Roger CPA Review Chapter 4

A company reports the following information as of December 31st: Sales revenue $ 350,000 Cost of goods sold $ 150,000 Operating expenses $ 110,000 Foreign currency translation adjustment $ 25,000 Ignoring income taxes, what amount should the company report as comprehensive income as of December 31st? $90,000 $125,000 $150,000 $115,000

$115,000 Explanation Comprehensive income includes net income plus other comprehensive income (OCI); or all changes in equity during a period except those resulting from investments by owners and distributions to owners. The company's net income includes sales revenues of $350,000 minus costs of goods sold of $150,000 minus operating expenses of $110,000, for a net amount of $90,000. Other comprehensive income (OCI) includes the foreign currency translation adjustment of $25,000. Therefore, comprehensive income equals $115,000 ($90,000 + $25,000).

Capsule Corp. reported the following in year 6: Beginning retained earnings $ 260,000 Ending retained earnings $ 290,000 Cash dividends declared $ 90,000 Beginning accumulated other comprehensive income $ 20,000 Ending accumulated other comprehensive income $ 15,000 What was Capstone's comprehensive income for year 6? $125,000 $55,000 $115,000 $65,000

$115,000 Explanation Comprehensive income is equal to net income plus other comprehensive income (OCI). Ending retained earnings of $290,000 consists of beginning retained earnings of $260,000 plus net income and minus dividends of $90,000. Beginning retained earnings reduced by dividends gives a balance of $170,000, requiring net income of $120,000 to give an ending balance of $290,000. Ending accumulated other comprehensive (AOCI) of $115,000 equals beginning AOCI of $120,000 plus OCI. As a result, OCI is equal to the reduction in AOCI of $5,000 and comprehensive income is $120,000 − $5,000 or $115,000.

On February 1, Pinn Corp., paid $40,000 in advertising expenses for ads that will run in a periodical for the entire calendar year. On July 3, Pinn paid $430,000 for anticipated major repairs to their machinery used for business. The repairs will benefit operations for the remainder of the calendar year. Assuming Pinn is a calendar year corporation, what amount of these expenses should Pinn include in its third quarter interim financial statements? $470,000 $255,000 $225,000 $440,000

$225,000 Explanation Expenses incurred in an interim period that are expected to benefit that and one or more other interim periods in the same fiscal year are allocated among the interim periods benefited. The $40,000 in advertising expenses benefits the entire year and will be recognized at $10,000 per quarter. The anticipated major repairs will benefit the last two quarters of Pinn's year and will be allocated at the rate of $215,000 per quarter. The total affecting the third quarter would therefore be $10,000 + $215,000, or $225,000.

Green Co.'s year 8 statement of cash flows reported cash provided from operating activities of $375,000. For year 8, depreciation of equipment was $145,000, cash inflows from the issuance of common stock was $75,000, and dividends paid on common stock was $25,000. In Greens' year 8 statement of cash flows, what amount was reported as net income? $230,000 $330,000 $245,000 $275,000

$230,000 Explanation Using the indirect method in the preparation of the statement of cash flows, net income is adjusted by the non-cash items of income and expense, non-operating items, and for the changes in the balances of accrual related balance sheet accounts. To reconcile cash provided from operating activities ($375,000) back to net income, it is necessary to subtract the non-cash expense items (depreciation) to arrive at the net income ($375,000 − $145,000) $230,000. There is not an adjustment for the dividends paid on common stock because dividends are not expenses and reported under financing activities on the statement of cash flows. The issuance of common stock is also a financing activity.

Green Co. reported the following in its year-end statement of cash flows: net cash provided by operating activities of $209,000; net cash used for investing activities of $354,000; and net cash provided by financing activities of $190,000. Included in those cash flows is the sale of equipment during the year that resulted in a gain of $7,200 and proceeds of $55,000. Green's cash balance at the beginning of the year was $36,500. What was Green's cash balance at the end of the year? $45,000 $55,000 $81,500 $88,700

$81,500 Change in cash during the year = 209000-354000+190000=45000 Green's cash balance at the end of the year=36500+45000=81500 Explanation Since cash provided by operating activities is $209,000, cash used by investing activities is $354,000, and cash provided by financing activities is $190,000, the net increase in cash for the period is $209,000 − $354,000 + $190,000 or $45,000. This is added to the beginning cash balance of $36,500 to give an ending cash balance of $81,500. The proceeds from the sale of equipment would already be included in cash flows from investing activities and the gain on sale would have been eliminated in measuring cash flows from operating activities.

A company reports the following information as of December 31st: Sales revenue $ 350,000 Cost of goods sold $ 150,000 Operating expenses $ 110,000 Foreign currency translation adjustment $ 25,000 Ignoring income taxes, what amount should the company report as net income as of December 31st? $90,000 $125,000 $150,000 $115,000

$90,000 Explanation The company's net income includes sales revenues of $350,000 minus costs of goods sold of $150,000 minus operating expenses of $110,000. Foreign currency translation adjustments are reported in other comprehensive income, but not as part of net income.

Capstone Corp. reported $150,000 of comprehensive income for year 8. It also reported the following: Beginning retained earnings $ 300,000 Income tax expense $ 60,000 Ending retained earnings $ 320,000 Cash dividends declared $ 80,000 Other comprehensive income $ 50,000 What was Capstone's net income for year 8? $100,000 $40,000 $140,000 $120,000

100,000 Ending retained earnings is equal to beginning retained earnings plus net income less dividends. Other comprehensive income is reported in accumulated other comprehensive income, a separate component of stockholders' equity and income taxes are included in the calculation of net income. With beginning retained earnings of $300,000 and dividends of $80,000, ending retained earnings would be $220,000 if there were no income. Since ending retained earnings is actually $320,000, net income must be equal to the difference of $100,000.

Which of the following items is included in the investing activities section of the statement of cash flows? Cash effects of transactions involving the issuance of common stock. Cash effects of transaction involving the acquisition of property, plant, and equipment. Cash effects of transactions involving the payment of dividends to shareholders. Cash effects of transactions that enter into the determination of net income.

Cash effects of transaction involving the acquisition of property, plant, and equipment.

On a statement of cash flows prepared in conformity with GAAP, which of the following would not be included as a financing activity? Dividends paid to shareholders Dividends received from an investment Cash used to repay a loan Cash received from the issuance of common stock

Dividends received from an investment Explanation Dividends received are reported under operating activities on the statement of cash flows prepared in conformity with GAAP (investing activities for IFRS unless lending is a normal business activity). Financing inflows include proceeds from the issuance of debt or equity. Outflows include loan principle repayments, the cost or reacquiring equity, and distributions to shareholders.

When preparing interim financial statements, an enterprise should: I. Use the same accounting principles followed in preparing its latest annual financial statements. II. Allocate expenses among all interim periods benefited, if the expenses are expected to benefit not only the period of occurrence but also additional period(s) in the same fiscal year. III. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred. I only. II only. I and II only. I and III only.

I and II only When preparing interim financial statements, the company must use the same accounting principles used in preparing its latest annual financial statements unless a change in accounting policy has been adopted in the current year. Expenses incurred in an interim period that are expected to benefit that and one or more other interim periods in the same fiscal year should be allocated among the interim periods benefited. Allocating revenues and expenses evenly over the quarters, regardless of when they are actually occurred, would be incorrect as it would be a violation of both the accrual and the cash methods of accounting.

Red Co. had the following transactions through December 31: Cash proceeds from the sale of investment in Gold Co. stock $ 15,000 Dividends received on investment in Blue Co. stock $ 10,000 Repaid principal on a loan to the bank $ 35,000 Acquired investment in Yellow Co. stock $ 75,000 Proceeds from the disposal of factory equipment $ 12,000 $23,000 $35,000 $75,000 $48,000

Net cash used by investing activities = 75000-15000-12000= 48,000 Explanation Net cash used by investing activities consists of the cash proceeds from the sale of the investment in Gold Co. stock minus the acquisition of the investment in Yellow Co. stock, plus the proceeds from the disposal of the factory equipment. Dividends received are reported under operating activities and the loan principal payment is reported under financing activities. The net cash used by investing activities at December 31 is $48,000 ($15,000 − $75,000 + 12,000).

During the year ended December 31, year 8, Dalgiesh Co. had sales of $1,500, cost of goods sold of $800, and sales, general and administrative expenses of $200. In addition, Dalgiesh is involved in a restructuring process expected to last several years, and incurred restructuring costs in year 8 of $125. During the year the company also sold various investments for a net pre-tax gain of $125, and received $40 in dividends from investments. What amount of operating and nonoperating income will Dalgiesh present in its year 8 income statement? Operating Nonoperating a. $ 500 $ 40 b. $ 225 $ 165 c. $ 375 $ 165 d. $ 300 $ 40

Option C Explanation Both operating and nonoperating income are presented prior to tax effects on the income statement, as part of income from continuing operations. Because restructuring costs will be incurred for several more years to come, they will be presented as part of operating income, for total operating income of $1,500 − $800 − $200 − $125, or $375. The gain on sale of investments and the dividend income are components of nonoperating income, for a nonoperating total of $125 + $40, or $165. Note: To avoid confusion about the classification of restructuring costs, there is no answer that is otherwise correct but for how the restructuring costs are classified. Answer A is wrong because it includes restructuring costs in Operating and presents nonoperating after tax. Answer B is wrong because it takes the correct pre-tax numbers, with restructuring in Operating, and presents them after tax. Answer D is wrong because it includes restructuring costs in Operating and presents both operating and nonoperating after tax.