01 General-Purpose Financial Reporting: For-Profit Business Entities

Question 1

How is owner’s equity presented on the balance sheet?

Answer 1

In order of permanence

Question 2

How are liabilities presented on the balance sheet?

Answer 2

Liabilities are shown in order of maturity. Current liabilities are presented first, and then long-term liabilities are presented.

Question 3

How are assets presented on the balance sheet?

Answer 3

Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment).

Question 4

What is another name for the balance sheet?

Answer 4

The statement of financial position

Question 5

How are current assets listed on the balance sheet?

Answer 5

Declining order of liquidity

Question 6

List the elements included in a full set of financial statements.

Answer 6

Balance sheet
Income statement
Statement of comprehensive income
Statement of cash flows
Statement of owner’s equity

Question 7

Where is gain/loss on disposal from discontinued operations shown?

Answer 7

In a separate line item in the DOP section of the income statement or netted against the discontinued component’s operating income with a footnote disclosure showing both

Question 8

What amount of disposal gain from a discontinued operation is disclosed in the income statement?

Answer 8

The actual amount for the period

Question 9

What does the multiple-step income statement present?

Answer 9

Includes multiple subtotals of revenues, expenses, gains, and losses Sales - Cost of Goods Sold = Gross profit; Gross profit - Operating expenses = Income from operations; Income from operations + or − Other income / expenses= Income before taxes Income before taxes − Taxes = Net Income

Question 10

What does the single-step income statement present?

Answer 10

Total revenues and gains less total expenses and losses

Question 11

What is the order of income statement presentation?

Answer 11

Income from continuing operations
Income from discontinued operations (net of tax)
Net income

Question 12

What items are not shown on the income statement?

Answer 12

Prior-period adjustments
Foreign currency translation adjustments
Unrealized gains and losses on available for sale (AFS) securities
Unrecognized pension items
Cumulative effect of changes in accounting principle
Unrealized gains and losses on cash flow hedges

Question 13

What is the amount of operating income from a discontinued operation that must be disclosed in the income statement?

Answer 13

The actual amount for the period

Question 14

List the two values to report for discontinued operations.

Answer 14

1. Income from discontinued operations
2. Gain or loss on disposal

Question 15

When is a held-for-sale asset impaired?

Answer 15

It is impaired when book value exceeds its fair value less cost to sell at the end of the reporting period.

Question 16

Define “foreign currency transactions.”

Answer 16

Transactions of a domestic entity denominated in a foreign currency but to be recorded on the domestic entity’s books in the domestic currency

Question 17

What are the general rules for treatment of a foreign currency operating transaction?

Answer 17

Measure and record the transaction on books in terms of the functional currency.
Convert foreign currency units to functional currency units using the spot exchange rate.
Recognize the effect of exchange rate changes as gains/losses in the period of the exchange rate change.

Question 18

How do you determine the dollar amount to settle a transaction denominated in a foreign currency?

Answer 18

Multiply the number of foreign currency units specified by the terms of the transaction by the spot exchange rate at the current date.

Question 19

At what dates can a gain or loss be recognized on a foreign currency–denominated operating transaction account balance?

Answer 19

At balance sheet date, if one occurs between the date the transaction is initiated and settled
At settlement date of the foreign currency–denominated account balance

Question 20

What is the general rule for handling a foreign currency–denominated account at the settlement date of the account?

Answer 20

1. Determine the dollar amount to settle the transaction at balance sheet date (# of foreign currency units × Exchange rate/Spot = $ Value).
2. Determine the difference between the recorded amount and the settlement amount.
3. Record the difference as an adjustment to foreign currency–denominated account and as an exchange gain/loss for the period.
4. Record settlement of the foreign currency–denominated account.

Question 21

What is the general rule for handling a foreign currency–denominated account that is outstanding as of a balance sheet date?

Answer 21

1. Determine the dollar amount to settle the transaction at balance sheet date (# of foreign currency units × Exchange rate/Spot = $ Value).
2. Determine the difference between recorded amount and settlement amount.
3. Record the difference as an adjustment to the foreign currency–denominated account and as an exchange gain/loss for the period.

Question 22

What are the items in other comprehensive income?

Answer 22

Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities

Question 23

What are the forms of the statement of comprehensive income?

Answer 23

Single statement
Two statements

Question 24

What type of account is accumulated other comprehensive income (AOCI)?

Answer 24

Owner’s equity

Question 25

What is comprehensive income?

Answer 25

Net income plus or minus unrealized gains and losses on securities available for sale, unrealized pension cost, certain unrealized gains and losses on derivatives, and foreign currency translation adjustments

Question 26

What is the main purpose of disclosing comprehensive income?

Answer 26

To report the net change in equity in a single amount

Question 27

Does accumulated other comprehensive income (AOCI) have its own column in the vertical format?

Answer 27

Yes, it has its own column.

Question 28

List the major owners’ equity accounts for a corporation.

Answer 28

Preferred stock
Common stock
Additional paid-in capital, preferred
Additional paid-in capital, common
Retained earnings
Treasury stock
Accumulated other comprehensive income

Question 29

List the other names for statement of changes in equity.

Answer 29

Statement of changes in owners’ equity
Owners’ equity statement
Statement of shareholders’ equity
Statement of owners’ equity

Question 30

In what type of format does the statement of changes in equity appear?

Answer 30

The format is vertical and horizontal.

Question 31

Where should the amount of interest paid be disclosed?

Answer 31

In the statement of cash flows, as part of the statement, as a supplemental schedule, or in a footnote

Question 32

What is the purpose of the statement of cash flows?

Answer 32

To explain the change in cash and cash equivalents that has occurred during the past accounting year

Question 33

Where are noncash investing and financing activities reported?

Answer 33

They are reported on the face of the statement of cash flows or as a separate disclosure.

Question 34

What is the indirect method on the statement of cash flows?

Answer 34

It reconciles net income to cash flows from operating activities.

Question 35

What is the purpose of the operating section of the statement of cash flows under the indirect method?

Answer 35

The purpose is to adjust accrual net income to net cash flow from operating activities.

Question 36

List the required categories for the statement of cash flows.

Answer 36

Net cash inflow or outflow from operating activities
Net cash inflow or outflow from investing activities
Net cash inflow or outflow from financing activities
Reconciliation of net cash inflows/outflows with the reported change in cash and cash equivalents on the balance sheet
Noncash investing and financing activities

Question 37

What is the reporting basis of the statement of cash flows?

Answer 37

The reporting basis is cash and cash equivalents.

Question 38

When is a statement of cash flows required?

Answer 38

For all business enterprises that report both financial position (balance sheet) and results of operations (income statement) for a period

Question 39

Where are held-to-maturity investments reported on the statement of cash flows?

Answer 39

As an investing activity

Question 40

What is the cash flow category for loans made to other entities?

Answer 40

The category is investing.

Question 41

What is the cash flow category for dividends paid?

Answer 41

The category is financing.

Question 42

What is the cash flow category for purchases of debt securities classified as available-for-sale?

Answer 42

The category is investing.

Question 43

What is the cash flow category for purchases of securities that will be sold in the near-term?

Answer 43

The category is operating.

Question 44

What is the cash flow category for interest paid and received?

Answer 44

This category is operating activities.

Question 45

Using the indirect method for reporting cash flows from operations, should a decrease in unearned revenue be added to or subtracted from accrual-based net income?

Answer 45

A decrease in unearned revenue should be subtracted.

Question 46

Using the indirect method for reporting cash flows from operations, should an increase in accounts payable be added to or subtracted from accrual based net income?

Answer 46

An increase in accounts payable should be added.

Question 47

Using the indirect method for reporting cash flows from operations, should a decrease in inventory be added to or subtracted from accrual-based net income?

Answer 47

A decrease in inventory should be added.

Question 48

Using the indirect method for reporting cash flows from operations, should an increase in accounts receivable be added to or subtracted from accrual-based net income?

Answer 48

An increase in accounts receivable should be subtracted.

Question 49

List some examples of intercompany amounts to be eliminated during a consolidation.

Answer 49

Receivables/payables
Interest
Dividends
Bonds

Question 50

What are the only types of transactions recognized for consolidation?

Answer 50

Transactions with non-affiliates

Question 51

List the consolidation accounts affected by intercompany fixed asset transactions.

Answer 51

Net income
Fixed asset
Accumulated depreciation
Depreciation expense/Accumulated depreciation

Question 52

What is the basic sequence of steps in the consolidating process?

Answer 52

1. Record trial balances on consolidating worksheet.
2. Record adjusting entries, if any.
3. Record eliminating entries.
4. Complete consolidating worksheet.
5. Prepare consolidated financial statements.

Question 53

List the methods a parent may use to carry investment in a subsidiary to be consolidated.

Answer 53

Cost
Equity
Any other method it chooses

Question 54

When a parent uses the equity method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?

Answer 54

Adjusts on its books the carrying value of its investment in the subsidiary to reflect:
The parent’s share of the subsidiary’s income or loss.
The parent’s share of dividends declared by the subsidiary.
The amortization/depreciation of the difference between the fair market value of identifiable assets (but not goodwill) and the book value of those assets.

Question 55

Where does the noncontrolling interests in a subsidiary’s income/loss and assets/liabilities get reported in consolidated financial statements?

Answer 55

Noncontrolling interest in a subsidiary’s net income or net loss gets reported as a separate line item in the consolidated income statement.
Noncontrolling interest in a subsidiary’s assets and liabilities gets reported as a separate line item in shareholders’ equity in the consolidated balance sheet.

Question 56

When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?

Answer 56

After recording the investment in the subsidiary on its books, in normal circumstances, the parent will only recognize its share of the subsidiary’s dividends declared/paid as dividend income. It will not recognize on its books its share of the subsidiary’s reported net income/loss, nor will it adjust its investment account for the subsidiary’s income/loss or dividends.

Question 57

What does the investment eliminating entry on the consolidating worksheet accomplish?

Answer 57

1. It eliminates the investment account (in the subsidiary) brought on to the worksheet by the parent against the shareholders equity accounts (of the subsidiary) brought on to the worksheet by the subsidiary
2. In the process, it adjusts the subsidiary’s identifiable assets and liabilities to fair value at the date of acquisition and recognizes goodwill, if any.

Question 58

What is the amount at which any noncontrolling interest is recognized in the eliminating entry at the date of business combination?

Answer 58

Fair value of noncontrolling interest percentage claim to consolidated net assets attributable to the subsidiary. This would include its claim to the subsidiary’s net assets at fair value and any goodwill recognized in the combination.

Question 59

What will be the difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?

Answer 59

There will be no difference in the final consolidated statements based on which method the parent uses to account for its investment in a subsidiary. The consolidated statements will be the same regardless of which method is used; only the consolidating process will be different.

Question 60

For consolidated purposes, what accounts can be affected by intercompany bonds?

Answer 60

Bonds payable
Premium or discount on bonds payable
Investment in bonds
Premium or discount on investment in bonds
Interest income/interest expense
Interest payable/interest receivable

Question 61

How is a gain or loss on an intercompany sale of a fixed asset confirmed (recognized) for consolidated statement purposes?

Answer 61

A gain or loss on an intercompany sale of a fixed asset is confirmed through the depreciation expense taken each period by the buying affiliate on the intercompany profit or loss. When the sale was at a gain (loss), the buying affiliate will take more (less) depreciation than the selling affiliate would have taken. That difference (each period) confirms a part of the gain or loss each period.

Question 62

What is the eliminating entry for consolidating purposes that would be necessary immediately following an intercompany sale of a fixed asset at a gain?

Answer 62

DR: Fixed Asset (to reestablish original cost from nonaffiliate)
DR: Gain (to eliminate intercompany gain on sale)
CR: Accumulated Depreciation (to reestablish accumulated depreciation written off by selling affiliate)

Question 63

What is the entry on the consolidating worksheet to eliminate intercompany inventory profit that is in ending inventory?

Answer 63

DR: Cost of Goods Sold (or Inventory) - I/S
CR: Ending Inventory – B/S
The entry eliminates the profit brought on the worksheet by the selling affiliate and reduces the ending inventory brought on the worksheet by the buying affiliate to cost from an outsider.

Question 64

When are consolidated statements required?

Answer 64

Under two major circumstances:
1. When a firm is the primary beneficiary of a variable-interest entity (VIE), the VIE must be consolidated with the primary beneficiary.
2. When a firm has a majority owned (>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control.

Question 65

What does the first footnote typically cover?

Answer 65

Summary of significant accounting policies

Question 66

Which items should be included in disclosures about risk due to certain significant estimates?

Answer 66

Estimate affected
Nature of uncertainty
Effect of change in estimate on financial statements

Question 67

When are disclosures required about certain significant estimates?

Answer 67

When it is reasonably possible an estimate will change within one year of the date the financial statements are issued, and effect of the change will be material

Question 68

What is the management discussion and analysis (MD&A) section?

Answer 68

It is a narrative written by management that is an integral part of the disclosure of the financial statements.

Question 69

What is presented in the related party transaction disclosures?

Answer 69

Nature of relationship
Description of all transactions for years presented
Dollar amounts of transactions
Receivables to or from parties

Question 70

What is the full disclosure principle?

Answer 70

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.