Exam 3: Accrual Accounting

Which asset groups do not need to be presented separately in the balance sheet?

Which of the following would be accounted for as a change in accounting policy? (More than one answer may be correct.) A. A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B. A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C. A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D. A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E. An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F. A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost.

The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: •requires an adjustment to the year-end financial statements, •requires note disclosure, or •requires neither adjustment to recognized amounts nor disclosure. There is a fire at the company's only warehouse; the company has insufficient fire insurance to replace the warehouse and contents such that a material loss will result and operations will be curtailed for six months. (Justify your recommendation)

Prepare a multiple-step income statement using the following data for Bella Inc for the year ended December 31, 2012.

Explain if the following situations would be accounted for prospectively or retrospectively. Give a brief explanation to support your response. A. A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B. A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C. A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D. A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E. An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F. A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost.

Computer Consulting Limited was started in early 2010 and continued to operate until early 2013, when it was wound up due to disputes between the two principal shareholders. When it started, the company used the following accounting policies: 1. Use straight-line depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years. 2. Estimate warranty expense as 9% of sales. 3. Estimate bad debts expense as 5% of sales. Derive net income for 2010 to 2012. For the year-end balance for 2013, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.

For the following types of accounting changes, identify the relevant criteria for each accounting change by selecting "yes," "no," or "N/A" (not applicable)

IFRS identifies a number of criteria to determine whether an asset can be classified as current. Satisfying any one of these criteria is sufficient. For the following list of criteria, identify whether each one is relevant for the classification of an asset as current instead of non-current.

Which of the following is an example of a change in accounting policy?

Sing Songs Ltd. started operations on January 1, 2010. During its first year of operations, the company had a choice of accounting policies: Using the following information about activities for 2010-2012, derive the 2010 net income (only)under both accounting options and explain why the net incomes are not the same.

Identify whether each of the following items of operating expense is described according to its function.

What is a "current asset"?

The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: •requires an adjustment to the year-end financial statements, •requires note disclosure, or •requires neither adjustment to recognized amounts nor disclosure. A new competitor enters the marketplace, which will result in serious price competition and, likely, reduced income next year. (Justify your recommendation.)

Which statement is not correct?

What information does a cash flow statement provide?

A change in accounting policy

Here are selected balances for BeaverCreek Inc for December 31, 2012: Required: A. Prepare the balance sheet for BeaverCreek Inc. with items classified as current and non-current. B. Prepare the statement of comprehensive income. C. Determine the missing amounts: Year 1 Year 2 Year 3 Revenues 1,000,000 3,500,000 Less: Sales returns 200,000 300,000 Net sales 900,000 2,800,000 Cost of goods -Beginning inventory 250,000 200,000 250,000 -Purchases 600,000 350,000 -Ending inventory (200,000) Gross profit 450,000 550,000 500,00

The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: •requires an adjustment to the year-end financial statements, •requires note disclosure, or •requires neither adjustment to recognized amounts nor disclosure. There is a significant fall in the market price of a major portion of inventory due to new technology making the existing items obsolete. The market price is lower than the current carrying value. (Justify your recommendation.)

Which of the following is an example of an error that should be corrected?

What is the accrual basis of accounting?