Deck 8: Reconciling Bank and Credit Card Statements

Question 1

In accounting, we would normally assume that a company will continue to use its factory over some period of time, and therefore it makes sense to depreciate the factory over some period of time. The name for this assumption is the

A) Constant-dollar assumption
B) Periodicity assumption
C) Going concern assumption
D) Realization principle

Answer 1

C

Question 2

The Laramie Company recorded an estimated liability for warranty claims related to its 2016 sales of vacuum cleaners of $100,000 in its 2016 balance sheet. The warranty allows customers to get free repairs for two years. By the end of 2018, the company had paid $85,000 of claims. It had no further liability for repairs for the 2016 sales. In the 2018 income statement, the company should recognize

A) $85,000 of expense
B) A benefit in its income statement of $15,000
C) An extra expense in its income statement of $15,000
D) Neither a benefit or an expense

Answer 2

B

Question 3

The Dix Company recorded an estimated liability for warranty claims related to its 2016 sales of farming machinery of $5,000,000 in its 2016 balance sheet. The warranty allows customers to get free repairs for one year. By the end of 2017, the company had paid $5,040,000 of claims. It had no further liability for repairs for the 2016 sales after 2017. In the 2017 income statement, the company should recognize

A) $40,000 of related expense
B) A benefit in its income statement of $40,000 related to these warranties
C) Warranty expense in its income statement of $5,040,000
D) Neither a benefit or an expense

Answer 3

A

Question 4

Under GAAP, the usual rule for accounting for research and development expenditures is to

A) Record such expenditures as increases in the research and development asset, which is never amortized
B) Record such expenditures as increases in the research and development asset, which is amortized over five years
C) Record such expenditures as increases in the research and development asset, which is amortized over the expected useful life of the results of the research
D) Expense such expenditures as they are incurred

Question 5

Under GAAP, spending on internally developed intangible assets is usually expensed. An exception occurs in the case of:

A) Research on life-saving medical drugs
B) Research on computer software that has reached a stage of technological feasibility
C) Advertising on brand awareness
D) Charity expenditures that increase the "goodwill" of surrounding communities toward the company

Question 6

The Buckley Corp. is located in Florida. Since Florida is sometimes affected by major hurricanes, there is a chance that Buckley's property will be damaged in the future. The proper accounting that Buckley should make for these possible future losses is to

A) Accrue nothing
B) Accrue an expense, using one-tenth of the expected value of storm losses over the next 10 years
C) Accrue an expense, using one-twentieth of the expected value of storm losses over the next 20 years
D) Accrue an expense, based on management's subjective judgment

Question 7

One of Bagget Airlines' planes crashed on December 29. One-hundred fifty people were killed. No one has actually sued yet, but the company's lawyers say that lawsuits are highly likely to be filed, and the company will probably have to pay damages of from $60 to $90 million. All numbers within that range are equally likely. The company should

A) Accrue nothing, since no lawsuits have yet been filed
B) Accrue a liability of $60 million
C) Accrue a liability of $75 million
D) Accrue a liability of $90 million

Question 8

The Argyle Corp. is the defendant in a lawsuit involving someone who was injured on its property in 2016. At the end of 2017, the company's attorneys tell the company that it is "reasonably possible" that the company will lose the suit, and the most likely amount it will have to pay is $400,000. This is a material number. The proper accounting is to

A) Neither disclose anything nor accrue a liability
B) Disclose the facts, and not accrue any liability
C) Accrue a $400,000 liability, but do not make a disclosure
D) Accrue a $400,000 liability and make a disclosure of the facts

Question 9

The Westminster Corp. is the defendant in a lawsuit involving patent infringement. At the end of 2017, the company's attorneys tell the company that it is "probable" that the company will lose the suit, and the most likely amount it will have to pay is $10,000,000. This is a material number. The proper accounting is to

A) Neither disclose anything nor accrue a liability
B) Disclose the facts, and not accrue any liability
C) Accrue a $10,000,000 liability, but do not make a disclosure
D) Accrue a $10,000,000 liability and make a disclosure of the facts

Question 10

The Stratmore Corp. is the defendant in a lawsuit claiming it has slandered someone. At the end of 2017, the company's attorneys tell the company that it is "remote" that the company will lose the suit. However, if it does lose, the most likely amount it will have to pay is $500,000. This is a material number. The proper accounting is to

A) Neither disclose anything nor accrue a liability
B) Disclose the facts, and not accrue any liability
C) Accrue a $500,000 liability, but do not make a disclosure
D) Accrue a $500,000 liability and make a disclosure of the facts

Question 11

The Essex Corp. is the plaintiff in a lawsuit claiming another company breached a contract by selling it poor quality goods. At the end of 2017, the company's attorneys tell the company that it is "probable" that the company will win the suit, and that the most likely amount it will win is $600,000. This is a material number. The proper accounting is to

A) Neither disclose anything nor accrue a gain
B) Disclose the facts, and not accrue any gain
C) Accrue a $500,000 gain, but do not make a disclosure
D) Accrue a $500,000 gain and make a disclosure of the facts

Question 12

Under GAAP, the rule for when a loss contingency must be accrued is that it must be

A) At least remotely possible, and reasonably estimable
B) At least reasonably possible, and reasonably estimable
C) Probable, and reasonably estimable
D) Probable, even if it is not reasonably estimable

Question 13

The Marlborough Corp. is trying to decide how to record a loss contingency. It believes the likelihood of a payment is probable, but it believes that there is a range of possible amounts it will have to pay, from $4 million to $8 million. Each amount in the range is equally likely. Under GAAP, the accrual must be

A) $4 million
B) $6 million
C) $8 million
D) Any figure it wants between $4 and $8 million

Question 14

The Rugby Corp. is trying to decide how to record a loss contingency. It believes the likelihood of a payment is probable, but it believes that there is a range of possible amounts it will have to pay, from $10 million to $20 million. Each amount in the range is equally likely. Under GAAP, the accrual must be

A) $10 million
B) $15 million
C) $20 million
D) Any figure it wants between $10 and $20 million

Question 15

The Knox Company has recorded an estimated liability for warranty claims of $10,000 in 2015 for products sold. In 2016, some of the items sold in 2015 break, and the Knox Company spends $9,000 to fix them. The warranties have not yet expired, and some more items may still break. In 2016, the Knox Company should record:

A) A reduction in cash of $9,000, and an expense of $9,000
B) A reduction in cash of $9,000, and a reduction in warranty liability of $9,000
C) An increase in warranty expense and warranty liability of $9,000
D) A negative warranty expense and liability of $1,000

Question 16

The Furman Company sells products, with a warranty if they break within two years. It should record an expense for the warranty costs:

A) After two years are up, once it knows the full costs
B) As items break and it incurs costs
C) At the time of sale, based on its estimate of what the warranty costs will be
D) Either as items break or after two years are up are acceptable alternatives under GAAP

Question 17

Which of the following statements best describes the FASB's general criteria for when an item should be recognized and recorded in the financial statements?

A) These criteria do not include any mention of the measurability of the item.
B) These criteria indicate that the item must be measurable in some way, even if the measurement has very low reliability.
C) These criteria indicate that the item must be measurable with sufficient reliability.
D) These criteria indicate that the item's measurement must be highly certain.

Question 18

Historically, which of the following has not been a factor leading toward more conservatism in accounting principles?

A) The influence of creditors and bankers interested in ensuring their loans will be repaid
B) The reaction of the SEC to perceived accounting abuses in the 1920s
C) Corporate income taxes
D) The influence of CEOs who have been given stock options

Question 19

One problem that the FASB has noted with overly conservative accounting is that:

A) Under-reporting of income in one period often leads to over-reporting income in future periods.
B) Bankers and creditors tend to be unhappy with conservative balance sheets.
C) This accounting generally forces companies to pay unduly high taxes.
D) This accounting tends to make income too volatile.

Question 20

Which group of financial statement users is likely to be least pleased with conservatively stated income statements?

A) Potential shareholders, seeking to buy stock cheaply
B) Current shareholders, seeking to sell their stock
C) Potential lenders, seeking to ensure the company can repay the loans
D) Workers, seeking to justify demands for higher pay

Question 21

The financial statement users who are most likely to be happy with conservative methods of reporting income are

A) Current shareholders who want to sell their stock
B) Managers who get performance-based bonuses
C) Tax authorities
D) Lenders to the company

Question 22

The most accurate statement of the FASB's position on conservative accounting is:

A) The FASB favors conservatism in both its conceptual framework and in all of its existing standards.
B) The FASB is against conservatism in its conceptual framework and in all of its existing standards.
C) The FASB is against conservatism all of its existing standards, but in its conceptual framework it favors conservative accounting.
D) The FASB is against conservatism in its conceptual framework, but some of the existing standards use a conservative approach.

Question 23

The financial statement users who are likely to object to very conservative methods of accounting are:

A) Managers who are trying to take the company private by buying stock from the public
B) Bankers who have loaned to the company
C) Bankers who are considering lending money to the company
D) Employees who get bonuses based on profits

Question 24

One way companies deal with uncertainty in the budgeting process is by budgeting some "miscellaneous" or "contingent" expenses.

Question 25

A company using the allowance method of accounting for bad debts has already set up an allowance for doubtful accounts. It now decides that one particular balance, for customer X, of $300, is uncollectible. The appropriate way to "write off" this item is:

A) Record bad debt of expense $300, and reduce accounts receivable by $300
B) Reduce sales by $300 and reduce accounts receivable by $300
C) Reduce the allowance for doubtful accounts by $300 and increase bad debt expense by $300
D) Reduce the allowance for doubtful accounts by $300 and decrease accounts receivable by $300

Question 26

The Schnoll Company uses the allowance method of accounting for bad debts. In 2016, its first year of operations, the Schnoll Company had sales of $80 million on credit. Based on its historical experience, it expects that it will collect all but 1% of these amounts. Over the course of the year, it makes entries to record $800,000 of bad debt expense and to increase the allowance for doubtful accounts. During 2016, it became aware of $300,000 of amounts from specific customers that were not colle

A) Zero
B) 300000
C) 500000
D) 800000

Question 27

A primary disadvantage of the allowance method of recording bad debts, compared to the direct write-off method, is that:

A) The allowance method gives a higher value of the company's accounts receivable asset.
B) The allowance method requires estimation.
C) The allowance method provides worse matching of revenues and expenses.
D) The allowance method provides users with less relevant information.

Question 28

Under the allowance method of recording bad debt expense, a company records bad debts:

A) Only at the time it writes off specific customer accounts known to be uncollectible
B) At the end of each accounting period, on an estimated basis
C) Both at the time it writes off specific customer accounts known to be uncollectible, and at the end of each accounting period
D) Only when the allowance for doubtful accounts is reduced to zero

Question 29

The Ditmas Corp. uses the allowance method of recording bad debt expense. In 2017, it overestimated the amount of bad debt expense, and recorded an allowance that was too large. At the end of 2018, when it learns that more customers are paying than it expected, it will:

A) Change the reported expenses for 2017, and re-issue its 2017 reports
B) Report a lower 2018 bad debt expense than it would have if its 2017 estimate had been accurate
C) Report a higher 2018 bad debt expense than it would have if its 2017 estimate had been accurate
D) Ignore the incorrect estimate from 2017, and include only the bad debts related to 2018 sales in the 2018 income statement

Question 30

The rules for recording financial guarantees require a company that makes a guarantee to record

A) The smaller of the fair value of the guarantee or the amount that would be required under loss contingency rules
B) The amount required by the loss contingency rules
C) The fair value of the guarantee
D) The larger of the fair value of the guarantee or the amount that would be required under loss contingency rules

Question 31

The Lehmann Corp. has a defined benefit pension plan. The actuaries say that the value of the liabilities to current and future retirees is $200 million. The pension plan now has a variety of investments, which cost $170 million and have a fair value of $190 million. The Lehmann Corp.'s balance sheet should show:

A) Pension-related assets of $170 million and pension liabilities of $200 million
B) Pension-related assets of $190 million and pension liabilities of $200 million
C) A net pension liability of $30 million
D) A net pension liability of $10 million

Question 32

Which of the following events would cause the estimate of a company's obligation under its defined benefit plan to decrease?

A) Interest rates fall
B) The company hires more employees
C) The company expects to pay workers more money in the future
D) The company expects more workers to leave the company after a very short period of time, before earning pension benefits

Question 33

Which of the following matters affecting a pension plan during a year does directly affect the expense shown in the income statement?

A) Service cost
B) Unexpectedly good earnings on the pension plan assets
C) Changes in the assumptions about future earnings of employees
D) Changes in assumptions about future life expectancy of retirees

Question 34

Which is the most accurate statement regarding GAAP rules for accounting for defined benefit pension plans?

A) All of the plans' transactions and other economic events that affect the plans are reflected in net income.
B) All of the plans' transactions and other economic events that affect the plans are reflected in other comprehensive income, and none are reflected in net income.
C) Some of the events that affect the plans are reflected in net income, and others are reflected in other comprehensive income.
D) No effects of these plans are shown in either net income or in other comprehensive income.

Question 35

The Pine Corp. learns in July 2018 some new information about a lawsuit that first started in 2015. Pine Corp. had shown a liability of $2,000,000 related to this lawsuit in its December 31 balance sheets for 2015, 2016, and 2017. It now believes the liability will be only $1,500,000. Under GAAP, Pine Corp. should

A) Restate the 2015, 2016, and 2017 statements to show a $1.5 million liability
B) Restate only the 2017 statements to show a $1.5 million liability
C) Not restate any prior year's liability, but reflect a benefit of $500,000 in the 2018 financial statements and disclose the change in estimate
D) Not restate any prior year's liability, but reflect a benefit of $500,000 in the 2018 financial statements. It should not disclose the change in estimate

Question 36

The Maple Corp. bought its factory building in 1990. At the time, it expected to use the factory for 40 years, so it depreciated it using a 40-year life. In 2016, it decided that the factory will last for 50 years. Under GAAP, Maple Corp. should

A) Restate its financial statements since the factory was bought, to reflect depreciation based on a 50-year life of the factory
B) Not restate any prior year statements, but adjust the opening balance for accumulated depreciation in 2016 to be what it should have been, using depreciation based on a 50-year estimated life, and use the 50-year life for future years
C) Reflect the change in estimate in 2016 and future years, without making any adjustment for using the 40-year estimate in the past
D) Make no adjustments, and continue to use the original 40-year estimate

Question 37

Which asset's valuation is least affected by uncertainty?

A) Accounts receivable of a toy manufacturer
B) Inventory of a toy manufacturer
C) Cash
D) Land

Question 38

Uncertainty affects the value of most assets and liabilities.

Question 39

The method of accounting for bad debts that recognizes an expense at the time specific customers' accounts are "written off" is the "allowance method."

Question 40

The FASB requires companies to use the allowance method of accounting for bad debts whenever bad debts are likely to be significant for the company.

Question 41

Generally accepted accounting procedures allow companies to choose to use either the "direct write-off" or "allowance" methods of accounting for bad debts, regardless of how material the bad debt expense is.

Question 42

The method of accounting for bad debts that recognizes an estimated expense in the period of the related sales, before the company knows which specific customers' are not going to pay, is the "allowance method."

Question 43

A major advantage of the "direct write-off method" over the allowance method of accounting for bad debts is better matching of revenues and expenses.

Question 44

A major advantage of the "direct write-off method" over the allowance method of accounting for bad debts is simplicity.

Question 45

Compared to the allowance method of accounting for bad debts, the direct write-off method requires companies to do more estimation.

Question 46

Under GAAP, companies should report both the amount receivable from customers and an allowance for doubtful accounts.

Question 47

If a company does not know at the end of a year exactly how much of its accounts receivable will not be collected, it is not allowed under GAAP to estimate the bad debt expense.

Question 48

When a company uses the allowance method of accounting for bad debts, its reported expense in any year is affected both by the events of that year, and also by over- or underestimates of bad debts in the previous year.

Question 49

In 2016, when the Lee Company learned that its estimate of bad debt expense in 2014 was 5% too high, the accounting rules required it to go back and change the 2014 financial reports.

Question 50

In general, if a company makes an incorrect estimate of bad debt expense one year, this incorrect estimate will not affect any future years' income.

Question 51

In general, if a company makes an incorrectly low estimate of bad debt expenses in 2016, then in later years it will have to reflect higher bad debt expenses than if it had made an accurate estimate in 2016.

Question 52

One major problem with GAAP is that companies do not have to disclose that they use estimates in preparing financial statements.

Question 53

One problem with undue conservatism in accounting is that under-reporting income in one time period is often over-reporting income in later time periods.

Question 54

"Aggressive" accounting tends to understate net income and assets.

Question 55

A "conservative" balance sheet would tend to overvalue liabilities.

Question 56

A "conservative" balance sheet would tend to overvalue land.

Question 57

"Conservative" accounting tends to understate net income.

Question 58

"Neutral" estimates have an equal probability of being too high and too low.

Question 59

In its Concepts Statements, the FASB favors conservative accounting.

Question 60

Normal accounting under GAAP assumes that companies will continue to operate normally, as "going concerns."

Question 61

The FASB's general principles on when to recognize something in the financial statements say that items can be recognized, even if there is no way to measure them reliably.

Question 62

One of the FASB's criteria for recognizing an item and recording it in the financial statements is that the item must be measurable with "sufficient reliability."

Question 63

One reason that GAAP requires companies to recognize intangible assets they acquired from others, but usually does not allow recognition of internally developed intangible assets, is that a verifiable arms-length transaction price exists for the items acquired from others.

Question 64

Historically, bankers and lenders have tended to favor conservative accounting principles.

Question 65

When the SEC was formed, in the 1930s, it tended to favor aggressive accounting principles over conservative ones, to help encourage investors to buy stocks.

Question 66

Historically, the adoption of income taxes on businesses has led to companies favoring more aggressive financial reporting methods and reporting higher income.

Question 67

According to GAAP, a company that sells cars, and gives its customers a five-year warranty, should not report any expense from these warranties until cars actually break and it has to pay for the repairs.

Question 68

A company that sells trucks, and gives a five-year warranty, should report an estimated expense related to these warranties in the same period as the sales revenue, and should not wait to record an expense until it pays for the repairs.

Question 69

One factor that affects the expected useful life of equipment is expected obsolescence.

Question 70

The only factor that should be considered when a company estimates the expected economic useful life of a fixed asset is when the asset will physically wear out.

Question 71

A company's estimate of the expected salvage value of a fixed asset is related to its estimate of the expected useful life of the asset.

Question 72

Under GAAP, the rule for whether a loss contingency is deemed "probable" is whether its probability is more than 50%.

Question 73

The FASB has never defined exactly what level of probability it means by the term "probable" in its rules for contingencies.

Question 74

Under FASB rules, a material loss contingency must be accrued if it is both "probable" and "reasonably estimable."

Question 75

Under FASB rules, a material loss contingency must be accrued if it is both "reasonably possible" and "reasonably estimable."

Question 76

Under FASB rules, a material loss contingency must be disclosed (but not accrued) if it is "reasonably possible."

Question 77

The FASB requires companies to record liabilities for contingencies as long as their likelihood is more than "remote."

Question 78

The normal rule for accounting for research and development costs is to record these costs as assets.

Question 79

The FASB's rules for accounting for possible liabilities resulting from "uncertain tax positions" are the same as its general rules for accounting for unasserted claims.

Question 80

If a company learns new information in 2018 that affects certain estimates it made when it published its 2017 financial statements, it should use the new information to restate the 2017 financial results.