Study Questions Flashcards
The purchase of treasury stock is recorded on the statement of financial position as a(n)
a) Increase in shareholders’ equity
b) Decrease in shareholders’ equity
c) Increase in assets
d) Decrease in assets
** B** Decrease in shareholders’ equity The purchase of treasury stock is recorded on the statement of financial position as a decrease in shareholders’ equity.
True or False: Equity includes the non-controlling interest in a consolidated entity.
TRUE -
Equity consists of (1) capital contributed by owners, (2) retained earnings (income reinvested), (3) accumulated OCI, and (4) the non-controlling interest in a consolidated entity.
Cash-basis financial statements are most suitably titled as
a) “Cash balance sheet” and “statement of cash flows”.
b) “Financial position” and “results of operations arising from cash transactions.”
c) “Assets and liabilities arising from cash transactions” and “revenue collected and expenses paid.”
d) “Balance sheet” and “income statement resulting from cash transactions.”
** C **“Assets and liabilities arising from cash transactions” and “revenue collected and expenses paid.”
Terms such as balance sheet, statement of financial position, statement of operations, income statement, statement of cash flows, and similar unmodified titles suggest that the statements were prepared in conformity with GAAP. Appropriate titles for comparable cash-basis statements are statement of assets and liabilities arising from cash transactions and statement of revenue collected and expenses paid.
A material loss should be presented separately as a component of income from continuing operations when it is
a) An extraordinary item
b) A cumulative effect change in accounting principle.
c) An item infrequent in occurrence and unusual in nature.
d) An item infrequent in occurrence but not unusual in nature.
**D - **An item infrequent in occurence but not unusual in nature.
To be classified as an extraordinary item, a transaction must be both unusual in nature and infrequent in occurrence within the environment in which the entity operates. If an item meets one but not both of these criteria, it should be presented separtely as a component of income from continuing operations. Whether it is a gain or a loss does not affect this presentation.
True or False: Intraperiod tax allocation must be reported on the face of the balance sheet.
FALSE -
Intraperiod tax allocation is required in the income statement. Thus, income tax expense or benefit is allocated to (1) continuing operations, (2) discontinued operations, (3) extraordinary items, (4) OCI, and (5) items debited or credited directly to other components of equity.
True or False: Under IFRS, items are classified as extraordinary, either on the statement of comprehensive income or in the notes.
FALSE -
Under IFRS, no items are classified as extraordinary, At all!
Either on the statement of comprehensive income or in the notes.
Which of the following is an example of the expense recognition principle of associating cause and effect?
a) Depreciation of fixed assets
b) Officers’ salaries
c) Sales commissions.
d) Allocation of insurnace cost.
C - Sales commissions.
If a direct cause-and-effect relationship can be established between costs and revenues, the costs should be recognized as expenses when the related revenue is recognized. Costs of products sold or services provided and sales commissions are expamples of costs that can be associated with specific revenues.
Under IFRS, the impracticability exception applies to which of the following?
I. Retrospective application of a new accounting policy
II. Retrospective application of a change in estimate
III. Retrospective restatement of a prior-period error
a) II and III only.
b) I and III only.
c) I and II only.
d) I only.
B I and III only
Retrospective application of a new accounting policy is not done if it is impracticable to determine period-specific effects or the cumulative effect. Impracticable means that the entity cannot apply a requirement after making every reasonable effort. The impracticability exception also applies to retrospective restatement of a prior-period error. However, a change in estimate is applied prospectively in profit or loss.
Fair value measurements (FVMs) of assets and liabilities are based on transactions between market participants at the measurement date. Market participants
a) Include parties who are forced to engage in the transactions if they are independent of the entity.
b) are willing and able to engage in transactions involving the asset or liability.
c) Must be specifcally identified.
d) May be related parties if they are knowledgeable about the asset or liability.
** B - **are willing and able to engage in transactions involving the asset or liability.
Market participants are not related parties. They are independent of the reporting entity. They also are knowledgeable and willing and able (but not compelled) to engage in transactions involving the asset or liability.
In computing diluted earnings per share (DEPS), the equivalent number of shares of convertible preferred stock is added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is preferred as to dividends, which amount should be added as an adjustment to the numerator (earnings available to common shareholders)?
a) Annual preferred dividend
b) Annual preferred dividend divided by the income tax rate.
c) Annual preferred dividend times (1- the income tax rate).
d) Annual preferred dividend times the income tax rate.
** A** - Annual preferred dividend
If a capital structure has convertible preferred stock with a dilutive effect on DEPS, the “if-converted” method is used. This method assumes the conversion of the preferred stock occurred at the beginning of the accounting period or at issuance, if later. The annual preferred dividend is accordingly added back to earnings available to common shareholders (the numerator of the DEPS ratio).
