Financial Statements - Summary

Question 1

measures the performance of the firm for the period. It is dated for the entire period (e.g., for the year ended December 31, 20xX).

Answer 1

The income statement

Question 2

is prepared by applying the all-inclusive approach. That is, almost all revenues, expenses, gains, and losses are shown and are included in the calculation of net income.

Answer 2

The income statement

Question 3

A major exception that isn’t included in the income statement is _______.

Answer 3

prior period adjustments, which are the effects of corrections of errors affecting prior year net income.

Question 4

are shown on the Statement of Retained Earnings as adjustments to the beginning balance of retained earnings in the year the error is discovered.

Answer 4

prior period adjustments

Question 5

There are other items that would appear to be income items but are not reflected in net income. These include ____ and are included in _____ which is now a required disclosure.

Answer 5

unrealized gains and losses on investments in securities available-for-sale, certain pension cost adjustments, and foreign currency translation adjustments.

comprehensive income

Question 6

reports all non-owner changes in equity over a period of time—the same time period as the income statement. This statement is also dated for the year ended December 31, 20xX. includes net income (or loss)

Answer 6

The statement of comprehensive income

Question 7

the items included in comprehensive income that are not part of net income. Those items include:

Answer 7

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

Question 8

discloses the resources of the firm at a point in time and is formally referred to as the Statement of Financial Position. It is dated as of a specific date (e.g., December 31, 20xX)

Answer 8

The balance sheet

Question 9

A business enterprise discloses its economic resources (assets) and the manner of financing the acquisition of those resources (creditors, owners’ contributions, and prior year’s earnings) in

Answer 9

the balance sheet.

Question 10

The presentation format for a balance sheet is typically one of two formats:

Answer 10

the account format or the report format.

Question 11

the assets are shown on the left side of the page, and the liabilities and owners’ equity are shown on the right side. This format emphasizes the balance sheet equation: A = L + OE.

Answer 11

The account format

Question 12

the most popular form, the three categories of accounts are listed from top to bottom, as in a report, with assets always shown first.

Answer 12

The report format

Question 13

are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment).

Answer 13

Assets, as shown in the balance sheet

Question 14

are shown in order of maturity. Current liabilities are presented first and then it’s longer than a year long-term liabilities are presented.

Answer 14

Liabilities, as shown in the balance sheet

Question 15

(also referred to as Shareholders’, Stockholders’, or Shareowners’ Equity) items are shown in order of permanence.

Answer 15

Owners’ equity, as shown in the balance sheet

Question 16

is the period of time required to purchase or produce inventory, sell the inventory, and collect cash from the resulting receivables. For most firms, is significantly less than one year. For firms in some industries, such as construction, it’s longer than a year

Answer 16

The operating cycle of a firm

Question 17

reflects the classification of assets and liabilities. The classification criteria used for each is indicated below and is affected by the firm’s operating cycle.

Answer 17

Balance sheet presentation

Question 18

Assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business, whichever is longer.

Answer 18

Current Assets

Question 19

Liabilities that are due in the upcoming year or in the operating cycle of the business, whichever is longer, and that will be met through the transfer of a current asset or the creation of another current liability. Both criteria must be met in order for a liability to be classified as

Answer 19

Current liabilities

Question 20

Cash, accounts receivable, short-term investments, inventory, and prepaid assets are

Answer 20

Current Assets

Question 21

Accounts payable, wages payable, income tax payable, unearned revenues, and warranty liability are

Answer 21

Current Liabilities

Question 22

only the portion to be extinguished within one year of the balance sheet would be classified as current.

Answer 22

unearned revenues, and warranty liability

Question 23

the current portion of ______ is classified as current; it is the amount of debt previously classified as long-term that is now due within one year of the balance sheet date.

Answer 23

Long term debt

Question 24

These are defined by exclusion. All assets that do not meet the criteria necessary to be classified as current are classified as

Answer 24

long-term assets

Question 25

all liabilities that do not meet the criteria necessary to be classified as current are classified as

Answer 25

long-term liabilities.

Question 26

Long-term investments, plant assets, certain deferred charges, and intangible assets are

Answer 26

non-current assets

Question 27

Notes and bonds payable and mortgages payable are

Answer 27

long-term liabilities

Question 28

CPA Exam questions tend to emphasize sections of the balance sheet. For example, a question might focus on the property, plant, and equipment section of the balance sheet or on the long-term liability section of the balance sheet. As we cover the individual items presented on the balance sheet, these problems will be a primary focus.

Answer 28

The point here is that the meaning of the dollar amount of an item listed in the balance sheet depends on the account being measured.

Question 29

PPE, Intangibles

Answer 29

Measured at Historical Cost and Depreciated/Amortized Historical Cost

Question 30

Receivables

Answer 30

Measured at Net Realizable Value

Question 31

Inventory

Answer 31

Measured at Lower of Cost or MArket

Question 32

Investments in Marketable Securities

Answer 32

Measured at Market Value

Question 33

Liabilities

Answer 33

Measured at Present Value

Question 34

Owners’ Equity

Answer 34

Measured at Historical Value of Cash Inflows and Residual Valuation

Question 35

presents the changes in the owners’ equity over a period of time—the same time period as the income statement. Like the income statement, this statement is dates for the year ended (e.g., December 31, 20xX).

Answer 35

The statement of stockholders’ equity (sometimes referred to as shareholders’ equity)

Question 36

This statement presents the changes in contributed capital, additional paid-in capital, and retained earnings. These changes arise from the purchase and sale of shares of the entities stock, the changes in comprehensive income, and the payment of dividends.

Answer 36

Statement of Stockholders’ Equity

Question 37

is the third of the three major financial statements required to be reported. It describes the major changes in cash by meaningful category. Like the income statement, it is dated for the entire period (e.g., for the year ended December 31, 20xX).

Answer 37

Statement of Cash Flows

Question 38

The purpose of this statement is to explain the change in cash and cash equivalents that has occurred during the past accounting year.

Answer 38

Statement of Cash Flows

Question 39

Cash equivalents are short-term investments that:

Answer 39

1. Are convertible into a known and fixed amount of cash; and
2. Have an original maturity to the purchaser of three months or less.

Question 40

Example: A US treasury obligation purchased when there are three months or less remaining to maturity is a

Answer 40

cash equivalent

Question 41

Investments in stocks are not ____ because they have no maturity value and are not convertible into a specific unchanging amount of cash.

Answer 41

cash equivalents

Question 42

In reviewing the statement of cash flows, it is important to remember the articulation between the balance sheet and the statement of cash flows. If the statement of cash flows employs a pure cash definition of funds, the first asset listed on the balance sheet will be cash. If the statement of cash flows employs a broader definition of funds (cash and cash equivalents), the first asset listed on the balance sheet will be Cash and Cash Equivalents.

Answer 42

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB

Question 43

operating, investing, and financing.

Answer 43

operating, investing, and financing.

Question 44

Those cash flows related to transactions that flow through the income statement.

Answer 44

Operating

Question 45

Cash flows related to the acquisition and disposal of long-term assets and investments (other than cash equivalents and trading securities; these are operating).

Answer 45

Investing

Question 46

Cash flows related to the liabilities and owners’ equity sections of the balance sheet.

Answer 46

Financing

Question 47

cash inflows include receipts from customers and interest. Cash outflows include payments to suppliers, to employers, and to taxing authorities.

Answer 47

Operating

Question 48

cash outflows include purchases of plant assets and investments. Cash inflows include proceeds from the sale of these items.

Answer 48

Investing

Question 49

cash inflows include issuing debt and equity securities. Cash outflows include retirement of debt and equity securities, and dividend payments.

Answer 49

Financing

Question 50

Which of the following defines equity as it relates to a business entity?

Net revenues
Total revenues less total expenses
Total assets and liabilities
Total assets less total liabilities

Answer 50

Total assets less total liabilities

Question 51

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?

Current asset
Current liability
Long-term asset
Long-term liability

Answer 51

Current liability

Question 52

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

Collection of proceeds from a note payable.
Collection of a note receivable from a related party.
Collection of an overdue account receivable from a customer.
Collection of a tax refund from the government.

Answer 52

Collection of a note receivable from a related party.