09.28 Flashcards
The premium on a three-year insurance policy expiring on December 31, 20X4 was paid in total on January 2, 20X2. If the company has a six-month operating cycle, then on December 31, 20X2, the prepaid insurance reported as a current asset would be for: six months. 12 months. 18 months. 24 months.
12 months.
**At the end of 20X2, two years of coverage remains. The cost of coverage for 20X3 is a current asset because it will be consumed within a year of the 20X2 Balance Sheet. The definition of a current asset uses the period “operating cycle or one year, whichever is longer.” An operating cycle of any length, not exceeding one year, would yield the same answer to this question. The fact that the operating cycle is only six months versus, for example eight months, has no effect on the classification of the prepaid insurance into a current component (to expire within a year of the 20X2 Balance Sheet) and a long-term component (the portion to expire after 20X3).
Rock Co.’s financial statements had the following balances at December 31:
Gain on the sale of equipment $ 50,000
Foreign currency translation gain $100,000
Net income $400,000
Unrealized gain on the available-for-sale debt securities $ 20,000
What amount should Rock report as comprehensive income for the year ended December 31?
$400,000
$420,000
$520,000
$570,000
$520,000
**By definition, comprehensive income includes all changes in enterprise equity during a period except those changes resulting from transaction between the enterprise and its owners (e.g., investments by owners, dividends to owners, etc.). Therefore, comprehensive income includes net income plus/minus changes in equity that do not enter into the determination of net income (called items of “other comprehensive income”).
Currently, there are four possible items of other comprehensive income:
Minimum additional pension liability adjustment
Unrealized gains and losses on debt investments classified as available-for-sale
Gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges
Gains and losses on the effective portion of cash flow hedges
For Rock Co. comprehensive income would be computed as:
Net income (includes the gain on sale) $400,000
Items of other comprehensive income:
Foreign currency translation gain 100,000
Unrealized gain on available-for-sale debt security 20,000
Comprehensive income $520,000
What is the purpose of reporting comprehensive income?
- To summarize all changes in equity from nonowner sources
- To reconcile the difference between net income and cash flows provided from operating activities
- To provide a consolidation of the income of the firm’s segments
- To provide information for each segment of the business
To summarize all changes in equity from nonowner sources
**The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS debt securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.
Which of the following is a component of other comprehensive income?
- Minimum accrual of vacation pay
- Cumulative currency-translation adjustments
- Changes in market value of inventory
- Unrealized gain or loss on equity securities carried at fair value
Cumulative currency-translation adjustments
**Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS debt securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.
Which of the following is included in other comprehensive income?
- Unrealized holding gains and losses on equity securities carried at fair value
- Unrealized holding gains and losses that result from a debt security being transferred into the trading category from the held-to-maturity category
- Foreign currency translation adjustments
- The difference between the accumulated benefit obligation and the fair value of pension plan assets
Foreign currency translation adjustments
**Foreign currency translation adjustments are reported in other comprehensive income.
Burns Corp. had the following items:
Sales revenue $45,000
Loss on early extinguishment of bonds 36,000
Realized gain on sale of available-for-sale debt securities 28,000
Unrealized holding loss on available-for-sale debt securities 17,000
Loss on write-down of inventory 3,100
Which of the following amounts would the statement of comprehensive income report as other comprehensive income or loss?
- $11,000 other comprehensive income
- $16,900 other comprehensive income
- $17,000 other comprehensive loss
- $28,100 other comprehensive loss
$17,000 other comprehensive loss
**Other comprehensive income is comprised of unrealized gains/losses on available-for-sale debt securities, minimum pension liability adjustment, foreign currency translation adjustment, and unrealized gains/losses on cash flow hedges. The only other comprehensive income item listed is the $17,000 unrealized gains/losses on available-for-sale debt securities
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.
The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year? $2 $5 $10 $12
$12
**If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.
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.
New England Co. had net cash provided by operating activities of $351,000; net cash used by investing activities of $420,000; and cash provided by financing activities of $250,000.
New England’s cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale.
What was New England’s cash balance at the end of the year?
$ 27,000
$ 40,000
$208,000
$248,000
$208,000
**The cash balance at the end of the year equals the cash balance at the beginning of the year, $27,000, plus the net sum of the three categories of cash flows: $351,000 operating − $420,000 investing + $250,000 financing. The ending balance is $208,000.
The $40,000 proceeds from land sale are included in the net cash outflow from investing activities.
Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available:
Mortgage repayment $20,000
Available-for-sale debt securities purchased 10,000 increase
Bonds payable–issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease
What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year?
$0
$10,000
$20,000
$30,000
$0
**Operating activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income − increase in inventory − decrease in accounts payable $70.000 − $40 000 − $30 000 = $0
Which of the following information should be disclosed as supplemental information in the statement of cash flows?
Cash flow per share
Conversion of debt to equity
Cash flow per share-NO
Conversion of debt to equity-YES
**Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts.
The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.
The primary purpose of a statement of cash flows is to provide relevant information about
- Differences between net income and associated cash receipts and disbursements.
- An enterprise’s ability to generate future positive net cash flows.
- The cash receipts and cash disbursements of an enterprise during a period.
- An enterprise’s ability to meet cash operating needs.
The cash receipts and cash disbursements of an enterprise during a period.
**This question provides an example of the need to read each answer alternative very carefully before choosing.
The statement of cash flows is a listing of cash flows for a period in meaningful categories. Thus, it depicts the major cash receipts and disbursements during a period. Although such information may help a user to assess the ability of a firm to generate future cash flows, it does not necessarily say anything about the firm’s ability to do so in the future.
Similarly, the cash flow statement does not directly indicate the firm’s ability to meet future cash operating needs. The reconciliation of income and net operating cash flows does indicate the differences between income and operating cash flows, but this is not the primary purpose of the statement.
Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay’s Statement of Cash Flows, this purchase would
- Have no effect.
- Be treated as an outflow from financing activities.
- Be treated as an outflow from investing activities.
- Be treated as an outflow from lending activities.
Have no effect.
**The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.
Mend Co. purchased a three-month U.S. Treasury bill. Mend’s policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. How should this purchase be reported in Mend’s Statement of Cash Flows?
- As an outflow from operating activities
- As an outflow from investing activities
- As an outflow from financing activities
- Not reported
Not reported
**The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.
