Area I A. for profit business Flashcards
how should a lessee account for variable lease payments that do not depend on an index or rate?
expense as incurred
what is the appropriate action when a discrepancy is found between the consolidated financial statement amounts and the supporting intercompany transaction documentation?
investigate and correct the root cause of the discrepancy
in a non-recourse factoring arrangement, what risk does the company selling its receivables avoid?
credit risk of the receivables
when reconciling the cash balance per books with the cash balance per bank statement which of the following would typically require an adjustment to the book balance?
bank service charges
what is the impact of the net assets of not-for-profit entity when it recognizes contributed services?
an increase in net assets
when preparing an income statement from the trial balance which of the following accounts would typically be classified as an operating expense
rent expense
in a regulatory framework what title is most appropriate for the statement that summarizes revenue and expenses?
regulatory statement of operations
on April 1 year1 Richter purchased a patent with a 10-year life for 50,000 from DD Co. DD incurred costs of 35,000 developing the patent. calculate the amortization amount of patent purchased on April 1 year 1 to be amortized for the year ended December 31, year 1?
3,750 = 50,000/10 years X 9/12(April to December year1)
how should inventory valuation error of a subsidiary be corrected?
make an adjustment in the consolidation worksheet
which step in bank reconciliation is done first?
1.comparing the general ledger balance to the bank statement to identify discrepancies. 2. adjusting the general ledger balance after identifying the reasons for the differences. 3. identifying outstanding checks. 4. calculating interest earned.
lease length 10 years, leasehold improvements depreciate in 8 years
leasehold improvements are capitalized and depreciated over the term of its useful life (8 years) or the lease term (10 years) whichever is shorter.
how should plan investments be reported in a defined benefit plan’s financial statements?
at fair value
if accrued expenses were not recorded at the end of the period what adjustment is necessary?
increase the current period’s expenses and liabilities
multiple step income statement
Trial Balance Extract:
● Sales Revenue: $600,000
● Cost of Goods Sold: $300,000
● Salaries Expense (Administrative): $80,000
● Salaries Expense (Sales): $50,000
● Rent Expense (Office): $40,000
● Utilities Expense: $20,000
● Advertising Expense: $30,000
● Interest Expense: $15,000
● Interest Income: $10,000
● Gain on Sale of Investments: $25,000
● Loss from Discontinued Operations: $18,000
Tech Innovations Inc. Income Statement (Multiple-Step)
For the Year Ended December 31, 2023
● Sales Revenue: $600,000
● Less: Cost of Goods Sold: $300,000
● Gross Profit: $300,000
● Operating Expenses:
○ Salaries Expense (Administrative): $80,000
○ Salaries Expense (Sales): $50,000
○ Rent Expense: $40,000
○ Utilities Expense: $20,000
○ Advertising Expense: $30,000
○ Total Operating Expenses: $220,000
● Operating Income: $80,000
● Non-Operating Revenues:
○ Interest Income: $10,000
○ Gain on Sale of Investments: $25,000
● Non-Operating Expenses:
○ Interest Expense: $15,000
● Net Non-Operating Income: $20,000
● Net Income Before Taxes: $100,000
● Less: Loss from Discontinued Operations: $18,000
● Net Income: $82,000
single step income statement
Trial Balance Extract:
● Sales Revenue: $500,000
● Service Revenue: $100,000
● Cost of Goods Sold: $250,000
● Salaries Expense: $120,000
● Rent Expense: $30,000
● Interest Expense: $10,000
● Interest Income: $5,000
● Gain on Sale of Equipment: $8,000
● Loss from Discontinued Operations: $15,000
Step 2: Separate Operating and Non-Operating Items
● Operating Items: Sales Revenue, Service Revenue, Cost of
Goods Sold, Salaries Expense, Rent Expense.
● Non-Operating Items: Interest Expense, Interest Income, Gain on Sale of Equipment.
Title and Date the Document:
● “Gadget Corp.”
● “Income Statement”
● “For the Year Ended December 31, 2023”
List All Revenues:
● Revenues:
○ Sales Revenue: $500,000
○ Service Revenue: $100,000
● Total Revenues: $600,000
List All Expenses (Operating and Non-Operating):
● Expenses
○ Cost of Goods Sold: $250,000
○ Salaries Expense: $120,000
○ Rent Expense: $30,000
○ Interest Expense: $10,000
● Total Expenses: $410,000
Calculate Total Income from Continuing Operations:
● Income from Continuing Operations
○ Total Revenues - Total Expenses = $600,000 -$410,000 = $190,000
.Include Non-Operating Items:
● Non-Operating Items
○ Interest Income: $5,000
○ Gain on Sale of Equipment: $8,000
● Adjusted Total Income: $190,000 + $5,000 + $8,000 =
$203,000
Account for Discontinued Operations:
● Discontinued Operations:
○ Loss from Discontinued Operations: $15,000
● Final Net Income: $203,000 - $15,000 = $188,000
foreign exchange on transaction and remeasurement date before settlement
non operating unrealized gain or loss
foreign exchange after settlement date
non operating realized gain or loss
OCI items are
temporary, non-cash and volatile
items on OCI (Other Comprehensive Income)
Foreign Currency Translation Adjustments(unrealized), Unrealized Gains and Losses on Available-for-Sale (AFS) Financial Assets, Gains and Losses from Cash Flow Hedges, Remeasurements of Defined Benefit Pension Plans, Changes in the Fair Value of Financial Liabilities Designated as Fair Value through OCI.
items on OCI represent
changes in equity during a reporting period that are not the result of transactions with shareholders (whether investments by or distributions to shareholders), and are not derived from regular business operations, i.e., outside regular business activities.
OCI statements presentation formats
single-statement approach and two-statement approach
OCI statement start with
net income
total comprehensive income is
the sum of net income and OCI
remeasurement of defined benefit plan reflects changes in
present value of defined benefit obligations and fair value of plan’s assets
statement of changes in equity
page 31
statement of changes in equity reflects
how the period’s profit or loss, dividend payments, issuance of shares, and other equity-related transactions have impacted the company’s equity. It provides valuable insights into how the company’s actions and performance have affected its financial position from an equity perspective
statement of comprehensive income is
a crucial financial statement used to provide a complete picture of all income and expenses, including those not captured in the traditional income statement. It represents the total change in equity from
non-owner sources during a reporting period
total equity equals
closing balance of retained earnings + closing balance of common stock
closing or adjusted balance of retained earnings on statement of changes in equity
beginning retained earnings + net income for the year - dividends declared and paid
components of equity
retained earnings and common stock
closing or adjusted balance of common stock on statement of changes inequity
beginning common stock for the year + issued common stock
closing balance retained earnings for the previous year in relation to statement of changes in equity is the same as
beginning balance of retained earnings for the year
failing to record stock issuance worth $20,000 on statement of changes in equity
understates total equity by $20,000
on statement of changes in equity, retained earnings and additional paid-in capital should be presented
separately not combined or added together
other comprehensive income included in statement of changes in equity
unrealized gains from available-for-sale securities, which are part of other comprehensive income, in the equity section. If there’s an unrealized gain of $15,000, it should be added to the
accumulated other comprehensive income in the equity section
statement of cash flows defined as
using the indirect method involves converting net income from an accrual basis to a cash basis. The indirect method starts with net income and then adjusts for all cash-based transactions. The rationale behind this method is to provide insights into the actual cash movements, despite what income statement and balance sheet numbers might suggest
statement of cash flows
Cash Flows from Operating Activities:
Net Income $150,000
Adjustments for non-cash items:
Depreciation $25,000
Loss(Gain) on sale of equipment ($5,000)
Changes in working capital:
Decrease in Accounts Receivable $20,000
Increase in Inventory ($10,000)
Increase in Accounts Payable $5,000
Net Cash Provided by Operating Activities
$185,000
Cash Flows from Investing Activities:
Sale of Equipment $40,000
Purchase of New Equipment ($50,000)
Net Cash Used in Investing Activities
($10,000)
Cash Flows from Financing Activities:
Dividends Paid ($30,000)
Net Cash Used in Financing Activities
($30,000)
Net Increase in Cash: $185,000 (operating) - $10,000 (investing) - $30,000 (financing) = $145,000
Net Increase in Cash $145,000
Beginning Cash Balance (Jan 1, 2023)
$100,000
Ending Cash Balance (Dec 31, 2023)
$245,000
ending cash balance on statement of cash flows is extracted from
refer to the comparative balance sheets of the company for the beginning of the year + Net Increase in Cash (as calculated)
on statement of cash flows, misclassifying investing activities (purchase of equipment) as operating activities expense would lead to
overstating operating activities cash outlfow and understate investing cash outflow
on statement of cash flows, company reports net income of $100,000 and noncash expense of $10,000 in depreciation. failing to add back this $10,000 in the cash flow from operating
activities would
understate the operating cash flow by
$10,000
cash balance on the statement of cash flows agrees with
cash balance on the balance sheet
on statement of cash flows, purchasing inventory with cash decreases
cash or increase cash outflow. Thus it is subtracted from the net income in the operating section
on statement of cash flows, purchasing inventory on credit increases
accounts payable or increases cash inflow. Thus it is added to net income in the operating section because more cash is in company’s pocket
on statement of cash flows, increase in sales revenue
decrease in accounts receivable, i.e., more cash is coming in so it would be added to net income
on statement of cash flows, the investing company receiving dividend payment
increases cash inflow in investing activities
on statement of cash flows, the company receives interest income from its deposits in a bank
increases cash inflow in operating section
on statement of cash flows, interest on loans paid by the company shows
in operating section decreasing cash inflow or increasing cash outflow, i.e., subtract from net income
on statement of cash flows, the company pays its shareholders dividends is
a financing activities decreasing cash inflow
on statement of cash flows, issuing stock and borrowing money by company increases
cash inflow in the financing section
Consolidated financial statements
pages 49 - 56
main GAAP requirements for notes to financial statements
Accounting Policies, Detailed Information: Specific disclosures about various
line items in the financial statements, such as long-term debt, leases, pensions, contingencies, and investments, Financial Instruments and Risks, Commitments and Contingencies, Subsequent Events: Information on significant events that
have occurred after the balance sheet date but before the financial statements are issued, Related Party Transactions, Segment Reporting, Changes in Accounting Principles and Estimates.
Preparing a classified balance sheet from a trial balance and supporting documentation involves organizing
financial data into a structured format
realized gain or loss from foreign currency transactions is recorded
in the income statement. Example: The $500 gain is reported as a “Foreign Exchange Gain” under non-operating income or financial expenses in the income statement
FAR3B10021
A company has a legal case pending that could potentially result in a $1 million loss. The company’s legal counsel advises that the chance of losing the case is 30%. How should this be treated in the financial statements?
A. Recognize a liability of $300,000.
B. Recognize a liability of $1 million.
C. Disclose the contingency in the notes to the financial statements.
D. No disclosure or recognition is necessary.
C. Disclose the contingency in the notes to the financial statements.
Since the likelihood of the loss is not probable but is more than remote, it should be disclosed in the notes.
