F1-M1: Balance Sheet, Income Statement, and Comprehensive Income

Question 1

What should a full set of financial statements include?

Answer 1

• Statement of Financial Position (Balance Sheet)
• Statement of Earnings (Income Statement)
• Statement of Cash Flows
• Statement of Changes in Owners’ Equity

Question 2

What is a “classified” balance sheet?

Answer 2

A classified balance sheet distinguishes between current and noncurrent assets and liabilities.

Question 3

Name the expense that each of the following unexpired costs turn into as they expire:
1. Inventory
2. Unexpired (prepaid) cost of insurance
3. Net book value of fixed assets
4. Unexpired cost of patents

Answer 3

1. Cost of goods sold (COGS)
2. Insurance expense
3. Depreciation expense
4. Amortization expense

Question 4

Are gains and losses on the disposal of assets shown on a “gross basis” or on the “net basis”?

Answer 4

Gains and losses are reported at their net amounts (i.e., proceeds less NBV).

• Gross basis - both the sales proceeds and the NBV of the disposed asset are reported
• Net basis - only the difference between sale price and NBV of the disposed asset is reported

Question 5

How does a “multiple-step” income statement differ from a “single-step” income statement?

Answer 5

• Multiple-step: reports operating revenues and expenses separately from nonoperating revenues and expenses and other gains and losses
• Single-step: does not separate operating and nonoperating revenues and expenses

Single-step income statement:
Income from continuing operations = (Total Revenues - Total Expenses)

Question 6

The gain (loss) from discontinued operations can consist of…

Hint: 3 items

Answer 6

• An impairment loss
• A gain (loss) from actual operations
• A gain (loss) on disposal

Question 7

How do we account for subsequent increases in the FV of a discontinued component?

How is it recognized? When is it reported?

Answer 7

• A gain is recognized for the subsequent increase in FV - costs to sell (but not in excess of the previously recognized cumulative loss).
• The gain is reported in the period of increase.

Refer to F1-M1 Example 3: Discontinued Operations Calculations and Income Statement Presentation

Question 8

What conditions must be present for a disposal to be reported in discontinued operations?

Answer 8

A disposal is reported in discontinued operations if the disposal:
1. Represents a strategic shift
2. That has or will have a major effect
3. On an entity’s operations and financial results

Examples of disposals: disposal of a component, group of components, business activity, or nonprofit activity.

Question 9

State two types of foreign currency transactions.

Answer 9

• Operating transactions (i.e., importing, exporting, borrowing, lending, and investing transactions)
• Forward exchange contracts (agreements to exchange two different currencies at a specific future date and at a specific rate)

Question 10

For operating transactions in foreign currency, detail the recording process.

This is for a transaction not settled by balance sheet date.

Answer 10

1. Record original transaction at exchange or spot rate on transaction date.
2. At BS date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.
3. On payment date, compute gain/loss on the transaction by using the exchange rate on payment date.

Refer to F1-M1 Example 4: Foreign Currency Transaction

Question 11

Define comprehensive income.

Answer 11

Change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources.

Comprehensive Income = Net Income +/- OCI (other changes in owner’s equity not resulting from transactions with owners)

Question 12

List the two formats acceptable for reporting comprehensive income.

Answer 12

• Single-statement approach: Statement of Comprehensive Income (OCI items are displayed individually and in total below the net income amount)
• Two-step approach: Statement of Income followed by separate Statement of Comprehensive Income

Single-statement: Income Statement starts w/ Revenue, end w/ OCI and CI
Two-step: starts w/ Net Income, ends w/ separate OCI statement

A company does not present comprehensive income if (1) the entity is a NFP or (2) the entity does not have comprehensive income. Comprehensive income should not be reported on a per-share basis.

Question 13

Identify four items included in OCI.

PUFI

Answer 13

• Pension adjustments
• Unrealized gains and losses on available-for-sale debt securities and hedges
• Foreign currency translation adjustments and gains/losses on certain foreign currency transactions
• Instrument-specific credit risk for liabilities (using FV) and their changes in FV