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

Question 1

Q

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

83 to 1
94 to 1
46 to 1

Answer

A

.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

Q

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

A

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

Q

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

A

Operating, Investing, Financing

Question 4

Q

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?***

Question 5

Q

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

A

goods
Interest and Dividends
True

Question 6

Q

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

Question 7

Q

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

A

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

Q

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.

Question 9

Q

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

A

Revenues
Amount
Segment Reporting

Question 10

Q

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

A

Revenues
Amount
Segment Reporting

Question 11

Q

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

Question 12

Q

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

A

$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 13

Q

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

A

Investing

Question 14

Q

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

A

Loans

Equity

fixed assets

Question 15

Q

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

A

Financing

equity

bonds, mortgages notes

Question 16

Q

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

A

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 17

Q

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

A

True

FALSE - It is to be reported separately

Question 18

Q

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

A

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 19

Q

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

A

discontinued operations

Question 20

Q

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

A

Continuing operations

Strategic shift – strategic shift

Question 21

Q

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:

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

Answer

A

Plan

immediate

initiated

one year

marketed

withdrawn

Question 22

Q

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:

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

Question 23

Q

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

A

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 24

Q

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

A

noncontrolling

controlling

Question 25

Q

The noncontrolling interest is reported in the ___statement of financial position within equity

Answer

A

consolidated

Question 26

Q

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

A

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 27

Q

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

Question 28

Q

In reporting cash flows from operating activities, enterprises are encouraged to use the ___method,

Question 29

Q

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

Answer

A

non-cash
False - it shall NOT be presented

Question 30

Q

(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

A

False - this is the DIRECT method

Question 31

Q

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:

(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

A

Income Taxes

Interest

Net Income

Question 32

Q

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

A

have no effect.

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 33

Q

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

A

$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 34

Q

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

A

yep! Just understand this.

Question 35

Q

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

A

$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 36

Q

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

A

Non-owner

Question 37

Q

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

Answer

A

Other Comprehensive Income

Question 38

Q

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:

Foreign currency ___adjustments
Gains and losses on ___currency transactions
Gains and losses on ___instrument
Unrealized holding gains and losses on ___-___-___debt securities
Gains or losses associated with ___or other ___benefits

Answer

A

translation

foreign

derivative

unrealized – available for sale

pension – postretirement

Question 39

Q

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

A

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 40

Q

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

A

$5,000

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 41

Q

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

A

$429,200.

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 42

Q

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

A

Depreciation expense would be decreased and goodwill impairment would be assessed.

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 43

Q

___is the excess of the fair value of the consideration given over the fair value of the net identifiable assets acquired

Question 44

Q

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

A

$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 45

Q

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

A

$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 46

Q

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

A

False - it does NOT constitute income to the investor

TRUE

FALSE - the share stays the SAME

Question 47

Q

___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

Question 48

Q

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

A

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 49

Q

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

A

True

Question 50

Q

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

A

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 51

Q

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

A

$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 52

Q

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

A

$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 53

Q

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

Question 54

Q

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

Question 55

Q

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

Question 56

Q

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

A

$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 57

Q

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

A

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 58

Q

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

A

Date

vulnerable

reasonably

Question 59

Q

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

Question 60

Q

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

A

Volume

Revenue

geographic area

Question 61

Q

What percentage is required for a concentration to be present?

Answer

A

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 62

Q

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?

1
7
3
7

Answer

A

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 63

Q

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

A

$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 64

Q

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

A

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.

Answer 52

A

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.

Answer 53

A

Refinance

Consummate (idk what this means - just memorize it)

Answer 54

A

long

one year

Answer 55

A

issuance

agreement

Answer 56

A

$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

Answer 57

A

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.

Answer 58

A

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.

Answer 59

A

Strut’s balance sheet

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.

Answer 60

A

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).

Answer 61

A

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.

Answer 62

A

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.

Answer 63

A

support

voting

losses

returns

Answer 64

A

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

Answer 65

A

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.

Answer 66

A

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.

Answer 67

A

balances

recognized

performance obligations

Answer 68

A

accounting

financial reporting

Answer 69

A

$1,250,000

Answer 70

A

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.

Answer 71

A

$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.

Answer 72

A

convertible

three months

Answer 73

A

Cash equivalents

Answer 74

A

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
=======

Answer 75

A

$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.

Answer 76

A

$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

Answer 77

A

$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.

Answer 78

A

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.

*

Answer 79

A

$48,000

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.

Answer 80

A

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

Answer 81

A

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.

Answer 82

A

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.

Answer 83

A

Assets

Liabilities

Equtiy

Answer 84

A

False – they MAY NOT

Answer 85

A

determinable

True

Intends

law

Answer 86

A

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.

Answer 87

A

cost constraint, potential adverse consequences, future-oriented information, and relevance.

Relevance: Disclosure is based upon relevance, not entity-specific materiality.
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.
Potential adverse consequences: The FASB will consider potential adverse consequences. Disclosure can have both beneficial and adverse consequences.
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.

Answer 88

A

Relevance

Cost Constraint

Potential Adverse Consequences

Future-oriented information

Answer 89

A

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%).

Answer 90

A

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

Answer 91

A

$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.

Answer 92

A

Operating Cycle (operating cycle is within 1 year)

advance (unearned revenue)

True

one year

Answer 93

A

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)

Answer 94

A

risks and uncertainties

a. Operations
b. estimates
c. concentrations

Answer 95

A

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.

Answer 96

A

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.

Answer 97

A

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.

Answer 98

A

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

Answer 99

A

available for sale

Currency

service costs

Answer 100

A

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

Answer 101

A

Column

Events

True

Stock

ending

Answer 102

A

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.

Answer 103

A

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.

Answer 104

A

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)).

Answer 105

A

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

Answer 106

A

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.

Answer 107

A

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.

Answer 108

A

$5,700,000

Answer 109

A

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.

Answer 110

A

$252,000

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%).

Answer 111

A

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:

Such a concentration exists at the date of the financial statements.
The concentration makes the entity vulnerable to the risk of a near-term severe impact.
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.

Answer 112

A

date

vulnerable

reasonably

vulnerable

Answer 113

A

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.

Answer 114

A

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)

Answer 115

A

$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.

Answer 116

A

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.

Answer 117

A

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.

Answer 118

A

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.

Answer 119

A

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.

Answer 120

A

operating

operating; financing

operating

Answer 121

A

$(120,000)

Answer 122

A

$1,240,000

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.

Answer 123

A

$1,314,600

Answer 124

A

$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.

Answer 125

A

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.

Answer 126

A

$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.

Answer 127

A

$6,000

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

Answer 128

A

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.

Answer 129

A

appropriateness

alternatives

industry

Unusual

True

FALSE - Should NOT duplicate info presented elsewhere

True

Answer 130

A

change

material

Answer 131

A

In the owners’ equity section

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

Answer 132

A

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.

Answer 133

A

$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

Answer 134

A

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

Answer 135

A

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.

Answer 136

A

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).

Answer 137

A

$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

Answer 138

A

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.

Answer 139

A

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.

Answer 140

A

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.

Answer 141

A

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.

Answer 142

A

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.

Answer 143

A

$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
========

Answer 144

A

$1,665,000

Answer 145

A

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

Answer 146

A

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.

Answer 147

A

$20,000

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.

Answer 148

A

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.

Answer 149

A

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.

Answer 150

A

$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.

Answer 151

A

Sale of property, plant, and equipment

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

Answer 152

A

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.

Answer 153

A

$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.”

Answer 154

A

Goodwill has been created in the purchase of a business.

The FASB only authorizes the recognition of goodwill in a purchase context.

Answer 155

A

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.

Answer 156

A

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).

Answer 157

A

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.

Answer 158

A

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.

Answer 159

A

$3,000

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.

Answer 160

A

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

Answer 161

A

As an addition to net income in the operating activities section

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.

Answer 162

A

$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.

Answer 163

A

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.

Answer 164

A

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.

Answer 165

A

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.

Answer 166

A

Cash Flows

Answer 167

A

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.

Answer 168

A

$800,000.

Answer 169

A

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.

Answer 170

A

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

Answer 171

A

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.

Answer 172

A

$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

Answer 173

A

(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.

Answer 174

A

Relevance

Answer 175

A

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.

Answer 176

A

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.

Answer 177

A

$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.

Answer 178

A

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.

Answer 179

A

$250,000

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.

Answer 180

A

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

Answer 181

A

$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
========

Answer 182

A

$0

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.”

Answer 183

A

$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.

Answer 184

A

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.

Answer 185

A

$617,000.

Answer 186

A

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.

Answer 187

A

$(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.

Answer 188

A

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.

Answer 189

A

$25,000

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.

Answer 190

A

$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)

Answer 191

A

$2,110,000

.

Answer 192

A

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.

Answer 193

A

$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.

Answer 194

A

Parent’s investment in Subsidiary is reduced by $4,500.

Answer 195

A

$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)

Answer 196

A

$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

Answer 197

A

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.

Answer 198

A

be displayed in a financial statement that has the same prominence as other financial statements

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.

Answer 199

A

$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

Answer 200

A

fundamentally interrelated.

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.

Answer 201

A

Articulation

Answer 202

A

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:

Answer 203

A

$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.

Answer 204

A

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.

Answer 205

A

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

Answer 206

A

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.

Answer 207

A

$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

Answer 208

A

$15,000 cash inflow from financing activities

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.

Answer 209

A

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.”

Answer 210

A

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

Answer 211

A

All of the answer choices are discontinued operations.

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.

Answer 212

A

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.

Answer 213

A

30.0 days

Answer 214

A

Working capital

Answer 215

A

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.

Answer 216

A

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.”

Answer 217

A

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.

Answer 218

A

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.

Answer 219

A

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).

Answer 220

A

$1,250,000.

Answer 221

A

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

Answer 222

A

$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

Answer 223

A

Criteria for determining which investments are treated as cash equivalents

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.

Answer 224

A

$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

Answer 225

A

received; disbursed

True

Answer 226

A

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.

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Answer 227

A

Disclosure of accounting policies is an integral part of the financial statements.

All financial statement notes are an integral part of the financial statements.

Answer 228

A

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.

Answer 229

A

$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

Answer 230

A

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.

Answer 231

A

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.

Answer 232

A

communication

Answer 233

A

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.

Answer 234

A

$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

Answer 235

A

$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

Answer 236

A

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.”

Answer 237

A

$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.

Answer 238

A

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.

Answer 239

A

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.

Answer 240

A

$37,000

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.

Answer 241

A

$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

Answer 242

A

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.

Answer 243

A

$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.

Answer 244

A

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.”

Answer 245

A

$0

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)).

Answer 246

A

$30,000

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.

Answer 247

A

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.

Answer 248

A

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.

Answer 249

A

$400,000

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

Answer 250

A

$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

Answer 251

A

$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).

Answer 252

A

Investment

Current-year

reciprocal

Reciprocal

Intercompany

Answer 253

A

AP & AR

Note Payable and Note receivable

Interest Income and Interest Expense

Answer 254

A

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.

Answer 255

A

Common Interests

Usefulness

Similar

Interrelate

Answer 256

A

Zero

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

Answer 257

A

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.

Answer 258

A

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.

Answer 259

A

$64,000

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.

Answer 260

A

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.

Answer 261

A

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

Answer 262

A

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.