1B - General-Purpose Financial Statements: For-Profit Business Entities

Question 1

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
Trading debt securities 90,000
Prepaid rent 18,000
Current liabilities 400,000
Long-term debt 220,000
What was Redwood’s quick ratio?
0.81 to 1

0. 83 to 1
1. 94 to 1
2. 46 to 1

Answer 1

.81

Quick ratio = Current assets (excluding Inventories and Prepaid assets) ÷ Current liabilities:

(Cash + Net accounts receivable + Trading debt securities) ÷ Current liabilities
($60,000 + ($180,000 - $8,000) + $90,000) ÷ $400,000 = 0.81 (rounded)
All of the assets listed are current. Inventory and prepaid rent are excluded from the quick ratio.

Question 2

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?
$0
$300,000
$900,000
$800,000

Answer 2

300,000
Interest payments are included in operating activities. Cash payments to acquire equity instruments are included in investing activities. Only payments of dividends to stockholders are included in financing activities.I

Question 3

The statement of cash flows (SCF) is presented in three primary sections: cash flows from ___ activities, cash flows from ___ activities, and cash flows from ___ activities (in that order).

Answer 3

Operating, Investing, Financing

Question 4

Cash flows from operating activities: Cash flows from operating activities include those cash flows resulting from transactions included in the determination of net income, unless specifically classified as financing or investing activities. ***TRUE OR FALSE?***

Answer 4

TRUE

Question 5

Cash inflows from operating activities generally include the following:

(a) Cash receipts from sales of ___ or services
(b) Cash receipts from ___ and ___ on investments in another enterprise
(c) All other cash receipts that are not classified as either investing or financing activities. **T/F**

Answer 5

goods
Interest and Dividends
True

Question 6

Cash outflows classified as operating activities include the following:

(a) Cash payments to acquire materials for manufacture or goods for resale
(b) Cash payments to other suppliers and employees for goods and services
(c) Cash payments to governments for taxes, duties, other fees, or penalties
(d) Cash payments to lenders and other creditors for interest
(e) All other cash payments that are not classified as investing or financing activities

T/F

Answer 6

True

Question 7

A public entity sells steel for use in construction. One of its customers accounts for 43% of sales, and another customer accounts for 40% of sales. What should the entity disclose in its annual financial statements about these two customers?

The financial condition of the two customers

The payment terms of accounts receivable due from each of the two customers

The names of the two customers

The amount of the entity’s revenue from each of the two customers

Answer 7

The amount of the entity’s revenue from each of the two customers.

If revenues from transactions with a single external customer amount to 10% or more of an entity’s revenues, the business must disclose that fact, the total amount of revenues from each such customer, and the identity of the segments reporting the revenues.

A major customer is a single customer, or a group of entities, known to a reporting enterprise to be under common control.

The identity, payment terms, and financial condition of the customers do not need to be disclosed.

Question 8

If revenues from transactions with a single external customer amount to __% or more of an entity’s revenues, the business must disclose that fact, the total amount of revenues from each such customer, and the identity of the segments reporting the revenues.

Answer 8

10%

Question 9

If revenues from transactions with a single external customer amount to 10% or more of an entity’s ___, the business must disclose that fact, the total ___of revenues from each such customer, and the identity of the ___ _____the revenues.

Answer 9

Revenues
Amount
Segment Reporting

Question 9

If revenues from transactions with a single external customer amount to 10% or more of an entity’s ___, the business must disclose that fact, the total ___of revenues from each such customer, and the identity of the ___ _____the revenues.

Answer 9

Revenues
Amount
Segment Reporting

Question 10

A ___is a functional or responsibility area within a business that can be reported upon separately.

Answer 10

Segment

Question 11

Fara Co. reported bonds payable of $47,000 on December 31, 20X1, and $50,000 on December 31, 20X2. During 20X2, Fara issued $20,000 of bonds payable in exchange for equipment. There was no amortization of bond premium or discount during the year. What amount should Fara report in its 20X2 statement of cash flows for redemption of bonds payable?

$20,000

$23,000

$3,000

$17,000

Answer 11

$17,000

Using the basic accounting equation, Beginning balance + Additions - Deletions = Ending balance:

Bonds payable on 12/31/X1 (beginning inventory) $47,000
Plus bonds issued in 20X2 20,000
Subtotal 67,000
Less bonds payable on 12/31/X2 (ending inventory) 50,000
Bonds redeemed in 20X2 (presumably for cash) $17,000

Question 12

Cash flows from ___ activities involve asset transactions other than cash (and cash equivalents) and those assets related directly to the determination of operating results (e.g., inventories, receivables).

Answer 12

Investing

Question 13

Specifically, the following are types of cash inflows from investing activities:

(a) Cash receipts from collections or sales of ___made by the enterprise and of other debt instruments that are purchased by the enterprise(b) Cash receipts from sales of ___securities of other enterprises(c) Cash receipts from the sales of ___ ___and other productive assets

Answer 13

Loans

Equity

fixed assets

Question 14

Cash flows from ___ activities involve debt and equity financing.

Cash inflows from financing activities include the following:

(a) Cash proceeds from issuing ___ instruments
(b) Cash proceeds from issuing ___, ____, ___, and other short- and long-term debt instruments

Answer 14

Financing

equity

bonds, mortgages notes

Question 15

Which of the following statements is correct regarding reporting comprehensive income?

Comprehensive income must include all changes in stockholders’ equity for the period.

Comprehensive income is reported in the year-end statements but not in the interim statements.

A separate statement of comprehensive income is required.

Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.

Answer 15

Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.

FASB ASC 220-10-45-14 requires that accumulated other comprehensive income be reported in the stockholders’ equity section of the balance sheet:”

Question 16

Accumulated other comprehensive income is be reported in the stockholders’ equity section of the balance sheet. T/F

Accumulated other comprehensive income is be reported in the stockholders’ equity section of the balance sheet COMBINED with retained earnings? T/F

component of equity.”

Answer 16

True

FALSE - It is to be reported separately

Question 17

When computing the amount of the gain or loss from discontinued operations:

the gain or loss on the disposal of the discontinued operation is not included in the computation of the total gain or loss.

the operating results of the operation being discontinued are not included in the computation of the total gain or loss.

both the operating results and the gain or loss on disposal are included in the computation of the total gain or loss.

the gain or loss on disposal of the discontinued operation is reported net of tax but the operating results are not.

Answer 17

both the operating results and the gain or loss on disposal are included in the computation of the total gain or loss.

The computation of the total gain or loss from discontinued operations is computed by combining the operating results (income or loss) from the point in time when the disposal qualifies as a discontinued operation until the disposal is complete, with the gain or loss on disposal. The net amount of the two components is reported net of tax after “income from continuing operations” in the income statement.

Question 18

The computation of the total gain or loss from ___ ___ is computed by combining the operating results (income or loss) from the point in time when the disposal qualifies as a discontinued operation until the disposal is complete, with the gain or loss on disposal.

The net amount of the two components is reported net of tax after “income from continuing operations” in the income statement.

Answer 18

discontinued operations

Question 19

Discontinued operations are presented in a separate section of the income statement, just below income from ___ ___.

To be reported as discontinued operations, a disposal must represent a ___ ___ . A ___ ____must have a major effect on the entity’s operations and financial results

Answer 19

Continuing operations

Strategic shift – strategic shift

Question 20

If a business or nonprofit activity is acquired to be held for sale, its disposal is considered a disposal of a discontinued operation. The initial criteria for classification as “held for sale” include:

1. management has committed to a ___to sell the component;
2. the entity is available for ___ sale;
3. an active program to sell has been ___;
4. the sale is expected to be complete within ___ ___;
5. the entity is being actively ___; or
6. it is unlikely the plan to sell will be ___.

Answer 20

Plan

immediate

initiated

one year

marketed

withdrawn

Question 21

The entity must qualitatively assess whether a strategic shift has occurred for it to be considered a discontinued operation. Examples of a strategic shift include:

1. a sale of a product line that represents __% of the entity’s total revenues;
2. a sale of a geographical area that represents __% of the entity’s total assets;

Answer 21

15%

20%

Question 22

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling (minority) interest balances in the parent company’s consolidated balance sheet?

A decrease in retained earnings and no effect on noncontrolling interest

Decreases in both retained earnings and noncontrolling interest

No effect on retained earnings and a decrease in noncontrolling interest

No effect on either retained earnings or noncontrolling interest

Answer 22

No effect on retained earnings and a decrease in noncontrolling interest

The dividend will have no effect on consolidated retained earnings because consolidated retained earnings include only retained earnings of the parent company.

However, since the noncontrolling (minority) interest (in this case, 30%) is a percentage of the stockholder equity (including retained earnings) of the subsidiary, any reduction in subsidiary retained earnings (such as dividend declaration) will decrease noncontrolling (minority) interest.

Question 23

A parent company may own less than 100% of the voting stock of a subsidiary. In such cases, there is a ___(minority) interest in the net assets of the subsidiary as well as a ___interest.

Answer 23

noncontrolling

controlling

Question 24

The noncontrolling interest is reported in the \_\_\_statement of financial position within equity

Answer 24

consolidated

Question 25

In its 20X7 income statement, Brinkley Company reported cost of goods sold of $625,000. Changes occurred in several balance sheet accounts as follows: Inventory $79,000 increase Accounts payable - suppliers 61,000 increase What amount should Brinkley Company report as cash paid to suppliers in its 20X7 cash flow statement, prepared under the direct method? $607,000 $485,000 $765,000 $643,000

Answer 25

Cost of goods sold $625,000 Inventory increase _79,000_ Purchases $704,000 Accounts payable increase _(61,000)_ Cash paid to suppliers **$643,000** . An increase in inventory during the period indicates that purchases were more than the cost of goods sold. Therefore, the current period's amount of purchases is determined by adding the increase in inventory to cost of goods sold. The ending accounts payable represents what is still owed to suppliers at the end of the current period for purchases. An increase in accounts payable during the current period indicates that suppliers were paid an amount of cash less than the amount of the current period's purchases. Therefore, subtracting the increase in accounts payable from purchases of the period yields the cash paid to suppliers in the current period.

Question 26

The SCF presents net cash flows from operating, investing, and financing activities to reconcile the change in \_\_\_(and cash equivalents) for the period.

Answer 26

cash

Question 27

In reporting cash flows from operating activities, enterprises are encouraged to use the \_\_\_*method,*

Answer 27

direct

Question 28

1. Information about \_\_\_-\_\_\_investing and/or financing activities must be disclosed outside the main body of the SCF. 2. Cash-flow-per-share information is REQUIRED to be presented. T/F

Answer 28

1. non-cash 2. False - it shall NOT be presented

Question 29

(1) Cash collected from customers(2) Interest and dividends received(3) Other operating cash receipts(4) Cash paid to employees and other suppliers of goods and services(5) Interest paid(6) Income taxes paid(7) Other operating cash payments This is an example of the INDIRECT method … T/F

Answer 29

False - this is the DIRECT method

Question 30

Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed in the SCF or related notes: ## Footnote (1) Amount of ___ \_\_\_paid during the period(2) Amount of ___ paid during the period(3) Reconciliation of ___ \_\_\_ and net cash flows from operating activities

Answer 30

Income Taxes Interest Net Income

Question 31

Bay Manufacturing Co. purchased a 3-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 investing activities. be treated as an outflow from operating activities. be treated as an outflow from financing activities.

Answer 31

have **no** effect. ## Footnote FASB ASC 230-10-20 focuses on cash and cash equivalents. The following explanation is offered: "Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an enterprise with banking operations)." Thus, the purchase of U.S. Treasury bills would have no effect on the statement of cash flows.

Question 32

Rowe, Inc., owns 80% of Cowan Co.'s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe's consolidated balance sheet as of December 31? $0 $80,000 $100,000 $20,000

Answer 32

$0 All intercompany liabilities are eliminated in the consolidation process. The amounts are not included as assets or liabilities on the consolidated balance sheet.consolidated balance sheet.

Question 33

Another type of eliminating entry the candidate should look for is that relating to year-end reciprocal balance sheet accounts. The following are examples of such accounts: a. Accounts receivable or accounts payableb. Notes receivable or notes payablec. Advance to sub (parent) or advance from parent (sub)

Answer 33

yep! Just understand this.

Question 34

Albany Co. has net income of $39,000, $17,000 of prior service costs related to amendments implemented in their pension plan, a gain of $8,100 on the effective portion of a cash flow hedge, and an impairment loss of $6,000 on an intangible asset. What amount is Albany’s comprehensive income? $13,900 $47,100 $22,000 $30,100

Answer 34

$30,100 Comprehensive income includes net income and other comprehensive income (OCI). OCI includes pension-related items like the implementation of prior service costs and gains and losses on the effective portion of cash flow hedges as well as unrealized holding gains or losses on available-for-sale debt securities. The impairment loss ($6,000) is already included in net income. Net income $39,000 Prior service costs related to a pension plan (17,000) Gain on effective portion of cash flow hedge _8,100_ $30,100 ======= Note: *Amortization* of prior service costs would be recognized in pension expense and included in net income.

Question 35

**Comprehensive income** is defined in SFAC 6 as “the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from \_\_\_sources.

Answer 35

Non-owner

Question 36

\_\_\_ ___ \_\_\_ is defined as revenues, expenses, gains, and losses that under GAAP are included in comprehensive income but excluded from net income.

Answer 36

Other Comprehensive Income

Question 37

Other comprehensive income (OCI) is defined as revenues, expenses, gains, and losses that under GAAP are included in comprehensive income but excluded from net income. Here are some examples: 1. Foreign currency \_\_\_adjustments 2. Gains and losses on \_\_\_currency transactions 3. Gains and losses on \_\_\_instrument 4. Unrealized holding gains and losses on \_\_\_-\_\_\_-\_\_\_debt securities 5. Gains or losses associated with \_\_\_or other \_\_\_benefits

Answer 37

translation foreign derivative unrealized – available for sale pension – postretirement

Question 38

Which of the following describes how comprehensive income should be reported? May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders' equity; separate statements of comprehensive income are **not** permitted Should **not** be reported in the financial statements but should only be disclosed in the footnotes May be reported in a separate statement or in a combined statement of income and comprehensive income Must be reported in a separate statement, as part of a complete set of financial statements

Answer 38

May be reported in a separate statement or in a combined statement of income and comprehensive income An entity reporting comprehensive income in a single continuous financial statement shall present its components in two sections, net income and other comprehensive income.” The financial statement should include **a total net income amount , total other comprehensive income amount, and total comprehensive income.**

Question 39

An entity reporting comprehensive income in a sA company reports the following information for year 1: Sale of equipment $20,000 Issuance of the company's bonds 10,000 Dividends paid 5,000 Purchase of stock of another company 2,000 Purchase of U.S. Treasury note 2,000 Income taxes paid 2,000 Interest income received 500 What is the company's net cash flow from financing activities?ingle continuous financial statement shall present its components in $5,000 ($9,000) $15,000 $5,500.

Answer 39

$5,000 ## Footnote **Cash Flows from Financing Activities:** Issuance of the company’s bonds $10,000 Dividends paid _(5,000)_ Net Cash Flows from Financing Activities $ 5,000

Question 40

The following information was taken from the current year financial statements of Planet Corp.: Accounts receivable, January 1 $ 21,600 Accounts receivable, December 31 30,400 Sales on account and cash sales 438,000 Uncollectible accounts 1,000 No accounts receivable were written off or recovered during the year. If the direct method is used in the current-year statement of cash flows, Planet should report cash collected from customers as:

Answer 40

$429,200. ## Footnote The cash collected is $429,200, calculated as follows: Sales $438,000 Increase in accounts receivable ($30,400 – $21,600) _8,800_ Cash collected from customers $429,200

Question 41

On January 1, 20X1, Prim, Inc., acquired all the outstanding common shares of Scarp, Inc., for cash equal to the book value of the stock. The carrying amounts of Scarp's assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. The combination is accounted for as an acquisition. In preparing Prim's 20X1 consolidated income statement, which of the following adjustments would be made? Depreciation expense would be decreased and goodwill impairment would be assessed. Depreciation expense would be decreased and goodwill impairment would not be assessed. Depreciation expense would be increased and goodwill impairment would not be assessed. Depreciation expense would be increased and goodwill impairment would be assessed.

Answer 41

Depreciation expense would be decreased and goodwill impairment would be assessed. ## Footnote Regardless of the depreciation issue, FASB ASC 350-20-35-28 requires goodwill to be tested for impairment at least annually, as well as in the year of acquisition. Therefore, goodwill impairment must be assessed in this case.

Question 42

\_\_\_is the excess of the fair value of the consideration given over the fair value of the net identifiable assets acquired

Answer 42

Goodwill

Question 43

Duke Co. reported cost of goods sold of $270,000 for 20X1. Additional information is as follows: _December 31__January 1_ Inventory $60,000 $45,000 Accounts payable 26,000 39,000 If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 20X1 statement of cash flows? $272,000 $298,000 $268,000 $242,000

Answer 43

## Footnote $298,000 Duke should report $298,000, calculated as follows: Reported cost of goods sold for 20X1 $270,000 Add increase in inventory ($60,000 − $45,000) 15,000 Decrease in accounts payable ($39,000 − $26,000) _13,000_ Cash paid to suppliers in 20X1 $298,000 ========

Question 44

Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders' equity for the dividend? $0 $1,500,000 $4,500,000 $7,500,000

Answer 44

$0 Stock dividends are accounted for by reclassifying a portion of retained earnings as contributed capital. They do not reduce assets or increase liabilities. Therefore, total stockholders' equity is not changed.

Question 45

Stock dividends constitute income to the investor. T/F A stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the stockholders; that is, the corporation's property is not diminished and the interests of the stockholders are not increased. T/F The proportional interest of each shareholder changes. T/F

Answer 45

False - it does NOT constitute income to the investor TRUE FALSE - the share stays the SAME

Question 46

**\_\_\_stock dividends** are usually accounted for on the basis of the par or stated value of the stock rather than on the basis of fair value

Answer 46

Large

Question 47

During January of the previous year, Doe Corp. agreed to sell the assets and product line of its Hart division. The sale on January 15 of the current year resulted in a gain on disposal of $900,000. Not con­sidering any impairment losses, Hart’s operating losses were $600,000 for the previous year and $50,000 for the current-year period January 1 through January 15. Disregarding income taxes, what amount of net gain (loss) should be reported in Doe’s comparative current and previous years' income statements? Current year, $250,000; Previous year, $0 Current year, $0; Previous year, $250,000 Current year, $900,000; Previous year, $(650,000) Current year, $850,000; Previous year, $(600,000)

Answer 47

## Footnote Current year, $850,000; Previous year, $(600,000) The sale of a division would be a discontinued operation since its disposition represents a strategic shift. The discontinued operation would be recorded in the year the sale occurred. _Previous_ _Current_ Net loss from continuing operations $(600,000) $(50,000) Gain on sale of discontinued operations _900,000_ Net income $(600,000) $850,000

Question 48

A discontinued operation must be presented separately, either on the balance sheet or in the footnotes, in the period it is classified as held for sale and for all prior periods presented. T/F The assets and liabilities of a disposal group must be presented separately in the asset and liability sections, respectively. T/F A gain or loss recognized for a long-lived asset classified as held for sale that is not a component of an entity must be included in income from continuing operations. T/F

Answer 48

True True True

Question 49

Which of the following should be disclosed as supplemental information in the statement of cash flows? Both cash flow per share and conversion of debt to equity Cash flow per share Conversion of debt to equity Neither cash flow per share nor conversion of debt to equity

Answer 49

Conversion of debt to equity Accounting guidance states very specifically that “financial statements shall not report an amount of cash flow per share.” Also, “information about all investing and financing activities of an enterprise during a period that affects recognized assets or liabilities shall be reported in related disclosures.” **Converting debt to equity is cited as an example of affecting recognized liabilities**

Question 50

The following changes in Vel Corp.'s account balances occurred during 20X1: _Increase_ Assets $89,000 Liabilities 27,000 Capital stock 60,000 Additional paid-in capital 6,000 Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for 20X1. What was Vel's net income for 20X1? $9,000 $13,000 $17,000 $4,000

Answer 50

$9,000 Increases in assets must equal increases in liabilities and equity (specifically increase in retained earnings in equity): Assets = Liabilities + Equity. Increase in Assets $89,000 Increase in Liabilities _(27,000_) Increase in stockholder's equity $62,000 Add back: Dividend Payment _13,000_ Increase in stockholders' equity BEFORE dividends $75,000 Less increase-new capital stock issued: Capital Stock $60,000 Additional Paid-in Capital _6,000__66,000_ 20X1 Net Income $ 9,000

Question 50

The following changes in Vel Corp.'s account balances occurred during 20X1: _Increase_ Assets $89,000 Liabilities 27,000 Capital stock 60,000 Additional paid-in capital 6,000 Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for 20X1. What was Vel's net income for 20X1? $9,000 $13,000 $17,000 $4,000

Answer 50

$9,000 Increases in assets must equal increases in liabilities and equity (specifically increase in retained earnings in equity): Assets = Liabilities + Equity. Increase in Assets $89,000 Increase in Liabilities _(27,000_) Increase in stockholder's equity $62,000 Add back: Dividend Payment _13,000_ Increase in stockholders' equity BEFORE dividends $75,000 Less increase-new capital stock issued: Capital Stock $60,000 Additional Paid-in Capital _6,000__66,000_ 20X1 Net Income $ 9,000

Question 51

The income statement may be presented in either of two formats—single step or multiple step. T/F

Answer 51

True

Question 52

The single-step income statement is a simple and relatively straightforward presentation whereby all revenues and gains are combined at the top of the statement. T/F

Answer 52

True

Question 53

Under the multiple-step income statement, a distinction is made between operating and nonoperating items. T/F Example: Operating revenues and non-operating revenues /// operating expenses and non-operating expenses

Answer 53

True

Question 54

On September 29, 20X1, Wall Co. paid $860,000 for all the issued and outstanding common stock of Hart Corp. On that date, the carrying amounts of Hart's recorded assets and liabilities were $800,000 and $180,000, respectively. Hart's recorded assets and liabilities had fair values of $840,000 and $140,000, respectively. In Wall's September 30, 20X1, balance sheet, what amount should be reported as goodwill? $20,000 $160,000 $240,000 $180,000

Answer 54

## Footnote $160,000 When, in the purchase of another company, the purchase price exceeds the fair value of all the assets the purchased company owns, then the excess is goodwill. Purchase price $860,000 Fair value of assets $840,000 Less fair value of liabilities _140,000_ Net fair value of assets _700,000_ Goodwill $160,000 ========

Question 55

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of: off-balance sheet risk of accounting loss. concentration of credit risk. risk of measurement uncertainty. concentration of market risk.

Answer 55

concentration of credit risk. Credit risk is the potential loss from any party to an agreement failing to perform. Credit risk must be disclosed. Off-balance sheet risk occurs when the amount of a loss exceeds the related asset. Market risk disclosure is encouraged, but not required

Question 56

Disclosure of such risk must be made if, based on management's information, the following criteria are met: a. the concentration exists at the \_\_\_of the financial statements,b. the concentration make the entity \_\_\_to the risk of a near-term severe impact, andc. it is at least \_\_\_possible that the events that could cause the severe impact will occur in the near term.

Answer 56

Date vulnerable reasonably

Question 57

A \_\_\_impact is defined as a significant financially disruptive effect on the normal functioning of an entity.

Answer 57

severe

Question 58

Examples of categories of concentrations include: a. concentrations in the \_\_\_of business transacted with a particular customer, supplier, lender, grantor, or contributor, b. concentrations in \_\_\_from particular products, services, or fund-raising events, c. concentrations in the available sources of supply of materials, labor, or services or of licenses or other rights used in the entity's operations, andd. concentrations in the market or \_\_\_area in which an entity conducts its operations.

Answer 58

Volume Revenue geographic area

Question 59

What percentage is required for a concentration to be present?

Answer 59

10% Examples of categories of concentrations include: a. concentrations in the **volume** of business transacted with a particular customer, supplier, lender, grantor, or contributor, b. concentrations in **revenues from particular products, services, or fund-raising events,** c. concentrations in the available sources of supply of materials, labor, or services or of licenses or other rights used in the entity's operations, andd. concentrations in the **market or geographic area** in which an entity conducts its operations.

Question 60

TGR Enterprises provided the following information from its statement of financial position for the year ended December 31: _January 1__December 31_ Cash $ 10,000 $ 50,000 Accounts receivable 120,000 100,000 Inventories 200,000 160,000 Prepaid expenses 20,000 10,000 Accounts payable 175,000 120,000 Accrued liabilities 25,000 30,000 TGR's sales and cost of sales for the year were $1,400,000 and $840,000, respectively. What is the accounts receivable turnover, in days? 26. 1 28. 7 31. 3 41. 7

Answer 60

**_You will be given a key for all ratios. You dont really need to memorize this._** Accounting receivable turnover = Net credit sales ÷ Average receivables: * $1,400,000 ÷ (($120,000 + $100,000) ÷ 2) = 12.727 times in a year Turnover in days = 365 days ÷ Turnover in a year: * 365 ÷ 12.727 = 28.7 (rounded)

Question 61

A company reported the following information for Year 1: Net income $34,000 Owner contribution 9,000 Deferred gain on an effective cash- flow hedge 8,000 Foreign currency translation gain 2,000 Prior service cost not recognized in net periodic pension cost 5,000 What is the amount of other comprehensive income for Year 1? $14,000 $15,000 $43,000 $5,000

Answer 61

$5,000 Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, and gains or losses associated with pension or other postretirement benefits. Therefore, for this question the correct answer is $5,000: * Deferred gain on an effective cash-flow hedge ($8,000) + Foreign currency translation gain ($2,000) − Prior service cost not recognized in net periodic pension cost ($5,000) = $5,000

Question 62

According to the FASB conceptual framework, comprehensive income includes which of the following? Neither loss on discontinued operations nor investment by owners Investment by owners Both loss on discontinued operations and investment by owners Loss on discontinued operations

Answer 62

Loss on discontinued operations SFAC 6 defines comprehensive income as: “Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.” Loss on discontinued operations is part of net income which changes equity; therefore, it is part of comprehensive income. By definition, investments by owners are specifically excluded from comprehensive income.

Question 63

Which of the following statements about the refinancing of short-term obligations is **incorrect?** The intent to refinance the short-term obligations is a required criterion to reclassify current liabilities as long term. The ability to refinance the short-term obligations is a required criterion to reclassify current liabilities as long term. Short-term obligations that are paid with cash before the balance sheet is released to the public can be refinanced and reclassified as long term. The amount that can be refinanced is limited to the amount actually refinanced or the amount specified in a refinancing agreement even though an actual refinancing did not occur.

Answer 63

Short-term obligations that are paid with cash before the balance sheet is released to the public can be refinanced and reclassified as long term. Short-term obligations intended to be refinanced cannot be reclassified as noncurrent if they are paid with current assets prior to the actual refinancing or a new refinancing agreement being agreed upon. The payment of cash would represent a settlement of the short-term obligation, not a refinancing. All of the other answer choices are correct statements about the refinancing of short-term obligations to be reclassified as noncurrent.

Question 64

**Short-Term Obligations Expected to Be Refinanced** Short-term obligations arising from transactions in the normal course of business that are due in customary terms must be classified as current liabilities. Other short-term obligations may be excluded from current liabilities, but only if the enterprise: a. intends to \_\_\_the obligation on a long-term basis *and*b. demonstrates the ability to \_\_\_\_the refinancing.

Answer 64

Refinance Consummate (idk what this means - just memorize it)

Question 65

Refinancing a short-term obligation on a long-term basis means: a. replacing it with a \_\_\_-term obligation or equity securities *or*b. renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond ___ year(s) (or the operating cycle, if applicable) from the date of an enterprise's balance sheet.

Answer 65

long one year

Question 66

The ability to consummate the refinancing may be demonstrated in either of the following two ways: 1. By actual \_\_\_of a long-term obligation or equity security after the balance sheet date, but before the balance sheet is issued, for the purpose of refinancing the short-term obligation2. By entering into a financing \_\_\_, before the balance sheet is issued, that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable

Answer 66

issuance agreement

Question 67

Papillon Corp. sold goods to its 90%-owned subsidiary, Trook Corp, during 20X6. At the end of 20X6, 1/4th of these goods were included in Trook's ending inventory. In its income statement for 20X6, Papillon reported freight-out expenses of $790,000, none of which was paid on sales made to Trook. Trook reported $375,000 of freight-out expenses for the same period. Trook's freight-out expenses included $103,000 in freight costs paid to ship goods to Papillon. What amount of selling expenses should be reported in Papillon's 20X6 consolidated income statement? $1,165,000 $1,072,300 $1,113,500 $1,062,000

Answer 67

$1,062,000 Since freight-out costs between Trook and Papillon are paid by the seller (Trook), they are not included in the value of inventory by the buyer (Papillon). Also, since they were paid on an intercompany sale, these costs should be eliminated from Papillon’s consolidated income statement. Thus, consolidated selling expenses for 20X6 are as follows: * Papillon total + Trook's total – Trook’s Intercompany * ($790,000) + ($375,000 – $103,000) * $790,000\* + $272,000 = $1,062,000

Question 68

Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of Envoy's operations. In a strategic shift, Envoy plans to sell the small appliance group with its operations. What is the earliest point at which Envoy should report the small appliance group as a discontinued operation? When Envoy classifies it as held for sale When Envoy first sells any of the assets of the segment When Envoy sells the majority of the assets of the segment When Envoy receives an offer for the segment

Answer 68

## Footnote When Envoy classifies it as held for sale Discontinued operations are presented in a separate section of the income statement after income from continuing operations. The discontinued operations section reflects the results of operations of an entity that is classified for sale or has actually been disposed of.

Question 69

At the end of the accounting period, the components of other comprehensive income are transferred to which of the following stockholders' equity accounts? Retained earnings Treasury stock Additional paid-in capital (common stock) Accumulated other comprehensive income

Answer 69

Accumulated other comprehensive income The total of other comprehensive income for a period is transferred to a component of equity that is presented in the statement of financial position separately from retained earnings and additional paid-in capital. This element of stockholders' equity should carry an appropriate title, such as accumulated other comprehensive income. The accumulated balances of each separate classification of that component of stockholders' equity is required, either in the statement of financial position or in notes to the financial statements. The classifications of other comprehensive income must be consistent throughout the financial statements.

Question 70

Strut Co. has a payable to its parent, Plane Co. In which of the following balance sheets should this payable be reported separately? Neither Strut's balance sheet nor Plane's consolidated balance sheet Plane's consolidated balance sheet Both Strut's balance sheet and Plane's consolidated balance sheet Strut's balance sheet

Answer 70

Strut's balance sheet ## Footnote The payable to Plane Co. from Strut Co. would only appear on Strut Co.’s balance sheet. Payable and receivable amounts that are due to and due from subsidiaries of a consolidated business entity are not reported on the consolidated balance sheet of the consolidated company. The payable would be eliminated during the consolidation process and would not appear on the balance sheet of the consolidated entity or the standalone balance sheet of the parent.

Question 71

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

Answer 71

## Footnote Collection of a note receivable from a related party Investing activities involve asset transactions other than those related to operating results (e.g., accounts receivables from sales and taxes).

Question 72

**Which of the following statements is correct concerning the appearance of noncontrolling interest on the income statement?** None of the answer choices are appropriate disclosure of the noncontrolling interest on the income statement. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements as the amounts attributable to the owners of the parent, followed by a separate disclosure of the revenues, expenses, gains, losses, net income or loss, and other comprehensive income attributable to the noncontrolling interest. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the owners' amounts with disclosure of the noncontrolling interest only in the footnotes. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest.

Answer 72

Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest. **FASB ASC 810-10-45-19 requires that the consolidated amounts of these items (revenues, expenses, gains, losses, net income or loss, and other comprehensive income) be reported on the income statement.** **The amount of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the face of the consolidated statement of income.**

Question 73

A holder of a variable interest that is **not** the primary beneficiary acquired additional variable interests in the variable interest entity (VIE). What action, if any, should follow? No action is necessary because the primary beneficiary of a VIE does not change subsequent to the initial assessment. The holder of the variable interest should use the voting-interest model to determine whether the VIE should be consolidated. The primary beneficiary should discontinue consolidation of the VIE because the election to consolidate is no longer allowed. The holder of the variable interest should reconsider whether it is now the primary beneficiary.

Answer 73

The holder of the variable interest should reconsider whether it is now the primary beneficiary. When the holder of a variable interest that is not the primary beneficiary increases the level of interest the holder has in the variable interest entity, it must assess if the increased interest has now made the holder the primary beneficiary and therefore possibly subject to consolidation procedures. The primary beneficiary is subject to change as facts change, making a reassessment necessary. Without evidence to the contrary, the primary beneficiary should continue to consolidate the entity. No information is given that would cause the primary beneficiary to believe they are not the primary beneficiary. We are given no information about voting or ownership percentages, making the voting-interest model not applicable.

Question 74

An entity is known as a *variable interest entity* and is subject to consolidation if, by design, either of the following conditions (*a.* or *b.*) exists: a. The total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. b. As a group the holders of the equity investment at risk lack any one or more of the following three characteristics of a controlling financial interest: (1) The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity's economic performance (2) The obligation to absorb the expected losses of the entity if they occur (3) The right to receive the expected residual returns of the entity if they occur

Answer 74

Yep

Question 75

An entity is known as a *variable interest entity* and is subject to consolidation if, by design, either of the following conditions (*a.* or *b.*) exists: a. The total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial \_\_\_from other parties. b. As a group the holders of the equity investment at risk lack any one or more of the following three characteristics of a controlling financial interest: (1) The power, through \_\_\_rights or similar rights, to direct the activities of an entity that most significantly impact the entity's economic performance (2) The obligation to absorb the expected \_\_\_of the entity if they occur (3) The right to receive the expected residual \_\_\_of the entity if they occur

Answer 75

support voting losses returns

Question 76

Where in its financial statements should a company disclose information about its concentration of credit risks? No disclosure is required. Management's report to shareholders The notes to the financial statements Supplementary information to the financial statements

Answer 76

FASB ASC 825-10-50-20 requires note disclosures regarding a company's concentrations of credit risks.

Question 77

Whitt Co. prepares its statement of cash flows using the indirect method. Whitt's unamortized bond premium account decreased by $18,500 during the year. How should Whitt report the change in unamortized bond premium in its statement of cash flows? As a subtraction from net income in the operating activities section As a financing cash outflow As a financing cash inflow As an addition to net income in the operating activities section

Answer 77

## Footnote As a subtraction from net income in the operating activities section The amortization of a bond premium is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Under the indirect method, interest expense is already included in net income. Amortization of a premium on bonds payable results in the interest expense amount being less than cash paid. Because less expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be subtracted from income to reconcile to the cash provided or used for operating activities.

Question 78

Which of the following should be disclosed in a summary of significant accounting policies? Future lease payments in the aggregate and for each of the five succeeding fiscal years Depreciation expense Composition of sales by segment Basis of profit recognition on long-term construction contracts

Answer 78

## Footnote Basis of profit recognition on long-term construction contracts Only basis of profit recognition on long-term construction contracts is disclosure related to an accounting method. The other answer choices might be included in disclosure related to those specific expenses, but are not accounting methods that would be included in the significant accounting policies footnote.

Question 79

**Contract balances:** An entity should disclose all of the following: 1. The opening and closing \_\_\_of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed 2. Revenue ____ in the reporting period that was included in the contract liability balance at the beginning of the period 3. Revenue recognized in the reporting period from ____ \_\_\_\_ satisfied or partially satisfied in previous periods; for example, changes in transaction price

Answer 79

balances recognized performance obligations

Question 80

FASB ASC 235-10-05-3 requires disclosure of significant\_\_\_ policies. ## Footnote The accounting policies of an entity are the specific accounting principles and the methods of applying those principles that are judged by the management of the entity to be the most appropriate in the circumstances to present fair ___ \_\_\_

Answer 80

accounting financial reporting

Question 81

Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities: Beginning inventory $ 200,000 Ending inventory 150,000 Cost of goods sold 1,200,000 Beginning accounts payable 300,000 Ending accounts payable 200,000 What amount should Baler report as cash paid to suppliers for inventory purchases? $1,350,000 $1,200,000 $1,250,000 $1,300,000

Answer 81

$1,250,000

Question 82

Yellow Co. received a large worker's compensation claim of $90,000 in the third quarter for an injury occurring in the third quarter. How should Yellow account for the transaction in its interim financial report? Recognize $90,000 in the third quarter Recognize $30,000 for each of the first three quarters Recognize $22,500 ratably over the four quarters of the year Disclose the $90,000 in the third quarter and recognize it at year-end

Answer 82

Recognize $90,000 in the third quarter In general, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report. Deferrals, accruals, and estimations at the end of each interim period are determined on the same basis as the same judgments would be made for an annual period; hence Yellow would recognize the entire $90,000 in the third quarter.

Question 83

During the year, Verity Co. purchased $200,000 of Otra Co. bonds at par and $50,000 of U.S. Treasury bills. Verity classified the Otra bonds as available-for-sale securities and the Treasury bills as cash equivalents. In Verity's statement of cash flows, what amount should it report as net cash used in investing activities? $0 $200,000 $250,000 $150,000

Answer 83

$200,000 Cash payments to acquire debt instruments of other entities are classified as cash outflows from investing activities on the statement of cash flows. The purchase of Otra Co. bonds would represent a net cash used of $200,000. Cash paid for items classified as cash and cash equivalents are not reported on the statement of cash flows because they are merely a transfer of one type of cash for another type of cash.

Question 84

Cash equivalents are short-term, highly liquid investments that: 1. are readily \_\_\_to known amounts of cash and 2. are so near maturity that they represent insignificant risk of changes in value due to changes in interest rates. (Generally, only investments with original maturities of ___ months or less qualify as cash equivalents, such as Treasury bills, commercial paper, money market funds, and federal funds sold.)

Answer 84

convertible three months

Question 85

Treasury bills, commercial paper, money market funds, and federal funds sold. These are examples of what?

Answer 85

Cash equivalents

Question 86

During 20X2, Solomon Co. purchased equipment for cash of $128,000, and sold equipment with a $38,000 carrying value for a loss of $14,000. How should these transactions be reported in Solomon's 20X2 statement of cash flows? Cash inflow of $24,000 and cash outflow of $128,000 Cash outflow of $142,000 Cash outflow of $104,000 Cash outflow of $152,000

Answer 86

Cash inflow of $24,000 and cash outflow of $128,000 According to FASB ASC 230-10-45-13, cash flows associated with transactions involving long-term assets are classified as cash flows from investing activities. **Cash inflows are not to be netted against cash outflows.** There is a cash outflow of $128,000 to purchase equipment given directly in the problem. The cash inflow must be determined from the facts as given. A loss on disposal indicates that the cash received is lower than the carrying value. Carrying value $38,000 Loss on disposal _(14,000_) Cash selling price $24,000 =======

Question 87

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings? $23,000 $21,000 $8,000 $15,000

Answer 87

## Footnote $15,000 Only dividends paid to Peace shareholders will be reported as dividends paid. Dividends paid to Peace by Surge will be eliminated in consolidation. Dividends paid to shareholders other than Peace will be reported as an adjustment to the noncontrolling interest account.

Question 88

Green Co. had the following equity transactions at December 31: Cash proceeds from sale of investment in Blue Co. (carrying value $60,000) $75,000 Dividends received on Grey Co. stock 10,500 Common stock purchased from Brown Co. 38,000 What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31? $47,500 $75,000 $37,000 $85,500

Answer 88

$37,000 Cash proceeds from the sale of an investment are a cash inflow and cash paid to purchase stock is a cash outflow. Both are investing activities. * $75,000 - $38,000 = $37,000

Question 89

Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows: Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase **Additional Information** * During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. * In December 20X1, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000. * Depreciation expense for the year was $52,000. In Karr's 20X1 statement of cash flows, net cash used in investing activities should be: $35,000. $12,000. $2,000. $22,000.

Answer 89

Question 90

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? $250 $50 $350 $150

Answer 90

$250 The company's increase in cash flows is $250, calculated as follows: Dividends paid $(300) Proceeds from the issuance of common stock 250 Borrowings under a line of credit 200 Proceeds from the issuance of convertible bond _100_ Net increase from financing activities $250 **The proceeds from the sale of a building are included in investing activities.**

Question 91

Which of the following statements about reporting discontinued operations in the balance sheet is **incorrect?** The assets and liabilities of the component of the entity can be reported as a single or net amount. If the discontinued operation includes both assets and liabilities, they must be presented separately in the respective asset and liability sections of the entity’s balance sheet. The discontinued operation must be reported separately in the balance sheet in the period in which it is classified as held for sale. If prior periods are presented, the assets and liabilities classified as held for sale must be separated out in prior periods as well as in the period in which the assets are initially classified as held for sale.

Answer 91

The assets and liabilities of the component of the entity can be reported as a single or net amount. The assets and liabilities of a component that qualify as discontinued operations need to be reported separately from assets in use on the balance sheet. When such reporting occurs, the assets need to be separated in a similar manner in any prior periods presented. When a component has both assets and liabilities, they are not to be “netted,” but rather the assets should be reported in the asset section of the balance sheet and the liabilities should be reported in the liability section of the balance sheet. *

Question 92

A company had the following transactions during the year: Principal payments on notes payable $48,000 Interest payments on notes payable 8,000 Cash payment to purchase 100 shares of another company's common stock 25,000 What amount is classified as cash outflow for financing activities in the company's statement of cash flows? $48,000 $81,000 $56,000 $73,000

Answer 92

$48,000 ## Footnote Financing activities are those activities that provide financing or use financing. They include the issuance and repurchase of a company’s own stock, cash dividend payments to shareholders, and the issuance and repurchase of debt. Interest on debt is an operating activity while purchase of another company’s stock is an investing activity. The only answer choice that meets the definition of financing is principal payments on notes payable for $48,000, which is a form of debt repayment.

Question 93

Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni's cash-basis pretax income is: higher by $4,000. higher by $36,000. lower by $36,000. lower by $4,000.

Answer 93

higher by $36,000. Relative to accrual basis, a decrease in accounts receivable is an increase in cash because cash must be received to decrease accounts receivable. Relative to accrual basis, an increase in accounts payable is an increase in cash because accounts payable was increased instead of making cash purchases. Decrease in accounts receivable $20,000 Increase in accounts payable _16,000_ Total increase in cash-basis income $36,000

Question 94

Financial statement line item explanations include which of the following? Degree of credit or nonperformance risk Segment reporting Potential litigation Inability to maintain a qualified workforce

Answer 94

Degree of credit or nonperformance risk Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows: * For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions. * For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), ***degree of credit or nonperformance risk**,* potential effect related to inability to pay or perform, and method used to determine the cash flows. * Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.

Question 95

When entities face risk due to a lack of diversification, they must include disclosures in the notes to the financial statements about “vulnerability to concentrations.” Which of the following is **not** an example of a concentration to which an entity may be considered vulnerable? An entity relies on certain available sources of raw materials, labor, services, or licenses. An entity manufactures products that are used in a wide variety of industries. An entity operates primarily in the specific market or geographic region in which an entity conducts its operations. An entity has a large volume of business with one customer, supplier, lender, or contributor.

Answer 95

An entity manufactures products that are used in a wide variety of industries. Categories of concentrations include a large volume of business with one customer, supplier, lender, contributor, or grantor. Categories also include when an entity operates primarily in the specific market or geographic region in which an entity conducts its operations and when an entity relies heavily on certain available sources of raw materials, labor, services, licenses, or other rights. Finally, a category exists when an entity has a concentration in revenue form particular products, services, or fundraising events. An entity that manufactures products that are used in a wide variety of industries would have a lower, *not* higher, vulnerability to concentrations.

Question 96

Mirr, Inc., was incorporated on January 1, 20X0, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, 20X0, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 20X1. No additional activities affected owners' equity in 20X0. Mirr's liabilities increased to $120,000 by December 31, 20X0. On Mirr's December 31, 20X0, balance sheet (statement of financial position), total assets should be reported at: $875,000. $882,000. $885,000. $878,000.

Answer 96

Question 97

**\_\_\_:** Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events **\_\_\_: p**robable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services to other entities as a result of past transactions **\_\_\_:** The residual interest in the assets of an entity that remains after deducting its liabilities. For a corporation, equity is the ownership interest

Answer 97

Assets Liabilities Equtiy

Question 98

A general principle of accounting is that the offsetting of assets and liabilities in the balance sheet is improper except where a right of \_\_\_exists.

Answer 98

setoff

Question 99

A debtor with a payable to an entity MAY offset a receivable from that same entity and display only the difference as a net payable or receivable T/F

Answer 99

False – they MAY NOT

Question 100

For example, a debtor with a payable to an entity may not offset a receivable from that same entity and display only the difference as a net payable or receivable unless the following specified conditions are met for the r**ight of setoff** to exist: a. Each of the two parties owes the other \_\_\_amounts. b. The reporting party has the right to set off the amount owed with the amount owed by the other party. T/F c. The reporting entity ___ to set off. d. The right of setoff is enforceable at \_\_\_

Answer 100

determinable True Intends law

Question 101

A public entity sells steel for use in construction. One of its customers accounts for 43% of sales, and another customer accounts for 40% of sales. What should the entity disclose in its annual financial statements about these two customers? The financial condition of the two customers The amount of the entity's revenue from each of the two customers The names of the two customers The payment terms of accounts receivable due from each of the two customers

Answer 101

**The amount of the entity's revenue from each of the two customers** If revenues from transactions with a single external customer amount to 10% or more of an entity’s revenues, the business must disclose that fact, the total amount of revenues from each such customer, and the identity of the segments reporting the revenues. A major customer is a single customer, or a group of entities, known to a reporting enterprise to be under common control. The identity, payment terms, and financial condition of the customers do not need to be disclosed.

Question 102

If revenues from transactions with a single external customer amount to \_\_% or more of an enterprise's revenues, the enterprise must disclose that fact, the total amount of revenues from each such customer, and the identity of the segments reporting the revenues.

Answer 102

10%

Question 103

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, lists four limitations/constraints to consider related to disclosure requirements. They are: representational faithfulness, materiality, future-oriented information, and predictive value. cost constraint, materiality, potential adverse consequences, and historical cost. cost constraint, potential adverse consequences, future-oriented information, and relevance. relevance, representational faithfulness, materiality, and predictive value.

Answer 103

cost constraint, potential adverse consequences, future-oriented information, and relevance. 1. *Relevance:* Disclosure is based upon relevance, not entity-specific materiality. 2. *Cost constraint:* The FASB has an expectation that financial statement users have awareness of accounting rules, policies, and regulations; thus, common knowledge can be excluded from the notes. Disclosure should include details of measurement if alternatives exist, methods not obvious to the user, or methods if changed since prior reporting. 3. *Potential adverse consequences:* The FASB will consider potential adverse consequences. Disclosure can have both beneficial and adverse consequences. 4. *Future-oriented information:* The FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.

Question 104

1. *\_\_\_:* Disclosure is based upon relevance, not entity-specific materiality. 2. *\_\_\_ \_\_\_:* The FASB has an expectation that financial statement users have awareness of accounting rules, policies, and regulations; thus, common knowledge can be excluded from the notes. Disclosure should include details of measurement if alternatives exist, methods not obvious to the user, or methods if changed since prior reporting. 3. *\_\_\_ ___ \_\_\_:* The FASB will consider potential adverse consequences. Disclosure can have both beneficial and adverse consequences. 4. *\_\_\_-\_\_\_ \_\_\_:* The FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.

Answer 104

Relevance Cost Constraint Potential Adverse Consequences Future-oriented information

Question 105

For purposes of consolidating financial interests, a majority voting interest is deemed to be: greater than 50% of the directly or indirectly owned outstanding voting shares of another entity. 50% of the directly or indirectly owned outstanding voting shares of another entity. 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity. greater than 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.

Answer 105

greater than 50% of the directly or indirectly owned outstanding voting shares of another entity. GAAP requires that consolidated financial statements be prepared when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. FASB ASC 810 specifies that, in general, the usual condition for consolidated financial statements is ownership (direct or indirect) of a majority voting interest (i.e., at least one share in excess of 50%).

Question 106

During 20X1, Beck Co. purchased equipment for cash of $47,000, and sold equipment with a $10,000 carrying value for a gain of $5,000. How should these transactions be reported in Beck's 20X1 statement of cash flows? Cash inflow of $5,000 and cash outflow of $47,000 Cash inflow of $15,000 and cash outflow of $47,000 Cash outflow of $32,000 Cash outflow of $42,000

Answer 106

Cash inflow of $15,000 and cash outflow of $47,000

Question 107

In its 20X1 income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in several balance sheet accounts as follows: Inventory $160,000 decrease Accounts payable—suppliers 40,000 decrease What amount should Kilm report as cash paid to suppliers in its 20X1 cash flow statement, prepared under the direct method? $570,000 $250,000 $650,000 $330,000

Answer 107

$330,000

Question 108

A company has the following liabilities at year-end: Mortgage note payable; $16,000 due within 12 months $355,000 Short-term debt that the company is refinancing with long-term debt 175,000 Deferred tax liability arising from depreciation 25,000 What amount should the company include in the current liability section of the balance sheet (statement of financial position)? $41,000 $191,000 $0 $16,000

Answer 108

## Footnote $16,000 Only the current portion of the mortgage is included in current liabilities. All deferred tax liabilities and deferred tax assets are classified as noncurrent. The refinanced loan is not included in current liabilities. The FASB states that a short-term obligation should be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis, and that intent is supported by an ability to consummate the refinancing.

Question 109

Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities, and include the following: a. Obligations for items that have entered into the ___ \_\_\_ b. Collections received in \_\_\_of the delivery of goods or performance of services c. Debts arising from operations directly related to the operating cycle (e.g., accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes) **T/F** d. Other liabilities whose regular and ordinary liquidation is expected to occur within ___ \_\_\_ or less (e.g., dividends payable, warranty payable, interest payable)

Answer 109

Operating Cycle (operating cycle is within 1 year) advance (unearned revenue) True one year

Question 110

On December 31, 20X1, Date Co. awaits judgment on a lawsuit for a competitor's infringement of Date's patent. Legal counsel believes it is probable that Date will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Date's 20X1 financial statements? By accrual for the lowest amount of the range of possible awards In note disclosure only Neither in note disclosure nor by accrual By accrual for the most likely award

Answer 110

In note disclosure only If Date Co. **wins** the lawsuit, the award paid to Date will be a **gain.** FASB ASC 450-30-50-1 provides that **gain** contingencies should **not** be reflected in the accounts (i.e., accrued) but that adequate **disclosure** should be made in **notes** to the financial statements. A **loss** contingency would be reported by accrual for the most likely award **or** for the lowest amount of the range of possible awards if no amount can be considered most likely. **(FASB ASC 450-20-25-4)**

Question 111

An important element of the topic of risks and uncertainties is selectivity. **Selectivity** involves the specified criteria that serve to screen the \_\_\_and \_\_\_encountered by every entity The types of risks and uncertainties discussed in this section are: a. the nature of the entity's \_\_\_, b. the use of \_\_\_in the preparation of the entity's financial statements, and c. significant \_\_\_in certain aspects of the entity's operations.

Answer 111

risks and uncertainties a. Operations b. estimates c. concentrations

Question 112

**Which of the following information should be included in Gold Corporation’s 20X7 summary of significant accounting policies?** The specific amounts of the components of pension expense The specific amounts of raw material inventory, work-in-process inventory, and finished goods shown in aggregate on the balance sheet The policies regarding inventory valuation and the methods used for inventory cost determination The valuation model used to determine the value of stock options granted to upper-level managers

Answer 112

The policies regarding inventory valuation and the methods used for inventory cost determination FASB ASC 235-10-50-4 requires a description of all significant accounting policies when financial statements are issued. A listing of required policy disclosures by this pronouncement includes basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing, and several other items. Gold should include *information concerning how inventory is valued and the inventory cost flow assumptions* used in its summary of significant accounting policies. **Note:** While the other three information items in the answer choices should be disclosed in the notes to the financial statements, they should **not** be included in the summary of significant accounting policies.

Question 113

Examples of accounting principles and methods for which disclosure of policy is frequently made include, but are not limited to, the following: a. Depreciation methods b. Consolidation basis c. Interperiod tax allocation d. Inventory pricing e. Revenue recognition methods

Answer 113

Yep!

Question 114

General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users? Investors and creditors and their advisors The board of directors of the corporation Regulatory and taxing authorities The management of the corporation

Answer 114

Investors and creditors and their advisors General purpose financial statements are designed to provide information to the primary users since information cannot be provided directly to these users. The primary users are existing and potential investors, lenders, and other creditors. These users make decisions about buying, selling, or holding equity and debt instruments or providing credit by evaluating the expected returns from their investment. These parties need information about the prospects of future net cash inflows to the entity. They also need information about the entity’s resources, claims against those resources, and how efficiently the entity’s management and governing board have used the entity’s resources. Regulatory and taxing authorities, the board of directors, and management of the corporation are also users of general purpose financial statements; however, they are not the *primary* users.

Question 115

General purpose financial statements are designed to provide information to the \_\_\_users since information cannot be provided directly to these users. The primary users are \_\_\_and \_\_\_investors, lenders, and other creditors. These users make decisions about buying, selling, or providing credit by evaluating the expected returns from their investment. These parties need information about the prospects of future net cash inflows to the entity. They also need information about the entity’s resources, claims against those resources, and how efficiently the entity’s management and governing board have used the entity’s resources. **T/F** Regulatory and taxing authorities, the board of directors, and management of the corporation are also users of general purpose financial statements. These are primary users also. **T/F**

Answer 115

primary existing and potential True False. Regulatory and taxing authorities, the board of directors, and management of the corporation are **NOT** primary users. **They're secondary users.**

Question 116

Which of the following does **not** represent an element of other comprehensive income under current generally accepted accounting principles? Amortization of unrecognized prior service costs related to a pension plan Cumulative effect of a change in accounting estimate Accumulated gains and losses on available-for-sale debt investments Foreign currency adjustments

Answer 116

Cumulative effect of a change in accounting estimate The components of other comprehensive income are to be presented based on their nature. Under current authoritative accounting literature, three categories of elements of other comprehensive income exist: Unrealized gains and losses on available-for-sale debt investments Foreign currency items Changes in unrecognized prior service costs, unrecognized gains and losses, and unrecognized transition assets or obligations related to defined benefit pension plans and defined benefit other postretirement plans

Question 117

The components of other comprehensive income are to be presented based on their nature. Under current authoritative accounting literature, three categories of elements of other comprehensive income exist: Unrealized gains and losses on \_\_\_-\_\_\_-\_\_ debt investments Foreign \_\_\_\_\_items Changes in unrecognized prior ___ \_\_\_, unrecognized gains and losses, and unrecognized transition assets or obligations related to defined benefit pension plans and defined benefit other postretirement plans

Answer 117

available for sale Currency service costs

Question 118

Which of the following is included on a statement of changes in equity? Events changing stockholders' equity accounts are listed chronologically to the left. All of the items listed are included on a statement of changes in equity. The impact of the transactions on the number of shares of stock, if any, is presented in the descriptions to the left. Column headings identify individual stockholders' equity accounts.

Answer 118

All of the items listed are included on a statement of changes in equity. A statement of changes in stockholders' equity includes the following: * Column headings that identify individual stockholders' equity accounts * Events changing stockholders' equity accounts * The body of the statement presented in terms of the dollar impact of various transactions and events * The impact of the transactions on the number of shares of stock, if any * Ending balances that tie to the items presented in the stockholders' equity section of the balance sheet on the same dates

Question 119

A statement of changes in stockholders' equity includes the following: * \_\_\_headings that identify individual stockholders' equity accounts * \_\_\_changing stockholders' equity accounts * The body of the statement presented in terms of the dollar impact of various transactions and events **T/F** * The impact of the transactions on the number of shares of \_\_\_, if any * \_\_\_balances that tie to the items presented in the stockholders' equity section of the balance sheet on the same dates

Answer 119

Column Events True Stock ending

Question 120

Consolidated financial statements are typically prepared when one company has a controlling financial interest in another, **unless:** the fiscal year-ends of the two companies are more than three months apart. the subsidiary is a finance company. such control does not rest with the majority owner because the subsidiary is in bankruptcy. the two companies are in unrelated industries, such as manufacturing and real estate.

Answer 120

such control does not rest with the majority owner because the subsidiary is in bankruptcy. Prior to FASB ASC 810-10-15, some parent companies would defend their decision to not consolidate certain subsidiaries by arguing that the nature of the subsidiary's business was too unlike that of the parent. For example, the subsidiary might be a financial institution and the parent a manufacturing operation. FASB ASC 810-10-15 eliminated such “non-homogenous operations” defenses for not consolidating majority-owned subsidiaries by specifying that all majority-owned subsidiaries have to be consolidated unless control does not rest with the majority owner.

Question 121

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, lists all of the following examples of past events and current conditions potentially impacting the entity’s future line items and cash flows **except** for: suspected regulatory violations. related party reporting. existing or potential litigation. dependency on a few customers or suppliers.

Answer 121

## Footnote related party reporting. Examples of past events and current conditions potentially impacting the entity’s future line items and cash flows but which have not yet been incorporated into financial statement line items include existing or potential litigation; suspected or known statute, judicial, regulatory, or contract violations; unrecognized existing commitments expected to be recognized in the future; events where significant uncertainty led to the decision to not recognize the event; and subsequent events . Items not necessarily impacting line items that may require disclosure include dependency on one or a few customers or suppliers for profitability, input or output market volatility, uncertainty regarding an entity’s access to markets for inputs or outputs or ability to maintain a qualified workforce, and other significant specific entity risk. **Related party reporting is considered to be a reporting entity disclosure.**

Question 122

During the current year, Cooley Co. had an unrealized gain of $100,000 on a debt investment classified as available-for-sale. Cooley's corporate tax rate is 25%. What amount of the gain should be included in Cooley's net income and other comprehensive income at the end of the current year? Net income $25,000 Other comprehensive income $75,000 Net income $75,000 Other comprehensive income $25,000 Net income $0 Other comprehensive income $75,000 Net income $100,000 Other comprehensive income $0

Answer 122

Net income $0 Other comprehensive income $75,000 Available-for-sale debt securities are carried on the balance sheet at fair value. Unrealized changes in fair value between periods are reported in other comprehensive income for the period. Gains and losses are not reported on the income statement until realized. Items in other comprehensive income are reported net of their effective tax. The unrealized gain in other comprehensive income is $75,000 ($100,000 gain × (1 – .25 tax rate)).

Question 123

Available-for-sale (AFS) securities are carried on the balance sheet at ___ value.

Answer 123

fair

Question 124

Available-for-sale securities Unrealized gains and losses from changes in fair value are reported in \_\_\_ Unrealized gains or losses from sold securities are adjusted when the entire portfolio is evaluated for fair value at date of sale. **T/F**

Answer 124

Other Comprehensive Income (OCI) False - it is evaluated at **YEAR-END**

Question 125

Wagner, a holder of a $1,000,000 Palmer, Inc., bond, collected the interest due on March 31, 20X1, and then sold the bond to Seal, Inc., for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal's purchase of Palmer's bond on the retained earnings and noncontrolling (minority) interest amounts reported in Palmer's March 31, 20X1, consolidated balance sheet? Retained earnings: $75,000 increase; Noncontrolling interest: $25,000 increase Retained earnings: $0; Noncontrolling interest: $25,000 increas Retained earnings: $100,000 increase; Noncontrolling interest: $0 Retained earnings: $0; Noncontrolling interest: $100,000 increase

Answer 125

Retained earnings: $100,000 increase; Noncontrolling interest: $0 Carrying value of Palmer bonds payable $1,075,000 Less acquisition cost to Seal, Inc. _975,000_ Gain to Palmer (Consolidated entity) $ 100,000 ========== This gain would, of course, *increase* consolidated retained earnings. The gain is identified with the issuer of the bonds, which is Palmer in this case. Therefore, the gain has no effect on noncontrolling (minority) interest.

Question 126

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows? Operating activities: $100,000 addition to net income; Investing activities: $400,000 cash inflow Operating activities: $100,000 addition to net income; Investing activities: $500,000 cash inflow Operating activities: $100,000 subtraction from net income; Investing activities: $500,000 cash inflow Operating activities: $100,000 subtraction from net income; Investing activities: $400,000 cash inflow

Answer 126

Operating activities: $100,000 addition to net income; Investing activities: $400,000 cash inflow The net loss ($400,000 – $500,000 = $(100,000)) would be removed (added back) from net income. The cash from the sale would be included as a cash inflow from investing activities.

Question 127

Answer 127

$5,700,000

Question 128

During the current year, Ace Co. amortized a bond discount. Ace prepares its statement of cash flows using the indirect method. In which section of the statement should Ace report the amortization of the bond discount? Investing activities Financing activities Operating activities Supplemental disclosures

Answer 128

Operating activities The amortization of the bond discount is classified as interest expense and has been deducted in arriving at net income. Using the indirect method, this amortization must be added to net income to compute net cash provided by operating activities.

Question 129

Answer 129

Question 130

Thyme, Inc. owns 16,000 of Sage Co.'s 20,000 outstanding common shares. The carrying value of Sage's equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for $200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling interest after the additional shares are issued? $172,000 $252,000 $300,000 $140,000

Answer 130

$252,000 ## Footnote After Sage issued the additional $200,000 in equity, its total equity was $700,000 ($500,000 + $200,000). Thyme now owns 16,000 shares out of the total 25,000 (20,000 + 5,000) shares outstanding, or 64% (16,000 ÷ 25,000). The remaining 36% (100% − 64%) accounts for a noncontrolling interest of $252,000 ($700,000 × 36%).

Question 131

When entities face risk due to a lack of diversification, they must include disclosures in the notes to the financial statements about “vulnerability to concentrations.” Which of the following is **not** a necessary criterion of a “vulnerability to concentrations”? The concentration exists at the date in the financial statements. The concentration makes the entity vulnerable to the risk of a severe impact in the near term. Severe impact events are those that are catastrophic. There is a reasonable possibility that the events resulting in a severe impact related to the concentration will occur in the near term.

Answer 131

When firms lack diversification, they may be exposed to risks not faced by firms with adequate diversification. This is called “vulnerability to concentrations.” Such risks need to be disclosed in the notes to the financial statements when three conditions exist: 1. Such a concentration exists at the date of the financial statements. 2. The concentration makes the entity vulnerable to the risk of a near-term severe impact. 3. It is at least reasonably possible that the events that could cause the severe impact will occur in the near term. When management’s information indicates that these three conditions exist, the firm must disclose it is “vulnerable to concentrations.” The answer choice "severe impact events are those that are catastrophic" is not one of the conditions necessary to require disclosure. While a concentrated event may be catastrophic, it only meets the disclosure requirement if it is also vulnerable to concentration.

Question 132

When firms lack diversification, they may be exposed to risks not faced by firms with adequate diversification. This is called “vulnerability to concentrations.” Such risks need to be disclosed in the notes to the financial statements when three conditions exist: 1. Such a concentration exists at the \_\_\_of the financial statements. 2. The concentration makes the entity \_\_\_to the risk of a near-term severe impact. 3. It is at least \_\_\_possible that the events that could cause the severe impact will occur in the near term. When management’s information indicates that these three conditions exist, the firm must disclose it is “\_\_\_to concentrations.”

Answer 132

date vulnerable reasonably vulnerable

Question 133

Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities? Statement of changes in stockholders' equity Statement of cash flows Balance sheet Income statement

Answer 133

## Footnote Statement of cash flows FASB ASC 230-10-45-1 requires cash flows to be presented in three categories in the statement of cash flows—operating, investing, and financing. Paragraph 6 states: “A statement of cash flows should report the cash effects during a period of an enterprise's operations, its investing transactions, and its **financing transactions.**” (*Emphasis added*) Hence, one of the key purposes of the statement of cash flows is to disclose how a business financed its operations.

Question 134

Answer 134

225,000

Question 135

On April 30, Deer approved a plan to dispose of a segment of its business. For the period January 1 through April 30, the segment had revenues of $500,000 and expenses of $800,000. The assets of the segment were sold on October 15, at a loss for which no tax benefit is available. In its income statement for the calendar year, how should Deer report the segment’s operations from January 1 to April 30? $300,000 reported as a net loss, as part of continuing operations $500,000 and $800,000 included with revenues and expenses, respectively, as part of continuing operations $300,000 reported as a loss from discontinued operations $300,000 reported as an extraordinary loss

Answer 135

The operating loss and the loss on the sale must be reported as the loss for the discontinued operation. (**Note:** The concept of “extraordinary” items has been eliminated from GAAP and is therefore not a valid response.) ``` Revenues $ 500,000 Expenses _(800,000)_ Loss from discontinued operations $(300,000) ```

Question 136

Marble Co. prepared its statement of cash flows using the following amounts: Net decrease in fixed assets $(3,750) Depreciation expense 13,000 Gain on sale of equipment (net book value, $3,250) 1,250 Capital expenditures 12,500 Marble reported net income of $20,000 at year-end. What amount should Marble report as net cash provided by operating activities? $31,750 $33,000 $29,250 $19,500

Answer 136

$31,750 Given the limited information provided, the cash provided by operations can be found using the indirect method. The indirect method begins with net income and adjusts for noncash effects and changes in operating assets and operating liabilities, as follows: Net income $20,000 Depreciation expense 13,000 Gain on sale of equipment _(1,250_) Cash provided by operating activities $31,750 The decrease in fixed assets, capital expenditures, and proceeds from the sale of equipment would all be classified as investing activities in the statement of cash flows.

Question 137

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, states that noncontractual asset disclosures could include all of the following **except** for: the nature of the asset. the quality of the asset. the location of the asset. the degree of nonperformance risk.

Answer 137

## Footnote the degree of nonperformance risk. SFAC 8 provides a summary of potential additional disclosures. For assets, the following items should be disclosed: the nature, quality, and location of the asset; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions. The degree of nonperformance risk of the asset is *not* one of the suggested disclosures.

Question 138

Which of the following items of stockholders’ equity can either be an increase or a decrease to total stockholders’ equity? Paid-in capital in excess of par Preferred stock (with par value) Treasury stock Accumulated other comprehensive income

Answer 138

Accumulated other comprehensive income Accumulated other comprehensive income (AOCI) can either increase or decrease total stockholders’ equity because the elements of AOCI can be either cumulative gains or losses. Paid-in capital in excess of par increases total stockholders’ equity. Treasury stock decreases total stockholders’ equity. Preferred stock (with par value) increases total stockholders’ equity.

Question 139

Town, Inc., is preparing its financial statements for the year ending December 31, 20X1. On December 1, 20X1, Town was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 20X2, prior to the issuance of the financial statements. What is the reporting requirement? Accrual only Disclosure only Both accrual and disclosure Neither accrual nor disclosure

Answer 139

Both accrual and disclosure Town, Inc., has a legally enforceable right to the settlement from the lawsuit on December 1, 20X1, so it would be reported in 20X1. The circumstances of the accrual of the gain should be disclosed in the interest of full disclosure.

Question 140

On July 1, 20X1, Dewey Co. signed a 20-year building lease that it reported as an operating lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its 20X1 statement of cash flows? An inflow equal to the present value of future lease payments on July 1, 20X1, less 20X1 principal and interest payments The lease payments should **not** be reported in the financing activities section. An outflow equal to the 20X1 principal and interest payments on the lease An outflow equal to the 20X1 principal payments only

Answer 140

The lease payments should **not** be reported in the financing activities section. Cash outflows for operating activities per FASB ASC 230-10-45-17 include “cash payments to other suppliers or employees for other goods or services.” Operating lease payments are to appear in the operating activity cash flow section.

Question 141

Cash payments related to leases may be treated differently by lessees and lessors. 1. For operating leases, cash flows appear in \_\_\_activities for both the lessee and the lessor. 2. **Lessees:** For finance leases, the lessee reports the interest portion of the lease payment as cash flows from \_\_\_activities and the principal portion as cash flows from \_\_\_activities. 3. **Lessors:** The lessor reports cash receipts from sales-type leases and direct financing leases as cash flows from \_\_\_activities.

Answer 141

operating operating; financing operating

Question 142

Answer 142

$(120,000)

Question 143

Answer 143

$1,240,000 ## Footnote In accounting for business combinations, the stockholders' equity of the acquired entity is eliminated against the investment account. As a result, consolidated retained earnings include only the retained earnings of the parent company. Thus, the Owen Corp. consolidated balance sheet on December 31, 20X1, would show a retained earnings amount of $1,240,000, an amount equal to Owen's separate retained earnings.

Question 144

Answer 144

$1,314,600

Question 145

Answer 145

$201,900. Items to be included in the revenue section of the 20X2 income statement: Net sales revenue $187,000 Interest revenue 10,200 Gain on sale of equipment _4,700_ Total revenues $201,900 ======== **Note:** Generally accepted accounting principles require that the other items listed appear in other sections of the income statement or in another financial statement.

Question 146

Financial statement line item explanations which may require additional information for full disclosure purposes include all of the following **except:** potential effect related to inability to perform or pay. nature of primary activities. line item relation to other line items. degree of credit or nonperformance risk.

Answer 146

nature of primary activities. Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows: * For assets: the nature, quality, and location; future cash flows; *relation to other line items*; and significant contractual, statutory, regulatory, or judicial restrictions. * For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), *degree of credit or nonperformance risk,* *potential effect related to inability to pay or perform,* and method used to determine the cash flows. * Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.

Question 147

Glass Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale (sale price $100,000) 10,000 increase Nontrade notes payable increase 50,000 Equipment purchases 40,000 increase Accounts payable increase 30,000 What amount should Glass report as net cash provided by investing activities in its statement of cash flows for the year? $50,000 $10,000 $60,000 $(40,000)

Answer 147

$60,000 Cash flows from investing activities involve the use and receipt related to nonoperating assets (i.e., property, plant, and equipment; equity and debt securities; notes receivable; etc.). Cash provided by investing activities is found in an identical manner under the direct or indirect method of preparing the statement of cash flows. In this example, only two items would be classified as investing activities: the equipment purchase and equipment sale. The sale resulted in a $100,000 cash inflow and the purchase resulted in a $40,000 cash outflow, for a net cash provided amount $60,000 ($100,000 inflow − $40,000 outflow). The change in accounts receivable and accounts payable balances would be captured in the operating section of the statement of cash flows. The change in notes payable would be captured in the financing section.

Question 148

Dove Inc. owns 100% of Flom Co. On January 2, 20X3, Dove sold equipment with an original cost of $120,000 and a carrying amount of $84,000 to Flom for $108,000. It is Dove’s policy to use straight-line depreciation with a useful life of 10 years for equipment like that sold to Flom. The equipment had no residual value. Flom is using straight-line depreciation over 6 years with no residual value. In Dove's December 31, 20X3, consolidating worksheet, by what amount should depreciation expense be decreased? $18,000 $6,000 $0 $12,000

Answer 148

$6,000 ## Footnote When dealing with unrealized gains or losses in a consolidated financial statement setting, the objective is to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated financial statement. The unrealized gain of the sale of the equipment to Flom is located in the cost of the equipment on Flom’s books. Depreciation expense on a consolidated basis should be the depreciation that would have been expensed on Dove's books if the equipment had not been sold. Depreciation on Flom's books (unrealized gain) ($108,000 ÷ 6) $18,000 Depreciation on Dove's books (original cost) ($120,000 ÷ 10) _12,000_ Difference $ 6,000

Question 149

The entire amount (100%) of any unrealized intercompany profit or loss should be eliminated for consolidation purposes **T/F**

Answer 149

True

Question 150

**Which of the following disclosures should prospective financial statements include?** Summary of significant accounting policies Both summary of significant accounting policies and summary of significant assumptions Summary of significant assumptions Neither summary of significant accounting policies nor summary of significant assumptions

Answer 150

Both summary of significant accounting policies and summary of significant assumptions The AICPA's “Statement of Standards for Accountants' Services on Prospective Financial Information” governs the preparation of prospective financial statements . It requires that accountants provide summaries of the significant accounting policies and the assumptions used to prepare these forward-looking statements. The same full disclosure principle that guides the preparation of historical financial statements applies to the reporting of prospective financial statements.

Question 151

The following statements describe the form and content of accounting policy disclosure: a. The disclosure encompasses important judgments as to \_\_\_of principles relating to recognition of revenue and allocation of asset costs to current and future periods. b. The disclosure encompasses principles and methods that involve the selection from among existing acceptable \_\_\_. c. Principles and methods peculiar to the __ are disclosed, even if the principles and methods are predominantly followed in that industry. d. \_\_\_or innovative applications of generally accepted accounting principles are disclosed. e. Policy disclosure is particularly useful if presented in a separate summary schedule, preceding the notes to the financial statements or as the first note. This should be appropriately identified (e.g., “Summary of Significant Accounting Policies”). **T/F** f. Policy disclosure in a summary schedule should duplicate information presented elsewhere in the financial statements. **T/F** g. In some cases, policy disclosure may need to be cross-referenced to information disclosed in other parts of the financial statements (e.g., other notes). **T/F**

Answer 151

appropriateness alternatives industry Unusual True FALSE - Should NOT duplicate info presented elsewhere True

Question 152

**Estimates** are a necessary part of the preparation of financial statements. **T/F**

Answer 152

True

Question 153

Disclosure of these significant estimates must be made when the following conditions are present: a. It is at least reasonably possible that the estimate of the effect on the financial statements will \_\_\_in the near term due to one or more future confirming events (*reasonably possible* is a chance more than remote but less than likely). b. The effect of the change would be \_\_\_.

Answer 153

change material

Question 154

Where does the noncontrolling interest appear on the balance sheet? In the owners' equity section In the liability section Between the liability section and the owners' equity section None of the answer choices are appropriate disclosure of the noncontrolling interest on the balance sheet.

Answer 154

In the owners' equity section FASB ASC 810-10-45-16 requires that the noncontrolling interest be reported in the owners' equity section.

Question 155

When the direct method of preparing a statement of cash flows is used, an enterprise should provide a reconciliation of net income to net cash flows from which activity? Financing No reconciliation should be provided. Operating Investing

Answer 155

Operating A business enterprise that provides a set of financial statements intended to report financial position and results of operations must provide a statement of cash flows (SCF) for each period for which results of operations are presented. The primary purpose of the SCF is to provide information about the cash receipts and cash payments of an enterprise during a period of time. The SCF is presented in three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (in that order). The SCF can be prepared using the direct or indirect method. If the direct method is used, net income and net cash flows from operating activities must be reconciled.

Question 156

Rory Co.’s prepaid insurance was $50,000 at December 31, Year 2, and $25,000 at December 31, Year 1. Insurance expense was $20,000 for Year 2 and $15,000 for Year 1. What amount of cash disbursements for insurance would be reported in Rory’s Year 2 net cash flows from operating activities presented on a direct basis? $45,000 $20,000 $30,000 $55,000

Answer 156

## Footnote $45,000 The $45,000 amount is calculated as follows: Insurance expense – Year 2 $20,000 Increase in prepaid insurance ($50,000 – $25,000) _25,000_ Total $45,000

Question 157

A company reports the following information as of December 31: Sales revenue $800,000 Cost of goods sold 600,000 Operating expenses 90,000 Unrealized holding gain on available- for-sale debt securities, net of tax 30,000 What amount should the company report as comprehensive income as of December 31? $30,000 $110,000 $200,000 $140,000

Answer 157

$140,000

Question 158

Answer 158

## Footnote $260,000

Question 159

The following information was taken from Baxter Department Store's financial statements: Inventory at January 1 $ 100,000 Inventory at December 31 300,000 Net sales 2,000,000 Net purchases 700,000 What was Baxter's inventory turnover for the year ending December 31? 2.5 5 10 3.5

Answer 159

2.5 Average inventory = (Beginning inventory + Ending inventory) ÷ 2: * ($100,000 + $300,000) ÷ 2 = $200,000 Inventory turnover = Cost of goods sold ÷ Average inventory: * ($100,000 + $700,000 - $300,000) ÷ (($100,000 + $300,000) ÷ 2) = 2.5

Question 160

What is the appropriate balance sheet classification for the portion of the principal balance owed on a 30-year mortgage note payable that will be paid in monthly installments during the next year? Long-Term Liabilities Stockholders’ Equity Long-Term Investments Current Liabilities

Answer 160

Current Liabilities Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities and include obligations that have entered into the operating cycle (oftentimes, one year). Monthly mortgage payments meet this definition because they will require the use of current assets to be settled (i.e., cash) and are due within the next operating cycle. Based on these factors, they should be reported as current liabilities in the balance sheet. The other answer choices are not the appropriate balance sheet classifications for the upcoming mortgage payments. The payments are not stockholders' equity because they are a repayment of debt, not a distribution to shareholders. They are not long term because they are due within one operating cycle.

Question 161

A company's year-end comparative statement of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000, and all other assets decreased by $65,000. Which of the following statements is correct regarding the current-year change in the company's stockholders' equity? It decreased by $32,000. It decreased by $57,000. It increased by $25,000. It increased by $105,000.

Answer 161

It decreased by $57,000. A statement of financial position (i.e., balance sheet) provides information about an enterprise’s assets, liabilities, and equity and their relationships to one another at a point in time. The statement delineates the enterprise’s resource structure (major classes and amounts of assets) and its financing structure (major classes and amounts of liabilities and equity). For the statement, Assets = Liabilities + Equity; therefore, a net decrease of $25,000 ($40,000 – $65,000) in assets must equal a net decrease of $25,000 in liabilities and equity. If liabilities increased by $32,000, equity must have decreased by $57,000 ($32,000 + $25,000).

Question 162

King, Inc., owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements? $590,000 $550,000 $650,000 $520,000

Answer 162

$550,000 All intra-entity liabilities must be eliminated when preparing the consolidated financial statements: King's liabilities $450,000 Simmon's liabilities 200,000 Intra-entity liability _(100,000_) Consolidated total $550,000

Question 163

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, provides descriptions and examples for all of the following areas that require consideration for note disclosure **except:** non–entity specific information that is common knowledge. the reporting entity. financial statement line item explanations. past events and current conditions that could impact an entity’s cash flow.

Answer 163

non–entity specific information that is common knowledge. The FASB provides descriptions and examples for three areas that require consideration when preparing financial statement notes: financial statement line item explanations, information about the reporting entity, and information about past events and current conditions that could impact the entity’s cash flows but have not yet been incorporated into financial statement line items. The FASB also provides a list of questions to be used as a tool when considering financial statement disclosures. A “yes” response to a question means the FASB should consider disclosure but does not mean the FASB should require disclosure.

Question 164

Answer 164

Question 165

Which of the following would be added back to net income when reporting operating activities' cash flows by the indirect method? Excess of treasury stock acquisition cost over sales proceeds (cost method) Both excess of treasury stock acquisition cost over sales proceeds (cost method) and bond discount amortization Neither excess of treasury stock acquisition cost over sales proceeds (cost method) nor bond discount amortization Bond discount amortization

Answer 165

Bond discount amortization FASB ASC 230-10-55-1 describes the indirect method briefly as follows: "Given sufficiently detailed information, major classes of operating cash receipts and payments may be determined indirectly by adjusting revenue and expense amounts for the change during the period in related asset and liability accounts." Thus, bond discount amortization would be deducted from interest expense to compute the amount of cash paid for bond interest. The net effect would be to **add** this amortization amount to net income (as a noncash expense). The excess of treasury stock acquisition cost over sales proceeds is **not** an income item; rather, the excess is an equity item debited to contributed capital from treasury stock transactions.

Question 166

In which of the financial statements can a user find details regarding items that caused retained earnings to increase and decrease during the fiscal year? Income statement Balance sheet Statement of cash flows Statement of changes in stockholders’ equity

Answer 166

Statement of changes in stockholders’ equity The details showing the increases and decreases to the Retained Earnings account are reported in the statement of changes in stockholders’ equity. Retained Earnings is also reported in the balance sheet, but the details of the items causing the changes to the beginning balance are only found in the statement of changes in stockholders’ equity.

Question 167

Which of the following items is included in the financing activities section of the statement of cash flows? Cash effects of transactions involving making and collecting loans Cash effects of transactions that enter into the determination of net income Cash effects of transactions obtaining resources from owners and providing them with a return on their investment Cash effects of acquiring and disposing of investments and property, plant, and equipment

Answer 167

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment Financing activities are associated with a company's liabilities and stockholders' equity. The list of financing activities in FASB ASC 230-10-45-14 and 45-15 therefore includes cash effects of transactions obtaining resources from owners and providing them with a return on their investment.

Question 168

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? Payment of principal on a long-term note payable Purchase of treasury stock Investment revenue recognized on an equity method investment Purchase of property, plant, and equipment

Answer 168

Investment revenue recognized on an equity method investment Investment revenue recognized on an equity method investment is included in net income. If an entity is using the indirect method, an adjustment to remove the investment revenue must be made to remove the effect from operating activities. Cash paid for the purchase of treasury stock and cash paid for principal on a long-term note payable are included in financing activities. Purchase of property, plant, and equipment is included in investing activities.

Question 169

Birk Co. purchased 30% of Sled Co.'s outstanding common stock on December 31, 20X1, for $200,000. On that date, Sled's stockholders' equity was $500,000, and the fair value of its identifiable net assets was $600,000. On December 31, 20X1, what amount of goodwill should Birk attribute to this acquisition? $50,000 $30,000 $20,000 $0

Answer 169

## Footnote $20,000 When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase. Purchase cost of stock $200,000 Less 30% of identifiable assets (30% of $600,000) _180,000_ Excess of purchase price over fair value of assets (Goodwill) $ 20,000 ========

Question 170

Answer 170

$1,665,000

Question 171

Answer 171

20X2: $91,000; 20X1: $(175,000)

Question 172

Babcock Company owes $50,000 to Mendenhall Corporation. Babcock also has an account receivable from Mendenhall of $45,000. Babcock wants to offset these items and report a net payable of $5,000 in their balance sheet. Which of the following is **not** required for Babcock to report these items in this manner? Babcock has the right to set off the amount owed with the amount owed by the other party. Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner. The amounts owed by Babcock and Mendenhall to each other are clearly determinable. Babcock’s right to offset the items is enforceable by law.

Answer 172

Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner. Generally, the offsetting of assets and liabilities in the balance sheet is improper unless a right of setoff exists. The four criteria to establish a right of setoff that permits a firm to report items in an offsetting manner are: each of the two parties owes the other determinable amounts, the reporting party has the right to set off the amount owed with the amount owed by the other party, the reporting entity intends to set off, and the right of setoff is enforceable by law. A signed agreement is the only answer choice that is not one of the four criteria.

Question 173

A partial listing of a company's accounts is presented below: Revenues $80,000 Operating expenses 50,000 Foreign currency translation adjustment gain, net of tax 4,000 Income tax expense 10,000 What amount should the company report as net income? $24,000 $30,000 $20,000 $34,000

Answer 173

$20,000 ## Footnote Revenues $80,000 Less: Operating expenses (50,000) Less: Income tax expense _(10,000)_ Net income $20,000 Net income or loss for an accounting period is determined by matching realized revenues with those expenses and expired costs necessary to generate the related revenue. Revenues are inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations, and include Operating Expenses and Income Tax Expense. Net income is $20,000 ($80,000 − $50,000 − $10,000). Foreign currency translation adjustment gain is an item of Other Comprehensive Income (OCI), and is included in comprehensive income but not net income; OCI is reported as a direct charge or credit to equity.

Question 174

On September 1, 20X1, Canary Co. sold used equipment for a cash amount equaling its carrying amount for both book and tax purposes. On September 15, 20X1, Canary replaced the equipment by paying cash and signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash received for the old equipment. How should these equipment transactions be reported in Canary's 20X1 statement of cash flows? Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note payable Cash inflow equal to the cash received and a cash outflow equal to the cash paid Cash outflow equal to the cash paid less the cash received Cash outflow equal to the cash paid and note payable less the cash received

Answer 174

Cash inflow equal to the cash received and a cash outflow equal to the cash paid Included in cash inflows from investing activities per FASB ASC 230-10-45-12 are “receipts from sales of property, plant, and equipment and other productive assets.” This pronouncement also includes, under the category of cash outflows from investing activities, “payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets.” **(FASB ASC 230-10-45-13)** Canary Co. should treat the cash payments related to the equipment separately as both a cash inflow and cash outflow in the statement of cash flows.

Question 175

Which of the following assets or transactions is an element of comprehensive income? Distributions to owners Deferred revenue Sales revenue Investments by owners

Answer 175

Sales revenue The statement of comprehensive income includes all revenues and expenses contained in the income statement/statement of profit and loss. Consequently, it would include sales revenue but would not include investments or distributions by owners or deferred revenue.

Question 176

Answer 176

## Footnote $293,000 Under the principle of consolidation, the parent and subsidiary are considered a single economic entity. Thus, the consolidated balance sheet reports the *combined* (parent plus subsidiary) asset and liability accounts. The single parent-sub entity owns all the net assets of both entities. Total stockholders' equity accounts on the consolidated balance sheet equals the total stockholders' equity of the parent *plus the noncontrolling interest.* Therefore, Dallas, Inc., reports total stockholders' equity account on December 31, 20X1, of $270,000 ($50,000 + $80,250 + $139,750) plus 20% of the total stockholders' equity of Style of $23,000 ($20,000 + $44,000 + $51,000), which is $293,000.

Question 177

Which of the following transactions should be classified as investing activities on an entity's statement of cash flows? Issuance of common stock to the shareholders Payment of cash dividend to the shareholders Increase in accounts receivable Sale of property, plant, and equipment

Answer 177

Sale of property, plant, and equipment Investing activities involve asset transactions other than those related to operating results (e.g., sale of property).

Question 178

Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements? Summary of long-term debt outstanding Schedule of fixed assets Revenue recognition policies Description of current-year equity transactions

Answer 178

## Footnote Revenue recognition policies The purpose of the summary of significant accounting policies is to describe the accounting policies used by an entity. The revenue recognition policies therefore would be included in this note.

Question 179

Answer 179

## Footnote $100,000 In a consolidated balance sheet, only the common stock of the parent entity is labeled “common stock.” Pare would report its own common stock ($100,000) on the December 31, 20X1, consolidated balance sheet. **Note:** The 25% non-majority-owned common stock of Kidd Co. would be reported as part of “noncontrolling (minority) interest.”

Question 180

A company should recognize goodwill in its balance sheet at which of the following points? Goodwill has been created in the purchase of a business. The company expects a future benefit from the creation of goodwill. The fair market value of the company's assets exceeds the book value of the company's assets. Costs have been incurred in the development of goodwill.

Answer 180

Goodwill has been created in the purchase of a business. The FASB only authorizes the recognition of goodwill in a purchase context.

Question 181

\_\_\_ represents the reputation, business contacts, staff relationships, and industry experience that make a business more than a collection of assets.

Answer 181

Goodwill

Question 182

Which of the following statements regarding reporting for discontinued operations is **incorrect?** The resulting gain or loss from discontinued operations should be reported net of applicable taxes. In order for a sale to qualify as a discontinued operation, it needs to represent a strategic shift for the entity. In order to qualify to be reported as a discontinued operation, the portion of the business being sold must have separate and identifiable cash flows. A strategic shift is the sale of a product line that represents 25% or more of the entity’s total revenues.

Answer 182

A strategic shift is the sale of a product line that represents 25% or more of the entity’s total revenues.. In order for the sale of a portion of an entity to qualify for discontinued operations, it must represent a strategic shift for the entity, meaning that the sale will have a significant effect on the entity’s operations and financial results. A strategic shift is the sale of a product line that represents *15%* (not 25%) or more of the entity’s total revenues. Discontinued operations are reported after income from continuing operations and therefore need to be reported net of tax. The cash flows of the portion of the business to be sold must be clearly distinguishable from the other operations of the portion to be sold.

Question 183

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements? The company's accounting policy for the investment The reason for the company's decision to invest in the investee company Whether the investee company is involved in any litigation The names and ownership percentages of the other stockholders in the investee company

Answer 183

The company's accounting policy for the investment Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company's use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).

Question 184

Which of the following statements regarding footnote disclosure related to “significant estimates” is **incorrect?** Disclosures in the footnotes about significant estimates are encouraged but not required. The disclosure about significant estimates needs to include the nature of the uncertainty. Disclosure is required when the change in the estimate will have a material effect on the financial statements. Disclosure is required when it is reasonably possible that the financial statement estimate will change in the near term.

Answer 184

Disclosures in the footnotes about significant estimates are encouraged but not required. “Significant estimates” are estimates that affect the financial statements and for which there is a reasonable possibility that the estimate will change in the near term . These significant estimates are also expected to have a material effect on the financial statements. Disclosures regarding these estimates require an explanation of the nature of the uncertainty as well as specific language that it is reasonably possible that the estimate will change in the near term.

Question 185

Wand, Inc., has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On October 1, 20X1, in a strategic shift, Wand, Inc., committed itself to a formal plan to sell its Kam division's assets. On that date, Wand estimated that the loss from the disposal of assets in February 20X2 would be $25,000. Wand also estimated that Kam would incur operating losses of $100,000 for the period of October 1, 20X1, through December 31, 20X1, and $50,000 for the period January 1, 20X2, through February 28, 20X2. These estimates were materially correct. Assuming that the Kam division qualifies as a component, disregarding income taxes, what should Wand report as loss from discontinued operations in its comparative 20X1 and 20X2 income statements? 20X1: $0; 20X2: $175,000 20X1: $175,000; 20X2: $0 20X1: $125,000; 20X2: $50,000 20X1: $100,000; 20X2: $75,000

Answer 185

20X1: $125,000; 20X2: $50,000 ASB ASC 360-10-35-40 provides that when an entity is classified as held for sale, the unit must be written down to the fair value, so “a loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell.” Wand's 20X1 loss from operations is $100,000 and the write-down to FMV is $25,000 and is reported in 20X1. The operating loss in 20X2 is $50,000, so Wand would report a $50,000 loss from discontinued operations before income taxes in 20X2.

Question 186

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? $9,000 $30,000 $3,000 $12,000

Answer 186

$3,000 ## Footnote Cash payments to purchase equipment are outflows from investing activities. The $3,000 down payment is an investing activity outflow. The $27,000 financed and the principal payments are financing activities.

Question 187

Zest Co. owns 100% of Cinn, Inc. On January 2, 20X1, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a 5-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest's December 31, 20X1, consolidating worksheet, by what amount should depreciation expense be decreased? $16,000 $8,000 $24,000 $0

Answer 187

8000 When dealing with unrealized gains or losses in a consolidated financial statement setting, the objective is to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated financial statement. The unrealized gain of the sale of the equipment to Cinn is located in the cost of the equipment on Cinn's books. Depreciation expense on a consolidated basis should be the depreciation that would have been expensed on Zest's books if the equipment had not been sold. Depreciation on Cinn's books (unrealized gain) (72,000 / 3) $24,000 Depreciation on Zest's books (original cost) (80,000 / 5) _16,000_ Difference $ 8,000

Question 188

Payne Co. prepares its statement of cash flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows? As an addition to net income in the operating activities section As a financing cash outflow As a financing cash inflow As a subtraction from net income in the operating activities section

Answer 188

As an addition to net income in the operating activities section ## Footnote The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be added to income to reconcile to the cash provided or used for operating activities.

Question 189

Answer 189

$356,000. The net cash used in financing operations is $356,000, calculated as follows: Payment for early retirement of long-term bonds $375,000 Dividend paid 31,000 Proceeds for sale of treasury stock (50,000) Net cash used $356,000 There is no cash involved in the conversion of stock.

Question 190

Which of the following is a criterion that must be satisfied in order for an asset or a group of assets to be classified as “held for sale”? The asset or group of assets is being actively marketed. The asset or group of assets must be ready for immediate sale. Management has committed to plan to sell the asset or group of assets. All of the answer choices are criteria that must be satisfied for an asset or group of assets to be classified as held for sale.

Answer 190

All of the answer choices are criteria that must be satisfied for an asset or group of assets to be classified as held for sale. There are six criteria that must be satisfied for an asset or group of assets to be classified as “held for sale.” ***First**,* management has committed to plan to sell the asset or group of assets. ***Second**,* the asset or group of assets must be ready for immediate sale. **Third**, an active program to sell the asset or group of assets has been initiated. **Fourth**, the sale of the assets or group of assets is probable and is to be completed within one year. ***Fifth**,* the asset or group of assets is being actively marketed. **Sixth**, it is unlikely that the plan to sell will be withdrawn. Therefore, all of the answer choices are criteria that must be satisfied.

Question 191

Perez, Inc., owns 80% of Senior, Inc. During 20X1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 20X1. For 20X1 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted? Sales and cost of goods sold should be reduced by the intercompany sales. Net income should be reduced by 80% of the gross profit on intercompany sales. Sales and cost of goods sold should be reduced by 80% of the intercompany sales. No adjustment is necessary.

Answer 191

Sales and cost of goods sold should be reduced by the intercompany sales. FASB ASC 810-10-45-1 states: “In the preparation of consolidated financial statements, intra-entity balances and transactions should be eliminated. This includes…sales and purchases....Any intra-entity profit…shall be eliminated.” The income statement adjustment process is greatly simplified because the goods sold to Senior were all subsequently sold to “outside” customers. This means that inventory will not require adjustment. The only adjustment needed is reduction of sales and cost of goods by the **total dollar amount** of the intercompany sales. Failure to do this would overstate those two items on the consolidated income statement.

Question 192

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. the cash receipts and cash disbursements of an enterprise during a period. an enterprise's ability to generate future positive net cash flows. an enterprise's ability to meet cash operating needs.

Answer 192

the cash receipts and cash disbursements of an enterprise during a period. FASB ASC 230-10-10-1 contains standards for the financial accounting and reporting of an enterprise's cash flows. This pronouncement notes: “The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period.” The information provided in the statement of cash flows must be used **in conjunction with** the related disclosures and other financial statements to assess differences between net income and associated cash receipts and disbursements, an enterprise's ability to generate future positive net cash flows, and an enterprise's ability to meet cash operating needs.

Question 193

The primary purpose of a statement of ___ \_\_\_is to provide information about the cash receipts and cash payments of an enterprise during a period of tim

Answer 193

Cash Flows

Question 194

Past events and current conditions potentially impacting the entity’s future cash flow include which of the following? Related party transactions Timing of asset cash flows Subsequent events Segment reporting

Answer 194

## Footnote Subsequent events Examples of past events and current conditions potentially impacting the entity’s future line items and cash flows but which have not yet been incorporated into financial statement line items include existing or potential litigation; suspected or known statute, judicial, regulatory, or contract violations; unrecognized existing commitments expected to be recognized in the future; events where significant uncertainty led to the decision to not recognize the event; and subsequent events. Items not necessarily impacting line items that may require disclosure include dependency on one or a few customers or suppliers for profitability, input or output market volatility, uncertainty regarding an entity’s access to markets for inputs or outputs or ability to maintain a qualified workforce, and other significant specific entity risk. Segment reporting and related party transactions are considered to be reporting entity disclosures, and the timing of asset cash flows is considered a financial statement line item explanation.

Question 195

On December 30, 20X1, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale's common stock was trading at $1.25 per share on December 30, 20X1. As a result of this transaction, Hale's total stockholder's equity had a net increase of: $1,200,000. $100,000. $80,000. $800,000.

Answer 195

$800,000.

Question 196

Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following statements is correct? After consolidation, the accounts of both Star and Sun should be combined together into one general-ledger accounting system for future ease in reporting. After consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting. Consolidated financial statements should be prepared for both Star and Sun. Consolidated financial statements (including the financial information of both corporations) should only be prepared by Star and **not** by Sun.

Answer 196

Consolidated financial statements (including the financial information of both corporations) should only be prepared by Star and **not** by Sun. A company that controls another company must prepare consolidated financial statements. Star owns 100% of Sun and must consolidate the financial statements of the two companies.

Question 197

Answer 197

Vane should report $126,000, calculated as follows: Net income before taxes ($600,000 – $420,000) $180,000 Income taxes ($180,000 x 0.30) _54,000_ Net income from continuing operations $126,000

Question 198

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? Issuance of common stock to the shareholders Payment of cash dividend to the shareholders Gain on sale of plant asset Sale of property, plant, and equipment

Answer 198

Gain on sale of plant asset Gain on sale of a plant asset is included in net income. If an entity is using the indirect method, an adjustment to remove the gain on the sale of a plant asset must be made to remove the effect from investment activities. Cash received from the sale of the plant asset is included in investing activities. Payment of a cash dividend and cash received from issuance of common stock to shareholders are included in financing activities.

Question 199

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 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? $30,000 $10,000 $20,000 $0

Answer 199

$0 Information provided supports the indirect method of computing net cash provided by operating activities. Only the increase in inventory and the decrease in accounts payable affect operating activities. The mortgage payment and the bonds issued are financing activities. Net income $70,000 Inventory increase (40,000) Accounts payable decrease _(30,000)_ Net cash provided by operating activities $ 0

Question 200

Although future-oriented information requires considerable judgment and tends to not be disclosed, the FASB recommends in Statement of Financial Accounting Concepts 8 (SFAC 8) disclosure for the following two future-oriented types of information: (1) Common knowledge and (2) management’s plans and strategies (1) Estimates and assumptions and (2) management’s plans and strategies (1) Terms and timing of cash flows and (2) nonperformance risk (1) Estimates and assumptions and (2) alternative accounting methods

Answer 200

(1) Estimates and assumptions and (2) management’s plans and strategies The Securities and Exchange Commission (SEC) provides protection for issuers regarding SEC-required information; however, that protection does not extend beyond SEC filings, potentially resulting in negative impacts (e.g., litigation) for entities providing information based upon predictions, projections, and forecasts about uncertain or unknown future events. Therefore, the FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.

Question 201

The FASB, when considering note disclosure, considers recognition, measurement, and presentation issues as well as other concepts such as objectives of financial reporting and qualitative characteristics of useful financial information. However, the FASB must also consider four constraints/limitations related to required information: Relevance Cost Constraint Potential Adverse Consequences Future-oriented information

Answer 201

Yep!

Question 202

The FASB, when considering note disclosure, considers recognition, measurement, and presentation issues as well as other concepts such as objectives of financial reporting and qualitative characteristics of useful financial information. However, the FASB must also consider four constraints/limitations related to required information: (Which is missing?) \_\_\_ Const Constraint Potential Adverse Consequences Future-oriented information

Answer 202

Relevance

Question 203

Reporting entity disclosures include which of the following? Asset nature, location, and quality Related party reporting Accounting method change impact Potential litigation

Answer 203

## Footnote Related party reporting Many reporting entity disclosures are part of separate standards (e.g., segment reporting and related party information) and therefore do not require additional disclosure requirements. Items included under this category include the nature of primary activities, special restrictions, advantages and disadvantages relative to other entities including unusual or unique regulatory or legal factors not readily available to users (e.g., one entity holds subsidiaries to sell and another integrates them into operations), related party disclosures, and disaggregated legal entity and segment information.

Question 204

One of the elements of a financial statement is comprehensive income. Comprehensive income excludes changes in equity resulting from which of the following? Dividends paid to stockholders Prior-period error correction Loss from discontinued operations Unrealized loss on investments in equity securities

Answer 204

## Footnote Dividends paid to stockholders Comprehensive income per SFAC 6, *Elements in Financial Statements,* encompasses all changes in equity of a business resulting from transactions with nonowners. Specifically: "It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." Based on this, dividends paid to stockholders would **not** be included in computation of comprehensive income.

Question 205

Burns Corp. had the following items: Sales revenue $45,000 Loss on early extinguishment of bonds 36,000 Realized gain on sale of investment in equity 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? $28,100 other comprehensive loss $11,000 other comprehensive income $17,000 other comprehensive loss $16,900 other comprehensive income

Answer 205

$17,000 other comprehensive loss Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, gains or losses associated with pension or other postretirement benefits, and unrealized holding gains or losses on available-for-sale debt securities ($17,000). All of the other items presented in the problem are included in net income.

Question 206

Mint Co.'s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance. In addition, Mint has classified cash of $250,000 that has been restricted for future expansion plans as “other assets.” Which of the following should Mint disclose in notes to its financial statements? Restricted cash Compensating balance Both compensating balance and restricted cash Neither compensating balance nor restricted cash

Answer 206

Both compensating balance and restricted cash Material amounts of restricted cash must be segregated from “regular” cash for reporting purposes because it is not readily available for general use. Restricted cash is classified as current or long-term assets depending upon the date of availability for disbursement. Compensating balances should be separately classified as being maintained as a compensating balance. It is classified as current or noncurrent based upon the terms of the agreement requiring the compensating balance, and details of the arrangement should be disclosed in the notes.

Question 207

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale increase 10,000 Nontrade notes payable increase 50,000 Prepaid insurance increase 40,000 Accounts payable increase 30,000 What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year? $50,000 $100,000 $0 $40,000

Answer 207

Question 208

In Dart Co.'s Year 2 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 2 single-step income statement (statement of profit or loss), what amount should Dart report as total revenues? $250,000 $260,000 $263,000 $253,000

Answer 208

$250,000 ## Footnote The single-step income statement presents all revenue and gains in the upper part of the statement. Purchase discounts are shown as deductions in the expense section. Recovery of accounts written off has no effect on the income statement since cash is increased and allowance for doubtful accounts is decreased.

Question 209

New England Co. had cash provided by operating activities of $351,000; 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 $208,000 $248,000 $40,000

Answer 209

## Footnote $208,000

Question 210

Tam Co. reported the following items in its year-end financial statements: Capital expenditures $1,000,000 Sales-type lease payments 125,000 Income taxes paid 325,000 Dividends paid 200,000 Net interest payments 220,000 What amount should Tam report as supplemental disclosures in its statement of cash flows prepared using the indirect method? $1,870,000 $745,000 $545,000 $1,125,000

Answer 210

Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed: * Amount of income taxes paid during the period ($325,000) * Amount of interest paid during the period ($220,000) $325,000 + $220,000 = $545,000

Question 211

Barr Co. has total debt of $420,000 and stockholders' equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow? $525,000 $330,000 $750,000 $225,000

Answer 211

## Footnote $330,000

Question 212

When preparing a draft of its 20X1 balance sheet (statement of financial position), Mont, Inc., reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following: Treasury stock of Mont, Inc., at cost, which approximates market value on December 31, 20X1 $24,000 Idle machinery 11,200 Cash surrender value of life insurance on corporate executives 13,700 Investments in equity securities 8,400 At what amount should Mont's net assets be reported in the December 31, 20X1, balance sheet (statement of financial position)? $851,000 $834,500 $850,100 $842,600

Answer 212

$851,000 Idle machinery, cash surrender value of life insurance on corporate executives, and investments in equity securities **should** appear in the asset section of the balance sheet (statement of financial position). Treasury stock should be presented as a reduction of stockholder's equity, **not** as an asset. Total net assets $875,000 Less Treasury stock _24,000_ Net assets reported on balance sheet $851,000 ========

Question 213

Wright Corp. has several subsidiaries that are included in its consolidated financial statements. In its December 31, 20X1, trial balance, Wright had the following intercompany balances before eliminations: _Debit_ _Credit_ Current receivable due from Main Co. 32,000 Noncurrent receivable from Main Co. 114,000 Cash advance to Corn Corp. 6,000 Cash advance from King Co. 15,000 Intercompany payable to King 101,000 In its December 31, 20X1, consolidated balance sheet, what amount should Wright report as intercompany receivables? $146,000 $36,000 $152,000 $0

Answer 213

$0 ## Footnote Do not fall for this trick question. On a consolidated balance sheet no intercompany receivables (or payables) would appear. They would be eliminated in the consolidation process. This rule is stated clearly in FASB ASC 810-10-45-1 as follows: "In the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated."

Question 214

Lando Company had the following items: Service revenue $64,000 Gain on early extinguishment of bonds 41,000 Realized loss on sale of equipment 76,000 Foreign currency translation gain 23,000 Loss on impairment of building 9,500 Which of the following amounts would the statement of comprehensive income report as other comprehensive income or loss? $53,000 other comprehensive loss $42,500 other comprehensive income $13,500 other comprehensive income $23,000 other comprehensive income

Answer 214

## Footnote $23,000 other comprehensive income Other comprehensive income includes items such as gains and losses on foreign currency translation ($23,000), gains and losses on derivative instruments, gains or losses associated with pension or other postretirement benefits, and unrealized holding gains or losses on available-for-sale debt securities. All of the other items presented in the problem are included in net income.

Question 215

Which of the following items should be shown as a component of comprehensive income? Dividend paid to a shareholder Foreign currency translation adjustment Additional capital contribution Deferred revenue

Answer 215

Foreign currency translation adjustment The FASB requires that various “gains” and “losses” be excluded from the income statement and reported as direct charges or credits to equity; these items are included in comprehensive income, which includes all changes in equity during a period except those resulting from investments (i.e., additional capital contributions) by owners and distributions (i.e., dividends) to owners. Deferred revenue is a liability and would not be reflected in equity until earned. The only item listed that should be shown as a component of comprehensive income is a foreign currency translation adjustment.

Question 216

Rice Co. was incorporated on January 1, 20X1, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, 20X1, Rice paid a $2,000 cash dividend. No additional activities affected owner's equity in 20X1. On December 31, 20X1, Rice's liabilities had increased to $94,000. **In Rice's December 31, 20X1, balance sheet (statement of financial position), total assets should be reported at:** $617,000. $598,000. $692,000. $600,000.

Answer 216

## Footnote $617,000.

Question 217

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of: materiality. economic entity. legal entity. faithful representation.

Answer 217

## Footnote economic entity. FASB ASC 810-10-10-1 summarizes the purpose of consolidated statements as follows: "The purpose of consolidated statements is to present…the results of operations and the financial position of a parent and all its subsidiaries essentially as if the consolidated group were a single economic entity." Thus, consolidated statements reflect the **economic entity** concept.

Question 218

Dunbarn Co. had the following activities during the year: Purchase of inventory $120,000 Purchase of equipment 80,000 Purchase of available-for-sale debt securities 60,000 Purchase of treasury stock 70,000 Issuance of common stock 150,000 What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year? $(120,000) $(140,000) $(210,000) $150,000

Answer 218

## Footnote $(140,000) A statement of cash flows reflects an entity’s cash receipts and cash payments classified by major uses (i.e., operating, investing, and financing activities). The investing activities section shows positive and negative cash flows for transactions involving assets that are not held for resale (i.e., inventory), such as investments in debt and equity securities; plant, property, and equipment; and intangible assets. Dunbarn should report $(140,000) in investing activities related to the purchase (i.e., use of cash) of equipment and AFS (available for sale) debt securities. Inventory transactions are classified as operating activities; treasury stock and common stock transactions are classified as financing activities.

Question 219

Mr. Cord owns four corporations. Combined financial statements are being prepared for these corpora­tions, which have intercompany loans of $200,000 and intercompany profits of $500,000. What amount of these intercompany loans and profits should be included in the combined financial statements? Intercompany loans, $200,000; Intercompany profits, $0 Intercompany loans, $200,000; Intercompany profits, $500,000 Intercompany loans, $0; Intercompany profits, $0 Intercompany loans, $0; Intercompany profits, $500,000

Answer 219

Intercompany loans, $0; Intercompany profits, $0 Intercompany loans and profits must be eliminated in the preparation of combined financial statements. This will result in balances of $0 in these accounts.

Question 220

Answer 220

$25,000 ## Footnote The amount reported on the consolidated statement retained earnings as “dividends paid” would include only dividends paid to majority shareholders directly, the $25,000 distributed by Pare Co. Of the $5,000 dividends paid by Kidd, the parent's share ($3,750) would be eliminated on the consolidated worksheet and the other $1,250 would be included in the noncontrolling (minority) interest. However, the $1,250 would not be included in “dividends paid” on the consolidated statement of retained earnings.

Question 221

Host Co. has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On October 1, 20X1, in a strategic shift, Host Co. approved a plan to dispose of a segment of its business. Host expected that the sale would occur on April 1, 20X2, at an estimated gain of $350,000. The segment had actual and estimated operating losses as follows: 01/01/X1 to 09/30/X1 $(300,000) 10/01/X1 to 12/31/X1 (200,000) 01/01/X2 to 03/31/X2 (400,000) Assuming that the segment qualified as a component under FASB ASC 205-20-45, in its 20X1 income statement, what should Host report as a loss from operation of a discontinued segment? $200,000 $600,000 $500,000 $250,000

Answer 221

$500,000 Under FASB ASC 205-20-45-3, the losses from a discontinued segment that qualifies as a component are reported in the period they occur. An anticipated loss on sale should be recognized by writing the component down to FMV. An anticipated gain on sale of the component should not be recognized until the day of the sale. Loss 01/01/X1 to 09/30/X1 ($200,000) Loss 10/01/X1 to 12/31/X1 _( 300,000)_ Loss ($500,000)

Question 222

Answer 222

$2,110,000 .

Question 223

Mend Co. purchased a 3-month U.S. Treasury bill. Mend's policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. 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 Not reported As an outflow from financing activities

Answer 223

Not reported FASB ASC 230-10-45-1 states: "A statement of cash flows shall report the cash effect during a period of an entity's operations, its investing transactions, and its financing transactions." It is further noted that these are the “same amounts as similarly titled line-items or subtotals shown in the statements of financial position as of those dates.” Since Mend's policy is to treat these investments as cash equivalents, the purchase would **not** be **reported** in the statement of cash flows.

Question 224

Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech? $190,000 $100,000 $10,000 $200,000

Answer 224

$10,000 Intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are dividends paid to noncontrolling shareholders: 10% of Dun's dividend of $100,000, or $10,000.

Question 225

Parent Co. owns 90% of the 10,000 outstanding shares of Subsidiary Co.'s common stock on December 31, year 1. On that date, the stockholders' equity of Subsidiary was $150,000, consisting of $100,000 of no-par common stock and $50,000 of retained earnings. On January 2, year 2, Subsidiary issued 2,000 previously unissued shares for $24,000 to various outside investors. As a consequence of this transaction, Parent's ownership share was reduced to 75%. Which of the following correctly reports this transaction? The consolidated income statement reports a gain of $4,000. The consolidated income statement reports a loss of $7,500. Parent's investment in Subsidiary is reduced by $4,500. Parent's investment in Subsidiary is increased by $3,000.

Answer 225

## Footnote Parent's investment in Subsidiary is reduced by $4,500.

Question 226

Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows: Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase **Additional Information** * During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. * In December 20X1, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000. * Depreciation expense for the year was $52,000. In Karr's 20X1 statement of cash flows, net cash provided by operating activities should be: $340,000. $347,000. $357,000. $352,000.

Answer 226

$347,000. Using the indirect method, Karr computes cash flow from operating activities as follows: Reported 20X1 net income $300,000 Add depreciation expense 52,000 Deduct gain on sale of equipment _( 5,000)_ Net Cash flow from operating activities $347,000 ========= **Note:** All items that are included in net income that do not affect net cash provided from, or used for, operating activities such as depreciation of property, plant, and equipment and amortization of finite-life intangible assets. This includes all items whose cash effects are related to investing or financing cash flows, such as gains or losses on sales of property, plant, and equipment and discontinued operations (which relate to investing activities), and gains or losses on extinguishment of debt (which relate to financing activities). (FASB ASC 230-10-45-28)

Question 227

Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale debt securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. What amount is Palmyra's comprehensive income? $10,000 $11,000 $17,000 $4,000

Answer 227

## Footnote $10,000 Other comprehensive income includes foreign currency translation adjustments and unrealized holding gains or losses on available-for-sale debt securities. The change in accounting principle is an adjustment to retained earnings. The increase in common stock is not reflected in the income statement. Net income $11,000 Unrealized loss on available-for-sale debt securities (3,000) Foreign currency translation adjustment _2,000_ Comprehensive income $10,000

Question 228

A company’s accounts receivable decreased from the beginning to the end of the year. In the company’s statement of cash flows (direct method), the cash collected from customers would be: sales revenues plus accounts receivable at the beginning of the year. the same as sales revenues. sales revenues less the decrease in accounts receivable from the beginning to the end of the year. sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.

Answer 228

sales revenues plus the decrease in accounts receivable from the beginning to the end of the year. Cash collected from customers includes: * sales revenue, * plus collections of accounts receivable from the prior year, * less recorded sales not yet received in cash. A decrease in accounts receivable would indicate less collections than recorded sales not yet collected.

Question 229

When a full set of general purpose financial statements are presented, comprehensive income and its components should: appear as a part of discontinued operations and cumulative effect of a change in accounting principle. be reported net of related income tax effect, in total and individually. appear in a supplemental schedule in the notes to the financial statements. be displayed in a financial statement that has the same prominence as other financial statements.

Answer 229

be displayed in a financial statement that has the same prominence as other financial statements ## Footnote The FASB requires that all items that are recognized as components of comprehensive income be reported in a financial statement that has the same prominence as other financial statements. However, the FASB does not prescribe a specific format for the display of such information.

Question 230

Bard Co. owned several subsidiaries at December 31. The following table shows each subsidiary's total liabilities, excluding intercompany transactions, and percentage of stock owned by Bard: _Subsidiary__Total Liabilities__% Owned_ Brock Co. $4,000,000 70 Harlson Co. 2,000,000 48 Porter Co. 7,000,000 80 Nortin Co. 5,000,000 100 What amount should Bard include as liabilities in its consolidated balance sheet at December 31? $18,000,000 $16,000,000 $5,000,000 $12,000,000

Answer 230

## Footnote $16,000,000 Intercompany balances in total are eliminated in the preparation of consolidated financial statements. Harlson is not included in the consolidated statements since Bard owns less than 50% of Harlson’s stock. Brock Co. $4,000,000 Porter Co. 7,000,000 Nortin Co. _5,000,000_ Total $16,000,000

Question 231

Articulation means that financial statements are: separate and self-balancing. unaffected by each other. totally dependent on each other. fundamentally interrelated.

Answer 231

fundamentally interrelated. ## Footnote Articulation means that the elements of financial statements are **fundamentally interrelated** in two ways: (1) beginning balance + changes = ending balance, and (2) assets = liabilities + equity. The concept of double-entry accounting (i.e., debits = credits) incorporates these relationships. In this way, financial statements show different aspects of the same transaction or event affecting the entity. Financial statements are **not** separate and self-balancing—the balance sheet is dependent upon the current period income or loss from the income statement to be balanced. Similarly, financial statements **are affected** by the other financial statements—changes in balance sheet elements (assets and liabilities) are reflected in the statement of cash flows.

Question 232

**“\_\_\_”** is a term used to describe the interrelationship of the elements of the financial statements.

Answer 232

**Articulation**

Question 233

Articulation means that the elements of financial statements are fundamentally interrelated in two ways: (1) beginning balance + changes = ending balance, and (2) assets = liabilities + equity. T/F

Answer 233

True

Question 234

mith Co. has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On November 1, 20X1, in a strategic shift, Smith Co. contracted to dispose of an industry segment on February 28, 20X2. Throughout 20X1 the segment had operating losses. These losses were expected to continue until the segment's disposition. Assuming that the segment qualifies as a component, if a loss is anticipated on final disposition, how much of the operating losses should be included in the loss on discontinued operations reported in Smith's 20X1 income statements? 1. Operating losses for the period January 1 to October 31, 20X1 2. Operating losses for the period November 1 to December 31, 20X1 3. Estimated operating losses for the period January 1 to February 28, 20X2 II and III only I and II only II only I and III only

Answer 234

I and II only The expected loss on the disposal to be reported in Smith Co.'s income statement for the period ended December 31, 20X1, would include actual operating losses for 20X1. FASB ASC 205-20-45-3 states: "In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur . The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows:

Question 235

The following information is from Mabel Co.’s year-end financial statements for the current and previous years: **_Current Year_****_Previous Year_** Prepaid expenses $ 10,000 $ 20,000 Accounts payable 50,000 30,000 Land 250,000 600,000 Land was sold during the current fiscal year for cash, resulting in a loss of $40,000. What is Mabel’s net adjustment to net income to determine net cash from operating activities? $30,000 $70,000 $0 $(70,000)

Answer 235

## Footnote $70,000 The reconciliation from net income to net cash flows from operating activities reconciles is required under the indirect method (as the operating section) or the direct method (as a reconciliation to the statement of cash flows). It begins with net income; adjusts for non-cash expenses, losses, and gains in the income statement; and is further adjusted for the net change in current assets and current liabilities. The reconciliation would add back the loss of $40,000 to net income, add $10,000 for the decrease in current assets (prepaid expenses) and add $20,000 for the increase in current liabilities (accounts payable) for a total positive adjustment of $70,000 ($40,000 + $10,000 + $20,000). The decrease in land would be recorded in the investing section of the statement of cash flows for the amount actually received in cash.

Question 236

For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as: a current asset. a noncurrent asset. an expense. a noncurrent liability.

Answer 236

a noncurrent asset. Current assets include cash or other assets expected to be turned into cash or consumed within the year. This deposit of sales taxes will not be returned within the year.

Question 237

A company's year-end balance sheet is shown below: _Assets_ Cash $ 300,000 Accounts receivable 350,000 Inventory 600,000 Property, plant, and equipment (net) _2,000,000_ $3,250,000 _Liabilities and Shareholders' Equity_ Current liabilities $ 700,000 Long-term liabilities 600,000 Common stock 800,000 Retained earnings _1,150,000_ $3,250,000 What is the current ratio as of December 31? 0. 43 0. 67 1. 79 0. 93

Answer 237

The current ratio as of December 31 is 1.79: Current ratio = Current assets / Current liabilities = ($300,000 + $350,000 + $600,000) / $700,000 = 1.79

Question 238

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility? Balance sheet Statement of cash flows Income statement Statement of retained earnings

Answer 238

## Footnote Balance sheet Evaluation of a company's liquidity would necessitate computation of liquidity ratios such as the current ratio and acid-test ratio. Financial flexibility would be evaluated using debt and equity ratios. The data used in computation of each of the above-mentioned ratios would be obtained from the balance sheet.

Question 239

Answer 239

$20,000 Baker should report $20,000 as net cash provided by operating activities: Net income $78,000 Adjustments Increase in accounts receivable ($82,000) Increase in accounts payable 24,000 _(58,000)_ Net cash provided by operating activities $20,000

Question 240

Ace Co. issued 1,000 shares of its $10 par value common stock for $15 per share in cash. How should this transaction be reported in Ace's statement of cash flows for the year of issuance? $10,000 cash inflow from financing activities and $5,000 adjustment to arrive at cash flows from operating activities $15,000 cash inflow from financing activities $10,000 cash flow from investing activities and $5,000 adjustment to arrive at cash flows from operating activities $15,000 cash flow from investing activities

Answer 240

$15,000 cash inflow from financing activities ## Footnote Cash inflows from issuing a company’s own equity instruments such as common stock and preferred stock are reported as financing activities in the statement of cash flows. The full cash proceeds of $15,000 ($15 per share × $1,000 shares) would be reported as cash inflows from financing activities. The par value is not used because it does not impact the cash received.

Question 241

Which of the following cash flows per share should be reported in a statement of cash flows? Both primary and fully diluted cash flows per share Primary cash flows per share only Fully diluted cash flows per share only Cash flows per share should **not** be reported.

Answer 241

Cash flows per share should **not** be reported. FASB ASC 230-10-45-3 states that “Financial statements shall not report an amount of cash flow per share.”

Question 242

On December 31, 20X1, in a strategic shift, Greer Co. entered into an agreement to sell its Hart segment's assets. On that date, Greer estimated the gain from the disposition of the assets in 20X2 would be $700,000 and Hart's 20X2 operating losses would be $200,000. Hart's actual operating losses were $300,000 in both 20X1 and 20X2, and the actual gain on disposition of Hart's assets in 20X2 was $650,000. Disregarding income taxes, what net gain (loss) should be reported for discontinued operations in Greer's comparative 20X2 and 20X1 income statements? 20X2: $0; 20X1: $50,000 20X2: $(150,000) ; 20X1: $200,000 20X2: $50,000; 20X1: $(300,000) 20X2: $350,000; 20X1: $(300,000)

Answer 242

## Footnote 20X2: $350,000; 20X1: $(300,000)

Question 243

Which of the following transactions qualifies as a discontinued operation? Phasing out of a production line representing 25% of the entity's total revenue Disposal of part of a line of business that represents 20% of the entity's total revenue All of the answer choices are discontinued operations. Planned and approved sale of a segment

Answer 243

All of the answer choices are discontinued operations. ## Footnote Discontinued operations result from a disposal that represents a strategic shift. Examples included in FASB ASC 205-20-55-83 to 55-101 include: a sale of a product line that represents 15% of the entity’s total revenues; a sale of a geographical area that represents 20% of the entity’s total assets; a sale of all of one type of a reporting entity’s store formats that historically provided 30% to 40% of the reporting entity’s net income and 15% of the current-period net income; the sale of an equity method investment representing 20% of the entity’s total assets; or the sale of 80% of a product line representing 40% of total revenue, but only if the entity retains 20% of its ownership interest. All of the disposals described in the answer choices are discontinued operations.

Question 244

Discontinued operations result from a disposal that represents a strategic shift. Examples included in FASB ASC 205-20-55-83 to 55-101 include: * a sale of a product line that represents 15% of the entity’s total revenues; * a sale of a geographical area that represents 20% of the entity’s total assets; * a sale of all of one type of a reporting entity’s store formats that historically provided 30% to 40% of the reporting entity’s net income and 15% of the current-period net income; * the sale of an equity method investment representing 20% of the entity’s total assets; or * the sale of 80% of a product line representing 40% of total revenue, but only if the entity retains 20% of its ownership interest.

Answer 244

Yep

Question 245

Which of the following is **not** disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule? A reconciliation of net income to net cash flow from operations A reconciliation of ending retained earnings to net cash flow from operations The major classes of gross cash receipts and gross cash payments The amount of income taxes paid

Answer 245

## Footnote A reconciliation of ending retained earnings to net cash flow from operations A reconciliation of ending retained earnings to net cash flow from operations would serve no useful purpose and is not required to be disclosed on the statement of cash flows. Each of the other items mentioned would be disclosed under the direct method.

Question 246

Penn Corp. paid $300,000 for the outstanding common stock of Star Co. At that time, Star had the following condensed balance sheet: _Carrying Amounts_ Current assets $ 40,000 Plant and equipment (net) 380,000 Liabilities 200,000 Stockholders' equity 220,000 The fair value of the plant and equipment was $60,000 more than its recorded carrying amount. The fair values and carrying amounts were equal for all other assets and liabilities. The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). What amount of goodwill, related to Star's acquisition, should Penn report in its consolidated balance sheet? $40,000 $60,000 $20,000 $80,000

Answer 246

$20,000

Question 247

Kline Co. had the following sales and accounts receivable balances at the end of the current year: Cash sales $1,000,000 Net credit sales 3,000,000 Net accounts receivable, 1/1 100,000 Net accounts receivable, 12/31 400,000 What is Kline's average collection period for its accounts receivable? 30. 0 days 22. 5 days 48. 0 days 12. 0 days

Answer 247

30.0 days

Question 248

Roro, Inc., paid $7,200 to renew its only insurance policy for three years on March 1, 20X1, the effective date of the policy. On March 31, 20X1, Roro's unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro's financial statements for the 3 months ending March 31, 20X1? Prepaid insurance: $7,000; Insurance expense: $300 Prepaid insurance: $7,200; Insurance expense: $300 Prepaid insurance: $7,000; Insurance expense: $500 Prepaid insurance: $7,300; Insurance expense: $200

Answer 248

Question 249

\_\_\_\_ \_\_\_\_is the excess of current assets over current liabilities.

Answer 249

Working capital

Question 250

Accumulated other comprehensive income is reported in which of the following financial statements? The statement of financial position The income statement The statement of cash flows The statement of comprehensive income

Answer 250

## Footnote The statement of financial position Other comprehensive is transferred to accumulated other comprehensive income each period. Accumulated other comprehensive income is reported as part of equity on the balance sheet/statement of financial position.

Question 251

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 an addition to income In operating activities as a deduction from income

Answer 251

In operating activities as a deduction from income The cash proceeds from a sale of used equipment would be treated as a cash inflow from investing activities. Since these cash proceeds include both carrying value of the equipment and the gain from the sale, this gain would need to be deducted from income in order to avoid “double counting.”

Question 252

Parisian Company has bonds that have an original maturity of 10 years. The bonds will mature and be retired on May 25, Year 17. Parisian established a bond sinking fund, as required by the bond indenture (contract). The bond sinking fund will be used to retire the bonds when they mature in May of Year 17. How should the bonds be classified in the December 31, Year 16, balance sheet? The bonds should be classified as a long-term liability. Parisian can choose whether to classify the bonds as either current or noncurrent. Because of the sinking fund, Parisian can eliminate both the bonds and the sinking fund from the balance sheet. The bonds should be classified as a current liability.

Answer 252

## Footnote The bonds should be classified as a long-term liability. Even though the bonds will mature in less than one year, they are classified as long-term liabilities (not current maturities of long-term liabilities) because the cash to be used to pay off the bonds is restricted and has therefore been classified as a long-term asset. Bonds in this situation should not be classified as current liabilities. Choice of classification (current vs. long-term) is not permitted. The presence of both the liability and the related asset (bond-sinking fund) are not offset on the balance sheet but are both reported in total.

Question 253

Which of the following defines equity as it relates to a business entity? Total assets and liabilities Net revenues Total revenues **less** total expenses Total assets **less** total liabilities

Answer 253

## Footnote Total assets **less** total liabilities Total assets less total liabilities defines equity. Equity (or net assets) is the residual interest in the assets of a business entity that remains after deducting its liabilities; equity represents the ownership interest. Revenues are inflows of the assets or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the enterprise’s ongoing major or central operations. Expenses are outflows or other uses of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the enterprise’s ongoing major or central operations. Revenues less expenses is net income (loss) and will increase (decrease) equity, but these accounts do not define equity.

Question 254

LLA, Inc. was capitalized through the issuance of 10,000 shares of $30 par common stock that was sold at $50 per share. LLA had net income as follows: Year 1 $100,000 Year 2 200,000 If, during year 2, LLA paid dividends to its shareholders at $2.50 per share, what amount was LLA's retained earnings balance and shareholders' equity balance at the end of year 2? Retained earnings $50,000; Shareholders' equity $775,000 Retained earnings $275,000; Shareholders' equity $775,000 Retained earnings $50,000; Shareholders' equity $550,000 Retained earnings $275,000; Shareholders' equity $550,000

Answer 254

Retained earnings $275,000; Shareholders' equity $775,000 Shareholder’s equity recognizes equity (e.g., common stock and of preferred stock) and the accumulated earnings of the business. Retained earnings, a component of stockholders' equity, is increased through net income and decreased through dividends and net losses. Retained earnings in this example would be increased through year 1 and year 2 net income, $300,000, and decreased by the $2.50 per share dividend payment of $25,000, for an ending balance of $275,000 ($300,000 − $25,000). Stockholders' equity would have been initially recorded at the stock issuance value of $500,000 ($50\* price per share × 10,000) shares. At the end of year 2 it would include the initial value and retained earnings, for a total balance of $775,000 ($500,000 common stock and additional paid-in capital + $275,000 retained earnings). \* On issuance, the $50 per share price would be split between common stock ($30 par value) and additional paid-in capital ($20 difference between par and fair value).

Question 255

Answer 255

$1,250,000.

Question 256

Which of the following items is included in accumulated other comprehensive income or loss? A reduction of shareholders' equity related to employee stock ownership plans Unrealized holding gains or losses on investments in equity securities Prior service costs **not** previously recognized as a component of net periodic pension costs Unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge

Answer 256

Prior service costs **not** previously recognized as a component of net periodic pension costs Accumulated other comprehensive income (AOCI) is a component of equity on the balance sheet, presented separately from retained earnings and additional paid-in-capital. Total items of other comprehensive income (OCI) are transferred to AOCI at the end of each reporting period. FASB defines OCI as “revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income” (FASB ASC 220-10-20). These items have not yet been realized. Some examples of OCI include the following: * Foreign currency translation gains or losses * Gains and losses (*effective* portion only) on derivative instruments that qualify as cash flow hedges * Unrealized holding gains and losses on available-for-sale debt securities * Pension or postretirement gains or losses (not recognized immediately as a component of net periodic benefit cost) * ***Prior service costs or credits***

Question 257

During 20X1, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December 31, 20X1, one-half of these goods were included in Seed's ending inventory. Reported 20X1 selling expenses were $1,100,000 and $400,000 for Pard and Seed, respectively. Pard's selling expenses included $50,000 in freight-out costs for goods sold to Seed. What amount of selling expenses should be reported in Pard's 20X1 consolidated income statement? $1,500,000 $1,475,000 $1,450,000 $1,480,000

Answer 257

$1,450,000 Since freight-out costs are paid by the seller (Pard), they are not included in the value of inventory by the buyer (Seed). Also, since they were paid on an intercompany sale, these costs should be eliminated from Pard's consolidated income statement. Thus, consolidated selling expenses for 20X1 are: Pard total - intercompany + Seed's total ($1,100,000 - $50,000) + $400,000 $1,050,000 + $400,000 = $1,450,000

Question 258

Which of the following information should be disclosed in the summary of significant accounting policies? Criteria for determining which investments are treated as cash equivalents Refinancing of debt subsequent to the balance sheet date Guarantees of indebtedness of others Adequacy of pension plan assets relative to vested benefits

Answer 258

Criteria for determining which investments are treated as cash equivalents ## Footnote FASB ASC 230-10-50-1, in a discussion of cash and cash equivalents, states: "An entity shall disclose its policy for determining which items are treated as cash equivalents." Note: The above requirement was embedded in a long paragraph discussing cash equivalents. The wording of the correct answer choice, particularly “criteria,” indicates a relation to policy, whereas none of the other answers imply such a relationship.

Question 259

A company decided to sell an unprofitable division of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as follows: Buildings $5,000,000 Accumulated depreciation 3,000,000 Mortgage on buildings 1,100,000 Inventory 500,000 Accounts payable 600,000 Accounts receivable 200,000 What is the after-tax net loss on the disposal of the division? $2,200,000 $200,000 $1,540,000 $140,000

Answer 259

Question 260

A company has the following accrual-basis balances at the end of its first year of operation: Unearned consulting fees $ 2,000 Consulting fees receivable 3,500 Consulting fee revenue 25,000 The company's cash-basis consulting revenue is what amount? $26,500 $23,500 $30,500 $19,500

Answer 260

$23,500 The company's cash-basis consulting revenue is $23,500: Accrual basis consulting fee revenue $25,000 Unearned consulting fee-- cash received with no revenue 2,000 Consulting fees receivable-- revenue with no cash received _(3,500)_ Cash basis revenue $23,500

Question 261

Under the cash basis of accounting, revenue is recognized when cash is ___ and expenses are recognized when cash is \_\_\_. Under the cash basis of accounting, No income or expense is accrued or deferred, and assets are not capitalized and subsequently depreciated. **T/F**

Answer 261

received; disbursed True

Question 262

Which of the following should be disclosed as supplemental information in the statement of cash flows? The issuance of stock to acquire a new warehouse The amount of cash paid for taxes during the period Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period **Neither** the issuance of stock to acquire a new warehouse nor the amount of cash paid for taxes during the period

Answer 262

Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities, but that do not result in cash receipts or cash payments in the period (i.e., noncash transactions), shall be reported in related disclosures (FASB ASC 230-10-50-3). The acquisition of assets for stock is an example of this type of item. Disclosing the amount of cash paid during the period for interest and taxes is also required to be reported in related disclosures. error\_outline

Question 263

hich of the following is correct concerning financial statement disclosure of accounting policies? The format and location of accounting policy disclosures are fixed by generally accepted accounting principles. Disclosures should duplicate details disclosed elsewhere in the financial statements. Disclosure of accounting policies is an integral part of the financial statements. Disclosures should be limited to principles and methods peculiar to the industry in which the company operates.

Answer 263

Disclosure of accounting policies is an integral part of the financial statements. All financial statement notes are an integral part of the financial statements.

Question 264

Numerous estimates are part of accrual accounting financial statements. Disclosures about these estimates are required in the notes to the financial statements. All but one of the following are correct statements about estimates disclosures; which statement is **incorrect?** Determining whether the effect of a change in the useful life of an intangible asset will be material should be done either at the individual asset or major asset class level. Certain significant estimates must be disclosed if there is a reasonable possibility that the estimate will change in the near term and the effect of the change will be material. Financial statement preparers can reasonably assume that users of financial statements recognize that estimates are necessary in preparing financial statements and therefore no explicit statement regarding estimates is necessary. GAAP requires an explanation that the preparation of the financial statements requires the use of estimates made by management in conformance with GAAP.

Answer 264

Financial statement preparers can reasonably assume that users of financial statements recognize that estimates are necessary in preparing financial statements and therefore no explicit statement regarding estimates is necessary. GAAP requires the disclosure of the use of estimates in financial statements. Explicit communication in the notes to the financial statements about the use of estimates is necessary and should inform readers that many of the amounts reported are approximations, not exact amounts. “Significant estimates” refers to estimates that have a reasonable possibility of changing in the near future and whose effect will be material—such items require disclosure in the notes to the financial statements. Whether disclosure is required for changes in intangible assets’ useful lives is based on determining if such changes will be material, and this determination needs to be done either at the individual asset or major asset class level.

Question 265

Qual Inc. purchased 90% of Saucer Co.'s outstanding common stock on December 31, 20X2, for $960,000. On that date, Saucer’s stockholders' equity was $775,000, and the fair value of its identifiable net assets was $880,000. On December 31, 20X2, what amount of goodwill should Qual attribute to this acquisition? $185000 $304000 $80000 $168000

Answer 265

$168000 When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase. Purchase cost of stock of $960,000 − 90% of identifiable assets (90% of $880,000) of $792000 = Excess of purchase price over fair value of assets (Goodwill) of $168000

Question 266

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method (Ignore income tax considerations.)? Dividends received from investments Gain on early retirement of bonds Change from straight-line to accelerated depreciation Gain on sale of equipment

Answer 266

Dividends received from investments FASB ASC 230-10-45-25 identifies several classes of receipts and payments that should be used in reporting cash flows from operating activities using the direct method. Included in the list of items are interest and **dividends received.** The transactions or events related to the other items listed are not reported in the operating activities section.

Question 267

A company calculated the following data for the period: Cash received from customers $25,000 Cash received from sale of equipment 1,000 Interest paid to bank on note 3,000 Cash paid to employees 8,000 What amount should the company report as net cash provided by operating activities in its statement of cash flows? $15,000 $26,000 $18,000 $14,000

Answer 267

$14,000

Question 268

On July 4, 20X1, ABC, Inc., adopted a plan to terminate 100 employees effective September 1, 20X1. Each employee received a one-time termination benefit of $10,000 on September 4, 20X1. The termination was communicated to the employees on July 20, 20X1. Employees were not required to render service after August 1, 20X1, in order to receive the termination benefit. On what date should ABC record the cost of the termination benefit? September 4, 20X1 July 4, 20X1 August 1, 20X1 July 20, 20X1

Answer 268

July 20, 20X1 FASB ASC 420-10-25-4 provides that the costs of one-time termination benefits be recognized and measured at its fair value on the communication date.

Question 269

If employees are entitled to receive termination benefits regardless of when they leave or if they will not be retained to render service beyond the minimum retention period, a liability for the termination benefits should be recognized at its fair value at the \_\_\_date

Answer 269

communication

Question 270

Contractual asset or liability disclosures identified in Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, include all of the following **except:** legal terms. degree of nonperformance risk. method used to calculate the cash flow. reporting segments.

Answer 270

reporting segments. SFAC 8 provides a summary of potential additional disclosures for assets and liabilities resulting from financial instruments or other contracts: the contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows. Reporting segments are *not* one of the suggested disclosure items.

Question 271

In preparing its cash flow statement for the year ending December 31, 20X1, Reve Co. collected the following data: Gain on sale of equipment $ (6,000) Proceeds from sale of equipment 10,000 Purchase of A.S., Inc., bonds (par value $200,000) (180,000) Amortization of bond discount 2,000 Dividends declared (45,000) Dividends paid (38,000) Proceeds from sale of treasury stock (carrying amount $65,000) 75,000 In its December 31, 20X1, statement of cash flows, what amount should Reve report as net cash used in investing activities? $176,000 $194,000 $170,000 $188,000

Answer 271

## Footnote $170,000 Cash inflows from investing activities: Proceeds from sale of equipment $ 10,000 Cash outflows for investing activities: Purchase of A.S., Inc., bonds (180,000) Net cash used in investing activities $170,000

Question 272

Answer 272

## Footnote $151,400 The $151,400 amount is calculated as follows: Net income $150,000 Increase in accounts receivable ($23,000 – $29,000) (6,000) Increase in allowance for uncollectible accounts ($800 – $1,000) 200 Decrease in prepaid rent expense ($12,400 – $8,200) 4,200 Increase in accounts payable ($22,400 – $19,400) _3,000_ Cash provided by operating activities $151,400

Question 273

What is the purpose of reporting comprehensive income? To provide information for each segment of the business To reconcile the difference between net income and cash flows provided from operating activities To summarize all changes in equity from nonowner sources To provide a consolidation of the income of the firm's segments

Answer 273

## Footnote To summarize all changes in equity from nonowner sources SFAC 6 defines comprehensive income as “the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.”

Question 274

A company that uses the accrual method of accounting started the fiscal year with assets of $600,000 and liabilities of $400,000. During the fiscal year the company recorded credit sales of $250,000, of which $8,000 remained to be collected at year-end, and incurred expenses of $90,000, of which $72,000 was paid in cash. A stock dividend valued at $10,000 was declared and issued to stockholders during the year. What is the year-end balance of total equity? $360,000 $370,000 $350,000 $380,000

Answer 274

$360,000 Stockholders’ equity is equal to the net assets of the balance sheet (assets minus liabilities) and primarily includes retained earnings and stock issued and repurchased by the company. Retained earnings, and therefore stockholders’ equity, is increased by net income and decreased by cash dividends declared. Stock dividends have no net impact on equity . The beginning equity balance is equal to the net assets of $600,000 less liabilities of $400,000, or $200,000. Year-end equity is $360,000, computed as follows: Beginning balance $200,000 Plus Credit sales 250,000\* Less Expenses (90,000)\* Ending balance $360,000 ======== \* Net income (revenues less expenses) is $160,000.

Question 275

Which of the following should be disclosed in a summary of significant accounting policies? Concentration of credit risk of financial instruments Adequacy of pension plan assets in relation to vested benefits Basis of consolidation Composition of plant assets

Answer 275

Basis of consolidation When financial statements are issued purporting to present fairly the financial position, cash flows, and results of operations in accordance with generally accepted accounting principles, a description of all significant accounting policies of the reporting enterprise is required. Examples of accounting principles and methods for which disclosure of policy is frequently made include, but are not limited to, depreciation methods, consolidation basis, interperiod tax allocation, inventory pricing, and revenue recognition methods. The concentration of credit risk, composition of plant assets, and adequacy of pension plan assets are not disclosed in the summary of significant accounting policies.

Question 276

Which of the following information should be included in Melay, Inc.'s, 20X1 summary of significant accounting policies? Property, plant, and equipment are recorded at cost with depreciation computed principally by the straight-line method. Operating segment 20X1 sales are Alay $1M, Belay $2M, and Celay $3M. Future common share dividends are expected to approximate 60% of earnings. During 20X1, the Delay segment was sold.

Answer 276

Property, plant, and equipment are recorded at cost with depreciation computed principally by the straight-line method. .FASB ASC 235-10-50-4 requires a description of all significant accounting policies when financial statements are issued. A listing of required policy disclosures by this pronouncement includes “basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing” and several other items. Melay should include information concerning the cost and depreciation method(s) relating to property, plant, and equipment in its summary of significant accounting policies. **Note**: While the other three information items should be disclosed in the financial statements, they should not be included in the summary of significant accounting policies: During 20X1, the Delay segment was sold. Operating segment 20X1 sales are Alay $1M, Belay $2M, and Celay $3M. Future common share dividends are expected to approximate 60% of earnings.

Question 277

In preparing its cash flow statement for the year ending December 31, 20X1, Reve Co. collected the following data: Gain on sale of equipment $ (6,000) Proceeds from sale of equipment 10,000 Purchase of A.S., Inc., bonds (par value $200,000) (180,000) Amortization of bond discount 2,000 Dividends declared (45,000) Dividends paid (38,000) Proceeds from sale of Treasury stock (carrying amount $65,000) 75,000 In its December 31, 20X1, statement of cash flows, what amount should Reve report as net cash provided by financing activities? $27,000 $37,000 $20,000 $30,000

Answer 277

$37,000 ## Footnote Cash inflows from financing activities: Proceeds from sale of treasury stock $75,000 Cash outflows from financing activities: Dividends paid _(38,000)_ **Net cash provided by financing activities $37,000** Dividends declared created a liability, but until they are paid, no cash flows out of the corporation.

Question 278

Reed Co.'s 20X1 statement of cash flows reported cash provided from operating activities of $400,000. For 20X1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed's 20X1 statement of cash flows, what amount was reported as net income? $105,000 $305,000 $205,000 $595,000

Answer 278

$205,000 Dividends paid are reported as financing activities. The reconciliation of net income and cash provided by operating activities would reflect both of the other items as they are noncash expenses and losses. * Net income + Depreciation expense + Goodwill impairment loss = Cash provided by operating activities * X + $190,000 + $5,000 = $400,000 * X = $205,000

Question 279

In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities? 1. Payments to retire mortgage notes 2. Interest payments on mortgage notes 3. Dividend payments I and III I, II, and III I only II and III

Answer 279

I and III Cash outflows from financing activities include cash payments for dividends and principal payments to creditors. Interest payments are cash flows from operating activities.

Question 280

Answer 280

## Footnote $770,000 Retained earnings on December 31, 20X1, would be computed as follows: Total income since incorporation $1,570,000 Less cash dividends $(716,000) Stock dividends _(84,000_) _(800,000_) Retained earnings on December 31, 20X1 $ 770,000 **Note:** The excess of cost of treasury stock sold over cash received would be debited to Additional Paid-in Capital—Treasury Stock because the balance in that account is larger than the amount of the difference between the cost of the treasury stock sold and the cash received from its sale. The balance in Additional Paid-in Capital—Treasury Stock does not affect the retained earnings balance.

Question 281

Which of the following should **not** be disclosed in an enterprise's statement of cash flows prepared using the indirect method? Cash flow per share Interest paid, net of amounts capitalized Dividends paid on preferred stock Income taxes paid

Answer 281

Cash flow per share Cash flow per share should not be disclosed under either the direct or indirect method. FASB ASC 230-10-45-3 is very specific concerning per share cash flow disclosures: "Financial statements shall not report an amount of cash flow per share."

Question 282

Dodd Co.'s debt securities at December 31 included available-for-sale securities with a cost basis of $24,000 and a fair value of $30,000. Dodd's income tax rate was 20%. What amount of unrealized gain or loss should Dodd recognize in its income statement at December 31? $6,000 gain $4,800 gain $0 $6,000 loss

Answer 282

$0 ## Footnote Available-for-sale debt securities are carried on the balance sheet at fair value. Unrealized changes in fair value between periods are reported in other comprehensive income for the period. Gains and losses are not reported on the income statement until realized. Items in other comprehensive income are reported net of their effective tax. Dodd would recognize $0 in gain on its income statement. The unrealized gain in other comprehensive income is $4,800 ($6,000 gain × (1 – .20 tax rate)).

Question 283

Answer 283

$30,000 ## Footnote According to FASB ASC 810-10-20, a noncontrolling interest is "the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest." The ownership interests in the subsidiary that are held by owners other than the parent is a noncontrolling interest. The noncontrolling interest in a subsidiary is part of the equity of the consolidated group. The noncontrolling (minority) interest is the interest of third parties in the acquired company (Kidd). Noncontrolling interest = Noncontrolling holding x Net assets of Kidd = (1.00 - 0.75) x ($50,000 + $70,000) = 0.25 x $120,000 = $30,000 Net assets can be computed in either of two ways: (1) book values of stockholders' equity or (2) book value of assets less book value of liabilities. Here, the book values of stockholders' equity are $50,000 for common stock and $70,000 for retained earnings.

Question 284

A noncontrolling interest is sometimes called a \_\_\_interest."

Answer 284

minority

Question 285

Comprehensive income includes all of the following, **except:** revenues from external customers. interest expense to bondholders. loss from a tornado. dividends to shareholders.

Answer 285

dividends to shareholders. **Comprehensive income** is defined in the FASB's conceptual framework as “the change in equity (net assets) of a business enterprise, during a period, from transactions and other events and circumstances from nonowner sources.” Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends are a distribution to owners and would therefore not be included in comprehensive income. The other three answer choices (revenues from external customers, interest expense to bondholders, and loss from a tornado) would be included.

Question 286

Note section disclosures in the financial statements for pensions do **not** require inclusion of which of the following? The company's best estimate of contributions expected to be paid into the plan in the next fiscal year The amount of net prior service cost or credit in accumulated other comprehensive income The components of net period pension costs A detailed description of the plan, including employee groups covered

Answer 286

## Footnote A detailed description of the plan, including employee groups covered The FASB requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position. The FASB requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation” (FASB ASC 715-20-50-1). **Note** that service cost is presented along with compensation expense, while the remaining items of net periodic pension cost are presented on a separate line item.

Question 287

A company has the following items on its year-end trial balance: Net sales $500,000 Common stock 100,000 Insurance expense 75,000 Wages 50,000 Cost of goods sold 100,000 Cash 40,000 Accounts payable 25,000 Interest payable 20,000 What is the company's gross profit? $400,000 $275,000 $230,000 $500,000

Answer 287

$400,000 ## Footnote As presented on a multiple-step income statement, gross profit (or gross margin) is net sales less cost of goods sold. In this problem, gross profit is: Net sales $500,000 Cost of goods sold _(100,000)_ Gross profit $400,000

Question 288

Bake Co.'s trial balance included the following at December 31, 20X1: Accounts payable $ 80,000 Bonds payable, due 20X2 300,000 Discount on bonds payable 15,000 Deferred income tax liability 25,000 The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in 20X2. What amount should be included in the current liability section of Bake's December 31, 20X1, balance sheet (statement of financial position)? $390,000 $420,000 $395,000 $365,000

Answer 288

## Footnote $365,000 All deferred tax liabilities (and deferred tax assets) are classified as noncurrent. All of the remaining items listed are considered current as they are due and payable within the next year. Accounts payable $ 80,000 Bonds payable 300,000 Discount on bonds payable _(15,000_) Total $365,000

Question 289

Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000 and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income? $960,000 $1,000,000 $900,000 $940,000

Answer 289

$900,000 Under the acquisition method, a number of adjusting and eliminating entries are made during the consolidation process. Eliminations may be categorized as those related to the following: * The investment account * Current-year changes in the investment account * Year-end reciprocal balance sheet accounts * Reciprocal income statement accounts * Intercompany profits and losses Since Daisy sold all of the inventory purchased from Tulip, Daisy would have recognized $100,000 in cost of goods sold (COGS). As Daisy is a 100%-owned subsidiary, 100% of the COGS from Tulip is eliminated (i.e., intercompany profits and losses). Total COGS on the consolidated statement of income is $900,000 ($600,000 + $400,000 − $100,000).

Question 290

Under the acquisition method, a number of adjusting and eliminating entries are made during the consolidation process. Eliminations may be categorized as those related to the following: * The \_\_\_account * \_\_\_-year changes in the investment account * Year-end \_\_\_balance sheet accounts * \_\_\_income statement accounts * \_\_\_profits and losses

Answer 290

Investment Current-year reciprocal Reciprocal Intercompany

Question 291

What are examples of reciprocal accounts?

Answer 291

AP & AR Note Payable and Note receivable Interest Income and Interest Expense

Question 292

According to the FASB conceptual framework, which of the following attributes would **not** be used to measure inventory? Historical cost Net realizable value Present value of future cash flows Replacement cost

Answer 292

Present value of future cash flows SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, discusses each of these measurement attributes. Each of the methods, except present value of future cash flows, would be acceptable in measuring inventory in certain circumstances. The use of present values of future cash flows was said to be useful in reporting long-term receivables. Inventory is accounted for at lower of (historical) cost or market. Market is measured as replacement cost, net realizable value, or net realizable value less a normal profit margin.

Question 293

**General purpose financial statements** are directed toward the ___ \_\_\_ of various users and are feasible only because groups of users of financial information have similar needs. **\_\_\_of financial statements:** Financial statements individually and collectively contribute to meeting the objectives of financial reporting. Each financial statement provides a different kind of information and, generally, various kinds of information cannot be combined into a smaller number of financial statements without unduly complicating the information. **Classification and aggregation:** Classification in financial statements facilitates analysis by grouping items with essentially \_\_\_characteristics and separating items with essentially different characteristics. Financial statements result from processing large amounts of data. Financial statements involve the need to simplify, condense, and aggregate information **Articulation of financial statements:** Financial statements \_\_\_\_, or articulate, because they reflect different aspects of the same transactions or other events affecting the entity.

Answer 293

Common Interests Usefulness Similar Interrelate

Question 294

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in financ­ing activities for the transaction? Cash payment Acquisition price Mortgage amount Zero

Answer 294

## Footnote Zero The only cash involved in this transaction is the cash paid. It would be included in cash flows from investing activities.

Question 295

How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method? In operating activities as an addition to income As a financing activities inflow As a financing activities outflow In operating activities as a deduction from income

Answer 295

In operating activities as an addition to income Interest paid would be an expense included in the determination of net income, and therefore a cash outflow from operating activities. Amortization of bond discount is noncash interest expense. Net income must be increased by noncash expenses that did not result from a cash outflow.

Question 296

Answer 296

Total separate accounts receivable = $52,000 + $38,000 = $90,000 Less consolidated accounts receivable _78,000_ Accounts receivable eliminated in consolidation $12,000 Intercompany receivables and payables are always eliminated in the consolidation process. Therefore, the $12,000 eliminated must represent the amount Shel owed to Pare for intercompany sales.

Question 297

On June 29, 20X4, Riff Inc. purchased all the issued and outstanding common stock of Jinks Co. for $2,640,000. Jinks had assets of $2,680,000 and liabilities of $540,000 on the acquisition date. Jinks' recorded assets and liabilities had fair values of $2,800,000 and $620,000, respectively. In Riff's June 30, 20X4, balance sheet, what amount should be reported as goodwill? $80,000 $160,000 $500,000 $460,000

Answer 297

Question 298

Answer 298

$64,000 ## Footnote Total separate revenues = $400,000 + $280,000 = $680,000 Less consolidated revenues _616,000_ Revenues eliminated in consolidation $ 64,000 Since intercompany sales are eliminated in the consolidation process, the $64,000 eliminated represents intercompany sales from Pare to Shel.

Question 299

For the 8 months ended August 31, year 5, the carpet division of a flooring company, which is considered a major line of business, had an operating loss of $115,000 from operations. On September 1, year 5, the board of directors voted to discontinue the division's operations. On December 31, year 5, the division was sold for a pretax loss of $135,000. The division's operating loss for year 5 was $240,000. The company's income tax rate is 30%. What amount of loss should the company report as discontinued operations in the December 31, year 5, income statement? $262,500 $182,000 $260,000 $168,000

Answer 299

Discontinued operations include all previously unrecognized gains or losses from the sale of the discontinued component and the results of operations for the discontinued component during the period, among other gains and losses. During year 5, the division lost $240,000 and was sold for a loss of $135,000, creating a total gross loss of $375,000 ($240,000 + $135,000). On the income statement the total loss is reduced by the tax benefit associated with the loss of $112,500 ($375,000 × 30%) for a net loss of $262,500 ($375,000 − $112,500). The $115,000 loss from the first 8 months of the year is already included in the $240,000 operating loss and is not needed to solve this problem.

Question 300

Which of the following is a component of other comprehensive income? Changes in market value of inventory Minimum accrual of vacation pay Foreign currency-translation adjustments Unrealized gain or loss on investment in equity securities

Answer 300

Foreign currency-translation adjustments Some items included in comprehensive income include the following: * Foreign currency translation adjustments * Unrealized holding gains and losses that result from a debt security * Prior service costs or credits associated with pension or other postretirement benefits

Question 301

Comprehensive income comprises both of the following: * All components of net income * All components of other comprehensive income. T/F

Answer 301

True

Question 302

Combined statements may be used to present the results of operations of: commonly controlled companies. neither commonly controlled companies nor companies under common management. both commonly controlled companies and companies under common management. companies under common management.

Answer 302

both commonly controlled companies and companies under common management. FASB ASC 810-10-20 notes that in consolidation controlling financial interest resides with one of the companies included in the consolidation. In addition, combined financial statements would be useful where one individual owns a controlling financial interest in several entities that are related in their operations Another use of combined statements is to present the financial position and the results of operations of entities under common management. Thus, combined statements (not consolidated) may be used to present operating results of companies under common management, as well as commonly controlled companies.