Gen Purpose Financial Reporting For-Profit business Flashcards
(12 cards)
A company that wishes to disclose information in the financial statements about the effect of changing prices should report this information in
A. The body of the financial statements.
B. The notes to the financial statements.
C. Supplementary information to the financial statements.
D. Management’s report to shareholders.
C. Supplementary information to the financial statements.
Only significant info is added to the notes.
Which of the following should be included in general and administrative expenses?
A. Both interest and advertising.
B. Interest but not advertising.
C. Advertising but not interest.
D. Neither interest nor advertising.
D. Neither interest nor advertising.
Adverstising is a selling expense.
In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis. Which of the following contributes to Pollard’s purchasing power loss on monetary items?
A. Refundable deposits with suppliers.
B. Inventories.
C. Warranty obligations.
D. Wages payable.
A. Refundable deposits with suppliers.
For monetary items (eg, cash, accounts receivable), there is a right/obligation to deliver a fixed amount. For example, accounts payable have a set dollar amount, regardless of changes in the value of currency before payment. Nonmonetary items (eg, inventory, land) are assets whose value may change. For example, inventory value can change based on multiple factors (eg, scarcity of resources, customer demand).
In times of rising prices, an entity’s purchasing power will decrease (creating a loss) along with monetary assets because the dollar amount of those assets stays the same while the value of the dollar declines. However, rising prices also impact monetary liabilities, causing purchasing power to increase (creating a gain) because the dollar amount of the debt remains constant while the value of the dollar decreases.
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. Plus the loss.
B. Less the loss.
C. Less the fair market value.
D. With no addition or subtraction.
B. Less the loss.
Only the cash inflows and outflows from those activities are reported under the investing activities. Any gain or loss incurred on the sale of a long-term asset is a noncash item that affects net income. Therefore, gains and losses are adjustments to net income under the operating activities section (if using the indirect method).
Cash received can be solved for when it is not provided in the data.
If equipment is sold at a loss, the cash received is less than the carrying value of the asset sold. Therefore, the amount of cash received equals the carrying value less the loss on the sale (Choice D).
If equipment is sold at a gain, the cash received is greater than the carrying value of the asset, so cash received equals the carrying value plus the gain (Choice A).
At December 31, Year 2, Salo Corp.’s balance sheet accounts increased by the following amounts compared with those at the end of Year 1:
Assets $178,000
Liabilities 54,000
Capital stock 120,000
APIC 12,000
Except for a $26,000 dividend payment and the year’s earnings, there were no changes in retained earnings for Year 2. What was Salo’s net income for Year 2?
A. $8,000
B. $18,000
C. $26,000
D. $34,000
B. $18,000
Change in RE needs to be net of dividend payment.
Mint Corp.’s December 31, Year 1, unadjusted trial balance includes the following information:
Cash $ 60,000
Accounts receivable 400,000
Allowance for credit losses (50,000)
Construction in progress in excess of billings on long-term contracts 160,000
Prepaid taxes 45,000
Property, plant, and equipment 100,000
Accumulated depreciation (52,000)
Mint has an income tax liability of $45,000 but has not yet recorded income tax expense. Mint recognizes revenue from long-term construction contracts as the performance obligation is being satisfied. What amount should be reported as total current assets on Mint’s December 31, Year 1 balance sheet?
A. $410,000
B. $570,000
C. $615,000
D. $663,000
B. $570,000
Current assets are future economic benefits that will be used or converted into cash within one year or the operating cycle, whichever is longer. Current assets are available for day-to-day operations and to pay current debts and obligations.
In this scenario, Mint Corp.’s current assets total $570,000 and consist of the following:
Cash of $60,000.
Accounts receivable reported at net realizable value (ie, accounts receivable less allowance for credit losses) of $350,000 (400,000 − 50,000).
Construction in progress (CIP), in excess of billings, of $160,000. Because Mint has completed more work on the long-term contract than it has billed, it is entitled to future customer payment.
Capstone Corp. reported the following amounts for Year 4:
Unrealized gain on trading securities $30,000
Income tax expense (60,000)
Foreign currency translation losses (20,000)
Accumulated other comprehensive income at December 31 80,000
Net income 150,000
What was Capstone’s comprehensive income for Year 4?
A. $100,000
B. $130,000
C. $160,000
D. $230,000
B. $130,000
Unrealized trading gain would already be included in NI
On November 30, Year 1, Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw Co. At November 30, Year 1, Shaw’s balance sheet showed a carrying amount of net assets of $3,000,000. At that date, the fair value of Shaw’s property, plant, and equipment exceeded its carrying amount by $400,000, and the fair value of Shaw’s trademark name brand is $75,000. In its November 30, Year 1, consolidated balance sheet, what amount should Parlor report as goodwill?
A. $275,000
B. $350,000
C. $475,000
D. $750,000
A. $275,000
Parlor, Inc. paid $3,750,000 for Shaw Co’s common stock ($15 per share × 250,000 shares). Goodwill is calculated by subtracting the fair value of net identifiable assets (Carrying value + Fair value adjustments) from the consideration paid on November 30, Year 1.
Purchase price $3,750,000
Less net identifiable assets:
Carrying value of net assets (3,000,000)
Fair value adjustment to property, plant, and equipment (400,000)
Fair value adjustment for trademark (75,000)
Goodwill $275,000
(Choice B) Goodwill of $350,000 excludes the value of the trademark from identifiable assets.
(Choice C) The total fair value adjustments for identifiable assets equal $475,000.
(Choice D) The excess of consideration given less the carrying value of net assets is $750,000.
Things to remember:
In a business combination, the net assets of the acquiree are purchased at fair values on the acquisition date. Tangible and intangible assets are adjusted to their fair values and are used to determine the amount of goodwill, if any. Goodwill is the difference between the purchase price and the fair value of net identifiable assets.
A company reported the following foreign currency transactions during the current year:
On January 20, the company purchased inventory on account from a foreign supplier for the equivalent of $90,000 USD. On March 20, the company paid off the related invoice using $96,000 USD.
On July 1, the company borrowed the equivalent of $500,000 USD with a note from a foreign lender. The note is payable in the lender’s local currency in two years and carries 10% interest annually. On December 31 of the current year, the USD equivalents of the principal and accrued interest were $520,000 and $26,000, respectively.
What amount should be reported for foreign currency transaction gain or loss in the company’s current year income statement?
A. $0
B. $6,000
C. $26,000
D. $27,000
D. $27,000
In this scenario, the company purchased inventory from a foreign supplier for the equivalent of $90,000. However, the transaction was settled for $96,000, resulting in a $6,000 loss. The company paid $6,000 more than anticipated due to fluctuations in the U.S. dollar’s strength.
The company also borrowed a note for the equivalent of $500,000. The note accrues 10% interest annually, resulting in accrual of the equivalent of $25,000 interest ($500,000 × 10% × 6/12 months) at year end. However, due to fluctuations in the U.S. dollar’s strength, the principal and interest are valued at $520,000 and $26,000, respectively, at year end. Thus, the company must revalue the note and related interest, resulting in a $20,000 loss on principal ($500,000 − $520,000) and a $1,000 loss on interest ($25,000 − $26,000).
The company should record a $27,000 foreign currency transaction loss ($6,000 + $20,000 + $1,000) (Choices B and C).
Required disclosures for an entity with plans that mitigate/alleviate substantial doubt regarding its ability to continue as a going concern include all of the following except:
A. Conditions giving rise to the substantial doubt about its ability to continue as a going concern.
B. Management’s evaluation of the significance of the conditions or events.
C. Management’s plan that alleviated the substantial doubt about its ability to continue as a going concern.
D. Management’s intended plans to alleviate substantial doubt about its ability to continue as a going concern.
D. Management’s intended plans to alleviate substantial doubt about its ability to continue as a going concern.
This answer is correct. Conditions giving rise to substantial doubt, management’s evaluation of the significance of the events, and management’s plans that alleviated the doubt are all required disclosures when an entity has alleviated substantial doubt about its ability to continue as a going concern. Management’s intended plans are disclosed when substantial doubt has not been alleviated.
Which one of the following levels of voting ownership is normally assumed to convey significant influence over an investee?
A. 0% - 10%.
B. 20% - 50%.
C. 50% - 100%.
D. 100%.
B. 20% - 50%.
Between 20% and 50% voting ownership of an investee normally is assumed to give the investor significant influence over the investee. Ownership of 20% to 50% of the voting stock of an investee may not give the investor significant influence over the investee if additional special circumstances exist, but normally, it does.
A sale of goods, denominated in a currency other than the entity’s functional currency, resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed. The resulting gain should be included as a:
A. Translation gain reported as a component of comprehensive income.
B. Translation gain reported as a component of income from continuing operations.
C. Transaction gain reported as a component of comprehensive income.
D. Transaction gain reported as a component of income from continuing operations.
D. Transaction gain reported as a component of income from continuing operations.
It is assuming that the gain was realized I guess.
