Financial Statements

Question 1

Which four items are included in comprehensive income?

Answer 1

• Unrealized gains and losses on available-for-sale securities
• Adjustments in the calculation of the pension liability
• Foreign currency translation adjustments
• Deferrals of certain gains or losses on hedge accounting

Question 2

Where should results from discontinued operations appear on the income statement?

Answer 2

Below income from continuing operations. Revenues, gains, expenses, and losses from discontinued operations should not be included in income from continuing operations.

Question 3

If a company refinances a current liability with a non-current liability after the balance sheet date but before financial statements are issued, how should the company classify the liability when it issues the balance sheet?

Answer 3

Non-current, with a footnote disclosure.

Question 4

How do you calculate the current ratio?

Answer 4

Current assets / current liabilities

Question 5

How do you calculate the quick ratio (aka acid-test ratio)?

Answer 5

(Cash + Short-term investments + AR) / CL

Question 6

A direct method statement of cash flows must be supplemented by a disclosure of ___________.

Answer 6

a reconciliation of net income to net cash flow from operations.

Question 7

What risks and uncertainties must a company disclose in notes to its financial statements?

Answer 7

(1) products and services, (2) geographical locations and (3) principal markets

Question 8

What determines whether or not the effects of a subsequent event are recognized in the financial statements or disclosed in a footnote?

Answer 8

If the conditions that gave rise to the subsequent event existed as of the balance sheet date, the effects of the subsequent event are recognized in the financial statements. If not, they are disclosed in a footnote.

Question 9

How is a contingent liability different from a subsequent event?

Answer 9

For recognized contingencies (those that are probable and estimable as of the balance sheet date), the event confirming the loss, reduction in asset, or recognition of liability need not take place before the issuance of the financial statements. It just needs to be probable and estimable as of the balance sheet date. (E.g., the warranty expense associated with sales recognized as of the balance sheet.)

Question 10

If a company decides to discontinue certain operations in 20X5 and estimates it will earn a $50 million gain on disposal of the operations in 20X6, how much estimated disposal gain should the company recognize in 20X5?

Answer 10

$0. Estimated disposal gains are not recognized, only estimated losses.