CPA Financial Accounting and Reporting (FAR) : Income Statements & Analysis
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Other Comprehensive Income
Camino Corporation reported the following items in Year 3: Foreign currency translation loss: $3,000; distributions to owners: $15,000; net income: $125,000; unamortized prior service cost on pension plan: $12,000; deferred gain on an effective cash flow hedge: $8,000. What amount should Camino report as other comprehensive income (loss) in Year 3?
$7,000
$35,000
$20,000
$32,000
$7,000
Included in other comprehensive income are the $3K foreign currency translation loss, the $12K in prior service cost, and the $8K gain on cash flow hedge.
Example Question #2 : Other Comprehensive Income
Which of the following is incorrect regarding the reporting of comprehensive income?
Comprehensive income may be shown on its own financial statement
Comprehensive income can be presented with the income statement as a single financial statement
The terms comprehensive income and other comprehensive income can be used interchangeably
Comprehensive income includes revenues and expenses that have not been realized in net income
The terms comprehensive income and other comprehensive income can be used interchangeably
Other comprehensive income includes several specific items that have not yet hit net income, while other comprehensive income includes these same items but begins with net income.
Example Question #3 : Other Comprehensive Income
Which of the following items would not be included in other comprehensive income?
Unrealized holding gains or losses on investments classified as available for sale
Unrealized holding gains or losses on investments classified as trading securities
Foreign currency translation gains or losses
Pension prior service costs or credits
Unrealized holding gains or losses on investments classified as trading securities
Unrealized holding gains/losses are included in net income.
Example Question #4 : Other Comprehensive Income
Peace Corp purchases marketable securities in Love Corp during Year 5. At the end of Year 5, the fair value of Love stock has dropped below its cost. Peace considered the decline in value to be temporary. The security is classified as available-for-sale. What should be the effect on Peace's financial statements at the end of Year 5?
Decrease in available-for-sale assets and decrease in other comprehensive income
No effect on available-for-sale assets and decrease in net income
Decrease in available-for-sale securities and decrease in net income
No effect on net income and decrease on available-for-sale assets
Decrease in available-for-sale assets and decrease in other comprehensive income
Securities that are classified as available-for-sale recognize holding gains/losses in OCI. Therefore, to adjust the securities to market value, the investment asset is decreased and a loss is recognized in OCI.
Example Question #5 : Other Comprehensive Income
Of the following, which are listed on the Statement of Comprehensive Income?
Net income
Neither
Other Comprehensive Income
Both
Both
Both of these items are listed and broken out on the Statement of Comprehensive Income. Net income are more regular and standard income items where as OCI items are less frequent and do not reflect normal operations.
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 #2 : Calculate Fluctuations & Ratios
Working capital is defined as:
Current assets minus current liabilities
Current assets divided by current liabilities
Total 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.
Example Question #1 : Income Statement
The metal division of a company generates an operating profit of $10,000 per month. On the final day of year 1, the company officials decide to sell the division which has a book value of $540,000. These officials believe they can sell the division for $570,000 but only after spending $70,000 needed to make the sale. The metal division meets the qualifications to be classified as an asset held for sale. In addition, the division qualifies as a discontinued operation. It is sold for the anticipated amount in February of year 2. Ignoring income taxes, what does the company report at the bottom of its year 1 income statement for the discontinued operation?
$120,000 profit
$80,000 profit
$50,000 profit
$0
$80,000 profit
The metal division generation $120K in operating profits throughout the year ($10K per month x 12 months). As part of the sale of the metal division, the company anticipates a loss of $40K ($570K sale price - $540K book value - $70K necessary expenses). Combined this creates a profit of $80K for the entire year.
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