CFA 25: Understanding Income Statements

n example of an expense classification by function is: tax expense. interest expense. cost of goods sold.

C is correct. Cost of goods sold is a classification by function. The other two expenses represent classifications by nature.

Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information: Total sales price of items sold during 2009 on consignment was €2,000,000. Total commissions retained by Apex during 2009 for these items was €500,000. How much revenue should Apex report on its 2009 income statement? €500,000. €2,000,000. €1,500,000.

A is correct. Apex is not the owner of the goods and should only report its net commission as revenue.

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes? $55,000. $60,000. $65,000.

A is correct. Straight-line depreciation would be ($600,000 - $50,000)/10, or $55,000.

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009? $600,000. $1,000,000. $3,000,000.

A is correct. The installment method apportions the cash receipt between cost recovered and profit using the ratio of profit to sales value (i.e., $3,000,000 ÷ $5,000,000 = 60 percent). Argo will, therefore, recognize $600,000 in profit for 2009 ($1,000,000 cash received × 60 percent).

At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract: Total revenue according to contract $10,000,000 Total expected cost $8,000,000 Cost incurred during 2009 $1,200,000 Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009? None. $300,000. $1,500,000.

A is correct. Under the completed contract method, no revenue would be reported until the project is completed.

Using the same information as in Question 8, how much profit will Argo report for 2009 using the cost recovery method? None. $600,000. $1,000,000.

A is correct. Under the cost recovery method, the company would not recognize any profit until the cash amounts paid by the buyer exceeded Argo's cost of $2,000,000.

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator? 1,003,333. 1,006,667. 1,010,000.

A is correct. With stock options, the treasury stock method must be used. Under that method, the company would receive $100,000 (10,000 × $10) and would repurchase 6,667 shares ($100,000/$15). The shares for the denominator would be: Shares outstanding 1,000,000 Options exercises 10,000 Treasury shares purchased (6,667) Denominator 1,003,333

Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: an extraordinary item. continuing operations. discontinued operations.

B is correct. A fire may be infrequent, but it would still be part of continuing operations. IFRS do not permit classification of an item as extraordinary. Discontinued operations relate to a decision to dispose of an operating division.

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business: Revenue $1,000,000 Returns of goods sold $100,000 Cash collected $800,000 Cost of goods sold $700,000 Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement? $200,000. $900,000. $1,000,000.

B is correct. Net revenue is revenue for goods sold during the period less any returns and allowances, or $1,000,000 minus $100,000 = $900,000.

Which inventory method is least likely to be used under IFRS? First in, first out (FIFO). Last in, first out (LIFO). Weighted average.

B is correct. The last in, first out (LIFO) method is not permitted under IFRS. The other two methods are permitted.

Under IFRS, income includes increases in economic benefits from: increases in liabilities not related to owners' contributions. enhancements of assets not related to owners' contributions. increases in owners' equity related to owners' contributions.

B is correct. Under IFRS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent's cost of goods sold for 2009? ₤120,000. ₤122,000. ₤124,000.

B is correct. Under the first in, first out (FIFO) method, the first 10,000 units sold came from the October purchases at £10, and the next 2,000 units sold came from the November purchases at £11.

Using the same information as in Question 15, how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method? $60,000. $110,000. $120,000.

C is correct. Double-declining balance depreciation would be $600,000 × 20 percent (twice the straight-line rate). The residual value is not subtracted from the initial book value to calculate depreciation. However, the book value (carrying amount) of the asset will not be reduced below the estimated residual value.

Denali Limited, a manufacturing company, had the following income statement information: Revenue $4,000,000 Cost of goods sold $3,000,000 Other operating expenses $500,000 Interest expense $100,000 Tax expense $120,000 Denali's gross profit is equal to $280,000. $500,000. $1,000,000.

C is correct. Gross margin is revenue minus cost of goods sold. Answer A represents net income and B represents operating income.

Expenses on the income statement may be grouped by: nature, but not by function. function, but not by nature. either function or nature.

C is correct. IAS No. 1 states that expenses may be categorized by either nature or function.

Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from: similar barter transactions with unrelated parties. similar non-barter transactions with related parties. similar non-barter transactions with unrelated parties.

C is correct. Revenue for barter transactions should be measured based on the fair value of revenue from similar non-barter transactions with unrelated parties.

If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is: the cost recovery method. the completed contract method. the percentage-of-completion method.

C is correct. The preferred method is the percentage-of-completion method. The completed contract method should be used under US GAAP only when the outcome cannot be measured reliably. A method similar to, but not referred to as, the cost recovery method is used under IFRS when the outcome cannot be measured reliably.

For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo's basic earnings per share for 2009? $0.80. $0.91. $0.95.

C is correct. The weighted average number of shares outstanding for 2009 is 1,050,000. Basic earnings per share would be $1,000,000 divided by 1,050,000, or $0.95.

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? Straight-line depreciation with a short useful life. Declining balance depreciation with a long useful life. Declining balance depreciation with a short useful life.

C is correct. This would result in the highest amount of depreciation in the first year and hence the lowest amount of net income relative to the other choices.

Using the same information as in Question 12, what would Accent's cost of goods sold be under the weighted average cost method? ₤120,000. ₤122,000. ₤124,000.

C is correct. Under the weighted average cost method: October purchases 10,000 units $100,000 November purchases 5,000 units $55,000 Total 15,000 units $155,000 $155,000/15,000 units = $10.3333 × 12,000 units = $124,000.