Financial Reporting - General Purpose For Profit - Income Statement/Comprehensive Income

Question 1

What does comprehensive income generally comprise?

Answer 1

Net Income + Other Comprehensive Income

Question 2

List examples of other comprehensive income.

Answer 2

Foreign Currency Translations (not transactions)

Unrealized gain losses on AFS debt securities, not trading debt securities ( aka HTM securities like bonds), unless the HTM security is being transferred to AFS (AFS to HTM is not OCI).

Pensions adjustments (net gain/loss, net prior service cost or credit, net transition asset or obligation recognized as component of net periodic benefit cost, and not the difference between accumulated benefit obligation and FV of pension plan)

Instrument-specific credit risks

Effective and ineffective portion of derivative cashflow hedges (not defective portion)

Question 3

Retained earnings appropriated for plant expansion and correction of understated depreciation expense from prior periods belong in what financial statement/section?

Answer 3

They both belong to the balance sheet within the equity section.

Question 4

How do you identify a discontinued asset with an impairment loss/gain happening next year but is commitment to be sold this year (including the last day of the year) sometime next year and how is it treated when calculating discontinued operations income for the current year?

Answer 4

if the asset is being sold less than or more than the carrying amount, if carrying amount is less than or more than the fair value amount an sold then there is a impairment loss/gain.

If the loss or gain is estimable to happen next year but the asset has been identified to be sold this year (including last day of the year) then subtract/add it to the operating loss or gain for this year.

If a loss add the loss to the operating loss for the current year.

If a gain add it the operating gain for the current year.

Multiply this new amount by the tax amount leaving out the following year’s operating loss.

Question 5

Calculate comprehensive income with the following items: net income, unrealized loss on AFS, common stock increase, positive net cumulative effect of a change in accounting principles, and a positive foreign currency translation adjustment.

Answer 5

Comprehensive Income:

Net income - unrealized loss on AFS + positive foreign currency translation adjustment.

Equity Section of BS (Retained Earnings):

Positive net cumulative effect of a change in accounting principles.

Equity Section of BS:

Common stock increase

Question 6

What is the definition of comprehensive income?

Answer 6

Includes all changes in equity during a period except those resulting from investments by owners (issuing new shares or receiving capital contributions like money) and distributions to owners (dividends or buybacks).

Question 7

Which of the following should be excluded from comprehensive income: loss from discontinued operations, prior period error corrections, and unrealized loss on investments in non-current marketable equity securities, dividend payments?

Answer 7

Loss from discontinued operations is net income (applies to comprehensive income)

Prior period error corrections are a change in stockholders’ equity (which does not apply to comprehensive income but isn’t the best choice to exclude if given dividend payments).

Unrealized loss on investments in non-current marketable equity securities is a change to shareholders’ equity (which applies to comprehensive income).

Dividend payments should be excluded as it is a distribution to owners.

Question 8

Calculate COGS given the following: raw materials, advertising, staff salaries, bad debt, direct labor costs, factory overhead?

Answer 8

Advertising and bad debt expense are selling expenses, not costs of goods sold (COGS).

Staff Salaries are a general and administrative expense, not a cost of goods sold (COGS).

Raw materials, direct labor costs, and factory overhead are considered a part of the Cost of Goods Sold (COGS).

Question 9

What is the definition of a discounted operation?

Answer 9

Planned and approved the sale of a component of a company that could have been sold, spun off, or abandoned or subject to be sold if still operating.

Question 10

When a full set of general-purpose financial statements is presented, comprehensive income and its components should?

Answer 10

It should be displayed in a financial statement that has the prominence of the other financial statements (on the face, not in the notes).

Question 11

A home currency (for example, a U.S.-based entity) has accounts payable, receivable, or cash valued in a foreign currency it should be adjusted for changes in the?

Answer 11

Non-operating section of the income statement since it is spot rate and foreign exchange gain/loss.

Question 12

How do you calculate life insurance expense given the following: purchased value of life insurance, beginning cash surrender value, ending cash surrender value, dividends applied to cash surrender value, and the annual advance premium?

Answer 12

Take the difference between the beginning year amount and the ending year amount, and add or subtract it from the annual advance premium to get the life insurance expense amount.

Subtract if the ending year amount is larger than the beginning value.

Add if the beginning value amount is larger than the ending value.

Ignore the purchase amount and the dividends

Question 13

How is the following recorded? A U.S. company purchased inventory on account at 1,000 foreign currency units (FCU) from a non-U.S. company on November 15, to be paid on December 15. The FCU is valued at $0.85 on November 15 and at $0.90 on December 15. The journal entry to record payment on December 15 should include which of the following?

Answer 13

November 15th Journal Entries:

The purchase inventory debit of: 850 (1,000 x 0.85)
Accounts Payable credit: 850

December 15th:

Exchange Gain/Loss: Debit 50 (recognize loss)
Accounts payable credit: 50 (fully recognize payment on account)

Accounts Payable Debit: 900 (remove liability)
Credit Cash: 900 (Capture actual payment)

To account for the additional $50 that needs to be paid on December 15th (since 1,000 x 0.90).

Question 14

Can comprehensive income be reported two different ways? How?

Answer 14

Yes, in the Income Statement after net income at the bottom or in the two statement preview within the Statement of Comprehensive Income with a separate income statement.

Question 15

Why is Adjustment for a Prior-Year Understatement of Amortization Expense not apart of net income?

Answer 15

It is a part of retained earnings which affects the balance sheet equity section and from prior year, not this year, as well (as a dead giveaway as to why it does not relate to the income statement).

Question 16

Why is UGL debt AFS/no current securities not apart of net income? But trading securities are? Where at for both?

Answer 16

Since it is a part of OCI, which goes after net income, or on a separate financial statement called the statement of comprehensive income.

Trading securities UGL are located in non-operating income for trading purposes

Question 17

Which of the following statements regarding foreign exchange gains and losses is correct?

An exchange loss occurs when the exchange rate increases between the date a receivable is recorded and the date of the cash receipt.

An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt.

An exchange gain occurs when the exchange rate increases between the date a payable is recorded and the date of cash payment.

An exchange loss occurs when the exchange rate decreases between the date a payable is recorded and the date of the cash payment.

Answer 17

Place yourself as the company or recipient in each scenario.

1. No, because the exchange rate would allow the receiver to recognize a gain as the exchange rate increased after being recorded and paid out.
2. Yes, the exchange rate is increasing, causing a gain when the receivable is recorded, since the actual paid-out amount would be higher than when it was recorded.
3. No, if an exchange rate increases after a payable is recorded when it is paid out, this would result in a loss.
4. No, if an exchange rate decreases after recording a payable compared to when it is paid out, it would result in a gain.

Question 18

How should UGL on a portfolio of marketable equity securities with no significant influence be recorded, with significant influence, and with significant influence with a fair value election?

Answer 18

Without significant influence, it should be reported in income from continuing operations within the non-operating section of the income statement.

With significant influence without fair value election, no unrealized gain or loss (UGL) is recognized on the income statement.

With significant influence with a fair value election should be reported in income from continuing operations within the non-operating section of the income statement.

Question 19

Examples of Non-Operating Items in Other Income/Expenses:
Unrealized gains/losses on equity investments (reported under FVTNI)

Interest income and expense

Foreign exchange gains/losses

Gain or loss on disposal of assets

Impairment charges on assets

Dividend income (if not from core operations)

Restructuring costs or legal settlements

Question 20

If given a trial balance with the following: Cost of Sales, Freight Out, Sales Commission, and the Beginning and Ending Values of the Finished Goods Inventory accounts.

How do you compute COGS?

Answer 20

Ignore freight out and sales commission, as these are sales expenses.

Take the ending debit balance - the beginning debit balance of the finished good inventory account.

If the remaining debit is negative, subtract it from the debit cost of sales.

If the remaining debit is positive, add it to the debit portion of the cost of sales.

Question 21

If given the following: Ordinary gain, foreign currency translation gain, net income, and Unrealized Gain on AFS debt securities.

What is comprehensive income?

Answer 21

Ordinary gain is apart of net income so ignore it

Add net income + foreign currency gain + unrealized gain on AFS debt security.

Question 22

Gains resulting from the process of translating a foreign entity’s financial statements from the functional currency, which has not experienced significant inflation, to U.S. dollars should be included as a (an)?

Answer 22

Other comprehensive income item

Question 23

Where do the following accounts belong on the income statement: loss on early extinguishment of bonds, realized gain on sale of available-for-sale debt securities, and the loss on write-down of inventory?

Answer 23

Non-Operating income (other revenue/expense/gain/loss section not from primary operations) or income from continuing operations within the income statement.

Question 24

Where is interest expense located on the income statement?

Answer 24

Non-operating income/expenses (income from continuing operations).

Question 25

What is the COGS formula?

Answer 25

COGS = Beginning Inventory + Purchases + Freight In (makes inventory more expensive) - Write off of obsolete inventory - Ending Inventory

Question 26

If the book value is higher than the fair value, less the cost to sell, what is this called when it is sold? What would a company report within discounted operations?

Answer 26

Impairment loss, and if the company had an operating loss, would be added together to determine the loss on discontinued operations resulting from the sale of a discontinued asset (if there was an operating gain take the difference between the two). Example: Operating Loss: $10 BV: $5 FV: $1 Impairment Loss: $4 Loss on discounted operation: $14

Question 27

If the book value is lower than the fair value, less the cost to sell, what is this called when it is sold? What would a company report within discounted operations?

Answer 27

Gain on disposal is added to the operating gain and subtracted from the operating loss as applicable (only when it is actually sold, conservatism principle).

Question 28

A likely method that managers use for classification shifting is to report certain operating expenses as? Revenues Income tax expense nonoperating expenses assets

Answer 28

Nonoperating expenses to make the operating profit look more profitable for investors/creditors.

Question 29

Temporary earnings are best characterized as?

Answer 29

Earnings that arise from events that are not likely to recur in the foreseeable future,

Question 30

A company decided to discontinue a component of its business and sell the element by the end of the year. What is the amount of income the company would report as income from discontinued operations?

Answer 30

Income from operations for the year and the gain or loss on the disposal of the asset.

Question 31

The principal benefit of separately reporting discontinued operation is to enhance the?

Answer 31

Ability to predict future profitability more easily.

Question 32

Calculate the permanent earnings under normal circumstances (ignoring tax effects) when given the following: Sales Revenue, selling expense, gain on sale of investments, interest expense, and COGS.

Answer 32

Sales revenue - selling expense - interest expense - COGS would be the permanent earnings since these are the primary functions that a business utilizes daily. The gain on the sale of investments can vary from year to year or not exist at all.

Question 33

Where does operating income stop on the income statement (expense-wise)? What is another name for it as well? What is it composed of?

Answer 33

Right after operating expenses, there is income from operations. Consists of the primary business revenues, COGS, and primary expenses (like SG&A Expense) of the business.

Question 34

What comes after income from operations? What is the difference? And what is it called?

Answer 34

Income from continuing operations, which includes other income/expenses and gains/losses that are not from the primary business activities.

Question 35

What does income from operations indicate on an income statement?

Answer 35

Profit from the primary business activities (revenues/expenses) before tax and other income/expenses.

Question 36

Where do revenues come from (primary, secondary, or anything)?

Answer 36

Comes from the primary business activities such sales, rentals, service income etc...

Question 37

Can revenues (increase of) result in a decrease in liabilities? If so, how?

Answer 37

Yes, when an unearned revenue (a liability) becomes earned revenue.

Question 38

Which of the following is correct? Revenues do not come primarily from rental income, but rather from business activities. Revenue often increases liability Revenue often results in a decrease in an asset. Revenue often results in a increase to asset or a decrease to liability

Answer 38

D. Because it increases assets most times but can decrease liabilities through unearned revenue being earned, and becoming earned revenue (lowering liability).

Question 39

Where do expenses come from (primary, secondary, or other)?

Answer 39

Expenses come from primary business activities like rent insurance, payroll, utility, office, and depreciation.

Question 40

When an expense increases, what typically happens?

Answer 40

Assets typically decrease, such as cash and prepaid expenses.

Question 41

What happens when expenses are incurred but not immediately paid for?

Answer 41

Liabilities such as accrued expenses (accrued payables) increase.

Question 42

Which of the following is correct regarding an increase in expenses? Current liabilities often decrease None of these Current assets often increase Current assets sometimes decrease other than cash

Answer 42

D. Since prepaid expenses can decrease (prepaid insurance upon insurance expense increasing)

Question 43

What are gains/losses?

Answer 43

Incidental activities that are not a part of the core operations of a company.

Question 44

What is the primary difference between revenue and gains in the context of an income statement?

Answer 44

Revenue is the income from primary business activities (like selling goods), while gains are income from secondary (peripheral) activities (such as selling property, plant, equipment)

Question 45

How is a loss different from an expense in an income statement? A loss is a decrease in net income from primary operations, while an expense is from secondary operations. A loss is a decrease in net income resulting from incidental or peripheral transactions, whereas an expense is incurred from core business operations. A loss and an expense are the same and are used interchangeably in accounting An expense results when an asset is sold for below its book value

Answer 45

A loss is from incidental/peripheral transactions while an expense is from core business activities.

Question 46

A company reports the following information as of December 31: Sales revenue $800,000 Cost of goods sold 600,000 Operating expenses 110,000 Foreign Currency Translation Gain 25,000 Non-Operating Gain 35,000 Ignoring Income Taxes, what amount should the company report as comprehensive income as of December 31?

Answer 46

Net income: Sales revenue - COGS - Operating Expenses 90K = 800K - 600K - 110K FCT Gain 25K Non-Operating Gain 35K 150K

Question 47

Gains that are unusual and infrequent should be reported as a direct increase to which of the following?

Answer 47

Income from continuin operations

Question 48

Is Cumulative change in Yr8 and Yr9 income due to the change in revenue and Gain/Loss disposal segement considered total revenue?

Answer 48

NO BACK IT OUT

Question 49

Hail damaged several of Toncan Co.'s vans. Hailstorms had frequently inflicted similar damage to Toncan's vans. Over the years, Toncan had saved money by not buying hail insurance and either paying for repairs, or selling damaged vans and then replacing them. The damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan's financial statements?

Answer 49

The actual hail damage loss in continuing operations, with no separate disclosure.

Question 50

Midway Corp. had the following transactions during year 2: $800,000 pretax loss on equipment damaged by a hurricane. Midway also received $1,000,000 from its insurance company to replace a building, with a carrying value of $300,000, that had been destroyed by the hurricane. What amount should Midway report in its year 2 income statement as an ordinary loss before income taxes?

Answer 50

Take the insured amount - the carrying value then subtract it from the pretax loss 700,000 = 1,000,000 - 300,000 800,000 - 700,000

Question 51

On November 1, year 2, Smith Co. contracted to dispose of an industry segment on February 28, year 3. Throughout year 2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is anticipated on final disposition, how much of the operating losses should be included in the loss on disposal reported in Smith's year 2 income statements? Operating losses for the period January 1 to October 31, year 2. Operating losses for the period November 1 to December 31, year 2. Estimated operating losses for the period January 1 to February 28, year 3.

Answer 51

For year 2 only

Question 52

During a reporting period, a computer manufacturing company used raw materials of $50,000, had direct labor costs of $75,000, and factory overhead of $30,000. Other expenses were for advertising of $5,000, staff salaries of $10,000 and bad debt of $3,000. The company did not have a beginning balance in any inventory account. All goods manufactured during the period were sold during the period. What amount was the company's cost of goods sold during the reporting period?

Answer 52

$50,000 + $75,000 + 30,000 - $0 = $155,000.

Question 53

For the last 10 years, Woody Co. has owned cumulative preferred stock issued by Hadley, Inc. During year 12, Hadley declared and paid both the year 12 dividend and the year 11 dividend in arrears. How should Woody report the year 11 dividend in arrears that was received in year 12?

Answer 53

Include in year 12 income from continuing operations

Question 54

Calculate COGS if given the following: COS 240K Beg Inv 400K End Inv 360K

Answer 54

Add the COS + END INV Then subtract the beg inv 600,000 = 240,000 + 360,000 200,000 = 600,000 - 400,000

Question 55

Toigo Co. purchased merchandise from a vendor in England on November 20 for 500,000 British pounds. Payment was due in British pounds on January 20. The spot rates to purchase one pound were as follows: November 20 $1.25 December 31 1.2 January 20 1.17 How should the foreign currency transaction gain be reported on Toigo's financial statements at December 31?

Answer 55

25000 = 500,000 X 0.05 in income statement

Question 56

On October 1, year 4, Host Co. approved a plan to dispose of a segment of its business. Host expected that the sale would occur on April 1, year 5, at an estimated gain of $350,000. The segment had actual and estimated operating losses as follows: 1/1 to 9/30, year 4 $(300,000) 10/1 to 12/31, year 4 (200,000) 1/1 to 3/31, year 5 (400,000) In its December 31, year 4 income statement, what should Host report as a loss from discontinued operations before income taxes?

Answer 56

The income statement of a business enterprise for current and prior periods shall report the results of operations of the component in discontinued operations in the period(s) in which they occur. The loss on disposal of the segment in year 4 is $500,000 [$300,000 + $200,000].

Question 57

Ball Corp. had the following foreign currency transactions during the current year: Merchandise was purchased from a foreign supplier on January 20 for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20 at the U.S. dollar equivalent of $96,000. On July 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender's local currency on July 1 in two years. On December 31, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum. In Ball's year-end income statement, what amount should be included as foreign exchange loss?

Answer 57

90,000 - 96,000 = -6,000 25,000 = (500,000 * .1) / 2 525,000 = 500,000 + 25,000 546,000 - 525,000 = 21,000 21,000 + 6,000 = 27,000

Question 58

A customer is considering buying a television set with a retail price of $2,000. The customer asks the store manager if the store will consider paying the sales tax so that the total cash payment is $2,000. The sales tax is 8%. The store manager agrees to accept $2,000 cash. What should the accountant credit in this transaction?

Answer 58

148 = 2,000 X .08 / 1.08 1,852 = 2,000 -148

Question 59

On April 30, Deer approved a plan to dispose of a segment of its business. For the period January 1 through April 30, the segment had revenues of $500,000 and expenses of $800,000. The assets of the seg­ment were sold on October 15, at a loss for which no tax benefit is available. In its income statement for the calendar year, how should Deer report the segment’s operations from January 1 to April 30?

Answer 59

300,000 Discontinued operations

Question 60

Nola has a portfolio of marketable equity securities where she does not exercise significant influence. How should Nola report unrealized gains and losses from these securities?

Answer 60

THINKS OF THESE AS TRADING SECURITIES WITHIN THE INCOME STATEMENT

Question 61

A company's draft income statement for the year ended December 31, year 5, reported $370,000 of income from continuing operations before taxes. The following items were excluded: Loss on Sale of Property: $160,000 Income from Discontinued Operations: $90,000 The Discontinued Operation is expected to be sold within six months. If the company's income tax rate is 20%, which of the following amounts should be reported as net income for the year ended December 31, year 5?

Answer 61

370,000 - 160,000 + 90,000 = 300,000 300,000 X 0.8 = 240,000