Far module 1 Flashcards
Jones Company purchased 1,000 shares of ABC common stock for $190,000 on January 1, Year 1. At quarter end, the value of the investment had declined to $182,000. Jones should reflect the stock’s decline in value by:
Recognizing an unrealized loss e of 8,000 or from income from continuing operations in its first quarter income statement
Losses on securities are not realized until
The security has been sold
A European company has made a purchase, which it intends to pay for in Japanese yen. Which of the following exchange rate movements will give rise to a loss for the company?
The yen appreciating versus the euro this means that more euros are needed to buy one yen
also the euro depreciating versus the yen and also when more euros are needed to buy one yen
A segment of Ace Inc. was discontinued during Year 1. Ace’s loss from discontinued operations should not:
Choice “B” is correct. Ace’s loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1. All Year 1 operating losses should be included.
Choice “A” is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations.
Choice “C” is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations.
Choice “D” is incorrect. Ace’s loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date. All Year 1 operating losses should be included.
Ignoring taxes, what amount would Sag report as accumulated other comprehensive income on its December 31 balance sheet under U.S. GAAP?
Projected benefit obligation
5,000,000
Unrecognized prior service cost
600,000
Current-year amortization of pension gains
250,000
Unrecognized pension gains
1,400,000
Current-year return on plan assets
450,000
Explanation
Choice “B” is correct. Under U.S. GAAP, unrecognized prior service cost and unrecognized net gains or losses must be reported in accumulated other comprehensive income, net of tax, until recognized as part of pension expense through amortization. Prior service cost increases pension expense and is recorded as a debit to OCI. Net gains decrease pension expense and are recorded as a credit to OCI.
Accumulated OCI is reported on an after-tax basis. The amount in accumulated OCI is as follows:
Unrecognized prior service cost
(600,000)
Unrecognized pension gains
1,400,000
800,000
Choice “A” is incorrect. The current-year amortization of pension gains and the return on plan assets for the current year are part of current-year pension expense and are not included in the calculation of accumulated other comprehensive income.
Choice “C” is incorrect. The unrecognized pension gains at the end of the year, not the current-year amortization, is included in accumulated other comprehensive income.
Choice “D” is incorrect. The unrecognized prior service cost and unrecognized pension gains are netted against each other, not added, since the unrecognized prior service cost represents a future addition to pension expense and the unrecognized pension gain represents a future offset to pension expense
Ball Corp. had the following foreign currency transactions during Year 1:
Merchandise was purchased from a foreign supplier on January 20, Year 1, for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, Year 1, at the U.S. dollar equivalent of $96,000.
On July 1, Year 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender’s local currency on July 1, Year 3. On December 31, Year 1, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum.
In Ball’s Year 1 income statement, what amount should be included as foreign exchange loss?
Foreign exchange
gain or loss
Merchandise purchased from a foreign supplier on 1/20/Year 1
for $90,000 was paid on 3/20/Year 1 with $96,000
$6,000
Loss
Loan made on 7/1/Year 1 for $500,000 payable on 7/1/Year 3:
Principal U.S. $ equivalent 7/1/Year 1
$500,000
Principal U.S. $ equivalent 12/31/Year 1
$520,000
Foreign exchange loss on principal
$20,000
Loss
Accrued interest for six months
U.S. $ equivalent 7/1/Year 1 ($500,000 x 10% x 1/2 year)
$25,000
U.S. $ equivalent 12/31/Year 1
$26,000
Foreign exchange loss
$1,000
Loss
Total foreign exchange loss for Year 1
Acela Co. reports $340,000 in accumulated other comprehensive income in Year 1. In Year 2, the company recorded the following:
Foreign currency translation loss:
30,000
Unrealized gain on available-for-sale debt security:
10,000
Unrealized loss on available-for-sale equity security:
10,000
Amortization of actuarial pension loss:
15,000
Actual return on pension plan assets:
65,000
Acela Co.’s Year 2 balance in accumulated other comprehensive income will be:
Choice “B” is correct. The beginning balance of $340,000 in accumulated other comprehensive income (AOCI) will be decreased by the $30,000 foreign currency translation loss, and increased by the unrealized gain on the available-for-sale debt security of $10,000 and the amortization of the actuarial loss on pension plan assets of $15,000. The balance in Year 2 will therefore be: $340,000 − $30,000 + $10,000 + $15,000 = $335,000. The actual return on pension plan assets is not specifically a part of AOCI.
Badel Co., a U.S. company, enters into a contract in which a company in Japan agrees to buy electronics products from Badel, payable in yen after year-end. If the yen depreciates versus the U.S. dollar, Badel will:
Choice “C” is correct. Badel is a U.S. company set to receive payment in yen. Because the yen has depreciated versus the U.S. dollar, this will cause a loss for Badel that will go on its income statement at year-end.
Which of the following statements is correct regarding the reporting of comprehensive income?
A. The statement of comprehensive income can be shown as part of the footnotes only or as a separate financial statement. B. Other comprehensive income per share is presented in a statement of comprehensive income. C. Comprehensive income may be presented in a single financial statement that presents both net income and comprehensive income. D. All companies must present a statement of comprehensive income.
Explanation
Choice “C” is correct. Comprehensive income can be shown in one statement of comprehensive income which displays other comprehensive income items individually, and in total, below the net income amount, and totals them for comprehensive income. At the company’s discretion, comprehensive income can also be shown as a separate statement that follows the income statement.
Choice “A” is incorrect. Comprehensive income and its components are presented with the same prominence as the other financial statements that constitute a full set of financial statements. Comprehensive income cannot be shown as in the footnotes only.
Choice “B” is incorrect. Comprehensive income is not reported on a per share basis.
Choice “D” is incorrect. The requirement to present a statement of comprehensive income does not apply to a company that has no items of other comprehensive income.
Noshima, a Japanese company, exports goods to Jacobs, a U.S. company. If the transaction is to be settled in yen, which of the following statements is correct?
A. Noshima will book a gain if the U.S. dollar appreciates versus the Japanese yen B. Jacobs will book a gain if the Japanese yen appreciates versus the U.S. dollar. C. Noshima will book a gain if the Japanese yen depreciates versus the U.S. dollar. D. Jacobs will book a gain if the U.S. dollar appreciates versus the Japanese yen.
Choice “D” is correct. If the U.S. dollar appreciates versus the Japanese yen, this implies that it will take fewer dollars to purchase one yen. As a result, when the transaction is ultimately settled, Jacobs will need fewer dollars to convert into yen to pay Noshima. This will therefore result in a gain.
Choice “A” is incorrect. An appreciation of the U.S. dollar is the same as a depreciation of the Japanese yen, which will result in a loss to Noshima.
Choice “B” is incorrect. The Japanese yen appreciating versus the U.S. dollar is the same as the U.S. dollar depreciating versus the Japanese yen. And if the dollar depreciates, this implies that Jacobs will need more dollars to convert into yen, which will result in the company booking a loss.
Choice “C” is incorrect. The Japanese yen depreciating versus the U.S. dollar is the same thing as the dollar appreciating versus the yen. If this happens, Jacobs will book a gain and Noshima will book a loss.
On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company’s December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain(loss) from foreign currency transactions when the receivable is collected?
A. $0 B. ($140) C. $140 D. $100
Question
Which of the following items is not classified as “other comprehensive income?”
A. Foreign currency translation adjustments. B. Gains from extinguishment of debt. C. Minimum pension liability equity adjustment for a defined-benefit pension plan. D. Unrealized gains for the year on available-for-sale debt securities.
Choice “B” is correct. Gains from extinguishment of debt are a component of net income, not a component of other comprehensive income. Comprehensive income is the sum of net income plus other comprehensive income. Other comprehensive income include changes in the funded status of a pension plan, unrealized gains and losses on available-for-sale debt securities and derivative instruments designated as cash flow hedges, foreign currency items, and instrument-specific credit risk.
Choice “A” is incorrect. Foreign currency translation adjustments are a component of other comprehensive income.
Choice “C” is incorrect. The minimum pension liability adjustment is no longer required under U.S. GAAP.
Choice “D” is incorrect. Unrealized gains (and losses) on available-for-sale debt securities are included in other comprehensive income.
Question
Fay Corp. had a realized foreign exchange loss of $15,000 for the year ended December 31, Year 1, and must also determine whether the following items will require year-end adjustment:
Fay had an $8,000 loss resulting from the translation of the accounts of its wholly owned foreign subsidiary for the year ended December 31, Year 1.
Fay had an account payable to an unrelated foreign supplier payable in the supplier’s local currency. The U.S. dollar equivalent of the payable was $64,000 on the October 31, Year 1 invoice date, and it was $60,000 on December 31, Year 1. The invoice is payable on January 30, Year 2.
In Fay’s Year 1 consolidated income statement, what amount should be included as foreign exchange loss?
Explanation
Choice “B” is correct. $11,000 foreign exchange loss.
Foreign exchange loss before adjustment
$15,000
Account payable:
U.S. Equivalent at invoice date
$64,000
U.S. Equivalent at payment date
60,000
Payable exchange gain
4,000
Foreign exchange loss included in
consolidated income statement
$11,000
Choice “A” is incorrect, per explanation above.
Choice “C” is incorrect. The $4,000 gain on the invoice transaction must be included.
Choice “D” is incorrect. The $8,000 translation loss from its wholly owned foreign subsidiary is not included in net income as it does not impact cash flows. It would be included in other comprehensive income in shareholders’ equity.
Preferred shaares are not
included in eps calculations
Forms and info
Choice “A” is correct. Form 10-Q is the quarterly report filed by U.S. registered companies that contains unaudited financial statements prepared using U.S. GAAP, interim period MD&A, and certain disclosures.
Choice “B” is incorrect. Form 10-K is the annual report filed by U.S. registered companies that contains audited financial statements prepared using U.S. GAAP, MD&A, and financial disclosures.
Choice “C” is incorrect. A 14A proxy statement is a statement required of a firm when soliciting shareholder votes. This statement is filed in advance of the annual meeting and is filed with the U.S. Securities and Exchange Commission.
Choice “D” is incorrect. Form S-1 is the form used for the registration under the Securities Act of 1933 of securities of all registrants.
For interim financial reporting, the computation of a company’s second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated:
Foreign tax rates
Available tax
planning alternatives
A.
Yes
No
B. No
Yes
C. Yes
Yes
D. No
No
The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished preparing Carlton’s income statement for the current fiscal year. While reviewing the income statement, Carlton’s finance director noticed that the earnings per share data has been omitted. What changes will have to be made to Carlton’s income statement as a result of the omission of the earnings per share data?
A. No changes will have to be made to Carlton's income statement. The income statement is complete without the earnings per share data. B. Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's net income for the past two years was greater than $5,000,000. C. Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's market capitalization is greater than $5,000,000. D. Carlton's income statement will have to be revised to include the earnings per share data.
Choice “D” is correct. All public entities must present earnings per share on the face of the income statement. In a simple capital structure, basic EPS for income from continuing operations and net income are presented. In a complex capital structure, basic and diluted EPS must be presented for income from continuing operations and net income.
A U.S. public company with a worldwide public float of $800 million at the end of the second quarter of the fiscal year is required to file its annual report with the U.S. SEC on:
Choice “A” is correct. A large accelerated filer is defined by the SEC as an issuer with a worldwide market value of outstanding common equity held by nonaffiliates of $700 million or more as of the last business day of the issuer’s most recently completed second fiscal quarter. Large accelerated filers are required to file Form 10-K (annual report) within 60 days after the end of the fiscal year.
Choice “B” is incorrect. The 10-Q is the quarterly report, whereas the questions asks for the annual report.
Choice “C” is incorrect. The 10-Q is the quarterly report, whereas the questions asks for the annual report.
Choice “D” is incorrect. The filing deadline for accelerated filers is 75 days after the end of the fiscal year. Based on the public float value of the company exceeding $700 million, the company qualifies as a large accelerated filer and, therefore, must file the annual report within 60 days of the end of the fiscal year.
A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?
A. 90 days. B. 120 days. C. 75 days. D. 60 days.
Choice “C” is correct. In 2002, the SEC approved a deadline of 75 days for Form 10-K “accelerated filers.” An accelerated filer is an issuer:
with a public float of greater than or equal to $75 million;
subject to the Securities Exchange Act’s reporting requirements for greater than or equal to 12 months;
that previously filed at least one report;
which is not eligible to file quarterly and annual reports on Forms 10-QSB and 10-KSB.
Smaller reporting companies, which are entities with annual revenues of less than $100 million, are excluded from the definition of large accelerated filers or accelerated filers.
Choice “D” is incorrect. This is the correct filing period for “large accelerated filers” (those with floats over $700 million).
Choice “A” is incorrect. This is the time period for non-accelerated filers.
Choice “B” is incorrect. This answer is not applicable.
Which one of the following is not considered contingent shares for purposes of computing EPS?
A. Shares issuable upon achieving a specific net income target. B. Shares issuable upon exercise of a stock option. C. Shares issuable upon the passage of a specific period of time. D. Shares issuable upon the issuance of a patent.
Choice “B” is correct. Shares issuable upon the exercise of a stock option are not considered contingent shares as the option holder is required to pay the strike price to exercise the options.
Choices “A”, “C”, and “D” are incorrect. These shares are contingent shares as they are issuable for no cash consideration after the occurrence of the specified condition.
The definition of a smaller reporting company with respect to market value, as established by the U.S. Securities and Exchange Commission, includes companies with less than exactly what amount in public equity float?
Choice “D” is correct. As defined by the SEC, a large accelerated filer has worldwide market value of outstanding common equity held by nonaffiliates of $700 million or more, and an accelerated filer has worldwide market value of $75 million or more, but less than $700 million. Therefore, a smaller reporting company has worldwide market value of outstanding common equity held by nonaffiliates of less than $75 million. Entities with annual revenues of less than $100 million are also considered smaller reporting companies and are excluded from the definition of large accelerated filers or accelerated filers.
Choice “A” is incorrect. $150 million in public equity float would qualify the company as an accelerated filer.
Choice “B” is incorrect. $125 million in public equity float would qualify the company as an accelerated filer.
Choice “C” is incorrect. $100 million in public equity float would qualify the company as an accelerated filer.
Ute Co. had the following capital structure during Year 1 and Year 2:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding
$250,000
Common stock, $5 par, 200,000 shares issued and outstanding
1,000,000
Ute reported net income of $500,000 for the year ended December 31, Year 2. Ute paid no preferred dividends during Year 1 and paid $16,000 in preferred dividends during Year 2. In its December 31, Year 2, income statement, what amount should Ute report as basic earnings per share?
A. $2.50 B. $2.42 C. $2.48 D. $2.45
Explanation
SkillBuilder Video
Choice “D” is correct. $2.45 earnings per share.
Year 1 Year 2
Net income
?
500,000
Less: cumulative preferred Stock dividend “requirement” ($10 par × 25,000 shares × 4%)
(10,000)
(10,000)
Income available to common shares
490,000
Divide by average common shares O/S
÷ 200,000
Basic earnings per common share
2.45
Note: Because the preferred stock dividends are cumulative, when they are declared or paid is not relevant.
Choice “A” is incorrect. This amount is equal to net income divided by the average common shares outstanding. When calculating basic earnings per share, preferred dividends accumulated during the period on cumulative preferred stock or preferred dividends declared during the period on noncumulative preferred stock must be subtracted from net income to calculate the income available to common shareholders, which is then divided by the average common shares outstanding.
Choice “B” is incorrect. This answer is calculated by incorrectly subtracting the $16,000 preferred dividend paid in Year 2. When preferred stock is cumulative, the dividend accumulated during the period must be subtracted to calculate basic earnings per share.
Choice “C” is incorrect. This amount is calculated by incorrectly subtracting preferred dividends of $4,000. This amount is not supported by the question facts.
