Trouble Questions
An income statement could be used by an external investor for all of the following purposes except to
The budget is an internal document that is only available to those within the company. Therefore, an external investor has no access to the information in the budget and thus no way to compare budgeted amounts to income statement amounts.
A corporation's common stock is currently selling for $108 per share. The corporation is planning a new stock issue in the near future and would like to stimulate interest in the company. The Board, however, does not want to distribute capital at this time. Therefore, the corporation is considering whether to offer a 2-for-1 common stock split or a 100% stock dividend on its common stock. The best reason for opting for the stock split is that
A 2-for-1 stock split doubles the number of shares outstanding; retained earnings is not affected. Under a stock dividend, however, a portion of retained earnings is reclassified as common stock. Since dividends are restricted by the amount of available retained earnings, a stock dividend, but not a stock split, will impair the firm's ability to pay dividends in the future.
How would a stock split affect the par value of the stock and the company's shareholders' equity?
A stock split reduces the par value of the stock and increases the number of shares outstanding, making it more attractive to investors. As with a stock dividend, each shareholder's proportionate interest in the company and total book value remain unchanged.
A corporation has 10,000,000 shares of $10 par-value stock authorized, of which 2,000,000 shares are issued and outstanding. The Board of Directors declared a 2-for-1 stock split on November 30 to be issued on December 30. The stock was selling for $30 per share on the date of declaration. In addition, the Board has amended the articles of incorporation to allow for a proportional increase in the number of authorized shares. The par-value information appearing in the shareholder's equity section of the statement of financial position at December 31 will be
As a result of the 2-for-1 stock split, the par value of Grand's shares is halved to $5
A company has 1,000,000 shares of common stock authorized, of which 100,000 shares are held as treasury shares; the remainder are held by the company shareholders. On November 1, the Board of Directors declared a cash dividend of $.10 per share to be paid on January 2. At the same time, the Board declared a 5% stock dividend to be issued on December 31. On the date of the declaration, the stock was selling for $10 a share, and no fractional shares were to be issued. The total amount of these declarations to be shown as current liabilities on the statement of financial position as of December 31 is
Cash dividends are only paid on outstanding shares. Thus, the dividend payable at December 31 is $90,000 (900,000 × $.10). Stock dividends distributable are reported in equity, not current liabilities.
A company is preparing its financial statements in accordance with U.S. GAAP. Listed below are select financial data for the company. Net income $950,000 Depreciation 40,000 Investment by owners 60,000 Unrealized gain on available-for-sale securities 90,000 Foreign currency translation loss 20,000 What is the amount that would be reported as comprehensive income?
Comprehensive income includes all changes in the equity (net assets) of a business during a period, except those from investments by and distributions to owners. In this case, comprehensive income is $1,020,000 ($950,000 net income + $90,000 unrealized gain on available-for-sale securities - $20,000 foreign currency translation loss). The depreciation amount given in the question should be ignored because depreciation is already included in net income.
A retail entity maintains a markup of 25% based on cost. The entity has the following information for the current year: Purchases of merchandise $690,000 Freight-in on purchases 25,000 Sales 900,000 Ending inventory 80,000 Beginning inventory was
Cost of goods sold for a period equals beginning inventory, plus purchases, plus freight-in, minus ending inventory. Given that sales reflect 125% of cost, cost of goods sold must equal $720,000 ($900,000 sales ÷ 1.25). Consequently, the beginning inventory must have been $85,000 ($720,000 COGS + $80,000 EI - $690,000 purchases - $25,000 freight-in).
Unless the shares are specifically restricted, a holder of common stock with a preemptive right may share proportionately in all of the following except
Cumulative dividends. Common stock does not have the right to accumulate unpaid dividends. This right is often attached to preferred stock.
The trial balance of Mint Corp. at December 31, Year 6, is presented below and has been adjusted except for income tax expense. Other financial data for the year ended December 31, Year 6, are as follows:During Year 6, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint's tax rate is 30%.Dr.Cr.Cash$ 600,000Accounts receivable, net3,500,000Contract asset1,600,000Contract liability$ 700,000Prepaid taxes450,000Fixed assets, net1,480,000Note payable -- noncurrent1,620,000Common stock750,000Additional paid-in capital2,000,000Retained earnings -- unappropriated900,000Retained earnings -- restricted for note payable160,000Earnings from long-term contracts6,680,000Costs and expenses5,180,000$12,810,000$12,810,000 Question: 9In Mint's December 31, Year 6, balance sheet, what amount should be reported as total retained earnings?
Earnings before taxes equals $1,500,000 ($6,680,000 revenues - $5,180,000 expenses). Income tax expense is thus $450,000 ($1,500,000 × 30%) and net income $1,050,000 ($1,500,000 - $450,000). Year-end retained earnings is therefore $2,110,000 ($900,000 unappropriated RE + $160,000 restricted RE + $1,050,000 net income).
In Year 1, Company A recorded the following transactions related to the equity section of its balance sheet: 1/4/Year 1 Issued 100,000 shares of $3 par value common stock for $500,000 3/1/Year 1 Repurchased 50,000 shares of common stock for $4 per share 8/8/Year 1 Reissued 50,000 shares of common stock at $6 per share 12/1/Year 1 Declared, but did not pay, dividends of $1 per common share 12/31/Year 1 Recorded net income of $75,000 for Year 1 Assume that at the beginning of Year 1, A's equity consisted only of $100,000 of retained earnings. Additionally, assume that A uses the cost method of accounting for treasury stock. What is A's Year 1 ending equity balance?
Finally, the net income is closed out to retained earnings, thus total equity increases by $75,000. Accordingly, the ending balance of equity is $675,000 ($100,000 + $500,000 - $200,000 + $300,000 - $100,000 + $75,000).
Which one of the following transactions would affect retained earnings but not additional paid-in capital?
Impairment results in a loss, which reduces retained earnings. It has no effect on additional paid-in capital.
Which one of the following transactions does not affect the balance of retained earnings?
In a stock split, no journal entry is recorded and no retained earnings are reclassified.
An entity has a 50% gross margin, general and administrative expenses of $50, interest expense of $20, and net income of $10 for the year just ended. If the corporate tax rate is 50%, the level of sales revenue for the year just ended was
Net income equals sales minus cost of sales, G&A expenses, interest, and tax. Given a 50% tax rate, income before tax must have been $20 [$10 net income ÷ (1.0 - 0.5 tax rate)]. Accordingly, income before interest and tax must have been $40 ($20 income before tax + $20 interest), and the gross margin (sales - cost of sales) must have been $90 ($40 income before interest and tax + $50 G&A expenses). If the gross margin is 50% of sales, sales equals $180 ($90 gross margin ÷ 0.5).
The following information pertains to a corporation's income statement for the 12 months just ended. The company has an effective income tax rate of 40%. Discontinued operations $(70,000) Income from continuing operations (net of tax) 72,000 Cumulative effect of change in accounting principle 60,000 Net income for the year is
Net income for the year is calculated as follows: Income Times: Statement Tax As Item Effect Reported Income from continuing operations (net of tax) $ 72,000 Discontinued operations $(70,000) (1.0 - .40) (42,000) Net income $30,000
A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?
Revenues $10,000,000 COGS (7,500,000)* Gross profit 2,500,000 ($10,000,000 × 25%) Operating expenses (1,000,000)** Operating income $ 1,500,000 ($10,000,000 × 15%) * COGS = Revenues - Gross profit ** Operating expenses = Gross profit - Operating income If operating expenses are reduced by 20%: Gross profit $ 2,500,000 ($10,000,000 × 25%) Operating expenses (800,000) ($1,000,000 × 80%) Operating income 1,700,000 Accordingly, a 20% reduction in operating expenses results in a $200,000 ($1,700,000 - $1,500,00) increase in operating income.
On December 15, a company distributed a previously declared cash dividend of $120,000 and declared a 5% stock dividend with a market value of $100,000. If the company uses U.S. GAAP, these two transactions would decrease the company's total shareholders' equity by
The distribution of previously declared cash dividends will not have any effect on a company's shareholders' equity. At the time that a dividend is declared, the amount of the dividend becomes a liability. It was at the time of declaration that the dividend reduced equity. The payment of that liability at a later date does not affect equity. The distribution of a stock dividend never affects the amount of equity since it merely represents a repackaging of the company's equity accounts.
The profit and loss statement of an entity includes the following information for the current fiscal year: Sales $160,000 Gross profit 48,000 Year-end finished goods inventory 58,300 Opening finished goods inventory 60,190 The cost of goods manufactured by the entity for the current fiscal year is
The entity's cost of goods manufactured can be calculated as follows: Sales $160,000 Less: Gross profit (48,000) Cost of goods sold $112,000 Add: Ending finished goods 58,300 Goods available for sale $170,300 Less: Beginning finished goods (60,190) Cost of goods manufactured $110,110
The following information was taken from last year's accounting records of a manufacturing company. Inventory January 1 December 31 Raw materials $38,000 $ 45,000 Work-in-process 21,000 10,000 Finished goods 78,000 107,000 Other information Direct labor $236,000 Shipping costs on outgoing orders 6,500 Factory rent 59,000 Factory depreciation 18,700 Advertising expense 24,900 Net purchases of raw materials 115,000 Corporate administrative salaries 178,000 Material handling costs 35,800 On the basis of this information, the company's cost of goods manufactured and cost of goods sold are
This solution requires a series of computations. Beginning raw materials $ 38,000 Add: Net purchases raw materials $115,000 Materials available $153,000 Less: Ending materials (45,000) Materials used in production $108,000 Direct labor 236,000 Manufacturing overhead Factory rent $59,000 Factory depreciation 18,700 Material handling costs 35,800 Total Manufacturing overhead 113,500 Total manufacturing costs $457,500 Add: Beginning work-in-process 21,000 Less: Ending work-in-process (10,000) Costs of Goods Manufactured $468,500 Add: Beginning finished goods 78,000 Less: Ending finished goods (107,000) Cost of Goods Sold $439,500
An adjusted trial balance at December 31, Year 6, includes the following account balances: Common stock, $3 par $600,000 Additional paid-in capital 800,000 Treasury stock, at cost 50,000 Net unrealized holding loss on available-for-sale securities 20,000 Retained earnings: appropriated for uninsured earthquake losses 150,000 Retained earnings: unappropriated 200,000 What amount should be reported as total equity in the December 31, Year 6, balance sheet?
Total credits to equity equal $1,750,000 ($600,000 common stock at par + $800,000 additional paid-in capital + $350,000 retained earnings). The treasury stock recorded at cost is subtracted from (debited to) total equity, and the unrealized holding loss on available-for-sale securities is debited to other comprehensive income, a component of equity. Because total debits equal $70,000 ($50,000 cost of treasury stock + $20,000 unrealized loss on available-for-sale securities), total equity equals $1,680,000 ($1,750,000 - $70,000).
During the month of October, a company purchased 1,000 units of inventory for $500 per unit and sold 900 of these units, which represented 10% of the company's annual sales budget in units. The company also incurred administrative costs of $300,000 during October. By applying the matching principle, the total amount of the company's expenses on its October income statement is
Under the matching principle, the recognition of expense and recognition of related revenue occur in the same accounting period. Cost of goods sold, a product cost, is recognized in the period during which the product is sold. Administrative costs, which are period costs, are recognized in the period in which they were incurred. Thus, the total expense in the month of October must include the cost of goods sold of $450,000 (900 units sold × $500 per unit) and the administrative costs of $300,000, which results in $750,000.
On December 1, a corporation's board of directors declared a property dividend, payable in stock held in a company. The dividend was payable on January 5. The investment in the company had an original cost of $100,000 when acquired 2 years ago. The market value of this investment was $150,000 on December 1, $175,000 on December 31, and $160,000 on January 5. The amount to be shown on the corporation's statement of financial position at December 31 as property dividends payable would be
When a property dividend is declared, the property is remeasured at its fair value as of the declaration date. This amount is then reclassified from retained earnings to property dividends payable
