09.29 Flashcards
During the year, Granite Co. sold a building for $100,000 resulting in a gain of $20,000. The building has a net book value of $80,000 at the time of the sale. Granite uses the indirect method when preparing its statement of cash flows. What is the amount that would be included in Granite's financing activities section because of the building sale? $0 $20,000 $80,000 $100,000
$0
**The sale of a building is not a financing activity, so zero would be included in the financing section. The gain of $20,000 would be a reconciling item in the operating section and the cash received of $100,000 would be in the investing section, but nothing would be reported in the financing section as it relates to this transaction.
In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows:
Accrued interest payable $17,000 decrease
Prepaid interest 23,000 decrease
What amount of interest expense for the current year will Ness report in its income statement?
$ 30,000
$ 64,000
$ 76,000
$110,000
$ 76,000
**A summary journal entry is helpful to sort out what happened with interest during the period:
Interest expense 76,000
Accrued interest payable 17,000
Prepaid interest 23,000
Cash 70,000
The interest expense amount for the year is the derived amount in the entry. Also, a more verbal approach works:
(1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and
(2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense.
The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 − accrued payable decrease of $17,000 + prepaid interest decrease $23,000.
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.
How should a gain from the sale of used equipment for cash be reported in a Statement of Cash Flows using the indirect method?
- In investment activities as a reduction of the cash inflow from the sale
- In investment activities as a cash outflow
- In operating activities as a deduction from income
- In operating activities as an addition to income
In operating activities as a deduction from income
**The operating section of the indirect method Statement of Cash Flows is the reconciliation of net income and net cash flow from operations. The gain on the sale of equipment increased income but did not provide any operating cash inflow. Therefore, it is subtracted from net income in the reconciliation.
In preparing its cash flow statement for the year ended December 31, 20X4, Reve Co. collected the following data:
Gain on the sale of equipment $ (6,000)
Proceeds from the sale of equipment 10,000
Purchase of A.S., Inc. bonds (par value $200,000) (180,000)
Amortization of bond discounts 2,000
Dividends declared (45,000)
Dividends paid (38,000)
Proceeds from the sale of treasury stock (carrying amount $65,000) 75,000
In its December 31, 20X4, Statement of Cash Flows, what amount should Reve report as net cash provided by financing activities?
$20,000
$27,000
$30,000
$37,000
$37,000
**Only the last two items are financing cash flows. The treasury stock sale of $75,000 less the dividends paid of $38,000 result in a net financing cash inflow of $37,000.
Which of the following is not a source of risk and uncertainty for which disclosures are required by GAAP?
- Nature of a firm’s operations
- Effect of changes in government regulations
- Use of estimates in financial statements
- Vulnerability to significant concentrations
Effect of changes in government regulations
**This is not one of the four sources noted in the applicable standard. It is specifically noted as a source not included in the accounting standard.
What information about estimates is not required to be disclosed?
- That estimates involve assumptions about future events
- Possible material financial statement effects of estimate changes
- That estimates are required in preparing financial statements
- The old and new estimate in quantitative terms
The old and new estimate in quantitative terms
**The actual numerical estimates typically are not disclosed. Rather, it is the effect of the change which is of interest to financial statement users.
The summary of significant accounting policies should disclose the
-Pro forma effect of retroactive application of an accounting change.
-Basis of profit recognition on long-term construction contracts.
-Adequacy of pension plan assets in relation to vested benefits.
Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
Basis of profit recognition on long-term construction contracts.
**The summary of significant accounting policies conveys information regarding the important accounting methods and policies chosen by the firm, when a choice is available.
Knowledge of the methods is critical to an understanding of the amounts disclosed in the financial statements. The method of accounting for long-term contracts may be the percentage of completion or completed contract method. Disclosure of this method assists the user in understanding the meaning of reported revenue and gross profit.
The other answer alternatives give data on specific accounts or the result of applying specific accounting principles. They do not indicate what choices the firm has made for accounting and reporting.
Adel Inc. uses the allowance method of accounting for bad debts.
During 20x5, the financial condition of Botel Co., one of Adel’s major customers, deteriorated rapidly due to accounting and other scandals. In February 20x6 it has become clear that Botel will go out of business, although the firm has not declared or been forced into formal bankruptcy proceedings. Adel’s receivable from Botel, 9 months old as of the issuance of Adel’s 20x5 financial statements, is 20 times the amount of bad debt expense otherwise reported by Adel.
How should the Botel situation be reflected in Adel’s 20x5 financial statements?
- No recognition other than that implied by the bad debt expense already recorded by Adel is necessary.
- The footnotes should describe the potential loss, but no separate loss or expense for the Botel receivable should be recognized.
- A loss in the amount of the Botel receivable should be recognized along with appropriate footnote disclosure.
- Increase bad debt expense by a percentage of the Botel receivable amount because bankruptcy has not been declared as of the issuance of the financial statements.
A loss in the amount of the Botel receivable should be recognized along with appropriate footnote disclosure.
**Although bad debt expense has been recognized, it does not adequately account for the Botel loss, which is probable and estimable.
On March 21, year 2, a company with a calendar year end issued its year 1 financial statements. On February 28, year 2, the company’s only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company’s year 1 financial statements?
Provide NO information related to the storm losses in the financial statements until losses and expenses become fully known.
Accrue and disclose the property loss with NO accrual or disclosure of the business disruption loss.
Do NOT accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements.
Accrue and disclose the property loss and additional business disruption losses in the financial statements.
Do NOT accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements.
**This is a subsequent event that did not exist at the balance sheet date but occurred before the financial statements were issued. The company is required to make a footnote disclosure describing the nature of the event and an estimate of the financial effect, or a statement that an estimate cannot be made. Recognition is inappropriate because the condition existed after the balance sheet date.
