Question

In: Accounting

1. Briefly describe two situations in which changes in fair value are not reported on the...

1. Briefly describe two situations in which changes in fair value are not reported on the Income Statement.

2. What is “earnings management” and “quality of earnings”? How is quality of earnings affected by earnings management?

3. Identify three limitations of the income statement and give an example of each.

4. What is the proper accounting for correction of errors?

5. How are the following items presented on the income statement?

 Discontinued operations

 Noncontrolling interest

 Basic earnings per share

6. What is the difference intraperiod and interperiod tax allocation?

7. Briefly describe the FASB’s guidance on the proper format for presenting comprehensive income.

8. What is Other Comprehensive Income?

9. Identify at least two items that are recorded as Other Comprehensive Income (OCI).

10. Briefly describe the proper accounting for the three accounting changes we covered in

Chapters 4 and 22.

11. Identify three limitations of a balance sheet and give an example of each.

12.Identify three methods companies use to disclose pertinent information related to financial reporting (full disclosure principle).

13. Identify at least two situations in which estimates could affect the usefulness of information on

the income statement or balance sheet.

14. What are some typical disclosures required for assets reported at fair value?

15. What is a “Summary of Significant Accounting Policies”?

Solutions

Expert Solution

1)

Situation 1: Items which are not reliably measured are not reported eg. Branding, loyalty.

Situation 2: Until the product is sold, the expenses which are incurred to produce a product are also not reported.

2)

Earnings management: It's the process of using the techniques of accounting to create financial statements that show a positive outlook of the financial position and business activites of a company.

Quality of earnings: It's the amount og earnings which look after the genuine attributes of higher sales or say lower costs rather than looking after the artificial profits created by accounting tricks mentioned above.

* Earnings management performs better than quality of earnings in guessing the profitability in the near future. It's observed that when the quality of earning has decreased over the period, it;s found that bankrupt firms increased and vice versa.

3)

i. Some figures depend on the method of accounting (FIFO,LIFO,etc.)

ii. Some figures depend on estimates (In calculating depreciation the estimates are salvage value and useful life)

iii. Some items can't be measured (Brading, loyalty)


4)

i. Determine the type of error occurred.

ii. Fix it whether its because of journal entry or direct adjustment to retained earnings.

iii. Restate the issued financial statement in order to correct the error.

5)

i. Disclose the basic and diluted amounts per share in either the statement of profit and loss or in the notes - DC disclosure.

ii. NCI is shown in the equity part of financial statements of parent company.

iii. BEPS is disclosed with and without extraordinary items. But it can vary depending on the situational accounting standards followed.

6)

Interperiod tax allocation: It's the temporary difference between the effects of tax policy on the financial reporting of a business and normal reporting followed by GAAP or IFRS.

Intraperiod tax allocation: It's allocation of income taxes to different parts appearing in the income statement of business which are stated with regards to net taxes.

7)

The FASB guidelines are the source of authoritative GAAP recognized by the FASB to applied to non governmental entities.

8)

Those revenues, expenses, gains and losses which are under GAAP and IFRS and that are excluded from net income on the income statement are Other comprehensive incomes.

9)

i. Foreign currency translation gains or losses if the currency which a company holds fluctuates.

ii. Pension plans gains or losses if their old and new value fluctuates.


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