FAR 47 - Combined FS and Financial Instruments Flashcards Preview

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Flashcards in FAR 47 - Combined FS and Financial Instruments Deck (25):
1

Combined statements may be used to present the results of operation of:
Companies under common management
Commonly controlled companies
Unconsolidated Subsidiaries

All 3. Combined financial statements are used (when consolidated statements are not appropriate) to show the aggregate results both for companies under common management and for companies under common control (and for unconsolidated subsidiaries).

2

T/F: Problems associated with minority interest, foreign operations, different fiscal periods, or income taxes should be treated differently if they occur in the preparation of combined FS vs. if they occur in the preparation of consolidated FS.

False.
According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.

3

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp.

Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During 2004, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 2004. In preparing combined financial statements for 2004, Nolan's bookkeeper disregarded the common ownership of Twill and Webb.

By what amount was unadjusted revenue overstated in the combined income statement for 2004?

$56,000
Since all the goods have been sold outside the combined entity, income recognition is correct.

However, sales and cost of goods sold have been recorded at two different points (i.e., the sale from Webb to Twill and the sale from Twill to outsiders). To the combined entity, Webb's cost of merchandise (the original cost to the combined entity) is what is needed for cost of goods sold, and Twill's sales (the amount the merchandise was sold for outside the combined entity) is needed for sales.

This means that the sale from Webb to Twill and the cost of goods recorded by Twill need to be eliminated. That amount is $56,000 (computed as $40,000 cost to Webb x transfer price to Twill of 140% of cost = $56,000).

4

T/F: When preparing combined financial statements, the parent company's investment account must be eliminated against the shareholders' equity of the subsidiaries.

False.
Intercompany ownership and related equity - the carrying value of an investment in a company to be combined is eliminated against an equal amount of equity of that company; thus, there are no differneces (between the debit and credit) to be allocated.

5

T/F: When preparing combined financial statements, the elimination of an investment held by one combining company in another combining company should be based on the amount of the investment.

True

6

T/F: When preparing combined financial statements, any investment held by one combining company in another combining company must be eliminated.

True

7

T/F: Entities that have different fiscal periods cannot be parties to combined financial statements.

False.
Entities do not have to have the same fiscal periods in order to be combined.

8

T/F: Receivables and payables between companies being combined should be eliminated.

True

9

T/F: Both corporate and non-corporate entities can be parties to the same combined financial statements.

True

10

T/F: Combined financial statements can be used in lieu of consolidated financial statements.

False.
Combined FS do not replace the need of consolidated FS.

11

T/F: When preparing combined financial statements, the elimination of an investment held by one combining company in another combining company can result in a difference between the amount of the investment and the equity eliminated, and that difference will need to be allocated.

False.
Intercompany ownership and related equity - the carrying value of an investment in a company to be combined is eliminated against an equal amount of equity of that company; thus, there are no differneces (between the debit and credit) to be allocated.

12

T/F: Combined financial statements show the financial position and results of operations for a single controlling corporation.

False.
Shows the financial position for two or more related firms.

13

For financial accounting purposes, which one of the following is not a type of hedge carried out using derivatives?
A. Fair value.
B. Cash flow.
C. Speculative.
D. Foreign currency.

C. When derivatives are used for speculative purposes, the intent is not to hedge an existing position, because there is no existing position to hedge. Rather, when used for speculative purposes, the intent is to make a profit.

14

Which one of the following is not a characteristic of derivative instruments?
A. Derivative instruments are a form of financial instrument.
B. All derivative instruments have the same accounting requirements.
C. Derivative instruments can be used for hedging purposes.
D. Derivative instruments can be used to hedge foreign currency risk.

B. All derivative instruments do not have the same accounting requirements. The appropriate accounting requirements depend on the specific purpose of holding or issuing the derivative instrument.

15

Which one of the following is not a financial instrument?
A. Cash.
B. Investment in another entity.
C. Derivative instruments.
D. All contracts.

D. Not all contracts are financial instruments. Only contracts that have certain features are financial instruments. Those features include: (1) they result in the exchange of cash or an ownership interest in an entity, and (2) both (a) impose on one entity a contractual obligation to deliver cash or another financial instrument and (b) convey to a second entity a contractual right to receive cash or another financial instrument. For example, a contract to exchange commodities would not be a financial instrument.

16

Which one of the following is not a characteristic of financial instruments?
A. Financial instruments include derivative instruments.
B. Certain disclosure requirements apply to all financial instruments.
C. Financial instruments can be used for hedging purposes.
D. All financial instruments have the same accounting requirements.

D. All financial instruments do not have the same accounting requirements. Because financial instruments cover a variety of assets and liabilities, and are used for different purposes, there are different accounting requirements for different financial instruments, including derivatives.

17

T/F: Accounts receivable and Accounts payable are financial instruments.

True

18

T/F: Derivative instruments can be used for hedging purposes.

True

19

T/F: Ownership interest in a partnership is a financial instrument.

True

20

T/F: A fair value hedge is the same as a cash flow hedge.

False.
Hedge accounting essentially falls into 2 broad categories:
Fair value risk - the risk of loss due to changes in FV.
Cash flow risk - the risk of loss due to changes in cash flows.

21

T/F: A warehouse receipt evidencing ownership of a commodity is a financial instrument.

False.
There are many, but this is not one of them.

22

T/F: Notes are financial instruments.

True

23

T/F: Derivative instruments can be used to speculate.

True

24

T/F: Inventory is a financial instrument.

False.
There are many, but this is not one of them.

25

T/F: Financial instruments and derivative instruments are different types of instruments.

False.
Derivatives are special forms of financial instruments.

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