Chapter 3: Additional Financial Reporting

Question 1

Impact of inflation on financial statements (5)

Answer 1

• Understated assets
• Overstated income
• Overpayment of taxes (due to overstated income)
• Demands for high dividends (due to overstated income)
• Lack of comparability across companies

Question 2

Historical costs

Answer 2

Ignore purchasing power gains and losses

Question 3

Purchasing power losses

Answer 3

Result from holding monetary assets

Question 4

Purchasing power gains

Answer 4

Result from holding monetary liabilities

Question 5

Methods for inflation accounting

Answer 5

• General purchasing power accounting

- Current cost accounting

Question 6

General Purchasing Power Accounting

Answer 6

• Nonmonetary assets and stockholders’ equity accounts are restated for changes in the general price levels
• COGS and depreciation are based on restated asset values
• PP gains are included in income

Question 7

Current Cost Accounting

Answer 7

• Adjusts historical costs of assets using the current costs to replace those assets
• Determine the amount of income that can be distributed to the owners while maintaining the company’s productive capacity
• PP gains are included in equity

Question 8

Restatement of financial statements using the International Accounting Standard (IAS) 29

Answer 8

• Restatements using GPP
• Monetary items that are already stated at the measuring unit at the balance sheet date are not restated
• Other items are restated based on GPI between the date those items were acquired or incurred and the balance sheet date
• Gain or loss in monetary position is included in the net income

Question 9

Subsidiary

Answer 9

When the parent company has effective control over the other firm

Question 10

Associate

Answer 10

When a company does not have effective control, but does have significant ownership (>20%)

Question 11

Effective control

Answer 11

When a company has a majority of ownership or has representation in the board of directors

Question 12

Segment reporting

Answer 12

Preparing separate accounts of a company’s individual divisions, subsidiaries or other segments

Question 13

An MNC should prepare a financial statement for its operating segment if it meets any of the following tests

Answer 13

• Revenue test
• Profit or loss test
• Asset test

If it represents 10% or more of the revenue profit or asset, the segment can be concluded.

If those segments do not account for 75% of the total consolidated revenues, additional segments must still be reported.