FAR: Diag Test: 10/3/2018

Question 1

The Statement of Changes in Equity:

Is one of the required financial statements under U.S. GAAP

Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items.

Is used only if a corporation frequently issues common shares

Reconciles all of the beginning and ending balances in the equity accounts.

Answer 1

Reconciles all of the beginning and ending balances in the equity accounts.

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 is not a required financial statement under U.S. GAAP.

Question 2

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 debt 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?

$0
$10,000
$20,000
$30,000

Answer 2

$0

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

Question 3

Which of the following information should be disclosed as supplemental information in the statement of cash flows?

Cash flow per share    Conversion of debt to equity
Yes                                Yes
Yes                                No
No                                 Yes
No                                 No

Answer 3

No, yes

Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts.

The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.

Question 4

Under what conditions is disclosure about risks and uncertainty pertaining to concentrations required?

If the firm has any of the concentrations for which disclosures are required by GAAP

If events affecting the firm negatively have already occurred, with respect to a concentration

If the firm is vulnerable to a severe impact in the near term because of a concentration, and it is at least reasonably possible that the impact will occur

If the Board of Directors has taken a direct action serving to reduce risk and uncertainty within a given concentration

Answer 4

If the firm is vulnerable to a severe impact in the near term because of a concentration, and it is at least reasonably possible that the impact will occur

Disclosures are required when the event is reasonably possible. The event is not required to be probable.

Question 5

Which of the following is not a source of risk and uncertainty for which disclosures are required by GAAP?

Nature of a firm’s operations

Effect of changes in government regulations

Use of estimates in financial statements

Vulnerability to significant concentrations

Answer 5

Effect of changes in government regulations

This is not one of the four sources noted in the applicable standard. It is specifically noted as a source not included in the accounting standard.

Question 6

The following computations were made from Clay Co.’s 2005 books:

Number of days’ sales in inventory 61

Number of days’ sales in trade accounts receivable 33

What was the number of days in Clay’s 2005 operating cycle?

33
47
61
94

Answer 6

94

The operating cycle is the total period of time from the purchase of inventory, to sale, and then finally to the collection of cash from receivables.

The operating cycle thus can be approximated by the sum of the number of days’ sales in inventory, which is the average number of days before an item of inventory is sold, plus the number of days’ sales in receivables, which is the average number of days to collect a receivable. This sum is 94 (61 + 33) days.

Question 7

Are the following ratios useful in assessing the liquidity position of a company?

Defensive-interval ratio Return on stockholders’ equity
Yes Yes
Yes No
No Yes
No No

Answer 7

Yes, No

The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources. Thus, the measure is a liquidity measure.

The return on stockholders’ equity is the ratio of income to average owners’ equity. This ratio is a profitability ratio, not a liquidity ratio. A firm could have a strong return on equity ratio and not be particularly liquid.

Question 8

On December 31, 2004, Curry Co. had the following balances in selected asset accounts:

2004 Increase over 2003
Cash $300 $100
Accounts receivable, net 1,200 400
Inventory 500 200
Prepaid expenses 100 40
Other assets 400 150
Total assets $2,500 $890

Curry also had current liabilities of $1,000 on December 31, 2004, and net credit sales of $7,200 for the year then ended.

What is Curry’s acid-test ratio on December 31, 2004?

1. 5
2. 6
3. 0
4. 1

Answer 8

1.5

The acid test ratio = liquid current assets/current liabilities

= (cash + net AR)/current liabilities = ($300 + $1,200)/$1,000 = 1.5.

The acid test ratio is a more stringent test of the ability to pay current debt because it excludes inventories and prepaids, assets which may not be immediately liquid.