MOCKTEST FINANCIAL REPORTING :MAY19.. Answers at the end..
Q1 Under U.S. GAAP, R&D costs are treated as period costs, meaning they are ****(capitalized/expensed) in the period incurred. The reason is that although the costs are incurred in order to provide future economic benefit to the company, the chances of achieving success with R&D is too difficult to gauge. To be
conservative, the costs are expensed as incurred and no ***(revenue/asset) is created.
Q2 How the sale of equipment is reported on the income statement depends on the reason for the sale. If equipment is sold because the part of the
business using the equipment is being shut down, the gain or loss on the sale is included as part of *****(other comprehensive income /discontinued operations)
Q3 ***** cash flows are cash flows that involve the purchase and sale of long-term assets. Because loaning money to other companies qualifies as the purchase of a long-term asset (a note receivable), it is ***** activity. ***** cash flows are cash flows that involve transactions with shareholders and borrowing and repaying debt. Borrowing cash from other entities qualifies as a ***** activity
Q4 The purpose of the statement of shareholders’ equity is to **** the beginning and ending balances in shareholders’ equity accounts
Q5 Comprehensive income includes all changes in ***(net assets/equity) during a period except changes from investments by owners and distributions to owners. ***(Operating income/Net income) is the starting point for calculating it. Since operating income is a component of net income, it is also a component of comprehensive income
Q6 When a company owns between 20% and 50% of the voting stock of another company, it accounts for this investment using the **** method of accounting. This is because the investor has significant (but not absolute) control over the investee’s activities. Under the equity method, the investment asset on the investor’s balance sheet is increased by its proportionate share of the investee’s **** and decreased by its proportionate share of the ***** paid by the investee
Q7 Legal costs associated with obtaining a patent on a new product. Research and development costs should be **** in the period incurred. Legal costs associated with obtaining a patent on a fully developed new product are not considered research and development, and may be *****(expensed/capitalized)
Q8 Under IFRS, an impairment loss is the amount by which the carrying amount of a cash-generating unit exceeds its recoverable amount. Recoverable
amount is:The ****(higher/lesser) of fair value less disposal costs or value in use. Under IFRS, there is impairment when the recoverable amount is ***(higher/less) than the current carrying amount of the cash generating unit or asset. The recoverable amount is the ***** of: (1) Value in use, which is the present value of expected future cash flows of the cash-generating unit or asset. (2) Fair value less costs of disposal (also referred to as net selling price or fair value
less costs to sell).
Q9 Cost of goods sold is recognized at the same time the revenue from the sale is recognized. When companies ship products to customers, the
shipping terms are generally used to determine when title to the goods passes from the seller to the buyer. When the title passes, the ****(sales/revenue) is
recognized because the seller has satisfied its performance obligation. When goods are shipped ****(FOB Destination/ FOB Shipping Point), the title passes when the goods arrive at the buyer’s location (the destination). When goods are shipped ****( FOB Destination/FOB Shipping Point), the title passes when the goods leave the seller (the shipping point).
Q10 Revenue should be recognized as performance obligations are fulfilled using an ****(input/output) method based on units delivered
Q11 When a company has multiple performance obligations in one transaction, it needs to allocate the *****(settlement/transaction) price among the performance obligations. The preferred method is to use each performance obligation’s **** (comprehensive /stand-alone ) price as the basis for the allocation
Q12 Revenue is recognized as or when *****(payment /performance) obligations are satisfied
Q13 When a contract is executed over a period of time, the revenue is recognized based on the ***(payment /progress) made toward completion. Progress can be measured using the ****(input/output)method :for example, the percentage of total expected costs incurred in the period or the percentage of total expected hours worked in the period, or the ****(input /output) method:for example, the percentage of miles completed or units completed.
Q14 Interest revenue from municipal bonds is included in GAAP income but is not ever included in tax income. This means it creates a ****(temporary/permanent) difference between GAAP income and tax income. Warranty expense is estimated at the time of sale for GAAP purposes but not recorded for tax purposes until actually paid. This means it creates a ****(temporary /permanent) difference between GAAP income and tax income
Q15 Life insurance proceeds on the death of an insured executive is included in GAAP income but is not ever included in tax income. This means it creates a ***** difference between GAAP income and tax income. Using accelerated depreciation for tax purposes and straight-line depreciation for GAAP purposes results in different depreciation expenses each year. However, the total depreciation expense under the methods is the same. This means it creates a ****** difference between GAAP income and tax income
answers :
ANSWER Q1 Under U.S. GAAP, R&D costs are treated as period costs, meaning they are expensed in the period incurred. The reason is that although the costs are incurred in order to provide future economic benefit to the company, the chances of achieving success with R&D is too difficult to gauge. To be conservative, the costs are expensed as incurred and no asset is created.
Answer Q2 How the sale of equipment is reported on the income statement depends on the reason for the sale. If equipment is sold because the part of the
business using the equipment is being shut down, the gain or loss on the sale is included as part of discontinued operations
answer Q3 Investing cash flows are cash flows that involve the purchase and sale of long-term assets. Because loaning money to other companies qualifies as
the purchase of a long-term asset (a note receivable), it is an investing activity. Financing cash flows are cash flows that involve transactions with
shareholders and borrowing and repaying debt. Borrowing cash from other entities qualifies as a financing activity
answer Q4 The purpose of the statement of shareholders’ equity is to reconcile the beginning and ending balances in shareholders’ equity accounts
answer Q5 Comprehensive income includes all changes in equity during a period except changes from investments by owners and distributions to owners. Net
income is the starting point for calculating it. Since operating income is a component of net income, it is also a component of comprehensive
income
ANSWER Q6 When a company owns between 20% and 50% of the voting stock of another company, it accounts for this investment using the equity method of
accounting. This is because the investor has significant (but not absolute) control over the investee’s activities. Under the equity method, the
investment asset on the investor’s balance sheet is increased by its proportionate share of the investee’s net income and decreased by its
proportionate share of the dividends paid by the investee
answer q7 Legal costs associated with obtaining a patent on a new product. Research and development costs should be expensed in the period incurred. Legal costs associated with obtaining a patent on a fully developed new product are not considered research and development, and may be capitalized
answer Q8 Under IFRS, an impairment loss is the amount by which the carrying amount of a cash-generating unit exceeds its recoverable amount. Recoverable amount is:The higher of fair value less disposal costs or value in use. Under IFRS, there is impairment when the recoverable amount is less than the current
carrying amount of the cash generating unit or asset. The recoverable amount is the higher of: (1) Value in use, which is the present value of
expected future cash flows of the cash-generating unit or asset. (2) Fair value less costs of disposal (also referred to as net selling price or fair value
less costs to sell).
Answer Q9 Cost of goods sold is recognized at the same time the revenue from the sale is recognized. When companies ship products to customers, the
shipping terms are generally used to determine when title to the goods passes from the seller to the buyer. When the title passes, the revenue is
recognized because the seller has satisfied its performance obligation. When goods are shipped “FOB Destination,” the title passes when the goods
arrive at the buyer’s location (the destination). When goods are shipped “FOB Shipping Point,” the title passes when the goods leave the seller (the
shipping point).
Answer Q10 Revenue should be recognized as performance obligations are fulfilled using an output method based on units delivered
Answer Q11 When a company has multiple performance obligations in one transaction, it needs to allocate the transaction price among the performance
obligations. The preferred method is to use each performance obligation’s stand-alone price as the basis for the allocation
answer Q12 Revenue is recognized as or when performance obligations are satisfied
answer Q13 When a contract is executed over a period of time, the revenue is recognized based on the progress made toward completion. Progress can be
measured using the input method (for example, the percentage of total expected costs incurred in the period or the percentage of total expected
hours worked in the period) or the output method (for example, the percentage of miles completed or units completed).
Answer Q14 Interest revenue from municipal bonds is included in GAAP income but is not ever included in tax income. This means it
creates a permanent difference between GAAP income and tax income. Warranty expense is estimated at the time of sale for GAAP purposes but not
recorded for tax purposes until actually paid. This means it creates a temporary difference between GAAP income and tax income
answer Q15 Life insurance proceeds on the death of an insured executive is included in GAAP income but is not ever included in tax
income. This means it creates a permanent difference between GAAP income and tax income. Using accelerated depreciation for tax purposes and
straight-line depreciation for GAAP purposes results in different depreciation expenses each year. However, the total depreciation expense under
the methods is the same. This means it creates a temporary difference between GAAP income and tax income
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