CPA Financial Accounting and Reporting (FAR) : Calculate Fluctuations & Ratios
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Calculate Fluctuations & Ratios
The Washington Company starts the year with $800,000 in assets and $300,000 in liabilities. During the year the company reported net income of $200,000 and paid dividends during the year of $40,000. No other equity transactions took place. What was the company's return on equity for the period?
27.60%
34.50%
30.30%
24.20%
34.50%
Return on equity is calculated by dividing net income by average owner's equity. Beginning owner's equity is the difference between beginning assets and liabilities ($800K - $300K = $500K). Ending owner's equity is beginning equity of $500K + net income of $200K - dividends paid of $40K = $660K. This makes average equity $580K, and return on equity is $200K dividend by $580K.
Example Question #1 : Income Statements & Analysis
At the end of Year 1, the Walter Company reported net income of $630,000. The company paid cash dividends of $20,000 per quarter on its preferred stock. The company started the year with 80,000 shares of common stock outstanding and 50,000 shares of preferred stock outstanding. On April 1, the company issued an additional 16,000 shares of common stock and 8,000 shares of preferred stock. What should the company report as basic earnings per share?
$5.98
$5.73
$6.56
$5.54
$5.98
Basic EPS is calculated as (net income - preferred dividends)/average common shares outstanding. $80K in preferred dividends were paid during the year ($20K x 4 quarters). Average common shares outstanding were 92K (80K beginning shares x 3/12 months plus 96K shares after the issuance x 9/12 months). Thus EPS is ($630K - $120K)/92K.
Example Question #1 : Income Statements & Analysis
Working capital is defined as:
Current assets divided by current liabilities
Total assets minus current liabilities
Current assets minus current liabilities
Cash plus net receivables plus marketable securities divided by current liabilities
Current assets minus current liabilities
Working capital represents net short term assets.
Example Question #3 : Calculate Fluctuations & Ratios
Of the following, which are elements of comprehensive income?
Deferred revenues
Investments by owners
Annual sales revenues
Capital distributions to owners
Annual sales revenues
Sales revenue is a part of comprehensive income, deferred revenue is a liability, distributions to owners are changes in equity, as well as investments by owners.
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