Solution Manual for Accounting And Auditing Research: Tools And Strategies , 9th Edition

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Accounting & Auditing Research:Tools and Strategies9th EditionSOLUTIONS MANUALThomas R. Weirich, PhD, CPAThomas Pearson, LL.M., J.D., CPANatalie Churyk, PhD, CPACHAPTER 1INTRODUCTION TO APPLIED PROFESSIONAL RESEARCHDiscussionQuestions1. Research in general involves the investigation and analysis of an issue in question.Theresearcher usually applies reasonable and reflective thinking to develop an answer to the issue orproblem at hand. Research requires a clear definition of the problem, using professionaldatabases to search the authoritative literature, reviewing and evaluating the data collected,drawing conclusions and communicating your rsults.2. Accounting, auditing, or tax research involve a systematic and logical investigation of an issueor problem using the accountant’s professional judgment.Furthermore, accountants approachthis problem using critical-thinking skills to obtain and document evidence underlying aconclusion relating to an issue or problem currently confronting the accountant or auditor.3. Accounting, auditing, or tax research are necessary in order to determine the proper recording,classification, and disclosure of economic events; to determine compliance with authoritativepronouncements; or to determine the preferability of alternative accounting procedures.4. The objective of accounting, auditing, or tax research is a systematic investigation of an issueor problem utilizing the researcher’s professional judgment to arrive at appropriate and timelyconclusions regarding the issues at hand.5. Research plays an important role within an accounting firm or department. It is critical for theaccountant/auditor to be able to find and locate applicable authoritative pronouncements and toascertain their current status. Given the number and diversity of clients served, public accountingfirms constantly engage in research on a wide array of accounting, auditing, or tax issues.This

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Weirich, Accounting & AuditingResearch, 9thEditionresearch process is usually conducted by the local office staff, selected local or regional"research specialists," and/or the executive office research personnel.6. The functions of a multi-office CPA firm's Policy Committee are to evaluate significantaccounting and auditing issues and establish firm-wide policies on these issues.Its ExecutiveSubcommittee handles daily ongoing policy (i.e., lower-level) decisions for the firm as a whole.7. Some basic questions that the researcher must address in performing, accounting, auditing, ortax research include: Do I have the knowledge to do the research?; What is authoritativeliterature?; Does authoritative literature address the issue?; If authoritative literature does exist,where can I find it?; If there exist more than one alternative of authoritative support, which onedo I use?; If authoritative literature does not exist, what do I do?; What professional databases doI use?8. Theoretical (pure or basic) research involves investigating questions that, while interesting,have little or no present, practical applications; while applied research involves investigatingissues of immediate, practical importance.9.Someofthecharacteristicsthatapractitioner-researchershouldpossessincludeinquisitiveness, open-mindedness, patience, thoroughness, and perseverance.10. The “Research Navigation Guide” serves as a tool in navigating through the authoritativeliterature. The guide helps to focus or narrow one’s research when utilizing various databaseslike the FASB’s Codification System. One would first focus on a functional area like “FinancialAccounting”. Once the functional area is identified then focus on the broad categorization of thetopic such as “Revenue”. This is followed by focusing on the subtopic that allows for furthersegregation of the issue “Software Revenue”. The final step would be to focus on the section ornature of the content of the issue which is often a recognition, measurement, or disclosure issuesuch as “Recognition of Software Revenue”.11. While a priori (before the fact)research refers to research before the client actually entersinto the (proposed) transaction, a posteriori (after the fact) research refers to research relating topast or completed economic transactions. For planning purposes, the practitioner would rather beinvolved with a priori research to work with the client to develop a correct solution rather thanattempting to correct a completed transaction.12. The California court decision stresses that "well-informed" accountants are expected tomaster "standard research techniques" (or face severe malpractice claims).13. The research process "adds value" to an accounting firm’s services, since today's complexbusiness transactions and proliferation of new authoritative pronouncements mandates that thefirm efficiently and effectively conduct such research for their clients.14. Some economic consequences to the standard-setting process of performing research includethe impact of such pronouncements to investors and creditors resource allocation decisions in

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Weirich, Accounting & AuditingResearch, 9thEditiontoday's (competitive) capital markets, and the cost/benefit analysis of the issuance of a newstandard.15. Since the accounting and auditing literature is organized with a keyword indexing system,listing keywords in step one of the research process will aid the researcher in locating theauthoritative literature in an efficient and effective manner. Failure to describe the keywords insufficient detail can cause one to overlook important sources.16. The five steps involved in the research process include: identifying the (research) issue,collecting the (appropriate) evidence, evaluating the results and identifying alternative solutions,developing (appropriate) conclusions, and communicating the results to the interested parties.17. Research can support or refute a biased alternative by gathering evidence that is eitherunbiased or slanted toward the alternative being researched.Since the researcher should beunbiased in evaluating the various alternatives, the process often requires a (detailed and logical)analysis of complex and detailed accounting issues--thereby requiring "critical thinking" skills.18. Problem distillation entails "refining" and "restating" the research issue from general tosufficiently specific terms, in order not to waste time investigating irrelevant items.19.TheskillstestedontheCPAexaminclude:understanding,analysis,judgment,communication,research, and synthesis.20. A research memorandum should contain such attributes as selecting objective and unbiasedwords; a grammatically correct and well-spelled, clear statement of the issue researched; astatement of the facts; a brief and precise discussion of the issue; and a straightforwardconclusion based upon supported and identified authoritative literature.The researcher should avoid making such common errors as excessive discussion of the issuesand facts, excessive citations to authoritative sources, avoidance of presenting a conclusion, andincluding irrelevant information.21. Critical-thinking skills (e.g., understanding a variety of contents and circumstances andapplying various accounting, auditing, and business principles to help solve the problem underreview) helps the researcher effectively and efficiently gather relevant facts, synthesize andevaluate alternatives, and develop alternative solutions.22. The SEC stressed the importance of accountants performing effective research, claiming thatthis CPA's deficiency constituted a lack of exercising "due professional care."23. Although this question is raised in Chapter 1, it is not directly answered until a later chapter.However, in Chapter 1 it briefly discusses that when authoritative literature does not exist on aspecific issue, the practitioner would normally develop a theoretical solution based on logic oranalogous authortitaive literature. In a later chapter we will focus on this question in detailwhereby one utilizes the “FASB’s Conceptual Framework” and other authoritative literature byanalogy to solve the problem.

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Weirich, Accounting & AuditingResearch, 9thEdition24. The standard setter for accounting standards for federal government entities is the FederalAccountingStandardsAdvisoryBoard(FASAB).ThePCAOBdoesnotsetaccountingstandards, but auditing standards.25. Since you are conducting accounting research for a public company (Microsoft), theresearcher would utilize the standards of the FASB located on the FASB Codification databasewhich is tshe fous of Chapter 4. This database also includes the authoritative stnadards of theAICPA. GAO and PCAOB standars are suditing standards, not accounting standards.26. Qualitiative analytics focuses on non-quantitiative data such as videos, pictures, or an enity’se-mails. Wheras quantiative analysis focuses on the analysis of numberical data suchas trends ofdollar sales and focusing on the outliers.27. Data analytics is considered a process of inspecting, cleansing, transforming, and modelingdata with the goal of discovering useful information, suggesting conclusions, and supportingdecision-making.28. Examples of structured data would be data found in excel spreadsheets. Examples ofunstructured data would include pictures, videos, or Twitter feeds.Exercises1.Current Quality Control stdandards of the PCAOB include:QC 20-System of QC for a CPA Firm’s Accounting & Auditing Practice.QC 30-Monitoring a CPA Firm’s Accounting & Auditing PracticeQC 40-ateh personnel Managaement Element of a Firm’s QC Conpetencies.2.The IASB is the independent, accounting standard setting body that issuesinternationalfinancial reporting standards (IFRS) which are discussed in Chapter 5.3.Recent IAASB standards include:ISA (Revised)-Consideration of Laws & Regulations in an Audit of Financial Statements.ISA 810 (Revised)-Engagementsto Report on Summary Financial Statements4.Two publications of the AICPA include publications related to Accounting & Auditingand Business Valuation, as well as other publications listed at the AICPA’s website.

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Weirich, Accounting & Auditing Research, 9thEditionCHAPTER 2CRITICAL THINKING and EFFECTIVE WRITING SKILLSFOR THE PROFESSIONAL ACCOUNTANTDiscussion Questions:1. Critical thinking has many definitions. One definition is as follows: Critical thinking involvesa process of (more deeply)understanding, evaluating, and judging the underlying issues underinvestigation.2. The highest level of thinking according to Bloom’s taxonomy entails the "evaluation” of astatement (based upon definite criteria) for a given purpose.3. In Bloom’s taxonomy, comprehension(or grasping the meaning of a statement) entails theability of restating the item into the researcher’s own words without changing the statement'smeaning--thereby entailing a higher order skill than merely paraphrasing it.4. While critical thinking involves a process of (more deeply) understanding, evaluating andjudging the underlying issues under investigation, professional skepticism entails an attitude ofexamining and recognizing emotional-laden, and explicit and hidden assumptions “behind” eachquestion.5. The qualities that lie behind rethinking include: a willingness to say that you don’t know theanswer, an openness to alternatives, an interest in the ideas of others, thoughtfulness, a desire todiscover what othershave done and thought, an insistence on getting the best evidence, and anopenness to one’s own intuition.6. The three levels of thought by the Illinois Renewal Institute include: Recall--the lowest level,where one defines, describes, lists, recites or selects; Process--the second level, where onecompares, contrasts, classifies, sorts, and analyzes; and Application--the highest level, where oneevaluates, imagines, judges, and hypothesizes.7.TheAICPA’slistofeffectivewritingcharacteristicsincludeacoherentorganization,conciseness, clarity, use of standard English, responsiveness to the requirements of the question,and appropriateness for the reader. The editing skills include conciseness, clarity, and the use ofstandardEnglish.Thecomposingskillsincludeorganization,responsiveness,andappropriateness.8. Per SEC Rule # 33-7380, six principles of clear writing include using:a.Active voice;b.Short sentences;c.Everyday language;d.Tabular presentation of complex material;e.No legal jargon; and

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Weirich, Accounting & Auditing Research, 9thEditionf.No multiple negatives.9. Plain English writing doesnotmean deleting complex information. Rather, it presentsdocuments in an orderly and clear fashion so the reader can better understand it.10. The elements of plain English include: Knowyour audience; know what material informationneeds to be disclosed; use clear writing techniques; and design and structure the document forease of readability.11. The active voice uses strong, direct verbs. The subject of the sentence performs the actiondescribed by the verb. An example: “ I will respond to the client’s memo.” The passive voice iswhere the action is done to somebody or something by another agent. The passive voice oftenuses the words “be" or "been.” An example: “No one has been authorized to respond to theclient’s memo.”12. Special concerns of using e-mails include the need to develop strong writing skills as oneattempts to state his or her thoughts as concisely as possible; and strong technological skills inthe security of the transmission of the communication.13. The different types of client letters include: transmittal letters that merely transmitinformation; status update letters that reminds the client about a situation by providing an updateto the issue; action request letter requests action; and an opinion letter summarizes the situationvery briefly.14. A memo to the file documents the reasoning for one’s conclusion that might be related to aresearch issue. A client letter normally does not document the details of the research process.15. A tax memo is often unique in that it usually includes the reasoning for the law or authoritiesused, as well as the application of the law or authorities to the client’s set of facts. The memowould include the following areas: Facts, Issues, Conclusion, and Reasoning. Chapter 7 willprovide greater details as to tax issues and memos.16. In Bloom’s Revised Taxonomy, Understanding includes “explaining ideas or concepts”,interpreting, summarizing, paraphrasing, classifying, or explaining. Evaluating includes“Justifying decision or course of action” checking, hypothesizing, critiquing, experimenting,judging.

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Weirich, Accounting & Auditing Research, 9thEditionExercises:1. The solution to this logic problem is the following:House 1House 2House 3House 4House 5ColorYellowBlueRedWhiteGreenCountryAmericaRussiaEnglandSpainJapanSportFootballTable TennisHockeyBasketballBaseballDrinkWaterTeaMilkOrange JuiceCoffeePetFoxHorseHamsterDogMonkey2.Allison is theeldest.A= Allison, M= Mary, J= Jennifer, X=eldestIf M = 1/2 X, J= A +M +1/2 XIf A is eldest: A=X, J= X =1/2 X =3/2 X and Jennefer receives the highest points, andMary as youngest receives the least points.If J is the eldest: J=X, J=A +1/2 X, A= 1/2 X, Allison and Mary receive the same numberof points. However, the youngest receives the least points, so J cannot be the eldest.3. The eight elements of reasoning as to the question of when assets need to be classified ascurrent assets are as follows:a.Purpose—the purpose is to respond to the client’s request for information.b.Issue—the issue is to provide a specific response to the question, "When do assetsneed to be classified as current assets?"c.Information—theinformationforthisissuewouldincludetheauthoritativeaccounting literature.d.Concepts—the concepts would include the concepts (definition) of an asset, andthe classification between current and long-term assets.e.Assumptions—the assumption to classify an asset as current is that it will be usedup, or consumed within one year or the operating cycle, whichever is longer.f.Interpretations or inference—the interpretation requires one to determine from theevidence whether the asset will be used up or converted into cash.g.Implications or Consequences—If an asset is not properly classified, the analysisof the financial statements (i.e., current ratio) would be misleading.h.Solution—An asset should be classified as a current asset when it will beconverted into cash, or consumed in operations within one year or the operatingcycle, whichever is longer ( ASC 210-45-3).

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Weirich, Accounting & Auditing Research, 9thEdition4.The eight elements of reasoning for the question of when a contingent liability should bebooked are as follows:a.Purpose—the purpose is to respond to the client’s request for information.b.Issue—the issue is to provide a specific response to the question, "When should acontingent liability be recorded?"c.Information—theinformationforthisissuewouldincludetheauthoritativeaccounting literature.d.Concepts—the concepts would include the concepts (definition) of a contingentliability, and when to record a liability.e.Assumptions—the assumption to record a contingent liability would be that the dollaramount can be estimated and the liability is probable in occurrence.f.Interpretationsorinference—theinterpretationrequiresonetoevaluatetheprobability of occurrence and whether the amount can be reasonably estimated.g.Implications—If a contingent liability meeting the requirements of FASB No. 5 is notrecorded, then the financial statements are misstated.h.Solution—a contingent liability should be recorded if it meets the two criteria of ASC450-20-25-1—probable and the amount can be reasonably estimated.5.Correct punctuation:a.A general ledger contains all the assets, liabilities, and owners’ equity accounts.b.The purpose of a trial balance is to prove that debits equal credits, but this doesnot prove that all transactions have been recorded.c.The current assets section of the balance sheet contains items such as cash,accounts receivable, and prepaid expenses; and the current liabilities sectioncontains items such as accounts payable, notes payable, and short-term debt.d.The auditing exam was to begin at 2:00 p.m., but the professor’s car broke down,so we didn’t begin until 2:30 p.m.e.Did William ask, “ How can we finish the audit tonight because Linda said, ‘Wehave twenty hours of work left to do’”?6.Examples of the sentences rewritten:a.Original sentence;For good reasons, the secretary may grant extensions of time in 30-dayincrementsfor filing of the lease and all required bonds, provided that additionalextensionsrequests are submitted and approved before the expiration of the original30days or the previously granted extension.+rewritten:We may extend the time you have to file the lease and required bonds. Eachextension will be for a 30-day period. To get an extension, you must write usgiving the reasons that you need more time. We must receive your extensionrequest in time to approve it before your current deadline or extension expires.

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Weirich, Accounting & Auditing Research, 9thEditionb.Original sentence:If the State agency finds that an individual has received a payment to which theindividual was not entitled, whether or not the payment was due to theindividual’s fault or misrepresentation, the individual shall be liable to repay tothe State the total sum of the payment to which the individual was not entitled.rewritten:If the State agency finds that you received a payment that you weren’t entitled to,you must pay the entire sum back.c.Original sentence:Universities differ greatly in style, with some being located on out of towncampuses in parkland, others having buildings scattered about parts of city centersand others being at various points between these two extremes.rewritten:Universities differ greatly in style. Some are located on out of town campuses inparkland. Others have buildings scattered about parts of city centers. Others areat various points between these two extremes.7.Multiple Negatives sentence rewritten:Original sentence:No termination will be approved unless the administrator reviews the applicationandfinds that it is not lacking any requisite materials.Rewritten:Termination will be approved if the administrator finds the application to contain allrequisite materials.8.Active Voice sentences rewritten:a. Original sentence:The fraud was reported by the employee.Rewritten sentence:The employee reported the fraud.b. Original sentence:The book was enjoyed by me because the seven fraud investigation techniques weredescribed so well by the author.Rewritten sentence:I enjoyed the book because the author described the seven fraud investigationtechniques so well.

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Weirich, Accounting & Auditing Research, 9thEdition9.By keeping $20, the bellboy changed the auditors’ rate to $270 ($250 actual + $20 stolen).The $20 should have been subtracted from the $270rather than added! The $300 is composed ofthe $250 cost, the $30 refund, and the $20 stolen.10.This question involves critical thinking that will vary between students and therefore doesnot have a right answer. Keys issues has future value and owned by the entity.11. Some potential answers to the given questions include:An asset “stays” as an asset as long as it generates future cash inflows to the company.Thus, an obsolete machine that continually requires much labor and other maintenancecosts to keep operating could well be considered a liability—especially if cheapertechnologies have arisen.While financial statements may not report certain assets and liabilities, such as humanresources (employees), or the benefits of high employee morale, themore criticalquestion is if the presented financial statements provide useful information to decisionmakers: i.e., can such decision makers make more informed decisions when they use suchstatements than they would have if these statements were unavailable? (Part 2) Similarly,financial statements that present assets at historical costs—rather than at fair marketvalues—should provide more meaningful information than not reporting statements thatfollow GAAP.Moreover, the objectivity of assets reported at historical costs usuallysupersedes those presented at current value.12.A liability should normally be first reported when the entity can reasonably measure theexpected cash outflows associated with a financial transaction or event (and stop recognizingsuch liabilities when the entity can no longer meet these “reasonably measurable” criteria).Forexample, a firm experiencing potential environmental remediation liabilities should recognizesuch liabilities when it ascertains a reasonable value of the amount of such damages. SFAS No.5 discusses this matter further.13.A primary advantage of using a contra-accumulated depreciation—rather than as a directreduction to the associated fixed asset account—includes keeping better track of theoriginal cost of the acquired asset.Disclosingboththe original and accumulated(depreciation) components of a fixed asset informs the financial statement reader of whatpart of such assets have “expired.” Moreover, directly reducing the “used” portion offixed assets will eventually bring such assets (i.e., at the end of their depreciable lives—unless some salvage value exists) to a ‘zero value,” while these assets actually exist.14.a)The professor received his PhD from the University of Illinois, and he continuedteaching there after he wasfinished with the program.b) The general ledger does not balance. It must balance before we leave.c) Did Robert say, “Can this item be classified as an asset?”

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Weirich, Accounting & Auditing Research, 9thEditiond) Susan’s investigation didn’t discover any fraud but there’s new evidence that mightkeep the investigation going.e) Dear Mr. Smith,15.a) The auditor said, “We must have these work papers completed by tomorrow.”b)When do we have to file our taxes?c) Is the conference in Dallas or Austin, Texas?

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Weirich, Accounting & Auditing Research, 9thEditionCHAPTER 3THE ENVIRONMENT OF ACCOUNTING RESEARCHDiscussion Questions1. The development of accounting standards is influenced by such environmental considerationsas the requirements of federal, state, and local government, and other regulatory bodies;influence of various tax laws on the financial reporting process; practices or problems of certainspecialized industries (such as the motion picture or the oil and gas industries); inconsistencies inpractice; disagreements among accountants, business executives, and others as to the objectivesof financial statements; and influence of professional organizations.2. A primary reason for the establishment of accounting standards appears to be in response tothe increasing needs of various financial statement users--including investors, lenders, andgovernmental entities; the increasing complexity of business enterprises and their underlyingeconomic eventsand accounting transactions;and the increasingrequestsof governmentagencies, legislative bodies, and professional organizations to respond to this demand.3. The FASB uses "due process" in developing its Standards, including identifying the problemor issue and considering legal or SEC pressures; deciding whether to consider the issue;establishing a task force to study the problem; having its research staff investigate the issues;issuing a discussion memo to interested parties; holding public hearings and request writtencomments on the issue; analyzing the results of the investigation, mail and hearings; if action isappropriate, issuing an exposure draft (a preliminary SFAS); requesting additional comments onthe exposure draft and holding further public hearings; after analyzing the public response,issuing a final SFAS.4. The FASB's conceptual framework project is a long-term project that should help describeconcepts and relationships that underlie financial accounting standards and address such issues asthe following: the elements of financial statements and their recognition, measurement, anddisplay; capital maintenance; unit of measure criteria for distinguishing information to beincluded in financial statements from that which should be provided by other means of financialreporting; and criteria to evaluate and select accounting information (qualitative characteristics).This project can help practitioners develop theoretical justification for resolving issues thatcontain no authoritative citations.5. Statements of Financial Accounting Concepts (SFAC) are not authoritative because FASB didnot use full due process in this project.Therefore, CPAs need not justify departures from theirguidance.6. Some authoritative publications of the AICPA include: ARBs and APB Opinions (and non-authoritative Statements of Position and Issues Papers).7.If content is within the Codification, it is authoritative.

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Weirich, Accounting & Auditing Research, 9thEdition8. A typical Accounting Standards Update (ASU) will contain the following; A summary of thekey provisions leading to the update, specific amendments to the Codification along withimplementation guidance, basis for the Board’s decisions (including background information),and amendments to the XBRL Taxonomy.9. No, ASU’s are not authoritativein their own right. ASUs contain Codification updateinstructions and that becomes authoritative.10.ASUs areissuedin sequential orderby the FASB, the EITF, and the PCC.Thus, theyencompass FASB standards, emerging issue standards, and private company standards.ASU’sare issued in the format of “year-sequential update number” (For example, 2017-2 is the secondstandard issued in 2017) and are labeled by the body creating the standard (FASB, EITF, orPCC).11.The purpose of GASB is to set financial accounting and reporting standards for the publicsector as the FASB does for all private entities.The public should have an interest ingovernmental financial reporting because of the large value of assets managed by governmentalentities.The financial community can also be affected by financial crisis in municipal units,such as the infamous crisis in New York, Cleveland, and Orange County.12. Generally Accepted Accounting Principles (GAAP) constitutes "a technical accounting termwhichencompassestheconventions,rules,andproceduresnecessarytodefineacceptedaccounting practice at a particular time." GAAP also changes in response to changes in thebusiness environment, and alternative principles for similar transactions may be consideredequally acceptable.13. A critical implication of authoritative support relative to GAAP for the researcher includesthat he or she should seek to find the highest available level of support.Primary authoritativesupport should be reviewed first; however, if no primary sources are found, the researcher wouldthen drop down and review any available secondary support.14.In conducting efficient research, the researcher should begin by reviewing primary sourcesthat have the highest level of authority in the GAAP hierarchy prior to July 1, 2009 and theFASB Accounting Standards CodificationTM(The Codification) subsequent to July 1, 2009.15.Promulgated accounting standards frequently impact economic behavior, since decisionmakers frequently engage in certain transactions in order to "report" better financial statements.For example, companies adopting the provisions of FASB ASC 740-10-35-4 (Changes in taxlaws or rates) could "transfer" part of their Deferred Tax Liability from a liability on the balancesheet to revenue on the income statement, as income tax rates fall; the reverse would occur asincome tax rates rise.16. Primary authoritative support differs from secondary authoritative support in that the formerone provides sufficient authoritative support for including a particular accounting principle

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Weirich, Accounting & Auditing Research, 9thEditionwithin GAAP. However, secondary authoritative support includes sources that support inclusionwithin GAAP, but individually do not constitute authoritative support.17. The formation of the GASB caused the following two governmental organizations to beadded to the list of Financial Accounting Foundation sponsors: the Government Finance OfficersAssociation (GFOA) and the National Association of State Auditors, Treasurers, and Controllers.18.Answers will vary.Rules-bases accounting provides specific rules or “bright-lines” for theaccountant to follow while preparing financial statements. Principles based accounting does notprovide these specific rules, thereby relying on professional judgment.An advantage to havingrules is that there will be no question as to how to apply or interpret the standard.Thedisadvantage to having rules for all standards is that the volumes of literature are ever expandingand when standard setters leave anything open to interpretation, they are inundated withquestions on how to apply the standard. Another disadvantage to “rules” is that not everycompany fits a certain mold. With that in mind, companies not fitting the rule must as for anexception or another application to be permitted.19.FASB is addressing the “standards overload”issue by implementing a framework thatemphasizes issuing standards that focus more on objectives than detailed rules.In addition,another project aims at improving the quality of the cost-benefit analysis performed on proposedstandards, reducing the costs of new standards without decreasing the benefits.Overall, theFASB’s goal is to make accounting standards that are easier to understand and apply.20.The Private Company Council (PCC). It was created in 2012 to recommend guidance forprivate business entities.21. PCC Decision-Making Framework: Framework identified five areas of difference betweenprivate and public entities:a. number of primary users and their access to managementb. primary user investment strategiesc. ownership and capital structured. accounting resourcese. new financial guidance education22. The seven FASB board members are elected by the FAF.They serve 5 year terms and areeligible for one additional 5-year term.Practice Exercises on Standard Setters1. The eight elements of reasoning for this question would include:a.Purpose—the purpose is to respond to the client’s request for information.b.Issue—the issue is the proper accounting for R&D according to U.S. GAAP andInternational AccountingStandards.c.Information—the information sources one would utilize are U.S. authoritativeliterature and International Accounting Standards.d.Concepts—the concept would include the capitalization or expensing of R&D.

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Weirich, Accounting & Auditing Research, 9thEditione.Assumptions—the assumptions would be that in order to capitalize R&D thereexists future economic benefits.f.Interpretations or Inferences—the interpretation is that R&D costs have futureeconomic benefit in order for Daimler to capitalize such costs. Also, one mustconclude whether U.S. GAAP or International Accounting Standards are moreappropriate if there exists a conflict.g.Implications or consequences—if R&D costs are not properly recorded, thefinancial statements are considered misleading.h.Solution—the solution according to US GAAP—FASB No. 2—is to expenseR&D costs.2. As of 07/1/2017the Board members were Russell G. Golden, James L. Kroeker, ChristineAnn Botosan, Marsha L. Hunt,Harold L. Monk, Jr., Harold Schroeder, Marc A. Siegel.3.This answer will change as new standards are issued. As of03/27/2017 the FASB’s three mostrecent issued exposure drafts were:a.Proposed Accounting Standards Update—Compensation—Stock Compensation(Topic 718): Improvements to Nonemployee Share-Based Payment Accountin(Issued 03/07/17)b.Proposed Accounting Standards Update—Inventory (Topic 330): DisclosureFramework—Changes to the Disclosure Requirements for Inventory (Issued01/10/17)c.Proposed Accounting Standards Update—Debt (Topic 470): Simplifying theClassification of Debt in a Classified Balance Sheet (Current versus Noncurrent)(Issued 01/10/17)4. GASB Concept Statement No.1—Objectives of Financial Reporting; Concept Statement No.2—Service Efforts and Accomplishments Reporting5.This answer will change as new standards are issued.As of03/27/2017, the GASB’s threemost recently issued exposure drafts were;a.Implementation Guide No. 201X-Y,Implementation GuidanceUpdate(Issued 11/16/2016)b.Implementation Guide No. 201X-X,Financial Reporting forPostemployment Benefit Plans Other Than Pension Plans (issued10/05/2016c.Omnibus 201X (Issued 09/13/2016)6a.Thisanswer will change as new standards are issued.As of 03/27/2017, the two mostrecently issued FASB Statements were:a.Update 2017-10–Service Concession Arrangements (Topic 853): Determining theCustomer of the Operation Services (A consensus of the FASB Emerging Issues TaskForce).b.Update 2017-09-Compensation–Stock Compensation (Topic 718): Scope ofModification Accounting6b. As of July 1, 2017, the following PCC ASUs have been issued:

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Weirich, Accounting & Auditing Research, 9thEditiona.Update 2016-03—Intangibles—Goodwill and Other (Topic 350), BusinessCombinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic815): Effective Date and Transition Guidance (a consensus of the Private CompanyCouncil)b.Update No. 2014-18—Business Combinations (Topic 805): Accounting for IdentifiableIntangible Assets in a Business Combination (a consensus of the Private CompanyCouncil)c.Update No. 2014-07—Consolidation (Topic 810): Applying Variable Interest EntitiesGuidance to Common Control Leasing Arrangements (a consensus of the PrivateCompany Council)d.Update No. 2014-03—Derivatives and Hedging (Topic 815): Accounting for CertainReceive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge AccountingApproach (a consensus of the Private Company Council)e.Update No. 2014-02—Intangibles—Goodwill and Other (Topic 350): Accounting forGoodwill (a consensus of the Private Company Council)7. The primary function of the Financial Accounting Standards Advisory Council (FASAC) is asfollows:Has advisory role in the process of establishing and improving financial accounting andreporting. FASAC works closely with the FASB in an advisory capacity to ensure that the viewsof its members are constantly and effectively communicated to the FASB. The FASAC ischarged with responsibility of consulting with the FASB on major technical and non-technicalissues and all other projects the FASB works on.8. As of 03/27/2017a. The two most recently issued SEC proposed rules include:1.Inline XBRL Filing of Tagged data (issued 3/1/17) and2.Proposed Amendments toExchange Act Rule 15c2-12 (issued 03/01/2017)b. The Office of Internet Enforcement (OIE) has the following responsibilities:1) conducts Internet investigations and prosecutions,2) identifies areas of surveillance,3) formulates investigation procedures,4) performs training for the Commission staff and others, and5) serves as a resource on Internet matters for the entire Commission.9. As of 03/27/2017the three most recently issued comment letters from the FEI to the FASBinclude:1.CCR Comments on the FASB’s Proposal Addressing the Application ofDisclosure Requirements for Inventory Guidance (Issued 03/13/2017)2.Cross-Border Application of the Registration Thresholds and External BusinessConduct Standards Applicable to Swap Dealers and Major Swap Participants(Issued 12/16/2016)3.CCR Comments on FASB’s Derivatives and Hedging Proposal (Issued11/29/2016)

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Weirich, Accounting & Auditing Research, 9thEdition10. As of 03/27/2017 the Accounting Standards Executive Committee has issued:1) Comment letter on ASU (Topic 944)2) Comment letter on Proposed ASU (Topic 815)3) Comment letter on FASB’s August 4, 2016 Invitation to CommentAgendaConsultation11. As of03/27/2017, three upcoming conferences of the IIA include:1) New York Seminar, 04/04/2017, MicroTek Training Facility2) Las Vegas Seminar, 04/17/2017, The Mirage3) Gaming & Hospitality Conference, 04/19/2017, The Mirage

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Weirich, Accounting & AuditingResearch, 9thEditionCHAPTER 4FINANCIAL ACCOUNTING RESEARCH TOOLSDiscussion Questions1. The advantages of commercial databases, compared to free internet sources, include theproviding of a more comprehensive document retrieval system, having better searchcapabilities,and making an effort to seek out reliable sources of information.2. Some tools to help in using a database include the use of connector terms, databasedirectories, different products within the database, and the use of full text searches or citationsearches.3. The typical search process in a database entails:a. Define the specific information needed.b. Determine the sources to search.c. Develop a search inquiry using keywords and sometimes connectors and limitations.d. Select how to view the search results, such as full text or just the citations.e. Print or download the relevant documents.4. The challenges to accounting research include the issue of finding all relevant authoritativesources, and the fact that in certain cases there are no clear cut answers to the issue or problem.Professional judgment is required for problems that do not have apparent answers.5. The four major topical FASB Codification topical guidance areas are: presentation, financialstatement accounts, broad transactions, and industries.6. The topical area “financial statements accounts” is further refined into subtopics: assets,liabilities, equity, revenues, and expenses.7. Original Pronouncements can be found in“Pre-Codification Standards” located in the leftnavigation panel. Original standards can also be accessed from the FASB website.8. The Codificationis authoritative U.S. GAAP. For user convenience,it containslimited SECcontent.9. Secondary sources are used to help the researcher find an answer to a problem that has noprimary authoritative support.Secondary sources need to be combined with other secondarysources to help support a conclusion.10. a. Authoritative GAAP sources are found in the Codification and can originate from ASUsand prior to ASUs, from:the FASB (statements, interpretations, technical bulletins, staffimplementations guides, SFAS 138 examples); Emerging Issues Task Force abstracts and TopicD; Derivative Implementation Group Issues; Accounting Principle Board opinions; Accounting

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Weirich, Accounting & AuditingResearch, 9thEditionResearch Bulletins; accounting interpretations; items issued by the AICPA (Statements ofPosition, audit and accounting guides, practice bulletins, technical inquiry services).b. Non-authoritative GAAP is any item not in the Codification and includes items such asnotable industry practice, APB statements, AICPA issue papers, FASB concept statements,international accounting standards, textbooks, journal articles and monographs.11. The SEC accounting authorities are different than GAAP because they follow the traditionallegal hierarchy and are generally found under Title 17 of the United States Code.They are foundat the SEC’s website and in legal databases such as Westlaw and LexisNexis.They can also befound in the electronic code of Federal Regulations (eCFR).12. The Codification has limited SEC authority for user convenience. The Codification has noauthority over SEC content.13. EDGARis different from other research tools because it uses an XBRL format that andviewer that allow the researcher to extract desirable information for analysis directly from filingswithout having to retype. This removes human error in data extraction and retyping.14. Three common SEC forms include(answers can vary):a.SEC 10-K: Public company annual report. Includes MD&A, select financial data, andaudit opinions. Must be audited by independent external auditors.b.SEC 8-K: Used by a public company to notify investors of material events. Must befiled within 5 days. Material events include change of executive management,entering/cancelling contracts, change of auditor, etc.c.SEC 10Q: Quarterly financial statements. Need not be subject to an audit, but areview.15. Three common SEC regulationsinclude(answers can vary):a.Reg S-K: Prescribes the requirements for information presented outside the financialstatements required under Reg S-Xb.Reg Fair Disclosure: Requires that all publicly traded companies simultaneously disclosematerial information to all investorsc.Reg G: Disclosure requirements related to non-GAAP Financial measuresExercises1.Answers will vary slightly. The five research steps discussed in the chapter are: 1. definewhat information is needed2. determine the sources to search 3. use appropriate searchmethods 4. view the results and 5. communicate the search results. 1. We know theinformation needed–due diligence review of a company. 2. Since that is related toauditing, use the AICPA database to locate the information. 3. perform a keyword searchof “due diligence”. 4. after reviewing the results5. communicate in a memo to the client.2.The five research steps are 1. Define the information needed–Natalie Churyk’ssuggestions for mastering the computerized CPA exam; 2–the sources to search–the

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Weirich, Accounting & AuditingResearch, 9thEditioninternet would be a viable option or a commercial database such as ABI Inform orEBSCO known for locating articles; 3-key word search using the author and key wordsfrom the topic would be appropriate; 4–results from the internet–typing in “NatalieChuryk mastering the cpa exam” resulted in 257 hits. There appears to be two articles byNatalie Churyk–Mastering the Technology, andThe Computer-Based CPA Exam: Hintsfor Managing the Exam Technology. The first is a quick synopsis on exam pitfalls whilethe latter is an inclusive article on the computerized CPA exam. At this point, it may behelpful to circle back to the client to see exactly what the client is looking for (total exam,or just exam pitfalls). 5. Assuming the client is concerned with pitfalls communicate tothe client in a memo the following regardingMastering the Technologyby Natalie TChuryk and Katrina L Mantzke: timing out at the front end, automatic shutdown, nogoing back to completed testlets, budgeting time for all testlets and simulations, the“Microsoft like” but not Microsoft software and how to use it, potential blind spots andother known exam problems.3.The first three subtopics within the general topic of Presentation are: 205–Presentationof Financial Statements, 210–Balance Sheet, and 215–Statement of ShareholdersEquity.4.One possible search strategy is to highlight Broad Transactions, 815-Derivtives andHedging, 30-Cash Flow Hedges, 25–Recognition.5.Cash6.GLOSSARY TERM USAGESEE TOPIC(S)210,230,305,860,942Consistentwith common usage, cash includes not only currency on hand but demand deposits withbanks or other financial institutions. Cash also includes other kinds of accounts that havethe general characteristics of demand deposits in that the customer may deposit additionalfunds at any time and also effectively may withdraw funds at any time without priornotice or penalty. All charges and credits to those accounts are cash receipts or paymentsto both the entity owning the account and the bank holding it. For example, a bank'sgranting of a loan by crediting the proceeds to a customer's demand deposit account is acash payment by the bank and a cash receipt of the customer when the entry is made.7.Film Production Interest Costs926-835-25-1An entity shall account for interest costs related to the production of afilm in accordance with Subtopic835-20.8.Revenue Recognition: Not-For-Profit Entities958Not-for-ProfitEntities > 605RevenueRecognition > 05 Overview andBackgroundGeneralThis Subtopic provides guidance onrevenuerecognition bynot-for-profitentities (NFPs).NFPsalso shall comply with the applicablestandards in Topic 605 . The guidance is presented in the following threeSubsections: a General b Contributions Received c Transfers of Assets to

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Weirich, Accounting & AuditingResearch, 9thEditionaNot-for-Profit...b.958Not-for-ProfitEntities > 30 Split-Interest Agreements > 25 RecognitionRevocable Agreements, they shall be recognized in conformity withSection 958-320-25 or 958-325-25 , as appropriate. Contributionrevenuefor the assets received shall be recognized when the agreement becomesirrevocable or when the assets are distributed to theNFPfor itsunconditional use, whichever occurs first.c.205 Presentation of Financial Statements > 20 Discontinued Operations > 50DisclosureDisclosures Required for a Discontinued OperationComprising a Component or Group of Components of anEntityconstituting the pretaxprofitor loss (or change in net assets for anot-for-profitentity) of the discontinued operation (for example,revenue,cost of sales, depreciation and amortization, and interest expense) for theperiods in which the results of operations of the discontinued operation arepresented...9.Use the topical categories in the left navigation panel to identify the capitalization ofinterest code section (topic, subtopic).835-20Capitalization of interest10.Capitalization of interest is required when getting an asset ready for its intended use.835-20-10-1states that the objectives of capitalizing interest is to obtain a measure ofacquisition cost that more closely reflects an entity's total investment in the asset and tocharge a cost that relates to the acquisition of a resource that will benefit future periodsagainst the revenues of the periods benefited.835-20-10-2states that failure to capitalize interest cost associatedwith the acquisition ofqualifying assets improperly reduces reported earnings during the period of acquisitionand increases reported earnings in later periods.11.Codification codereferencesa.310b.505c.460d.830e.720f.840/842g.440

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Weirich, Accounting & AuditingResearch, 9thEditionh.605i.815j.97xk.35012.Find Use the Codification to find the guidance for (there are additional acceptableanswers, the most common are listed below):a.Prepaid advertising 340-20; 340-10-05; 210-10-45-1; 310-10-05-04a.Reclassification of long term debt. 470-10-45-14; 470-10-45-2, 470-10-45-12a or b,470-10-45-13b.Accelerated depreciation 360-10-35-7 (only answer)c.Range of an estimated loss contingency 450-30-40-1; 450-20-05-5; 450-20-30-1d.Reporting period 270-10-05-1; 270-10-50-1e.Factoring of receivable with recourse 860-10-05-15; 860-20-55-24Students often cite the following but it is incorrect since this cites without recourse–310-10-05-613.Use the Codification to find the guidance for:a.What does it discuss?FASB Interpretation 36 discusses the accounting for explorationcosts by oil and gasproducing companies. Its rationale is that an unsuccessful companywill end upcapitalizing the costs.b.How did you find the authority? Click on pre-codification standards which will link theuser to the FAS websitec.The authority affects the gas and oil producing industry.d.The major organizational parts of that authority are Status, Summary,Introduction,Interpretation, Effective Date and Transition, and the Appendix14.Cost to be recognized as research and development 730-10-25-2Five types of costassociated with R &D activities: (1) Material, Equipment, and Facilities; (2) Personnel;(3) Purchased intangible; (4) contract services; (5) Indirect costs.a.The salaries of the research staff designing new products can be classified as thepersonnel cost related with R&D activities thus can be expensed as R&D costs.730-10-25-2b.The commissions paid to sales staff marketing new products is a selling expense,so it does not qualify. 730-10-15-415.Use the master glossary for the following question.a.Master glossary “C”-An existing condition, situation, or set of circumstancesinvolving uncertainty as to possible gain (a gain contingency) or loss (a loss

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Weirich, Accounting & AuditingResearch, 9thEditioncontingency) to an enterprise that will ultimately be resolved when one or morefuture events occur or fail to occur.b.Masterglossary “c”c.Contingent losses will be recorded when it is probable that a liability has beenincurred at the date of the financial statements and the amount of the loss can bereasonably estimated.d.450-20-2516.Post-retirement benefits other than pensions is located in 715-60. There are 11 sectionsfrom 00 status to 75 XBRL elements. Each section has multiple subsections.17.Left click on Master Glossary in left navigation panel.Left click on the letter “P”. Scrolldown to “postretirement benefits.” Hyperlink to 715-60-50, link to disclosure715-60-50-2This Subsection provides guidance on disclosures regarding the effect ofthe Medicare subsidy. This Subsection also provides guidance on the disclosures aboutthe effects of the subsidy for an employer that sponsors a postretirement health carebenefitplanthat provides prescription drug coverage but for which the employer has notyet been able to determine actuarial equivalency.715-60-50-3In interim and annual financial statements for the first period in which anemployer includes the effects of the subsidy in measuring theaccumulatedpostretirement benefit obligationand the first period in which an employer includes theeffects of the subsidy in measuringnet periodic postretirement benefit cost, it shalldisclose all of the following:•a.The reduction in the accumulated postretirement benefit obligation for thesubsidy related tobenefitsattributed to past service.•b.The effect of the subsidy on the measurement of net periodic postretirementbenefit cost for the current period. That effect includes anyamortizationof theactuarial gain in (a) of this paragraph as a component of the net amortizationcalled for by paragraphs715-60-35-29 through 35-30, the reduction in currentperiod service cost due to the subsidy, and the resulting reduction in interest coston the accumulated postretirement benefit obligation as a result of the subsidy.•c.Any other disclosures required by paragraph715-20-50-1(r).715-60-50-4For purposes of the disclosures required by paragraph715-20-50-1(a)and715-20-50-1(f), an employer shall disclose gross benefit payments (paid and expected,respectively), including prescription drug benefits, and separately the gross amount of thesubsidy receipts (received and expected, respectively).715-60-50-5[Paragraph not used]

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Weirich, Accounting & AuditingResearch, 9thEdition715-60-50-6Until an employer is able to determine whether benefits provided by itsplan are actuarially equivalent, it shall disclose both of the following in financialstatements for interim or annual periods:•a.The existence of the Medicare Prescription Drug, Improvement, andModernization Act•b.That measures of the accumulated postretirement benefit obligation or netperiodic postretirement benefit cost do not reflect any amount associated with thesubsidy because the employer is unable to conclude whether the benefits providedby the plan are actuarially equivalent to Medicare Part D under the Act.18.Preferredstock has debt characteristics ( a and b)It should be accounted for as follows:Mandatorily Redeemable Preferred Stock Not Accounted for as a Liability810-10-40-2Section480-10-25does not require mandatorily redeemable preferred stock to beaccounted for as a liability under certain conditions. If such conditions apply and the mandatorilyredeemable preferred stock is not accounted for as a liability, then the entity's acquisition of asubsidiary's mandatorily redeemable preferred stock shall be accounted for as a capital stocktransaction. Accordingly, the consolidated entity would not recognize in its income statement anygain or loss from the acquisition of the subsidiary's preferred stock. In theconsolidated financialstatements, the dividends on a subsidiary's preferred stock, whether mandatorily redeemable ornot, would be included in noncontrolling interest as a charge against income.>>Mandatorily Redeemable Preferred Stock Accounted for as a Liability810-10-40-2ASection480-10-25requires mandatorily redeemable preferred stock to beaccounted for as a liability under certain conditions. If mandatorily redeemable preferred stock isaccounted for as a liability, then any amounts paid or to be paid to holders of those contracts inexcess of the initial measurement amount are reflected as interest cost and not asnoncontrollinginterestcharge. Topic860specifies whether a liability has been extinguished and Subtopic470-50requires that theparentrecognize a gain or loss upon extinguishment of the subsidiary's liabilityfor mandatorily redeemable preferred shares for any difference between the carrying amount andthe redemption amount.480-10-S99-1The following is the text of CFRR 211: Redeemable Preferred Stock.•[.01 General : ASR 268: [CFRR211,paragraph.01,sequence1]][On July 27, 1979, the Commission amended Regulation S-X to modify thefinancial statement presentation of preferred stocks subject to mandatoryredemption requirements or whose redemption is outside the control of the issuer.The rules adopted do not impact reporting practices of registrants not having suchsecurities outstanding. Registrants having such securities outstanding are requiredto present separately, in balance sheets, amounts applicable to the following threegeneral classes of securities: (i)preferred stocks subject to mandatory redemptionrequirements or whose redemption is outside the control of the issuer; (ii)preferred stocks which are not redeemable or are redeemable solely at the optionof the issuer; and (iii) common stocks. A general heading, "Stockholders' Equity,"is not to be used and presentation of a combined total for equity securities,

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Weirich, Accounting & AuditingResearch, 9thEditioninclusive of redeemable preferred stocks, is prohibited. In addition, the rulesrequire disclosure of redemption terms, five-year maturity data, and changes inredeemable preferred stocks in a separate note to the financial statementscaptioned "Redeemable Preferred Stocks."[CFRR211,paragraph.01,sequence2]][The Commission believes that redeemable preferred stocks are significantlydifferent from conventional equity capital. Such securities have characteristicssimilar to debt and should, in the opinion of the Commission, be distinguishedfrom permanent capital. The Commission believes that traditional financialreporting practices do not provide the most meaningful presentation of thefinancial obligations attached to these types of securities and that improvement inthe financial statement presentation of redeemable preferred stocks is necessary.[CFRR211,paragraph.01,sequence5]]19.a.10-Q:Quarterly report under Section 13 & 15(d)b.11-K:Annual report of employee stock purchase, savings & similar plansc.18-K:Annual Report for foreign governments & political subdivisionsd.20-F:Annual & transition report of foreign private issuerse.40-F:Annual reports filed by Canadian issuersf.5:Annual statement of changes in beneficial ownership of securitiesg.8-K:Current reporting filingh.S-1:General form of registration statementi.6-K:Current report of foreign issuerj.40-17F2:Initialcertificate of accounting of securities and similar investments inthe custody of management investment companies20.Rule 10b-5 discusses the issue of the “Employment of Manipulative and DeceptiveDevises.”SAB 99 provided the views of the SEC staff that exclusive reliance on certainquantitative benchmarks to assess materiality in preparing financial statements andperforming audits of those financial statements is inappropriate; misstatements are notimmaterial simply because they fall beneath a numerical threshold.21.The Chief Accountant for the SEC is the principal adviser to the SEC Commission onaccounting and auditing matters. The Office of the Chief Accountant also works closely

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Weirich, Accounting & AuditingResearch, 9thEditionwith domestic and international private-sector accounting and auditing standards-settingbodies tomonitor the application of accounting standards and financial disclosurerequirements.Prepare your client to handle a SEC investigation through internal reviews, self-reporting,correcting problems, and cooperating with the SEC staff.22.The seven methods to search with SEC’s EDGARinclude: company or fund name, tickersymbol, central index key, file number, state, country, or SIC.23.This answer will vary.On the SEC website–the EDGARSystem allows the user tohyperlink to the section desired whereas the report on the company website is static andone must scroll down to the section desired.24.Go to the SEC website (www.sec.gov).a. 39 AAER’s were issued as of 07/02/2017b. JPMorgan provided valuable positions within itsfirm to relatives and friends of keyexecutives of its clients, prospective clients, and Asian government officials. This violatesthe FCPA.Many of their clients were also state-owned entities. JPMorgan was fined$72,000,000 in criminal fines.JPMorgan also paid a grand total of $130,591,405 indisgorgement fees.25.Go to the Electronic Code of Federal Regulations (www.ecfr.gov).a. Part 210b According to S239.11, this form shall be used for first time registration under theSecurities Act of 1933. As for the consolidated balance sheet item, according to S210.3-01,There shall be filed, for the registrant and its subsidiaries consolidated, audited balancesheets as of the end of each of the two most recent fiscal years. If the registrant has been inexistence for less than one fiscal year, there shall be filed an audited balance sheet as of adate within 135 days of the date of filing the registration statement.26.Go to the Deloitte Foundation website (www.deloitte.com). Download a TruebloodCase involving a joint venture or partnership. Write a sentence summarizing the issue inthe case. Use the Codification database to find the authorities providing the answer to theissue presented. Identify those authorities.a.Case 16-6 “Closely Associated Cars”The issue in this case is that a a joint venture (JV) was formed, and we need todetermine if this JVis a variable interest entity (VIE), and who shouldconsolidate JV. According to ASC 810-10-20, “Variable Interest Entity refers toa legal entity subject to consolidation according to the provisions of the Variableinterest subsections of subtopic 810-10.”27.Accessing theJournal of Accounting EducationV37, the four educational casesappearing in this volume are:

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Weirich, Accounting & AuditingResearch, 9thEditiona.Newport Soup: An interactive inherent risk assessment casewith objectives to“To initiate the process of understanding your client'sbusiness, you must emailprofessional inquiries to the “client” (a role played by your instructor) and “askthe right questions” to acquire the information necessary to assess inherent risk.Ultimately, you are asked to prepare a professional memo documenting yourassessment of inherent risk for six account balances as part of the audit planningprocess. An important component of the case is the performance of analyticalprocedures, which you must interpret using your understanding of the companyand the industry in which it operates.”b.WhytGlov Services: IRC Section 1060 asset acquisitionwithobjectives‘toleverage an understanding of depreciation, amortization, and purchase priceallocation rules to assess the competing incentives of the buyer and seller andpresent the allocations preferred by each party. You must also perform analyses todetermine whether a business case exists for the buyer to assume certain loss-generating contracts from the seller. This case develops critical thinking ininterdisciplinary areas (tax, financial accounting, finance, and managerialaccounting) and cultivates the ability to provide professional tax-planning advice.’c.Starbucks: Social responsibility and tax avoidancewithobjectives“designed tohelp you think about the strategic, legal, ethical, and public relations implicationsof tax minimization strategies, especially when companies portray themselves asresponsible “citizens” of the communities in which they operate. The questionsalso probe whether other characteristics of firms, including their “home” countryand the nature of the business, have implications for public perceptions aboutcorporate tax minimization strategies.’d.A case of fixed asset accounting: Initial and subsequent measurementwithobjectivesof “ applying accounting knowledge, professional judgment, andcritical thinking skills to evaluate fixed assets and make recommendations.Analyzing differences between fixed asset accounting under US generallyaccepted accounting principles and IFRS.Knowledge Busters1.Topic: Revenue Recognitiona.Only $1 million in additional sales should be recorded this year. The tworemaining customer sale transactions should not be recorded as sales until nextyear. The SEC believes that the normal business practice for Medical Devices isto have a signed agreement and therefore persuasive evidence of a salearrangement would not occur until Medical Devices receives the signedagreements. (Codification 605-10-S99)2.Topic: Repurchase of Loansa.ASC 310-30-15 requires that if a seller repurchases the asset at a price greaterthan fair value, the seller should record the asset at its fair value and record a lossfor the difference between the purchase price and the fair value.

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Weirich, Accounting & AuditingResearch, 9thEdition3.Topic: Debt Classificationa.ASC 470-10-45-11 states that current liabilities shall include any long-term debtthat are or will be callable by the creditor either because the debtor’s violation ofa debt provision agreement which makes the debt callable or because theviolation, if not cured within a specified grace period will make the debt callable.However, since the violation was cured in the second year and not called, the debtshould be classified as long-term in year 2’s financial statements. The debt shouldnot be reclassified to long-term in year 1 based upon the set of facts.4.Topic: Allowance Accounta.ASC 310-10-35-7 states that “the conditions under which receivables exist usuallyinvolve some degree of uncertainty about their collectability, in which case acontingency exists…”b.ASC 450-20-25-2 would require the establishment of an allowance account ifboth of the following conditions exist:i.Information available prior to issuance of the financial statementsindicates that it is probable that an asset has been impaired, andii.The amount ofthe loss can be reasonably estimatedc.If both of the aforementioned conditions are met, no allowance account isnecessary.5.Topic: Membership Duesa.Since the entity is a not-for-profit organization, ASC 958-605-25-2 requiresthat such dues be recognized as contributions and recorded as revenue whenreceived as no services are exchanged for the dues. However, if services werereceived the dues would be recognized as revenue over the period ofmembership (ASC 958-605-25-1)TRANSITION TO TOPIC 606 in 20186.Topic: Stock Dividenda.ASC 260-10-55-12 requires that the computations of basic and diluted EPS beadjusted retroactively for all periods presented to reflect a change in capitalstructure due to the 3% stock dividend.7.Topic: Inventory Valuationa.ASC 330-10-35-2 states that inventories should be valued the lower of cost ormarket with the excess of market disclosed. Furthermore, ASC 330-10-35-15states that an exception to the lower of cost or market rule to record preciousmetals at market does not apply to National since the diamonds will be used inmanufacturing process rather than being held for immediate sale. Therefore, thediamonds should be valued at cost in this case which is lower than market.8.Topic: Barter Transactionsa.According to ASC 605-20-25-(14-17), U.S. GAAP general requirescompanies to use the fair value of goods or services surrendered as thestarting point for measuring a barter transaction.

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Weirich, Accounting & AuditingResearch, 9thEdition9.Topic: Insurance Contractsa.Since this is an insurance company, ASC 944-Fincial Services-Insurance isthe appropriate reference. Specifically, 944-20-20 (Glossary) provides thedefinition for the two types of accounting that Matt is dealing with.10.Topic:Current Assetsa.ASC 210-10-45-4 states that the concept of current assets can exclude suchitems asfollows: a) Cash and claims to cash that are restricted as towithdrawal or use for other than current operations, are designated forexpenditure in the acquisition or construction of noncurrent assets, or aresegregated for the liquidation of long-term debts. Therefore, the deposit forthe purchase of the equipment should be classified as a noncurrent asset eventhough the purchase is within one year.11.Topic: Treasury Stocka.ASC 505-30-30-4 states the following: “Transactions do arise, however, inwhich a reacquisition of an entity’s stock may take place at prices differentfrom routine transactions in the open market. For example, to obtain thedesired number of shares in a tender offer to all or most shareholders, theoffer may need to be at a price in excess of the current market price. Inaddition, a block of shares representing a controlling interest will generallytrade at a price in excess of market, and a large block of shares may trade at aprice above or below the current market price depending on whether the buyeror seller initiates the transaction. An entity’s reacquisition of its shares inthose circumstances is solely a treasury stock transaction properly accountedfor at the purchase price of the treasury shares. Therefore, in the absence ofthe receipt of states or unstated consideration in addition to the capital stock,the entire purchase price shall be accounted for as the cost of treasury shares.”12.Topic: Inventorya.ASC 330-10-30-1 states in part that, “As applied to inventories, cost means inprinciple the sum of the applicable expenditures and charges directly orindirectly incurred in bringing an article to its existing condition andlocation.” Therefore, warehousing costs would be considered a sellingexpense and not to be allocated to the inventory on hand.13.Topic: Interest Capitalizationa.ASC 835-20-30-3 states that “the amount capitalized in an accounting periodshall be determined by applying the capitalization rate to the average amountof accumulated expenditures for the asset during the period.”b.Further, ASC 835-20-35-3 state that “The compounding of capitalized interestis conceptually consistent with the conclusion that interest on expenditures forthe asset is a cost of acquiring the asset”.c.Therefore, the rate should be applied to the average of all the accumulatedexpenditures.

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Weirich, Accounting & AuditingResearch, 9thEdition14.Topic: Research and Development Costsa.ASC 730-10-25 states that “R&D costs should be expensed when incurred”.There is no justification to capitalize the costs because the business is to besold.15.Topic: Cash Flow Statementa.(ASC) 230-10-15-3states:A business entity or not-for-profit entity that providesa set of financial statements that reports both financial position and results ofoperations shall also provide a statement of cash flows for each period for whichresults of operations are provided.Therefore, if a balance sheet is presented, a statement of cash flows should bepresented for both current and prior periods if income statements are presented forsuch periods.16.Topic. CashFlow Statementa.The amount that will be shown on the statement of cash flows is the two accountswith the positive balances.ASC 230-10-45-4, "The total amounts of cash andcash equivalents at the beginning and end of the period shall be the same amountsas similarly titled line items or subtotals shown in the statements of financialposition..." The net change in overdrafts during the period is a financingactivity.17.Topic: Inventorya.The portion of the slow-moving inventory not reasonably expected to be realizedin cash during the client's normal operating cycle should be classified as a long-term asset in the company's classified balance sheet.(ASC) 310-10-45-9statesthat the termcurrent assetsis used to designate cash and other assets or resourcescommonly identified as those that are reasonably expected to be realized in cashor sold or consumed during the normal operating cycle of the business.18.Topic: Data Analytics and Finance Chargesa.Not an acceptable policy. FASB 310-20 states the interest (actuarial) methodshould be used to account for interest income. Also,ASC 310-2-35-2 requires thatcertain discount loans acquisition costs be deferred and treated as yieldadjustments.19.Topic: SEC Reporting Requirementsa.Form 8-K requires issuers that are subject to the reporting requirements of Section13(a) and Section 15(d) of the Exchange Act to file required reports on Form 8-KL within four business days of a triggering event. The twotriggering events inthis case are the resignations of the two board members and the accounting firm.According to Item 4.01 “Changes in Registrant’s Certifying Accountant” andItem 5.02 “Departure of Directors or Principal Officers”, Clever is required to filea Form 8-K with the SEC.

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