DQ 1

What is a current asset? What is a non-current asset? What is the difference

between the two types of assets? In which financial statement would you find
these assets?

___________________________________________________________________________________

What is a current asset?

Current assets are assets that a company expects to convert to cash or use up
within one year (Kimmel, Weygandt, & Kieso, 2007, p. 49). Supplies or accounts
receivable are current assets since supplies are expected to be used within one
year, and accounts receivable are expected to be collected within one year.

According to the text, common types of current assets are:

1
2
3
4
5

Cash
Short-term investments
Receivables
Inventories
Prepaid expenses

What is a non-current asset?

The opposite of a current asset, a non-current asset is an asset that is not easily
converted to cash or not expected to become cash within one year.

What is the difference between the two types of assets?

As the definition of each indicates, current assets are assets that are expected to
be used or converted to cash within one year, whereas, noncurrent assets are not
expected to be used or converted to cash within one year.

In which financial statement would you find these assets?

The current and noncurrent assets are found within the Balance Sheet and are
usually listed in the order in which they are expected to convert to cash (or, order of
liquidity).

Reference

Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.
DQ2
What is an example of a significant accounting estimate? What is the
importance of these estimates? How do ethics play into the decision-making
process? Which financial statements include significant accounting
estimates? Why?

------------------------

What is an example of a significant accounting estimate?

An example of a significant accounting estimate is estimated uncollectibles; referred

to as the allowance method of accounting. This method involves estimating
uncollectible accounts at the end of each period (Kimmel, Weygandt, &
Kieso, 2007, p. 375).

What is the importance of these estimates?

The estimated uncollectibles, or allowance method provides better matching of

expenses with revenues. In addition, it ensures that receivables are stated at cash
realizable value, excluding amounts that the company has estimated uncollectible;
therefore reducing receivables on the balance sheet.

According to Kimmel et al. (2006), when bad debts are material, companies must
use the allowance method for financial reporting purposes. The three essential
features are:

1. Companies estimate uncollectible accounts receivable and match them

against revenues in the same accounting period in which the revenues are
recorded.
2. Companies record estimated uncollectibles as an increase (a debit) to Bad
Debts Expense and an increase (a credit) to Allowance for Doubtful Accounts
(a contra asset account) through an adjusting entry at the end of each period.
3. Companies debit actual uncollectibles to Allowance for Doubtful Accounts and
credit them to Accounts Receivable at the time the specific account is written
off as uncollectible.
How do ethics play into the decision-making process?

The decisions an individual makes are based upon their ethics. Without good ethics,
the decision-making process is hampered. Any individual or organization must have
a good ethics base in order to make sound and ethics decisions.

Which financial statements include significant accounting estimates? Why?

Commonly, the income statement contains estimates, such as expense

adjustments, uncollectible debts, depreciation, etc. From the income statement,
these estimates move to the balance sheet. As an example, depreciation expenses
are deducted in the income statement, and then added to the accumulated

depreciation; this allows deduction from the cost figure of the asset on the balance
sheet.

Reference

Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.

DQ3

What are internal controls? Why do companies need them? What are some
examples of internal controls? Who is responsible for developing internal
controls? What are some limitations of internal controls?

What are internal controls?

Internal controls are policies and procedures set in place in order to safeguard the
company. To safeguard assets and enhance the accuracy and reliability of
accounting records, companies follow internal control principles (Kimmel,
Weygandt, & Kieso, 2007, p. 317).

Why do companies need them?

Not every person or employee is honest, and occasionally honest mistakes will
occur. Companies need internal controls to assure mistakes or dishonest employees
are not stealing from the company. In addition, internal controls assure the accuracy
of the accounting records.

What are some examples of internal controls?

Establishment of Responsibility: Assigning certain responsibilities to

specific individuals.
Segregation of Duties: Where the work of one individual evaluates or
oversees the work of another.
Documentation Procedures: Documentation or evidence that transactions
have taken place.
Physical, Mechanical, and Electrical Controls: Safes, alarms, etc. are
used to enhance accuracy.
Independent Internal Verification: The reviewing, comparison, and
reconciliation of data.
Other Controls: Bonding employees whom handle cash, rotating
employees, and conducting background checks.

Who is responsible for developing internal controls?

Although everyone in an organization has responsibility for internal control,

management typically develops the internal controls.

What are some limitations of internal controls?

One major limitation of internal controls is the human element. Any system can
become ineffective and vulnerable when the human element is involved. As the text
points out, employees can become fatigued, careless, or indifferent.

Reference

Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.

DQ4

What are intangible assets? How does a business obtain intangible assets?
What is goodwill? Why would a business have an account for goodwill?

What are intangible assets?

Intangible assets are assets that are valuable but have no physical substance.
Intangible assets are rights, privileges, and competitive advantages that result
from ownership of long-lived assets that do not possess physical substance
(Kimmel, Weygandt, & Kieso, 2007, p. 444). Intangible assets include patents,
copyrights, trademarks, and trade names.

How does a business obtain intangible assets?

Since an intangible asset includes patents, copyrights, trademarks, and trade

names; a company can obtain an intangible asset through copyrighting a product,
or developing a trade name. As the text notes, Microsofts patents, McDonalds
franchises, the iPod trade name, and Nikes trademarks are all valuable intangible
assets.

What is goodwill?

Goodwill is an intangible asset and commonly the largest upon the company
balance sheet. Goodwill represents the value of all favorable attributes that relate
to a business enterprise (Kimmel, Weygandt, & Kieso, 2007, p. 444). Goodwill
includes exceptional management, location, customer relations, skill of employees,
quality product, and pricing policies. Essentially, goodwill is a portion of the
company value that is not directly attributable to assets and liabilities.

If I had to rename goodwill, I would call it reputation value. Ultimately, the

companys reputation with employees, customers, and public recognition increases
the goodwill.

Why would a business have an account for goodwill?

A business would have an account for goodwill when purchased for more than the
fair value of the identifiable assets. A company with a higher goodwill will attract a
higher selling price because customers are more likely to stay and the business is
more likely to remain profitable.

Reference

Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial Accounting: Tools for
Business Decision Making (4th ed.). Hoboken, NJ: Wiley.