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Exam 14: Accounting Principles and Reporting Standards

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Question 41

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If too much of the cost of an asset is charged as depreciation expense in the present period, the firm's net income will be understated in later periods.

A) True
B) False

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Question 42

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Why are notes important in financial statements and when should they be provided?

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1. The notes provide integral ...

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Question 43

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The Boston Red Sox receives cash from its season ticket holders in advance for the entire season. Under the revenue recognition principle, the Boston Red Sox should recognize the revenue from the season ticket holders

The matching principle is being applied when the cost of equipment is depreciated over its useful life.

Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy. According to the matching principle, if 4 months of the policy has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement?

Accountants use footnotes to financial statements to disclose information that may influence investor decisions.

Revenue should not be recorded until it is ____________________ that is, until new assets are created in the form of money or claims against others.

The Cervantes Company uses the same method of depreciation for its equipment in each fiscal period. This practice is an example of

The financial statements in the annual report of a corporation contain footnotes explaining the methods used to depreciate the firm's equipment. This practice is an example of

Assets are recorded at cost when they are purchased, but the asset accounts are adjusted each year to reflect changes in market value.

Explain the following statement. "Investors and creditors expect to receive a cash flow directly or indirectly from the business entity."

What is the general rule-of-thumb for determining if an item is material?

The modifying convention of ____________________ concerns the significance of an item in relation to the particular situation of which it is a part.

The separate entity assumption permits businesses to record property and equipment as assets that will provide benefits in future periods.

Which of the following statements is not correct?

According to FASB's conceptual framework, what are the 4 assumptions that financial statement users should assume that preparers of the statements have made in preparing the statements?

The Financial Accounting Standards Board is an agency of the federal government.

Carlos Verde owns a small nursery. He recently approached the local bank for a loan to finance an expansion of his nursery. Carlos prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles. $\begin{array}{l}\text { Liabilities and Owner's Equity }\\\begin{array} { l r } \text { Accounts Payable } & 23,000 \\\text { Note Payable on Family Car } & 9,000 \\\text { Note Payable on Truck } & 6,000 \\\text { Mortgage on House } & 127,000 \\\text { Carlos Verde, Capital } & \underline { 134,000 } \\\text { Total Liabilities and Owner's Equity } & \$ 299,000 \\\hline\end{array}\end{array}$ Additional information provided by owner: 1. The inventory has an original cost of $\$ 42,000$ . It is listed on the balance sheet at what it would cost to purchase today. 2. Included in the cash listed on the balance sheet is $\$ 4,000$ in Carlos Verde's personal checking account. 3. Depreciation allowable to date on the equipment is $\$ 5,000$ . Depreciation allowable to date on the truck is $\$ 3,000$ .

Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented. 1. A piece of machinery has a book value (cost less accumulated depreciation) of $90,000. However, the machinery could not be sold for more than $70,000 today. The company's owner thinks that the machinery should nevertheless be reported on the balance sheet at $90,000 and depreciated over its useful life, because the equipment is being used regularly in the business and it is expected to be used for the next five years-the remaining useful life that is being used for depreciation purposes. 2. At the beginning of the year, the company bought a building for $1,000,000. At the end of the year, the building's value was appraised at $1,220,000. Since there was an increase in value, the company did not record depreciation on the building. 3. The assets listed in the accounting records of the company, which is operated as a sole proprietorship, include a savings account of the owner of the business. The owner established the savings account so that if she needs to invest more cash in the business, it will be readily available. 4. Three years ago, the company paid for a three-year insurance policy on its automobiles by writing a check for $6,000. At the end of the current year, the balance sheet of the company reported prepaid insurance at $6,000.

Under the accrual basis of accounting