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109. The shareholders' equity section of the balance sheet for a corporation generally does not include
110. Before preparing the balance sheet and income statement, an accountant would use what accounting record
to first record the firm's transactions?
111. To record the purchase of equipment that is fully financed by the seller, you would
112. The accounting system uses a device called an account. An account
113. The analysis of business transactions is facilitated by
114. In a modern corporate environment, the trial balance is prepared from the
115. A cereal company issues coupons that can be exchanged for boxes of cereal. It issues million coupons that
promise the retailer who redeems the coupons $1 per coupon. The probability of redemption of any one coupon
is 10%. What is the amount of the liability that the company recognizes?
116. For each of the following items, indicate whether the item meets all of the criteria in the definition of a
liability [Yes or No]. If so, how does the firm value it? If not, why not?
a.. Bonds payable.
b. Interest accrued but not paid on a note.
c. Confirmed orders from customers for goods and services to be delivered later.
d. Advances from customers for goods and services to be delivered later.
e. Promises by an airline to provide flights in the future in exchange for miles flown,
if customers accumulate a certain number of miles at regular fares.
f. Product warranties.
g. Contractual promises to purchase specific quantities of natural gas for each
of the next 10 years.
h. Damages the company must pay if it loses a pending lawsuit.
i. Future costs of restoring strip-mining sites after completing mining operations.
117. What is the amount of the liability that the company recognizes in each of the following independent
cases?
118. Classifying financial statement accounts. The balance sheet or income statement classifies various items in
one of the following ways:
CA—Current assets
NA—Noncurrent assets
CL—Current liabilities
NL—Noncurrent liabilities
CC—Contributed capital
RE—Retained earnings
NI—Income statement item (revenue or expense)
X—Item generally does not appear on a balance sheet or an income statement
Using the abbreviations in the previous list, indicate the classification of each of the following items under U.S.
GAAP and IFRS. If the classifications differ between U.S. GAAP and IFRS, indicate what that difference
would be.
a. Interest revenue.
b. Factory.
c. Treasury shares repurchased by a corporation.
d. Research and development expenditures.
e. Automobiles used by sales staff.
f. Cash on hand.
g. Promise to a vendor to buy inventory from it next period.
h. Commissions earned by sales staff.
i. Supplies inventory.
j. Note payable, due in six months.
k. Increase in fair value of land held.
l. Income taxes owed to state or city government.
m. Note payable, due in ten years.
n. The portion of the note payable in part n that is due next year.
o. Dividends declared.
(Classifying financial statement accounts.) (Unless indicated, classifications do not differ
between U.S. GAAP and IFRS.)
a.NI (revenue).
119. Balance sheet relations. Colonial Group, an investment management company, reported the following data
for four recent years. Compute the missing balance sheet amounts for each of the four years. In answering this
question, assume that Colonial Group uses U.S. GAAP.
2007 2006 2005 2004
Current Assets $10,999.20 ? ? 6,882.60
Noncurrent Assets _____ ? 18,717.40 11,289.10 9,713.90
Total Assets ? 28,224.70 ? ?
Current Liabilities ? $4,351.30 1,494.20 1,755.20
Noncurrent Liabilities 5,721.70 ? ? 3,540.70
Shareholders’ Equity 21,537.30 16,666.90 9,002.00 __ ?
Total Liabilities and
Shareholders’
Equity 30,178.90 28,224.70 18,491.30 16,596.
(Colonial Group; balance sheet relations.)
The missing items appear in boldface type below
2007 2006 2005 2004
120. Balance sheet relations. George Group, an investment management company, reported the following data
for four recent years. Compute the missing balance sheet amounts for each of the four years. In answering this
question, assume that George Group uses U.S. GAAP.
2007 2006 2005 2004
Current Assets $12,000 ? ? $7,000
Noncurrent Assets _____ ? 18,000 11,000 9,700
Total Assets ? 28,000 ? ?
Current Liabilities ? $4,000 $1,500 $1,700
Noncurrent Liabilities 6,000 ? ? 3,500
Shareholders’ Equity 10,000 16,000 9,000 ?
Total Liabilities and
Shareholders’
Equity $19,000 $28,000 $18,500 $16,700
(George Group; balance sheet relations.)
The missing items appear in boldface type below
121. Describe Asset recognition, definition, and measurement.
ASSET RECOGNITION, DEFINITION AND MEASUREMENT
Asset recognition means that the item is an accounting asset on the balance sheet. For an item to be an asset, it
Asset Recognition The three criteria for asset recognition are:
122. Describe Current Replacement Cost, Net Realizable Value, Fair Value, and the Present Value of Future
Net Cash Flow use in valuing assets.
Current Replacement Cost
The current replacement cost of an asset is the amount a firm would have to pay to obtain another asset with
Fair Value.
U.S. GAAP explicitly defines the fair value of an asset 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.”
value for such assets. U.S. GAAP requires that a fair value measurement use measurement techniques, inputs,
and assumptions that market participants would use if they were arriving at a transaction price.
Present Value of Future Net Cash Flows
123. Describe the following concepts: (1) going concern, (2) recognition and realization, and (3) relevance and
reliability,
GOING CONCERN
RECOGNITION AND REALIZATION
RELEVANCE AND RELIABILITY
The third criterion for asset recognition is that the future benefit has a relevant measurement attribute that the
firm can measure with sufficient reliability. Relevance means that the information is pertinent to the decisions
124. What is conservatism?
CONSERVATISM
125. Define liability and when is it recognized?
An accounting liability arises when a firm incurs an obligation to make a future sacrifice that, because of a past
Liability Recognition
The criteria for liability recognition are:
126. Discuss shareholders’ equity, how it is measured and disclosed.
SHAREHOLDERS’ EQUITY MEASUREMENT AND DISCLOSURE
127. Explain how common-size balance sheets are used by analysts.
COMMON-SIZE BALANCE SHEET
128. The balance sheet portrays the effects of a firm’s investing and financing decisions. In analyzing these
decisions, what two principles guide financing decisions:
BALANCE SHEET RELATIONS
The balance sheet portrays the effects of a firm’s investing and financing decisions. In analyzing these
decisions, consider two principles that guide financing decisions:
1. Matching the duration of the financing with the duration of the asset. Firms use short-term financing for
129. How does one asses the impact of asset and liability recognition and their measurement.
ASSESSING THE IMPACT OF ASSET AND LIABILITY RECOGNITION AND MEASUREMENT ISSUES
The balance sheet does not provide all the information an analyst wants or needs about a firm’s resources and
130. The balance sheet imperfectly describes both resources and financing (claims on those resources). Explain
why applying asset and liability definitions and recognition criteria under
U.S. GAAP and IFRS does not result in the balance sheet including all economic benefits (resources) and
obligations.
1. Deciding whether items meet the definitions and recognition criteria for assets and liabilities and, if so,
2. Deciding how to measure the items.
For a firm to recognize an asset, a resource must represent a future economic benefit that the firm controls as a
result of a past transaction or exchange, and the firm must be able to measure the resource with sufficient
reliability. For a firm to recognize an obligation as a liability, the obligation must impose a future economic
sacrifice because of a past event or transaction that the firm has little or no discretion to avoid, and the firm
must be able to measure the obligation with sufficient reliability. Shareholders’ equity reports the amounts of
funding attributable to owners’ contributions and resulting from the retention of net assets generated by
earnings. Shareholders’ equity equals the difference between total assets and total liabilities and typically
comprises contributed (paid-in) capital and retained earnings.
