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Flashcards in 11.13.18 Deck (18)
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1
Q

A statement of cash flows must be presented by a state or local government for which funds?

A

Proprietary funds.

A statement of cash flows is required only for proprietary funds and entities engaged in business-type activities (e.g., utilities, healthcare providers, and colleges and universities). Other fund types account for governmental activities, not business-type activities.

2
Q

Which of the following are acceptable formats for reporting comprehensive income?
I. In one continuous financial statement
II. In a statement of changes in equity
III. In a separate statement of net income
IV. In two separate but consecutive financial statements

A

I & IV only.

If an entity that presents a full set of financial statements has items of other comprehensive income (OCI), it must present comprehensive income either (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements (an income statement and a statement of OCI).

3
Q

The summary of significant accounting policies of a state or local government most likely should disclose

A

A unique policy followed by all governments in the industry.

Notes are an integral part of the basic financial statements. They disclose information essential to fair presentation not reported in the statements. The notes include a summary of significant accounting policies. Disclosure of significant accounting policies is required when (1) a selection has been made from existing acceptable alternatives; (2) a policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry; and (3) GAAP have been applied in an unusual or innovative way.

4
Q

A state or local government is reported as a special-purpose government if it

A

Is engaged in one governmental program.

A special-purpose governments is a legally separate entity that is a component unit or other stand-alone government. If it has governmental and business-type activities or engages in two or more governmental programs, it should be reported as a general-purpose government. If it engages in one governmental program, it is reported as a special-purpose government. It may combine the government-wide and fund statements in a format that reconciles individual items of fund data to government-wide data in a separate column.

5
Q

On December 1, Noble Inc.’s Board of Directors declared a property dividend, payable in stock held in the Multon Company. The dividend was payable on January 5. The investment in Multon stock had an original cost of $100,000 when acquired 2 years ago. The market value of this investment was $150,000 on December 1, $175,000 on December 31, and $160,000 on January 5. The amount to be shown on Noble’s statement of financial position at December 31 as property dividends payable would be

A

$150,000.

When a property dividend is declared, the property is remeasured at its fair value as of the declaration date. This amount is then reclassified from retained earnings to property dividend payable.

6
Q

Conn Corp. owns an office building and normally charges tenants $30 per square foot per year for office space. Because the occupancy rate is low, Conn agreed to lease 10,000 square feet to Hanson Co. at $12 per square foot for the first year of a 3-year operating lease. Rent for remaining years will be at the $30 rate. Hanson moved into the building on January 1, Year 1, and paid the first year’s rent in advance. What amount of rental revenue should Conn report from Hanson in its income statement for the year ended September 30, Year 1?

A

$180,000.

In an operating lease, when payments differ from year to year, revenue is recognized by allocating the total amount of revenue to be received evenly over the lease term. At 9/30/Year 1, the amount of revenue to be recognized is for 9 months. Thus, rent revenue is $180,000 {[$10,000 square feet × ($12 + $30 + $30)] × (9 ÷ 36)}.

7
Q

Day Corp. holds 10,000 shares of its $10 par value common stock as treasury stock reacquired in Year 2 for $120,000. On December 12, Year 4, Day reissued all 10,000 shares for $190,000. Under the cost method of accounting for treasury stock, the reissuance resulted in a credit to

A

Additional paid-in capital of $70,000.

When treasury stock accounted for under the cost method is acquired, the treasury stock account is debited for the amount of the purchase price. If it is subsequently reissued for a price greater than its carrying amount, the excess is credited to additional paid-in capital. For this transaction, the excess is $70,000 ($190,000 – $120,000).

8
Q

A purchased patent has a remaining legal life of 15 years. It should be

A

Amortized over its useful life if less than 15 years.

The amortization period for an intangible asset distinct from goodwill is the shorter of its useful life or the legal life remaining after acquisition.

9
Q

Accumulated other comprehensive income is reported in which of the following financial statements?

A

The statement of financial position.

Accumulated other comprehensive income is an equity account. All equity accounts are reported on the statement of financial position (balance sheet) of an entity.

10
Q

An internal service fund received an interfund transfer of $50,000 cash from the general fund. This transfer should be reported in the statement of revenues, expenses, and changes in fund net position as

A

An item below nonoperating revenues and expenses.

Nonreciprocal interfund activity is similar to nonexchange transactions. Interfund transfers are one-way asset flows with no repayment required. In a governmental fund, a transfer is an other financing use (source) in the transferor (transferee) fund. In a proprietary fund’s statement of revenues, expenses, and changes in fund net position, transfers should be reported separately after nonoperating revenues and expenses. They are the final amounts in the section of the statement that also includes capital contributions, additions to endowments, and special and extraordinary items.

11
Q

On September 1, Year 1, Brok Co. issued a note payable to Federal Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000. On this date, the bank’s prime rate was 11%. The first interest and principal payment was made on September 1, Year 2. At December 31, Year 2, Brok should record accrued interest payable of

A

$24,000.

Under the interest method, accrued interest payable is equal to the face amount of the note at the beginning of the interest period, times the stated interest rate, times the portion of the interest period that is included within the accounting period. At 9/1/Yr 1, the face amount of the note was $900,000. After the first payment of $300,000 principal plus interest on 9/1/Yr 2, the face amount of the note was $600,000 ($900,000 – $300,000). Accrued interest payable for the period 9/1/Yr 2 to 12/31/Yr 2 was thus $24,000 [$600,000 face amount × 12% stated interest rate × (4 months ÷ 12 months)]. The prime rate is irrelevant to the calculation of accrued interest payable.

12
Q
The following data were extracted from the financial statements of a company for the year ended December 31:
Net income: $70,000
Depreciation expense: 14,000
Amortization of intangible assets: 1,000
Decrease in accounts receivable: 2,000
Increase in inventories: 9,000
Increase in accounts payable: 4,000
Increase in plant assets: 47,000
Increase in contributed capital: 31,000
Decrease in short-term notes payable: 55,000

There were no disposals of plant assets during the year. Based on the above, a statement of cash flows will report a net increase in cash of

A

$11,000.

Depreciation and amortization are noncash expenses and are added to net income. A decrease in receivables indicates that cash collections exceed sales on an accrual basis, so it is added to net income. To account for the difference between cost of goods sold (a reduction of income) and cash paid to suppliers, a two-step adjustment of net income is necessary. The difference between cost of goods sold and purchases is the change in inventory. The difference between purchases and the amount paid to suppliers is the change in accounts payable. Accordingly, the conversion of cost of goods sold to cash paid to suppliers requires deducting the inventory increase and adding the accounts payable increase. An increase in plant assets indicates an acquisition of plant assets, causing a decrease in cash, so it is deducted. An increase in contributed capital represents a cash inflow and is added to net income. A decrease in short-term notes payable is deducted from net income because it reflects a cash outflow. Thus, cash increased by $11,000 ($70,000 NI + $14,000 + $1,000 + $2,000 – $9,000 + $4,000 – $47,000 + $31,000 – $55,000).

13
Q

The management’s discussion and analysis (MD&A) section of an annual report

A

Covers three financial aspects of a firm’s business: liquidity, capital resources, and results of operations.

The MD&A section is included in SEC filings. It addresses in a nonquantified manner the prospects of a filer. The SEC examines it to determine that management has disclosed material information affecting future results. Disclosures about commitments and events that may affect operations or liquidity are mandatory. Thus, the MD&A section pertains to liquidity, capital resources, and results of operations.

14
Q

On March 2, Year 4, the city of Finch issued 10-year general obligation bonds at face amount, with interest payable March 1 and September 1. The proceeds were to be used to finance the construction of a civic center over the period April 1, Year 4, to March 31, Year 5. During the fiscal year ended June 30, Year 4, no resources had been provided to the debt service fund for the payment of principal and interest. On June 30, Year 4, Finch should report the construction in progress for the civic center in the

Capital Projects Fund:
Government-Wide Statement of Net Position:

A

No
Yes

Expenditures for the construction project but not the resulting general capital assets should be reported in the capital projects fund. The construction in progress is a general capital asset if it results from expenditure of governmental fund financial resources and is not related to activities reported in nongovernmental funds. Ultimately, the completed project should be reported in the government-wide statement of net position at historical cost, including ancillary charges. The expenditures should not be reported in the governmental funds balance sheet.

15
Q

Black Co., organized on January 2, Year 1, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, Year 1. Black expected to maintain this level of taxable income in future years. The only temporary difference is for accrued product warranty costs, expected to be paid as follows:
Year 2: $100,000
Year 3: 50,000
Year 4: 50,000
Year 5: 100,000
The applicable enacted income tax rate is 30%. In Black’s December 31, Year 1, balance sheet, the deferred income tax asset and related valuation allowance should be

Deferred Tax Asset:
Valuation Allowance:

A

$90,000
$0

Black should report an accrued product warranty liability of $300,000. The result is a deductible temporary difference of $300,000 because the liability will be settled and related amounts will be tax deductible when the warranty costs are incurred. A deferred tax asset should be measured for deductible temporary differences using the applicable tax rate. Hence, Black should record a $90,000 ($300,000 × 30%) deferred tax asset. A valuation allowance should be used to reduce a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion will not be realized. In this case, Black had taxable income of $800,000 for Year 1 and expects to maintain that level of taxable income in future years. The positive evidence therefore indicates that sufficient taxable income will be available for the future realization of the tax benefit of the existing deductible temporary differences. Given no negative evidence, a valuation allowance is not necessary.

16
Q

Users of a government’s financial statements should be able to distinguish between the primary government and its component units. Furthermore, an overview of the discretely presented component units should be provided. Accordingly,

A

Information about each major component unit must be provided in the reporting entity’s basic statements.

To provide an overview of component units, discrete presentation of component unit data is required in the government-wide statements. Each major component unit should be reported in the basic statements by presentation (1) in a separate column in the government-wide statements, (2) in combining statements of major component units after the fund statements, or (3) of condensed statements (a statement of net position and a statement of activities) in the notes. However, major component unit information is not required for fiduciary component units.

17
Q

Garson Co. recorded goods in transit purchased FOB shipping point at year end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year end?

Assets:
Retained Earnings:

A

Understated.
Understated.

FOB shipping point means title transfers to the buyer when the seller delivers the goods to a common carrier. The buyer should include the goods in its inventory upon shipment. Because the goods are in transit (they have already been delivered to the shipping point), the buyer should have included them in inventory. The omission of the goods understates inventory and total assets. Understating ending inventory overstates cost of goods sold (BI + Purchases – EI). Accordingly, net income and retained earnings are understated.

18
Q

At December 30, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1. On December 31, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Current ratio:
Quick ratio:

A

Increase
Decrease

This transaction reduced the numerator and the denominator of both ratios by equal amounts. The effect is to increase a ratio greater than 1:1 and to decrease a ratio lower than 1:1. Thus, the current ratio increased and the quick ratio decreased.