Using the definition of a liability from FASB Concepts Statement No. 6, indicate whether each of the following should be listed as a liability by Pauli Company. (a) Pauli was involved in a highly publicized lawsuit last year. Pauli lost and was ordered to pay damages of $125 million. The payment has been made. (b) In exchange for television advertising services that Pauli received last month, Pauli is obligated to provide the television station with building maintenance service for the next four months. (c) Pauli contractually guarantees to replace any of its stain-resistant carpets if they are stained and can’t be cleaned. (d) Pauli estimates that its total payroll for the coming year will exceed $35 million. (e) In the past, Pauli has suffered frequent vandalism at its storage warehouses. Pauli estimates that losses due to vandalism during the coming year will total $3 million.
> Give three common examples of contra accounts. Explain why contra accounts are used.
> Tom Obstinate is disgusted by all of the emphasis being put on international accounting issues. Tom plans to practice accounting in the United States, with U.S. companies, using U.S. GAAP. Accordingly, Tom sees no reason to know anything about the Intern
> Accounts of Pioneer Heating Corporation at the end of the first year of operations showed the following balances. In addition, prepaid operating expenses are $4,000, and accrued sales commissions payable are $5,900. Investment revenue receivable is $1,00
> FASB ASC Subtopic 715-60 requires companies to recognize a liability for their obligation to pay for retirees’ health care. Prior to this rule, most companies recognized no liability for their health care promises to employees, although an economic liabi
> For each situation, reconstruct the adjusting entry that was made to arrive at the ending balance. Assume statements and adjusting entries are prepared only once each year. 1. Prepaid Insurance: Balance beginning of year ……………………………… $3,600 Balance end o
> The “due process” system of the FASB encourages public input into the standard-setting process. It invites written comments, holds public hearings, and often changes proposed standards in response to this input. However, some observers have suggested tha
> Upon inspecting the books and records for Wernli Company for the year ended December 31, 2013, you find the following data: (a) A receivable of $640 from Hatch Realty is determined to be uncollectible. The company maintains an allowance for bad debts for
> Quality Enterprises Inc. issued its 2012 financial statements on February 22, 2013. The auditors expressed a “clean” opinion in the audit report. On July 14, 2013, the company filed for bankruptcy as a result of the inability to meet currently maturing l
> Explain the significance of a company meeting or beating analysts’ earnings forecasts for many quarters in a row.
> In analyzing the accounts of Sydney Corporation, the adjusting data listed below are determined on December 31, the end of an annual fiscal period. (a) The prepaid insurance account shows a debit of $6,000, representing the cost of a 2-year earthquake in
> Emilio Valdez worked for several years as a loan analyst for a large bank. He recently left the bank and took a management position with Positron, a high-tech manufacturing firm. Emilio prepared for his first management meeting by extensively analyzing P
> Georgia Supply Corporation, a merchandising firm, prepared the following trial balance as of October 1: Georgia Supply engaged in the following transactions during October 2013. The company records inventory using the perpetual system. Oct. 1 Sold merc
> Describe the structure of the FASB. Where does the FASB get its operating funds?
> Assume that you just inherited $1 million. You are aware that numerous studies have shown that investments in equity securities (stocks) give the highest rate of return over the long run. However, you are not sure in which companies you should invest. Yo
> Tarazania is a country with a small but active stock market. However, the country has no accounting standards; in fact, the issuance of financial statements is illegal. This odd law stems from the fact that the founding king of Tarazania once took an int
> 1. One of the elements on a financial statement is comprehensive income. Comprehensive income excludes changes in equity resulting from which of the following? (a) Loss from discontinued operations (b) Unrealized loss from foreign currency translation (c
> There are two general types of financial analysts: • Buy-side analyst. An analyst employed by an entity, such as a mutual fund, which invests on its own accounts. Unlike that of the sell-side analysts employed by brokerage firms, research produced by buy
> One of the underlying assumptions of the accounting model is the going concern assumption. When this assumption is questionable, valuation methods used for assets and liabilities may differ from those used when the assumption is viable. For each of the f
> Tooele Company is publicly traded. However, its chief executive officer (CEO), Kara Brown, is considering taking the company private in a leveraged buyout (LBO). One of the primary motivations for the LBO is dissatisfaction with the amount of time Kara m
> Jonathan Atwood, a student from England, shows you the following balance sheet from his father’s British company. Jonathan knows that you are studying accounting and asks you to look at the statement. You immediately recognize some diff
> In each of the following independent situations, an example is given involving one of the five traditional assumptions of the accounting model. For each situation, identify the assumption involved (briefly explain your answer). 1. A subsidiary of Parent
> A building was purchased for $100,000 on January 1, 2008. It was estimated to have no salvage value and to have an estimated useful life of 20 years. On January 1, 2013, the estimated useful life was changed from 20 years to 30 years. Compute depreciatio
> The company has the following three potential obligations. Describe how each will be reported in the financial statements. (a) The company has promised to make fixed pension payments to employees after they retire. The company is not certain how long the
> Fleming Company has two divisions, E and N. Both qualify as business components. In 2013, the firm decides to dispose of the assets and liabilities of Division N; it is probable that the disposal will be completed early next year. The revenues and expens
> As Beechnut Mining Company’s independent certified public accountant, you find that the company accountant posts adjusting and closing entries directly to the ledger without formal entries in the general journal. How would you evaluate this procedure in
> In each of the following independent situations, an example is given requiring a trade-off between the qualitative characteristics discussed in the text. For each situation, identify the relevant characteristics and briefly discuss how satisfying one cha
> Use the following information to compute income from continuing operations and net income. Assume that the income tax rate on all items is 35%. Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> For each situation listed, indicate by letter the appropriate qualitative characteristic(s) or accounting concept(s) applied. A letter may be used more than once, and more than one characteristic or concept may apply to a particular situation. 1. Goodwil
> Refer to the data in Practice 4-11. Repeat the exercise, assuming that Division E is being discontinued. Also assume that instead of a $2,000 pretax loss on the disposal, there was a $1,500 pretax gain. In Practice 4-11 Fleming Company has two divisions
> For each of the following independent situations, identify the relevant objective(s) of financial reporting that the company could be overlooking. Discuss each of these objectives. 1. The president of Daughters, Inc. believes that the financial statement
> Explain the significance of the figure in Exhibit 6-2. Exhibit 6-2 Standardized distribution of annual net income 2000 1500 1000 500 -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 Earnings Interval Frequency
> Prepare two balance sheets, one using the information in Practice 2–8 and the other using the information in Practice 2–9. In Practice 2–8 Use the following account balance information to construct a trial balance: Cost of Goods Sold ……………………………. $ 9,0
> Determine whether the following statements are true or false. If a statement is false, explain why. 1. Comprehensive income includes changes in equity resulting from distributions to owners. 2. Timeliness and predictive value are both characteristics of
> Use the following information to compute income from continuing operations. Assume that the income tax rate on all items is 40%. Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Following is a balance sheet presented in standard U.S. format. Rearrange this balance sheet to be in standard British format. Don’t worry about differences in terminology; use the U.S. labels, but present the information in the British format. Current
> Refer to the IBM information in Exhibit 4-5. Compute income from continuing operations as a percentage of total revenue for 2007, 2008, and 2009. EX 4-5 INTERNATIONAL BUSINESS MACHINES INCOME STATEMENT Consolidated Statement of Earnings (USD $) 12 M
> What conditions led to the establishment of accounting standard-setting bodies in the United States?
> Using the following information, compute (a) Total contributed capital, (b) Total accumulated other comprehensive income, and (c) Total stockholders’ equity: Additional Paid-In Capital, Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> You are a senior staff member in the office of the Chief Accountant of the Securities and Exchange Commission (SEC). You have been supervising a case brought against an audit firm. The audit client used non-GAAP accounting practices that allowed it to re
> Using the following information, compute: (a) Total contributed capital, (b) Ending retained earnings, and (c) Total stockholders’ equity: Additional Paid-In Capital, Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Using the following information, prepare a multiple-step income statement. Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000 Interest expense . . . . . . . .
> Technology Unlimited, Inc., uses a fiscal year ending June 30. The auditors completed their review of the 2013 financial statements on September 8, 2013. They discovered the following subsequent events between June 30 and September 8. (a) Technology spli
> The company has the following three loans. As of December 31 of this year, identify which of the three should be classified as current and which should be classified as noncurrent. (a) On July 15 of next year, Loan A will become payable on demand. (b) Lo
> Using the following information, prepare a multiple-step income statement. Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000 Interest expense . . . . . . . .
> The company has the following three loans payable scheduled to be repaid in June of next year. As of December 31 of this year, identify which of the three should be classified as current and which should be classified as noncurrent. (a) The company inten
> The following information describes the company’s costs incurred during the year: How much expense should be recognized for the year? Length of Amount Expense Recognitlon Method Allocation Matched Revenue of Cost Perlod Recognized
> From the following list of accounts, prepare a balance sheet showing all balance sheet items properly classified. (No monetary amounts are to be recognized.) Accounts Payable Accounts Receivable Accumulated Depreciation—Buildings Accumulated Depreciation
> You are an analyst for an investment fund that invests in initial public offerings (IPOs). You are looking at the financial statements of two companies, Clark Company and Durfee Company, that plan to go public soon. Net income for the past three years fo
> Explain the nature and the purpose of (a) Adjusting entries and (b) Closing entries.
> The company sells custom-designed engineering equipment. During the most recent year, the company received the following customer orders: For Machine A, selling price = $125,000, production cost = $67,000 For Machine B, selling price = $235,000, producti
> Using the definition of an asset from FASB Concepts Statement No. 6, indicate whether each of the following should be listed as an asset by Ingalls Company. (a) Ingalls has legal title to a coal mine in a remote location. Historically, the mine has yield
> How do auditors react to the existence of an earnings-based bonus plan in the company being audited?
> Chris Titera is the chief financial officer (CFO) for Dallas Company. It is January 10, and Chris has just finished compiling the preliminary financial results for the most recent fiscal year, which ended on December 31. The preliminary results indicate
> State how each of the following accounts should be classified on the balance sheet. (a) Treasury Stock (b) Retained Earnings (c) Vacation Pay Payable (d) Foreign Currency Translation Adjustment (e) Allowance for Bad Debts (f) Liability for Pension Paymen
> Benjamin Vincent is the chief financial officer (CFO) of Annie Company. The company’s chief executive officer (CEO) has asked Benjamin to design an incentive scheme that will motivate employees to focus more on the company’s bottom-line results. Benjamin
> A balance sheet contains the following classifications: (a) Current assets (b) Investments (c) Property, plant, and equipment (d) Intangible assets (e) Other noncurrent assets (f) Current liabilities (g) Long-term debt (h) Other noncurrent liabilities (i
> John Sleaze and Mary Scum run Earnings Management, Inc., a consulting business. They have the following items in their product line: 1. A database that lists types of depreciable assets and the minimum and maximum depreciation lives that have been accept
> On December 31, the warranty liability was estimated to be $100,000. On January 16 of the following year, it was learned that one week before, on January 9, poor-quality materials were introduced into the production process. This mistake is expected to c
> Heidelberg Company has been in business for 100 years. The past three years have been trying ones for the company, which has reported operating losses in each of those three years. The board of directors is planning a huge, year-long celebration of the c
> Why are independent audits necessary?
> On December 31, the warranty liability was estimated to be $150,000. On January 16 of the following year, results of a study done before December 31 were received. These study results indicate that products would require a much larger amount of warranty
> Cruella DeVil is the chief financial officer (CFO) of a local publicly traded company. She was recently invited to speak to accounting students at the local university. One of the students asked Cruella whether she thought earnings management was ethical
> First Federal Finance Co. has a large investment securities portfolio. In the “old days,” First Federal was allowed to value these securities at the lower of cost or market. U.S. GAAP now requires current market valuation on the balance sheet for most se
> Use the information in Practice 3-2 to compute the proportion of total assets in each of the following asset categories. Assume that the list contains all the asset items. (a) Inventory (b) Property, Plant, and Equipment In Practice 3-2 Goodwill . . . .
> Dalian Company is a Chinese state-owned enterprise. This means that ownership of the company rests in one of the ministries of the Chinese central government. Ministry officials have decided to sell a portion (40%) of the government’s ownership interest
> What is one way to distinguish between earnings management that is ethically right and earnings management that is ethically wrong?
> The Piedmont Computer Company has brought legal action against ATC Corporation for alleged monopolistic practices in the development of software. The claim has been pending for two years, with both sides accumulating evidence to support their positions.
> What factors influence whether a manager actually violates GAAP in an effort to manage earnings?
> 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?
