How are revenues and expenses different from gains and losses?
> Following are summaries of the balance sheets of five companies. The amounts are all stated as a percentage of total assets. The five companies are • BankAmerica, a large bank • Kelly Services, a firm that provides tem
> Refer to the GAAP oval in Exhibit 6-7. (a) In what important way is point E different from point C? (b) In what important way is point A different from point C? EX 6-7 THE GAAP OVAL The GAAP Oval D A B Lowest Highest GAAP GAAP Earnings Earnings
> Forbes annually provides a list of the most valuable companies in the world. The top 10 most valuable companies in the United States, from the 2010 Forbes 2000, follow. As an analyst for a securities broker, you are asked the following questions concer
> Use the information in Practice 3-7 to compute the debt ratio. Assume that the list includes all liability and equity items. In Practice 3-7 Additional Paid-In Capital, Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> What is a benefit of a company’s reporting a pro forma earnings number? What is a danger with pro forma earnings numbers?
> 1. Which of the following is the true purpose of information presented in notes to the financial statements? (a) To provide disclosures required by generally accepted accounting principles. (b) To correct improper presentation in the financial statements
> What is a pro forma earnings number?
> Blake Matthews incorporated his paper manufacturing operations on January 1, 2013, by issuing 5,000 shares of $1 par common stock to himself. The following balance sheet for the new corporation was prepared. Looseleaf Corporation Balance Sheet January 1
> What major accounting action has been taken since Chairman Levitt’s speech in 1998 to limit the abuse of revenue recognition to manage earnings?
> What criteria are generally used (a) In classifying assets as current? (b) In classifying liabilities as current?
> The accountant for Delicious Bakery prepares the following condensed balance sheet. Delicious Bakery Condensed Balance Sheet December 31, 2013 Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> In what way is the concept of materiality contained in SAB 99 different from the traditional concept of materiality?
> The following balance sheet is submitted to you for inspection and review. Appalachian Freight Company Balance Sheet December 31, 2013 Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> (a) What is the purpose of internal earnings targets? (b) What is the risk associated with internal earnings targets?
> Stella Valerio is a financial analyst who follows Olsen Company and other companies in the same industry. You have just done a historical analysis of Stella’s earnings forecasts for Olsen Company and noticed that its earnings have exceeded Stella’s forec
> The bookkeeper for Chordwise Music, Inc., reports the following balance sheet amounts as of June 30, 2013. Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,800
> What type of company would be most likely to establish a cookie jar reserve?
> Distinguish between contingent liabilities and estimated liabilities.
> What accounting actions have been taken since Chairman Levitt’s speech in 1998 to limit the use of big-bath charges to manage earnings?
> (a) What is a subjective acceleration clause? (b) What is an objective acceleration clause? (c) How do these clauses in debt instruments affect the classification of a liability?
> What is the benefit of “taking a big bath”?
> List and describe the steps in the accounting process. Why are these steps necessary? Are any steps optional?
> How can expected refinancing impact the classification of a liability?
> Company A has created fictitious transactions to report more favorable earnings. Is it likely that this is the only action Company A has taken to manage earnings? Explain.
> Indicate under what circumstances each of the following can be considered noncurrent: (a) Cash and (b) Receivables.
> You are on the accounting staff of Chisos Manufacturing Company. Chisos has a $100 million loan with Rio Grande National Bank. One of the covenants associated with the loan is that Chisos must maintain a current ratio greater than 1.5. As of January 20,
> Is there anything wrong with using a different accounting estimate this year compared to last year so long as both estimates fall within a generally accepted range for your industry?
> What does the difference between current assets and current liabilities measure?
> What are the five labels in the earnings management continuum (see Exhibit 6-4), and what general types of actions are associated with each label? EX 6-4 THE EARNINGS MANAGEMENT CONTINUUM Sawy Aggressive Accounting Deceptive Accounting Transaction F
> “The balance sheet does not reflect the value of a business.” Do you agree or disagree? Explain.
> How does financial reporting impact a company’s cost of capital?
> What does the cost of capital mean?
> Distinguish between management accounting and financial accounting.
> How has the FASB used note disclosure as a tool of compromise?
> The flexibility that is a key part of the estimates and judgments inherent in accrual accounting allows desperate managers to manipulate the reported numbers. Why not do away with this flexibility and just require companies to report raw cash flow data w
> You are a manager with Doman & Detmer, a mid-sized local accounting firm. You have been with the firm for six years. Currently, you are working on the McMahon Company audit engagement. You are supervising a team of seven staff and senior accountants. You
> Under what circumstances may offset balances be properly recognized on the balance sheet?
> When the SEC launches an investigation against a company and finds evidence of misleading financial reporting, historically what type of punishments has the SEC used?
> What is the most common career path for a college graduate who starts out in public accounting?
> Describe one setting in which a manager might have an incentive to manipulate the accrual assumptions so that lower earnings are reported.
> Briefly describe the five traditional assumptions that influence the conceptual framework.
> What guidelines are used to match costs with revenues in determining income?
> Identify and describe five different measurement attributes.
> Name three exceptions to the general rule that assumes revenue is recognized at the point of sale. What is the justification for these exceptions?
> Distinguish between the recording and reporting phases of the accounting process.
> What are the three major categories in a corporation’s Equity section?
> You are a member of the most popular student club on campus, the Accounting Antidefamation Organization. Recently, the field of accounting was savagely attacked in an article written by a militant economics student group and published in the student news
> What two factors must be considered in deciding the point at which revenues and gains should be recognized? At what point in the revenue cycle are these conditions usually met?
> What three elements are contained in a balance sheet?
> What is the current numerical materiality standard in accounting?
> Income as determined by income tax regulations is not necessarily the same as income reported to external users. Why might there be differences?
> Of what value is consistency in financial reporting?
> What different measurement methods may be applied to net assets in arriving at income under the capital maintenance approach?
> Define comparability.
> After the necessary definitions and assumptions that support the determination of income have been made, what are the two methods of income measurement that may be used to determine income? How do they differ?
> Accounting is sometimes characterized as dealing only with the past. Give examples of how accounting information can be of value in dealing with the future.
> You are the controller for Cam-Ry Industries. Your company has recently received a large amount of unfavorable publicity because an SEC investigation uncovered a systematic 2-year effort by Cam-Ry’s management to manipulate reported earnings. The primary
> Does reliability imply absolute accuracy? Explain.
> Under IASB standards, how is a change in accounting principle reported?
> Distinguish between the qualities of relevance and reliability.
> Explain briefly the difference in accounting treatment of (a) A change in accounting principle and (b) A change in accounting estimate.
> Why is it so difficult to measure the cost effectiveness of accounting information?
> Which of the following would not normally qualify as an extraordinary item? (a) The write-down or write-off of receivables. (b) Major devaluation of foreign currency. (c) Loss on sale of plant and equipment. (d) Gain from early extinguishment of debt. (e
> One objective of financial reporting is understandability. Understand able to whom?
> Pop-Up Company has decided to sell its lid manufacturing division even though the division is expected to show a small profit this year. The division’s assets will be sold to another company at a loss of $10,000. What information (if any) should Pop-Up d
> Identify the major objectives of financial reporting as specified by the FASB.
> What are restructuring charges, and why do they generate controversy?
> Distinguish between (a) Real and nominal accounts, (b) General journal and special journals, and (c) General ledger and subsidiary ledgers.
> What are the main similarities and differences between a manual and an automated accounting system?
> List and explain the main reasons why a conceptual framework of accounting is important.
> Define comprehensive income. How does it differ from net income?
> What is the IASB? What is the SEC position regarding IASB standards?
> What is the general practice in reporting earnings per share?
> Why are differing national accounting standards converging to a common global standard?
> One of your clients overheard a computer manufacturer sales representative saying that the computer will make the accountant obsolete. How would you respond to this comment?
> What are the major types of notes attached to the financial statements?
> What are the major advantages of computers as compared with manual processing of accounting data?
> Why is standard setting such a difficult and complex task?
> Refer to the 2009 balance sheet for Consolidated Edison. 1. Compute the following financial ratios for Consolidated Edison for 2008: (a) Debt ratio (total liabilities/total assets) (b) Current ratio (current assets/current liabilities) (c) Long-term debt
> What has academic research shown with respect to earnings-based bonus thresholds?
> Is greater accuracy achieved in financial statements prepared from double-entry accrual data as compared with cash data? Explain.
> How does the fact that there are limited resources in the world relate to accounting information?
> Explain the relationship between financial accounting rules and tax accounting rules.
> Distinguish between accrual and cash-basis accounting.
> What is the best long-run business practice?
> According to the AICPA Code of Professional Conduct, what precept should guide members of the AICPA as they encounter conflicting pressures among their clients, investors, the business community, the government, and so forth?
> How do accounting standards impact the cost of capital?
> The text of the chapter includes discussion of seven stages in an earnings management meltdown. At what stage does the earnings management meltdown become public knowledge?
> What economic incentives do financial analysts sometimes have for overlooking a company’s glaring deficiencies and continuing to recommend it to investors as a “buy”?
> What costs and risks is an auditor balancing when signing an audit opinion?
> As indicated in the case at the beginning of this chapter, Xerox was manipulating income between the years 1997 through 1999. Below are revenue, gross profit, net income, and operating cash flow data for Xerox for the years 1997 through 2000. The secur
> A manager being pressured to meet expectations in the face of a downturn in operating performance can be tempted to turn to an accounting solution and use accrual estimates and judgments to manage reported earnings. How else might the manager respond to
> What are the seven elements of an earnings management meltdown?
> What is the AICPA? The AAA?
> What user careers require a knowledge of intermediate accounting issues?
> In what sense is financial reporting part of a company’s general public relations effort?
> Identify the criteria that an item must meet to qualify for recognition.
> With respect to pro forma earnings numbers, what recommendation made by the Financial Executives International (FEI) and the National Investor Relations Institute did the SEC endorse?
> What is conservatism in accounting? What is an example of conservatism in accounting practice?
> Describe the process one should use in forecasting depreciation expense.
