Tuesday, July 23, 2013

ACC 563 Homework Chapter 6 and 7 Week 4

ACC 563 Week 4 Homework Chapter 6 and 7
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ACC 563 Chapter 6 and 7Week 4 Homework
Chapter 6

Case 6-4
It is important in accounting theory to be able to distinguish the types of accounting changes.
Required:
 a. If a public company desires to change from the sum-of-year’s-digits depreciation method to the straight-line method for its fixed assets, what type of accounting change will this be? How would it be treated? Discuss the permissibility of this change.
 b. If a public company obtained additional information about the service lives of some of its fixed assets that showed that the service lives previously used should be shortened, what type of accounting change would this be? Include in your discussion how the change should be reported in the income statement of the year of the change and what disclosures should be made in the financial statements or notes.
 c. Changing specific subsidiaries comprising the group of companies for which consolidated financial statements are presented is an example of what type of accounting change? What effect does it have on the consolidated income statements?

Case 6-6
APB Opinion No. 20 was concerned with accounting changes. SFAS No. 154 (see FASB ASC 250) changes the accounting treatment for some accounting changes.
Required:
 a. Define, discuss, and illustrate each of the following in such a way that one can be distinguished from the other:
i. An accounting change
 ii. A correction of an error in previously issued financial statements
 b. Discuss the justification for a change in accounting principle.
 c. Discuss the reporting of accounting changes that was required by APB Opinion No. 20.
 d. Discuss how accounting changes are to be reported under the provisions of FASB ASC 250.

Case 6-7
Sometimes a business entity may change its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Listed below are three independent, unrelated sets of facts relating to accounting changes.
Situation 1
A company determined that the depreciable lives of its fixed assets were presently too long to fairly match the cost of the fixed assets with the revenue produced.The company decided at the beginning of the current year to reduce the depreciable lives of all its existing fixed assets by five years.
Situation 2
On December 31, 2010, Gary Company owned 51 percent of Allen Company, at which time Gary reported its investment using the cost method due to political uncertainties in the country in which Allen was located. On January 2, 2011, the management of Gary Company was satisfied that the political uncertainties were resolved and that the assets of the company were in no danger of nationalization. Accordingly, Gary will prepare consolidated financial statements for Gary andAllen for the year ended December 31, 2011.
Situation 3
A company decides in January 2011 to adopt the straight-line method of depreciation for plant equipment. This method will be used for new acquisitions as well as for previously acquired plant equipment for which depreciation had been provided on an accelerated basis.
Required:
For each of the preceding situations, provide the information indicated below. Complete your discussion of each situation before going on to the next situation.
 a. Type of accounting change
 b. Manner of reporting the change under current GAAP, including a discussion, where applicable, of how amounts are computed
 c. Effects of the change on the statement of financial position and earnings statement
 d. Required e disclosures


Chapter 7

Case 7-2
The argument among accountants and financial statement users over the proper valuation procedures for assets and liabilities resulted in the release of SFAS No. 115 (see FASB ASC 320-19). The statement requires current-value disclosures for all investments in debt securities and for investments in equity securities that have readily determinable fair values and for which the investor does not have significant influence. The chairman of the Securities and Exchange Commission termed historical cost valuations “once-upon-a-time accounting.” Historical cost accountingalso has been criticized as contributing to the savings and loan crisis of the 1980s.
During that period, these financial institutions continued to value assets at historical cost when they were billions of dollars overvalued. Critics of current-value accounting point out that objective market values for many assets are not available, current values cannot be used for tax purposes, using current values can cause earnings volatility, and management could use current value to “manage earnings.”
Required:
 a. Determine how current values might be determined for investments, land, buildings, equipment, patents, copyrights, trademarks, and franchises.
 b. How might the use of current values in the accounting records cause earnings volatility?
 c. Discuss how management might manage earnings using current cost data.
 d. How do the requirements originally established by SFAS No. 157 affect the use of fair value measurement in financial statements?

Case 7-6
The recent emphasis on capital maintenance concepts of income as seen in the FASB’s support for “comprehensive income” implies that balance sheet measurement should determine measures of income. That is, accrual accounting is to focus on measurements in the balance sheet, and because financial statements are articulated, measurements in the income statement are residual in nature.
Required:
 a. Do you think this focus implies that the balance sheet is more important than the income statement? Explain.
 b. How is the balance sheet useful to investors? Discuss.
 c. What is meant by the phrase “financial statements are articulated”?
 d. Which measurements currently reported in balance sheets are consistent with the physical capital maintenance concept? Give examples.
 e. Which measurements currently reported in balance sheets are not consistent with the physical capital maintenance concept? Give examples.

Case 7-7
The statement of cash flows is intended to provide information about the investing, financing, and operating activities of an enterprise during an accounting period. In a statement of cash flows, cash inflows and outflows for interest expense, interest revenue, and dividend revenue and payments to the government are considered operating activities.
Required:
 a. Do you believe that cash inflows and outflows associated with non operating items, such as interest expense, interest revenue, and dividend revenue, should be separated from operating cash flows? Explain.
b. Do you believe that the cash flows from investing activities should include not only the return of investment but also the return on investment—that is, the interest and dividend revenue? Explain.
 c. Do you believe that the cash flows from the sale of an investment should also include the tax effect of the sale? Explain. Do you believe that cash flows from sales of investments should be net of their tax effects, or do you believe that the tax effect should remain an operating activity because it is a part of “payments to the government”? Explain.


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