Exam 3: Accrual Accounting

Using the data provided below, determine what amounts will appear on the income statement that is prepared by "nature of expenses." Distribution expense (1) 23,000 Cost of goods sold (2) 70,000 General and administrative expense (3) 25,000 Note 1 - Distribution costs include $13,000 of employee wages and $10,000 of depreciation. Note 2 - Cost of goods sold includes $10,000 for depreciation; the remaining amount relates to the net change in inventory and purchases during the year. Note 3 - General and administrative expenses include $20,000 of employee wages and $5,000 of depreciation.

What is classified as a "non-current" liability?

A correction of an accounting error does not involve

Information on the balance sheet is categorized into

Explain the difference between a cash cycle, a financing cash cycle, an investing cash cycle and an operating cash cycle.

The following entry was recorded by Hollow Inc.: Cash 70,000 Accumulated depreciation 30,000 Gain on disposal of property, plant and equipment (PPE) 10,000 PPE 90,000 What is the effect on Hollow's financial statements?

For each of the following scenarios, determine the effects (if any)of the accounting change (correction of error, change in accounting policy, or change in estimate)on the relevant asset or liability, equity, and comprehensive income in the year of change and the prior year. Use the following table for your response. A. Company A increases the allowance for doubtful accounts (ADA). Using the old estimate, ADA would have been $71,000. The new estimate is $74,000. B. Company B omitted to record an invoice for a $7,000 sale made on credit at the end of the previous year and incorrectly recorded the sale in the current year. The related inventory sold has been accounted for. C. Company C changes its revenue recognition policy to a more conservative one. The result is a decrease in prior year revenue of $4,200 and a decrease in current-year revenue of $6,300 relative to the amounts under the old policy.

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.

What is the accrual basis of accounting?

Determine the missing amounts in the statement of financial position provided below:

A company's cash flows are $3,600. Based on economic conditions during the year, the company booked allowances of $1,500. As a result of contractual incentives, the company booked a further $700 in accruals. What is the total reported earnings of the company?

What are excessive accruals?

Which statement is correct?

A change in accounting policy should

Why are excessive accruals a concern for accounting and financial reporting?

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

Changes in accounting estimates are

What is the cash basis of accounting?

Which of the following is an example of an "operating" cash cycle?

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)