10-14-Statement of Comprehensive Income

Question 1

The accumulated other comprehensive income (AOCI) beginning balance for the current year was $6,000 dr. Net income for the period is $21,000. During the year the following two other comprehensive income items were recognized:
*foreign currency translation loss, $2,000
*unrealized gain on securities AFS $9,000.
What amount is reported for comprehensive income (CI) for the year, and what is the ending AOCI balance?

CI                       AOCI 
$7,000              $1,000 cr.
$28,000           $1,000 cr.
$21,000            $7,000 cr.
$28,000            $6,000 dr.

Answer 1

CI AOCI

$28,000 $1,000 cr.

CI ($28,000) is the sum of income ($21,000) and other comprehensive income (-$2,000 + $9,000 = $7,000). AOCI is the running OE account, which is increased or decreased by other comprehensive income for the period. Ending AOCI = $6,000 dr. - $7,000 other comprehensive income (positive) = $1,000 cr. AOCI began the year with a new loss of $6,000 (debit balance), but the $7,000 positive other comprehensive income for the year turned the beginning dr. balance of AOCI into a net credit of $1,000.

Question 2

What are the components of Other Comprehensive Income ?

Answer 2

The components of comprehensive income are:
Net Income,
Unrealized gain/loss on AFS securities,
foreign currency translation adjustment,
unrecognized gain/loss on pension benefits,
and deferred gain/loss on certain hedging transactions.

Question 3

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?

A. $2
B. $5
C. $10
D. $12

Answer 3

D. $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.

Question 4

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?

A. The major classes of gross cash receipts and gross cash payments.

B. The amount of income taxes paid.

C. A reconciliation of net income to net cash flow from operations.

D. A reconciliation of ending retained earnings to net cash flow from operations.

Answer 4

D. 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.

Question 5

The primary purpose of a Statement of Cash Flows is to provide relevant information about:

A. Differences between net income and associated cash receipts and disbursements.

B. An enterprise’s ability to generate future positive net cash flows.

C. The cash receipts and cash disbursements of an enterprise during a period.

D. An enterprise’s ability to meet cash operating needs.

Answer 5

C. 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.

Question 6

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?

A. $ 27,000

B. $ 40,000

C. $208,000

D. $248,000

Answer 6

C. $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.

Question 7

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

          Yes                                    Yes
          Yes                                    No
          No                                     Yes
           No                                      No

Answer 7

Cash flow per share Conversion of debt to equity

                        No                                     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.

Question 8

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill.
In preparing Bay’s Statement of Cash Flows, this purchase would:

A. Have no effect.

B. Be treated as an outflow from financing activities.

C. Be treated as an outflow from investing activities.

D. Be treated as an outflow from lending activities

Answer 8

A. 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.

Question 9

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 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?

A. $0

B. $10,000

C. $20,000

D. $30,000

Answer 9

A. $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

Question 10

Abbott Co. is preparing its Statement of Cash Flows for the year. Abbott’s cash disbursements during the year included the following:
Payment of interest on bonds payable $500,000
Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of Marks Co. common stock 100,000

What should Abbott report as total cash outflows for financing activities in its Statement of Cash Flows?

A. $0

B. $300,000

C. $800,000

D. $900,000

Answer 10

B. $300,000

Dividends paid to shareholders are a financing activity. The payment of interest on bonds is an operating activity, and payments to acquire shares of Marks Co. stock are investing activities.

Question 11

Which of the following items is included in the Financing Activities section of the Statement of Cash Flows?

A. Cash effects of transactions involving making and collecting loans.

B. Cash effects of acquiring and disposing of investments and property, plant, and equipment.

C. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment.

D. Cash effects of transactions that enter into the determination of net income

Answer 11

C. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment.

Financing cash flows are those between the firm and the parties providing it with debt and equity financing. Financing cash flows are the major sources of nonoperating cash inflows and repayments of those amounts to the providers. For example, borrowings and proceeds from stock issuance, retirements of debt, treasury stock purchases, and dividends paid are all financing cash flows. Interest paid, however, is an operating cash flow.

Question 12

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

A. Gain on sale of plant asset.

B. Sale of property, plant and equipment.

C. Payment of cash dividend to the shareholders.

D. Issuance of common stock to the shareholders.

Answer 12

A. Gain on sale of plant asset.

The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

Question 13

Which of the following transactions should be classified as Investing Activities on an entity’s Statement of Cash Flows?

A. Increase in accounts receivable.

B. Sale of property, plant and equipment.

C. Payment of cash dividend to the shareholders.

D. Issuance of common stock to the shareholders

Answer 13

B. Sale of property, plant and equipment.

The cash flows from the sale of property, plant, and equipment would be shown as a cash inflow under the investing section in the Statement of Cash Flows.

NOTE-payment of cash dividends and issuance of common stock are FINANCING Activitites

Question 14

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?

A. $50

B. $150

C. $250

D. $550

Answer 14

C. $250

Cash flows from financing activities are those associated with how the company is financed such as with borrowing or equity.
* proceeds from the sale of the building would not be included in financing activities.

• proceeds from the issuance of common stock (250) convertible bonds (100) 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.

Question 15

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, year 1?

A. $3,000

B. $9,000

C. $12,000

D. $30,000

Answer 15

A. $3,000

Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment for the forklift and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.

Question 16

The summary of significant accounting policies should disclose the

A. Maturity dates of noncurrent debts.

B. Terms for convertible debt to be exchanged for common stock.

C. Concentration of credit risk of all financial instruments by geographical region.

D. Criteria for determining which investments are treated as cash equivalents.

Answer 16

D. Criteria for determining which investments are treated as cash equivalents.

The accounting policy footnote discloses both the methods of accounting used by the firm and other information useful for understanding the bases under which the financial statements were prepared. How the firm classifies investments as cash equivalents is one such basis; it is disclosed in the policy footnote. The other answer alternatives are disclosures about specific aspects of particular accounts

Question 17

Brad Corp. has unconditional purchase obligations associated with product financing arrangements. These obligations are reported as liabilities on Brad’s balance sheet, with the related assets also recognized.
In the notes to Brad’s financial statements, the aggregate amount of payments for these obligations should be disclosed for each of how many years following the date of the latest balance sheet?

A. 0

B. 1

C. 5

D. 10

Answer 17

C. 5

The payments for the five years following the balance sheet date must be disclosed.
This question requires memorization of a relatively obscure piece of information. However, there are other cases for which data must be disclosed for the five years following the balance sheet date. Few, if any disclosures are required for a full ten years after the balance sheet date.

Question 18

The summary of significant accounting policies should disclose the

A. Pro forma effect of retroactive application of an accounting change.

B. Basis of profit recognition on long-term construction contracts.

C. Adequacy of pension plan assets in relation to vested benefits.

D. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

Answer 18

B. 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.

Question 19

Where in its financial statements should a company disclose information about its concentration of credit risks?

A. No disclosure is required.

B. The notes to the financial statements.

C. Supplementary information to the financial statements.

D. Management’s report to shareholders.

Answer 19

B. The notes to the financial statements.

GAAP requires disclosure of all significant concentrations of credit risk from receivables and other financial instruments in the notes. A concentration of credit risk occurs when receivables from different sources reflect common economic risks (for example, a group of receivables from several firms within the same industry

Question 20

On November 1, 2004, Davis Co. discounted with recourse at 10%, a one-year, noninterest-bearing, $20,500 note receivable maturing on January 31, 2005.
What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2004?

Answer 20

$20,500

The firm is contingent for the maturity amount, which for a noninterest-bearing note is the face value. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.

Question 21

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

A. Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.

B. Good Neighbor Financing will assume the responsibility of collecting the receivables.

C. Milton will retain control of the receivables.

D. Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid..

Answer 21

C. Milton will retain control of the receivables.

In a pledge arrangement, the title remains with the originator, in this case with Milton Co

Question 22

When a note receivable is determined to be impaired,

A. The note is written-off.

B. No recognition of the impairment is required until a formal troubled-debt restructuring takes place.

C. The note is written down to the nominal sum of future cash flows expected to be collected, including interest.

D. A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received.

Answer 22

D. A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received.

A note is considered to be impaired if the present value of remaining cash flows is less than book value, using the rate in the note. This is caused by an expected delay in timing of cash flows or reduction in amount of cash flows compared with the original agreement. The creditor makes the determination that the note is impaired and writes the note down to present value. A loss is recorded for the decline in carrying value to present value.

Question 23

Under IFRS, a cash generating unit (CGU) is:

A. The smallest business segment.

B. Any grouping of assets that generates cash flows.

C. Any group of assets that are reported separately to management.

D. The smallest group of assets that generates independent cash flows from continuing use.

Answer 23

D. The smallest group of assets that generates independent cash flows from continuing use.

A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

Question 24

A creditor’s note receivable has a carrying value of $60,000 at the end of Year 1. Based on information about the debtor, the creditor believes the note is impaired and establishes the new carrying value of the note to be $25,000 at the end of Year 1. During Years 2 and 3, the debtor pays $14,000 on the note each year (total payments, $28,000). For Year 3, under which method of the two indicated is interest revenue recognized?

Interest Method Cost Recovery Method
Yes Yes
No No
Yes No
No Yes

Answer 24

Interest Method Cost Recovery Method
Yes Yes

The interest method recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded. The estimated future cash flows to be received include interest, which is recognized over the remaining term of the note. The cost recovery method recognizes interest revenue only after cash equal to the new carrying value is collected. During Year 3, total collections surpassed the $25,000 new carrying value. $3,000 of interest revenue is recognized under this method in Year 3 ($28,000 - $25,000).