Exam 2: Accrual Accounting and Income Determination

Adjusting entries must be made

Accumulated depreciation is a/an

The shareholders' equity account,Revaluation Surplus,is likely to be found on the balance sheet of a company reporting under U.S.GAAP.

An adjusting entry is required whenever all economic events that have occurred are not already reflected in the accounts.

Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.

Transitory items are disclosed separately on the income statement so that statement users can place less weight on these earnings components when forecasting future profitability.

If a material event is either unusual in nature or an infrequent occurrence-such as a one-time charge resulting from a major restructuring-it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company's last major restructuring.

An entry to record a change in accounting principle will typically require an adjustment to the firm's retained earnings balance to reflect the cumulative effect of the change in accounting principle on all prior periods' reported net income.

One difference between U.S.GAAP and IFRS is that IFRS requires companies to present a single statement of comprehensive income while U.S.GAAP allows companies to alternatively present separately a net income statement and a statement of comprehensive income.

The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.

Gains or losses from the sale of property,plant or equipment would be reported on the income statement as a special item in continuing operations.

"Book value" refers to the amount at which an account is carried in the company's accounting records as opposed to "carrying amount" which refers to the amount at which an account is reported in the company's financial statements.

When firms use different accounting principles to account for similar accounting events in adjacent periods,the period-to-period consistency of the reported numbers can be compromised.

Traceable costs are also called period costs.

Each set of EPS numbers includes separately reported numbers for income from continuing operations and the items that appear below it on the income statement.

When a company acquires another company,the merger gives rise to a type of accounting change.

Delta Co.began operations on January 1,2012.During 2012 and 2013,the company used the weighted-average method for its inventory costing.In 2014,the company changed its method of inventory costing to FIFO so that its financial statements would be more comparable to those of other firms in its industry.If the FIFO method had been used,Delta's cost of goods sold would have been $45,000 less in 2012 and $35,000 less in 2013.Delta's income statements,as originally presented,appear below.Delta's tax rate is 30%. Sales \ 1,000,000 \ 1,100,000 \ 1,210,000 Cost of goods sold 645,000 695,000 726,000 Gross profit 355,000 405,000 484,000 Selling, general and administrative expenses 250,000 255,000 265,000 Depreciation expense 55,000 55,000 55,000 Income before tax 50,000 95,000 164,000 Income tax expense Net income Required: a.Assume that for comparison purposes Delta presents 2012 and 2013 income statements in its 2014 annual report.Revise Delta's 2012 and 2013 income statements to appear as they should in the 2014 annual report. b.Prepare the journal entry required in 2014 to record Delta's change in accounting principle.

An analyst gathered the following information about a company whose fiscal year end is December 31. Net income for the year was $\$ 23.7$ million. Preferred stock dividends of $\$ 3$ million were paid for the year. Common stock dividends of $\$ 6$ million were paid for the year. There were 10 million shares of common stock outstanding on January 1, 2014. The company issued 6 million new shares of common stock on July 1, 2014. The capital structure does not include any potentially dilutive securities. Required: Calculate the company's basic earnings per share for 2014.

While basic earnings per share (EPS)must be disclosed,management may opt to place it in the notes to the financial statements.

The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.