1.Revenue recognition, when the right of return exists, was standardized in 1981 by SFAS No. 48. Prior to this, SOP 75-1 provided guidance but was not mandatory (which is why the FASB has brought various SOPs into the accounting standards themselves). As a result, three methods were widely used to account for this type of transaction: (1) no sale recognized until the product was unconditionally accepted, (2) sale recognized along with an allowance for estimated returns, and (3) sale recognized with no allowance for estimated returns. SFAS No. 48 mandated revenue recognition for such sales subject to six conditions: (1) price is substantially fixed or determinable at sale date; (2) buyer has paid or is obligated to pay the seller, and payment is not contingent on resale of the product; (3) buyer’s obligation would not be changed in the event of theft or physical damage to the product; (4) buyer acquiring the product for resale has economic substance apart from the seller; (5) seller has no significant obligations to bring about resale by the buyer; and (6) future returns can be reasonably estimated. Required: a. Discuss the underlying conceptual issues concerning revenue recognition when the right of return exists. Can any (or all) of the pre-SFAS No. 48 methods be justified? b. Indicate the rationale for each of the SFAS No. 48 tests before a revenue is recognized. c. Is SFAS No. 48 an example of finite uniformity or of circumstantial variables as developed by Cadenhead (see Chapter 9)? d. Discuss the role of future events in SFAS No. 48. 2. Accounting for the transfer of receivables with recourse has been problematic. At issue is whether such a transaction is, in substance, a sale, in which case a gain/loss would be recognized, or a financing transaction, in which case any gain/loss should be amortized over the original life of the receivable. (The receivable could be long-term; for example, a sale of an interest-bearing note.) SOP 74-6 concluded that most transfers with recourse are financing transactions based on the argument that a transfer of risk (i.e., no recourse) must exist for a sale to have occurred. In 1983, the FASB reached a different conclusion in SFAS No. 77. A sale is now recognized if (1) the seller surrenders control of future economic benefits embodied in the receivable and (2) the seller’s obligation under the recourse provisions can be reasonably estimated. If these conditions are not met, the proceeds from a transfer are reported on the balance sheet as a liability. Required: a. What is the critical issue in interpreting the nature of this transaction? How does interpretation of the critical issue lead to the two different viewpoints? b. Explain why the SOP 74-6 view represents a revenue-expense orientation, while the SFAS No. 77 represents an asset-liability orientation. 3. In its 1994 monograph on future events, the FASB discussed several orientations that might be related to asset valuation. As an example of its thinking, assume that we are assessing future sales of a product for the purpose of determining the value of the asset which is used to manufacture the product. The product is expected to sell for $25 per unit. Probability and unit sales are shown here. Probability Estimated Sales .45……………………………… 0 .10………………………………5000 .30……………………………… 6000 .15 ……………………………… 8000 Required: Part 1: Determine (a) the modal (most likely individual unit sales), (b) the cumulative probability (summed probability of sales being either positive or negative), and (c) the weighted probability number (expected value of probability times estimated sales times sales price). Part 2: How might these approaches be utilized to value the asset which is used to manufacture the product? 4. In 1983, a number of computer software companies reported use of an accounting procedure that was investigated by the SEC. The accounting policy is to capitalize the cost of developing computer software and amortize it over the life of the software (usually three to five years). This procedure is used by large and small companies, but the impact is more pronounced on smaller, new companies, in which a greater portion of their activity is devoted to software development. An official of Comserv, a small company that specializes in software, said that small companies would be in deep trouble because of SFAS No. 86. He said smaller companies would be under strong pressure to keep costs down if development costs had to be expensed. He also said, relative to the immediate write-off of these costs that smaller companies would not be able to put as much cash into their own growth and development because of SFAS No. 86. The SEC’s concern was whether this accounting policy was consistent with SFAS No. 2 concerning the expensing of research and development costs as incurred. In 1985, SFAS No. 86 treated software-related research and development costs the same as in SFAS No. 2. Required: a. Evaluate the software capitalization argument with reference to SFAS No. 2. b. Why is the choice of accounting policies (expensing vs. capitalization) more likely to affect smaller companies? c. Comment on the claim that small companies “wouldn’t be able to invest as much cash in their own growth if they couldn’t use [capitalization].” Is this a real economic consequence? d. If you were a FASB member, how would you have voted on this issue? 5. Discuss the role of future events in the following revenue and expense recognition situations. a. Modification of terms under troubled debt restructuring in SFAS No. 114. b. Pension accounting relative to measuring current expense in SFAS No. 87. c. Other postretirement benefits under SFAS No. 106. d. Full costing and successful efforts in oil and gas 6. Shown below is the bottom part of the income statement of Waste Management, Inc., for the year ending December 31, 1998. Also shown below is a note from its financial statements showing the elements of its comprehensive income items, which were shown as part of the statement of changes in equity. Required: a. Recast the income statement for December 31, 1998, so that it includes comprehensive income. b. Even though not allowed by the FASB, compute the EPS for comprehensive income. c. Do you think that elements specific to comprehensive income should be shown only in the statement of changes in equity? d. Do you think there are circumstances in which Waste Management might desire to show comprehensive income elements within the income statement itself? 7. Utilizing the stock options proposal made in this chapter, show entity and proprietary income in the following situation for the Ethan Neil Corporation: Income before taxes…………………………... $4,810,000 Interest expense……………………………………. 182,000 Stock options expense (incentive) ……………240,000 Income tax rate………………………………………. 40%
> The three attempts at standard setting in the private sector (CAP, APB, and FASB) have all dealt with the need for a theoretical foundation. Why were the CAP and the APB unsuccessful at this endeavor?
> What is the importance of the FAF and FASAC to the success of the FASB?
> Why may accounting policies with no direct cash flow consequences indirectly affect investors or creditors?
> Over the years, the research findings regarding changing from FIFO to LIFO have varied? Why do you suppose this is the case?
> As an investor, how would you react to a company changing is inventory accounting from FIFO to LIFO? Why?
> Why is the choice between the FIFO-LIFO inventory methods an interesting issue in capital market research?
> Describe the general findings from capital market research concerning the information content of accounting numbers and the effects of alternative accounting policies.
> What is classification shifting?
> How does the term “embedded derivatives” compare with the term “embedded journalists” (from the Iraqi War)?
> In what two different senses is the term pro forma used?
> Are disclosures of hedging effectiveness effective?
> Of the various reasons that a firm might deal in its treasury stock, are there any that you might think are questionable? Discuss.
> Why do you think earnings is managed when it appears that actual income might be less than management’s voluntary forecasts of earnings?
> What are the benefits of evaluating a CEO based on the sum of earnings and cash flow divided by two? What is the downside to this metric? Make sure you clearly identify which cash flow and earnings you use in your calculation.
> Do you think that the color-coded terrorist threat system instituted by the Department of Homeland Security involves a measurement system? Explain.
> Did the 21st century begin on January 1, 2000?
> Political factors are an adverse influence on the accounting standard-setting function. Discuss this statement.
> Are issues of costliness and timeliness as they pertain to accounting standards part of accounting theory?
> How do measurement and calculation in accounting differ from each other? Give three examples of each.
> Does the statement of cash flows obviate the possible need for exit price financial statements?
> Why is discounted cash flow extremely difficult to implement in the accounts?
> How do entry- and exit-value approaches differ?
> If general price-level adjustment is concerned with the change over time of the purchasing power of the monetary unit, why is it not considered to be a current value approach?
> What type of measurement scale (nominal, ordinal, interval, or ratio scale) is being used in the following situations? a. Musical scales b. Insurance risk classes for automobile insurance c. Numbering of pages in a book d. A grocery scale e. A grocery sc
> Some individuals believe that valuation methods proposed by a standard-setting body such as FASB should be based on those measurement procedures having the highest degree of objectivity as defined by Equation (1.1). Thus, some assets might be valued on t
> Accounting practitioners have criticized some proposed accounting standards on the grounds that they would be difficult to implement because of measurement problems. They therefore conclude that the underlying theory is inappropriate. Assuming that the c
> A great deal of interest is generated each week during the college football and college basketball seasons by the ratings of the teams by the Associated Press and United Press International. Sports writers or coaches are polled on what they believe are t
> Can assessment measures be used for predictive purposes?
> The measurement process itself is quite ordinary and routine in virtually all situations. Comment on this statement.
> Is accounting theory, as the term is defined in this text, exclusively developed and refined through the research process?
> Comment on the following statement: Cash flow from operating activities is the most important section of the SCF. Hence, analysis should be focused on this section.
> How can political factors be an input into accounting policy-making if the latter is concerned with governing and making the rules for financial accounting?
> Of the three inputs to the accounting policy-making function, which do you think is the most important?
> 1.Refer to either a current intermediate accounting text or a guide to current “generally accepted accounting principles.” Give at least one example for each of the four cells of Exhibit 9-1 (your instructor may desire to modify this problem). 2. Compare
> Williams and Ravenscroft (2015) question decision usefulness as the basis for accounting standards. Take a position and argue its merits.
> Do you see an evolutionary process involving the documents and reports presented in this chapter? Explain.
> How can accounting move more toward becoming a science rather than an art? Discuss.
> What role should the AICPA assume in the possible development of “baby GAAP” standards?
> If you could relate materiality, disclosure, and conservatism to types of measurements (nominal, ordinal, interval, and ratio scale), how would you do so?
> How permanent do you think the postulates and principles underlying historical costing will be?
> The FASB and AICPA are considering the addition of “baby GAAP” for private companies. Take a position and argue why two GAAPs should or should not exist?
> The value of the firm is equal to the discounted value of the firm's free cash flows. Is it possible to forecast distant free cash flows? If not, what is the alternative?
> Why have management consulting operations created problems for the public accounting industry? How has SOX affected these problems?
> Is accounting theory really necessary for the making of accounting rules? Discuss.
> Every fall U.S. News and World Report comes out with a much awaited ranking of American colleges and universities (you may have even used it yourself). While there has been much criticism of the methodology that the magazine employs as well as some “fudg
> What are the implications of Young (2006) on the standards promulgated by standards setting bodies?
> Bradbury and Harrison (2015) study dissenting opinions in Financial Accounting Standards Board (FASB) standards. What changes, if any, do these opinions suggest need to be made in the conceptual framework?
> If different user groups do have different objectives, how might the situation be handled?
> Murphy, et al (2013) argue “living law” applies to conceptual frameworks. How does this perspective affect current frameworks?
> 1. Assume that an asset is being examined and it is determined that its cash flows would be $10,000 per year for four years (assume that all cash flows are received at the end of the year). The carrying value of the asset is $35,000 and its replacement c
> 1. What are the main distinctions between the Anglo-Saxon and the Continental models relative to accounting and financial reporting? Within the Anglo-Saxon group, how does the United States differ from other members of the group? What developments are le
> Should a CEO be evaluated based on one year's cash flows? Why or why not? (Your answer might be affected by your definition of cash flow.)
> How might the “capture” of auditors by auditees be mitigated?
> Evaluate the costs and benefits of the accounting standard-setting process (versus an unregulated environment).
> Liu and Espahbodi (2014) suggest that a firm’s dividend policy affects its propensity to smooth earnings. How might this finding affect financial statement analysis?
> Moehrle et al. (2010) respond to the FASB regarding possible financial statement presentation changes. Evaluate their response.
> The question of the usefulness of cost allocations (discretionary accruals and management compensation plans) has been introduced in this and previous chapters. What, if anything, would you do about (fixed) cost allocations? Don’t forget to consider poli
> Ball (2009) evokes the question of responsibility for the rash of accounting scandals in the 2000s. What actions do you propose to address the problem, if you agree that one exists?
> In July 2003, the SEC submitted to Congress its Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System. A year later, FASB issued its repl
> It might be said that we are slowly moving toward an asset-liability approach in the balance sheet. Which event situations support this statement?
> The IASB and FASB are pursuing a single, converged conceptual framework. The United States has a good start with SFAC No. 8. What additional changes should FASB make to further improve its conceptual framework?
> Why do we need international accounting standards? Why not simply let each country develop and use its own standards and let it go at that?
> Reexamine Exhibit 13.11. Explain the purpose of each performance measure. As a manager, which performance measure would you want to use. Which measure would you want used to evaluate you? Why? How would your decision change if your firm was experiencing
> To what extent should the liquidity measures revisions be considered if LIFO were to be eliminated from U.S. GAAP? Provide examples of those likely measures that would be affected. . As an interesting side note, what does the 2016 United States Budget es
> How do you think the efficient-markets hypothesis impacts the drafting of accounting standards? Bear in mind that many questions have been raised about the efficient markets hypothesis itself.
> Monsen (2001) proposes using cameral accounting to reduce the difficulties in preparing the Statement of Cash Flows using the direct method. Evaluate Monsen’s proposal from an implementation perspective.
> Broome (2004) recommends that the FASB should provide more guidance on classification of cash flows for the three sections. What guidance would you suggest?
> Why is the use of free cash flows increasing?
> What is cash flow? In your answer, be sure to reference the use to which it is put.
> Do you think that the indirect method of reporting cash flows from operations should be eliminated, allowing only the direct method in the SCFs? Discuss.
> 1. The usefulness of accounting data to investors and creditors for predictive purposes is necessarily forward looking. However, under generally accepted accounting principles, financial statements are constructed primarily as an historical record. Requi
> 1. A crucial question brought up in this chapter concerns the issue of whether the admittedly heterogeneous users of financial statements have highly diverse information needs in terms of their underlying objectives. State as carefully as you can (1) wh
> 1. Critique A Statement of Basic Accounting Postulates and Principles by a study group at the University of Illinois (it should be on reserve or otherwise made available to you). Your critique should cover, but not be restricted to, the following points:
> Why may interindustry income uniformity be more difficult to achieve than intraindustry uniformity, and what are the implications of this in terms of a conceptual framework project, specific accounting standards, and comparability of accounting income nu
> Morunga and Bradbury (2012) find that IFRS adoption may lead to some adverse disclosure results. Discuss their findings.
> What is the relationship between uniformity (both finite and rigid) and disclosure?
> 1. What is the relationship among agency theory, economic consequences, and signalling? Explain in depth 2. Benston (1982, p. 102), in an analysis of corporate social accounting and reporting (CSAR), says: “The social responsibility of accountants can be
> 1. During its long tenure, the CAP produced a total of 51 ARBs. While the CAP was in existence, another committee, the Committee on Terminology of the American Institute of Accountants (the previous name of the AICPA), prepared certain definitions. Asses
> 1. Assume that three accountants have been selected to measure the income of a firm under two different income measurement systems. The results for the first income system (M1) were incomes of $3,000, $2,600, and $2,200. Under the second system (M2), res
> Do you think that the income tax return mandated by the federal government is an example of user heterogeneity? Why or why not?
> Past viewpoints expressed that financial statement preparers are also the largest class of users of financial statements. Hence, the preparer has a “unique ability” to recognize user needs that the FASB does not really appreciate. Critique this viewpoint
> Under an accountability orientation, Ijiri makes a strong case for the use of historical costing including the possibility of general price-level adjustments. Why do you think he has made this choice?
> Why has Ijiri advocated the need for a conceptual framework to implement accountability?
> What potential conflicts are present in terms of different user needs?
> Why is income smoothing difficult to research, and what are the research findings to date?
> How do the research orientations of accounting in Chapter 2 compare with SATTA’s organization of research?
> APB Statement 4 defines assets in the following terms: “Assets are economic resources of an enterprise that are recognized and measured in conformity with generally accepted accounting principles. Assets also include certain deferred charges that are not
> Why is the problem of heterogeneous users so critical in the development of accounting theory?
> Do you think that the standards mentioned in ASOBAT are really standards? Why or why not?
> Do you think that the funds flow statement is more “factual” and less “interpretative” than the income statement and balance sheet?
> How do objectives differ from postulates?
> 1. Agency theory takes the view that the corporation is the locus or nexus of many competing and conflicting interests. List as many of these conflicting groups as you can and discuss in detail the nature of their conflicts with other groups. 2. Using th
> 1. Presented in the exhibit for Case 1 (see text) is a graph of accounting income, cash flows from operations, and working capital flows from operations for W. T. Grant Company, a retailer that filed for bankruptcy in 1976. As late as 1973, the company’s
> 1. Discuss as many of the potential trade-offs among the qualities mentioned in SFAC No. 8 as you can and give either a general or a concrete example of each one. 2. Analyze three accounting standards promulgated by the FASB and show how economic consequ
> In 2003, South Africa was the first country to adopt IFRS with fair value accounting. The country does not allow for differential accounting treatment depending on the size of enterprise. What type of response do you expect from this implementation?
> Describe the incentives that might motivate income smoothing, and the ways it could be done.
> The comingling of legal and contingent liabilities exists under current GAAP accounting. Discuss potential problems this creates and propose alternatives to address them.
> Since the FASB makes the standards that are used by business and industry, they make accounting theory. Comment on this statement.
> Do you think that changes brought about in accounting standards by failures of publicly traded companies such as Enron should be classified under political factors or economic decisions? Support your position.
> What type of measurement is the measurement of objectivity in Equation (1.1): nominal, ordinal, interval, or ratio scale?
