The cumulative effect of changing to a new accounting principle on the amount of retained earnings at the beginning of the period in which the change is made should be included in net income of ________.
Answer(s): B
A change from one acceptable method of accounting to another should be accounted for as the cumulative effect of a change in accounting principle. The cumulative effect should be recognized as a component of net income, net of tax effect, in the period of change.
A company is currently being sued by a customer. A reasonable estimate can be made of the costs that would result from a ruling unfavorable to the company, and the amount involved is material. The company's managers, lawyers, and auditors agree that there is a remote likelihood of an unfavorable ruling. This contingency
Answer(s): E
Losses arising from litigation should be accrued if both probable and reasonably estimable, and should be disclosed if reasonably possible. In this case, the likelihood is remote. Therefore, no disclosure is required.
Which of the following is not a current liability?
Answer(s): A
Allowance for Uncollectible Accounts is a contra account to Accounts Receivable, both of which are reported in the current asset section of the balance sheet.
Which of the following is/are true about computation of Basic EPS?
In the computation of basic EPS, one must be careful about the time period for which shares are assumed to be outstanding. This becomes an issue when the firm issues new shares or reacquires outstanding shares during the accounting period. Further, the purpose for which the shares are issued are also of concern since the computation of the weighted number of shares outstanding must be consistent with the logic behind the accounting treatment of the newly issued shares. Hence, when shares are issued for the acquisition of another business, they are considered as equity issued to raise new capital for investment and therefore included from the date of issuance. On the other hand, under pooling of interests method, the merged companies are assumed to have been a combined entity since their respective inceptions. Therefore, when shares are issued under pooling of interests, they are assumed to have been outstanding at the beginning of all the periods reported. Finally, stock splits and stock dividends change the number of shares without any direct impact on earnings. Hence, for consistency, previously reported EPS numbers are retroactively readjusted.
When prices are rising, which of the following inventory valuation methods produces the lowest income tax liability?
When prices are rising, LIFO will produce the lowest profit, and the lowest income tax liability, because the last in (highest cost) inventory is the first out. This leaves the oldest inventory on hand and since it has the lowest cost, ending inventory will have the lowest value which means that cost of goods sold will be the highest and profits will be the lowest (ending inventory = beginning inventory + net purchases - cost of goods sold).
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