Final Exam

Question 1

What is cost allocation in accounting?

Answer 1

Distributing the expenses of an asset over its useful life

This is crucial for accurately reflecting a company’s financial performance.

Question 2

Define depreciation.

Answer 2

Used for tangible assets such as machinery and buildings

It reflects the allocation of the cost of tangible assets over their useful life.

Question 3

What is depletion?

Answer 3

Specific to natural resources like oil or minerals

It refers to the allocation of the cost of natural resources over their extraction.

Question 4

What does amortization pertain to?

Answer 4

Intangible assets like patents and copyrights

It involves spreading the cost of intangible assets over their useful life.

Question 5

List the key factors in cost allocation.

Answer 5

• Service Life
• Allocation Base
• Allocation Method

These factors determine how costs are allocated over the asset’s useful life.

Question 6

What are the time-based methods of depreciation?

Answer 6

• Straight-Line Method
• Accelerated Methods

The straight-line method spreads costs equally, while accelerated methods allocate higher expenses in earlier years.

Question 7

Name two accelerated methods of depreciation.

Answer 7

• Double Declining Balance Method
• Sum-of-the-Years’-Digits Method

These methods reflect that assets may be more useful initially.

Question 8

What is the Units-of-Production Method?

Answer 8

Calculates depreciation based on actual usage of the asset

This method differs from time-based methods by focusing on how much the asset is used.

Question 9

How is depletion calculated?

Answer 9

Based on the total cost of the resource divided by the estimated volume available for extraction

It reflects the consumption of natural resources over time.

Question 10

What is the typical method of amortization for intangible assets?

Answer 10

Straight-line method

Most intangible assets are assumed to have no residual value at the end of their useful life.

Question 11

What triggers an impairment loss?

Answer 11

When the carrying value of an asset exceeds its recoverable amount

This requires testing for impairment under changing circumstances.

Question 12

True or false: Once an asset is impaired, recovery of this loss is allowed under U.S. GAAP.

Answer 12

FALSE

Under U.S. GAAP, once impaired, no recovery of the loss is permitted.

Question 13

What is goodwill?

Answer 13

Arises when one company acquires another for more than the fair value of its net identifiable assets

Goodwill cannot be directly tied to specific identifiable rights.

Question 14

How is goodwill impairment determined?

Answer 14

By testing the reporting unit against its book value

If the fair value drops below the book value, an impairment loss is recorded.

Question 15

What are the three types of debt investments?

Answer 15

• Held-to-Maturity (HTM)
• Trading Securities (TS)
• Available-for-Sale Securities (AFS)

Each type has different accounting treatments based on the investor’s intent.

Question 16

Define Held-to-Maturity (HTM) securities.

Answer 16

Debt securities intended to be held until maturity

They are recorded at amortized cost, with unrealized gains or losses not recognized.

Question 17

What are trading securities (TS)?

Answer 17

Bought and sold actively to make quick profits

Changes in their fair value are recognized in the income statement.

Question 18

What is the equity method of accounting?

Answer 18

Used for investments where the investor has significant influence, typically owning 20% to 50% of voting shares

It records the investor’s share of the investee’s net income.

Question 19

What is the difference between book value and fair value?

Answer 19

Book value is the recorded value on financial statements, while fair value is the market value

Discrepancies may require adjustments in financial records.

Question 20

What happens to income recorded under the equity method?

Answer 20

It isn’t taxable until dividends are received

This creates temporary differences leading to deferred tax liabilities.

Question 21

What is the fair value option?

Answer 21

Allows companies to account for certain investments at fair value, reported in net income

This can introduce volatility and management discretion over reported values.

Question 22

What is the significance of asset impairment?

Answer 22

It ensures that assets are valued accurately on financial statements

Regular assessments are necessary to maintain transparency and compliance with accounting standards.

Question 23

What does the equity method reflect in financial statements?

Answer 23

An investment’s economic reality

It connects the investor’s performance to the investee’s.

Question 24

Define liabilities.

Answer 24

Future sacrifices of economic benefits due to past transactions or events

They arise from present obligations.

Question 25

What are the two classifications of **liabilities**?

Answer 25

* Current Liabilities * Long-Term Liabilities ## Footnote Current liabilities are due within one year, while long-term liabilities are due beyond one year.

Question 26

What are **accrued liabilities**?

Answer 26

Expenses incurred but not yet paid ## Footnote Common forms include salaries payable and interest payable.

Question 27

What are **contingent liabilities**?

Answer 27

Liabilities arising from uncertain future events ## Footnote Examples include lawsuits.

Question 28

What is the difference between **current** and **noncurrent liabilities**?

Answer 28

Current liabilities are due within one year; noncurrent liabilities are due beyond one year ## Footnote Some obligations may be classified as noncurrent based on refinancing plans.

Question 29

What are the **types of current liabilities**?

Answer 29

* Accounts Payable * Short-Term Borrowings * Accrued Liabilities * Deferred Revenues ## Footnote These represent various forms of obligations a company has.

Question 30

What does **depreciation** refer to?

Answer 30

The allocation of costs for tangible assets over their useful life ## Footnote It is commonly used for machinery and buildings.

Question 31

What is **amortization**?

Answer 31

The allocation of costs for intangible assets over their useful life ## Footnote Most intangible assets are assumed to have no residual value.

Question 32

What is the **straight-line method** of depreciation?

Answer 32

Costs are spread equally over the asset's service life ## Footnote It is the most common method of depreciation.

Question 33

What is **impairment** in asset accounting?

Answer 33

A significant decline in an asset's value below its recorded book value ## Footnote It requires recognition of an impairment loss.

Question 34

What is **goodwill**?

Answer 34

The excess paid over the fair value of net identifiable assets during an acquisition ## Footnote It cannot be directly tied to specific identifiable rights.

Question 35

What are the **types of debt investments**?

Answer 35

* Held-to-Maturity (HTM) * Trading Securities (TS) * Available-for-Sale Securities (AFS) ## Footnote Each type has different accounting treatments based on the investor's intent.

Question 36

What is the **equity method** used for?

Answer 36

Investments where ownership is between 20% and 50% ## Footnote It allows the investor to report their share of the company's profits or losses.

Question 37

True or false: **U.S. GAAP** allows revaluation of assets.

Answer 37

FALSE ## Footnote Revaluation is prohibited under U.S. GAAP but allowed under IFRS.

Question 38

What is the **importance of classification** of liabilities?

Answer 38

Helps assess a company’s liquidity ## Footnote A balanced ratio of current assets to current liabilities indicates financial health.

Question 39

What is the **units-of-production method**?

Answer 39

A method that calculates depreciation based on actual usage of the asset ## Footnote It contrasts with time-based methods.

Question 40

What is the **initial test** for asset impairment?

Answer 40

Compare undiscounted future cash flows from the asset with its book value ## Footnote If cash flows are less than book value, an impairment loss is indicated.

Question 41

What is the **treatment of contingencies** in accounting?

Answer 41

Recognized as liabilities or disclosed in notes based on likelihood and potential loss amount ## Footnote This informs stakeholders about potential financial risks.

Question 42

What do you report regarding the company's profits or losses but not as income?

Answer 42

dividends ## Footnote You report your share of the company's profits or losses but not the dividends as income.

Question 43

If you own over 50% of a company, what happens to its financial results?

Answer 43

fully control the company ## Footnote The financial results are combined with yours.

Question 44

What are **Fair Value Options** in accounting?

Answer 44

Companies can choose to treat certain investments at fair value ## Footnote This flexibility helps in matching their accounting with the nature of their investments.

Question 45

What is a key difference between **U.S. GAAP** and **IFRS** regarding investments?

Answer 45

how investments are classified and reported ## Footnote U.S. GAAP and IFRS differ in their treatment of investments.

Question 46

What are the implications of **Held-to-Maturity** and **Trading Securities**?

Answer 46

* Unrealized gains/losses treatment differs * Available-for-Sale allows flexibility while emphasizing long-term holding ## Footnote Both methods affect what appears in net income versus comprehensive income.

Question 47

What does the **equity method** account for?

Answer 47

investments in companies where the investor has significant influence ## Footnote Typically, this is when owning 20% to 50% of the voting shares.

Question 48

When United company purchased a 30% stake in Arjent, what was the purchase price?

Answer 48

$1,500,000 ## Footnote This required assessing the fair value of Arjent's net assets.

Question 49

What is identified as **goodwill** in the context of investment valuation?

Answer 49

$420,000 ## Footnote It is the difference between what United paid and the fair value of net assets.

Question 50

What must United account for when recognizing its share of income from Arjent?

Answer 50

additional depreciation ## Footnote This is based on the fair value of assets.

Question 51

What is the treatment for **land** and **goodwill** regarding depreciation?

Answer 51

no adjustments necessary ## Footnote Unlike buildings, land isn’t depreciated, and goodwill is not amortized.

Question 52

What happens to income recorded under the equity method for tax purposes?

Answer 52

isn't taxable until dividends are received ## Footnote This creates temporary differences leading to deferred tax liability.

Question 53

How does the investment account change over time under the equity method?

Answer 53

* Starts with initial purchase price * Adds investor’s share of net income * Subtracts dividends received ## Footnote Cash inflows from dividends are recorded separately in cash flow statements.

Question 54

What can lead to a shift in accounting methods regarding investments?

Answer 54

changes in the level of influence ## Footnote If influence decreases, the equity method can be replaced without adjusting the remaining value.

Question 55

What is the **Fair Value Option** in accounting?

Answer 55

account for investments at fair value ## Footnote Reported in net income, simplifying processes but may introduce volatility.

Question 56

What do both U.S. GAAP and IFRS require for significant influence investments?

Answer 56

the equity method ## Footnote They differ in notations regarding fair value options and asset adjustments.

Question 57

What do **liabilities** signify?

Answer 57

future sacrifices of economic benefits due to past transactions ## Footnote They arise from present obligations.

Question 58

What are **accrued liabilities**?

Answer 58

expenses incurred but not yet paid ## Footnote Common forms include salaries payable and interest payable.

Question 59

What are **contingent liabilities**?

Answer 59

arise from uncertain future events ## Footnote They must be recorded if the outcome is likely.

Question 60

What is the importance of classifying liabilities?

Answer 60

assessing a company’s liquidity ## Footnote A balanced ratio of current assets to current liabilities indicates financial health.

Question 61

What happens to contingencies based on the situation's likelihood?

Answer 61

could be recognized as liabilities or disclosed in notes ## Footnote For example, if a lawsuit outcome is uncertain but probable.