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Chapter 1

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Which statement is NOT correct? A) Financial accounting is the process of providing information to internal parties. B) Accounting is about the communication of financial information. C) Financial accounting is the process of providing information to external parties. D) Accounting is the production of information about an enterprise and the transmission of

2) Which of the following statements is correct about financial information? A) Historical cost information is useful for pricing the value of a company's shares. B) Forward looking information is useful for evaluating management stewardship. C) Trade-offs are necessary in accounting. D) All users require the same kind of information.

3) Which statement BEST explains the semi-strong form of the efficient securities market

4) Which statement is correct? A) Financial reporting provides the same information as management accounting. B) Financial reporting is the process of preparing information for internal parties. C) Financial reporting is only based on rules issued by CPA Canada or the IASB. D) Financial reporting involves issuing financial statements to external parties.

5) In the context of accounting, which of the following BEST describes an application of the

that information to those who need the information.

hypothesis? A) A market in which the prices of debt securities traded in that market reflect all information that is privately known about those securities. B) A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. C) A market in which the prices of securities traded in that market reflect all information, whether publicly or privately known. D) A market in which the prices of equity securities traded in that market reflect all information that is privately known about those securities.

"Transform" stage in the ETL process? A) Reviewing and interpreting the financial statements for strategic decision-making.

B) Loading processed financial data into a data warehouse for storage. C) Extracting a trial balance from accounting software to a .csv file. D) Cleaning and reordering account data for compatibility with a financial statement template.

6) Data analytics is crucial for the future of accounting because it allows accountants to A) replace all traditional accounting methods. B) shift from routine transactions to value-added activities. C) eliminate the need for professional judgment in accounting. D) focus solely on generating financial statements.

7) Company: GreenTech Innovations

Mission: "To lead the market in sustainable technology solutions for a greener planet." Current Problem: Declining sales in the solar panel division. Which business question would be most effective in enhancing GreenTech Innovation's strategy? A) How can we reduce the operational costs of our headquarters?

B) Should we invest more in advertising our electric car division? C) How can we expand our product range to unrelated industries? D) What are the key factors driving the decline in solar panel sales? 8) Which of the following is an example of "velocity" in the context of accounting data? A) Analyzing a large dataset of transaction records over several years to identify financial

trends.

B) Monitoring real-time data from point-of-sale systems for immediate financial reporting. C) Confirmation of cash balances received directly from a company's bank. D) Assessing financial data from diverse sources, including social media sentiments and market trends.

9) Management motivation to increase the likelihood that the company will receive a $50,000

government rebate BEST illustrates which of the following? A) Information asymmetry. B) Earnings management.

C) Efficient securities market.

D) Positive accounting theory.

10) Company: FreshFoods Ltd.

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Mission: "To provide fresh, organic produce to consumers while supporting local farmers." Current Problem: Decrease in customer retention rates. Which business question would be most effective in enhancing FreshFoods Ltd.'s strategy? A) Should we diversify into non-organic food products?

B) How can we increase the number of our retail outlets? C) What changes can be made to improve the quality of our produce? D) Why are customers not returning, and what factors influence their decisions? 11) During the ETL process in data analytics, what does the "Transform" stage primarily involve? A) Loading the data into a data warehouse for storage and access. B) Analyzing the data to derive business insights and strategies. C) Manipulating and cleansing the data to ensure quality and accuracy. D) Extracting raw data from various sources for analysis.

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12) Which statement BEST explains "information asymmetry"? A) Information asymmetry means that external parties need financial information. B) Information asymmetry means that there is uncertainty about the future. C) Information asymmetry means that some people have more information than others. D) Information asymmetry means information is material to a decision maker.

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13) During a financial review, an accountant finds that a new product line, though popular, is not as

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profitable as expected. What storytelling approach should be used to present this finding? A) Present the product's popularity data.

B) Focus on the low profitability, recommending immediate discontinuation of the product line.

C) Suggest increasing production volume to compensate for low profitability per unit. D) Consider multiple facets of the product's performance, and how they intertwine with profitability.

14) Why is the efficient securities market hypothesis important for accounting? A) Accounting information is the only source of financial information that markets use. B) When providing financial information, management need only consider the specifically

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identifiable users who they know will rely on the information. C) Individuals with information that is not publicly available cannot make significant profits.

D) Accounting standards can assume that the majority of market participants have a reasonable level of sophistication.

15) What distinguishes structured data from unstructured data in the context of accounting data

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analytics? A) Unstructured data are always numerical, while structured data include textual information.

B) Structured data cannot be used for machine learning, while unstructured data can. C) Structured data are used only in manual accounting, while unstructured data are used in

digital accounting. D) Structured data are clearly formatted and organized for manipulation, whereas unstructured data are not.

16) How does an accountant decide on the appropriate method of accounting for a business

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transaction? A) Testing the selected method for numerical accuracy and consistency.

B) Evaluating if the particular method is consistent with the conceptual framework. C) Evaluating whether the selected method differs from the underlying economics. D) Ensuring that the accounting method agrees with that selected by other companies. 17) Which statement BEST explains "adverse selection"? A) The term refers to a situation where one party has an information advantage over another. B) The term refers to the fact that some people have more information than others. C) The term refers to the need external parties have for financial information. D) The term refers to a situation where one party cannot observe the actions of another party.

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18) Which statement BEST explains "moral hazard"? A) The term refers to a situation where one party cannot observe the actions of another party. B) The term refers to a situation where one party has an information advantage over another. C) The term refers to the fact that some people have more information than others. D) The term refers to the need external parties have for financial information.

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19) Having an audit performed on the company's financial statements BEST illustrates which of the

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following? A) Information asymmetry.

B) Moral hazard. D) Signalling.

C) Cheap talk.

20) Which of the following is an example of "veracity" in the context of accounting data? A) Analyzing a large dataset of transaction records over several years to identify financial

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trends.

B) Assessing financial data from diverse sources, including social media sentiments and market trends.

C) Confirmation of cash balances received directly from a company's bank. D) Monitoring real-time data from point-of-sale systems for immediate financial reporting. 21) Which of the following BEST represents a challenge in the use of data analytics in accounting? A) Managing and interpreting large and varied data sets. B) The need for accountants to adapt to a solely technical role. C) The decreasing volume of available data. D) The diminishing role of professional judgment in financial analysis.

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22) Which is NOT a question that financial accounting theory can answer? A) Why do all companies use the same accounting policies? B) What is the role of financial accounting and reporting? C) Why is certain disclosure mandatory in financial reporting? D) Why do companies provide financial information to external parties?

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23) Which statement appropriately explains the meaning of "publicly accountable enterprise"? A) Firms with equity, debt or other securities traded in public markets. B) New firms entering the public markets to provide goods and services. C) Firms without equity, debt or other securities traded in public markets. D) Firms with assets and liabilities that provide goods and services in public markets.

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24) Which statement BEST explains the relationship between the efficient securities market hypothesis

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and accounting? A) Security prices adjust slowly when accounting reports are publicly released.

B) Security prices are unaffected when accounting reports are publicly released. C) The timeliness of accounting information is irrelevant to securities markets. D) Accounting information competes with other sources of information.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 25) Explain the accounting implications of the following concepts about efficient securities markets:

a) Accounting information competes with other sources of information. b) Accounting reports and standards can assume that users have a reasonable level of sophistication.

26) For the situations described below, explain whether managers would be motivated to manage earnings, assets,

and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings, assets, and equity downward and liabilities upward. Management motivation Situation (Upward / Downward) To influence investors to pay more for the firm's shares. To reduce the likelihood of additional taxes or regulations. To take a "big bath" in a bad year by recording more expenses than usual so that future years are more likely to show higher and rising profitability, resulting in higher future compensation or stock price. To reduce riskiness of its cash flows and obtain funds from the bank at a lower interest rate. To obtain a stronger bargaining position in merger negotiations.

27) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these accounting activities related to each other?

28) Why is financial information required? 29) Explain the meaning of generally accepted accounting principles (GAAP). 30) Explain how accounting information helps security markets. 31) Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a company.

32) How does accounting information help alleviate adverse selection and moral hazard? 33) Explain the process an accountant uses to determine the appropriate accounting method for a business transaction.

34) Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting information.

35) For the situations described below, explain whether managers would be motivated to manage earnings, assets,

and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings, assets, and equity downward and liabilities upward.

Situation To obtain higher bonuses. To increase the likelihood of receiving government subsidies and trade protection. To improve bargaining position relative to employee unions. To meet covenants based on net income. To meet regulatory requirements.

Management motivation (Upward / Downward)

36) Explain the meaning of adverse selection and moral hazard. Give an example of each. 37) Explain the difference between moral hazard and adverse selection. 38) Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a company. 39) Explain how earnings management may arise. 40) Explain what accounting is and why financial reporting exists. 41) Explain the meaning of information and information asymmetry. Give an example of each. 42) Discuss three reasons why it is important to understand accounting theory. 43) Explain the meaning of publicly accountable enterprises, efficient securities market (semi-strong form), and efficient securities market (strong form).

Answer Key Testname: CHAPTER 1

1) A 2) C 3) B 4) D 5) D 6) B 7) D 8) B 9) B 10) D 11) C 12) C 13) D 14) D 15) D 16) B 17) A 18) A 19) D 20) C 21) A 22) A 23) A 24) D 25) a) The demand for accounting reports depends on the ability of those reports to convey decision-useful information for security pricing purposes, incremental to any other information available and in a timely manner. Timeliness is important as evident in the issuance of quarterly financial statements. b) If publicly traded securities are efficiently priced, it is not necessary for accounting information and accounting standards to be understandable to all potential users. Rather, it is sufficient that they are understandable to a substantial portion of the market participants.

Answer Key Testname: CHAPTER 1

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Management motivation (Upward / Downward)

Situation To influence investors to pay more for the firm's shares. Upward To reduce the likelihood of additional taxes or regulations. Downward To take a "big bath" in a bad year by recording more expenses than usual so that future years are more likely to show higher and rising profitability, resulting in higher future compensation or stock price. Downward To reduce riskiness of its cash flows and obtain funds from the bank at a lower interest rate. Upward To obtain a stronger bargaining position in merger negotiations. Upward

27) Financial reporting is the process by which enterprises provide information to external parties. Managerial accounting, on the other hand, involves reporting within the enterprise. Tax accounting is the reporting of taxable amounts to the government revenue authorities.

What ties all the branches of accounting together is the idea that some people have information that others need.

28) • Governmental bodies issue proclamations requiring companies to provide financial information.

• Quasi-governmental organizations issue proclamations requiring companies to provide financial information. • Accounting organizations such as CPA Canada or the IASB issue proclamations requiring companies to provide financial information. 29) GAAP refers to broad principles and conventions of general application as well as rules and procedures that determine accepted accounting practices.

Answer Key Testname: CHAPTER 1

30) Accounting is an important source of information for security markets, and information from security markets is also

useful for accounting. The theory of efficient security markets has important implications for the practice of accounting, particularly with regard to the timely provision of information, the need to protect outside investors from insider trading, and the level of sophistication expected of financial statement users. Efficient market theory has several implications for accounting: • Security prices react quickly to accounting information: when accounting reports are publicly released, security prices adjust to that information rapidly. • Accounting information competes with other sources of information: because market participants demand all information that is relevant to the pricing of securities, they seek out and use many sources of information in addition to accounting reports. As a result, the demand for accounting reports depends on the ability of these reports to convey information useful for security pricing purposes, incremental to any other information available and in a timely fashion. • It is important to distinguish new information from what has already been reflected in prices: what may appear to be good news could already have been reflected in a higher share price, so that the stock no longer represents a good buying opportunity. • Using only publicly available information, it is difficult to earn abnormal profits (i.e. an amount exceeding the expected rate of return given the risk of the investment). • It is possible to earn abnormal profits using information that is NOT publicly available: individuals who are privy to information that is not publicly available can buy or sell securities at significant profits. • Accounting reports and standards can assume that users have a reasonable level of sophistication: if publicly traded securities are efficiently priced, it is not necessary for accounting information and accounting standards to be understandable to all potential users. Rather, it is sufficient to ensure that a substantial portion of the market participants are able to process the information for prices to properly reflect that information. The less sophisticated users who have difficulty interpreting accounting (and other) information can rely on market prices. • Efficient market theory influences legal doctrine: investors need not show direct reliance on information provided by companies for them to have a claim against companies and their management for misrepresentation; they merely needed to have relied on the prevailing security price. Thus, management's provision of financial or other information needs to consider not only specifically identifiable users who will rely on that information but also the overall impact on the security prices and anyone who relies on those prices. 31) To mitigate this moral hazard problem, audit reports can be used to provide information to owners about the firm's performance as an indirect indicator of management performance. Compensation can be linked to performance measures such as net income or earnings per share. Ask management to take partial ownership of the company through stock purchase and stock option programs. The thought being that if managers share in the rewards of their efforts, they will thus be more motivated to create value for the company's owners. 32) • The presence of adverse selection reduces outsiders' perception of the value of an enterprise, creating a demand for full disclosure of information that is relevant to the value of the enterprise, and that will help assist them to forecast future cash flows. • Moral hazard causes outsiders to be suspicious of information supplied by management regarding its actions, creating a demand for information that is reliable and verifiable. 33) As GAAP refers to broad principles, not specific rules, accounting involves exercising professional judgment to determine the appropriate accounting. Judgment is exercised by: • considering the range of possible methods of accounting; • evaluating whether and how the particular method of accounting is consistent with the conceptual framework underlying GAAP; • appreciation for the underlying economic forces at work and ensuring that the accounting appropriately reflects the substance of the transaction.

Answer Key Testname: CHAPTER 1

34) Adverse selection means that users will demand information that is RELEVANT to their decisions.

Moral hazard means that users will demand information that is VERIFIABLE (representationally faithful/reliable) and not prone to manipulation by the preparers.

35) Situation To obtain higher bonuses. To increase the likelihood of receiving government subsidies and trade protection. To improve bargaining position relative to employee unions. To meet covenants based on net income. To meet regulatory requirements.

Management motivation (Upward / Downward) Upward Downward Downward Upward Upward

36) Adverse selection: A type of information asymmetry whereby one party to a contract has an information advantage

over another party. Examples: buying a resale home; buying a used car; buying shares in a company, etc. Moral hazard: A type of information asymmetry whereby one party to a contract cannot observe some actions relating to the fulfillment of the contractual terms by the other party. Examples: renting an apartment to a tenant; car insurance; hiring an executive - separation of ownership and management or the principal-agent problem; lending money to a company, etc. 37) • Moral hazard involves information about one party's actions that is not available to the other party. For this reason, moral hazard is succinctly summed up as hidden actions. As actions are involved, moral hazard involves information about what happens in the future. • Adverse selection concerns no actions other than whether the parties choose to reveal information that they possess. Consequently, adverse selection involves hidden information from the past and present (although such information could have ramifications for the future). 38) The lender can request certain covenants that must be satisfied as a condition of granting the loan; for example, a requirement to have a certain debt-to-equity ratio so that the company does not get over-leveraged. Also, the bank can request an audit report be prepared. 39) Insiders have many incentives to manage earnings: to influence share price, to lower the cost of financing, to meet contractual and regulatory requirements, to increase management compensation, to lower political costs, to gain regulatory protection. Most often, the incentives lead to an upward bias in earnings and net assets, but sometimes the incentives lead to a downward bias. 40) Accounting is the production of information about an enterprise and the transmission of that information from those who have it to those who need it. In other words, accounting is communicating information about business transactions and activities about business entities to interested external parties. Financial reporting is the process by which enterprises provide information to external parties. Financial reporting is an economic good that is subject to the laws of supply and demand. Financial reporting exists because interested parties require information about the business entity to make their investment, credit or other decisions. The demand for information arises from people's need to make decisions under uncertainty about the future. In many contexts, there are asymmetric distributions of information amongst people. Those who have more information are the potential suppliers of information to those who have less. People making decisions under uncertainty demand information to alleviate that uncertainty; an asymmetric distribution of information allows some individuals to supply information to others.

Answer Key Testname: CHAPTER 1

41) Information: Evidence that can potentially affect an individual's decisions. Example: details about the format of the

final exam; details about the career placement opportunities for a university's programs; etc. Information asymmetry: A condition in which some people have more information than others. Example: professor has more information about the final exam than the students; management has more information about the financial results than the shareholders; etc. 42) • In order to make the best decisions possible, external investors as well as internal managers need to interpret financial and accounting information about the state of the business. • There is a misunderstanding that accounting standards are simply proclamations issued by government or quasi-governmental regulatory agencies such as the International Accounting Standards Board (IASB) that have no economic benefit to society. • Rather, financial reporting is an economic good and is therefore subject to the laws of supply and demand. Accounting standards reflect and respond to, although imperfectly, the demand for financial information and the ability of enterprises to supply that information. Financial accounting theory helps us to understand the complexities in the production and consumption (use) of accounting information. Viewed in this way, financial information can be, and is, a subject of rigorous economic analysis. 43) • Publicly accountable enterprises: Firms with equity, debt, or other securities traded in public markets. • Efficient securities market (semi-strong form): A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. • A market that is strong form efficient has prices that reflect all information, whether publicly or privately known.

Chapter 2

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Which of the following is part of the ASPE Conceptual Framework? A) To provide information useful for assessing management stewardship. B) To provide information useful for investment decisions. C) To provide information for investors, lenders and creditors only. D) Completeness is an attribute of representational faithfulness.

2) What is NOT an information need of users of financial information under the IFRS Conceptual

Framework? A) Information on the uncertainty of cash flows.

B) Information about the amount of past cash flows. C) Information about the timing of future cash flows. D) Information on the amount of cash flows. 3) What decision would users of financial information need to make under the IFRS Conceptual

Framework? A) Determining if a company is an ethical company.

B) Determine if the company is socially responsible. C) Determining if the liquidation values are accurate. D) Determining whether to lend to the company. 4) When actual financial statements routinely report results that overstate or understate a company's financial position, which qualitative characteristic is violated? A) Prudence. B) Reliability. C) Neutrality.

D) Relevance.

5) Which of the following is NOT correct about the conceptual framework in accounting? A) It is based on fundamental accounting truths derived from the laws of nature. B) It is the basis for standard-setting for accounting standard setting bodies. C) It can be used to solve emerging or complex accounting problems. D) It can be used to develop consistent and comparable accounting principles.

6) Which statement best explains the meaning of "measurement" in financial reporting? A) Quantifying items so that they can be presented in the body of the financial statements. B) Presenting expenses in the same accounting period as the related revenues. C) Determining where items should be presented in the body of the financial statements. D) Presenting an item in the financial statements but not in the notes.

7) Who are NOT users of financial information under the IFRS Conceptual Framework? A) Management. B) Creditors. C) Present investors. D) Potential investors.

8) When are financial items recognized in the financial statements? A) Items are recognized if the inflows or outflows of resources are probable. B) Items are recognized if the fair value amounts can be determined. C) Items are recognized if the future gains will result from disposal of the item. D) Items are recognized if there are no measurement uncertainties.

9) The underlying or fundamental objective of the accounting conceptual framework is A) comparability. B) decision usefulness. C) representational faithfulness. D) understandability.

10) Financial statements under the IFRS Conceptual Framework do NOT help users with what kind of

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objective(s)? A) Forecasting future product growth.

B) Alleviating moral hazard. C) Prediction of future earnings. D) Evaluating the riskiness of an investment. 11) Which financial statement is NOT needed under the IFRS Conceptual Framework? A) Statement of cash flows. B) Balance sheet. C) Statement of retained earnings. D) Income statement.

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12) Which of the following is an attribute of "representational faithfulness"? A) Confirmatory value. B) Neutrality. C) Understandability. D) Historical cost.

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13) Which of the following accurately describes the standard setting process in Canada? A) The Public Sector Accounting Board oversees standards for private enterprises. B) The Accounting Standards Oversight Council approves the IFRS. C) The IFRS are jointly set by the Accounting Standards Board and the IASB. D) The Accounting Standards Board has no authority to alter IFRS.

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14) What is the most commonly used measurement basis? A) Realizable value. B) Present value. C) Current cost. D) Historical cost.

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15) Which is NOT an example of trade-offs made in the IFRS Conceptual Framework? A) Physical capital versus financial capital. B) Relevance versus representational faithfulness. C) Comparability versus consistency. D) Timeliness versus verifiability.

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16) Which of the following is part of the IFRS Conceptual Framework? A) Statement of financial position. B) Elements of financial statements. C) Financial statement notes. D) Information Asymmetry.

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17) Which of the following is an attribute of "relevance"? A) Predictive value. B) Comparability. C) Free from error. D) Verifiability.

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18) Which statement is NOT correct? A) Private enterprises may follow ASPE. B) Government organizations must follow IFRS. C) Private enterprises may follow IFRS. D) Not-for-profit organizations may follow IFRS.

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19) Which organization oversees accounting standards in Canada? A) Chartered Professional Accountants of each province. B) Financial Accounting Standards Board. C) International Accounting Standards Board. D) Chartered Professional Accountants of Canada.

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20) Which statement best explains the meaning of "comparability" in financial reporting? A) Financial information that is available quickly to financial statement users. B) Financial statement preparers using consistent accounting policies year over year. C) Financial reports that are comprehendible to the users of such reports. D) Financial information that can be objectively confirmed by another person.

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21) Which statement best explains the meaning of "recognition" in financial reporting? A) Determining where items should be presented in the body of the financial statements. B) Quantifying items so that they can be presented in the body of the financial statements. C) Presenting expenses in the same accounting period as the related revenues. D) Presenting an item in the financial statements, rather than simply disclosing in the notes.

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22) Which is NOT an element of financial information in the IFRS Conceptual Framework? A) Income. B) Other comprehensive income. C) Liabilities. D) Assets.

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23) Which is a purpose of the conceptual framework in accounting? A) To support principles-based accounting standards, principles and practices. B) To develop different accounting practices between countries around the globe. C) To provide rules from which decision-useful financial information can be developed. D) To promote global consistency, acceptance and adoption of IFRS around the globe.

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24) Which is NOT a qualitative characteristic of financial information in the IFRS Conceptual

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Framework? A) Comparability.

B) Representational faithfulness. D) Understandability.

C) Historical cost.

25) Which statement best explains the qualitative characteristic of "completeness"? A) Financial information should not contain errors or bias. B) Financial statements should not omit material items or transactions. C) Financial statements should represent the underlying transactions, assets and liabilities. D) Omission of financial information that would influence a user's economic decision.

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26) Computer Inc. sells equipment with a 3-year warranty. Prior experience indicates that costs for

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27) Which is NOT a criteria for recognition of financial information in the IFRS Conceptual

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warranty repairs average 3% in the first year, 2% in the second year, and 1% in the third year. In the current year, Computer Inc. had sales of $800,000. It paid $20,000 for materials and labour to make warranty-related repairs in the current year. What amount will be recorded as warranty expense in the current year? A) $20,000 B) $28,000 C) $24,000 D) $48,000

Framework? A) The expenses should be matched with revenues.

B) Inflow or outflow of cash flows are probable. C) The amount is reasonably measurable. D) The amount must be measured at historical cost. 28) What decision would users of financial information NOT need to make under the IFRS

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Conceptual Framework? A) Amount of money to borrow from an entity.

B) Assessment of the riskiness of cash flows. C) Information on an entity's economic performance. D) Decide whether to invest in an entity. 29) During the past year, Easy Supplies Ltd.'s assets decreased $33,000, its liabilities decreased

$41,000, its share capital increased $5,000, and Easy recorded net profit of $12,000. What was the amount of dividends declared? A) $1,000 B) $12,000 C) $19,000 D) $9,000

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30) Maybel Company has a March 31, 20X1, year-end. Which of the following should NOT be

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recorded as a current liability? A) Unpaid payroll taxes.

B) Property taxes estimated and unpaid based on the prior year's municipal tax bill. C) Dividends in arrears on preferred dividends. D) A deposit received from a customer for the February 20X2 rent on a 1-year lease entered into on March 1, 20X1.

31) Which of the following is NOT a purpose of a conceptual framework of accounting concepts and

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financial reporting objectives? A) To increase the user's ability to understand financial statements.

B) To enhance comparability among companies' financial statements. C) To provide a foundation for detailed accounting and reporting rules. D) To increase financial statement users' confidence in financial reporting. 32) What information does the balance sheet provide to users of financial information under the IFRS

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Conceptual Framework? A) Information about the state of a company at a point in time.

B) Information about changes in resources over a period of time. C) Information about the performance of a company over a period of time. D) Information about changes in liabilities over a period of time. 33) What standards are NOT contained in the CPA Canada Handbook? A) MD&A standards for publicly accountable enterprises. B) Accounting standards for publicly accountable enterprises. C) Accounting standards for private enterprises. D) Accounting standards for not-for-profit organizations.

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34) Which statement best describes a private enterprise? A) Any entity, excluding a not-for-profit organization. B) An entity that holds assets in a legal capacity for a broad group of outsiders as one of its

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primary businesses.

C) Any for-profit organization that is not a publicly accountable enterprise. D) Any entity that is not a publicly accountable enterprise. 35) Which qualitative characteristic of financial information alleviates "moral hazard"? A) Timeliness. B) Comparability. C) Neutrality. D) Predictive value.

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36) Which of the following is/are constraints in the financial reporting process? A) Recognizing an item as an asset versus a liability in the balance sheet. B) Using the historical cost versus the fair value method to measure transactions. C) Benefits of information versus the costs of producing that information. D) Classifying an item as a revenue versus an expense in the income statement.

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37) Which statement best explains the meaning of "presentation" in financial reporting? A) Presenting an item in the body of the financial statements and in the notes. B) Quantifying items so that they can be presented in the body of the financial statements. C) Determining where items should be presented in the body of the financial statements. D) Presenting expenses in the same accounting period as the related revenues.

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38) What information does the income statement provide to users of financial information under the

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IFRS Conceptual Framework? A) Information about the state of a company at a point in time.

B) Information about changes in liabilities over a period of time. C) Information about the performance over a period of time. D) Information about changes in resources over a period of time. 39) Fail-Safe Computer Inc. sells equipment with a 2-year warranty. Prior experience indicates that

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40) JP Corporation had net income of $1,000,000 for 20X2. After issuing its financial statements, the

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costs for warranty repairs average 3% in the first year and 2% in the second year. Sales were $300,000 and $400,000 in fiscal 20X1 and 20X2, respectively. It paid $5,000 for materials and labour to make warranty-related repairs in 20X1. What amount will be recorded as warranty expense in 20X1? A) $12,000 B) $15,000 C) $18,000 D) $5,000

company realized that it had failed to include inventory from one of its small warehouses for several years. Specifically, it forgot to include $20,000 on December 31, 20X1, and $30,000 on December 31, 20X2. Which of the following is TRUE regarding JP's 20X2 net income? A) Net income was understated by $30,000. B) Net income was overstated by $30,000.

C) Net income was understated by $10,000.

D) Net income was overstated by $10,000.

41) Which statement best explains the concept of "representational faithfulness"? A) Transactions should be recorded using the rules and guidelines provided in the accounting

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42) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the

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standards. B) Transactions should be recorded accurately and completely to be useful to financial statement users. C) Transactions should be recorded in accordance with their substance rather than their legal form. D) Transactions should be recorded in accordance with their legal form rather than their substance.

year, purchases of $141,700 were made and debited to the office supplies account. At the end of the year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies expense for the year? A) $141,700 B) $183,500 C) $194,000 D) $152,200

43) Which of the following accurately describes the objective of financial reporting under the IFRS

43)

Conceptual Framework? A) In the Conceptual Framework, users include a broad range such as employees and customers. B) Under the Conceptual Framework, general purpose financial statements increase moral hazard. C) The Conceptual Framework focuses on a narrow set of users such as investors and lenders.

D) Special purpose financial statements are required under the Conceptual Framework. 44) Which statement is correct? A) Private enterprises must follow ASPE. B) Publicly accountable enterprises must follow IFRS. C) Private enterprises must follow IFRS. D) Not-for-profit organizations must follow ASPE.

44)

45) Which of the following characteristic of financial information alleviates "information asymmetry"? A) Materiality. B) Confirmatory value. C) Verifiability. D) Completeness.

45)

46) Which statement best explains the qualitative characteristic of "relevance"? A) Information should influence a user's economic decisions. B) Omitting information would influence a user's economic decision. C) Financial reports should be accurate and complete. D) Financial reports should be understandable to the users of the information.

46)

47) Which statement best describes a publicly accountable enterprise? A) An entity that has not issued equity instruments that are outstanding and traded in a public

47)

48) Which is an assumption of financial information in the IFRS Conceptual Framework? A) Timeliness. B) Accrual basis of accounting. C) Historical cost. D) Financial capital maintenance.

48)

49) In which of the following transactions would it NOT be appropriate to recognize an asset in the

49)

market. B) An entity that has not issued debt instruments that are outstanding and traded in a public market. C) An entity that holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. D) An entity that holds assets in a legal capacity for a broad group of outsiders as one of its primary businesses.

financial statements? A) SGG receives a firm commitment from another company to purchase goods from SGG.

B) SGG pays $10,000 to a lawyer for services to be provided next year. C) A customer of SGG makes a deposit of $1,500 for goods to be custom-made. D) SGG provides services to another company, but will not be paid until after year end. 7

50) Which statement is correct? A) Not-for-profit organizations must follow ASPE. B) Private enterprises may follow IFRS. C) Publicly accountable enterprises may follow ASPE. D) Private enterprises must follow ASPE.

50)

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 51) Which concept of financial reporting is being described? Assumption

Situation A reporting entity will continue its operations into the foreseeable future Record transactions when they have been settled in cash as of the balance sheet date. Measured in physical quantities, a company should be capable of producing as much at the end of an accounting period as it was able to produce at the beginning of that period. Record transactions even if they have not been settled in cash as of the balance sheet date. A company should have as much resources in monetary terms at the end of an accounting period as it had at the beginning of that period.

52) Identify the eight major components of the conceptual framework for accounting. Explain how these components interact with the demand for and supply of financial information.

53) Indicate the qualitative characteristic being described in each situation below: Qualitative characteristic

Situation The degree to which different people would agree with the chosen representation in the financial reports. Information that is able to provide feedback about past performance or helps make future predictions of performance. Information that lacks errors and bias, and users can depend on the information to be a faithful representation of what it is purported to represent. Information that is free from bias. The ease with which users are able to comprehend financial reports.

54) Which financial statement element is being described? Element

Situation A present obligation of the entity to transfer an economic resource as a result of past events. A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants. The residual interest in the assets of an entity after deducting all its liabilities. Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.

55) Discuss some of the conceptual framework concepts involved in determining whether to capitalize or expense an expenditure.

56) ABC Manufacturing paid $250,000 to defend itself against a patent infringement lawsuit from CCB Limited. CCB has won, but ABC is planning to appeal the decision and continue pursuing its case. ABC is permitted to use its patent during the appeal process.

Provide two arguments to support ABC capitalizing the $250,000 expenses associated with a lawsuit. Provide two arguments against ABC capitalizing the $250,000 expenses associated with a lawsuit. Which option would you recommend and why?

57) Explain why assets and liabilities are generally not offset against one another. Use an example to illustrate your rationale.

58) Accelerated Earnings Inc. (Company) has an operating line of credit with the local bank that is secured by accounts receivable and inventory.

The Company purchased inventory whenever the price was low during the year and has a substantial amount on hand at year end. The inventory price has increased substantially at year end. The Controller recorded the following journal at year end: Dr.

Cr.

Inventory Gain on inventory

120,000

Required: a) Who are the users of the Company's financial statements, and what is their informational need? b) What part of the IFRS Conceptual Framework is violated by this journal entry? c) What is the impact of this journal entry on the Company's users? d) What correction is required?

59) Provide three reasons for the importance of the conceptual framework for financial reporting. 60) Explain how accounting standards are set in Canada. Your answer should list the different groups responsible for setting standards and which types of businesses use each standard.

Answer Key Testname: CHAPTER 2

1) A 2) B 3) D 4) C 5) A 6) A 7) A 8) A 9) B 10) A 11) C 12) B 13) D 14) D 15) A 16) B 17) A 18) B 19) D 20) B 21) D 22) B 23) A 24) C 25) B 26) D 27) D 28) A 29) D 30) C 31) C 32) A 33) A 34) C 35) C 36) C 37) C 38) C 39) B 40) C 41) C 42) D 11

Answer Key Testname: CHAPTER 2

43) C 44) B 45) B 46) A 47) C 48) D 49) A 50) B 51) Assumption Going concern Cash basis of accounting Physical capital maintenance

Accrual basis of accounting Financial capital maintenance

Situation A reporting entity will continue its operations into the foreseeable future. Record transactions when they have been settled in cash as of the balance sheet date. Measured in physical quantities, a company should be capable of producing as much at the end of an accounting period as it was able to produce at the beginning of that period. Record transactions even if they have not been settled in cash as of the balance sheet date. A company should have as much resources in monetary terms at the end of an accounting period as it had at the beginning of that period.

52) • The eight components are: users of financial statements, needs/objectives of users, qualitative characteristics,

elements, recognition criteria, measurement considerations, constraints and assumptions. • The conceptual framework can be viewed and better understood as a plan for the supply of accounting information to meet the demands of potential users. • Analysis of the demand for accounting information requires specifying the users (target market), their information needs (customer needs), and the desirable characteristics of information (desirable product characteristics). • The supply side of a conceptual framework involves identifying the elements of financial statements (potential components), followed by criteria for recognition in the financial statements (product design), and measurement (customization to specific needs). • Whether the supply of information is able to meet the users' demands also depends on constraints on financial reporting and the suitability of assumptions made in the planning process.

Answer Key Testname: CHAPTER 2

53) Qualitative characteristic Verifiability

Relevance

Representational faithfulness

Neutrality Understandability

54) Element Liability Asset

Expenses

Equity Income

Situation The degree to which different people would agree with the information presented in the financial reports. Information that is able to provide feedback about past performance or helps make future predictions of performance. Information that lacks errors and bias, and users can depend on the information to be a faithful representation of what it is purported to represent. Information that is free from bias. The ease with which users are able to comprehend financial reports.

55) Consider whether the expenditure satisfies the definition of an asset:

• Does the expenditure represent an economic resource controlled by the entity that has the potential to produce economic benefits? Consider whether the expenditure satisfies the definition of an expense: • Does the expenditure decrease equity for reasons other than a distribution to equity participants?

Answer Key Testname: CHAPTER 2

56) Arguments to support capitalizing:

• The $250,000 represents an asset: the expenditure has future economic benefits because the payment allows ABC to remain in operation to generate future cash flows from operations. • The payment arose from past events and the company has control over using the patent. • The $250,000 should be matched with the related revenues that ABC earns by using the patent. • Other valid arguments

Arguments against capitalizing: • The future benefits are unclear since ABC may still lose upon appeal, so, to be prudent, it should not capitalize. • Future period of benefit is unclear, so there is no reliable basis for amortization and matching. • Defending itself against patent infringement is a normal business activity for ABC and should be expensed as incurred. • Other valid arguments Recommendation – must follow from student's analysis 57) While the definitions of assets and liabilities are mirror images of each other, it is implicit in the definitions of assets and liabilities that they are two distinct concepts and we do not offset one against the other. Rather than defining "net assets" or equity, we specify assets separately from liabilities. Showing that a company has $700 million in assets and $200 million in liabilities conveys more information than simply showing $500 million in net assets. Also, the characteristics of the assets can differ dramatically from those of the liabilities. Only in limited circumstances in which an asset is closely linked to a specific liability would offsetting be appropriate. 58) a) The local bank is the user of the financial statement. The line of credit is based on the inventory (and accounts receivable) balance. b) This journal entry violates the "recognition" requirements of the IFRS Conceptual Framework. Transactions are recognized in the financial statements if the inflows/outflows of resources are probable. Simply because the market value of inventory has increased does not result in an inflow to the organization an inflow will result ONLY when the inventory is sold. Additionally, this journal entry violates the "historical cost" principle. Inventory should be recorded at the price paid by the Company. c) As a result of this journal entry, the Company's inventory is overstated. This will cause the bank to lend too much to the Company. The bank could suffer a loss if the Company is unable to repay the loan. d) The solution is to reverse the entry. 59) A conceptual framework is like a strategic business plan that identifies demands of users and how to supply a product that meets those demands. The conceptual framework provides overall plans to guide implementation: the evaluation of more specific accounting standards and the application of accounting standards to specific circumstances. As business plans, they differ in response to variations in the environments for which they are developed, and they change from time to time to respond to changes in market conditions. It provides the foundational principles, assumptions and principles upon which accounting standards are built. This foundation ensures accounting standards are consistent with each other (e.g. the definition of an "asset" ensures that the accounting for fixed assets and intangible assets are based on consistent recognition criteria). The foundational concepts help accountants determine the appropriate accounting in circumstances for which specific standards may not exist.

Answer Key Testname: CHAPTER 2

60) In Canada, the Canada Business Corporations Act refers to accounting and auditing

standards in the CPA Canada Handbook as the standards to be met for compliance with its regulations, thus effectively granting the CPA authority to set accounting and auditing standards. The CPA Canada Handbook contains a relatively comprehensive set of standards, comprising - accounting standards for entities not in the public sector (including all for-profit enterprises whether publicly traded or privately held, and not-for-profit organizations); - public sector accounting standards for governments and related entities such as government-owned universities and hospitals; and - standards for auditing and other assurance engagements for both the public and private sectors. Responsibility for non-public sector accounting standards rests with the Accounting Standards Board (AcSB), while the Public Sector Accounting Board (PSAB) issues standards for the public sector. While IFRS is contained within Part I of the CPA Canada Handbook, the AcSB has no authority to alter IFRS since these standards are set by the IASB in London. Given the dual role of the CPA as an association of chartered professional accountants and a standard-setting body, there is a potential for a real or perceived conflict of interest. In response, in 2000 the Canadian Institute of Chartered Accountants (CICA), one of the legacy bodies of the CPA, established an independent governance body to oversee the other boards in order to increase the independence of the standard-setting bodies. The Accounting Standards Oversight Council (AcSOC) oversees the two accounting boards (AcSB and PSAB).

Chapter 3

Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) What is an investing cash cycle? A) A cycle where there is receipt of funding from investors, those funds are used to generate

returns from investments and operations, and then the funds are returned to investors.

B) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers. C) A cycle of transactions that converts cash inflows to cash outflows, or vice versa.

D) A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of.

2) What is a "cash" cycle? A) A cycle that involves the purchase of items such as inventory; production, sales, delivery of

goods or provision of services; and receipts from customers.

B) A cycle of transactions that converts cash inflows to cash outflows, or vice versa. C) A cycle where a property is purchased that has long-term future benefits for the enterprise,

which ultimately results in cash inflows, and then the property is disposed of. D) A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors.

3) Which of the following is an example of an "investing" cash cycle? A) Planning for product growth that results in investment opportunities that will create returns

4) What is the accrual basis of accounting? A) A basis of accounting that records economic events when they happen rather than only

for investors. B) Purchase of property with long-term future benefits that results in cash inflows and then disposing of the property. C) Purchase of inventory, conversion into products that are delivered to customers, and receipts from customers. D) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors.

when cash exchanges occur. B) An entry that reflects events in a period different from their corresponding cash flow.

C) An entry that reflects accounting events and transactions after the related cash flow. D) A method of accounting that does not require accruals for amounts due or outstanding at year-end.

5) Which statement is correct about the statement of comprehensive income? A) The multiple-step format must be used in financial reporting. B) Entities using the function format for expenses must provide additional disclosure. C) Entities using the nature format for expenses must provide additional disclosure. D) The single-step format provides more information than the multiple-step format.

6) Which statement is NOT correct about expenses in the income statement? A) The nature of expense format classifies expenses based on their source. B) Some function of expense categories are depreciation, employee costs, raw materials

consumed.

C) The function of expense format classifies expenses based on their use. D) Some function of expense categories are cost of sales, administration or warehouse. 7) What is an "accrual"? A) An entry to record the payment of a supplier invoice for goods received last month. B) An entry that reflects accounting events or transactions after the related cash flow. C) An entry that reflects events or transactions in a period different from its corresponding

cash flow.

D) An entry to record deposits received from a customer for services to be provided next year. 8) Which of the following is an example of the "financing" cash cycle? A) Purchase of inventory, conversion into products that are delivered to customers, and

9) A company's reported earnings are $2,000 and cash flows are $1,600. Based on economic

10) Why is determining the "cut-off" point critical in the accrual basis of accounting? A) It is important to reflect business transactions and events in the subsequent accounting

10)

receipts from customers. B) Purchase of property with long-term future benefits which results in cash inflows and then the property is disposed of. C) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors. D) Planning for product growth which results in investment opportunities that will create returns for investors.

conditions during the year, the company booked allowances of $150. As a result of contractual incentives, the company booked a further $250 in accruals. What is the total of the excessive accruals? A) $1,600 B) $150 C) $250 D) $400

period.

B) The point in time at which one reporting period ends and another begins is important. C) Transactions must be reported in the cut-off period before the statements are authorized. D) Based on the periodicity concept, financial statements are prepared on a regular basis.

11) Which financial statement provides information about the transactions in a company's financing, investing, and operating cycle? A) Statement of Cash Flows.

11)

B) Statement of Comprehensive Income. D) Statement of Changes in Equity.

C) Statement of Financial Position.

12) What is meant by the phrase "true and fair view" of financial reporting? A) The financial statements provide an unbiased representation of the company's economic

12)

conditions and performance.

B) The financial statements provide an accurate representation of the company's economic

conditions and performance. C) The financial statements provide a true representation of the company's economic conditions and performance. D) The financial statements provide a fair representation of the company's economic conditions and performance.

13) Handy Corp. retired bonds payable with a carrying value of $980,000. What effect does this

13)

transaction have on total assets and shareholders' equity?

A) Total Assets Increase by $980,000

B) Total Assets Increase by $980,000

C) Total Assets Decrease by $980,000

D) Total Assets Decrease by $980,000

Shareholders' Equity Decrease by $980,000 Shareholders' Equity Increase by $980,000 Shareholders' Equity Increase by $980,000 Shareholders' Equity No effect

14) General Limited's income statement reported the following for last year: Sales revenue Cost of goods sold Expenses Net income

14)

$ 881,000 573,000 129,000 $179,000

Which of the following statements is correct about the income statement? A) Net income percentage is 20.32%.

B) Mark-up on the selling price is $308,000. C) Gross profit percentage is 20.32%. D) Mark-up on cost is $573,000. 15) A company's cash flows are $3,600. Based on economic conditions during the year, the company

booked allowances of $1,500. As a result of contractual incentives, the company booked a further $700 in accruals. What is the total reported earnings of the company? A) $2,200 B) $3,600 C) $5,800 D) $1,400

15)

16) The method of depreciation was changed from the double-declining-balance method to the

16)

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. Assume that net income before tax (NIBT) was $102,000 for fiscal 20X2. What is the appropriate accounting for fiscal 20X2? A) Retrospective adjustment and revised NIBT of $126,000.

B) Retrospective adjustment and revised NIBT of $111,900. C) Retrospective adjustment and revised NIBT of $87,900. D) No accounting is necessary in fiscal 20X2. 17) Which of the following would be accounted for retrospectively? (More than one answer may be

17)

correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales.

B) A manufacturer determines that credit losses are becoming material due to deteriorating

economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C) A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D) A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E) An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F) A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost.

18) Correction of an error is based on A) the use of hindsight. B) information available at the time of preparing the financial statements. C) comparable industry practice. D) new information that has now become available.

18)

19) Assume that a company has a calendar year of January 1, 20X3 December 31, 20X3. March 15,

19)

20X4 was the end of the period for gathering information pertaining to the financial statements. The financial statements were authorized for issue on March 24, 20X4. What is the cut off point for the "recognition" of transactions and events in a reporting period? A) March 15, 20X4. B) March 24, 20X4.

C) December 31, 20X3.

D) January 1, 20X3.

20) The following entry was recorded by Hollow Inc.:

20)

Cash Accumulated depreciation Gain on disposal of property, plant and equipment (PPE) PPE

70,000 30,000 10,000 90,000

What is the effect on Hollow's financial statements? A) A cash inflow from operating activities of $70,000.

B) Net assets decreased by $10,000. C) Retained earnings increased by $10,000. D) A decrease of $10,000 in using the indirect method of determining cash flows from operating activities.

21) General Limited's income statement reported the following for last year: Sales revenue Cost of goods sold Expenses Net income

21)

$ 881,000 573,000 129,000 $179,000

Which of the following statements is correct about the income statement? A) Gross profit percentage is 34.96%.

B) Net income percentage is 14.64%. C) Mark-up on cost is $573,000. D) Mark-up on the selling price is $308,000. 22) Which of the following would be accounted for as correction of an error? A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B) A manufacturer determines that credit losses are becoming material due to deteriorating

22)

23) What is a financing cash cycle? A) A cycle where a property is purchased that has long-term future benefits for the enterprise,

23)

which ultimately results in cash inflows, and then the property is disposed of.

B) A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors.

C) A cycle of transactions that converts cash inflows to cash outflows, or vice versa. D) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers.

24) What is the cash basis of accounting? A) An entry that reflects events in a period different from their corresponding cash flow. B) A method of accounting that records accounting transactions based on economic substance. C) A method of accounting that records transactions only when cash is received or paid. D) A method of accounting that requires accruals for amounts due or outstanding at year-end.

24)

25) The Rihanna Company owns 1,000 shares in Abhay Corp, a public company listed on the stock

25)

exchange. The share price was as follows: - At date of purchase, July 2, 20X3 = $100/share - At year end, June 30, 20X4 = $100/share - At start of next fiscal year, July 1, 20X4 = $95/share - At date financial statements authorized for issue, September 1, 20X4 = $90/share

Materiality for Rihanna's financial statements is $500,000. What is the appropriate treatment of the subsequent event in the June 30, 20X4 financial statements? A) Adjustment in the financial statement for the decline in value of $10,000.

B) No adjustment is needed for the subsequent decline in share price to $90/share. C) Both an adjustment and note disclosure in the financial statements for the decline to

$90/share. D) Note disclosure in the financial statements for the decline in value of $5,000.

26) The following information was provided from the records of Konstruct Inc, which began operations in the current year:

Accrued expenses (payable), end of year Sales revenue (cash and credit) Prepaid expenses, end of year Cash collected on customer accounts during the year Cash paid for expenses (including prepaid expenses and cost of goods sold) What were the company's expenses for the year? A) $237,000 B) $222,000

C) $207,000

$ 30,000 325,000 15,000 31,000 207,000

D) $192,000

26)

27) What is a "deferral"? A) An entry that reflects a transaction in a period different from its corresponding cash flow. B) An entry to record payments received from customers that had been outstanding for 100

27)

days.

C) An entry that reflects accounting events or transactions after the related cash flow. D) An entry to record the receipt of inventory that will be paid in 60 days. 28) The method of depreciation was changed from the double-declining-balance method to the

28)

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What is the appropriate accounting? A) Retrospective adjustment for fiscal 20X3.

B) Retrospective adjustment for fiscal 20X1 and 20X2. C) Error correction for fiscal 20X3. D) Prospective adjustment from fiscal 20X2 going forward. 29) Which statement is correct about accrual accounting? A) An accounting method that records events when they have an economic effect on the

29)

company.

B) Accounting estimates or professional judgment are not necessary with accrual accounting. C) A true measure of economic or accounting income is possible with accrual accounting. D) A method of accounting that does not require accruals for amounts due or outstanding at year-end.

30) Winder Corporation had total shareholders' equity of $665,000 at the beginning of the year and

30)

31) A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions

31)

32) What are biased accruals? A) Accruals based on overly optimistic estimates. B) Accruals based on applying GAAP. C) Accruals based on applying professional judgment. D) Accruals based on ethical considerations.

32)

$773,000 at the end of the year. Shareholders invested an additional $75,000 during the year. Also during the year, cash dividends of $20,000 were declared and paid. Calculate the net income or loss for the year. A) $108,000 B) $33,000 C) $53,000 D) $128,000

during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. What is the total of the unbiased accruals and excessive accruals? A) $150 B) $1,000 C) $600 D) $400

33) What is a "current asset"? A) An asset expected to be consumed in the ordinary operating cycle of the business. B) An asset expected to be used for investment purposes. C) An asset not expected to be consumed in the ordinary operating cycle of the business. D) An asset, such as cash, that is restricted from being used for at least 12 months.

33)

34) Assume that a company has a fiscal year of July 1, 20X3 June 30, 20X4. August 15, 20X4, was the

34)

end of the period for gathering information pertaining to the financial statements. The financial statements were authorized for issue on August 24, 20X4. What is the cut off point for the "measurement" of transactions and events in this reporting period? A) June 30, 20X4.

B) August 24, 20X4. C) July 1, 20X3. D) The end of the subsequent events period. 35) Which statement is NOT correct? A) The cash flow statement reports performance under cash accounting. B) Cash accounting is straightforward. C) The income statement is the same as the cash flow statement under cash accounting. D) Cash accounting requires the same financial statements as accrual accounting.

35)

36) The method of depreciation was changed from the double-declining-balance method to the

36)

37) What is meant by "earnings quality"? A) A measure of how closely expense accruals correspond to actual expenses without

37)

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What should have been booked as depreciation expense in fiscal 20X2? A) $30,000 B) $24,000 C) $9,900 D) $14,100

management bias.

B) A measure of how closely earnings correspond to earnings reported without management

bias. C) A measure to determine management bias by comparing reported income to actual cash flows. D) A measure to determine management bias by comparing actual reported profits with "true" earnings.

38) Changes in accounting estimates are based on A) information available from the use of hindsight. B) providing comparable information in the financial statements. C) low quality of professional judgment being exercised. D) information available at the time financial statements are prepared.

38)

39) Which statement is correct? A) Excessive accruals are transparent and improve the quality of financial reporting. B) The amount and types of excessive accruals are directly related to earnings quality. C) Users can routinely determine the contractual incentives causing excessive accruals. D) Users like earnings that closely correspond to reported results without management bias.

39)

40) If the gross profit percentage used in the gross profit inventory method were understated, which

40)

of the following is correct? A) Ending inventory would be understated.

B) Ending inventory would be correctly stated, but beginning inventory would be incorrect. C) Ending inventory would be overstated. D) Cost of goods sold would be understated. 41) A change in accounting policy A) allows management to bias financial reporting. B) is accounted for in the same manner as an error correction. C) is accounted for on a prospective basis, with restatement. D) is accounted for on a retrospective basis, without restatement.

41)

42) Which of the following would result in an overstatement in reported net income? A) Failure to record $45,000 collection of accounts receivable. B) Failure to record an accrued revenue of $24,000. C) Failure to record an accrued expense of $18,000. D) Expensing rather than capitalizing the $12,500 cost of a capital asset.

42)

43) The following entry was recorded by Woodrow Inc.:

43)

Cash Accumulated depreciation Loss on disposal of property, plant and equipment (PPE) PPE

57,000 33,000 10,000 100,000

What is the effect on Woodrow's financial statements? A) Retained earnings decreased by $10,000.

B) A cash inflow from financing activities of $57,000. C) A deduction of $10,000 in using the indirect method of determining cash flows from operating activities.

D) Net assets increased by $57,000. 44) Changes in accounting estimates are based on A) information available from the use of hindsight. B) comparable industry practice. C) management bias. D) new information that has now become available.

44)

45) Which statement is NOT correct? A) Financial statements under cash accounting are less complicated than those under accrual

45)

accounting.

B) The balance sheet accumulates accruals and deferrals required by accrual accounting. C) The cash flow statement reports accounting performance under accrual accounting. D) Financial statements under accrual accounting are more time consuming to prepare than those under cash accounting.

46) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the

46)

47) Which statement is NOT correct? A) Higher earnings quality provides users with more decision useful financial statements. B) Companies must use the same accounting estimates year-over-year in preparing

47)

statements. C) A company can change its accounting policies if it provides more relevant information.

D) Accruals involve uncertainty about future transactions and events. 48) Which asset groups do NOT need to be presented separately in the balance sheet? A) Investment properties. B) Liabilities that are due to different banks. C) Asset groups that are material. D) Asset groups that differ in their function or nature.

48)

49) The method of depreciation was changed from the double-declining-balance method to the

49)

50) The method of depreciation was changed from the double-declining-balance method to the

50)

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What adjustment is needed for fiscal 20X2? A) $20,000 B) $30,000 C) $9,900 D) $10,000

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. Assume that net income before tax (NIBT) was $80,000 for fiscal 20X1. What is the appropriate accounting for fiscal 20X1? A) Retrospective adjustment and revised NIBT of $95,900.

B) Retrospective adjustment and revised NIBT of $65,900. C) Retrospective adjustment and revised NIBT of $110,000. D) No accounting is necessary in fiscal 20X1.

51) Changes in accounting estimates are A) accounted for in the same manner as error corrections. B) applied to current and past reporting periods. C) accounted for on a prospective basis. D) accounted for in the same manner as accounting policy changes.

51)

52) Expenses in the income statement may A) be classified on the basis of their function. B) be classified by materiality. C) be classified on the basis of their currency. D) be classified by geographic location.

52)

53) Which statement is correct about the difference between IFRS and ASPE? A) The concept of "comprehensive income" does not exist under ASPE. B) A combined statement of comprehensive income can be provided under IFRS. C) A statement of compliance with ASPE is required in note disclosures. D) The concept of "comprehensive income" exists under both IFRS and ASPE.

53)

54) Information on the income statement is categorized into A) current and non-current activities. B) continuing and discontinued activities. C) nature and function activities. D) operating, investing and financing activities.

54)

55) Changes in accounting estimates A) are applied to current and future reporting periods. B) reduce the relevance and reliability of financial reporting. C) are accounted for in the same manner as changes in accounting policies. D) are applied to current and past reporting periods.

55)

56) The method of depreciation was changed from the double-declining-balance method to the

56)

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What adjustment is needed for fiscal 20X1? A) $14,100 B) $30,000 C) $15,900 D) $24,000

57) Which of the following would be accounted for on a prospective basis? (More than one answer

57)

may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales.

B) A manufacturer determines that credit losses are becoming material due to deteriorating

58) Dexter Corp. received cash for a service that is to be performed in the next accounting period. How should this transaction be accounted for? A) As accrued revenue.

B) As an expense. D) As a prepaid expense.

C) As a liability.

58)

59) Which of the following would be accounted for as a change in accounting policy? (More than one

59)

answer may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales.

B) A manufacturer determines that credit losses are becoming material due to deteriorating

60) Information on the balance sheet is categorized into A) current and non-current elements. B) operating, investing and financing activities. C) continuing and discontinued activities. D) profit or loss and other comprehensive income.

60)

61) Information on the cash flow statement is categorized into A) operating, non-operating and discontinued activities. B) nature and function activities. C) current and non-current activities. D) operating, investing and financing activities.

61)

62) Which statement is incorrect about the cash flow statement? A) The cash flow statement can be prepared using the indirect method. B) The cash flow statement can be prepared using the direct method. C) The cash flow statement provides information on the economic performance of the

62)

company. D) The cash flow statement shows the change in cash and cash equivalents over the year.

63) What is the significance of the subsequent events period for accrual accounting? A) The subsequent events period can affect the recognition and measurement of business

63)

transactions and events.

B) The subsequent events period can affect the recognition of business transactions and events. C) Transactions must be reported in the cut-off period before the statements are authorized. D) The subsequent events period can affect the measurement of business transactions and events.

64) What is classified as a "non-current" liability? A) An obligation where the company has breached its covenants. B) An obligation expected to be settled within the ordinary operating cycle of the business. C) Both A and B are non-current liabilities. D) Both A and B are current liabilities.

64)

65) Which statement is NOT correct about expenses in the income statement? A) The nature of expense format classifies expenses based on their source. B) Some nature of expense categories are cost of sales, administration or warehouse. C) The function of expense format classifies expenses based on their use. D) Some nature of expense categories are depreciation, employee costs, raw materials

65)

66) Windmere Corporation had total shareholders' equity of $765,000 at the beginning of the year and

66)

67) Which one of the following errors would cause a company's unadjusted trial balance to be out of

67)

consumed.

$873,000 at the end of the year. Shareholders invested an additional $75,000 in common shares and $15,000 in preferred shares during the year. Net income was $43,000. Calculate the dividends paid for the year. A) $108,000 B) $43,000 C) $25,000 D) $65,000

balance? A) Overstating an asset balance by $100 and a revenue balance by the same amount.

B) Recording a $5,000 revenue transaction by crediting the accounts receivable account and debiting the revenue account.

C) Failure to post the debit portion of a journal entry to the proper account (recorded, for example, as a credit to revenue rather than as a debit to an expense account).

D) Recording $1,000 cash collected from a customer as a debit to the cash account and a debit to the accounts receivable account.

68) Which of the following would be accounted for as a change in accounting estimate? (More than

68)

one answer may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales.

B) A manufacturer determines that credit losses are becoming material due to deteriorating

69) What information does a cash flow statement provide? A) Changes not due to performance of the company. B) Resources that the company owns. C) Performance of the company on an accrual basis. D) Performance of the company on a cash basis.

69)

70) Which statement is correct? A) The income statement reports performance of the company. B) The income statement tracks the flow in assets and liabilities on the balance sheet. C) The cash flow statement tracks the flow of revenues and expenses in the income statement. D) The balance sheet reports the economic performance of the company.

70)

71) Sally Corp. received payment on a long-term receivable for $980,000. What effect does this

71)

transaction have on these accounts?

A) Total Assets No effect

B) Total Assets Increase by $980,000

C) Total Assets Decrease by $980,000

D) Total Assets No effect

Total Liabilities No effect

Shareholders' Equity No effect

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

Total Liabilities Increase by $980,000

Shareholders' Equity No effect

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

72) Which statement is correct? A) Excessive accruals improve the comparability of financial reporting. B) Excessive accruals are directly observable in financial reporting. C) It is easy to determine the contractual incentives causing excessive accruals. D) Lower amounts of excessive accruals results in higher earnings quality.

72)

73) What is classified as a "non-current" liability? A) A debt that need not be settled until more than a year after the balance sheet date. B) An obligation where the company has breached its covenant violations. C) An obligation expected to be settled within the ordinary operating cycle of the business. D) An obligation related to the company's normal operating activities.

73)

74) A company's reported earnings are $2,000 and cash flows are $1,600. Based on economic

74)

75) Which of the following is NOT an example of a "cash" cycle? A) Planning for product growth which results in investment opportunities that will create

75)

conditions during the year, the company booked allowances of $150. As a result of contractual incentives, the company booked a further $250 in accruals. What is the amount of unbiased earnings? A) $400 B) $2,000 C) $150 D) $1,750

returns for investors. B) Purchase of inventory, conversion into products that are delivered to customers, and receipts from customers. C) Purchase of property with long-term future benefits which results in cash inflows and then the property is disposed of. D) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors.

76) Which statement is correct about expenses in the income statement? A) The function of expense format classifies expenses based on their use. B) Some function of expense categories are depreciation or employee costs. C) Expenses should be classified based on their materiality. D) Expenses can be classified in any manner under IFRS.

76)

77) A change in accounting policy should A) be based on changes in the underlying economics of business transactions. B) not be based on changes to accounting standards. C) be based on improving the comparability of financial reporting. D) not be based on management's best discretion.

77)

78) A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions

78)

79) The following entry was recorded by Hollow Inc.:

79)

during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. How much are the unbiased accruals? A) $250 B) $600 C) $150 D) $400

Cash Accumulated depreciation Gain on disposal of property, plant and equipment (PPE) PPE

70,000 30,000 10,000 90,000

What is the effect on Hollow's financial statements? A) Retained earnings decreased by $10,000.

B) A decrease of $10,000 in using the indirect method of determining cash flows from operating activities.

C) Net assets decreased by $10,000. D) A cash inflow from investing activities of $70,000. 80) Which of the following is an example of a change in accounting policy? A) Using 4% for the allowance for bad debts, instead of 2% as stated in the company's procedures manual.

B) Capitalizing a delivery truck that had previously been expensed. C) Changing from weighted average to the first-in, first-out method of inventory valuation. D) Using 5% for the allowance for bad debts because of the increased possibility of bankruptcy by customers.

80)

81) What is classified as a "current" liability? A) An obligation not expected to be settled within the ordinary operating cycle of the business. B) An obligation where the lender has waived the company's covenant violations before the

81)

balance sheet date, and an obligation where the company has breached its covenant violations. C) An obligation where the company has breached its covenants.

D) An obligation where the lender has waived the company's covenant violations before the balance sheet date.

82) Which of the following is an example of an error that should be corrected? A) Changing from weighted average to the first-in, first out method of inventory valuation. B) Starting to capitalize fixed assets under $1,000 which were previously considered

82)

immaterial.

C) Using 5% for bad debts provision, but 1% is required in the company's procedures manual. D) Switching from straight-line to the declining balance method of depreciation. 83) Which statement is correct? A) Accounting policy changes should reflect changes in economic circumstances. B) Accounting errors are corrected prospectively in the financial statements. C) Correction of accounting errors proves that management bias exists in reporting. D) Changes in accounting estimates are corrected retrospectively in the statements.

83)

84) Which of the following is an example of a change in accounting estimate? A) Using 3% for the allowance for bad debts, instead of 1% as stated in the company's

84)

procedures manual.

B) Switching from straight-line to the declining balance method of depreciation. C) Changing from weighted average to the first-in, first-out method of inventory valuation. D) Using 5% for the allowance for bad debts because of the increased possibility of bankruptcy by customers.

85) What is the effect of overstating 20X3 depreciation expense? A) Accumulated depreciation will be understated for 20X3. B) Ending retained earnings for 20X3 will be overstated. C) Net income for 20X3 will be overstated. D) Ending retained earnings for 20X3 will be understated.

85)

86) Lee Limited began operations on January 1, 20X1. The following data relate to the company's first

86)

2 years in business:

Inventory December 31, 20X1 December 31, 20X2 Cost of goods sold For 20X1 For 20X2

Reported Amount

Correct Amount

$25,000 35,000

$20,000 30,000

$400,000 450,000

$?????? ??????

What is the correct cost of goods sold amount for 20X2? A) $450,000 B) $405,000 C) $400,000

D) $460,000

87) Which statement correctly explains the relationship between cash flows, accruals, and reported

87)

88) The method of depreciation was changed from the double-declining-balance method to the

88)

89) Which statement is correct about expenses in the income statement? A) The nature of expense format classifies expenses based on their source. B) Expenses must be classified by their function. C) Expenses should be classified in decreasing order of magnitude. D) Some nature of expense categories are cost of sales, administration or warehouse.

89)

90) What is an "operating" cycle? A) A cycle where there is receipt of funding from investors, those funds are used to generate

90)

earnings? A) Cash flows are the best representation of a company's financial position and performance because of excessive accruals. B) The accrual basis of accounting provides the best representation of a company's financial position and performance. C) The cash basis of accounting provides the best representation of a company's financial position and performance. D) Accruals reduce earnings quality but are needed in financial reporting because GAAP is founded on professional judgment.

straight-line method in fiscal 20X3. A machine was purchased on January 1, 20X1, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What was booked as depreciation expense in fiscal 20X1? A) $30,000 B) $14,100 C) $15,900 D) $24,000

returns from investments and operations, and then the funds are returned to investors.

B) A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of. C) A cycle of transactions that converts cash inflows to cash outflows, or vice versa.

D) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers.

91) JP Corporation had net income of $1,000,000 for 20X2. After issuing its financial statements, it

91)

realized that it had failed to include inventory from one of its small warehouses for several years. Specifically, it forgot to include inventory of $20,000 on December 31, 20X1, and $30,000 on December 31, 20X2. Which of the following is TRUE regarding JPs 20X2 net income? A) Net income was overstated by $30,000. B) Net income was understated by $10,000.

C) Net income was overstated by $10,000.

D) Net income was understated by $30,000.

92) What are excessive accruals? A) Accruals based on contractual incentives or opportunism. B) Accruals that are based on ethical considerations. C) Accruals required by GAAP. D) Accruals that are based on professional judgment.

92)

93) In North America, the balance sheet A) should show other comprehensive income. B) should separate current and non-current elements. C) should be prepared on the liquidity basis. D) should show non-current assets before current assets.

93)

94) Under the IFRS Conceptual Framework, what general information is useful for the

94)

decision-making needs of lenders and investors? A) Information on the company's equity and share structure.

B) Information and changes in information relating to the entity's resources and claims against those resources. C) Information prepared on the cash basis of accounting.

D) Financial performance resulting from a company's operating activities. 95) Which is NOT an example of a biased accrual? A) Accruals based on applying professional judgment. B) Accruals based on achieving target level of revenues. C) Accruals based on overly optimistic estimates. D) Accruals based on overly conservative estimates.

95)

96) Which of the following is an example of an "operating" cash cycle? A) Planning for product growth that results in investment opportunities that will create returns

96)

for investors.

B) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors.

C) Purchase of inventory, conversion into products that are delivered to customers, and

receipts from customers. D) Purchase of property with long-term future benefits that results in cash inflows and then disposing of the property.

97) A correction of an accounting error does NOT involve A) retrospective adjustment. B) retrospective restatement. C) management bias. D) note disclosure.

97)

98) Mandel Corp. repaid a bank loan for $980,000. What effect does this transaction have on these

98)

accounts?

A) Total Assets Increase by $980,000

B) Total Assets Decrease by $980,000

C) Total Assets No effect

D) Total Assets No effect

Total Liabilities Increase by $980,000

Shareholders' Equity Decrease by $980,000

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

Total Liabilities No effect

Shareholders' Equity No effect

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

99) The following entry was recorded by Hollow Inc.: Cash Accumulated depreciation Gain on disposal of property, plant and equipment (PPE) PPE

99) 70,000 30,000 10,000 90,000

What is the effect on Hollow's financial statements? A) An increase of $10,000 in using the indirect method of determining cash flows from operating activities. B) Retained earnings decreased by $10,000.

C) Net assets increased by $10,000. D) A cash inflow from financing activities of $70,000. 100) The following information was provided from the records of Nimble Limited, which began operations in the current year:

Accrued expenses (payable), end of year Sales revenue (cash and credit) Prepaid expenses, end of year Cash collected on customer accounts during the year Cash paid for expenses (including prepaid expenses and cost of goods sold) What was the company's pre-tax income for the year? A) $138,000 B) $169,000 C) $116,000

$ 22,000 325,000 5,000 31,000 187,000

D) $121,000

100)

101) A correction of an accounting error involves A) the use of hindsight. C) prospective adjustment.

101) B) professional judgment. D) retrospective restatement.

102) During the past year, Easy Supplies Ltd.'s assets decreased $33,000, its liabilities decreased

102)

103) Why are excessive accruals a concern for accounting and financial reporting? A) They may represent unethical practices by the company. B) They require too much professional judgment. C) They result in standards overload. D) They improve the quality of earnings of the company.

103)

104) Mandel Corp. retired bonds payable with a carrying value of $980,000. What effect does this

104)

$41,000, its share capital increased $5,000, and the company recorded net income of $12,000. What was the amount of dividends declared? A) $19,000 B) $9,000 C) $12,000 D) $1,000

transaction have on these accounts?

A) Total Assets Decrease by $980,000

B) Total Assets Increase by $980,000

C) Total Assets No effect

D) Total Assets Decrease by $980,000

Total Liabilities Decrease by $980,00

Shareholders' Equity No effect

Total Liabilities Decrease by $980,000

Shareholders' Equity Increase by $980,000

Total Liabilities No effect

Shareholders' Equity Decrease by $980,000

Total Liabilities Increase by $980,000

Shareholders' Equity No effect

105) What is the impact of overstating an accrued expense during the 20X2 fiscal year? A) Current liabilities for 20X2 will be understated. B) Net income for 20X2 will be overstated. C) Ending retained earnings for 20X2 will be understated. D) There is no effect on 20X2 income.

105)

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 106) Explain the differences between a cash cycle, a financing cash cycle, an investing cash cycle, and an operating cash cycle.

107) What is meant by "quality of earnings"? Discuss if earnings quality should be assessed by comparing earnings to cash flows.

108) Using the conceptual frameworks and other ideas, discuss whether a change in accounting policy should be treated prospectively or retrospectively.

109) Sing Songs Ltd. started operations on January 1, 20X1. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Using the information provided below, discuss whether the cumulative cash flows will be the same or different for each accounting option. 20X1 20X2 20X3 Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Bad debt expense 7% of sales 735,000 945,000 987,000 Bad debt expense AFDA based on 200,000 200,000 1,387,000 analysis of AR Warranties actually paid 180,000 500,000 525,000 Warranty expense 5% of sales 525,000 675,000 705,000 Warranty expense provision based on 385,000 525,000 700,000 analysis of sales and repairs Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately)

110) For each of the following scenarios, determine the effects (if any) of the accounting change (correction of error,

change in accounting policy, or change in estimate) on the relevant asset or liability, equity, and comprehensive income in the year of change and the prior year. Use the following table for your response. Effects in year prior to change Type of Treatment Assets or Equity Income accounting liabilities change

Effects in year of change Assets or Equity Income liabilities

A. Company A increases the allowance for doubtful accounts (ADA). Using the old estimate, ADA would have been $71,000. The new estimate is $74,000. B. Company B omitted recording an invoice for a $7,000 sale made on credit at the end of the previous year and incorrectly recorded the sale in the current year. The related inventory sold has been accounted for. C. Company C changes its revenue recognition policy to a more conservative one. The result is a decrease in prior year revenue of $4,200 and a decrease in current-year revenue of $6,300 relative to the amounts under the old policy.

111) Identify at least one estimate that would be required in measuring the following financial statement items. Work in process inventories Intangible assets Building Vacation pay Revenue from a 5-year construction contract

112) What is meant by the "going concern assumption" in financial accounting? Explain the implications to financial accounting if the going concern assumption is not valid.

113) Sing Songs Ltd. started operations on January 1, 20X1. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Using the following information about activities for 20X1 20X3, derive the net income for each year under BOTH accounting options: 20X1 20X2 20X3 Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable ending 385,000 525,000 700,000 balance based on ageing analysis of sales Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately)

114) Explain how "accruals" are used in financial reporting. Provide an example to support your discussion. 115) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event:

• requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. The company experiences a major labour strike. Workers are still on strike when the audit is finished. Does your answer change if this strike might force the company into bankruptcy? (Justify your recommendation).

116) An adjusted trial balance for Wizard Industries Ltd. at December 31, 20X2, follows.

Prepare a balance sheet at December 31, 20X2, with items classified as current or non-current. Debit Accounts payable Accounts receivable Accumulated depreciation Advertising expense Cash Common stock Cost of goods sold Current portion of long-term loan payable Depreciation expense Dividends Equipment Income tax expense Interest expense Interest payable Inventory Long-term loan receivable Non-current portion of long-term loan payable Prepaid rent Rent expense Retained earnings Sales revenue Stationery Stationery expense Unearned revenue Wages expense Wages payable Total

$100,000 45,000 18,000 319,000 100,000 370,000 25,000 13,000 23,000 620,000 28,000 34,000 5,000 55,000 250,000 350,000 15,000 90,000 421,500 910,000 2,500 11,000 21,000 87,000 $2,035,500

117) Determine the missing amounts: Assets Cash Accounts receivable Allowance Inventory Prepaids Total current assets PPE Land Building Accumulated depreciation Machinery Accumulated depreciation Total PPE

Credit $141,000

$88,540

$110,630 A

100,778 B 3,214 $374,933

$160,234 22,980 193,193 D

$22,983 C E $198,885

17,000 $2,035,500

LT investment Other Total assets

$1,863 F $581,247

Liabilities and shareholders' equity Account payable Other provisions Income tax LT debt - current Accruals Total current liabilities

$G 6,671 2,283 3,399 5,431 $73,657

LT debt Deferred income taxes Total LT liabilities

$190,540 H $224,510

Shareholders' equity Preferred shares Common shares Retained earnings Accumulated OCI Total shareholders' equity Total liabilities and shareholders' equity

$33,987 168,241 I 21,870 J $K

118) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event:

• requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. A major client unexpectedly goes bankrupt and it is determined that you will get only 30% of the value of their account receivable as full and final settlement. (Justify your recommendation.)

119) Explain how financial information prepared using accrual accounting provides better information to predict future cash flows than financial information prepared using the cash basis of accounting.

120) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event:

• requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. A new competitor enters the marketplace, which will result in serious price competition and, likely, reduced income next year. (Justify your recommendation.)

121) Hatcher Limited, a private company, was started on January 1, 20X1. For the first year, the chief accountant

prepared the financial statements and a local accountant completed the necessary review of these statements. However, for the year ended December 31, 20X2, an external auditor was appointed. For each situation below, explain the recommended treatment for each of these matters in terms of whether they are errors, changes in accounting policy, or changes in estimate. Explain your conclusion. 1) Long-term contracts: Hatcher used the completed contract method for revenue recognition in 20X1. Management now believes that the percentage of completion method would be better. Income under the completed contract method for 20X1 was $3,800,000 and for 20X2 it was $3,600,000. If the percentage of completion method had been used, the income would have been $5,800,000 (20X1) and $3,400,000 (20X2). 2) Accounts receivable: The accounts receivable on December 31, 20X1, included a $30,000 account which was not provided for but subsequently was written off during 20X2 as the customer went bankrupt after the issuance of the financial statements. Hatcher would like to adjust 20X1 for this oversight as it sees this as an error. 3) Machine depreciation: Hatcher has a machine that cost $500,000 and has been depreciated over an estimated useful life of 10 years. Upon reviewing the manufacturer's reports in 20X2, management now firmly believes the machine will last a total of 15 years from date of purchase. They would like to change last year's depreciation charge based on this analysis. Depreciation expense of $50,000 has been recorded for 20X2. 4) Building depreciation: The company's building (cost $5,000,000, estimated salvage value $0, useful life 20 years) was depreciated in 20X1 using the 10% declining-balance method. The company and auditor now agree that the straight-line method would be a more appropriate method to use. A depreciation provision of $450,000 has been made for 20X2. 5) Inventories: In 20X1, the accountant failed to apply the lower of cost or net realizable value to ending inventory. Upon review, the inventory balance for 20X1 should have been reduced by $250,000. The closing inventory allowance for the 20X2 year-end should be $370,000. No entry has been made for this. 6) Warranties: Hatcher does not accrue for warranties; rather, it records the warranty expense when claims are paid. Hatcher provides a one-year warranty for defective goods. Payments to satisfy warranty claims in 20X1 were $160,000, and $370,000 in 20X2. Out of the $370,000 paid in 20X2, $170,000 related to 20X1 sales. A reasonable estimate of warranties payable at the end of 20X2 is $270,000. Recommended treatment

Supporting explanation

1 2 3 4 5 6

122) McMillan Industries Ltd. reports the following transactions and events for fiscal 20X2 and 20X3.

a. On January 11, 20X3, there was a fire and the company had insufficient fire insurance. As such, a material loss will result and operations will be curtailed for the next six months. b. The allowance for doubtful accounts (ADA) was increased in 20X2 due to deteriorating economic conditions. Using the old estimate, ADA would have been $171,000. The new estimate is $184,000. c. On December 30, 20X2, there was a significant decrease of $15,000 in the market price of some inventory due to new technology. The market price is $15,000 lower than the carrying values used in fiscal 20X2 statements. This occurred after the company's year-end but before the completion of the audit and issuance of the financial statements. d. A new competitor entered the marketplace in March 20X3; this will likely reduce 20X3 revenues and net income. e. In January 20X3, the accountant recorded $17,000 for sales made on credit on December 28, 20X2. f. The revenue recognition policy was changed in 20X2. The result is a decrease in 20X1 revenue by $40,200 and a decrease in 20X2 revenue by $60,300 relative to the amounts under the old policy. g. New technology made some equipment obsolete on January 26, 20X3; the fair market and salvage value have decreased by 50%. This occurred after the company's year-end but before the completion of the audit and issuance of the financial statements. h. A major client unexpectedly went bankrupt on January 20, 20X3. The company received 10% of the value of the accounts receivable as full and final settlement on February 20, 20X3. This occurred after the company's year-end but before the completion of the audit and issuance of the financial statements. i. The company has not previously needed to accrue for warranties. A new consumer protection law comes into effect in June 20X3, giving buyers a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. Required: For each event, determine whether it requires note disclosure or an adjustment to the 20X2 financial statements. Ignore income taxes. Use the following table for your response. Justify your recommendations.

Accounting requirement/explanation

Effects in 20X2, if any (increase/decrease/none) Assets or liabilities Equity Income

123) Explain the meaning of the cash basis of accounting and the accrual basis of accounting. When is the cash basis appropriate? Why is the accrual basis used in financial reporting?

124) Explain why companies prepare financial statements on an annual basis.

125) IFRS identifies a number of criteria to determine whether a liability should be classified as current. A liability that satisfies ANY ONE of these criteria must be classified as current. For the following list of criteria, identify whether each one is relevant for the classification of a liability as current instead of non-current.

a. b. c. d.

Criteria The liability is expected to be settled in the entity's normal operating cycle. The liability requires settlement in cash The liability is expected to be realized within 12 months after the balance sheet date. The liability is held primarily for the purpose of being traded.

Relevant for classification as current? (Yes/No)

126) For the following types of accounting changes, identify the relevant criteria for each accounting change by selecting "yes," "no," or "N/A" (not applicable).

Accounting change due to management choice (Yes, No, N/A)

Information known (or should have been known) in the prior period (Yes, No, N/A)

Accounting change due to management choice (Yes, No, N/A) No No Yes

Information known (or should have been known) in the prior period (Yes, No, N/A) Yes No N/A

Error correction Change in estimate Change in accounting policy

127) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event:

• requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. There is a fire at the company's only warehouse; the company has insufficient fire insurance to replace the warehouse and contents such that a material loss will result and operations will be curtailed for six months. (Justify your recommendation)

128) Explain why estimates are necessary in accrual accounting and why a "true" measure of income cannot be provided.

129) Sing Songs Ltd. started operations on January 1, 20X1. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Explain why net income would NOT be the same under both accounting options.

130) Hatcher Limited, a private company, was started on January 1, 20X1. For the first year, the chief accountant

prepared the financial statements and a local accountant completed the necessary review of these statements. However, for the year ended December 31, 20X2, an external auditor was appointed. For each situation outlined below, determine the correct accounting treatment and prepare the corrected statements of comprehensive income for 20X1 and 20X2. 1) Long-term contracts: Hatcher used the completed contract method for revenue recognition in 20X1. Management now believes that the percentage of completion method would be better. Income under the completed contract method for 20X1 was $3,800,000 and for 20X2 it was $3,600,000. If the percentage of completion method had been used, the income would have been $5,800,000 (20X1) and $3,400,000 (20X2). 2) Accounts receivable: The accounts receivable on December 31, 20X1, included a $30,000 account which was not provided for but subsequently was written off during 20X2 as the customer went bankrupt after the issuance of the financial statements. Hatcher would like to adjust 20X1 for this oversight as it sees this as an error. 3) Machine depreciation: Hatcher has a machine that cost $500,000 and has been depreciated over an estimated useful life of 10 years. Upon reviewing the manufacturer's reports in 20X2, management now firmly believes the machine will last a total of 15 years from date of purchase. They would like to change last year's depreciation charge based on this analysis. Depreciation expense of $50,000 has been recorded for 20X2. 4) Building depreciation: The company's building (cost $5,000,000, estimated salvage value $0, useful life 20 years) was depreciated last year using the 10% declining-balance method. The company and auditor now agree that the straight-line method would be a more appropriate method to use. A depreciation provision of $450,000 has been made for 20X2. 5) Inventories: In 20X1, the accountant failed to apply the lower of cost or net realizable value to ending inventory. Upon review, the inventory balance for 20X1 should have been reduced by $250,000. The closing inventory allowance for the 20X2 year-end should be $370,000. No entry has been made for this. 6) Warranties: Hatcher does not accrue for warranties; rather, it records the warranty expense when amounts are paid. Hatcher provides a one-year warranty for defective goods. Payments to satisfy warranty claims in 20X1 were $160,000 and $370,000 in 20X2. Out of the $370,000 paid in 20X2, $170,000 related to 20X1 sales. A reasonable estimate of warranties payable at the end of 20X2 is $270,000.

20X1

Long-term contract income Other income (loss) Bad debt expense Depreciation expense - machine Depreciation expense - building Inventory write-down Warranty expense Income before taxes Income taxes (at 25) Net income

$ 3,800,000 (300,000) (450,000) (50,000) (500,000) 0 (160,000) 2,340,000 (585,000) $ 1,755,000

20X1 as amended (answer)

20X2

20X2 as amended (answer)

$ 3,600,000 (200,000) (480,000) (50,000) (450,000) 0 (370,000) 2,050,000 (512,500) $ 1,537,500

131) Sing Songs Ltd. started operations on January 1, 20X1. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Using the following information about activities for 20X1 20X3, derive the 20X1 net income (only) under BOTH accounting options and explain why the net income under the two methods is NOT the same. 20X1 20X2 20X3 Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable ending 385,000 525,000 700,000 balance based on ageing analysis of sales Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately)

132) Explain if the following situations would be accounted for prospectively or retrospectively. Give a brief

explanation to support your response. A. A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B. A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C. A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D. A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E. An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F. A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost.

133) Computer Consulting Limited was started in early 20X1 and continued to operate until early 20X4, when it was wound up due to disputes between the two principal shareholders. When it started, the company used the following accounting policies:

1. Use straight-line depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years. 2. Estimate warranty expense as 9% of sales. 3. Estimate bad debts expense as 5% of sales. Derive net income for 20X1 to 20X3. For the year-end balance for 20X4, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.

Sales (all on account) Warranties paid Proceeds on disposal of computer Accounts receivable collected in the year Accounts receivable written off in the year All other expenses (paid in cash in the year incurred)

20X1 20X2 $3,400,000 $3,600,000 272,000 288,000 0 0

20X3 $4,100,000 420,250 0

20X4 $410,000 147,600 410,000

2,958,000

2,880,000

3,895,000

1,126,000

102,000

108,000

205,000

236,000

2,380,000

2,520,000

2,767,500

287,000

134) Why is it important to properly define the reporting period when using the accrual basis of accounting?

135) Xavier Computer Limited was started in early 20X1 and continued to operate until early 20X4, when it was

wound up due to disputes between the two principal shareholders. When it started, the company used the following accounting policies: 1. Use 50% declining-balance depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years. 2. Estimate warranty expense as 10% of sales. 3. The year-end allowance for doubtful accounts should be 40% of gross accounts receivable. Derive net income for 20X1 to 20X3. For the year-end balance for 20X4, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.

20X1 20X2 $3,400,000 $3,600,000 272,000 288,000 0 0

20X3 $4,100,000 420,250 0

20X4 $410,000 147,600 410,000

2,958,000

2,880,000

3,895,000

1,126,000

102,000

108,000

205,000

236,000

2,380,000

2,520,000

2,767,500

287,000

136) Explain what is meant by "quality of earnings." 137) Prepare a multiple-step income statement using the following data for Bella Inc. for the year ended December 31, 20X3.

Sales revenue Rental revenue Loss on sale of short-term investments Distribution expense Cost of goods sold General and administrative expense Depreciation expense Interest income Income tax expense (25% rate on all items)

$300,000 35,000 19,000 23,000 150,000 25,000 20,000 5,000

138) Here are selected balances for Beaver Creek Inc. for December 31, 20X3: Debit $10,000 41,600 1,900 51,600 3,700 116,200 71,000

Cash and cash equivalents Trade and other receivables Investments at fair value through profit or loss Inventories Intangible assets Property, plant and equipment - net Goodwill Short term borrowings Long term borrowings Liabilities at fair value through profit or loss Trade and other payables Current taxes payable Short term provisions Long term provisions Deferred taxes Share capital Retained earnings Reserves Revenue Cost of sales Income tax Profit from discontinued operations Selling and admin expenses Gain on disposal Other operating expenses Interest costs Interest income Other comprehensive income for 20X2

Credit

$2,000 41,500 2,300 50,300 12,300 1,000 1,000 1,000 150,000 23,800 10,800 17,600 12,700 700 100 1,600 200 150 650 130 300

Required: A. Prepare the Statement of Financial Position for Beaver Creek Inc. with items classified as current and non-current. B. Prepare the statement of comprehensive income. C. Determine the missing amounts:

Revenues Less: Sales returns Net sales

Year 1 $1,000,000 solve for 900,000

Year 2 $solve for 200,000 2,800,000

Year 3 $3,500,000 300,000 solve for

Cost of goods -Beginning inventory -Purchases -Ending inventory Gross profit

250,000 solve for (200,000) 450,000

200,000 600,000 solve for 550,000

250,000 350,000 solve for 500,000

139) Prepare a single-step income statement using the following data for Leila Inc. for the year ended December 31, 20X3.

Sales revenue Rental revenue Distribution expense Cost of goods sold General and administrative expense Depreciation expense Interest expense Income tax expense (20% rate on all items) Gain on sale of building Loss from fire damage

$210,000 35,000 23,000 120,000 25,000 20,000 5,000 15,000 40,000

140) Explain how changes in accounting policies, changes in accounting estimates and errors are accounted for under the accrual basis of accounting.

141) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event:

• requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. New technology makes a major capital asset redundant or causes it to lose significant fair market and salvage value. (Justify your recommendation).

142) IFRS identifies a number of criteria to determine whether an asset can be classified as current. Satisfying ANY

ONE of these criteria is sufficient. For the following list of criteria, identify whether each one is relevant for the classification of an asset as current instead of non-current.

a. b. c. d.

Criteria The asset is expected to be sold in the entity's normal operating cycle. The asset is traded in an active market. The asset is expected to be realized within 12 months after the balance sheet date. The asset is held primarily for the purpose of being traded.

143) What is the difference between accrual accounting and cash accounting?

Relevant for classification as current? (Yes/No)

144) Sing Songs Ltd. started operations on January 1, 20X1. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Assume that the company selected Accounting Option 2. Using the following information about activities for 20X1 20X3, derive the net income for each year: 20X1 20X2 20X3 Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable ending 385,000 525,000 700,000 balance based on ageing analysis of sales Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately)

145) Sing Songs Ltd. started operations on January 1, 20X1. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Assume that the company selected Accounting Option 1. Using the following information about activities for 20X1 20X3, derive the net income for each year: 20X1 20X2 20X3 Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid 4,500,000 3,000,000 2,900,000 immediately) Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: 1,710,000 1,750,000 2,150,000 Average cost Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable 385,000 525,000 700,000 ending balance based on ageing analysis of sales Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses 2,500,000 2,800,000 3,000,000 (paid immediately)