ch24.doc.pdf

CHAPTER 24 PRESENTATION AND DISCLOSURE IN FINANCIAL REPORTING CHAPTER LEARNING OBJECTIVES 1. Review the full disclosure principle and describe implementation problems. 2. Explain the use of notes in financial statement preparation. 3. Discuss the disclosure requirements for related-party transactions, subsequent events, and major business segments. 4. Describe the accounting problems associated with interim reporting. 5. Identify the major disclosures in the auditor's report. 6. Understand management’s responsibilities for financials. 7. Identify issues related to financial forecasts and projections. 8. Describe the profession's response to fraudulent financial reporting. *9. Understand the approach to financial statement analysis. *10. Identify major analytic ratios and describe their calculation. *11. Explain the limitations of ratio analysis. *12.

Describe techniques of comparative analysis.

* 13. Describe techniques of percentage analysis. * 14. Describe the guidelines for first-time adoption of IFRS. * 15. Describe the implementation steps for preparing the opening IFRS statement of financial position. * 16. Describe the exemptions to retrospective application in first-time adoption of IFRS. * 17. Describe the presentation and disclosure requirements for first- time adoption of IFRS.

24 - 2

Test Bank for Intermediate Accounting, IFRS Edition, 2e

TRUE-FALSE—Conceptual 1.

IASB rules directly affect financial statements, notes to the financial statements, and management commentary.

2.

The IASB has developed IFRS for small-and medium-sized entities that publish generalpurpose financial statement for external users but do not issue shares in a public market.

3.

IASB rules directly affect financial statements, notes to the financial statements, and supplementary information.

4.

Other types of information found in the annual report, such as management commentary and the letter to shareholders, are subject to IASB rules.

5.

The IASB and FASB require companies to provide expanded disclosure about their contractual obligations.

6.

The IASB has issued many pronouncements in the last 10 years that have substantial disclosure provisions.

7.

Accounting policies are the specific accounting principles and methods a company uses and considers most appropriate to present fairly its financial statements.

8.

In order to make adequate disclosure of related party transactions, companies should report the legal form, rather than the economic substance, of these transactions.

9.

If the loss on an account receivable results from a customer’s bankruptcy after the statement of financial statement date, the company only discloses this information in the notes to the financial statements.

10.

IFRS for SMEs is more complex than regular IFRS.

11.

The operating approach reflects how management segments the company for making operating decisions.

12.

IFRS requires that general-purpose financial statements include selected information on a single basis of segmentation.

13.

The IASB requires allocations of joint, common, or company-wide costs solely for external reporting purposes.

14.

If 10 percent or more of company revenue is derived from a single customer, the company must disclose the total amount of revenue from each such customer by segment.

15.

Companies should report accounting transactions as they occur, and expense recognition should not change with the period of time covered under the integral approach.

16.

Companies should generally use the same accounting policies for interim reports and for annual reports.

Full Disclosure in Financial Reporting

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17.

Income tax expense is recognized in each interim period based on the best estimate of the weighted-average annual income tax rate expected for the full financial year.

18.

A qualified opinion is issued when the exception to the standard opinion is not of sufficient magnitude to invalidate the statements as a whole.

19.

Management commentary helps in the interpretation of the financial position, financial performance, and cash flows of a company.

20.

While there are no formal IFRS requirement for management commentary, the IASB has initiated a project that offers a non-binding framework and limited guidance on its application, which could be adapted to the legal and economic circumstances of individual jurisdictions.

21.

The IASB and the FASB are proposing better ways to present information for businesses in the statement of financial position, including the separation of assets and liabilities into operating and investing categories.

22.

A financial projection is a set of prospective financial statements that present a company’s expected financial position, results of operations, and cash flows.

23.

The difference between a financial forecast and a financial projection is that a forecast provides information on what is expected to happen, while a projection provides information on what might take place but is not necessarily expected to happen.

24.

Fraudulent financial reporting is intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements.

25.

Influences in a company’s internal environment may relate to industry conditions, poor internal control systems, or legal and regulatory considerations.

True-False Answers—Conceptual Item 1. 2. 3. 4. 5. 6.

Ans. F T T F T T

Item 7. 8. 9. 10. 11. 12.

Ans. T F F F F T

Item 13. 14. 15. 16. 17. 18.

Ans. F T F T T T

Item 19. 20. 21. 22. 23. 24. 25.

Ans. T T T F T T F

24 - 4

Test Bank for Intermediate Accounting, IFRS Edition, 2e

MULTIPLE CHOICE—Conceptual 26.

The full disclosure principle, as adopted by the accounting profession, is best described by which of the following? a. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements. b. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements. c. Enough information should be disclosed in the financial statements so a person wishing to invest in the shares of the company can make a profitable decision. d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.

27.

All of the following are reasons that the amount of disclosure provisions issued by the IASB has increased in the last 10 years except a. There has been greater complexity of the business environment. b. There has greater necessity for timely information. c. Accounting has become more important as a control and monitoring device. d. More disclosure means lower costs for companies.

28.

All of the following are ways in which simplified IFRS is less complex than full IFRS except which statement? a. Topics that are not relevant for SMEs are omitted. b. Simplified IFRS for SMEs allows fewer accounting policy choices. c. Revisions to the IFRS for SMEs will be limited to once every five years. d. Significantly fewer disclosures are required.

29.

All of the following are benefits to the IASB requiring a reconciliation between the effective tax rate and the government's statutory rate except a. An investor can determine the actual taxes paid by the enterprise. b. This reconciliation is important if the enterprise has substantial fluctuations in its effective tax rate caused by unusual or infrequent transactions. c. This information is effective in identifying a favorable tax treatment that is not sustainable. d. The reconciliation can identify past penalties levied by the IRS on the company.

30.

According to IAS 1, which of the following are not commonly required disclosures of accounting policies? a. the measurement basis or bases used in the financial statements b. personnel involved in drafting the summary of significant accounting policies or other notes, including those who made the judgments apart from those involving estimations c. disclosures required by other IFRSs, like the reasons why the entity’s ownership interest does not constitute control d. the nature of a company’s operations and the policies that the users of its financial statements would expect to be disclosed for that type of entity

Full Disclosure in Financial Reporting

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31.

All of the following statementsare true regarding the IASB and disclosure of dividend policies except; a. According to IASB, companies must meet a minimum payout ratio before they are required to disclose their dividend policies in their annual reports. b. IASB encourages companies to report their dividend policies in their annual reports if they do not expect to pay dividends in the foreseeable future. c. IASB encourages companies to report their dividend policies in their annual reports if they have earning but fail to pay dividends. d. IASB encourages companies that show a consistent pattern of paying dividends to indicate whether they intend to continue this practice in the future.

32.

Which of the following should be disclosed in a Summary of Significant Accounting Policies? a. Types of executory contracts b. Amount for cumulative effect of change in accounting policy c. Claims of equity holders d. Depreciation method followed

33.

An example of an inventory accounting policy that should be disclosed in a Summary of Significant Accounting Policies is the a. composition of inventory into raw materials, work-in-process, and finished goods. b. major backlogs of inventory orders. c. method used for pricing inventory. d. All of these answer choices should be disclosed.

34.

Which of the following are defined as intentional distortions of financial statements. a. b. c. d.

Errors Yes Yes No No

Fraud Yes No Yes No

S

35.

The disclosure of accounting policies, is important to financial statement readers in determining a. net income for the year. b. whether accounting policies are consistently applied from year to year. c. the value of obsolete items included in ending inventory. d. whether the working capital position is adequate for future operations.

S

36.

If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the a. nature of the relationship between the parties to the transactions. b. nature of any future transactions planned between the parties and the terms involved. c. dollar amount of the transactions for each of the periods for which an income statement is presented. d. amounts due from or to related parties as of the date of each statement of financial position presented.

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Test Bank for Intermediate Accounting, IFRS Edition, 2e

37.

Events that occur after the December 31, 2015 statement of financial position date (but before the statement of financial position is authorized to be issued) and provide additional evidence about conditions that existed at the statement of financial position date and affect the realizability of accounts receivable should be a. discussed only in the Management commentary section of the annual report. b. disclosed only in the Notes to the Financial Statements. c. used to record an adjustment to Accounts Receivable at December 31, 2015. d. used to record an adjustment directly to the Retained Earnings account

38.

Which of the following subsequent events would generally require disclosure, but no adjustment of the financial statements? a. Retirement of the company president b. Settlement of litigation when the event that gave rise to the litigation occurred prior to the statement of financial position date. c. Employee strikes d. Issue of a large amount of ordinary shares.

39.

Which of the following subsequent events would require adjustment of the accounts before issuance of the financial statements? a. Loss of plant as a result of fire b. Changes in the quoted market prices of securities held as an investment c. Loss on an uncollectible account receivable resulting from a customer’s major flood loss d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.

40.

Revenue of a segment includes a. only sales to unaffiliated customers. b. sales to unaffiliated customers and intersegment sales. c. sales to unaffiliated customers and interest revenue. d. sales to unaffiliated customers and other revenue and gains.

41.

An operating segment is a reportable segment if a. its operating profit is 10% or more of the combined operating profit of profitable segments. b. its operating loss is 10% or more of the combined operating losses of segments that incurred an operating loss. c. the absolute amount of its operating profit or loss is 10% or more of the company's combined operating profit or loss. d. none of these answer choices are correct.

42.

A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the a. total combined revenues of all segments reporting profits. b. total revenues of all the enterprise's industry segments. c. total export and foreign sales. d. combined net income of all segments reporting profits.

Full Disclosure in Financial Reporting

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43.

All of the following information about each operating segment must be reported except a. unusual items. b. interest revenue. c. cost of goods sold. d. depreciation and amortization expense.

44.

The accounting profession requires disaggregated information in the following ways: a. products or services. b. geographic areas. c. major customers. d. All of these answer choices are correct.

45.

In presenting segment information,for which of the following items must a reconcilation be provided?

a. b. c. d.

Revenues Yes No Yes Yes

Operating Profit (Loss) Yes Yes No Yes

Assets and Liabilities Yes Yes Yes No

46.

IFRS requires that a company report all to the following except a. segment profits and loss and related information. b. segment assets and liabilities. c. major customers. d. liquidity ratios.

47.

What did the IASB decide was a reasonable upper limit for the number of segments that a company must disclose? a. two b. five c. six d. ten

48.

All of the following statements are true regarding IFRS and interim except a. IFRS requires a complete set of financial statements at the interim reporting date. b. IFRS companies expense interim amounts like advertising expenditures that could benefit later interim periods c. IFRS leans toward the discrete approach. d. No accruals or deferrals in anticipation of future events during the year should be reported.

49.

All of the following are technical accounting areas where FASB and IASB have not reached convergence on a set of accounting standards except a. error correction. b. prohibition of LIFO c. reversal of impairments d. earnings per share calculations

24 - 8 S

Test Bank for Intermediate Accounting, IFRS Edition, 2e

50.

IFRS requires that a. all companies that issue an annual report should issue interim financial reports. b. the integral view is the most appropriate approach to take in preparing interim financial reports. c. the three basic financial statements should be presented each time an interim period is reported upon. d. the same accounting principles used for the annual report should be employed for interim reports.

51.

In considering interim financial reporting, how does IFRS conclude that such reporting should be viewed? a. As a "special" type of reporting that need not follow international financial reporting standards b. As useful only if activity is evenly spread throughout the year so that estimates are unnecessary. c. As reporting for an integral part of an annual period. d. As reporting for a separate accounting period

52.

Accounting policies are modified for the following at interim dates. a. b. c. d.

Revenue Yes Yes No No

Losses Yes No Yes No

53.

For interim financial reporting, a company’s income tax expense for the second quarter should be computed by using the: a. statutory tax rate for the year. b. effective tax rate expected to be applicable for the second quarter. c. effective tax rate expected to be applicable for the full year as estimated at the end of the first quarter. d. effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.

54.

Companies should disclose all of the following in interim reports except a. dividends paid. b. changes in accounting policies. c. balance in accounts receivable. d. seasonal revenue, cost, or expenses.

55.

If there is a lack of conformity with IFRS, but except for the effects of that nonconformity, the financial statements are fairly presented, what type of opinion is required? a. Unqualified opinion. b. Qualified opinion. c. Adverse opinion. d. A disclaimer of an opinion.

Full Disclosure in Financial Reporting

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S

56.

If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be a. unmodified. b. qualified. c. adverse. d. exceptional.

S

57.

Which of the following best characterizes the difference between a financial forecast and a financial projection? a. Forecasts include a complete set of financial statements, while projections include only summary financial data. b. A forecast is normally for a full year or more and a projection presents data for less than a year. c. A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen. d. A forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification.

58.

A financial forecast presents to the best of the responsible party's knowledge and belief, a. of an entity's expected financial position, results of operations, and cash flows. b. an assessment of the company's ability to be successful in the future. c. given one or more hypothetical assumptions, of an entity's expected financial position, results of operations, and cash flows. d. an assessment of the company's ability to be successful in the future under a number of different assumptions.

*59.

Cash, short-term investments, and net receivables are the numerator for Acid-Test Ratio Current Ratio a. Yes No b. Yes Yes c. No No d No Yes

*60.

Theoretically, in computing the accounts receivable turnover, the numerator should include a. net sales. b. net credit sales. c. sales. d. credit sales.

*61.

The return on ordinary share capital-equity is calculated by dividing a. net income by average ordinary shareholders’ equity. b. net income less preference dividends by average ordinary shareholders’ equity. c. net income by ending ordinary shareholders’ equity. d. net income less preference dividends by ending ordinary shareholders’ equity.

*62.

The payout ratio is calculated by dividing a. dividends per share by earnings per share. b. cash dividends by net income plus preference dividends. c. cash dividends by market price per share. d. cash dividends by net income.

24 - 10 Test Bank for Intermediate Accounting, IFRS Edition, 2e *63.

Which of the following ratios measures long-term solvency? a. Acid-test ratio b. Accounts receivables turnover c. Debt to assets d. Current ratio

*64.

The calculation of times interest earned involves dividing a. net income by annual interest expense. b. net income plus income taxes by annual interest expense. c. net income plus income taxes and interest expense by annual interest expense. d. none of these answer choices are correct.

*65.

When should an average amount be used for the numerator or denominator? a. When the ratio consists of only statement of financial position items b. When the ratio consists of only income statement items c. When a ratio consists of an income statement item and a statement of financial position item d. Never; the numerator or denominator should always be a year-end balance

*66.

The basic limitations associated with ratio analysis include a. the lack of comparability among firms in a given industry. b. the use of estimated items in accounting. c. the use of historical costs in accounting. d. all of these answer choices are correct.

67.

All of the following are exemptions to retrospective application in first-time adoption of IFRS except a. estimates. b. hedge accounting. c. non-controlling interest. d. deferred taxes.

68.

Elective exemptions to retrospective application in first-time adoption of IFRS include all of the following except a. share-based payment transactions. b. deferred taxes. c. leases. d. employee benefits.

69.

How many years of comparative information must a company present under IFRS firsttime adoption? a. One. b. Two. c. Five. d. Ten.

70.

A company’s first IFRS financial statements must include at least how many statements of financial position? a. One. b. Two. c. Three.

Full Disclosure in Financial Reporting 71.

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d. Five. A company’s first IFRS financial statements must include at least how many separate cash flow statements? a. None are required b. One c. Two d. Three

Multiple Choice Answers—Conceptual Item

26. 27. 28. 29. 30. 31. 32.

Ans.

d d c d b a d

Item

33. 34. 35. 36. 37. 38. 39.

Ans.

c c b b c d d

Item

40. 41. 42. 43. 44. 45. 46.

Ans.

b d b c d a d

Item

47. 48. 49. 50. 51. 52. 53.

Ans.

d a d d d d d

Item

54. 55. 56. 57. 58. 59. 60.

Ans.

c b b c a a b

Item

61. 62. 63. 64. 65. 66. 67.

Ans.

Item

b d c c c d d

Ans.

68. 69. 70. 71.

b a b c

Solutions to those multiple choice questions for which the answer is “none of these:”

MULTIPLE CHOICE—Computational 72.

Presented below are four segments that have been identified by Haley Productions: Segments A B C D

Total Revenue (Unaffiliated) $255,000 600,000 225,000 90,000

Operating Profit (Loss) $30,000 (55,000) 6,000 4,000

Identifiable Assets $900,000 800,000 450,000 225,000

For which of the segments would information have to be disclosed in accordance with professional pronouncements? a. Segments A, B, C, and D b. Segments A, B, and C c. Segments A and B d. Segments A and D 73.

In January 2015, Post, Inc. estimated that its year-end bonus to executives would be $720,000 for 2015. The actual amount paid for the year-end bonus for 2014 was $660,000. The estimate for 2015 is subject to year-end adjustment. What amount, if any, of expense should be reflected in Post's quarterly income statement for the three months ended March 31, 2015? a. $ -0-. b. $165,000. c. $180,000. d. $720,000.

24 - 12 Test Bank for Intermediate Accounting, IFRS Edition, 2e 74.

On January 15, 2015, Vancey Company paid property taxes on its factory building for the calendar year 2015 in the amount of $560,000. In the first week of April 2015, Vancey made unanticipated major repairs to its plant equipment at a cost of $1,400,000. These repairs will benefit operations for the remainder of the calendar year. How should these expenses be reflected in Vancey's quarterly income statements? Three Months Ended 3/31/15 6/30/15 9/30/15 12/31/15 a. $140,000 $606,667 $606,667 $606,667 b. $140,000 $1,540,000 $140,000 $140,000 c. $560,000 $1,400,000 $ -0$ -0d. $490,000 $490,000 $490,000 $490,000

75.

An inventory loss from market decline of $1,600,000 occurred in May 2015, after its March 31, 2015 quarterly report was issued. None of this loss was recovered by the end of the year. How should this loss be reflected in the company's quarterly income statements? Three Months Ended 3/31/15 6/30/15 9/30/15 12/31/15 a. $ -0$ -0$ -0$1,600,000 b. $ -0$533,333 $533,333 $533,333 c. $ -0$1,600,000 $ -0$ -0d. $400,000 $400,000 $400,000 $400,000

Use the following information for questions 76 through 79. Information for Ramirez Corp. is given below: Ramirez Corp. statement of financial position December 31, 2015 Assets Plant and equipment, net of depreciation Patents Other intangible assets Inventories Accounts receivable (net) Cash Total Assets

$661,000 87,000 25,000 813,000 650,000 100,000 $2,336,000

Equities Share capital-preference ($100 par, 6% cumulative nonparticipating) 250,000 Share capital-ordinary (no par, 20,000 shares authorized, issued and outstanding) 375,000 Retained earnings 813,000 Treasury shares—500 shares preference (75,000) Bonds payable (10%, due 2019) 625,000 Accounts payable 210,000 Income tax payable 63,000 Miscellaneous accrued payables 75,000 Total Equities $2,336,000

Full Disclosure in Financial Reporting

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Ramirez Corp. Income Statement Year Ended December 31, 2015 Net sales Cost of goods sold Gross profit Operating expenses (including bond interest expense) Income before income taxes Income tax Net income

$3,000,000 2,000,000 1,000,000 500,000 500,000 150,000 $ 350,000

Additional information: There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, share capital-reference or ordinary accounts during 2015. Assume that preferred dividends for the current year have not been declared. *76.

At December 31, 2015, the current ratio was a. 750 ÷ 210. b. 2,225 ÷ 273. c. 1,563 ÷ 273. d. 1,563 ÷ 348.

*77.

The times interest earned ratio during 2015 was a. 350 ÷ 62.5. b. 500 ÷ 62.5. c. 562 ÷ 62.5. d. 437 ÷ 62.5.

*78.

At December 31, 2015, the book value per ordinary share of was a. $55.66. b. $58.16. c. $59.41. d. $58.65.

*79.

The return on ordinary share capital – equity for 2015 was a. 350 ÷ 1,173. b. 350 ÷ 1,188. c. 335 ÷ 1,173. d. 335 ÷ 1,188.

24 - 14 Test Bank for Intermediate Accounting, IFRS Edition, 2e Use the following information for questions 80 through 85. The following data are provided: Cash Accounts receivable (net) Inventories Plant assets (net) Accounts payable Taxes payable Bonds payable Share capital-preference, 10% $50 par Share capital $10 par Share premium-ordinary Retained earnings Net credit sales Cost of goods sold Operating expenses Net income

December 31 2015 2014 $ 375,000 $ 250,000 400,000 300,000 650,000 550,000 2,000,000 1,625,000 275,000 200,000 50,000 25,000 350,000 350,000 500,000 500,000 600,000 450,000 400,000 325,000 1,000,000 875,000 3,200,000 2,100,000 725,000 375,000

Additional information: Depreciation included in cost of goods sold and operating expenses is $305,000. On May 1, 2015, 15,000 ordinary shares were issued. The preference share are cumulative. The preference dividends were not declared during 2015. *80.

The accounts receivable turnover for 2015 is a. 3,200 ÷ 400. b. 2,100 ÷ 400. c. 3,200 ÷ 350. d. 2,100 ÷ 350.

*81.

The inventory turnover for 2015 is a. 3,200 ÷ 650. b. 2,100 ÷ 650. c. 3,200 ÷ 600. d. 2,100 ÷ 600.

*82.

The profit margin on sales for 2015 is a. 1,100 ÷ 3,200. b. 375 ÷ 3,200. c. 1,100 ÷ 2,100. d. 375 ÷ 2,100.

*83.

The return on ordinary share capital - equity for 2015 is a. 375 ÷ 1,800. b. 375 ÷ 2,000. c. 325 ÷ 1,800. d. 325 ÷ 2,000.

Full Disclosure in Financial Reporting *84.

The book value per ordinary share at 12/31/15 is a. 1,950 ÷ 60. b. 1,940 ÷ 60. c. 1,950 ÷ 55. d. 2,000 ÷ 55.

*85.

At December 31, 2015, the acid-test ratio was a. 775 ÷ 325. b. 775 ÷ 540. c. 1,050 ÷ 400. d. 1,425 ÷ 325.

*86.

Presented below is information related to Tolbert Company. Current Assets Inventories Accounts receivable Prepaid expenses Short-term investments Cash Total current assets

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220,000 122,000 60,000 150,000 $ 8,000 $560,000

Total current liabilities are $200,000. What is the acid-test ratio? a. 2.8 to 1. b. 2.5 to 1. c. 1.4 to 1. d. 0.8 to 1. *87.

Perez Company's net accounts receivable were $600,000 at December 31, 2014 and $660,000 at December 31, 2015. Net cash sales for 2015 were $390,000. The accounts receivable turnover for 2015 was 7.0. What were Perez's total net sales for 2015? a. $2,730,000. b. $4,410,000. c. $4,800,000. d. $4,020,000.

*88.

During 20115, Quirk, Incorporated purchased $3,200,000 of inventory. The cost of goods sold for 2015 was $3,600,000 and the ending inventory at December 31, 2015, was $400,000. What was the inventory turnover for 2015? a. 5.3. b. 8.0. c. 6.0. d. 9.0.

Multiple Choice Answers—Computational Item

72. 73. 74.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

b c a

75. *76. *77.

c d c

*78. *79. *80.

d c c

*81. *82. *83.

d b c

*84. *85. *86.

a a c

*87. *88.

c c

24 - 16 Test Bank for Intermediate Accounting, IFRS Edition, 2e

MULTIPLE CHOICE—CPA Adapted 89.

Which of the following facts concerning plant assets should be included in the summary of significant accounting policies? a. b. c. d.

Depreciation Method No Yes Yes No

Composition Yes Yes No No

90.

Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to unaffiliated customers. Farr should report segment financial information for each division meeting which of the following criteria? a. Segment profit or loss is 10% or more of consolidated profit or loss. b. Segment profit or loss is 10% or more of combined profit or loss of all company segments. c. Segment revenue is 10% or more of combined revenue of all the company segments. d. Segment revenue is 10% or more of consolidated revenue.

91.

Unruh Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2015. Assets Industry Revenue Profit 12/31/15 A $ 8,000,000 $1,320,000 $16,000,000 B 6,400,000 1,120,000 14,000,000 C 4,800,000 960,000 10,000,000 D 2,400,000 440,000 5,200,000 E 3,400,000 540,000 5,600,000 F 1,200,000 180,000 2,400,000 $26,200,000 $4,560,000 $53,200,000 In its segment information for 2015, how many reportable segments does Unruh have? a. Three b. Four c. Five d. Six

92.

The following information pertains to Nixon Corp. and its divisions for the year ended December 31, 2015. Sales to unaffiliated customers $2,500,000 Intersegment sales of products similar to those sold to unaffiliated customers 750,000 Interest earned on loans to other operating segments 50,000 Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a reportable segment if that segment's revenue exceeds a. $330,000. b. $325,000. c. $255,000. d. $250,000.

Full Disclosure in Financial Reporting

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93.

Mayo Corp. has estimated that total depreciation expense for the year ending December 31, 2015 will amount to $300,000, and that 2015 year-end bonuses to employees will total $600,000. In Mayo's interim income statement for the six months ended June 30, 2015, what is the total amount of expense relating to these two items that should be reported? a. $0. b. $150,000. c. $450,000. d. $900,000.

94.

Fina Corp. had the following transaction during the quarter ended March 31, 2015: Payment of fire insurance premium for calendar year 2015 600,000 What amount should be included in Fina's income statement for the quarter ended March 31, 2015? a. $600,000 b. $150,000 c. $300,500 d. $450,000

*95.

How is the average inventory used in the calculation of each of the following? Acid-Test (Quick) Ratio Inventory Turnover a. Numerator Numerator b. Numerator Denominator c. Not Used Denominator d. Not Used Numerator

*96.

Which of the following ratios is(are) useful in assessing a company's ability to meet current maturing or short-term obligations? Acid-Test Ratio Debt to Assets Ratio a. No No b. No Yes c. Yes Yes d. Yes No

*97.

Which of the following ratios should be used in evaluating the effectiveness with which the company uses its assets? Accounts Receivable Turnover Payout Ratio a. Yes Yes b. No No c. Yes No d. No Yes

Multiple Choice Answers—CPA Adapted Item

89. 90.

Ans.

c c

Item

91. 92.

Ans.

b b

Item

93. 94.

Ans.

c b

Item

95. 96.

Ans.

Item

Ans.

c d

*97.

c

24 - 18 Test Bank for Intermediate Accounting, IFRS Edition, 2e

DERIVATIONS — Computational No. Answer

Derivation

72.

b

Revenue test: Total revenue = $1,170,000 × 10% = $117,000. Operating profit test: $55,000 × 10% = $5,500. Asset test: Total assets = $2,375,000 × 10% = $237,500.

73.

c

$720,000 ÷ 4 = $180,000.

74.

a

$560,000 ÷ 4 = $140,000. $1,400,000 ÷ 3 = $466,667 + $140,000 = $606,667.

75.

c

Conceptual.

*76.

d

($100,000 + $650,000 + $813,000) 1,563 ———————————————— = ——— ($210,000 + $63,000 + $75,000) 348

c

$500,000 + ($625,000  .10) 562.5 ————————————— = ——— $625,000  .10 62.5

*78.

d

$375,000 + [$813,000 – (.06 × $250,000)] ——————————————————— = $58.65. 20,000

*79.

c

$350,000 – (.06 × $250,000) ——————————————————— = 335 ÷ 1,173. $375,000 + [$813,000 – (.06  $250,000)]

*80.

c

$3,200,000 ———————————— = 3,200 ÷ 350. ($300,000 + $400,000) ÷ 2

*81.

d

$2,100,000 ———————————— = 2,100 ÷ 600. ($650,000 + $550,000) ÷ 2

*82

b

$375,000 ÷ $3,200,000 = 375 ÷ 3,200.

*83.

c

———————————————————————————————————

*77.

$375,000 – ($500,000 ×.10) [($600,000 + $400,000 + $1,000,000 – $50,000) + ($450,000 + $325,000 + $875,000)] ÷ 2

= 325 ÷ 1,800. *84.

a

$600,000 + $400,000 + ($1,000,000 – $50,000) ————————————————————— = 1,950 ÷ 60 60,000

Full Disclosure in Financial Reporting

DERIVATIONS — Computational (cont.) No. Answer

Derivation

*85.

a

$375,000 + $400,000 —————————— = 775 ÷ 325. $275,000 + $50,000

*86.

c

$8,000 + $150,000 + $122,000 —————————————— = 1.40 to 1. $200,000

*87.

c

(X – $390,000) ———————————— = 7.0, X = $4,800,000. ($600,000 + $660,000)  2

*88.

c

$3,600,000 + $400,000 – $3,200,000 = $800,000 beginning inventory. $3,600,000 ———————————— = 6. ($800,000 + $400,000) ÷ 2

DERIVATIONS — CPA Adapted No. Answer

Derivation

89.

c

Conceptual.

90.

c

Conceptual.

91.

b

Revenue test: $26,200,000 × 10% = $2,620,000 Profit test: $4,560,000 × 10% = $456,000 Asset test: $53,200,000 × 10% = $5,320,000 A, B, C, E.

92.

b

($2,500,000 + $750,000) × 10% = $325,000.

93.

c

($300,000 + $600,000) ÷ 2 = $450,000.

94.

b

$600,000 ÷ 4 = $150,000.

*95.

c

Conceptual.

*96.

d

Conceptual.

*97.

c

Conceptual.

24 - 19

24 - 20 Test Bank for Intermediate Accounting, IFRS Edition, 2e

EXERCISES Ex. 24-98—Segment reporting. The international Accounting Standards Board requires the reporting of disaggregated financial data about the different types of business activities in which an enterprise engages. Instructions Identify 4 of the 6 items of disaggregated information the IASB requires that an enterprise report. Solution 24-98 The IASB requires that an enterprise report the following disaggregated information: 1. General information about its operating segments. 2. Segment profit and loss and related information. 3. Segment assets and liabilities. 4. Reconciliations. 5. Information about products and services and geographic areas. 6. Major customers. Ex. 24-99—Segment reporting. Finney Company's condensed income statement is presented below: Revenues Expenses Cost of goods sold Operating and administrative expenses Depreciation expense Income before taxes Income tax expenses Net income

$1,000,000 $400,000 200,000 40,000

640,000 360,000 108,000 $ 252,000

Earnings per share (100,000 shares)

$2.52

The following data is compiled relative to Finney's operating segments: Percent Identified with Segment Hotels Grains Candy Revenues 42% 50% 8% Cost of goods sold 48 49 3 Operating and administrative expense 35 50 15 Depreciation expense 46 42 12 Included in the amounts allocated to each segment on the above percentages are the following expenses which relate to general corporate activities: Operating Segment Hotels Grains Candy Totals Operating and administrative expense $12,000 $9,000 $3,000 $24,000 Depreciation expense 3,500 4,000 2,500 10,000 Instructions (a) Compute operating profit for each segment. (b) Based only on the above information, which segments must be reported and why?

Full Disclosure in Financial Reporting

24 - 21

Solution 24-99 (a) Revenues (1) Expenses— Cost of goods sold (1) Operating and admin. expense (2) Depreciation expense (3) Total expenses Operating profit

(b)

Operating Segment Hotels Grains Candy Totals $420,000 $500,000 $80,000 $1,000,000 192,000 58,000 14,900 264,900 $155,100

(1)

Total times segment percentage.

(2)

Hotels = ($200,000 × 35%) – $12,000 = $58,000 Grains = ($200,000 × 50%) – $9,000 = $91,000 Candy = ($200,000 × 15%) – $3,000 = $27,000

(3)

Hotels = ($40,000 × 46%) – $3,500 = $14,900 Grains = ($40,000 × 42%) – $4,000 = $12,800 Candy = ($40,000 × 12%) – $2,500 = $2,300

196,000 91,000 12,800 299,800 $200,200

12,000 27,000 2,300 41,300 $38,700 $

400,000 176,000 30,000 606,000 394,000

Two segments, Hotels and Grains, must be reported because they satisfy the revenue test; that is, the segment's revenues are 10% or more of the combined revenues of all operating segments. In addition, the Hotels and the Grains segments meet the 10% of the operating profit test.

Ex. 24-100—Interim reports. A few years ago, a publishing company in the fourth quarter had a net profit figure that exceeded sales for that quarter. Such a situation as this suggests that some difficult accounting issues are involved in interim reporting. Instructions (a)

What problem exists with income taxes in interim reports and how does IFRS recommend that taxes be reported? What does IFRS require?

(b)

Many academicians have attempted to predict the year's net income after the first quarter's income is reported. These attempts are generally unsuccessful, no matter how sophisticated the prediction model. What might be the reason for this inability to predict?

24 - 22 Test Bank for Intermediate Accounting, IFRS Edition, 2e Solution 24-100 (a)

The basic question with income taxes is whether in the preparation of interim income statements the provision for taxes should reflect the anticipated effective tax rate for the year or be computed on the basis of actual results for that interim period. IFRS recommends that at the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. IFRS requires that the estimated annual effective tax rate be applied to the year-to-date ordinary income at the end of each interim period to compute the year-to-date tax. Further, the interim period tax related to ordinary income shall be the difference between the amount so computed and the amounts reported for previous interim periods of the fiscal period.

(b)

The prediction models are probably unsuccessful because accountants have not treated the problem of seasonality correctly in their interim reports. The problem with the conventional approach is that fixed nonmanufacturing costs are not charged in proportion to sales. Rather, these costs are charged as incurred, or spread evenly over the four quarters. As a result, it is extremely difficult to make accurate predictions because some artificial concepts are used for matching purposes.

Ex. 24-101—Interim reports. Explain the difference between the discrete approach and the integral approach. Solution 24-101 The discrete approach holds that each interim period should be treated as a separate accounting period. Companies should report accounting transactions as they occur, and expense recognition should not change with the period of time covered. The integral approach holds that the interim report is an integral part of the annual report and that deferrals and accruals should take into consideration what will happen for the entire year. Companies should assign estimated expenses to parts of a year on the basis of sales volume or some other activity base. Ex. 24-102—Forecasts. Recent proposals by investors and others have suggested that corporations include financial forecasts in their annual reports. It further has been suggested that accountants attest to those forecasts. Instructions (a) What arguments are advanced to support the publication of such forecasts? (b) What arguments are advanced that oppose the publication of such forecasts?

Full Disclosure in Financial Reporting

24 - 23

Solution 24-102 (a)

The basic argument for the publication of financial forecasts in corporate annual reports is to provide the investor with additional information about the future activities of the company upon which to base investment decisions. A second argument is that some investors have access to the forecast data currently; it would be more equitable if all investors had access to such information. The attestation by accountants to such forecast data would provide the forecast data with reliability and permit the investor to have confidence in the forecast. A third argument is that circumstances now change so rapidly that historical information is no longer adequate for prediction.

(b)

One argument raised against the publication of such forecasts is the expectation that management would present a conservative forecast in order to “look good” when actual results of the year are in. A second point often considered is the prospect that the forecast would provide competitors with confidential information thus endangering business strategy and the performance of the firm. A third argument is that forecasts are narrow estimates, which makes them difficult to interpret given that the future is not a certainty, and as a result investors may be misled by them. The attestation by accountants also can be questioned. There may be a conflict of interest because the forecast in the current year report and the actual results of the next year are both audited by the accountant There would be concern that the reported results might be adjusted so that the forecast appears to be borne out by the actual results. Additionally, it can be questioned that the accountant has the training and qualifications to attest to forecasts. Also, the profession is hesitant to attest to forecasts until the problem of additional exposure to liability is clarified.

*Ex. 24-103—Financial statement analysis. The condensed financial statements of Marks Company for the years 2014-2015 are presented below: Marks Company Comparative Statement of Financial Position As of December 31, 2015 and 2014 2015 2014 Plant and equipment 1,700,000 1,112,000 Accumulated depreciation (260,000) (192,000) Inventories 380,000 340,000 Accounts Receivable (net) 460,000 300,000 Cash $ 420,000 $ 120,000 $2,700,000 $1,680,000 Share capital–ordinary ($10 par) Retained earnings Bonds payable Dividends payable Accounts payable

1,520,000 540,000 400,000 -0$ 240,000 $2,700,000

1,200,000 280,000 -040,000 $ 160,000 $1,680,000

24 - 24 Test Bank for Intermediate Accounting, IFRS Edition, 2e *Ex. 24-103 (cont.) Additional data: Market value at 12/31/15 is $80 per share. Marks sold 32,000 ordinary shares of at par on July 1, 2015. Marks Company Condensed Income Statement For the Year Ended December 31, 2015 Sales Cost of goods sold Gross profit Administrative and selling expenses Net income

$2,400,000 1,600,000 800,000 500,000 $ 300,000

Instructions Compute the following financial ratios by placing the proper amounts in the parentheses provided for numerators and denominators. a.

Current ratio at 12/31/15

( (

) )

b.

Acid test-ratio at 12/31/15

( (

) )

c.

Accounts receivable turnover in 2015

( (

) )

d.

Inventory turnover in 2015

( (

) )

e.

Profit margin on sales in 2015

( (

) )

f.

Earnings per share in 2015

( (

) )

g.

Return on ordinary share capital - equity in 2015

( (

) )

h.

Debt to assets at 12/31/15

( (

) )

i.

Book value per share at 12/31/15

( (

) )

Full Disclosure in Financial Reporting

24 - 25

*Solution 24-103 $1,260,000 a. ————— $240,000 b.

$880,000 ———— $240,000

$2,400,000 c. ————— $380,000

$300,000 e. ————— $2,400,000 f.

$300,000 ———— 136,000

g.

$300,000 ————— $1,770,000

$640,000 h. ————— $2,700,000 i.

$2,060,000 ————— 152,000

$1,600,000 d. ————— $360,000 *Ex. 24-104—Selected financial ratios. The following information pertains to Wamser Company: Plant assets (net) Inventory Accounts receivable Cash Total assets

$360,000 75,000 125,000 40,000 $600,000

Share capital-ordinary ($10 par) Share permium-ordinary Retained earnings Long-term debt Accounts payable Accrued taxes and expenses payable Total equities

$160,000 40,000 200,000 120,000 55,000 25,000 $600,000

Net sales (all on credit) Cost of goods sold Net income

$900,000 675,000 72,000

Instructions Compute the following: (It is not necessary to use averages for any statement of financial position figures involved.) (a) Current ratio (b) Inventory turnover (c) Accounts receivable turnover (d) Book value per share (e) Earnings per share (f) Debt to assets (g) Profit margin on sales (h) Return on ordinary share capital - equity

24 - 26 Test Bank for Intermediate Accounting, IFRS Edition, 2e *Solution 24-104 (a)

($40,000 + $125,000 + $75,000) ÷ ($55,000 + $25,000) = $240,000 ÷ $80,000 = 3.00.

(b)

$675,000 ÷ $75,000 = 9 times.

(c)

($900,000 ÷ $125,000) = 7.2 times.

(d)

($160,000 + $40,000 + $200,000) ÷ ($160,000 ÷ $10) = $25.

(e)

$72,000 ÷ ($160,000 ÷ $10) = $4.50.

(f)

($55,000 + $25,000 + $120,000) ÷ $600,000 = 33.3%.*

(g)

$72,000 ÷ $900,000 = 8%.

(h)

$72,000 ÷ ($160,000 + $40,000 + $200,000) = 18.0%.

*Rounded amounts. *Ex. 24-105—Computation of selected ratios. The following data is given: Plant assets (net) Inventories Accounts receivable (net) Cash

December 31, 2015 2014 400,000 325,000 90,000 110,000 68,000 60,000 49,000 50,000

Share capital-preference 10, $40 par Share capital-ordinary $10 par Share premium-ordinary Retained earnings Bonds payable Accounts payable Salaries and wages payable

100,000 120,000 80,000 172,000 70,000 55,000 10,000

Net credit sales Cost of goods sold Net income

800,000 500,000 100,000

Instructions Compute the following ratios: (a) Acid-test ratio at 12/31/15 (b) Accounts receivable turnover in 2015 (c) Inventory turnover in 2015 (d) Profit margin on sales in 2015 (e) Return on ordinary share capital - equity in 2015 (f) Book value per ordinary share at 12/31/15

100,000 90,000 65,000 175,000 70,000 40,000 5,000

Full Disclosure in Financial Reporting *Solution 24-105 (a)

$117,000 ÷ $65,000 = 1.8.

(b)

$800,000 ÷ [($60,000 + $68,000) ÷ 2] = 12.5 times.

(c)

$500,000 ÷ [($110,000 + $90,000) ÷ 2] = 5 times.

(d)

$100,000 ÷ $800,000 = 12.5%.

(e)

($100,000 – $10,000) ÷ [($330,000 + $372,000) ÷ 2] = 25.6%.

(f)

$372,000 ÷ 12,000 = $31.

24 - 27

24 - 28 Test Bank for Intermediate Accounting, IFRS Edition, 2e

PROBLEMS Pr. 24-106—Segment reporting. A central issue in reporting on operating segments of a business enterprise is the determination of which segments are reportable. Instructions 1. What are the tests to determine whether or not an operating segment is reportable? 2. What is the test to determine if enough operating segments have been separately reported upon, and what is the guideline on the maximum number of operating segments to be shown?

Solution 24-106 1.

There are three basic tests to be applied to segments of a company to see if they are significant enough to be separately reportable. If a segment meets any one of the tests, it is deemed significant and reportable. The first test is based upon revenue. If a segment's revenue from sales to unaffiliated customers and intersegment sales and transfers is equal to 10 percent or more of the enterprise's combined revenues, the segment is reportable. The second test is based upon profits or losses. A segment is deemed reportable if the absolute amount of its profit or loss is 10 percent or more of the greater, in absolute amount, of: The combined operating profit of all operating segments that did not incur a loss, or The combined loss of all operating segments that did report a loss. Third, a segment is significant and reportable if the identifiable assets of the segment equal or exceed 10 percent of the combined assets of all operating segments. Finally, all segments, whether deemed reportable or not, must be viewed from the standpoint of interperiod comparability because the primary purpose of presenting segment information is to aid the financial statement reader.

2.

The International Accounting Standards Board states that enough operating segments must be separately reported so that the total of revenues from sales to unaffiliated customers for the reportable segments equals or exceeds 75 percent of the combined sales to unaffiliated customers for the entire enterprise. If applying the prescribed tests does not yield the required percentage of revenues described above, additional segments must be reported on until the 75 percent test is met. The International Standards Board has stated that if an enterprise has many reportable segments, benefit to the reader may be lost if more than 10 segments are reported. In such a situation, the board suggests combining related reportable segments until the total is ten or fewer.

Full Disclosure in Financial Reporting

24 - 29

Pr. 24-107—Interim reporting. Interim financial reporting has become an important topic in accounting. There has been considerable discussion as to the proper method of reflecting results of operations at interim dates. Instructions (a) Discuss generally how revenue should be recognized at interim dates and specifically how revenue should be recognized for industries subject to large seasonal fluctuations in revenue and for long-term contracts using the percentage-of-completion method at annual reporting dates. (b)

Discuss generally how product and period costs should be recognized at interim dates. Also discuss how inventory and cost of goods sold may be afforded special accounting treatment at interim dates.

(c)

Discuss how the provision for income taxes is computed and reflected in interim financial statements.

Solution 24-107 (a)

Sales and other revenues should be recognized for interim financial statement purposes in the same manner as revenues are recognized for annual reporting purposes. This means normally at the point of sale or, in the case of services, at completion of the earnings process. In the case of industries whose sales vary greatly due to the seasonal nature of business, revenues should still be recognized as earned, but a disclosure should be made of the seasonal nature of the business in the notes. In the case of long-term contracts recognizing earnings on the percentage-of-completion basis, the current state of completion of the contract should be estimated and revenue recognized at interim dates in the same manner as at the normal year end.

(b)

For interim reporting purposes, product costs (costs directly attributable to the production of goods or services) should be matched with the product and associated revenues in the same manner as for annual reporting purposes. Period costs (costs not directly associated with the production of a particular good or service) should be charged to earnings as incurred or allocated among interim periods based on an estimate of time expired, benefit received, or other activity associated with the particular interim period(s). Also, if a gain or loss occurs during an interim period and is a type that would not be deferred at year end, the gain or loss should be recognized in full in the interim period in which it occurs. Finally, in allocating period costs among interim periods, the basis for allocation must be supportable and may not be based on merely an arbitrary assignment of costs between interim periods.

24 - 30 Test Bank for Intermediate Accounting, IFRS Edition, 2e Solution 24-107 (cont.) The IASB allowed for some variances from the normal method of determining cost of goods sold and valuation of inventories at interim dates but these methods are allowable only at interim dates and must be fully disclosed in a note to the financial statements. Some companies use the gross profit method of estimating cost of goods sold and ending inventory at interim dates instead of taking a complete physical inventory. This is an allowable procedure at interim dates, but the company must disclose the method used and any significant variances that subsequently result from reconciliation of the results obtained using the gross profit method and the results obtained after taking the annual physical inventory. (c)

The Board states that the provision for income taxes shown in interim financial statements must be based upon the effective tax rate expected for the entire annual period for ordinary earnings. The effective tax rate is based on earnings for financial statement purposes as opposed to taxable income which may consider temporary differences. This effective tax rate is the income tax rate applied to expected annual earnings, taking into consideration all anticipated tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax-planning alternatives. Ordinary earnings do not include unusual items, or discontinued operations both of which will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year. The amount shown as the provision for income taxes at interim dates should be computed on a year-to-date basis. For example, the provision for income taxes for the second quarter of a company's fiscal year is the result of applying the expected rate to year-to-date earnings and subtracting the provision recorded for the first quarter. There are several variables in this computation (expected earnings may change; tax rates may change), and the year-to-date method of computation provides the only continuous method of approximating the provision for income taxes at interim dates. However, if the effective rate or expected annual earnings change between interim periods, the change is not reflected retroactively but the effect of the change is absorbed in the current interim period.