FAR 6 - General Purpose FS 2 - Stmt of Comp Income, Equity and Cash Flows Flashcards Preview

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Flashcards in FAR 6 - General Purpose FS 2 - Stmt of Comp Income, Equity and Cash Flows Deck (36):
1

Comprehensive income for a period is the:
A. Sum of other comprehensive income items for the period.
B. Change in total owners' equity from all sources, other than from transactions with owners acting as owners.
C. Sum of net income and other comprehensive income for the period.
D. Change in total owners' equity for the period.

C. Comprehensive income is considered an overall measure of income and includes other comprehensive income. The latter is the net sum across four items: foreign currency adjustments, derivative gains and losses, unrealized gains and losses on securities available for sale, and certain pension adjustments. The latter four items are similar to income items but are not currently included in net income. Thus, comprehensive income is considered a broader and more inclusive measure of income than net income reported in the Income Statement.

2

Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealized loss on investments in noncurrent marketable equity securities.
B. Unrealized loss on investments in current marketable equity securities.
C. Loss on exchange of similar assets.
D. Loss on exchange of dissimilar assets.

A. Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings.
This is a change in owners' equity that is not included in earnings and is not the result of a transaction with owners. It is an "other" comprehensive income item. "Other" refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.

3

What is the purpose of reporting comprehensive income?
A. To summarize all changes in equity from nonowner sources.
B. To reconcile the difference between net income and cash flows provided from operating activities.
C. To provide a consolidation of the income of the firm's segments.
D. To provide information for each segment of the business.

A. The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

4

T/F: Comprehensive income is a required disclosure.

True

5

The Statement of Changes in Equity:
A. Is one of the required financial statements under U.S. GAAP
B. Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items.
C. Is used only if a corporation frequently issues common shares
D. Reconciles all of the beginning and ending balances in the equity accounts.

D. The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.

6

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

$12
If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

7

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay's Statement of Cash Flows, this purchase would:
A. Have no effect.
B. Be treated as an outflow from financing activities.
C. Be treated as an outflow from investing activities.
D. Be treated as an outflow from lending activities.

A. The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

8

T/F: An investment in bonds which has been held for three years will likely be treated as a cash equivalent during the three months prior to its maturity.

False
Investments are usually considered cash equivalents only when their original maturity is three months or less.

9

T/F: Regardless of whether the direct or the indirect method is used to present "Cash Flows from Operating Activities" the remainder of the body of the Statement of Cash Flows will be the same.

True

10

T/F: There is only one way to present "Cash Flows from Operating Activities" in the Statement of Cash Flows.

False
The "Cash Flows from Operating Activities" can be presented with either the Direct or the Indirect method.

11

T/F: In the body of the Statement of Cash Flows, only the "Cash Flows from Operating Activities" section can be different based on the method - direct or indirect - used.

True

12

T/F: The amount of "Cash Flows from Operating Activities" will be the same whether the direct of the indirect method is used.

True

13

T/F: Under the indirect method of presenting "Cash Flows from Operating Activities," the presentation begins with net income.

True
The indirect method is a reconciliation of net income and net operating cash flow.

14

T/F: When the direct method is used to present "Cash Flows from Operating Activities," a separate reconciliation of net income with cash flow from operating activities must be provided.

True
The direct method reports the actual operating cash flows in the operating section. The reconciliation is provided in a separate schedule.

15

T/F: The Statement of Cash Flows discloses only information about cash flows.

False.
The CF reports on info of net cash inflow/outflow of Operating Activities, Investing Activities, and Financing Activities; the Effects of Foreign Currency Translation; Reconciliation of net cash inflows/outflows; and Non-cash Investing and Financing Activities.

16

T/F: The direct method of presenting "Cash Flows from Operating Activities" requires different additional disclosures than the indirect method.

True
The direct method reports the actual operating cash flows in the operating section. The reconciliation is provided in a separate schedule.

17

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance.
In a Statement of Cash Flows, what amount is included in investing activities for the above transaction?

The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, ONLY THE CASH AMOUNT PAID is disclosed in the Statement of Cash Flows. The non-cash activity schedule would disclose the acquisition price and amount financed with the mortgage.

18

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, year 1?

$3,000
Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment for the forklift and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.

19

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance.
In a Statement of Cash Flows for the purchasing company, what amount is included in financing activities for the above transaction?

ZERO
The cash payment is an investing cash outflow, not a financing cash flow. The transaction would show no entry in the financing section of the Statement of Cash Flows.
The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow.

20

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?
A. Gain on sale of plant asset.
B. Sale of property, plant and equipment.
C. Payment of cash dividend to the shareholders.
D. Issuance of common stock to the shareholders.

A. The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

21

On December 31, 20x1, Deal, Inc. failed to accrue the December 20x1 sales salaries that were payable on January 6, 20x2.
What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's 20x1 financial statements?

Working Capital = Overstated
Cash flows from operating activities = No effect

Failure to accrue salaries at the end of 20x1 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated.
The accrued salaries at the end of 20x1 would not have been paid in 20x1, even if they had been accrued correctly. Therefore, 20x1 operating cash flows are not affected by the failure to accrue the salaries.

22

T/F: Using the Direct Method, Operating Activities includes cash inflows: from customers, interest income or dividend income, and sale of trading investments.

True

23

T/F: Using the Direct Method, Operating Activities includes cash outflows: to suppliers and employees, to government, purchase of trading investments, and for interest or other operational expenses.

True

24

T/F: When using the indirect method of cash flows, you are essentially doing a reconciliation.

True

25

T/F: Investing Activities, cash inflows: sale of PPE. sale of debt or equity securities of other entities, collection of loan principal. Cash outflows: Purchase of PPE, Purchase of debt or equity securities of other entities.

True

26

Financing Activities, cash inflows: from sale of the entity's own equity securities, from issuance of debt (bonds and notes). Cash outflows: to stockholders as dividends, to redeem LT debt, and to reacquire capital stock.

True

27

Y/N: Are the amounts of operating cash flows generally the same as the related amounts of accrual basis revenues and expenses?

No.

28

T/F: Cash payments for income tax is a cash outflow from operating activities.

True.

29

T/F: The sale of marketable securities Held for Trading would be a source of cash flow for operations if the purchaser intends to hold the securities only for a short time.

True

30

In a Statement of Cash Flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:
A. Less the loss and plus the amount of tax attributable to the loss.
B. Less both the loss and the amount of tax attributable to the loss.
C. Less the loss.
D. With no addition or subtraction.

C. A journal entry helps to visualize the transaction:
Cash dr. xxx
Loss dr. xxx
Asset (book value) cr. xxx
The investing cash inflow is the book value of the asset less the loss. In actuality, this amount equals the amount of cash received on the sale. Any tax effects are accounted for in income tax payments, an operating cash outflow.

31

Rory Co.'s prepaid insurance was $50,000 at December 31, 2005 and $25,000 at December 31, 2004. Insurance expense was $20,000 for 2005 and $15,000 for 2004.
What amount of cash disbursements for insurance should be reported in Rory's 2005 net cash flows from operating activities presented on a direct basis?

The prepaid insurance account is analyzed to determine insurance payments during the year.
Beg. prepaid insurance + insurance payments - insurance expense = end. prepaid insurance
$25,000 + insurance payments - $20,000 = $50,000
insurance payments = $45,000

32

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows:
Accrued interest payable $17,000 decrease
Prepaid interest 23,000 decrease
What amount of interest expense for the current year will Ness report in its income statement?

A summary journal entry is helpful to sort out what happened with interest during the period:
dr. Interest expense 76,000
dr. Accrued interest payable 17,000
cr. Prepaid interest 23,000
cr. Cash 70,000
The interest expense amount for the year is the derived amount in the entry. Also, a more verbal approach works:
(1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and
(2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense.
The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 - accrued payable decrease of $17,000 + prepaid interest decrease $23,000.

33

Which of the following should not be disclosed in an enterprise's Statement of Cash Flows that is prepared using the indirect method?
A. Interest paid, net of amounts capitalized.
B. Income taxes paid.
C. Cash flow per share.
D. Dividends paid on preferred stock.

C. Cash flow per share is not an accepted disclosure. The reason is that there might be confusion with earnings per share, and investors might believe that the amount of cash flow per share would be available for dividends.

34

When calculating the cash paid for goods to be sold, what are the two accounts related to COGS?

Inventory and Accounts Payable

Cost of goods sold
$250,000

Less decrease in inventory (this represents an increase to cost of goods sold for inventory not purchased in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount).
(16,000)

Less increase in accounts payable (this represents an increase in purchases and, therefore, cost of goods sold that was not paid for in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount).
( 7,500)

Equals cash paid for inventory

35

In a Statement of Cash Flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:
A. Plus the gain.
B. Plus the gain and less the amount of tax attributable to the gain.
C. Plus both the gain and the amount of tax attributable to the gain.
D. With no addition or subtraction.

A. The carrying amount plus the gain equals the cash proceeds received. The proper disclosure is something along the lines of the following journal entry:
dr. Proceeds from sale of equipment $xxxxxx.
cr. Gain xxxxx
cr. Equipment (book value) xxxxx

36

During 20x1, Teb, Inc. had the following activities related to its financial operations:
Payment for the early retirement of long-term bonds payable (carrying value $740,000) $750,000
Distribution in 20x1 of cash dividends declared in 20x0 to preferred shareholders 62,000
Carrying value of convertible preferred stock in Teb, converted into common shares 120,000
Proceeds from the sale of treasury stock (carrying value at cost, $86,000) 95,000
In Teb's 20x1 Statement of Cash Flows, net cash used in financing activities should be:

$717,000

Payment for the early retirement of long-term bonds payable ($750,000)
Distribution in 20x1 of cash dividend declared in 20x0 to preferred shareholders (62,000)
Proceeds from the sale of treasury stock 95,000
Net cash used in financing activities ($717,000)
The conversion of preferred stock is a non-cash activity, not a cash flow.

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