Accounting Chapter 4 Homework The average company in the study would boost its earnings

BYP 4-2 COMPARATIVE ANALYSIS PROBLEM

Accounts that provide evidence of the use of accrual accounting are:

Balance Sheet Income Statement

(a) Hershey Company

1.

Accounts receivable

—

trade

1.

Sales

(b) Tootsie Roll

1.

2.

Prepaid expenses

Accumulated depreciation

1.

2.

Insurance (or supplies) expense

Depreciation expense

BYP 4-3 RESEARCH CASE

(a) They recalculated earnings per share to the 1/10 cent, rather than to the

penny, for nearly 500,000 earnings reports. In doing this, they

(b) The average company in the study would boost its earnings per share

by 1/10 of a cent if it increased net income by $31,000.

(c) The authors cite adjustments to inventory valuation, or adjustments

made to the company’s estimate of how many of its accounts

receivable will go bad as examples of items that could be easily

(d) An earnings restatement occurs when a company is required to issue

new financial statements because those that were originally issued

(e) It is suggested in the article that in the stock market, if a company

misses its estimated earnings per share number, even by a penny, its

BYP 4-4 INTERPRETING FINANCIAL STATEMENTS

LASER RECORDING SYSTEMS

(a) Laser Recording is handling legal expense via an accrued expense

(b) Each of the three adjustments is an accrued expense adjustment. Since

BYP 4-5 REAL-WORLD FOCUS

(a) The SEC was created by Congress after the stock market crash of 1929. The

(b) Division of Corporation Finance. The Division of Corporation Finance

oversees corporate disclosure of important information to the investing

public. Corporations are required to comply with regulations pertaining to

Division of Trading and Markets. The Division of Trading and Markets

establishes and maintains standards for fair, orderly, and efficient markets. It

does this primarily by regulating the major securities market participants:

Division of Investment Management. The Division of Investment Man-

agement oversees and regulates the $15 trillion investment management

Division of Enforcement. The Division of Enforcement investigates possible

BYP 4-5 (Continued)

and negotiates settlements on behalf of the Commission. While the SEC

has civil enforcement authority only, it works closely with various criminal law

enforcement agencies throughout the country to develop and bring criminal

cases when the misconduct warrants more severe action.

(c) The Chief Accountant is the principal adviser to the Commission on

accounting and auditing matters. The Office of the Chief Accountant also

works closely with domestic and international private-sector accounting and

BYP 4-6 GROUP DECISION CASE

(a) LINCOLN PARK

Income Statement

For the Quarter Ended March 31, 2014

Revenues

Rent revenue ($83,000 – $21,000) ……………. $62,000

Expenses

Salaries and wages expense

[$27,600 + ($290 X 3)] ……………………….. $28,470

Advertising expense ($4,200 + $110) ……….. 4,310

(b) The generally accepted accounting principles pertaining to the income

statement that were not recognized by Judy were the revenue recognition

principle and the expense recognition principle. The revenue recognition

principle states that revenue is recognized when the performance

BYP 4-7 COMMUNICATION ACTIVITY

(a) Accrual-basis accounting records the events that change an entity’s

financial statements in the periods in which the events occur, rather than

in the periods in which the entity receives or pays cash. Information

(b) Politicians might desire a cash-basis accounting system over an accrual-

basis system because if an accrual accounting system is used, it could

(c) Dear Senator,

It is my understanding, after having taken a beginning course in account-

ing principles, that the federal government uses a cash-basis

accounting system rather than an accrual-basis accounting system.

BYP 4-8 ETHICS CASE

(a) The stakeholders in this situation are:

(b) 1. It is unethical for the president to place pressure on Mark to mis-

state net income by requesting him to prepare incorrect adjusting

entries.

(c) Mark can accrue revenues and defer expenses through the preparation

of adjusting entries and be ethical so long as the entries reflect

BYP 4-9 ALL ABOUT YOU ACTIVITY

The following is a personal balance sheet using the classified presentation.

Note that the earnings from the part-time job as well as the tuition costs are

not listed since neither of those items is an asset, liability, or equity item.

Assets

Current assets

Cash ………………………………………………………… $1,200

Money market account ……………………………… 1,800

Property, plant, and equipment

Automobile ………………………………………………. 7,000

Liabilities and Owner’s Equity

Current liabilities

Current portion of automobile loan ……………. $1,500

Long-term liabilities

Student loan …………………………………………….. 5,000

Equity

M. Y. Own, Capital ($15,350 – $12,300) ……….. 3,050

BYP 4-10 FASB CODIFICATION ACTIVITY

(a) Revenue earned by an entity from its direct distribution, exploitation,

or licensing of film, before deduction for any of the entity’s direct costs

(b) Compensation is reciprocal transfers of cash or other assets in

exchange for services performed.

IFRS CONCEPTS AND APPLICATION

IFRS4-1

GAAP and IFRS both require companies to record transaction (and revenues)

in the period in which events occur. Both prohibit cash-basis accounting

and both apply the periodicity assumption.

IFRS4-2

IFRS uses the term income to encompass both revenues and gains. GAAP

defines income as the net difference between revenues and expenses. In

IFRS 4-3 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Note 3.7 indicates that revenue is measured as the fair value of

consideration received or receivable for the goods sold less any

discounts or rebates.