Ormiston Chapter 4 Self Test, Ormistron Ch 3 Self Test, FRA: Understanding CF Stmts, FRA: Understanding Income Statements
13. What are internal sources of cash? (a) Cash inflows from operating activities. (b) Cash inflows from investing activities. (c) Cash inflows from financing activities. (d) All of the above.
(a) Cash inflows from operating activities.
12. An outflow of cash would result from which of the following? (a) The decrease in an asset account other than cash. (b) The increase in a liability account. (c) The decrease in a liability account. (d) The increase in an equity account.
(c) The decrease in a liability account.
1. The statement of cash flows segregates cash inflows and outflows by: (a) Operating and financing activities. (b) Financing and investing activities. (c) Operating and investing activities. (d) Operating, financing, and investing activities.
(d) Operating, financing, and investing activities.
How is a common-size income statement created?
A common size income statement is created by dividing each of the line items on the income statement for a year by the net sales or net revenues amount for that same year.
Explain how a company could have a decreasing gross profit margin.
A decreasing gross profit margin could occur if the sales prices or volume in a capital intensive company decreased or the cost of goods sold increased. Operating profit margin, while affected by the change in gross profit margin, is also affected by changes in operating expenses other than cost of goods sold. Significant decreases in operating expenses such as general and administrative, marketing and selling or research and development, for example, could cause operating profit margin to increase despite a decrease in gross profit margin
15. 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? A. $55,000. B. $60,000. C. $65,000.
A. $55,000 600,000-50,000 = 550,000/10 = 55,000
8. 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? A. $600,000. B. $1,000,000. C. $3,000,000.
A. $600,000: 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).
20. 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? A. 1,003,333. B. 1,006,667. C. 1,010,000.
A. 1,003,333. 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
8. Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method? A. Net income. B. Cash paid to suppliers. C. Cash received from customers.
A. Net income.
7. 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? A. None. B. $300,000. C. $1,500,000.
A. None: Under the completed contract method, no revenue would be reported until the project is completed
9. Using the same information as in Question 8, how much profit will Argo report for 2009 using the cost recovery method? A. None. B. $600,000. C. $1,000,000.
A. None: 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.
7. Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? A. Operating. B. Investing. C. Financing.
A. Operating.
18. Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: A. continuing operations. B. discontinued operations. C. other comprehensive income.
A. continuing operations.: 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.
11. 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? A. €500,000. B. €2,000,000. C. €1,500,000.
A. €500,000.
Define: Depletion.
Allocation of costs of acquiring and developing natural resources. (
Copper, Inc., a fictitious brewery and restaurant chain, reported a gain on the sale of equipment of $12 million. In addition, the company's income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $15 million, all of which was for the purchase of new equipment. Balance sheet item 12/31/2009 12/31/2010 Change Equipment $100 million $109 million $9 million Accumulated depreciation—equipment $30 million $36 million $6 million Using the above information from the comparative balance sheets, how much cash did the company receive from the equipment sale? A. $12 million. B. $16 million. C. $18 million.
B. $16 million. Selling price (inflow) - BV = gain or loss on sale Gain was $12M to Find BV: 1) Beg Bal of equip (100M) + equipment purchase ($15M) - ending balance of equipment ($109M) = historical cost of equip ($6M) 2) Beg accumulated Dep ($30M) + dep exp ($8M) - ending bal of accum dep ($36M) = accumulated dep on equipment sold ($2M) 3) BV = historical cost of equip ($6M) - dep pn equipment sold ($2M) = $4M Since gain on sale was $12M, selliong price =$12M + BV ($4M) = $16M
5. 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? A. $200,000. B. $900,000. C. $1,000,000.
B. $900,000: Net revenue is revenue for goods sold during the period less any returns and allowances, or $1,000,000 minus $100,000 = $900,000
A company recorded the following in Year 1: Proceeds from issuance of long-term debt €300,000 Purchase of equipment €200,000 Loss on sale of equipment €70,000 Proceeds from sale of equipment €120,000 Equity in earnings of affiliate €10,000 On the Year 1 statement of cash flows, the company would report net cash flow from investing activities closest to: A. (€150,000). B. (€80,000). C. €200,000
B. (€80,000). = -200,000 + 120,000
22. Which of the following is an appropriate method of computing free cash flow to the firm? A. Add operating cash flows to capital expenditures and deduct after-tax interest payments. B. Add operating cash flows to after-tax interest payments and deduct capital expenditures. C. Deduct both after-tax interest payments and capital expenditures from operating cash flows.
B. Add operating cash flows to after-tax interest payments and deduct capital expenditures.
19. 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? A. $0.80. B. $0.91. C. $0.95.
C. $0.95: 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.
C. $120,000. 17. Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? A. Straight-line depreciation with a short useful life. B. Declining balance depreciation with a long useful life. C. Declining balance depreciation with a short useful life.
C. Declining balance depreciation with a short useful life: 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.
10. Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from: A. similar barter transactions with unrelated parties. B. similar non-barter transactions with related parties. C. similar non-barter transactions with unrelated parties.
C. similar non-barter transactions with unrelated parties.
Defined the following terms as they relate to the statement of Cash flows: cash, operating activities, investing activities, and financing activities
Cash includes cash and highly liquid short-term marketable securities, called cash equivalents.Operating activities include delivering or producing goods for sale and providing services and the cash effects of transactions and other events that enter into the determination of net income.Investing activities include acquiring and selling securities that are not cash equivalents, productive assets that are expected to benefit the firm for long periods of time and lending money and collecting on loans.Financing activities include borrowing from creditors and repaying the principal of debt and obtaining resources from owners and providing them with a return on investment.
Alpha Company purchased 30% of the voting common stock of Beta Company on January 1 and paid $500,000 for the investment. Beta Company reported $100,000 of earnings for the year and paid $40,000 in cash dividends. Calculate investment income and the balance sheet investment account for Alpha Company under the cost method and under the equity method.
Cost Method: Under the cost method, the company will report $500,000 as the balance sheet investment account (that is at the purchase price only). Alpha company's share in the dividend income which is $12,000 (40,000*30%) will be reported in the income statement as a revenue. Therefore, its investment income will be $12,000 only. ________ Equity Method: Under the equity method, the value of investment income will comprise of the share in Beta Company's net earnings which is $30,000 (100,000*30%). Since, we have already accounted for a share in the earnings of Beta Company, there is no need to record the receipt of dividend seperately. The balance sheet investment account is calculated with the use of following table: Investment in Beta Company Stock500,000Add Net Income (100,000*30%)30,000Less Cash Dividends (30,000*40%)12,000Investment Account Balance$518,000 ________ Tabular Representation: Investment IncomeInvestment Account BalanceCost Method$12,000$500,000Equity Method$30,000$518,000
Define: Net profit.
Difference between all revenues and expenses.
Define: Gross profit.
Difference between net sales and cost of goods sold.
Define: Operating profit.
Difference between sales revenue and expenses associated with generating sales.
Discuss all reasons that could explain an increase or decrease in gross profit margin.
Gross profit margin can increase or decrease as a result of a change in sales prices, a change in cost of goods sold, or in the case of capital intensive industries, a change in volume. Increases (decreases) in sales prices, decreases (increases) in cost of goods sold and increases (decreases) in volume in capital intensive industries will lead to an increase in gross profit margin.
Define: Discontinued operations.
Operations that will not continue in the future because the firm sold a major portion of its business.
Define: Equity method.
Proportionate recognition of investee's net income for invest ments in voting stock of other companies.
What are the two causes of an increasing and decreasing sales number?
Sales will increase or decrease if the amount of units sold increases or decreases or if the price at which the product or service is sold increases or decreases.
What is an example of an industry that would need to spend a minimum amount on advertising to be competitive? On research and development?
The beverage and athletic shoes industries are examples of industries that must advertise regularly or risk losing market share.The pharmaceutical and high technology industries are examples of industries that must do extensive research and development to create new and innovative products.
What can creditors, investors, and other users learn from an analysis of the cash flow statement
The cash flow statement helps investors, creditors and other users determine the following about a firm:• Its ability to generate cash flows in the future• Its capacity to meet obligations for cash• Its future external financing needs• Its success in productively managing investing activities• Its effectiveness in implementing financing and investing strategies
How does the direct method differ from the indirect method
The direct method shows cash collections from customers, interest and dividends collected, other operating cash receipts, cash paid to suppliers and employees, interest paid, taxes paid, and other operating cash payments.The indirect method starts with net income and adjusts for deferrals; accruals; noncash items, such as depreciation and amortization; and nonoperating items, such as gains and losses on asset sales. The direct and indirect methods yield identical figures for net cash flow from operating activities because the underlying accounting concepts are the same.
Discuss the four items that are included in a company's comprehensive income.
The four items included in comprehensive income include: Foreign currency translation effects which are adjustments to the equity section of the balance sheet resulting from the translation of foreign financial statements. Unrealized gains and losses on investments in debt and equity securities classified as available-for-sale are reported in comprehensive income. Additional pension liabilities are reported as other comprehensive income when the accumulated benefit obligation is greater than the fair market value of plan assets less the balance in the accrued pension liability account or plus the balance in the deferred pension asset account. Cash flow hedges (derivatives designated as hedging the exposure to variable cash flows of a forecasted transaction) are required to initially report any gain or loss from a change in the fair market value of the cash flow hedge in other comprehensive income and subsequently reclassify the amount into earnings when the forecasted transaction affects earnings.
What is the difference between a multiple - step and a single- step format of the earnings statement? Which form is the most useful for analysis?
The multiple-step format provides several intermediate profit measures: gross profit, operating profit, and earnings before income taxes. The single-step format groups revenues together and then deducts all categories to arrive at net earnings. The multiple-step format is the most useful for analysis.
Why is the bottom line figure, net income, not necessarily a good indicator of a firms' financial success?
The net income figure is based on accounting choices and estimates. The inventory valuation and depreciation methods chosen can vary significantly and impact differently on net income. Discretionary items such as advertising and repairs and maintenance can be manipulated to change the net income of a firm. Use of the equity method for investments may also distort net income. Nonrecurring and nonoperating items are included in net income. Net income also incorporates accounting changes and extraordinary items. Finally, net income does not equal cash flow.
Why is the statement of Cash flows a useful document
The statement of cash flows is a useful document because it is the only financial statement where the analyst can learn about cash generation in the firm. A positive net income figure on the income statement is ultimately insignificant unless a company can translate its earnings into cash.
Explain what can be found on a statement of stockholders' equity.
The statement of stockholders' equity summarizes the changes in all of the equity accounts, including the retained earnings account.
7. What type of accounts are accounts receivable and inventory? (a) Cash accounts. (b) Operating accounts. (c) Financing accounts. (d) Investing accounts.
b) Operating accounts.
5. How would the sale of a building be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing inflow. (d) Financing inflow.
c) Investing inflow.
6. How would the repayment of debt principal be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing outflow. (d) Financing outflow.
(d) Financing outflow.
3. Which of the following items needs to be disclosed separately in the income statement? (a) Discontinued operations. (b) Salary expense. (c) Warranty expense. (d) Bad debt expense.
(a) Discontinued operations.
13. Which of the following items should be recorded as other comprehensive income? (a) Foreign currency translation effects. (b) Extraordinary gains and losses. (c) Realized gains and losses. (d) All of the above.
(a) Foreign currency translation effects.
6. Why is it important to evaluate increases and decreases in operating expenses? (a) Increases in operating expenses may indicate inefficiencies and decreases in operating expenses may be detrimental to long-term sales growth. (b) It is important to determine whether companies are spending at least 10 cents of every sales dollar on advertising expenses. (c) Increases in operating expenses are always an indication that a firm will increase sales in the future. (d) None of the above.
(a) Increases in operating expenses may indicate inefficiencies and decreases in operating expenses may be detrimental to long-term sales growth.
12. Why should the effective tax rate be evaluated when assessing earnings? (a) It is important to understand whether earnings have increased because of tax techniques rather than from positive changes in core operations. (b) Effective tax rates are irrelevant because they are mandated by law. (c) Effective tax rates do not include the effects of foreign taxes. (d) Net operating losses allow a firm to change its effective tax rates for each of the five years prior to the loss.
(a) It is important to understand whether earnings have increased because of tax techniques rather than from positive changes in core operations.
4. How would payments for taxes be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing outflow. (d) Financing outflow.
(a) Operating outflow.
11. Why can the equity method of accounting for investments in the voting stock of other companies cause distortions in net earnings? (a) Significant influence may exist even if the ownership of voting stock is less than 20%. (b) Income is recognized where no cash may ever be received. (c) Income should be recognized in accordance with the accrual method of accounting. (d) Income is recognized only to the extent of cash dividends received.
(b) Income is recognized where no cash may ever be received.
3. How would revenue from sales of goods and services be classified? (a) Operating outflow. (b) Operating inflow. (c) Investing inflow. (d) Financing inflow.
(b) Operating inflow.
22. Which of the following could lead to cash flow problems? (a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers. (b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers. (c) Obsolete inventory, increasing notes payable, easing of credit by suppliers. (d) Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers.
(b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers.
11. An inflow of cash would result from which of the following? (a) The increase in an asset account other than cash. (b) The decrease in an asset account other than cash. (c) The decrease in an equity account. (d) The decrease in a liability account.
(b) The decrease in an asset account other than cash.
10. Why is the figure for operating profit important? (a) This is the figure used for calculating federal income tax expense. (b) The figure for operating profit provides a basis for assessing the success of a company apart from its financing and investment activities and separate from its tax status. (c) The operating profit figure includes all operating revenues and expenses as well as interest and taxes related to operations. (d) The figure for operating profit provides a basis for assessing the wealth of a firm.
(b) The figure for operating profit provides a basis for assessing the success of a company apart from its financing and investment activities and separate from its tax status.
19. How is it possible for a firm to be profitable and still go bankrupt? (a) Earnings have increased more rapidly than sales. (b) The firm has positive net income but has failed to generate cash from operations. (c) Net income has been adjusted for inflation. (d) Sales have not improved even though credit policies have been eased.
(b) The firm has positive net income but has failed to generate cash from operations.
10. Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and non-operating expenses? (a) The direct method. (b) The indirect method. (c) The inflow method. (d) The outflow method.
(b) The indirect method.
17. What accounts can be found on a statement of stockholders' equity? (a) Investments in other companies. (b) Treasury stock, accumulated other comprehensive income, and retained earnings. (c) Market value of treasury stock. (d) Both (a) and (c).
(b) Treasury stock, accumulated other comprehensive income, and retained earnings.
4. What is a common-size income statement? (a) An income statement that provides intermediate profit measures. (b) An income statement that groups all items of revenue together, then deducts all categories of expense. (c) A statement that expresses each item on an income statement as a percentage of net sales. (d) An income statement that includes all changes of equity during a period.
(c) A statement that expresses each item on an income statement as a percentage of net sales.
21. Which of the following statements is false? (a) A negative cash flow can occur in a year in which net income is positive. (b) An increase in accounts receivable represents accounts not yet collected in cash. (c) An increase in accounts payable represents accounts not yet collected in cash. (d) To obtain cash flow from operations, the reported net income must be adjusted.
(c) An increase in accounts payable represents accounts not yet collected in cash.
8. What type of accounts are notes payable and current maturities of long-term debt? (a) Cash accounts. (b) Operating accounts. (c) Financing accounts. (d) Investing accounts.
(c) Financing accounts.
14. What are three profit measures calculated from the income statement? (a) Operating profit margin, net profit margin, repairs and maintenance to fixed assets. (b) Gross profit margin, cost of goods sold percentage, EBIT. (c) Gross profit margin, operating profit margin, net profit margin. (d) None of the above.
(c) Gross profit margin, operating profit margin, net profit margin.
16. What is a statement of stockholders' equity? (a) It is the same as a retained earnings statement. (b) It is a statement that reconciles only the treasury stock account. (c) It is a statement that summarizes changes in the entire stockholders' equity section of the balance sheet. (d) It is a statement reconciling the difference between stock issued at par value and stock issued at market value.
(c) It is a statement that summarizes changes in the entire stockholders' equity section of the balance sheet.
7. Which of the following assets will not be depreciated over its service life? (a) Buildings. (b) Furniture. (c) Land. (d) Equipment.
(c) Land.
9. The change in retained earnings is affected by which of the following? (a) Net income and common stock. (b) Net income and paid-in capital. (c) Net income and payment of dividends. (d) Payment of dividends and common stock.
(c) Net income and payment of dividends.
1. What does the income statement measure for a firm? (a) The changes in assets and liabilities that occurred during the period. (b) The financing and investment activities for a period. (c) The results of operations for a period. (d) The financial position of a firm for a period.
(c) The results of operations for a period.
16. Which statement is true for gains and losses from capital asset sales? (a) They do not affect cash and are excluded from the statement of cash flows. (b) They are included in cash flows from operating activities. (c) They are included in cash flows from investing activities. (d) They are included in cash flows from financing activities.
(c) They are included in cash flows from investing activities.
18. Which of the following cause(s) a change in the retained earnings account balance? (a) Prior period adjustment. (b) Payment of dividends. (c) Net profit or loss. (d) All of the above
(d) All of the above
15. Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? (a) Depreciation expense for the period. (b) The change in deferred taxes. (c) The amount by which equity income recognized exceeds cash received. (d) All of the above.
(d) All of the above.
17. Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities? (a) Accounts receivable. (b) Inventory. (c) Prepaid expenses. (d) All of the above.
(d) All of the above.
2. How are companies required to report total comprehensive income? (a) On the face of the income statement. (b) In a separate statement of comprehensive income. (c) In its statement of stockholders' equity. (d) All of the above.
(d) All of the above.
20. Why has cash flow from operations become increasingly important as an analytical tool? (a) Inflation has distorted the meaningfulness of net income. (b) High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms. (c) Firms may have uncollected accounts receivable and unsalable inventory on the books. (d) All of the above.
(d) All of the above.
8. How are costs of assets that benefit a firm for more than one year allocated? (a) Depreciation. (b) Depletion and amortization. (c) Costs are divided by service lives of assets and allocated to repairs and maintenance. (d) Both (a) and (b).
(d) Both (a) and (b).
18. Which of the following current liability accounts is included in the adjustment of expenses to obtain cash flow from operating activities? (a) Accounts payable. (b) Notes payable and current maturities of long-term debt. (c) Accrued liabilities. (d) Both (a) and (c).
(d) Both (a) and (c).
14. What are external sources of cash? (a) Cash inflows from operating activities. (b) Cash inflows from investing activities. (c) Cash inflows from financing activities. (d) Both (b) and (c).
(d) Both (b) and (c).
9. Why should the expenditures for repairs and maintenance correspond to the level of investment in capital equipment and to the age and condition of that equipment? (a) Repairs and maintenance expense is calculated in the same manner as depreciation expense. (b) Repairs and maintenance are depreciated over the remaining life of the assets involved. (c) It is a generally accepted accounting principle that repairs and maintenance expense is generally between 5% and 10% of fixed assets. (d) Inadequate repairs of equipment can impair the operating success of a business enterprise.
(d) Inadequate repairs of equipment can impair the operating success of a business enterprise.
15. When is a dual presentation of basic and diluted earnings per share required? (a) When a company has pension liabilities. (b) When convertible securities are in fact converted. (c) When a company has a simple capital structure. (d) When a company has a complex capital structure.
(d) When a company has a complex capital structure.
5. Which of the following statements is incorrect with regard to gross profit or gross profit margin? (a) The gross profit margin and cost of goods sold percentage are complements of each other. (b) Generally, firms want to maintain the relationship between gross profit and sales, or, if possible, increase gross profit margin. (c) The gross profit margin tends to be more stable in industries such as groceries. (d) When cost of goods sold increases, most firms do not raise prices.
(d) When cost of goods sold increases, most firms do not raise prices.
Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company's income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $10 million, all of which was for the purchase of new equipment. Using the following information from the comparative balance sheets, how much cash did the company receive from the equipment sale? Balance Sheet Item 12/31/2009 12/31/2010 Change Equipment $100 million $105 million $5 million Accumulated depreciation—equipment $40 million $46 million $6 million A. $1 million. B. $2 million. C. $3 million.
A is correct. Selling price (cash inflow) minus book value equals gain or loss on sale; therefore, gain or loss on sale plus book value equals selling price (cash inflow). The amount of loss is given—$2 million. Beginning balance of equipment of $100 million plus equipment purchased of $10 million minus ending balance of equipment of $105 million equals the historical cost of equipment sold, or $5 million. Beginning accumulated depreciation of $40 million plus depreciation expense for the year of $8 million minus ending balance of accumulated depreciation of $46 million equals accumulated depreciation on the equipment sold, or $2 million. Therefore, the book value of the equipment sold was $5 million minus $2 million, or $3 million. Because the loss on the sale of equipment was $2 million, the amount of cash received must have been $1 million.
Define: Diluted earnings per share
Earnings per share figure based on the assumption that all poten tially dilutive securities have been converted to common stock.
11. Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: A. $67 million. B. $79 million. C. $83 million.
A. $67 million. COGS (-75) + DEC IN INV (6) + INC IN AP (2) = 67
9. Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? A. $90 million. B. $100 million. C. $110 million.
A. $90 million. REV (100) - INC IN AR (10)
Orange Beverages Plc., a fictitious manufacturer of tropical drinks, reported cost of goods sold for the year of $100 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, but accounts payable decreased by $2 million. How much cash did the company pay to its suppliers during the year? A. $96 million. B. $104 million. C. $108 million.
A. $96 million. Cost of goods sold of $100 million less the decrease in inventory of $6 million equals purchases from suppliers of $94 million. The decrease in accounts payable of $2 million means that the company paid $96 million in cash ($94 million plus $2 million).
Based on the following information for Pinkerly Inc., a fictitious company, what are the total adjustments that the company would make to net income in order to derive operating cash flow? Year Ended Income statement item 12/31/2009 Net income $30 million Depreciation $7 million Balance sheet item 12/31/2008 12/31/2009 Change Accounts receivable $15 million Inventory ($3 million) Accounts payable $10 million A. Add $5 million B. Add $21 million. C. Subtract $9 million.
A. Add $5 million: NI + dep +decrease in Inv + inc in AP - inc in AR 30+7+3+10-15 = $5M
Jaderong Plinkett Stores reported net income of $25 million. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the company report in the financing section of the statement of cash flows in 2010? Balance Sheet Item 12/31/2009 12/31/2010 Change Common stock $100 $102 $2 Additional paid-in capital common stock $100 $140 $40 Retained earnings $100 $115 $15 Total stockholders' equity $300 $357 $57 A. Issuance of common stock of $42 million; dividends paid of $10 million. B. Issuance of common stock of $38 million; dividends paid of $10 million. C. Issuance of common stock of $42 million; dividends paid of $40 million.
A. Issuance of common stock of $42 million; dividends paid of $10 million. The increase of $42 million in common stock and additional paid-in capital indicates that the company issued stock during the year. Then NI of 25 - RE of 15 = dividends of 10 were paid out.
23. An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate? A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. B. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. C. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company's liquidity.
A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency.
Define: Amortization.
Allocation of costs of intangible assets.
Define: Depreciation
Allocation of costs of tangible fixed assets.
An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Balances as of Year Ended 31 December 2009 2010 Retained earnings 120 145 Accounts receivable 38 43 Inventory 45 48 Accounts payable 36 29 In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company considers dividends paid a financing activity. The company's 2010 cash flow from operations (in $ millions) was closest to A. 25. B. 45. C. 75.
B. 45. NI = INC in RE (25) + Dividend Payment (10) = 35 so 25 + 10 + dep exp (25) - INC AR (5) - Inc Inv (3) - AP (7) = 45
Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow? Year Ended Income Statement Item 12/31/2010 Net income $20 million Depreciation $2 million Balance Sheet Item 12/31/2009 12/31/2010 Change Accounts receivable $25 million $22 million ($3 million) Inventory $10 million $14 million $4 million Accounts payable $8 million $13 million $5 million A. Add $2 million. B. Add $6 million. C. Subtract $6 million
B. Add $6 million. 26=20+2+3+5-4
2. The sale of a building for cash would be classified as what type of activity on the cash flow statement? A. Operating. B. Investing. C. Financing.
B. Investing.
14. Which inventory method is least likely to be used under IFRS? A. First in, first out (FIFO). B. Last in, first out (LIFO). C. Weighted average.
B. Last in, first out (LIFO): Not permitted under IFRS
21. Which is an appropriate method of preparing a common-size cash flow statement? A. Show each item of revenue and expense as a percentage of net revenue. B. Show each line item on the cash flow statement as a percentage of net revenue. C. Show each line item on the cash flow statement as a percentage of total cash outflows.
B. Show each line item on the cash flow statement as a percentage of net revenue.
20. Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3? A. The primary use of cash is financing activities. B. The primary source of cash is operating activities. C. Telefónica classifies interest received as an operating activity.
B. The primary source of cash is operating activities.
4. Under IFRS, income includes increases in economic benefits from: A. increases in liabilities not related to owners' contributions. B. enhancements of assets not related to owners' contributions. C. increases in owners' equity related to owners' contributions.
B. enhancements of assets not related to owners' contributions: Under IFRS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities
1. The three major classifications of activities in a cash flow statement are: A. inflows, outflows, and net flows. B. operating, investing, and financing. C. revenues, expenses, and net income.
B. operating, investing, and financing.
12. 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? A. ₤120,000. B. ₤122,000. C. ₤124,000.
B. ₤122,000.
An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Year ended 31 December 2009 2010 Net sales 245.8 254.6 Cost of goods sold 168.3 175.9 Accounts receivable 73.2 68.3 Inventory 39.0 47.8 Accounts payable 20.3 22.9 Based only on the information above, the company's 2010 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to: cash received from customers cash paid to suppliers A 249.7 169.7 B 259.5 174.5 C 259.5 182.1
C Cash Received: 259.5 Cash paid to customers: 182.1 Cash Received: Net Sales 2010 (254.6) + Dec in AR (4.9) Cash Paid: COGS 2010 (-175.9) - Inc in Inv (8.8) + inc in AP (2.6)
3. 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 4. Denali's gross profit is equal to A. $280,000. B. $500,000. C. $1,000,000.
C. $1,000,000.
16. 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? A. $60,000. B. $110,000. C. $120,000.
C. $120,000: 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.
14. Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? A. $22 million for interest and $10 million for taxes. B. $16 million for interest and $2 million for taxes. C. $16 million for interest and $10 million for taxes.
C. $16 million for interest and $10 million for taxes. Int exp (-$19) + Inc Int Payable (3) = -$16 Taxes (-6) - dec in taxes payable (4) = -10
12. White Flag, a women's clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries? A. $18 million. B. $21 million. C. $22 million.
C. $22 million. SAL EXP (-20) - DEC IN SAL PAYABLE (2) = 22
Black Ice, a fictitious sportswear manufacturer, reported other operating expenses of $30 million. Prepaid insurance expense increased by $4 million, and accrued utilities payable decreased by $7 million. Insurance and utilities are the only two components of other operating expenses. How much cash did the company pay in other operating expenses? A. $19 million. B. $33 million. C. $41 million.
C. $41 million Other operating expenses of $30 million plus the increase in prepaid insurance expense of $4 million plus the decrease in accrued utilities payable of $7 million equals $41 million.
Define: Basic earnings per share.
Earnings per share figure based on the assumption that all poten tially dilutive securities have been converted to common stock.
Blue Bayou, a fictitious advertising company, reported revenues of $50 million, total expenses of $35 million, and net income of $15 million in the most recent year. If accounts receivable decreased by $12 million, how much cash did the company receive from customers? A. $38 million. B. $50 million. C. $62 million.
C. $62 million. Revenues of $50 million plus the decrease in accounts receivable of $12 million equals $62 million cash received from customers.
10. Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: A. $73 million. B. $77 million. C. $83 million.
C. $83 million. COGS (-80) - INC IN INV (5M) + INC IN AP (2) = 83
3. Which of the following is an example of a financing activity on the cash flow statement under US GAAP? A. Payment of interest. B. Receipt of dividends. C. Payment of dividends.
C. Payment of dividends. Payment of dividends is a financing activity under US GAAP. Payment of interest and receipt of dividends are included in operating cash flows under US GAAP. Note that IFRS allow companies to include receipt of interest and dividends as either operating or investing cash flows and to include payment of interest and dividends as either operating or financing cash flows
5. Interest paid is classified as an operating cash flow under: A. US GAAP but may be classified as either operating or investing cash flows under IFRS. B. IFRS but may be classified as either operating or investing cash flows under US GAAP. C. US GAAP but may be classified as either operating or financing cash flows under IFRS.
C. US GAAP but may be classified as either operating or financing cash flows under IFRS.
6. Cash flows from taxes on income must be separately disclosed under: A. IFRS only. B. US GAAP only. C. both IFRS and US GAAP.
C. both IFRS and US GAAP.
2. An example of an expense classification by function is: A. tax expense. B. interest expense. C. cost of goods sold.
C. cost of goods sold: FUNCTION A. tax expense: Nature B. interest expense: Nature
1. Expenses on the income statement may be grouped by: A. nature, but not by function. B. function, but not by nature. C. either function or nature.
C. either function or nature.
19. The first step in cash flow statement analysis should be to: A. evaluate consistency of cash flows. B. determine operating cash flow drivers. C. identify the major sources and uses of cash.
C. identify the major sources and uses of cash.
On 31 December 2009, a company issued a £30,000 180-day note at 8 percent and used the cash received to pay for inventory and issued £110,000 long-term debt at 11 percent annually and used the cash received to pay for new equipment. Which of the following most accurately reflects the combined effect of both transactions on the company's cash flows for the year ended 31 December 2009 under IFRS? Cash flows from: A. operations are unchanged. B. financing increase £110,000. C. operations decrease £30,000.
C. operations decrease £30,000. The payment for inventory would decrease cash flows from operations. The issuance of debt (both short-term and long-term debt) is part of financing activities and would increase cash flows from financing activities by £140,000. The purchase of equipment is an investing activity. Note that the treatment under US GAAP would be the same for these transactions.
4. A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: A. reported as a $1 million investing cash inflow and outflow. B. reported as a $1 million financing cash outflow and inflow. C. reported as supplementary information to the cash flow statement.
C. reported as supplementary information to the cash flow statement.
6. If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is: A. the cost recovery method. B. the completed contract method. C. the percentage-of-completion method.
C. the percentage-of-completion method.
13. Using the same information as in Question 12, what would Accent's cost of goods sold be under the weighted average cost method? A. ₤120,000. B. ₤122,000. C. ₤124,000.
C. ₤124,000. 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.
New Era Network Associates has a five-year license to provide networking support services to a customer. The total amount of the license fee to be received by New Era is $1 million. New Era recognizes license revenue on a prorated basis regardless of the time at which cash is received. How much revenue will New Era recognize for this license in each year?
For this license, New Era Network Associates will recognize $200,000 each year for five years (calculated as $1 million divided by 5).
Define: Single-step format.
Presentation of income statement that groups all revenue items, then deducts all expenses, to arrive at net income.
Define: Multiple-step format.
Presentation of income statement that provides several inter- mediate profit measures.
Define: Cost method
Recognition of income from investments in voting stock of other companies to the extent of cash dividend received.
Define: Extraordinary events.
Unusual events not expected to recur in the foreseeable future
