Hock Section A Answers.pdf - Hock 2020 Part 1 Section A \u2013 External Financial Reporting Decisions Answers 1 Question ID ICMA 19.P1.010(Topic Financial

Hock Section A Answers.pdf - Hock 2020 Part 1 Section A...

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Unformatted text preview: Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers 1. Question ID: ICMA 19.P1.010 (Topic: Financial Statements - Other Than Statement of Cash Flows) A company is preparing its financial statements in accordance with U.S. GAAP. Listed below are select financial data for the company. Net income = $950,000 Depreciation = $40,000 Investment by owners = $60,000 Unrealized gain on available-for-sale securities = $90,000 Foreign currency translation loss = $20,000 What is the amount that would be reported as comprehensive income? A. $1,120,000. B. $1,020,000.correct C. $1,060,000. D. $970,000. Question was not answered Correct Answer Explanation: There are certain items that are added to (or subtracted from) net income to calculate comprehensive income. In this question, the unrealized gain on available-for-sale securities ($90,000) and the foreign currency translation loss ($20,000). Adding these two items to net income gives a comprehensive income of $1,020,000. The investment by owners is not included in comprehensive income and depreciation is already included in net income. Explanation for Choice A: There are certain items that are added to (or subtracted from) net income to calculate comprehensive income. This answer choice does not make the necessary adjustments. Depreciation and investment by owners are both incorrectly included as adjustments to net income. Explanation for Choice C: There are certain items that are added to (or subtracted from) net income to calculate comprehensive income. This answer choice does not make the necessary adjustments. The foreign currency translation loss was added instead of being subtracted. Explanation for Choice D: There are certain items that are added to (or subtracted from) net income to calculate comprehensive income. This answer choice does not make the necessary adjustments. The unrealized gain on available-for-sale securities is not included and the foreign currency translation is added instead of subtracted. 2. Question ID: ICMA 19.P1.002 (Topic: Financial Statements - Other Than Statement of Cash Flows) An income statement could be used by an external investor for all of the following purposes except to A. analyze the company’s performance compared to the budget.correct ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers B. assess the risk of the company achieving future profitability. C. compare the company’s results to those of its competitors. D. predict the company’s future revenues. Question was not answered Correct Answer Explanation: The income statement cannot be used to analyze the company's performance compared to the budget because the budget is not part of the financial statements. Explanation for Choice B: The income statement may be used to assess the risk of the company achieving future profitability. Explanation for Choice C: The income statement may be used to compare the company’s results to those of its competitors. Explanation for Choice D: The income statement may be used to predict the company’s future revenues. 3. Question ID: HOCK LR P2E 1 (Topic: Financial Statements - Other Than Statement of Cash Flows) The balance sheet (or statement of financial position) helps users to assess the liquidity, financial flexibility, solvency and risk of a company. A company with financial flexibility has the ability to A. decide whether to settle a liability or write it off. B. respond to unexpected needs and opportunities.correct C. choose the valuation methods it will use to report its assets. D. meet its financial obligations as they come due. Question was not answered Correct Answer Explanation: Financial flexibility refers to the ability of a company to take actions that will alter the amounts and timing of its cash flows so that it is able to respond to unexpected needs and opportunities. For example, a company with a lot of debt is not financially flexible, because its available cash is committed to servicing its debt and it may have loan covenants that it must comply with. It will not have much spare cash available to finance an expansion or to meet an unexpected need, nor will it have the ability to borrow much more. A firm with a high degree of financial flexibility can better survive an economic downturn or other difficult setback, and it is in a better position to take advantage of profitable and unexpected investment opportunities. Moreover, a company with greater financial flexibility has a lower risk of failure. Explanation for Choice A: When a company has a liability, it does not have the ability to decide whether or not to settle that liability. It has a legal obligation to settle the liability by paying it or by satisfying the performance obligation represented by the liability, unless the company is relieved of that obligation by a bankruptcy judge. Explanation for Choice C: ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers To a degree, all companies can choose the valuation methods they will use to report certain assets. For example, a company has a choice of inventory cost flow assumptions (FIFO, average cost, etc.), and its choice will affect the value of the inventory on its balance sheet. However, this flexibility applies to only certain assets and only as permitted under generally accepted accounting principles; and this is not what financial flexibility means. Explanation for Choice D: While it is important for a company to be able to meet its financial obligations as they come due, this is not what financial flexibility means. 4. Question ID: CIA 1192 P4 Q37 (Topic: Financial Statements - Other Than Statement of Cash Flows) Because of inexact estimates of the service life and the residual value of a plant asset, a fully depreciated asset was sold in the current year at a material gain. This gain should be reported: A. As part of sales revenue on the current year income statement. B. In the income from continuing operations section of the current year income statement.correct C. As an adjustment to prior periods' depreciation on the statement of retained earnings. D. As an unusual or infrequent event in the unusual and infrequent events section of the current year income statement. Question was not answered Correct Answer Explanation: The gain on the sale of an asset is reported in the income statement in the section of continuing operations in the year in which it is sold. Explanation for Choice A: The sale of a fixed asset is not recorded as revenue in the financial statements. Explanation for Choice C: The sale of a fixed asset is not recorded as an adjustment to prior periods' depreciation in the financial statements. Explanation for Choice D: The sale of a fixed asset is not recorded as an unusual or infrequent event in the financial statements, and unusual or infrequent events are not reported in a separate section of the income statement. Unusual or infrequent events are reported as separate line items within the income from continuing operations section of the income statement or, alternatively, included in some other line of the income from continuing operations section and disclosed in the notes to the financial statements. 5. Question ID: ICMA 10.P2.004 (Topic: Financial Statements - Other Than Statement of Cash Flows) The statement of changes in stockholders' equity shows a A. listing of all stockholders' equity accounts and their corresponding dollar amounts. B. computation of the number of shares outstanding used for earnings per share calculations. C. reconciliation of the beginning and ending balances in the Retained Earnings account. D. reconciliation of the beginning and ending balances in the individual stockholders' equity accounts.correct ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers Question was not answered Correct Answer Explanation: Firms are required to present a reconciliation of the beginning and ending balances of their stockholders' equity accounts. The statement of changes in stockholders' equity reports the changes in each stockholders' equity account and in total stockholders' equity during the year and reconciles the beginning balance in each account with the ending balance. Explanation for Choice A: This is a description of the equity section of the balance sheet. The statement of changes in stockholders' equity shows more than just the ending balances of the stockholders' equity accounts. Explanation for Choice B: The computation of the number of shares outstanding used for earnings per share calculations is not shown on the statement of changes in stockholders' equity. Explanation for Choice C: The statement of changes in stockholders' equity shows more than just a reconciliation of the beginning and ending balances in the Retained Earnings account. 6. Question ID: ICMA 1603.P1.053 (Topic: Financial Statements - Other Than Statement of Cash Flows) All of the following are limitations of the balance sheet except that A. the balance sheet provides information on the liquidity and solvency of the company.correct B. assets and liabilities are usually recorded at historical cost, which might differ significantly from current fair value. C. the balance sheet is prepared using management judgments and estimates. D. the balance sheet omits many items that cannot be recorded objectively but which have financial value to the company. Question was not answered Correct Answer Explanation: Providing information on the liquidity and solvency of the company is not a limitation of the balance sheet. It is a characteristic of the balance sheet. The balance sheet helps to assess the company’s liquidity, financial flexibility, solvency, and risk. Explanation for Choice B: This is a limitation of the balance sheet. Explanation for Choice C: This is a limitation of the balance sheet. Explanation for Choice D: This is a limitation of the balance sheet. 7. Question ID: HOCK MP2 AF16 (Topic: Financial Statements - Other Than Statement of Cash Flows) ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers In times of rising prices, what effect does the use of the historical cost concept have on a company's asset values and profit? A. Asset values will be overstated and profit understated in the financial statements. B. Asset values and profit will both be understated in the financial statements. C. Asset values will be understated and profit overstated in the financial statements.correct D. Asset values and profit will both be overstated in the financial statements. Question was not answered Correct Answer Explanation: In a period of rising prices, use of the historical cost concept will cause the value of assets on the financial statements to be understated, since the current fair value of the assets will be more than was paid for them. Similarly, the selling prices of inventory items will go up but their inventory cost will remain the same in the financial statements while they are in inventory. Thus, cost of goods sold is unadjusted and so profits will be overstated. Therefore, in a time of rising prices, assets are understated and profits are overstated in the financial statements. Explanation for Choice A: In a time of rising prices, asset values will not be overstated and profit will not be understated in the financial statements. Explanation for Choice B: In a time of rising prices, asset values and profit will not both be understated in the financial statements. Explanation for Choice D: In a time of rising prices, asset values and profit will not both be overstated in the financial statements. 8. Question ID: ICMA 10.P2.002 (Topic: Financial Statements - Other Than Statement of Cash Flows) The financial statements included in the annual report to the shareholders are least useful to which one of the following? A. Managers in charge of operating activities.correct B. Competing businesses. C. Stockbrokers. D. Bankers preparing to lend money. Question was not answered Correct Answer Explanation: The financial statements included in the annual report to shareholders do not contain enough detail for internal managers in charge of operating activities. Managers need internal reports that give them the details about the effectiveness and the efficiency of operations, so they can make the necessary day-to-day decisions. Explanation for Choice B: ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers Competing businesses use financial statements of their competitors to analyze how well they are doing versus the competition. Explanation for Choice C: Stockbrokers use financial statements of publicly-traded companies to make recommendations to their clients. Explanation for Choice D: Bankers use financial statements of both publicly-traded companies and private companies to make loan decisions in response to loan requests from the companies. 9. Question ID: ICMA 1603.P1.006 (Topic: Financial Statements - Other Than Statement of Cash Flows) A company’s net income totaled $12,000,000. The company had an unusual loss of $250,000, an unrealized after-tax gain of $25,000 on available-for-sale debt securities, and a $900,000 distribution of cash dividends. The company’s comprehensive income was A. $10,875,000. B. $11,775,000. C. $11,750,000. D. $12,025,000.correct Question was not answered Correct Answer Explanation: Comprehensive income includes everything on the income statement plus several specific items that are called Other Comprehensive Income (OCI) that do not appear on the income statement. They do not appear on the income statement because U.S. GAAP requires them to be reported as OCI items in the calculation of comprehensive income. Accumulated other comprehensive income is a line in the equity section of the balance sheet that includes these items that are not reflected on the income statement. The amount of change in the accumulated other comprehensive income account during a given year is included along with net income in calculating comprehensive income. The unrealized after-tax gain of $25,000 on available-for-sale debt securities was reported in accumulated other comprehensive income. Thus, comprehensive income includes the net income of $12,000,000 (which includes the unusual loss) plus the $25,000 unrealized gain on available-for-sale debt securities reported in accumulated other comprehensive income, for a total of $12,025,000. Explanation for Choice A: This answer excludes the unusual loss of $250,000 and the dividend of $900,000. Comprehensive income includes everything on the income statement plus several specific items that are called other comprehensive income (OCI) that do not appear on the income statement. The unusual loss of $250,000 reduces net income and thus it should not be deducted again. Comprehensive income includes all transactions of the company except for those transactions that are made with the owners of the company, such as distribution of dividends. The components of comprehensive income are net income and the amount of change during the period in accumulated other comprehensive income. Dividends are not reported on the income statement, nor are they reported in accumulated other comprehensive income. Instead, dividends are deducted from retained earnings. Since dividend transactions are not part of the components of comprehensive ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers income, it is not proper to deduct the $900,000 in dividends distributed when calculating comprehensive income. Explanation for Choice B: This answer excludes the unusual loss of $250,000. Comprehensive income includes everything on the income statement plus several specific items that are called other comprehensive income (OCI) that do not appear on the income statement. The unusual loss of $250,000 is included in net income and thus is included in comprehensive income. Explanation for Choice C: This answer excludes the unusual loss of $250,000 and the unrealized after-tax gain of $25,000 on available-for-sale debt securities. Comprehensive income includes everything on the income statement plus several specific items that are called other comprehensive income (OCI) that do not appear on the income statement. The unusual loss of $250,000 is included in net income and thus is included in comprehensive income. The unrealized after-tax gain of $25,000 on available-for-sale debt securities is reported in accumulated other comprehensive income and thus is also included in comprehensive income. 10. Question ID: ICMA 10.P2.016 (Topic: Financial Statements - Other Than Statement of Cash Flows) All of the following are limitations to the information provided on the statement of financial position except the A. quality of the earnings reported for the enterprise.correct B. judgments and estimates used regarding the collectibility, salability, and longevity of assets. C. omission of items that are of financial value to the business such as the worth of the employees. D. lack of current valuation for most assets and liabilities. Question was not answered Correct Answer Explanation: The statement of financial position, or balance sheet, does not report earnings for the enterprise at all. Earnings are reported on the income statement. Explanation for Choice B: Judgments and estimates are used in determining many of the items reported in the balance sheet. For example, estimates of the amount of receivables the company will collect are used to value the accounts receivable; the expected useful life of fixed assets is used to determine the amount of depreciation; and the company’s liability for future warranty claims is estimated by projecting the number and the cost of the future claims. Because these are estimates, they are by nature not precise. Explanation for Choice C: Many assets are not reported on the balance sheet, even though they do have value and will generate future cash flows. Examples of these include the company’s employees, or its human resources, its processes and procedures, and its competitive advantages. Explanation for Choice D: Values of certain assets are measured at historical cost, not fair (or market) value, replacement cost, or their value to the firm, for the balance sheet. For example, property, plant and equipment are ‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬ Hock 2020 Part 1 Section A – External Financial Reporting Decisions Answers reported on the balance sheet at their historical cost minus accumulated depreciation, although the assets’ value in use may be significantly greater. 11. Question ID: HOCK MP2 AF15 (Topic: Financial Statements - Other Than Statement of Cash Flows) The accounting concept or convention which, in times of rising prices, tends to understate asset values and overstate profits, is the A. going concern concept. B. historical cost convention.correct C. conservatism concept. D. prudence concept. Question was not answered Correct Answer Explanation: In a period of rising prices, the value of assets will be understated since the current value of the assets is more than was paid for them. Similarly, the selling prices of inventory items will go up but their inventory cost will remain the same while they are in inventory. Thus, cost of goods sold is unadjusted and so profits will be overstated. Explanation for Choice A: The going concern concept says that a company's balance sheet must reflect the value of that company assuming it will remain in existence for, and beyond, the foreseeable future. That concept does not lead to ...
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