Exam 8: Reconciling Bank and Credit Card Statements

When a company uses the allowance method of accounting for bad debts, its reported expense in any year is affected both by the events of that year, and also by over- or underestimates of bad debts in the previous year.

A "conservative" balance sheet would tend to overvalue land.

The type of pension plan where a company promises to pay employees a pension for the rest of the employees' lives, with a value that depends on how much the employees earn until they retire, is called a "defined benefit" plan.

Under FASB rules, a material loss contingency must be accrued if it is both "reasonably possible" and "reasonably estimable."

The rules that the FASB sets for recognizing gain contingencies and loss contingencies are an example of neutral, rather than conservative, accounting.

The Dix Company recorded an estimated liability for warranty claims related to its 2016 sales of farming machinery of $5,000,000 in its 2016 balance sheet. The warranty allows customers to get free repairs for one year. By the end of 2017, the company had paid $5,040,000 of claims. It had no further liability for repairs for the 2016 sales after 2017. In the 2017 income statement, the company should recognize

Under FASB rules, a material loss contingency must be disclosed (but not accrued) if it is "reasonably possible."

The Pine Corp. learns in July 2018 some new information about a lawsuit that first started in 2015. Pine Corp. had shown a liability of $2,000,000 related to this lawsuit in its December 31 balance sheets for 2015, 2016, and 2017. It now believes the liability will be only $1,500,000. Under GAAP, Pine Corp. should

The accounting for depreciation of equipment is affected by uncertainty over the assets' lives, but not by any uncertainty over their salvage value.

"Neutral" estimates have an equal probability of being too high and too low.

Under the allowance method of recording bad debt expense, a company records bad debts:

The financial statement users who are most likely to be happy with conservative methods of reporting income are

One way companies deal with uncertainty in the budgeting process is by budgeting some "miscellaneous" or "contingent" expenses.

If a company estimates wrongly, and records too small an adjustment for a "lower of cost or market" adjustment in one period, then its income in later periods will be reduced when the estimation error is corrected.

According to GAAP, a company that sells cars, and gives its customers a five-year warranty, should not report any expense from these warranties until cars actually break and it has to pay for the repairs.

In accounting, we would normally assume that a company will continue to use its factory over some period of time, and therefore it makes sense to depreciate the factory over some period of time. The name for this assumption is the