Chapter 11 Corporations and Their Financial Statements RQ Flashcards
Identify the correct statement(s) regarding the Statement of Financial Position.
A statement of financial position traces the cash flows through a company over a defined period of time.
A statement of financial position shows what a company owns and owes as of a certain date.
A statement of financial position must always balance, or there is a mistake.
A statement of financial position is divided into two equal parts, assets and liabilities.
A. 1 only.
B. 3 only.
C. 2 and 3 only.
D. 2 and 4 only.
C. 2 and 3 only.
The Statement of Financial Position shows a company’s financial position at a specific date. In annual reports, that date is the last day of the company’s fiscal year. The financial statement that traces the cash flow over a defined period would be the Statement of Cash Flow. One side of the statement of financial position (often the left side) shows what the company owns and what is owing to it. These items are called assets. The other side of the statement of financial position shows (1) what the company owes (called liabilities) and (2) the equity or net worth of the company which represents the shareholders’ interest in the company. There are therefore three, not two sections. Accordingly, the company’s total assets are equal to the sum of the company’s liabilities plus the equity.
Identify the correct statements regarding depreciation, amortization or depletion.
Depreciation is a non-cash deductible expense.
Depletion usually refers to “wasting assets”.
Amortization is usually used to write-off intangible assets.
Depreciation applies to property plant and equipment but not on land.
A. 1, 2, 3 and 4.
B. 1 and 3 only.
C. 1, 2 and 3 only.
D. 1 and 2 only.
A. 1, 2, 3 and 4.
With the exception of land, fixed assets wear out in time or otherwise lose their usefulness. Between the time when a given asset is acquired and when it is no longer economically useful, a decrease in its value takes place. This loss in value over a period of years is known as depreciation. Depletion is a similar term applied to resource assets, and amortization is usually used to describe the writing off of intangible assets.
ABC Co. experiences a $100,000 loss and is unable to pay dividends. How will this affect the value of Equity on the Statement of Financial Position?
A. Market value of common shares will decrease by $100,000.
B. Liabilities will increase by $100,000.
C. Retained Earnings will decrease by $100,000.
D. Assets will decrease by $100,000.
C. Retained Earnings will decrease by $100,000.
If a company suffers a loss in any year, the loss is deducted from the retained earnings. Profit is added to previous year’s retained earnings and losses are deducted from previous year’s retained earnings.
A bicycle retailer purchases 20 bicycles at $150 and then later purchases another 15 of the same bicycle for $140. Calculate the cost of goods sold for 2 bicycles sold from this inventory using FIFO.
A. $280.00
B. $290.00
C. $291.43
D. $300.00
D. $300.00
FIFO means that the first items purchased as inventory are the first items sold for calculations of cost of goods sold. Therefore, the 2 bicycles sold from this inventory would have had the cost of goods sold calculated based on the first purchase at $150, for a total cost of goods sold of 2 x $150 = $300.
ABC Co. owns 25% of XYC Co. XYC Co. earned $20,000 (after tax) in a particular fiscal year. Calculate what ABC Co. would claim as its share of profit of associates.
A. Zero
B. $5,000
C. $20,000
D. $25,000
B. $5,000
Share of profit of associates occurs when a company invests in another company and where significant influence exists without control (traditionally when 20% or more of the voting shares are owned) and where each company has its own financial statements. For example, ABC Co. owns 25% of XYC Co., and XYC Co. earned $20,000 (after tax). ABC Co., in its statement of comprehensive income, claims $5,000 (25%) of this as share of profit of associates. While the parent company claims this income, it does not actually receive it in cash. Thus, share of profit of associates is a non-cash source of funds, just as depreciation, depletion, and amortization are non-cash uses of funds.
If a company reports $5.5 million of income as non-controlling interest on its consolidated statement of changes in equity, what does this mean?
A. All the subsidiary’s income was included in the company’s income, but $5.5 million of it belongs to other shareholders of the subsidiary.
B. The company’s portion of a subsidiary’s income is $5.5 million.
C. The company received $5.5 million cash from the subsidiary.
D. The $5.5 million is the portion of the subsidiary’s cash flow that belongs to other shareholders.
A. All the subsidiary’s income was included in the company’s income, but $5.5 million of it belongs to other shareholders of the subsidiary.
If a company controls a subsidiary, it consolidates the income of the subsidiary with its own income. This means that the parent company adds all the earnings of the subsidiary to its own earnings. It then identifies, as non-controlling interest, the portion of the subsidiary’s income that belongs to other shareholders in its consolidated statement of changes in equity.
When would a company typically use the cost method of accounting for a subsidiary?
A. If it owns between 20% and 50% of the voting shares of a subsidiary.
B. If it owns more than 50% of the voting shares of a subsidiary.
C. If it owns more than 90% of the voting shares of a subsidiary.
D. If it owns less than 20% of the voting shares of a subsidiary.
D. If it owns less than 20% of the voting shares of a subsidiary.
The cost method of accounting is used for inter-company ownership holdings of less than 20%, where the company does not have significant influence. In this situation, the company adds dividends received from the subsidiary to its own income as dividend income.
Identify the correct statements regarding the Statement of Cash Flows.
The statement of cash flow provides information on how the company generated and spent its cash during the year.
The statement of cash flow usually breaks down activities into the following headings: Operating Activities; Financing Activities; and Investing Activities.
The statement of cash flow shows the cash inflows and expenses over a one-year period.
The statement of cash flow is established using IFRS.
A. 1 only.
B. 1 and 2 only.
C. 3 only.
D. 1, 2 and 4 only.
D. 1, 2 and 4 only.
While the statement of financial position shows a company’s financial position at a specific point in time and the statement of comprehensive income summarizes the company’s operating activities for the year (note that 3) above is incorrectly defined), neither statement shows how the company’s financial position changed from one period to the next. The statement of cash flows fills this gap between the statement of financial position and the statement of comprehensive income by providing information about how the company generated and spent its cash during the year. The statement of cash flows assists users of financial statements in evaluating the liquidity and solvency of a company, and in assessing the company’s ability to generate cash internally, to repay debts, to reinvest and to pay dividends to shareholders. A review of the cash flow statements over a number of years may illustrate trends that might otherwise go unnoticed. For purposes of the cash flow statement, “cash”
normally includes cash held in bank accounts, net of short-term borrowing, and temporary investments. In some cases, other elements of working capital might be included when they are equivalent to cash. It is the changes in cash, and the reasons for them, that this financial statement details. A statement of cash flows shows the company’s cash flows for the period under the following three headings: Operating Activities consist of the company’s net earnings adjusted for items such as depreciation, depreciation and equity income which do not involve an outlay or receipt of cash. Further adjustments are made for those revenues and expenses which have not yet been realized in the form of cash, such as trade receivables and trade payables. Financing Activities include the proceeds from issuances of shares, funds received under long-term debt issues, repayments of long-term debt and changes in term bank loans. Investing Activities consist of include outlays of cash to acquire fixed assets, receipts of cash on the disposal of assets or investments, income from investments when received in the form of cash, etc.
UHJ Inc. reported $12 million in the retained earnings account for Year 1, while its Year 2 retained earnings account was $14.4 million. The company paid $1,500,000 in dividends for Year 2 and does not have a non-controlling interest. Calculate UHJ’s total comprehensive income in Year 2.
A. $1,500,000
B. $2,200,000
C. $3,900,000
D. $5,400,000
C. $3,900,000
The company paid $1.5 million in dividends. If the company’s retained earnings increased from $12 million to $14.4 million, but that was after $1.5 million was paid in dividends, the company must have earned a profit of $3.9 million. Step by step, here’s a breakdown:
$12 million retained earnings + $3.9 million in profits = $15.9 million
The company paid $1.5 million in dividends:
$15.9 million - $1.5 million = $14.4 million
Identify the non-current asset.
A. Cash.
B. Goodwill.
C. Pre-paid rent.
D. Trade receivables.
B. Goodwill.
Cash, pre-paid rent and trade receivables are all current assets as they are realizable within a fiscal period. Goodwill is an intangible asset and is considered to be non-current as its benefit is spread over more than one fiscal period.
Calculate equity for DEF based on the following information.
DEF Inc. financials (000s):
Current Assets $400 Fixed Assets $500 Current Liabilities $300 Long-Term Debt $200 A. $200,000 B. $300,000 C. $400,000 D. $500,000
C. $400,000
$400 + $500 = $900 = Assets
$300 + $200 = $500 = Liabilities
Equity = Assets – Liabilities = $900 – $500 = $400
DEF Company purchases GHI Company for $1.5 million. GHI Company has $1 million in fixed assets, valued at market prices. Select the correct statement.
A. DEF would add $1.5 million to fixed assets.
B. DEF would add $1 million to fixed assets and $500,000 to goodwill.
C. DEF would add $1.5 million to current assets.
D. DEF would deduct $1.5 million from cash and add $1.5 million to shareholders’ equity.
B. DEF would add $1 million to fixed assets and $500,000 to goodwill.
The buyer of a business is often willing to pay for its “good name” in addition to the value of its assets. This is known as goodwill. Goodwill may also signify the amount that a purchaser of a company will pay for the good management of the company. It will appear on consolidated (or combined) statement of financial position as the excess of the amount paid for the shares over their net asset value.
An investor purchased 1,000 shares of XYZ.com (an incorporated company) for $25 each. The company was subsequently successfully sued for $750 million for breach of contract (equivalent to $75/share). The company later declared bankruptcy with unpaid debts equivalent to $15/share and the investor still held the shares at that point. What is the total amount that the shareholder lost on this investment?
A. $15 per share.
B. $25 per share.
C. $40 per share.
D. $75 per share.
B. $25 per share.
Shareholders of a corporation have limited liability with respect to the company. They are not liable for debts of the company even in the event of bankruptcy. The maximum that can be lost is the shareholder’s investment in the company. In this case, the investor will lose her entire investment of $25,000 or $25/share, because after the company declared bankruptcy and is unable to pay for all of its outstanding debts (e.g., bank loans, bonds, debentures), there would be no money available to pay the common shareholder. Common shareholders rank behind debt holders. The investor is not liable for any potential judgement in the lawsuit nor for the debts owed after the bankruptcy of the company.
When must the management of public companies solicit proxies?
A. For shareholders’ meetings.
B. For directors’ meetings.
C. For management committee meetings.
D. For information meetings.
A. For shareholders’ meetings.
Management of public companies must solicit proxies for shareholders’ meetings. A proxy and information circular must accompany the notice of a shareholders’ meeting which is sent to all shareholders.
Sydney is starting up a new small business selling computer parts and needs some financing. He has always been very successful at sales, but is poor at the details of running the administration side of the business. Recommend a business structure that would work best for Sydney.
A. Corporation.
B. Cooperative.
C. Sole proprietorship.
D. Partnership.
D. Partnership.
A partnership involves two or more persons contributing to the business, whether it be capital or expertise required to run the enterprise. A partner could be chosen who has capital to contribute and also has expertise in running a business. A corporation may be too expensive as he is just starting out. A sole proprietorship won’t give him the capital or the support he needs on the admin side.
