cpa excel oci Flashcards
Rock Co.’s financial statements had the following balances at December 31:
Extraordinary gain $ 50,000
Foreign currency translation gain 100,000
Net income 400,000
Unrealized gain on the available-for-sale equity securities 20,000
What amount should Rock report as comprehensive income for the year ended December 31? A. $400,000 B. $420,000 C. $520,000 D. $570,000
C
Correct!
By definition, comprehensive income includes all changes in enterprise equity during a period except those changes resulting from transaction between the enterprise and its owners (e.g., investments by owners, dividends to owners, etc.). Therefore, comprehensive income includes net income plus/minus changes in equity that do not enter into the determination of net income (called items of “other comprehensive income”).
Currently, there are four possible items of other comprehensive income:
1.minimum additional pension liability adjustment,
2. unrealized gains and losses on investments classified as available-for-sale (and certain other related unrealized gains/losses),
3. gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges,
4. and gains and losses on the effective portion of cash flow hedges.
For Rock Co. comprehensive income would be computed as:
Net income (includes the extraordinary gain) $400,000
Items of other comprehensive income:
Foreign currency translation gain 100,000
Unrealized gain on available-for-sale security 20,000
Comprehensive income $520,000
Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealized loss on investments in noncurrent marketable equity securities.
B. Unrealized loss on investments in current marketable equity securities.
C. Loss on exchange of similar assets.
D. Loss on exchange of dissimilar assets.
Correct!
Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings.
This is a change in owners’ equity that is not included in earnings and is not the result of a transaction with owners. It is an “other” comprehensive income item. “Other” refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.
Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealized loss on investments in noncurrent marketable equity securities.
B. Unrealized loss on investments in current marketable equity securities.
C. Loss on exchange of similar assets.
D. Loss on exchange of dissimilar assets.
B
Correct!
Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings.
This is a change in owners’ equity that is not included in earnings and is not the result of a transaction with owners. It is an “other” comprehensive income item. “Other” refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.
Which of the following is included in other comprehensive income?
A. Unrealized holding gains and losses on trading securities.
B. Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category.
C. Foreign currency translation adjustments.
D. The difference between the accumulated benefit obligation and the fair value of pension plan assets.
D
Incorrect…
This item is not included in other comprehensive income. The question is trying to trick you into thinking that this is the minimum pension liability adjustment.
B
Incorrect…
Unrealized holding gains and losses from a debt security that is transferred from held-to-maturity to available-for-sale are reported in net income.
The Statement of Changes in Equity:
A. Is one of the required financial statements under U.S. GAAP B. Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items. C. Is used only if a corporation frequently issues common shares D. Reconciles all of the beginning and ending balances in the equity accounts.
A
Incorrect…
The Statement of Changes in Equity is not a required financial statement under U.S. GAAP.
D Correct
Correct!
The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.
The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?
A. $2 B. $5 C. $10 D. $12
A
Incorrect…
The average issue price is the sum of the par value and the additional paid-in capital. $2 represents the par value per share amount, $2.
D
Correct!
If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.
PQ2517
The amount of “Cash Flows from Operating Activities” will be the same whether the direct of the indirect method is used.
True
False
True
Sources and Uses of Cash
AICPA.951148FAR-FA
Which of the following is not disclosed on the Statement of Cash Flows, either on the face of the statement or in a separate schedule, when prepared under the direct method?
A. The major classes of gross cash receipts and gross cash payments.
B. The amount of income taxes paid.
C. A reconciliation of net income to net cash flow from operations.
D. A reconciliation of ending retained earnings to net cash flow from operations.
C
Incorrect…
This reconciliation must be reported as a footnote or supplementary schedule to the direct method Statement of Cash Flows. It does not appear in the body of the statement.
Sources and Uses of Cash
AICPA.951148FAR-FA
Which of the following is not disclosed on the Statement of Cash Flows, either on the face of the statement or in a separate schedule, when prepared under the direct method?
A. The major classes of gross cash receipts and gross cash payments.
B. The amount of income taxes paid.
C. A reconciliation of net income to net cash flow from operations.
D. A reconciliation of ending retained earnings to net cash flow from operations.
A
Incorrect…
This reconciliation must be reported as a footnote or supplementary schedule to the direct method Statement of Cash Flows. It does not appear in the body of the statement.
D
Correct!
The direct method Statement of Cash Flows must be supported by the supplemental disclosure of a reconciliation, but the reconciliation is of net income to net cash flow from operations, not retained earnings to net cash flow from operations. The ending retained earnings balance is not related to, and does not affect, operating cash flow.
Two Formats Allowed By GAAP
A. As discussed in detail later, the Statement of Cash Flows can be presented using either the direct or the indirect format.
B. The only difference between the two is in the operating activity section of the statement. The direct method reports the actual operating cash flows in the operating section. The indirect method reports the reconciliation of net income and net operating cash flow in the operating section. Both lead to the same subtotal: net operating cash flow. The following diagram shows the differences and similarities between the approaches.
Direct Method Indirect Method
Operating Activities: Operating Cash Flows Reconciliation
Investing Activities: Investing Cash Flows Investing Cash Flows
Financing Activities: Financing Cash Flows Financing Cash Flows
C. The direct method reports the reconciliation in a separate schedule.
D. Only the operating-activities section is different between the formats. Most firms use the indirect method.
AICPA.061230FAR
Sources and Uses of Cash
New England Co. had net cash provided by operating activities of $351,000; net cash used by investing activities of $420,000; and cash provided by financing activities of $250,000.
New England’s cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale.
What was New England’s cash balance at the end of the year?
A. $ 27,000 B. $ 40,000 C. $208,000 D. $248,000
C
Correct!
The cash balance at the end of the year equals the cash balance at the beginning of the year, $27,000, plus the net sum of the three categories of cash flows: $351,000 operating - $420,000 investing + $250,000 financing. The ending balance is $208,000.
The $40,000 proceeds from land sale are included in the net cash outflow from investing activities.
B
Incorrect…
The $40,000 proceeds from land sale is already included in the net cash outflow from investing activities ($420,000). The firm also had operating and financing cash flows.
The correct approach is to begin with the Jan. 1 balance and add/subtract the three net cash flow amounts for operating, investing, and financing activities.
AICPA.911122FAR-TH-FA
Sources and Uses of Cash
Bay Manufacturing Co. purchased a three-month U.S. Treasury bill.
In preparing Bay’s Statement of Cash Flows, this purchase would:
A. Have no effect.
B. Be treated as an outflow from financing activities.
C. Be treated as an outflow from investing activities.
D. Be treated as an outflow from lending activities.
Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.
A
Correct!
The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows.
B
Incorrect…
Even if this transaction involved a change in cash and cash equivalents, it would not be classified as a financing activity. But the three-month bill meets the definition of cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase.
Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.
C
Incorrect…
Even if this transaction involved a change in cash and cash equivalents, it would not be classified as an investing activity. But the three-month bill meets the definition of cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.
D
Incorrect…
The Statement of Cash Flows does not have a category “lending activities.” The transaction is the purchase of a cash equivalent, which does not change cash and cash equivalents. No disclosure is required.
Sources and Uses of Cash
AICPA.951147FAR-FA
Mend Co. purchased a three-month U.S. Treasury bill. Mend’s policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents . How should this purchase be reported in Mend’s Statement of Cash Flows?
A. As an outflow from operating activities.
B. As an outflow from investing activities.
C. As an outflow from financing activities.
D. Not reported.
D
Correct!
The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.
AICPA.940505FAR-FA
Sources and Uses of Cash
The primary purpose of a Statement of Cash Flows is to provide relevant information about:
A. Differences between net income and associated cash receipts and disbursements.
B. An enterprise’s ability to generate future positive net cash flows.
C. The cash receipts and cash disbursements of an enterprise during a period.
D. An enterprise’s ability to meet cash operating needs.
C
Correct!
The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.
A
Incorrect…
This is not the primary purpose; although, it is one of the functions of the Statement of Cash Flows. Both the direct and indirect methods require the disclosure of the reconciliation of net income and net operating cash flow.
B
Incorrect…
Although a user may be helped by the Statement of Cash Flows when attempting to make this assessment, this is not the main purpose of the statement.
D
Incorrect…
Although a user may be helped by the Statement of Cash Flows when attempting to make this assessment, this is not the main purpose of the statement.
AICPA.040213FAR-SIM
Sources and Uses of Cash
Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?
A. Income Statement, Balance Sheet, Statement of Cash Flows.
B. Income Statement, Statement of Cash Flows.
C. Statement of Cash Flows.
D. Balance Sheet and Statement of Cash Flows.
C
Correct!
This statement generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The Statement of Cash Flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.
AICPA.070771FAR
Sources and Uses of Cash
Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available:
Mortgage repayment $20,000
Available-for-sale securities purchased 10,000 increase
Bonds payable-issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease
What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year? A. $0 B. $10,000 C. $20,000 D. $30,000
B
Incorrect…
Operating Activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70.000 - $40 000 - $30 000 = $0
A
Correct!
Operating Activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70.000 - $40 000 - $30 000 = $0
