FAR 1 Flashcards
Reporting A/R at Net Realizable Value is a departure from which accounting principle?
Historical Cost
Retained earnings are calculated as follows:
Revenue [4,500,000] - Expenses [3,750,000] 750,000
Income taxes = 0.30 * 750,000 (225,000)
Net income 525,000
Retained earnings, 1/1/Yr. 5 350,000
Retained earnings, 12/31/Yr. 5 875,000
Is Goodwill included in Total Assets?
Yes, Goodwill is included in Total Assets
What is the purpose of a Multi-Step Income Statement?
In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Thus, total expenses are not subtracted from total revenues, but both revenues and expenses would be broken down into operating and other revenues and expenses.
Is a gain on the disposal of a segment included in total revenue?
No.
This item is not a revenue; rather, it is part of the special category “discontinued operations” found below income from continuing operations in the Income Statement.
A company’s activities for year two included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of amortization expense 59,000
Sales returns 34,000
Gain on sale of available-for-sale securities 8,000
Gain on disposal of a discontinued business segment 4,000
Unrealized gain on available-for-sale securities 2,000
The company has a 30% effective income tax rate. What is the company’s net income for year two?
All items are included in net income except the prior year adjustment to amortization expense and the unrealized gain on the AFS securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.
What is Gross Profit?
Gross profit is sales less cost of goods sold.
Freight Out is what type of expense?
Selling Expense
How is Cost of Goods Manufactured Calculated?
Thus, cost of goods manufactured must be $200,000.
Cost of goods manufactured
?
Plus finished goods beginning inventory $400,000
Less finished goods ending inventory (360,000)
Equals cost of sales $240,000
What is Comprehensive Income? What is Accumulated Other Comprehensive Income?
CI ($28,000) is the sum of income ($21,000) and other comprehensive income (-$2,000 + $9,000 = $7,000). AOCI is the running OE account, which is increased or decreased by other comprehensive income for the period. Ending AOCI = $6,000 dr. - $7,000 other comprehensive income (positive) = $1,000 cr. AOCI began the year with a new loss of $6,000 (debit balance), but the $7,000 positive other comprehensive income for the year turned the beginning dr. balance of AOCI into a net credit of $1,000.
What is Comprehensive Income and what does it include?
The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income.
The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.
How do you calculate the Issue Price?
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.
The Statement of Changes in Equity
Is not Required, includes common stock, OCI and Retained Earnings.
What 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 reconciliation of ending retained earnings to net cash flow from operations.
Financing Activities Include:
Cash flows related to liabilities and owners’ equity.
Cash flows from financing activities are those associated with how the company is financed such as with borrowing or equity. Proceeds from issuance of Stock, Bonds and borrowing. The payment of dividends is a cash outflow from financing activities.
Operating Activities Include:
Cash flows related to income statement items.
Investing Activities Include:
Cash flows related to long-term assets and investments.
