QUIZ NO. 1 [marked out of 28 marks for convenience: worth 5% of the course mark)
Intermediate Financial Accounting I
Student Name: _______________________ Question No. 1 (5.5 marks) Required For each of the 11 statements listed below, indicate the name of the underlying assumption, measurement convention or accounting constraint that is most closely associated with the statement involved. Each answer is worth 0.5 mark. Underlying assumption, measurement convention or accounting constraint Student ID: ____________________
Example: Continuity Assumption is the appropriate answer for the below statement. Continuity Assumption Presumes stability, and existence of the entity sufficiently long to carry out contemplated operations and commitments. 1. Provides that an asset with a four-year estimated life and a cost of $15 can be expensed when it is acquired. 2. Acquisition cost is the proper starting point for asset valuation. 3. Distinguishes personal transactions of the owners from transactions of the business. 4. Earnings per common share must be reported.
Historical Cost Principle
Separate Entity Assumption
5. Cost of collecting and reporting information on cash flow per share exceeds the estimated value to users. 6. Relates costs of earning revenue with the revenue recognized in a particular period.
Revenue Recognition Principle 7. Determines the timing of recognition of sales and service revenues. Conservatism 8. Means adopting the less optimistic of two possible reasonable assumptions about the future. 9. Establishes the rationale of accounting on a non-liquidation basis.
10. Is the basis for use of lower-of-cost-or-market valuation of inventory. 11. Requires measurement of the income and financial position of entities at regular intervals. 1/4
Time Period Assumption
Question No. 2 (6.5 marks) Shown below is an income statement for 2012 that was prepared by a junior accountant of Parasoft Corporation. Parasoft Corporation INCOME STATEMENT December 31, 2012 Sales revenue Investment revenue Cost of merchandise sold Selling expenses Administrative expense Interest expense Income before special items Special items Loss on disposal of a segment of the business Major casualty loss Net income tax liability Net income $975,000 19,500 (408,500) (155,000) (215,000) (13,000) 203,000 (30,000) (80,000) (27,900) $ 65,100
Required Prepare a multiple-step income statement in good form for 2012 for Parasoft Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology). Parasoft Corporation has 50,000 shares of common stock outstanding and has a 20 percent income tax rate on all tax related items. Parasoft is publically listed and applies IFRS. Parasoft Corporation INCOME STATEMENT For the Year Ended December 31, 2012 Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Other revenue and gains Investment revenue Other expenses and losses Interest expense Casualty loss Income from continuing operations before taxes Income taxes* Income from continuing operations $975,000 408,500 566,500 $155,000 215,000 370,000 196,500
19,500 13,000 80,000
73,500 123,000 24,600 98,400
Discontinued operations: Loss from discontinued operations (net of applicable income tax of $6,000*) Net income
24,000 $ 74,400
EPS: Income from Continuing Operations EPS: Discontinued Operations EPS: Net Income
$1.97 ($0.48) $1.49
* The applicable income tax rate is 20%. The junior account incorrectly used 30%, calculated as follows: 27,900/(27,900 + 65,100).
Question 3 (10 marks) Selected amounts from Edgemont Company's trial balance of December 31, 2012 appear below: Account Number Title 1. 2. 3. 4. 5....