Larimer Corporation prepares its financial statements in accordance with IFRS. Larimer acquired equipment by issuing 5,000 shares of its common stock. How should this transaction be reported on the statement of cash flows?
- As an outflow of cash from investing activities and inflow of cash from financing activities.
- As an inflow of cash from financing activities and an outflow of cash from operating activities.
- At the bottom of the statement of cash flows as a significant noncash transaction.
- In the notes to the financial statements as a significant noncash transaction.
4. This transaction did not involve an exchange of cash; therefore, it is not included on the statement of cash flows. IFRS requires that significant noncash transactions be reported in the notes to the financial statements. (Note that for U.S. GAAP, if there are only a few significant noncash transactions, they may be reported at the bottom of the statement of cash flows, or they may be reported in a separate schedule in the notes to the financial statements.)
Ward, a consultant, keeps her accounting records on a cash basis. During year 2, Ward collected $200,000 in fees from clients. At December 31, year 1, Ward had accounts receivable of $40,000. At December 31, year 2, Ward had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Ward's service revenue for year 2?
collected + End. AR − Beg. AR + Beg. unearned fees − End. unearned fees = Accrual basis service revenue
$200,000 + $60,000 − $40,000 + 0 − $5,000 = $ 215,000
As an alternative, T-accounts can be used.
Reid Partners, Ltd., which began operations on January 1, 20X3, has elected to use cash-basis accounting for tax purposes and accrual-basis accounting for its financial statements.
Reid reported sales of $175,000 and $80,000 in its tax returns for the years ended December 31, 20X4 and 20X3, respectively. Reid reported accounts receivable of $30,000 and $50,000 in its Balance Sheets as of December 31, 20X4 and 20X3, respectively.
What amount should Reid report as sales in its Income Statement for the year ended December 31, 20X4?
2. When converting from cash-basis sales to accrual-basis sales, sales must be adjusted for the net change in accounts receivable. There has been a net decrease in receivables of $20,000 over the course of the year from $50,000 to $30,000. Thus, accrual sales would decline by $20,000 as compared to cash sales (which included the additional receivables collected). Therefore, this response of $155,000 ($175,000-$20,000) is correct.
A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company's internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1?
1. Correct! An equity security is valued using Level 1 prices whenever those prices are available. The quoted price for an identical security is Level 1 and therefore is the most robust fair value for this security.
Which of the following is an accepted valuation technique for fair value estimates?
- The conservative approach
- The residual value approach
- The cost approach
- The consistent approach
3. This answer is correct. The accepted valuation approaches in ASC Topic 820 are the cost approach, the market approach, and the income approach.
Which of the following is an assumption used in fair value measurements?
- The asset must be in use.
- The asset must be considered in exchange.
- The most conservative estimate must be used.
- The asset is in its highest and best use.
4. For valuation purposes, the highest and best use would maximize the value of the asset.
A company has the following accrual-basis balances at the end of the first year of operation:
Unearned consulting fees $ 2,000
Consulting fees receivable 3,500
Consulting fee revenue 25,000
The company’s cash-basis consulting revenue is what amount?
2. This answer is correct. Cash-basis consulting revenue is the consulting fee revenue of $25,000, plus the cash received from unearned consulting fees of $2,000, less the consulting fees receivable of $3,500. Cash-basis consulting revenue is equal to $23,500 ($25,000 + $2,000 – $3,500).
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on
- Generally accepted accounting principles.
- Reporting for regulators.
- The need for conservatism.
- The needs of the users of the information.
4. Per SFAC 8, the objectives of financial reporting focus on providing present and potential investors and creditors with information useful in making investment decisions. Financial statement users do not have the authority to prescribe the data they desire. Therefore, they must rely on external financial reporting to satisfy their information needs, and the objectives must be based on the needs of those users.
Within the context of the qualitative characteristics of accounting information, which of the following is a fundamental qualitative characteristic?
- Confirmatory value
1. Relevance and faithful representation are the two primary qualitative characteristics of financial information.
Which of the following statements concerning the determination of fair value at the date an asset is acquired or a liability is assumed is/are correct?
I. The exit price is conceptually different than the entry price.
II. The entry price and the exit price may be different amounts at the date an asset or liability is initially recognized.
- I only.
- II only.
- Both I and II.
- Neither I nor II.
3. Both Statement I and Statement II are correct. An exit price and an entry price are conceptually different (Statement I) and in practice an entry price and an exit price may be different amounts at the date an asset or liability is initially recognized (Statement II). Such a difference may come about, for example, because the entry price is based on a transaction between related parties or because the selling entity was under financial duress at the time of the sale.
Bixby Company is in its first year of operations. Bixby estimates its annual warranty expense at 2% of net annual sales. Bixby provides its customers with a three-year warranty plan. Expected warranty expense is shown below:
YearExpected warranty expensePresent value discounted at 8%
Year 1 $40,000 $37,037
Year 2 10,000 8,573
Year 3 10,000 7,938
Total $60,000 $53,548
The current borrowing rate for Bixby is 8%. Bixby can contract with a third party to provide the warranty work. The cost for a contract to settle the warranties is $57,000. If Bixby elects the fair value option to report warranty obligations, at what amount will the warranty liability be recorded on the balance sheet?
3. This answer is correct. ASC Topic 825 provides that a company can elect the fair value option to record its warranties if the warranty liability can be satisfied by contracting with a third party. ASC Topic 820 provides that the fair value is the exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the principal or most advantageous market. Therefore, if the fair value option is elected, the fair value of the warranty liability is the cost to settle or transfer the liability in the market.
What is the underlying concept that supports estimating a fixed asset impairment charge?
- Substance over form.
- Faithful representation.
4. An estimate of an impairment charge to a fixed asset can only be a faithful representation if the entity has applied impairment rules properly, disclosed the process of arriving at the impairment estimate and disclosed any uncertainties that affect the impairment estimate. Assuming the above is true, and no other estimate is better than the derived estimate, then the estimate is comprised of the best available information. Therefore, it is a faithful representation.
According to the FASB conceptual framework, an entity's revenue may result from
- A decrease in an asset from primary operations.
- An increase in an asset from incidental transactions.
- An increase in a liability from incidental transactions.
- A decrease in a liability from primary operations.
4. Per SFAC 6, revenues are inflows of assets or settlements of liabilities, or both, during a period as a result of an entity's major or primary operations. Two essential characteristics of revenues are that revenues (1) arise from a company's primary earnings activities and (2) are recurring or continuing in nature. Therefore, this answer is correct because it meets the above criteria.
Which of the following is true about financial statement requirements under IFRS?
- Prior year comparative financial statements are required.
- Income statements for three years are required.
- Balance sheets for three years are required.
- There are no specific requirements regarding comparative financial statements.
1. The IFRS requires the presentation of prior year financial statements for comparative purposes.