CFA 23: Financial Reporting Mechanics

Which of the following elements represents an economic resource? Asset. Liability. Owners' equity.

A is correct. An asset is an economic resource of an entity that will either be converted into cash or consumed.

An analyst has projected that a company will have assets of €2,000 at year-end and liabilities of €1,200. The analyst's projection of total owners' equity should be closest to: €800. €2,000. €3,200.

A is correct. Assets must equal liabilities plus owners' equity and, therefore, €2,000 = €1,200 + Owners' equity. Owners' equity must be €800.

Which of the following items would most likely be classified as a financing activity? Issuance of debt. Payment of income taxes. Investments in the stock of a supplier.

A is correct. Issuance of debt would be classified as a financing activity. B is incorrect because payment of income taxes would be classified as an operating activity. C is incorrect because investments in common stock would be generally classified as investing activities.

An analyst who is interested in assessing a company's financial position is most likely to focus on which financial statement? Balance sheet. Income statement. Statement of cash flows.

A is correct. The balance sheet shows the financial position of a company at a particular point in time. The balance sheet is also known as a "statement of financial position."

HVG, LLC paid $12,000 of cash to a real estate company upon signing a lease on 31 December 2005. The payment represents a $4,000 security deposit and $4,000 of rent for each of January 2006 and February 2006. Assuming that the correct accounting is to reflect both January and February rent as prepaid, the most likely effect on HVG's accounting equation in December 2005 is: no net change in assets. a decrease in assets of $8,000. a decrease in assets of $12,000.

A is correct. The payment of January rent represents prepaid rent (an asset), which will be adjusted at the end of January to record rent expense. Cash (an asset) decreases by $12,000. Deposits (an asset) increase by $4,000. Prepaid rent (an asset) increases by $8,000. There is no net change in assets.

When, at the end of an accounting period, a revenue has been recognized in the financial statements but no billing has occurred and no cash has been received, the accrual is to: unbilled (accrued) revenue, an asset. deferred revenue, an asset. unbilled (accrued) revenue, a liability.

A is correct. When cash is to be received after revenue has been recognized but no billing has actually occurred, an unbilled (accrued) revenue is recorded. Such accruals would usually occur when an accounting period ends prior to a company billing its customer. This type of accrual can be contrasted with a simple credit sale, which is reflected as an increase in revenue and an increase in accounts receivable. No accrual is necessary.

An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (in millions): Estimated net income $ 200 Beginning retained earnings $ 1,400 Estimated distributions to owners $ 100 The analyst's estimate of ending retained earnings (in millions) should be closest to: $1,300. $1,500. $1,700.

B is correct. Beginning retained earnings $1,400 + Net income 200 - Distributions to owners (100) = Ending retained earnings $1,500

Squires & Johnson, Ltd., recorded €250,000 of depreciation expense in December 2005. The most likely effect on the company's accounting equation is: no effect on assets. a decrease in assets of €250,000. an increase in liabilities of €250,000.

B is correct. Depreciation is an expense and increases accumulated depreciation. Accumulated depreciation is a contra account which reduces property, plant, and equipment (an asset) by €250,000. Assets decrease by €250,000, and expenses increase by €250,000.

When, at the end of an accounting period, cash has been paid with respect to an expense, the business should then record: an accrued expense, an asset. a prepaid expense, an asset. an accrued expense, a liability.

B is correct. Payment of expenses in advance is called a prepaid expense which is classified as an asset.

The collection of all business transactions sorted by account in an accounting system is referred to as: a trial balance. a general ledger. a general journal.

B is correct. The general ledger is the collection of all business transactions sorted by account in an accounting system. The general journal is the collection of all business activities sorted by date.

TRR Enterprises sold products to customers on 30 June 2006 for a total price of €10,000. The terms of the sale are that payment is due in 30 days. The cost of the products was €8,000. The most likely net change in TRR's total assets on 30 June 2006 related to this transaction is: €0. €2,000. €10,000.

B is correct. The sale of products without receipt of cash results in an increase in accounts receivable (an asset) of €10,000. The balance in inventory (an asset) decreases by €8,000. The net increase in assets is €2,000. This would be balanced by an increase in revenue of €10,000 and an increase in expenses (costs of goods sold) of €8,000.

The statement of cash flows presents the flows into which three groups of business activities? Operating, Nonoperating, and Financing. Operating, Investing, and Financing. Operating, Nonoperating, and Investing.

B is correct. The three sections of the statement of cash flows are operating, investing, and financing activities.

An analyst has compiled the following information regarding Rubsam, Inc. Liabilities at year-end € 1,000 Contributed capital at year-end € 500 Beginning retained earnings € 600 Revenue during the year € 5,000 Expenses during the year € 4,300 There have been no distributions to owners. The analyst's most likely estimate of total assets at year-end should be closest to: €2,100. €2,300. €2,800.

C is correct. Assets = Liabilities + Contributed capital + Beginning retained earnings - Distributions to owners + Revenues - Expenses Liabilities $1,000 + Contributed capital 500 + Beginning retained earnings 600 - Distributions to owners (0) + Revenues 5,000 - Expenses (4,300) = Assets $2,800

Which of the following statements about cash received prior to the recognition of revenue in the financial statements is most accurate? The cash is recorded as: deferred revenue, an asset. accrued revenue, a liability. deferred revenue, a liability.

C is correct. Cash received prior to revenue recognition increases cash and deferred or unearned revenue. This is a liability until the company provides the promised goods or services.

If a company reported fictitious revenue, it could try to cover up its fraud by: decreasing assets. increasing liabilities. creating a fictitious asset.

C is correct. In order to balance the accounting equation, the company would either need to increase assets or decrease liabilities. Creating a fictitious asset would be one way of attempting to cover up the fraud.

Which of the following elements represents a residual claim? Asset. Liability. Owners' equity.

C is correct. Owners' equity is a residual claim on the resources of a business.

Which of the following items would most likely be classified as an operating activity? Issuance of debt. Acquisition of a competitor. Sale of automobiles by an automobile dealer.

C is correct. Sales of products, a primary business activity, are classified as an operating activity. Issuance of debt would be a financing activity. Acquisition of a competitor and the sale of surplus equipment would both be classified as investing activities.

On 30 April 2006, Pinto Products received a cash payment of $30,000 as a deposit on production of a custom machine to be delivered in August 2006. This transaction would most likely result in which of the following on 30 April 2006? No effect on liabilities. A decrease in assets of $30,000. An increase in liabilities of $30,000.

C is correct. The receipt of cash in advance of delivering goods or services results in unearned revenue, which is a liability. The company has an obligation to deliver $30,000 in goods in the future. This balances the increase in cash (an asset) of $30,000.

A group of individuals formed a new company with an investment of $500,000. The most likely effect of this transaction on the company's accounting equation at the time of the formation is an increase in cash and: an increase in revenue. an increase in liabilities. an increase in contributed capital.

C is correct. This is a contribution of capital by the owners. Assets would increase by $500,000 and contributed capital would increase by $500,000, maintaining the balance of the accounting equation.

When, at the end of an accounting period, cash has not been paid with respect to an expense that has been incurred, the business should then record: an accrued expense, an asset. a prepaid expense, an asset. an accrued expense, a liability.

C is correct. When an expense is incurred and no cash has been paid, expenses are increased and a liability ("accrued expense") is established for the same amount.