Vol. 3 LM1 Comprehensive Income

Question 1

Concept

certain items of revenue and expense that, by accounting convention, are excluded from the net income

p 47

Answer 1

other comprehensive income (OCI)

Question 2

Describe

other comprehensive income

p 47

Answer 2

OCI consists of revenues, expenses, gains, and losses to be included in comprehensive income but excluded from net income.

Question 3

describe

total comprehensive income

p 47

Answer 3

is the change in equity during a period resulting from transaction and other events, other than those changes resulting from transactions with owners in their capacity as owners

IAS 1, Presentation of Financial Statements

Question 4

describe

comprehensive income

p 47

Answer 4

• the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non-owner sources
• it includes all changes in equity during a period except
  1. those resulting from investments by owners
  2. distributions to owners

FASB ASC Section 2022-10-05

Question 5

list

components of OCI

ASC 220-10-45-10A

p 47

Answer 5

• currency translation adjustments
• gains or losses on net investment hedges
• gains and losses on derivatives qualifying as cash flow hedges
• unrealized holding gains or losses on available for sale debt securities (excludes accrued interest, writeoffs, or the allowance for credit losses)
• gains and losses associated with pensions or other post-retirement benefits
• changes in the fair value of FVO-elected liabilities attributable to instrument-specific credit risk

Question 6

list

four types of items are treated as other comprehensive income

p 47

Answer 6

• foreign currency translation adjustments
• unrealized gains or losses on derivatives contracts accounted for as hedges
• unrealized holding gains and losses on a certain category of investment securities, namely, available-for-sale debt securities
• certain costs of a company’s defined post-retirement plans that are not recognized in the current period

Question 7

OCI

holding losses on securities arise when

p 48

Answer 7

• a company owns securities over a period during which time the securities’ value decreases

Question 8

comprehensive income

should a company
1. exclude unrealized gains and losses from income
2. reflect these unrealized holding gains and losses in its income statement
3. reflect these unrealized holding gains as other comprehensive income

p 48

Answer 8

the answer depends on how the company has categorized the securities.
1. held-to-maturity are reported at their amortized cost, so no unrealized gains or losses are reflected either in the income statement or as other comprehensive income
2. debt securities designated as trading securities, and all investments in equity securities. unrealized gains or losses are reflected in the income statement
3. available-for-sale securities are those not classified as either held-to-maturity or trading securities. Unrealized gains and losses are reflected in the income statement.

Question 9

Assume a company’s beginning shareholders’ equity is €200 million, its net income for the year is €20 million, its cash dividends for the year are €3 million, and there was no issuance or repurchase of common stock. The company’s actual ending shareholders’ equity is €227 million.

What amount has bypassed the net income calculation by being classified as other comprehensive income?
A. €0.
B. €7 million.
C. €10 million.

p 49

Answer 9

C. €10 million
* If the company’s actual ending shareholders’ equity is €227
million, then €10 million [€227– (€200 + €20 – €3)] has bypassed the net income calculation by being classified as other comprehensive income.

Question 10

Which of the following statements best describes other comprehensive income?

A. income earned from diverse geographic and segment activities
B. Income that increases stockholders’ equity but is not reflected as part of net income
C. Income earned from activities that are not part of the company’s ordinary business activities

p 49

Answer 10

B. Income that increases stockholders’ equity but is not reflected as part of net income
* Answers A and C are not correct because they do not specify
whether such income is reported as part of net income and shown in the income statement.

Question 11

Other Comprehensive Income in Analysis

An analyst is looking at two comparable companies. Company A has a lower price/earnings (P/E) ratio than Company B, and the conclusion that has been suggested is that Company A is undervalued. As part of examining this conclusion, the analyst decides to explore the question: What would the

p 50

Answer 11

As shown in the following table, part of the explanation for Company A’s
lower P/E ratio may be that its significant losses—accounted for as other
comprehensive income (OCI)—are not included in the P/E ratio.

Question 12

Concept

presents a subtotal for gross profit (revenue minus cost of goods sold) is said to be presented in what format

p 51

Answer 12

multi-step format

Question 13

P1

Expenses on the income statement may be grouped by:
A. nature, but not by function.
B. function, but not by nature.
C. either function or nature.

p 53

Answer 13

C

Question 14

P2

An example of an expense classification by function is:
A. tax expense.
B. interest expense.
C. cost of goods sold.

p 53

Answer 14

C.

Question 15

P3

Denali Limited, a manufacturing company, had the following income statement information:
* Revenue $4,000,000
* Cost of goods sold $3,000,000
* Other operating expenses $500,000
* Interest expense $100,000
* Tax expense $120,000

Denali’s gross profit is equal to:
A. $280,000.
B. $500,000.
C. $1,000,000.

p 53

Answer 15

C.

Question 16

P4

Under IFRS, income includes increases in economic benefits from:
A. increases in liabilities not related to owners’ contributions.
B. enhancements of assets not related to owners’ contributions.
C. increases in owners’ equity related to owners’ contributions.

p 53

Answer 16

B

Question 17

P5

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business:
* Revenue $1,000,000
* Returns of goods sold $100,000
* Cash collected $800,000
* Cost of goods sold $700,000

Under the accrual basis of accounting, how much net revenue would be reported on Fairplay’s 2009 income statement?
A. $200,000.
B. $900,000
C. $1,000,000

p 53

Answer 17

B

Question 18

P7

A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company’s profitability initially appear:
A. lower.
B. unchanged.
C. higher.

p 54

Question 19

P10

Which inventory method is least likely to be used under IFRS?
A. First in, first out (FIFO).
B. Last in, first out (LIFO).
C. Weighted average.

p 54

Answer 19

B. LIFO

Question 20

P11

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes?

A. $55,000.
B. $60,000.
C. $65,000.

p 55

Answer 20

A. $55,000

Question 21

P13

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired?

A. Straight-line depreciation with a short useful life.
B. Declining balance depreciation with a long useful life.
C. Declining balance depreciation with a short useful life.

p 55

Answer 21

C

Question 22

P14

Under IFRS, a loss from the destruction of property in a fire would most likely be classified as:

A. continuing operations.
B. discontinued operations.
C. other comprehensive income.

p 55

Answer 22

A.

Question 23

P15

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for:

A. all prior periods.
B. current and future periods.
C. prior periods shown in a report.

p 55

Answer 23

C

Question 24

P17

A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company’s:

A. basic EPS equals its diluted EPS.
B. capital structure is considered complex at year-end.
C. basic EPS is calculated by using a simple average number of shares
outstanding.

p 56

Answer 24

A.

Question 25

P18

For its fiscal year-end, Sublyme Corporation reported net income of $200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of $5. Each preferred share is convertible into two shares of the common stock.

The diluted EPS is closest to:
A. $3.52.
B. $3.65.
C. $3.70.

p 56

Answer 25

C

Question 26

P19

For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC’s market price over the year averaged $25 per share. CWC’s diluted EPS is closest to:

A. $5.33.
B. $5.54.
C. $5.94.

p 56

Answer 26

B