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the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment.
When long-term investments in bonds are sold before their maturity date, the seller would receive the sales price less commissions plus any accrued interest since the last interest payment date.
If the proceeds from the sale of bonds held as a long-term investment exceed the carrying amount of the bonds, a gain is realized.
Any gains or losses on the sale of long-term investments normally would be reported in the Other Income or Other Loss section of the income statement.
Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.
Bonds payable would be listed at their carrying value on the balance sheet.
The fair market value of bond investments should be disclosed, either on the face of the financial statements or in an accompanying note.
Investment in Bonds are reported on the balance sheet at lower of cost or market.
Investment in Bonds is listed on the balance sheet after Bonds Payable.
Comprehensive income is all changes in stockholders' equity during the period except those resulting from dividends and stockholders' investment.
Other comprehensive income transactions should be reported net of taxes.
The cumulative effects of other comprehensive income items must be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income.
Comprehensive income does not affect net income or retained earnings.
Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit.
Temporary investments are reported on the balance sheet at cost.
Any difference between the fair market values of the securities and their cost is a realized gain or loss.
The equity method causes the investment account to mirror the proportional changes in book value of the investee.
The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee.
Cash flows from investing activities, as part of the statement of cash flows, include payments for the purchase of treasury stock.
The main disadvantage of the direct method of reporting cash flows from operating activities is that the necessary data are often costly to accumulate.
Cash outflows from financing activities include the payment of cash dividends, the acquisition of treasury stock, and the repayment of amounts borrowed.
In preparing the cash flows from operating activities section of the statement of cash flows by the indirect method, the net decrease in inventories from the beginning to the end of the period is added to net income for the period.
If $475,000 of bonds payable are sold at 101, $475,000 would be reported in the cash flows from financing activities section of the statement of cash flows.
Net income was $ 51,000 for the year. The accumulated depreciation balance increased by $14,000 over the year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the cash flow from operations is $37,000
Net income for the year was $29,500. Accounts receivable increased $2,500, and accounts payable increased $5,400. Under the indirect method, the cash flow from operations is $32,400.
Under the indirect method, expenses that do not affect cash are added to net income in the operating activities section of the statement of cash flows.
Cash inflows and outflows are not netted in any activity section of the statement of cash flows but are separately disclosed to give the reader full information.
The Investing and Financing sections for the indirect and direct statement of cash flows are the same for the same period of the same company.
To determine cash payments for merchandise for the cash flow statement using the direct method, a decrease in accounts payable is added to the cost of merchandise sold.
To determine cash payments for operating expenses for the cash flow statement using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation.
To determine cash payments for income tax for the cash flow statement using the direct method, an increase in income taxes payable is added to the income tax expense.
Free cash flow is cash flow from operations, less cash used to purchase fixed assets to maintain productive capacity and cash used for dividends.
Financial statements showing the current year's financial data in one column and preceding years' financial data in other columns are called horizontal statements.
Comparable financial statements are designed to compare the financial statements of two or more corporations.
The percentage analysis of increases and decreases in corresponding items in comparative financial statements is referred to as horizontal analysis.
Horizontal analysis may compare three or more statements and the earliest year could be used as the base year.
The relationship of each asset item as a percent of total assets is an example of vertical analysis.
In a common size income statement, each item is expressed as a percentage of net income.
The current ratio is sometimes called the bankers' ratio.
A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000 and $222,500 of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1.
Inventory turnover shows how many times the average inventory was sold during the year.
An increase in the ratio of stockholders' equity to liabilities indicates an improvement in the margin of safety for creditors.
The rate earned on total common stockholders' equity for most thriving businesses will be higher than the rate earned on total assets.
A company is using the concept of leverage or trading on equity, when it borrows money from creditors in order to earn additional income in excess of the interest cost and thereby increases the rate of return to the common stockholders.
Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general economic conditions.
Notes to the financial statements are generally not useful.
Unusual items affecting the current period's income statement consist of fixed assets and discontinued items.
When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item before income from continuing operations on the income statement.
An extraordinary loss of $300,000 that results in income tax savings of $90,000 should be reported as an extraordinary loss (net of tax) of $210,000 on the income statement.
One potential advantage of financing corporations through the use of bonds rather than common stock is
a. the interest expense is deductible for tax purposes by the corporation
b. a higher earnings per share is guaranteed for existing common shareholders
c. the corporation must pay the bonds at maturity
d. the interest on bonds must be paid when due
The account Investment in Bonds is reported
a. at cost as a long-term asset less Discount on Bond Investments or plus Premium on Bond Investments
b. at fair market value because that is all that is required
c. at cost as a long-term asset
d. at cost as a long-term liability along with the current portion reported as a current liability
Which of the following is not a part of comprehensive income?
a. foreign currency items
b. unrealized gains and losses
c. restructuring charges
d. pension liability adjustment
Which of the following investments below should be accounted for by using the cost method?
a. long-term investments in stock where the investor does not have a significant influence over the investee
b. long-term investments in stock where the investor does have significant influence over the investee
c. temporary investments in stock
d. temporary investments in stock and long-term investments in stock where the investor does not have a significant influence over the investee
The cost method of accounting for investments
a. requires the investment to be reported at its original cost in the balance sheet
b. requires the investment be increased by the reported net income of the investee
c. requires the investment be decreased by the reported net income of the investee
d. requires the investment to be reported at its market value
Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to
a. Dividend Revenue
b. Dividend Receivables
c. Investment in Vallerio
d. Retained Earnings
The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the
a. market method
b. equity method
c. cost method
d. income method
When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as a(n)
a. extraordinary gain or loss
b. paid-in capital addition
c. gain or loss
d. prior period adjustment
Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record its share of the earnings of Worton Corporation?
a. debit Cash; credit Dividend Revenue
b. debit Investment in Worton Corporation; credit Income of Worton Corporation
c. debit Cash; credit Investment in Worton Corporation
d. debit Investment in Worton Corporation Stock; credit Cash
Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the
b. minority interest
Financial statements in which financial data for two or more companies are combined as a single entity are called
a. constitutional statements
b. consolidated statements
c. conventional statements
d. audited statements
In general, consolidated financial statements should be prepared
a. when a corporation owns more than 20% of the common stock of another company
b. when a corporation owns more than 50% of the common stock of another company
c. whenever the market value of the stock investment is significantly lower than its cost
d. only when a corporation owns 100% of the common stock of another company
Goyo Company owns 87% of the outstanding stock of Luis company. Goyo Company is referred to as the
Which of the following is not one of the four basic financial statements?
a. income statement
b. balance sheet
c. statement of cash flows
d. statement of changes in financial position
Which of the following concepts of cash is not appropriate to use in preparing the statement of cash flows?
a. cash and cash equivalents
b. cash and U.S. treasury bonds
c. cash and money market funds
Cash paid to purchase long-term investments would be reported in the statement of cash flows in
a. the cash flows from investing activities section
b. a separate schedule
c. the cash flows from operating activities section
d. the cash flows from financing activities section
Which of the following would not be found in a Schedule of Noncash Investing and Financing Activities, reported at the end of a Statement of Cash Flows?
a. bonds payable exchanged for capital stock
b. purchase of treasury stock
c. capital stock issued to acquire fixed assets
d. stock dividends declared
Which of the following does not represent an outflow of cash and therefore would not be reported on the statement of cash flows as a use of cash?
a. purchase of noncurrent assets
b. discarding an asset that had been fully depreciated
c. payment of cash dividends
d. purchase of treasury stock
Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows?
a. declaration of stock dividends
b. appropriation of retained earnings
c. issuance of long-term debt
d. acquisition of treasury stock
A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of cash flows under
a. operating activities
b. investing activities
c. financing activities
d. noncash investing and financing activities
The order of presentation of activities on the statement of cash flows is
a. financing, operating, and investing.
b. financing, investing, and operating.
c. operating, financing, and investing.
d. operating, investing, and financing
Financing activities involve
a. lending money.
b. issuing debt.
c. acquiring long-lived assets.
d. acquiring investments
Investing activities include
a. collecting cash on loans made.
b. obtaining capital from stockholders.
c. repaying money previously borrowed.
d. obtaining cash from creditors
A building with a book value of $ 46,000 is sold for $51,000 cash Using the indirect method, this transaction should be shown on the statement of cash flows as follows:
a. an increase of $46,000 from investing activities and an addition to net income of $5,000
b. an increase of $46,000 from investing activities
c. an increase of $51,000 from investing activities
d. an increase of $51,000 from investing activities and a deduction from net income of $5,000
On the statement of cash flows, the cash flows from financing activities section would include all of the following except
a. payments of interest on bonds payable
b. payments for dividends
c. receipts from the sale of bonds payable
d. payments for purchase of treasury stock
A business issues 20-year bonds payable in exchange for preferred stock. This transaction would be reported on the statement of cash flows in
a. the cash flows from financing activities section
b. the cash flows from operating activities section
c. the cash flows from investing activities section
d. a separate schedule
Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method?
a. a decrease in accounts receivable
b. a decrease in accounts payable
c. a decrease in inventory
d. preferred dividends declared and paid
Baxter Company reported a net loss of $13,000 for the year ended December 31, 2010. During the year, accounts receivable decreased $5,000, merchandise inventory increased $8,000, accounts payable increased by $10,000, and depreciation expense of $4,000 was recorded. During 2010, operating activities
a. used net cash of $8,000.
b. provided net cash of $2,000.
c. used net cash of $2,000.
d. provided net cash of $8,000
On the statement of cash flows, the cash flows from operating activities section would include
a. payments for the acquisition of investments
b. receipts from the issuance of capital stock
c. payments for cash dividends
d. payment for interest on short-term notes payable
The cost of merchandise sold during the year was $50,000. Merchandise inventories were $12,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $6,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total
Operating expenses other than depreciation for the year were $400,000. Prepaid expenses increased by $17,000 and accrued expenses decreased by $30,000 during the year. Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be
If comparative balance sheets indicate no notes receivable on the preceding year and a $48,000 note receivable on the current year, the increase of $48,000
a. cannot be stated as a percentage
b. can be stated as 0%
c. can be stated as 500% increase
d. can be stated as 100% increase
Assume that Axle Company reported a net loss of $50,000 in 2009 and net income of $250,000 in 2010. The increase in net income of $300,000
a. can be stated as 100% increase
b. can be stated as 200% increase
c. can be stated as 0%
d. cannot be stated as a percentage
One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to
a. determine which companies in a single industry are of the same value.
b. determine which companies in a single industry are of the same size.
c. judge the relative potential of two companies of similar size in different industries.
d. make a better comparison of two companies of different sizes in the same industry.
Under which of the following cases may a percentage change be computed?
a. There is a negative amount in the base year and a positive amount in the subsequent year.
b. There is a negative amount in the base year and a negative amount in the subsequent year.
c. The trend of the amounts is decreasing but all amounts are positive.
d. There is no amount in the base year
Assume the following sales data for a company:
What is the percentage increase in sales from 2009 to 2010?
In a common size financial statement, which of the following is given a percentage of 100 percent?
a. Costs of Goods Sold
b. Total assets
c. Net income
d. Total liabilities
Which of the following is a measure of the liquid position of a corporation?
a. earnings per share
b. inventory turnover
c. number of times interest charges earned
d. current ratio
The numerator used to calculate accounts receivable turnover is
a. total sales
b. net credit sales
c. accounts receivable at year-end
d. average accounts receivable
An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to
b. either increase or decrease
c. remain the same
The number of times interest charges are earned is computed as
a. income before income tax plus interest charges, divided by interest charges
b. net income plus interest charges, divided by interest charges
c. net income divided by interest charges
d. income before income tax divided by interest charges
The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is sometimes referred to as
a. quick assets
A common measure of liquidity is
a. profit margin.
b. ratio of net sales to assets.
c. dividends per share of common stock.
d. receivable turnover
All of the following are typically included in the Management's Discussion and Analysis in annual reports except:
a. journal entries.
b. management's assessment of liquidity.
c. off-balance-sheet arrangements.
d. explanations of any significant changes between the current and prior years' financial statements
Which of the following would appear as an extraordinary item on the income statement?
a. liquidating dividend
b. loss from land condemned for public use
c. gain resulting from the disposal of a segment of the business
d. loss resulting from the sale of fixed assets
A loss on disposal of a segment would be reported in the income statement as a(n)
a. selling expense
b. administrative expense
c. deduction from income from continuing operations
d. other expense
Which of the following is considered an unusual item affecting the prior period's income statement?
b. Extraordinary item
c. Fixed asset impairments
d. Discontinued operations
a. Extraordinary item
b. Fixed asset impairments
c. Change in accountinng principles
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