CPA Financial Accounting and Reporting (FAR) : Statement of Retained Earnings
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Example Questions
Example Question #1 : Statement Of Retained Earnings
A company has to report cash flows generated from its operating activities. Which of the following is true in regards to the presentation of operating activities on the statement of cash flows?
FASB allows the direct method but not the indirect method.
FASB allows the indirect method but not the direct method
FASB has expressed a preference for the direct method but allows the indirect method
FASB has expressed a preference for the indirect method but allows the direct method
FASB has expressed a preference for the direct method but allows the indirect method
FASB allows a company to choose between the direct and indirect method for reporting cash flows from operating activities. FASB believes that the direct method better achieves the statement's goal of providing relevant financial information.
Example Question #2 : Statement Of Retained Earnings
A company's total stockholders' equity on January 1 was $870,000. At the end of the year this balance was $990,000. The company bought back treasury stock during the year. The shares were originally issued for $120,000 and were reacquired for $150,000. The company reported net income for the year of $340,000. No other stock transactions occurred during the year but a dividend was paid. How much should be reported on the statement of cash flows for the dividend distribution?
$50,000
$60,000
$80,000
$70,000
$70,000
To get from beginning stockholder's equity to ending stockholder's equity, the following calculation is done: $870K beginning equity minus $150K paid for the treasury stock, plus $340K in net income, minus the missing amount for the dividend payment. To back into, the dividend payment, the calculation is $870K - $150K + $340K - $990K = $70K.
Example Question #3 : Statement Of Retained Earnings
A building is bought on August 1, Year 1, for $400,000 and is depreciated using the straight-line method over a life of 20 years with an expected residual value of $40,000. The half-year convention is elected. On April 1, Year 3, the building is sold for a loss of $30,000. What appears on the company's year 3 statement of cash flows?
Investing activities cash inflow of $370,000
Operating activities cash inflow of $364,000
Operating activities cash inflow of $325,000
Investing activities cash inflow of $334,000
Investing activities cash inflow of $334,000
Purchases and sales of long-term assets belong in the investing activities section of the statement of cash flows.To calculate the amount of cash received in the sale, determine the net book value of the asset at the time of the sale. ($400K purchase price - $40K residual value) / 12 years x 2 years = $36K in depreciation. $400K - $36K = NBV of $364K, meaning cash of $334 was received for the building.
Example Question #4 : Statement Of Retained Earnings
Which of the following accounts would affect retained earnings? A) Net income B) Dividend payments
Both
Neither
A
B
Both
Net income would result in an increase to retained earnings where as dividend payouts decrease the retained earnings account.
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