Questions and Answers of Accounting Theory Conceptual

=+3. Why are exit values generally considered to be less useful than entry values?
=+2. Why, under deprival value, do we compare exit-value and present-value numbers taking the higher of the two?
=+1. Why do Paasche-type indexes tend to take into account technological changes, whereas Laspeyres indexes do not?
=+5. What advantages do you see for classifying interest expense as an invest-ing cash flow rather than an operating cash flow? What is the advantage of classifying it as an operating cash flow?
=+8. Why is cash flow reporting advocated as an alternative to accounting income by such critics of accounting allocations as Thomas (1969)?
=+9. What attribute is being measured in the SCF, and how well is represen-tational faithfulness achieved?
=+Compare this to when funds are defined as working capital.
=+10. Why is the three-way classification system in the SCF more informative than the two-way source/use classification?
=+11. How does the source/use classification reflect the structure of double-entry accounting?
=+12. What is the purpose of reporting noncash items in the SCF?
=+13. Why is the SCF called a derivative statement?
=+14. The chapter suggests that liquidity and flexibility data do not compose a central feature of accrual accounting. Explain why this is so.
=+15. What do research findings indicate concerning the relevance of cash and funds flow data?
=+1. Presented in the exhibit for Case 1 is a graph of accounting income, cash flows from operations, and working capital flows from operations for W. T. Grant Company, a retailer that filed for
=+What could explain the significant differences between working capital flows and cash flows?
=+2. This case is adapted from Appendix B of the exposure draft leading up to the FASB's standard on cash flow reporting." Prepare in good form an SCF. Use the direct format. The following
=+b.Company D entered into capital lease transactions for the use of new equipment, and the related lease obligation was $750.
=+c.Company D purchased all the common stock of Company ABC for$900 in cash. Company D thereby acquired Company ABC's work-ing capital other than cash (a net current liability of $100) and its
=+d.Cash borrowed by Company D for the year consisted of short-term debt of $75 and long-term debt of $1,250.
=+c.Company D paid $300 on its short-term debt and $125 on capital lease obligations during the year.Company D issued $750 in common stock during the year, $250 of which was issued to settle
=+g.Company D paid $450 as dividends to its stockholders during the year.
=+h.Company D's financial services activities during the year included purchases and sales of investment securities amounting to $4,700 and $5,000, respectively. Lending activities produced new loans
=+i. The following are the results of Company D's operations for the year.Net income$ 3,000 Depreciation and amortization 1,500 Deferred taxes 150 Changes in operating working capital items other
=+j-The effect on cash and cash equivalents of changes in the exchange rate for the year was $100.
=+3. The adjacent balance sheets represent the beginning and end-of-year for 2000 for the N-M Company and the income statement for 2000.Other information:a.The leased property rights and liability
=+b. The 8 percent debenture bonds were sold on December 31, 1999, for $49,500. Bonds have a five-year life. Straight-line amortization is to be used.
=+c Leased property is being depreciated on a straight-line basis over four years.
=+d. Depreciation on owned property is $7,075 for the year.
=+e. Fixed assets having a cost of $20,000 were sold during the year.
=+f. Dividends of $7,800 were declared and paid during the year.Required:
=+a.Do a conventional SCF in accord with SFAS No. 95. (Use the indi-rect method.)
=+b.Do a second SCF in accordance with the modifications suggested in the section of the chapter entitled ~Classification Problems of SFAS No, 95.7
=+c. Discuss the underlying reason for the two approaches.
=+4. Ventius Company issued $10,000 of four-year bonds on December 31.2000. The coupon rate on the bonds is 7% percent. The bonds were sold for $9.400.Required:. Show four possible ways that the
=+5. On January 1, 2000, P Company had the following balance sheet (in thousands);P Company Balance Sheet January 1, 2000 Cash$ 200 Accounts Receivable (net)87 Inventory Fixed Assets (net)267 Total$
=+b.Show a consolidated SCF for 2000 (from January 1, 2000-December 31, 2000). Hint: Your cash flow will not show the correct cash increase for 2000.C.
=+Where does the discrepancy inb. lie and what is it an example of?
=+How might the situation be remedied?
=+d. In b ., show how you think the SCF would be done in actual practice.
=+7. D. R. Horton is a custom homebuilder located mainly in the southern and western parts of the United States. It is the third largest home-builder in the country. Through 1998 the company claimed
=+b. If you did the W. T. Grant case, compare D. R. Horton with W. T Grant.
=+8. Worldcom, Inc. improperly capitalized S3.8 billion dollars of expense from January 1, 2001 through the first quarter of 2002 ($3.04 billion occurred in 2001). Its balance sheets for the years
=+a.What effect did Worldcom's misclassification have on cash flows (a) in total and (b) br classification?
=+b.Why is it difficult to accept the effects upon cash flow from opera-tions of the working capital items listed above?
=+c Worldcom's long-term debt went up by approximately $13 billion during 2001. Is it possible that some of Worldcom's current liabili-ties were reclassified as long-term during 2001?
=+. It might be said that we are slowly moving toward an asset-liability approach in the balance sheet. Discuss as many event situations as you can where this is the case.
=+b. Make the entries that result from assuming that these debenture bonds were Means Corporation's only available-for-sale securities,
=+7. On January 1, 2000, $1,000,000 of 10 percent debenture bonds were acquired by Means Corporation at $927,908, which would yield a 12 percent rate of return. The bonds mature on December 31,
=+d. What dangers are present?
=+c. Has Leeson benefited from this transaction?
=+b. Why would Leeson enter into a strategy of this type?
=+6. Leeson Company entered into an interest rate swap with Morley Corporation on January 1, 2003. The notional amount of the swap is$20,000,000. Leeson will pay Morley a fixed annual rate of 8
=+b.Do you see a possible "hidden agenda" here involving certain eco-nomic consequences that the CAP was trying to bring about rela-tive to stock dividends?
=+situations where market value of common stock should be capital-ized in certain stock dividend situations.
=+5. Shown below are paragraphs 8-10 of ARB 43, Chapter 7 on stock dividends.Required:a. From a logical standpoint, evaluate the CAP's argument involving
=+b.Assume that the swap occurred prior to December 31, 2000, and the interest rate swap contract had a debit balance of $1,000.Under this circumstance make the entry for the fair value as of
=+4. Assume an interest rate swap with a notional value of $1,000,000. Firm A receives fixed and pays variable. The fixed rate on December 31, 2000, is eight percent. The swap has two years to run
=+C.What theoretical problems do you see with the application of SFAS Nos. 121 and 144 to asset impairments?
=+b.By how much should each of the assets be written down?
=+3. Assets A. B, and C comprise an asset group. Asset B is considered to be the principal asset in this group. Asset B has a three-year estimated life and A and C have remaining lives of four years.
=+d.Is there anything unusual about your answer to part (c) since accounting rules are frequently concerned with conservatism?
=+c.Would your answer to part (a) be different if the cash flows were$8,000 rather than $10,000? Explain.
=+b.Why is your answer in part (a) anomalous and how does SFAS No. 121 justify it?
=+2. Assume that an asset is being examined and it is determined that its cash flows would be $10,000 per year for four years (assume that all cash flows are received at the end of the year). The
=+how might it be improved, especially from a communication viewpoint?
=+1. Review a recent annual report. Identify all attributes of measurement explicitly identified in the balance sheet and accompanying notes.Notice which items are not specified. Group the accounting
=+26. How does the term "embedded derivatives" compare with the term"embedded journalists" (from Gulf War II)?
=+25. Why do derivatives create difficult problems relative to balance sheet classification and valuation?
=+24. Are convertible bonds and convertible preferred stock examples of embedded derivatives?
=+23. Are disclosures of hedging effectiveness effective;
=+22. Of the various reasons for dealing in treasury stock, which do you think is the most questionable?
=+21. What is a securitization and why do firm's use this technique?
=+20. Why are interest rate swaps a zero sum game?
=+19. How does the asset impairment measurement approach of SFAS No. 121 compare to deprival value (Chapter 13)?
=+18. Why is there an implicit recognition of fair value in the 1984 Revised Model Business Corporation Act?
=+17. Are distinctions between the debt and equity classifications airtight?Explain.
=+16. Which accounts on the balance sheet are moving toward current or fair value?
=+15. Based on your reading of this chapter, plus your general knowledge of accounting standards, identify as many examples as you can of mea-surement flexibility in the statement of financial
=+14. Is the "available-for-sale" category for debt and equity securities used in SFAS No. 115 a homogeneous category?
=+13. The limitation of the accounting classification system depicted in Exhibit 10-1 was referred to throughout the chapter. What is meant by this? Give some examples. Why is the accounting
=+ Do definitions of accounting elements and general principles of recognition and measurement resolve the controversy over full absorption costing and variable costing of manufactured inventory?
=+12. Why is it difficult to determine the historical acquisition cost of self-constructed assets?
=+ What measurement problems are illustrated by this question?
=+11. As a potential investor, what do you feel would be the most useful attri-bute of measurement for each of the following: inventories held for sale.inventories held for production, and long-term
=+10. What is the purpose of balance sheet classification? How useful is the information produced from a classified balance sheet? What are some alternative classification systems that could be used?
=+How relevant is this approach for professional sports franchises?
=+Can this practice be justified in terms of asset and liability definitions?
=+9. Why have mutually unperformed executory contracts traditionally been excluded from financial statements?
=+8. What are deferred charges and deferred credits, how do they come about, and do they conform to asset and liability definitions?
=+7. What is the meaning of "owners' equity" in the balance sheet? Why are certain unrealized gains or losses included in owners' equity?
=+6. Three approaches have been advocated concerning the definition of accounting elements and the relationship between the balance sheet and income statement What are the three approaches and how do
=+How useful do you think ratio analysis is?
=+5. What do aggregated balance sheet totals represent? This data is used for ratio analysis.
=+Why is this practice criticized?
=+4. Numerous attributes are measured in the balance sheet. What are the different attributes?
=+ Why are definitions important to policy-setting bodies?
=+3. Why are asset and liability definitions important to the theoretical structure of accounting?
=+2. Why is it difficult to define the basic accounting elements?
=+how have they evolved over time?
=+1. What are the characteristics of assets, liabilities, and owners' equity, and

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