Intermediate - Accounting - Spiceland - Sepe - Nelson - 8th - Ed - CHPT - 01 - Exercises Answer

Intermediate Accounting by Spiceland, Sepe, Nelson, 8th edition Homework
Chapter 01: Environment and Theoretical Structure of Financial Accounting

Questions For Review of Key Topics
1. The function and focus of financial accounting is to provide high-quality financial information to
external users, such as creditors, investors, government, etc. Financial information helps capital
providers in allocating capital, i.e. deciding which profit-oriented companies to invest money
with or loan money to. ✓
2. Efficient allocation of resources means to invest money with or loan money to companies that
are the best at producing goods and services needed and wanted by society. The mechanism
that fosters this efficient allocation of resources in the US is capitalism. Capitalism rewards
investors that invest with or lenders that lend money to companies that give consumers what
they want. ✓
3. When making investment decisions, there are two variables to consider: The timing, amount of
cash flows that’s expected to be produced by the investment & the uncertainty or risk of getting
the expected cash flows. ✓
4. A company, to provide a return to investors and creditors, must earn profits. And to earn profits,
the company must produce and sell goods and services desired by society, and the cash receipts
must exceed the disbursements necessary to produce the cash receipts. ✓
5. The objective of financial accounting is to provide high-quality financial information to creditors
and investors so they can make wise investment and credit decisions, i.e. allocate capital well. ✓
6. Net operating cash flows = Cash receipts from selling products and services – Cash expenditures
needed to produce and sell the products and services. Net operating cash flow is not a good
indicator of future operating cash flows because NOCF does not account for uncompleted
transactions that will be completed in the future. ✓
7. GAAP stands for Generally Accepted Accounting Principles, a dynamic set of broad and specific
guidelines that companies should follow in measuring and reporting information on their
financial statements and related notes.
Companies follow GAAP when preparing financial reports so that investors and creditors can
compare financial information across companies to allocate resources. ✓
8. SEC (Securities and Exchange Commission) has the power to set accounting standards. SEC was
created by Congress in 1934 in response to the stock crash of 1929. SEC’s role is to ensure that
no misleading information is provided to investors and lenders.
FASB (Financial Accounting Standards Board) is a private-sector body to which SEC has delegated
the task of setting accounting standards. ✓
9. Auditor is an independent intermediary that examines company management’s claims about its
financial statement, then renders an independent, professional opinion on the compliance of
the firm’s financial statement with GAAP.
Such opinion reflects the auditor’s assessment of the statements’ fairness. Auditor adds
credibility to the financial statements, which increases the confidence of capital market
participants relying on that information. ✓
10. The key provisions of Sarbanes-Oxley Act include:
a. Internal control: Section 404 of SOX requires that management assess effectiveness of
internal control that could affect financial reporting. Auditing Standard #5 requires that
company’s auditors express an opinion on whether the company has maintained

effective internal control over financial reporting.
b. Audit firms are hired by the audit committee of the board of directors of a company, not
the company management.
c. Non-audit services: It is unlawful for public companies’ auditors to perform non-audit
services for audit clients. Prohibited services include bookkeeping, internal audit
outsourcing, appraisal or valuation services, and various consulting services Tax services,
require pre-approval by the audit committee of the audited company.
d. Corporate executive accountability: Executives must personally certify the financial
statements and company disclosures with financial penalties and the possibility of
imprisonment for fraudulent misstatement.
e. Oversight board: The 5-member Public Company Accounting Oversight Board establish
standards dealing with auditing, quality control, ethics, independence and other
activities about the audit reports or could delegate these responsibilities to the AICPA.
Before then, the AICPA set auditing standards.
f. Conflict of interest: Audit firms cannot audit public companies who CEO worked for the
audit firm and audited the company during the preceding year.
g. Retention of work papers: Public companies’ auditors must retain all audit or review
work papers for 7 years. ✓
11. New or changed accounting standards could redistribute wealth in the US economy, benefit
others, while harming others.
For example, when accounting for business combinations, the pooling of interests method and
the purchase method were allowed. Purchase method amortizes (expenses) goodwill, an
intangible asset over its estimated useful life. The amortization expense reduces net income. To
avoid reporting the amortization expenses of goodwill, companies structured their business
combinations under the pooling of interests method. FASB eliminated the pooling of interests
method so that only the purchase (acquisition) method remains. But the FASB did away with
amortizing the resulting goodwill.
The adverse economic consequence of the changed accounting standards in the above example
is only allowing the purchase method to account for business combinations. ✓
12. The reason that FASB undertake a series of information-gathering steps before issuing a
substantial accounting standard is because standard setting affects the economy and could
redistribute wealth, adversely affect some companies, investors, creditors, etc. So the standard
setters must consider the interests and views of key constituencies concerning how accounting
would best capture that economic reality. This is to determine consensus as to the preferred
accounting method and to anticipate adverse economic consequences. ✓
13. FASB's conceptual framework is U.S. accounting standards' underlying foundation. The
framework is a coherent system of inter-related objectives and fundamental concepts that lead
to consistent standards and that prescribes the nature, function, and limits of financial
accounting and reporting.
The fundamental concepts guide the selection of events to be accounted for, the
measurement of those events, and the means of summarizing and communicating them to
others.
The framework provides the reasoning on which to consider the merits of alternatives.
However, the conceptual framework does not prescribe GAAP. ✓
14. Relevance as it related to financial accounting information means the financial info must have
predictive value and confirmatory value. And that the financial information is material.
Faithful representation exists when there is an agreement between a measure or
description & the phenomenon the measure or description purports to represent. ✓
15. The components of relevance include:
a. The financial info has predictive value if it helps users predict the company’s future cash
flows
b. The info has confirmatory value if it helps investors confirm or changes their assessment
of the company’s cash-flow generating ability.
c. Financial info is material if omitting or misstating it could affect users’ decisions.
Material depends on the company and the item being reported.
The components of faithful representation include 3 components
a. Free from error: There are no errors or omission in the amount or the process used to
report the amount.
b. Neutral: Free from bias
c. Completeness: it includes all the info needed for faithful representation. ✓
16. The costs of endowing financial information with the qualitative characteristics include the costs
of disseminating, processing and gathering info. The costs include possible adverse economic
consequences of implementing accounting standards, such as having companies incur
competitive disadvantage costs.
The benefits of accounting standard are increased decision usefulness provided by the
info, which should improve the resource allocation of capital providers. It is difficult to quantity
such benefit. The info-gathering undertaken by the FASB in setting accounting standards is to
assess both costs and benefits of a proposed accounting standards. ✓
17. Materiality in the context of financial reporting means that omitting or misstating a financial
item could affect users’ decisions.
Materiality is a part of relevance that depends on the amount of the financial item and
the company concerned. For example, a missed accounts payable of $68,000 is material to a deli
with an annual net income of $42,000, but not material to a multinational corporation with an
annual net income of $73 million.
If the transaction is deemed to be immaterial, then GAAP does not need to be followed
in reporting and measuring a transaction. ✓
18.
Financial accounting elements Definition
1) Assets Probable future economic benefits obtained by a
business as a result of past transactions or events.
2) Liabilities Probable future sacrifices of economic benefits arising
from present obligations of a business to transfer assets
or provide services to other entities in the future as a
result of past transactions or events.
3) Equity Shareholders’ equity or stockholders’ equity for a

corporation, this is the residual interest in the assets of a
business that remains after deducting its liabilities.
4) Investments by owners Increases in equity of a business resulting from transfers
to it from other entities of something of value or to
increase or obtain ownership interests in it.
5) Distributions to owners Decreases in equity of a business resulting from transfers
to owners.
6) Revenues Inflows or other enhancements of assets or settlements
of liabilities during period from producing goods,
rendering services or other activities that are the
principal operations.
7) Expenses Outflows or other using up of assets or incurrences of
liabilities during period from producing goods, rendering
services or other activities that are the principal
operations.
8) Gains Increases in equity from peripheral or incidental
transactions of an entity.
9) Losses Decreases in equity from peripheral or incidental
transactions of an entity.
10) Comprehensive income Changes in equity of a firm during a period from
transactions and other events from non-owner sources.
It includes changes in equity except changes due to
investments by owners and distributions to owners. ✓
19. The underlying assumptions of GAAP are:

a. Economic entity: All economic events can be identified with a particular economic
entity.
b. Going concern: It is anticipated that a business entity will continue to operate
indefinitely.
c. Periodicity: The life of a company can be divided into artificial time periods to provide
timely information to external users.
d. Monetary unit: In the US, financial statements elements are measured in terms of the
US dollar. ✓
20. The going concern assumption means that it is anticipated that a business entity will continue to
operate indefinitely. ✓
21. The periodicity assumption means that life of a company can be divided into artificial time
periods to provide timely information to external users. This is so that external users can receive
timely financial reports. ✓
22. The key accounting practices in GAAP include:
a. Revenue recognition: Revenues are inflows of assets or settlements of liabilities from
providing a product or services to a customer. The timing of revenue recognition is a key
element of earnings measurement. To recognize revenue means to admit information
into the financial statements
b. Expense recognition: Expenses were outflows or other using up of assets or incurrence

of liabilities. Expenses are often recognized when their associated revenue are
recognized.
Expenses may be recognized based on a cause-and-effect relationship, based on
associating an expense with the revenues recognized in a time period, in the period
incurred, without regard to the related revenues, by a rational allocation to specific time
periods.
c. Mixed-attribute measurement: There are 5 measurement attributes used in GAAP. Fair
value, present value of future cash flows, net realizable value, current cost, historical
cost.
d. Full disclosure: This principle means that financial reports should include any
information that could affect he decisions made by external users. And the following
means implement the full disclosure principle: Supplemental schedules and tables,
disclosure notes, parenthetical comments or modifying comments. ✓
23. The two reasons to value assets and liabilities on their historical costs include:
a. The historical cost valuation is an exchange transaction between two independent
parties, the exchange value is objective and highly verifiable.
b. Historical cost provides important cash flow info because it is the cash or equivalent
paid for an asset or received in exchange for assuming a liability. ✓
24. The two criteria that must be satisfied before revenue can be recognized include:
a. The earning is judged to be complete or virtually complete, the seller fulfilling its
obligations
b. There is reasonable certainty that the seller will be paid (Small likelihood of customer
defaulting on payment) ✓
25. Expenses may be recognized by the four methods below:
a. Based on a cause-and-effect relationship: There is a definite cause-and-effect
relationship between a creamery firm’s cost of ice cream manufactured & revenue from
selling the ice cream. Therefore, COGS are recognized when ice creams are sold.
b. Based on associating an expense with the revenues recognized in a time period: Many
expenses can be related only to the period of period of tie in which revenue is earned.
The monthly salary of marketing personnel, legal counsel of a manufacturing firm is
recognized in the time period in which indirect revenues occur.
c. In the period incurred, without regard to the related revenues: For some expenses, it’s
impossible to determine when and if at all, the revenue will occur. Advertising and
research and development expenses are expensed as incurred.
d. By a rational allocation to specific time periods: Some long-lived assets that provide
benefits for more than one reporting period, so we recognized expense over those time
periods. Depreciation and amortization allocate equipment’s cost to the periods in
which the equipment produces revenue. ✓
26. In addition to items show directly on the main body of financial statements, financial info can be
disclosed via
a. Supplemental schedules and tables
b. Disclosure notes
c. Parenthetical comments or modifying comments ✓
27. Fair value is the price that would be received to sell assets or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The input to use in
determining fair value is based on a hierarchy:
a. Level 1 (Most desirable): Quoted market prices in active markets for identical assets or
liabilities. Some marketable securities investments could be measured by their quoted
stock market prices.
b. Level 2: Quote prices for similar assets or liabilities active or inactive markets and inputs
derived principally from or corroborated by observable related market data. Similar
buildings recently sold could value fair value of buildings.
c. Level 3: Unobservable inputs that reflect the entity’s own assumptions about the
assumptions market participants would use to price the asset or liability. Asset
retirement obligations (AROs) are measured at fair value. ✓
28. The measurement attributes commonly used in financial reporting include:
a. Fair value: Price that would be received to sell assets or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
b. Present value of future cash flows: The amount of cash flows that will be produced by
an asset and then discounted back to the present.
c. Net realizable value: The amount of cash into which an asset is expected to be
converted in the ordinary course of business. AR of $7,000 less anticipated bad debts of
$1,300 = NRV of $5,700.
d. Current cost: Cost that would be incurred to buy or reproduce the asset.
e. Historical cost: The cash or equipment used to purchase an asset or received to assume
a liability. ✓
29.
a. Assets/liability approach: We first measure and recognize the assets and liabilities on a
balance sheet date, measure and recognize revenues, expense, gains and losses needed
to account for changes in asset and liabilities from the prior measurement date to the
present measurement date. The reason being that since revenues and expense are
defined in terms of inflow and outflow of assets and liabilities, the fundamental
concepts underlying accounting are asset and liabilities, and priority should be given to
them.
b. Revenue/expense approach: Recognize revenues and expenses, with some assets and
liabilities recognized as needed to reconcile the balance sheet with the income
statement. ✓
30. In IFRs, the conceptual framework guides standard setting, but it also guides practitioners to
make accounting judgement when another IFRS standard does not apply. ✓
31. The standard-setting body that determines IFRS is International Accounting Standards Board
(IASB). The IASB’s objective is to develop a single set of high-quality, understandable, and
enforceable global accounting standards to help capital markets participants to make economic
decisions. IASB obtains its funding from International Accounting Standards Committee
Foundation (IASCF), which receives its funding from voluntary donations from accounting firms
and corporations. ✓
32. The SEC issues 2 studies comparing US GAAP and IFRs and analyzed how IFRS are applied
globally. The SEC identified key differences between GAAP and IFRS, and found that US gap
provides significant more guidance about particular transactions or industries. The SEC notes
some diversity in the application of IFRS that suggest the potential for non-comparability of
financial statements cross countries and industries. ✓
Brief Exercises
1.
Cash inflow (outflow) Amount
Cash collected from customers $340,000
Cash paid for 2 years’ rent $40,000
Cash paid to employees for services rendered $120,000
Cash paid for utilities $50,000
Additional info Amount

AR from customers $60,000
AP to gas and electric company $2,000
What is the accrual net income for the year?

Revenue: .......................................................................... $340,000
Revenue earned but not collected: .................................. $60,000
Total revenue: .................................................................. $400,000
Rent expenses: .................................................................. $20,000

Salaries expenses: ............................................................ $120,000
Utilities expenses: ............................................................ $50,000
Utilities expenses incurred but no paid: ........................... $2,000
Total expenses: ................................................................ $192,000
Accrual net income: ......................................................... $208,000 ✓

2.
Financial statement item definition Financial statement item
1. Probable future sacrifices of economic Liabilities
benefits
2. Probable future economic benefits Assets
owned by the company
3. Inflows of assets from ongoing, major Revenue
activities
4. Decrease in equity from peripheral or Losses ✓
incidental transactions
3.
1. Periodicity
2. Economic entity
3. Realization principle (Revenue recognition)
4. The matching principle: Matching the benefits provided by the equipment to its cost over
the equipment’s useful life. ✓
4.
1. Realization principle (Expense recognition): Expense should be recognized when expenses
are incurred, COGS is not incurred until the goods are sold.
2. Historical cost (original transaction value).
3. Economic entity: The financial events of a company and those of its officers are separate
and should not be commingled.
5.
1. Disagree. It violates the full disclosure principle where material events affecting the finances
of the company have to be disclosed.
2. Agree. Periodicity principle: The life of a company is divided into artificial time periods, this
is to furnish reports to investor and creditors.
3. Disagree. Violated the matching principle that matches expenses to the revenue
engendered by the expenses. Since the rent provide benefits for 2 years, the rent expense
should be matched against the 2 years’ period, and not expensed right away.
4. Agree. Revenue recognition principle: Sales revenues are recognized after seller has fulfilled
its obligations to the customer and there is reasonable certainty that the seller will be paid.
Shipping the product is fulfilling the seller’s obligations. ✓
6.
1. Voluntary donations by accounting firms and corporations, and this financial support may
compromise the IASB’s independence. International Accounting Standards Committee
Foundation (IASCF).
2. International Accounting Standards Board (IASB)
3. International Organization of Securities Commissions (IOSC)
4. Standards Advisory Council (SAC)
5. International Financial Reporting Interpretations Committee (IFIC) ✓
Exercises
1.
Requirement 1.
Net operating cash flow is the difference between cash receipts and cash disbursements.
Year 1 Year 2
Cash collected from $160,000 $190,000
customers:
Salaries paid: $90,000 $100,000
Utilities: $30,000 $40,000
Insurance purchase: $60,000 $0
Net operating cash flow: ($20,000) ($50,000)
Requirement 2.
Pete, Pete and Roy

Income Statement for year 1
Revenues: .................................................................. $170,000

Expenses:
Salaries: ............................................................... $90,000

Utilities: ............................................................... $35,000
Insurance: ............................................................ $20,000
Total expenses: ................................................... $145,000
Net income: ................................................................ $25,000
Peter, Pete and Roy

Revenues: .................................................................. $220,000
Expenses:
Salaries: ............................................................... $100,000
Utilities: ............................................................... $35,000
Insurance: ............................................................ $20,000
Total expenses: ................................................... $155,000
Net income: ................................................................ $65,000
Requirement 3.
Accounts Receivable: Revenue billed – Cash collected

Year 1 Year 2
AR $170K - $160K = $10K $10K beginning AR + $220K
- $190K = $40K ✓
2.
Requirement 1.
RPG Consulting
Revenues: .................................................................. $350,000
Expenses:
Salaries: ............................................................... $140,000
Rent exp: ............................................................. $40,000 (Matching principle says to
match expenses with the benefits provided by the expenses)
Travel and entertainment: .................................. $30,000
Advertising: ......................................................... $25,000
Total expenses: ................................................... $235,000
Net income: ................................................................ $115,000
RPG Consulting
Revenues: .................................................................. $450,000
Expenses:
Salaries: ............................................................... $160,000
Rent exp: ............................................................. $40,000 (Matching principle says to
match expenses with the benefits provided by the expenses)
Travel and entertainment: .................................. $40,000
Advertising: ......................................................... $20,000*

Total expenses: ................................................... $260,000
Net income: ................................................................ $190,000
*: To find the advertising expense incurred in Year 2, the cash disbursements over year 2
and 3 were sufficient to discharge advertising expenses incurred in Year 1, 2, and 3.
a. Cash disbursements for ads expenses in Year 2 and 3: $15K + $35K = $50K
b. Ad expenses incurred in Year 1, 2, and 3: $5K + $25K + Ad exp in Yr. 3 = $50K of cash
disbursements to discharge the accrued expenses
$50K - $5K - $25K = $20K
Requirement 2.
AP to ad agency at the end of Year 2 is:
$5K of AP from Yr. 1 + $25K incurred in Yr. 2 - $15K cash disbursement to pay off = $15,000.
✓
3.
1. Topic 820 (Fair Value Measurement), Accounting Standards Codification (ASC) defines
fair value as "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." ✓
2. FASB ASC 820-10-50-2: Fair value measurement - Overall - Disclosure – General
3. The disclosure requirements are:
a. For assets and liabilities that are measured at fair value on a recurring or
nonrecurring basis in the statement of financial position after initial recognition, the
valuation techniques and inputs used to develop those measurements
b. For recurring fair value measurements using significant unobservable inputs (Level 3),
the effect of the measurements on earnings (or changes in net assets) or other
comprehensive income for the period. ✓
4.
1. The topic number of business combinations: ASC 805
2. The topic number of related party disclosures: ASC 850-10
3. The topic, subtopic and section number for the initial measurement of internal-use
software; ASC 350-40-30
4. The topic, subtopic and section number for subsequent measurement of asset
retirement obligations: ASC 410-20-35-3 and 35-4
5. The topic, subtopic and section number for the recognition of stock compensation: ASC
718-10-25: Compensation - Stock compensation - Overall – Recognition ✓
5.
1. SEC: Users
2. Financial Executives International: Preparers
3. AICPA: Auditors
4. Institute of Management Accountants: Preparers
5. Association of Investment Management and Research: Users ✓
6.
1. Liability
2. Dividends or distribution to owners
3. Revenues
4. Assets, liability and equity
5. Comprehensive income
6. Gain
7. Loss
8. Equity
9. Asset
10. Net income (loss)
11. Investment by owners
12. Expense ✓
7.
List A List B
4 a
15 b
11 c
14 d
6 e
8 f
3 g
2 h
16 i
5 j
9 k
13 l
12 m
7 n
1 o
10 P✓
8.
1. Materiality
2. Neutrality
3. Consistency: Financial statements (FS) should be prepared under the same principles
4. Timeliness
5. Relevance has several characteristics: confirmatory value, predictive value, and
timeliness
6. Faithful representation. Account or description accords with the phenomenon the
account or description purports to represent.
7. Comparability
8. Cost effectiveness ✓
9.
List A List B
8 a
7 B
6 C
1 D
3 E
9 F
2 G
5 (Seller fulfilled its obligations, and likely H
to be paid)
4 I✓
10.
1. Economic entity
2. Periodicity
3. Matching principle: Record expenses in the periods that the associated revenue is
recognized
4. Historical cost
5. Revenue recognition (Realization): Revenues are recognized when the Honeywell has
fulfilled its obligations to customers, and Honeywell is likely to be paid
6. Going concern
7. Materiality ✓
11.
1. Historical cost: Pastel Paint should record the land at the original transaction value.
2. Timeliness or periodicity: External users need periodic info to make decisions. This need
for periodic info requires that the economic life of a company (presumed to be
indefinite) be divided into artificial time periods for financial reporting. Not supplying
financial statement for over 3 years is too late.
3. Revenue recognition: Revenues are inflows of assets from selling a product or service to
a customer. An income statement should report these activities only for the period
shown in the financial statements. Thus, the timing of revenue recognition is a key of
earnings measurement.
According to the realization principle, 2 criteria must be satisfied before revenue
can be recognized:
1. The earnings is judged to be complete or virtually complete.
2. It's reasonable certain that the seller will be paid
4. Economic entity: All economic events can be identified with a particular economic
entity. There is a distinction between the economic activities of company owners and
those of the firm. Ex: the economic activities of a sole proprietorship, Moodle's
Dictionary should be separated from the activities of its owner, Daniel Finley, Finley's
personal checking account is not an asset of the firm Moodle's Dictionary.
5. Materiality: Financial info is material if omitting or misstating it could affect users’
decisions. Materiality is part of relevance that depends on a company's financial
strength and is based on the magnitude of the reported item. Immaterial item is not
relevant.
6. Full disclosure principle: Financial reports should include any info that could affect the
decisions made by external users. ✓
12.
1. Historical cost (Original transaction value): Disagree. Other measurement attributes
include Net realizable value, current cost, present value of future cash flows, and fair
value.
2. Full disclosure principle, comparability, consistency: Disagree. To make sure the FS are
comparable across years, the same accounting principles should be used, and if
changed, disclosure of the change must be made in the notes to the FS.
3. Matching principle: Agree. Expense should be recognized over the same time periods in
which the related revenues were generated.
4. Historical cost (Original transaction value): Disagree. Rudeen Corp. paid $180K for the
machine, therefore should record the amount that was paid in its books.
5. Revenue recognition: Agree. Before revenue can be recognized, 2 criteria must be
satisfied: The seller has fulfilled its obligation to the customer, and it is reasonable
certain that the seller will be paid.
The 2nd criterion was fulfilled on Mar 15th when it was paid, but the 1st criterion under
the realization principle was not fulfilled until the bicycles were delivered to the
customer, affecting transfer of title on Mar 17th, thus Davis Co should recognize revenue
on March 17th when both criteria were fulfilled.
6. Materiality: Agree. The $32 calculators were insignificant in costs, thus immaterial to
warrant the depreciation treatment.
7. Periodicity (Timeliness): Disagree. FS should be furnished to users more frequently,
preferably quarterly or annually. ✓
13.
1. Historical cost (Original transaction value): Disagree. Assets are usually valued at the
prices at which they were bought. Only under Current Value measurement attribute are
the assets recorded at the current FMV.
2. Economic entity: Disagree. The financial affairs of a company and its owners are
separately accounted for.
3. Revenue recognition: Disagree. 2 criteria must be met before revenue can be
recognized: The seller has fulfilled its obligation to the customer, and it is reasonable
certain that the seller will be paid. The seller will not fulfill its obligations and
merchandise will not be shipped to customers until early 2014, thus revenue should not
be recognized until early 2014.
4. Matching principle: Agree. The $48K rent expense would provide the benefit of
warehouse rental over a 2 years’ period, thus the expense should be allocated over the
2 years as well.
5. Full disclosure principle: Agree. Financial reports should include any information that
could affect the decisions made by external users.
6. Periodicity principle: Disagree. Quarterly financial statements should be distributed to
external users as well. ✓
14.
Statement or phrase Assumption, principles, constraints
1 F
2 H
3 G
4 E
5 C
6 A
7 I
8 J
9 K
10 B
11 D✓
15.
1. B
2. D
3. C
4. D. expense recognition matches revenues and expenses that arise from the same
transactions or other events.
For example, a Sterilizer was bought for $3,000, with a useful life of 8 years. Since the
Sterilizer provides benefit over 8 years’ period, the funds used to buy the Sterilizer
would also be expensed over the 8 years’ period over which the machine provides
benefit.
5. B
6. B ✓
CPA and CMA Exam Questions

1. a
2. b
3. b
4. a
5. d
6. b
7. b
8. d. The change in equity of a biz during a period from transactions of non-owner sources. It
includes all changes in equity during a period except those from investments by owners and
distributions to owners.
9. d
10. c. the IFRS conceptual framework does not include specific implementation guidance for
particularly complex standards.
11. d. The SEC postpones making a final determination concerning whether and how to incorporate
IFRS into U.S. GAAP until 2012
1. b
2. c. Different independent measurers would reach consensus about whether info is a faithful
representation of what it is intended to depict.
3. c. According to SFAC 5, an item should be recognized in the basic financial statements when it
meets the following 4 criteria:
i. Definition. The item meets the definition of an element of financial statements.
ii. Measurability. The item has a relevant attribute measurable with sufficient reliability.
iii. Relevance. Its info can make a difference in user decisions.
iv. Reliability. The info is representationally faithful, verifiable, and neutral
v. In addition, revenue should be recognized when it is realized or realizable and earned ✓
Broaden Your Perspective
1.
Requirement 1.
SEC provides regulatory oversight on accounting and reporting standards. It has overtime
delegated the power to set standards to various private sector standard setting bodies, but the
power still lies with the SEC.
Over the years, various private sector bodies have been deleted the task of setting accounting
standards.
The 1st private sector body to set accounting standards was the Committee on
Accounting Procedure (CAP). From 1938 to 1959, the CAP issued 51 Accounting Research
Bulletins (ARBs) which dealt with specific accounting and reporting problems. No theoretical
framework for financial accounting was established. This piecemeal approach of dealing with
individual issues without a framework led to criticism.
In 1959 the Accounting Principles Board (APB) replaced the CAP. The APB operated from
1959 through 1973 and issued 31 Accounting Principles Board Opinions (APBOs), various
Interpretations, and four Statements. The Opinions also dealt with specific accounting and
reporting problems. Many ARBs and APBOs have not been superseded and still represent
authoritative GAAP.
Criticism of the APB led to the creation in 1973 of the Financial Accounting
Standards Board (FASB) and its supporting structure. There are 7 full-time members of the FASB.
12 FASB members represent various constituencies concerned with accounting
standards, and have included representatives from the auditing profession, profit-oriented
companies, accounting educators, financial analysts, and government. The FASB is supported by
the Financial Accounting Foundation (FAF).
In 1984, the FASB’s Emerging Issues Task Force (EITF) was formed to resolve narrowly
defined financial accounting issues within the framework of existing GAAP.
The succession of private sector standard-setting bodies include:
a) Committee on Accounting Procedure (CAP): 1938 - 1959
b) Accounting Principles Board (APB): 1959 - 1973
c) Financial Accounting Standards Board (FASB): 1973 – present
Requirement 2.
The SEC delegated the standard-setting responsibility because setting standards is an onerous
task fraught with sometimes intense political pressures and criticisms. Better to sit up high with
a buffer between it and the constituencies and let others do the dirty work.
Besides, the SEC employees may not have the expertise to set accounting standards. And the
cost of setting accounting standards is not borne by taxpayers. And having private body set
standards mean that eh standards may gain greater acceptance. ✓
2.
Requirement 2.
The objectives of the 1933 Securities Act are:
a. Companies publicly offering securities for investment dollars must tell the public the
truth about their businesses, the securities they are selling, and the risks involved in
investing.
b. People who sell and trade securities – brokers, dealers, and exchanges – must treat
investors fairly and honestly, putting investors' interests first.
Requirement 3.
EDGAR stands for Electronic Data Gathering, Analysis and Retrieval, it stores more than
21 million company filings. It automatically collects, validates, indexes, accepts, and forwards
submissions by companies and others who are required to file forms with the SEC. Public
companies use EDGAR to make the majority of their filings. Filing by foreign companies are not
required to be filed on EDGAR, but some of these companies do so voluntarily.
EDGAR’s content includes: FORM 10-Q Quarterly report, 10-K Annual report, 8-K
Notification that a class of securities of successor issuer is deemed to be registered pursuant to
Section 12(g), 11-K: Annual report of employee stock purchase, savings and similar plans, form
15: Notice of termination of registration of a class of securities under Section 12(sb) ✓
3.
Requirement 1.
The mission of the FASB, the Governmental Accounting Standards Board (GASB) and the FAF is
to establish and improve financial accounting and reporting standards to provide useful
information to investors and other users of financial reports and educate stakeholders on how
to most effectively understand and implement those standards.
Requirement 2.
Current FASB board members Background
(May, 2018)
Russell G. Golden, Chairman He was a partner at Deloitte & Touche LLP in the National
Office Accounting Services department: He provided
timely and accurate accounting consultations to partners
and clients throughout the US and around the world.
Mr. Golden earned his Bachelor’s degree from
Washington State University. He is a licensed CPA in
Connecticut.
James L. Kroeker, Vice Chairman He was a partner at Deloitte in the firm's Professional
Practice Network and provided consultation and support
regarding the implementation, application,
communication and development of accounting

standards, including disclosure and reporting matters.
Mr. Kroeker was Deloitte & Touche's representative on

the AICPA Accounting Standards Executive Committee
(AcSEC).
He also served as a Practice Fellow at the Financial
Accounting Standards Board.
Christine Ann Botosan, Board Mrs. Botosan has broad knowledge of accounting issues,
Member with particular expertise in the areas of financial
statement analysis and valuation. Ms. Botosan has served
in a variety of roles during her tenure at the David Eccles
School of Business at the University of Utah. In addition
to her tenure as a professor, she served as a leadership
fellow in the office of the vice president and as the
George S. and Dolores Dore Eccles Presidential Chair in
Ethical Financial Reporting. She was previously the
associate dean of graduate affairs and an associate
professor of accounting.
Marsha L. Hunt, Board Member Ms. Hunt previously served as Vice President and
Corporate Controller for Cummins Inc. where she was
responsible for external reporting, consolidation, finance
systems, accounting policy, insurance risk management
and Sarbanes Oxley compliance. She also served as a
trustee of the Cummins UK pension schemes, and as a
board member of the company’s largest US based joint
venture. Previously, Ms. Hunt served as assistant
controller and director of accounting at Corning
Incorporated, where she led all U.S. Securities and
Exchange Commission and external reporting, audits,
Sarbanes-Oxley Act compliance, and M&A accounting-
related functions.
Harold L. Monk, Jr., Board Prior to joining the FASB, he spent six years at Carr, Riggs
Member & Ingram, LLC, where he provided auditing and
attestation, accounting, tax, forensic accounting, and
M&A services to public and private companies of all sizes
in various industries. He also served on the Private
Company Council and the Financial Accounting Standards
Advisory Council.
Previously, Mr. Monk helped form the firm of Davis,
Monk & Company in 1977, which merged with Carr, Riggs
& Ingram in 2010. He previously served as an auditor with
Purvis Gray and Company, and as an internal auditor with
the University of Florida.
R. Harold Schroeder, Board Prior to joining the Board, Mr. Schroeder was a partner at
Member Carlson Capital, L.P., a Dallas money manager with assets
of over $6 billion. He joined Carlson Capital’s relative
value arbitrage team in 2000 and was a member of the

firm’s management and investment committees.
As a senior portfolio manager, he focused on the financial
services industry.
Mr. Schroeder also spent 5 years as a senior equity

analyst with Schroder & Company, Inc. and KBW, Inc.
Both based in NYC. From 1993 to 1995, he was Chief
Financial Officer for NewYork-based Nafinsa Securities,
Inc., and various other subsidiaries, of Nacional
Financiera, SNC, the primary development bank for the
Mexican government.
Prior to that, he spent 13 years with Ernst & Young,

including the firm’s National office as well as client-
serving roles in New Orleans and New York, where he
was a partner in the financial services division.
Marc A. Siegel, Board Member A recognized expert in forensic accounting, Mr. Siegel has
over 20 years of experience in diverse and global
industries that include technology, media,
telecommunications, healthcare, retail, and insurance.
Prior to his appointment to the FASB, he led the
Accounting Research and Analysis team at the
RiskMetrics Group in Rockville, Maryland.
Previously, Mr. Siegel was the Director of Research at the

Center for Financial Research & Analysis (CFRA), prior to
the firm’s acquisition by RiskMetrics Group. In this
capacity, he was responsible for CFRA’s proprietary
research methodology for identifying hidden risks of
business deterioration through forensic financial
statement analysis, leading a team of 25 analysts in N
America and Europe.
He joined CFRA in 2001, after spending 10 years at Arthur

Andersen LLP as both an auditor and a financial
consultant focusing on litigation support.
Requirement 3.
The FASB receives many requests for action on various financial accounting and
reporting topics from a diverse constituency, including the SEC.
The auditing profession is sensitive to emerging trends in practice, and consequently it is
a frequent source of requests.
Requests for action include both new topics and suggested review or re-consideration of
existing pronouncements.
The FASB is alert to trends in financial reporting through reading reports, liaison with
interested organizations, and from discussions with the Emerging Task Force.
In addition, the staff receives many technical inquiries by letter and phone, which may
provide evidence that a particular topic, or aspect of a pronouncement, has become a problem.
The FASB also is alert to changes in the financial reporting environment that may be brought
about by new legislation or regulatory decisions.
Among the groups with which liaison is maintained are the Financial Accounting
Standards Advisory Council, the Accounting Standards Executive Committee and Auditing
Standards Board of the AICPA, and Association for
Investment Management and Research, Financial Executives Institute, Institute of Management
Accountants, and Robert Morris Associates. ✓
4.
Requirement 1.
IFRS (International Financial Reporting Standards) bring transparency, accountability and
efficiency to financial markets around the world by developing IFRS Standards. IFRS’ work serves
the public interest by fostering trust, growth and financial stability in the global economy.
 IFRS Standards bring transparency by enhancing the international comparability and quality of
financial information, enabling investors and other market participants to make informed
economic decisions.
 IFRS Standards strengthen accountability by reducing the information gap between the
providers of capital and the people to whom they have entrusted their money. Our Standards
provide information needed to hold management to account. As a source of globally
comparable information, IFRS Standards are also of vital importance to regulators around the
world.
 IFRS Standards contribute to economic efficiency by helping investors to identify opportunities
and risks across the world, thus improving capital allocation. Use of a single, trusted accounting
language lowers the cost of capital and reduces international reporting costs for businesses.
Requirement 2.
IFRS has 14 board members.
Requirement 3.
The current chairman of IFRS is Hans Hoogervorst. Former Chairman, Netherlands Authority for
the Financial Markets.
Requirement 4.
IFRS is located in:
30 Cannon Street
London
EC4M 6XH
UK ✓
5.
Requirement 1.
By analyzing the changes in the accounting environment of China during the recent economic
reforms, this paper places the development of accounting reforms in China into perspective and
assesses the desirability of China?s adopting accounting principles in close conformity with
International Accounting Standards (IAS). The recent economic reforms, particularly the
enterprise reform, in China have changed the corporate landscape and have profoundly altered
the accounting environment. The Chinese accounting profession and government have
responded with the enactment of a number of accounting regulations. These regulations have
essentially transformed China?s accounting from the traditionally rigid and uniform system into
a predominantly Anglo-Saxon approach to financial reporting. Accounting reform in China will
be followed by the enactment of 30 detailed accounting standards which will bring China?s
accounting practice into further conformity with IAS. However, the paper argues that accounting
rules in China should not be formulated to cater to the need of a small number of firms which
are already listed (or will be listed) on overseas stock exchanges. Rather, China GAAP should be
designed to serve China?s large industrial and commercial enterprises that are characterized by
extensive managerial autonomy and an effective separation of ownership and control. These
enterprises in China operate in an accounting environment which differs considerably from that
which is typically presumed by IAS. China’s accounting environment, both now and in the
foreseeable future, is characterized by a lack of independent/professional auditing. Without an
independent audit profession, information provided under IAS will be unreliable; therefore,
adopting IAS may not be warranted in the specific context of China. The analysis sheds light on
the role of IAS in developing and transitional economies with rudimentary auditing and judiciary
infrastructure, suggesting the limit of accounting harmonization. Institutional Factors Influencing
China’s Accounting Reforms.... Available from:
Requirement 2.
Under Deng Xiao Ping’s directive, China’s state controlled economies have become a market-
driven, free-enterprise economy where many private enterprises have been established. The
massive state-owned enterprises remain however. In this transitional economic landscape, to
foster investor’s confidence in Chinese enterprises, the need to provide reliable information to
investors and lenders led to the need for external financial reporting in China.
In 1978, China adopted an "open-door" policy and started to change from a centrally planned
economy to a market economy where every man for himself. China's recent economic reforms,
particularly the enterprise reform, have profoundly altered the country's accounting
environment. The ownerships of the industrial and commercial firms in China are now highly
diverse. State enterprises, generating 34% of the 1995 industrial output compared with 78% in
1978, have lost their dominance; much of the industrial output is now produced by the non-
state sectors. Collectively- owned enterprises are the largest sector of the Chinese economy,
while enterprises with foreign investment and individually owned enterprises play an
increasingly important role. State enterprises, once the production units in the centrally planned
economy, are now organized as profit and investment centers with a substantial degree of
managerial autonomy and a separation of management from ownership.
Furthermore, China has evolved from a closed economy with negligible imports and exports to a
major trading nations in the global economy. These changes have profoundly altered China's
accounting environment and changed the role of financial reporting in China.
The Chinese accounting profession and government have responded with the enactment of a
accounting regulations. The most significant change was catalyzed by the Accounting Standards
for Business Enterprises, China's accounting conceptual framework, promulgated in 1992 and
came into effect in 1993. This conceptual framework, which governs all enterprises in China, has
transformed China's accounting from the traditionally rigid and uniform system into an Anglo-
Saxon approach to financial reporting.
Requirement 3.
China’s enterprises operate in an accounting environment which differs much from that which is
presumed by IAS. China’s accounting environment lacks independent/professional auditing.
Without an independent audit profession, info provided under IAS will be unreliable and subject
to fraud and manipulation; therefore, adopting IAS may not be warranted in the social and
economical context of China. The analysis sheds light on the role of IAS in developing and
transitional economies with incipient auditing and judiciary infrastructure, suggesting the limit
of accounting adoption in China. ✓
6. How could the cost of pollution generated by a company be represented in conformity with the
fundamental characteristic of relevance and faithful representation?
If pollution costs are included in the polluting company’s income statement and the
company still manages to make a profits, it means that society is willing to buy products and
services despite of the stigma of pollution, and thus help the company survive by contributing to
its profitability. This means that the resources are efficiently used. It looks like that pollution
costs info is relevant to FS users.
Now are the pollution costs in the income statement representationally faithful? That is, are the
reported pollution’s costs free from error, complete and free from bias? The question is: How to
measure the costs incurred by pollution? If a company dumps toxic wastes into rivers, fishes will
dye, and water drawn from the river will be harmful to human health, but how would the harm
from polluting the river be quantified? It would be very difficult to translate the pollution’s costs
into dollars. From this perspective then, reporting pollution costs in income statement is not
representational faithful because such costs cannot be estimated in the first place. ✓
7. Politics is to acquire power, to gain one's own ends against others’ opposition, to establish
oneself as a legitimate governing entity.
Pressures on the accounting profession to establish uniform accounting standards
surfaced after the stock market crash of 1929. Some thought that insufficient and misleading FS
inflated stock prices and that this contributed to the stock market crash and depression.
The 1933 Securities Act & the 1934 Securities Exchange Act were to restore
investor confidence. The 1933 Act sets forth accounting and disclosure requirements for initial
offerings of securities (stocks and bonds). The 1934 Act applies to secondary market
transactions and mandates reporting requirements for public companies.
The 1934 Securities Exchange Act also created the Securities and Exchange Commission
(SEC). In this act, Congress gave the SEC the authority to set accounting and reporting standards
for public companies. However, the SEC, a government appointed body, has always delegated
the task of setting accounting standards to the private sector. The power still lies with the SEC. If
the SEC does not agree with a standard issued by the private sector, it can change the standard
and has done so in the past.
The private sector bodies that issue standards have changed over the years: The
Committee on Accounting Procedure (CAP) set standards from 1938 to 1959. The Accounting
Principles Board (APB) from 1959 to 1973. The FASB from 1973 to the present. FASB is
supported by Financial Accounting Foundation (FAF). In 1984, the FASB’s Emerging Issues Task
Force (EITF) was formed to resolve narrow financial accounting issues within the framework of
existing GAAP.
To develop accounting standards, a standard setter (FASB) needs to understand the
nuances of the economic transactions being considered and the views of key constituents
regarding how accounting standards should capture that economic reality. Thus, the FASB goes
through 7 steps prior to issuing an Accounting Standards Update. It analyzes comment letters,
roundtable discussions, issues Exposure Drafts, holds public meetings to deliberate various
issues identified by the staff, decides whether or not to add a project to the technical agenda,
etc.
Since accounting standards updates can substantially redistribute wealth, accounting
standards expose the FASB to much political pressure by interest groups who want an
accounting treatment that serves their own best interest.
Accounting for business combinations. GAAP used to allow 2 methods of accounting for
business combinations: the pooling of interests method & the purchase method.
A key issue involved goodwill, an intangible asset that arises only in business
combinations accounted for using the purchase method. Under the old standards, goodwill was
amortized (expensed) over its estimated useful life. To avoid such amortization expense, many
companies incurred costs to structure their business combinations as a pooling of interests
(instead of purchase method).
The FASB proposed eliminating the pooling method. This proposal was opposed.
Companies argued that they would not combine businesses important to economic growth if
they had to use the purchase method, due to the reduction in earnings caused amortizing
goodwill.
Eventually the FASB compromised. In the final standard issued in 2001, only the
purchase method, now called the acquisition method, is acceptable, but to soften the blow,
goodwill under the purchase method is not amortized.
People would exert political pressure include companies who had to revise their
financial statements to their detriment, lobbyists, politicians, etc.
The concerns of the various interest groups are to have accounting standards set to
benefit their financial wellbeing, such as maximize their net income, earnings per share.
Due to the importance of accounting standards and financial statements which were
prepared according to the standards, the standard setter had to contend with pressures exerted
by many interest groups whose companies’ reported earnings are affected by the accounting
standards. Such interest groups include politicians, lobbyists, public traded companies. And each
try to influence the standard setting to maximize their wealth and financial performance. Here
we come to the very essence of politics: To have one’s way regardless of naysay by opposing
entities. And it is in this contentious environment that the FASB must set its supposedly
“neutral” standards. ✓
8. Auditor assures the fairness of financial statements and their compliance with GAAP, an auditor
does not verify the account correctness. Some FS items are estimates, thus auditors cannot
provide an opinion as to the exactness of an entity’s financial position. Auditing standards
suggest that “present fairly” is to present financial information that’s believable, reliable and not
misleading to the users of the FS.
An auditor must provide an independent opinion on an entity’s FS even though the
entity pays the audit fee and the auditor performs other services such as to prepare income tax
returns and conduct consulting engagement. Sarbanes-Oxley significantly restricts the additional
services that the auditor can perform for an audited company.
By challenging the ethics of an auditor, the affected entities include: Auditors, company
management, company employees and labor unions, shareholders, creditors, investors, financial
analysts, the government.
What are ethical values?
Ethical values as pertaining to auditors’ responsibility include honesty, integrity, lack of bias,
independence in mindset as well as appearance, and quality of work in conducting the audit.
The AICPA and most state Rules of Conduct expect these qualities from auditors.
The auditor’s ethics is challenged when the company prepared FS does not accord with
GAAP. Ex: the company naturally want to maximize its reported earnings to look good to
investors and for management to be awarded bonuses.
Thus the company might capitalize printers it bought as assets to be depreciated graduated over
its useful life (Printers are a 5-year asset under MACRS) instead of expensing off the entire
printers’ costs in the year in which they are bought. Here the auditor may challenge the
management’s preparation of FS.
The auditor has 2 choices and it could face pressures from opposing the management:
a. It could acquiesce and accept the management prepared FS. And have investors sue the
auditor if investors lose their invested funds in the audited company.
b. It could challenge the accounting treatment of the printers and
i. risk losing the audit client and the audit fees, and if the company also hires the
auditor preparing corporate income tax returns and conducting consulting
engagements, revenues for these auxiliary services could be lost as well.
ii. The management could bias the auditor by providing an expensive gift and bribe
to the auditor. The auditor, to maintain independence in appearance as well as
mindset, should refuse all but nominal gift from the management.
iii. The management could bias the auditor because the auditor or the family
members of auditor has an investment or loan in and to the audited firm.
iv. The management could bias the auditor because the auditor or a family is
employed by the client or is in a position of influence with the client. ✓
9. The fundamental qualities of financial information are relevance and faithful representation.
a. Relevance’s components: Predictive value, confirmatory value, timelines.
b. Faithful representation’s components: Completeness, freedom from error, neutrality.
Do financial variables’ forecasts have the above 2 fundamental characteristics of financial info?
Financial variables’ forecasts may not have predictive nor confirmatory value because
the forecasts, involving high degree of estimates and wishful thinking, could be wrong. Though
the forecasts would be timely.
The forecasts would not faithfully represent the company’s position because nobody
can say for sure or even remotely sure that the forecasts are free from error, complete nor
neutral. Management naturally want to paint a rosy picture of the future to perk up investors
and keep their own jobs.
Since the forecasts do not faithfully represent the company, it cannot be disclosed per
GAAP. ✓
10.
Requirement 1.
Yes, Mary can compare the FS of two companies. The comparability of FS is due to management
and auditors ensuring that Generally Accepted Accounting Principles are followed in preparing
FS. GAAP is a dynamic set of broad and specific guidelines that companies follow when reporting
and measuring their financial statements and notes.
Requirement 2.
Auditors examines the FS prepared by the company management, and expresses an
opinion on the FS’ compliance with GAAP. ✓
11. Requirement 1.
The desired benefit from revising an accounting standards is that revised accounting
standard would better the financial information prepared under it. By bettering the financial
statement, it means that the FS would have in high degree, relevance and faithful
representation.
Requirement 2.
The costs of revising an accounting standards include getting the public to accept the
standards, disseminating the standards, and the manpower involved in revising the standards in
the first place.
The costs include possible adverse economic consequences to the companies, their
investors, creditors, employees and other interest groups.
Requirement 3.
Since revising accounting standards is contentious, the FASB goes through 7 steps to hear
inputs from various constituencies.
a. The board receives requests and recommendations for probable projects, as well as
reconsiderations of extant standards.
b. The Board decides whether to add a project to the agenda.
c. The Board deliberates at public meetings the issues identified and analyzed by the staff.
d. The Board issues Exposure Draft.
e. The Board hold public roundtable discussions on Exposure Draft.
f. It analyzes comments, public roundtable discussions, and other info. The Board
deliberates the proposed the proposed revision at public meetings.
g. The FASB issues Accounting Standards Update (ASU) ✓
12.
Requirement 1.
Before revenue can be recognized, 2 criteria must be fulfilled:
a. The earnings process is complete or substantially complete. i.e. The seller has fulfilled its
obligation to be paid by its customers.
b. There is a reasonable certainty as to the collectability of the assets to be received. (It is

reasonably certain that the seller will be paid)
Requirement 2.
No, I do not agree with the position of the client. According to the 1st revenue
recognition criterion, the earning of the rent payment is completed gradually over the quarterly
rental period. Over the quarterly rental period does Wolf Co. fulfill its obligation to provide
office building rental to its tenants. Thus, Wolf Co. should not recognize revenue when rent
payment is received at the beginning of the quarter. ✓
13.
Requirement 1.
Matched with revenue means that expenses are recognized over the same period of
time in which their related revenues are produced.
Requirement 2.
The four approaches to implement the matching principle include:
1) In the period incurred, without considering related revenues: It is impossible to
determine in which periods, if any, related revenues will occur for some costs. Ex:
Sapphire Pharmaceuticals spend $2.3 million to research and develop a new vaccine,
but it is highly uncertain that commercial success and revenue will follow from the R&D
expenditure. Thus, the R&D expenditures are recognized in the period in which they are
incurred.
2) By systematically allocate to specific time periods. Some costs are incurred to buy long-
lived assets that benefit the enterprise for > 1 yr. So we recognize these costs over the
time period during which benefits are provided by the assets bought with the costs. Ex:
MACRS depreciation is a “systematical and rational” method to allocate the equipment's
cost to the periods in which that equipment produces revenue.
3) By associating an expense with the revenues recognized in a specific time period: Many
expenses related only to time periods during which revenue is earned. Ex: The monthly
salary of an office worker is not directly related to a specific revenue event. But the
office work provides benefits to the firm for that one month indirectly relate to the
revenue recognized in that that one month.
4) Based on an exact cause-and-effect relationship: Suitable for cost of goods sold, there is
a definite causative relationship between Dell’s PC sales revenue and the costs to
manufacture those PCs. Commissions paid to salespersons to obtain sales is also an
expense recognized because the expense can be directly associated with the revenue
produced by the salesperson.
Requirement 3.
Cost Matching approach
A 4. Based on exact cause-and-effect relationship
B 1. In the period incurred, without considering related revenues
C 3. By associating an expense with the revenue recognized in a specific time
period
D 3. By associating an expense with the revenue recognized in a specific time

period
E 2. By systematically allocate to specific time periods. Because the office
building benefits the firm for > 1 reporting period, and the rent is significant
in amount. Thus the rent is expensed over the periods of time during which
the office building obtain by the rent payment provides benefit. ✓
14.
Requirement 1.
To decide whether to capitalize or expense an expenditure, the firm asks whether the
expenditure provides benefit for more than 1 reporting period (Quarterly or annually). If the
asset bought benefits for a few days or weeks, then it is expensed in its entirely right away. But
if the asset bought benefits the firm for > 1 year or 1 reporting period, then it is capitalized and
expenses as the asset is consumed.
Requirement 2.
The key accounting principle involved is the matching principle, which states that
expenses are recognized over the time periods during which the related revenues are
recognized. The dominant factor is the revenue produced by the expenditure.
Requirement 3.
If the capitalizing the asset and expensing the asset over time takes up excess
manpower and hours, then the company could alter its decision.
The materiality constraint. If an expense creates a benefit beyond the current period but
the benefit is below the materiality threshold, many companies expense right away rather than
capitalize over time. ✓
15.
Requirement 1.
a. Total net revenues: $14,664
b. Total operating expenses: $3,921
c. Net income (earnings): $1,204
d. Total assets: $7,065
e. Total stockholders’ equity: $ 4,080
Amounts and shares in millions.
Requirement 2.
Gap, Inc. issued 1,106 million shares so far as of Jan 29, 2011.
Requirement 3.
By reporting more than one year of data in its financial statements, GAP makes it easy for
investor and creditors to compare its performance and profitability across years. ✓
16.
Requirement 1.
Arguments in favor of convergence:
Investors across the world can understand the financial position and profitability of companies
both in the US and other nations.
Requirement 2.
Arguments in favor of non-convergence:
The tremendous time and manpower to converge the 2 separate set of accounting standards.
Requirement 3.
Yes, the US should converge with the IFRS. Globalization is here to stay. To have the US
participate in the global market, its financial statements should be understood by foreign
investors as well. This brings infusion of capital from abroad, boosting the US economy. ✓
Air France–KLM Case

1.
Requirement 1.
a. Total revenues: $25,530 million Euros

b. Income from current operations: $130 million Euros
c. Net income (AF equity holders): $(1,827) million Euros
d. Total assets: $25,423 million Euros
e. Total equity: $2,290 million Euros
Requirement 2.
Basic earnings per share for the 2011 fiscal year: $4.14 per share
Requirement 3.
Air France’s note 3.1.1 says that “the consolidated FS as of March 31, 2011 are prepared in
accordance with the IFRS as adopted by the European Commission. IFRs adopted by the EC differ in
certain respect form IFRS as adopted by the IASB. The group has determined that the financial info for
the periods presented would not differ substantially had the Group applied IFRs as published by the
IASB.
This note says that the IFRs as adopted by EC differs from the IFRS promulgated by the IASB.
Thus, AF’s financial statements could differ had the company followed the IFRS as published by the IASB,
but it does not depart from IASB’s IFRS materially in its case. ✓

Intermediate - Accounting - Spiceland - Sepe - Nelson - 8th - Ed - CHPT - 01 - Exercises Answer

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Intermediate - Accounting - Spiceland - Sepe - Nelson - 8th - Ed - CHPT - 01 - Exercises Answer

Uploaded by

Copyright:

Available Formats

Intermediate Accounting by Spiceland, Sepe, Nelson, 8th edition Homework

Chapter 01: Environment and Theoretical Structure of Financial Accounting

company’s auditors express an opinion on whether the company has maintained

3) Equity Shareholders’ equity or stockholders’ equity for a

19. The underlying assumptions of GAAP are:

b. Expense recognition: Expenses were outflows or other using up of assets or incurrence

Additional info Amount

What is the accrual net income for the year?

Rent expenses: .................................................................. $20,000

Accrual net income: ......................................................... $208,000 ✓

Pete, Pete and Roy

Revenues: .................................................................. $170,000

Salaries: ............................................................... $90,000

Peter, Pete and Roy

Accounts Receivable: Revenue billed – Cash collected

Advertising: ......................................................... $20,000*

CPA and CMA Exam Questions

Broaden Your Perspective

communication and development of accounting

Mr. Kroeker was Deloitte & Touche's representative on

value arbitrage team in 2000 and was a member of the

Mr. Schroeder also spent 5 years as a senior equity

Prior to that, he spent 13 years with Ernst & Young,

Previously, Mr. Siegel was the Director of Research at the

He joined CFRA in 2001, after spending 10 years at Arthur

b. There is a reasonable certainty as to the collectability of the assets to be received. (It is

D 3. By associating an expense with the revenue recognized in a specific time

Air France–KLM Case

a. Total revenues: $25,530 million Euros

You might also like