ch 4 Flashcards
(15 cards)
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
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.
The Compton Press Company reported income before taxes of $250,000. This amount included a $50,000 loss on discontinued operations. The amount reported as income from continuing operations, assuming a tax rate of 25%, is:
$225,000
[$250,000 (income before income taxes) + $50,000 (loss on discontinued operations)] × [1.0 − 0.25 (tax rate)] = $225,000.
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?
$115,000
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 May 31, 2024, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. The assets of the component were sold on October 13, 2024, for $1,120,000. The component generated operating income of $300,000 from January 1, 2024, through disposal. In its income statement for the year ended December 31, 2024, the company reported before-tax income from operations of a discontinued component of $620,000. What was the book value of the assets of the cosmetics component?
$800,000
Of the $620,000 pretax income from discontinued operations, $300,000 was from income from operations. The remaining $320,000 was therefore gain on sale of the assets. If the assets were sold for $1,120,000, their book value must have been $800,000.
Selected information from the accounting records of Dunn’s Auto Dealers is as follows:
Cost of furniture purchased for cash $8,000
Proceeds from bank loan 100,000
Repayment of bank loan (includes interest of $4,000) 44,000
Proceeds from sale of equipment 5,000
Cash collected from customers 320,000
Purchase of stock of another corporation as an investment 20,000
Common stock issued for cash 200,000
In its statement of cash flows, Dunn’s should report net cash inflows from financing activities of:
$260,000
$100,000 (proceeds from bank loan) − $40,000 (repayment of bank loan principal) + $200,000 (common stock issued for cash) = $260,000
Rowdy’s Restaurants Cash Flow ($ in millions)
Cash received from:
Customers $ 3,900
Interest on investments 340
Sale of land 240
Sale of Rowdy’s common stock 880
Issuance of debt securities 3,400
Cash paid for:
Interest on debt $ 440
Income tax 220
Debt principal reduction 2,900
Purchase of equipment 6,800
Purchase of inventory 2,400
Dividends on common stock 620
Operating expenses 780
Rowdy’s would report net cash inflows (outflows) from financing activities in the amount of:
$760 million
Explanation
Sale of common stock $ 880
Issuance of debt securities 3,400
Debt principal reduction (2,900)
Dividends on common stock (620)
Cash inflows from financing activities $ 760
Earnings per share should be reported for each of the following income statement captions except:
Operating income.
Earnings per share is only reported on income from continuing operations, discontinued operations, and net income.
Which of the following items would not be included as a cash flow from operating activities in a statement of cash flows?
Purchase of equipment
Purchase of equipment is reported as an investing activity in the statement of cash flows.
Lucia Limited reported net income of $137,000 for the year ended December 31, 2024. January 1 balances in accounts receivable and accounts payable were $27,300 and $27,700, respectively. Year-end balances in these accounts were $30,500 and $23,900, respectively. Assuming that all relevant information has been presented, Lucia’s cash flows from operating activities would be:
$130,000
Net income $ 137,000
Subtract increase in Accounts receivable (3,200)
Subtract decrease in Accounts payable (3,800)
Cash flows from operating activities
Which of the following most likely would be classified as restructuring costs?
Severance pay for employee layoffs associated with facility closings
Misty Company reported the following before-tax items during the current year:
Sales revenue $ 1,200
Selling and administrative expenses 620
Restructuring charges 20
Loss on discontinued operations 40
Misty’s effective tax rate is 25%.
What is Misty’s net income for the current year?
$390
Income from continuing operations before taxes ($1,200 − 620 − 20) $ 560
Income tax expense ($560 × 25%) 140
Income from continuing operations $ 420
Loss on discontinued operations (net of $10 tax benefit) (30)
Net income $390
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?
$115,000
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).
An item typically included in the income from continuing operations section of the income statement is:
Restructuring costs
Restructuring costs are reported as a component of continuing operations. Discontinued operations are reported separately, net of tax, after continuing operations. Prior period adjustments are reported as an adjustment to beginning retained earnings.
Freda’s Florist reported the following before-tax income statement items for the year ended December 31, 2024:
Operating income $ 268,000
Income on discontinued operations 53,000
All income statement items are subject to a 25% income tax rate. In its 2024 income statement, Freda’s income tax expense from continuing operations and total income tax expense would be:
$67,000 and $80,250, respectively.
Income tax expense from continuing operations
($268,000 × 25%) $ 67,000
Tax expense due to discontinued operations
($53,000 × 25%) 13,250
Total income tax expense $80,250
The following items appeared in the year-end trial balance for Coffee Bean Company:
Debits Credits
Revenues $ 600,000
Operating expenses $420,000
Income on discontinued operations 200,000
Restructuring costs 100,000
Interest expense 20,000
Gain on sale of investments 30,000
Income tax expense has not yet been accrued. The company’s income tax rate is 25%. What amount should be reported in the company’s income statement as income from continuing operations after taxes?
$67,500
[$600,000 (revenues) − $420,000 (operating expenses) − $100,000 (restructuring costs) − $20,000 (interest expense) + $30,000 (gain on sale of investments)] × [1.0 − 0.25 (income tax rate)] = $67,500.
