Question & Answer

The earning of revenue by a business enterprise is recognized for accounting purposes when the transaction is recorded. In some situations, revenue is recognized approximately as it is earned in the economic sense. In other situations, however, accountants have developed guidelines for recognizing revenue by other criteria, such as at the point of sale. Instructions (Ignore income taxes.) (a) Explain and justify why revenue is often recognized as earned at time of sale. (b) Explain in what situations it would be appropriate to recognize revenue as the productive activity takes place. (c) At what times, other than those included in (a) and (b) above, may it be appropriate to recognize revenue? Explain.

Why do loans that can be prepaid on a moment’s notice complicate the bank’s assessment of interest rate risk? (LO3)

Give some examples of decisions you have taken recently that were made under conditions of uncertainty. With hindsight do you think you made the right decisions?

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 principles. 2. Accounting standard-setters use the following process in establishing accounting standards: (a) Research, exposure draft, discussion paper, standard. (b) Discussion paper, research, exposure draft, standard. (c) Research, preliminary views, discussion paper, standard. (d) Research, discussion paper, exposure draft, standard. 3. GAAP is comprised of: (a) FASB standards, interpretations, and concepts statements. (b) FASB financial standards. (c) FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations. (d) any accounting guidance included in the FASB Codification. 4. The authoritative status of the conceptual framework is as follows. (a) It is used when there is no standard or interpretation related to the reporting issues under consideration. (b) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue. (c) It takes precedence over all other authoritative literature. (d) It has no authoritative status. 5. The objective of financial reporting places most emphasis on: (a) reporting to capital providers. (b) reporting on stewardship. (c) providing specific guidance related to specific needs. (d) providing information to individuals who are experts in the field. 6. General-purpose financial statements are prepared primarily for: (a) internal users. (b) external users. (c) auditors. (d) government regulators. 7. Economic consequences of accounting standard-setting means: (a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard. (b) standard-setters must ensure that no new costs are incurred when a new standard is issued. (c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public. (d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information. 8. The expectations gap is: (a) what financial information management provides and what users want. (b) what the public thinks accountants should do and what accountants think they can do. (c) what the governmental agencies want from standard-setting and what the standard-setters provide. (d) what the users of financial statements want from the government and what is provided.

1.    What is the difference between a benefit corporation and a B Corporation?

In 2024, Juanita is married and files a joint tax return with her husband.  What is her tentative minimum tax in each of the following alternative circumstances?

What particular sectors might a distributional analysis of the impact of trade consider?

What are some of the cybersecurity issues facing fintech companies? (LO5)

Explain the analysis at the account level approach to developing a cost function.

Contrast the cash-basis method and the accrual method of accounting for warranty costs.

Stansfield Corporation had the following activities in 2014. 1. Payment of accounts payable $770,000. 4. Collection of note receivable $100,000. 2. Issuance of common stock $250,000. 5. Issuance of bonds payable $510,000. 3. Payment of dividends $350,000. 6. Purchase of treasury stock $46,000. Compute the amount Stansfield should report as net cash provided (used) by financing activities in its 2014 statement of cash flows.

What is a variable-interest entity?

What are some of the key obstacles for the FASB and IASB within their accounting guidance in the area of cash flow reporting? Explain.

In general terms, identify the similarities and differences between the corporate taxable income formula and the individual taxable income formula.

Explain Congress’s rationale for depreciation recapture.

Balanced scorecard measures Curry House owns a number of stores that sell fast food. As part of its compensation packages, Curry House provides employees with bonuses based on customer satisfaction surveys. Recent analysis of the data shows a positive correlation between survey ratings and sales; that is, as customer satisfaction increases, sales increase. However, at a certain point in this trend, sales plateau even though the ratings continue to increase. In addition, increasing customer satisfaction causes costs to also increase because more time is spent with each customer and more employees are on hand to help with food preparation and cashiering to reduce the time that customers wait for their food to be prepared. Other factors that appear to affect customer satisfaction are the general cleanliness of the store and the attitudes of the cashiers as they provide customer service. A factor that strongly affects sales at each store is its health rating from the local council. These ratings are published in the local daily newspaper. When a store has a low rating, sales at that outlet drop off until publication of an improved rating occurs. The owner wants to add one or more financial performance measures to the bonus package so that employees will earn more money when customer satisfaction increases at the same time that financial performance is also increasing.   Required                         (a)     Describe advantages and disadvantages of using a combination of performance measures reflecting the customer and financial perspectives. (b)     Management would like to add other customer-related measures and is considering replacing survey satisfaction with some other measure. List one potential measure and list at least one advantage and one disadvantage for it. (c)     List one additional performance measure that could be included in the compensation package. Explain what it is and what it would contribute. (d)     Explain how the scorecard measures (particularly the customer perspective) are being used in part as a boundary system.

Assume that the price of a good falls. How will an ‘efficient’ level of consumption be restored?

War tends to cause significant reactions in financial markets. Why might a war in the Middle East place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place downward pressure on U.S. interest rates? (LO2)

Samson Corporation issued a 4-year, $75,000, zero-interest-bearing note to Brown Company on January 1, 2014, and received cash of $47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

Cost function using high-low and regression; quality of cost estimates Following are sales and administrative cost data for Big Jack Burgers for four months:  Administrative cost is a mixed cost, and sales is a potential cost driver.   Required (a)          Using the high-low method, create a cost function for administrative costs. (b)          In your own words, explain why the high-low method might not be a good method for estimating the cost function. (c)           Create a scatter plot and add a trend line. After examining the plot, use your judgement to determine whether the cost is fixed, variable, or mixed. (d)          Perform regression analysis to create a cost function for administrative costs. (e)           Can we know for certain that the cost function from part (d) provides a good estimate for next month’s administrative costs? Why or why not? (f)           Discuss whether sales are an economically plausible driver for administration costs for Big Jack Burgers.(a)     Total revenue (TR) instead of quantity (Q) in the cost function because sales is a potential cost driver. Under the high-low method, the cost function is calculated using the highest and lowest values of the cost driver. First, the variable cost is calculated: ($68 333 – $43 333)/($1 132 100 – $632 100) = $25 000/$500 000 = 0.05  or 5% of sales   The fixed cost is determined by substituting the variable cost into one of the high-low data points: $68 333 = F + 5%×$1 132 100 F = $68 333 – $56 605 = $11 728   Thus, the total cost function is: TC = $11 728 + 5%×Sales   (b)        The high-low method uses the most extreme cost driver values, which could be outliers, that is, not represent the cost most of the time. That means that the cost function might not represent the actual cost, on average. Therefore, this cost function might provide poor estimates of future costs. (c)     Chart of data with trend line added by Excel; trend line extended to Y-axis (dashed line) using Word: It appears that the cost is most likely mixed. There is a general downward slope     (variable cost) that appears to meet the intercept enough above zero to suggest a    fixed cost. The upward slope of the line indicates that there are variable costs.   (d)     Following is the regression output. A t-statistic greater than 2 is often interpreted as meaning that the coefficient is significantly different from zero. Notice that the t-statistic for the intercept coefficient is 2.172, but the p-value is greater than 10% at 0.162. Based on the p-value, there is a 16% probability that the intercept (fixed cost) is not different from zero. Because this regression has few observations, the p-value result for the t-statistic is atypical. Additional judgement is required to decide whether it is appropriate to include a fixed cost in the cost function.             Analysis at the account level can be used to increase the understanding of this cost. If this cost pool includes items such as salaries and other fixed costs (insurance, etc.), the regression intercept can be used as an estimate of the fixed costs. Then, the cost function would be TC = $16 800 + 4.5% × sales. Alternatively, analysis at the account level might indicate that there are few fixed costs. In that case, fixed costs are likely to be zero and would be excluded from the cost function. Then, the cost function would be: TC = 4.5% × sales   (e)     Because of unforeseen changes in cost behaviour, a cost function may not provide a good estimate for the next month’s costs. The past costs used for estimation might not be representative, especially because so few observations were used in the estimation. Sales might not be the activity that drives administrative costs. There might be a change in business operations or in the economy that would cause future costs to be different than in the past. There might be a large discretionary component in administrative costs, causing fluctuations in cost that are unrelated to any cost driver.                     (f)      The cons of the high-low method as an estimation technique were discussed in Part B above. If there are only two or three data points, however, the high-low method may be the best option available. This method can be used in cases where there is not enough data to perform regression, and it can be further improved by adopting more representative data points than the highest and lowest values of the cost driver. If there are more data points, regression analysis incorporates all of the observations into the analysis. Therefore, the results rely on more complete information and provide a better estimate, on average. Both methods assume that the cost function is linear and that all data points come from a single relevant range. If these assumptions do not hold, then both methods may be unsuitable for estimating future costs. In addition, both of these methods assume that the data points are representative of future costs. Unusual cost items are assumed to continue in the future, and possible changes in costs such as those described in Part E are ignored.

Richardson Company cans a variety of vegetable-type soups. Recently, the company decided to value its inventories using dollar-value LIFO pools. The clerk who accounts for inventories does not understand how to value the inventory pools using this new method, so, as a private consultant, you have been asked to teach him how this new method works. He has provided you with the following information about purchases made over a 6-year period. Ending Inventory Date (End-of-Year Prices) Price Index Dec. 31, 2010 $ 80,000 100 Dec. 31, 2011 111,300 105 Dec. 31, 2012 108,000 120 Dec. 31, 2013 128,700 130 Dec. 31, 2014 147,000 140 Dec. 31, 2015 174,000 145 You have already explained to him how this inventory method is maintained, but he would feel better about it if you were to leave him detailed instructions explaining how these calculations are done and why he needs to put all inventories at a base-year value. Instructions (a) Compute the ending inventory for Richardson Company for 2010 through 2015 using dollar-value LIFO. (b) Using your computation schedules as your illustration, write a step-by-step set of instructions explaining how the calculations are done. Begin your explanation by briefly explaining the theory behind this inventory method, including the purpose of putting all amounts into base-year price levels.

Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume Ken files as a single taxpayer. Determine Ken’s gross income and complete page 1 of Form 1040 (through line 9) and Schedule 1 for Ken.

: Describe the concept of total quality management (TQM) and major TQM techniques, including quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous improvement.

During a tensile test, a metal has a true strain = 0.10 at a true stress = 37,000 lb/in2 . Later, at a true stress = 55,000 lb/in2 , true strain = 0.25. Determine the strength coefficient and strain-hardening exponent in the flow curve equation.

Boyne Inc. had beginning inventory of $12,000 at cost and $20,000 at retail. Net purchases were $120,000 at cost and $170,000 at retail. Net markups were $10,000; net markdowns were $7,000; and sales revenue was $147,000. Compute ending inventory at cost using the conventional retail method.