ACCOUNTING 301A SPRING, 2011.

FINAL EXAM (EXAM III) REVIEW SHEET

NOTE THE ESSAY POLICY BELOW!!!!!

The Final Exam will be cumulative. That is, material from ANY of the chapters covered this semester
may be on it. Approximately 50% of the Final Exam will concern chapters covered since the second exam
(i.e., Chapters 10, 11, 12, 17 and 18)

There will be a Cash Flow Statement Problem on the exam.

A SIGNIFICANT NUMBER OF QUESTIONS WILL CONCERN ACCOUNTING PRINICPLES,

EVENTHOUGH THIS IS DEALT WITH IN CHAPTER 2. That is, the question will measure two
learning objectives: your knowledge of how to account for a particular transaction, and your knowledge
of WHY the transaction is accounted for in that particular way. That is, what accounting principle is being
adhered to, or, what accounting principle are we deviating from (usually to satisfy another accounting
principle). For example, sometimes the historical cost principle is not followed, because of various other
considerations.

SUGGESTIONS FOR REVIEW:

1) Accounting Principles. Read Chapter 2 very carefully and thoughtfully.

2) Statement of Cash Flows.
READ: Chapter 5, pages 197-203.
DO: Chapter 5, Exercises E5-14, 15, 16; Problems P5-6, 5-7 (Cash Flow Statements ONLY!)
This part of the exam will test your knowledge of numerous transactions by requiring you to assess the
impact on Net Income of various transactions.
3) RE-READ Chapters 10, 11, 12, 17 and 18. ASK QUESTIONS
4) DO: As many of the assigned problems from those chapters (in #3) as possible. Check Solutions on
BlackBoard.
5) Prepare the essays prior to the Exam, although you will need to write it without notes or other aids.

THE ESSAY. The essay will be worth up to 100% of the Final Exam grade and up to 50% of the course
grade. This is because, if you do not acquire the comprehension and communication skills the course is
designed to develop, you are wasting your time, as you will not be a successful accountant.
So, here’s how it works: If you blow the essay off due to poor preparation, you will receive a “0%” on the
exam.
IF, on the other hand, you write out solid drafts of each of these questions, and are then able to
write a solid essay during the exam, you will be able to raise your grade in the course by 2 letter
grades. That is, if you are currently failing, you will get a “C”; if you are getting a “C” you will get an
“A”.

1) Discuss the controversy surrounding the accounting for exploration costs in the oil and gas industry.
Be sure to explain the full costs and successful efforts approach. Discuss the arguments in favor of each
(that is explain how each conforms to a central accounting principle). Explain why companies resisted
the successful efforts approach. (That is, discuss how this issue is of tremendous importance to you and
everyone else in the industrialized world). Explain the “Reserve Recognition Accounting (RRA)”
approach, why it was proposed, and why it was not adopted. [see p. 557-59]

2) Explain each of the three major viewpoints regarding interest capitalization for self constructed assets.
Be sure to illustrate each approach with detailed illustrations, with specific numbers. Provide the
arguments in favor of each viewpoint by appealing to general accounting principles. Be sure to illustrate
your discussion with examples that make the argument clear to your reader. Then, explain in detail the
acceptable approach to interest capitalization. Be sure to clearly explain the steps and the reasons for each
step, by means of a precise specific illustration.

3) Ordinarily, revenue is not recognized until it is earned. For example, an attorney may require payment
in advance for her services. However, although she has received the cash, her firm cannot recognize the
revenue until she has performed the services the payment was for. An exception to this principle is made
with respect to long term construction contracts. Explain how such contracts are accounted for by means
of a thorough illustration, and how this method violates the revenue recognition principle. Then, explain
why this exception is allowed by appealing to basic accounting principles. Be sure to illustrate this by
means of a specific illustration that clearly demonstrates how, if the exception were not allowed, one or
more basic principles of accounting would be violated.

4) When a company purchases an asset like equipment, the cost is capitalized. However, costs of research
and development and advertising are not capitalized, but expensed. Explain this apparent inconsistency.
[To adequately answer this question, you must provide an illustration of the purchase of equipment, and
an illustration of how the cost is allocated. You must do this without using any technical terms like
capitalization, or depreciation, without illustrating them. You must tell exactly what the equipment is,
describe in vivid detail what it does, so that your reader can see what you are talking about. You must
then explain why accountants take all this trouble to record things this way. You must then convince your
reader that, by the same argument, research and development and advertising costs SHOULD BE
CAPITALIZED. Be sure your argument is so detailed and powerful, that no one could possibly disagree
with it. Then, go on to completely demolish your own argument by showing why only no one could
possibly think research and development costs and advertising should be capitalized. Be sure to make it
clear why companies would want to capitalize costs rather than expense them.