Materiality is one of the pervasive concepts in financial accounting. Which of the following statements is true with regard to materiality?
Answer(s): D
The basis for a materiality judgment is generally not sufficient unless the nature of the item, the circumstances in which the judgment has to be made, and the magnitude of the item are all considered.
At December 31, 1995, Del Monte Co. had the following balances in the accounts it maintains at Royal Street Bank:Checking account #101 $175,000Checking account #102 $(10,000)Money market account $25,00090-day certificate of deposit due 2/28/96 $50,000180-day certificate of deposit due 3/15/96 $80,000Del Monte classifies investments with original maturities of 3 months or less as cash equivalents. In its December 31, 1995 balance sheet, what amount should Del Monte report as cash and cash equivalents?
Answer(s): A
Cash consists of coins, currency on hand, checking accounts (demand deposits), certificates of deposit (time deposits) and near-cash assets (money market accounts). Cash equivalents are limited to investments with original maturities to the holding entity of 3 months or less. As a result, cash and cash equivalents will be $240,000 ($175,000 - 10,000 + 25,000 + 50,000).
Which of the following statements is true?
Answer(s): E
Determining the useful life of an asset is central to the allocation of its cost and its period-to-period valuation; the same is true with depreciation schedules that are selected. These pose problems in determining the fair value of plant and equipment.
Which of the following is/are true in an inflationary environment?
Remember that for income statement, it is desirable to have the COGS as close to true, current cost, as possible. For balance sheet, the assets must be as close to current, market value, as possible. Hence, for income statement, LIFO preferred to average cost preferred to FIFO. For balance sheet, FIFO preferred to average cost preferred to LIFO.
Deferred credits arise because of:
Answer(s): C
Deferred credits can be liabilities incurred in the course of current business which are not yet recognized in the income statement or are unearned assets or revenues which have been recognized prematurely, as determined by the matching principle. Examples of these include deferred income taxes and unearned royalties received. In either case, accrual accounting dictates that such "mistakes" be corrected for through the use of deferred credits.
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