Financial Accounting 1 Exam

Chapters 6-12

Using the allowance method, when an account receivable is written off, the account to be debited is

Allowance for doubtful accounts

Which of the following approaches to determine bad debts expense best achieves the matching concept?

Percentage of sales

The straight line method of amortization of discounts and premiums for long term notes

is only allowed by ASPE

When the stated rate and market rate of a note receivable are the same

the notes face value and fair value would be the same

If a note receivable was issued at an amount that is more than its face value then

the note was issued at a premium and the notes stated rate was different from the prevailing market rate of interest

When a zero-interest bearing note is issued its present value is

the cash paid to the issuer

A hardware retailer typically maintains the following inventory accounts

Merchandise inventory

Goods in transit that are shipped FOB shipping point should be included

in the inventory of the buyer

In a periodic inventory system, if ending inventory is understated

net income is understated

The cost of inventory is made up of

cost of purchase, allocated direct labour and allocated overhead

which of the follwoing best describes the concept of standard cost

they are the costs that should be incurred per unit of finished goods inventory

when using the moving average cost formula with a perpetual system

a new unit cost is calculated each time a purchase is made

An investment is an entiti’s debt instruments make that investor a(n)

creditors of the issuing entity

which of the following is not an equity instrument

convertible bonds

any contract that is evidence of a residual interest in an entity’s assets is called a(n)

equity security

which of the following is not a motivation for investment in debt and equity instruments issued by other companies

to assist those companies in meeting financial obligations

Under ASPE the costs for environment clean-up at the end of an assets useful life

are recognized only if they represent a legal obligation

PPE purchased on a long-term credit contracts should be accounted for at the

present value of the future payments

when a closely held corporation issues preferred shares for land, the land should be recorded at the

fair market value of the land

which of the following expenditures after acquisition would not be capitalized

replacing all the tires on an 18-wheel semi-trailer

land is generally included in PPE except when

it is held for resale by land developers

depreciation commences or continues when

the asset has is available for use

when the unit of production method of deprecation is used, which of the following best describes depreciation expense

depreciation expense will vary directly with output

When all or a portion of shareholders capital investments are returned to them this is called a

liquidating dividend

the cost recovery impairment model

uses undiscounted cash flows in its determination of impairment

the rational entity imparment model

compares the assets carrying value with its recoverable amount

which of the following best describes the concept of cash generating units (CGU)

the individual assets that are included in the CGU fo not generate cash flows on their own

3 main characteristics of intangible assets are

Identifiable, non-physical, nonmonetary nature

development costs may be capitalized if

The resulting product or service is technically feasible, the entity has sufficient resources to complete the project, the entity intends to use or sell the resulting product or service. (all in addition to others must be met)

which of the following legal fees should be capitalized

Legal fees to obtain a franchise and legal fees to successfully defend a trademark.

Principle-agent relationships

the fact that companies act either as principles or agents in selling transactions. When acting as a principle agent the company has the risks and rewards of ownership of what is being sold. When acting as an agent the company does not. *agent revenue is commision.

Consignment

Type of transaction where one party who does not have legal title to goods, presents them to customers for sale and earns a commission when the customer buys the goods.

consignee

Dealer. Party in consignment that acts as agent, displays good for sale. Legal title remains w/ supplier. **not asset on books, is liability for net amount due to consignor. '

Periodically receives a report called account sales that shows the merch received, sold, consignment charges, and cash remitted.

Financial asset

A receivable that represents contractual rights to receive cash or other financial assets from another party. May also be cash, a derivative, or investment.

compensating balances

That portion of any demand deposit (or any time deposit or certificate of deposit) maintained by a company that constitutes support for existing borrowing arrangements of the company with a lending institution.

cash equivalents

Short-term, highly liquid investments that are readily converted to known amounts of cash and are subject to an insignificant risk of change in value. (treasury bills, commercial paper, money market funds). Reported on fair value

trade receivable

Amounts owed by customers for goods and services rendered as part of the normal course of business operations.

bad debt

The account Sales Returns and Allowances is reported as a deduction from Sales Revenue in the income statement. Allowance for Sales Returns and Allowances is an asset valuation account (contra asset) that is deducted from total accounts receivable. It is similar to the Allowance for Expected Credit Losses discussed below.

The fair value of a note or loan receivable is measured as

the present value of the cash amounts that are expected to be collected in the future, with the amounts discounted at the market rate of interest that is appropriate for a loan with similar credit risk and other characteristics.

compensating balances

That portion of any demand deposit (or any time deposit or certificate of deposit) maintained by a company that constitutes support for existing borrowing arrangements of the company with a lending institution.

factoring receivables

When a company sells its accounts receivable to banks or finance companies that buy receivables from businesses for a fee and then collect the remittances directly from the customers.

secured borrowing

When a creditor requires that a debtor designate (assign) or pledge receivables or other assets as security for the loan, but the assets remain under the control of the borrowing company.

What inventory type would not be included in manufactures SFP

Merchandise inventory (inventory purchased ready to sell)