Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 6, Problem 14QE
To determine
Explain the two criteria along with examples is such a way that if the criteria is applied it would result in recording of loss contingency and accounting liability.
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Under GAAP, companies are permitted to recognize bad debt expense based on estimated bad-debt losses as of the time of sale, rather than when the accounts are actually written off. Identify one aspect of the conceptual framework of accounting that supports this treatment and one aspect that might not support it.
The following legal claims exist for a company. Identify the accounting treatment for each claim as either(a) a liability that is recorded or (b) an item described in notes to its financial statements. The company faces a probable loss on a pending lawsuit; the amount is not reasonably estimable.
A tradeoff between enhancing qualitative characteristics often occurs. For example, when a company records sales revenue, it is required to simultaneously estimate and record an expense for potential bad debts (uncollectible accounts). Including this estimated expense is considered to represent the economic event faithfully and to provide relevant information about the net profi ts for the accounting period. Th e information is timely and understandable; but because bad debts may not be known with certainty until a later period, inclusion of this estimated expense involves a sacrifi ce of verifi ability. Th e bad debt expense is simply an estimate. It is apparent that it is not always possible to simultaneously fulfi ll all qualitative characteristics. Companies are most likely to make tradeoff s between which of the following when preparing fi nancial reports? A . Relevance and materiality. B . Timeliness and verifi ability. C . Relevance and faithful representation.
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Financial Reporting, Financial Statement Analysis and Valuation
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- Financial accounting rules require firms to assess whether they will recover carrying amounts of long-lived assets and, if not, to write down the assets to their fair value and recognize an impairment loss in income from continuing operations. Impairment charges often appear as a separate line item on the income statement of companies that experience reductions in the future benefits originally anticipated from the long-lived assets. Conduct a search to identify a firm (other than those given in this chapter) that has recently reported an impairment charge. Discuss how the firm (a) reported the charge on the income statement, (b) determined the amount of the charge, and (c) used cash related to the charge.arrow_forwardWhich is a valid statement regarding recognition of liabilities? a. A non-interest bearing note is initially recognized at face value. b. A provision should not be recognized for future operating losses. c. For accumulating compensated absences, an entity should recognize the expense and related liability during the period the absences are incurred by the employees. d. The estimated future costs of supplying awards for customer loyalty program shall be recognized as an expense in the period the award credits are availed of by customers.arrow_forwardThe revenue recognition principle and the expense recognition principle require that the company recognize related revenue and expense transactions in the same accounting period. Discuss why this matching concept is important and explain how the financial information would be misleading if the accountant did not follow these rules. Provide examples in your discussion to demonstrate your point(s).arrow_forward
- Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Explain in what situations it would be appropriate to recognize revenue over time. Ignore income taxes.arrow_forwardConsider the following independent situations. For each of the situations described, suggest the appropriate accounting treatment for recording the liability. Back-up your answer with reference to the appropriate recognition criteria and disclosure requirements for liabilities, as per AASB 137. a)A manufacturing company is being sued by a customer group for losses sustained due to a faulty product design. The company’s lawyers feel the suit will likely succeed, but they cannot estimate the potential amount of damages that will be awarded. B)A resource company is obligated by municipal regulations to clean up the site of an active drilling operation in 10 years’ time when the resource has been fully extracted. The company is in its first year of operations and has no previous experience in cleaning up drilling sites C) A mining company has determined that it will cost approximately $10 million to restore a site that it previously minedarrow_forwardWhich of the following statements is most likely to be correct? Bad debts recovered account, if having an income tax benefit, is transferred to profit or loss summary account. A trial balance establishes the arithmetical accuracy of the accounting records. A well-maintained asset need not be depreciated. Drawing of goods by the owner should be debited to profit or loss summary account.arrow_forward
- 1. Of the following, choose the one that describes a situation where liabilities and expenses are manipulated to make a company appear less profitable? A. Liabilities are capitalized to increase revenues. B. Failure to record insurance expense for the period. C. Failure to record employee payroll earned but not paid as of period end. D. Failure to record warranty costs when the facts suggest that disclosure is more appropriate accounting treatment. E. None of the above.arrow_forwardWhich of the following is not an advantage of accounting standards? Select one: a. All of the given answers are correct. b. It reduces the reliability of financial statements. c. It helps to attain uniformity in accounting. d. It provides guidance on the content and presentation of financial statements.arrow_forwarddefine contingent liability and give an example. How would you management of a company distort a liability if they wish to report less liability in the financial statement.arrow_forward
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