ACCT3321 Study Guide - Final Guide: Bid Price, Accounts Receivable, Ask Price

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FAIR VALUE MEASUREMENT

- Is the price that would be received to sell an asset or paid to transfer a liability in an

orderly transaction between market participants at the measurement date

- Essentially an exit price, where it is the price that would be received to sell an asset

or paid to transfer a liability

oBased on the perspective of the entity that holds the asset or owes the

liability and expectations about future cash flows that would be generated by

the asset or liability subsequent to the sale or transfer

- An orderly transaction is an unforced transaction involving such assets or liabilities: it

is not a forced transaction (e.g. a forced liquidation or distress sale)

oNot orderly = the seller was forced to sell to meet regulatory or legal

requirements or the seller is or near bankruptcy

- Market participants need to:

oBe independent from each other

oBe knowledgeable about the asset or liability

oHave the ability to enter into the transaction

oNot be forced or compelled

- They need to consider

oThe actual asset or liability being measured

oThe principal (or most advantageous) market for the asset or liability – the

market with the most trade in it

oThe market participants with whom the entity would enter into a transaction

in that market

- Transaction and transportation costs

oTransaction costs = The costs to sell an asset or transfer a liability in the

principal (or most advantageous) market for the asset or liability that are

directly attributable to the disposal of the asset or the transfer of the liability

oThese are entity specific therefore, are not included in the measurement of

fair value

oThey must

Result directly from and are essential to that transaction

They would have not been incurred by the entity had the decision to

sell the asset or transfer the liability had not been made

oTransport costs = the costs that would be incurred to transport an asset from

its current location to its principal market

oTransport costs are deducted to determine fair value as they are regarded as

a characteristic of the asset

Steps to make a fair value measurement for a non-financial asset

1. Determine the particular asset that is the subject of the measurement

oWhat is the location of the asset, the condition, any restrictions on sale or

use of the asset (e.g. lease) or is it a stand-alone asset of part of a group

2. For a non-financial asset, determine the valuation premise that is appropriate for

measurement

oFair value is measured by considering the highest and best use of an asset

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Document Summary

Is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants need to: be independent from each other, be knowledgeable about the asset or liability, have the ability to enter into the transaction, not be forced or compelled. Result directly from and are essential to that transaction. Maximise the use of relevant observable inputs and minimise the use of unobservable inputs: market approach. A technique that uses prices and other relevant information generated by market transactions: cost approach. A technique that reflects the amount that would be required currently to replace the service capacity of an asset: income approach. A technique that converts future amounts (e. g. cash flows or income and expenses) to a single current (discounted) amount: judgement must be made to determine which approach to use. Depending on the circumstances, data available, extent of observable and non-observable inputs.

Related Questions

FASB SFAS 157 was issued September 2006 for application tofinancial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.This Statement, which applies to assets and liabilities, definesfair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. The statement does notapply to assets acquired and liabilities assumed in an acquisitionof a business or non-profit activity by a not-for-profit entitythat are required to be measured at fair value under FASB StatementNo. 164. The objective of a fair value measurement is to determinethe price that would be received to sell the asset or paid totransfer the liability at the measurement date which is the exitprice. The fair value measurement assumes that the asset orliability is exchanged in an orderly transaction between marketparticipants. For assets, fair value measurement assumes thehighest and best use of the asset by market participants,considering the use of the asset that is physically possible,legally permissible, and financially feasible at the measurementdate. The highest and best use of the asset establishes thevaluation premise. For liabilities, it is assumed that theliability is transferred to a market participant at the measurementdate and that the nonperformance risk relating to that liability isthe same before and after its transfer. The fair value of theliability shall reflect the nonperformance risk relating to thatliability. As in our text, the position in the statement is thatvaluation techniques must be consistently applied. It emphasizesthose valuation techniques using the market approach, incomeapproach, and cost approach to measure fair value. In some cases asingle valuing technique may serve the purpose, however in others,using multiple techniques may be more appropriate. The informationthat is available will help to determine which method that shouldbe used. Examples are provided in Appendix A to illustrate thevarious approaches for certain transactions. The statement alsoestablishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value by placing theminto three broad levels in order to increase consistency andprovide better comparability. Level 1 is given the highest priorityand is based on quoted prices (unadjusted) in active markets foridentical assets or liabilities that the reporting entity has theability to access at the measurement date. Level 2 is based oninformation other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly orindirectly through substantiation with observable market data.Level 3 has the lowest priority and is based on unobservable inputsfor the asset or liability, primarily, inputs that reflect thereporting entityâs own assumptions.

Follow-Up Discussion Expand upon any of the points identified byyour classmates and/or ask for clarification on points that you donot understand.

I have provided the classmates response.

300 words

I NEED 2 PARAGRAPHS RESPOND TO THIS! THANK YOU

A transfer price is the monetary value recorded in a companyâsaccounting records when one division transfers a good or service toanother business unit (Lanen, 2016, P. 584). It is a device tomotivate managers to act in the best interests of the company(Lanen, 2016, P. 586). Sometimes this is disregarded, and managersact in his or her own self-interest. This is done by increasing thetransferring price to make a bigger profit. The transfer pricenegotiated between the divisions can have a huge effect on thereported performance and subsequent decisions made. The transferprice affects the division managersâ decision about whether toengage in the transaction (Lanen, 2016, P. 584). Managers of theselling division and the buying division are both evaluated ontheir divisions profit, and not on the overall company profit.Therefore, they consider, how the sale will impact their division,internally and externally. Having this type of mindset, can affectcorporate profitability negatively. For example, If the buyingdivision perceived the transferring price of the selling divisionto be too high, the buying division decides not to buy the goodsbecause it would be impossible to make a profit. Therefore, thebuying division decides to buy cheaper goods from an outsidesupplier. If the transaction would have occurred between the twodivisions, only one would be profitable. This is because the higherthe transfer price is, the lower the profit, and return oninvestment or economic value added, the buying division willreceive (Lanen, 2016, P. 585). Which will result in a higher profitfor the selling division. Overall, it would not be profitable forthe company. In my opinion, changing profits can result in eachdivision making different decisions, as a result of that decision,group profits may be affected.

redfly450

NEED ASAP PLEASE

Question 1

Which one of the following is not an externaluser of accounting information?

		Customers
		Investors
		Regulatory agencies
		All of these are external users

3 points

Question 2

The first step in solving an ethical dilemma is to

		identify and analyze the principal elements in thesituation.
		identify the alternatives.
		recognize an ethical situation and the ethical issuesinvolved.
		weigh the impact of each alternative on variousstakeholders.

3 points

Question 3

Generally accepted accounting principles are

		income tax regulations of the Internal Revenue Service.
		standards that indicate how to report economic events.
		theories that are based on physical laws of the universe.
		principles that have been proven correct by academicresearchers.

3 points

Question 4

Which of the following events is not a businesstransaction?

		Issuance of stock in exchange for cash.
		Hired employees.
		Incurred utility expenses for the month.
		Earned revenue for services provided.

3 points

Question 5

When assets are distributed to the owners of a corporation,these distributions are termed

		depletions.
		consumptions.
		dividends.
		a credit line.

3 points

Question 6

If total liabilities increased by $8,000, then

		assets must have decreased by $8,000.
		stockholders' equity must have increased by $8,000.
		assets must have increased by $8,000, or stockholders' equitymust have decreased by $8,000.
		assets and stockholders' equity each increased by $4,000.

3 points

Question 7

If total liabilities increased by $30,000 and stockholders'equity increased by $20,000 during a period of time, then totalassets must change by what amount and direction during that sameperiod?

		$50,000 decrease
		$10,000 decrease
		$10,000 increase
		$50,000 increase

3 points

Question 8

Misra Company compiled the following financial information as ofDecember 31:

Revenues	$ 340,000
Retained Earnings, Beginning	$ 60,000
Equipment	$ 80,000
Expenses	$ 250,000
Cash	$ 90,000
Dividends	$ 20,000
Supplies	$ 10,000
Accounts payable	$ 40,000
Accounts receivable	$ 70,000
Common Stock	$ 80,000

Misra's assets on December 31 are

		$180,000.
		$250,000.
		$360,000.
		$ 490,000.

3 points

Question 9

Mofro's Computer Repair Shop started the year with total assetsof $300,000 and total liabilities of $200,000. During the year, thebusiness recorded $500,000 in computer repair revenues, $300,000 inexpenses, and Mofro paid dividends of $50,000. Stockholders' equityat the end of the year was

		$200,000.
		$100,000.
		$250,000.
		$300,000.

3 points

Question 10

A balance sheet shows

		assets, liabilities, and stockholders' equity.
		expenses, dividends, and stockholders' equity.
		revenues, expenses, and dividends.
		revenues, liabilities, and stockholders' equity.

3 points

Question 11

At September 1, Foli Co. reported retained earnings of $136,000.During the month, Foli generated revenues of $20,000, incurredexpenses of $12,000, purchased equipment for $5,000 and paiddividends of $2,000. What is the amount of retained earnings atSeptember 30?

		$136,000
		$142,000
		$8,000
		$137,000

3 points

Question 12

Grayton Industries purchased supplies for $1,000. The Companypaid $500 in cash and agreed to pay the balance in 30 days. Thejournal entry to record this transaction would include a debit toan asset account for $1,000, a credit to a liability account for$500. Which of the following would be the correct way to completethe recording of the transaction?

		Credit an asset account for $500.
		Credit the Retained Earnings account for $500.
		Credit another liability account for $500.
		Debit the Retained Earnings account for $500.

3 points

Question 13

Radio Moscow Industries purchased supplies for $1,000. They paid$400 in cash and agreed to pay the balance in 30 days. The journalentry to record this transaction would include a debit to an assetaccount for $1,000, a credit to a liability account for $600. Whichof the following would be the correct way to complete the recordingof the transaction?

		Credit an asset account for $400.
		Credit another liability account for $400.
		Credit the retained earnings account for $400.
		Debit the retained earnings account for $400.

3 points

Question 14

A credit to a liability account

		must be accompanied by a debit to an asset account.
		indicates an increase in the amount owed to creditors.
		is an error.
		indicates a decrease in the amount owed to creditors.

3 points

Question 15

In recording business transactions, evidence that an accountingtransaction has taken place is obtained from

		business documents.
		the Internal Revenue Service.
		the public relations department.
		the SEC.

3 points

Question 16

On June 1, Leno Inc. buys a copier machine for her business andfinances this purchase with cash and a note. When journalizing thistransaction, the company's accountant will

		make a simple entry.
		use two journal entries.
		make a compound entry.
		list the credit entries first, which is proper form for thistype of transaction.

3 points

Question 17

A three column form of account is so named because it hascolumns for

		debit, credit, and balance.
		debit, credit, and date.
		debit, credit, and account name.
		debit, credit, and reference.

3 points

Question 18

The first step in designing a computerized accounting system isthe creation of the

		general ledger.
		general journal.
		trial balance.
		chart of accounts.

3 points

Question 19

Chik Chik Company showed the following balances at the end ofits first year:

Cash	$ 6,000
Prepaid insurance	$ 9,400
Accounts receivable	$ 7,000
Accounts payable	$ 5,600
Notes payable	$ 8,400
Common stock	$ 2,800
Dividends	$ 1,400
Revenues	$ 44,000
Expenses	$ 35,000

What did Chik Chik Company show as total credits on its trialbalance?

		$51,400
		$60,800
		$62,200
		$70,200

3 points

Question 20

Which of the following time periods would notbe referred to as an interim period?

		Monthly
		Quarterly
		Semi-annually
		Annually

ACCT3321 Study Guide - Final Guide: Bid Price, Accounts Receivable, Ask Price

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