Far Unsures 24

In financial statement analysis, expressing all financial statement items as a percentage of base-year amounts is called

Expressing financial statement items as percentages of corresponding base-year figures is a horizontal form of common-size (percentage) analysis that is useful for evaluating trends. The base amount is assigned the value of 100%, and the amounts for other years are denominated in percentages compared to the base year.

Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the following transactions would improve Gil's current ratio?

If a ratio is less than 1.0, a transaction that results in equal increases in the numerator and denominator will improve the ratio. Gil's current ratio is .5 ($90,000 ÷ $180,000). Debiting inventory and crediting accounts payable increases the ratio to .61 ($140,000 ÷ $230,000).

The following data pertain to Cowl, Inc., for the year ended December 31, Year 4: Net sales $ 600,000 Net income 150,000 Total assets, January 1, Year 4 2,000,000 Total assets, December 31, Year 4 3,000,000 What was Cowl's rate of return on assets for Year 4?

Return on assets equals net income ($150,000) divided by average total assets [($2,000,000 + $3,000,000) ÷ 2 = $2,500,000], or 6%.

Fact Pattern: Selected data pertaining to Lore Co. for the Year 4 calendar year is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 Question: 19 Lore would use which of the following to determine the average days' sales in inventory?

The average days' sales in inventory is calculated by dividing the number of days in the year by the inventory turnover.

On December 1, Year 1, Lombardi Company, a calendar-year-end firm, enters into a derivative contract designed to hedge the risk of cash flows associated with the forecast future sale of 300,000 bushels of wheat. The anticipated sales date is February 1, Year 2. The notional amount of the derivative contract is 300,000 bushels, the underlying is the price of the same variety and grade of wheat that Lombardi expects to sell, and the settlement date of the derivative is February 1, Year 2. The fair value of the derivative contract on December 31, Year 1, increased by $30,000, an amount equal to the decrease in the fair value of the wheat. The fair value of the derivative contract had increased by an additional $25,000 on February 1, Year 2, also an amount equal to the decrease in the fair value of the wheat. On February 1, the wheat was sold and the derivative contract was settled. The gains attributable to the increase in the fair value of the derivative that should be recognized in Year 1 and Year 2 earnings, respectively, are

A cash flow hedge is a hedge of an exposure to variability in the cash flows of a recognized asset or liability or a forecasted transaction. The accounting treatment of gains and losses arising from changes in fair value of a derivative designated as a cash flow hedge varies for the effective and ineffective portions. The effective portion initially is reported as other comprehensive income. It is reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion is immediately included in earnings. This hedge has no ineffective portion. Given that the sale occurred in Year 2, the $30,000 gain in Year 1 is recognized as other comprehensive income in Year 1. It is reclassified and included in earnings in Year 2. Thus, Year 2 earnings include the $30,000 reclassified from other comprehensive income and the $25,000 gain attributable to the increase in fair value in Year 2.

Which of the following is the characteristic of a perfect hedge?

A hedge is used to avoid or reduce risks by creating a relationship by which losses on certain positions are expected to be counterbalanced in whole or in part by gains on separate positions in another market. A perfect hedge is completely effective. It has a complete negative correlation with the item being hedged and results in no net gain or loss.

Fact Pattern: Selected data pertaining to Lore Co. for the Year 4 calendar year is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 Question: 18 The accounts receivable turnover for Year 4 was 5.0 times. What were Lore's Year 4 net credit sales?

Credit sales may be determined from the accounts receivable turnover formula (credit sales ÷ average accounts receivable). Credit sales are equal to 5.0 times average receivables [($20,000 + $22,000) ÷ 2], or $105,000.

A company's year-end balance sheet is shown below: Assets Cash $ 300,000 Accounts receivable 350,000 Inventory 600,000 Property, plant, and equipment (net) 2,000,000 $3,250,000 Liabilities and Shareholder Equity Current liabilities $ 700,000 Long-term liabilities 600,000 Common stock 800,000 Retained earnings 1,150,000 $3,250,000 What is the current ratio as of December 31?

The current ratio equals current assets divided by current liabilities [($300,000 + $350,000 + $600,000) ÷ $700,000 = 1.79].

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?

The current ratio equals current assets divided by current liabilities. The sale of trading securities at their carrying amounts for cash has no net effect on the current ratio (both accounts are in the numerator). The quick ratio equals the quick assets (current assets minus inventory and prepaids) divided by current liabilities. The sale of trading securities has no net effect on the numerator and therefore no effect on the quick ratio.

Gordon Ltd., a 100% owned British subsidiary of a U.S. parent company, reports its financial statements in local currency, the British pound. A local newspaper published the following U.S. exchange rates to the British pound at year end: Current rate $1.50 Historical rate (acquisition) 1.70 Average rate 1.55 Inventory (FIFO) 1.60 Which currency rate should Gordon use to convert its income statement to U.S. dollars at year end?

The method used to convert foreign currency amounts (in this case, stated in British pounds) into units of the reporting currency (the U.S. dollar) is the functional currency translation approach. It (1) identifies the functional currency of the entity (the currency of the primary economic environment in which the foreign entity operates (in this case, presumably the British pound), (2) measures all elements of the financial statements in the functional currency, and (3) uses a current exchange rate for translation from the functional currency to the reporting currency. Assets and liabilities are translated at the exchange rate at the balance sheet date. Income statement items (revenues, expenses, gains, and losses) are translated at the rates in effect when they were recognized. However, a weighted-average rate for the period may be used for these items. Consequently, the average rate should be used. Translation of income statement items at the effective rates when they were recognized is seldom feasible.

On June 1, Year 1, ABC Co. issued a 200,000 euro purchase order for equipment to be supplied by a German company. ABC's functional currency is the U.S. dollar. The equipment was delivered to ABC on November 1, Year 1, and ABC recorded a payable due to the German company. ABC paid for the equipment on January 31, Year 2. The following are the exchange rates in effect: June 1, Year 1 1 euro = 1.40 U.S. dollars November 1, Year 1 1 euro = 1.50 U.S. dollars December 31, Year 1 1 euro = 1.35 U.S. dollars January 31, Year 2 1 euro = 1.30 U.S. dollars What is the foreign currency gain or loss that ABC should record for the year ended December 31, Year 1?

The terms of a foreign currency transaction are stated in a currency different from the entity's functional currency. The initial measurement of the transaction must be in ABC's functional currency (U.S. dollar). The exchange rate used is the rate in effect on the date the transaction was initially recognized. On 11/1/Year 1, ABC initially recognized a payable to a German company of $300,000 (200,000 euros × 1.5 exchange rate on 11/1/Year 1) because the equipment was delivered on that date. A foreign currency transaction gain or loss is recognized in the period when the exchange rate changes, e.g., at a balance sheet date and at the settlement date. On 12/31/Year 1, a payable is reported at $270,000 (200,000 euros × 1.35 exchange rate on 12/31/Year 1). The decrease in the payable of $30,000 ($270,000 - $300,000) is recognized as a gain in the Year 1 income statement.