1. (a)
Elaborate the meaning of the term cost as used for financial reporting in conformity with GAAP and also explain the different characteristics of the terms and their connections and other dissimilar items.
1. (b)
Elaborate the meaning of the term expense as used for financial reporting in conformity with GAAP and also explain the different characteristics of the terms and their connections and other dissimilar items.
1. (c)
Elaborate the meaning of the term loss as used for financial reporting in conformity with GAAP and also explain the different characteristics of the terms and their connections and other dissimilar items.
2.
Categorize each of the following items as a cost, expense, loss, or other category, and also elaborate the manner in which the classification of each item may change.
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Chapter 5 Solutions
Intermediate Accounting: Reporting And Analysis
- An important task ¡n the audit of the revenue cycle is determining whether a client has appropriately recognized revenue. a. What is the five-step process that companies should use in recognizing revenue? Why might the auditor need to do additional research and consider additional criteria on revenue recognition? b. The following are situations in which the auditor will make decisions about the amount of revenue to be recognized. For each of the following scenarios, labeled (1) through (6): . Identify the key issues to address in determining whether or not revenue should he recognized. . Identify additional information the auditor may want to gather in making a decision on revenue recognition. . Based only on the information presented, develop a rationale for either the recognition or nonrecognition of revenue. 1. AOL sells software that is unique as a provider of Internet services. The software contract includes a service fee of $19.95 for up to 500 hours of Internet service each month. The minimum requirement is a one-year contract. The company proposes to immediately recognize 30% of the first-year’s contract as revenue from the sale of software and 70% as Internet services on a monthly basis as fees are collected from the customer. 2. Modis Manufacturing builds specialty packaging machinery for other manufacturers. All of the products are high end and range in sales price from $5 million to $25 million. A major customer is rebuilding one of its factories and has ordered three machines with total revenue for Modis of $45 million. The contracted date to complete the production was November, and the company met the contract dare. The customer acknowledges the contract and confirms the amount. However, because the factory is not yet complete, it has asked Modis to hold the products in the ware house as a courtesy until its building is complete. 3. Standish Stoneware has developed a new low-end line of baking products that will be sold directly to consumers and to low-end discount retailers. The company had previously sold high-end silverware products to specialty stores and has a track record of returned items for the high-end stores. The new products tend to have more defects, but the defects are not necessarily recognizable ¡n production. For example, they are more likely to crack when first used in baking. The company does not have a history of returns from these products, but because the products are new, it grants each customer the right to return the merchandise for a full refund or replacement within one year of purchase. 4. Omer Technologies is a high-growth company that sells electronic products to the custom copying business. It is an industry with high innovation, but Omer’s technology is basic. In order to achieve growth, management has empowered the sales staff to make special deals to increase sales in the fourth quarter of the year. The sales deals include a price break and an increased salesperson commission but not an extension of either the product warranty or the customer’s right to return the product. 5. Electric City is a new company that has the exclusive right to a new technology that saves municipalities a substantial amount of energy for large-scale lighting purposes (e.g., for ball fields, parking lots, and shop ping centers). The technology has been shown to be very cost effective in Europe. In order to get new customers to try the product, the sales force allows customers to try the product for up to six months to prove the amount of energy savings they will realize. The company is so confident that customers will buy the product that it allows this pilot-testing period. Revenue is recognized at the time the product is installed at the customer location, with a small provision made for potential returns. 6. Jackson Products decided to quit manufacturing a line of its products and outsourced the production. However, much of its manufacturing equipment could be used by other companies. In addition, it had over $5 million of new manufacturing equipment on order in a noncancelable deal. The company decided to become a sales representative to sell the new equipment ordered and its existing equipment. All of the sales were recorded as revenue.arrow_forwardReimbursement of operating expenses analysis is the example of choice. Construction audit Compliance audit Operational audit Tax audit Mark two possible options related to the Material error Any omission expected to influence the economic decisions of users of financial statement It is misrepresenting actual financial position Biased opinion of auditor expected to influence the economic decisions of users of financial statement Misstatement expected to influence the economic decisions of users of financial statement Please answer me fast only correct option dont include explanation.arrow_forwardAccountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs andrevenues requires that costs resulting from typical business operations be recognized in the period in which they expired. Instructions(a) List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period.(b) As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss each item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information.(1) Receiving and handling costs.(2) Cash discounts on purchases.arrow_forward
- Presented below are a number of facts related to Weller, Inc. Assume that no mention of these facts was made in the financial statements and the related notes. Instructions Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items. a. The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted. b. Equipment purchases of $170,000 were partly financed during the year through the issuance of a $110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at $60,000. c. Weller has reported its ending inventory at $2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.arrow_forwardAn accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria. Instructions a. Explain the rationale for recognizing costs as expenses at the time of product sale. b. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain. c. In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense? Explain. d. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale…arrow_forward**Objective Question:** In the context of accounting practices, what term refers to the mandatory periodic rotation of audit firms tasked with auditing a company's financial statements to enhance independence and objectivity? a) Financial disclosure b) Audit rotation c) Tax planning d) Cost accountingarrow_forward
- You were assigned to audit the financial statements of Swansea Corporation as at and for the year ended December 31, 2021. Your senior asked you to draft a memo on materiality and tolerable error for your client. Swansea Corporation has incurred substantial net losses due to COVID-19 pandemic. Up to 2019, it has been profitable. Which of the following is least likely to be your starting point in computing materiality? Group of answer choices Normalized net income Net loss Total assets Normalized revenuearrow_forwardConsider FASB Concepts Statement No. 8, as amended. What are the conceptual issues underlying financial reporting in determining how the coronavirus event should be reported and disclosed in the financial statements? How does it relate to the measurement of potential costs to the business including contingencies? Explain the accounting and auditing issues related to the coronavirus event with respect to accurately determining reportable amounts and disclosures of events. Which group(s) represent the public interest with respect to accounting for the events surrounding the coronavirus and what are their interests? Based on what you know to date, evaluate whether the crisis has been handled properly by the various stakeholders. Use ethical reasoning to support your view.arrow_forwardAn analyst must be familiar with the determination of income. Income reported for a business entity depends on proper recognition of revenues and expenses. In certain cases, costs are recog- nized as expenses at the time of product sale; in other situations, guidelines are applied in capi- talizing costs and recognizing them as expenses in future periods. Required: a. Under what circumstances is it appropriate to capitalize a cost as an asset instead of expensing it? Explain. b. Certain expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the rationale for recognizing expenses on such a basis.arrow_forward
- Liberty Corporation reported the following financial statements: What part of the Liberty’s annual report is written by the company and could a biased view of financial conditions and results? a. Balance Sheet b. Management’s Discussion and Analysis of Financial Condition and Results Operations (MD&A) c. Auditors Report d. Income Statementarrow_forwardwhich of the following application would an auditor apply to determine the probability of a corporation's account balance being in error? A) overinvolvement rations B) probability rules C) bayes theorem D) emprical formulaarrow_forwardDuring a review of a nonissuer’s financial statements, accountants are required to make certaininquiries of management. Which of the following inquiries is not required by the SSARS?a. The basis for the preparation of financial statements.b. Internal control deficiencies.c. Significant transactions occurring near the end of the reporting period.d. Material subsequent eventsarrow_forward
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