hisab memar 13.doc

CHAPTER 24
FULL DISCLOSURE IN FINANCIAL REPORTING
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
F 1. Items affected by FASB standards.
T 2. SEC reporting requirements.
T 3. Definition of accounting policies.
F 4. Related party transactions disclosure.
F 5. Post-balance-sheet disclosures.
T 6. FASB 131 requirements
F 7. Allocation of joint or common costs.
T 8. Disclosure of major customers.
F 9. Reporting under the integral approach.
T 10. Accounting principles in interim reports.
F 11. Reporting extraordinary items in interim reports.
T 12. Computing taxes in an interim period.
F 13. Opinions issued by auditor.
T 14. Definition of qualified opinion.
F 15. Management’s discussion and analysis section.
T 16. Information provided by MD&A section.
F 17. Definition of financial projection.
T 18. Financial forecast vs. financial projection.
T 19. Fraudulent financial reporting.
F 20. Internal environment influences.
MULTIPLE CHOICE—Conceptual
d 21. Disclosure of significant accounting policies.
c 22. Disclosure of inventory accounting policy.
c 23. Definition of errors and irregularities.
d S
24. Full disclosure principle description.
b S
25. APB Opinion No. 22 disclosure.
b S
26. Related party transactions.
c P
27. Post-balance-sheet events.
d 28. Subsequent events disclosure.
d 29. Recognition of subsequent events.
b 30. Revenue of a segment.
d 31. Segment revenue test.
b 32. Segment revenue test.
c 33. Disclosure of operating segment information.
d 34. Bases of reporting disaggregated information.
a S
35. Items reconciled in segment reporting.
d S
36. Accounting principles used in interim reports.
a P
37. Planned volume variance in interim period.
d 38. Interim financial reporting.

Test Bank for Intermediate Accounting, Thirteenth Edition
24 - 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer N/o. Description
d 39. Application of accounting principles on interim reporting.
b 40. Methods of inventory valuation—year end vs. interim.
a 41. Partial LIFO liquidation reported in interim statements.
c 42. Disclosing information in interim statements.
c 43. Extraordinary items in interim reports.
b S
44. Issuing qualified opinion.
c P
45. Items covered in MD&A section.
c S
46. Difference between financial forecast and financial projection.
a 47. Disclosures in financial forecasts.
a *48. Acid-test ratio and current ratio.
b *49. Receivables turnover ratio.
b *50. Rate of return on common stock equity.
d *51. Payout ratio.
c *52. Measure of long-term solvency.
c *53. Number of times interest earned.
c *54. Using average amounts.
d *55. Limitations of ratio analysis.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.
* This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE—Computational
b 56. Determine reportable operating segments.
c 57. Bonus expense in first quarter interim income statement.
a 58. Property taxes and plant repairs recognized in interim period.
c 59. Inventory loss reflected in interim statements.
d *60. Calculate the current ratio.
c *61. Calculate the number of times interest was earned.
d *62. Calculate book value per share of common stock.
c *63. Calculate rate of return on common stock equity.
c *64. Calculate receivables turnover.
d *65. Calculate inventory turnover.
b *66. Calculate the profit margin on sales.
c *67. Calculate the rate of return on common stock equity.
a *68. Determine book value per share.
a *69. Calculate the acid-test ratio.
c *70. Calculate the acid-test ratio.
c *71. Receivables turnover.
c *72. Calculate inventory turnover.

Full Disclosure in Financial Reporting 24 - 3
MULTIPLE CHOICE—CPA Adapted
c 73. Significant accounting policies disclosed for plant assets.
c 74. Criteria for reporting disaggregated information.
b 75. Identification of reportable segments.
b 76. Identification of a reportable segment.
b 77. Advertising costs—year end vs. interim reporting.
c 78. Total expense to be reported in interim statements.
b 79. Extraordinary loss reported in interim statements.
c 80. Extraordinary gain reported in interim statements.
c *81. Acid-test ratio and inventory turnover ratio.
d *82. Acid-test ratio and debt to total assets ratio.
c *83. Receivables turnover and payout ratio.
EXERCISES
Item Description
E24-84 Notes to financial statements.
E24-85 Segment reporting.
E24-86 Segment reporting.
E24-87 Interim reports.
E24-88 Inventory and cost of goods sold at interim dates.
E24-89 Forecasts.
*E24-90 Financial statement analysis.
*E24-91 Selected financial ratios.
*E24-92 Computation of selected ratios.
PROBLEMS
Item Description
P24-93 Segment Reporting.
P24-94 Interim Reports.
CHAPTER LEARNING OBJECTIVES
1. Review the full disclosure principle and describe implementation problems.
2. Explain the use of notes in financial statement preparation.
3. Discuss the disclosure requirements for major business segments.
4. Describe the accounting problems associated with interim reporting.
5. Identify the major disclosures in the auditor's report.
6. Understand management’s responsibilities for financials.
7. Identify issues related to financial forecasts and projections.
8. Describe the profession's response to fraudulent financial reporting.
*9. Understand the approach to financial statement analysis.
*10. Identify major analytic ratios and describe their calculation.
*11. Explain the limitations of ratio analysis.

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SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 2. TF 21. MC 22. MC 23. MC S
24. MC
3. TF 5. TF S
26. MC 28. MC 73. MC
4. TF S
25. MC P
27. MC 29. MC 84. E
6. TF 30. MC 33. MC 56. MC 76. MC 93. P
7. TF 31. MC 34. MC 74. MC 85. E
8. TF 32. MC S
35. MC 75. MC 86. E
9. TF S
36. MC 40. MC 57. MC 78. MC 88. E
10. TF P
37. MC 41. MC 58. MC 79. MC 94. P
11. TF 38. MC 42. MC 59. MC 80. MC
12. TF 39. MC 43. MC 77. MC 87. E
13. TF 14. TF 15. TF 16. TF S
44. MC
P
45. MC
17. TF 18. TF S
46. MC 47. MC 89. E
19. TF 20. TF
48. MC 52. MC 61. MC 65. MC 69. MC 81. MC 91. E
49. MC 53. MC 62. MC 66. MC 70. MC 82. MC 92. E
50. MC 54. MC 63. MC 67. MC 71. MC 83. MC
51. MC 60. MC 64. MC 68. MC 72. MC 90. E
55. MC
Note: TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem

TRUE-FALSE—Conceptual
1. FASB standards directly affect financial statements, notes to the financial statements, and
management’s discussion and analysis.
2. The SEC requires that companies report to it certain substantive information that is not
found in their annual reports.
3. Accounting policies are the specific accounting principles and methods a company uses
and considers most appropriate to present fairly its financial statements.
4. In order to make adequate disclosure of related party transactions, companies should
report the legal form, rather than the economic substance, of these transactions.
5. If the loss on an account receivable results from a customer’s bankruptcy after the
balance sheet date, the company only discloses this information in the notes to the
financial statements.
6. FASB Statement 131 requires that general purpose financial statements include selected
information on a single basis of segmentation.
7. The FASB requires allocations of joint, common, or company-wide costs for external
reporting purposes.
8. If 10 percent or more of company revenue is derived from a single customer, the company
must disclose the total amount of revenue from each such customer by segment.
9. Companies should report accounting transactions as they occur, and expense recognition
should not change with the period of time covered under the integral approach.
10. Companies should generally use the same accounting principles for interim reports and
for annual reports.
11. Companies report extraordinary items in interim reports by prorating them over the four
quarters.
12. To compute the year-to-date tax, companies apply the estimated annual effective tax rate
to the year-to-date ordinary income at the end of each interim period.
13. In most situations, an auditor issues a qualified opinion or disclaims an opinion.
14. A qualified opinion is issued when the exception to the standard opinion is not of sufficient
magnitude to invalidate the statements as a whole.
15. Management’s discussion and analysis section covers three financial aspects of an
enterprise’s business-liquidity, profitability, and solvency.
16. The MD&A section must provide information about the effects of inflation and changing
prices, if they are material to financial statement trends.

24 - 6
17. A financial projection is a set of prospective financial statements that present a company’s
expected financial position and results of operations.
18. The difference between a financial forecast and a financial projection is that a forecast
provides information on what is expected to happen, while a projection provides
information on what might take place.
19. Fraudulent financial reporting is intentional or reckless conduct, whether act or omission,
that results in materially misleading financial statements.
20. Influences in a company’s internal environment may relate to industry conditions, poor
internal control systems, or legal and regulatory considerations.
True-False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. F 16. T
2. T 7. F 12. T 17. F
3. T 8. T 13. F 18. T
4. F 9. F 14. T 19. T
5. F 10. T 15. F 20. F
MULTIPLE CHOICE—Conceptual
21. Which of the following should be disclosed in a Summary of Significant Accounting
Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in accounting principle
c. Claims of equity holders
d. Depreciation method followed
22. An example of an inventory accounting policy that should be disclosed in a Summary of
Significant Accounting Policies is the
a. amount of income resulting from the involuntary liquidation of LIFO.
b. major backlogs of inventory orders.
c. method used for pricing inventory.
d. composition of inventory into raw materials, work-in-process, and finished goods.
23. Errors and irregularities are defined as intentional distortions of facts.
Errors Irregularities
a. Yes Yes
b. Yes No
c. No Yes
d. No No

S
24. The full disclosure principle, as adopted by the accounting profession, is best described
by which of the following?
a. All information related to an entity's business and operating objectives is required to
be disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is to be
included in the notes to the financial statements.
c. Enough information should be disclosed in the financial statements so a person
wishing to invest in the stock of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an
informed reader.
S
25. The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This
information is important to financial statement readers in determining
a. net income for the year.
b. whether accounting policies are consistently applied from year to year.
c. the value of obsolete items included in ending inventory.
d. whether the working capital position is adequate for future operations.
S
26. If a business entity entered into certain related party transactions, it would be required to
disclose all of the following information except the
a. nature of the relationship between the parties to the transactions.
b. nature of any future transactions planned between the parties and the terms involved.
c. dollar amount of the transactions for each of the periods for which an income state-
ment is presented.
d. amounts due from or to related parties as of the date of each balance sheet presented.
P
27. Events that occur after the December 31, 2011 balance sheet date (but before the
balance sheet is issued) and provide additional evidence about conditions that existed at
the balance sheet date and affect the realizability of accounts receivable should be
a. discussed only in the MD&A (Management's Discussion and Analysis) section of the
annual report.
b. disclosed only in the Notes to the Financial Statements.
c. used to record an adjustment to Bad Debt Expense for the year ending December 31,
2011.
d. used to record an adjustment directly to the Retained Earnings account
28. Which of the following post-balance-sheet events would generally require disclosure, but
no adjustment of the financial statements?
a. Retirement of the company president
b. Settlement of litigation when the event that gave rise to the litigation occurred prior to
the balance sheet date.
c. Employee strikes
d. Issue of a large amount of capital stock
29. Which of the following subsequent events (post-balance-sheet events) would require
adjustment of the accounts before issuance of the financial statements?
a. Loss of plant as a result of fire
b. Changes in the quoted market prices of securities held as an investment
c. Loss on an uncollectible account receivable resulting from a customer’s major flood
loss
d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.

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30. Revenue of a segment includes
a. only sales to unaffiliated customers.
b. sales to unaffiliated customers and intersegment sales.
c. sales to unaffiliated customers and interest revenue.
d. sales to unaffiliated customers and other revenue and gains.
31. An operating segment is a reportable segment if
a. its operating profit is 10% or more of the combined operating profit of profitable
segments.
b. its operating loss is 10% or more of the combined operating losses of segments that
incurred an operating loss.
c. the absolute amount of its operating profit or loss is 10% or more of the company's
combined operating profit or loss.
d. none of these.
32. A segment of a business enterprise is to be reported separately when the revenues of the
segment exceed 10 percent of the
a. total combined revenues of all segments reporting profits.
b. total revenues of all the enterprise's industry segments.
c. total export and foreign sales.
d. combined net income of all segments reporting profits.
33. All of the following information about each operating segment must be reported except
a. unusual items.
b. interest revenue.
c. cost of goods sold.
d. depreciation and amortization expense.
34. The profession requires disaggregated information in the following ways:
a. products or services.
b. geographic areas.
c. major customers.
d. all of these.
S
35. In presenting segment information, which of the following items must be reconciled to the
entity's consolidated financial statements?
Operating Identifiable
Revenues Profit (Loss) Assets
a. Yes Yes Yes
b. No Yes Yes
c. Yes No Yes
d. Yes Yes No
S
36. APB Opinion No. 28 indicates that
a. all companies that issue an annual report should issue interim financial reports.
b. the discrete view is the most appropriate approach to take in preparing interim
financial reports.
c. the three basic financial statements should be presented each time an interim period
is reported upon.
d. the same accounting principles used for the annual report should be employed for
interim reports.

P
37. Rondelli Manufacturing Company employs a standard cost system. A planned volume
variance in the first quarter of 2011, which is expected to be absorbed by the end of the
fiscal year, ordinarily should
a. be deferred at the end of the first quarter, regardless of whether it is favorable or
unfavorable.
b. never be deferred beyond the quarter in which it occurs.
c. be deferred at the end of the first quarter if it is favorable; unfavorable variances are to
be recognized in the period incurred.
d. be deferred at the end of the first quarter if it is unfavorable; favorable variances are to
be recognized in the period incurred.
38. In considering interim financial reporting, how does the profession conclude that such
reporting should be viewed?
a. As a "special" type of reporting that need not follow generally accepted accounting
principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are
unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
39. Accounting principles are modified for the following at interim dates.
Revenue Losses
a. Yes Yes
b. Yes No
c. No Yes
d. No No
40. The following methods of estimating inventory can be used at interim dates for inventory
pricing. May they also be used at year end?
Gross Profit Method Retail Inventory Method
a. No No
b. No Yes
c. Yes No
d. Yes Yes
41. A company that uses the last-in, first-out (LIFO) method of inventory pricing finds at an
interim reporting date that there has been a partial liquidation of the base period inventory
level. The decline is considered temporary and the partial liquidation is expected to be
replaced prior to year end. The amount shown as inventory at the interim reporting date
should
a. be shown at the actual level, and cost of sales for the interim reporting period should
include the expected cost of replacement of the liquidated LIFO base.
b. be shown at the actual level, and cost of sales for the interim reporting period should
reflect the historical cost of the liquidated LIFO base.
c. not give effect to the LIFO liquidation, and cost of sales for the interim reporting period
should reflect the historical cost of the liquidated LIFO base.
d. be shown at the actual level, and the decrease in inventory level should not be
reflected in the cost of sales for the interim reporting period.

24 - 10
42. Companies should disclose all of the following in interim reports except
a. basic and diluted earnings per share.
b. changes in accounting principles.
c. post-balance-sheet events.
d. seasonal revenue, cost, or expenses.
43. The required approach for handling extraordinary items in interim reports is to
a. prorate them over all four quarters.
b. prorate them over the current and remaining quarters.
c. charge or credit the loss or gain in the quarter that it occurs.
d. disclose them only in the notes.
S
44. If the financial statements examined by an auditor lead the auditor to issue an opinion that
contains an exception that is not of sufficient magnitude to invalidate the statement as a
whole, the opinion is said to be
a. unqualified.
b. qualified.
c. adverse.
d. exceptional.
P
45. The MD&A section of a company's annual report is to cover the following three items:
a. income statement, balance sheet, and statement of owners' equity.
b. income statement, balance sheet, and statement of cash flows.
c. liquidity, capital resources, and results of operations.
d. changes in the stock price, mergers, and acquisitions.
S
46. Which of the following best characterizes the difference between a financial forecast and a
financial projection?
a. Forecasts include a complete set of financial statements, while projections include
only summary financial data.
b. A forecast is normally for a full year or more and a projection presents data for less
than a year.
c. A forecast attempts to provide information on what is expected to happen, whereas a
projection may provide information on what is not necessarily expected to happen.
d. A forecast includes data which can be verified about future expectations, while the
data in a projection is not susceptible to verification.
47. A financial forecast per professional pronouncements presents to the best of the
responsible party's knowledge and belief,
a. an entity's expected financial position, results of operations, and cash flows.
b. an assessment of the company's ability to be successful in the future.
c. given one or more hypothetical assumptions, an entity's expected financial position,
results of operations, and cash flows.
d. an assessment of the company's ability to be successful in the future under a number
of different assumptions.
*48. Cash, short-term investments, and net receivables are the numerator for
Acid-Test Ratio Current Ratio
a. Yes No
b. Yes Yes
c. No No
d No Yes

*49. Theoretically, in computing the receivables turnover, the numerator should include
a. net sales.
b. net credit sales.
c. sales.
d. credit sales.
*50. The rate of return on common stock equity is calculated by dividing
a. net income by average common stockholders’ equity.
b. net income less preferred dividends by average common stockholders’ equity.
c. net income by ending common stockholders’ equity.
d. net income less preferred dividends by ending common stockholders’ equity.
*51. The payout ratio is calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income plus preferred dividends.
c. cash dividends by market price per share.
d. cash dividends by net income less preferred dividends.
*52. Which of the following ratios measures long-term solvency?
a. Acid-test ratio
b. Receivables turnover
c. Debt to total assets
d. Current ratio
*53. The calculation of the number of times interest is earned involves dividing
a. net income by annual interest expense.
b. net income plus income taxes by annual interest expense.
c. net income plus income taxes and interest expense by annual interest expense.
d. none of these.
*54. When should an average amount be used for the numerator or denominator?
a. When the numerator is a balance sheet item or items
b. When the denominator is a balance sheet item or items
c. When a ratio consists of an income statement item and a balance sheet item
d. When the numerator is an income statement item or items
*55. The basic limitations associated with ratio analysis include
a. the lack of comparability among firms in a given industry.
b. the use of estimated items in accounting.
c. the use of historical costs in accounting.
d. all of these.

24 - 12
Multiple Choice Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. d 26. b 31. d 36. d 41. a 46. c *51. d
22. c 27. c 32. b 37. a 42. c 47. a *52. c
23. c 28. d 33. c 38. d 43. c *48. a *53. c
24. d 29. d 34. d 39. d 44. b *49. b *54 c
25. b 30. b 35. a 40. b 45. c *50. b *55. d
Solutions to those multiple choice questions for which the answer is “none of these:”
31. The absolute amount of its profit or loss is 10% or more of the greater, in absolute amount,
of (a) the combined profit of all operating segments that did not incur a loss, or (b) the
combined loss of all operating segments that did incur a loss.
MULTIPLE CHOICE—Computational
56. Presented below are four segments that have been identified by Haley Productions:
Total Revenue Operating
Segments (Unaffiliated) Profit (Loss) Identifiable Assets
A $255,000 $30,000 $900,000
B 600,000 (55,000) 800,000
C 225,000 6,000 450,000
D 90,000 4,000 225,000
For which of the segments would information have to be disclosed in accordance with
professional pronouncements?
a. Segments A, B, C, and D
b. Segments A, B, and C
c. Segments A and B
d. Segments A and D
57. In January 2011, Post, Inc. estimated that its year-end bonus to executives would be
$720,000 for 2011. The actual amount paid for the year-end bonus for 2010 was
$660,000. The estimate for 2011 is subject to year-end adjustment. What amount, if any,
of expense should be reflected in Post's quarterly income statement for the three months
ended March 31, 2011?
a. $ -0-.
b. $165,000.
c. $180,000.
d. $720,000.
58. On January 15, 2011, Vancey Company paid property taxes on its factory building for the
calendar year 2011 in the amount of $560,000. In the first week of April 2011, Vancey
made unanticipated major repairs to its plant equipment at a cost of $1,400,000. These
repairs will benefit operations for the remainder of the calendar year. How should these
expenses be reflected in Vancey's quarterly income statements?

Three Months Ended
3/31/11 6/30/11 9/30/11 12/31/11
a. $140,000 $606,667 $606,667 $606,667
b. $140,000 $1,540,000 $140,000 $140,000
c. $560,000 $1,400,000 $ -0- $ -0-
d. $490,000 $490,000 $490,000 $490,000
59. An inventory loss from marketdecline of $1,600,000 occurred in May 2011, after its March 31,
2011 quarterly report was issued. None of this loss was recovered by the end of the year.
How should this loss be reflected in the company's quarterly income statements?
Three Months Ended
3/31/11 6/30/11 9/30/11 12/31/11
a. $ -0- $ -0- $ -0- $1,600,000
b. $ -0- $533,333 $533,333 $533,333
c. $ -0- $1,600,000 $ -0- $ -0-
d. $400,000 $400,000 $400,000 $400,000
Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below:
Ramirez Corp.
Balance Sheet
December 31, 2011
Assets Equities
Cash $ 100,000 Accounts payable $ 210,000
Accounts receivable (net) 650,000 Federal income tax payable 63,000
Inventories 813,000 Miscellaneous accrued payables 75,000
Plant and equipment, Bonds payable (10%, due 2015) 625,000
net of depreciation 661,000 Preferred stock ($100 par, 6%
Patents 87,000 cumulative nonparticipating) 250,000
Other intangible assets 25,000 Common stock (no par, 20,000
Total Assets $2,336,000 shares authorized, issued
and outstanding) 375,000
Retained earnings 813,000
Treasury stock—500 shares
of preferred (75,000)
Total Equities $2,336,000
Ramirez Corp.
Income Statement
Year Ended December 31, 2011
Net sales $3,000,000
Cost of goods sold 2,000,000
Gross profit 1,000,000
Operating expenses (including bond interest expense) 500,000
Income before income taxes 500,000
Income tax 150,000
Net income $ 350,000

24 - 14
Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and
Inventory accounts are unchanged from January 1, 2011, and there were no changes in the
Bonds Payable, Preferred Stock, or Common Stock accounts during 2011. Assume that preferred
dividends for the current year have not been declared.
*60. At December 31, 2011, the current ratio was
a. 750 ÷ 210.
b. 2,225 ÷ 273.
c. 1,563 ÷ 273.
d. 1,563 ÷ 348.
*61. The number of times interest was earned during 2011 was
a. 350 ÷ 62.5.
b. 500 ÷ 62.5.
c. 562 ÷ 62.5.
d. 437 ÷ 62.5.
*62. At December 31, 2011, the book value per share of common stock was
a. $55.66.
b. $58.16.
c. $59.41.
d. $58.65.
*63. The rate of return for 2011 based on the year-end common stockholders' equity was
a. 350 ÷ 1,173.
b. 350 ÷ 1,188.
c. 335 ÷ 1,173.
d. 335 ÷ 1,188.
Use the following information for questions 64 through 69.
The following data are provided:
December 31
2011 2010
Cash $ 375,000 $ 250,000
Accounts receivable (net) 400,000 300,000
Inventories 650,000 550,000
Plant assets (net) 2,000,000 1,625,000
Accounts payable 275,000 200,000
Taxes payable 50,000 25,000
Bonds payable 350,000 350,000
10% Preferred stock, $50 par 500,000 500,000
Common stock, $10 par 600,000 450,000
Paid-in capital 400,000 325,000
Retained earnings 1,000,000 875,000
Net credit sales 3,200,000
Operating expenses 725,000
Net income 375,000

Additional information:
Depreciation included in cost of goods sold and operating expenses is $305,000. On May 1,
2011, 15,000 shares of common stock were issued. The preferred stock is cumulative. The
preferred dividends were not declared during 2011.
*64. The receivables turnover for 2011 is
a. 3,200 ÷ 400.
b. 2,100 ÷ 400.
c. 3,200 ÷ 350.
d. 2,100 ÷ 350.
*65. The inventory turnover for 2011 is
a. 3,200 ÷ 650.
b. 2,100 ÷ 650.
c. 3,200 ÷ 600.
d. 2,100 ÷ 600.
*66. The profit margin on sales for 2011 is
a. 1,100 ÷ 3,200.
b. 375 ÷ 3,200.
c. 1,100 ÷ 2,100.
d. 375 ÷ 2,100.
*67. The rate of return on common stock equity for 2011 is
a. 375 ÷ 1,800.
b. 375 ÷ 2,000.
c. 325 ÷ 1,800.
d. 325 ÷ 2,000.
*68. The book value per share of common stock at 12/31/11 is
a. 1,950 ÷ 60.
b. 1,940 ÷ 60.
c. 1,950 ÷ 55.
d. 2,000 ÷ 55.
*69. At December 31, 2011, the acid-test ratio was
a. 775 ÷ 325.
b. 775 ÷ 540.
c. 1,050 ÷ 400.
d. 1,425 ÷ 325.
*70. Presented below is information related to Tolbert Company.
Current Assets
Cash $ 8,000
Short-term investments 150,000
Accounts receivable 122,000
Inventories 220,000
Prepaid expenses 60,000
Total current assets $560,000

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Total current liabilities are $200,000. What is the acid-test ratio?
a. 2.8 to 1.
b. 2.5 to 1.
c. 1.4 to 1.
d. 0.8 to 1.
*71. Perez Company's net accounts receivable were $600,000 at December 31, 2010 and
$660,000 at December 31, 2011. Net cash sales for 2011 were $390,000. The accounts
receivable turnover for 2011 was 7.0. What were Perez's total net sales for 2011?
a. $2,730,000.
b. $4,410,000.
c. $4,800,000.
d. $4,020,000.
*72. During 2011, Quirk, Incorporated purchased $3,200,000 of inventory. The cost of goods
sold for 2011 was $3,600,000 and the ending inventory at December 31, 2011, was
$400,000. What was the inventory turnover for 2011?
a. 5.3.
b. 8.0.
c. 6.0.
d. 9.0.
Multiple Choice Answers—Computational
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
56. b 59. c *62. d *65. d *68. a *71. c
57. c *60. d *63. c *66. b *69. a *72. c
58. a *61. c *64. c *67. c *70. c
MULTIPLE CHOICE—CPA Adapted
73. Which of the following facts concerning plant assets should be included in the summary of
significant accounting policies?
Depreciation Method Composition
a. No Yes
b. Yes Yes
c. Yes No
d. No No
74. Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to
unaffiliated customers. Farr should report segment financial information for each division
meeting which of the following criteria?
a. Segment profit or loss is 10% or more of consolidated profit or loss.
b. Segment profit or loss is 10% or more of combined profit or loss of all company
segments.
c. Segment revenue is 10% or more of combined revenue of all the company segments.
d. Segment revenue is 10% or more of consolidated revenue.

75. Unruh Corp. and its divisions are engaged solely in manufacturing operations. The
following data (consistent with prior years' data) pertain to the industries in which
operations were conducted for the year ended December 31, 2011.
Assets
Industry Revenue Profit 12/31/11
A $ 8,000,000 $1,320,000 $16,000,000
B 6,400,000 1,120,000 14,000,000
C 4,800,000 960,000 10,000,000
D 2,400,000 440,000 5,200,000
E 3,400,000 540,000 5,600,000
F 1,200,000 180,000 2,400,000
$26,200,000 $4,560,000 $53,200,000
In its segment information for 2011, how many reportable segments does Unruh have?
a. Three
b. Four
c. Five
d. Six
76. The following information pertains to Nixon Corp. and its divisions for the year ended
December 31, 2011.
Sales to unaffiliated customers $2,500,000
Intersegment sales of products similar to those sold to
unaffiliated customers 750,000
Interest earned on loans to other operating segments 50,000
Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a
reportable segment if that segment's revenue exceeds
a. $330,000.
b. $325,000.
c. $255,000.
d. $250,000.
77. Advertising costs may be accrued or deferred to provide an appropriate expense in each
period for
Interim Year-end
Financial Reporting Financial Reporting
a. Yes No
b. Yes Yes
c. No No
d. No Yes
78. Mayo Corp. has estimated that total depreciation expense for the year ending December 31,
2011 will amount to $300,000, and that 2011 year-end bonuses to employees will total
$600,000. In Mayo's interim income statement for the six months ended June 30, 2011,
what is the total amount of expense relating to these two items that should be reported?
a. $0.
b. $150,000.
c. $450,000.
d. $900,000.

24 - 18
79. Fina Corp. had the following transactions during the quarter ended March 31, 2011:
Loss from hurricane damage $350,000
Payment of fire insurance premium for calendar year 2011 500,000
What amount should be included in Fina's income statement for the quarter ended
March 31, 2011?
Extraordinary Loss Insurance Expense
a. $350,000 $500,000
b. $350,000 $125,000
c. $87,500 $125,000
d. $0 $500,000
80. For interim financial reporting, an extraordinary gain occurring in the second quarter
should be
a. recognized ratably over the last three quarters.
b. recognized ratably over all four quarters with the first quarter being restated.
c. recognized in the second quarter.
d. disclosed by note only in the second quarter.
*81. How is the average inventory used in the calculation of each of the following?
Acid-Test (Quick) Ratio Inventory Turnover Ratio
a. Numerator Numerator
b. Numerator Denominator
c. Not Used Denominator
d. Not Used Numerator
*82. Which of the following ratios is(are) useful in assessing a company's ability to meet
current maturing or short-term obligations?
Acid-Test Ratio Debt to Total Assets Ratio
a. No No
b. No Yes
c. Yes Yes
d. Yes No
*83. Which of the following ratios should be used in evaluating the effectiveness with which the
company uses its assets?
Receivables Turnover Payout Ratio
a. Yes Yes
b. No No
c. Yes No
d. No Yes
Multiple Choice Answers—CPAAdapted
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
73. c 75. b 77. b 79. b *81. c *83. c
74. c 76. b 78. c 80. c *82. d

DERIVATIONS — Computational
No. Answer Derivation
56. b Revenue test: Total revenue = $1,170,000 × 10% = $117,000.
Operating profit test: $55,000 × 10% = $5,500.
Asset test: Total assets = $2,375,000 × 10% = $237,500.
57. c $720,000 ÷ 4 = $180,000.
58. a $560,000 ÷ 4 = $140,000.
$1,400,000 ÷ 3 = $466,667 + $140,000 = $606,667.
59. c Conceptual.
($100,000 + $650,000 + $813,000) 1,563
*60. d ———————————————— = ———
($210,000 + $63,000 + $75,000) 348
$500,000 + ($625,000  .10) 562.5
*61. c ————————————— = ———
$625,000  .10 62.5
$375,000 + [$813,000 – (.06 × $250,000)]
*62. d ——————————————————— = $58.65.
20,000
$350,000 – (.06 × $250,000)
*63. c ——————————————————— = 335 ÷ 1,173.
$375,000 + [$813,000 – (.06  $250,000)]
$3,200,000
*64. c ———————————— = 3,200 ÷ 350.
($300,000 + $400,000) ÷ 2
$2,100,000
*65. d ———————————— = 2,100 ÷ 600.
($650,000 + $550,000) ÷ 2
*66 b $375,000 ÷ $3,200,000 = 375 ÷ 3,200.
$375,000 – ($500,000 ×.10)
*67. c ———————————————————————————————————
[($600,000 + $400,000 + $1,000,000 – $50,000) + ($450,000 + $325,000 + $875,000)] ÷ 2
= 325 ÷ 1,800.
$600,000 + $400,000 + ($1,000,000 – $50,000)
*68. a ————————————————————— = 1,950 ÷ 60
60,000

24 - 20
DERIVATIONS — Computational (cont.)
$375,000 + $400,000
*69. a —————————— = 775 ÷ 325.
$275,000 + $50,000
$8,000 + $150,000 + $122,000
*70. c —————————————— = 1.40 to 1.
$200,000
(X – $390,000)
*71. c ———————————— = 7.0, X = $4,800,000.
($600,000 + $660,000)  2
*72. c $3,600,000 + $400,000 – $3,200,000 = $800,000.
$3,600,000
———————————— = 6.
($800,000 + $400,000) ÷ 2
DERIVATIONS — CPA Adapted
73. c Conceptual.
74. c Conceptual.
75. b Revenue test: $26,200,000 × 10% = $2,620,000
Profit test: $4,560,000 × 10% = $456,000
Asset test: $53,200,000 × 10% = $5,320,000
A, B, C, E.
76. b ($2,500,000 + $750,000) × 10% = $325,000.
77. b Conceptual.
78. c ($300,000 + $600,000) ÷ 2 = $450,000.
79. b Extraordinary loss = $350,000
Insurance expense = $500,000 ÷ 4 = $125,000.
80. c Conceptual.
*81. c Conceptual.
*82. d Conceptual.
*83. c Conceptual.

EXERCISES
Ex. 24-84—Notes to financial statements.
An article in Dun's Review made the following comments:
"Every other year, say, companies should print the notes in big type
and the base figures in smaller ones."
Instructions
(a) Are notes considered as part of the financial statements and what basic purpose do they
serve?
(b) What are the general types of notes?
Solution 24-84
(a) Notes are an integral part of the financial statements of a business enterprise. Notes are the
accountant's means of more fully disclosing data relevant to the interpretation of the
statements. Information pertinent to specific financial statement items can be explained in
qualitative terms, and supplementary data of a quantitative nature can be provided to
expand on the information in the financial statements. Restrictions imposed by financial
arrangements or basic contractual agreements can be explained in notes.
(b) The more common types of notes disclose such items as the following: (1) accounting
methods used, (2) contingent assets or liabilities, (3) examination of creditor claims, (4)
claims of equity holders, and (5) executory commitments.
Ex. 24-85—Segment reporting.
The Financial Accounting Standards Board requires the reporting of disaggregated financial data
about the different types of business activities in which an enterprise engages.
Instructions
Identify 4 of the 6 items of disaggregated information the FASB requires that an enterprise report.
Solution 24-85
The FASB requires that an enterprise report the following disaggregated information:
1. General information about its operating segments.
2. Segment profit and loss and related information.
3. Segment’s total assets.
4. Reconciliation of the total of operating segments’ profits and losses to its income before
income taxes.
5. Information about products and services and geographic areas.
6. Total amount of revenues derived from major customers.

24 - 22
Ex. 24-86—Segment reporting.
Finney Company's condensed income statement is presented below:
Revenues $1,000,000
Expenses
Cost of goods sold $400,000
Operating and administrative expenses 200,000
Depreciation expense 40,000 640,000
Income before taxes 360,000
Income tax expenses 108,000
Earnings per share (100,000 shares) $2.52
The following data is compiled relative to Finney's operating segments:
Percent Identified with Segment
Hotels Grains Candy
Revenues 42% 50% 8%
Cost of goods sold 48 49 3
Operating and administrative expense 35 50 15
Depreciation expense 46 42 12
Included in the amounts allocated to each segment on the above percentages are the following
expenses which relate to general corporate activities:
Operating Segment
Hotels Grains Candy Totals
Operating and administrative expense $12,000 $9,000 $3,000 $24,000
Depreciation expense 3,500 4,000 2,500 10,000
Instructions
(a) Prepare a schedule showing the amounts distributed to each segment.
(b) Based only on the above information, which segments must be reported and why?
Solution 24-86
(a) Operating Segment
Hotels Grains Candy Totals
Revenues (1) $420,000 $500,000 $80,000 $1,000,000
Expenses—
Cost of goods sold (1) 192,000 196,000 12,000 400,000
Operating and admin. expense (2) 58,000 91,000 27,000 176,000
Depreciation expense (3) 14,900 12,800 2,300 30,000
Total expenses 264,900 299,800 41,300 606,000
Operating profit $155,100 $200,200 $38,700 $ 394,000
(1) Total times segment percentage.
(2) Hotels = ($200,000 × 35%) – $12,000 = $58,000
Grains = ($200,000 × 50%) – $9,000 = $91,000
Candy = ($200,000 × 15%) – $3,000 = $27,000

Solution 24-86 (cont.)
(3) Hotels = ($40,000 × 46%) – $3,500 = $14,900
Grains = ($40,000 × 42%) – $4,000 = $12,800
Candy = ($40,000 × 12%) – $2,500 = $2,300
(b) Two segments, Hotels and Grains, must be reported because they satisfy the revenue test;
that is, the segment's revenues are 10% or more of the combined revenues of all operating
segments. In addition, the Hotels and the Grains segments meet the 10% of the operating
profit test.
Ex. 24-87—Interim reports.
A few years ago, a publishing company in the fourth quarter had a net profit figure that exceeded
sales for that quarter. Such a situation as this suggests that some difficult accounting issues are
involved in interim reporting.
Instructions
(a) What are the major accounting problems related to interim reports?
(b) What problem exists with income taxes in interim reports and how does GAAP recommend
that taxes be reported? What does GAAP require?
(c) Many academicians have attempted to predict the year's net income after the first quarter's
income is reported. These attempts are generally unsuccessful, no matter how sophisticated
the prediction model. What might be the reason for this inability to predict?
Solution 24-87
(a) The major accounting issues related to interim reporting are the treatment of (1)
extraordinary items, (2) annually determined items such as income taxes, pension costs,
executive compensation based on annual net income, and (3) the problem of seasonality.
(b) The basic question with income taxes is whether in the preparation of interim income
statements the provision for taxes should reflect the anticipated effective tax rate for the
year or be computed on the basis of actual results for that interim period. APB Opinion No.
28 recommends that at the end of each interim period the company should make its best
estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so
determined should be used in providing for income taxes on a current year-to-date basis.
FASB Interpretation No. 18 requires that the estimated annual effective tax rate be applied
to the year-to-date "ordinary" income at the end of each interim period to compute the year-
to-date tax. Further, the interim period tax related to ordinary income shall be the difference
between the amount so computed and the amounts reported for previous interim periods of
the fiscal period.
(c) The prediction models are probably unsuccessful because accountants have not treated the
problem of seasonality correctly in their interim reports. The problem with the conventional
approach is that fixed nonmanufacturing costs are not charged in proportion to sales.
Rather, these costs are charged as incurred, or spread evenly over the four quarters. As a
result, it is extremely difficult to make accurate predictions because some artificial concepts
are used for matching purposes.

24 - 24
Ex. 24-88—Inventory and cost of goods sold at interim dates.
Discuss how inventory and cost of goods sold may be afforded special accounting treatment at
interim dates.
Solution 24-88
The following exceptions are appropriate at interim reporting dates:
a. Companies may use the gross profit method for interim inventory pricing.
b. When LIFO inventories are liquidated at an interim date and are expected to be replaced by
year end, cost of goods sold should be based on expected replacement cost of the
liquidated LIFO base rather than historical cost.
c. Inventory market declines should not be deferred beyond the interim period unless they are
temporary and no loss is expected for the fiscal period. Recoveries of such losses on the
same inventory in later interim periods shall be recognized as gains.
d. Planned variances under a standard cost system which are expected to be absorbed by
year end may be deferred.
Ex. 24-89—Forecasts.
Recent proposals by investors and others have suggested that corporations include financial
forecasts in their annual reports. It further has been suggested that the CPA attest to those
forecasts.
Instructions
(a) What arguments are advanced to support the publication of such forecasts?
(b) What arguments are advanced that oppose the publication of such forecasts?
Solution 24-89
(a) The basic argument for the publication of financial forecasts in corporate annual reports is to
provide the investor with additional information about the future activities of the company
upon which to base investment decisions. A second argument is that some investors have
access to the forecast data currently; it would be more equitable if all investors had access
to such information. The attestation by the CPA to such forecast data would provide the
forecast data with reliability and permit the investor to have confidence in the forecast. A
third argument is that circumstances now change so rapidly that historical information is no
longer adequate for prediction.
(b) One argument raised against the publication of such forecasts is the expectation that
management would present a conservative forecast in order to "look good" when actual
results of the year are in. A second point often considered is the prospect that the forecast
would provide competitors with confidential information thus endangering business strategy
and the performance of the firm.
A third argument is that forecasts are narrow estimates, which makes them difficult to
interpret given that the future is not a certainty, and as a result investors may be misled by
them.

The attestation by CPAs also can be questioned. There may be a conflict of interest
because the forecast in the current year report and the actual results of the next year are
both audited by the CPA. There would be concern that the reported results might be
adjusted so that the forecast appears to be borne out by the actual results. Additionally, it
can be questioned that the CPA has the training and qualifications to attest to forecasts.
Also, the profession is hesitant to attest to forecasts until the problem of additional exposure
to liability is clarified.
*Ex. 24-90—Financial statement analysis.
The condensed financial statements of Marks Company for the years 2010-2011 are presented
below:
Marks Company
Comparative Balance Sheets
As of December 31, 2011 and 2010
2011 2010
Cash $ 420,000 $ 120,000
Receivables (net) 460,000 300,000
Plant and equipment 1,700,000 1,112,000
Accumulated depreciation (260,000) (192,000)
$2,700,000 $1,680,000
Accounts payable $ 240,000 $ 160,000
Dividends payable -0- 40,000
Bonds payable 400,000 -0-
Common stock ($10 par) 1,520,000 1,200,000
Retained earnings 540,000 280,000
$2,700,000 $1,680,000
Additional data:
Market value of stock at 12/31/11 is $80 per share.
Marks sold 32,000 shares of common stock at par on July 1, 2011.
Marks Company
Condensed Income Statement
For the Year Ended December 31, 2011
Sales $2,400,000
Gross profit 800,000
Administrative and selling expense 500,000
Instructions
Compute the following financial ratios by placing the proper amounts in the parentheses provided
for numerators and denominators.

24 - 26
*Ex. 24-90 (cont.)
a. Current ratio at 12/31/11 ( )
( )
b. Acid test ratio at 12/31/11 ( )
( )
c. Receivables turnover in 2011 ( )
( )
d. Inventory turnover in 2011 ( )
( )
e. Profit margin on sales in 2011 ( )
( )
f. Earnings per share in 2011 ( )
( )
g. Rate of return on common stock equity in 2011 ( )
( )
h. Price earnings ratio at 12/31/11 ( )
( )
i. Debt to total assets at 12/31/11 ( )
( )
j. Book value per share at 12/31/11 ( )
( )
*Solution 24-90
$1,260,000 $300,000 $640,000
a. ————— e. ————— i. —————
$240,000 $2,400,000 $2,700,000
$880,000 $300,000 $2,060,000
b. ———— f. ———— j. —————
$240,000 136,000 152,000
$2,400,000 $300,000
c. ————— g. —————
$380,000 $1,770,000
$1,600,000 $80
d. ————— h. ———
$360,000 $2.21

*Ex. 24-91—Selected financial ratios.
The following information pertains to Wamser Company:
Cash $ 40,000
Accounts receivable 125,000
Merchandise inventory 75,000
Plant assets (net) 360,000
Total assets $600,000
Accounts payable $ 55,000
Accrued taxes and expenses payable 25,000
Long-term debt 120,000
Common stock ($10 par) 160,000
Paid-in capital in excess of par 40,000
Retained earnings 200,000
Total equities $600,000
Net sales (all on credit) $900,000
Cost of goods sold 675,000
Net income 72,000
Instructions
Compute the following: (It is not necessary to use averages for any balance sheet figures
involved.)
(a) Current ratio
(b) Inventory turnover
(c) Receivables turnover
(d) Book value per share
(e) Earnings per share
(f) Debt to total assets
(g) Profit margin on sales
(h) Return on common stock equity
*Solution 24-91
(a) ($40,000 + $125,000 + $75,000) ÷ ($55,000 + $25,000) = $240,000 ÷ $80,000 = 3.00.
(b) $675,000 ÷ $75,000 = 9 times.
(c) ($900,000 ÷ $125,000) = 7.2 times.
(d) ($160,000 + $40,000 + $200,000) ÷ ($160,000 ÷ $10) = $25.
(e) $72,000 ÷ ($160,000 ÷ $10) = $4.50.
(f) ($55,000 + $25,000 + $120,000) ÷ $600,000 = 33.3%.*
(g) $72,000 ÷ $900,000 = 8%.
(h) $72,000 ÷ ($160,000 + $40,000 + $200,000) = 18.0%.
*Rounded amounts.

24 - 28
*Ex. 24-92—Computation of selected ratios.
The following data is given:
December 31,
2011 2010
Cash $ 49,000 $ 50,000
Accounts receivable (net) 68,000 60,000
Plant assets (net) 400,000 325,000
Accounts payable 55,000 40,000
Wages payable 10,000 5,000
Bonds payable 70,000 70,000
10% Preferred stock, $40 par 100,000 100,000
Common stock, $10 par 120,000 90,000
Paid-in capital 80,000 65,000
Retained earnings 172,000 175,000
Net credit sales 800,000
Cost of goods sold 500,000
Net income 100,000
Instructions
Compute the following ratios:
(a) Acid-test ratio at 12/31/11
(b) Receivables turnover in 2011
(c) Inventory turnover in 2011
(d) Profit margin on sales in 2011
(e) Rate of return on common stock equity in 2011
(f) Book value per share of common stock at 12/31/11
*Solution 24-92
(a) $117,000 ÷ $65,000 = 1.8.
(b) $800,000 ÷ [($60,000 + $68,000) ÷ 2] = 12.5 times.
(c) $500,000 ÷ [($110,000 + $90,000) ÷ 2] = 5 times.
(d) $100,000 ÷ $800,000 = 12.5%.
(e) ($100,000 – $10,000) ÷ [($330,000 + $372,000) ÷ 2] = 25.6%.
(f) $372,000 ÷ 12,000 = $31.

PROBLEMS
Pr. 24-93—Segment reporting.
A central issue in reporting on operating segments of a business enterprise is the determination
of which segments are reportable.
Instructions
1. What are the tests to determine whether or not an operating segment is reportable?
2. What is the test to determine if enough operating segments have been separately reported
upon, and what is the guideline on the maximum number of operating segments to be shown?
Solution 24-93
1. There are three basic tests to be applied to segments of a company to see if they are
significant enough to be separately reportable. If a segment meets any one of the tests, it is
deemed significant and reportable.
The first test is based upon revenue. If a segment's revenue from sales to unaffiliated
customers and intersegment sales and transfers is equal to 10 percent or more of the
enterprise's combined revenues, the segment is reportable.
The second test is based upon profits or losses. A segment is deemed reportable if the
absolute amount of its profit or loss is 10 percent or more of the greater, in absolute amount,
of:
The combined profits of all operating segments reporting profits.
The combined losses of all operating segments reporting losses.
Third, a segment is significant and reportable if the identifiable assets of the segment equal
or exceed 10 percent of the combined assets of all operating segments within the
enterprise.
Finally, all segments, whether deemed reportable or not, must be viewed from the
standpoint of interperiod comparability because the primary purpose of presenting segment
information is to aid the financial statement reader.
2. The Financial Accounting Standards Board states that enough operating segments must be
separately reported so that the total of revenues from sales to unaffiliated customers for the
reportable segments equals or exceeds 75 percent of the combined sales to unaffiliated
customers for the entire enterprise. If applying the prescribed tests does not yield the
required percentage of revenues described above, additional segments must be reported on
until the 75 percent test is met.
The Financial Accounting Standards Board has stated that if an enterprise has many
reportable segments, benefit to the reader may be lost if more than 10 segments are
reported. In such a situation, the board suggests combining related reportable segments
until the total is ten or fewer.

24 - 30
Pr. 24-94—Interim reporting.
Interim financial reporting has become an important topic in accounting. There has been
considerable discussion as to the proper method of reflecting results of operations at interim
dates. Accordingly, the Accounting Principles Board issued an opinion clarifying some aspects of
interim financial reporting.
Instructions
(a) Discuss generally how revenue should be recognized at interim dates and specifically how
revenue should be recognized for industries subject to large seasonal fluctuations in
revenue and for long-term contracts using the percentage-of-completion method at annual
reporting dates.
(b) Discuss generally how product and period costs should be recognized at interim dates. Also
discuss how inventory and cost of goods sold may be afforded special accounting treatment
at interim dates.
(c) Discuss how the provision for income taxes is computed and reflected in interim financial
statements.
Solution 24-94
(a) Sales and other revenues should be recognized for interim financial statement purposes in
the same manner as revenues are recognized for annual reporting purposes. This means
normally at the point of sale or, in the case of services, at completion of the earnings
process.
In the case of industries whose sales vary greatly due to the seasonal nature of business,
revenues should still be recognized as earned, but a disclosure should be made of the
seasonal nature of the business in the notes.
In the case of long-term contracts recognizing earnings on the percentage-of-completion
basis, the current state of completion of the contract should be estimated and revenue
recognized at interim dates in the same manner as at the normal year end.
(b) For interim reporting purposes, product costs (costs directly attributable to the production of
goods or services) should be matched with the product and associated revenues in the
same manner as for annual reporting purposes.
Period costs (costs not directly associated with the production of a particular good or
service) should be charged to earnings as incurred or allocated among interim periods
based on an estimate of time expired, benefit received, or other activity associated with the
particular interim period(s). Also, if a gain or loss occurs during an interim period and is a
type that would not be deferred at year end, the gain or loss should be recognized in full in
the interim period in which it occurs. Finally, in allocating period costs among interim
periods, the basis for allocation must be supportable and may not be based on merely an
arbitrary assignment of costs between interim periods.

The profession allowed for some variances from the normal method of determining cost of
goods sold and valuation of inventories at interim dates in APB Opinion No. 28, but these
methods are allowable only at interim dates and must be fully disclosed in a note to the
financial statements. Some companies use the gross profit method of estimating cost of
goods sold and ending inventory at interim dates instead of taking a complete physical
inventory. This is an allowable procedure at interim dates, but the company must disclose
the method used and any significant variances that subsequently result from reconciliation
of the results obtained using the gross profit method and the results obtained after taking
the annual physical inventory.
At interim dates, companies using the LIFO cost-flow assumption may temporarily have a
reduction in inventory level that results in a liquidation of base period layers of inventory. If
this liquidation is considered temporary and is expected to be replaced prior to year end, the
company should charge cost of goods sold at current prices. The difference between the
carrying value of the inventory and the current replacement cost of the inventory is a current
liability for replacement of LIFO base inventory temporarily depleted. When the temporary
liquidation is replaced, inventory is debited for the original LIFO value and the liability is
removed.
Inventory losses from a decline in market value at interim dates should not be deferred but
should be recognized in the period in which they occur. However, if in a subsequent interim
period the market price of the written-down inventory increases, a gain should be
recognized for the recovery up to the amount of the loss previously recognized. If a
temporary decline in market value below cost can reasonably be expected to be recovered
prior to year end, no loss should be recognized.
Finally, if a company uses a standard cost system to compute cost of goods sold and to
value inventories, variances from the standard should be deferred instead of being
immediately recognized.
(c) The Board states that the provision for income taxes shown in interim financial statements
must be based upon the effective tax rate expected for the entire annual period for ordinary
earnings. The effective tax rate is, in accordance with previous APB opinions, based on
earnings for financial statement purposes as opposed to taxable income which may
consider temporary differences. This effective tax rate is the combined federal and state(s)
income tax rate applied to expected annual earnings, taking into consideration all
anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains
rates, and other available tax planning alternatives. Ordinary earnings do not include
unusual or extraordinary items, discontinued operations, or cumulative effects of changes in
accounting principles, all of which will be separately reported or reported net of their related
tax effect in reports for the interim period or for the fiscal year. The amount shown as the
provision for income taxes at interim dates should be computed on a year-to-date basis. For
example, the provision for income taxes for the second quarter of a company's fiscal year is
the result of applying the expected rate to year-to-date earnings and subtracting the
provision recorded for the first quarter. There are several variables in this computation
(expected earnings may change; tax rates may change), and the year-to-date method of
computation provides the only continuous method of approximating the provision for income
taxes at interim dates. However, if the effective rate or expected annual earnings change
between interim periods, the change is not reflected retroactively but the effect of the
change is absorbed in the current interim period.

24 - 32
IFRS QUESTIONS
True/False
1. Due to the broader range of options available under U.S. GAAP compared to iGAAP, note
disclosures are generally more expansive under U.S. GAAP than under iGAAP.
2. iGAAP requires companies to prepare interim reports on a quarterly basis.
3. iGAAP requires segment reporting, and uses the management approach to identify reportable
segments.
4. iGAAP requires companies to disclose transactions with related parties, including the name of
the related party and any doubtful amounts related to outstanding balances for the related
party.
5. Neither U.S. GAAP nor iGAAP requires interim reports.
Answers to True/False:
1. False
2. False
3. True
4. False
5. True
Multiple Choice
1. If Benjamin Company and Iris, Inc. are similar companies in every regard, except
Benjamin Company uses iGAAP while Iris, Inc. uses U.S. GAAP, which of the following is
true?
a. Iris, Inc. is required to issue interim statements every 6 months.
b. Benjamin Company need not recognize post-balance sheet events.
c. Benjamin Company is not required by iGAAP to issue interim statements.
d. All of the above are true.
2. Benjamin Company uses iGAAP, while Iris, Inc. uses U.S. GAAP, for their external
financial reporting. On January 16, 2011, both companies settled lawsuits relating to
industrial accidents that occurred in 2009. Benjamin Company paid $450,000 and Iris, Inc.
paid $230,000. Assuming that no accrual had been previously made, what amount of loss
should be reported on the income statement for the year ended December 31, 2010 for
each company?
Benjamin Company Iris, Inc.
a. $-0- $-0-
b. $450,000 $230,000
c. $-0- $230,000
d. $450,000 $-0-

3. iGAAP requires which of the following disclosures regarding related parties?
I. The name of the related party.
II. The amount and terms of the outstanding balance.
III. Doubtful amounts related to the outstanding balance.
a. I, II, and III.
b. I and II.
c. I and III.
d. II and III.
4. Nicole, Inc. uses iGAAP for its external financial reporting. During 2009, an employee of
the company was injured in the factory. Discussions with corporate attorneys resulted in a
determination that the company would be required to pay between $1,000,000 and
$2,000,000 to settle the injury claim. Nicole, Inc. accrued a contingent liability on
December 31, 2009 for $1,000,000. On February 4, 2011, Nicole, Inc. settled the lawsuit
for $2,200,000. What amount of loss should be reported on the income statement for the
year ended December 31, 2010 for Nicole, Inc. related to this lawsuit?
a. $2,200,000
b. $1,200,000
c. $1,000,000
d. No extra loss will be recorded in 2010, the remaining loss will be recorded in 2011.
5. Identifiable assets for the 4 industry segments of Brittle Company are as follows:
Candy $120,000
Stix $240,000
Chips $980,000
Gum $ 45,000
Brittle Company uses iGAAP for its external financial reporting. Using only the identifiable
assets test, which of the segments are reportable?
a. Under iGAAP, all four segments must be reported.
b. Candy, Stix, and Chips only.
c. Chips only.
d. Stix and Chips only.
6. Operating profits and losses for the 4 industry segments of Brittle Company are as
follows:
Candy ($590,000)
Stix $ 20,000
Chips $ 85,000
Gum $ 9,000
Brittle Company uses iGAAP for its external financial reporting. Using only the operating
profits (loss) test, which of the segments are reportable?
a. Under iGAAP, all four segments must be reported.
b. Stix, Chips, and Gum only.
c. Candy and Chips only.
d. Candy only.

24 - 34
7. Which of the following is true regarding iGAAP and GAAP?
a. Due to the broader range of options available under U.S. GAAP compared to iGAAP,
note disclosures are generally more expansive under U.S. GAAP than under iGAAP.
b. iGAAP requires companies to prepare interim reports on a quarterly basis.
c. iGAAP requires segment reporting, and uses the management approach to identify
reportable segments.
d. iGAAP requires companies to disclose transactions with related parties, including the
name of the related party and any doubtful amounts related to outstanding balances
for the related party.
*8. iGAAP is important for U.S. investors for all of the following reasons except
a. the SEC requires that foreign companies that list on U.S. stock exchanges provide a
reconciliation between iGAAP and U.S. GAAP.
b. many U.S. companies, such as McDonald’s, generate 50% of their sales outside the
U.S.
c. mergers frequently take place between companies from different countries.
d. financial markets are among the most significant international markets.
*9. Challenges to convergence of iGAAP with U.S. GAAP include all of the following except
a. cultural differences exist between countries.
b. the litigious environment in the U.S. is best suited to very detailed standards.
c. legal barriers to change include the difficulty associated with changing loan covenants.
d. political issues result in politicians setting the final accounting standards.
*10.High-quality standards in an international environment include which of the following?
a. They permit a wide variety of alternative practices.
b. They are stated in ambiguous terms to allow practitioners the opportunity to interpret
and implement.
c. They are comprehensive, covering major transactions facing companies.
d. All of the above are necessary for high-quality international standards.
Answers to Multiple Choice:
1. c
2. b
3. d
4. b
5. d
6. c
7. c
8. a
9. d
10. c
Short Answer
1. Bill Novak is working on an audit of an iGAAP client. In his review of the client’s interim reports, he
notes that the reports are prepared on a discrete basis. That is, each interim report is viewed as a
distinct period. Is this acceptable under iGAAP? If so, explain how that treatment could affect
comparisons to U.S. GAAP company?
1. While U.S. has a preference for the integral approach, iGAAP leans toward the discrete approach
to interim reports. Thus, if an iGAAP company expenses interim amounts, like advertising
expenditures that could benefit later interim periods, it may be difficult to compare to a U.S.
company that would spread the cost across interim periods.

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