Exam 2: Qualities of Accounting Information

The Financial Accounting Standards Board sets international financial reporting standards (IFRS).

For each of the following situations discuss whether the accounting treatment is proper and,if not proper,what accounting principle is violated.Discuss the ethical and financial statement implications of each of the improper treatments. A.A service company records revenue when cash is collected in advance of performing the service. B.The owner used the cash received from a company bank loan to buy a car for his own personal use.The car was recorded as a company asset. C.A company records revenue when earned even when the cash has not yet been received. D.Land purchased ten years ago for $20,000 is reported on the balance sheet at its current value of $30,000.The company follows U.S.GAAP in preparing financial statements. E.Inventory purchased last month and sold this month was deducted as an expense on this month's income statement.

Preventive controls are ________.

Both Company A and Company B use accrual accounting.Both have $80,000 in sales revenues and $50,000 in expenses for their first month of business.Company A allows cash sales only.Company B sells to its customers on account and as of the end of the month its customers owe $30,000.Show how Company A's and B's four financial statements compare by putting an X under either the Same or Different column for each of the statements.

The current ratio measures a company's ability to pay its bills.

It requires more judgment to use ________ than to use ________.

On July 1,Team Shirts paid $600 for three months' worth of advertising beginning on July 1.What is the balance in the Prepaid advertising account at August 31?

On July 1,Team Shirts paid $600 for three months' worth of advertising beginning on July 1.What is the balance in the Prepaid advertising account at July 31?

What is profit?

Ima Knerd is happy with the progress of her computer repair business.She has made a profit in each of the past six months.However,her accountant is worried because the current ratio for the business is 0.80.Explain to Ima why this is a concern.

Preventive controls are designed to prevent an error or irregularity.

River Runners,Inc.reported the following information in its financials for the year ended December 31,2012: 1.What were the company's revenues? 2.How much of the past profits have been kept by the company as of December 31? 3.How much do customers owe River Runners as of December 31,2012?

Indicate with an "X" whether each item is an asset,liability or shareholders' equity account.There is only one correct answer for each.

IFRS and U.S.GAAP are the same in all respects.

For each description,identify with an "X" whether the item is either an asset (A),liability (L)or shareholders' equity (SE)account on the balance sheet or a revenue (R)or expense (E)on the income statement.There is only one correct answer for each description.

The accounting rule which assumes that Team Shirts is continuing in business for an indefinite period of time is the ________.

During its first year of business,Mega,Inc.earned revenues of $400,000,of which it collected only $310,000 in cash.Which of the following statements is CORRECT?

Team Shirts ordered T-shirts from its supplier in June.The T-shirts were delivered in July.Team Shirts paid the bill in August and sold the T-shirts in September.When should Team Shirts recognize an expense using accrual accounting?

The current ratio measures the ________.