1.2 Flashcards
Items rolled up in “total sales expense”
Advertising, freight out, Sales salaries, Rent for sales office space
Interest and Advertising - What kind of expense?
Should not be general and administrative
Total Revenue
= All revenues/gains on disposal except discontinued operations
Multi-step income statement:
Gross Profit (margin), operating profit (margin), and pretax income from continuing operations is determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Thus, cost of sales and operating expense are not subtracted from total revenues. They would be subtracted from total operating revenues in the multi-step Income Statement.
Net Income:
All items included except Unrealized gain. (other comprehensive income)
Other comprehensive income:
1) Minimum additional pension liability adjustment
2) Unrealized gains and losses on debt investments classified as available-for-sa
3) Gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges
4) Gains and losses on the effective portion of cash flow hedges
What is the purpose of reporting comprehensive income
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.
The components of comprehensive income are:
Net Income, Unrealized gain/loss on AFS debt securities, foreign currency translation adjustment, unrecognized gain/loss on pension benefits, and deferred gain/loss on certain hedging transactions.
When a full set of general-purpose financial statements are presented, comprehensive income and its components should
Be presented as part of the Income Statement or as a separate a financial statement following the Income Statement.
The Statement of Changes in Equity
Reconciles all of the beginning and ending balances in the equity accounts.
Cost of goods sold
BI + P - EI = COGS
Cash Paid for purchases + Increase in Trade Payables + Decrease in Inv = Cost of good sold
A company changes from the double-declining balance method of depreciation for previously recorded assets to the straight-line method. According to ASC Topic 250, the effect of the change should be reported separately as a(n)
Component of income from continuing operations on a prospective basis.
What is a reclassification adjustment as used when reporting comprehensive income?
Adjustment made to avoid double counting items
A reclassification adjustment is an adjustment made to avoid double counting in comprehensive income items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.
When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the earnings statement as a gain or loss on disposal reported as
An amount after continuing operations.
This answer is correct because both the gain or loss from discontinued operations and the gain or loss on sale of the segment should be shown after income from continuing operations.
IFRS financial statements includes the following:
statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.
How should an unusual event not meeting the current criteria for an extraordinary item be disclosed in the financial statements?
Shown as a separate item in operating revenues or expenses and supplemented by a footnote if deemed appropriate.
What is the purpose of reporting comprehensive income?
This answer is correct. The purpose of reporting comprehensive income is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity with owners. An enterprise should continue to display an amount for net income with equal prominence to the comprehensive income amount displayed.
On December 31, 20X1, Deal, Inc. failed to accrue the December 20X1 sales salaries that were payable on January 6, 20X2.
What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal’s 20X1 financial statements?
Working Capital
Cash flows from operating activities
Working Capital -
Overstated
Cash flows from operating activities -
No effect
Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated.
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?
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.
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?
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.
Which of the following items is included in the Financing Activities section of the Statement of Cash Flows?
When a firm lends money to other parties and collects the principal on loans, it is acting as an investor. Such flows are investing cash inflows and outflows. When the firm borrows money and pays it back, the corresponding flows are financing cash flows.
Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?
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.
The sale of a plant asset is an investing activity
In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities?
I. Payments to retire mortgage notes
II. Interest payments on mortgage notes
III. Dividend payments
Both I and III are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.
The dividends are a return to shareholders who have provided a considerable portion of total firm financing.
The differences in Beal Inc.’s Balance Sheet accounts at December 31, 20X4 and 20X3, are presented below:
Assets Increase (Decrease) Cash and cash equivalents $ 120,000 Short-term investments 300,000 Account receivable, net - Inventory 80,000 Long-term investments (100,000) Plant assets 700,000 Accumulated depreciation - $1,100,000 Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $ (5,000) Dividends payable 160,000 Short-term bank debt 325,000 Long-term debt 110,000 Common Stock, $10 par 100,000 Additional paid-in capital 120,000 Retained Earnings 290,000 $1,100,000 The following additional information relates to 20X4:
Net income was $790,000.
Cash dividends of $500,000 were declared.
Building costing $600,000, with a carrying amount of $350,000, was sold for $350,000.
Equipment costing $110,000 was acquired through issuance of long-term debt.
A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. These investments are categorized as available for sale.
10,000 shares of common stock were issued for $22 a share.
The short-term investments are classified as trading securities.
In Beal’s 20X4 Statement of Cash Flows, net cash provided by operating activities was
Net income $790,000
Increase in inventory (80,000)
Decrease in AP/accrued liabilities ( 5,000)
Gain on sale of long-term investments ($135,000 − $100,000) (35,000)
Increase in short-term investments (from purchase) (300,000)
Depreciation expense 250,000
Equals net operating cash inflow $620,000
The accumulated depreciation account did not change during the year. Therefore, depreciation expense equals $250,000, which offsets the decrease in the account due to the sale of the equipment.
