Answer keys to intermediate accouting 12th edition

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Reconcile pretax financial income with taxable income. Identify temporary and permanent differences. Determine deferred income taxes and related items— single tax rate. Classification of deferred taxes. Determine deferred income taxes and related items— multiple tax rates, expected future income. Determine deferred taxes, multiple rates, expected future losses.

Carryback and carryforward of NOL. Change in enacted future tax rate. Tracking temporary differences through reversal. Income statement presentation. Conceptual issues—tax allocation. Valuation allowance—deferred tax asset. Disclosure and other issues. Identify differences between pretax financial income and taxable income. Describe a temporary difference that results in future taxable amounts. Describe a temporary difference that results in future deductible amounts.

Explain the purpose of a deferred tax asset valuation allowance. Describe the presentation of income tax expense in the income statement.

Describe various temporary and permanent differences. Explain the effect of various tax rates and tax rate changes on deferred income taxes. Apply accounting procedures for a loss carryback and a loss carryforward. Describe the presentation of deferred income taxes in financial statements. Simple 15—20 E Two differences, no beginning deferred taxes, tracked through 2 years. Simple 15—20 E One temporary difference, future taxable amounts, one rate, beginning deferred taxes.

Simple 15—20 E Three differences, compute taxable income, entry for taxes. Simple 15—20 E Two temporary differences, one rate, beginning deferred taxes. Simple 15—20 E Identify temporary or permanent differences. Simple 10—15 E Terminology, relationships, computations, entries. Simple 10—15 E Two temporary differences, one rate, 3 years. Simple 10—15 E Carryback and carryforward of NOL, no valuation account, no temporary differences.

Simple 15—20 E Two NOLs, no temporary differences, no valuation account, entries and income statement. Moderate 20—25 E Three differences, classify deferred taxes. Simple 10—15 E Two temporary differences, one rate, beginning deferred taxes, compute pretax financial income. Complex 20—25 E One difference, multiple rates, effect of beginning balance versus no beginning deferred taxes.

Simple 20—25 E Deferred tax asset with and without valuation account. Moderate 20—25 E Deferred tax asset with previous valuation account. Complex 20—25 E Deferred tax liability, change in tax rate, prepare section of income statement. Complex 15—20 E Two temporary differences, tracked through 3 years, multiple rates. Moderate 30—35 E Three differences, multiple rates, future taxable income. Moderate 20—25 E Two differences, one rate, beginning deferred balance, compute pretax financial income.

Complex 25—30 E Two differences, no beginning deferred taxes, multiple rates. Moderate 15—20 E Two temporary differences, multiple rates, future taxable income. Some major challenges facing the accounting profession relate to the following items: Nonfinancial measurement—how to report significant key performance measurements such as customer satisfaction indexes, backlog information and reject rates on goods purchased.

Forward-looking information—how to report more future oriented information. Soft assets—how to report on intangible assets, such as market know-how, market dominance, and well-trained employees.

Timeliness—how to report more real-time information. Accountants must perceive the moral dimensions of some situations because GAAP does not define or cover all specific features that are to be reported in financial statements. In these instances accountants must choose among alternatives. These accounting choices influence whether par- ticular stakeholders may be harmed or benefited. Moral decision-making involves awareness of potential harm or benefit and taking responsibility for the choices.

CA Time 15—20 minutes Purpose—to provide the student with an opportunity to answer questions about financial reporting and accounting standards topics. CA Time 15—20 minutes Purpose—to provide the student with an opportunity to distinguish between financial accounting and managerial accounting, identify major financial statements, and differentiate financial statements and financial reporting.

CA Time 20—25 minutes Purpose—to provide the student with an opportunity to explain the basic objective of financial reporting. CA Time 15—20 minutes Purpose—to provide the student with an opportunity to evaluate the viewpoint of removing mandatory accounting rules and allowing each company to voluntarily disclose the information it desired.

CA Time 20—25 minutes Purpose—to provide the student with an opportunity to explain the evolution of accounting rule-making organizations and the role of the AICPA in the rule making environment.

CA Time 15—20 minutes Purpose—to provide the student with an opportunity to focus on what type of rule-making environment exists in the United States. In addition, this CA explores why user groups are interested in the nature of GAAP and why some groups wish to issue their own rules. CA Time 30—40 minutes Purpose—to provide the student with an opportunity to identify and define acronyms appearing in the first chapter. Some are self-evident, others are not so. CA Time 30—40 minutes Purpose—to provide the student with an assignment that explores the role and function of the Securities and Exchange Commission.

CA Time 25—35 minutes Purpose—to provide the student with a writing assignment concerning the ethical issues related to meeting earnings targets. CA Time 25—35 minutes Purpose—to provide the student with the opportunity to discuss the role of Congress in accounting rule- making.

CA Time 25—35 minutes Purpose—to provide the student with an opportunity to comment on a letter sent by business execu- tives to the FASB and Congress on the accounting for derivatives. True 2. Any company claiming compliance with GAAP must comply with all standards and interpretations, including disclosure requirements.

True 4. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.

The FASB follows the same due process procedures for interpretations and standards. In contrast, managerial accounting is the process of identification, measurement, accumulation, analysis, prepa- ration, interpretation, and communication of financial information used by the management to plan, evaluate, and control within an organization and to assure appropriate use of, and accountability for, its resources. As indicated in b , there are four major financial statements. However, some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements.

Financial reporting other than financial statements and related notes may take various forms. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. Although the level of sophistication related to business and financial accounting matters varies both within and between these user groups, users are expected to possess a reasonable understanding of accounting concepts, financial statements, and business and economic activities and are expected to be willing to study and interpret the information with reasonable diligence.

Because these statements follow generally accepted accounting principles, investors can make meaningful comparisons of different financial statements to assist their investment decisions. The information is essential for the bank to ensure that the loan is safe and sound. As a result, it would be almost impossible to prepare state- ments that could be compared. In addition, voluntary disclosure may not be an efficient way of disseminating information.

A company is likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost of assembling and disseminating information. However, an investor wishing additional information has to pay to receive additional information desired. Different investors may be interested in different types of information.

As a result, investors may not get the desired information or they may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and distributing information occurs when different investors ask for the same information at different points in time. To the society as a whole, this would not be an efficient way of utilizing resources. Unfortunately, the APB was beleaguered throughout its year existence. It came under fire early, charged with lack of produc- tivity and failing to act promptly to correct alleged accounting abuses.

The APB also met a lot of industry and CPA firm opposition and occasional governmental interference when tackling numerous thorny accounting issues. In fear of governmental rule making, the accounting profession investigated the ineffectiveness of the APB and replaced it with the FASB. The FASB has: 1 smaller membership, 2 full-time, compensated membership, 3 greater autonomy, 4 increased independence, and 5 broader representation.

In addition, the FASB has its own research staff and relies on the expertise of various task force groups formed for various projects. These features form the bases for the expectations of success and support from the public. In addition, the due process taken by the FASB in establishing financial accounting standards gives interested persons ample opportunity to make their views known. Thus, the FASB is responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession.

The passage of a new accounting standard in the form of an FASB Statement requires the support of five of the seven Board members, before it is incorporated in the codification. They are intended to form a cohesive set of interrelated concepts, a body of theory or a conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent, sound manner.

The EITF identifies controversial accounting problems as they arise and determines whether they can be quickly resolved or whether the FASB should become involved in solving them. The committee was formed in direct response to the criticism received by the accounting profession during the financial crisis of and the years thereafter. The authorization to issue pronouncements on matters of accounting principles and procedures was based on the belief that the AICPA had the responsibility to establish practices that would become generally accepted by the profession and by corporate management.

As a general rule, the CAP directed its attention, almost entirely, to resolving specific accounting problems and topics rather than to the development of generally accepted accounting principles. The committee voted on the acceptance of specific Accounting Research Bulletins published by the committee. A two-thirds majority was required to issue a particular research bulletin. The CAP did not have the authority to require acceptance of the issued bulletins by the general membership of the AICPA, but rather received its authority only upon general acceptance of the pronouncement by the members.

The demise of the CAP could probably be traced to four distinct factors: 1 the narrow nature of the subjects covered by the bulletins issued by the CAP, 2 the lack of any theoretical groundwork in establishing the procedures presented in the bulletins, 3 the lack of any real authority by the CAP in prescribing adherence to the procedures described by the bulletins, and 4 the lack of any formal representation on the CAP of interest groups such as corporate managers, governmental agencies, and security analysts.

The APB was thus charged with the responsibility of developing written expression of generally accepted accounting principles through consideration of the research done by other members of the AICPA in preparing Accounting Research Studies.

The committee was in turn given substantial authoritative standing in that all opinions of the APB were to constitute substantial authoritative support for generally accepted accounting principles. If an individual member of the AICPA decided that a principle or procedure outside of the official pronouncements of the APB had substantial authoritative support, the member had to disclose the departure from the official APB opinion in the financial statements of the firm in question.

The membership of the committee comprising the APB was also extended to include representation from industry, government, and academe. The opinions were also designed to include minority dissents by members of the board. Exposure drafts of the proposed opinions were readily distributed. The demise of the APB occurred primarily because the purposes for which it was created were not being accomplished.

Broad generally accepted accounting principles were not being developed. The research studies supposedly being undertaken in support of subsequent opinions to be expressed by the APB were often ignored.

The committee in essence became a simple extension of the original CAP in that only very specific problem areas were being addressed. Interest groups outside of the accounting profession questioned the appropriateness and desirability of having the AICPA directly responsible for the establishment of GAAP.

Politicization of the establishment of GAAP had become a reality because of the far-reaching effects involved in the questions being resolved. It is independent, in fact, of any private or govern- mental organization. Independence is facilitated through the funding of the organization and payment of the members of the Board. Full-time members are paid by the organization and the organization itself is funded solely through contributions.

Thus, no one interest group has a vested interest in the FASB. The FASB represents, perhaps, just another step in this evolutionary process. Accounting depends in large part on public confidence for its success. Consequently, the critical issues are not solely technical, so all those having a bona fide interest in the output of accounting should have some influence on that output. There are numerous conflicts between the various interest groups. In the face of this, compro- mise is necessary, particularly since the critical issues in accounting are value judgments, not the type which are solvable, as we have traditionally assumed, using deterministic models.

Only in this way reasonable compromise will the financial community have confidence in the fairness and objectivity of accounting rule-making. Over the years, accountants have been unable to establish, on the basis of technical accoun- ting elements, rules which would bring about the desired uniformity and acceptability.

This inability itself indicates rule-setting is primarily consensual in nature. For many years, these businesses and individuals had little say as to what the rules would be, in spite of the fact that their economic well-being was influenced to a substantial degree by those rules. It is only natural that they would try to influence or control the factors that determine their economic well-being. Many accountants feel that accounting is primarily technical in nature.

The complex situations that arise in the business world require that trained accountants develop the appropriate accounting principles.

The use of consensus to develop accounting principles would decrease the professional status of the accountant. In many respects, the FASB is a quasi-governmental agency in that its pronouncements are required to be followed because the SEC has provided support for this approach. It might be useful to inform the students that not all countries follow this model.

For example, the purely political approach is used in France and West Germany. The private, professional approach is employed in Australia, Canada, and the United Kingdom. Resources are channeled where needed at returns commensurate with perceived risk. Thus, reported accounting numbers have economic effects in that resources are transferred among entities and individuals as a consequence of these numbers.

It is not surprising then that individuals affected by these numbers will be extremely interested in any proposed changes in the financial reporting environment. Also, Congress has been attempting to legislate certain accounting practices, particularly to help struggling industries.

Some possible reasons why other groups might wish to establish GAAP are: 1. As indicated in the previous answer, these rules have economic effects and therefore certain groups would prefer to make their own rules to ensure that they receive just treatment.