Intermediate Accounting Volume 1, 11th Canadian Edition By Bruce J. McConomy - Test Bank

Intermediate Accounting Volume 1, 11th Canadian Edition By Bruce J. McConomy – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

CHAPTER 5

 

FINANCIAL POSITION AND CASH FLOWS

 

CHAPTER STUDY OBJECTIVES

 

 

1. Understand the statement of financial position and statement of cash flows from a business perspective. It is important to understand how users of financial statements use the SFP and the cash flow statement. For example, potential investors in a company may use the SFP to analyze a company’s liquidity and solvency in order to assess risk of investing. In addition, the SFP provides details about the company’s financial structure. Users may use a company’s statement of cash flows to assess its earnings quality and obtain information about its operating, investing, and financing activities.

 

 

2. Identify the uses and limitations of a statement of financial position. The SFP provides information about the nature and amounts of investments in enterprise resources, obligations to creditors, and the owners’ equity in net resources. The SFP contributes to financial reporting by providing a basis for (1) calculating rates of return, (2) evaluating the enterprise’s capital structure, and (3) assessing the enterprise’s liquidity, solvency, and financial flexibility. The limitations of a SFP are as follows: (1) The SFP often does not reflect current value, because accountants have adopted a historical cost basis in valuing and reporting many assets and liabilities. (2) Judgments and estimates must be used in preparing a SFP. (3) The SFP leaves out many items that are of financial value to the business but cannot be recorded objectively, such as its human resources, customer base, and reputation.

 

 

3. Identify the major classifications of a statement of financial position. The SFP’s general elements are assets, liabilities, and equity. The major classifications within the SFP on the asset side are current assets; investments; property, plant, and equipment; intangible assets; and other assets. The major classifications of liabilities are current and long-term liabilities. In a corporation, owners’ equity is generally classified as shares, contributed surplus, retained earnings, and accumulated other comprehensive income.

 

 

4. Prepare a classified statement of financial position. The most common format lists liabilities and shareholders’ equity directly below assets on the same page.

 

 

5. Identify statement of financial position information that requires supplemental disclosure. Five types of information are normally supplemental to account titles and amounts presented in the SFP. (1) Contingencies: Material events that have an uncertain outcome. (2) Accounting policies: Explanations of the valuation methods that are used or the basic assumptions that are made for inventory valuation, amortization methods, investments in subsidiaries, and so on. (3) Contractual situations: Explanations of certain restrictions or covenants that are attached to specific assets or, more likely, to liabilities. (4) Additional information: Clarification by giving more detail about the composition of SFP items. (5) Subsequent events: Events that happen after the date of the SFP.

 

 

6. Identify major disclosure techniques for the statement of financial position. There are four methods of disclosing pertinent information in the SFP: (1) Parenthetical explanations: Additional information or description is often provided by giving explanations in parentheses that follow the item. (2) Notes: Notes are used if additional explanations or descriptions cannot be shown conveniently as parenthetical explanations. (3) Cross-reference and contra items: A direct relationship between an asset and a liability is cross-referenced on the SFP. (4) Supporting schedules: Often a separate schedule is needed to present more detailed information about certain assets or liabilities because the SFP provides just a single summary item.

 

 

7. 7. Indicate the purpose and identify the content of the statement of cash flows. The main purpose of a statement of cash flows is to provide relevant information about an enterprise’s cash receipts and cash payments during a period. Reporting the sources, uses, and net increase or decrease in cash lets investors, creditors, and others know what is happening to a company’s most liquid resource. Cash receipts and cash payments during a period are classified in the statement of cash flows into three different activities: (1) Operating activities: Involve the cash effects of transactions that enter into the determination of net income. (2) Investing activities: Include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment. (3) Financing activities: Involve liability and owners’ equity items and include (a) obtaining capital from owners and providing them with a return on their investment and (b) borrowing money from creditors and repaying the amounts borrowed.

 

 

8. Prepare a statement of cash flows using the indirect method. This involves determining cash flows from operations by starting with net income and adjusting it for noncash activities, such as changes in accounts receivable (and other current asset/liability) balances, depreciation, and gains/losses. It is important to look carefully at prior years’ operating activities that might affect cash this year, such as cash collected this year from last year’s credit sales and cash spent this year for last year’s accrued expenses. The cash flows from investing and financing activities can then be determined by analyzing changes in SFP accounts and the cash account.

 

 

9. Understand the usefulness of the statement of cash flows. Creditors examine the statement of cash flows carefully because they are concerned about being paid. The amount of net cash flow provided by operating activities in relation to the company’s liabilities is helpful in making this assessment. In addition, measures such as a free cash flow analysis provide creditors and shareholders with a better picture of the company’s financial flexibility.

 

 

10. Identify differences in accounting between ASPE and IFRS. Illustration 5-24 outlines the major differences in how both sets of standards account for and present items on the SFP and statement of cash flows. Both sets of standards largely require that the same SFP elements be presented. In addition, IFRS requires presentation of biological assets, investment properties, and provisions. The statement of cash flow presentation requirements are similar.

 

 

11. 11. Identify the significant changes planned by the IASB regarding financial statement presentation. The IASB has been planning to change the way financial statements are presented by issuing a new standard on financial statement presentation. However, the project was paused in 2011 “until the IASB concludes its ongoing deliberations about its future work plan.” In June 2014, the IASB issued a more targeted Exposure Draft called the “Disclosure Initiative—Proposed Amendments to IAS 7.” It proposes amendments to provide additional information to financial statement users about financing activities (other than those that relate to equity items).

 

 

12. Identify the major types of financial ratios and what they measure (Appendix 5A).

Ratios express the mathematical relationship between one quantity and another, in terms of a percentage, a rate, or a proportion. Liquidity ratios measure the short-term ability to pay maturing obligations. Activity ratios measure how effectively assets are being used. Profitability ratios measure an enterprise’s success or failure. Coverage ratios measure the degree of protection for long-term creditors and investors.

 

 

Multiple Choice QUESTIONS

 

Answer           No.      Description

b                 1.       Earnings quality

d                 2.       Limitation of the balance sheet

d                 3.       Uses of the statement of financial position

b                 4.       Uses of the statement of financial position

c                 5.       Uses of the statement of financial position

d                 6.       Definition of solvency

a                 7.       Definition of financial flexibility

b                 8.       Risk of business failure

d                 9.       Limitations of the statement of financial position

d               10.       Monetary assets

c               11.       Monetary assets

b               12.       Financial instruments

c               13.       Non-monetary assets

b               14.       Non-monetary assets

c               15.       Basis of classifying assets

d               16.       Definition of operating cycle

a               17.       Identification of current asset

d               18.       Identification of non-current asset

c               19.       Classification of securities

b               20.       Intangible assets

c               21.       Identification of current liabilities

d               22.       Definition of working capital

b               23.       Identification of working capital items

b               24.       Definition of liabilities

a               25.       Identification of long-term liabilities

d               26.       Classification of equity section accounts

c               27.       Classification of shareholders’ equity

d               28.       Current assets on the balance sheet

b               29.       Value of receivables

c               30.       Calculate total current assets

b               31.       Calculate total current assets

d               32.       Calculate total current liabilities

b               33.       Calculate retained earnings balance

b               34.       Calculate current and long-term liabilities

d               35.       Supplementary disclosure

b               36.       Supplementary disclosure

c               37.       Summary of significant accounting policies

d               38.       Methods of disclosure

d               39.       Contra account

d               40.       Accounting policies

c               41.       Definition of statement of cash flows

a               42.       Disclosure of revenue-producing activities on the statement of cash flows

b               43.       Identify an investing activity

c               44.       Identify a financing activity

a               45.       Identify an investing activity

c               46.       Statement of cash flow

b               47.       Classification of investing activity

c               48.       Classification of investing activity

a               49.       Classification of operating activity

d               50.       Classification of financing activity

b               51.       Classification of investing activity

a               52.       Preparation of statement of cash flows under indirect method

c               53.       Cash flows from operating activities

d               54.       Preparation of statement of cash flows under indirect method

c               55.       Preparation of statement of cash flows under direct method

b               56.       Preparation of statement of cash flows under direct method

c               57.       Classification of operating activity

b               58.       Cash debt coverage ratio

c               59.       Current cash debt coverage ratio

d               60.       Financial flexibility measure

c               61.       Calculation of free cash flow

b               62.       Financial flexibility

c               63.       Calculation of free cash flow

a               64.       Disclosures under ASPE

c               65.       Disclosures under IFRS

c               66.       Reclassification of current debt

d               67.       Special disclosure under IFRS

b               68.       Listing of current assets

c               69.       Reporting requirements for SFP

c               70.       Upcoming IABS and FASB changes to financial statement presentation

a               71.       New definitions in Exposure Draft

c               72.       New proposals in Exposure Draft

b              *73.       Definition of activity ratios

c              *74.       Definition of solvency ratios

d              *75.       Definition of asset turnover

c              *76.       Calculate asset turnover ratio

d              *77.       Calculate rate of return on assets

c              *78.       Financial or capital market risks

 

*This topic is dealt with in an Appendix to the chapter.

 

 

Exercises

   Item              Description

 

E5-79              Earnings quality

E5-80              Creditworthiness; debt to total assets

E5-81              Liquidity, solvency, and financial flexibility

E5-82              Limitations of the statement of financial position

E5-83              Terminology

E5-84              Definitions

E5-85              Account classification

E5-86              Current liabilities

E5-87              Current assets

E5-88              Account classification

E5-89              Valuation of statement of financial position items

E5-90              Statement of financial position classifications

E5-91              Statement of financial position classifications

E5-92              Statement of financial position classifications

E5-93              Statement of financial position

E5-94              Statement of financial position presentation

E5-95              Subsequent events

E5-96              Contractual disclosures and ethical consideration

E5-97              Notes

E5-98              Contra or adjunct accounts

E5-99              Statement of cash flows

E5-100            Statement of cash flows purpose

E5101              Statement of cash flows basic format

E5-102            Cash provided (used) by operating activities

E5-103            Ending cash balance

E5-104            Statement of cash flows ratios

E5-105            Calculation of cash flow and ratio

*E5-106                       Calculation of ratios

*E5-107                       Interpretation of ratios

*E5-108                       Calculation of ratios

*E5-109                       Calculation of ratios

 

*This topic is dealt with in an Appendix to the chapter.

 

 

PROBLEMS

 

   Item              Description

 

P5-110             Statement of financial position format

P5-111             Statement of financial position presentation

P5-112            Calculation of ending retained earnings

P5-113             Statement of cash flows – direct method

P5-114            Statement of cash flows – indirect method

*P5-115                       Calculation of ratios

 

*This topic is dealt with in an Appendix to the chapter.

 

MULTIPLE CHOICE QUESTIONS

 

 

1. When assessing earnings quality, financial analysts are concerned that management may attempt to manipulate information to make earnings appear better or worse than they really are. Which of the following would NOT suggest poor earnings quality?
2. a) reduction of the allowance for doubtful accounts
3. b) consistent application of GAAP
4. c) significantly higher net income than cash flows from operations
5. d) reliance on share issuances to offset repeated negative cash flow from operations

 

Answer: b

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

CPA: Audit and Assurance

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

2. Which of the following is a limitation of the balance sheet?
3. a) Many items that are of financial value are omitted.
4. b) Judgments and estimates are used.
5. c) Current fair value is not reported.
6. d) All of these answer choices are correct.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

3. The statement of financial position is useful for all of the following EXCEPT
4. a) assessing a company’s risk.
5. b) evaluating a company’s liquidity.
6. c) evaluating a company’s financial flexibility.
7. d) determining free cash flows.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

4. The statement of financial position is useful for all of the following EXCEPT to
5. a) compute rates of return.
6. b) analyze cash inflows and outflows for the period.
7. c) evaluate capital structure.
8. d) assess future cash flows.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

5. The statement of financial position is useful for analyzing all of the following EXCEPT
6. a) liquidity.
7. b) solvency.
8. c) profitability.
9. d) financial flexibility.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

6. An enterprise’s ability to pay its debts and related interest is called
7. a) liquidity.
8. b) financial flexibility.
9. c) the amount of time expected to pass until an asset is realized.
10. d) solvency.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

7. An enterprise’s ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities is called
8. a) financial flexibility.
9. b) liquidity.
10. c) the quick ratio.
11. d) solvency.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

8. Generally, as financial flexibility increases, the risk of enterprise or business failure will
9. a) increase.
10. b) decrease.
11. c) stay the same.
12. d) be eliminated.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

9. Which of the following is NOT a limitation of the statement of financial position?
10. a) Many assets are reported at historical cost.
11. b) Judgments and estimates are used.
12. c) Only “hard” numbers are reported.
13. d) Disclosure of all pertinent information in the notes.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

10. Monetary assets represent
11. a) only cash.
12. b) contractual rights to receive cash.
13. c) equity investments in other companies.
14. d) cash or claims to future cash flows that are fixed and determinable in amounts and timing.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

11. Monetary assets include
12. a) cash, accounts receivable and inventory.
13. b) accounts and notes receivable and inventory.
14. c) cash, accounts and notes receivable.
15. d) accounts receivable and property, plant and equipment.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

12. Financial instruments do NOT include
13. a) cash.
14. b) inventory.
15. c) derivatives.
16. d) accounts payable.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

13. Non-monetary assets include
14. a) accounts and notes receivable and inventory.
15. b) accounts receivable and property, plant and equipment.
16. c) inventory, property, plant and equipment, and intangibles.
17. d) accounts receivable and investments.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

14. Non-monetary assets
15. a) are those for which the cash value is determinable in amount and timing.
16. b) are often measured at historical cost.
17. c) are always classified as non-current.
18. d) will required future cash outflows from the company.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

15. The basis for classifying assets as current or non-current is conversion to cash within
16. a) the accounting cycle or one year, whichever is shorter.
17. b) the accounting cycle or one year, whichever is longer.
18. c) the operating cycle or one year, whichever is longer.
19. d) the operating cycle or one year, whichever is shorter.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

16. The operating cycle is the time between
17. a) selling products to customers and the realization of cash.
18. b) purchase of inventory and selling to customers.
19. c) manufacture of products and receiving cash from customers.
20. d) acquisition of assets for processing and the realization in cash or cash equivalents.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

17. Which of the following is a current asset?
18. a) trade instalment receivables normally collectible in eighteen months
19. b) intangible assets
20. c) investment in associates (significant influence investments)
21. d) cash designated for the purchase of property, plant and equipment

 

Answer: a

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

18. Which of the following should NOT be considered current assets in the statement of financial position?
19. a) instalment notes receivable due over eighteen months, in accordance with normal trade practice
20. b) prepaid taxes, which cover assessments for the current year
21. c) equity or debt securities purchased with cash available for current operations
22. d) franchises and copyrights

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

19. Equity or debt securities held to finance future construction of additional plants should be classified on a statement of financial position as
20. a) current assets.
21. b) property, plant, and equipment.
22. c) non-current investments.
23. d) intangible assets.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

20. Which of the following statements about intangible assets is INCORRECT?
21. a) They are capital assets that have no physical substance.
22. b) Intangibles with finite lives are amortized but not tested for impairment.
23. c) Intangibles with infinite lives are not amortized but are tested for impairment.
24. d) Internally recognized intangibles are never recognized on the statement of financial position.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

21. Which of the following is NOT a current liability?
22. a) unearned revenue
23. b) derivatives
24. c) stock dividends distributable
25. d) trade accounts payable

 

Answer: c

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

22. Working capital is
23. a) capital which has been reinvested in the business.
24. b) cash invested by owners.
25. c) cash and receivables less current liabilities.
26. d) current assets less current liabilities.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

23. An example of an item which is NOT an element of working capital is
24. a) accrued interest on notes receivable.
25. b) goodwill.
26. c) inventory.
27. d) short-term investments.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

24. Which of the following statements best describes a liability?
25. a) Any obligation, whether enforceable or not, is a liability.
26. b) A liability is an enforceable economic burden or obligation.
27. c) A liability is a legal economic benefit.
28. d) Deferred income taxes are always shown as liabilities.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

25. Which of the following should be EXCLUDED from long-term liabilities?
26. a) derivatives
27. b) employee future benefits obligations
28. c) long-term liabilities maturing within the operating cycle, but will be paid from a sinking fund
29. d) bonds payable maturing in five years

 

Answer: a

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

26. Which of the following would NOT appear in the equity section of a statement of financial position?
27. a) preferred shares
28. b) accumulated other comprehensive income
29. c) stock dividend distributable
30. d) investment in affiliate

 

Answer: d

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

27. The shareholders’ equity section is usually divided into which four parts?
28. a) preferred shares, common shares, retained earnings, contributed surplus
29. b) preferred shares, common shares, retained earnings, other comprehensive income
30. c) capital shares, contributed surplus, retained earnings, accumulated other comprehensive income
31. d) capital shares, appropriated retained earnings, unappropriated retained earnings, contributed surplus

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

28. The current assets section of the balance sheet should include
29. a) machinery.
30. b) patents.
31. c) goodwill.
32. d) inventory.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

29. Receivables are valued based on their ______.
30. a) fair value
31. b) estimated amount collectible
32. c) lower of cost or market value
33. d) historical cost

 

Answer: b

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

30. Pluto Corp.’s trial balance included the following account balances at December 31, 2017:

Accounts receivable (net)……………………………………………………….       $41,000

Trading securities…………………………………………………………………..           7,000

Accumulated depreciation on equipment and furniture……………….         15,000

Cash…………………………………………………………………………………….         10,000

Inventory………………………………………………………………………………         27,000

Equipment…………………………………………………………………………….         25,000

Patent…………………………………………………………………………………..           4,000

Prepaid expenses………………………………………………………………….           1,500

Land held for future business site…………………………………………….         18,000

In Pluto’s December 31, 2017 statement of financial position, the current assets total is

500. a) $104,500.
501. b) $90,500.
502. c) $86,500.
503. d) $73,500.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $41,000 + $7,000 + $10,000 + $27,000 + $1,500 = $86,500

 

 

Use the following information for questions 31–33.

 

Venus Corp.’s trial balance at December 31, 2017 is properly adjusted except for the income tax expense adjustment.

Venus Corp.

Trial Balance

December 31, 2017

  Dr.                       Cr.            

Cash                                                                                          $  675,000

Accounts receivable (net)                                                           2,895,000

Inventory                                                                                     2,385,000

Property, plant, and equipment (net)                                         8,366,000

Accounts payable and accrued liabilities                                                            $ 1,981,000

Income taxes payable                                                                                                684,000

Future income tax liability                                                                                            75,000

Common stock                                                                                                        3,350,000

Contributed surplus                                                                                                 2,680,000

Retained earnings, Jan 1, 2017                                                                              4,650,000

Net sales and other revenues                                                                               12,360,000

Costs and expenses                                                                 10,080,000

Income tax expenses                                                                1,379,000                            

$25,780,000         $25,780,000

 

Other financial data for the year ended December 31, 2017:

• Included in accounts receivable is $720,000 due from a customer and payable in quarterly instalments of $90,000. The last payment is due December 29, 2019.
• The balance in the future income tax liability account relates to a temporary difference that arose in a prior year, of which $30,000 is classified as a current liability.
• During the year, estimated tax payments of $465,000 were charged to income tax expense. The current and future tax rate on all types of income is 35 percent.

 

 

31. In Venus’s December 31, 2017 statement of financial position, the current assets total is
32. a) $5,955,000.
33. b) $5,595,000.
34. c) $3,060,000.
35. d) $4,495,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $675,000 + [$2,895,000 – ($90,000 x 4)] + $2,385,000 = $5,595,000

 

 

32. In Venus’s December 31, 2017 statement of financial position, the current liabilities total is
33. a) $2,435,000.
34. b) $2,695,000.
35. c) $2,200,000.
36. d) $2,114,000.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: Note the adjusted income tax expense will be $798,000 [($12,360,000 – $10,080,000) x 35%] = $798,000. When the expense is reduced by $581,000 ($1,379,000 – $798,000 = $581,000), the liability will also be reduced by the same amount to $103,000 ($1,981,000 + $103,000) + $30,000 = $2,114,000

 

 

33. In Venus’s December 31, 2017 statement of financial position, the final retained earnings balance is
34. a) $5,551,000.
35. b) $6,132,000.
36. c) $5,135,000.
37. d) $6,016,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $4,650,000 + $12,360,000 – $10,080,000 – $798,000 (income tax exp) = $6,132,000

 

 

34. On January 1, 2017, Mars Inc. leased a building to Vulcan Corp. for a ten-year term at an annual rental of $160,000. At inception of the lease, Mars received $640,000, which covered the first two years rent of $320,000 and a security deposit of $320,000. This deposit will not be returned to Vulcan upon expiration of the lease, but will be applied to payment of rent for the last two years of the lease. What portion of the $640,000 should be shown as a current and long-term liability in Mars’s December 31, 2017 statement of financial position?

Current Liability                 Long-term Liability

1. a) $0                                $640,000
2. b) $160,000 $320,000
3. c) $320,000 $320,000
4. d) $320,000 $160,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

35. Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?
36. a) Current assets
37. b) Current liabilities
38. c) Plant assets
39. d) Long-term liabilities

 

Answer: d

 

Difficulty: Easy

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

36. Which of the following is NOT a required supplemental disclosure for the balance sheet?
37. a) Contingencies
38. b) Financial forecasts
39. c) Accounting policies
40. d) Contractual situations

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

37. Which of the following facts concerning depreciable assets should be included in the summary of significant accounting policies?

Depreciation Method    Composition

1. a) No Yes
2. b) Yes Yes
3. c) Yes No
4. d) No No

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

38. Which of the following is NOT a method of disclosing additional information in the financial statements?
39. a) supporting schedules
40. b) parenthetical explanations
41. c) cross-reference and contra items
42. d) press releases

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

39. Which of the following is a contra account?
40. a) Premium on bonds payable
41. b) Unearned revenue
42. c) Patents
43. d) Accumulated depreciation

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

40. Significant accounting policies may NOT be
41. a) selected on the basis of judgment.
42. b) selected from existing acceptable alternatives.
43. c) unusual or innovative in application.
44. d) omitted from financial-statement disclosure.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

41. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
42. a) retained earnings statement.
43. b) income statement.
44. c) statement of cash flows.
45. d) statement of financial position.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

42. On a statement of cash flows, the enterprise’s main revenue-producing activities are disclosed in the
43. a) operating activities.
44. b) investing activities.
45. c) financing activities.
46. d) both operating and investing activities.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

43. Making and collecting loans and disposing of property, plant, and equipment are
44. a) operating activities.
45. b) investing activities.
46. c) financing activities.
47. d) liquidity activities.

 

Answer: b

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

44. In preparing a statement of cash flows, repurchase of a company’s own shares at an amount greater than cost would be classified as a(n)
45. a) operating activity.
46. b) extraordinary activity.
47. c) financing activity.
48. d) investing activity.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

45. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
46. a) sale of equipment at book value
47. b) sale of merchandise on credit
48. c) declaration of a cash dividend
49. d) issuance of bonds payable at a discount

 

Answer: a

 

Difficulty: Medium

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

46. The statement of cash flows reports all of the following EXCEPT
47. a) the net change in cash for the period.
48. b) the cash effects of operations during the period.
49. c) the free cash flows generated during the period.
50. d) investing transactions.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

47. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
48. a) operating activities.
49. b) investing activities.
50. c) financing activities.
51. d) lending activities.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

48. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should be classified as cash inflows from
49. a) operating activities.
50. b) financing activities.
51. c) investing activities.
52. d) selling activities.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

49. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
50. a) operating activities.
51. b) borrowing activities.
52. c) lending activities.
53. d) financing activities.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

50. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
51. a) lending activities.
52. b) operating activities.
53. c) investing activities.
54. d) financing activities.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

51. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
52. a) operating activities.
53. b) investing activities.
54. c) financing activities.
55. d) lending activities.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

52. A statement of cash flows prepared under the INDIRECT method adds and subtracts certain items to the base number. Decreases in unearned revenues would be shown as
53. a) a deduction from net income.
54. b) an addition to net income.
55. c) a deduction from sales.
56. d) an addition to sales.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

53. In preparing a statement of cash flows under the INDIRECT method, cash flows from operating activities
54. a) are always equal to accrual accounting income.
55. b) are calculated as the difference between revenues and expenses.
56. c) can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
57. d) can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

54. Preparing a statement of cash flows under the INDIRECT method involves all of the following EXCEPT determining the
55. a) cash provided by operations.
56. b) cash provided by or used in investing and financing activities.
57. c) change in cash during the period.
58. d) cash collections from customers during the period.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

55. A statement of cash flows prepared under the DIRECT method starts with
56. a) net income.
57. b) gross profit.
58. c) cash received from customers.
59. d) income from operations.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

56. Which of the following is NOT included in a statement of cash flows prepared under the DIRECT method?
57. a) cash flows from operating activities
58. b) gross profit
59. c) cash paid to suppliers and employees
60. d) interest paid or received

 

Answer: b

 

Difficulty: Easy

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

57. Yule Corporation reports the following information:

Net income……………………………………………………………………………     $480,000

Depreciation expense…………………………………………………………….       140,000

Increase in accounts receivable………………………………………………         60,000

Yule should report cash provided by operating activities of

1. a) $280,000.
2. b) $400,000.
3. c) $560,000.
4. d) $680,000.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

Feedback: $480,000 + $140,000 – $60,000 = $560,000.

 

 

58. The cash debt coverage ratio is calculated by dividing net cash provided by operating activities by
59. a) average long-term liabilities.
60. b) average total liabilities.
61. c) ending long-term liabilities.
62. d) ending total liabilities.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

59. The current cash debt coverage ratio is often used to assess
60. a) financial flexibility.
61. b) solvency.
62. c) liquidity.
63. d) profitability.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

60. A measure of a company’s financial flexibility is the
61. a) cash debt coverage ratio.
62. b) current cash debt coverage ratio.
63. c) free cash flow.
64. d) cash debt coverage ratio and free cash flow.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

61. Free cash flow is calculated as net cash provided by operating activities less
62. a) capital expenditures.
63. b) dividends.
64. c) capital expenditures and dividends.
65. d) capital expenditures and depreciation.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

62. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?
63. a) the nearness to cash of assets and liabilities
64. b) the firm’s ability to respond and adapt to financial adversity and unexpected needs and opportunities
65. c) the firm’s ability to pay its debts as they mature
66. d) the firm’s ability to invest in a number of projects with different objectives and costs

 

Answer: b

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Finance

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

63. Free cash flow is calculated as net cash provided by operating activities less
64. a) capital expenditures.
65. b) dividends.
66. c) capital expenditures and dividends.
67. d) capital expenditures and depreciation.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Finance

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

64. A company that follows ASPE
65. a) must not disclose cash flow per share.
66. b) may disclose cash flow per share.
67. c) may disclose cash flow per share if it makes a special election to do so.
68. d) must disclose cash flow per share.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Identify differences in accounting between IFRS and ASPE.

Section Reference: A Comparison of IFRS and ASPE

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

65. A company that follows IFRS
66. a) may disclose cash flow per share if it makes a special election to do so.
67. b) must not disclose cash flow per share.
68. c) is generally allowed to disclose cash flow per share.
69. d) only discloses cash flow per share if there are more than two shareholders.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify differences in accounting between IFRS and ASPE.

Section Reference: A Comparison of IFRS and ASPE

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

66. When current debt is refinanced by the issue date of financial statements, it may generally be presented as non-current
67. a) if the company follows IFRS.
68. b) under either ASPE or IFRS.
69. c) if the company follows ASPE.
70. d) only if the company is a subsidiary.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify differences in accounting between IFRS and ASPE.

Section Reference: A Comparison of IFRS and ASPE

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

67. Which of the following items would require special disclosure under IFRS?
68. a) investment property only
69. b) biological assets and investment property only
70. c) provisions and biological assets
71. d) biological assets, investment property and provisions

 

Answer: d

 

Difficulty: Hard

Learning Objective: Identify differences in accounting between IFRS and ASPE.

Section Reference: A Comparison of IFRS and ASPE

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

68. Under IFRS, current assets are listed in
69. a) the order of liquidity.
70. b) the reverse order of liquidity.
71. c) the ascending order of their balances.
72. d) the descending order of their balances.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify differences in accounting between IFRS and ASPE.

Section Reference: A Comparison of IFRS and ASPE

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

69. Which of the following statements about IFRS and ASPE accounting and reporting requirements for the statement of financial position is NOT correct?
70. a) The presentation formats required by IFRS and ASPE for the statement of financial position are similar.
71. b) One difference between the reporting requirements under IFRS and those of ASPE statement of financial position is that an IFRS balance sheet may list long-term assets first.
72. c) Both IFRS and ASPE require that cash flow per share information be reported on the statement of financial position.
73. d) Both IFRS and ASPE require that comparative information be reported.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Identify differences in accounting between IFRS and ASPE.

Section Reference: A Comparison of IFRS and ASPE

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

70. Significant changes to the presentation of financial statements are currently being developed by the IASB and FASB. Which of the following best describes the focus of these changes?
71. a) to better highlight the company’s assets, liabilities and equity
72. b) to segregate the company’s operating, financing and investing activities
73. c) to highlight the company’s major business and financing activities
74. d) to increase the number of notes to be attached to financial statements

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the significant changes planned by the IASB regarding financial statement presentation.

Section Reference: Looking Ahead

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

71. The IASB issued an Exposure Draft (ED) in May 2015 entitled “Conceptual Framework for Financial Reporting” including proposed changes to the definitions of assets and liabilities. For most assets and liabilities, applying the new definition
72. a) yields the same accounting results as the current definition.
73. b) results in more conservative reporting of assets, and more aggressive reporting of liabilities.
74. c) results in more aggressive reporting of assets and more conservative reporting of liabilities.
75. d) results in more conservative reporting of both assets and liabilities.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Identify the significant changes planned by the IASB regarding financial statement presentation.

Section Reference: Looking Ahead

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

72. The Exposure Draft (ED) called the “Disclosure Initiative—Proposed Amendments to IAS7” proposes
73. a) replacement of IAS 7: Statement of Cash flows.
74. b) amendments that would provide additional information about investing activities.
75. c) amendments that would provide additional information about financing activities.
76. d) amendments that would provide additional information about operating activities.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the significant changes planned by the IASB regarding financial statement presentation.

Section Reference: Looking Ahead

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*73. Ratios that measure how effectively an entity is using is assets are called

1. a) liquidity ratios.
2. b) activity ratios.
3. c) solvency ratios.
4. d) profitability ratios.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*74. Ratios that measure the degree of protection for long-term creditors and investors or the ability to meet long-term obligations are called

1. a) liquidity ratios.
2. b) activity ratios.
3. c) solvency ratios.
4. d) profitability ratios.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*75. Net sales divided by average total assets is called

1. a) inventory turnover.
2. b) receivables turnover.
3. c) rate of return on assets.
4. d) asset turnover.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*76. Thrifty’s Inc. gives you the following information pertaining to the year 2017:

Net sales……………………………………………………………………………….     $800,000

Cost of goods sold………………………………………………………………….       500,000

Current assets……………………………………………………………………….       500,000

Current liabilities…………………………………………………………………….       250,000

Average total assets……………………………………………………………….       900,000

Total liabilities………………………………………………………………………..       550,000

Net income……………………………………………………………………………      150,000

The asset turnover ratio of Thrifty’s Inc. is

1. a) 0.56.
2. b) 0.17.
3. c) 0.89.
4. d) 1.13.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $800,000 ÷ $900,000 = 0.89.

 

 

*77. Thrifty’s Inc. gives you the following information pertaining to the year 2017:

Net sales……………………………………………………………………………….     $850,000

Cost of goods sold………………………………………………………………….       500,000

Current assets……………………………………………………………………….       500,000

Current liabilities…………………………………………………………………….       250,000

Average total assets……………………………………………………………….       900,000

Total liabilities………………………………………………………………………..       550,000

Net income……………………………………………………………………………       150,000

The rate of return on assets Thrifty’s Inc. is

55. a) 55.5%.
56. b) 30.0%.
57. c) 18.7%.
58. d) 16.6%.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $150,000 ÷ $900,000 = 16.6%

 

 

*78. Financial or capital market risks are related to

1. a) financing activities only.
2. b) investing activities only.
3. c) both financing and investing activities.
4. d) operating and financing activities.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

Exercises

 

 

Ex. 5-79 Earnings quality

An analysis of the financial statements of Scion Inc. shows that net income is significantly higher than cash flows from operations. What does this indicate about the quality of Scion’s earnings? Where else can analysts look for further information?

 

Solution 5-79

A net income significantly higher than cash flows from operations could be a sign of poor earnings quality that may require further analysis. Analysts should look to the financing activities section to see if Scion is relying on issuance of shares or other financing activities to generate cash flow. They could also look towards industry reports and analyst expectations to see if Scion’s cash flow and earnings quality are expected to improve.

 

Difficulty: Medium

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

CPA: Communication

CPA: Finance

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-80 Creditworthiness; debt to total assets

Explain why a high debt to total assets ratio means a company has a higher risk of bankruptcy.

 

Solution 5-80

The debt to total assets ratio is a coverage ratio that measures the percentage of total assets provided by creditors. Coverage ratios are said to measure the degree of protection for long-term creditors and investors. A company whose assets are heavily financed by creditors (also known as heavily leveraged) is liable to pay those creditors back first in the event they are forced to liquidate. Where leveraged assets represent the majority of a company’s value, it is likely that there would be little or nothing left after repaying these creditors, and that the company would declare bankruptcy before repaying investors or other equity providers.

 

Difficulty: Medium

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Communication

CPA: Finance

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-81 Liquidity, solvency, and financial flexibility

Explain the relation between the concepts of liquidity, solvency and financial flexibility.

 

Solution 5-81

Liquidity depends on the amount of time expected to pass until an asset is realized (converted into cash) or until a liability is paid. Solvency reflects an enterprise’s ability to pay its debts and related interest.

 

Together, liquidity and solvency affect an entity’s financial flexibility, a measure of the enterprise’s ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. For example, if a company’s cash sources to finance expansion or pay off maturing debt are limited it will have difficulty surviving bad times, recovering from unexpected setbacks, and taking advantage of investment opportunities.

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-82 Limitations of the statement of financial position

The statement of financial position has many limitations. One of these limitations is that it necessarily leaves out many items. Of greatest concern to investors are omitted liabilities. Explain why some liabilities are left off the statement of financial position, and how investors can identify and measure potentially omitted items.

 

Solution 5-82

Assets or liabilities may be left off the statement of financial position because they cannot be recorded objectively. To preserve the quality of their liquidity and solvency ratios (which measure the enterprise’s short-term ability to pay maturing obligations) a company may be particularly biased against including liabilities in the financial statements.

 

When reviewing a company, an analyst’s knowledge of the business and industry can make it possible to identify and measure off-balance sheet items that often represent additional risk to the company. For example, manufacturers or utilities companies may have capital lease obligations which have not been capitalised. Analysts can search for corresponding note disclosures and industry stats to estimate and incorporate these lease obligations into the liquidity and solvency ratios.

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-83 Terminology

In the space provided at the right, write the word or phrase that is defined or indicated.

 

1. A company’s ability to take effective ______

actions to alter the amounts and timing

of cash flows so it can respond to

unexpected needs and opportunities

 

2. Claims to future cash flows that are ______

fixed and determinable

 

3. Short-term, highly liquid investments ______

that are readily convertible into known

amounts of cash

 

4. Assets that are held for sale in the ______

ordinary course of business

 

5. Expenditures already made for benefits ______

that will be received within one year

or the operating cycle

 

6. Assets of physical substance that are ______

used in ongoing business operations

 

7. Assets that have no physical substance ______

 

8. The excess of total current assets over ______

total current liabilities

 

9. Unrealized gains and losses included ______

as part of equity

 

Solution 5-83

1. Financial flexibility

 

2. Monetary assets

 

3. Cash equivalents

 

4. Inventories

 

5. Prepaid expenses

 

6. Property, plant, and equipment

 

7. Intangible assets

 

8. Working capital

 

9. Accumulated other comprehensive income

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-84 Definitions

Provide clear, concise answers for the following:

1. Explain the merits of classified financial statements.
2. What are financial instruments?
3. What are inventories?
4. What are other assets?
5. What statement of financial position information requires supplemental disclosure?
6. Explain the purpose of the statement of cash flows.
7. Explain the concept of free cash flow.

 

Solution 5-84

1. Classification of financial statements increases their information content. This is accomplished through the grouping of items with similar characteristics and separating items with different characteristics.

 

2. Financial instruments are contracts between two or more parties that create financial assets for one party and a financial liability or equity instrument for the other and include cash, the right to receive cash or another financial instrument, and investments in other companies.

 

3. Inventories are assets that are held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of service.

 

4. “Other assets” includes assets that are not included anywhere else. They commonly include items such as non-current receivables and assets in special funds and require the disclosure of sufficient detail.

 

5. Supplemental disclosure is required for contingencies, accounting policies, contractual situations, and subsequent events. Additional information is also required for many individual statement of financial position items.

 

6. The purpose of the statement of cash flows is to allow users to assess an entity’s capacity to generate cash and cash equivalents and its needs for cash resources. The statement identifies the sources of cash inflows and uses of cash during the period.

 

7. Free cash flow can be defined as a measure of a company’s level of financial flexibility and is calculated as cash flow from operating activities less capital expenditures and dividends.

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-85 Account classification

Although the Statement of Financial Position can be classified and presented in several ways, the major subdivisions noted in Illustration 5-1 tend to be closely followed. Explain how following these classifications contributes to the financial statement objectives of representational faithfulness and transparency.

 

Solution 5-85

Standard classifications make it easier to calculate important ratios, such as the current ratio for assessing liquidity and debt to equity ratios for assessing solvency. Breaking down assets and liabilities into categories helps users calculate which assets are more significant than other and how these relationships change over time. This gives insight into management’s strategy and stewardship. If classifications were uncommon across companies and years this type of intra- and inter-company analysis would not be possible, and some adjustment would be necessary to bring statements to a comparable and transparent format. Keeping the same format enhances transparency. Where there is a change in presentation to preserve representational faithfulness, the company should disclose any supplementary information, including, but not limited to, comparative data for prior years, to facilitate analysis and enhance the understanding of financial statement users.

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-86 Current liabilities

Define current liabilities without using the word “liability.”

 

Solution 5-86

Current liabilities are legally enforceable obligations that are due within one year from the date of the statement of financial position or the operating cycle, whichever is longer.

 

Difficulty: Easy

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-87 Current assets

Define current assets without using the word “asset.”

 

Solution 5-87

Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.

 

Difficulty: Easy

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-88 Account classification

ASSETS                                                      LIABILITIES AND CAPITAL

1. a) Current assets f) Current liabilities
2. b) Investments g) Long-term liabilities
3. c) Property, plant and equipment h) Preferred shares
4. d) Intangibles i) Common shares
5. e) Other assets j) Contributed surplus
6. k) Retained earnings
7. l) Items excluded from statement of financial

position

 

Using the letters above, classify the following accounts according to the preferred statement of financial position presentation.

____    1.    Bond sinking fund

____    2.    Common stock dividend distributable

____    3.    Appropriation for plant expansion

____    4.    Bank overdraft

____    5.    Bonds payable (due 2024)

____    6.    Premium on common shares

____    7.    Securities owned by another company which are collateral for that company’s note

____    8.    Trading securities

____    9.    Inventory

____ 10.    Unamortized discount on bonds payable (due 2024)

____ 11.    Patents

____ 12.    Unearned revenue

Solution 5-88

1. b

 

2. k

 

3. k

 

4. f

 

5. g

 

6. j

 

7. l

 

8. b

 

9. a

 

10. g

 

11. d

 

12. f

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-89 Valuation of statement of financial position items

Use the code letters listed below (a – k) to indicate, for each statement of financial position item (1 – 13) listed below, the usual valuation reported on the statement of financial position.

1. a) No par value
2. b) Current cost of replacement
3. c) Amount payable when due, less unamortized discount or plus unamortized premium
4. d) Amount payable when due
5. e) Fair value at statement of financial position date
6. f) Net realizable value
7. g) Lower of cost or net realizable value
8. h) Original cost less accumulated depreciation/amortization
9. i) Original cost less accumulated depletion
10. j) Historical cost
11. k) Unexpired or unconsumed cost

 

____    1.    Common shares                            _______ 8.    Long-term bonds payable

____    2.    Prepaid expenses                         _______ 9.    Land (in use)

____    3.    Natural resources                          ______ 10.    Land (future plant site)

____    4.    Property, plant, and equipment     ______ 11.    Patents

____    5.    Trade accounts receivable            ______ 12.    Trading securities

____    6.    Copyrights                                     ______ 13.    Trade accounts payable

____    7.    Merchandise inventory

 

Solution 5-89

1. a

 

2. k

 

3. i

 

4. h

 

5. f

 

6. h

 

7. g

 

8. c

 

9. j

 

10. j

 

11. h

 

12. e

 

13. d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-90 Statement of financial position classifications

Typical statement of financial position (SFP) classifications are as follows:

1. a) Current Assets g) Long-Term Liabilities
2. b) Investments h) Capital Shares
3. c) Plant Assets i) Contributed Surplus
4. d) Intangible Assets j) Retained Earnings
5. e) Other Assets k) Notes to Financial Statements
6. f) Current Liabilities l) Not Reported on SFP

 

Indicate by use of the above letters how each of the following items would be classified on a statement of financial position prepared at December 31, 2014. If a contra account, or any amount that is negative or opposite the normal balance, place parentheses around the letter selected. A letter may be used more than once or not at all.

 

_____    1.    Accrued salaries and wages

_____    2.    Rental revenues for three months collected in advance

_____    3.    Land used as plant site

_____    4.    Equity securities classified as short term

_____    5.    Cash

_____    6.    Accrued interest payable due in thirty days

_____    7.    Premium on preferred shares issued

_____    8.    Dividends in arrears on preferred shares

_____    9.    Petty cash fund

_____    10.  Unamortized discount on bonds payable due in 2020

_____    11.  Common shares at no par value

_____    12.  Bond indenture covenants

_____    13.  Unamortized premium on bonds payable due in 2020

_____    14.  Allowance for doubtful accounts

_____    15.  Accumulated depletion, oil well

_____    16.  Natural resources—timberlands

_____    17.  Deficit (no income earned since beginning of company)

_____    18.  Goodwill

_____    19.  Ninety-day notes payable

_____    20.  Investment in bonds in another company; that will be held to 2018 maturity

_____    21.  Land held for speculation

_____    22.  Death of company president

_____    23.  Current maturity of bonds payable

_____    24.  Investment in subsidiary; no plans to sell in the near future

_____    25.  Trade accounts payable

_____    26.  Preferred shares, no par value

_____    27.  Prepaid expenses for next twelve months

_____    28.  Copyright

_____    29.  Accumulated depreciation, equipment

_____    30.  Earnings, not distributed to shareholders

Solution 5-90

1. f 16.  c

 

2. f 17.  j

 

3. c 18.  d

 

4. a 19.  f

 

5. a 20.  b

 

6. f 21.  b

 

7. I 22.  l

 

8. k 23.  f

 

9. a 24.  b

 

10. g 25.  f

 

11. h 26.  h

 

12. k 27.  a

 

13. g 28.  d

 

14. a 29.  c

 

15. c 30.  j

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-91 Statement of financial position classifications

The various classifications listed below have been used in the past by Mercury Ltd. in its statement of financial position. The corporation asks your professional opinion concerning the appropriate classification of each of the items 1–14 below.

1. a) Current Assets f) Current Liabilities
2. b) Investments g) Long-Term Liabilities
3. c) Property, Plant and Equipment h) Capital Shares
4. d) Intangible Assets i) Retained Earnings
5. e) Other Assets

 

Indicate by letter how each of the following items should be classified. If an item need not be reported on the statement of financial position, use the letter “X.” A letter may be used more than once or not at all. If an item can be classified in more than one category, choose the category most favoured by the authors of your textbook.

 

____    1.    Employees’ payroll deductions

____    2.    Cash in sinking fund

____    3.    Rent revenue collected in advance

____    4.    Factory building retired from use and held for sale

____    5.    Patents

____    6.    Payroll cash fund

____    7.    Goods held on consignment

____    8.    Accrued revenue on short-term investments

____    9.    Advances to salespersons

____ 10.    Premium on bonds payable due two years from date

____ 11.    Bank overdraft

____ 12.    Salaries which company budget shows will be paid to employees within the next year

____ 13.    Work in process

____ 14.    Appropriation of retained earnings for bonded indebtedness

Solution 5-91

1. f

 

2. b

 

3. f

 

4. a or e

 

5. d

 

6. a

 

7. x

 

8. a

 

9. a

 

10. g

 

11. f

 

12. x

 

13. a

 

14. i

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-92 Statement of financial position classifications

The various classifications listed below have been used in the past by Droid Inc. in its statement of financial position.

1. a) Current Assets e) Current Liabilities
2. b) Investments f) Long-term Liabilities
3. c) Plant and Equipment g) Common Shares
4. d) Intangible Assets h) Retained Earnings

 

Instructions

Indicate by letter how each of the items below should be classified at December 31, 2014. If an item is not reported on the December 31, 2014 statement of financial position, use the letter “X” for your answer. If the item is a contra account within the particular classification, place parentheses around the letter. A letter may be used more than once or not at all.

 

Sample question and answer:

 a__           Allowance for doubtful accounts

 

____    1.    Customers’ accounts with credit balances

 

____    2.    Bond sinking fund

 

____    3.    Salaries which the company’s cash budget shows will be paid to employees in 2015

 

____    4.    Accumulated depreciation

 

____    5.    Appropriation of retained earnings for plant expansion

 

____    6.    Impairment of goodwill for 2014

 

____    7.    On December 31, 2014, Droid signed a purchase commitment to buy all of its raw materials from Jupiter Inc. for the next two years

 

____    8.    Discount on bonds payable due March 31, 2017

 

____    9.    Launching of Droid’s internet retailing division in February, 2014

 

____ 10.    Cash dividends declared on December 15, 2014, payable on January 15, 2015

 

Solution 5-92

1. e

 

2. b

 

3. x

 

4. c

 

5. h

 

6. x

 

7. x

 

8. f

 

9. x

 

10. e

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-93 Statement of financial position

The following statement of financial position was prepared by the bookkeeper for Hauser Company as of December 31, 2017:

Hauser Company

Statement of Financial Position

as of December 31, 2017

 

Cash                                            $ 95,000            Accounts payable                                $ 85,000

Accounts receivable (net)              52,200            Bonds payable                                      100,000

Inventory                                        62,000            Stockholders’ equity                             238,500

Investments                                   76,300

Equipment (net)                           106,000

Patents                                          32,000                                                                                      

$423,500                                                                        $423,500

 

The following additional information is provided:

1. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank overdraft of $2,500 has been deducted.
2. The net accounts receivable balance includes:

(a) accounts receivable—debit balances $60,000;

(b) accounts receivable—credit balances $4,000;

(c) allowance for doubtful accounts $3,800.

3. Inventory does not include goods costing $3,000 shipped out on consignment. Receivables of $3,000 were recorded on these goods.
4. Investments include investments in common stock, trading $19,000 and available-for-sale $48,300, and franchises $9,000.
5. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is $40,000.

 

Instructions

Prepare a statement of financial position in good form (stockholders’ equity details can be omitted.) Assume Hauser reports in accordance with ASPE.

 

Solution 5-93

Hauser Company

Statement of Financial Position

As of December 31, 2017

 

Assets

Current assets

Cash                                                                                                                    $ 88,100     (1)

Trading securities                                                                                                  19,000

Accounts receivable                                                       $ 57,000     (2)

Less: Allowance for doubtful accounts                                3,800                         53,200

Inventories                                                                                                             65,000     (3)

*Equipment held for sale                                                                                        1,000     (4)

Total current assets                                                                                       226,300

 

Investments

Available-for-sale securities                                              48,300

Cash surrender value                                                          9,400                         57,700

 

Property, plant, and equipment

Equipment                                                                        145,000     (5)

Less: accumulated depreciation                                       40,000                       105,000

 

Intangible assets

Patents                                                                               32,000

Franchises                                                                           9,000                        41,000

Total assets                                                                                                 $430,000

 

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable                                                                                               $ 85,000

Bank overdraft                                                                                                         2,500

Unearned revenue                                                                                                  4,000     (6)

Total current liabilities                                                                                      91,500

 

Long-term liabilities

Bonds payable                                                                                                    100,000

Total liabilities                                                                                                      191,500

 

Stockholders’ equity                                                                                                  238,500

Total liabilities and stockholders’ equity                                                            $430,000

 

(1)  ($95,000 – $9,400 + $2,500)

(2)  ($60,000 – $3,000)

(3)  ($62,000 + $3,000)

(4)  ($5,000 – $4,000)

(5)  ($106,000 + $40,000 – $5,000 + $4,000)

(6)  Credit balances in accounts receivable

 

*An alternative is to show it as another asset.

 

Difficulty: Hard

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

Bloomcode: Synthesis

 

 

Ex. 5-94 Statement of financial position presentation

Given the following account information for Howard Corporation, prepare a balance sheet in report form for the company as of December 31, 2017. All accounts have normal balances.

 

Equipment…………………………………………………………………………….         60,000

Interest Expense……………………………………………………………………           2,400

Interest Payable…………………………………………………………………….              600

Retained Earnings………………………………………………………………….                  ?

Dividends………………………………………………………………………………         50,400

Land……………………………………………………………………………………..       137,320

Accounts Receivable……………………………………………………………..       102,000

Bonds Payable………………………………………………………………………         78,000

Notes Payable (due in 6 months)…………………………………………….         29,400

Common Stock……………………………………………………………………..         70,000

Accumulated Depreciation—Equip…………………………………………..         10,000

Prepaid Advertising………………………………………………………………..           5,000

Service Revenue……………………………………………………………………       341,400

Buildings……………………………………………………………………………….         80,400

Supplies………………………………………………………………………………..           1,860

Income Taxes Payable…………………………………………………………..           3,000

Utilities Expense…………………………………………………………………….           1,320

Advertising Expense………………………………………………………………           1,560

Salaries and Wages Expense………………………………………………….         53,040

Salaries and Wages Payable…………………………………………………..              900

Accumulated Depr.—Bld………………………………………………………..         15,000

Cash…………………………………………………………………………………….         45,000

Depreciation Expense…………………………………………………………….           8,000

 

Solution 5-94

Leong Corporation

Balance Sheet

December 31, 2017

 

Assets

Cash                                                                                                             $ 45,000

Accounts Receivable                                                                                    102,000

Supplies                                                                                                             1,860

Prepaid advertising                                                                                           5,000

Total current assets                                                                                               $ 153,860

Land                                                                                                              137,320

Building                                                                                       $ 80,400

Accumulated depreciation – bld                                                 (15,000)       65,400

Equipment                                                                                    60,000

Accumulated depreciation—eq                                                 (10,000)       50,000      252,720

Total assets                                                                                                             $ 406,580

 

Liabilities & Stockholders’ Equity

Notes payable                                                                                               $ 29,400

Taxes payable                                                                                                    3,000

Salaries and wages payable                                                                                 900

Interest payable                                                                                                    600

Total current liabilities                                                                                                      $ 33,900

Long-term liabilities

Bonds payable                                                                                                                   78,000

Total liabilities                                                                                                                  111,900

Common stock                                                                                                70,000

Retained earnings ($275,080*- $50,400)                                                      224,680

Total stockholders’ equity                                                                                                 294,680

Total liabilities & stockholders’ equity                                                                            $ 406,580

 

*$341,400 – $53,040 – $8,000 – $2,400 – $1,560 – $1,320

 

Difficulty: Hard

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

Bloomcode: Synthesis

 

 

Ex. 5-95 Subsequent events

Explain the importance of considering subsequent events before financial statements are issued. What two types of subsequent events should be considered prior to financial statement issuance?

 

Solution 5-95

There are generally several weeks or months after the year end before the financial statements are issued. This time is to count inventory, reconcile subsidiary ledgers with controlling accounts, prepare necessary adjusting entries, ensure all transactions have been entered and obtain an audit. It’s possible that, in this period, important transactions and events may occur that materially affect the company’s financial position. These events are known as subsequent events, and fall into two types:

1. Events that provide further evidence of conditions that existed at the date of the Statement of Financial Position
2. Events that indicate conditions that occurred after the financial statement date.

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Audit and Assurance

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-96 Contractual disclosures and ethical consideration

Contractual obligations should be disclosed in the notes to financial statements when they are significant. Considerable judgment is needed to determine whether leaving out such information is misleading. What principle should the accountant’s judgment consider in this situation? Describe anything that should be factored into the disclosure decision.

 

Solution 5-96

The basis for including additional information is the full disclosure principle; that is, the information needs to be important enough to influence the decisions of an informed user. When in doubt, it is better to disclose a little too much information than not enough. However, the accountant’s judgment should also include ethical considerations, because the way of disclosing accounting principles, methods, and other items that have important effects on the enterprise may reflect the interests of a particular stakeholder in subtle ways that are at the expense of other stakeholders. For example, a reader might benefit from comprehensive note disclosures that potentially jeopardize the company’s competitive advantage or its stance with regard to a legal matter.

 

Difficulty: Easy

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Communication

CPA: Financial Reporting

CPA: Professional and Ethical behaviour

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-97 Notes

Describe the purpose and appropriate use of notes to the financial statements. How should notes be presented, and what information should they provide? Name an area of the financial statements for which notes are frequently used.

 

Solution 5-97

Notes are used if additional explanations cannot be shown conveniently as parenthetical explanations or to reduce the amount of detail on the face of the statement. The notes should present all essential facts as completely and concisely as possible. Loose wording can mislead readers instead of helpful them. Notes should add to the total information made available in the financial statements, not raise unanswered questions or contradict other parts of the statements.

 

An area of the financial statements often accompanied by notes is the property, plant, and equipment portion.

 

Difficulty: Easy

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Audit and Assurance

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-98 Contra or adjunct accounts

The use of contra or adjunct accounts is common in financial statement preparation. Though the function of these accounts is similar, they are slightly different in nature. Describe each, and name one scenario in which it would be used.

 

Solution 5-98

Contra Account—Is an SFP item that reduces an asset, liability, or owners’ equity account. Examples include Accumulated Depreciation and Allowance for Doubtful Accounts.

 

Adjunct Account—Is an SFP item that increases an asset, liability, or owners’ equity account. An example is Premium on Bonds Payable.

 

Difficulty: Easy

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-99 Statement of cash flows

For each event listed below, select the appropriate category, which describes its effect on a statement of cash flows:

1. a) Cash provided/used by operating activities
2. b) Cash provided/used by investing activities
3. c) Cash provided/used by financing activities
4. d) Not a cash flow

 

____    1.    Payment on long-term debt

 

____    2.    Issuance of bonds at a premium

 

____    3.    Collection of accounts receivable

 

____    4.    Cash dividends declared

 

____    5.    Issuance of shares to acquire land

 

____    6.    Sale of marketable securities (long-term)

 

____    7.    Payment of employees’ wages

 

____    8.    Issuance of common shares for cash

 

____    9.    Payment of income taxes payable

 

____ 10.    Purchase of equipment

 

____ 11.    Purchase of treasury stock (common)

 

____ 12.    Sale of real estate held as a long-term investment

 

Solution 5-99

1. c

 

2. c

 

3. a

 

4. d

 

5. d

 

6. b

 

7. a

 

8. c

 

9. a

 

10. b

 

11. c

 

12. b

 

Difficulty: Medium

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-100 Statement of cash flows purpose

What simple but important questions does the statement of cash flows help answer?

 

Solution 5-100

The statement of cash flows helps answer the following simple bur important questions:

1. Where did cash come from during the period?
2. What was cash used for during the period?
3. What was the change in the cash balance during the period?

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-101 Statement of cash flows basic format

Illustrate the basic format of the statement of cash flows.

 

Solution 5-101

Statement of Cash Flows

Cash flows from operating activities………………………………………….            $xxx

Cash flows from investing activities…………………………………………..              xxx

Cash flows from financing activities…………………………………………..              xxx

Net increase (decrease) in cash……………………………………………….              xxx

Cash at beginning of year………………………………………………………..              xxx

Cash at end of year…………………………………………………………………            $xxx

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Communication

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-102 Cash provided (used) by operating activities

Willows Corporation reports the following information:

Net income……………………………………………………………………………     $320,000

Depreciation expense…………………………………………………………….         70,000

Increase in accounts receivable……………………………………………… 30,000

 

What amount should Willows report under the cash provided (used) by operating activities portion of their statement of cash flows?

 

Solution 5-102

Willows should report cash provided by operating activites of $360,000.

 

Calculation:

$320,000 + $70,000 – $30,000 = $360,000

 

Difficulty: Easy

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Communication

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-103 Ending cash balance

Caldwell Corporation reports:

Cash provided by operating activities……………………………………….     $280,000

Cash used by investing activities……………………………………………..       110,000

Cash provided by financing activities……………………………………….       140,000

Beginning cash balance………………………………………………………….         70,000

 

What is Caldwell’s ending cash balance?

 

Solution 5-103

Caldwell’s ending cash balance is $380,000.

 

Calculation:

$70,000 + $280,000 – $110,000 + $140,000 = $380,000

 

Difficulty: Easy

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Communication

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-104 Statement of cash flows ratios

Financial statements for Comet Ltd. are presented below:

 

Comet Ltd.

Statement of Financial Position

December 31, 2017

Assets                                                             Liabilities & Shareholders’ Equity

Cash………………………………………..      $ 44,000              Accounts payable…………. …. $ 28,000

Accounts receivable…………………..         39,000              Bonds payable…………….. ……. 54,000

Buildings and equipment…………….       154,000

Accumulated depreciation—

buildings and equipment………      (46,000)              Common shares…………… ……. 69,000

Patents……………………………………..        24,000              Retained earnings………… …… 64,000

$215,000                                                             $215,000

 

 

Comet Ltd.

Statement of Cash Flows

For the Year Ended December 31, 2017

 

Cash flows from operating activities

Net income…………………………………………………………………..                                   $ 60,000

Adjustments to reconcile net income to net cash

provided by operating activities:

Increase in accounts receivable………………………………..    $(19,000)

Increase in accounts payable……………………………………           7,000

Depreciation—buildings and equipment…………………….         12,000

Gain on sale of equipment……………………………………….        (7,000)

Amortization of patents…………………………………………….          3,000                (4,000)

Net cash provided by operating activities……………………………….                                      56,000

 

Cash flows from investing activities

Sale of equipment………………………………………………………….         14,000

Purchase of land……………………………………………………………      (27,000)

Purchase of buildings and equipment………………………………      (52,000)

Net cash used by investing activities……………………………………..                                   (65,000)

 

Cash flows from financing activities

Payment of cash dividend………………………………………………      (25,000)

Sale of bonds………………………………………………………………..        45,000

Net cash provided by financing activities………………………………..                                     20,000

 

Net increase in cash…………………………………………………………….                                      11,000

Cash, January 1, 2017…………………………………………………………                                     33,000

Cash, December 31, 2017…………………………………………………….                                   $ 44,000

 

At the beginning of 2017, the accounts payable balance was $21,000, and the bonds payable balance was $9,000. All Asteroid’s bonds have been issued at par.

 

Instructions

Calculate the following for Comet Ltd.:

1. a) Current cash debt coverage ratio
2. b) Cash debt coverage ratio
3. c) Free cash flow

 

Solution 5-104

Net cash provided by operating activities

1. a) Current cash debt coverage ratio = ——————————————————

Average current liabilities

 

$56,000                            $56,000

=  ——————————— =   ———— = 2.29:1

($21,000 + $28,000) ÷ 2        $24,500

 

Net cash provided by operating activities

1. b) Cash debt coverage ratio = ——————————————————

Average total liabilities

 

=              $56,000  _____    =   $56,000 = 1:1

($30,000 + $82,000) ÷ 2        $56,000

 

1. c) Free cash flow = Net cash provided by operating activities –

capital expenditures and dividends

 

=  $56,000 – *$79,000 – $25,000 = $(48,000)

 

*$27,000 + $52,000

 

Difficulty: Medium

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Comprehension

Bloomcode: Knowledge

 

 

Ex. 5-105 Calculation of cash flow and ratio

Dawe Corporation reports the following information:

Net cash provided by operating activities………………………………….     $285,000

Average current liabilities………………………………………………………..       150,000

Average long-term liabilities…………………………………………………….       100,000

Dividends declared…………………………………………………………………         60,000

Capital expenditures………………………………………………………………       110,000

Payments of debt…………………………………………………………………..         35,000

 

Instructions

Calculate the following:

1. a) Cash Debt Coverage Ratio
2. b) Free Cash Flow

 

Solution 5-105

1. a) $285,000 ÷ ($150,000 + $100,000) = 1.14

 

1. b) $285,000 – $60,000 – $110,000 = $115,000

 

Difficulty: Easy

Learning Objective: Understand the usefulness of the statement of cash flows.

Section Reference: Usefulness of the Statement of Cash Flows

CPA: Finance

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

*Ex. 5-106 Calculation of ratios

Keefe Enterprises reported the following:

Net sales……………………………………………………………………………….     $285,000

Average trade receivables………………………………………………………       150,000

Cost of Goods Sold………………………………………………………………..       100,000

Average Inventory………………………………………………………………….         60,000

Average total assets……………………………………………………………….       110,000

Average current liabilities………………………………………………………..         35,000

 

Instructions

Calculate the activity ratios of Keefe Enterprises.

 

Solution 5-106

1. a) Receivables turnover: Net sales / Average trade receivables = $285,000 / $150,000 = 1.9

 

1. b) Inventory turnover: Cost of goods sold / Average inventory = $100,000 / $60,000 = 1.67

 

2. c) Asset turnover: Net sales / Average total assets = $285,000 / $110,000 = 2.59

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Finance

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

*Ex. 5-107 Interpretation of ratios

For each ratio you calculated for Keefe Enterprises in exercise 5-xx explain what the ratio measures and provide a brief interpretation of the ratio you calculated for Keefe Enterprises.

 

Solution 5-107

1. a) Receivables turnover: Liquidity of receivables. Keefe’s receivables are fairly liquid and turnovers 1.9 times per period. This indicates a healthy rate of collection, though we’d need to look more closely at the customer terms to know this for certain.

 

1. b) Inventory turnover: Liquidity of inventory. Keefe’s inventory is also fairly liquid, and is turning over 1.67 times per period.

 

1. c) Asset turnover: How efficiently assets are used to generate sales. Keefe appears to make efficient use of their assets, generating sales at over two times the assets’ value.

 

Difficulty: Medium

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Finance

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*Ex. 5-108 Calculation of ratios

A company reported current assets of $120,000 and current liabilities of $150,000.

 

Instructions

Calculate the following:

1. a) Working capital
2. b) Current ratio

 

Solution 5-108

(a) Working capital: $120,000 – $150,000 = $30,000 negative

 

(b) Current ratio: $120,000 / $150,000 = 0.80

 

Difficulty: Easy

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Finance

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

*Ex. 5-109 Calculation of ratios

A company reported current assets of $450,000, current liabilities of $250,000, and total assets of $1 million.

 

Instructions

Calculate the following:

1. a) Working capital
2. b) Current ratio

 

Solution 5-109

(a)   Working capital: $450,000 – $250,000 = $200,000

 

(b)   Current ratio: $450,000 / $250,000 = 1.80

 

Difficulty: Easy

Learning Objective: Identify the major types of financial ratios and what they measure.

Section Reference: Ratio Analysis: A Reference (Appendix 5A)

CPA: Finance

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

PROBLEMS

 

 

Pr. 5-110 Statement of financial position format

The following statement of financial position has been submitted to you by an inexperienced bookkeeper. List your suggestions for improvements in the format of the statement of financial position. Consider both terminology deficiencies as well as classification inaccuracies.

 

Hathaway Industries Inc.

Statement of Financial Position

For the Period Ended December 31, 2017

Assets

Fixed Assets—Tangible

Equipment…………………………………………………… … $110,000

Less: reserve for depreciation…………………. … (40,000)          $ 70,000

Factory supplies…………………………………………… ………………              22,000

Land and buildings……………………………………….. ….. 400,000

Less: reserve for depreciation…………………. .. (150,000)           250,000

Plant site held for future use………………………….. ………………            90,000        $ 432,000

Current Assets

Accounts receivable…………………………………….. ………………            175,000

Cash…………………………………………………………………………….              80,000

Inventory…………………………………………………….. ………………            220,000

Treasury stock (at cost)………………………………… ………………            20,000           495,000

Fixed Assets—Intangible

Goodwill……………………………………………………………………….              80,000

Notes receivable………………………………………….. ………………             40,000

Patents…………………………………………………………………………            26,000          146,000

Deferred Charges

Advances to salespersons…………………………….. ………………              60,000

Prepaid rent………………………………………………… ………………              27,000

Returnable containers………………………………….. ………………            75,000          162,000

TOTAL ASSETS…………………………………………………….                               $1,235,000

Liabilities

Current Liabilities

Accounts payable………………………………………… ………………          $140,000

Allowance for doubtful accounts……………………. ………………                8,000

Common stock dividend distributable……………… ………………              35,000

Income taxes payable…………………………………… ………………             42,000

Sales taxes payable…………………………………….. ………………            17,000        $ 242,000

Long-Term Liabilities, 5% debenture bonds, due 2020                            500,000

Reserve for contingencies…………………………………… ………………          150,000          650,000

TOTAL LIABILITIES………………………………. ………………                                  892,000

 

 

Equity

Common shares, no par value, issued 12,000 shares with

60 shares held as treasury stock                                                       $240,000

Dividends paid                                                                                       (20,000)

Earned surplus                                                                                        23,000

Other accumulated past earnings                                                       100,000

TOTAL EQUITY                                                                                                     343,000

TOTAL LIABILITIES AND EQUITY                                                                   $1,235,000

 

Note 1.   The reserve for contingencies has been created by charges to earned surplus and has been established to provide a cushion for future uncertainties.

 

Note 2.   The inventory account includes only items physically present at the main plant and warehouse. Items located at the company’s branch sales office, amounting to $30,000, are excluded since the company has consistently followed this procedure for many years.

 

Solution 5-110

1. The heading should be at a specific date rather than for a period of time.

 

2. “Fixed Assets – Tangible” and “Reserve for Depreciation” is poor terminology; should be Property, Plant and Equipment and Accumulated Depreciation.

 

3. Land and buildings should be segregated into two accounts. The Accumulated Depreciation account should only be reported for the buildings.

 

4. Plant site held for future use should be shown in the Investments section.

 

5. Popular practice lists current assets first; as well, current assets are usually listed in order of liquidity. Factory supplies should be shown as a current asset.

 

6. Treasury stock is not an asset, but a deduction from shareholders’ equity.

 

7. Notes receivable should be reported as a current asset or an investment.

 

8. The deferred charge items should be reclassified as follows:

Advances to salespersons—current asset

Prepaid rent—current asset

Returnable containers—current asset

 

9. Allowance for doubtful accounts should be shown as a contra account to accounts receivable.

 

10. Common stock dividend distributable should be shown in shareholders’ equity.

 

11. The debenture bonds should be shown on a separate line.

 

12. Earned surplus is poor terminology. The term “retained earnings” is more appropriate.

 

13. Other Accumulated Past Earnings is poor terminology. Accumulated Other Comprehensive Income is the term required by IFRS.

 

14. “Dividends paid” title is a misnomer. It probably is a “dividends declared” item that should be close to retained earnings.

 

15. No reference in the body of the statement is made to the notes. The order of the notes is wrong.

 

16. Note 2 indicates that the inventory account is understated by $30,000. Inventory and earned surplus amounts should both be adjusted by increasing it by 30,000.

 

17. Specific identification and description of all significant accounting principles and methods that involve selection from among alternatives and/or those that are peculiar to a given industry should be disclosed in the annual report.

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

Pr. 5-111 Statement of financial position presentation

The following statement of financial position was prepared by the bookkeeper for Badger Corp. at December 31, 2017.

Badger Corp.

Statement of Financial Position

December 31, 2017

Cash………………………………..      $ 90,000              Accounts payable…………………. …. $ 75,000

Accounts receivable (net)…..         52,200              Long-term liabilities……………….. ….. 110,000

Inventories………………………..         57,000              Shareholders’ equity……………… ….. 208,500

Investments………………………         76,300

Equipment (net)………………..         86,000

Patents…………………………….        32,000                                                                     ________

……………………………………….     $393,500                                                                      $393,500

 

The following additional information is provided:

1. “Cash” includes prepaid insurance of $9,400; as well, a bank overdraft of $1,500 has been deducted.
2. The net accounts receivable balance includes:

(a) accounts receivable—debit balances $62,000;

(b) accounts receivable—credit balances $5,000;

(c) allowance for doubtful accounts $4,800.

3. Inventories do not include goods costing $5,000 shipped out on consignment. Receivables of $5,000 were recorded on these goods.
4. Investments include investments in common shares, trading $24,000 and long-term $43,300, and franchises $9,000.
5. Equipment costing $8,000 with accumulated depreciation $6,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is $40,000.

 

Instructions

Prepare a statement of financial position in good form (shareholders’ equity details can be omitted.)

 

Solution 5-111

Badger Corp.

Statement of Financial Position

December 31, 2017

Assets

Current assets

Cash………………………………………………………………………..                                  $ 82,100  (1)

Trading securities………………………………………………………                                      24,000

Accounts receivable…………………………………………………..           $ 57,000   (2)

Less allowance for doubtful accounts………………………….               4,800             52,200

Inventories………………………………………………………………..                                     62,000  (3)

Prepaid insurance……………………………………………………..                                       9,400

*Equipment held for sale…………………………………………….                                      2,000  (4)

Total current assets……………………………………………….                                    231,700

 

Investments

Long-term securities………………………………………………….                                     43,300

 

Property, plant, and equipment

Equipment………………………………………………………………..            124,000   (5)

Less accumulated depreciation…………………………………..            40,000             84,000

 

Intangible assets

Patents…………………………………………………………………….              32,000

Franchises………………………………………………………………..               9,000            41,000

Total assets………………………………………………………….                                 $400,000

 

Liabilities and Shareholders’ Equity

Current liabilities

Accounts payable………………………………………………………                                   $ 80,000  (6)

Bank overdraft………………………………………………………….                                        1,500

Total current liabilities…………………………………………….                                      81,500

 

Long-term liabilities………………………………………………………….                                   110,000

Total liabilities……………………………………………………………                                    191,500

 

Shareholders’ equity………………………………………………………..                                   208,500

Total liabilities and shareholders’ equity……………………….                                  $400,000

 

(1)   ($90,000 – $9,400 + $1,500)

(2)   ($62,000 – $5,000)

(3)   ($57,000 + $5,000)

(4)   ($8,000 – $6,000)

(5)   ($86,000 + $40,000 – $8,000 + $6,000)

(6)   ($75,000 + $5,000)

*An alternative is to show this as an “other asset.”

 

Difficulty: Hard

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

Pr. 5-112 Calculation of ending retained earnings

The records of Biloxi Corp. for calendar 2017 reflected the following correct pre-tax amounts: gain from discontinued operations, $50,000; cash dividends declared and paid, $45,000; retained earnings, January 1, 2017, $275,000, correction of accounting error, $35,000 debit; income before income taxes and before discontinued operations, $165,000. The average income tax rate of 40 % applies to all items except the dividends.

 

Instructions

Calculate the December 31, 2017 ending balance of retained earnings.

 

Solution 5-112

Beginning balance………………………………………………………………….     $275,000

Correction of error ($35,000 x 60%)…………………………………………      (21,000)

Income ($165,000 x 60%)……………………………………………………….         99,000

Gain from discontinued operations ($50,000 x 60%)………………….         30,000

Dividends………………………………………………………………………………      (45,000)

Ending balance……………………………………………………………………..     $338,000

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

Pr. 5-113 Statement of cash flows – direct method

The controller of Nebula Corporation has provided you with the following information:

 

Nebula Corporation

Income Statement

For the Year Ended December 31, 2017

 

Net sales……………………………………………………………………………………..                         620,000

Operating expenses……………………………………………………………………..                         410,000

Income from operations………………………………………………………………..                         210,000

Other revenues and expenses

Gain on sale of equipment……………………………………………………… 30,000

Interest expense……………………………………………………………………. 8,000                22,000

Income before income taxes………………………………………………………….                         232,000

Income taxes……………………………………………………………………………….                           92,800

Net income………………………………………………………………………………….                         139,200

 

 

Nebula Corporation

Comparative Account Information

Relating to Operations

For the Year Ended December 31, 2017

 

 2014                             2013

Accounts receivable                                        56,000                          40,000

Prepaid insurance                                             5,000                            6,000

Accounts payable                                            59,000                          47,000

Interest payable                                                    600                            1,500

Income taxes payable                                       4,200                            6,000

Unearned revenue                                           20,000                          14,000

 

Instructions

Prepare a statement of cash flows (for operating activities only) for the year ended December 31, 2017, using the direct method.

 

Solution 5-113

 

Nebula Corporation

Partial Statement of Cash Flows

For the Year Ended December 31, 2017

 

Cash received from customers………………………………………………….                             $610,000

Cash paid

For operating expenses………………………………………………………     $397,000

For interest………………………………………………………………………..         $8,900

For income taxes……………………………………………………………….       $94,600         $500,500

Net cash provided by operating activities……………………………………                             $109,500

 

Calculations:

Cash received from customers:

Net sales…………………………………………..    $ 620,000

– Increase in accounts receivable………..      (16,000)

+ Increase in unearned revenue…………..          6,000

$ 610,000

Cash paid for operating expenses:

Operating expenses……………………………    $ 410,000

– Decrease in prepaid insurance………….        (1,000)

– Increase in accounts payable……………      (12,000)

$ 397,000

Cash paid for interest:

Interest expense………………………………..        $ 8,000

+ Decrease in interest payable…………….              900

$ 8,900

Cash paid for income tax:

Income tax expense……………………………      $ 92,800

+ Decrease in income tax payable……….          1,800

$ 94,600

 

Difficulty: Hard

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

CPA: Taxation

Bloomcode: Application

Bloomcode: Knowledge

 

 

Pr. 5-114 Statement of Cash Flows – indirect method

Use the information provided in Pr. 5-113. Prepare a statement of cash flows (for operating activities only) for the year ended December 31, 2017 using the indirect method.

 

Solution 5-114

Nebula Corporation

Partial Statement of Cash Flows

For the Year Ended December 31, 2017

 

Cash flows from operating activities

Net income…………………………………………………………………     $139,200

Adjustments:

Gain on sale of equipment……………………………………………       (30,000)

Increase in accounts receivable……………………………………       (16,000)

Decrease in prepaid insurance……………………………………..           1,000

Increase in accounts payable……………………………………….         12,000

Decrease in interest payable………………………………………..            (900)

Decrease in income taxes payable………………………………..         (1,800)

Increase in unearned revenue………………………………………           6,000

Net cash provided by operating activities……………………….    $109,500

Difficulty: Hard

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

*Pr. 5-115 Calculation of ratios

Brandon Systems Inc. has provided you with the following information:

 

2017                    2016

Cash………………………………………………………… …. $ 21,000              $ 47,000

Short-term (trading) investments………………………… 28,000                          –

Accounts receivable………………………………………… 102,000               116,000

Inventory………………………………………………….. ……. 86,000                 64,000

Prepaid expenses…………………………………………….. 11,000                   9,000

Total assets………………………………………………. .. 1,503,000            1,489,000

Total current liabilities………………………………………. 205,000               241,000

Net sales, all on credit…………………………………….. 877,000               850,000

Cost of goods sold………………………………………….. 570,000               555,000

Operating income…………………………………………… 165,000               158,000

Income tax expense………………………………………….. 20,000                 18,000

Net income……………………………………………….. ….. 109,000               100,000

Interest expense………………………………………………. 36,000                 40,000

Common shares (no preferred) ………………….. ….. 420,000               420,000

Retained earnings…………………………………………… 153,000                 74,000

 

Instructions

Calculate the following ratios for 2017. Round all values to two decimals, including percentages, e.g., 12.34, 34.56%. Show all calculations for full marks.

1. a) Profit margin on sales
2. b) Quick (acid-test) ratio
3. c) Receivables turnover
4. d) Debt to total assets
5. e) Times interest earned
6. f) Rate of return on assets
7. g) Rate of return on common share equity

 

Solution 5-115

1. a) Profit margin on sales = Net income/net sales x 100 =

109,000 x 100 = 12.43%

877,000

 

1. b) Quick (acid-test) ratio = Quick assets/current liabilities

= 21,000 + 28,000 + 102,000 =.74 to 1

205,000

 

1. c) Receivables turnover = Net sales/average A/R

= _   877,000                 _ = 8.05 (times)

(102,000 + 116,000)/2

 

1. d) Debt to total assets = Total liabilities/total assets x 100

=  930,000 x 100 = 61.88%

1,503,000

 

Total liabilities = 1,503,000 – 420,000 – 153,000 = 930,000

 

1. e) Times interest earned = Net income before interest and income taxes/interest exp

= 109,000 + 36,000 + 20,000 (i.e., operating income) = 4.58 (times)

36,000

 

1. f) Rate of return on assets = Net income/average total assets

=  109,000 x 100 = 7.29%

1,496,000

 

average total assets = (1,503,000 + 1,489,000)/2 = 1,496,000

 

1. g) Rate of return on common share equity = NI/average comm S/H equity x 100

 

= 109,000 x 100 = 20.43%

533,500

 

Average equity = (420,000 + 420,000 + 153,000 + 74,000)/2 = 533,500

 

Difficulty: Hard

Learning Objective: Prepare a statement of cash flows using the indirect method.

Section Reference: Preparation of the Statement of Cash Flows

CPA: Financial Reporting

CPA: Taxation

Bloomcode: Application

Bloomcode: Knowledge

 

 

 

 

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