passage requires support of three of five Board members.S. A. The passage of a new FASB Standards Statement requires the support of three of five Board members. False Practice Bulletins focus on narrow financial reporting issues that have not been addressed by the FASB 12. The AICPA's Practice Bulletins provide the Accounting Standards Executive Committee's views on narrow financial reporting issues that have not been addressed by the FASB. 13. True B. True B. False Financial reports focus on hard assets such as inventory and plant assets. True B. A. A. Foreign companies that list on U.

http://higheredbcs. Cash basis accounting. B.com/legacy/college/kieso/0470587237/addtl_selftests/ch01.html?. IFRS is more “rule-based” in its approach to standards than U. Managerial basis accounting. B. FASAC.S. Accrual basis accounting better indicates present and continuing favorable cash flows for a company. GAAP.Chapter 1 Financial Accounting and Accounting Standards Results Page 4 of 7 Foreign companies that list on U.. A. D.S. Which of the following generally provides a better indication of an enterprise's present and continuing ability to generate favorable cash flows? A. Accrual basis accounting. exchanges can use IFRS. 17. 14. AICPA. The Financial Accounting Foundation (FAF) is the group that selects members of the FASB. 15. False Over 100 countries including those in the European Union use IFRS. 2/15/2012 . C.wiley.. False IFRS is more “principle-based” in its approach to standards than is U. Which group selects members of the FASB? A. 16. Financial basis accounting. SEC.S. D. GAAP. FAF. C. True B. True B. All listed companies in the European Union use IFRS. A.

Financial Accounting Foundation. C. Which of the following is not a significant difference between the FASB and its predecessor.. Larger membership. D. except the Financial Accounting Council. B. Staff positions are issued without going through the due process system.. http://higheredbcs. D. Broader representation. Financial Accounting Council.Chapter 1 Financial Accounting and Accounting Standards Results Page 5 of 7 18. 7. FASB Standard. C. are part of the current standard-setting structure. 21. D. C. Discussion memorandum. B. 5. B. 19. All of the above. Financial Accounting Standards Board. D. the APB? A. Increased independence. Staff positions.com/legacy/college/kieso/0470587237/addtl_selftests/ch01. 2/15/2012 . Board membership decreased from 18 to 5 members. 10. C. Exposure draft. Which of the following organizations is not part of the current standard-setting structure? A.html?. Greater autonomy.wiley. 20. Financial Accounting Standards Advisory Council. 18. B. Which of the following documents is not issued during the due process system that results in a new pronouncement? A. The Financial Accounting Standards Board is composed of how many board members? A.

B. the Codification changes the way GAAP is documented. The organization whose purpose is to reach consensus on how to account for new and unusual financial transactions that have potential for creating differing financial reporting practices is the: A.Chapter 1 Financial Accounting and Accounting Standards Results Page 6 of 7 The FASB is composed of 5 members. the Codification was created to simplify user access. EITF. C. D. IASB C. 22. and updated. B. the purpose of the Codification is to create new GAAP. 2/15/2012 .. SEC D. 24. FASAC. FASB B. the goal of the Codification was to provide one place where all authoritative literature about financial statement preparation could be found. http://higheredbcs.wiley. International Financial Reporting Standards (IFRSs) are issued by the: A. 25. All of the following are true regarding the FASB Codification except: A. AICPA. EU The International Accounting Standards Board issues IFRS. The Codification's purpose is to integrate and synthesize existing GAAP—not to create new GAAP. D. FASB. requires codes of ethics for senior financial officers.html?. replacing the 18 member board of the APB. 23. C. presented. The Emerging Issues Task Force has this responsibility.com/legacy/college/kieso/0470587237/addtl_selftests/ch01. The Sarbanes Oxley Act does all of the following except: A..

html?. Foreign companies that trade shares in U. GAAP under these convergence efforts. D. 2/15/2012 . The standard-setting structure for IFRS is very similar to the standard-setting structure in the United States. GAAP. markets to reconcile their accounting with U.com/legacy/college/kieso/0470587237/addtl_selftests/ch01. Regulators have recently eliminated the need for foreign companies that trade shares in U. D. C.Chapter 1 Financial Accounting and Accounting Standards Results Page 7 of 7 B. 26.S. Retake Test http://higheredbcs. C. GAAP with IFRS except: A. The IASB has looked to the United States to determine the structure it should follow in establishing IFRS. transfers the final authority for GAAP to the PCAOB. strengthens independence rules for auditors. IFRS tends to be less stringent in its disclosure requirements than U. requires independence and financial expertise for members of the audit committee.wiley.S. markets are required to reconcile their accounting with U.S. an oversight board with enforcement authority and the responsibility for establishing auditing. GAAP.S... The Sarbanes Oxley Act created the PCAOB. quality control and independence standards. All of the following statements are true regarding convergence of U.S. B.S.

C.. Anything under 5% of net income is generally considered not material.wiley. Which of the following statements about the fair value principle is not true? A. revenue recognition principle. 4. historical cost assumption. economic entity assumption. B. sales. 1. historical cost principle. going concern assumption. D. http://higheredbcs. assets. Providing information that is of sufficient importance to influence the judgment: and decisions of an informed user is required by the A. C. A.Chapter 2 Conceptual Framework for Financial Accounting Results Page 1 of 7 0% (0 out of 26 correct) Responses to questions are indicated by the symbol. B.html?. Fair value is generally more relevant than historical cost. not a basic assumption. C. 2/15/2012 . B. liabilities. B. The four basic assumptions underlying the financial accounting structure include all of the following except: A. 3.. The full disclosure principle requires providing information that will influence the judgment and decisions of informed users. D. 2. net income. D. monetary unit assumption. Fair value is a market-based measure.com/legacy/college/kieso/0470587237/addtl_selftests/ch02. expense recognition principle. Companies and their auditors have adopted a general rule of thumb that anything under 5% of _______ is considered not material. full disclosure principle. Historical cost is a measurement principle.

so that part of the project was scrapped..Chapter 2 Conceptual Framework for Financial Accounting Results Page 2 of 7 C. The historical cost principle applies even when a firm is not a going concern.wiley. 5. 6. http://higheredbcs. 8. B. False In certain circumstances revenue may be recognized during production.. it does not identify it as an assumption. The full disclosure principle requires that all information that is of sufficient importance to influence the judgment and decisions of informed users be disclosed in the main body of the financial statements and in the notes to the financial statements. the FASB framework extensively discusses and assumes that reporting entities are going concerns. there is a need to change many aspects of existing frameworks. A. All of the following statements are false regarding the IASB and FASB convergence efforts except: A. at the end of production or after the sale once cash is received. 7. True B. 2/15/2012 . While the FASB framework discusses accrual accounting extensively. D. False Disclosure may also be accomplished through supplementary information. The pervasive criterion of accounting information is decision usefulness.html?. the FASB framework does not identify accrual accounting as an assumption. C.com/legacy/college/kieso/0470587237/addtl_selftests/ch02. GAAP gives companies the option of using fair value for financial assets and financial liabilities. A. Measurement based on fair value can increase subjectivity into financial reporting. the IASB and FASB have not been able to agree on qualitative characteristics. True B. GAAP requires the use of fair value for financial assets and financial liabilites. D.

Information that has been measured and reported in a similar manner for different enterprises is considered comparable. and be timely. A.. it needs to have predictive value. A. A. The FASB sometimes issues standards that have undesirable economic effects on an industry or company. 10. False Because of the neutrality ingredient of the fundamental quality of faithful representation. The periodicity assumption specifies that the appropriate time period for financial reporting is the calendar year. 12. False For information to be relevant.Chapter 2 Conceptual Framework for Financial Accounting Results Page 3 of 7 A. False The periodicity assumption suggests that the economic life of a business can be divided http://higheredbcs. False Comparability is between firms. True B.. False All three of the objectives of financial reporting stress the importance of useful information. True B.wiley. 9. the FASB does not favor one set of interested parties over another. it needs to have predictive or feedback value. 2/15/2012 . A. True B. feedback value. For information to be relevant. 11. True B.html?.com/legacy/college/kieso/0470587237/addtl_selftests/ch02. True B.

html?.S. 16. True B. The conceptual framework contains how many Statements of Financial Accounting Concepts that related to financial reporting for business enterprises? A. 6 C.Chapter 2 Conceptual Framework for Financial Accounting Results Page 4 of 7 into artificial time periods such as a month. 5 D.. SFAC 4 deals with non-business enterprises. False Fair value information is useful for financial instrument such as derivatives. Costs are classified as period costs when a company cannot establish a direct relationship between the cost and revenues. are expensed in the period when incurred because there is no direct relationship between the cost and revenues. A. A. True B.wiley. SFAC 1 –3 and 5 – 8. False Period costs. Certain financial instruments are reported at fair value rather than historical cost. http://higheredbcs. False The objective of the convergence project is to develop a common conceptual framework based on existing conceptual frameworks that underlie U. A. quarter or year. GAAP and IFRS. 14.com/legacy/college/kieso/0470587237/addtl_selftests/ch02. 13.. 2/15/2012 . The objective of the joint project of the IASB and the FASB is to develop a conceptual framework to replace the going concern concept. such as administrative salaries. 7 B. 4 The framework consists of 7 Statements of Financial Accounting Concepts. 15. True B.

2 C. The fundamental qualities of accounting information are: A. predictive value. B. confirmatory value. All three levels. 20.. 2/15/2012 .com/legacy/college/kieso/0470587237/addtl_selftests/ch02. the “Why”. relevance and faithful representation. the Bridge between levels 1 & 3. except: A. and the “How”.html?. B. C.Chapter 2 Conceptual Framework for Financial Accounting Results Page 5 of 7 17. principles. The third level which consists of assumptions. 1 B. 3 D. materiality. 19. C. not an ingredient of relevance. 18. 4 There are 3 levels. D. First. All of the following are ingredients of reliability. The fundamental qualities are relevance and faithful representation.wiley. relevance and consistency. D. and constraints. Faithful representation is a fundamental quality. Second. The conceptual framework for financial reporting consists of how many levels? A. D. http://higheredbcs. comparability and materiality.. comparability and verifiability. B. Which level of the conceptual framework is devoted to recognition and measurement concepts? A. faithful representation. Third. C.

Verifiability. monetary unit assumption. A parent and its subsidiaries are separate legal entities. Going concern assumption. Economic entity assumption. Periodicity assumption. All of the options. C. are for a moment in time. http://higheredbcs. B. B. Liabilities. Comparable. other than comprehensive income. Assets. C.html?.. The assumption that allows the merging of a parent company and its subsidiaries for financial reporting purposes is the: A. 24.Chapter 2 Conceptual Framework for Financial Accounting Results Page 6 of 7 21. Which of the following is an important advantage of using cost over other possible valuations? A. D. In liquidation the distinction between current and noncurrent would not be useful. D. Which assumption makes the current – noncurrent classification of assets and liabilities on the balance sheet useful? A. B. C. periodicity assumption. Monetary unit assumption. C. but a single economic entity. D. going concern assumption. B. Comprehensive income. Which of the following elements of financial statements is the result of transactions. Relevance. 22.com/legacy/college/kieso/0470587237/addtl_selftests/ch02. or circumstances that affect an enterprise during a period of time? A. 2/15/2012 . Equity. 23. events.wiley. economic entity assumption..

C. All of the above.. Historical cost is reliable due to its being inherently objective and verifiable. 25. unlike the two conceptual frameworks that presently exist. the IASB framework makes three assumptions. the converged framework should be a single document.wiley.Chapter 2 Conceptual Framework for Financial Accounting Results Page 7 of 7 D.. GAAP and IFRS are very similar. Which of the following is a constraint recognized by the Conceptual Framework? A. The Conceptual Framework recognized the cost constraint. Retake Test http://higheredbcs. Periodicity. All of the following statements are true regarding the convergence project by the FASB and IASB except: A. D. B. the existing conceptual frameworks underlying U. The IASB framework makes two assumptions – accrual basis and going concern.com/legacy/college/kieso/0470587237/addtl_selftests/ch02. B. Industry practices.S. D. Cost. Materiality. C. 2/15/2012 . the FASB framework discusses accrual accounting exclusively but does not identify it as an assumption. 26.html?.

nominal accounts. Dividends paid exceed the net income earned for the period. No Purchases account is used because the purchases are debited directly to the Inventory account. Purchases. Sales Revenue. All of the following accounts are used with a perpetual inventory system except: A. Cost of Goods Sold. All revenue and expense account balances are transferred to the Income Summary account... Income Summary account. C. If the entry to close Income Summary to Retained Earnings includes a credit to Income Summary: A. 2. D. The post-closing trial balance consists only of: A. B. revenue and expense accounts. C. B. Capital account. Inventory. D. Dividends account.html?. Retained Earnings account. In the closing process all of the revenue and expense account balances are transferred to the: A. Retained Earnings will be increased by the current period's net income. http://higheredbcs.com/legacy/college/kieso/0470587237/addtl_selftests/ch03. real accounts.Chapter 3 The Accounting Information System Results Page 1 of 7 0% (0 out of 27 correct) Responses to questions are indicated by the symbol. 1. B.wiley. asset and liability accounts. the company has incurred a net loss. 2/15/2012 . Only real accounts are included on the post-closing trial balance. C. 4. B. C. D. 3.

B..wiley. The higher cost of good information and better internal controls is part of the debate about why the U. IPOs. Purchases. Revenues exceed expenses. False Nominal (also called temporary) accounts are closed at the end of each accounting period.com/legacy/college/kieso/0470587237/addtl_selftests/ch03. C. commentators argue that the growth in non-U. C. Merchandise Inventory.html?.S. Nominal accounts are periodically closed. D.. http://higheredbcs.Chapter 3 The Accounting Information System Results Page 2 of 7 D. 5. The balance in Accounts Payable would be listed in the credit column of a post-closing trial balance.S. If the Income Summary has a debit balance. 7. Accounts Payable.S. All of the following are points made about accounting information systems and their relationship to the convergence efforts by the IASB and the FASB except: A. 6. security markets more competitive.S. markets is a natural consequence of general globalization of capital flows. Sales Revenue. the company has incurred a net loss because expenses exceeded revenue. while there is a need to work toward international convergence of accounting standards. A. 2/15/2012 . B. D. the cost of good information and better internal controls is a general held reason for why U. there has also been a movement to improve international auditing standards. security markets are less competitive. True B. commentators argue that SOX is the cause of the relative decline of U. Which one of the following accounts would have an amount listed in the credit column of a post-closing trial balance? A.

2/15/2012 .com/legacy/college/kieso/0470587237/addtl_selftests/ch03. equity and liability accounts have normal credit balances. A. False Transactions are initially recorded in the general journal. Transactions are initially recorded in the general ledger.. True B. Dividends are increased on the debit side. False Purchases and sales are recorded directly to the inventory account in a perpetual inventory system. 11. equity and liability accounts all are increased by credits and have normal credit http://higheredbcs. When revenues are collected in advance of being earned. False Dividends is a nominal contra stockholders' equity account. A.Chapter 3 The Accounting Information System Results Page 3 of 7 8. 10.html?. A. In a periodic inventory system. Revenue. True B. True B. 12. purchases and sales are recorded directly in the inventory account as the purchase and sales occur.. False A revenue collected in advance of being earned is called an unearned revenue. A. False Revenue. therefore it has a debit balance and is increased with debits. True B. A. True B.wiley. it is normally called an accrued revenue. 9.

Chapter 3 The Accounting Information System Results Page 4 of 7 balances. Since non-U. True B. True B.S.html?. 17. 2/15/2012 . A. A. False The book value of an asset is cost less accumulated depreciation. True B.. False The journal entry to accrue interest expense includes a debit to an expense account and a credit to a liability account.. 14. The revenue recognition principle requires that bad debts be estimated and expensed in the period of the sale. http://higheredbcs. internal controls will not be discussed as part of the convergence efforts of the FASB and IASB. A. A. True B. markets are not affected by the Sarbanes Oxley Act (SOX). 16. 13. False Tangible assets are depreciated and intangible assets are amortized so that that the cost of the assets is allocated over their useful lives in a systematic and rational manner. The book value of an asset is cost less salvage value. 15.com/legacy/college/kieso/0470587237/addtl_selftests/ch03. False The expense recognition principle requires that bad debts be estimated and expensed in the period of the sale. Depreciation and amortization allocate the cost of long-term assets to the periods which benefit from their use.wiley. The journal entry to accrue interest expense includes a debit to an expense account and a credit to an asset account.

2/15/2012 . Additional Paid in Capital. every transaction will affect at least two accounts. False While enhanced internal control standards under SOX apply only to large public companies listed on U.S.html?. at least two accounts. 20. Which of the following is a real account? A. C.. C. True B. In a proprietorship. there is continuing debate over whether foreign issuers should have to comply with this extra layer of regulation. 19. B.Chapter 3 The Accounting Information System Results Page 5 of 7 A. the Capital account takes the place of all of the following corporation accounts except: A. D. 18.wiley. D. Interest Payable.com/legacy/college/kieso/0470587237/addtl_selftests/ch03. http://higheredbcs. only one account. Interest Expense. exchanges. In order to keep the basic accounting equation in balance.. B. Retained Earnings. In a double entry system every transaction affects: A. The Drawing account takes the place of the Dividends account. B. Interest Payable is a real (permanent) account. only two accounts. All of the others are nominal (temporary) accounts. Dividends. Interest Revenue. Dividends. Common Stock. C. D. three or more accounts.

B. Posting a journal entry twice.com/legacy/college/kieso/0470587237/addtl_selftests/ch03. 2/15/2012 . D. 24. accruals or reversals B. All of the following statements about contra asset accounts are true except: A.Chapter 3 The Accounting Information System Results Page 6 of 7 21. B. C. Not posting a journal entry. Which of the following errors would cause a trial balance to not balance? A. Adjusting entries can be classified as either: A. C.. Any time errors are not offsetting debits and credits will not balance. C. Which of the following steps in the accounting cycle is not optional? A.html?. D. Contra asset accounts are increased with credits. prepayments or accruals. Contra asset accounts are not reported in the financial statements. real or nominal. internal or external. Contra asset accounts are reported on the balance sheet as deductions from the associated asset account. The two types of adjustments are prepayments and accruals. Adjusted trial balance. Contra asset accounts are permanent accounts. C. Only the adjusted trial balance is required. 23. 22. D. Reversing entries. Recording a transaction with several errors that are not offsetting. Post closing trial balance. Contra asset accounts have normal credit balances. B.wiley.. Work sheet. D. Not journalizing a transaction. http://higheredbcs.

Sales Revenue. not the perpetual inventory system. B. assets. C. D. B. fair value.html?. Purchases. B. 27. revenues. The Purchases account is part of a periodic inventory system. Unearned revenues are classified as: A. Cost of goods sold. real value. liabilities. 26. market value. 2/15/2012 . D. Merchandise inventory. Unearned revenues are liabilities because the firm owes the customer that amount of goods and services. C.. Retake Test http://higheredbcs. book value. Which of the following accounts are not used with a perpetual inventory system? A. stockholders' equity.com/legacy/college/kieso/0470587237/addtl_selftests/ch03. D. C..Chapter 3 The Accounting Information System Results Page 7 of 7 25. The undepreciated cost of an asset is its book value.wiley. The difference between the cost of a depreciable asset and its related contra account. Accumulated Depreciation is referred to as the asset's: A.

2/15/2012 . divided by the ending common shares outstanding. C. D. 2. B. an addition to (or deduction from) net income in the income statement. Prior period adjustments are added to (or deducted from) the beginning retained earnings balance. B. http://higheredbcs. an addition to (or deduction from) the ending balance of retained earnings. discontinued operations and extraordinary items. Prior period adjustments are reported as: A. Earnings per share is computed as net income: A. 1. C. discontinued operations. comprehensive income. B. unusual gains/losses.. extraordinary items. B. an addition to (or a deduction from) the beginning balance of retained earnings. minus preferred dividends divided by the ending common shares outstanding. Gains and losses that bypass net income but affect stockholders' equity are referred to as: A. 4.html?. Earnings per share is reported for discontinued operations and extraordinary items but not for unusual gains/losses. an extraordinary item in the income statement.Chapter 4 Income Statement and Related Information Results Page 1 of 7 0% (0 out of 26 correct) Responses to questions are indicated by the symbol. divided by the weighted average of common shares outstanding. D. but not unusual gains/losses. C.. D. minus preferred dividends divided by the weighted average of common shares outstanding. other comprehensive income. Earnings per share are reported for: A. 3. Net income minus preferred dividends is divided by the weighted average of common shares outstanding to compute earnings per share.wiley.com/legacy/college/kieso/0470587237/addtl_selftests/ch04.

D.S.S. False Net income results from revenue.Chapter 4 Income Statement and Related Information Results Page 2 of 7 C. C. prior period income. 2/15/2012 . 8.html?. Combined Income Statement of Comprehensive Income D.. in a second separate income statement. B. Other comprehensive income includes gains and losses that bypass net income. The FASB decided that the components of other comprehensive income must be displayed: A. The components of other comprehensive income may be displayed using any of these options. but not U.. gain and loss transactions. Single Income Statement C. Statement of Stockholders' Equity The Statement of Recognized Income and Expense is allowed under IFRS. Any of these options is permissible. A. 6. Income measurement is based on the transaction approach.com/legacy/college/kieso/0470587237/addtl_selftests/ch04. as a part of the statement of stockholders' equity. The single-step income statement differentiates between operating and nonoperating activities.wiley. 7. in a combined statement of comprehensive income. True http://higheredbcs. Statement of Recognized Income and Expense B. A. expense. True B. D. unusual gains and losses. GAAP. 5. U. GAAP allows all of the following statement formats to be used for reporting comprehensive income except: A.

com/legacy/college/kieso/0470587237/addtl_selftests/ch04.. True B. and losses and is usually used to boost current period profits by accelerating revenue or gain recognition or http://higheredbcs. 11. Extraordinary items must be both unusual in nature and infrequent in occurrence. Earnings per share (EPS) is calculated using the weighted average number of shares of both common and preferred stock outstanding. True B. such as extraordinary items. gains. True B. A. False Both criteria must be met in order for an item to be considered extraordinary. should be reported separately following income from continuing operations. Typically. companies that manage earnings increase current year profits at the expense of future profits.wiley.html?. Irregular items. True B. False EPS is only calculated using the weighted average number of shares of common stock outstanding. A.Chapter 4 Income Statement and Related Information Results Page 3 of 7 B. expenses.. 2/15/2012 . False Earnings management is the planned timing of revenues. 9. 10. A. 12. False The single-step makes no distinction between operating and nonoperating items and only contains two groupings: revenues and expenses. A. False Income from continuing operations should be separated from irregular items to provide statement users to differentiate between what normal and recurring and what is not.

wiley. 2/15/2012 . 17. A. 15.. False Changes in estimates effect the current and future periods. True B. A company who manages earnings may establish a “cookie jar reserve” by increasing current earnings in order to decrease future earnings. Losses as a result of a strike are reported as an extraordinary item.. False The Discontinued Operations section on the income statement includes material gains or losses resulting from the disposition of a component of the business.S. Material gains or losses resulting from the disposition of a component of the business are reported in Discontinued Operations.com/legacy/college/kieso/0470587237/addtl_selftests/ch04. A.html?. True B. False Effects of a strike. 16. True B. http://higheredbcs. the statement of income is a required statement for IFRS. Changes in estimates result in restatement of prior period's financial statements and an adjustment to the beginning balance of retained earnings. 14. including those against competitors and major suppliers are not extraordinary items. 13. False A company who manages earnings may establish a “cookie jar reserve” by decreasing current earnings in order to increase future earnings. A. A. True B. GAAP. As in U.Chapter 4 Income Statement and Related Information Results Page 4 of 7 delaying expense or loss recognition.

. Gross profit. Which of the following is not included in the operating section of a multiple-step income statement? http://higheredbcs. Income from operations. True B. Net income. 21. 2/15/2012 . 18. 20. irregular activities are disclosed after this measure of regular profitability. All of the options are limitations of the income statement. C. C. Cost of goods sold. D. Gains and losses result from peripheral or incidental transactions. False Both IFRS and U.. The limitations of the income statement include: A. Income from operations is the result of normal recurring operations. B.Chapter 4 Income Statement and Related Information Results Page 5 of 7 A. C. Sales revenue. All of the above. items that cannot be measured reliably are not reported. D. 19. Which of the following would be reported as other comprehensive income? A. B.S. D. Gain on the sale of equipment. income numbers that are affected by the accounting method used. B. GAAP require a statement of income. Which of the following occur from peripheral or incidental transactions? A. income measurement involves judgment.com/legacy/college/kieso/0470587237/addtl_selftests/ch04.html?. Operating expenses. Income before income taxes.wiley.

. Cost of goods sold.Chapter 4 Income Statement and Related Information Results Page 6 of 7 A. Which of the following items are not reported net of their applicable taxes? A.com/legacy/college/kieso/0470587237/addtl_selftests/ch04. B. 24. C. Discontinued operations. Losses from inventory obsolescence. Income tax expense. Extraordinary items. D. Unusual gains and losses. Discontinued items. C. C. Which of the following is not considered an irregular item on the income statement? A. Impairment losses on intangible assets. http://higheredbcs. Income tax expense is disclosed in a separate section just above net income. D. All of the options except unusual gains and losses are reported net of their tax effects. Income tax expense. Flood damage losses to property where flooding is rare. D. Restructuring charges. Changes in accounting principle. Extraordinary gains. Sales. Administrative expenses. B. The FASB accords extraordinary item treatment to the loss from flood damages. 2/15/2012 . 22. Extraordinary losses. B. Income tax expense is a regular item on the income statement. B.. if flood damage in the locality is rare.html?. Which of the following is an extraordinary loss? A.wiley. C. 23. D.

D. None of the above. B. a change from estimating bad debts expense as 3% of credit sales to estimating bad debts expense as 5% of credit sales. introperiod tax allocation. 26.wiley..Chapter 4 Income Statement and Related Information Results Page 7 of 7 25. A change from the FIFO inventory cost flow assumption to the weighted-average cost flow assumption is accounted for as a change in accounting principle. C. intraperiod tax allocation. B. Which of the following is not accounted for as a change in estimate? A. Retake Test http://higheredbcs. a change from the FIFO inventory cost flow assumption to the weighted-average cost flow assumption. 2/15/2012 . a change in the estimated useful life and salvage value of equipment. Intraperiod tax allocation means allocating taxes to the specific items that caused the tax..com/legacy/college/kieso/0470587237/addtl_selftests/ch04. Relating income taxes to specific items on the income statement to provide more informative disclosure to statement users is called: A. C.html?. D. a change from estimating bad debts expense using the percentage of receivables method to the percent of sales method. interperiod tax allocation.

notes. noncash activities. Notes are used when additional explanations cannot be conveniently shown as parenthetical explanations. Operating activities involve the cash effects of transactions that enter into the determination of net income. 2/15/2012 . C. If additional explanations cannot be conveniently shown as parenthetical explanations. The last step in preparing the statement of cash flows is to: A. financing activities. determine the cash provided by operations. B. cross reference. the information should be disclosed by: A.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 1 of 8 0% (0 out of 28 correct) Responses to questions are indicated by the symbol. B. 2. The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments during a period. investing activities. net increase or decrease in cash during the period. Activities that involve the cash effects of transactions entering into the determination of net income are classified as: A. http://higheredbcs. investing and financing transactions.. 4. supporting schedules. D. D. relevant information about the cash receipts and cash payments during a period.. operating activities. C. D. 1. C. The primary purpose of a statement of cash flows is to report the: A.com/legacy/college/kieso/0470587237/addtl_selftests/ch05.wiley.html?. a contra account. B. 3. cash effects of operations during a period.

reconcile the change in cash with the beginning and the ending cash balances. capital expenditures and dividends.com/legacy/college/kieso/0470587237/addtl_selftests/ch05.wiley. capital expenditures. http://higheredbcs. both require disclosure of significant accounting policies. B. D. total assets. Free cash flow is calculated as net cash provided by operating activities less: A. D. dividends. C. total liabilities.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 2 of 8 B. C. GAAP requirements for balance sheet presentation include all of the following except: A. 2/15/2012 . Net cash provided by operating activities less capital expenditures and dividends is called free cash flow. determine the change in cash during the period. 5. both generally require the use of the current/ non-current classification for both assets and liabilities. B. current liabilities. B.. 7. both require the preparation of financial statements annually..html?. determine the cash provided by or used in investing and financing activities. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by average A. capital expenditures and interest.S. D. 6. D. both require that changes to the valuation reserve be disclosed in the notes to the financial statements. Reconciling the change in cash with the beginning and ending cash balances is the last step in preparing the statement. total long-term liabilities. Similarities between IFRS and U. C. C. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by average total liabilities.

The balance sheet is sometimes referred to as the Statement of Financial Position. The current cash debt coverage ratio is equal to net cash provided by operating activities ÷ average total liabilities. 9. which is their order of liquidity. revaluations are recorded and reported as part of stockholders' equity. 11. False Current assets are presented in the order that they will be converted to cash or used up. 12. True B.com/legacy/college/kieso/0470587237/addtl_selftests/ch05.. False Solvency refers to the ability to pay debts as they mature. 8. A. The financing section is the first section of the statement of cash flows. Current assets are presented in the balance sheet in their order of liquidity. 10. True B. Solvency refers to the amount of time that is expected to elapse until a liability has to be paid.. A. True B. A. A. False http://higheredbcs.wiley.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 3 of 8 Under IFRS. A. False A balance sheet reports on the financial position of a business enterprise. 2/15/2012 .html?. True B. True B. False The operating section is the first section of the statement of cash flows.

Indicators of strong financial flexibility include a low debt coverage ratio and negative free cash flow. True B. Companies rarely use estimates in valuing items on the balance sheet. 13. False A lower debt coverage ratio and negative free cash flow are indicators of poor financial flexibility.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 4 of 8 It is net cash provided by operating activities ÷ average current liabilities. 14. 15. False Companies use judgments and estimates to determine many of the items reported on the balance sheet. A. True B. A. False A liability that is payable within the next year is sometimes included in long-term debt if the company expects to refinance the debt through another long-term issue or to retire the debt out of non-current assets. A. 2/15/2012 .com/legacy/college/kieso/0470587237/addtl_selftests/ch05. Investing activities on the statement of cash flows include the purchase of debt and equity http://higheredbcs. False Net working capital is the excess of total current assets over total current liabilities.html?. A. 16. The excess of total assets over total liabilities is referred to a net working capital.. True B. 17. True B. A liability that is payable within the next year is sometimes included in long-term debt..wiley.

18. 21.html?. financial flexibility. liquidity. there is no such prohibition in IFRS.com/legacy/college/kieso/0470587237/addtl_selftests/ch05. 20. True B. False The purchase of debt and equity securities is reported as an investing activity on the statement of cash flows. True B. 4 C. Assets can be divided into how many subclassifications? A. Profitability is determined primarily by analyzing information from the income statement. 2/15/2012 . B. 19. intangibles. profitability.S. 5 B. PP & E. A balance sheet is useful for analyzing all of the following except: A. A. and other.wiley.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 5 of 8 securities.S. long-term investments. GAAP and IFRS. 3 D. GAAP. False While the use of the term “reserve” is discouraged in U. solvency. 2 There are 5 subclassifications: current.. D. A.. The use of the term “reserve” is discouraged in both U. C. Which of the following is not one of the portfolio groupings for investments in debt and equity securities? http://higheredbcs.

C. 23. Trading. Wasting resources. 2012? A. C. D.. B. Patents. 22. Which of the following would be reported as a long-term asset at December 31. Equipment held for sale. plant & equipment asset. http://higheredbcs. Equipment used in the manufacturing process would be classified as a long-term asset. Held to maturity securities maturing in 2015.. C. Land held for speculative purposes. Land held for future development is classified as an investment. Franchises. Held to maturity. B. B. Land held for future development. C. Investments is a subcategory of assets. 24. Equipment used in the manufacturing process.com/legacy/college/kieso/0470587237/addtl_selftests/ch05. D. D. D. Building held for sale. B. 2/15/2012 . Which of the following is not an intangible asset? A. Goodwill. Available-for-sale. Investments.wiley. Patent. not a type of portfolio.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 6 of 8 A. Wasting resources are a type of property.html?. Which of the following would be reported in the investments section of the balance sheet? A. Trading securities.

Investing. 26.. C. B. D. Payment of a cash dividend. Financing. http://higheredbcs. 2/15/2012 . D.Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 7 of 8 25. 2 D.wiley. Which of the following would be added back to net income in the operating activities section of the statement of cash flows? A. How many different ways may pertinent information be disclosed in the financial statements? A. Operating activities involve the cash effects of transactions that enter into the determination of net income including interest expense. cross-references and contra items. 28. Payment of a cash dividend would be reported as a cash outflow in which of the following sections: A. Increase in inventory. C. 3 C. B. 4 B. Operating. Cash dividends are an outflow under the financing activities section. operating activities. 27.html?. Increase in accounts payable. B. notes. Payment of interest expense would come under which activity on the statement of cash flows? A.. None of the above. stock activities. 1 There are 4: parenthetical explanations. financing activities. and supporting schedules.com/legacy/college/kieso/0470587237/addtl_selftests/ch05. C. investing activities.

html?..Chapter 5 Balance Sheet and Statement of Cash Flows Results Page 8 of 8 D. Retake Test http://higheredbcs. Increases in current liabilities are positive adjustments to net income in the operating activities section of the statement of cash flows..wiley. 2/15/2012 .com/legacy/college/kieso/0470587237/addtl_selftests/ch05. Gain on sale of equipment.

    6.  How do the prepaid expenses of rent and supplies expire?    A.  The financial statements are prepared from the    B.   The double‐entry accounting system means the dual effect of each transaction is recorded with a debit and  a credit. Proves that debits and credits are equal in the ledger.  D.  Factors that shape an accounting information system include the    A. the size of the firm.Unit 2 – Chapter 3 Self‐Test Questions      1.   C.      2.  C. Size of the firm.    Correct! The nature of the business.        5. All of these.   . Nature of the business.  A trial balance     A. Purchase of supplies    Correct! The purchase of supplies is a recordable event.      3. and the volume of data to be handled are all factors  that shape the accounting information system. All of these.  Which of the following is a recordable event or item?   D.  B.     4. Lists accounts and their balances.   B.    Correct! The financial statements are prepared from the adjusted trial balance. The dual effect of each transaction is recorded with a debit and a credit. Volume of data to be handled.   D. Rent: with the passage of time. supplies: through use and consumption   Correct! Rent expires with the passage of time while supplies expire through usage and consumption.  The double‐entry accounting system means  C. Adjusted trial balance. Does not prove that a company recorded all transactions.

    12. it is debited in the closing process. Equity    Dividends.    Since the Revenue account has a normal balance of a credit. An expense that has been incurred but for which payment has not yet been made. and Expenses are all nominal accounts.  Which of the following is not an internal event?  C.  C. the Balance Sheet.     14. Revenue.      8.  Adjustments are often prepared   A. Equity accounts are real accounts.      .  The proper sequence of financial statement preparation is:    B.   Adjustments are often prepared after the balance sheet date but are dated as of the balance sheet date. and then the Statement  of Cash Flows. The Income Statement. but dated as of the balance sheet date. dividend declarations and payments are external events.  7.    Correct! A trial balance proves the equality of debits and credits in each of these situations.  An accrued expense is    B.  Which type of account is always debited during the closing process?  C.      13.  A trial balance may prove that debits and credits are equal. Dividend declaration and subsequent payment   Since dividends are paid to shareholders. Revenues.       11.      9.  When a corporation pays a note payable and interest.  Which of the following is not a nominal account?  D. After the balance sheet date. All of these. The accounts Notes Payable and Interest Expense will be debited. but    D.      10.    Correct! An accrued expense is an expense that has been incurred but for which payment has not yet been  made. the Retained Earnings Statement.

    The preparation of the work sheet is an optional part in the accounting cycle.000.  If the balances in both accounts receivable and accounts payable increase during the year   C.  An optional step in the accounting cycle is the preparation of:    D.      18. the Balance Sheet.   If the balances in both accounts receivable and accounts payable have increased during the year the  increase in the accounts receivable balance would result in a decrease in cash for the period while the  increase in the accounts payable balance would result in an increase in cash for the period. Gordon Corporation had revenues of $2. Common stock and retained earnings.  All of the following are external events except:  B.000. Dividends are closed to Retained Earnings in a separate entry. and then the Statement of Cash Flows.000. and dividends of $130.  Which of the following are reported in the stockholders' equity section of the balance sheet?     D. Consuming raw materials in production processes.  The financial statement that shows the financial condition of the enterprise at the end of a period is the:  C.      19.  R.700.      15.    The balance sheet shows an enterprise's financial condition at the end of a period. .     20. Credit of $300.      16. the Retained  Earnings Statement.000.Correct! The proper sequence of financial statement preparation is the Income Statement.      17.  All of the following accounts are increased on the credit side except:  B. the amount of the debit or credit to Retained  Earnings is a     C.000.     21.   Common stock and retained earnings are reported in the stockholders' equity section of the balance sheet. the credit amount is  $300.    The Supplies Expense account is increased on the debit side.  When Income Summary is closed to Retained Earnings. The increase in the accounts receivable balance would result in a decrease in cash for the period. expenses of $1.000.    Correct! Since the credit to Retained Earnings is equal to Revenues less Expenses. The worksheet. Balance sheet. Salaries Expense.

  An adjusting entry would never include a:  D.    Liabilities (and expenses also) will be understated if the adjusting entry for an accrued expense is not made.  Which of the following statements about a trial balance is incorrect?  D.   .    Posting is transferring items in a general journal to the general ledger.      23. Liabilities will be understated.    Consuming raw materials in production processes is an internal event.  If the adjusting entry for an accrued expense is not made:  C. It proves that all transactions have been recorded.   A trial balance does not prove that all transactions have been recorded. Debit to an asset account and a credit to a liability account. An asset account and a credit to a revenue account.     22.  The adjusting entry to record accrued revenue includes a debit to:    A.      26.  Posting is the process of transferring items entered in a general journal to the:    C. General ledger.   The adjusting entry for accrued revenues includes a debit to an asset account and a credit to a revenue  account.      25.     An adjusting entry including a debit to an asset account and a credit to a liability account would never  occur because income statement amounts would not be adjusted.     24.

gain or loss on disposal of a component of the business. Classification as an extraordinary item on the income statement would be appropriate for the A. D. A single-step income statement B. D. B. D. loss from a strike. A condensed income statement D. selling expenses. gains. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. non-operating section. cost of goods sold. B. expenses. and general expense. 2. total revenues and total expenses. . non-operating section. It is required for extraordinary items and discontinued operations but not for prior period adjustments. the gross profit and income from operations. discontinued operations. C. C. revenues. The major elements of the income statement are A. 3. 5. B. C. operating expenses. D. operating section. Its purpose is to relate the income tax expense to the items which affect the amount of tax. cost of goods sold. Which of the following is an acceptable method of presenting the income statement? A. A multiple-step income statement C. All of these 4. The single-step income statement emphasizes A. Its purpose is to allocate income tax expense evenly over a number of accounting periods. Which of the following is true about intraperiod tax allocation? A. and extraordinary items. revenue. and losses. C. the various components of income from continuing operations. extraordinary items and discontinued operations more than these are emphasized in the multiple-step income statement. B. substantial write-off of obsolete inventories.Chapter 4 1. revenue. gain from condemnation settlement.

D. Material losses resulting from unusual sales of assets not acquired for resale. Results of operations of a discontinued component should be disclosed immediately below extraordinary items. B. the following information is available: Cost of goods sold Dividend revenue $99. Information in the income statement helps users to A. separate column in the statement of changes in stockholders' equity. combined income statement of comprehensive income. Material losses resulting from correction of errors related to prior periods. all of these. 9. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? A. second separate income statement.000 2. B. Material losses resulting from transactions in the company's investments account. D. D.500 . B. B. The gain or loss on disposal should not be segregated. C. D. footnote disclosure. For Wolverton Company. C. 8. 7. but should be reported together with the results of continuing operations. 10 .6. evaluate the past performance of the enterprise. help assess the risk or uncertainty of achieving future cash flows. Earnings per share for both continuing operations and net income should be disclosed on the face of the income statement. The gain or loss on disposal should be reported as an extraordinary item. Material losses resulting from the write-off of intangibles. C. Which one of the following types of losses is excluded from the determination of net income in income statements? A. C. provide a basis for predicting future performance. The approach most companies use to provide information related to the components of other comprehensive income is in a A.

000) D.000 11.000 280. gross profit A. B. (120. Shown in operating revenues or expenses if material but not shown as a separate item.000 170. D. 12. Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate. The occurrence which most likely would have no effect on 2010 net income (assuming that all amounts involved are material) is the A.000. will be reported at $16. B. will not be reported. $(150. will be reported at $18. C.000. an unusual gain of $350. and a tax rate of 20%. Shown net of income tax after extraordinary items but before net earnings. B.000 53. (150. will be reported at $71.000.000 350. 13. collection in 2010 of a receivable from a customer whose account was written off in 2009 by a charge to the allowance account. Cordoba Corporation has an extraordinary loss of $150. (120.Income tax expense Operating expenses Sales In Wolverton's single-step income statement.000. D. D.000.000) B. worthlessness determined in 2010 of stock purchased on a speculative basis in 2006. How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? A.000) C. C. sale in 2010 of an office building contributed by a stockholder in 1986. At what amount should Cordoba report each item? Extraordinary loss Unusual gain A. C.000) $350. 2.000 280. Shown net of income tax after ordinary net earnings but before extraordinary items. settlement based on litigation in 2010 of previously unrecognized damages from a serious accident which occurred in 2008.000 .

000. $97. Stamey would report comprehensive income of A. D.60. $115.000 55.00.125.000. $20.000 350. 1/1/12.14. C.000.000.555. $117.000 60.40. D.000 Retained earnings. $1.000 100.000. $500. $3. $4. $1.000 20. D.00. at A.000 15.000.000 Net income $500. $5.000 2. Stamey Company reported the following information for 2012: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale securities Cash dividends received on the securities For 2012. C. C.000 Nguyen should report retained earnings. $785. B. 12/31/12. Nguyen Corporation reports the following information: Correction of overstatement of depreciation expense in prior years.000. $500. $215. Investors and creditors can use the information in the income statement to: . Reddaway Corporation reports the following information: Net income Dividends on common stock Dividends on preferred stock Weighted average common shares outstanding Reddaway should report earnings per share of A.000 17.000 Dividends declared $160.000. 16. as reported $1.000. $3.000 140. $1.340. B. net of tax. B.

interest revenue. All of the options are expenses except the loss on sale of investments. selling and administration. 18. evaluate the past performance of the enterprise. help assess the risk or uncertainty of achieving future cash flows. just two groupings exist . Non-operating items include all of the following except: A. provide a basis for predicting future performance. D. rent expense. B. B. interest expense.revenues and expenses. expenses are classified by functions. 19. Expenses include all of the following except: A. Investors and creditors can use the information in the income statement for all of the options listed. In the single-step income statement: A.A. C. C. B. C. Just two groupings exist in the single-step income statement . 21. such as merchandising. cost of goods sold. B. D. salaries and wages. D. Irregular transactions such as discontinued operations and extraordinary items should be reported separately . interest revenue and rental revenue are reported as other revenues and gains. D. 20. an income from operations figure is presented.revenues and expenses. Rent expense is an operating expense. depreciation. loss on sale of investments. rent revenue. C. All of these.

. In both a single-step and multiple-step income statement. C. part of discontinued operations. an expropriation of assets. Discontinued operations include the gain or loss from disposal of a component of a business.in: A. B. A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an): A. D. 22. unusual gain or loss. discontinued operations and extraordinary items should be separately reported. a major casualty. All of the following would meet the criteria for an extraordinary item except gains or losses from: A. change in estimate. B. prior period adjustment. All of the options would be classified as an extraordinary item except gains or losses from exchange of foreign currency. C. B. loss on exchange of foreign currencies. Changes in accounting principle would include a change in the method of inventory pricing. D. a multiple-step income statement only. change in accounting principle. part of discontinued operations. D. prohibition under a newly enacted law or regulation. 24. The gain or loss from disposal of a component of a business is shown as a (an): A. C. D. neither a single-step nor a multiple-step income statement. extraordinary item. both a single-step and multiple-step income statement. 23. extraordinary item. C. a single-step income statement only. B.

D.25. D. accounts receivable. Extraordinary gains and losses are reported net of any applicable income tax effects. Intraperiod tax allocation is applied to all of the options except unusual gains/losses. Judgments and estimates are used. are reported net of tax. C. prepaid items. but not extraordinary losses. Condensed form and report form. . Cash. extraordinary items. B. Which of the following is a limitation of the balance sheet? A. All of these 2. accounts receivable. B. accounts receivable. Current fair values are not reported for many assets and liabilities. Many items that are of financial value are omitted. C. Extraordinary losses. 26. prepaid items. Which of the following statements related to extraordinary items and intraperiod tax allocation is correct? A. Intraperiod tax allocation is used for all of the following except: A. unusual gains/losses. The correct order to present current assets is A. Extraordinary gains. discontinued operations. accounts receivable. changes in accounting principle. inventories. B. inventories. Chapter 5 1. prepaid items. inventories. D. Cash. Both extraordinary gains and losses are reported net of tax. C. Cash. are reported net of tax. Cash. but not extraordinary gains. inventories. Neither extraordinary gains nor losses are reported net of tax. 3. prepaid items. D. B. Which of the following are acceptable balance sheet formats? A. C.

Plant assets D. . Which of the following is not a major disclosure technique for the balance sheet? A. financing activities. Making and collecting loans and disposing of property. investing activities. C. Long-term liabilities 5. retained earnings statement. D. C. Report form and account form. operating activities. D. 6. The issuance of stock and the payment of dividends are A. Condensed form and multiple step form. operating activities. The financial statement which summarizes the operating. statement of cash flows. Notes. 7. plant. C.B. D. D. Multiple step form and account form. Parenthetical explanations. investing. 4. Supporting schedules. statement of financial position. income statement. B. and equipment are A. Worksheets. liquidity activities. Current assets B. Current liabilities C. and financing activities of an entity for a period of time is the A. B. 8. Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure? A. B. C.

or 12 months. inventory back into cash. 10. investing activities. 13. 11. or 12 months. profitability. B. D. 12. whichever is longer. The current cash debt coverage ratio is often used to assess A. tangible fixed assets back into cash. B. C. solvency. or 12 months. whichever is shorter. Multiple step form. B. receivables back into cash. Account form. The basis for classifying assets as current or non-current is the period of time normally required by the accounting entity to convert cash invested in A. B. solvency. whichever is longer. financing activities.B. C. whichever is longer. stock activities. Single step form. Report form. financial flexibility. C. Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies? . D. D. inventory back into cash. liquidity. C. D. profitability. 9. Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? A. or 12 months. D. The balance sheet is useful for analyzing all of the following except A. financial flexibility. liquidity. C.

D.000 320. C. D. $720.000 340.000. Prepaid Revenue. Cortex Corporation reports: Cash provided by operating activities Cash used by investing activities Cash used by financing activities Beginning cash balance What is Cortez's ending cash balance? A.000.500. What was the change in the cash balance during the period? 16 .000 . C. $1. $1. No Yes Yes No No 14.000 110. A generally accepted account title is A. What is the impact of inflation on the cash balance at the end of the year? D.000. 15.000 170. Reserve for Doubtful Accounts. What was the cash used for during the period? C. Yes D. Earned Surplus.Depreciation Method Composition A. $1. Appropriation for Contingencies. $890. Yes C.530.000. No B. The statement of cash flows provides answers to all of the following questions except A. B. B.750. Rover Corporation reports the following information: Net income Depreciation expense $2. Where did the cash come from during the period? B.000 17 .150.

and equity of a company for a period of time. $215. The balance sheet reports information as of a specific date. It helps in predicting the amounts. not for a period of time.000. and uncertainty of future cash flows. liabilities. most assets and liabilities are stated at historical cost. D.000 60. It reports the assets.000. $10. C. C.000.Loss on the sale of investments Increase in accounts receivable 77. and the owners' equity. B. $105. Which of the following statements about the balance sheet is incorrect? A. .000 110.000 35. $1. Nirvana Corporation reports the following information: Net cash provided by operating activities Average current liabilities Average long-term liabilities Dividends paid Capital expenditures Purchase of treasury stock Payments of debt Nirvana's free cash flow is A. $2.000. Major limitations of the balance sheet include all of the following except: A.000 160. B.923. obligations to creditors. It is sometimes referred to as the statement of financial position.000 Rover should report cash provided by operating activities of A. $2. 20. $45. D. timing. C.000 11. $155.000.000. 18 .500. B.757.000 100.000. D. It provides information about the nature and amounts of investments in resources. $3.000 19.077.000 150.000.

dollar amounts. it necessarily omits many items that are of financial value but cannot be recorded objectively. Available-for-sale securities. 23. B. C. The note payable due January 1. D. judgments and estimates are used in determining many of the items reported. 2014 is not a current liability. D. Which of the following investments should always be reported as current assets? A. All of the following are stockholders' equity sections reported in the balance sheet except: . 24. current portion of long-term debt. only amounts known with certainty are reported. C. Held-to-maturity securities. Current assets are presented in the balance sheet in order of: A. note payable due January 1. Current assets are presented in the balance sheet in order of liquidity. D. Trading securities should always be reported as current assets. liquidity. 21. D. All of the following would be classified as current liabilities at December 31. C. Trading securities. 2012 except: A. advances received from customers. 2014. accrued warranty costs. All of the options are major limitations of the balance sheet except only amounts known with certainty are reported. 22. C.B. Long-term investments. B. B. the alphabet. solvency.

Accounting policies. The report form lists liabilities and stockholders' equity below assets on the same page. C. D. . dividends. The balance sheet format listing liabilities and stockholders' equity directly below assets is called the: A. Which of the following is not a type of information that is supplemental to amounts presented in the balance sheet? A. the identity of all stockholders. additional paid-in-capital. report form. B. Dividends are reported in the statement of stockholders' equity but are not a section of stockholders' equity reported on the balance sheet. 27. financial position form. C. D. the use of estimates. solvency form. B. B. Balance sheet format. 25.A. Companies are required to disclose information about all of the options except the identity of all stockholders. D. retained earnings. account form. C. Companies are not required to disclose information about: A. depreciation methods. capital stock. inventory cost flow methods. C. Contingencies. All of the options are types of information that are supplemental to amounts presented except the balance sheet format. B. Contractual situations. 26. D.

Provide information that is useful in assessing cash flow prospects. encourages productivity. B.Chapter 1 1. D. promotes innovation. C. financial reporting should be focused an assessing the company's stewardship. an authoritative accounting rule-making body has established it in an official pronouncement. neither of these. 3. C. 2. 4. B. all of these. Provide information about enterprise resources. Provide information on the liquidation value of an enterprise. both of these. Provide information that is useful in investment and credit decisions. . The financial statements most frequently provided include all of the following except the A. which means that A. statement of retained earnings. D. financial reporting should be focused solely on the needs of the owners. B. D. B. 5. none of these. B. C. D. C. C. it has been accepted as appropriate because of its universal application. companies are viewed as separate and distinct from their owners. Which of the following statements is not an objective of financial reporting? A. claims to those resources. and changes to them. Accounting principles are "generally accepted" only when A. statement of stockholders' equity. balance sheet. An effective capital allocation process A. statement of cash flows. D. The objective of general purpose financial reporting adopts an entity perspective. provides an efficient market for obtaining and granting credit.

is a legalistic process based on rules promulgated by governmental agencies. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. rather than to individual enterprises . D. non-existent. B. The Financial Accounting Standards Board – (FASB). is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable. C. D. Generally accepted accounting principles A. rather than to members of society as consumers. What group or organization governs the ethical issues in financial accounting? A. sometimes primary and sometimes secondary.6. consistently primary. C. 7. The Government Accounting Standards Board (GASB). Financial accounting standard-setting in the United States A. change over time as the nature of the business environment changes. all of these. D. rather than to industries or an economy as a whole or to members of society as consumers. B. C. B. D. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as A. individual business enterprises. individual business enterprises. C. The information provided by financial reporting pertains to A. business industries. consistently secondary. rather than to individual enterprises or an economy as a whole or to members of society as consumers. and an economy as a whole. The American Institute of Certified Public Accountants (AICPA). The Securities and Exchange Commission (SEC). is based solely on research and empirical findings. B. 10. are influenced by pronouncements of the SEC and IRS. B. 8. industries. C. D. 9. include detailed practices and procedures as well as broad guidelines of general application. an economy as a whole and to members of society as consumers.

C. generally accepted accounting principles. political pressure from users. D. C. C. A common set of accounting standards and procedures are called A. it recognizes revenues when cash is received and expenses when cash is paid. B. B. the expectations gap. all of these. All of these statements are true. D. B. The Codification includes International Financial Reporting Standards. financial accounting standards. An effective capital allocation process A. it provides a better indication of ability to generate cash flows than the cash basis. encourages innovation. C. D. C. B. D. cash flows are considered less important. objectives of financial reporting. Which of the following statements about the FASB's Codification is true? A. B. The Codification creates new GAAP. D. The Codification provides all of the authoritative literature on a topic in one place. provides an efficient market for buying and selling securities.or industries. all of these. Issues in financial reporting include A. 14. 11. . the economic consequences of accounting rules. 15. 13. 12. promotes productivity. none of these. statements of financial accounting concepts. Accrual accounting is used because A.

job. and 4 are all true. arbitrate accounting disputes between auditors and international companies. Statements of financial standards issued by the FASB B. The pressures “to bend the rules. 3. A. 3. Accounting interpretations issued by the FASB C. B. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. 2. client. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. From the four statements that follow. Time. balance sheet. statement of cash flows.” “to play the game. C. 2 and 4 are true. B. promote uniform accounting standards among countries of the world. which grouping is true? 1. and peer pressures do not complicate the process of ethical sensitivity and selection among alternatives. Technical competence is not enough when encountering ethical decisions. personal. 1. APB Opinions D. 1. D. Accounting research studies issued by the AICPA 17. and 4 are all true. D. . The financial statements most frequently provided include all of the following except the: A. 4. 2. 18. 2. Which of the following publications does not qualify as a statement of generally accepted accounting principles? A. 1 and 2 are true.16.” “to just ignore it” can be considerable. B. C. The purpose of the International Accounting Standards Board is to A. C. 19. statement of stockholders' equity. The decision may be easier because there is no comprehensive ethical system to provide guidelines. statement of retained earnings. The most frequently provided financial statements include all of the options except the statement of retained earnings. D.

encourages innovation. SEC Statements on Accounting Positions. generally accepted auditing practices. generally accepted accounting principles. C. B. C. D. All of the following are objectives of financial reporting except to provide information: A. An effective process of capital allocation is critical to a healthy economy. . FASB Technical Bulletins. about the management and major shareholders of an enterprise. All of the options are correct. promotes productivity. 21. that is useful in assessing cash flow prospects. claims to those resources. An effective process of capital allocation is critical to a healthy economy. 22. D. B. that is useful in investment and credit decisions. generally accepted accounting practices. 23. C. C. B. generally accepted accounting purposes. GAAP includes all of the following except: A. GAAP does not include SEC Statements on Accounting Positions. The term GAAP means: A. AICPA-SEC Practice Bulletins. which results in all of the options listed. Objectives of financial reporting include all of the options except providing information about the management and major shareholders.20. D. and changes in them. D. provides an efficient and liquid market for buying and selling securities. AICPA Accounting Research Bulletins. which: A. B. about enterprise resources.

Elements of financial statements . D. Chapter 2 1. 24. FASB. C. 2. B. Measurement and recognition concepts such as assumptions. B. Which of the following was established by the federal government to help develop and standardize financial information presented to stockholders? A.GAAP means generally accepted accounting principles. have been specified in detail in the FASB conceptual framework. Generally accepted accounting principles A. Qualitative characteristics of accounting information C. 25. derive their authority from legal court proceedings. AICPA. the federal government established the SEC to help develop and standardize financial information for stockholders. GASB. AICPA. what provides "the why"--the goals and purposes of accounting? A. and constraints B. C. D. As a result of the call for greater regulation after the stock market crash of 1929. B. D. Which one of the following organizations has not been instrumental in the development of financial accounting standards? A. SEC. All of the options have been instrumental in the development of financial accounting standards except the IMA. are fundamental truths or axioms that can be derived from laws of nature. FASB. derive their credibility and authority from general recognition and acceptance by the accounting profession. principles. C. SEC. In the conceptual framework for financial reporting. IMA.

D. C. C. B. matching principle. C. C. have confirmatory value. D. be free from error. A decrease in net assets arising from peripheral or incidental transactions is called a(n) A. comparability. D. . D. 6. Revenue is generally recognized when realized or realizable and earned. This statement describes the A. be material. Objective of financial reporting 3. revenue recognition principle. going concern assumption. C. B. loss. Enhancing qualities include all of the following except A. financial information must have all of the following ingredients of fundamental qualities except A. 4. In order to be relevant. have predictive value. materiality. verifiability. periodicity assumption. B. 5. Under current GAAP. 7. B. inflation is ignored in accounting due to the A. economic entity assumption. timeliness B. completeness characteristic. D. monetary unit assumption. expense. capital expenditure. cost.

9. Management should not be required to report information that would significantly harm the company's competitive position. . 4th B. is capable of making a difference in a decision. It should allow practical problems to be solved more quickly by reference to it. Which level of the conceptual framework is devoted to recognition and measurement concepts? A. management should gather information not included in the financial statements that would not otherwise be gathered for internal use.D. 1st 11. Management should not be required to provide forecasted financial information. comparability. 8. C. It should be based on fundamental truths that are derived from the laws of nature. It should be a basis for standard-setting. All of these are true. C. The underlying theme of the conceptual framework is A. If needed by financial statement users. 10. D. decision usefulness. B. 12. Business reporting should exclude information outside of management's expertise. C. B. C. is understandable by reasonably informed users of accounting information. Which of the following is/are not true concerning a conceptual framework in accounting? A. understandability. Accounting information is considered to be relevant when it A. 3rd C. Which of the following statements concerning the cost-benefit relationship is not true? A. D. relevance characteristic. can be depended on to represent the economic conditions and events that it is intended to represent. B. D. 2nd D. B. reliability.

B. allocated revenue. relevance characteristic. merchandise. D. D. C. realizable revenue. realized revenue. materiality quality. is verifiable and neutral. C. economic entity assumption. B. B. D. One of the elements of financial statements is comprehensive income. D. 14. "When products (goods or services). 15.D." comprehensive income is equal to A. neutrality characteristic. or other assets are exchanged for cash or claims to cash" is a definition of A. expense recognition principle. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities. C. All of the following statements about the conceptual framework are correct except it: . 17. consistency characteristic. 13. comparability characteristic. 6. As described in Statement of FinancialAccounting Concepts No. none of these. historical cost principle. C. B. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners. revenues minus expenses plus gains minus losses. Expensing the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of applying the A. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the A. "Elements of Financial Statements. earned revenue. 16.

objective of financial reporting. 20. Which of the following is an ingredient of the fundamental quality of faithful representation? A. recognition and measurement concepts. Enhancing qualities of accounting information include: A. C. Freedom from error is an ingredient of the fundamental quality of faithful representation. prescribes the nature. predictive value. All of the following are ingredients of relevance except: A. Neutrality is an ingredient of faithful representation. . materiality. B. elements of financial statements. D. freedom from error. B. D. qualitative characteristics of accounting information. The first level of the conceptual framework is the: A. not relevance. cost/benefits and materiality.A. C. comparability and verifiability. predictive value. D. B. D. B. B. materiality. feedback value. neutrality. 19. A conceptual framework includes all of the options listed. confirmatory value. C. function. C. The objective of financial reporting is the first level of the conceptual framework. is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. 21. increases financial statement users' understanding of and confidence in financial reporting. 18. All of these options are correct. and limits of financial accounting and financial statements.

gains. economic entity assumption. It includes all changes in equity during a period except net income. 22. 25. C. economic entity assumption. 23. Changes in equity of an entity during a period from transactions and other events from nonowner sources are included in comprehensive income. Gains are increases in equity from peripheral or incidental transactions. D. Depreciation and amortization policies are justifiable and appropriate because of the: A. going concern assumption. C. B. periodicity assumption. B.C. investments by owners. Which of the following statements about comprehensive income is incorrect? A. 24. It is more inclusive than the traditional notion of net income. D. Comparability and verifiability are the enhancing qualities of accounting information. Comprehensive income includes net income and all other changes in equity exclusive of owners' investments and distributions. D. B. The going concern assumption is the justification for depreciation and amortization. Unrealized holding gains on available-for-sale securities are included in comprehensive income. revenues. The assumption that implies that the economic activities of an enterprise can be divided into artificial time periods is the: A. Increases in equity from peripheral or incidental transactions of an entity are: A. monetary unit assumption. D. relevance and faithful representation. completeness and neutrality. B. C. going concern assumption. . expenses.

D. at the end of production. Usually. product is produced. The periodicity assumption implies that the economic activities of an enterprise can be divided into artificial time periods. revenue is recognized at the time of sale. expenses are recognized when the: A. Expenses are recognized when the work or product actually makes its contribution to revenue. Generally.C. B. revenue should be recognized: A. during production. Generally. work or product actually makes its contribution to revenue. wages are paid. D. 26.     . B. at the time of sale. at the time cash is received. D. C. periodicity assumption. work is performed. 27. C. monetary unit assumption.

If an item should appear in a note to the financial statements. Intangible assets. Investments. (a) (b) (c) (d) (e) Current assets. plant. Other assets. Paid-in capital in excess of par Retained earnings. use the letter "n" to indicate this fact."   .  E5-3 (Classification of Balance Sheet Accounts) Assume that Masters Enterprises uses the following headings on its balance sheet. Capital stock. use the letter "x. and equipment. Indicate by letter how each of the following usually should be classified. Property. Long-term liabilities. If an item need not be reported at all on the balance sheet. (f) (g) (h) (i) (j) Current liabilities.

AE4-9 (Earnings Per Share with Dividends) The stockholders' equity section of Sosa Corporation appears below as of December 31.021. authorized 100. outstanding 90.520 shares.526. $50 par value.742.200 (before tax) as a result of a major casualty.000 were declared and paid to common stockholders in 2012. Dividends of $1.33 million shares Additional paid-in capital Retained earnings Net income $4.400 $203.800 33. $1 par.600 168. .830.518. Included in the net income figure is a loss of $12.800 Net income for 2012 reflects a total effective tax rate of 34%. 2012.000 10.400 $134.560 were declared and paid in 2012. 6% preferred stock.000 20.537.500. authorized and issued 10.520 shares Common stock. Preferred stock dividends of $271. Compute earnings per share data as it should appear on the income statement of Sosa Corporation. which should be classified as an extraordinary item.330.056.

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2013) Effective tax rate (a) Prepare a 2012 retained earnings statement for McEntire Corporation.300 Dividends declared $ -054.900 59. 2012.600 2009 2010 2011 The following information relates to 2012. $241. After this action. Net income $43.700 $35.600 127. balance sheet?     . 15. 2009.000 $30.AE4-11 (Retained Earnings Statement) McEntire Corporation began operations on January 1.400 161.000 will be paid on Jan. McEntire reported net income and declared dividends as follows. 2012. $25.000 40% (b) Assume McEntire Corp.300 $100. During its first 3 years of operations. what would McEntire report as total retained earnings in its December 31. restricted retained earnings in the amount of $70.000 on December 31. Income before income tax Prior period adjustment: understatement of 2010 depreciation expense (before taxes) Cumulative decrease in income from change in inventory methods (before taxes) Dividends declared (of this amount.

payable monthly. 30 Purchased a new computer for $7.200 in the business. During the first month of operations of her business (a sole proprietorship).600 cash and equipment valued at $22. 4 Purchased supplies on account $1.500. 10 Completed an audit assignment and billed client $3. 29 Paid secretary-receptionist $3.Unit 1 Review Problem Attempt to work this problem before you do the practice problems and the graded homework problems at WileyPLUS. (Use Service Revenue account. 18 Received cash of $4.000 for the month.750 for the month.) 8 Paid office rent of $1. May 1 Invested $65. (Debit an asset account.) .) 13 Received $6.300 for services rendered. 30 A count of supplies indicated that $350 of supplies had been used. (The computer will be used exclusively for business purposes. 22 Paid insurance expense $420.500 for services completed for Logan Co. 2 Hired a secretary-receptionist at a salary of $750 per week. Transaction Analysis—Service Company Martin is a licensed CPA.500 with personal funds.500 in advance on a tax consulting engagement. the following events and transactions occurred.

................................................................................500 8 Rent Expense .......................................................300 3................................................................... 3....................... 1................................................................................................................................................................300 13 Cash Unearned Service Revenue ............................................... 4 Supplies ................................................................................ Cash ..........................750 10 Accounts Receivable .......... 65...600 22...................................................................000 30 Supplies Expense ......................................................................................................................................................................................500 ..............500 22 Insurance Expense .......................................Review Problem Solution May 1 Cash Equipment ............................................. Accounts Payable .....................................................................................................................500 4.........................500 7....................... 420 420 39 Salaries Expense ..........................................000 87....................................................500 6................... Capital ......................................................................................................................................................... 3..............................................................................600 2 No entry—not a transaction...................................................... 350 350 30 Equipment ... 1............................................................................................................ Cash ..750 1......... Martin.................................................................................................................................................................................................................. 4....................................... Capital ................................................................................... Martin.................................................................... Service Revenue .............................................. Cash .............. Supplies .500 18 Cash Service Revenue ................................................................... 6. 7.............000 3.................................................................................................................................................................................500 1..............

Unit 1 Online Practice      .

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900 Depreciation of office furniture and equipment 3. Common shares outstanding for 2012 total 40.580 Interest expense 1.960 Cost of goods sold 63. (a) (b)       .500 Income tax 7.480 Sales 96.230 Selling expense Transportation-out 2. Administrative expense Officer's salaries $4. Prepare an income statement for the year 2012 using the single-step form. The discussion involves the following 2012 information related to Webster Company ($000 omitted).690 Sales commissions 7.860 Prepare an income statement for the year 2012 using the multiple-step form.550 (000 omitted).E 4-4 Two accountants for the firm of Allen and Wright are arguing about the merits of presenting an income statement in a multiple-step versus a single-step format.570 Rental revenue 17.980 Depreciation of sales equipment 6.

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Assume 20. 2012.000 2011 Retained earnings. including appropriate earnings per share information. not recorded in 30. December 31.000 Cash dividends declared (2012) 20.000 shares of common stock were outstanding during . and (a) (b) 2012.E 4-7Presented below are selected ledger accounts of McGraw Corporation as of December 31.000 Cash dividends paid (2012) 15.000 income taxes) Depreciation expense. 2011 90.000 Cost of goods sold 260.000 Effective tax rate 30% Compute net income for 2012.000 Discontinued operations (loss before 40.000 Selling expenses 80.000 Administrative expenses 100. Cash $50.000 Net sales 540. Prepare a partial income statement beginning with income from continuing operations before income tax.

Write-off inventory due to obsolescence $80.000 Administrative expenses 48. for the year 2012. Net sales Cost of goods sold $1. Prepare a separate retained earnings statement for 2012. Assume that 60.000 Interest revenue 7.000 Effective tax rate of 34% on all items Prepare a multiple-step income statement for 2012. 2011 980.E 4-8 (Multiple-step Statement with Retained Earnings) Presented below is information related to Brokaw Corp.200.000 Retained earnings at December 31.000 shares of common stock are outstanding.000 Depreciation expense omitted by accident in 40.000 Dividend revenue 20.000 (a) (b) .000 Casualty loss (extraordinary item) before taxes 50.000 Dividends declared 45.000 780.000 2011 Selling expenses 65.

.E5-4 Prepare a classified balance sheet in good form.

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300   .  780.

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Correct Answer for (i): Faithful Representation .

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29 Paid secretary-receptionist $3. 22 Paid insurance expense $420. May 1 Invested $65.500 in advance on a tax consulting engagement. (The computer will be used exclusively for business purposes.500 for services completed for Logan Co. 30 Purchased a new computer for $7. 4 Purchased supplies on account $1.000 for the month. payable monthly. During the first month of operations of her business (a sole proprietorship).) 13 Received $6.500 with personal funds.750 for the month. the following events and transactions occurred. 30 A count of supplies indicated that $350 of supplies had been used. 2 Hired a secretary-receptionist at a salary of $750 per week.300 for services rendered.200 in the business.Unit 1 Review Problem Attempt to work this problem before you do the practice problems and the graded homework problems at WileyPLUS.500.600 cash and equipment valued at $22. 18 Received cash of $4. 10 Completed an audit assignment and billed client $3.) 8 Paid office rent of $1.) . (Use Service Revenue account. (Debit an asset account. Transaction Analysis—Service Company Martin is a licensed CPA.

.................................................................. 4 Supplies ................... Martin.......... 4. 1............................................................................................................ Cash ...................000 3........ Cash ...................................................500 7.....................................................................600 22.......................................................................................................................................500 18 Cash Service Revenue .............................. 1...................... Supplies ............................... 3..........................................................................................................300 3................................................................................................................ 420 420 39 Salaries Expense .............................................................................................500 8 Rent Expense ......................500 6..........Review Problem Solution May 1 Cash Equipment ........................................600 2 No entry—not a transaction..................................................................................................................750 1...................... 3...................... 350 350 30 Equipment .......................................................... Capital ........................................................................................................................................................................................................... Accounts Payable ....500 22 Insurance Expense ........... 7.............................. 65........500 4.......................................................................................................... 6.........................................................................................................................000 87...................................300 13 Cash Unearned Service Revenue ...................................................................................................................... Service Revenue ........................................................................................................................................................................................500 .... Martin..................000 30 Supplies Expense ...................................................................................................... Cash .......................750 10 Accounts Receivable ...................... Capital .500 1..............................................................................................................................................................

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Three different appraisers arrive at substantially different amounts for this value. decides to report the middle value for external reporting purposes. “If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement. Exercise 3 Question (a) (b) (c) What is the quality of information that enables users to confirm or correct prior expectations? Identify the pervasive constraint(s) developed in conceptual framework The chairman of the SEC at one time noted.) Roddick Company has attempted to determine cost of its inventory.) What are the two primary qualities that make accounting information useful for decision making? Watteau. switches from FIFO to average cost to FIFO over a 2year period. because immediate recognition of the loss may have adverse economic consequences on the industry. does not issue its first-quarter report until after the second quarter’s results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance) Predictive value is an ingredient of which of the two primary qualities that make accounting information useful for decision-making purposes? Duggan. we assume a grave risk that confidence in the credibility of our financial system will be undermined. Which qualitative characteristic of information is lacking in these data? Do not use reliability or representational faithfulness. The president. Which qualitative characteristic of accounting information may not be followed? (Do not use industry practices. Which qualitative characteristic of accounting information is not followed? Assume that the profession permits the savings and loan industry to defer losses on investments it sells. Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. nevertheless.” Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use reliability. Inc.) Answer Confirmatory Value Cost Neutrality (d) Comparability (Consistency) Neutrality (e) (f) Relevance and Faithful Representation Timeliness (g) (h) (i) Relevance Comparability (j) Verifiability .) Muruyama Corp. 3401 -Intermediate Accounting I Chapter 2. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or representationally faithful.Acct.

ACCT 5325 Intermediate Financial Accounting I 1 Unit 1: The Accounting Information System .

Prepare an unadjusted trial balance. . 6. 3. 5. Overview of the accounting information system. 4. Discuss the steps in the accounting cycle.Learning Objectives 2 1. Understand the double-entry accounting system and the accounting equation. 2. Analyze and record transactions in the journal. Post transactions from the journal to the ledger accounts.

Overview of the Accounting Information System 3  Accounting Information System   Collects and processes transaction data that impacts the entity. Provides financial information to interested parties.      Management Investors Creditors Securities and Exchange Commission (SEC) Internal Revenue Service (IRS) .

and Equity Nominal Accounts – Revenue.Accounting Terminology 4     Event Transaction Account Elements of Accounting   Real Accounts – Assets. Liabilities. Expense. and Dividends    Journalizing Posting Trial Balance .

) – Left and Right At least one account is debited and credited Debit = Credits .Double-Entry Accounting System 5     Every transaction affects at least two accounts Debits (Dr.) and Credits (Cr.

Debits and Credits 6 Normal Balance Debit Normal Balance Credit Expenses .

The Accounting Equation 7 Assets Assets: Cash Accounts Receivables Inventory = Liabilities + Equity Equity: Common Stock Additional Paid-in-Capital Retained Earnings Property. Plant & Equipment Liabilities: Accounts Payable Taxes Payable Notes Payable Interest Payable .

The Accounting Equation 8 Assets = Liabilities + Equity .

Steps in the Accounting Cycle 9          Journalize transactions Post from the journal to the ledger accounts Prepare an unadjusted trial balance Determine adjustments (journalize and post) Prepare adjusted trial balance Prepare financial statements Closing entries (journalize and post) Post-closing trial balance Reversing entries (optional) .

 Hirings of new CEO for $175.   Customer makes a payment on accounts receivable. .Analysis of Transactions 10  External Event  Exchange between a company and its environment.  Internal Event  Internally generated event to be recorded.   Depreciation recorded for use of equipment.  Not Recorded  Does not impact entity’s accounts. Borrows money from the bank. Interest owed on note payable is calculated and recorded.000.

.Analysis of Transactions 11     Determine if it is an internal or external event that needs to be recorded. Accounting equation should remain balanced after each transaction is recorded. Determine whether accounts need to be debited or credited. Identify accounts impacted and direction (+) or (-).

. Purchased supplies on account for $500.500 of equipment in the corporation.500 was collected in cash and $500 was billed to the client. Paid August rent of $700. 2 7 12 18 25 Shareholders invested $12.000 cash and $2. Aug. $1. Performed services for clients.Analysis of Transactions 12 Problem 1: Kelly Repair Shop had the following transactions during the first month of business as a corporation. Hired a receptionist at a salary of $500 per week. Analyze the following transactions and determine which accounts should be debited or credited and the impact on the accounting equation. for which.

$12.000 cash and $2.500 of equipment in the corporation. 2 Shareholders invested $12.Analysis of Transactions 13 Problem 1 (cont.000 Equipment (+) Dr. $14.500 Common Stock (+) Cr. Assets = Liabilities + Equity Cash (+) Dr. $2.) Aug.500 .

) Aug. $500 . $500 Accounts Payable (+) Cr. 7 Purchased supplies on account for $500.Analysis of Transactions 14 Problem 1 (cont. = Liabilities + Equity Assets Supplies (+) Dr.

Analysis of Transactions 15 Problem 1 (cont. $2.) Aug.500 Accounts Receivable (+) Dr. = Liabilities + Equity Assets Cash (+) Dr.500 was collected in cash and $500 was billed to the client. $1.000 . $500 Revenue (+) Cr. 12 Performed services for which $1.

$700 Rent Expense (+) Dr.Analysis of Transactions 16 Problem 1 (cont. 18 Paid August rent of $700 = Liabilities + Equity Assets Cash (-) Cr. $700 .) Aug.

Analysis of Transactions 17 Problem 1 (cont. . = Liabilities + Equity Assets Nothing to record until work is performed by the receptionist. 25 Hired a receptionist at a salary of $300 per week.) Aug.

Journalizing 18 General Journal . The following journal entries illustrate the formal entries that would be entered or journalized in the general journal for problem 1.Chronological listing of recorded transactions.500 J1 Credit 14.000 2. 2 Account Titles and Explanation Cash Equipment Common Stock (Issued shares of stock for cash and equipment) Ref. Debit 12.500 . General Journal Date 2010 Aug.

Debit 500 J1 Credit 500 12 1.Journalizing 19 Date 2010 Aug 7 General Journal Account Titles and Explanation Supplies Accounts Payable (Purchased Supplies on Account) Cash Accounts Receivable Sales Revenue (Performed services for cash and on account) Rent Expense Cash (Paid monthly rent) Ref.000 18 700 700 .500 500 2.

500 J1 Credit 14. 101 301 510 Debit 12.Posting to the Ledger 20 Posting.Transferring amounts from the general journal to the general ledger accounts. 2 Account Titles and Explanation Cash Equipment Common Stock (Issued shares of stock for cash and equipment) Ref.000 2.500 . General Journal Date 2010 Aug.

500 Equipment Date Aug 2 Explanation .301 Ref.101 Balance -012. J1 Debit Credit 14.Posting to the Ledger 21 General Ledger Cash Date Aug 2 Explanation Ref.500 Debit 2.500 No.000 No.000 Credit No. J1 Debit 12. J1 Common Stock Date Aug 2 Explanation Ref.510 Balance -014.500 Credit Balance -02.

000 10.Unadjusted Trial Balance 22 Unadjusted Trial Balance A listing of all the general ledger accounts and their debit or credit balances prior to end of the period adjusting entries.000 3. Unadjusted Trial Balance December 31.500 $5. 2010 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accumulated DepreciationOffice Equipment Accounts Payable Notes Payable Unearned Revenue Common Stock Retained Earnings Sales Revenue Rent Expense Depreciation Expense Insurance Expense Debit $110.000 23.500 .500 Credit Thompson Inc.500 43.000 60.000 $177. 12.000 3.500 25.000 $177.000 36.000 500 1.000 2.000 15.

ACCT 5325 Intermediate Financial Accounting I 1 Unit 2: Accrual Aspects of Accounting .

Create financial statements from the trial balance. Prepare adjusting entries for Accrued Expenses. Prepare an adjusted trial balance. Explain the difference between the cash basis of accounting and the accrual basis of accounting.Learning Objectives 2 1. 4. 3. Prepare adjusting entries for Accrued Revenues. 9. . Prepare adjusting entries for Unearned Revenues. Prepare adjusting entries for Prepaid Expenses. 8. 7. 5. Overview of the adjustment process. 2. 6. Prepare closing entries and the post closing trial balance.

 Deferrals   Prepaid Expenses Unearned Revenue Accrued Revenue Accrued Expenses  Accruals   .Overview of the Adjustment Process 3  Adjusting entries – recorded at the end of an accounting period to ensure that the revenue recognition and the matching principle are followed according to accrual accounting.

liability .  Accrued Revenues – asset  Accrued Expenses .Deferrals vs.Cash paid or received before the adjustment.  Prepaid expenses – asset  Unearned revenues – liability  Accruals – Cash paid or received after the adjustment. Accruals 4  Deferrals .

“Prepaid Expense” Adjusting Entry 5  Prepaid expenses are recorded as assets before being consumed.      Insurance Supplies Advertising Rent Fixed Assets   To adjust prepaid expenses. -SE) Prepaid Expense (-A) XXX XXX . determine the amount used during the current period Typical adjusting entry:  “______” Expense (+E.

Prepaid insurance was debited for the full amount. A 2 year insurance policy was purchased on 9/1/10 for $2.400 2.400.“Prepaid Expense” Adjusting Entry 6  Insurance . 1 Prepaid Insurance (+A) Cash (-A) 2. The journal entry is as follows: Sept.400 What should the adjusting journal entry be at 12/31/10? .

000 Credit_ 400 400 400 Credit_ Insurance Expense Debit 400 . The adjustment is [(4/24) * $2.400 2. The adjusting entry is as follow: Dec. -SE) Prepaid Insurance (-A) Prepaid Insurance Debit 2.“Prepaid Expense” Adjusting Entry 7  Insurance . 31 Insurance Expense (+E. Four out of the twenty-four month policy was used during the period.400]= $400.

“Prepaid Expense” Adjusting Entry 8  Supplies .500 If a count revealed $800 supplies remaining on 12/31/10.500 1. 15 Supplies (+A) Cash (-A) 1. what should the adjusting journal entry be at 12/31/10? .500 were purchased on 9/15/10. A supplies inventory account was debited for the purchase. Sept. Supplies costing $1.

500 -800 = 700).“Prepaid Expense” Adjusting Entry 9  Supplies . $700 must be expensed since $800 of supplies remain on hand. Dec.500 800 Credit_ 700 700 700 Supplies Expense Debit 700 Credit _ . 31 Supplies Expense (+E. -SE) Supplies (-A) Supplies Debit 1. (1.

500. Aug.500 1. 15 Machinery (+A) Cash (-A) 6.“Prepaid Expense” Adjusting Entry 10  Equipment . Machinery was purchased on 8/1/10 for $6.500 Straight-line depreciation is calculated as follows: (Cost – Salvage)/Life * (months/12) What should the adjusting entry be at 12/31/10? . The machinery account was debited for $6.500 with a salvage value of $500 and an expected useful life of 5 years.

-SE) Accumulated Depr. Debit Credit_ 500 Depreciation Expense Debit 500 Credit _ .500 -500)/5] * 5/12= 500 Dec. [(6. -A) 500 500 Accumulated Depr.“Prepaid Expense” Adjusting Entry 11  Equipment. (+XA. 31 Depreciation Expense (+E.

determine the amount earned during the current period Typical adjusting entry:  Unearned Revenue (-L) Revenue (+R.“Unearned Revenue” Adjusting Entry 12  Unearned revenues are recorded as a liability when the cash is collected until services earned.      Customer deposits Airline tickets Magazine subscriptions Rent Season football tickets   To adjust unearned revenue. +SE) XXX XXX .

1 Cash (+A) 2.400 Unearned Rent Revenue (+L) What should the adjusting entry be at 12/31/10? .“Unearned Revenue” Adjusting Entry 13  Rent Revenue. On 11/1/10 the company collected 4 months of $600 a month rent. Nov.400 2. It was credited to an unearned revenue account.

200 Unearned Rent Revenue Debit 1.200 1.200 Dec.400 . (2/4 * 2. +SE) 1.“Unearned Revenue” Adjusting Entry 14  Rent Revenue.200 Credit_ 2.200 Rent Revenue Debit Credit _ 1.400) = 1. 31 Unearned Rent Revenue (-L) 1.200 Rent Revenue (+R.

Typical adjusting entry:  “________” receivable (+A) XXX “_______” Revenue (+R. +SE) XXX .“Accrued Revenue” Adjusting Entry 15  Accrued revenues are earned revenues that have not been collected in cash or recorded.    Interest Services Rent   A receivable and revenue are recorded for the amount earned but not collected yet.

At 12/31/10. $2. What should the adjusting entry be at 12/31/10? .“Accrued Revenue” Adjusting Entry 16  Service Revenue.000 of services had been performed for customers but not collected or recorded.

Dec.000 2.000 . 31 Accounts Receivable (+A) Sales Revenue (+R.000 105.000 37.000 Credit_ Sales Revenue Debit Credit _ 103.000 2. +SE) 2.“Accrued Revenue” Adjusting Entry 17  Service Revenue.000 Accounts Receivable Debit 35.000 2.

     Interest Taxes Rent Salaries Bad Debts (Cr. Allowance for Doubtful Accounts)   A payable and an expense are recorded for the amount incurred but not paid. Typical adjusting entry:  “______” Expense (+E.“Accrued Expense” Adjusting Entry 18  Accrued expenses are expenses that have been incurred but not yet paid. -SE) “_______” Payable (+L) XXX XXX .

(Principal * Rate * X/12) What should the adjusting entry be at 12/31/10? .000 for 5 years at an annual rate of 6% to be paid each 9/30. On 10/1/10 ABC Company borrowed $100.“Accrued Expense” Adjusting Entry 19  Interest Expense.

500 Interest Expense Debit 1. 31 Interest Expense (+E.500 Credit _ .06 * 3/12) = $1.500 Dec.“Accrued Expense” Adjusting Entry 20  Interest Expense. -SE) Interest Payable (+L) 1.500 Interest Payable Debit Credit_ 1.500 1.000 * . ($100.

2010 there remained three days of unpaid salaries.“Accrued Expense” Adjusting Entry 21  Salaries.000 a day which is paid for a 5 day work week. The payroll was $1. What should the adjusting entry be at 12/31/10? . On Wednesday December 31.

000 Credit _ .000 Salaries Expense Debit 3. -SE) Salaries Payable (+L) 3. 31 Salaries Expense (+E.“Accrued Expense” Adjusting Entry 22  Salaries.000 Salaries Payable _Debit Credit 3.000 * 3 days) = $3. ($1.000 Dec.000 3.

Adjusted Trial Balance 23 K. 13th Ill.W. 3-33 .W.

 Income Statement  Revenues – Expenses = Net Income (Loss)  Statement of Retained Earnings  Beginning Retained Earnings +(-) Net Income (Loss) – Dividends = Ending Retained Earnings  Balance Sheet  Assets = Liabilities + Equity .Financial Statements 24 These financial statements are prepared from the information from the adjusted trial balance.

W. 13th Ill.Financial Statements 25 K. 3-34 .W.

W. 3-35 . Ill.W.Financial Statements 26 K. 13th.

Closing Process 27  In the closing process of the accounting cycle all temporary accounts are closed to the retained earnings accounts so that only balance sheet (permanent) accounts remain with balances to carryover to the next period.   Revenue and expense accounts are closed either directly to retained earnings or to an “income summary” account that is then closed to retained earnings. . Dividends is closed directly to retained earnings.

000 33. 3-36 Credit 106. 13th Ill.000 500 1.W.600 31 33.000 5.000 400 500 46.000 Account Titles and Explanation Service Revenue Income Summary (To close revenue account) Income Summary Advertising Supplies Expense Depreciation Expense Insurance Expense Salaries Expense Rent Expense Interest Expense Bad Debt Expense (To close expense accounts) Income Summary Retained Earnings (To close net income to retained earnings) Retained Earnings Dividends (To close dividends to retained earnings) K.000 31 73.000 15.000 .Closing Entries 28 General Journal Date Oct 31 J3 Debit 106.000 31 5.000 9.W.

Post-Closing Trial Balance 29 .

Cash Basis Accounting 30  Cash Basis   Revenues recorded when received in cash Expenses recorded when paid in cash  Accrual Basis (required by GAAP)   Revenues recorded in the period earned Expenses recorded in the period incurred .Accrual vs.

Beginning accounts receivable +Ending Accounts Receivable +Beginning Unearned Revenue -Ending Unearned Revenue  Converting Cash Expenses to Accrual Expenses  Cash paid for operating expenses +Beginning prepaid expenses .Beginning accrued liabilities .Ending prepaid expenses +Ending accrued liabilities .Accrual vs. Cash Basis Accounting 31  Converting Cash Receipts to Accrual Service Revenue  Cash receipts from customers .

ACCT 5325 Intermediate Financial Accounting I 1 Unit 3: Financial Statements .

5. 6. Understand the reporting of irregular items on the income statement. Explain intraperiod tax allocation. 4. Prepare a retained earnings statement. 1. Prepare a single-step and a multi-step income statement. .Learning Objectives 2  Income Statement and Retained Earnings Statement Identify the uses and the limitations of the income statement. 2. 3. Identify earnings per share disclosures.

Prepare a classified balance sheet.Learning Objectives 3  1. Understand the purpose and the content of the cash flow statement. 5. Identify the major classifications of the balance sheet. 4. Balance Sheet and Cash Flow Statement Identify the uses and the limitations of the balance sheet. 2. . Determine which balance sheet information requires additional disclosure and techniques of disclosure. 3.

Uses and Limitations of the Income Statement 4  Income Statement measures the operating success of a company for a specific period of time.  Usefulness Evaluate past performance  Basis for predicting future performance  Helps in the assessment of the uncertainty of achieving future cash flows   Limitations Omission of items that cannot be measured reliably  Alternative accounting methods  Judgment involved in income measurement  .

Elements of the Income Statement 5  Revenues – Inflows or other increases in assets or settlement of liabilities related to the entity’s ongoing or central operations.      Sales Fee revenue Rent revenue Dividend revenue Interest revenue .

      Depreciation expense Cost of goods sold Salary expense Insurance expense Interest Expense Rent Expense .Elements of the Income Statement 6  Expenses – Outflows or other decreases in assets or increases in liabilities related to an entity’s ongoing or central operations.

Elements of the Income Statement 7   Gains – Increases in assets or decreases in liabilities related to peripheral transactions.Decreases in assets or increases in liabilities related to peripheral transactions. Losses .   Write-off of assets Sale of plant assets or investments .

000 10.000 17. K.000 302.000 $ 55.Single-Step Income Statement 8 Single-Step Income Statement Revenues -Expenses Net Income No distinction between operating and non-operating items.000 $ 0.W.000 43.75 .W.13th ppt 4-11 Income Statement (in thousands) Revenues: Sales Interest revenue Total revenue Expenses: Cost of goods sold Selling expense Administrative expense Interest expense Income tax expense Total expenses Net income Earnings per share $ 285.000 149.000 21.000 247.000 24.

Multi-Step Income Statement 9    Separates operating transactions from nonoperating transactions Highlights intermediate components of income Income Statement Sections       Operating Non-operating Income tax Discontinued operations Extraordinary items Earnings per share .

000 53. Operating Section Selling expenses Administrative expenses Total operating expense Income from operations Other revenue (expense): Interest revenue Interest expense Total other Income before taxes Income tax expense Net income Earnings per share 2.w. 13th.000 (21.000 83.000 10.000 $ 0.000 $ 55.000) 79.000 24.W.000 136.75 .000 149.000 43.Multi-Step Income Statement 10 Income Statement (in thousands) Sales Cost of goods sold Gross profit Operating expenses: $ 285.000 17.000) (4. 1.W. Income tax K. ppt. 4-17 . Nonoperating Section 3.

There is specific FASB guidance on the reporting of these items       Discontinued Operations Extraordinary items Unusual gains and losses Changes in accounting estimates Changes in accounting principles Correction of errors .Reporting Irregular Items 11  Irregular Items unusual items that affect current or past earnings.

Discontinued Operations 12  Discontinued operations – material gains and losses due to the disposition of a segment of a business . It is considered discontinued by   Eliminating the results of operations and cash flows of the segment. and Discontinuing any significant involvement in the segment After Income from Continuing Operations Net of tax effects Gain or loss from operations separate from disposal  Reporting of discontinued operations    .

net of $81. the division operated at a pretax loss of $450.000 . Prepare a partial income statement for KC.Reporting Discontinued Operations 13 Illustration: KC Corporation had after tax income from continuing operations of $55.W 13 ppt 4-23 th Income from continuing operations Discontinued operations: Loss from operations.000 $54.000 in 2008. it disposed of its restaurant division at a pretax loss of $270.000. Prior to disposal.000.000 tax Total loss on discontinued operations Net income $55.W.000 in 2008.000. net of $135. K.496.000 tax Loss on disposal. Assume a tax rate of 30%. During 2008.000 315.000 189.000 504.

000 55.000 (21. net of tax Total loss on discontinued operations Net income $ 285.496 K.000 24. net of tax Loss on disposal.000) (4.000 315 189 504 $ 54.W.000 17.W.000 149.Reporting Discontinued Operations 14 Income Statement (in thousands) Sales Discontinued Operations reported after “Income from Continuing Operations” Cost of goods sold Other revenue (expense): Interest revenue Interest expense Total other Income before taxes Income tax expense Income from continuing operations Discontinued operations: Loss from operations. ppt. 4-23 .000) 79.13th.

Example – material loss due to earthquake destroying refinery of a multi-national company in a location earthquakes are rare.Extraordinary Items 15    Extraordinary items – unusual and infrequent material gains and losses. considering the environment the company operates. Reporting   Reported on the income statement after “income from continuing operations” or “discontinued operations” if applicable. Reported net-of-tax .

The corporation’s tax rate is 30%. net of $231.461.W.W 13th.000 ($770. Prepare a partial income statement for KC Corporation beginning with income from continuing operations. Income from continuing operations Extraordinary loss.000 x 30% = $231. it suffered an unusual and infrequent pretax loss of $770.000 tax Net income K.Extraordinary Items Example 16 Illustration: KC Corporation had after tax income from continuing operations of $55. In addition.000 from a volcano eruption.000 tax) .000 in 2007.000 $54.000 539.000.000. ppt 4-27 $55.

000) (4.461 K.W 13th.Extraordinary Items Example 17 Extraordinary Items are reported after “Income from continuing operations.000 55. net of tax Net income $ 17.000 24.000 539 54.” (and Discontinued Operation if present) Income Statement (in thousands) Sales Cost of goods sold $ 285.000 149.000 Other revenue (expense): Interest revenue Interest expense Total other Income before taxes Income tax expense Income from continuing operations Extraordinary loss.W.000 (21.000) 79. ppt 4-29 .

Examples   Inventory write-down Restructuring charges Just before “income from continuing operations” At gross amount (not net-of-tax)  Reporting   .Unusual Gains and Losses 18   Unusual Gains and Losses – material gains and losses that are either unusual or infrequent. but not both.

Examples   Change from FIFO to LIFO for inventory Change from percentage-of-completion to the completed-contract method for accounting for construction costs Retrospective adjustment Cumulative effect adjustment to beginning retained earnings  Reporting   .Change in Accounting Principle 19   Change in accounting principle – change from one acceptable method to another acceptable method.

Change in Estimates 20   Change in Estimates – many estimates are used in the accounting process. Often new information or a change in circumstances will require a change in an estimate Examples   Change in percentage of bad debts Change in useful lives or salvage values for depreciable assets Handled prospectively (in the period of change and future periods)  Reporting  .

W.000 at the end of that time. In 2010 (year 8). it is determined that the total estimated life should be 15 years with a salvage value of $5. purchased equipment for $510.000 at the end of that time.000 which was estimated to have a useful life of 10 years with a salvage value of $10.Change in Estimate Example 21 Change in Estimate: Arcadia HS. Questions:  What is the journal entry to correct the prior years’ depreciation? Calculate the depreciation expense for 2010.W 13th ppt 4-36 .  K. Depreciation has been recorded for 7 years on a straight-line basis.

000 .000 $160.000 350.000 First.W 13th.W. ppt 4-37 $510.000 . establish NBV at date of change in estimate x 7 years = $350.10.2009) Fixed Assets: Equipment Accumulated depreciation Net book value (NBV) K. 31.000 10 years $ 50.000 Balance Sheet (Dec.000 500.Change in Estimate Example 22 Equipment cost Salvage value Depreciable base Useful life (original) Annual depreciation $510.

375 19.000 8 years $ 19.000 5.W 13th ppt 4-37 .W.000 155.375 K.375 Depreciation Expense calculation for 2010. Journal entry for 2010 Depreciation expense Accumulated depreciation 19.Change in Estimate Example 23 Net book value Salvage value (new) Depreciable basis Useful life remaining Annual depreciation $160.

Examples   Mathematical errors Error in reporting revenue Treated as prior period adjustment Adjust beginning balance in retained earnings  Reporting   .Corrections of Errors 24   Corrections of errors – due to mistakes or misuse of facts.

These items are as follows:      Income from continuing operations before tax Discontinued operations Extraordinary items Changes in accounting principles Correction of errors .Intraperiod Tax Allocation 25  Intraperiod tax allocation is the allocation of income tax expense for a period to the items that brought about the tax expense.

W.W. net of $61 tax Total loss on discontinued operations Income before extraordinary item Extraordinary loss. before taxes Income tax expense Income from continuing operations Discontinued operations: Loss on operations.Example of Intraperiod Tax Allocation 26 Income Statement (in thousands) Sales Cost of goods soldNote: losses reduce the total Interest expense tax Total other $ 285.000 (135) (61) (231) $23.000 149.000 315 189 504 54. net of $135 tax Loss on disposal.000 (21.000) 79. net of $231 tax Net income $24.957 Calculation of Total Tax Income from cont.573 K.000 55. oper. 13th ppt 4-44 .000) (4.000 24.496 539 $ 53.

and it must be disclosed on the income statement. It is a widely accepted business indicator.Earnings Per Share 27  Earnings Per Share is the number of dollars earned per share of common stock. Net income – Preferred Dividends______ Weighted Average of Common Shares Outstanding .

Earnings Per Share 28 K.W.W 13th .

Retained Earnings Statement 29  Increases in Retained Earnings    Net income Change in accounting principle Correction of errors  Decreases in Retained Earnings     Net loss Dividends Change in accounting principle Correction of errors .

000) (25. December 31 50. Retained Earnings Statement For The Year Ended December 31.000) $650. 2010 Retained earnings. January 1. adjusted Less: Net Loss for 2010 Less: Dividends Retained earnings.000 $850.000 800.Retained Earnings Statement 30 Sharp Inc.000 .000 (125. January 1 Correction for overstating Net Income in prior period Retained earnings.

Comprehensive Income 31  Comprehensive Income represents net income and all gains and losses that bypass net income and affect stockholders’ equity (other than investments by and distributions to owners)     Unrealized gains and losses on available-for-sale securities Translation gains and losses on foreign currency transactions Pension related And others .

Comprehensive Income Formats 32  Second income statement  (Net income +(-) Other Comprehensive Income)  Combined income statement of comprehensive income Part of the statement of stockholders’ equity  .

Ill 4-21 .W 13th.W.Comprehensive Income – Balance Sheet Presentation 33  Accumulated Other Comprehensive Income Disclosed on the balance sheet below retained earnings K.

Uses and Limitations of the Balance Sheet 34  Balance Sheet – The financial statement that reports the assets. and stockholders’ equity of an entity at a specific date. solvency.   Usefulness  Evaluation of capital structure  Assess risk and future cash flows  Analysis of company’s liquidity. and financial flexibility Limitations  Most assets and liabilities reported at historical cost  Use of judgments and estimates  Omission of items of financial value . liabilities.

the equity is the ownership interest. In a business enterprise. Equity Residual interest in the assets of an entity that remains after deducting its liabilities.Elements of the Balance Sheet 35   Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. . Liabilities Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

and equipment Current liabilities Long-term liabilities Capital stock Additional paid-in capital Retained earnings  Liabilities    Owners’ Equity    .Balance Sheet Classifications 36  Assets    Current Assets Long-term investments Property. plant.

sold. whichever is longer. or used either in one year or in the operating cycle.Current Assets 37  Current Assets Cash and other assets expected to be converted into cash.   Cash and cash equivalents Short-term investments    Held-to-maturity Trading Available-for-sale    Receivables Inventories Prepaid expenses .

Long-Term Investments 38  Long-Term Investments  Investments in Securities  Stocks. bonds. or long-term notes   Fixed Assets not used in operations Special funds  Pension. cash surrender value of life insurance  Nonconsolidated subsidiaries or affiliated companies . plant expansion.

and Equipment 39  Property. Plant. Plant and Equipment Tangible.      Land Buildings Machinery and equipment Capitalized leases Leasehold improvements .Property. long-lived assets that are used in the regular operations of the business.

     Goodwill Trademarks Copyrights Franchises Patents .Intangible Assets 40  Intangible Assets Operating assets that lack physical substance. Some have a limited life (amortized) while others have an unlimited life (tested for impairment).

     Accounts payable Accrued compensation Unearned revenue Income tax payable Current maturities of LT debt .Current Liabilities 41  Current Liabilities The obligations of the company that can be reasonably expected to be liquidated either through the use of current assets or the creation of other current liabilities.

Long-Term Liabilities 42  Long-Term Liabilities Obligations that are expected to be liquidated beyond the normal operating cycle or one year.     Long-term debt Capital lease obligations Deferred income taxes Pension obligations . whichever is longer.

Owners’ Equity 43  Capital Stock   Common stock Preferred stock   Additional Paid-in-Capital Retained earnings   Unappropriated Restricted  Treasury Stock .

W 13th Ill 5-16 .W.Balance Sheet Example 44 K.

Balance Sheet Formats 45  Account Form Assets Liabilities Equity  Report Form Assets Liabilities Equity .

Supplemental Disclosures 46  Supplemental Disclosures     Accounting Policies Contingencies Contractual situations Fair values Notes Parenthetical explanations Supporting schedules Cross reference Contra items  Techniques of Disclosure      .

The Statement of Cash Flows 47   Purpose To provide relevant information about the cash receipts and cash payments of an entity during a period. Content    Operating – Cash inflows and outflows from operations Investing – Cash inflows and outflows from noncurrent assets Financing – Cash inflows and outflows from noncurrent liabilities and equity .

The Statement of Cash Flows 48 K.W.W 13th Ill 5-30 .

Cash Flow Statement Ratios 49  Financial Liquidity Current Cash Debt = Net Cash Provided by Operating Activities Coverage Ratio Average Current Liabilities  Financial Flexibility Cash Debt Coverage Ratio = Net Cash Provided by Operating Activities Average Total Liabilities  Free Cash Flow Free Cash Flow = Net Cash Provided by Operating Activities .Dividends .Capital Expenditures .

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