Exam 3: Financial Reporting Concepts

The conceptual framework of accounting

Which of the following is not a component of five-step framework to the contract-based approach of revenue recognition?

Comfort King Ltd. sells central air units and furnaces to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes installation, maintenance on the central air unit for two years, and a one-time furnace cleaning, which will occur when the central air unit is installed. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation, central air maintenance, and furnace cleaning services separately to its customers as follows: installation fee $ 400, annual central air maintenance fee $ 250, and furnace cleaning fee $ 100. Comfort King installed the unit and cleaned the furnace on May 20, 2021, and was immediately paid the agreed-upon price by Jack Frost. Instructions Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so. 1. Is there a contract? 2. What is the performance obligation? 3. What is the transaction price? 4. Is there a need to allocate the selling price? 5. Has the performance obligation been satisfied?

The conceptual framework does not include

If goods are shipped FOB shipping point, the selling company cannot recognize the revenue until the goods are received at their destination.

Faithful representation means that accounting information reports on the economic reality of a transaction, not its legal form.

Canadian GAAP allows private companies the choice to adopt ASPE instead of IFRS since the cost to private companies of providing financial statements prepared under IFRS is often greater than the benefits. This statement is an example of which of the following concepts and constraints?

If goods are shipped FOB destination, the selling company can recognize revenue when the goods are shipped.

Financial statements are designed to provide information about all of the following except

The following are independent situations observed by Aqua Company's senior accountant at December 31, 2021, the company's year end. Aqua Company has not adopted the revaluation model for accounting for long-lived assets. 1. Aqua purchased land in February at a cost of $ 60,000 for the purpose of expanding the size of their parking lot, although this project has not yet been started at year end. Due to increases in real estate values, this land has a value of $ 100,000 by year end. An entry to record this increase in value has been recorded, crediting "Gain on Land." 2. One of the items making up Aqua 's total current assets of $ 354,000 is an amount of $ 1,400 for Supplies. The company owner asks one of the accounting staff whether she thinks this balance is correct. The staff person takes two days of work time to count the actual supplies on hand and another day to research the exact cost of the items, and subsequently adjusts the balance of Supplies to its exact balance of $ 1,425. As a result of this task, the month-end financial statements are submitted to the company's lender two days after the reporting deadline. 3. A $ 96,300 payment for a 12-month insurance policy effective March 1 had been debited to Insurance Expense. 4. Included in Accrued Interest Payable is interest on a $ 200,000, 3% note payable. Interest has been paid to December 2, 2021. Accrued interest payable was calculated and recorded as $ 500 by applying the following formula: $ 200,000 x 3% x 1÷12. However, the accountant was concerned because part of December's interest has already been paid and the formula included a full month's accrual. He therefore reduces the accrued interest payable by $ 33 ($ 200,000 x 3% x 2÷365). 5. On January 15, 2022, before the financial statement preparation for December 31, 2021 had been completed, a fire destroyed General's warehouse, which had a carrying value of $ 1,500,000, and inventory with a cost of $ 900,000. The lost assets are insured, but will result in a 6-month interruption in business while being reconstructed. No mention of this event is found in the financial statements. 6. The company completed its year-end inventory count and the controller noticed that obsolete inventory had been included in the physical count and that it was valued at its original cost less an obsolescent factor of 10%. When the controller asked how long the inventory had been on hand, he was told that it was 4 years old; most of their inventory is 6 months old. Instructions For each of the events, indicate the accounting assumption, concept, or constraint that has been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Aqua's financial statements comply with GAAP.

The elements of financial statements are the key ratios that a company will use to manage its business.

Which of the following violates the monetary unit concept when measuring, recording, and reporting financial information?

Ed Sullivan Sailing Ltd. sold $ 175,500 of boat parts on credit in September. A total of 30% of the goods were shipped FOB destination and 70% were shipping FOB shipping point. At September 30, $ 25,000 of the goods that were FOB destination, were in transit. During September the company collected $ 100,000 cash from its customers. The company estimates that about 2% of the sales will become uncollectible and that about 8% of the sales will be returned by the customer. How much revenue should the company recognize for the month?

In the year of a change in an accounting policy, the change and its impact must be disclosed in the notes to the financial statements.

If accounting information has confirmatory value, it

Accounting information is neutral if it makes a difference in a decision.

Financial statements are prepared for an economic business unit that is separate and distinct from its owners. This is referred to as

The enhancing qualitative characteristics, such as comparability and timeliness, must be applied first before the characteristic of relevance in order to provide the most usefulness to the decision makers.

For each of the independent situations described below, list the assumption, concept, constraint, or recognition criteria that have been violated, if any. List only one term for each case. 1. Chris Burgess, MD, had the clinic accountant prepare his personal tax return. He paid the accountant using clinic funds and debited the clinic's "Professional Fees" account. 2. Chu Company does not use an account for allowance for doubtful accounts. Instead, accounts receivable are written off directly to Bad Debt Expense if they remain unpaid after 24 months. 3. Equipment is carried at its fair value on the Chipawa Company balance sheet, which is $ 25,000 higher than cost. Fontaine Chipawa has not adopted the revaluation model for accounting for long-lived assets. 4. Depreciation Expense for Rowland Company is $ 15,000. The company will have a net loss of $ 12,000 if the depreciation is recorded, but a profit of $ 3,000 if depreciation is deferred a year. The decision is made to defer the depreciation to next year which is expected to be more profitable. 5. The land of Fountain Company is appraised at $ 200,000 more than its cost. The new accountant for the company recommends booking the appraised value and showing a "Gain from Revaluation" on the income statement. Fountain Company has not adopted the revaluation model for accounting for long-lived assets.

One of the conditions that must be met for revenue to be recognized is that the amount of the revenue can be reliably measured.