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Test Bank for Intermediate Accounting, Fifteenth Edition
24 - 20
DERIVATIONS — Computational
No. Answer Derivation
Full Disclosure in Financial Reporting
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Test Bank for Intermediate Accounting, Fifteenth Edition
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BRIEF EXERCISES
BE. 24-84—Notes to financial statements.
An article in Dun's Review made the following comments:
"Every other year, say, companies should print the notes in big type
and the base figures in smaller ones."
Instructions
(a) Are notes considered as part of the financial statements and what basic purpose do they
serve?
(b) What are the general types of notes?
Solution 24-84
BE. 24-85—Segment reporting.
The Financial Accounting Standards Board requires the reporting of disaggregated financial data
about the different types of business activities in which an enterprise engages.
Instructions
Identify 4 of the 6 items of disaggregated information the FASB requires that an enterprise report.
Solution 24-85
Full Disclosure in Financial Reporting
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EXERCISES
Ex. 24-86—Segment reporting.
Finney Company's condensed income statement is presented below:
Revenues $900,000
Expenses
Cost of goods sold $400,000
Operating and administrative expenses 200,000
Depreciation expense 40,000 640,000
Income before taxes 260,000
Income tax expenses 78,000
Net income $182,000
Earnings per share (100,000 shares) $1.82
The following data is compiled relative to Finney's operating segments:
Percent Identified with Segment
Hotels Grains Candy
Revenues 42% 50% 8%
Cost of goods sold 48 49 3
Operating and administrative expense 35 50 15
Depreciation expense 46 42 12
Included in the amounts allocated to each segment on the above percentages are the following
expenses which relate to general corporate activities:
Operating Segment
Hotels Grains Candy Totals
Operating and administrative expense $12,000 $9,000 $3,000 $24,000
Depreciation expense 3,500 4,000 2,500 10,000
Instructions
(a) Prepare a schedule showing the amounts distributed to each segment.
(b) Based only on the above information, which segments must be reported and why?
Solution 24-86
Test Bank for Intermediate Accounting, Fifteenth Edition
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Grains = ($200,000 × 50%) – $9,000 = $91,000
Candy = ($200,000 × 15%) – $3,000 = $27,000
Solution 24-86 (cont.)
Ex. 24-87—Interim reports.
A few years ago, a publishing company in the fourth quarter had a net profit figure that exceeded
sales for that quarter. Such a situation as this suggests that some difficult accounting issues are
involved in interim reporting.
Instructions
(a) What are the major accounting problems related to interim reports?
(b) What problem exists with income taxes in interim reports and how does GAAP recommend
that taxes be reported? What does GAAP require?
(c) Many academicians have attempted to predict the year's net income after the first quarter's
income is reported. These attempts are generally unsuccessful, no matter how sophisticated
the prediction model. What might be the reason for this inability to predict?
Solution 24-87
Full Disclosure in Financial Reporting
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Test Bank for Intermediate Accounting, Fifteenth Edition
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Ex. 24-88—Inventory and cost of goods sold at interim dates.
Discuss how inventory and cost of goods sold may be afforded special accounting treatment at
interim dates.
Solution 24-88
Ex. 24-89—Forecasts.
Recent proposals by investors and others have suggested that corporations include financial
forecasts in their annual reports. It further has been suggested that the CPA attest to those
forecasts.
Instructions
(a) What arguments are advanced to support the publication of such forecasts?
(b) What arguments are advanced that oppose the publication of such forecasts?
Solution 24-89
Full Disclosure in Financial Reporting
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Solution 24-89 (cont.)
*Ex. 24-90—Financial statement analysis.
The condensed financial statements of Marks Company for the years 2014-2015 are presented
below:
Marks Company
Comparative Balance Sheets
As of December 31, 2014 and 2015
2015 2014
Cash $ 420,000 $ 120,000
Accounts receivable (net) 360,000 300,000
Inventories 380,000 340,000
Plant and equipment 1,800,000 1,112,000
Accumulated depreciation (260,000) (192,000)
$2,700,000 $1,680,000
Accounts payable $ 340,000 $ 160,000
Dividends payable -0- 40,000
Bonds payable 400,000 -0-
Common stock ($10 par) 1,520,000 1,200,000
Retained earnings 440,000 280,000
$2,700,000 $1,680,000
Additional data:
Market value of stock at 12/31/15 is $80 per share.
Marks sold 32,000 shares of common stock at par on July 1, 2015.
Marks Company
Condensed Income Statement
For the Year Ended December 31, 2015
Sales revenue $2,400,000
Cost of goods sold 1,650,000
Gross profit 750,000
Administrative and selling expenses 500,000
Net income $ 250,000
Instructions
Compute the following financial ratios by placing the proper amounts in the parentheses provided
for numerators and denominators.
Test Bank for Intermediate Accounting, Fifteenth Edition
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*Ex. 24-90 (cont.)
a. Current ratio at 12/31/15 ( )
( )
b. Acid test ratio at 12/31/15 ( )
( )
c. Accounts receivable turnover in 2015 ( )
( )
d. Inventory turnover in 2015 ( )
( )
e. Profit margin on sales in 2015 ( )
( )
f. Earnings per share in 2015 ( )
( )
g. Return on common stock equity in 2015 ( )
( )
h. Price earnings ratio at 12/31/15 ( )
( )
i. Debt to assets at 12/31/15 ( )
( )
j. Book value per share at 12/31/15 ( )
( )
*Solution 24-90
Full Disclosure in Financial Reporting
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*Ex. 24-91—Selected financial ratios.
The following information pertains to Wamser Company:
Cash $ 20,000
Accounts receivable 125,000
Inventory 75,000
Plant assets (net) 380,000
Total assets $600,000
Accounts payable $ 75,000
Accrued taxes and expenses payable 25,000
Long-term debt 50,000
Common stock ($10 par) 160,000
Paid-in capital in excess of par 90,000
Retained earnings 200,000
Total equities $600,000
Net sales (all on credit) $800,000
Cost of goods sold 600,000
Net income 81,000
Instructions
Compute the following: (It is not necessary to use averages for any balance sheet figures
involved.)
(a) Current ratio
(b) Inventory turnover
(c) Accounts receivable turnover
(d) Book value per share
(e) Earnings per share
(f) Debt to assets
(g) Profit margin on sales
(h) Return on common stock equity
*Solution 24-91
Test Bank for Intermediate Accounting, Fifteenth Edition
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*Ex. 24-92—Computation of selected ratios.
The following data is given:
December 31,
2015 2014
Cash $ 66,000 $ 50,000
Accounts receivable (net) 90,000 60,000
Inventories 90,000 110,000
Plant assets (net) 383,000 325,000
Accounts payable 55,000 40,000
Salaries and wages payable 10,000 5,000
Bonds payable 70,000 70,000
8% Preferred stock, $40 par 100,000 100,000
Common stock, $10 par 120,000 90,000
Paid-in capital in excess of par 80,000 65,000
Retained earnings 194,000 175,000
Net credit sales 900,000
Cost of goods sold 700,000
Net income 81,000
Instructions
Compute the following ratios:
(a) Acid-test ratio at 12/31/15
(b) Accounts receivable turnover in 2015
(c) Inventory turnover in 2015
(d) Profit margin on sales in 2015
(e) Return on common stock equity in 2015
(f) Book value per share of common stock at 12/31/15
*Solution 24-92
Full Disclosure in Financial Reporting
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PROBLEMS
Pr. 24-93—Segment reporting.
A central issue in reporting on operating segments of a business enterprise is the determination
of which segments are reportable.
Instructions
1. What are the tests to determine whether or not an operating segment is reportable?
2. What is the test to determine if enough operating segments have been separately reported
upon, and what is the guideline on the maximum number of operating segments to be shown?
Solution 24-93
1. There are three basic tests to be applied to segments of a company to see if they are
significant enough to be separately reportable. If a segment meets any one of the tests, it is
deemed significant and reportable.
2. The Financial Accounting Standards Board states that enough operating segments must be
separately reported so that the total of revenues from sales to unaffiliated customers for the
reportable segments equals or exceeds 75 percent of the combined sales to unaffiliated
customers for the entire enterprise. If applying the prescribed tests does not yield the
required percentage of revenues described above, additional segments must be reported on
until the 75 percent test is met.
Test Bank for Intermediate Accounting, Fifteenth Edition
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Pr. 24-94—Interim reporting.
Interim financial reporting has become an important topic in accounting. There has been
considerable discussion as to the proper method of reflecting results of operations at interim
dates. Accordingly, the Accounting Principles Board issued an opinion clarifying some aspects of
interim financial reporting.
Instructions
(a) Discuss generally how revenue should be recognized at interim dates and specifically how
revenue should be recognized for industries subject to large seasonal fluctuations in
revenue and for long-term contracts using the percentage-of-completion method at annual
reporting dates.
(b) Discuss generally how product and period costs should be recognized at interim dates. Also
discuss how inventory and cost of goods sold may be afforded special accounting treatment
at interim dates.
(c) Discuss how the provision for income taxes is computed and reflected in interim financial
statements.
Solution 24-94
Full Disclosure in Financial Reporting
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Solution 24-94 (cont.)
Test Bank for Intermediate Accounting, Fifteenth Edition
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IFRS QUESTIONS
True/False
1. Due to the broader range of options available under U.S. GAAP compared to IFRS, note
disclosures are generally more expansive under U.S. GAAP than under IFRS.
2. IFRS requires companies to prepare interim reports on a quarterly basis.
3. IFRS requires segment reporting, and uses the management approach to identify reportable
segments.
4. IFRS requires companies to disclose transactions with related parties, including the name of
the related party and any doubtful amounts related to outstanding balances for the related
party.
5. Neither U.S. GAAP nor IFRS requires interim reports.
Answers to True/False:
Multiple Choice
6. If Benjamin Company and Iris, Inc. are similar companies in every regard, except
Benjamin Company uses IFRS while Iris, Inc. uses U.S. GAAP, which of the following is
true?
a. Iris, Inc. is required to issue interim statements every 6 months.
b. Benjamin Company need not recognize post-balance sheet events.
c. Benjamin Company is not required by IFRS to issue interim statements.
d. All of the above are true.
7. Benjamin Company uses IFRS, while Iris, Inc. uses U.S. GAAP, for their external
financial reporting. On January 16, 2015, both companies settled lawsuits relating to
industrial accidents that occurred in 2013. Benjamin Company paid $550,000 and Iris, Inc.
paid $230,000. Assuming that no accrual had been previously made, what amount of loss
should be reported on the income statement for the year ended December 31, 2014 for
each company?
Benjamin Company Iris, Inc.
a. $-0- $-0-
b. $550,000 $230,000
c. $-0- $230,000
d. $550,000 $-0-
Full Disclosure in Financial Reporting
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8. IFRS requires which of the following disclosures regarding related parties?
I. The name of the related party.
II. The amount and terms of the outstanding balance.
III. Doubtful amounts related to the outstanding balance.
a. I, II, and III.
b. I and II.
c. I and III.
d. II and III.
9. Nicole, Inc. uses IFRS for its external financial reporting. During 2013, an employee of
the company was injured in the factory. Discussions with corporate attorneys resulted in a
determination that the company would be required to pay between $1,500,000 and
$3,000,000 to settle the injury claim. Nicole, Inc. accrued a contingent liability on
December 31, 2013 for $1,500,000. On February 4, 2014, Nicole, Inc. settled the lawsuit
for $3,300,000. What amount of loss should be reported on the income statement for the
year ended December 31, 2014 for Nicole, Inc. related to this lawsuit?
a. $3,300,000
b. $1,800,000
c. $1,500,000
d. $300,000.
10. Identifiable assets for the 4 industry segments of Brittle Company are as follows:
Candy $120,000
Stix $240,000
Chips $980,000
Gum $ 45,000
Brittle Company uses IFRS for its external financial reporting. Using only the identifiable
assets test, which of the segments are reportable?
a. Under IFRS, all four segments must be reported.
b. Candy, Stix, and Chips only.
c. Chips only.
d. Stix and Chips only.
11. Operating profits and losses for the 4 industry segments of Brittle Company are as
follows:
Candy ($590,000)
Stix $ 20,000
Chips $ 85,000
Gum $ 9,000
Brittle Company uses IFRS for its external financial reporting. Using only the operating
profits (loss) test, which of the segments are reportable?
a. Under IFRS, all four segments must be reported.
b. Stix, Chips, and Gum only.
c. Candy and Chips only.
d. Candy only.
Test Bank for Intermediate Accounting, Fifteenth Edition
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12. Which of the following is true regarding IFRS and GAAP?
a. Due to the broader range of options available under U.S. GAAP compared to IFRS,
note disclosures are generally more expansive under U.S. GAAP than under IFRS.
b. IFRS requires companies to prepare interim reports on a quarterly basis.
c. IFRS requires segment reporting, and uses the management approach to identify
reportable segments.
d. U.S. GAAP requires companies to disclose transactions with related parties, including
the name of the related party and any doubtful amounts related to outstanding
balances for the related party.
*13. IFRS is important for U.S. investors for all of the following reasons except
a. the SEC requires that foreign companies that list on U.S. stock exchanges provide a
reconciliation between IFRS and U.S. GAAP.
b. many U.S. companies, such as McDonald’s, generate 50% of their sales outside the
U.S.
c. mergers frequently take place between companies from different countries.
d. financial markets are among the most significant international markets.
*14. Challenges to convergence of IFRS with U.S. GAAP include all of the following
except
a. cultural differences exist between countries.
b. the litigious environment in the U.S. is best suited to very detailed standards.
c. legal barriers to change include the difficulty associated with changing loan covenants.
d. political issues result in politicians setting the final accounting standards.
*15. High-quality standards in an international environment include which of the following?
a. They permit a wide variety of alternative practices.
b. They are stated in ambiguous terms to allow practitioners the opportunity to interpret
and implement.
c. They are comprehensive, covering major transactions facing companies.
d. All of the above are necessary for high-quality international standards.
Answers to Multiple Choice:
Short Answer
16. Bill Novak is working on an audit of an IFRS client. In his review of the client’s interim reports, he
notes that the reports are prepared on a discrete basis. That is, each interim report is viewed as a
distinct period. Is this acceptable under IFRS? If so, explain how that treatment could affect
comparisons to U.S. GAAP company?
Full Disclosure in Financial Reporting
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