Far - Chapter 2
A transaction that is unusual in nature or infrequent in occurrence should be reported as a(n) A) Component of income from continuing operations, but not net of applicable income taxes. B) Item of other comprehensive income. C) Component of income from continuing operations, net of applicable income taxes. D) Discontinued operations, net of applicable income tax.
A) Component of income from continuing operations, but not net of applicable income taxes. A material event or transaction that is unusual in nature or infrequent in occurrence must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes.
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 Shareholder's Equity C) Statement of Retained Earnings D) Statement of Financial Position
A) Income Statement
According to authoritative GAAP issued by the FASB, an entity that presents a full set of financial statements A) Must report comprehensive income if it has items of other comprehensive income (OCI). B) Must report other comprehensive income (OCI) in the liabilities section of the statement of financial position. C) May report comprehensive income instead of net income. D) Must report comprehensive income even if it has no items of other comprehensive income.
A) Must report comprehensive income if it has items of other comprehensive income (OCI). If an entity has no items of OCI for any period presented, it need not report OCI or comprehensive income. Otherwise, it must report comprehensive income either (1) in one continuous statement of comprehensive income (with sections for net income and OCI) or (2) in two separate but consecutive statements (a statement of net income and a statement of OCI).
Comprehensive income is best defined as A) The change in net assets for the period excluding owner transactions. B) Total revenues minus total expenses. C) The change in net assets for the period including contributions by owners and distributions to owners. D) Net income excluding discontinued operations.
A) The change in net assets for the period excluding owner transactions. Comprehensive income includes all changes in equity of a business entity except those changes resulting from investments by owners and distributions to owners. The components of comprehensive income are net income and other comprehensive income (OCI). Net income includes the results of operations classified as income from continuing operations and discontinued operations. Components of comprehensive income not included in the determination of net income are included in OCI, for example, unrealized gains and losses on available-for-sale debt securities.
Which of the following assets or transactions is an element of comprehensive income? A) Investments by Owners B) Sales Revenue C) Distributions to Owners D) Deferred Revenue
B) Sales Revenue Comprehensive income includes all components of net income and other comprehensive income. Sales revenue is a component of net income and thus is considered a component of comprehensive income.
What is the purpose of reporting comprehensive income? A) To reconcile the difference between net income and cash flows provided from operating activities. B) To summarize all changes in equity from nonowner sources. C) To provide information for each segment of the business. D) To provide a consolidation of the income of the firm's segments.
B) To summarize all changes in equity from nonowner sources. Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of (1) net income and (2) other comprehensive income (OCI).
Noncurrent debt should be included in the current section of the statement of financial position if A) A bond retirement fund has been set up for use in its scheduled retirement during the next year. B) It is to be converted into common stock before maturity. C) It matures within the year and will be retired through the use of current assets. D) Management plans to refinance it within the year.
C) It matures within the year and will be retired through the use of current assets. Current liabilities include those obligations that are expected to be satisfied by the (1) payment of cash, (2) use of current assets other than cash, or (3) creation of new current liabilities within 1 year from the balance sheet date (or operating cycle, if longer).
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? A) Long-term Asset B) Long-term Liability C) Current Asset D) Current Liability
D) Current Liability
Which of the following describes how comprehensive income is reported under U.S. GAAP? A) It may be reported in a statement of equity. B) No specific format is required. C) It should be disclosed in the notes but not reported in the financial statements. D) It must be reported in two separate but consecutive statements or in one continuous statement.
D) It must be reported in two separate but consecutive statements or in one continuous statement.
Which of the following items is not subject to the application of intraperiod income tax allocation? A) Other comprehensive income. B) Income from continuing operations. C) Discontinued operations. D) Operating income.
D) Operating income. Items included in the determination of taxable income may be presented in different sections of the financial statements. Accordingly, intraperiod tax allocation is required. Income tax expense or benefit is allocated to (1) continuing operations, (2) discontinued operations, (3) other comprehensive income, and (4) items debited or credited directly to shareholders' equity. Operating income is not one of the categories of income subject to intra-period income tax allocation.
A receivable classified as current on the statement of financial position is expected to be collected within A) The current operating cycle or 1 year, whichever is shorter. B) The current operating cycle. C) 1 Year D) The current operating cycle or 1 year, whichever is longer.
D) The current operating cycle or 1 year, whichever is longer. Current assets are reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of the business or within 1 year, whichever is longer. The operating cycle is the time between the acquisition of materials or services and the final cash realization from the earning process.
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 A) Intangible Assets B) Purchased Goodwill C) Organizational Costs D) Trading Debt Securities
D) Trading Debt Securities Current assets include, in descending order of liquidity, (1) cash and cash equivalents; (2) certain individual trading, available-for-sale, and held-to-maturity debt securities; (3) receivables; (4) inventories; (5) prepaid expenses; and (6) certain individual investments in equity securities. Trading debt securities are expected to be sold in the near term, so they are likely to be classified as current.
T/F - The results of a material transaction that is unusual in nature or infrequent in occurrence must be reported separately in the income statement after the results of discontinued operations.
False - A material event or transaction that an entity considers to be of an unusual nature, of a type that indicates infrequency of occurrence, or both must be reported as a separate component of income from continuing operations.
T/F - The results of a material event that is unusual in nature or infrequent in occurrence must be reported in the income statement net of income taxes.
False - A material event or transaction that an entity considers to be of an unusual nature, of a type that indicates infrequency of occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes.
T/F - A statement of retained earnings must be presented separately as part of a full set of financial statements.
False - A statement of retained earnings is reported as part of the statement of changes in equity in a separate column. This statement reconciles the beginning and ending balances of the retained earnings account.
T/F - Combined financial statements are a convenient alternative for entities without the time or expertise to prepare consolidated statements.
False - Combined financial statements are used to combine the statements of the subsidiaries without consolidating them with those of the parent. They are not an allowable substitute for consolidated statements.
T/F - Current assets are expected to be realized or consumed within 12 months after the reporting period or are held primarily for trading.
False - Current assets consist of cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. The operating cycle is the average time between the acquisition of resources and the final receipt of cash from their sale as the culmination of revenue-generating activities. If the cycle is less than a year, 1 year is the period used for segregating current from noncurrent assets.
T/F - Current liabilities are due to be settled within 12 months after the reporting period or are held primarily for trading.
False - Current liabilities are "obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities."
T/F - When current obligations are intended to be refinanced on a noncurrent basis, they should continue to be classified as current.
False - Current liabilities are "obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities." They do not include current obligations intended to be refinanced on a noncurrent basis.
T/F - Sales representatives' salaries and commissions must be reported as general and administrative expenses.
False - General and administrative expenses are incurred for the direction of the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing. Selling expenses are incurred in selling or marketing. Thus, sales representatives' salaries and commissions must be reported as selling expenses.
T/F - Intraperiod tax allocation must be reported on the face of the balance sheet.
False - Intraperiod tax allocation is required in the income statement. Thus, income tax expense or benefit is allocated to (1) continuing operations, (2) discontinued operations, (3) other comprehensive income, and (4) items debited or credited directly to shareholders' equity.
T/F - Property, plant, and equipment are intangible operating items recorded at cost and reported net of any accumulated depreciation.
False - Property, plant, and equipment are tangible operating items recorded at cost and reported net of any accumulated depreciation. They include land and natural resources subject to depletion, buildings, equipment, furniture, fixtures, leasehold improvements, and land improvements, among others.
T/F - Income statement elements are permanent (real) accounts that must be rolled forward from period to period.
False - The accounts presented on the balance sheet are real, or permanent, accounts. These elements exist from period to period. The accounts presented on the income statement, however, are nominal, or temporary, accounts. They are periodically closed to permanent (real) accounts at the end of each period and started again from zero for the next period. Income or loss for a period (a nominal account) is closed to retained earnings (a real account) at the end of the period.
T/F - Accumulated other comprehensive income is a nominal account.
False - The components of OCI are recorded initially in a temporary (nominal) account. The total OCI for a period must be transferred to a component of equity (a permanent or real account) separate from retained earnings and additional paid-in capital. The component must have a descriptive title, e.g., accumulated OCI.
T/F - If an entity chooses to present comprehensive income in two statements, the second statement presents a total for other comprehensive income.
False - The first of two separate but consecutive statements (the income statement) presents the components of net income and total net income. The second statement (the statement of OCI) is presented immediately after the first. It presents (1) the components of OCI, (2) the total of OCI, and (3) a total for comprehensive income.
T/F - The single-step income statement matches operating revenues and expenses in a section separate from nonoperating items.
False - The single-step income statement provides one grouping for revenues and gains and one for expenses and losses. The single step is the one subtraction necessary to arrive at net income. The multiple-step income statement matches operating revenues and expenses in a section separate from nonoperating items. It enhances disclosure by presenting subtotals.
T/F - Comprehensive income and its components may be reported in the statement of changes in equity.
False - Two reporting formats for comprehensive income are acceptable: (1) one continuous financial statement that reports (a) a total of net income with its components, (b) a total of other comprehensive income with its components, and (c) a total of comprehensive income and (2) two separate but consecutive financial statements (statements of net income and other comprehensive income) that present the same elements.
T/F - Other comprehensive income includes, among other things, realized gains and losses on available-for-sale securities.
False: OCI includes all items of comprehensive income not included in net income. Under existing accounting standards, items of OCI include, among others, 1. Unrealized gains and losses on available-for-sale debt securities (except those that are hedged items in a fair value hedge). 2. Gains and losses on derivatives designated and qualifying as cash flow hedges. 3. Certain amounts associated with recognition of the funded status of postretirement defined benefit plans. 4. Certain foreign currency items.
T/F - Noncurrent investments and funds include a variety of nonoperating items intended to be held beyond the longer of 1 year or the operating cycle.
True - Noncurrent investments and funds include nonoperating items intended to be held beyond the longer of 1 year or the operating cycle. The following assets are typically included: 1. Advances or investments in securities made to control or influence another entity and other noncurrent securities 2. Funds restricted as to withdrawal or use for other than current operations 3. Cash surrender value of life insurance policies 4. Capital assets not used in current operations
T/F - A statement of changes in equity must be presented as part of a full set of financial statements.
True - A statement of changes in equity is presented as part of a full set of financial statements. This statement provides disclosure of changes during the accounting period in the separate equity accounts.
T/F - One amount may be presented for the aggregate tax effect on the total of other comprehensive income.
True - Each component of OCI must be presented net of tax, or one amount must be presented for the aggregate tax effect on the total of OCI. In either case, the tax effect on each component must be disclosed.
T/F - Equity includes the noncontrolling interest in a consolidated entity.
True - Equity consists of (1) capital contributed by owners, (2) retained earnings (income reinvested), (3) accumulated other comprehensive income (all comprehensive income items not included in net income), and (4) the noncontrolling interest in a consolidated entity.
T/F - A particular format of financial statements may be required by a taxing or regulatory body. Such statements are said to be prepared using an other comprehensive basis of accounting (OCBOA). True.
True - Financial statements based on a reporting system other than GAAP are said to be prepared using an other comprehensive basis of accounting (OCBOA). Examples of OCBOAs are a basis used for tax purposes and a basis used to comply with the requirements of a regulator.
T/F - An entity must report in the financial statements comprehensive income attributable to a noncontrolling interest.
True - If a noncontrolling interest exists, amounts for net income and comprehensive income attributable to the parent and to the subsidiary must be reported in the appropriate statements.
T/F - One of the changes in retained earnings can result from the adjustment of net income/loss for the period.
True - One of the changes in retained earnings can result from the adjustment of net income/loss for the period.
T/F - Other noncurrent assets are items not readily classifiable elsewhere.
True - Other noncurrent assets are items not readily classifiable elsewhere. They include long-term receivables from unusual transactions, machinery rearrangement costs, long-term prepayments, and deferred tax assets arising from interperiod tax allocation.
T/F - Reclassification adjustments are necessary when an item included in net income also was included in other comprehensive income.
True - Reclassification adjustments must be made for each component of OCI. Their purpose is to avoid double counting when an item included in net income also was included in OCI for the same or a prior period. For example, if a gain or loss on available-for-sale debt securities is realized in the current period, the prior recognition of an unrealized holding gain or loss must be eliminated from accumulated OCI. Reclassification adjustments and their effects must be presented in the statement in which the components of net income and OCI are presented.
T/F - The balance sheet (statement of financial position) provides information about an entity's assets, liabilities, and equity and their relationships to each other at a moment in time.
True - The balance sheet (statement of financial position) provides information about an entity's assets, liabilities, and equity and their relationships to each other at a moment in time. It helps users to assess the entity's liquidity, financial flexibility, profitability, and risk.
T/F - Two major principles underlying the accrual basis of accounting that are ignored under the cash basis are revenue and expense recognition principles.
True - The cash basis ignores the revenue and expense recognition principles that are fundamental to the accrual basis. Thus, cash basis financial statements do not conform to GAAP.
T/F - The modified cash basis of accounting uses the cash basis for typical operating activities, but capitalizes items such as plant assets.
True - The modified cash basis uses the cash basis for typical operating activities, but capitalizes items such as plant assets. Thus, modified cash basis financial statements do not conform to GAAP.
T/F - The effects on prior periods of accounting changes are excluded from net income.
True - The transactions not included in net income are (1) transactions with owners, (2) prior-period adjustments (error corrections), (3) items reported initially in other comprehensive income, (4) transfers to and from appropriated retained earnings, (5) adjustments made in a quasi-reorganization, and (6) effects on prior periods of accounting changes.
