Solution Manual for Intermediate Accounting 18th Edition, by Donald E. Kieso, Jerry J. Weygandt and Terry D. Warfield .Chapter 1- 23 | Complete Guide A+

Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-1 Complete Solution Manual and Instructor Resource for Intermediate Accounting, 18th Edition 18th Edition, by Donald E. Kieso, Jerry J. Weygandt and Terry D. Warfield. ISBN- Chapter 1 Financial Accounting and Accounting Standards Assignment Classification Table (By Topic) Topics Questions Brief Exercises Exercises Critical Thinking 1. Environment of accounting, principles, objectives, standards, accountingtheory. 1,2,3,4 1 1 1 2. Authoritative pronouncements and rule-making bodies. 5,6, 7,8 2 2 2 3. Conceptual frameworkgeneral, objective of financial reporting. 9, 10 3 3,4 4. Qualitative characteristics of accounting. 11,12, 13, 14, 15, 16,17 3,4, 5, 6, 7 4,5,6 5, 10 5. Elements of financial statements. 18, 19 8, 9 7 6. Basic assumptions and principles. 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30,31 10, 11, 12, 13, 14 4, 8, 9, 10, 11, 12 6, 7, 8, 9, 11 7. Cost constraint. 32,33,34 8. Role of pressure groups. 35, 36 12, 14, 15, 16, 17 9. Ethical issues. 37, 38,39,40 13 5-1-2 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Assignment Classification Table (By Learning Objective) Learning Objectives Questions Brief Exercises Exercises Critical Thinking 1. Describe the financial reporting environment, major standardsetting bodies, and the meaning of generally accepted accounting principles (GAAP). 1, 2, 3, 4, 5, 6, 7, 8 1, 2 1, 2 1 2. Describe the components and usefulness of the conceptual framework. 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19 3, 5, 6, 7, 8,9 3, 4, 5, 6, 7 2,3,4, 5, 10 3. Discuss the basic assumptions and principles of accounting. 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 31, 32, 33, 34 4, 10, 11, 12, 13, 14 8, 9, 10, 11, 12 6, 7, 8, 9, 11, 12 4. Identify the major challenges in the financial reporting environment. 30, 35, 36, 37, 38, 39,40 2 11, 13, 14, 15, 16 Assignment Characteristics Table (Time on Task) Item Description Level of Difficulty Time (minutes) E1.1 Need for GAAP. Simple 15-20 E1.2 Financial reporting and accounting standards. Simple 15-20 E1.3 Usefulness, objective of financial reporting. Simple 15-20 E1.4 Usefulness, objective of financial reporting, qualitative characteristics. Simple 15-20 E1.5 Qualitative characteristics. Moderate 20-30 E1.6 Qualitative characteristics. Simple 15-20 E1.7 Elements of financial statements. Simple 15-20 E1.8 Assumptions, principles, and constraint. Simple 15-20 E1.9 Assumptions, principles, and constraint. Moderate 20-25 E1.10 Full disclosure principle. Complex 20-25 E1.11 Accounting principles and assumptionscomprehensive. Moderate 20-25 E1.12 Accounting principles-comprehensive. Moderate 20-25 CT1.1 Securities and Exchange Commission. Moderate 30-40 CT1.2 Conceptual framework-general. Simple 20-25 CT1.3 Conceptual framework-general. Simple 25-35 CT1.4 Objective of financial reporting. Moderate 25-35 CT1.5 Qualitative characteristics. Moderate 30-35 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-3 CT1.6 Revenue recognition principle. Complex 25-30 CT1.7 Expense recognition principle. Complex 20-25 CT1.8 Expense recognition principle. Moderate 20-25 CT1.9 Expense recognition principle. Moderate 20-30 CT1.10 Qualitative characteristics. Moderate 20-30 CT1.11 Expense recognition principle. Moderate 20-25 CT1.12 Cost Constraint. Moderate 30-35 CT1.13 Rule-making Issues. Complex 20-25 CT1.14 Models for setting GAAP. Simple 15-20 CT1.15 Economic consequences. Moderate 25-35 CT1.16 GAAP and economic consequences. Moderate 25-35 Answers to Questions 1. If a company‘s financial performance is measured accurately, fairly, and on a timely basis, the right managers and companies can attract investment capital. Unreliable and irrelevant information leads to poor capital allocation, which adversely affects the efficiency of the securities market. LO: 1, Bloom: K, Difficulty: Simple, Time: 1-3, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 2. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity through equity investments and loans or other forms of credit. Information that is decision-useful to capital providers (investors) may also be useful to other users of financial reporting who are not investors. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Decision Making 3. Investors are interested in financial reporting because it provides information that is useful for making decisions (referred to as the decision-usefulness approach). When making these decisions, investors are interested in assessing the company‘s (1) ability to generate net cash inflows and (2) management‘s ability to protect and enhance the capital providers‘ investments. Financial reporting should therefore help investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. For investors to make these assessments, the economic resources of an enterprise, the claims to those resources, and the changes in them must be understood. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Decision Making 4. A common set of financial accounting and reporting standards applied by all businesses and entities should produce financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop a theory structure and set of practices, resulting in noncomparability among the financial statements of enterprises. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 5. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years, the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the development of 5-1-4 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB‘s statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 6. The explanation should note that generally accepted accounting principles or standards have ―substantial authoritative support.‖ They consist of accounting practices, procedures, concepts, and methods that are recognized by a large majority of practicing accountants as well as other members of the business and financial community. Statements issued by the Financial Accounting Standards Board constitute ―substantial authoritative support.‖ LO: 1, Bloom: K, Difficulty: Simple, 5-10, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication Questions Chapter 1 (Continued) 7. The FASB Accounting Standards Codification (Codification) is a compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP, not to create new GAAP. It creates one level of GAAP which is considered authoritative. The FASB Codification Research Systems (CRS) is an online real-time database that provides easy access to the Codification. The Codification and the related CRS provide a topically organized structure that is subdivided into topics, subtopics, sections, and paragraphs. LO: 1, Bloom: K, Difficulty: Moderate, Time: 5-7, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 8. It is hoped that the Codification will help users to better understand what GAAP is. If this occurs, companies will be more likely to comply with GAAP and the time to research accounting issues will be substantially reduced. In addition, through the electronic web-based format, GAAP can be easily updated which will help users stay current. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 9. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary for financial accounting for the following reasons: (1) It enables the FASB to issue more useful and consistent standards in the future. (2) New issues will be more quickly solvable by reference to an existing framework of basic theory. (3) It increases financial statement users‘ understanding of and confidence in financial reporting. (4) It enhances comparability among companies‘ financial statements. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 10. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 11. ―Qualitative characteristics of accounting information‖ are those characteristics that contribute to the quality or value of the information. The overriding qualitative characteristic of accounting information is usefulness for decision-making. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 12. Relevance and faithful representation are the two fundamental qualities of useful accounting information. For information to be relevant, it should be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-5 confirm or correct expectations. Faithful representation rests on whether the numbers and descriptions match what really existed or happened. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication Questions Chapter 1 (Continued) 13. The concept of materiality refers to the relative significance of an amount, activity, or item to informative disclosure, proper presentation of financial position, and the results of operations. Materiality has qualitative and quantitative aspects; both the nature of the item and its relative size enter into its evaluation. An accounting misstatement is said to be material if knowledge of the misstatement could affect the decisions of the average informed reader of the financial statements. Financial statements are misleading if they omit a material fact or include so many immaterial matters as to be confusing. In the examination, the auditor concentrates efforts in proportion to degrees of materiality and relative risk and disregards immaterial items. The relevant criteria for assessing materiality will depend upon the circumstances and the nature of the item and will vary greatly among companies. For example, an error in current assets or current liabilities will be more important for a company with a flow of funds problem than for one with adequate working capital. The effect upon net income (or earnings per share) is the most commonly used measure of materiality. This reflects the prime importance attached to net income by investors and other users of the statements. The effects upon assets and equities are also important, as are misstatements of individual accounts and subtotals included in the financial statements. The FASB defines materiality to be consistent with the legal concept of materiality, as established in the securities laws. Specifically, information is material ―if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.‖ There are no rigid standards or guidelines for assessing materiality. The lower bound of materiality has been variously estimated at 5% of net income, but the determination will vary based upon the individual case and might not fall within these limits. Certain items, such as a questionable loan to a company officer, may be considered material even when minor amounts are involved. In contrast, a large misclassification among expense accounts may not be deemed material if there is no misstatement of net income. LO: 2, Bloom: C, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Decision Making 14. The enhancing characteristics are comparability, verifiability, timeliness, and understandability. Enhancing qualities are qualitative characteristics that are complementary to the fundamental qualitative characteristics. These characteristics distinguish more useful information from less useful information. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 15. In providing information to users of financial statements, the FASB relies on general-purpose financial statements. The intent of such statements is to provide the most useful information possible at minimal cost to various user groups. Underlying these objectives is the notion that a user needs a reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. This point is important. It means that in the preparation of financial statements, a level of reasonable competence for the user can be assumed; this has an impact on the way and the extent to which information is reported. LO: 2, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: AICPA AC: Reporting, AICPA PC: Communication 5-1-6 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 16. Comparability facilitates comparisons between information about two different enterprises at a particular point in time. Consistency, a type of comparability, facilitates comparisons between information about the same enterprise at two different points in time. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication Questions Chapter 1 (Continued) 17. The accounting literature contains many terms that have specific meanings. Some of these terms have been in use for a long time, and their meanings have changed over time. Since the elements of financial statements are the building blocks with which the statements are constructed, it is necessary to develop a basic definitional framework for them. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 18. Distributions to owners differ from expenses and losses in that they represent transfers to owners, and they do not arise from activities intended to produce income. Expenses differ from losses in that they arise from the entity‘s ongoing major or central operations. Losses arise from peripheral or incidental transactions. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 19. Investments by owners differ from revenues and gains in that they represent transfers by owners to the entity, and they do not arise from activities intended to produce income. Revenues differ from gains in that they arise from the entity‘s ongoing major or central operations. Gains arise from peripheral or incidental transactions. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None 20. The four basic assumptions that underlie the financial accounting structure are: (1) The economic entity assumption. (2) The going concern assumption. (3) The monetary unit assumption. (4) The periodicity assumption. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 21. (a) In accounting, it is generally agreed that any measures of the success of an enterprise for periods less than its total life are at best provisional and subject to correction. Measurement of progress and status for arbitrary time periods is a practical necessity to serve those who must make decisions. It is not the result of postulating specific time periods as measurable segments of total life. (b) The practice of periodic measurement has led to many of the most difficult accounting problems, such as inventory pricing, depreciation of long-term assets, and the necessity for revenue recognition tests. The accrual system calls for associating related revenues and expenses. This becomes difficult for an arbitrary time period with incomplete transactions in process at both the beginning and the end of the period. Many accounting practices such as adjusting entries or the reporting of corrections of prior periods result directly from efforts to make each period‘s calculations as accurate as possible and yet recognizing that they are only provisional. LO: 3, Bloom: C, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 22. The monetary unit assumption assumes that the unit of measure (the dollar) remains reasonably stable so that dollars of different years can be added without any adjustment. When the value of the dollar fluctuates greatly over time, the monetary unit assumption loses its validity. The FASB in Concept No. 5 indicated that it expects the dollar unadjusted for inflation or deflation to be used to measure items recognized in financial statements. Only if circumstances change dramatically will the FASB consider a more stable measurement unit. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-7 Questions Chapter 1 (Continued) 23. Fair value is defined as ―the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.‖ Fair value is, therefore, a market-based measure. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: AICPA PC: None 24. The fair value hierarchy provides insight into the priority of valuation techniques that are used to determine fair value. The fair value hierarchy is divided into three broad levels. Fair Value Hierarchy Level 1: Observable inputs that reflect quoted prices for Least Subjective identical assets or liabilities in active markets. Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or through corroboration with observable data. Level 3: Unobservable inputs (for example, a company‘s own data or assumptions). Most Subjective As indicated, Level 1 is the most reliable because it is based on quoted prices, such as a closing stock price in the Wall Street Journal. Level 2 is the next most reliable and would rely on evaluating similar assets or liabilities in active markets. At the least-reliable level, Level 3, much judgment is needed based on the best information available to arrive at a relevant and representationally faithful fair value measurement. LO: 3, Bloom: K, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 25. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. In the case of services, revenue is recognized when the services are performed. In the case of selling a product, the performance obligation is met when the product is delivered. Companies follow a five-step process to analyze revenue arrangements to determine when revenue should be recognized: (1) Identify the contract(s) with the customer; (2) Identify the separate performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations, and; (5) Recognize revenue when each performance obligation is satisfied. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 26. A performance obligation is a promise to deliver a product or provide a service to a customer. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. In the case of services, revenue is recognized when the services are performed. In the case of selling a product, the performance obligation is met when the product is delivered. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 5-1-8 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Questions Chapter 1 (Continued) 27. The five steps in the revenue recognition process are: Step 1 Identify the contract(s) with the customer. A contract is an agreement between two parties that creates enforceable rights or obligations. Step 2 Identify the separate performance obligations in the contract. A performance obligation is either a promise to provide a service or deliver a product, or both. Step 3. Determine the transaction price. The transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring a good or service. Step 4. Allocate the transaction price to separate performance obligations. This is usually done by estimating the value of consideration attributable to each product or service. Step 5. Recognize revenue when each performance obligation is satisfied. This occurs when the service is provided or the product is delivered. Note that many revenue transactions pose few problems because the transaction is initiated and completed at the same time. LO: 3, Bloom: C, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 28. Revenues are recognized when a performance obligation is satisfied–in the case of services, revenue is recognized when the services are performed. Therefore, revenue for Selane Eatery should be recognized at the time the luncheon is served. LO: 3, Bloom: AN, Difficulty: Simple, Time: 3-5, Analytic, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 29. The cause and effect relationship can seldom be conclusively demonstrated, but many costs appear to be related to particular revenues, and recognizing them as expenses accompany recognition of the revenue. Examples of expenses that are recognized by associating cause and effect are sales commissions and the cost of products sold or services provided. Systematic and rational allocation means that in the absence of a direct means of associating cause and effect, and where the asset provides benefits for several periods, its cost should be allocated to the periods in a systematic and rational manner. Examples of expenses that are recognized in a systematic and rational manner are depreciation of plant assets, amortization of intangible assets, and allocation of rent and insurance. Some costs are immediately expensed because the costs have no discernible future benefits or the allocation among several accounting periods is not considered to serve any useful purpose. Examples include officers‘ salaries, most selling costs, amounts paid to settle lawsuits, and costs of resources used in unsuccessful efforts. LO: 3, Bloom: AN, Difficulty: Simple, Time: 5-7, Analytic, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 30. (a) To be recognized in the main body of financial statements, an item must meet the definition of an element. In addition, the item must have been measured, recorded in the books, and passed through the double-entry system of accounting. (b) Information provided in the notes to the financial statements amplifies or explains the items presented in the main body of the statements and is essential to an understanding of the performance and position of the enterprise. Information in the notes does not have to be quantifiable, nor does it need to qualify as an element. (c) Supplementary information includes information that presents a different perspective from that adopted in the financial statements. It also includes management‘s explanation of the financial information and a discussion of the significance of that information. LO: 4, Bloom: C, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-9 Questions Chapter 1 (Continued) 31. The general guide followed with regard to the full disclosure principle is to disclose in the financial statements any facts of sufficient importance to influence the judgment of an informed reader. The fact that the amount of outstanding common stock doubled in January of the subsequent reporting period probably should be disclosed because such a situation is of importance to present stockholders. Even though the event occurred after December 31, 2025 (referred to as a subsequent event), it should be disclosed on the balance sheet as of December 31, 2025, in order to make adequate disclosure. (The major point that should be emphasized throughout the entire discussion on full disclosure is that there is normally no ―black‖ or ―white‖ but varying shades of grey and it takes experience and good judgment to arrive at an appropriate answer). LO: 3, Bloom: AN, Difficulty: Simple, Time: 3-5, Analytic, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 32. Accounting information is subject to the cost constraint. Information should not be provided unless the benefits exceed the costs of preparing it. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, Analytic, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 33. The costs of providing accounting information include costs of collecting and processing, disseminating, auditing, potential litigation, disclosure to competitors, and analysis and interpretation. Benefits to preparers may include greater management control and access to capital at a lower cost. Users may receive better information for allocation of resources, tax assessment, and rate regulation. Occasionally new accounting standards require the presentation of information that is not readily assembled by the accounting systems of most companies. A determination should be made as to whether the incremental or additional costs of providing the proposed information exceed the incremental benefits to be obtained. This determination requires careful judgment since the benefits of the proposed information may not be readily apparent. LO: 3, Bloom: AN, Difficulty: Simple, Time: 3-5, Analytic, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 34. In general, conservatism should not be the basis for determining the accounting for transactions because it conflicts with the conceptual framework quality of neutrality. (a) Acceptable if reasonably accurate estimation is possible. To the extent that warranty costs can be estimated accurately, they should be recorded when an obligation exists, usually in the period of the sale. (b) Not acceptable. Most accounts are collectible, or the company will be out of business very soon. Hence, sales can be recorded when made. Also, other companies record sales when made rather than when collected, so if accounts for Landowska Co. are to be compared with other companies, they must be kept on a comparable basis. However, estimates for uncollectible accounts should be recorded if there is a reasonably accurate basis for estimating bad debts. (c) Not acceptable. A provision for the possible loss can be made through an appropriation of retained earnings, but until judgment has been rendered on the suit or it is otherwise settled, entry of the loss usually represents anticipation. Recording it earlier is probably an unwise legal strategy as well. For the loss to be recognized at this point, the loss would have to be probable and reasonably estimable. (See FASB ASC for additional discussion if desired.) Note disclosure is required if the loss is not recorded. LO: 3, Bloom: AN, Difficulty: Simple, Time: 3-5, Analytic, AICPA BC: None, AICPA AC: Measurement, Reporting, AICPA PC: None 35. The sources of pressure are innumerable, but the most intense and continuous pressure to change or influence accounting principles or standards come from individual companies, industry associations, governmental agencies, practicing accountants, academicians, professional accounting organizations, and public opinion. LO: 4, Bloom: K, Difficulty: Simple, 5-10, AACSB: Communication, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communication 5-1-10 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Questions Chapter 1 (Continued) 36. Economic consequences mean the impact of accounting reports on the wealth positions of issuers and users of financial information and the decision-making behavior resulting from that impact. In other words, accounting information impacts various users in many different ways, which leads to wealth transfers among these various groups. If politics plays an important role in the development of accounting rules, the rules will be subject to manipulation to further whatever policy prevails at the moment. No matter how well-intentioned the rule maker may be, if the information is designed to indicate that investing in a particular enterprise involves less risk than it actually does, or is designed to encourage investment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of credibility. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communication 37 Concern exists about fraudulent financial reporting because it can undermine the entire financial reporting process. Failure to provide accurate information to users can lead to inappropriate allocations of resources in our economy. In addition, failure to detect massive fraud can lead to additional governmental oversight of the accounting profession. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communication 38. The expectations gap is the difference between what people think accountants should be doing and what accountants think they can do. It is a difficult gap to close. The accounting profession recognizes it must play an important role in narrowing this gap. To meet the needs of society, the profession is continuing its efforts in developing accounting standards, such as numerous pronouncements issued by the FASB, to serve as guidelines for recording and processing business transactions in the changing economic environment. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 39. Some major challenges facing the accounting profession relate to the following items: Nonfinancial measurement—how to report significant key performance measurements such as customer satisfaction indexes, backlog information and reject rates on goods purchased. Forward-looking information—how to report more future-oriented information. Soft assets—how to report on intangible assets, such as market know-how, market dominance, and well-trained employees. Timeliness—how to report more real-time information. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication 40. Accountants must perceive the ethical dimensions of some situations because GAAP does not define or cover all specific features that are to be reported in financial statements. In these instances, accountants must choose among alternatives. These accounting choices influence whether particular stakeholders may be harmed or benefited. Ethical decision-making involves awareness of potential harm or benefit and taking responsibility for the choices. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Ethics, Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Ethical Conduct Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-11 Solutions to Brief Exercises Brief Exercise 1.1 1. True 2. False. Any company claiming compliance with GAAP must comply with all standards and interpretations, including disclosure requirements. 3. True 4. False. In establishing financial accounting standards, the FASB relies on two basic premises: (1) the FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession, and (2) it should operate in full view of the public through a ―due process‖ system that gives interested people ample opportunities to make their view known. LO: 1, Bloom: K, Difficulty: Simple, Time: 5-10, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.2 (a) AICPA. American Institute of Certified Public Accountants. The national organization of practicing certified public accountants. (b) FAF. Financial Accounting Foundation. An organization whose purpose is to select members of the FASB and its Advisory Councils, fund their activities, and exercise general oversight. (c) FASAC. Financial Accounting Standards Advisory Council. An organization whose purpose is to consult with the FASB on issues, project priorities, and select task forces. (d) GAAP. Generally Accepted Accounting Principles. A common set of standards, principles, and procedures which have substantial authoritative support and have been accepted as appropriate because of universal application. (e) CPA. Certified Public Accountant. An accountant who has fulfilled certain education and experience requirements and passed a rigorous examination. Most CPAs offer auditing, tax, and management consulting services to the general public. (f) FASB. Financial Accounting Standards Board. The primary body that currently establishes and improves financial accounting and reporting standards for the guidance of issuers, auditors, users, and others. (g) SEC. Securities and Exchange Commission. An independent regulatory agency of the United States government which administers the Securities Acts of 1933 and 1934 and other acts. (h) IASB. International Accounting Standards Board. An international group, formed in 2001 (replacing a predecessor body that was formed in 1973), actively developing and issuing accounting standards that will have international appeal and hopefully support. LO: 1, Bloom: K, Difficulty: Moderate, Time: 5-10, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None 5-1-12 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Brief Exercise 1.3 (a) 5. Comparability (b) 8. Timeliness (c) 3. Predictive value (d) 1. Relevance (e) 7. Neutrality LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Decision Making Brief Exercise 1.4 (a) 5. Faithful representation (b) 8. Confirmatory value (c) 3. Free from error (d) 2. Completeness (e) 4. Understandability LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Decision Making Brief Exercise 1.5 (a) If the company changed its method for inventory valuation, the consistency, and therefore the comparability, of the financial statements have been affected by a change in the method of applying the accounting principles employed. The change would require comment in the auditor‘s report in an explanatory paragraph. (b) If the company disposed of one of its two subsidiaries that had been included in its consolidated statements for prior years, no comment as to consistency needs to be made in the CPA‘s audit report. The comparability of the financial statements has been affected by a business transaction, but there has been no change in any accounting principle employed or in the method of its application. (The transaction would probably require informative disclosure in the financial statements). Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-13 BE 1.5 (Continued) (c) If the company reduced the estimated remaining useful life of plant property because of obsolescence, the comparability of the financial statements has been affected. The change is not a matter of consistency; it is a change in accounting estimate required by altered conditions and involves no change in accounting principles employed or in their method of application. The change might be disclosed by a note in the financial statements if the effect was material. If commented upon in the audit report, it would be a matter of disclosure rather than consistency. LO: 2, Bloom: AN, Difficulty: Hard, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication Brief Exercise 1.6 (a) Verifiability (b) Comparability (c) Comparability (consistency) (d) Timeliness LO: 2, Bloom: K, Difficulty: Simple, Time: 5-7, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.7 Companies and their auditors, for the most part, have adopted the general rule of thumb that anything under 5% of net income is considered not material. Recently, the SEC has indicated that it is okay to use this percentage for the initial assessment of materiality, but other factors must be considered. For example, companies can no longer fail to record items to meet consensus analyst‘s earnings numbers, preserve a positive earnings trend, convert a loss to a profit or vice versa, increase management compensation, or hide an illegal transaction like a bribe. In other words, both quantitative and qualitative factors must be considered in determining when an item is material. (a) Because the change was used to create a positive trend in earnings, the change is considered material. (b) Each item must be considered separately and not netted. Therefore, each transaction is considered material. 5-1-14 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) BE 1.7 (Continued) (c) In general, companies that follow an ―expense all capital items below a certain amount‖ policy are not in violation of the materiality concept. Because the same practice has been followed from year to year, Damon‘s actions are acceptable. LO: 2, Bloom: K, Difficulty: Moderate, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.8 (a) Equity (b) Revenues (c) Equity (d) Assets (e) Expenses (f) Losses (g) Liabilities (h) Distributions to owners (i) Gains (j) Investments by owners LO: 2, Bloom: K, Difficulty: Simple, Time: 7-10, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.9 (a) Debit to the Land account, as it is a cost incurred in acquiring land. (b) Debit to an asset account, preferably Land Improvements. The driveway will last for many years, and therefore should be capitalized and depreciated. (c) Debit to an asset account, preferably Equipment, as the machine will last for a number of years and contribute to the operations of those years. (d) If the fiscal year ends December 31, this expenditure will be an expense of the current year so will be debited to an expense account. If financial statements are prepared on some date before December 31, part of this cost would be an expense and part would be an asset. Depending upon the circumstances, the original entry, as well as the adjusting entry for statement purposes, should take the financial statement date into account. Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-15 BE 1.9 (Continued) (e) Debit to the Building account, as it is a part of the cost of that plant asset which will contribute to operations for many years. (f) Debit to an expense account, as the service has already been received; the contribution to operations occurred in this period. LO: 2, Bloom: AN, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.10 (a) Periodicity (b) Monetary unit (c) Going concern (d) Economic entity LO: 3, Bloom: K, Difficulty: Moderate, Time: 5-10, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.11 (a) Net realizable value. (b) Would not be disclosed. (c) Would not be disclosed. Depreciation would be inappropriate if the going concern assumption no longer applies. (d) Net realizable value. (e) Net realizable value (i.e., redeemable value). LO: 3, Bloom: K, Difficulty Moderate, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.12 (a) Revenue recognition (b) Expense recognition (c) Full disclosure (d) Measurement (historical cost) LO: 3, Bloom: K, Difficulty: Moderate, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: AICPA AC: Reporting, AICPA PC: None 5-1-16 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Brief Exercise 1.13 Investment (1)—Level 3 Investment (2)—Level 1 Investment (3)—Level 2 LO: 3, Bloom: AN, Difficulty: Moderate, Time: 5-10, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Brief Exercise 1.14 (a) Full disclosure (b) Expense recognition (c) Historical cost LO: 3, Bloom: C, Difficulty: Moderate, Time: 5-10, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-17 Solutions to Exercises Exercise 1.1 It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily disclose the type of information it considers important. Without a coherent body of accounting theory and standards, each accountant or enterprise would have to develop its own theory structure and set of practices, and readers of financial statements would have to familiarize themselves with every company‘s peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared. In addition, voluntary disclosure may not be an efficient way of disseminating information. A company is likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost of assembling and disseminating information. However, an investor wishing additional information has to pay to receive additional information desired. Different investors may be interested in different types of information. Since the company may not be equipped to provide the requested information, it would have to spend additional resources to fulfill such needs; or the company may refuse to furnish such information if it is too costly to do so. As a result, investors may not get the desired information or they may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and distributing information occurs when different investors ask for the same information at different points in time. To society as a whole, this would not be an efficient way of utilizing resources. LO: 1, 4, Bloom: AN, Difficulty: Simple, Time: 15-20, AACSB: Reflective Thinking, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None Exercise 1.2 1. (d) 2. (d) 3. (d) 4. (a) 5. (a) 6. (b) 7. (d) 8. (b) LO: 1, 2, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: Knowledge, AICPA BC: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None Exercise 1.3 (a) True. (b) False – General-purpose financial reports help users who lack the ability to demand all the financial information they need from an entity and, therefore, must rely on, at least partly, the information in financial reports. (c) False – Standard-setting based on personal conceptual frameworks will lead to different conclusions about identical or similar issues. As a result, standards will not be consistent with one another, and past decisions may not be indicative of future ones. 5-1-18 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Exercise 1.3 (Continued) (d) False – Information that is decision-useful to capital providers may also be useful to users of financial reporting who are not capital providers. (e) False – An implicit assumption is that all users need reasonable knowledge of business and financial accounting matters to understand the information contained in the financial statements. (f) True. LO: 2 Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: Knowledge, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None Exercise 1.4 (a) False – The fundamental qualitative characteristics that make accounting information useful are relevance and faithful representation. (b) False – Relevant information must also be material. (c) False – Information that is relevant is characterized as having predictive or confirmatory value or both. (d) False – Comparability also refers to comparisons of a firm over time (consistency). (e) False – Verifiability is an enhancing characteristic that relates to both relevance and faithful representation. (f) True. LO: 2, Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: Knowledge, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Decision Making Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-19 Exercise 1.5 (a) (b) Confirmatory value. Cost. (g) (h) Timeliness. Relevance. (c) Neutrality. (i) Comparability. (d) Comparability (Consistency). (j) Verifiability. (e) Neutrality. (f) Relevance and Faithful representation. LO: 2, Bloom: C, Difficulty: Moderate, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Exercise 1.6 (a) (b) (c) Comparability. Confirmatory value. Comparability (Consistency). (h) (i) (j) Materiality. Faithful representation. Relevance and Faithful (d) (e) Neutrality. Verifiability. (k) representation. Timeliness. (f) Relevance. (g) Comparability, Verifiability, Timeliness, and Understandability. LO: 2, Bloom: C, Difficulty: Simple, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Bloom: Exercise 1.7 (a) Gains, losses. (b) Liabilities. (c) Investments by owners, comprehensive income. (also, possible would be revenues and gains). (d) Distributions to owners. (Note to instructor: net effect is to reduce equity and assets). (e) Comprehensive income (also, possible would be revenues and gains). (f) Assets. (g) Comprehensive income. (h) Revenues, expenses. (i) Equity. (j) Revenues. (k) Distributions to owners. (l) Comprehensive income. LO: 2, Bloom: C, Difficulty: Moderate, Time: 15-20, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None 5-1-20 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Exercise 1.8 (a) 7. Expense recognition principle. (b) 5. Measurement principle (historical cost.) (c) 8. Full disclosure principle. (d) 2. Going concern assumption. (e) 1. Economic entity assumption. (f) 4. Periodicity assumption. (g) 3. Monetary unit assumption. LO: 3, Bloom: C, Difficulty: Simple, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Exercise 1.9 (a) Measurement principle (historical cost). (i) Expense recognition and revenue recognition principles. (b) Full disclosure principle. (j) Economic entity assumption. (c) Expense recognition principle. (k) Periodicity assumption. (d) Measurement (fair value) principle. (l) Measurement principle, Expense recognition principle. (e) (f) Economic entity assumption. Full disclosure principle. (m) Measurement principle (historical cost). (g) Revenue recognition principle. (n) Expense recognition principle. (h) Full disclosure principle. LO: 3, Bloom: C, Moderate, Time: 10-15, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Exercise 1.10 (a) It is well established in accounting that revenues, expenses, and cost of goods sold must be disclosed in an income statement. It might be noted to students that such was not always the case. At one time, only net income was reported, but over time, we have evolved to the present reporting format. (b) The proper accounting for this situation is to report the equipment as an asset and the notes payable as a liability on the balance sheet. Offsetting is permitted in only limited situations where certain assets are contractually committed to pay off liabilities. Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-21 Exercise 1.10 (Continued) (c) According to GAAP, the basis upon which inventory amounts are stated (lower of cost or market) and the method used in determining cost (LIFO, FIFO, average cost, etc.) should also be reported. The disclosure requirement related to the method used in determining cost should be emphasized, indicating that where possible alternatives exist in financial reporting, disclosure in some format is required. (d) Consistency requires that disclosure of changes in accounting principles be made in the financial statements. To do otherwise, would result in misleading financial statements. Financial statements are more useful if they can be compared with similar reports for prior years. LO: 3, Bloom: C, Difficulty: Hard, Time: 20-25, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Exercise 1.11 (a) This entry violates the economic entity assumption. This assumption in accounting indicates that economic activity can be identified with a particular unit of accountability. In this situation, the company erred by charging this cost to the wrong economic entity. (b) The historical cost principle indicates that assets and liabilities are accounted for on the basis of cost. If we were to select sales value, for example, we would have an extremely difficult time in attempting to establish a sales value for a given item without selling it. It should further be noted that the revenue recognition principle provides the answer to when revenue should be recognized. Revenue should be recognized when a performance obligation is satisfied. In this case, the obligation is not satisfied until goods are delivered to a customer. (c) The expense recognition principle indicates that expenses should be allocated to the appropriate periods involved. In this case, there appears to be a high degree of uncertainty about whether the company will have to pay. GAAP requires that a loss should be accrued only (1) when it is probable that the company would lose the suit and (2) the amount of the loss can be reasonably estimated. (Note to instructor: The student will probably be unfamiliar with the guidance (FASB ASC 450; formerly FASB Statement No. 5). The purpose of this question is to develop some decision framework when the probability of a future event must be assumed.) 5-1-22 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Exercise 1.11 (Continued) (d) At present, accountants do not recognize price-level adjustments in the accounts. Hence, it is misleading to deviate from the measurement principle (historical cost) because conjecture or opinion can take place. It should also be noted that depreciation is not so much a matter of valuation as it is a means of cost allocation. Assets are not depreciated on the basis of a decline in their fair value but are depreciated using systematic charges of expired costs against revenues. (Note to instructor: It might be called to the students‘ attention that the FASB does encourage supplemental disclosure of price-level information.) (e) The answer to this situation is the same as (b). LO: 3, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None Exercise 1.12 (a) Depreciation is an allocation of cost, not an attempt to value assets. As a consequence, even if the fair value of the building increased, costs related to this building should be matched with revenues on the income statement, not as a charge against retained earnings. (b) Accountants follow the measurement principle (historical cost) approach and write-ups of assets are not permitted. It should also be noted that the revenue recognition principle states that revenue should not be recognized until a performance obligation is satisfied. In this case, revenue (gross profit) would not be recognized until the goods are delivered to the customer. Further, this is not a peripheral transaction so recording a gain is not appropriate. Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 5-1-23 Exercise 1.12 (Continued) (c) Assets should be recorded at the fair value of what is given up or the fair value of what is received, whichever is more clearly evident. It should be emphasized that it is not a violation of the measurement principle (historical cost) to use the fair value of the stock. Recording the asset at the par value of the stock has no conceptual validity. Par value is merely an arbitrary amount usually set at the date of incorporation. (d) The gain should be recognized when the equipment is delivered to the customer. Deferral of the gain is not permitted, because the company has satisfied the performance obligation. (e) It appears from the information that the sale should be recorded in 2026 instead of 2025. Revenue should be recognized when a performance obligation is satisfied. In this case, the performance obligation is met when the order is delivered to the buyer. Accounts receivable and Sales revenue should be recorded in 2026. It should be noted that if the company is employing a perpetual inventory system in dollars and quantities, a debit to Cost of Goods Sold and a credit to Inventory is also necessary in 2026. LO: 3, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None 5-1-24 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) Solutions to Using Your Judgement UYJ 1.1 Financial Reporting Problem (a) From Note 1 – Summary of Significant Accounting Policies: Our revenue is primarily generated from the sale of the finished product to customers. Those sales predominantly contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks, and rewards transfer, which can be on the date of shipment or the date of receipt by the customer. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period the revenue is recognized. The revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities. The revenue includes shipping and handling costs, which generally are included in the list price to the customer. Trade promotions, consisting primarily of customer pricing allowances, merchandising funds, and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net of trade promotion spending, which is recognized as incurred at the time of the sale. Most of these arrangements have terms of approximately one year. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the Accrued and other liabilities line item in the Consolidated Balance Sheets. (b) Historical Cost Buildings, machinery, and equipment Property, plant, and equipment is recorded at cost reduced by accumulated depreciation. Fair Value Investments (U.S. government securities, corporate bond securities, other investments), derivatives (relating to foreign currency hedges, other foreign currency instruments, interest rates, net investment hedges) are reported at fair value. Certain financial instruments are required to be recorded at fair value. (c) On July 1, 2019, we adopted ASU 2016-02,