AC305 Chapter 4 and Chapter 5 review
If a parent company holds a noncontrolling interest in a subsidiary company, the parent company must present an allocation of net income or loss that is attributable to the noncontrolling interest. True False
True
Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid. True False
True
One of the primary advantages of the single-step income statement is the absence of any implication that one type of revenue or expense has priority over another. True False
True
The income statement helps investors and creditors predict amounts, timing, and uncertainty of future cash flows. True False
True
Current asset decrease is a _________ and leads to a _______ in cashflow
-Is a source -Leads to an increase
Current liability increase is a _________ and leads to a _________ in cashflow
-Is a source -Leads to an increase
Current asset increase is a _________ and leads to a _______ in cashflow
-Is a use -Leads to a decrease
Current liability decrease is a _________ and leads to a _______ in cashflow
-Is a use -Leads to a decrease
Common examples of unusual gains and losses
-Write down of receivables, inventories or intangibles -Restructuring charges (plant layoffs, plant closings, asset write-offs) -Effects of a strike -Gains or losses from redemption of debt obligations -Gains or losses from casualties (fire, flood, earthquake) -Gains or losses on the sale of investment securities (non-operating section and/or itemized in notes)
Capital Stock
-carried a par or stated value of the shares issued -authorized, issued and outstanding par value amounts must be disclosed -Treasury stock shown as a reduction of stockholders equity
Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? 1)Account form. 2)Single step form. 3)Multiple step form. 4)Report form.
1)Account form.
Expenses include all of the following except: 1.dividends. 2.depreciation. 3.cost of goods sold. 4.taxes.
1.dividends.
Classify: Idle land and facilities withdrawn from production
Other assets
During the year, Deltech, Inc., acquired a long-term productive asset for $5,000 and also borrowed $10,000 from a local bank. These transactions should be reported on Deltech's statement of cash flows as Inflows from investing activities, $10,000; outflows for financing activities, $5,000. Outflows for operating activities, $5,000; inflows from financing activities, $10,000. Outflows for financing activities, $5,000; inflows from investing activities, $10,000. Outflows for investing activities, $5,000; inflows from financing activities, $10,000.
Outflows for investing activities, $5,000; inflows from financing activities, $10,000.
In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment With no addition or subtraction. Plus both the gain and the amount of tax attributable to the gain. Plus the gain. Plus the gain and less the amount of tax attributable to the gain.
Plus the gain.
Borrowing money from creditors and repaying the amounts borrowed are 1)liquidity activities. 2)investing activities. 3)financing activities. 4)operating activities.
financing activities.
3 balance sheet clarifications
Assets, liabilities, equity
Treasury stock
The cost/amount of common shares/stock repurchased
Available for sale debt securities
Securities not classified as held-to-maturity or trading securities (sometimes classified as non current assets but most of time current assets)
Dunbarn Co. had the following activities during the year: Purchase of inventory $120,000 Purchase of equipment 80,000 Purchase of available-for-sale securities 60,000 Purchase of treasury stock 70,000 Issuance of common stock 150,000 What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year? $(120,000) $150,000 $(140,000) $(210,000)
$(140,000) -Cash flows from investing activities come from transactions involving the purchase or sale of non-current assets. Both equipment and available-for-sale securities purchases are cash flows used by investing activities. Purchase of equipment $ 80,000 Purchase of Available for sale securities $ 60,000 Total $140,000 Outflow
Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale 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? $10,000 $30,000 $20,000 $0
$0 -Net income = 70,000 Increase in acct payable (30,000) Inventory increase (40,000) =0
Addison, Inc. reports: Cash provided by operating activities $2,300,000 Cash used by investing activities 640,000 Cash used by financing activities 220,000 Beginning cash balance 340,000 What is Addison's ending cash balance? $3,060,000. $1,440,000. $1,780,000. $3,500,000.
$1,780,000. -Cash provided by operating activities, $2,300,000 less Cash used by investing activities, $640,000 less Cash used by financing activities, $220,000 = Net increase in Cash, $1,440,000. Then add: Net increase in Cash, $1,440,000 + Beginning cash balance, $340,000 = Addison's ending cash balance, $1,780,000.
Three years ago, Jameson 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 Jameson's statement of cash flows as $100,000 $150,000 Zero. $50,000
$150,000
New England Co. had net cash provided by operating activities of $351,000, net cash used by investing activities of $420,000, and cash provided by financing activities of $250,000. New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year? $208,000 $248,000 $40,000 $27,000
$208,000 Net cash provided by operating activities 351000 Net cash used by investing activities (420000) Net cash provided by financing activities 250000 Net cash flow 181000 Add : Beginning cash 27000 Ending cash 208000
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred: Dividends paid $300 Proceeds from the issuance of common stock 250 Borrowings under a line of credit 200 Proceeds from the issuance of convertible bonds 100 Proceeds from the sale of a building 150 What is the company's increase in cash flows provided by financing activities for the year? $50 $550 $150 $250
$250 -Cash flows from financing activities are those associated with how the company is financed such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock 250, convertible bonds 100 and borrowing on the line of credit 200 are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 - 300 = 250.
Carlson Company has the following payments recorded for the current period: Dividends paid to Carlson shareholders $150,000 Interest paid on bank loan 250,000 Purchase of equipment 350,000 The total amount of the above items to be shown in the operating activities section of Carlson's statement of cash flows should be $150,000 $350,000 $750,000 $250,000
$250,000
Abbott Co. is preparing its statement of cash flows for the year. Abbott's cash disbursements during the year included the following: Payment of interest on bonds payable $500,000 Payment of dividends to stockholders 300,000 Payment to acquire 1,000 shares of Marks Co. common stock 100,000 What should Abbott report as total cash outflows for financing activities in its statement of cash flows under U.S. GAAP? $800,000 $900,000 $0 $300,000
$300,000
Atwater Company has recorded the following payments for the current period: Purchase Trillium stock $300,000 Dividends paid to Atwater shareholders 200,000 Repurchase of Atwater Company stock 400,000 The amount to be shown in the investing activities section of Atwater's statement of cash flows should be $500,000 $300,000 $900,000 $700,000
$300,000 -Repurchase of stock and dividends paid are financing activities
Green Co. had the following transactions at December 31: Cash proceeds from sale of investment in bonds of Blue Co. classified as available-for-sale (carrying amount = $60,000) $75,000 Dividends received on Grey Co. stock 10,500 Common stock purchased from Brown Co. 38,000 What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31? $37,000 $85,500 $75,000 $47,500
$37,000 75,000-38,000=37,000
Peterson Enterprises reports the following information: Net income $5,000,000 Depreciation expense 680,000 Loss on the sale of investments 154,000 Increase in accounts receivable 320,000 Peterson should report cash provided by operating activities of $3,846,000. $5,000,000. $5,514,000. $6,154,000.
$5,514,000. -Net Income, $5,000,000 plus Depreciation Expense, $680,000 plus Loss on the sale of investments, $154,000 less Increase in accounts receivable, $320,000 equals $5,514,000, the cash provided by operating activities
As of December 15, Year 4, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for Year 4 of $100,000 have not yet been declared. The board of directors plans to declare cash dividends on its preferred and common stock on January 16, Year 5. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for Year 4 was $50,000, and it will be paid on February 10, Year 5. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 4? $50,000 $200,000 $350,000 $150,000
$50,000 The $50,000 bonus payable to the CEO is an obligation incurred in Year 4 based on profits for that year. Moreover, it will be paid within 12 months, so it should be classified as a current liability. However, dividends do not become a legal obligation of the entity until declared. The entity incurs no liability in Year 4 because it has no obligation to declare dividends on common stock or preferred stock (whether or not cumulative).
Dixon Company has the following items recorded on its financial records: Available-for-sale debt securities $200,000 Prepaid expenses 400,000 Treasury stock 100,000 The total amount of the above items to be shown as assets on Dixon's statement of financial position is $400,000 $700,000 $600,000 $500,000
$600,000 200,000+400,000
Gar, Inc.'s trial balance reflected the following liability account balances at December 31, Year 6: Accounts payable $19,000 Bonds payable, due Year 7 34,000 Deferred tax liability 4,000 Discount on bonds payable 2,000 Dividends payable on 2/15/Year 7 5,000 Income tax payable 9,000 Notes payable, due Year 8 6,000 The deferred tax liability is based on temporary differences that will reverse in Year 8 and Year 9. In Gar's December 31, Year 6, balance sheet, the current liabilities total was $71,000 $69,000 $67,000 $65,000
$65,000
Trent Co. reports the following information: Net cash provided by operating activities $430,000 Average current liabilities 300,000 Average long-term liabilities 200,000 Dividends paid 120,000 Capital expenditures 220,000 Purchase of treasury stock 22,000 Payments of debt 70,000 Trent's free cash flow is $20,000. $90,000. $210,000. $310,000.
$90,000. -Net cash provided by operating activities, $430,000, less capital expenditures, $220,000, less dividends paid, $120,000 equals a free cash flow of $90,000.
Other assets
-Deferred charges such as long-term prepaid expenses -Non-current receivables -Assets in special funds -Deferred income taxes -Property held for sale
Indirect method (Reconciliation method)
-Derive cash flows from operating activities indirectly by starting with net income and convert it to the cash basis by adding/subtracting non-cash items
Dividends paid under GAAP is what activity? Under IFRS is what activity?
-GAAP= Financing -IFRS= Operating or financing
Taxes paid under GAAP is what activity? Under IFRS is what activity?
-GAAP= Operating -IFRS= Operating or financing or investing
Interest paid under GAAP is what activity? Under IFRS is what activity?
-GAAP= operating -IFRS= Operating or financing
Dividends received under GAAP is what activity? Under IFRS is what activity?
-GAAP= operating -IFRS= Operating or investing
Interest received under GAAP is what activity? Under IFRS is what activity?
-GAAP= operating -IFRS= Operating or investing
Which of the following items is included in the financing activities section of the statement of cash flows? 1)Cash effects of transactions obtaining resources from owners and providing them with a return on their investment. 2)Cash effects of transactions that enter into the determination of net income. 3)Cash effects of acquiring and disposing of investments and property, plant, and equipment. 4)Cash effects of transactions involving making and collecting loans.
1)Cash effects of transactions obtaining resources from owners and providing them with a return on their investment.
Payment of dividends would come under which activity on the statement of cash flows? 1)Financing. 2)Operating. 3)Investing. 4)None of these answer choices are correct.
1)Financing.
The statement of cash flows provides answers to all of the following questions except 1)What is the impact of inflation on the cash balance at the end of the year? 2)Where did the cash come from during the period? 3)What was the change in the cash balance during the period? 4)What was the cash used for during the period?
1)What is the impact of inflation on the cash balance at the end of the year?
The cash effects of transactions that enter into the determination of net income are 1)operating activities. 2)investing activities. 3)financing activities. 4)income activities.
1)operating activities.
The 5 Current assets
1. Cash 2. Short-term investments (equity securities, held to maturity debt securities, trading debt securities, available for sale debt securities) 3. Receivables 4. Inventory 5. Prepaid expenses
Usefulness
1. Evaluate past performance of the enterprise 2. Provide a basis for predicting future performance 3. Assess the risk or uncertainty of achieving future cash flows
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 1)Multiple-step method. 2)Indirect method. 3)Single-step method. 4)Direct method.
2)Indirect method.
Current assets under IFRS are listed generally: 1)by importance. 2)in the reverse order of their expected conversion to cash. 3)by longevity. 4)alphabetically.
2)in the reverse order of their expected conversion to cash.
Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as: 1)operating activities. 2)investing activities. 3)financing activities. 4)noncash activities.
2)investing activities.
Which of the following defines equity as it relates to a business entity? 1)Total assets and liabilities. 2)Net revenues. 3)Total revenues less total expenses. 4)Total assets less total liabilities.
4)Total assets less total liabilities.
Both IFRS and GAAP 1)use the term "reserve". 2)require presentation of noncontrolling interests in the equity section of the balance sheet. 3)use "Share capital - ordinary" in the shareholders' equity section. 4)list current assets in reverse order of liquidity.
2)require presentation of noncontrolling interests in the equity section of the balance sheet.
Noncurrent debt should be included in the current section of the statement of financial position if 1)It is to be converted into common stock before maturity. 2)Management plans to refinance it within the year. 3)It matures within the year and will be retired through the use of current assets. 4)A bond retirement fund has been set up for use in its scheduled retirement during the next year.
3)It matures within the year and will be retired through the use of current assets.
Which of the following is not included in the summary of significant accounting policies? 1)Valuation method for investments. 2)Inventory cost flow assumption. 3)Length of operating cycle. 4)Depreciation methods.
3)Length of operating cycle.
A receivable classified as current on the statement of financial position is expected to be collected within 1) 1 year. 2)The current operating cycle. 3)The current operating cycle or 1 year, whichever is longer. 4)The current operating cycle or 1 year, whichever is shorter.
3)The current operating cycle or 1 year, whichever is longer.
Companies that use IFRS: 1)may report all their assets on the statement of financial position at fair value. 2)are not allowed to net assets (assets − liabilities) on their statement of financial positions. 3)may report non-current assets before current assets on the statement of financial position. 4)do not have any guidelines as to what should be reported on the statement of financial position.
3)may report non-current assets before current assets on the statement of financial position.
If additional explanations cannot be conveniently shown as parenthetical explanations, the information should be disclosed by: 1)a contra account. 2)supporting schedules. 3)notes. 4)cross reference.
3)notes.
Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections: 1)financing activities. 2)stock activities. 3)operating activities. 4)investing activities.
3)operating activities.
Which of the following statements shows the amount of cash used to pay dividends or purchase treasury stock? 1)statement of financial position. 2)income statement. 3)statement of stockholders' equity. 4)all of these answer choices are correct.
3)statement of stockholders' equity.
Which of the following statements about IFRS and GAAP accounting and reporting requirements for the balance sheet is not correct? 1)Both IFRS and GAAP require that comparative information be reported. 2)Both IFRS and GAAP distinguish between current and non-current assets and liabilities. 3)One difference between the reporting requirements under IFRS and those of the GAAP balance sheet is that an IFRS balance sheet may list long-term assets first. 4)Both IFRS and GAAP use the term "reserve".
4)Both IFRS and GAAP use the term "reserve".
Which of the following transactions should be classified as investing activities on an entity's statement of cash flows? 1)Payment of cash dividend to the shareholders. 2)Increase in accounts receivable. 3)Issuance of common stock to the shareholders. 4)Sale of property, plant, and equipment.
4)Sale of property, plant, and equipment.
Monroe Enterprises uses IFRS and has property and equipment on an historical cost basis of $1,000,000. At the end of the year, Monroe appraises its property and equipment and determines it has a revaluation increase of $110,000. Which of the following statements is correct? 1)Under IFRS, Monroe cannot record the revaluation increase. 2)Under IFRS, Monroe records the revaluation increase with a decrease to a valuation reserve in equity and an increase to a contra asset account. 3)Under IFRS, Monroe records the revaluation increase by increasing property and equipment and increasing a gain that will be reported on the income statement in the current year. 4)Under IFRS, Monroe records the revaluation increase with increases to property and equipment and a valuation reserve in equity.
4)Under IFRS, Monroe records the revaluation increase with increases to property and equipment and a valuation reserve in equity.
Similarities between IFRS and U.S. GAAP requirements for balance sheet presentation include all of the following except: 1)both require the preparation of financial statements annually. 2)both require disclosure of significant accounting policies. 3)both generally require the use of the current/ non-current classification for both assets and liabilities. 4)both require that changes to the valuation reserve be disclosed in the notes to the financial statements.
4)both require that changes to the valuation reserve be disclosed in the notes to the financial statements.
Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as: 1)operating activities. 2)noncash activities. 3)financing activities. 4)investing activities.
4)investing activities.
Mill Co.'s trial balance included the following account balances at December 31, Year 6: Accounts payable $15,000 Bonds payable, due Year 7 25,000 Discount on bonds payable, due Year 7 3,000 Dividends payable 1/31/Year 7 8,000 Notes payable, due Year 8 20,000 What amounts should be included in the current liability section of Mill's December 31, Year 6, balance sheet? $45,000 $65,000 $71,000 $51,000
45,000 15,000 + 25,000(-3,000) + 8,0000
Which one of the following should be classified as a cash flow from an operating activity on the statement of cash flows? A decrease in accounts payable during the year. The payment of a cash dividend from money arising from current operations. The payment of cash for the purchase of additional equipment needed for current production. An increase in cash resulting from the issuance of previously authorized common stock.
A decrease in accounts payable during the year.
Which collection is reported as an investing activity in statement of cash flows? A note receivable from a related party. Proceeds from a note payable. A tax refund. An overdue account receivable from a customer.
A note receivable from a related party. -Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity - the fact that the loan is in the form of a note implies that it is interest bearing
Income tax (multiple-step)
All operations charges on income from continuing operations
Retained earnings
BB retained earnings + net income - Dividends = EB retained earnings
Dividends paid to shareholders are shown on the statement of cash flows as Operating cash inflows. Cash flows from financing activities. Operating cash outflows. Cash flows from investing activities.
Cash flows from financing activities.
A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the remaining balance. In a statement of cash flows, what amount is included in investing activities for this transaction? Acquisition price of the building. Cash payment. Mortgage amount. Zero.
Cash payment.
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? Long-term liability. Current asset. Current liability. Long-term asset.
Current liability.
Which one of the following would result in a decrease in cash flow measured under the indirect method of preparing a statement of cash flows? Proceeds from the issuance of common stock. Amortization expense. Decrease in inventories. Decrease in income taxes payable.
Decrease in income taxes payable. -The indirect method reconciles accrual-basis net income to net operating cash flow. A decrease in income taxes payable implies an operating cash outflow not reflected in net income. Thus, the reconciling adjustment is a subtraction from net income. The result is a lower measure of net operating cash flow.
In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from Lending activities. Investing activities. Financing activities. Operating activities.
Financing activities.
Payment of dividends would come under which activity on the statement of cash flows?
Financing.
Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? Gain on sale of plant asset. Payment of cash dividend to the shareholders. Sale of property, plant, and equipment. Issuance of common stock to the shareholders.
Gain on sale of plant asset.
Inventory
Generally valued at the lower of cost or net realizable value using FIFO or LIFO, the method must be disclosed in notes
Statement of Cash Flows purpose
Helps users evaluate liquidity, solvency and financial flexibility
Obsolete Inventory
Inventory that can no longer be sold because the product has expired, been redesigned, was over-ordered, or is at the end of its product life. -Must be written off
In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents and debt instruments acquired specifically for resale) should be classified as cash outflows for Financing activities. Investing activities. Lending activities. Operating activities.
Investing activities.
In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from Investing activities. Financing activities. Operating activities. Selling activities.
Investing activities.
What affect does restriction have of total retained earnings?
It does not usually affect total retained earnings, it labels part of retained earnings as being unavailable or evenly distributed: Unappropriated and appropriated
Classify: Held for speculation
Long-term investment
Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli's statement of cash flows as a(n) Investing activity. Noncash financing and investing activity. Financing activity. Operating activity.
Noncash financing and investing activity. -The exchange of debt for a long-lived asset does not involve a cash flow. It is therefore classified as a noncash financing and investing activity.
Mend Co. purchased a 3-month U.S. Treasury bill. Mend's policy is to treat as cash equivalents all highly liquid investments with an original maturity of 3 months or less when purchased. How should this purchase be reported in Mend's statement of cash flows? As an outflow from operating activities. Not reported. As an outflow from financing activities. As an outflow from investing activities.
Not reported. -because it is a cash equivalent
In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for Operating activities. Borrowing activities. Financing activities. Lending activities.
Operating activities. -Because interest payments
In accordance with IFRS, in the statement of cash flows, the payment of cash dividends appears Operating or financing Use Operating or investing Source Investing Source Investing or financing Use
Operating or financing Use
Which of the following pairings of an item and a basis of valuation is incorrect? Receivables - Lower-of-cost-or-market. Prepaid expenses - Cost. Cash - Fair value. Short-term investments - Generally Fair value.
Receivables - Lower-of-cost-or-market.
Equity securities
Recorded at fair value ad changes in fair value are reported period to period
Operating section on multiple-step income statement
Revenues and expenses from principle operations -Sales/revenues -COGS -Selling expense, administrative or general expense
What is capital stock called under IFRS?
Share capital
What is preferred stock called under IFRS?
Share capital - Preference
What is common stock called under IFRS?
Share capital-Ordianry
What is additional paid in capital called under IFRS?
Share premium
Decrease in an asset represents a __________
Source of cash
Non-controlling interest
The equity interest of subsidiaries that are not 100% owned
Accumulated other comprehensive income is reported in which of the following financial statements? The statement of cash flows. The statement of financial position. The income statement. The statement of comprehensive income.
The statement of financial position.
Current assets are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. Current assets most likely include Intangible assets. Trading debt securities. Purchased goodwill. Organizational costs.
Trading debt securities.
Operating activities
Transactions/items affecting net income and operating activities -Sales of goods and services, extending credit to customers, investing in inventory, obtaining credit from suppliers etc
What is Treasury Stock called under IFRS?
Treasury shares
Companies frequently use judgments and estimates in valuing items on the balance sheet. True False
True
The excess of current assets over current liabilities is referred to a net working capital. True False
True
Supplemental balance sheet information that addresses material events with uncertain outcomes is referred to as _________
contingencies
Companies use a ____________ to show a direct relationship between an asset and a liability on the balance sheet?
cross-reference
Current Liabilities
liabilities due within a short time, usually within a year -Payables, unearned revenue, other liabilities such as short-term notes payable
long-term liabilities
liabilities owed for more than a year -Bonds(shown with less discount or plus premium below it), Long term lease, long term notes payable, pension obligations, deferred income taxes, service or product warranties
Treasury Stock
the cost of shares repurchased
The balance sheet format listing liabilities and stockholders' equity directly below assets is called the: 1)report form. 2)account form. 3)financial position form. 4)solvency form.
1)report form.
Investing activities
Changes in investment and long-term debt -Lending money and collecting principal -Acquiring and disposing or productive long-lives assets
Financing activities
Changes in long-term liabilities and stockholders equity -Obtaining and repaying fund borrowed from creditors -Obtaining capital from owners and providing them with a return on or a return of their investment
Reporting
Company's report as discontinued operations in a separate section on the income statement, below income from continuing operations, *net of taxes** a) Gain or loss from discontinued operations: Results of the operations of the discontinued business component or division up to the time it is discontinued -net of taxes b) Gain or loss disposal of discontinued operations: Any gain or loss realized on the disposal of the component -net of taxes
Interest paid to lenders and bondholders
Considered part of operating activities because it affects net income
Classify: Owned by a realty company and held for sale
Current Asset
Trading debt securities
Debt securities bought and held with intent to be sold innear future to generate income for short term price changes -always current asset
Earnings per share
Disclosed on front of income statement because of importance -Net income - Preferred dividends /weighted avg. of common shares outstanding
Multiple-step income statement
Divides income statement into major sections including: 1.Operating 2.Non-operating expenses 3. Income tax 4.Discontinued operations 5.Non-controlling interest 6.Earnings per share
Additional pain-in capital
Excess amount paid in over the par or stated value
Which of the following would be reported as "other comprehensive income"? 1.correction for understatement of net income in a prior period. 2.unrealized holding gain on available-for-sale securities. 3.gain from the sale of available-for-sale securities. 4.loss on impairment of an intangible asset.
2.unrealized holding gain on available-for-sale securities. -An unrealized holding gain on available-for-sale securities is reported as other comprehensive income. The correction of an error is reported, net of tax, as an adjustment to the opening balance of retained earnings. Losses on impairment and gains from sales are reported as part of net income, not as other comprehensive income.
Which of the following transactions would be least likely to have an effect on the net income for 2020? 1)Stock purchased in 2003 and deemed worthless in 2020. 2)Sale in 2020 of an office building contributed by a stockholder in 1971. 3)Correction of an error in the financial statements of a prior period discovered subsequent to their issuance. 4)Collection in 2020 of a dividend from an investment.
3)Correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
Which item would likely be reported on the income statement as "other expenses and losses"? 1) Legal expenses. 2) Sales commissions. 3)Interest paid on bonds. 4)Insurance expenses.
3)Interest paid on bonds.
Major limitations of the balance sheet include all of the following except: 1)most assets and liabilities are reported at historical cost. 2)it necessarily omits many items that are of financial value but cannot be recorded objectively. 3)only amounts known with absolute certainty are reported. 4)judgments and estimates are used to determine many of the items reported.
3)only amounts known with absolute certainty are reported.
Classification as an unusual item on the income statement would be appropriate for all of the following except: 1.substantial writedown of obsolete inventories. 2.loss from a strike. 3.gain or loss on disposal of a component of the business. 4.gain from condemnation settlement.
3.gain or loss on disposal of a component of the business.
The single-step income statement emphasizes 1.discontinued operations more than these are emphasized in the multiple-step income statement. 2.the various components of income from continuing operations. 3.total revenues and total expenses. 4.the gross profit and income from operations.
3.total revenues and total expenses.
Which of the following investments should always be reported as current assets? 1)Held-to-maturity securities. 2)Available-for-sale securities. 3)Long-term investments. 4)Trading securities.
4)Trading securities.
The balance sheet is useful for analyzing all of the following except 1)solvency. 2)liquidity. 3)financial flexibility. 4)profitability.
4)profitability.
Which of the following statements is incorrect? 1.Under IFRS, companies must classify expenses by either nature or function. 2.Both GAAP and IFRS follow the same presentation guidelines for discontinued operations but IFRS defines a discontinued operation more narrowly. 3.Both GAAP and IFRS require companies to indicate the amount of net income attributable to noncontrolling interest. 4.GAAP identifies certain minimum items that should be presented on the income statement. IFRS has no minimum information requirements.
4.GAAP identifies certain minimum items that should be presented on the income statement. IFRS has no minimum information requirements. -IFRS identifies certain minimum items that should be presented on the income statement is an incorrect statement. GAAP has no minimum information requirements.
Montana Company uses IFRS to prepare its financial statements. Montana's income statement lists the following expenses. Which of the following statements is correct regarding Montana's income statement? Supplies expense $4,000 Utilities expense 2,300 Entertainment expense 3,300 1.Montana is using the general expense approach. 2.Montana is using the function-of-expense approach. 3.Montana has violated IFRS reporting standards. 4.Montana is using the nature-of-expense approach.
4.Montana is using the nature-of-expense approach.
A multiple-step income statement 1.highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. 2.separates operating transactions from nonoperating transactions. 3.matches costs and expenses with related revenues. 4.all of these answer choices are correct.
4.all of these answer choices are correct.
A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an): 1.accounting error. 2.change in estimate. 3.part of discontinued operations. 4.change in accounting principle.
4.change in accounting principle.
Unusual and infrequent gains and losses 1.include the elimination of a component of the business. 2.include restructuring charges and are reported net of tax. 3.are reported net of tax. 4.include restructuring charges.
4.include restructuring charges.
In the single-step income statement: 1.an income from operations figure is presented 2.interest revenue and rental revenue are reported as other revenues and gains 3.expenses are classified by functions, such as merchandising, selling and administration 4.just two groupings exist - revenues and expenses
4.just two groupings exist - revenues and expenses
Discontinued operations (multiple-step)
A discontinued operation is reported when: -A company eliminates a component of the business -The elimination of the component has a strategic shift and has major effect on the company's operations and financial results (disposal of major business line, disposal of a major geographical area, disposal of a major equity method investment)
Peripheral/Incidental transactions
All other transactions and events affecting the entity during the accounting period except those that result from expenses or distributions to owners. Examples are losses on the sale of investments and losses from litigation, gain on the sale of a building and a gain on the early retirement of long-term debt.
Condensed Income Statement
An income statement that includes only the totals for the major revenue and expense categories(e.g selling, genera, administrative) with the details itemized in the notes to the financial statements
Intangible assets
Assets that do not have physical substance -Goodwill, copyrights(amortized), patents, franchise, trademarks,
Investment income
Investment income such as interest and dividends received are considered operating activities because they are reported in the income statement
Loss contingencies
May be related to litigation, environmental issues, possible tax assessments, or governmental investigation
Gain contingencies
May be related to tax operating loss carry-forwards or company litigation against another party
Long-term investments
Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations held for speculation; and (3) long-term notes receivable. -Non current asset -Held to maturity securities are reported as amortized cost
Indirect method (reconciliation method) of cash flows
Get cash flows from operating activities indirectly by starting with net income and convert it to the cash basis by adding/subtracting non-cash items -Accrual based net income is reconciled to the cash basis
Single-step income statement
2 major categories -revenues and expenses Additional possible sections -income taxes, discontinued operations, noncontrolling interest, earnings per share
Owners Equity
1. Capital Stock 2. Additional pain-in capital 3. Retained earnings 4. Accumulated other comprehensive income 5.Treasury Stock 6. Noncontrolling interest(minority interest)
Limitations
1. Items that cannot be measured reliably are not reported 2. Numbers are affected by the accounting methods employed 3. Income measurement involves judgment
Advantages of single-step income statement
1. Simplicity 2. Easier to understand 3. Emphasis on total costs and expenses and net income 4. Does not imply priority of one expense over another
Operating section of indirect method
1. Start with net income 2. Adjustments to reconcile net income to net cash provided by operating activities (depreciation expense, amortization expense, gain or loss of an asset or impairment of an asset)
Unusual gains and losses
1. Unusual: High degree of abnormality and of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment in which it operates 2. Infrequency of occurrence: Event/transaction not reasonably expected to recur in the foreseeable future
When a company transfers an amount of restricted retained earnings into a different account, that account is titled 1.Appropriated Retained Earnings. 2.Comprehensive Retained Earnings. 3.Noncontrolling Retained Earnings. 4.Unappropriated Retained Earnings.
1.Appropriated Retained Earnings.
Preparation of Statement of Cash Flows
1.Determine cash provided by operations 2.Determine cash provided (used in) investing and financing 3.Determine the change (increase/decrease) in cash 4. Reconcile the change in cash with the beginning and ending cash balances
Which of the following occur from peripheral or incidental transactions? 1.Gain on the sale of equipment. 2.Cost of goods sold. 3.Sales revenue. 4.Operating expenses.
1.Gain on the sale of equipment.
Advantages of multiple-step income statement
1.Provides more information through segregation of operating and nonoperating 2.Expenses are matched with related revenue
Krista Company prepares a consolidated income statement that includes its subsidiary, Edward Co. Krista's income statement shows $23,500 of net income attributable to the noncontrolling interest which is presented as 1.an allocation of net income. 2.a gain attributable to the noncontrolling interest. 3.a dividend. 4.an expense.
1.an allocation of net income.
An advantage of the nature-of-expense method under IFRS is that it 1.is simple to apply. 2.is viewed as more relevant. 3.identifies the major cost drivers of the company. 4.all of these answer choices are correct.
1.is simple to apply.
The non-controlling interest section of the income statement is: 1.required under IFRS and GAAP. 2.required under IFRS but not under GAAP. 3.not reported under GAAP or IFRS. 4.required under GAAP but not under IFRS.
1.required under IFRS and GAAP.
Which of the following statements is correct regarding income reporting under IFRS? 1.IFRS does not permit revaluation of property, plant, and equipment, and intangible assets. 2.IFRS provides the same options for reporting comprehensive income as GAAP. 3.Companies must classify expenses by nature. 4.IFRS provides a definition for all items presented in the income statement.
2.IFRS provides the same options for reporting comprehensive income as GAAP.
Limitations of the income statement include all of the following except: 1.Income measurement involves judgment. 2.It provides a basis for predicting future performance. 3.Companies omit items from the income statement that they cannot reliably measure. 4.Income numbers are affected by the accounting methods employed.
2.It provides a basis for predicting future performance.
Which of the following is not explicitly discussed as part of income statement reporting under IFRS? 1.Classifying expenses by nature. 2.Single-step and multiple-step formats for the income statement. 3.The identification of certain minimum items that should be presented on the income statement. 4.All of these answer choices are correct.
2.Single-step and multiple-step formats for the income statement.
Earnings per share 1.represents the dollar amount paid to stockholders in the form of dividends. 2.measures the number of dollars earned by each share of common stock. 3.can be reported either on the face of the income statement or in the notes to the financial statement. 4.all of these answer choices are correct.
2.measures the number of dollars earned by each share of common stock.
Gains and losses that bypass net income but affect stockholders' equity are referred to as: 1.unusual gains and losses. 2.other comprehensive income. 3.prior period adjustments. 3.prior period income.
2.other comprehensive income.
The gain or loss from disposal of a component of a business is shown as a (an): 1.prior period adjustment. 2.part of discontinued operations. 3.unusual gain or loss. 4.noncontrolling interest.
2.part of discontinued operations.
The major elements of the income statement are 1.operating section, non-operating section, discontinued operations, and extraordinary items. 2.revenues, expenses, gains, and losses. 3.revenue, cost of goods sold, selling expenses, and general expense. 4.revenue, cost of goods sold, operating expenses, non-operating section.
2.revenues, expenses, gains, and losses.
Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In 2017, however, Sawyer determines that it must revise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2017 financial statements? 1.$500,000 of expense and $500,000 as an unusual loss in the income statement. 2.$500,000 of expense reported as a change in accounting principle and accounted for under the retrospective approach. 3.$500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet. 4.$500,000 of expense in the income statement as an ordinary item, $500,000 of expense reported as an adjustment to the beginning balance of retained earnings (net of tax).
3.$500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet.
Which of the following is not classified as an unusual and infrequent gain or loss? 1.Losses from inventory write-downs. 2.Impairment losses on intangible assets. 3.A discontinued operation. 4.Flood damage losses to property.
3.A discontinued operation.
Which statement is correct regarding IFRS? 1.The function-of-expense approach never requires arbitrary allocations. 2.IFRS requires use of the nature-of-expense approach. 3.An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary. 4.An advantage of the function-of-expense method is that allocation of costs to the varying functions is rarely arbitrary.
3.An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary.
Which limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation? 1.Companies omit from the income statement items they cannot measure reliably. 2.Income measurement involves judgment. 3.Income numbers are affected by the accounting methods employed 4.All of these answer choices are correct.
3.Income numbers are affected by the accounting methods employed
Noncontrolling interest 1.Is not shown on the face of the income statement. 2.Is shown in a separate section of the income statement after continuing operations but before discontinued operations net of tax. 3.Is reported as a separate item below net income or loss. 4.Is shown in a separate section of the income statement after discontinued operations, net of tax.
3.Is reported as a separate item below net income or loss.
Which of the following statements related to noncontrolling interest is incorrect? 1.Consolidated net income is allocated to the parent and to the noncontrolling interest in proportion to their appropriate percentages of ownership. 2.Noncontrolling interest is the portion of equity interest in a subsidiary not attributable to the parent company. 3.Noncontrolling interest in net income is reported as an expense on the income statement. 4.Noncontrolling interest is sometimes called minority interest.
3.Noncontrolling interest in net income is reported as an expense on the income statement.
Discontinued operations occur when a company eliminates the results of operations of a component of the business. The elimination of the component need not represent a strategic shift, having a major effect on the company's operations and financial results. True False
False
Losses as a result of a strike are reported net of tax as a subdivision of noncontrolling interest section. True False
False
When comparing the account form and the report form of the balance sheet, the dollar amount of current assets will be higher under the report form, but total assets will be equal under both forms True False
False - The only difference in balance sheets prepared using the report form or account form is the layout of the balance sheet. The account form lists assets on the left and liabilities and stockholders' equity on the right. The report form list the sections one above the other. Current assets and total assets will be the same in both formats.
Property, Plant, and Equipment
Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business. -Non current asset -Offset by contra asset account for depreciation and depletion (land cant do either, assume it is always there)
Held-to maturity debt securities
Purchased with intent to be held to maturity (sometimes classified as non current assets but most of time current asset)
Classify: Used as a factory site
PP&E
Non-operating section on multiple-step income statement
Revenues and expenses resulting from secondary activities -Other revenues and gains; other expenses and losses
Increase in a liability represents a __________
Source of cash
Sale of property, plant and equipment
The gain or loss from the sale is reported in the income statement but it is a non-cash amount -The only cash generated is from the sale proceeds which are . treated as part of investing activities
Non-controlling interest (multiple step)
The portion of equity (net assets) interest in a subsidiary not attributable to the parent company
Decrease in a liability represents a _____________
Use of cash
Increase in an asset represents a ______
Use of cash
