Download 6 Keeping Score: Bases of

6
Keeping Score: Bases of
Economic Measurement
Discussion Questions
6-1. The transcript testimony presents a factual account of each
word spoken. It cannot, however, depict the voice inflection
and body language of the witness which often give clues
about the truthfulness and emotions of the witness.
6-2. An audio tape provides the voice inflections and some
emotions of the witness. A video tape represents the closest
thing to being present at the trial.
6-3. The actual cash in Laura’s checking account is $695. The
account is overstated by the difference between the $480
and the amount deducted of $48 ($480 - $48 = $432).
Subtract $432 from the incorrect balance of $1,127 ($1,127 $432 = $695) to find the true balance of $695.
6-4. If the owners thought the incorrect bank balance was reality,
they would think they had $432 more than they actually do.
If they write a check for more than $695, it will bounce.
6-5. Students frequently find the concept of accounting (income
statement) periods difficult to understand. As users of the
statements, they need to be aware of the period being
reported and this exercise helps them discern how results of
the report could vary, based on the definition of the period.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-1
Using a timeline similar to Exhibit 6-1 on page F-172 of the
text to illustrate the different reports’ coverage is a help to
the students.
a. Each month.
February: Sold $6,000 of equipment on account.
March: Collected $6,000 cash; Sold $4,500 of
equipment on account.
April: Collected $4,500 cash.
b. Each quarter.
First quarter: Sold $10,500 of equipment on account;
Collected $6,000 cash.
Second quarter: Collected $4,500 cash.
c. Each year.
Sold $10,500 of equipment on account; Collected
$10,500 cash.
NOTE TO INSTRUCTOR: Discussion Questions 6-6 and 6-7
are intended to help your students begin to understand the
difficulties associated with revenue and expense recognition.
It is premature at this point to discuss rewards and sacrifices
in terms of cash accounting versus accrual accounting, but
the questions are designed to lay the groundwork for that
discussion.
6-6. You may have to guide your students somewhat so they
come to the conclusion about the two alternatives as to
when a reward (revenue) should be recognized are:
a. when the seller has delivered the goods and actually
obtained the reward in the form of cash.
b. when the seller has delivered the goods and knows that
it can obtain the reward under a binding agreement.
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Chapter 6 – Keeping Score: Bases of Economic Measurement
6-7. You may have to guide your students somewhat so they
come to the conclusion that the two alternatives as to when
a sacrifice (expense) should be recognized are:
a. when you actually make the sacrifice of the cash
b. when you know you are going to have to make the
sacrifice because you have used something that will
have to be paid.
NOTE TO INSTRUCTOR: Discussion Questions 6-8 and 6-9 are
critical to your students’ understanding of the weaknesses
of cash accounting in predicting future performance. Be wary
of your students’ answers to these questions. If they have
had a traditional accounting class before, they are anxious to
get to real (accrual) accounting. They will likely be able to
provide the “how” of depreciation and accrual cost of goods
sold, but will probably not have an understanding of the
“why”. These questions also help the students build on the
concept of relevance (Chapter 2) as they consider the
banker’s perspective.
6-8. Based on the income statement presented in Exhibit 6-2,
you would be forced to conclude that McCumber performed
poorly in January because the statement reports a loss of
$33,500 for the month. This income statement, however,
does not provide any real feedback value as to the
company’s results of operations during the month or
predictive value as to how it will perform in the future.
We know from the facts of the case that McCumber’s sales
were actually higher than reported (the ones on account
were not included) and expenses were actually lower than
reported ($18,000 of the COGS is inventory that has not yet
been sold, for example). Because the income statement
lacks feedback and predictive value, it must be concluded
that it lacks relevance.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-3
The balance sheet presented lacks both feedback value and
predictive value. McCumber owns a vehicle, has inventory,
is owed money by its customers, and owes amounts in
addition to the note payable. All of these items resulted from
activities during January, but none of them are reported on
the balance sheet. For this reason, the balance sheet is
severely limited as to its feedback value. There is also no
way to reasonably predict future cash requirements when so
many assets and liabilities are omitted. Because the balance
sheet lacks feedback and predictive value, it must be
concluded that it lacks relevance.
6-9. The two main causes of the problem are the treatment of the
vehicle McCumber purchased and the way cost of goods
sold is calculated for the month. Because the entire cost of
the vehicle was recognized as an expense at the time the
cash was paid, the financial statements do not reflect its
ability to produce revenue in the future. The same problem
exists with the purchase of merchandise inventory. Of the
$75,000 of inventory purchased during January, some is still
on hand at the end of the month. Neither the income
statement nor the balance sheet reflects this fact. The
answer as to how the company could better relate the cost of
these items to the revenues they help generate is to devise a
way to recognize expenses (sacrifices) in the same income
statement period as the revenue (rewards) they generated
are recognized.
6-10. The examples your students provide in answering this
question will likely deal more with the lack of feedback value
or predictive value than they will the lack of timeliness.
Lack of feedback value. Your checkbook balance cannot
provide feedback as to how much money you earned in the
last month. Even if you look back through your check
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Chapter 6 – Keeping Score: Bases of Economic Measurement
register and add up the deposits, it will not provide feedback
as to how much you earned if your latest paycheck has not
yet been deposited.
Lack of predictive value. Your checkbook shows a correct
balance of $1,000. This checkbook balance in and of itself
cannot be used to predict how much money you can spend
on movies and clothes because you may have commitments
for rent, utilities, etc. of $990.
6-11. The answer to this Discussion Question depends upon the
laws of individual states. However, the following are
generally true:
a. Title usually passes with possession. Since the
computer will not be delivered until Tuesday, the title
would not yet have passed on Monday.
b. The computer will not be delivered until Tuesday.
Therefore, no exchange has taken place as of Monday.
c. In this case, the earnings process will not be complete
until the computer system is delivered and accepted.
This will not be until Tuesday. Therefore, the process is
not yet completed on Monday.
6-12. The answer to the accrual part of this question is based on
the answers to Discussion Question 6-11.
a. Image Technology cannot recognize revenue under the
cash basis until the company receives the cash
associated with the sale. Presumably, this will be 30
days from Tuesday.
b. Image Technology would recognize the revenue from
the sale of the computer when title transfers, an
exchange has taken place, or the earnings process is
virtually complete. From the information presented in
Discussion Question 6-11, this will be Tuesday.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-5
6-13. If insurance companies did not require payment in advance,
policy holders might cancel the policies if no loss occurred to
avoid paying the premium.
6-14. The purpose of this question is to emphasize the different
way cash basis and accrual basis recognize the expense
associated with long-lived items.
a. Under the cash basis, the expense of the computer
purchase is recognized when it is paid for. Presumably,
this will be 30 days from the date the computer was
actually purchased.
b. The accrual basis requires recognition of the computer
based on the periods benefited by its use. Therefore, at
the time of purchase, the cost of the computer would be
recorded as an asset. Then, using some systematic
and rational allocation technique, the cost of the
computer would be converted from asset to expense
over its estimated useful life.
6-15. The ones that are definitely a result of the adjustment
process are:
Wages Expense ($2,000).
Interest Expense ($1,000).
Depreciation Expense ($250).
Utilities Expense ($700) may or may not have been recorded
as a part of the adjustment process. If the bill was recorded
when it was received, this expense is not the result of an
adjustment. If, on the other hand, the bill had not been
recorded by the end of the month, it was recorded as an
adjustment.
6-16. The guidelines of accrual accounting result in many
estimates being used in revenue and expense recognition.
In this sense, the net income reported for a specific period
using this measurement basis is an opinion because both
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Chapter 6 – Keeping Score: Bases of Economic Measurement
the revenue and expense that lead to net income can be
affected by judgment calls.
Because both revenue and expense recognition under
accrual accounting are totally unrelated to when cash is
received and paid, this measurement basis takes the focus
off cash flows. Net income (an opinion) is not the same
thing as cash generated through operations (a fact).
6-17. If we define reality as the flow of cash in and out of the
company, the cash basis does a better job of measuring that
reality than does the accrual basis. The cash basis is more
objective (factual) than is the accrual basis, because fewer
estimates and judgments are required under the cash basis.
If we define reality as making sacrifices (expenses) to attain
rewards (revenue) during January, 2008, accrual accounting
does a better job than does the cash basis. It more
realistically matches expenses to the same accounting
period as the revenues they helped generate.
6-18. Most accountants and users of accounting information would
agree that the financial statements using accrual basis
accounting better reflect McCumber’s future profit potential.
Because accrual accounting focuses on the earnings
process (recognizing expenses in the same income
statement period as the revenues they helped generate), this
basis is superior in determining the net reward (profit) for a
particular period. This makes accrual accounting a better
predictor of future profit potential.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-7
Review the Facts
A.
Reality refers to the true amount whereas the measurement
of reality is the recording of an amount which intends to
represent the true amount. Reality is the fact that I believe
my bank account has $2,000, but the measurement of reality
proves that the account has only $1,500.
B.
The problem of periodic measurement includes the
discrepancies between reality and measurement when
earnings are measured for a specific time period.
C.
The term recognition in accounting means to record in the
books and to report on the financial statements.
D.
The term realization is defined as the actual receipt of cash
or the payment of cash.
E.
Under the cash basis revenues are recognized when the
cash is received and the receipt relates to producing goods,
rendering services, or other business activities.
F.
Under the cash basis expenses are recognized when the
cash is paid in relation to paying for goods or services.
G.
The greatest strength of the cash basis is its objectivity and
lack of management manipulation with estimates.
H.
The greatest weakness of the cash basis is the poor
measurement of reality and the failure to achieve proper
matching.
I.
Under the accrual basis the revenues are recognized when
they are earned. The receipt of cash is not a factor.
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Chapter 6 – Keeping Score: Bases of Economic Measurement
J.
Under the accrual basis the expenses are recognized when
a benefit is derived from the expense.
K.
The matching principle has the expenses following the
revenues. It is an attempt to portray the reality of
performance by direct cause and effect or an allocation to
the periods benefited when no discernible future benefit or
periods benefited can be reasonably estimated.
L.
Depreciation represents the allocation of the cost of longlived assets on the income statement.
M.
Accruals are the adjustments made to recognize items that
should be included in the determination of income but have
not yet been recorded. Deferrals are created when cash is
paid before an expense has been incurred or cash is
received before revenue has been earned.
N.
The strength of the accrual system is the demonstration of
the reality of performance and that all assets and liabilities
are known and reflected.
O.
The weakness of the accrual system is that it turns the
attention of the user from the focus of cash.
P.
The reality of performance refers to the measure of income
on the accrual basis with the proper measurement of
revenues and expenses. The reality of cash refers to the
actual receipt and payment of cash irrespective of the reality
of the measurement of profitability.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-9
Apply What You Have Learned
6-19.
1. i
2.
a
3.
g
4.
e
5.
h
6.
j
7.
d
8.
b
9.
f
10. c
F6-10
The amount of the cost of a long-lived asset that is
never allocated to the periods benefited.
Recognized when cash associated with a sale is
received.
The situation that causes costs to be either recognized
immediately as an expense or allocated to the income
statements supposed benefited.
One of the three evidences that revenue has been
earned under accrual accounting.
Recognized when the cash associated with a cost is
paid.
Recognized when there is a legal claim to the cash
associated with a sale.
An attempt to recognize expenses in the same income
statement period as the revenues they generate.
Recognized when the benefit is received rather than
when the cash is paid.
The process of converting the cost of a long-lived item
from asset to expense.
The treatment for costs where no future benefit can be
determined or allocation to future periods serves no
useful purpose.
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-20.
a.
Katie Bales Company
Income Statement
For the Month Ending January 31, 2007
Cash Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Other Expenses
Total Operating Expenses
Net Income
b.
$30,000
10,000
$20,000
$ 3,000
7,500
10,500
$ 9,500
This income statement presents a very good measurement
of reality, if the performance is measured based on cash
flow. On the other hand, if the performance is a comparison
of the sacrifices required and the revenues generated for the
month, this income statement is inadequate.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-11
6-21.
a.
Katie Bales Company
Income Statement
For the Month Ending January 31, 2007
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
$39,000
23,000
$16,000
Operating Expenses:
Rent
Other Expenses
Accrued Expenses
Total Operating Expenses
Net Income
b.
F6-12
$ 3,000
7,500
1,500
12,000
$ 4,000
This income statement is inadequate if the performance is
measured based on cash flow. On the other hand, if the
performance is a comparison of the sacrifices required and
the revenues generated for the month, this income
statement provides a very good measurement of the reality
of performance.
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-22.
a.
Snow and Ice Company
Income Statement
For the Month Ending June 30, 2007
Cash Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Other Expenses
Total Operating Expenses
Net Income
b.
$42,000
20,000
$22,000
$ 2,000
9,500
11,500
$10,500
This income statement presents a very good measurement
of reality, if the performance is measured based on cash
flow. On the other hand, if the performance is a comparison
of the sacrifices required and the revenues generated for the
month, this income statement is inadequate.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-13
6-23.
a.
Snow and Ice Company
Income Statement
For the Month Ending June 30, 2007
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
$56,000
40,000
$16,000
Operating Expenses:
Rent
Other Expenses
Accrued Expenses
Total Operating Expenses
Net Income
b.
F6-14
$ 2,000
9,500
3,500
15,000
$ 1,000
This income statement is inadequate if the performance is
measured based on cash flow. On the other hand, if the
performance is a comparison of the sacrifices required and
the revenues generated for the month, this income
statement provides a very good measurement of reality.
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-24.
a.
Roger Webb and Company
Income Statement
For the Month Ending January 31, 2008
Cash Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Loss
$18,000
15,000
$ 3,000
4,000
$<1,000>
b.
Roger Webb and Company
Income Statement
For the Month Ending January 31, 2008
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
c.
$31,500
21,000
$10,500
2,000
$ 8,500
The differences between the two income statements are
caused by the different ways revenues and expenses are
recognized and reported under the two bases of accounting.
Under cash basis accounting, the revenues and expenses
shown on the income statement can be traced to the inflow
and outflow of cash. The only revenue shown is the cash
sale of $18,000. The expenses are cost of goods sold of
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-15
$15,000 (the cash merchandise inventory purchase) and
6-24. (Continued)
$4,000 rent. It does not matter under cash accounting that
the $2,000 rent paid in January was actually for February.
Under accrual accounting, the $13,500 sale on January
26 is included in the January income statement because
Webb had legal claim to the cash even though it will not be
received until next month. Cost of goods sold (expense)
includes the sacrifices required for both the cash sale and
the credit sale ($12,000 + $9,000). The fact that Webb
purchased $40,000 of merchandise inventory in January is
irrelevant to the income statement. The $19,000 of inventory
still on hand at the end of the month ($40,000 purchased
less $21,000 cost of goods sold) will be reported on the
accrual basis balance sheet as an asset. Only $2,000 of the
amount paid for rent will be included as an expense on the
January income statement. The other $2,000 is for February
and, as a deferred expense, is an asset as of January 31.
d. 1. The cash basis income statement provides better
feedback as to cash flow for the month because all
revenues and expenses are based on cash inflows and
cash outflows.
2. The accrual basis income statement provides better
feedback as to what Webb earned during the month
because it matches the sacrifices (expenses) with the
benefits (revenues) generated.
3. Even though the cash basis focuses on cash inflows
and cash outflows, the accrual basis, because it does a
better job of matching revenues and expenses, is
actually a better predictor of future earnings and cash
flow capacity.
F6-16
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-25.
a.
Roger Webb and Company
Income Statement
For the Month Ending February 28, 2008
Cash Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
$72,000
45,000
$27,000
-0$27,000
b.
Roger Webb and Company
Income Statement
For the Month Ending February 28, 2008
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
c.
$58,500
39,000
$19,500
2,000
$17,500
The differences between the two income statements are
caused by the different ways revenues and expenses are
recognized and reported under the two bases of accounting.
Under cash basis accounting, the revenues and expenses
shown on the income statement can all be traced to the
inflow and outflow of cash. The revenue shown includes the
cash sale of $28,500 on February 2, the cash sale of
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-17
$30,000 on February 21, and the $13,500 collected from the
6-25. (Continued)
customer on February 26 for a total of $72,000. The only
expense is cost of goods sold of $45,000 (the $20,000 cash
merchandise inventory purchase of February 11 plus the
$25,000 Webb paid on February 5 for the inventory
purchased on January 5). There was no rent expense for
February because the payment was made and recognized in
January.
Under accrual accounting, the revenue includes the
$28,500 sale of February 2 and the $30,000 sale of February
21, not because the cash was received, but because the
earnings process was complete. Cost of goods sold
(expense) includes the $19,000 inventory sold on February
2, and the $20,000 sold on February 21. The $2,000 rent
expense is shown on the February income statement, even
though the rent was actually paid in January.
d. 1. The cash basis income statement provides better
feedback as to cash flow for the month because all
revenues and expenses are based on cash inflows and
cash outflows.
2. The accrual basis income statement provides better
feedback as to what Webb earned during the month
because it matches the sacrifices (expenses) with the
benefits (revenues) these sacrifices generated.
3. Even though the cash basis focuses on cash inflows
and cash outflows, the accrual basis, because it does a
better job of matching revenues and expenses, is
actually a better predictor of future earnings and cash
flow capacity.
F6-18
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-26.
a.
Roger Webb and Company
Income Statement
For the Two Months Ending February 28, 2008
Cash Basis
Sales
$90,000
Cost of Goods Sold
60,000
Gross Margin
$30,000
Operating Expenses:
Rent
4,000
Net Income
$26,000
b.
Roger Webb and Company
Income Statement
For the Two Months Ending February 28, 2008
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
c.
$90,000
60,000
$30,000
4,000
$26,000
The income statement presentations are exactly the same
for the two-month period for two reasons. First, all the cash
associated with the sales (whether under cash basis or
accrual basis) during the two months had been collected by
the end of February. Second, all the cash associated with
the expenses (cost of goods sold and rent) had been paid,
and the benefit had been received from those expenses.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-19
6-27.
a.
Arley Safer and Company
Income Statement
For the Month Ending August 31, 2008
Cash Basis
Sales
$33,000
Cost of Goods Sold
25,000
Gross Margin
$ 8,000
Operating Expenses:
Rent
6,000
Net Income
$ 2,000
b.
Arley Safer and Company
Income Statement
For the Month Ending August 31, 2008
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
c.
F6-20
$48,000
32,000
$16,000
3,000
$13,000
The differences between the two income statements are
caused by the different ways revenues and expenses are
recognized and reported under the two bases of accounting.
Under cash basis accounting, the revenues and expenses
shown on the income statement can all be traced to the
inflow and outflow of cash. The only revenue shown is the
cash sale of $33,000. The expenses are cost of goods sold
of $25,000 (the cash merchandise inventory purchase) and
Chapter 6 – Keeping Score: Bases of Economic Measurement
$6,000 rent. It does not matter under cash accounting that
6-27. (Continued)
the $3,000 rent paid on August 31 was actually for
September.
Under accrual accounting, the $15,000 sale on August
26 is included in the August income statement because
Safer had legal claim to the cash even though it will not be
received until next month. Cost of goods sold (expense)
includes the sacrifices required for both the cash sale and
the credit sale ($22,000 + $10,000). The fact that Safer
purchased $60,000 of merchandise inventory in August is
irrelevant to the income statement. The $28,000 of inventory
still on hand at the end of the month ($60,000 purchased
less $32,000 cost of goods sold) will be reported on the
accrual basis balance sheet as an asset. Only $3,000 of the
amount paid for rent will be included as an expense on the
August income statement. The other $3,000 is for
September and, as a deferred expense, is an asset as of
August 31.
d. 1. The cash basis income statement provides better
feedback as to cash flow for the month because all
revenues and expenses are based on cash inflows and
cash outflows.
2. The accrual basis income statement provides better
feedback as to what Webb earned during the month
because it matches the sacrifices (expenses) with the
benefits ( revenues) generated.
3. Even though the cash basis focuses on cash inflows
and cash outflows, the accrual basis, because it does a
better job of matching revenues and expenses, is
actually a better predictor of future earnings and cash
flow capacity.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-21
6-28.
a.
Arley Safer and Company
Income Statement
For the Month Ending September 30, 2008
Cash Basis
Sales
$102,000
Cost of Goods Sold
65,000
Gross Margin
$ 37,000
Operating Expenses:
Rent
-0Net Income
$ 37,000
b.
Arley Safer and Company
Income Statement
For the Month Ending September 30, 2008
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
c.
F6-22
$87,000
58,000
$29,000
3,000
$26,000
The differences between the two income statements are
caused by the different ways revenues and expenses are
recognized and reported under the two bases of accounting.
Under cash basis accounting, the revenues and expenses
shown on the income statement can all be traced to the
inflow and outflow of cash. The revenue shown includes the
cash sale of $42,000 on September 2, the cash sale of
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-28. (Continued)
$45,000 on September 21, and the $15,000 collected from
the customer on September 26 for a total of $102,000. The
only expense is cost of goods sold of $65,000 (the $30,000
cash merchandise inventory purchase of September 11 plus
the $35,000 Safer paid on September 5 for the inventory
purchased on August 5). There was no rent expense for
September because the payment was made and recognized
in August.
Under accrual accounting, the revenue includes the
$42,000 sale of September 2 and the $45,000 sale of
September 21, not because the cash was received, but
because the earnings process was complete. Cost of goods
sold (expense) includes the $28,000 inventory sold on
September 2, and the $30,000 sold on September 21. The
$3,000 rent expense is shown on the September income
statement, even though the rent was actually paid in August.
d. 1. The cash basis income statement provides better
feedback as to cash flow for the month because all
revenues and expenses are based on cash inflows and
cash outflows.
2. The accrual basis income statement provides better
feedback as to what Safer earned during the month
because it matches the sacrifices (expenses) with the
benefits (revenues) generated.
3. Even though the cash basis focuses on cash inflows
and cash outflows, the accrual basis, because it does a
better job of matching revenues and expenses, is
actually a better predictor of future earnings and cash
flow capacity.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-23
6-29.
a.
Arley Safer and Company
Income Statement
For the Two Months Ending September 30, 2008
Cash Basis
Sales
$135,000
Cost of Goods Sold
90,000
Gross Margin
$ 45,000
Operating Expenses:
Rent
6,000
Net Income
$ 39,000
b.
Arley Safer and Company
Income Statement
For the Two Months Ending September 30, 2008
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Net Income
c.
F6-24
$135,000
90,000
$ 45,000
6,000
$ 39,000
The income statement presentations are exactly the same
for the two-month period for two reasons. First, all the cash
associated with the sales (whether under cash basis or
accrual basis) during the two months had been collected by
the end of February. Second, all the cash associated with
the expenses (cost of goods sold and rent) had been paid,
and the benefit had been received from those expenses.
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-30.
a. Cash Basis:
Cost of Goods Sold = Cash Paid Out For Merchandise
December, 2001, Cost of Goods Sold = $65,000
January, 2002, Cost of Goods Sold = $ -0b.
Accrual Basis:
Cost of Goods Sold = Cost Actually Incurred
December, 2001, Cost of Goods Sold = $25,000
January, 2002, Cost of Goods Sold = $40,000
6-31.
a. The due date is January 14, 2008.
December (31 – 15)
16
January (due date)
14
30
b. Cash Basis:
Cost of Goods Sold = Cash Paid Out For Merchandise
December, 2000, Cost of Goods Sold = $ -0Balance Sheet Inventory on December 31, 2007 = $ -0c. Accrual Basis:
Cost of Goods Sold = Cost Actually Incurred
December, 2000, Cost of Goods Sold = $35,000
Balance Sheet Inventory on December 31, 2007 = $65,000
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-25
6-32.
a. The due date is March 5
December (31 – 5) 26
January
31
February
28
March (due date)
5
90
b. Cash Basis:
Cost of Goods Sold = Cash Paid Out For Merchandise
December, 2007, Cost of Goods Sold = $ -0Balance Sheet Inventory on December 31, 2007 = $ -0c. Cash Basis:
Cost of Goods Sold = Cash Paid Out For Merchandise
January, 2008, Cost of Goods Sold = $ -0Balance Sheet Inventory on January 31, 2008 = $ -0d. Accrual Basis:
Cost of Goods Sold = Cost Actually Incurred
December, 2007, Cost of Goods Sold = $55,000
Balance Sheet Inventory on December 31, 2007 = $95,000
e. Accrual Basis:
Cost of Goods Sold = Cost Actually Incurred
January, 2008, Cost of Goods Sold = $70,000
Balance Sheet Inventory on January 31, 2000 = $25,000
F6-26
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-33.
a. Geoffrey will report $4,800 Insurance Expense on the
income statement for the year ending December 31, 2007,
and nothing on the December 31, 2007 balance sheet under
the cash basis.
b. Geoffrey will report $1,600 Insurance Expense on the
income statement for the year ending December 31, 2007,
and $3,200 of Prepaid Insurance as an asset on the
December 31, 2007, balance sheet under the accrual basis.
Prepaid Insurance on May 1, 2007
$4,800
Monthly Insurance Expense ($4,800 / 24)
$ 200
Income Statement December 31, 2007
(8 months x $200) = $1,600 Insurance Expense
Balance Sheet December 31, 2007 ($4,800 – $1,600) =
$3,200 Prepaid Insurance
c. Since Geoffrey reported all the expense in 2007, there will
be nothing left to report in the year 2008 on the cash basis.
d. Using the accrual basis Geoffrey would report another 12
months of Insurance Expense or $2,400 in the income
statement for the year ended December 31, 2000. At
December 31, 2008 there would still be 4 months remaining
in the balance of Prepaid Insurance or $800 that would be
reported on the December 31, 2008 balance sheet as a
Prepaid Asset.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-27
6-34.
a. Kazu & Liu will report $10,000 Rent Expense on the income
statement for the year ending December 31, 2008 and
nothing on the December 31, 2008, balance sheet under the
cash basis.
b. Kazu & Liu will report $4,000 Rent Expense on the income
statement for the year ending December 31, 2008 and
$6,000 of Prepaid Rent on the December 31, 2008 balance
sheet under the accrual basis.
c. Kazu & Liu will report nothing on the income statement for
the year ending December 31, 2009, and nothing on the
balance sheet for December 31, 2009 on the cash basis.
d. Kazu & Liu will report $6,000 Rent Expense on the income
statement for year ending December 31, 2009, and nothing
on the balance sheet at December 31, 2009
6-35.
a. Under the cash basis, Regina will report $1,600 Rent
Expense on the income statement for month ending March
31, 2007, and nothing on the March 31, 2007 balance sheet.
b. Using the accrual basis, Regina will report $800 Rent
Expense on the income statement for the month ending
March 31, 2007, and $800 Prepaid Rent on the March 31,
2007 balance sheet.
F6-28
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-36.
a. Lechleiter recognizes $10,000 Rental Income on its income
statement for the year ended February 28, 2008 and nothing
on its February 28, 2008 balance sheet, using a cash basis.
b. Using the accrual basis, Lechleiter recognizes $8,000 Rental
Income on its income statement for the year ended February
28, 2008, and $2,000 Unearned Rent Revenue on its
February 28, 2008 balance sheet.
c. Using the cash basis, Lechleiter recognizes no Rental
Income on its income statement for the year ended February
28, 2009, and nothing on its February 28, 2009 balance
sheet.
d. Using the accrual basis, Lechleiter will recognize $2,000
Rental Income on its income statement for the year ended
February 28, 2009, and nothing on its February 28, 2009
balance sheet.
6-37.
a. On a cash basis, Davis will report $675 of Service Fees on
the income statement for the year ending December 31,
2007 and nothing on the December 31, 2007 balance sheet.
b. On the accrual basis, Davis will report $450 of Service Fees
on the income statement for the year ending December 31,
2008, and $225 of Unearned Service Revenue on the
January 31, 2008 balance sheet.
c. On the cash basis, Garretson will report $675 Accounting
Expense on the income statement for the year ending
December 31, 2007, and nothing on the December 31, 2007
balance sheet.
d. On the accrual basis, Garretson will report $225 of
Accounting Expense on the income statement for the year
ending December 31, 2007, and $450 of Prepaid Accounting
Expense on the December 31, 2007 balance sheet.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-29
6-38.
a. On a cash basis, the bank will report $300 of Interest Income
on its year 2007 income statement.
b. On an accrual basis, the bank will report $100 of Interest
Income on its year 2007 income statement.
c. On a cash basis, Dylan will report $300 of Interest Expense
on his year 2007 income statement.
d. On an accrual basis, Dylan will report $200 of Interest
Expense on his year 2007 income statement.
6-39.
a. Cash Basis Expenses for 2007:
Cost of Sales
$200,000
Labels ( Cost of Sales)
10,000
Freight-Out
12,000
The balance sheet is only affected by the reduction in cash.
b. Accrual Basis Expenses for 2007:
Cost of Sales
$150,000
Labels ( Cost of Sales)
7,500
Freight-Out
12,000
Balance sheet at December 31, 2007:
Inventory
$ 52,500
Reduction in cash for amounts paid on inventory.
6-40.
a. Interest Expense owed at May 31, 2008
Principal x Rate x Time = Interest
$15,000 x 9% x 12/12 = $1,350
b. On a cash basis, Dennis reports a Note Payable of $15,000
on his balance sheet, but reports no 2007 interest expense.
c. On the accrual basis, Dennis reports the Note Payable and
Accrued Interest Expense of $787.50 for seven months
interest expense on the balance sheet at December 31,
2007, and Interest Expense of $787.50 on the income
F6-30
Chapter 6 – Keeping Score: Bases of Economic Measurement
statement for 2007.
6-41.
a. Cash Basis Expenses:
b.
c.
d.
Year
2006
2007
2008
Expense
$25,000
-0-0-
Accrual Basis Expenses:
Year
Expense
2006
$ 2,500 [($25,000/5) x 6/12}
2007
5,000 ($25,000/5)
2008
5,000 ($25,000/5)
Assuming Tiffany uses the cash basis, the machine will not
be listed on the balance sheets because the entire $25,000
was expensed in 2006.
Assuming the accrual basis of accounting each balance
sheet would show the historical cost of equipment $25,000
less the accumulated depreciation as follows:
Year Historical Cost Accumulated Depreciation
2006
$25,000
$ 2,500
2007
25,000
7,500
2008
25,000
12,500
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-31
6-42.
a. Accrual Basis Accounting
1. Annual Depreciation = Cost – Salvage Value
Useful Life
= $26,000 – $2,000 = $6,000/Year
4
2006 – $1,500 ($6,000 x 3/12)
2007 – $6,000
2008 – $6,000
2. Annual Depreciation = Cost – Salvage Value
Useful Life
= $34,000 – $2,000 = $8,000/Year
4
2006 – $2,000 ($8,000 x 3/12)
2007 – $8,000
2008 – $8,000
b.
Accumulated Depreciation
1. 2006
$ 1,500
2007
$ 7,500 ($1,500 + $6,000)
2008
$13,500 ($1,500 + $6,000 +$6,000)
2.
F6-32
2006
2007
2008
$ 2,000
$10,000 ($2,000 + $8,000)
$18,000 ($2,000 + $8,000 +$8,000)
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-43.
a. Accrual Basis Accounting
1. Annual Depreciation = Cost – Salvage Value
Useful Life
= $300,000 – $150,000 = $30,000
5
2006
$22,500 ($30,000 x 9/12)
2008
$30,000
2010
$30,000
2. Annual Depreciation = Cost – Salvage Value
Useful Life
= $300,000 – $45,000 = $25,500
10
2006
$19,125 ($25,500 x 9/12)
2008
$25,500
2010
$25,500
b. Accumulated Depreciation
1. 5-year useful life
2006
$ 22,500
2008
$ 82,500 ($22,500 + $30,000 +$30,000)
2010
$142,500 ($22,500 + $30,000 +$30,000
+$30,000 + $30,000)
2. 10-year useful life
2006
$ 19,125
2008
$ 70,125 ($19,125 + $25,500 +$25,500)
2010
$121,125 ($19,125 + $25,500 +$25,500
+$25,500 + $25,500 )
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-33
6-44.
Both deferred expenses and accrued expenses are the
result of the guidelines of accrual accounting. Deferred expenses
result when expenses are paid for and recorded before they are
incurred. In this case, the item represents a future benefit to the
company, and therefore, should be recognized as an asset. For
instance, assume a company pays for 3 months rent in advance
on December 1. Financial statements as of December 31 should
show 1 month’s worth of rent as an expense because it was used
up in operating the business. The remaining 2 months’ worth of
rent will provide future benefit – an asset reflecting this amount
will be shown on the balance sheet. As time passes and the rent
paid in advance is used up, the asset on the balance sheet will be
converted to an expense on the income statement.
Accrued expenses occur in situations in which expenses
have been incurred but (unlike in the case of deferred expenses)
have not yet been paid and recorded. As an example, financial
statements for a period ending December 31 must reflect the
impact of the company’s December phone service. As of
December 31, the month’s telephone expense has been incurred.
If it has not yet been recorded, it is an accrued expense which
should be included on the company’s income statement. To
indicate that the amount is still owed to the telephone company,
the company’s balance sheet would show a corresponding
liability.
F6-34
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-45.
Cash basis accounting has very simple guidelines for
recognizing revenues and expenses─if cash is received or
disbursed as a result of the activities of producing, selling, or
delivering goods or services, a revenue or expense should be
recognized. In other words, the receipt or disbursement of cash
related to the earnings process triggers the recognition of revenue
or expense. Because cash had to come in or go out in order for
revenue or expense to be recognized, there is very little question
as to the period in which to recognize the item.
Properly implementing accrual accounting’s revenue and
expense recognition guidelines requires more analysis. Accrual
accounting attempts to recognize revenues in the income
statement period they are earned and realizable, and attempts to
match those expenses that helped generate the revenue to the
same income statement period. Adjustments must be made
before financial statements are prepared to ensure these
guidelines have been followed. The adjustment process involves
reviewing the financial records to be sure that all items that should
be recognized in the current period have been recorded. In
addition, during the adjustment process, we determine that no
revenues or expenses corresponding to future periods appear in
the current period’s records. The two basic types of adjustments
that are necessary are accruals and deferrals.
Accruals are adjustments made to recognize items that
should be included on the income statement of the current period,
but have not yet been recorded. Accrual adjustments recognize
revenue or expense before the associated cash is received or
paid. Accrued revenues are revenues considered earned during
the financial statement period that have not been recognized.
Under accrual accounting, revenues recognized (recorded)
should reflect the amount earned during the period, for which the
firm has an enforceable claim, regardless of whether the related
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-35
6-45. (Continued)
cash has been received. Accrued expenses are expenses
deemed to have been incurred during the financial statement
period, but which have not yet been recognized nor paid.
Deferrals are postponements of the recognition of revenue
or expense even though the item has already been paid for and
recorded. Deferrals are adjustments of revenues which have been
received but not yet earned, and of expenses paid for but for
which no benefit has yet been received. Deferred revenues are
created when cash is received before it is earned. If customers
pay a company in advance for products or services, the company
should not show that amount as a revenue on its income
statement if it has not been earned as of the end of the financial
statement period. The amount not yet earned, the deferred
revenue, represents a liability of the company, which will remain
until the company either earns the amount, or refunds the
payment to the customer. Deferred expenses are created when
cash is paid before an expense has been incurred. If the
expenses are paid for, and thus recorded in advance, an
adjustment must be made before financial statements are
prepared. Expenses on the income statement should reflect the
expenses incurred or “used up” during the period. If part of the
cost of an item represents an amount which will provide future
benefit to the company, that amount should not be shown as an
expense in the current period. Instead, this portion should be
shown as an asset (a deferred asset) which will be recognized as
an expense in future periods.
F6-36
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-46.
Cash Collections for the Year Ended December 31, 2007:
Sales
$200,000
+ Accounts Receivable ( December 31, 2006) 25,000
– Accounts Receivable ( December 31, 2007) 12,000
Cash Collections for 2007
$213,000
6-47.
Sales for the Year Ended December 31, 2008:
Cash Collections for 2008
$196,000
+ Accounts Receivable ( December 31, 2008) 48,000
– Accounts Receivable ( December 31, 2007) 35,000
Sales for Year Ended December 31, 2008
$209,000
6-48.
Merchandise Purchases for Year Ended December 31, 2008:
Cash Payments for Merchandise for 2008
$245,000
+ Accounts Payable (December 31, 2008)
29,000
– Accounts Payable (December 31, 2007)
34,000
Merchandise Purchases for 2008
$240,000
6-49.
Merchandise Purchases for Year Ended December 31, 2008:
Cash Payments for Merchandise for 2008
$365,000
+ Accounts Payable (December 31, 2008)
120,000
– Accounts Payable (December 31, 2007)
96,000
Merchandise Purchases for 2008
$389,000
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-37
6-50.
Note To Instructor: At this point in their accounting education,
students will not know about the actual calculation of cost of
goods sold and the full operation of an inventory system, so their
answer may be based on limited understanding of the impacts of
inventory on the financial statements.
a. 1. Income Statement. The purpose of the income
statement is to measure the rewards of doing business
for a specific period of time and the sacrifices required
to obtain those rewards. Because Academy uses
accrual accounting, both sales (rewards) and cost of
goods sold (sacrifices) will be understated. Net income
will be understated, assuming the unrecorded sales
revenue was greater than the unrecorded cost of goods
sold.
2. Statement of Stockholders Equity. This statement
shows changes in each part of stockholders’ equity
(i.e., retained earnings, stock accounts, and paid-in
capital accounts). Net income is a particular period’s
addition to retained earnings. Because the clerk’s
behavior caused net income for the period to be lower
than it should have been, retained earnings will be
lower than it should be by the same amount. Retained
earnings is the only portion of stockholders’ equity
affected by the event, but the effect on retained
earnings will cause total stockholders’ equity to be
understated as well.
3. Balance Sheet. Both the asset section and the
stockholders’ equity section of the balance sheet are
affected by the clerk’s theft. Obviously, Academy does
not have the cash stolen by the clerk, so cash will be
less than the amount the company should have.
However, there is no reason to believe the cash
F6-38
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-50. (Continued)
amount on the balance sheet is not truly reflective of
what the company has. Based on the logic that the sale
would cause the inventory to be removed from the
balance sheet, since the sale was never recorded, the
inventory amount on the balance sheet will be
overstated.
b. Since this was a cash sale, the effect on cash and revenue
would be the same under either measurement basis. The
major difference between the effect of this theft under
accrual accounting and cash accounting revolves around the
cost of the merchandise inventory. Under the cash basis, the
cost of the merchandise inventory is recognized as an
expense whenever it is paid for. Under cash accounting,
there is no other asset besides cash, so any effects of the
cost of inventory under accrual accounting would be absent
under cash accounting.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-39
6-51.
a. 1.
b.
F6-40
Income Statement. The purpose of the income
statement is to measure the rewards of doing business
for a specific period of time and the sacrifices required
to obtain those rewards. Because Ajax uses accrual
accounting, expenses (sacrifices) will be overstated.
Net income will be understated because expenses are
overstated.
2. Statement of Stockholders Equity. This statement
shows changes in each part of stockholders’ equity
(i.e., retained earnings, stock accounts, and paid-in
capital accounts). Net income is a particular period’s
addition to retained earnings. Because the
bookkeeper’s behavior caused net income for the
period to be lower than it should have been, retained
earnings will be lower than it should be by the same
amount. Retained earnings is the only portion of
stockholders’ equity affected by the event, but the effect
on retained earnings will cause total stockholders’
equity to be understated as well.
3. Balance Sheet. Both the asset section and the
stockholders’ equity section of the balance sheet are
affected by the bookkeeper’s error. Assets will be
understated as a result of failing to record equipment.
The stockholders’ equity will also be understated as a
result of the understatement of net income and retained
earnings.
Under the cash basis, the cost of the equipment is
recognized as an expense whenever it is paid. Under cash
accounting, there is no other asset besides cash, so any
effects of the cost of equipment under accrual accounting
would be absent under cash accounting.
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-52.
a. 1.
b.
Income Statement. The purpose of the income
statement is to measure the rewards of doing business
for a specific period of time and the sacrifices required
to obtain those rewards. Because Miller uses accrual
accounting, expenses (sacrifices) will be understated.
Net income will be overstated because the expenses
are understated.
2. Statement of Stockholders Equity. This statement
shows changes in each part of stockholders’ equity
(i.e., retained earnings, stock accounts, and paid-in
capital accounts). Net income is a particular period’s
addition to retained earnings. Because the
bookkeeper’s error caused net income for the period to
be higher than it should have been, retained earnings
will be higher than it should be by the same amount.
Retained earnings is the only portion of stockholders’
equity affected by the event, but the effect on retained
earnings will cause total stockholders’ equity to be
overstated as well.
3. Balance Sheet. Both the asset section and the
stockholders’ equity section of the balance sheet are
affected by the bookkeeper’s error. Assets will be
overstated as a result of the erroneous recording of
land. The stockholders’ equity will also be overstated as
a result of the overstatement of net income and
retained earnings.
Under the cash basis, the cost of the land is recognized as
an asset when it is paid. The effect would be the same under
cash accounting as it is for accrual accounting.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-41
6-53.
a. (1)
b.
Income Statement. The purpose of the income
statement is to measure the rewards of doing business
for a specific period of time and the sacrifices required
to obtain those rewards. Because Elmendorf uses
accrual accounting, the error will have no effect on
expenses (sacrifices). Net income will be unaffected.
The impact on the income statement is merely an
erroneous misclassification of one expense for another.
(2) Statement of Stockholders Equity. This statement
shows changes in each part of stockholders’ equity
(i.e., retained earnings, stock accounts, and paid-in
capital accounts). Net income is a particular period’s
addition to retained earnings. Because the
bookkeeper’s error caused no change in net income for
the period, neither retained earnings nor total
stockholders’ equity is affected.
(3) Balance Sheet. No asset, liability, or stockholders’
equity account on the balance sheet is affected by the
bookkeeper’s error.
Under cash accounting, there is no impact as this item was a
simple misclassification of an expense.
6-54.
a. August Accrual Basis Revenue:
Sale of merchandise in August (1)
b.
F6-42
August Cash Basis Revenue:
Sale of merchandise in August (1)
Collection of cash on account (2)
Collection of cash for prepaid sale (3)
Total Cash Basis Revenue
$ 5,000
$ 5,000
10,000
4,000
$19,000
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-55.
a. November Accrual Basis Revenue:
Sale of merchandise in November (2)
b.
November Cash Basis Revenue:
Sale of merchandise in November (2)
Collection of cash on account (1)
Collection of cash for prepaid sale (3)
Total Cash Basis Revenue
6-56.
a. July Accrual Basis Expenses:
Office supplies used in July (1)
Insurance expense (3) (1/3 of total)
Total Expenses for July
b.
$18,000
$18,000
10,000
12,000
$40,000
$20,000
2,000
$22,000
July Cash Basis Expenses:
Office supplies paid in July (1)
Payment of cash on account (2)
Payment for insurance (3)
Total Cash Expenses for July
$ 20,000
22,000
6,000
$48,000
6-57.
a. December Accrual Basis Expenses:
Equipment rental in December (1)
Insurance expense (3) (1/4 of total)
Total Expenses for December
$ 8,000
2,000
$10,000
b.
December Cash Basis Expenses:
Equipment rental paid in December(1)
Payment of cash for advertising (2)
Payment for insurance (3)
Total Cash Expenses for December
Chapter 6 – Keeping Score: Bases of Economic Measurement
$ 8,000
32,000
8,000
$48,000
F6-43
6-58.
a.
Murphy Company
Income Statement
For the Month Ending January 31,
Cash Basis
Sales
$ 6,000
Cost of Goods Sold
25,000
Gross Margin
$<19,000>
Operating Expenses:
Rent
$2,000
Office Furniture
3,000
Wages
3,500
Total Operating Expenses
8,500
Net Loss
$<27,500>
b.
Murphy Company
Income Statement
For the Month Ending January 31,
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Advertising
Depreciation
Wages
Total Operating Expenses
Net Income
F6-44
$26,000
9,000
$17,000
$ 1,000
2,000
50
3,500
6,550
$10,450
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-59.
a.
Sheets Corporation
Income Statement
For the Month Ending February 28,
Cash Basis
Sales
$118,000
Cost of Goods Sold
56,000
Gross Margin
$ 62,000
Operating Expenses:
Rent
$ 3,600
Advertising
12,000
Computer
5,400
Wages
4,500
Total Operating Expenses
25,500
Net Loss
$ 36,500
b.
Sheets Corporation
Income Statement
For the Month Ending February 28,
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Advertising
Depreciation
Wages
Total Operating Expenses
Net Income
Chapter 6 – Keeping Score: Bases of Economic Measurement
$118,000
69,000
$ 49,000
$ 1,800
8,000
150
6,000
15,950
$ 33,050
F6-45
6-60.
a.
Arnell Johnson Enterprises
Income Statement
For the Month Ending November 30,
Cash Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Van
Wages
Total Operating Expenses
Net Loss
$106,000
100,000
$ 6,000
$ 12,000
25,000
13,500
50,500
$<44,500>
b.
Arnell Johnson Enterprises
Income Statement
For the Month Ending November 30,
Accrual Basis
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Rent
Advertising
Depreciation
Wages
Total Operating Expenses
Net Income
F6-46
$178,000
126,000
$ 52,000
$ 1,000
9,000
417
13,500
23,917
$ 28,083
Chapter 6 – Keeping Score: Bases of Economic Measurement
6-61.
a. Depending upon the timing of when the student visits the
website, the footnote may vary. The following are the topics
covered in the footnote for the year ended December 31, 2005.
The annual report does not state that the company uses the
accrual basis of accounting. Since GAAP require that the accrual
basis be used, the auditor’s report would indicate if the cash basis
were being used. Also, the balance sheet includes receivables
and payables which are indicative of accrual accounting.
b. The second footnote in the Ford Motor Company’s financial
statements presents a summary of the company’s basic
accounting policies. The student’s discussion should include the
following topics:
1. Cash and cash equivalents
2. Revenue recognition
3. Use of estimates
4. Foreign currency translations
5. Business and credit concentrations
6. Deprecation and amortization
7. Asset impairments
8. Sale of receivables
9. Revenue recognition
10. Income taxes
11. Stock options
12. Fair value of financial instruments
13. Earnings per common share
14. Comprehensive income
c. Each student may pick a different article.
Chapter 6 – Keeping Score: Bases of Economic Measurement
F6-47
6-62.
a. Depending upon the timing of when the student visits the
Web site, the footnote may vary. The following are the topics
covered in the footnote for the year ended in 2005.
The annual report does not state that the company uses the
accrual basis of accounting. Since GAAP require that the accrual
basis be used, the auditor’s report would indicate if the cash basis
were being used. Also, the balance sheet includes receivables
and payables which are indicative of accrual accounting.
b. The first footnote in The Walt Disney Company and
Subsidiaries’ financial statements presents a description of its
business. Footnote number 2 presents a summary of the basic
significant accounting policies. For Disney, the student’s
discussion should include the following topics:
Significant accounting policies
1. Principles of consolidation
2. Accounting changes
3. Use of estimates
4. Revenue recognition
5. Cash and cash equivalents
6. Investments
7. Inventories
8. Film and television costs
9. Theme parks, resorts and other property
10. Intangible/other assets
11. Risk management contracts
12. Earnings per share
13. Reclassifications
F6-48
Chapter 6 – Keeping Score: Bases of Economic Measurement
c. Each student’s paper may vary.
6-63.
a. Depending upon the timing of when the student visits the
Web site, the footnote may vary. The following are the topics
covered in the footnote for the year ended December 31, 2005.
The annual report does not state that the company uses the
accrual basis of accounting. Since GAAP require that the accrual
basis be used, the auditor’s report would indicate if the cash basis
were being used. Also, the balance sheet includes receivables
and payables which are indicative of accrual accounting.
b. The first footnote in The Coca-Cola Company and
Subsidiaries’ financial statements presents a description of its
organization and a summary of the significant accounting policies.
For Coca-Cola, the student’s discussion should include the
following topics:
1. Organization
2. Basis of presentation
3. Consolidation
4. Issuances of stock by equity investees
5. Advertising costs
6. Net income per share
7. Cash equivalents
8. Inventories
9. Property, plant, and equipment
10. Other assets
11. Goodwill and other intangible assets
12. Use of estimates
13. New accounting standards
14. Derivative financial instruments
c. Each student’s paper may vary.
F-50
Chapter 6 – Keeping Score: Bases of Economic Measurement