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financeaccountingus · 8 months ago

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Accounting vs Finance: Unlocking the 5 Secrets

Accounting vs Finance: Unlocking the 5 Secrets

Explore the distinctions between accounting and finance, and make informed decisions.

1. Introduction

In the intricate tapestry of personal and business finance, the terms “accounting” and “finance” often become entwined, leaving individuals bewildered about the distinctions. If you’ve ever found yourself pondering the differences between these two financial pillars, you’re not alone. This article aims to unravel the complexity, providing a comprehensive guide to the both fields tailored for the common person. By the end, you’ll not only understand the intricacies but also feel empowered to navigate your financial journey with confidence.

1. What is Accounting?

It, in its essence, serves as the meticulous storyteller of your financial affairs. It goes beyond mere number-crunching; it is the art of recording, summarizing, and interpreting the financial transactions that shape your economic narrative. Think of it as the architect behind the scenes, constructing the foundation upon which wise financial decisions are made. To delve deeper, let’s explore the pivotal role of accounting in financial management.

In the vast landscape of financial management, it stands as a foundational pillar. Its primary objective is to provide a systematic and accurate representation of an entity’s financial transactions. It encompasses a range of activities, from recording day-to-day transactions to preparing detailed financial statements.

Financial statements, including the balance sheet, income statement, and cash flow statement, are the tangible outputs of the accounting process. Each statement serves a unique purpose, collectively offering a comprehensive view of an organization’s financial health. The balance sheet presents a snapshot of assets, liabilities, and equity at a specific point in time. The income statement outlines the revenue and expenses over a set period, revealing the profitability of the entity. Meanwhile, the cash flow statement tracks the inflow and outflow of cash, providing insights into liquidity.

Beyond the technicalities, it is governed by a set of principles and standards that ensure consistency and transparency in financial reporting. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) guide accountants in preparing financial statements that accurately reflect the economic reality of an organization.

2. Who are Accountants?

In the world of finance, accountants are the unsung heroes, diligently working behind the scenes to ensure the financial narrative is not just a sequence of numbers but a coherent and accurate story. Their role extends beyond mathematical precision; it requires a keen eye for detail, a commitment to accuracy, and the ability to interpret the financial language.

Accountants act as financial custodians, ensuring that every transaction is recorded accurately and in compliance with regulatory standards. Their work goes beyond number-crunching; it involves making sense of financial data, identifying trends, and providing valuable insights to support strategic decision-making.

The skill set required for this subject is diverse, encompassing mathematical proficiency, attention to detail, analytical thinking, and a thorough understanding of financial principles. Accountants must stay abreast of evolving regulations and adapt to the changing landscape of financial reporting.

Examples of how accountants contribute to financial stability are abundant. From preparing tax returns to conducting audits, accountants play a crucial role in ensuring that an organization’s financial activities align with legal requirements and ethical standards. In essence, accountants are the architects of financial transparency, laying the groundwork for informed decision-making.

3. Types of Accounting Simplified

Its realm of is surprisingly diverse, akin to a palette of colors each serving a distinct purpose. Managerial accounting is like the personal financial advisor you consult for making day-to-day money decisions. It involves the preparation of internal reports that help managers make informed decisions about the allocation of resources, cost control, and performance evaluation.

Financial accounting, on the other hand, is the storyteller we mentioned earlier, narrating your financial tale to the world. It focuses on the preparation of external financial statements that provide stakeholders, such as investors and creditors, with a comprehensive view of an organization’s financial performance.

Then there’s forensic accounting, akin to a financial detective, unveiling mysteries hidden within the numbers. Forensic accountants are called upon to investigate financial irregularities, fraud, and legal disputes. They combine skills with investigative techniques to uncover financial discrepancies and provide expert testimony in legal proceedings.

The versatility within the field of accounting is striking. Accountants can specialize in areas such as tax accounting, cost accounting, or internal auditing, each requiring a unique set of skills and expertise. This diversity ensures that accounting professionals can find roles that align with their interests and strengths.

"Accounting is the cornerstone of the business world." Tiffany Johnson

4. What is Finance?

As we shift our focus to finance, it is crucial to understand that finance is not merely about money; it is the strategic commander guiding your financial ship through the vast sea of economic decisions. Finance is the art of managing resources, making informed decisions, and steering towards financial goals. Imagine finance as the compass directing your financial journey, ensuring you navigate the twists and turns with precision.

Finance encompasses a broad spectrum of activities, ranging from investment and risk management to capital budgeting and financial planning. At its core, finance aims to optimize the allocation of resources to achieve the organization’s objectives. It is forward-looking, involving projections, forecasts, and strategic planning to ensure long-term financial sustainability.

5. Understanding Financial Components

To comprehend finance, envision financial markets as bustling shopping malls where pieces of companies are bought and sold. Financial instruments, in this analogy, are the products available in these malls, each carrying its own unique value. Financial management acts as the wise shopping list, guiding you to make optimal choices and ensuring that your financial resources are utilized most efficiently.

Financial markets serve as the platforms where buyers and sellers come together to trade financial instruments. These markets include stock markets, bond markets, and commodity markets, among others. Investors participate in these markets to buy and sell financial assets, with prices determined by the forces of supply and demand.

Financial instruments, on the other hand, represent various types of tradable assets. Stocks, bonds, options, and derivatives are examples of financial instruments, each serving a specific purpose in the financial landscape. These instruments provide individuals and organizations with avenues to invest, hedge risks, and diversify their portfolios.

Financial management, as the wise shopping list, involves making decisions about how to allocate financial resources to achieve organizational goals. This includes decisions about budgeting, capital expenditures, and financing options. The goal is to maximize shareholder value by ensuring that resources are employed in the most efficient and effective manner.

The role of financial instruments in risk management is crucial. Organizations use instruments like insurance, derivatives, and hedging strategies to mitigate the impact of uncertain events on their financial health. By carefully managing risks, organizations can safeguard their financial stability and protect against adverse market conditions.

6. Who are Finance Professionals?

Finance professionals are the captains of your financial ship, entrusted with steering towards prosperity. Their responsibilities go beyond number analysis; they are the architects of financial strategies, evaluating investments, managing risks, and helping you make strategic decisions that align with your financial objectives.

Finance professionals are integral to the success of organizations and individuals alike. They play a pivotal role in the allocation of resources, ensuring that capital is deployed in ventures that generate the highest returns. Investment bankers, financial analysts, and financial managers are among the various roles within the realm of finance.

The skills required for success in finance are diverse, ranging from analytical thinking and strategic planning to effective communication and risk management. Finance professionals must possess a deep understanding of financial markets, economic trends, and the factors influencing investment decisions.

Exploring real-life scenarios showcases the decision-making role of finance professionals. Imagine a company looking to expand its operations. Finance professionals would assess the financial feasibility of the expansion, considering factors such as market trends, potential returns, and associated risks. They would develop financial models, conduct cost-benefit analyses, and recommend funding options to support the expansion.

In strategic planning and forecasting, finance professionals anticipate future financial trends and formulate plans to achieve organizational objectives. This involves projecting financial statements, evaluating investment opportunities, and aligning financial strategies with the overall goals of the organization.

7. Spotting the Differences

Now, let’s unravel the subtle yet significant differences between the two. Accounting is akin to looking at your financial photo album, capturing the essence of where your money has been. In contrast, finance peers into the future, sketching out plans and strategies to guide your financial journey ahead. While both are integral, accounting dwells in the past, and finance anticipates the future, creating a dynamic balance essential for financial success.

Accounting, with its historical focus, is concerned with recording, classifying, and interpreting past financial transactions. It provides a detailed account of an organization’s financial performance, offering stakeholders insights into its economic activities. The reports generated by accountants, such as balance sheets and income statements, serve as snapshots of the financial past.

In contrast, finance takes a forward-looking approach, embracing the mantra that the past is prologue. Finance professionals leverage historical data to make informed predictions about future financial trends. Their focus is on strategic planning, forecasting, and allocating resources to achieve long-term financial goals. Finance is the compass that guides organizations through the uncertainties of the future.

Real-world analogies can help readers grasp the disparities between both fields. Consider accounting as the historian meticulously documenting every detail of a journey. The historian’s role is to faithfully record the events, transactions, and experiences along the way. On the other hand, finance is the navigator charting the course for the next leg of the journey. The navigator analyzes the historical path, considers external factors like weather and terrain, and plots the optimal route forward.

Despite their distinct focuses, both are interdependent. The accuracy and reliability of data complied by accountants are paramount for informed financial decision-making. Finance professionals rely on the historical context provided by accountants to formulate strategies, assess risks, and guide organizations toward financial success. In essence, accounting provides the raw material, and finance shapes it into a strategic plan.

Common misconceptions about both of them can further contribute to the confusion. Some may perceive accounting as a mundane task, confined to number-crunching and compliance. In reality, it is a dynamic field that requires analytical thinking, interpretive skills, and a deep understanding of financial principles. On the other hand, finance is not just about managing money; it involves complex decision-making, risk evaluation, and the strategic allocation of resources.

8. Learning Paths

For those considering joining the financial superhero squad, understanding the academic paths is crucial. Aspiring accountants often delve into one of the two fields of studies, honing their skills in the art of recording and interpreting financial transactions. Finance professionals, on the other hand, may explore economics, mathematics, and statistics, acquiring a holistic understanding of the financial landscape. The key is to embark on a path that resonates with individual interests and aspirations.

The academic journey for accountants typically involves coursework in financial accounting, managerial accounting, taxation, and auditing. These courses provide a solid foundation in accounting principles, ethical standards, and regulatory requirements. Aspiring accountants may pursue degrees such as Bachelor of Science in Accounting or Bachelor of Business Administration with a focus on accounting.

Finance professionals often pursue degrees in finance, economics, or related fields. Academic programs in finance cover topics such as financial management, investment analysis, risk management, and financial markets. Degrees such as Bachelor of Science in Finance or Bachelor of Business Administration with a concentration in finance equip individuals with the knowledge and skills needed for success in the field.

The evolving nature of academic programs in accounting and finance reflects the dynamic landscape of the financial industry. Institutions are increasingly incorporating technology and data analytics into their curricula, preparing students for the demands of the digital age. Interdisciplinary knowledge, including an understanding of business operations, ethics, and communication, is increasingly emphasized to produce well-rounded professionals.

9. Jobs in Numbers

The world of careers in both is vast and diverse, offering a multitude of opportunities for those equipped with financial expertise. Accountants may find themselves as auditors, tax professionals, or even forensic investigators, delving into the intricate details of financial records. Finance professionals, on the other hand, could become financial analysts, investment bankers, or the guiding force behind a company’s financial strategy. The impact of these professions extends beyond individual careers, influencing the global and personal financial tapestry.

The role of accountants in various industries is expansive. Auditors, for instance, examine financial statements to ensure compliance with accounting principles and legal regulations. Tax professionals navigate the complex landscape of tax codes, helping individuals and organizations optimize their tax positions. Forensic accountants use their investigative skills to uncover financial irregularities, detect fraud, and provide expert testimony in legal proceedings.

Finance professionals contribute to the financial success of organizations through diverse roles. Financial analysts assess the financial health of companies, analyze market trends, and provide recommendations for investment decisions. Investment bankers facilitate capital raising, mergers and acquisitions, and other financial transactions. Financial managers oversee the financial activities of organizations, ensuring sound financial practices and strategic decision-making.

The impact of these professions on the global and personal financial landscapes cannot be overstated. Accountants contribute to financial transparency, helping stakeholders make informed decisions about investments, loans, and business partnerships. Finance professionals drive economic growth by facilitating capital flows, supporting businesses in expansion efforts, and optimizing financial resources for long-term sustainability.

The choice between both professional careers often hinges on individual preferences, skills, and aspirations. Accountants may find fulfillment in the meticulous analysis of financial records, ensuring accuracy and compliance. Finance professionals, on the other hand, may thrive in the dynamic world of financial markets, strategic planning, and investment analysis. Regardless of the chosen path, both professions play pivotal roles in shaping the financial landscape.

10. How They Work Together

The synergy between the two field is nothing short of magical. Accountants provide the data – the historical context, if you will – and finance professionals transform that data into a strategic plan. It’s akin to a perfect dance where the precision of accounting data meets the strategic finesse of financial planning. Together, they ensure that your financial journey is not only accurately recorded but also wisely navigated toward prosperity.

The collaboration between both of them begins with the meticulous work of accountants. They record every financial transaction, classify expenses, and summarize financial activities. The resulting financial statements serve as a comprehensive record of an organization’s past performance.

Finance professionals take the reins from there, using the historical data provided by accountants to make informed decisions about the future. They analyze financial statements, assess market trends, and evaluate investment opportunities. Finance professionals use financial modeling and forecasting techniques to project future performance and guide strategic planning.

Consider a scenario where a company is contemplating a significant investment in new technology. Accountants would provide the historical data related to the company’s financial health, including past expenses, revenue, and cash flow. Finance professionals would then analyze this data to assess the feasibility of the investment, considering factors such as potential returns, risks, and long-term impact.

The collaboration extends to budgeting and resource allocation. Accountants play a crucial role in preparing budgets based on historical data and expected expenses. Finance professionals use this information to align budgetary allocations with organizational goals, ensuring that resources are directed toward initiatives that maximize value.

In the context of decision-making, accountants and finance professionals work hand in hand. Accountants provide the necessary financial information, and finance professionals use their analytical skills to evaluate options, assess risks, and formulate strategic plans. The result is a harmonious integration of past financial data and future-oriented decision-making.

The symbiotic relationship is evident in strategic financial management. Accountants contribute by providing accurate and timely financial information, enabling finance professionals to make informed decisions. Finance professionals, in turn, leverage this information to develop financial strategies, allocate resources efficiently, and guide organizations toward financial success.

The interdependence between both of them is not confined to large corporations. It extends to individuals managing personal finances. Accountants help individuals track income and expenses, prepare tax returns, and maintain financial records. Finance professionals assist in making strategic decisions about investments, savings, and retirement planning. Together, they ensure that personal financial journeys are not only well-documented but also strategically navigated.

The collaboration between the two fields is not without its challenges. Differences in perspectives, communication barriers, and evolving regulatory landscapes can pose obstacles. However, the commitment to a common goal – effective financial management – fosters a collaborative spirit. Organizations that recognize and nurture this synergy unlock the full potential of both disciplines, creating a powerful force driving financial success.

11. Tech Impact on Money Matters

As we embrace the digital era, technology has woven its threads into the fabric of both fields, ushering in unprecedented advancements. Automation, artificial intelligence, and blockchain technologies have revolutionized traditional accounting tasks, enhancing accuracy and efficiency. In the realm of finance, advanced analytics and modeling tools empower professionals to make real-time, data-driven decisions. Adaptability to these technological changes becomes paramount, akin to mastering a new tool in the ever-evolving toolkit of financial professionals.

In accounting, the impact of technology is transformative. Automation of routine tasks, such as data entry and reconciliation, allows accountants to focus on higher-order activities that require human judgment and interpretation. Artificial intelligence algorithms can analyze vast datasets, identify patterns, and even predict potential financial risks. Blockchain technology ensures the integrity and security of financial transactions, reducing the risk of fraud and errors.

Finance professionals benefit from technology in diverse ways. Advanced analytics tools enable real-time analysis of market trends, helping professionals make timely and informed decisions. Algorithmic trading platforms use complex algorithms to execute trades at optimal times, maximizing returns. The use of big data allows finance professionals to gather insights from massive datasets, enhancing the accuracy of financial projections.

The integration of technology into both field is not without challenges. Professionals need to adapt to new tools and platforms continually. Cybersecurity becomes a critical consideration as financial data becomes increasingly digital. The ethical use of technology, particularly in areas like algorithmic decision-making, demands careful scrutiny.

However, the overall impact is undeniable – technology has streamlined processes, increased efficiency, and expanded the capabilities of accounting and finance professionals. The adaptability to these technological changes has become a valuable skill in the toolkit of financial experts, ensuring they remain at the forefront of industry trends.

12. Challenges Made Simple

In the face of challenges, professionals from both field stand resilient, armed with solutions and strategies. For accountants, keeping pace with ever-evolving regulations presents a perpetual challenge, yet staying informed and adaptable serves as a powerful solution. Finance professionals navigate risks and uncertainties, akin to steering a ship through unpredictable waters, but their strategic prowess and analytical skills act as a compass, guiding them to safe harbors. The dynamic nature of the financial landscape ensures that challenges are not roadblocks but rather stepping stones towards greater financial acumen.

For accountants, the challenge of regulatory compliance is ever-present. As financial regulations evolve in response to changing economic landscapes, accountants must stay abreast of updates and ensure that their practices align with the latest standards. This requires continuous learning, professional development, and a proactive approach to adapting to regulatory changes.

The digital transformation poses both opportunities and challenges for accountants. While automation streamlines routine tasks, it necessitates upskilling in areas like data analytics, technology proficiency, and cybersecurity awareness. Embracing these changes positions accountants not only as record-keepers but as strategic advisors leveraging technology for enhanced financial management.

Finance professionals encounter challenges in navigating the complexities of financial markets. Market volatility, geopolitical events, and economic uncertainties create a dynamic landscape that demands agility and foresight. Successful finance professionals are those who can analyze these challenges, assess risks, and formulate strategies that mitigate potential downsides.

Risk management is a cornerstone of financial decision-making. Finance professionals continually assess and manage risks associated with investments, market fluctuations, and economic trends. They employ sophisticated risk models, scenario analyses, and stress testing to anticipate potential challenges and devise strategies to protect financial interests.

The digitalization of financial processes introduces cybersecurity challenges. Finance professionals must safeguard sensitive financial information from cyber threats, ensuring the integrity and confidentiality of data. This requires robust cybersecurity measures, employee training, and a proactive approach to identifying and addressing potential vulnerabilities.

The adaptability of both accounting and finance professionals becomes paramount in overcoming these challenges. Continuous learning, professional development, and staying abreast of industry trends are essential practices. The ability to embrace change, whether in regulatory environments or technological landscapes, positions professionals for success in navigating the complexities of the financial world.

13. Trends in Your Wallet’s Future

Peering into the crystal ball of financial trends reveals a landscape shaped by innovation and evolution. Sustainable investing emerges as a trend aligning finances with ethical values, much like choosing eco-friendly products for a sustainable lifestyle. Fintech innovations, resembling the latest apps simplifying everyday tasks, reshape the financial landscape, making transactions and management more accessible. The influence of global events on remote work trends affects not only how we earn but also how we spend, reflecting the continuous evolution of personal financial practices.

Sustainable investing, once a niche concept, has gained significant traction in recent years. Investors are increasingly considering environmental, social, and governance (ESG) factors in their investment decisions. Sustainable funds, green bonds, and impact investing are becoming mainstream, reflecting a growing awareness of the interconnectedness between financial choices and broader societal and environmental impacts.

Fintech, or financial technology, is transforming the way we manage money. From mobile banking apps to robo-advisors, fintech innovations are making financial transactions more convenient and accessible. Cryptocurrencies and blockchain technology introduce decentralized forms of currency and secure, transparent transaction systems. The rise of neobanks challenges traditional banking models, offering digital-only, user-friendly banking experiences.

The influence of global events on personal finance is evident in the shift towards remote work. The traditional 9-to-5 office model is evolving, with more individuals embracing flexible work arrangements. This not only impacts how we earn but also how we spend. Remote work trends contribute to changes in housing preferences, spending patterns, and the adoption of digital payment methods.

The continuous evolution of personal financial practices requires individuals to stay informed about emerging trends. Whether it’s adopting sustainable investment strategies, embracing digital financial tools, or adapting to changing work patterns, staying ahead of the curve is essential for navigating the dynamic landscape of personal finance.

Conclusion: Money Made Easy

In the tapestry of both field, what may seem complex at first is, in reality, a roadmap to making your financial journey more straightforward. Accounting paints an accurate picture of where your money has been, while finance charts the course for where it’s headed. Understanding these basics transforms your financial maze into a well-guided adventure, empowering you to make informed decisions and navigate the complexities of your financial journey with confidence.

The key is recognizing the symbiotic relationship between both of them. They are not isolated silos but interconnected disciplines that, when harmonized, create a robust framework for financial success. Accountants lay the foundation with accurate data, and finance professionals sculpt that data into a strategic plan.

As you navigate the ever-evolving landscape of personal and business finances, remember that challenges are not roadblocks but opportunities for growth. Embrace the technological advancements reshaping the financial industry, stay informed about emerging trends, and, most importantly, leverage the collaboration between accounting and finance to your advantage.

Your financial journey is unique, and understanding the nuances of both subject matters equips you with the tools to tailor strategies that align with your goals. The complexities of financial management become more manageable when viewed through the lens of informed decision-making, strategic planning, and the collaboration of two essential disciplines.

So, as you embark on your financial adventure, let the synergy of both be your guiding light. With accurate historical data and forward-looking strategies, your financial journey becomes not just a series of transactions but a purposeful navigation towards prosperity. Money, once perceived as complex and elusive, becomes a tool at your disposal, and your financial story transforms into a narrative of informed choices and strategic achievements.

#accounting #banking #finance #investment #personal finance #cfo #financial literacy #financial planning #financial modeling #financial accounting #corporate finance

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rightrev-revenuerecognition · 10 months ago

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Generating revenue in business is undoubtedly gratifying, but it's crucial to pause and ask: Has your business genuinely 'earned' that money? The spotlight on how the revenue recognition principle impacts financial reporting has intensified, especially with the introduction of the Accounting Standards Codification (ASC) 606 in 2014 by the Financial Accounting Standards Board (FASB).

This standard, incorporated into the Generally Accepted Accounting Principles (GAAP) in the U.S., brought consistency to how companies should recognize revenue, especially in situations where the timing, nature, or certainty of revenue might pose challenges.

The International Accounting Standards Board (IASB) echoed this move by introducing similar guidelines under the International Financial Reporting Standards (IFRS). These guidelines aim to help businesses determine when they can legitimately consider revenue as 'earned' and subsequently update their financial statements.

Curious about when your company should recognize its revenue? Dive into our comprehensive guide on revenue recognition, where we'll explore the latest and most critical aspects.

How to Fulfill the Revenue Recognition Principle?

Step 1: Contract Identification Begin your revenue journey by identifying the contract with your customer.

Step 2: Obligation Identification Pinpoint the specific promises or obligations within that contract – what are you committed to delivering to your customers?

Step 3: Transaction Price Determination Determine the exact price or consideration for the transaction.

Step 4: Allocation of Transaction Price Allocate the transaction price to the promises or obligations identified earlier.

Step 5: Revenue Recognition Recognize the revenue when promises are fulfilled, and goods or services are delivered, transferring the earned revenue to your general ledger and financial statements.

Remember: Revenue recognition is not just a technicality; it's the ethical cornerstone of financial reporting, reflecting when value is delivered and financial obligations are met.

Importance of Revenue Recognition in the Business World

Picture this: In financial reporting for public companies, adherence to a set of rules known as GAAP accounting is crucial. One of the key stars in this accounting standard is the 'Revenue Recognition Principle.' This principle plays a simple yet critical role – revenue should be recognized when rightfully earned.

And why is this so vital?

Firstly, it prevents companies from manipulating financial reports – no cooking the books. Secondly, it provides a crystal-clear view of a company's financial well-being, akin to having a trustworthy health report for a corporation.

Revenue recognition is a fundamental accounting principle governing how and when a company should recognize revenue in its financial statements. Proper revenue recognition is critical because it directly impacts a company’s financial reporting, financial performance, and the transparency of its financial statements.

How Revenue Recognition Affects Financial Reporting:

1. Accurate Income Statement: Recognizing revenue at the appropriate time ensures that the income statement accurately reflects the company’s financial performance during a given period.

2. Matching Principle: Proper revenue recognition ensures that expenses and revenues are matched, providing a more accurate picture of profitability.

3. Consistency and Comparability: Consistent revenue recognition practices are essential for meaningful comparisons between financial statements of different periods or companies.

4. Investor Confidence: Proper revenue recognition enhances investor confidence, offering a clear and transparent view of a company’s financial health.

5. Compliance with Accounting Standards: Adherence to accounting standards is crucial, and companies must follow them to ensure compliance.

6. Timing of Revenue Recognition: The timing of revenue recognition can affect financial metrics, such as earnings per share, net income, and operating margins.

7. Impact on Ratios and Metrics: Revenue recognition can influence various financial ratios and metrics, including current ratio, debt-to-equity ratio, and return on assets.

8. Cash Flow Reporting: Revenue recognition affects the cash flow statement, impacting a company’s operating, investing, and financing cash flows.

9. Audit and Regulatory Compliance: Accurate revenue recognition is critical for the auditing process and compliance with accounting standards and regulations.

10. Disclosure and Footnotes: Detailed disclosures and footnotes in financial statements explain revenue recognition policies, enhancing transparency.

In conclusion, revenue recognition plays a pivotal role in financial reporting. Accurate and consistent practices are essential for providing stakeholders with reliable financial information, ensuring compliance, and supporting investment and lending decisions. Companies must follow relevant accounting standards and exercise good judgment in determining when to recognize revenue.

#asc-606-revenue-recognition-examples #asc-606-revenue-recognition #revenue-recognition #revenue-recognition-examples #asc-606

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shasat-uk · 1 year ago

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US GAAP Update: Are Finance Pros Truly Compliant?

In today's ever-changing financial landscape, professionals in the world of financial reporting face a constant challenge - staying up-to-date with the intricate nuances of the US Generally Accepted Accounting Principles (GAAP). Recognizing this need for continuous learning and adaptation, Shasat, a well-respected name in professional education, has unveiled an extensive two-day US GAAP update program. This initiative is designed to empower financial professionals with the essential knowledge and skills required to navigate the dynamic world of US GAAP effectively.

The US GAAP is a complex framework that frequently undergoes revisions, releases discussion papers, exposure drafts, and conducts research projects. Keeping abreast of these changes is vital, but it can be a daunting task. Shasat's new program is geared towards filling this knowledge gap and arming participants with a comprehensive understanding of the latest developments within the realm of US GAAP.

The program encompasses a wide spectrum of critical topics, including new accounting standards, insights into comments and concerns raised by the Securities and Exchange Commission (SEC), in-depth analysis of discussion papers and exposure drafts issued by the Financial Accounting Standards Board (FASB), updates from the Emerging Issues Task Force (EITF), and their ramifications on current practices. Additionally, it covers annual improvement projects, provides insights into FASB's project timeline, and sheds light on recent accounting scandals and their potential implications.

One key aspect of the program is addressing the differences between US GAAP and International Financial Reporting Standards (IFRS), which is invaluable in today's globalized business environment. By offering a thorough examination of these differences, Shasat ensures that participants are well-equipped to handle the complexities of international financial reporting.

What sets Shasat's program apart is its practical approach. It doesn't just focus on theory; it provides participants with hands-on experience through examples and group case studies. This application-oriented learning ensures that attendees can readily apply the knowledge gained to real-world scenarios in their professional roles.

To facilitate learning, participants will also receive a variety of supplementary materials, including handouts and references. These resources will prove invaluable not only during the program but also in their future endeavors.

Upon completing the US GAAP update program, financial professionals will not only have a comprehensive understanding of the latest developments in US GAAP but will also be well-prepared to integrate these updates into their day-to-day practices. This translates to better compliance with the most current standards and, more importantly, the ability to make informed decisions in financial reporting, thereby providing stakeholders with accurate and meaningful information.

Shasat understands the global reach of this program and, as such, has scheduled it at various locations across the world. Here is the schedule of upcoming programs by Shasat. However, we recommend you continue to visit Shasat's website for the most up-to-date program schedules.

US GAAP Update Program | GID 2001 | San Francisco: October 10-11, 2023

US GAAP Update Program | GID 2002 | Dallas: December 11-12, 2023

US GAAP Update Program | GID 2003 | Chicago: December 4-5, 2023

US GAAP Update Program | GID 2004 | Miami: December 14-15, 2023

US GAAP Update Program | GID 2007 | London: November 13-14, 2023

US GAAP Update Program | GID 2010 | Zurich: November 10-11, 2023

US GAAP Update Program | GID 2011 | Toronto: November 2-3, 2023

US GAAP Update Program | GID 2013 | Washington: November 1-2, 2023

US GAAP Update Program | GID 2000 | Online | Available on request

For more details and to enrol in US GAAP Courses, please visit:

https://shasat.co.uk/product-category/us-gaap-courses/ For those looking to enhance their expertise in US GAAP and stay ahead in the ever-evolving world of financial reporting, Shasat's US GAAP update program presents an excellent opportunity.

#US GAAP #Financial Reporting #Accounting Standards #Professional Development #Financial Professionals #Accounting Updates #International Financial Reporting Standards (IFRS)#Compliance

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mas1blogs · 1 year ago

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Top 5 Accounting Errors Canadian Businesses Make

Every company at some point makes accounting errors or bookkeeping mistakes; the same is the case with Canadian Small Businesses as well. The notable thing about this is that most of the time these are common bookkeeping mistakes that can be avoided.

In order to avoid these accounting errors in Canada, one needs to first understand the standards for accounting in Canada. The Canadian standards specify the needs and guidelines to follow which can reduce common errors in accounting

In this article, we will be looking at the Canadian Accounting Standards to follow as well as the common accounting mistakes to avoid.

Difference Between US and Canadian Accounting Standards

Accounting in Canada differs from accounting in the USA, as the standards differ in both countries. The parameters on which this difference can be measured are:

Certification

Standards for Audit Reports

Format of Financial Statements

Reporting Assets and Liabilities

Choice of Selecting Accounting Standards

Brief on Canadian Accounting Rules

Just like other countries, Canada also has its own accounting rules and standards which must be followed by businesses. These standards ensure the authenticity and reliability of the financial reporting.

In the past few years, there has been a constant improvement in the Canadian bookkeeping and accounting measures to align them with the international standards. The Canadian GAAP has been made similar to the IFRS rules so that businesses can easily operate globally.

Canada has CSA: Canadian Securities Administrators. This regulatory body ensures compliance with the accounting standards in Canada. It also oversees that the public companies are following the security laws as well as the investors’ interest protection.

Specifics of Canadian Accounting Rules

StandardsWhat they doInternational Financial Reporting Standards (IFRS)This sets the foundation for Canadian accounting which is globally recognized.Accounting Standards for Private Enterprises (ASPE)These standards are specific to non-publicly accountable businesses and simplify the complex nature of accounting procedures for small businesses.CPA HandbookThis rule book focuses on maintaining integrity in financial reporting and highlights the ethics, assurance, and accounting standards that must be followed by all.Canadian Auditing Standards (CAS)CAS ensures that the quality of audits is up to the mark and establishes guidelines for auditors.

Common Accounting Errors and Bookkeeping Mistakes Made by Canadian Businesses

So, the truth must be told and before you take it to heart, let’s accept the fact that we all love to do things on our own. However, mistakes in accounting and bookkeeping can prove to be costly for your small business. Here are some accounting and bookkeeping mistakes to avoid if you are operating a small business in Canada… or for that matter anywhere.

Putting personal and professional together

It’s not just about lives but also your finances when it comes to avoid common errors in accounting. You must not mix your personal finances with that of your professional. Maintain separate accounts and books for both so that you can track the specifics whenever needed.

Not taking regular follow-ups

Another common accounting error is not maintaining your books regularly. Your financials won’t come to you, it’s you who have to keep them close in the form of noting them down in your books. Keep a regular check on your expenses to make sure you haven’t missed mentioning any amount and that the financials are organized.

Forgetting to check the books

One of the most common bookkeeping mistakes and still a highly possible error is forgetting to reconcile the books. Letting it go one or two times can turn to 20 or 100 before you know. Before your bank statement starts looking like a puzzle, make sure to reconcile your debits and credits.

Letting Deadlines become scarier

There are some guests we do not want to host. Well, penalties are one of those. Do not let penalties come at your door and knock. Stay prepared with your organized statements for the tax season. Deadlines are scary already but with penalties, they can make the whole process scarier.

Doing it your own way

Time for an eye roll here. Oftentimes, individuals take it into their own hands to do the accounting and bookkeeping without having a proper understanding of Canadian standards and rules. Remember, this is not just any common error in accounting but can prove to be a blunder. It is important to save a buck wherever possible while doing business but becoming ignorant in this process can cost you much more than what you have saved.

So, how to avoid these accounting mistakes in Canada?

How about taking help from an expert? If hiring an in-house accountant seems too much of a hassle, you can always choose to outsource your accounting and bookkeeping responsibilities. This is not at all weird or odd, individuals around the globe have been outsourcing expertise. You can choose from a vast pool of knowledge while ensuring that they do not weigh heavy on your pockets.

Here’s what you can get by outsourcing your Canadian bookkeeping process.

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fulltestbank · 2 years ago

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EBook For For Financial Accounting, 13th Edition C. William Thomas

1. The Financial Statements 2. Transaction Analysis 3. Accrual Accounting and Income 4. Internal Control and Cash 5. Receivables and Revenue 6. Inventory and Cost of Goods Sold 7. Plant Assets, Natural Resources, and Intangibles 8. Current and Contingent Liabilities 9. Long-Term Liabilities 10. Stockholders' Equity 11. The Statement of Cash Flows 12. Financial Statement Analysis APPENDICES A. Apple Inc. Annual Report 2016 B. Typical Charts of Accounts for Different Types of Businesses C. Summary of Generally Accepted Accounting Principles (GAAP) D. Summary of Differences Between US GAAP and IFRS Cross Referenced to Chapter E. Investments F. Time Value of Money Read the full article

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homeoflearning1 · 3 years ago

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Difference between GAAP and IFRS

IFRS Vs Indian Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles (GAAPs) are a set of basic rules and procedures prescribed by the Institute of Chartered Accountants of India (ICAI) which have to be followed while preparing financial statements. These are the accounting principles, concepts, and conventions that ensure that financial reporting is…

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#5 Differences between GAAP and IFRS #Difference between GAAP and IFRS #Difference between GAAP and IFRS class 11 #Difference between GAAP and IFRS PDF #Difference between GAAP and IFRS with examples #Difference between GAAP and IFRSPPT #GAAP Vs IFRS #IFRS Vs GAAP #IFRS Vs Indian Generally Accepted Accounting Principles (GAAP)#what are the Differences between GAAP and IFRS

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businessdevelopmentvietnam · 4 years ago

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Business & Economics

Those companies embody coal gasification, geothermal exploration, and smelting of ores similar to nickel and copper. All PT PMA corporations must acquire the Principal Licence earlier than it could possibly begin operations. Subsequently, the corporate should obtain the Business Licence or different exercise-specific licences before it could commence revenue-generating activities.

Most generally generally known as KITAS by the native, this work visa is familiar to expats who are working and doing enterprise in Indonesia on a full-time foundation with Indonesian residence. KITAS allows its holder to reside in Indonesia for up to 5 years, and has to be renewed annually. With a much clearer and more clear Indonesian visa system, many foreigners are nonetheless confused between a piece visa and enterprise visa in Indonesia. There are several kinds of visa to work and do business development Vietnam based mostly on applicant’s intended use.

As a end result, it's extremely really helpful so that you can understand the type of visa that is appropriate for you based on your wants and necessities. Indonesia's economy contracted for the first time in more than two decades last year as household consumption slumped and companies delayed investment as a result of coronavirus pandemic. Singapore has traditionally been the biggest foreign investor in Indonesia.

It is required for the company to be managed by a Board of Directors, which in flip ought to be supervised by a Board of Commissioners. Many overseas traders coming into the Indonesian market at an early stage often select to arrange an Agency Agreement or a Representative Office. However, as soon as the enterprise starts to develop they may apply for Foreign Direct Investment Company status. This section discusses the incorporation of a foreign funding restricted liability company in Indonesia, often known as Perseroan Terbatas Penanaman Modal Asing .

An overview of the authorized system; international funding, including restrictions, forex laws and incentives; and business autos and their relevant restrictions and liabilities. The Doing Business project offers goal measures of business laws and their enforcement. Looking at domestic small and medium-dimension corporations and measures the regulations applying to them by way of their life cycle.

In this regard, ESG and SBF have led mission trips and launched Singapore companies to regional governments in Indonesia to share our corporations’ competencies and focus on potential areas of collaboration. You must submit a copy of your Employment Pass, Blue IC, Work Permit or "PR". Applicants who've been issued with a new Singapore Work Pass which shows a QR code should provide a printout the expiry standing through accessing the Ministry of Manpower 's SGWorkPass app. This print out must present the current date and confirm that the work move is valid.

Applicants who wish to remain in Indonesia for greater than 30 days, or usually are not arriving and departing Indonesia from any of the Airports and Seaports listed above, should apply for a Tourist Visa. Single-entry and Multiple-entry visa candidates who provide a telex approval from the Indonesian Government, must supply an authorisation letter from the Indonesian workplace.

You must additionally retain your earlier cell gadget with the TraceTogether app up to 14 days after departure from Singapore. This is as a result of the TraceTogether app information saved in your earlier cellular gadget also needs to be retained for that duration, as set out within the RGL Terms and Conditions. Yes, all travellers to Singapore must download and activate the TraceTogether app. They should stay isolated on the accommodation until the test result is confirmed to be adverse.

Once the RPTKA is approved, a piece allow and limited keep permit are issued. This requires cost of an annual Skill and Development Fund fee amounting to USD 1,200 per foreigner. If a RGL returnee subsequently exams constructive for COVID-19 within 14 days after leaving Singapore, he/she might be required to addContent his/her TraceTogether app data through the TraceTogether app, utilizing an addContent code provided by MOH.

If the traveller had used the TraceTogether app on a cellphone that was provided by the host/sponsor, the host/sponsor will be required to upload the TraceTogether app knowledge via the identical course of. Travellers must retain the TraceTogether app with the information on their cell units for 14 consecutive days after departing from Singapore.

The tourism minister said the Indonesian authorities also plans to launch an utility that can not only hint however observe the motion of tourists. Corporate Secretary tracks adjustments in your organization’s construction and top administration, compiles papers and reports to the government about your small business. No, travellers ought to seek help from their Host to make the purchases on their behalf to limit the contact with the area people. Any deviation from controlled itinerary could result in the cancellation of Visit Pass.

Indonesia’s stated coverage is to take care of its national GAAP and steadily converge it with IFRS. As of 1 January 2017, Indonesia has converged to IFRS applicable as of 1 January 2016 . All public listed firms, state owned firms, firms handling public money and corporations having a turnover above IDR 50 billion (USD three.eight million), should have their accounts audited by a registered Indonesian CPA.

For some industrial activities that include tourism and mining, having an Indonesian associate is compulsory with the proportion of equity required various across the completely different fields of exercise. Gain a greater understanding of Indonesia’s business surroundings and structure by reading via this guide.

Thailand has managed to realize zero native instances for over 20 days and is considering allowing inbound journey for enterprise visitors. Income tax is applied to resident companies and people on most sources of increase in financial wealth. Income tax is collected both directly and at source through a wide range of withholding taxes. Individuals who're residents in Indonesia for greater than 183 days in any 12-month period or who intend to settle in Indonesia are taxed on their worldwide revenue and are usually allowed a credit for taxes paid overseas. The government of Indonesia opens international funding opportunities to an extended record of industries, some of which can require local equity partnership or different circumstances.

You must also take observe that Indonesia has just lately handed a new Law No. 6 in 2011 on immigration and international agreement, with extra visa options out there. In this text, we'll provide some insights to allow you to resolve which visa kind might be your best match. Limited Liability Company is the most commonly used type of business relevant in Indonesia.

Passive partner, is the associate who only invest funds to the active companion and never contain within the business of the corporate. Passive associate is responsible to the risks to the extent of the capital invested. Firms , regulated under Commercial Code, Firm is a partnership to carry out enterprise by two or extra folks with joint name.

Alternatively, some venues permit you to complete SafeEntry by presenting your passport as identification. A traveller who doesn't have a TraceTogether-appropriate system must secure in advance the rental of a TraceTogether-suitable gadget prior to arrival. For extra information on the rental of Trace-Together appropriate gadgets, please visit the Changi Recommendation website here.

Please be sure that you retain your cell system’s Bluetooth operate turned on so that the TraceTogether app stays activated throughout your stay in Singapore. If you change your SIM card however are nonetheless using the same cellular device, you'll not have to obtain the TraceTogether app again.

The TraceTogether app supports nationwide efforts to fight COVID-19 by enabling group-pushed contact tracing. It facilitates the contact tracing course of by exchanging Bluetooth signals with close by cellular units running the same app.

In somewhat greater than 20 years, Indonesia has gone from being a minor player within the international coal industry to playing a central role as a key consumer and producer of coal. And at the same time as traders and key export markets are shifting towards alternative energy sources, Indonesia’s legal guidelines are more and more tying future economic growth to the fossil gasoline.

In the realm of infrastructure, there is additionally a growing demand throughout Indonesia in areas similar to transportation, utilities and sanitation. In addition, the rise of know-how opens up alternatives for sensible city options similar to the event of e-authorities platforms, clever transportation and sensible street lighting.

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cpausaonliningtraining · 4 years ago

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CPA EXAM PREPARATION STRATEGY FROM VARSHITHA | SIMANDHAR EDUCATION

This is Varshitha Nadipineni, and I passed my CPA Exam with the latest score release, and this is my attempt at trying to explain what worked for me in.

FAR

1. First things first, do not get intimidated by the course material. Agreed it is bulky and has massive amounts of information to get through. But you definitely went through most of it at some point, while getting your accounting credits.

2. Keep looking out for differences between IFRS and US GAAP, try to note them down in one place to look at a glance and to avoid confusion.

3. Governmental accounting is one such topic, which most of us, being international students, may not be aware of. Never, go to the exam without knowing this topic. Generally, if it gets tested in MCQs, the questions will be pretty straightforward and easy points are up for grabs.

4. Since this is a calculation-intensive subject, try to work out the sums (including MCQs) on excel and make this a habit when you are preparing. Helps you to quickly check your answers before submitting your test-lets, rather than using the calculator again to re-compute everything from scratch. This helped me finish the exam in time and also spend some extra time on the SIMS I was struggling with.

5. Understand the call of the question in SIMS and don’t try to do your calculations by just reading the question. Use the FASB standards for your benefit, if you are confused or maybe just to make sure you nailed your answers.

6. I made a huge mistake by blindly going to the exam (for FAR), without actually sitting through Mock tests and just reviewing the questions, due to some time constraints. I did manage to pass the exam in my first attempt, but I highly recommend that you sit through the exam. Helps you to concentrate better and helps you manage time on your actual exam. Corrected this for my other exams and it helped me a lot.

7. Try to test for FAR as your first paper. It takes the most amount of time to go through. So it definitely helps that you will not have to fit in preparing for this, once the 18-month window starts

BEC

1. Make sure that you make a note of all the formulae and know your concepts well. It’s just not remembering the formulae, make sure you understand the logic. Financial ratios are a recurring topic in BEC, AUD as well as in FAR.

2. Practice written communications. Go through the skill master videos on how to frame these communications. Even if you are completely lost on the subject asked on your exam, try to follow the pattern and give your best understanding of the topic. Just don’t think of it as something you need for the exam. It definitely helps you prepare Memos and communicate with clarity in your professional journey.

REG

1. Make sure you can answer any basic question, no matter how it is asked on the exam. Be it property basis, S-Corp, C-Corp or Partnership basis. This is definitely the most frequently tested topic and has heavy weightage both in MCQ’s and SIMS.

2. If you are facing difficulty in retaining business law, try to take it towards the end of your Regulation preparation It stays fresh and you don’t have to worry about forgetting it while trying to tackle other areas.

3. SIMS allows the usage of authoritative literature. While practising, try using the AL to cross-check your answers. It helps us to efficiently use the AL and also helps you review your answers before you press submit.

AUD

1. Understand the reports clearly. Make your own tables to note down the differences between various reports we issue and make sure you know them inside out.

2. Also, make sure that you are familiar with the general text of every report, enough for you to identify what kind of report any given text relates to.

3. In Professional ethics, you generally get straight forward questions. Do not lose these easy points.

4. Read and re-read each question on the MCQ twice. First, recognize if the question is about Issuer or non-issuer before you try to answer it. It is essential to note the differences in audit procedures and reporting when dealing with issuers and non-issuers.

GENERAL TIPS

1. Just listening to the lectures doesn’t help. Read through the textbook fully and make your notes.

2. Do not get carried away while making your notes. You will end up having another copy of the textbook if you do. Just make crisp summaries which you can go through. Throw in flow charts or diagrams if that makes you remember better, especially for procedural topics.

3. Always note down any new points you come across when solving MCQ’s and SIMS. This nitty-gritty may, at times, help you more than the text in the chapter. Skill master videos as well are great to cement the topics firmly in a precise manner.

4. Even if you have done MCQ’s, revise using the unlimited practice tests. They give you the test feeling as you won’t be able to check your answers immediately. Take these tests in the exam pattern; it will help you to sit through a four-hour exam as well as revise it module wise.

5. At the end of the day, try flipping through the pages you read that day and try to remember the points you studied earlier under each topic. Flashcards are another great source to help with this quick revision session.

6. Take the Mock exams after one round of revision. And review your weak areas. Try to sit for these tests during the timings you booked for your actual exam. It helps you to mentally focus during the time as our study timings may be different from test timings.

7. Have a credibility partner even if it’s just to push you during your downtime or to help you look at your progress from a different angle.

8. Never leave any part of the syllabus. You never know what will get tested in your exam. Be familiar with the terminology.

9. One other thing that helped me was Becker’s Facebook study groups. Keep looking at the questions and if you can just try to answer them. When random topics pop up and are being discussed, it helps me revise. Some of the members are super helpful, and the files section has really good notes in excel, which the authors have published. They can help you if you do not have the time to make your own notes.

Hope all of this is of some help. Feel free to reach me out on LinkedIn if you need any help. I will try my best to help out with whatever I know.

It’s a lot of ups and downs, frustrations and emotions, but it’s all definitely worth it.

All the Best with the prep and Happy Studying!!

REGARDS,

VARSHITHA NADIPINENI

SIMANDHAR EDUCATION

Simandhar Education is India’s No.1 training provider for US CPA, US CMA, Enrolled Agent IFRS and HRCI professional courses.

#cpa uscpa

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wingedbreadfury · 6 years ago

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Test Bank for Financial Accounting in an Economic Context 9th Edition by Pratt

This is completed downloadable of Test Bank for Financial Accounting in an Economic Context 9th Edition by Jamie Pratt

Instant download Test Bank for Financial Accounting in an Economic Context 9th Edition by Jamie Pratt

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Product Description:

Financial Accounting in an Economic Context has become an important part of the curriculum in many MBA programs. Grounded in financial statements, Pratt’s Financial Accountinghelps students see the impact of transactions on overall business decisions. The text enables MBA students to become effective managers and decision-makers by encouraging them to develop a conceptual understanding of the impact that economic events have on a business. The newest edition on this popular text addresses topics that today’s accountants and managers must consider: increased impacts of IFRS, fair value reporting, segment reporting and an earnings management framework. While addressing recent developments and maintaining the perspective of the previous editions, Financial Accounting in an Economic Context 8th Editionoffers new elements designed to sharpen the text’s economic decisions-making foundation. The text highlights the differences between IFRS and GAAP throughout each chapter. Each chapter closes with a “Issue for Discussion” feature, allowing students to apply data found in the financial statements of an international company. New boxed-in features illustrate the effects of accounting transitions on cash flow of statements and new end of chapter items address the cash flow effects of accounting transactions.

Test Bank for Financial Accounting in an Economic Context 9th Edition by Pratt

Table of Content:

Part 1: An Overview of Financial Accounting 1. Financial Accounting and its Economic Context 2. The Financial Statements

Part 2: Measurement, Mechanics, and Use of Financial Statements 3. The Measurement Fundamentals of Financial Accounting 4. The Mechanics of Financial Accounting 5. Using Financial Statement Information Part 3: Assets: A Closer Look 6. The Current Asset Classification, Cash, and Accounts Receivable 7. Merchandise Inventory 8. Investments in Equity Securities 9. Long-Lived Assets Part 4: Liabilities and Stockholder’s Equity: A Closer Look 10. Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies. 11. Long-Term Liabilities: Notes, Bonds, and Leases 12. Stockholders’ Equity Part 5: Income and Flows 13. The Complete Income Statement 14. The Statement of Cash Flows

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Language: English ISBN-10: 1118582551 ISBN-13: 978-1118582558 ISBN-13: 9781118582558

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fullgrade-blog · 7 years ago

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what is the best way to find financial statements of companies showing discontinued... Posted 1 hour ago

what is the best way to find financial statements of companies showing discontinued… Posted 1 hour ago

what is the best way to find financial statements of companies showing discontinued operations? I need to look at 4-5 (some using U.S. GAAP and some using IFRS) and compare and contrast some of the differences between the two standards using those financial statement presentations as examples…HELP!

Mar 24 2018 02:56 AM

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jim1stewart-blog · 7 years ago

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ACC 401 Week 8 Quiz - Strayer

Click on the Link Below to Purchase A+ Graded Course Material

http://budapp.net/ACC-401-Advanced-Accounting-Week-8-Quiz-Strayer-276.htm

Quiz 7 Chapter 11 and 12

Chapter 11

International Financial Reporting Standards

Multiple Choice—Conceptual

1. The goals of the International Accounting Standards Committee include all of the following except

a. To improve international accounting.

b. To formulate a single set of auditing standards to be applied in all countries.

c. To promote global acceptance of its standards.

d. To harmonize accounting practices between countries.

2. Which of the following is true about the FASB after the mandatory adoption of IFRS by US companies?

a. The FASB will serve in an advisory capacity to the IASB.

b. The FASB will remain the designated standard-setter for US companies, but incorporate IFRS into US GAAP.

c. The role of the FASB post-IFRS adoption has not been determined.

d. The FASB will cease to exist.

3. Milestones in the transition plan for mandatory adoption of IFRS by US companies include all of the following except:

a. Improvements in accounting standards.

b. Limited early adoption of IFRS in an effort to enhance comparability for US investors

c. Mandatory use of IFRS by US entities.

d. All of the above are milestones in the transition plan for mandatory adoption of IFRS by US companies.

4. The roles of the IASC Foundation include

a. establishing global standards for financial reporting.

b. coordinating the filing requirements of stock exchange regulatory agencies.

c. financing IASB operations.

d. all of the above are roles of the IASC Foundation.

5. Which of the following statements is true regarding the IASC?

a. The IASC is a public-sector, not-for-profit organization.

b. The IASC is accountable to an international securities regulator.

c. The IASC is a stand-alone, private-sector organization.

d. The IASC funds the operations of the IASB through filing fees paid to national securities regulators.

6. . Concerns of the SEC with regard to the mandatory adoption of IFRS by US entities include all of the following except:

a. the extent to which the standard-setting process addresses emerging issues in a timely manner.

b. the security and stability of IASC funding.

c. the enhancement of IASB independence through a system of voluntary contributions from firms in the accounting profession.

d. the degree to which due process is integrated into the standard-setting process .

7. . Under the staged transition to mandatory adoption of IFRS being considered by the SEC,

a. large, accelerated filers would begin IFRS filings for fiscal years beginning on or after December 31, 2011.

b. non-accelerated filers would begin IFRS filings for fiscal years beginning on or after December 31, 2015.

c. large non-accelerated filers would have until fiscal years beginning on or after December 15, 2017 to adopt IFRS.

d. smaller reporting companies would begin IFRS filings for fiscal years beginning on or after December 15, 2016.

8. In order to complete its first IFRS filing, including three years of audited financial statements, according to the staged transition to mandatory adoption of IFRS considered by the SEC, a large accelerated filer would need to adopt IFRS beginning in fiscal year

a. 2011.

b. 2012.

c. 2013.

d. 2014.

9. Benefits of the FASB Accounting Standards Codification (ASC) include all of the following except

a. increases the independence of the FASB.

b. aids in the convergence of US GAAP with IFRS.

c. reduces time and effort required to research accounting issues.

d. clearly distinguishes between authoritative and non-authoritative guidance.

10. SFAS No.162, the Accounting Standards Codification, is directed to

a. auditors.

b. Boards of Directors.

c. securities regulators.

d. entities.

11. IFRS and US GAAP differ with regard to financial statement presentation in all of the following except

a. IFRS generally requires that assets be listed in order of increasing liquidity while US GAAP requires that assets be listed in order of decreasing liquidity.

b. US GAAP requires expenses to be listed by function while IFRS requires expenses to be listed by nature.

c. IFRS prohibits extraordinary items which are allowed by US GAAP.

d. IFRS requires two years of comparative income statements while under US GAAP, three years of income statements are required.

12. The major difference between IFRS and US GAAP in accounting for inventories is that

a. US GAAP prohibits the use of specific identification.

b. IFRS requires the use of the LIFO cost flow assumption.

c. US GAAP prohibits the use of the LIFO cost flow assumption

d. US GAAP allows the use of the LIFO cost flow assumption.

13. One difference between IFRS and GAAP in valuing inventories is that

a. IFRS, but not GAAP, allows reversals so that inventories written down under lower-of-cost-or-market can be written back up to the original cost .

b. GAAP defines market value as replacement cost where IFRS defines market as the selling price.

c. GAAP strictly adheres to the historical cost concept and does not allow for write-downs of inventory values while IFRS embraces fair value.

d. IFRS, but not GAAP, requires that inventories be valued at the lower of cost or market.

14. In accounting for research and development costs.

a. the general rule under both US GAAP and IFRS is that research and development costs should be expensed as incurred .

b. IFRS generally expenses all research and development costs while US GAAP expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.

c. US GAAP generally expenses all research and development costs while IFRS expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.

d. both US GAAP and IFRS expense research costs as incurred but capitalize development costs once technological and economic feasibility has been demonstrated.

15. Property, plant and equipment are valued at

a. historical cost under both IFRS and US GAAP.

b. historical cost or revalued amounts under both IFRS and US GAAP.

c. revalued amounts under IFRS.

d. historical cost under US GAAP while IFRS allows the assets to be valued at either historical cost or revalued amounts.

16. The amount of a long-lived asset impairment loss is generally determined by comparing

a. the asset’s carrying amount and its fair value under US GAAP.

b. the asset’s carrying amount and its discounted future cash flows less cost to sell under IFRS.

c. the asset’s carrying amount and its undiscounted future cash flows under US GAAP.

d. the asset’s carrying amount and its undiscounted future cash flows less disposal cost under IFRS.

17. In accounting for liabilities, IFRS interprets “probable” as

a. likely.

b. more likely than not.

c. somewhat possible.

d. possible and not remote.

18. Accounting under IFRS and US GAAP is similar for all of the following topics except

a. changes in estimates.

b. related party transactions.

c. research and development costs.

d. changes in methods.

Use the following information to answer the next three questions.

On January 1, 2010, AirFrance purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows:

Component

Cost

Useful life

Frame

€7,200,000

24 years

Engine

4,800,000

20 years

Other

2,400,000

10 years

AirFrance uses the straight-line method of depreciation. The asset is assumed to have no salvage value.

19. Under IFRS, the entry to record the acquisition of the airplane would include

a. a debit to Asset/ Airplane of €14,400,000.

b. a debit to Asset/ Airplane frame of €14,400,000.

c. a debit to Asset/ Airplane engine of €4,800,000.

d. cannot be determined from the information given.

20. Under US GAAP, the entry to record depreciation expense on the asset at December 31, 2011 will include

a. a credit to accumulated depreciation of €1,200,000.

b. a debit to depreciation expense of €1,440,000

c. a debit to depreciation expense of €800,000.

d. a credit to accumulated depreciation of €600,000.

21. Under IFRS, the entry to record depreciation expense on the asset at December 31, 2011 will include a credit to accumulated depreciation of

a. €1,440,000.

b. €1,200,000

c. €800,000.

d. €600,000.

22. Accounting terminology that differs between IFRS and US GAAP include all of the following except

a. the use by IFRS of “turnover” for revenue.

b. the use by IFRS of “share premium” for additional paid-in-capital.

c. the use by IFRS of “other capital reserves” for retained earnings.

d. the use by IFRS of “issued capital” for common stock.

23. New terminology introduced under the joint IFRS- US GAAP Customer Consideration (Allocation) Model includes all of the following except

a. revenue recognition voids.

b. contract rights.

c. net contract asset/ liability.

d. performance obligations.

24. Under IFRS, the criteria to determine whether a lease should be capitalized include

a. the present value of the minimum lease payments is 90% or more of the fair value of the asset at the inception of the lease.

b. the term of the lease is 75% or more of the economic life of the asset.

c. the term of the lease is equal to substantially all of the economic life of the asset.

d. the present value of the minimum lease payments is equal to substantially all of the fair value of the asset at the inception of the lease.

Use the following information to answer the next three questions.

Bellingham Electronics Inc. offers one model of laptop computer for £1000 and a two-year warranty for £250. The retailer, as part of a Boxing Day promotion, offers a limited-time offer for the laptop, including delivery and the two-year warranty for £1,180. The cost of the computer to Bellingham is £700. Any warranty repairs are assumed to be done ratably over time. Bellingham accounts for transactions using the customer consideration model.

In the first twelve months following the sale, Bellingham incurred £980 of costs servicing the computers under warranty.

25. Bellingham sells ten laptops to Bertram Inc. under the limited-time promotion. Upon delivery of the laptops to Bertram, Bellingham will recognize revenue of

a. £9,300.

b. £9,440

c. £10,000.

d. £11,800.

26. In the first twelve months following the sale, Bellingham would reduce the Contract liability – warranty account by

a. £784.

b. £980

c. £1,180.

d. £1,380.

27. In the first twelve months, Bellingham would record warranty expense of

a. £784.

b. £980

c. £1,180.

d. £1,380.

28. Significant differences between IFRS and Chinese GAAP include all of the following except

a. Chinese GAAP allows the use of LIFO while IFRS prohibits it.

b. Chinese GAAP has different related party disclosure requirements.

c. Chinese GAAP follows the cost principle while IFRS allows for revaluations and recoveries of impairment losses.

d. Chinese GAAP uses the equity method of accounting for jointly controlled entities while IFRS also allows proportionate consolidation.

29. All of the following are options for non-US companies who wish to list securities on a US exchange except

a. The company can use either IFRS or their local GAAP.

b. If a company uses their local GAAP they must reconcile net income and shareholders’ equity or fully disclose all financial information required of US companies.

c. If a company uses their local GAAP they must reconcile net income and shareholders’ equity and fully disclose all financial information required of US companies

d. The company must file a form 20-F with the SEC.

30. All of the following are true regarding American Depository Receipts (ADRs) except

a. Most ADRs are unsponsored, meaning that the DR bank creates a DR program without a formal agreement with the issuing non-US company.

b. An ADR is a derivative instrument traded in the US that usually represents a fixed number of publicly traded shares of a non-US company.

c. ADRs are denominated in US dollars.

d. A Level 1 sponsored ADR is the easiest way for a non-US company to access US markets.

Exercise from the Textbook

Exercise 11-1

Component Depreciation SMC Company purchases a building for $100,000. Included in this cost are $12,000 for electrical systems and $15,000 for the roof. The building is expected to have a 40 year useful life, but the electrical system will last for 20 years and the roof will last 15 years.

Required: Part A: Assuming that straight-line depreciation is used, compute depreciation expense assuming that U.S. GAAP is used.

Part B: Assuming that straight line depreciation is used, compute depreciation expense for year one assuming IFRS is used (assume component depreciation).

Problem from the Textbook

Problem 11-4

Prepare a statement of financial position using the proposed new format as described in the chapter.

Questions from the Textbook

1. As mentioned in Chapter 1, the project on business combinations was the first of several joint projects undertaken by the FASB and the IASB in their move to converge standards globally. Nonetheless, complete convergence has not yet occurred, and there are those who believe it to be a poor idea. Discuss the reasons for and against global convergence.

2. In recent months, virtually every topic that has come to the attention of the standard setters has been undertaken as a joint effort of the FASB and the IASB rather than as an individual effort by one of the two boards. List and discuss some of the joint projects that fall into this category.

3. What is the rationale for the harmonization of international accounting standards?

4. Why is the SEC, once so reluctant to accept IAS, now very willing to allow firms using IFRS to is-sue securities in the U.S. stock market without reconciling to U.S. GAAP?

5. Discuss the types of ADRs that non-U.S. companies might use to access the U.S. markets.

6. Describe the attitude of the FASB toward the IASB (International Accounting Standards Board).

7. How does the FASB view its role in the development of an international accounting system? Currently, two members of the IASB board were affiliated with the FASB. Comment on what effect this might have on the likelihood that the U.S. standard setters will accept the new IASB statements, if any?

8. List some of the major differences in accounting between IFRS and U.S. GAAP.

Business Ethics Question from the Textbook

A vice president of marketing for your company has been charged with embezzling nearly $100,000 from the company. The vice president allegedly submitted fraudulent vendor invoices in order to receive payments. As the vice president of marketing for the company, the vice president is authorized to approve the payment of invoices submitted by third-party vendors who did work for the company. After the activities were uncovered, the company responded by stating: “All employees are accountable to our ethics guidelines and procedures. We do not tolerate violations of our ethics policy and will consistently enforce these policies and procedures.”

1. How would you evaluate the internal controls of the company?

2. Do you think there are companies that develop comprehensive ethics and compliance pro-grams for mid- and lower-level employees and ignore upper-level executives and managers?

3. Is it an ethical issue if companies are not forth-coming concerning fraudulent activities of top executives in an effort to minimize negative publicity?

Chapter 12

Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk

Multiple Choice

1. A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:

a. hedge of a net investment in a foreign entity.

b. hedge of an exposed asset or liability position.

c. hedge of an identifiable foreign currency commitment.

d. contract acquired to speculate in the movement of exchange rates.

2. The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:

a. included as a separate component of stockholders’ equity.

b. amortized over the life of the forward contract.

c. deferred and included in the measurement of related foreign currency transaction.

d. none of these.

3. An indirect exchange rate quotation is one in which the exchange rate is quoted:

a. in terms of how many units of the domestic currency can be converted into one unit of foreign currency.

b. for the immediate delivery of currencies exchanged.

c. in terms of how many units of the foreign currency can be converted into one unit of domestic currency.

d. for the future delivery of currencies exchanged.

4. A transaction gain is recorded when there is an:

a. importing transaction and the exchange rate increases.

b. exporting transaction and the exchange rate increases.

c. exporting transaction and the exchange rate decreases.

d. none of these.

5. During 2011, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2012. For the years 2011 and 2012, transaction gains or losses should be recognized as:

2011 2012

a. gain gain

b. gain loss

c. loss loss

d. loss gain

6. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:

a. hedge a net investment in a foreign entity.

b. hedge an identifiable foreign currency commitment.

c. speculate in foreign currency.

d. none of these.

7. On November 1, 2011, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of

Date Foreign Currency

November 1 $0.73

December 31 0.71

March 1 0.74

The entry to record the forward contract is

a. FCU Receivable 350,000

Premium on Forward Contract 15,000

Dollars Payable 365,000

b. Dollars Receivable 365,000

Discount on Forward Contract 15,000

FCU Payable 350,000

c. FCU Receivable 365,000

Discount on Forward Contract 15,000

Dollars Payable 350,000

d. Dollars Receivable 350,000

Discount on Forward Contract 15,000

FCU Payable 365,000

8. On November 1, 2011, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of

Date Foreign Currency

November 1 $0.73

December 31 0.71

March 1 0.74

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

Receivable Balance Gain/Loss Recorded

a. $319,500 $9,000 gain

b. $319,500 $9,000 loss

c. $333,000 $4,500 gain

d. $333,000 $18,000 gain

9. A transaction gain or loss at the settlement date is:

a. a change in the exchange rate quoted by a foreign exchange trader.

b. synonymous with the translation of foreign currency financial statements into dollars.

c. the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received.

d. the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date.

10. From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:

a. measured in a foreign currency.

b. denominated in a foreign currency.

c. measured in U.S. currency.

d. denominated in U.S. currency.

11. The exchange rate quoted for future delivery of foreign currency is the definition of a(n):

a. direct exchange rate.

b. indirect exchange rate.

c. spot rate.

d. forward exchange rate.

12. A transaction loss would result from:

a. an increase in the exchange rate applicable to an asset denominated in a foreign currency.

b. a decrease in the exchange rate applicable to a liability denominated in a foreign currency.

c. the import of merchandise when the transaction is denominated in a foreign currency.

d. a decrease in the exchange rate applicable to an asset denominated in a foreign currency.

13. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:

a. extends beyond one year or the current operating cycle.

b. is a hedge of an identifiable foreign currency commitment.

c. is a hedge of an exposed net liability position.

d. was acquired to speculate in foreign currency.

14. A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:

a. included as a separate item in the stockholders’ equity section of the balance sheet.

b. recognized currently in the determination of net income.

c. deferred and included in the measurement of the related foreign currency transaction.

d. none of these.

15. Craiger, Inc. a U.S. corporation, bought machine parts from Reinsch Company of Germany on March 1, 2011, for 70,000 marks, when the spot rate for marks was $0.5395. Craiger’s year-end was March 31, 2011, when the spot rate for marks was $0.5445. Craiger bought 70,000 marks and paid the invoice on April 20, 2011, when the spot rate was $0.5495. How much should be shown in Craiger’s income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2011 and 2012?

2011 2012

a. $0 $0

b. $0 $350 loss

c. $350 loss $0

d. $350 loss $350 loss

16. A forward exchange contract is transacted at a discount if the current forward rate is:

a. less than the expected spot rate.

b. more than the expected spot rate.

c. less than the current spot rate.

d. more than the current spot rate.

17. Stuart Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after delivery. Between the delivery date and the time of payment, the exchange rate changed in Stuart’s favor. The resulting gain should be reported in the financial statements as a(n):

a. component of othercomprehensiveincome.

b. component of incomefromcontinuingoperations.

c. extraordinary income.

d. deferred income.

18. Jackson Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2011. Payment in British pounds is due on Sept. 7, 2011. The exchange rates to purchase one pound is as follows:

July 7 August 31, (year end) September 7

Spot-rate 2.08 2.05 2.04

30-day rate 2.07 2.03 --

60-day rate 2.06 1.99 --

On its August 31, 2011 income statement, what amount should Jackson Paving report as a foreign exchange transaction gain:

a. $14,000.

b. $7,000.

c. $10,500.

d. $0.

19. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate

Spot rate For Dec. 1, 2011

September 1, 2011 1.46 1.47

September 30, 2011 (year-end) 1.50 1.48

The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1. On September 30, what amount of foreign currency transaction loss should Swash Plating report in income?

a. $0.

b. $2,500.

c. $5,000.

d. $10,000.

20. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate

Spot rate For Dec. 1, 2011

September 1, 2011 1.46 1.47

September 30, 2011 (year-end) 1.50 1.48

The second forward contract was strictly for speculation. On September 30, 2011, what amount of foreign currency transaction gain should Swash Plating report in income?

a. $0.

b. $2,500.

c. $5,000.

d. $10,000.

21. On November 1, 2011, Prism Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Prism also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency. Prism has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of

Date Foreign Currency

November 1 $0.93

December 31 0.91

March 1 0.94

The entry to record the forward contract is

a. FCU Receivable 225,000

Premium on Forward Contract 7,500

Dollars Payable 232,500

b. Dollars Receivable 232,500

Discount on Forward Contract 7,500

FCU Payable 225,000

c. FCU Receivable 232,500

Discount on Forward Contract 7,500

Dollars Payable 225,000

d. Dollars Receivable 225,000

Discount on Forward Contract 7,500

FCU Payable 232,500

22. On November 1, 2011, National Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1, National also entered into a forward contract to hedge the exposed asset. The forward rate is $0.80 per unit of foreign currency. National has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of

Date Foreign Currency

November 1 $0.83

December 31 0.81

March 1 0.84

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

Receivable Balance Gain/Loss Recorded

a. $170,000 $4,000 gain

b. $162,000 $4,000 loss

c. $168,000 $2,000 gain

d. $164,000 $2,000 loss

23. Caldron Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2011. Payment in British pounds is due on Sept. 3, 2011. The exchange rates to purchase one pound is as follows:

July 3 August 31, (year end) September 3

Spot-rate 1.58 1.55 1.54

30-day rate 1.57 1.53 --

60-day rate 1.56 1.49 --

On its August 31, 2011, income statement, what amount should Caldron report as a foreign exchange transaction gain:

a. $18,750.

b. $3,750.

c. $11,250.

d. $0.

24. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate

Spot rate For Aug. 1, 2011

April 1, 2011 1.16 1.17

April 30, 2011 (year-end) 1.20 1.18

The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1. On April 30, what amount of foreign currency transaction loss should Trent report in income?

a. $0.

b. $3,000.

c. $9,000.

d. $12,000.

25. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate

Spot rate For Aug. 1, 2011

April 1, 2011 1.16 1.17

April 30, 2011 (year-end) 1.20 1.18

The second forward contract was strictly for speculation. On April 30, 2011, what amount of foreign currency transaction gain should Trent report in income.

a. $0.

b. $3,000.

c. $9,000.

d. $12,000.

Problems

12-1 On November 1, 2010, Dorsey Company sold inventory to a company in England. The sale was for 600,000 British pounds and payment will be received on February 1, 2011. On November 1, Dorsey entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows:

November 1 $1.61

December 31 1.67

February 1 1.62

Dorsey has a December 31 fiscal year-end.

Required:

Compute each of the following:

1. The dollars to be received on February 1, 2011, from selling the 600,000 pounds to the exchange dealer.

2. The dollars that would have been received from the account receivable if Dorsey had not hedged the sale contract with the forward contract.

3. The discount or premium on the forward contract.

4. The transaction gain or loss on the exposed asset related to the sale in 2010 and 2011.

5. The transaction gain or loss on the forward contract in 2010 and 2011.

6. The amount of the discount or premium on the forward contract amortized in 2010 and 2011.

12-2 On December 1, 2010, Derrick Corporation agreed to purchase a machine to be manufactured by a company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in the exchange rate, Derrick entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real. The following exchange rates were quoted:

Forward Rate

Date Spot Rate (Delivery on 4/1)

December 1 0.390 0.375

December 31 0.370 0.373

April 1 0.385 --

Required:

Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the transactions described above.

12-3 Colony Corp., a U.S. corporation, entered into a contract on November 1, 2010, to sell two machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the amount collected on March 1, 2011.

In order to hedge its commitment, Colony entered into a forward contract for 95,000 FCU delivery on March 1, 2011. The forward contract met all conditions for hedging an identifiable foreign currency commitment.

Selected exchange rates for FCU at various dates were as follows:

November 1, 2010 – Spot rate $1.3076

Forward rate for delivery on March 1, 2011 1.2980

December 31, 2010 – Spot rate 1.3060

Forward rate for delivery on March 1, 2011 1.3150

March 1, 2011 – Spot rate 1.2972

Required:

Prepare all journal entries relative to the above on the books of Colony Corp. on the following dates:

1. November 1, 2010.

2. Year-end adjustments on December 31, 2010.

3. March 1, 2011. (Include all adjustments related to the forward contract.)

12-4 On October 1, 2010, Nance Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU) due on January 31, 2011. Simultaneously, Nance entered into a forward contract for 750,000 units of FC for delivery on January 31, 2011, at the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2011. Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76, respectively. Nance amortizes all premiums and discounts on forward contracts and closes its books on December 31.

Required:

A. Prepare all journal entries relative to the above to be made by Nance on October 1, 2010.

B. Prepare all journal entries relative to the above to be made by Nance on December 31, 2010.

C. Compute the transaction gain or loss on the forward contract that would be recorded in 2011. Indicate clearly whether the amount is a gain or loss.

12-5 On October 1, 2010, Kline Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2011. All revenue realization criteria were satisfied and accordingly the sale was recorded by Kline Company on October 1. Simultaneously, Kline entered into a forward contract to sell 3,000,000 FCU on January 31, 2011 for $1,200,000. Payment was received from the foreign customer on January 31, 2011. Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively. Kline amortizes all premiums and discounts on forward contracts and closes its books on December 31.

Required:

Prepare all journal entries relative to the above to be made by Kline during 2010 and 2011.

12-6 On July 15, Worth, Inc. purchased 88,500,000 yen worth of parts from a Tokyo company paying 20% down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid balance. The exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was $1.00 = 114 Japanese yen.

Required:

Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S. dollars.

12-7 On November 1, 2010, Bisk Corporation, a calendar-year U.S. Corporation, invested in a speculative contract to purchase 700,000 euros on January 31, 2011, from a German brokerage firm. Bisk agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000 euros to Bisk on January 31, 2011. The spot rates for euros are:

November 1, 2010 1 euro = 1.45

December 31, 2010 1 euro = 1.43

January 31, 2011 1 euro = 1.44

Required:

Prepare the journal entries that Bisk would record on November 1, December 31, and January 31.

12-8 Consider the following information:

1. On November 1, 2011, a U.S. firm contracts to sell equipment (with an asking price of 500,000 pesos) in Mexico. The firm will take delivery and will pay for the equipment on February 1, 2012.

2. On November 1, 2011, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1, 2012.

3. Spot rates and the forward rates for February 1, 2012, settlement were as follows (dollars per peso):

Forward Rate

Spot Rate for 2/1/12

November 1, 2011 $0.0954 $0.0948

Balance sheet date (12/31/11) 0.0949 0.0944

February 1, 2012 0.0947

4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was $20,000.

Required:

Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward contract, the firm commitment, and the transaction to sell the equipment.

Short Answer

1. Accounting for a foreign currency transaction involves the terms measured and denominated. Describe a foreign currency transaction and distinguish between the terms measured and denominated.

2. There are a number of business situations in which a firm may acquire a forward exchange contract. Identify three common situations in which a forward exchange contract can be used as a hedge.

Short Answer Questions from the Textbook

1. Define currency exchange rates and distinguish between “direct” and “indirect” quotations.

2. Explain why a firm is exposed to an added risk when it enters into a transaction that is to be settled in a foreign currency.

3. Name the three stages of concern to the accountant in accounting for import–export transactions. Briefly explain the accounting for each stage.

4. How should a transaction gain or loss be reported that is related to an unsettled receivable recorded when the firm’s inventory was exported?

5. A U.S. firm carried a receivable for 100,000 yen. Assuming that the direct exchange rate declined from $.009 at the date of the transaction to $.006at the balance sheet date, compute the transaction gain or loss. What balance would be reported for the receivable in the firm’s balance sheet?

6. Explain what is meant by the “two-transaction method” in recording exporting or importing trans-actions. What support is given for this method?

7. Describe a forward exchange contract.

8. Explain the effects on income from hedging a foreign currency exposed net asset position or net liability position.

9. What criteria must be satisfied for a foreign currency transaction to be considered a hedge of an identifiable foreign currency commitment?

10. The FASB classifies forward contracts as those acquired for the purpose of hedging and those acquired for the purpose of speculation. What main differences are there in accounting for these two classifications?

11. How are foreign currency exchange gains and losses from hedging a forecasted transaction handled?

12. What is a put option, and how might it be used to hedge a forecasted transaction?

13. Define a derivative instrument, and describe the keystones identified by the FASB for the ac-counting for such instruments.

14. Differentiate between forward-based derivatives and option-based derivatives.

15. List some of the criteria laid out by the FASB that are required for a gain or loss on forecasted trans-actions (a cash flow hedge) to be excluded from the income statement. If these criteria are satisfied, where are the gains or losses reported, and when (if ever) are they shown in the income statement? What is the rationale for this treatment?

Business Ethics Question from Textbook

Executive stock options (ESOs) are used to provide incentives for executives to improve company performance. ESOs are usually granted “at-the-money,” meaning that the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Clearly, executives would prefer to be granted options when the stock price (and thus the exercise price) is at its lowest. Backdating options is the practice of choosing a past date when the market price was particularly low. Backdating has not, in the past, been illegal if no documents are forged, if communicated to the shareholders, and if properly reflected in earnings and in taxes.

1. Since backdating gives the executive an “instant” profit, why wouldn’t the firm simply grant an option with the exercise price lower than the cur-rent market price?

2. Suppose the executive was not involved in back-dating the ESOs. Does the executive face any ethical issues?

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Chapter 1

FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control a company’s operations.

2. Financial statements are the principal means through which a company communicates its financial information to those outside it.

3. Users of financial reports provided by a company use that information to make their capital allocation decisions.

4. An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit.

5. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, but not to users who are not investors.

6. Investors are interested in financial reporting because it provides information that is useful for making decisions (decision-usefulness approach).

7. Users of financial accounting statements have both coinciding and conflicting needs for information of various types.

8. The Securities and Exchange Commission appointed the Committee on Accounting Procedure.

9. The passage of a new FASB Standards Statement requires the support of five of the seven board members.

10. Financial Accounting Concepts set forth fundamental objectives and concepts that are used in developing future standards of financial accounting and reporting.

11. The AICPA created the Accounting Principles Board in 1959.

12. The FASB’s Codification integrates existing GAAP, and creates new GAAP.

13. The AICPA’s Code of Professional Conduct requires that members prepare financial statements in accordance with generally accepted accounting principles.

14. GAAP is a product of careful logic or empirical findings and are not influenced by political action.

15. The Public Company Accounting Oversight Board has oversight and enforcement authority and establishes auditing and independence standards and rules.

16. The expectations gap is caused by what the public thinks accountants should do and what accountants think they can do.

17. Financial reports in the early 21st century did not provide any information about a company’s soft assets (intangibles).

18. Accounting standards are now less likely to require the recording or disclosure of fair value information.

19. U.S. companies that list overseas are required to use International Financial Reporting Standards, issued by the International Accounting Standards Board.

20. Ethical issues in financial accounting are governed by the AICPA.

True-False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. General-purpose financial statements are the product of

a. financial accounting.

b. managerial accounting.

c. both financial and managerial accounting.

d. neither financial nor managerial accounting.

22. Users of financial reports include all of the following except

a. creditors.

b. government agencies.

c. unions.

d. All of these are users.

23. The financial statements most frequently provided include all of the following except the

a. balance sheet.

b. income statement.

c. statement of cash flows.

d. statement of retained earnings.

24. The information provided by financial reporting pertains to

a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers.

c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.

d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.

25. All the following are differences between financial and managerial accounting in how accounting information is used except to

a. plan and control company's operations.

b. decide whether to invest in the company.

c. evaluate borrowing capacity to determine the extent of a loan to grant.

d. All the above.

26. Which of the following represents a form of communication through financial reporting but not through financial statements?

a. Balance sheet.

b. President's letter.

c. Income statement.

d. Notes to financial statements.

P27. The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called

a. financial accounting.

b. managerial accounting.

c. tax accounting.

d. auditing.

28. How does accounting help the capital allocation process attract investment capital?

a. Provides timely, relevant information.

b. Encourages innovation.

c. Promotes productivity.

d. a and b above.

29. Whether a business is successful and thrives is determined by

a. markets.

b. free enterprise.

c. competition.

d. all of these.

30. An effective capital allocation process

a. promotes productivity.

b. encourages innovation.

c. provides an efficient market for buying and selling securities.

d. all of these.

31. Financial statements in the early 2000s provide information related to

a. nonfinancial measurements.

b. forward-looking data.

c. hard assets (inventory and plant assets).

d. none of these.

32. Which of the following is not a major challenge facing the accounting profession?

a. Nonfinancial measurements.

b. Timeliness.

c. Accounting for hard assets.

d. Forward-looking information.

33. What is the objective of financial reporting?

a. Provide information that is useful to management in making decisions.

b. Provide information that clearly portray nonfinancial transactions.

c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

d. Provide information that excludes claims to the resources.

34. Primary users for general-purpose financial statements include

a. creditors.

b. employees.

c. investors.

d. both creditors and investors.

35. When making decisions, investors are interested in assessing

a. the company’s ability to generate net cash inflows.

b. management’s ability to protect and enhance the capital providers’ investments.

c. Both a and b.

d. the company’s ability to generate net income.

36. Accrual accounting is used because

a. cash flows are considered less important.

b. it provides a better indication of ability to generate cash flows than the cash basis.

c. it recognizes revenues when cash is received and expenses when cash is paid.

d. none of the above.

37. Which perspective is adopted as part of the objective of general-purpose financial reporting?

a. Decision-usefulness perspective.

b. Proprietary perspective.

c. Entity perspective.

d. Financial reporting perspective.

38. Accounting principles are "generally accepted" only when

a. an authoritative accounting rule-making body has established it in an official pro-nouncement.

b. it has been accepted as appropriate because of its universal application.

c. both a and b.

d. neither a nor b.

39. A common set of accounting standards and procedures are called

a. financial accounting standards.

b. generally accepted accounting principles.

c. objectives of financial reporting.

d. statements of financial accounting concepts.

40. Which of the following is a general limitation of "general purpose financial statements"?

a. General purpose financial statements may not be the most informative for a specific enterprise.

b. General purpose financial statements are comparable.

c. General purpose financial statements are assumed to present fairly the company's financial operations.

d. None of the above.

41. What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?

a. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.

b. The SEC coordinates with the AICPA in establishing accounting standards.

c. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.

d. The SEC reviews financial statements for compliance.

42. What is due process in the context of standard setting at the FASB?

a. FASB operates in full view of the public.

b. Public hearings are held on proposed accounting standards.

c. Interested parties can make their views known.

d. All of the above.

43. Which of the following organizations has been responsible for setting U.S. accounting standards?

a. Accounting Principles Board.

b. Committee on Accounting Procedure.

c. Financial Accounting Standards Board.

d. All of the above.

44. Why did the AICPA create the Accounting Principles Board?

a. The SEC disbanded the previous standard setting organization.

b. The previous standard setting organization did not provide a structured set of accounting principles.

c. No such organization existed in the past.

d. None of the above.

45. Which organization was responsible for issuing Accounting Research Bulletins?

a. Accounting Principles Board.

b. Committee on Accounting Procedure.

c. The SEC.

d. AICPA.

46. A characteristic of generally accepted accounting principles include the following:

a. common set of standards and principles.

b. standards and principles are based federal statutes.

c. acceptance requires an affirmative vote of Certified Public Accountants.

d. practices that become accepted for at least a year by all industry members.

47. Characteristics of generally accepted accounting principles include all of the following except

a. authoritative accounting the rule-making body established a principle of reporting.

b. standards are considered useful by the profession.

c. each principle is approved by the SEC.

d. practice has become universally accepted over time.

48. Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight?

a. Smaller membership.

b. FASB board members are well-paid.

c. FASB board members must be CPAs.

d. Due process.

49. The passage of a new FASB Standards Statement requires the support of

a. all Board members.

b. three Board members.

c. four Board members.

d. five Board members.

50. What is the purpose of Emerging Issues Task Force?

a. Provide interpretation of existing standards.

b. Provide a consensus on how to account for new and unusual financial transactions.

c. Provide interpretive guidance.

d. Provide timely guidance on select issues.

51. Which organization is responsible for issuing Emerging Issues Task Force Statements?

a. FASB

b. CAP

c. APB

d. SEC

52. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as

a. consistently primary.

b. consistently secondary.

c. sometimes primary and sometimes secondary.

d. non-existent.

53. The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the

a. FASB.

b. AICPA.

c. SEC.

d. APB.

54. Companies that are listed on a stock exchange are required to submit their financial statements to the

a. AICPA.

b. APB

c. FASB.

d. SEC.

55. The Financial Accounting Standards Board (FASB) was proposed by the

a. American Institute of Certified Public Accountants.

b. Accounting Principles Board.

c. Study Group on the Objectives of Financial Statements.

d. Special Study Group on establishment of Accounting Principles (Wheat Committee).

56. The Financial Accounting Standards Board

a. has issued a series of pronouncements entitled Statements on Auditing Standards.

b. was the forerunner of the current Accounting Principles Board.

c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards.

d. is appointed by the Financial Accounting Foundation.

57. The Financial Accounting Foundation

a. oversees the operations of the FASB.

b. oversees the operations of the AICPA.

c. provides information to interested parties on financial reporting issues.

d. works with the Financial Accounting Standards Advisory Council to provide informa-tion to interested parties on financial reporting issues.

58. The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is

a. the FASB issues exposure drafts of proposed standards.

b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.

c. all members of the FASB possess extensive experience in financial reporting.

d. a majority of the members of the FASB are CPAs drawn from public practice.

59. The Financial Accounting Standards Board employs a "due process" system which

a. is an efficient system for collecting dues from members.

b. enables interested parties to express their views on issues under consideration.

c. identifies the accounting issues that are the most important.

d. requires that all accountants must receive a copy of financial standards.

60. Which of the following is not a publication of the FASB?

a. Statements of Financial Accounting Concepts

b. Accounting Research Bulletins

c. Interpretations

d. Technical Bulletins

61. FASB Technical Bulletins

a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's Code of Professional Ethics.

b. are issued monthly by the FASB to deal with current topics.

c. are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with any broad fundamental accounting principle.

d. were recently discontinued by the FASB because they dealt with specialized topics having little impact on financial reporting in general.

62. The purpose of the Emerging Issues Task Force is to

a. develop a conceptual framework as a frame of reference for the solution of future problems.

b. lobby the FASB on issues that affect a particular industry.

c. do research on issues that relate to long-term accounting problems.

d. issue statements which reflect a consensus on how to account for new and unusual financial transactions that need to be resolved quickly.

63. The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except

a. developing and enforcing professional ethics.

b. developing auditing standards.

c. providing professional education programs.

d. all of the above.

P64. Which of the following pronouncements were issued by the Accounting Principles Board?

a. Accounting Research Bulletins

b. Opinions

c. Statements of Position

d. Statements of Financial Accounting Concepts

65. Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States?

a. AICPA

b. FASB

c. IASB

d. SEC

66. An organization that has not published accounting standards is the

a. American Institute of Certified Public Accountants.

b. Securities and Exchange Commission.

c. Financial Accounting Standards Board.

d. All of these have published accounting standards.

67. The purpose of Statements of Financial Accounting Concepts is to

a. establish GAAP.

b. modify or extend the existing FASB Standards Statement.

c. form a conceptual framework for solving existing and emerging problems.

d. determine the need for FASB involvement in an emerging issue.

P68. Members of the Financial Accounting Standards Board are

a. employed by the American Institute of Certified Public Accountants (AICPA).

b. part-time employees.

c. required to hold a CPA certificate.

d. independent of any other organization.

P69. The following are part of the "due process" system used by the FASB in the evolution of a typical FASB Statement of Financial Accounting Standards:

1. Exposure Draft

2. Statement of Financial Accounting Standards

3. Preliminary Views

The chronological order in which these items are released is as follows:

a. 1, 2, 3.

b. 1, 3, 2.

c. 2, 3, 1.

d. 3, 1, 2.

70. Generally accepted accounting principles

a. include detailed practices and procedures as well as broad guidelines of general application.

b. are influenced by pronouncements of the SEC and IRS.

c. change over time as the nature of the business environment changes.

d. all of these.

71. The most significant current source of generally accepted accounting principles is the

a. AICPA.

b. SEC.

c. APB.

d. FASB.

72. Which of the following is not a part of generally accepted accounting principles?

a. FASB Interpretations

b. CAP Accounting Research Bulletins

c. APB Opinions

d. All of these are part of generally accepted accounting principles.

73. Which of the following publications does not qualify as a statement of generally accepted accounting principles?

a. Statements of financial standards issued by the FASB

b. Accounting interpretations issued by the FASB

c. APB Opinions

d. Accounting research studies issued by the AICPA

74. Rule 203 of the Code of Professional Conduct addresses:

a. ethical requirements.

b. financial statements should be based on generally accepted accounting principles.

c. advertising to obtained clients.

d. auditing financial statements.

75. What is the purpose of a FASB Staff Position?

a. Provide interpretation of existing standards.

b. Provide a consensus on how to account for new and unusual financial transactions.

c. Provide interpretive guidance.

d. Provide timely guidance on select issues.

76. Which of the following is not considered a component of generally accepted accounting principles?

a. FASB Implementation Guides.

b. Widely recognized industry practices.

c. Articles published in CPA journals.

d. AICPA Accounting Interpretations.

77. Financial accounting standard-setting in the United States

a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic.

b. is based solely on research and empirical findings.

c. is a legalistic process based on rules promulgated by governmental agencies.

d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.

78. The purpose of the International Accounting Standards Board is to

a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations.

b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured.

c. promote uniform accounting standards among countries of the world.

d. arbitrate accounting disputes between auditors and international companies.

79. What is not a source of pressure that may influence the accounting standard setting process?

a. Congress.

b. Lobbyist.

c. CPA firms.

d. None of the above.

80. What is a possible danger if politics plays too big a role in accounting standard setting?

a. Accounting standards that are not truly generally accepted.

b. Individuals may influence the standards.

c. User groups become active.

d. The FASB delegates its authority to elected officials.

81. What is "expectation gap"?

a. The difference between what the public thinks the accountant is not doing and what the accountant knows they don't do.

b. The difference between what the public thinks the accountant is doing and what Congress says the accountant is doing.

c. The difference between what the public thinks the accountant is doing and what the accountant thinks they can do.

d. The difference between what the accountant is doing and what the Courts say the accountant should be doing.

82. What is not a reason that accounting standards may differ across countries?

a. Governments.

b. Language.

c. Culture.

d. Past Practice.

83. What would be an advantage of having all countries adopt and follow the same accounting standards?

a. Consistency.

b. Comparability.

c. Lower preparation costs.

d. b and c

84. Which of the following is an ethical concern of accountants?

a. Earnings manipulation.

b. Conservative accounting.

c. Industry practices.

d. None of the above.

Multiple Choice Answers—Conceptual

IFRS QUESTIONS

True/False:

1. IFRS includes both International Financial Reporting Standards and International Accounting Standards.

2. International Financial Reporting Standards preceded International Accounting Standards

3. The standard-setting structure used by the International Accounting Standards Board is very similar to that used by the Financial Accounting Standards Board.

4. The rules-based standards of IFRS are more detailed than the simpler, principles-based standards of U.S. GAAP.

5. The International Accounting Standards Board issues International Financial Reporting Standards.

6. International Accounting Standards are no longer considered part of IFRS because they have been replaced by International Financial Reporting Standards.

Answers to True/False questions:

Multiple Choice:

1. Authoritative standards for IFRS include:

a. International Financial Reporting Standards only.

b. International Financial Reporting Standards and International Accounting Standards only.

c. International Financial Reporting Standards, International Accounting Standards and U.S. GAAP only.

d. International Financial Reporting Standards, International Accounting Standards and any GAAP standard recognized by an organized stock exchange.

2. Which of these statements regarding the IFRS and U.S. GAAP is correct?

a. U.S. GAAP is considered to be "principles-based" and more detailed than IFRS.

b. U.S. GAAP is considered to be "rules-based" and less detailed than IFRS.

c. IFRS is considered to be "principles-based" and less detailed than U.S. GAAP

d. Both U.S. GAAP and IFRS are considered to be "rules-based", but U.S. GAAP tends to be more complex.

3. The IASB's standard-setting structure includes all of the following except

a. Standing Interpretations Committee

b. Standards Advisory Council

c. Standards Comparison Committee

d. Trustees

Answers to Multiple Choice:

Short Answer:

1. Why would it be advantageous for U.S. GAAP and International GAAP to be the same?

2. What is the difference between principles-based and rules-based accounting rules? Is IFRS more principles-based than U.S. GAAP? Explain.

#ACC 303 Week 2 Quiz – Strayer NEW

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FIN 320 Week 8 Quiz – Strayer

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Quiz 6 Chapter 14 and 15

Chapter 14: ___________________________________________________________________________

Which of the following assets is most liquid?

Cash equivalents

Receivables

Inventories

Plant and equipment

Cost of goods sold refers to ___________.

direct costs attributable to producing the product sold by the firm

salaries, advertising, and selling expenses

payments to the firm's creditors

payments to federal and local governments

Many observers believe that firms "manage" their income statements to _______.

minimize taxes over time

maximize expenditures

smooth their earnings over time

generate level sales

Depreciation expense is in what broad category of expenditures?

Operating expenses

General and administrative expenses

Debt interest expense

Tax expenditures

Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to _____.

$175 million

$155 million

$120 million

$55 million

One of the biggest impediments to a global capital market has been _________.

volatile exchange rates

the lack of common accounting standards

lower disclosure standards in the United States than abroad

the lack of transparent reporting standards across the EU

Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life.

increased greatly

increased slightly

remained constant

decreased

If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.

decrease

increase

not change

change but in an indeterminable manner

Which of the following is not one of the three key financial statements available to investors in publicly traded firms?

Income statement

Balance sheet

Statement of operating earnings

Statement of cash flows

10.

In 2006 Hewlett-Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long-term debt accounts of Hewlett-Packard change?

Increased $138 million

Decreased $138 million

Increased $836 million

Decreased $836 million

11.

What must cash flow from financing have been in 2008 for Interceptors, Inc.?

$28

$30

$33

12.

Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct? I. This firm appears to be a good investment because of its steady growth in cash. II. This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows. III. Financing activities have been increasingly important for this firm's operations, at least in the short run.

I only

II and III only

II only

I and II only

13.

Common-size balance sheets are prepared by dividing all quantities by ____________.

total assets

total liabilities

shareholders' equity

fixed assets

14.

Operating ROA is calculated as __________, while ROE is calculated as _________.

EBIT/Total assets; Net profit/Total assets

Net profit/Total assets; EBIT/Total assets

EBIT/Total assets; Net profit/Equity

Net profit/EBIT; Sales/Total assets

15.

A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's: I. Beta II. Earnings variability over the business cycle III. ROE IV. Stock price

I and II only

III and IV only

I, III, and IV only

I, II, and III only

16.

The highest possible value for the interest-burden ratio is ______, and this occurs when the firm _________.

0; uses as much debt as possible

1; uses debt to the point where ROA = interest cost of debt

1; uses no interest-bearing debt

-1; pays down its existing debts

17.

Which one of the following ratios is used to calculate the times-interest-earned ratio?

Net profit/Interest expense

Pretax profit/EBIT

EBIT/Sales

EBIT/Interest expense

18.

The process of decomposing ROE into a series of component ratios is called ______________.

DuPont analysis

technical analysis

comparative analysis

liquidity analysis

19.

Which of the following is not a ratio used in the DuPont analysis?

Interest burden

Profit margin

Asset turnover

Earnings yield ratio

20.

By 2008, over 100 countries had adopted financial reporting standards that are in conformance with ________.

GAAP

IFRS

FASB

GASB

21.

Operating ROA can be found as the product of ______.

Return on sales × ATO

Tax burden × Interest burden

Interest burden × Leverage ratio

ROE × Dividend payout ratio

22.

A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.

8.4

11.9

17.62

47.6

23.

If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________.

greater than zero, but it is impossible to determine how operating ROA will compare to ROE

equal to ROE

greater than ROE

less than ROE

24.

You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

the firm's use of financial leverage is positively contributing to ROE

the firm's use of financial leverage is negatively contributing to ROE

the firm's use of operating leverage is positively contributing to ROE

the firm's use of operating leverage is negatively contributing to ROE

25.

A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is _________.

2.88

1.75

.69

26.

A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.

12%

27.

A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

12.4%

14.5%

16.6%

17.8%

28.

Economic value added (EVA) is:

the difference between the return on assets and the opportunity cost of capital times the capital base

ROA × ROE

a measure of the firm's abnormal return

largest for high-growth firms

29.

Which of the following statements is true concerning economic value added?

A growing number of firms tie managers' compensation to EVA.

A profitable firm will always have a positive EVA.

EVA recognizes that the cost of capital is not a real cost.

If a firm has positive present value of growth opportunities, it will have positive EVA.

30.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2012 indicates that Flathead's liquidity has ________ since 2011.

risen

fallen

stayed the same

The answer cannot be determined from the information given.

31.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

11.6

10.2

9.5

7.7

32.

2.13

2.44

2.56

2.89

33.

$810,000

$775,000

$755,000

$735,000

34.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

Flathead's receivables are outstanding about 9 fewer days than the industry average.

Flathead's receivables are outstanding about 15 fewer days than the industry average.

Flathead's receivables are outstanding about 12 more days than the industry average.

Flathead's receivables are outstanding about 6 more days than the industry average.

35.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

3.56

3.26

3.14

3.02

36.

$.075

$.086

$.092

$.099

37.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

6.5%

26.5%

33.4%

38%

38.

3.39

3.6

13.33

10.67

39.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.5

2.5

40.

1.3

1.5

1.69

2.83

41.

1.3

1.5

1.69

2.83

42.

1.3

1.5

1.69

2.83

43.

2.8

11.11

44.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed-asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

2.8

11.11

45.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.3

1.5

1.69

2.83

46.

.0409

.0429

.0475

.0753

47.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-on-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

.0409

.0429

.0462

.0923

48.

2.8

3.6

11.11

49.

.1708

.1529

.1462

.1636

50.

A firm has a net profit/pretax profit ratio of .6, a leverage ratio of 1.5, a pretax profit/EBIT of .7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is _________.

7.56%

15.12%

20.16%

30.24%

51.

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________.

15.12%

28.42%

37.24%

40.6%

52.

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

understate; overstate

understate; understate

overstate; understate

overstate; overstate

53.

If a firm's ratio of stockholders' equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders' equity is also lower than the industry average, this would suggest that the firm _________.

has more current liabilities than the industry average

has more leased assets than the industry average

will be less profitable than the industry average

has more current assets than the industry average

54.

A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has: I. Lower ATO than the industry average II. Lower ROA than the industry average III. Lower ROE than the industry average

I only

I and II only

II and III only

I, II, and III

55.

A high price-to-book ratio may indicate which one of the following?

The firm expanded its plant and equipment in the past few years.

The firm is doing a poorer job controlling its inventory expense than other related firms.

Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.

All of these options.

56.

A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's _________.

earnings yield is above the industry average

P/E ratio is above the industry average

dividend payout ratio is too high

interest burden must be below the industry average

57.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by operating activities of Haven Hardware?

-$30,000

$220,000

$320,000

$780,000

58.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in investing activities of Haven Hardware?

-$12,000

-$62,000

$12,000

$164,000

59.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in financing activities of Haven Hardware?

-$10,000

-$120,000

$10,000

$120,000

60.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net increase or decrease in cash for Haven Hardware for 2012?

-$94,000

-$88,000

$88,000

$188,000

61.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the cash at the end of 2012 for Haven Hardware?

$6,000

$94,000

$736,000

$188,000

62.

All of the following ratios are related to efficiency except _______.

total asset turnover

fixed-asset turnover

average collection period

cash ratio

63.

Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows?

Purchase of capital equipment

Payments to suppliers for inventory

Collections on receivables

Sale of production machinery

64.

When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

Cash flow from investment activities

Cash flow from operating activities

Cash flow from financing

Cash flow from extraordinary events

65.

The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

$8 million

-$6 million

$3 million

-$4 million

66.

Another term for EVA is ______.

net income

operating income

residual income

market-based income

67.

Which of the following transactions will result in a decrease in cash flow from operations?

Increase in accounts receivable

Decrease in inventories

Decrease in taxes payable

Decrease in bonds outstanding

68.

Which of the following transactions will result in a decrease in cash flow from investments?

Acquisition of another business

Capital gain from sale of a subsidiary

Decrease in net investments

Sale of equipment

69.

Which of the following will result in an increase in cash to the firm?

Dividends paid

A delay in collecting on accounts receivable

Net new investments

An increase in accounts payable

70.

The table below shows some data for Key Biscuit Company: What must have caused the firm's ROE to drop?

The firm began using more debt as a percentage of financing.

The firm began using less debt as a percentage of financing.

The compound leverage ratio was less than 1.

The operating ROA was declining.

71.

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

$50 increase

$100 increase

$150 increase

$250 increase

72.

A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

$20 increase

$80 increase

$100 increase

$200 increase

73.

A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

$10 decrease

$90 decrease

$180 decrease

$190 decrease

74.

The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities?

Increase of $225

Increase of $130

Decrease of $195

Decrease of $110

75.

The term quality of earnings refers to ________.

how well reported earnings conform to GAAP

the realism and sustainability of reported earnings

whether actual earnings matched expected earnings

how well reported earnings fit a trend line of earnings growth

76.

The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________.

channel stuffing

clogging the network

spamming the johns

artificial sales

77.

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

Asset turnover

Current ratio

Liquidity ratio

Quick ratio

78.

A firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .25, and its asset turnover is 1.1. What is the firm's compound leverage factor?

.243

.267

.826

.972

79.

The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?

1.58%

5.68%

12.2%

13.33%

80.

The tax burden of the firm is .5, the interest burden is .55, the profit margin is .25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

1.88%

6.68%

12.15%

17.02%

81.

The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________.

strictly enforced; weakly enforced

rules-based; principles-based

evolutionary; devolutionary

based on government standards; based on corporate practice

82.

The quick ratio is a measure of a firm's __________.

asset turnover

market valuation

liquidity

interest burden

83.

The firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA?

.25

.335

.372

84.

A firm has a compound leverage factor greater than 1; this indicates that ______.

the firm has no interest payments

the firm uses less debt as a percentage of financing

the firm's interest payments are equal to the firm's pretax profits

the firm's debt has a positive contribution to the firm's ROA

Chapter 15: ___________________________________________________________________________

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$300 profit

$300 loss

You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$500 profit

$500 loss

You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$300 profit

$300 loss

$500 loss

$200 profit

You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment.

$300 profit

$200 loss

$600 loss

$200 profit

______ option can only be exercised on the expiration date.

A Mexican

An Asian

An American

A European

All else the same, an American style option will be ______ valuable than a ______ style option.

more; European-

less; European-

more; Canadian-

less; Canadian-

At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

An American put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

10.

An Asian call option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11.

An Asian put option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

12.

A time spread may be executed by _____.

selling an option with one exercise price and buying a similar one with a different exercise price

buying two options that have the same expiration dates but different strike prices

selling two options that have the same expiration dates but different strike prices

selling an option with one expiration date and buying a similar option with a different expiration date

13.

Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option.

I and III only

I and IV only

I, II, and IV only

III and IV only

14.

A quanto provides its holder with the right to ______________.

participate in the payoffs from a portfolio of gambling casino stocks

exchange a fixed amount of a foreign currency for dollars at a specified exchange rate

participate in the investment performance of a foreign security

exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15.

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.

Max (-C0, ST - X - C0)

Min (-C0, ST - X - C0)

Max (C0, ST - X + C0)

Max (0, ST - X - C0)

16.

Strips and straps are variations of __________.

straddles

collars

money spreads

time spreads

17.

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.

Max (P0, X - ST - P0)

Min (-P0, X - ST - P0)

Min (P0, ST - X + P0)

Max (0, ST - X - P0)

18.

Longer-term American-style options with maturities of up to 3 years are called __________.

warrants

LEAPS

GICs

CATs

19.

The initial maturities of most exchange-traded options are generally __________.

less than 1 year

less than 2 years

between 1 and 2 years

between 1 and 3 years

20.

A futures call option provides its holder with the right to ___________.

purchase a particular stock at some time in the future at a specified price

purchase a futures contract for the delivery of options on a particular stock

purchase a futures contract at a specified price for a specified period of time

deliver a futures contract and receive a specified price at a specific date in the future

21.

Exchange-traded stock options expire on the _______________ of the expiration month.

second Monday

third Wednesday

second Thursday

third Friday

22.

The writer of a put option _______________.

agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires

has the right to buy shares at a set price

has the right to sell shares at a set price

23.

Advantages of exchange-traded options over OTC options include all but which one of the following?

Ease and low cost of trading

Anonymity of participants

Contracts that are tailored to meet the needs of market participants

No concerns about counterparty credit risk

24.

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

100

1,000

25.

Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price.

$20

$25

26.

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

27.

In 1973, trading of standardized options on a national exchange started on the _________.

AMEX

CBOE

NYSE

CFTC

28.

An American call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

29.

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

at the money

in the money

out of the money

knocked out

30.

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

time spread

long straddle

short straddle

money spread

31.

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

at the money

in the money

out of the money

knocked in

32.

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

covered call

long straddle

naked call

money spread

33.

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

34.

A European call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

35.

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.

long straddle

naked put

protective put

short stroll

36.

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II, III, and IV only

I, III, and IV only

I, II, and III only

I, II, III, and IV

37.

The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

the Federal Deposit Insurance Corporation

the Federal Reserve System

major U.S. banks

38.

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II only

II and IV only

I, II, and III only

I, II, III, and IV

39.

The maximum loss a buyer of a stock call option can suffer is the _________.

call premium

stock price

stock price minus the value of the call

strike price minus the stock price

40.

Which one of the statements about margin requirements on option positions is not correct?

The margin required will be higher if the option is in the money.

If the required margin exceeds the posted margin, the option writer will receive a margin call.

A buyer of a put or call option does not have to post margin.

Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

41.

A European put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

42.

The potential loss for a writer of a naked call option on a stock is _________.

equal to the call premium

larger the lower the stock price

limited

unlimited

43.

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

decrease; decrease

decrease; increase

increase; decrease

increase; increase

44.

Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins.

are; are not

are; are

are not; are

are not; are not

45.

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option.

an American

a European

an Asian

an Australian

46.

Which of the following expressions represents the value of a call option to its holder on the expiration date?

ST - X if ST>X, 0 if ST ≤ X

- (ST - X) if ST> X, 0 if ST ≤ X

0 if ST ≥ X,X - ST if ST<X

0 if ST ≥ X, - (X - ST) if ST<X

47.

A "bet" option is also called a ____ option.

barrier

lookback

digital

foreign exchange

48.

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

SPX

DJX

CME

OEX

49.

The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________.

$1,980

$4,900

$5,000

$2,080

50.

You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

$120

$1,000

$11,000

$12,000

51.

You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________.

$125

$450

$575

unlimited

52.

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August.

either lower than $44.25 or higher than $55.75

between $44.25 and $55.75

higher than $55.75

lower than $44.25

53.

Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.

$150

$400

$600

$1,850

54.

__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

Writing an uncovered call option

Writing an uncovered put option

Buying a call option

Buying a put option

55.

Which one of the following is a correct statement?

Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

A convertible bond consists of a straight bond plus a specified number of detachable warrants.

Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year.

Call options may be convertible into the stock, while warrants are not convertible into the stock.

56.

A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

$33; $3.50

$33; $31.50

$35; $3.50

$35; $35

57.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with calls, you would _______________.

buy the 55 call and sell the 45 call

buy the 45 call and buy the 55 call

buy the 45 call and sell the 55 call

sell the 45 call and sell the 55 call

58.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be _______.

$1,050

$650

$400

$400 income rather than cost

59.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

$300

-$400

$150

$50

60.

sell the 55 put and buy the 45 put

buy the 45 put and buy the 55 put

buy the 55 put and sell the 45 put

sell the 45 put and sell the 55 put

61.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is _______________.

$500

$700

$200

$250

62.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

Sell a call.

Purchase a put.

Sell a straddle.

Buy a straddle.

63.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of _____.

$300

$400

$500

$700

64.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

$200

$300

$700

$400

65.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

Buy the call, sell the put; lend the present value of $40.

Sell the call, buy the put; lend the present value of $40.

Buy the call, sell the put; borrow the present value of $40.

Sell the call, buy the put; borrow the present value of $40.

66.

A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

$300

$200

$475

67.

A covered call strategy benefits from what environment?

Falling interest rates

Price stability

Price volatility

Unexpected events

68.

You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip.

$300 profit

$100 loss

$500 profit

$200 profit

69.

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

Bull spread

Long put

Short call

Straddle

70.

What combination of puts and calls can simulate a long stock investment?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

71.

An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

$32.50

$35

$37.50

$37.60

72.

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

$24.15

$25

$25.87

$27.86

73.

Which of the following strategies makes a profit if the stock price stays stable?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

74.

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

75.

If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______.

long call

short call

short put

long put

76.

What strategy could be considered insurance for an investment in a portfolio of stocks?

Covered call

Protective put

Short put

Straddle

77.

What strategy is designed to ensure a value within the bounds of two different stock prices?

Collar

Covered Call

Protective put

Straddle

78.

You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

Buy a strip.

Buy a strap.

Buy a straddle.

Write a straddle.

79.

When issued, most convertible bonds are issued _____________.

deep in the money

deep out of the money

slightly out of the money

slightly in the money

80.

A convertible bond is deep in the money. This means the bond price will closely track the __________.

straight debt value of the bond

conversion value of the bond

straight debt value of the bond minus the conversion value

straight debt value of the bond plus the conversion value

81.

Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.

I only

I and II only

II and III only

I, II, and III

82.

Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct? I. The value of the conversion option for bond A is $125. II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

II only

I and III only

III only

I, II, and III

83.

You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______.

-$15

$200

$85

$185

84.

Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.

$195,000

$220,000

$175,000

$215,000

85.

You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________.

greater; lower

greater; greater

lower; greater

lower; lower

86.

You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment.

$300 profit

$100 loss

$400 loss

$200 profit

87.

You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

I only

II only

I and III only

I, II, and III

#FIN 320 Week 8 Quiz – Strayer

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