Chapter 1recommended problems.doc

Ch1: Recommended End-of-Chapter Problems E 1-1   Accrual accounting Listed below are several transactions that took place during the first two years of operations for the law firm of Pete, Pete, and Roy.  In addition, you learn that the company incurred utility costs of $35,000 in year one, that there were no liabilities at the end of year two, no anticipated bad debts on receivables, and that the insurance policy covers a three-year period.Required:1. Calculate the net operating cash flow for years 1 and 2.2. Prepare an income statement for each year similar to Illustration 1-2 on page 8 according to the accrual accounting model.3. Determine the amount of receivables from customers that the company would show in its year 1 and year 2 balance sheets prepared according to the accrual accounting model.  LO2E 1-2   Accrual accounting Listed below are several transactions that took place during the second two years of operations for RPG Consulting.   In addition, you learn that the company incurred advertising costs of $25,000 in year 2, owed the advertising agency $5,000 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.Required:1. Calculate accrual net income for both years.2. Determine the amount due the advertising agency that would be shown as a liability on the RPG's balance sheet at the end of year 2.   LO2E 1-8   Qualitative characteristics Phase A of the joint FASB and IASB conceptual framework project stipulates the desired fundamental and enhancing qualitative characteristics of accounting information. Several constraints impede achieving these desired characteristics. Answer each of the following questions related to these characteristics and constraints.1. Which constraint would allow a company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset?2. Donald Kirk, former chairman of the FASB, once noted that “ there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests ” Which characteristic is implicit in Mr. Kirk's statement?3. Allied Appliances, Inc., changed its revenue recognition policies. Which characteristic is jeopardized by this change?4. National Bancorp, a publicly traded company, files quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings?5. In general, relevant information possesses which qualities?6. When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?7. Jeff Brown is evaluating two companies for future investment potential. Jeff's task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jeff will be using possess?8. A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe?  LO6E 1-9   Basic assumptions, principles, and constraints Listed below are several terms and phrases associated with basic assumptions, broad accounting principles, and constraints. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it.  LO6 through LO8E 1-10   Basic assumptions and principles Listed below are several statements that relate to financial accounting and reporting. Identify the basic assumption, broad accounting principle, or constraint that applies to each statement. 1. Jim Marley is the sole owner of Marley's Appliances. Jim borrowed $100,000 to buy a new home to be used as his personal residence. This liability was not recorded in the records of Marley's Appliances.2. Apple Computer, Inc., distributes an annual report to its shareholders.3. Hewlett-Packard Corporation depreciates machinery and equipment over their useful lives.4. Crosby Company lists land on its balance sheet at $120,000, its original purchase price, even though the land has a current fair value of $200,000.5. Honeywell Corporation records revenue when products are delivered to customers, even though the cash has not yet been received.6. Liquidation values are not normally reported in financial statements even though many companies do go out of business.7. IBM Corporation, a multibillion dollar company, purchased some small tools at a cost of $800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense.  LO6 through LO8E 1-11    Basic assumptions and principles Identify the basic assumption or broad accounting principle that was violated in each of the following situations. 1. Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet.2. Atwell Corporation has not prepared financial statements for external users for over three years.3. The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received.4. Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith's personal residence and recorded a $150 expense.5. Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.6. Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.  LO7  LO8E 1-12    Basic assumptions and principles For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the basic assumption, constraint, or accounting principle that is applied (if you agree) or violated (if you disagree). 1. Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar.2. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements.3. Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery.4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000.5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $100 each. The customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer.6. Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life.7. Esquire Company provides financial statements to external users every three years.  LO6 through LO8E 1-13    Basic assumptions, principles, and constraints For each of the following situations, state whether you agree or disagree with the financial reporting practice employed, and briefly explain the reason for your answer. 1. The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its recently appraised value of $3.5 million.2. The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase of an automobile to be used solely for personal use.3. At the end of its 2011 fiscal year, Dower, Inc., received an order from a customer for $45,350. The merchandise will ship early in 2012. Because the sale was made to a long-time customer, the controller recorded the sale in 2011.4. At the beginning of its 2011 fiscal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi recorded the expenditure as an asset to be expensed equally over the two-year period of the lease.5. The Reliable Tire Company included a note in its financial statements that described a pending lawsuit against the company.6. The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statement for internal use but disseminates to external users only the annual financial statements.  LO6 through LO8E 1-14    Basic assumptions, principles, and constraints Listed below are the basic assumptions, broad accounting principles, and constraints discussed in this chapter. a. Economic entity assumptionb. Going concern assumptionc. Periodicity assumptiond. Monetary unit assumptione. Historical cost principlef. Realization principleg. Matching principleh. Full-disclosure principlei. Cost effectivenessj. Materialityk. Conservatismp. 43   Identify by letter the assumption, principle, or constraint that relates to each statement or phrase below.  _1. Revenue is recognized only after certain criteria are satisfied. _ 2.Information that could affect decision making should be reported. _3. Cause-and-effect relationship between revenues and expenses. _ 4.The basis for measurement of many assets and liabilities. _5. Relates to the qualitative characteristic of timeliness. _6. All economic events can be identified with a particular entity. _7. The benefits of providing accounting information should exceed the cost of doing so. _8.A consequence is that GAAP need not be followed in all situations. _9. Not a qualitative characteristic, but a practical justification for some accounting choices. _10. Assumes the entity will continue indefinitely. _11. Inflation causes a violation of this assumption.  LO6 through LO8E 1-15    Multiple choice; concept statements, basic assumptions, principles Determine the response that best completes the following statements or questions. 1. The primary objective of financial reporting is to provide information a. About a firm's management team.b. Useful to capital providers.c. Concerning the changes in financial position resulting from the income-producing efforts of the entity.d. About a firm's financing and investing activities.2. Statements of Financial Accounting Concepts issued by the FASB a. Represent GAAP.b. Have been superseded by SFASs.c. Are subject to approval of the SEC.d. Identify the conceptual framework within which accounting standards are developed.3. In general, revenue is recognized as earned when the earning process is virtually complete and a. The sales price has been collected.b. A purchase order has been received.c. There is reasonable certainty as to the collectibility of the asset to be received.d. A contract has been signed.4. In depreciating the cost of an asset, accountants are most concerned with a. Conservatism.b. The realization principle.c. Full disclosure.d. The matching principle.5. The primary objective of the matching principle is to a. Provide full disclosure.b. Record expenses in the period that related revenues are recognized.c. Provide timely information to decision makers.d. Promote comparability between financial statements of different periods.6. The separate entity assumption states that, in the absence of contrary evidence, all entities will survive indefinitely. a. Trueb. FalseCPA and CMA Exam QuestionsCPA Exam QuestionsThe following questions are used in the Kaplan CPA Review Course to study the environment and theoretical structure of financial accounting while preparing for the CPA examination. Determine the response that best completes the statements or questions.1. Which of the following is not a qualitative characteristic of accounting information according to the FASB's conceptual framework?a. Auditor independence.b. Neutrality.c. Timeliness.d. Predictive value.2. According to the conceptual framework, neutrality is a characteristic ofa. Understandability.b. Faithful representation.c. Relevance.d. Both relevance and faithful representation.   LO63. The Financial Accounting Standards Board (FASB)a. Is a division of the Securities and Exchange Commission (SEC).b. Is a private body that helps set accounting standards in the United States.c. Is responsible for setting auditing standards that all auditors must follow.d. Consists entirely of members of the American Institute of Certified Public Accountants.   LO34. Confirmatory value is an ingredient of the primary quality of   LO65. Predictive value is an ingredient of   LO66. Completeness is an ingredient of the primary quality ofa. Verifiability.b. Faithful representation.c. Relevance.d. Understandability.   LO67. The objective of financial reporting for business enterprises is based ona. Generally accepted accounting principles.b. The needs of the users of the information.c. The need for conservatism.d. None of above.   LO68. According to the FASB's conceptual framework, comprehensive income includes which of the following?   LO6CMA Exam QuestionsThe following questions dealing with the environment and theoretical structure of financial accounting are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field o