Exam 8: Reconciling Bank and Credit Card Statements

In 2016, when the Lee Company learned that its estimate of bad debt expense in 2014 was 5% too high, the accounting rules required it to go back and change the 2014 financial reports.

Under GAAP, manufacturing and retail inventories are normally carried at the "lower of cost or market."

A major advantage of the "direct write-off method" over the allowance method of accounting for bad debts is better matching of revenues and expenses.

The FASB has never defined exactly what level of probability it means by the term "probable" in its rules for contingencies.

A company that sells trucks, and gives a five-year warranty, should report an estimated expense related to these warranties in the same period as the sales revenue, and should not wait to record an expense until it pays for the repairs.

"Aggressive" accounting tends to understate net income and assets.

The FASB's rules for accounting for possible liabilities resulting from "uncertain tax positions" are the same as its general rules for accounting for unasserted claims.

Which is the most accurate statement regarding GAAP rules for accounting for defined benefit pension plans?

Uncertainty affects the value of most assets and liabilities.

For a company like General Motors, the reported warranty expense in any given year will usually include both the impact of the current year's sales and some revision of previous years' estimated warranty liabilities.

One of the FASB's criteria for recognizing an item and recording it in the financial statements is that the item must be measurable with "sufficient reliability."

"Conservative" accounting tends to understate net income.

A company's estimate of the expected salvage value of a fixed asset is related to its estimate of the expected useful life of the asset.

The accounting for depreciation of equipment is affected by uncertainty over the assets' lives and their salvage value.

If a company learns new information in 2018 that affects certain estimates it made when it published its 2017 financial statements, it should use the new information to restate the 2017 financial results.

The Knox Company has recorded an estimated liability for warranty claims of $10,000 in 2015 for products sold. In 2016, some of the items sold in 2015 break, and the Knox Company spends $9,000 to fix them. The warranties have not yet expired, and some more items may still break. In 2016, the Knox Company should record:

In general, if a company makes an incorrectly low estimate of bad debt expenses in 2016, then in later years it will have to reflect higher bad debt expenses than if it had made an accurate estimate in 2016.

Historically, the adoption of income taxes on businesses has led to companies favoring more aggressive financial reporting methods and reporting higher income.

The Buckley Corp. is located in Florida. Since Florida is sometimes affected by major hurricanes, there is a chance that Buckley's property will be damaged in the future. The proper accounting that Buckley should make for these possible future losses is to

A major advantage of the "direct write-off method" over the allowance method of accounting for bad debts is simplicity.