Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the “ground floor” of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items. You have told Neville that, unless you can take a look at its financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville’s most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240. The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.
Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.
> Omar Morena has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting. Instructions (a) Differentiate between financial accounting a
> Answer the following multiple-choice questions. 1. GAAP stands for: (a) Governmental auditing and accounting practices. (b) Generally accepted attest principles. (c) Government audit and attest policies. (d) Generally accepted accounting p
> Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false. 1. The objective of financial statements emphasizes a stewardship approach for reporting financial information. 2. The pur
> Presented below are four statements which you are to identify astrue or false. If false, explain why the statement is false. 1. GAAP is the term used to indicate the whole body of FASB authoritative literature. 2. Any company claiming compliance wi
> How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?
> What are some of the major challenges facing the accounting profession?
> The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?
> What is the “expectations gap”? What is the profession doing to try to close this gap?
> Differentiate between “financial statements” and “financial reporting.”
> What are the five steps used to determine the proper time to recognize revenue?
> One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?
> What are the primary advantages of having a Codification of generally accepted accounting principles?
> What is the difference between the Codification and the Codification Research System?
> Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.
> The chairman of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and lawyers rely less on
> What is Rule 203 of the Code of Professional Conduct?
> Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.
> How are FASB preliminary views and FASB exposure drafts related to FASB “statements”?
> In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
> If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
> What is a performance obligation, and how is it used to determine when revenue should be recognized?
> Differentiate broadly between financial accounting and managerial accounting.
> What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?
> The life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period. (a) This practice is based on the accounting assump
> Revenues, gains, and investments by owners are all increases in net assets. What are the distinctions among them?
> Why is it necessary to develop a definitional framework for the basic elements of accounting?
> Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material. (a) Legal fees paid in connection with the purchase of land are $1,500. (b) Eduardo, Inc. paves the driveway
> What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below? (a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements. (b) Target alloca
> If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in the financial statements for the following items. (a) Land. (b) Unamortized bond premium. (c) Depreciation expense on equipment. (d) In
> Vande Velde Company made three investments during 2014. (1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model. (2) It purchased 2,000 sha
> Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected. (b) Yaho
> Explain the revenue recognition principle.
> Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does n
> For each item below, indicate to which category of elements of financial statements it belongs. (a) Retained earnings (e) Depreciation (h) Dividends (b) Sales (f) Loss on sale of equipment (i) Gain on sale of investment (c) Additiona
> Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material. (a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces
> Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.) (a) The annual reports of Best Buy Co. are audited by certified public accountants. (b) Bl
> According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial
> Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material.) (a) The company changed its inventory method to FIFO from weighted-average,
> Match the qualitative characteristics below with the following statements. 1. Timeliness 5. Faithful representation 2. Completeness 6. Relevance 3. Free from error 7. Neutrality 4. Understandability 8. Confirmatory value (a) Quality of inform
> Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quali
> Access the glossary (“Master Glossary”) at the FASB Codification website to answer the following. (a) What is the definition of fair value? (b) What is the definition of revenue? (c) What is the definition of comprehensive income?
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marks-and-Spencer-Annual-report-and-financial-statements-20
> Briefly describe the fair value hierarchy.
> Your aunt recently received the annual report for a company in which she has invested. The report notes that the statements have been prepared in accordance with IFRS. She has also heard that certain terms have special meanings in accounting relative to
> Do the IASB and FASB conceptual frameworks differ in terms of the role of financial reporting? Explain.
> What two assumptions are central to the IASB conceptual framework?
> The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting. 1. Business reporting should exclude information outside of management’s expertise or for which management is not the best sour
> Anderson Nuclear Power Plant will be “mothballed” at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be matched to revenue. Accountants Ana Alicia and Ed Bradley a
> How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?
> Daniel Barenboim sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding, and ceiling joists. Shell houses are sold chiefly to customers
> Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs and revenues requires that costs resulting fr
> An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time pe
> What is the fair value option? Explain how use of the fair value option reflects application of the fair value principle.
> After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the reve
> Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting
> The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective a
> Presented below is information related to Cramer, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Cramer, Inc. (a) Depreciation expense on the building for the year was $60,000. Because the building was
> Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.InstructionsIn each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.(
> Presented below are a number of facts related to Weller, Inc. Assume that no mention of these facts was made in the financial statements and the related notes. Instructions Assume that you are the auditor of Weller, Inc. and that you have been ask
> Briefly describe the two fundamental qualities of useful accounting information.
> Presented below are a number of operational guidelines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (a) Fair value ch
> Presented below are the assumptions, principles, and constraint used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption 5. Measurement principle (historical cost
> Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Instructions Identify the element or elements associated with the 12 items below.(a) Arises from peripheral
> The chairman of the board of directors of the company for which you are chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of
> The qualitative characteristics that make accounting information useful for decision-making purposes are as follows. Instructions Identify the appropriate qualitative characteristic(s) to be used given the information provided below.(a) Qualitative ch
> SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (a) What is the quality of information tha
> Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) The fundamental qualitative characteristics that make accounting information useful are rel
> Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) Accounting rule-making that relies on a body of concepts will result in useful and consiste
> The treasurer of Landowska Co. has heard that conservatism is a doctrine that is followed in accounting and, therefore, proposes that several policies be followed that are conservative in nature. State your opinion with respect to each of the policies li
> What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.
> In January 2015, Janeway Inc. doubled the amount of its outstanding stock by selling on the market an additional 10,000 shares to finance an expansion of the business. You propose that this information be shown by a footnote on the balance sheet as of De
> What is the primary objective of financial reporting?
> Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) Within the main body of the financial statements, (b) In the notes to the financial statements, or (c) As supplementary in
> Distinguish among Accounting Research Bulletins, Opinions of the Accounting Principles Board, and Statements of the Financial Accounting Standards Board.
> Statement of Financial Accounting Concepts No. 5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics?
> What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?