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LOS a: Contrast accrual accounting and cash accounting and explain why accounting discretion exists in an accrual accounting system. ffice ffice" />
Q1. Consider the following statements:
Statement 1: Compared to the cash basis of accounting, the accrual basis of accounting provides more timely information about future cash flows.
Statement 2: Compared to the cash basis of accounting, the accrual basis requires more use of discretion than the cash basis.
Are these statements CORRECT?
A) No, because it is actually the cash basis of accounting that provides more timely and relevant information to users about future cash flows.
B) No, because it is actually the cash basis of accounting that results in more difficulty in properly assigning revenues and expenses to the appropriate periods.
C) Yes.
Correct answer is C)
Users of financial information seek timely information about future cash flows. The accrual basis of accounting provides this information at the earliest appearance of objective evidence. Thus, accrual accounting provides more timely and relevant information to users. The cash basis is more concerned with recording cash flows for transactions that have already occurred.
Accrual accounting (not cash-based accounting) necessitates the use of discretion because of the many estimates and judgments involved with assigning revenue and expense to the appropriate periods.
Q2. Management is considering the need to record a number of transactions on its financial statements. Which of the following items
is least likely to involve the use of subjective measurement estimates by management?
A) Use of FIFO (first in-first out) to cost inventories.
B) Use of criteria to determine treatment as an extraordinary item.
C) Use of straight-line depreciation method to depreciate tangible assets.
Correct answer is B)
The use of criteria to determine treatment as an extraordinary item (i.e. Is the item within management’s discretion? Is the event likely to recur in the foreseeable future?) does not involve numerical and subjective estimates per se. It is more a test of qualitative factors to determine the proper classification. Contrast this to FIFO, which is clearly a numerical estimate since an alternative of using LIFO (last in-first out) is possible and this will result in a different reported amount than FIFO. The same argument can be made for the use of the straight-line method since an alternative of using the declining-balance method is possible to depreciate tangible assets.
Q3. A manufacturing firm purchases equipment for use in its operations. With regards to recording the purchase using the cash
basis versus the accrual basis of accounting, which of the following statements is most appropriate?
A) With the cash basis, revenues and expenses relating to the equipment are generally recognized in the same period.
B) With the accrual basis, the cost of the equipment is allocated to the cash flow statements over the asset’s life.
C) With the cash basis, revenues and expenses relating to the equipment are generally recognized in different periods.
Correct answer is C)
With the cash basis of accounting, revenues are recognized when cash is collected and expenses are recognized when cash is paid. Therefore, the cash flows may occur in different periods than when the revenues are actually earned or when the expenses are actually incurred. For example, the purchase of equipment used in a firm’s manufacturing operation may result in an immediate cash outflow but the equipment generates revenues over its useful life. In this case, the revenues and expense are reported in different periods.
With the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of the cash flows. With the equipment purchase, the cost of the equipment will be allocated to the income statement (not cash flow statement) over the asset’s life and at the same time, matched with the revenues generated.
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发表于 2009-3-3 09:15
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