09.27 Flashcards
The Statement of Changes in Equity:
- Is one of the required financial statements under U.S. GAAP
- Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items.
- Is used only if a corporation frequently issues common shares
- Reconciles all of the beginning and ending balances in the equity accounts.
Reconciles all of the beginning and ending balances in the equity accounts.
**The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.
Which of the following is not disclosed on the Statement of Cash Flows, either on the face of the statement or in a separate schedule, when prepared under the direct method?
- The major classes of gross cash receipts and gross cash payments
- The amount of income taxes paid
- A reconciliation of net income to net cash flow from operations
- A reconciliation of ending retained earnings to net cash flow from operations
A reconciliation of ending retained earnings to net cash flow from operations.
**The direct method Statement of Cash Flows must be supported by the supplemental disclosure of a reconciliation, but the reconciliation is of net income to net cash flow from operations, not retained earnings to net cash flow from operations. The ending retained earnings balance is not related to, and does not affect, operating cash flow.
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:
Dividends paid $300
Proceeds from the issuance of common stock $250
Borrowings under a line of credit $200
Proceeds from the issuance of convertible bonds $100
Proceeds from the sale of a building $150
What is the company’s increase in cash flows provided by financing activities for the year?
$50
$150
$250
$550
$250
**Cash flows from financing activities are those associated with how the company is financed, such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock (250), convertible bonds (100), and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 − 300 = 250.
Baker Co. began its operations during the current year. The following is Baker’s Balance Sheet at December 31:
Baker Co. Balance Sheet Assets Cash $192,000 Accounts receivable 82,000 Total Assets $274,000 Liabilities and stockholders' equity Accounts payable $ 24,000 Common stock 200,000 Retained earnings 50,000 Total liabilities and stockholders' equity $274,000
Baker’s net income for the current year was $78,000, and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its Statement of Cash Flows for the current year?
$20,000
$50,000
$192,000
$250,000
$20,000
**The accounts receivable increase represents sales included in net income but not yet collected and is subtracted because income was increased by an amount exceeding cash collections. The accounts payable increase represents purchases of inventory included in cost of goods sold not yet paid for. This amount is added because income was reduced by an amount exceeding cash payments.
Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation method
Composition
Depreciation method-YES
Composition-NO
**The summary of significant accounting policies requires that the methods of depreciation used by a firm be disclosed.
The composition of plant assets must also be disclosed, but not in the summary of significant accounting policies. The composition information typically is disclosed in another footnote.
Which of the following is not one of the concentrations about which disclosures are required?
- Concentrations in revenue
- Concentrations in sources of supply
- Concentrations in the market for the firm’s products
- Concentrations in investment in other firm’s stock for which ownership is less than 20% in any specific investment
Concentrations in investment in other firm’s stock for which ownership is less than 20% in any specific investment
**Although diversification may be lacking in a firm’s investment portfolio, passive investments are not one of the concentrations for which a firm is considered to be vulnerable. The fourth concentration (besides the three other answer alternatives) is concentration in the volume of business with a particular customer or supplier.
During the last quarter of 20x4, a firm violated U.S. securities laws, and 20x4 revenues were overestimated as a result.
Although no lawsuit was brought against the firm before the 20x4 financial statements were released, management knows that in all likelihood the firm will be sued by shareholder groups and a range of possible loss amounts is estimated.
Therefore,
- The firm has no recognized liability for 20x4.
- The firm should recognize the estimated loss and liability.
- The firm should only footnote the potential loss.
- The firm should wait until being sued before considering any kind of disclosure.
The firm should recognize the estimated loss and liability.
**The firm faces a probable loss, and counsel has developed reasonable estimates. The condition leading to the future loss existed at the balance sheet date. Thus, the loss and liability should be recognized. Any difference between the estimated and actual loss is treated as a change in estimate in a future period. A footnote will describe the situation.
In October 20x2, a large U.S. aircraft manufacturer signed a significant contract with the government of France to build 50 jumbo jets, with delivery scheduled for 20x5.
In February 20x3, the firm signed a second contract with the government of Germany to build 35 jumbo jets. The 20x2 financial statements were issued in early March 20x3. The firm did not begin work on either contract before the issuance of the 20x2 statements.
Which contract(s) should be recognized in the accounts for the 20x2 financial statements?
Contract 1 (French) Contract 2 (German)
Contract 1 (French)-NO Contract 2 (German)NO
**No transactions have taken place for either contract. Even though the French contract was signed before the balance sheet date, there is nothing to recognize. Footnotes will describe both contracts.
In 20x5, a firm decided to discontinue a segment with a book value of $200 million and a fair value of $250 million. The cost to dispose of the segment in 20x6 is estimated to be $10 million. In the 20x5 income statement, what amount of disposal gain or loss will be reported in the discontinued operations section? $ -0- $50 million loss. $50 million gain. $40 million gain.
$ -0-
**The estimated disposal gain is $240 [($250 − $10) proceeds] − $200 book value, or $40. Estimated disposal gains are not recognized, only estimated losses. Next year, the actual disposal gain will be recognized. Nonfinancial assets are not written up in value.
Redwood Co.’s financial statements had the following information at year end:
Cash $ 60,000 Accounts receivable 180,000 Allowance for uncollectible accounts 8,000 Inventory 240,000 Short-term marketable securities 90,000 Prepaid rent 18,000 Current liabilities 400,000 Long-term debt 220,000 What was Redwood's quick ratio?
- 81 to 1
- 83 to 1
- 94 to 1
- 46 to 1
0.81 to 1
**The quick ratio is the quotient of very liquid current assets to total current liabilities. Inventories and prepaids are not included in the numerator because they are not considered sufficiently liquid. As such, it is a more stringent test of liquidity than the current ratio. In this case, the quick ratio consists of: cash + net AR + marketable securities divided by current liabilities: ($60,000 + $180,000 − $8,000 + $90,000)/$400,000) = .805. The closest answer is 0.81 to 1.
Are the following ratios useful in assessing the liquidity position of a company?
Defensive-interval ratio
Return on stockholders’ equity
Defensive-interval ratio-YES
Return on stockholders’ equity-NO
**The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources. Thus, the measure is a liquidity measure.
The return on stockholders’ equity is the ratio of income to average owners’ equity. This ratio is a profitability ratio, not a liquidity ratio. A firm could have a strong return on equity ratio and not be particularly liquid.
In Dart Co.’s year two single-step Income Statement, as prepared by Dart’s controller, the section titled “Revenues” consisted of the following:
Sales $250,000 Purchase discounts 3,000 Recovery of accounts written off 10,000 Total revenues $263,000 In its year two single-step Income Statement, what amount should Dart report as total revenues?
$250,000
$253,000
$260,000
$263,000
$250,000
**Revenues are inflows of economic resources. The purchase discounts would be netted against purchases, not sales. The recovery of accounts written off is not revenue, it is an adjustment to the allowance for uncollectible accounts. Therefore the total revenue reported should be $250,000.
Which of the following would be reported as an investing activity in a company’s statement of cash flows?
- Collection of proceeds from a note payable.
- Collection of a note receivable from a related party.
- Collection of an overdue account receivable from a customer.
- Collection of a tax refund from the government.
Collection of a note receivable from a related party.
**Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.
Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 20x5 included the following expense and loss accounts:
Accounting and legal fees $120,000 Advertising 150,000 Freight-out 80,000 Interest 70,000 Loss on the sale of long-term investments 30,000 Officers' salaries 225,000 Rent for office space 220,000 Sales salaries and commissions 140,000 One-half of the rented premises is occupied by the sales department.
Brock’s total selling expenses for 20x5 are:
$480,000
$400,000
$370,000
$360,000
$480,000
**
Advertising $150,000
Freight-out 80,000
Rent for office space ($220,000 × .50) 110,000
Sales salaries and commissions 140,000
Equals total selling expenses $480,000
Advertising is part of the overall selling effort. Freight-out is delivery expense. Offering delivery service is also part of the overall sales effort. Only 1/2 the rent is included in selling expenses because the sales department occupies only 1/2 the premises.
Which of the following should be included in general and administrative expenses?
Interest
Advertising
Interest-NO
Advertising-NO
**Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified.
