CA Intermediate exam1 with Complete Solution

What two organizations are primarily responsible for the development of GAAP in the US? - ANSWER Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) What organization was established by the federal government, requires public companies to adhere to GAAP, has enforcement authority, and relies on FASB (private sector)to develop accounting standards? - ANSWER SEC What does the financial accounting foundation (FAF) do? - ANSWER selects members of the FASB, funds their activities consults on major policy issues, technical issues, project priorities and selection and organization of task forces - ANSWER Financial accounting standards advisory council What is the due process system of the FASB? - ANSWER topics for boards agenda, research and analysis conducted and preliminary views of pros and cons issued, public hearing on proposed standard,board evaluates research and public response, and issues an exposure draft, board evaluates responses and changes exposure draft, if necessary., a final standard is issued what are the two types of pronouncements - ANSWER accounting standards updates and financial accounting concepts what types of decisions are investors and lenders making about companies? - ANSWER investors decide whether to buy, sell, or hold stock in a company and lenders decides whether to lend money to a company, what interest rate to do it at, and how long what are the two fundamental qualities of accounting? - ANSWER Relevance and Faithful representation what are the ingredients of the fundamental quality: Relevance? - ANSWER Predictive Value, Confirmatory Value, Materiality what are the ingredients of the fundamental quality: Faithful Representation? - ANSWER completeness, neutrality, free from error What are the enhancing qualitative characteristics? - ANSWER comparability, verifiability, timeliness, understandability what are the four accounting assumptions - ANSWER going concern, monetary unit, periodicity, economic entity What is the going concern assumption? - ANSWER Assumes that the entity will remain in operation for the foreseeable future. what are the implications of the going concern assumption - ANSWER the historical cost principle is of limited usefulness if we assume eventual liquidation, depreciation and amortization approaches may need to be adjusted, current and noncurrent classification of assets and liabilities may lose their significance what is the economic entity assumption - ANSWER every economic entity can be separately identified and accounted for What is the monetary unit assumption? - ANSWER Express transactions and events in monetary, or money, units. what is the periodicity assumption - ANSWER The economic life of a business can be divided into artificial time periods. what are the four basic principles of accounting? - ANSWER Measurment principle, revenue recognition, expense recognition, full disclosure what is the measurement principle - ANSWER the most commonly used measurements are based on historical cost and fair value what is the full disclosure principle - ANSWER recognizes that the nature and amount of information included in financial reports reflects a series of judgemental trade offs what is an example of a product cost - ANSWER material, labor, overhead what is an example of a period cost - ANSWER salaries and admin costs when do you recognize a product cost - ANSWER recognize in a period of revenue when to recognize period costs - ANSWER expense as incurred types of events in the transaction process - ANSWER external and internal what are the two types of deferrals - ANSWER prepaid expenses and unearned revenues what are the two types of accruals - ANSWER accrued revenues and accrued expenses what is a weakness of cash basis accounting? - ANSWER today's economy is considerably more driven by credit than cash, investors want timely info about companies future cash flows what are the rules for reversing entries - ANSWER 1. all accruals should be reversed 2. all deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed **when original transaction is reported as an expense or revenue 3. adjusting entries for depreciation and bad debts are not reversed what are gains - ANSWER increases in equity from other transactions that do not have to do with a companies operating activity, except those that result from revenues or investments by owners what are losses - ANSWER decreases in equity from other transactions that do not have to do with a companies operating activity, except those that result from expenses or distribution by owners example of some gains and losses - ANSWER sale of investments or plant assets, settlement of liabilities, and write-offs of assets due to impairments or casualty what are the two types of gains/losses and explain them? - ANSWER 1. unusual: high degree of abnormality and of a type clearly unrelated to the ordinary activities of the company (loss on flood) 2. Infrequency of occurrence: type of transaction that is not reasonably expected to recur in the future, but it does have to do with the operations of the business (impairments) how to calculate eps - ANSWER net income - preferred dividends / weighted average common shares outstanding single step income statement formula - ANSWER revenues- expenses= net income what are special items in the income statement - ANSWER 1. discontinued operations and 2. other comprehensive income when is something labled a discontinued operation? - ANSWER 1, a company eliminates the results of operations of a component of the business 2. the elimination of a component that represents a strategic shift, having a major effect on the company's operatiojns and financial results how are amounts of discontinued operations reported? - ANSWER net of tax where are discontinued operations reported? - ANSWER after income from continuing operations