P1SA1 Financial Statements

Question 1

Long-term debt should be included in the current section of the statement of financial position if

A) it is to be converted into common stock before maturity.
B) It matures within the year and will be retired through the use of current assets
C) management plans to refinance it within the year
D) a bond retirement fund has been set up for use it its scheduled retirement during the next year

Answer 1

B - current liabilities are those liabilities that will be settled within one year or during the operating cycle if it is longer than one year.

Question 2

When a corporation repurchases shares of its own stock from the market, the repurchased shares are called

Answer 2

Treasury shares or treasury stock

• Treasury shares purchased reduce owner’s equity, because those shares are no longer outstanding

Question 3

A statement of financial position provides a basis for all of the following except
a) computing rates of return
b) evaluating capital structure
c) assessing liquidity and financial flexibility
d) determining profitability and assessing past performance for a specific period

Answer 3

D.

A statement of financial position (balance sheet) cannot provide a basis for determining profitability and assessing past performance for a specific period. An income statement is required for that.

Question 4

The financial statement that provides a summary of the firm’s operations for a period of time is the

a) income statement
b) statement of financial position
c) statement of shareholders’ equity
d) statement of retained earnings

Answer 4

A. Income statement

it reports the results of operations of a period of time

Question 5

Dividends paid to company shareholders would be shown on the statement of cash flows as
a) operating cash inflows
b) operating cash outflows
c) cash flows from investing activities
d) cash flows from financing activities

Answer 5

D. cash flows from financing activities

Question 6

The presentation of the major classes of operating cash receipts (such as receipts from customers) less than the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as

a) direct method of calculating net cash provided or used by operating activities
b) cash method of determining income in conformity with generally accepted accounting principles
c) format of the statement of cash flows
d) indirect method of calculating net cash provided or used by operating activities

Answer 6

a) direct method of calculating net cash provided or used by operating activities

It is different from the indirect method, because the indirect method begins with net income and adjusts it to include net changes in operating cash that do not appear on the income statement and to remove noncash items that are included in the income statement

Question 7

The most commonly used method for calculating and reporting a company’s net cash flow from operating activities on its statement of cash flows is the

Answer 7

Indirect method

Question 8

A statement of cash flows prepared using the indirect method would have cash activities listed in which of orders?

Answer 8

Operating, Investing, Financing is the order of presentation whether the direct or the indirect method is being used

Question 9

Following rules apply for adjusting net income:
* Assets
-The amount of an increase in an asset should be ____________ net income
-The amount of a decrease in an asset should be ___________ net income

• Liabilities
  -The amount of an increase in a liability should be ___________ net income
  -The amount of a decrease in a liability should be _________ net income

Answer 9

• Assets
  -The amount of an increase in an asset should be deducted from net income
  -The amount of a decrease in an asset should be added to net income
• Liabilities
  -The amount of an increase in a liability should be added to net income
  -The amount of a decrease in a liability should be deducted from net income

Question 10

The ______ reflects the financial position of an entity at a particular point in time

Answer 10

Balance Sheet

The balance sheet reflects the financial position of an entity at a particular point in time

Question 11

Balance sheet formula

Answer 11

Assets = Liabilities + Owner’s Equity

Question 12

________ reflects what the company earned and how the resources of the company were spent in order to produce those revenues over a period of time

Answer 12

Income statement

Income statement reflects what the company earned and how the resources of the company were spent in order to produce those revenues over a period of time

Question 13

Formula to calculate an income statement

Answer 13

Net income = revenues - expenses

Question 14

Summary of the steps followed in preparing the operating activities section under the indirect method.

Add back to/Subtract from

• ________ all depreciation and amortization expense ____ net income
• ________ all non-operating losses on the income statement ____ net income
• ________ all non-operating gains on the income statement _____ net income
• ________ the changes in balance sheet accounts that are related to operating activities
• If purchases, sales and maturities of trading securities are being classified as operating activities, _____ cash used to purchase trading securities and _____ cash received for trading securities that were sold or that matured

Answer 14

• Add all depreciation and amortization expense back to net income
• Add all non-operating losses on the income statement to net income
• Subtract all non-operating gains on the income statement from net income
• Add and subtract the changes in balance sheet accounts that are related to operating activities
• If purchases, sales and maturities of trading securities are being classified as operating activities, subtract cash used to purchase trading securities and add cash received for trading securities that were sold or that matured

Question 15

For the fiscal year just ended, Doran Electronics had the following results

Net Income $920,000
Depreciation expense 110,000
Increase in AP. 45,000
Increase in AR 73,000
Increase in deferred income tax liability 16,000

Doran’s net cash flow from operating activities is

A) $928,000
B) 986,000
C) 1,018,000
D) 1,074,000

Answer 15

C) 1,018,000

Net cash flow from operating activities is
Net income + depreciation expense + increase in AP - Increase in AR + Increase in deferred income tax liability

Question 16

Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock was sold for $150,000 during the current fiscal year. The result of this transaction should be shown in the Investing Activities Section of James’ statement of cash flow as..

Answer 16

$150,000

The cash received from the sale of the stock was $150,000, and that is the amount that should be shown in the Investing Activities section of James’ Statement of Cash Flows for the transaction.

Question 17

These are examples of..

• Debt converted to equity
• Borrowing money to purchase a fixed asset when the lender pays the loan proceeds directly to the seller of the asset to make sure the loan proceeds are used as intended
• Buying or selling fixed assets for something other than cash (for example, stock)
• Obtaining a building or other item by gift
• Exchanging noncash assets or liabilities for other noncash assets or liabilities

Answer 17

Noncash investing and financing transactions

Question 18

Helicon accrued a gain from the sale of equipment for cash. The gain should be reported in the statement of cash flows using the indirect method in:

a) investment activities as a reduction of the cash inflow from the sale
b) investment activities as a cash outflow
c) operating activities as a deduction from income
d) operating activities as an addition to income

Answer 18

c) operating activities as a deduction from income

Gains and losses need to be eliminated from net income in the indirect method, so the gain needs to be deducted from net income

Question 19

Identify which items in this list are investing and which are financing activities.

1) Proceeds from issuance of preferred stock
2) Dividends paid on preferred stock
3) Bonds payable converted to common stock
4) Payment for purchase of machinery
5) Proceeds from sale of plant building
6) 2% stock dividend on common stock
7) Gain on sale of plant building

Answer 19

1) Proceeds from issuance of preferred stock - financing inflow
2) Dividends paid on preferred stock - financing outflow
3) Bonds payable converted to common stock - noncash investing and financing activity
4) Payment for purchase of machinery - Investing outflow
5) Proceeds from sale of plant building - Investing inflow
6) 2% stock dividend on common stock - financing activity, but this one doesn’t say it was paid
7) Gain on sale of plant building - deducted from net income in the operating activities section

Question 20

Chelny Co. uses the indirect method in its statement of cash flows. The amortization of a patent should be presented as a(n):

Answer 20

Addition to net income

Question 21

Identify which items in this list are included in operating activities and how.

a. Net income
b. Increase in AR
c. Decrease in inventory
d. Increase in AP
e. Depreciation expense
f. Gain on the sale of available for sale securities
g. cash receivable from the issue of common stock
h. cash paid for dividends
i. cash paid for the acquisition of land
j. cash received from the sale of available for sale securities

Answer 21

a. Net income - beginning balance
b. Increase in AR - deducted from net income
c. decrease in inventory - added to net income
d. increase in AP - added to net income
e. depreciation expense - added to net income
f. gain on the sale of available for sale securities - subtracted from net income
g. cash receivable from the issue of common stock - cash inflow from financing activities
h. cash paid for dividends - cash outflow from financing activity
i. cash paid for the acquisition of land - cash outflow from investing activity
j. cash received from the sale of available for sale securities - cash inflow from investing cash flow

Question 22

Bertram company had a balance of $100,000 in retained earnings at the beginning of the year and $125,000 at the end of the year. Net income for this time period was $40,000. Bertram’s statement of financial position indicated that dividends payable had decreased by 5,000 throughout the year, despite the fact that both cash dividends and a stock dividend were declared. The amount of the stock dividend was 8,000. When preparing its statement of cash flows for the year, Bertram should show cash paid for dividends as

Answer 22

$12,000

First, we need to find how much cash dividends were declared for the year, then we can find how much cash dividends were actually paid during the year.

The retained earnings account began the year with a balance of $100,000 and ended the year with a balance of $125,000. Net income for the year increased retained earning by $40,000 to $140,000.

The stock dividend in the amount of $8,000 was debited to retained earnings, reducing it to $132,000.

The only other transactions that would have affected retained earnings would have been the declaration of cash dividends, which reduce retained earnings. Thus, dividends declared must have been $132,000-125,000 (ending balance).

The question tells us that dividends payable decreased by $5,000 during the year. That means that $5,000 in dividends declared during the previous year were paid during the current year and that the full $7,000 of dividends declared during the current year were also paid during the current year. so 7,000+5,000 = 12,000

Question 23

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli’s Statement of Cash Flow as a(n)

a) financing activity
b) investing activity
c) operating activity
d) noncash financing and investing activity

Answer 23

d) noncash financing and investing activity

Company acquired land, an investing activity, without any cash payment; and it became liable for a mortgage, a financing activity, without receiving any cash.

Question 24

The net income for Hudson Co. was (A) for the year ended December 31. Additional information is as follows:

• Depreciation on fixed assets (B)
• Gain from the cash sale of land (C)
• Increase in accounts payable (D)
• Dividends paid on preferred stock (E)

The net cash provided by operating activities in the statement of cash flows for the year ended December 31 should be:

Answer 24

A + B - C + D

Question 25

Comprehensive income is best defined as

a) net income excluding extraordinary gains and losses
b) the change in net assets for the period including contributions by owners and distributions to owners
c) total revenues minus total expenses
d) the change in net assets for the period excluding owner transactions

Answer 25

d) the change in net assets for the period excluding owner transactions

comprehensive income includes the results of all transactions except for those that are carried out with owners, such as investments by owners and the sale of new shares and distribution of dividends.

Question 26

Which cash flow activity is this?

• cash collections or receipts from customers

Answer 26

Operating cash inflow

Question 27

Which cash flow activity is this?

• cash payment to suppliers

Answer 27

Operating cash outflow

Question 28

Which cash flow activity is this?

• proceeds from the sales of fixed assets

Answer 28

Investing cash inflow

Question 29

Which cash flow activity is this?

• purchase of fixed assets

Answer 29

Investing outflow

Question 30

Which cash flow activity is this?

• proceeds from issuance of debt (bonds)

Answer 30

Financing inflow

Question 31

Which cash flow activity is this?

• principal payments from the issuance of debt (bonds)

Answer 31

Financing outflow

Question 32

Which cash flow activity is this?

• Payment for re-acquisition of stock

Answer 32

Financing outflow

Question 33

Which cash flow activity is this?

• proceeds from issuance of stock

Answer 33

Financing inflow

Question 34

Which cash flow activity is this?

• purchase of debt and equity investments classified as available for sale or held to maturity and on trading securities if not held for sale in the short-term

Answer 34

Investing outflow

Question 35

Which cash flow activity is this?

• Proceeds from sale of debt and equity investments classified as available for sale or held to maturity and on trading securities if not held for sale in the short term

Answer 35

Investing inflow

Question 36

Which cash flow activity is this?

• cash payment to employees

Answer 36

Operating outflow

Question 37

Which cash flow activity is this?

• sale of trading securities classified as current assets

Answer 37

Operating inflow

Question 38

Which cash flow activity is this?

• interest received from debt investments

Answer 38

Operating inflow

Question 39

Which cash flow activity is this?

• cash paid for other expenses

Answer 39

Operating outflow

Question 40

Which cash flow activity is this?

• purchase of trading securities classified as current assets

Answer 40

Operating outflow

Question 41

Which cash flow activity is this?

• collection of loans made to others

Answer 41

Investing inflow

Question 42

Which cash flow activity is this?

• granting of loans to others

Answer 42

Investing outflow

Question 43

Which cash flow activity is this?

• treasury stock transactions

Answer 43

Financing inflow

Question 44

Which cash flow activity is this?

• cash flows for income tax associated with share based compensation

Answer 44

Financing outflow

Question 45

Which cash flow activity is this?

• dividends paid to shareholders

Answer 45

Financing outflow

Question 46

Which cash flow activity is this?

• interest paid on debt

Answer 46

Operating outflow

Question 47

Which cash flow activity is this?

• taxes paid

Answer 47

Operating outflow

Question 48

Which cash flow activity is this?

• dividends received from equity investments

Answer 48

Operating inflow

Question 49

The financial statements included in the annual report to the shareholders are least useful to

a. Stockbrokers
b. Bankers preparing to lend money
c. Competing business
d. Managers in charge of operating activities

Answer 49

d. Managers in charge of operating activities

Question 50

Cash received from the issue of common stock

Answer 50

Financing activity

Question 51

Change in estimate

Answer 51

Prospective

Treated as affecting only the period of the change

Question 52

Change in accounting principles like change from LIFO to FIFO

Answer 52

Retroactive effect type of accounting change

Retrospective

Question 53

Under US GAAP, which one of the following statements best describes the effects on the financial statements resulting from a change in the the accounting classification for a security from available for sale to held to maturity?

a. Comprehensive income will be impacted in the future by unrealized gains/losses
b. Net income will not be impacted in the future by unrealized gains/losses
c. The balance sheet will be impacted by unrealized gains/losses
d. No change will occur regarding the accounting treatment for unrealized gains/losses

Answer 53

b. Net income will not be impacted in the future by unrealized gains/losses

Unrealized gains/losses on debt securities classified as available for sale securities are recognized in comprehensive income, whereas they are not recognized in either net income or comprehensive income if the debt security is classified as held to maturity security. Therefore in this case the recognition of unrealized gains/losses in other comprehensive income will discontinue, which means the balance sheet will no longer be impacted as well.

Question 54

How does declaration of a small stock dividend affect retained earnings and additional paid in capital?

Answer 54

It decrease retained earnings and increase stock dividends distributable, part of paid in capital.

Question 55

How does decrease in the value of an available for sale investment affect retained earnings but not additional paid in capital?

Answer 55

This is recorded as an unrealized loss and is shown in other comprehensive income, affecting neither retained earnings nor paid in capital

Question 56

How does the impairment of a long term asset affect retained earnings and additional paid in capital?

Answer 56

Loss on the income statement that would reduce retained earnings but not paid in capital

Question 57

How does purchase of treasury stock using the cost method affect retained earnings and additional paid in capital?

Answer 57

Treasury stock is its own account. Shown as a deduction from paid in capital and retained earnings

Question 58

A fundamental difference between US GAAP and IFRS is that
a. Reversal of inventory write down is prohibited under US GAAP but is permitted under IFRS
b. Distribution costs are included in cost of sales under US GAAP but are excluded from cost of sales under IFRS
c. Inventory is generally valued at the lower of cost or net realizable value under US GAAP but is generally valued at the lower of cost market under IFRS
d. Marketing costs are included in the cost of sales under US GAAP but are excluded from cost of sales under IFRS

Answer 58

a. Reversal of inventory write down is prohibited under US GAAP but is permitted under IFRS

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Question 59

Which one of the following would be excluded from the Other Comprehensive Income reported for the current year?

a) Foreign currency translation adjustments.
b) Foreign currency remeasurement gains or losses.
c) Unrealized holding gains or losses on available-for-sale securities.
d) Additional pension liability in excess of unrecognized prior service cost.

Answer 59

b) Foreign currency remeasurement gains or losses.

The four items reported in accumulated other comprehensive income are:
1) foreign currency translation adjustments,
2) gains or losses and prior service costs or credits related to a defined benefit pension plan that have not been recognized as components of net periodic benefit cost
3) unrealized holding gains or losses on available-for-sale securities
4) the effective portion of the gain or loss on a derivative designated as a cash flow hedge.

Foreign currency remeasurement gains and losses are reported on the income statement

Question 60

An accountant is preparing a company’s cash flow statement and is evaluating how to classify certain transactions. The company paid dividends, invested in the stock of other corporations, sold plant and equipment, and reacquired some of its own stock. Which of these would be in the cash flow from financing activities in the statement of cash flow?

A) Only the dividends
B) Only the investment in the stock of other corporations
C) The dividends and the reacquiring of stock
D) The selling of plant and equipment and the reacquiring of some of its stock

Answer 60

c) The dividends and the reacquiring of stock

Question 61

Which one of the following transactions would affect retained earnings but not additional paid-in-capital?

A) declaration of a small stock dividend
B) decrease in the value of an available for sale investment
C) impairment of a long-term asset
D) purchase of treasury stock using the cost method

Answer 61

C) impairment of a long-term asset

Question 62

when a fixed asset is sold for less than book value, which one of the following will decrease?

a) total current ratio
b) current ratio
c) net profit
d) net working profit

Answer 62

c) Net profit

The sale of a fixed asset for less than book value will decrease net profit as the loss on the sale will be recognized on the Income Statement.

Question 63

The excess of proceeds over cost of treasury stock sold, accounted for using the cost method, is credited to

Answer 63

An appropriately titled paid-in capital account, such as additional paid-in capital from treasury stock transactions.

Question 64

Which of the following is not a challenge for implementation of Integrated Reporting (IR)?

A. IR provides a clear, condensed version of an organization’s annual financial report
B. Burdensome for small- and medium-sized organizations
C. Additional cost for no quantifiable benefits
D. Forward-looking content elements may breed litigation risk

Answer 64

A. IR provides a clear, condensed version of an organization’s annual financial report

This is a benefits of IR and not a challenge.

Challenges:
* IR is burdensome for small and medium sized organizations
* IR requires additional cost for no quantifiable benefits as no headcount reductions, no production improvements will occur as a result of adoption of IR.
* Forward-looking content elements may breed litigation risk as some forecasted future benefits will not be realized.

Question 65

Assets are to be recorded at their acquisition cost. Acquisition cost is the cash price, or its equivalent, plus all costs reasonably necessary to bring it to the location and to make it ready for its intended use. Depletion refers to periodic allocation of acquisition cost of natural resources. A per-unit depletion rate is computed by….

Answer 65

Dividing the acquisition cost of the natural resource, less any estimated residual value, by the estimated number of units of the resources available for extraction

Question 66

Formula to calculate depreciation under straight line method each year

Answer 66

Cost of the asset
————————-
Useful life

Question 67

Reed Co’s current year statement of cash flows reported cash provided from operating activities of $400,000. For the year, depreciation of equipment was $190,000, good will is impaired by $5,000, and dividends paid on common stock were $100,000. In Reed’s current year statement of cash flows, what amount was reported as net income?

Answer 67

$205,000.00

Net cash provided by operating activities is adjusted to remove the effects of depreciation expense and goodwill impairment expense.

• Net Income+Depreciation+Impairment = Cashflow from operating activities
• Net Income = Cashflow from Operating Activities - Depreciation - Impairment

Net Income = 400,000 - 190,000 - 5,000

• Dividends paid on common stock are not reported in operating activities

Question 68

In the current year, Bal Corp. declared a $25,000 cash dividend on May 8 to stockholders of record on May 23 payable on June 3. As a result of this cash dividend, working capital

A. Was not affected
B. Decreased on June 3
C. Decreased on May 23
D. Decreased on May 8

Answer 68

D. Decreased on May 8

On the declaration date, May 8, the liability for dividends payable is recorded by a debit to Retained Earnings and a credit to Cash Dividends Payable. Since the declaration of the cash dividend increases current liabilities without affecting current assets, working capital is decreased on this date.

On May 23, the date of record, which stockholders will receive the cash dividend is determined. Assuming that the common shares outstanding did not change between the date of declaration and the date of record, no journal entry is made on the date of record and, thus, working capital is not affected on this date.

On the payment date, June 3, the cash dividend is paid and is recorded by a debit to Cash Dividends Payable and a credit to Cash. Since current assets and current liabilities decrease by the same amount, working capital is not affected on this date.

Question 69

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Farve Corp. is properly stated in the balance sheet?

A. discounted cash flow of Farve’s operations.
b. Quoted market prices available from a business broker for a similar asset
C. Quoted market prices on a stock exchange for an identical asset
D. Historical performance and return on Driver’s investment in Farve

Answer 69

C. Quoted market prices on a stock exchange for an identical asset

Fair value is a market based (not an entity-based) measurement. Fair value is the amount at which an asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties other than in a forced or liquidation sale.

Generally, quoted market prices, if available, are the are the best evidence of fair value. Quoted market prices on a stock exchange for an identical asset are Level 1 inputs to valuation (highest priority) and would be better than quoted market prices available from a business broker for a similar asset (Level 2 inputs). If quoted market prices are unavailable, the estimated of fair value should be based on the best information available in the circumstances.

Question 70

Which of the following is a level three input to valuation techniques used to measure fair value of an asset?

A. Quoted prices in active markets for identical assets
B. Quoted prices for similar assets in active markets
C. Unobservable inputs for the asset
D. Inputs other than quoted prices that are observable for the asset

Answer 70

C. Unobservable inputs for the asset

Level 1: the preferred inputs to valuation efforts are current quoted prices in active markets for identical assets or liabilities

Level 2: this is a valuation based on market observables. The second level arises when assets and liabilities are similar to, but not the same as, those traded in active market. In this case, the reporting company makes some assumptions about what the fair value of the reported items could be in a market.

Level 3: the FASB describes Level 3 inputs as unobservable. If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measurements could be based on unobservable inputs. Level 3 allows for situations in which there is little if any, market activity for the asset or liability at the measurement date.

Unobservable inputs for an asset is a level 3 input to valuation techniques used to measure the fair value of an asset.

Question 71

During the year, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the year end income statement?

• all interest incurred
• Interest incurred after completion

Interest incurred for machinery for own use:
Interest incurred for machinery held for sale:

Answer 71

Interest incurred for machinery for own use:
- interest incurred after completion

Interest incurred for machinery held for sale:
- all interest incurred

Interest cost during construction is to be capitalized on assets constructed for an enterprise’s own use, or assets intended for sale or lease that are constructed as discrete projects.

However, interest cost shall not be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Once the constructed assets are completed, all interest should be expensed as incurred.

In the question at hand, it is not clear, but it is assumed that the machinery constructed for sale is routinely manufactured in large quantities on a repetitive basis. Therefore, the interest during construction should be capitalized only for the equipment constructed for Bay’s own use. The interest incurred during construction of the inventory items should be expensed. The interest incurred after completion should be expensed on both groups of equipment.

Question 72

Formula for moving average cost

Answer 72

Current inventory value
———————————————————
Number of units in your current inventory

Question 73

When the market value of an investment in securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year?

Trading marketable securities:
Available for sale marketable securities:

Market vale / carrying amount

Answer 73

Market value, market value

Marketable securities classified as either trading or available-for-sale are to be accounted for at market

Question 74

In its current year income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in several balance sheet accounts as follows:

• Inventory: $160,000 decrease
• Accounts payable—-suppliers: 40,000 decrease

What amount should Kilm report as cash paid to suppliers in its current year cash flow statement, prepared under the direct method?

Answer 74

$330,000

Step 1: calculate purchases
COGS = opening inventory + purchases - ending inventory
Purchases = closing inventory + cost of goods sold - opening inventory

Opening inventory: $160,000
Cost of goods sold: $450,000

Purchases = 450,000 - 160,000 = 290,000

Step 2: calculate payments to suppliers
Payments = opening payables + purchases - closing payables

Opening payable: $40,000
Purchases = $290,000
Closing Accounts Payable=$0

Question 75

Which method of recording uncollectible accounts expense is consistent with accrual accounting?

• allowance
• direct write off

Answer 75

Allowance

The allowance method of recording uncollectible account expense matches uncollectible account expense with the revenues generated by the credit sales in the same period.

Since the write off of an account receivable often occurs in a period after the revenues were generated, the direct write-off method of recording uncollectible account expense does not necessarily match uncollectible account expense with the revenues generated by credit sales in the same period.

Question 76

Components of other comprehensive income

Answer 76

• pension related adjustments
• unrealized gain or loss on available for sale securities
• foreign currency translation gain or loss
• effective and ineffective portion of cashflow hedges

Question 77

What is financial capital?

Answer 77

Financial capital refers to pooling of funds and financial resources available to an enterprise

Question 78

Direct method presentation for cashflow from operating activities

Answer 78

Add: cash collection from customers
Less: cash payment to suppliers
Less: cash payment for operating expense
Add: cash receipts from operating income
Less: interest paid
Less: taxes paid
——————————————————————————
Cash inflow (outflow) from operating activities

Question 79

Primary purpose of statement of cashflows

Answer 79

Primary purpose of statement of cashflows is to provide relevant information about a company’s cash receipts and cash payments that occurred over a period of time

Question 80

A company has the following items on its year-end trial balance

Net sales: $500,000
Common stock: 100,000
Insurance Expense: 75,000
Wages: 50,000
Cost of Goods Sold: 100,000
Cash: 40,000
AP: 25,000
Interest payable: 20,000

What is the company’s gross profit?

Answer 80

$400,000

Gross profit = net sales - COGS = $400,000

Question 81

Samm Corp. purchased a plot of land for $100,000. The cost to raze a building on the property amounted to $50,000 and Samm received $10,000 from the sale of scrap materials. Samm built a new plant on the site at a total cost of $800,000 including excavation costs of $30,000. What amount should Samm capitalize in its land account?

Answer 81

$140,000

Land must be recorded at its acquisition cost. Generally, acquisition cost is defined as the cash price, or its equivalent, plus all other costs reasonably necessary to make it ready for its intended use. Such additional cost include demolition of an old building, less any scrap proceeds received.

Purchase price of land: $100,000
+ Add: cost to raze old building: $50,000
- Less: proceeds from sale of scrap materials: $10,000

Capitalized value of land: $140,000

Question 82

During periods of rising prices, when the FIFO inventory method is used, a perpetual inventory system results in an ending inventory cost that is

A. The same as in a periodic inventory system
B. Higher than in a periodic inventory system
C. Lower than in a periodic inventory system
D. Higher or lower than in a periodic inventory system, depending on whether physical quantities have increase or decreased

Answer 82

A. The same as in a periodic inventory system

In all cases where FIFO is used, the inventory and cost of goods sold would be the same at the end of a period whether a perpetual or a periodic system is used. This is true because the same cost will always be first in and, therefore, first out, whether cost of goods sold is computed as cost of goods sold throughout the accounting period (the perpetual system) or as a residual at the end of the accounting period (the periodic system). This is true regardless of whether inventory prices rose or fell during the period.

Question 83

When a full set of general-purpose financial statement is presented, comprehensive income and its components should

a. appear as a part of discontinued operations
b. be reported net of related income tax effect, in total and individually
c. appear in a supplemental schedule in the notes to the financial statements
d. be displayed in a financial statement that has the same prominence as other financial statements

Answer 83

d. be displayed in a financial statement that has the same prominence as other financial statements

Comprehensive income and all items that are required to be recognized as components of comprehensive income should be reported in a financial statement that is displayed with the same prominence as other financial statements.

Discontinued operations are a component of the income statement, reported after income from continuing operations and before net income. If comprehensive income is reported in the same statement as net income, other comprehensive income and comprehensive income are reported after net income. An entity may display components of OCI in either net-of-tax basis or summary net-of-tax basis.

Comprehensive income must be shown on the face of one of the statements, not just in the notes to the financial statements.

Question 84

Selected financial information for Kristina Company for the year just ended is shown below.

Net Income: $2,000,000
Increase in AR: 300,000
Decrease in Inventory: 100,000
Increase in AP: 200,000
Depreciation Expense: 400,000
Gain on the sale of available-for-sale securities: 700,000
Cash receivable from the issue of common stock: 800,000
Cash paid for dividends: 80,000
Cash paid for the acquisition of land: 1,500,000
Cash received from the sale of available-for-sale securities: 2,800,000

Kristina’s cash flow from investing activities for the year is?

Answer 84

$1,300,000

Kristina’s cash flow from investing activities:
Cash paid for the acquisition of land: -$1,500,000
Cash received from the sale of available for sale securities: $2,800,000
= cash flow from investing activities: $1,300,000

Question 85

Clear Co.’s trial balance has the following selected accounts:

• Cash (includes $10,000 in bond-sinking fund for long term bond payable): $50,000
• Accounts receivable: $20,000
• Allowance for doubtful accounts: $5,000
• Deposits received from customers: $3,000
• Merchandise inventory: $7,000
• Unearned rent: $1,000
• Investment in trading debt securities: $2,000

what amount should Clear report as total current assets in its balance sheet?

Answer 85

$64,000

Current assets are economic benefits owned by a firm that are reasonably expected to be converted into cash or consumed during the entity’s operating cycle or one year, whichever is longer.

Current assets include cash available for current operations; temporary investments in marketable securities; trade accounts and notes receivable, receivables from officers, employees, affiliates, and others if collectible in the ordinary course of business within a year; inventories; most prepaid expenses; and property held for resale. The deposits received from customers and unearned rent are liabilities.

Current assets=
unrestricted cash $40,000
+add) accounts receivable $20,000
-less) allowance for doubtful accounts $5,000
+add) inventory $7,000
+add) investment in trading debt securities: $2,000
————————————————————–
$64,000

Question 86

On January 1, Brecon Co. installed cabinets to display products in customers’ stores. Brecon expects to use these cabinets for five years. Brecon’s year-end-multi-step income statement should include:

a. One-fifth of the cabinet costs in cost of goods sold
b. One-fifth of the cabinet costs in selling, general, and administrative expenses
c. All of the cabinet costs in cost of goods sold
d. All of the cabinet costs in selling, general, and administrative expenses.

Answer 86

b. One-fifth of the cabinet costs in selling, general, and administrative expenses

Brecon Co. will use the installed cabinets to display its merchandise in customers’ store, which are fixed assets that would be used to generate day to day sales/revenue. The cost of installing the cabinets will be capitalized and depreciated over a period of 5 years. Depreciation is calculated on a straight line basis for 5 years which means 1/5 of the cost per year will be charged to the income statement. The cabinets are used to display product for sale, depreciation will reported under selling expense.

Question 87

Garland Johnson, President of Guilford International, thinks that cash flows per share is an important number and asked if it is possible to present this number in the financial statements?

a. permissible under GAAP
b. permissible under IFRS
c. permissible under both IFRS and US GAAP
d. Not permissible

Answer 87

b. permissible under IFRS

The presentation of cash flow per share is allowed under IFRS but not under US GAAP.

Question 88

Beck Co.’s inventory of trees is as follows:
Beginning Inventory: 10 trees at $50
March 4: purchased 6 trees at $55
March 12: sold 8 trees at $100
March 20: purchased 9 trees at $60
March 27: sold 7 trees at $105
March 30: purchased 4 trees at $65

What was Beck’s cost of goods sold using the last in, first out (LIFO) perpetual method?

Answer 88

$850

• 7 trees sold on 3/27 are assumed to come entirely from the 3/20’s purchase at $60/ea
• 6 of the 8 trees sold on 3/12 are assumed to come from 3/4 purchase at $55/ea and balance, 2 trees will come from beginning inventory at $50/ea
  *COGS using LIFO is [(7 x $60) + (6 x $55) + (2 x $50)] = $850