978-0324651140 Test Bank Chapter 16 Part 4

192. Discuss the definition, recognition, and measurement of liabilities.

The criteria for recognition of a liability are as follows:

Firms report many financial liabilities as the present value of the amount payable, except that firms can ignore

discounting for liabilities due within one year. Nonfinancial liabilities, those settled by providing goods and

services instead of cash, appear at either the amount of cash received (for example, advances from customers)

or the expected cost of providing goods and services (for example, warranty liability).

Obligations under executory contracts do not usually appear as liabilities because they do not represent a

present obligation. An exception involves leases accounted for as capital, or finance, leases. Firms also do not

recognize certain obligations that are uncertain as to amount or timing or both as liabilities, unless those items

The FASB and the IASB are reconsidering the role of uncertainty, or probability, in the

definition, recognition, and measurement of liabilities. Existing recognition criteria include

a probable future sacrifice of resources; one issue involves the minimum probability level to

warrant recognition of an uncertain obligation as a liability. U.S. GAAP does not specify

193. Discuss the definition, recognition, and measurement of shareholders’ equity for a corporation.

Equity

bonds and some preferred stock issues subject to redemption.

194. Discuss the definition, recognition, and measurement of revenue.

Revenue

decreases in liabilities that result in increases in equity, other than those relating to contributions from equity

participants. Firms recognize revenue, or income, when they satisfy two conditions:

related to the product and the portion related to the services?

195. Discuss the definition, recognition, and measurement of gains and losses .

Gains and Losses

196. Describe comprehensive income, net income, and other comprehensive income.

COMPREHENSIVE INCOME, NET INCOME, AND OTHER COMPREHENSIVE INCOME

197. Describe accrual and cash accounting.

Accrual Accounting

Accrual accounting measures the effects of transactions and events in the periods when they occur. In contrast,

cash-basis accounting recognizes only cash receipts and disbursements. Under accrual accounting, firms

recognize revenues when an arrangement satisfies the revenue recognition criteria, increasing net assets but not

198. Describe what is meant by a reporting entity.

Entity

199. Describe the relationship between financial reporting standards and the financial reporting objectives,

qualitative characteristics of accounting information, and elements of financial statements that comprise the

200. When do firms recognize revenue?

201. How do firms report accounts receivable?

202. How do firms account for inventories?

203. How do firms account for property, plant, and equipment?

PROPERTY, PLANT, AND EQUIPMENT

Firms initially record property, plant, and equipment, sometimes referred to as fixed assets, at acquisition cost,

the cash paid or the fair value of other consideration given in exchange for the asset. Acquisition cost includes

204. How do firms account for intangibles other than goodwill?

INTANGIBLES OTHER THAN GOODWILL

U.S. GAAP and IFRS require firms to treat some or all expenditures made to internally

develop brand names, customer lists, new technologies, and other intangibles as expenses in

205. How do firms account for goodwill?

GOODWILL

In ordinary usage, goodwill refers to various unidentifiable intangible resources of a firm,

206. Explain the accounting for notes and bonds.

NOTES AND BONDS

U.S. GAAP and IFRS account for notes and nonconvertible bonds payable similarly. Firms

initially record long-term notes and bonds at their issue price, the present value of the future

207. Explain the accounting for leases.

LEASES

Firms account for leases using either the operating lease method or the capital (finance) lease

method. The operating lease method treats leases as executory contracts, with neither the

208. Explain the accounting for retirement benefits.

RETIREMENT BENEFITS

U.S. GAAP and IFRS require firms to recognize the cost of retirement benefits (pensions,

health care, life insurance) as an expense while employees work, not when they receive payments or other

benefits during retirement. Employers often contribute cash to a trust, an entity legally separate from the

employer, to fund their retirement obligations. The trust invests the funds received to generate a return.

Payments to employees come from both the employer’s contributions and investment returns. The accounting

records of the trust are separate from the accounting records of the employer, and the amounts on the two sets of

books usually differ. Two issues in accounting for defined benefit retirement benefits are as follows:

209. Explain the accounting for income taxes.

INCOME TAXES

Income before taxes for financial reporting usually differs from taxable income reported to tax authorities. The

differences arise because of (1) permanent differences (items that affect income for financial reporting but never

210. Explain the accounting for marketable securities.

MARKETABLE SECURITIES

Firms sometimes acquire bonds or capital stock of other entities for their expected returns

(through interest, dividends, and price appreciation) without any intent to exert influence

or control over the other entity. U.S. GAAP and IFRS presume that the acquisition of any

amount of bonds, and the acquisition of less than 20% of the voting stock of another entity

implies an inability to exert significant influence or control. Firms account for such securities

as passive investments. Firms classify such securities into three categories:

211. Explain the accounting for derivative instruments.

DERIVATIVE INSTRUMENTS

Firms often acquire derivative instruments to hedge interest rate, exchange rate, commodity price, and other

risks. U.S. GAAP and IFRS classify derivatives into three categories:

212. Explain the accounting for intercorporate investments in common stock.

INTERCORPORATE INVESTMENTS IN COMMON STOCK

Firms sometimes invest in the common stock of other entities in order to exert significant influence or control

over the other entity. U.S. GAAP and IFRS assume that firms owning between 20% and 50% of the voting

stock of another entity can exert significant influence, and firms owning more than 50% can exert control,

unless other information indicates the contrary.

with its own.

Standard-setting bodies are reconsidering the concept of an accounting entity, including

the use of majority equity ownership to gauge control of another entity. The evolving

concept of control involves both the capacity to direct the strategic, operating, investing, and

financing decisions of another entity and the ability to benefit from value increases and to

bear the loss from value decreases of the other entity.

213. Explain the accounting for redeemable preferred shares.

REDEEMABLE PREFERRED SHARES

214. Explain the accounting for employee stock options.

EMPLOYEE STOCK OPTIONS

215. Explain the accounting for the issuance of securities with warrants attached or that have conversion

privileges.

216. Explain the accounting for treasury shares.

TREASURY SHARES

217. Explain the accounting for errors and changes in accounting principles and changes in accounting

estimates.