Q&A Hero

Q: For a firm using the indirect method, amortization of bond discount should be added back to net income to arrive at cash flow from operating activities.

Q: An increase in accounts payable of $6,000 for the year increases cash flow from operating activities by $6,000.

Q: An increase in prepaid expenses of $8,000 for the year increases cash flow from operating activities by $8,000.

Q: For a firm using the indirect method to prepare cash flows from operating activities, a decrease in a company's pension liability account should be deducted from net income to arrive at cash flow from operating activities.

Q: Firms using the indirect method must also provide a reconciliation between accrual earnings and cash flows from operating activities.

Q: Firms using the indirect method must separately disclose the amount of income taxes paid and interest paid.

Q: Both the direct method and indirect method will arrive at the same amount for cash flow from operating activities.

Q: When using the direct method to report cash flow from operating activities, a specific category for cash paid to employees and other suppliers of goods and services must be reported.

Q: A cash collection from a customer pertaining to a sale from the prior year will result in cash flow being reported in this year's statement of cash flows.

Q: The direct method is easier for firms to implement because it relies exclusively on data already available in the accrual accounts.

Q: Depreciation expense is the most common adjustment under the indirect method because it does not cause cash to increase or decrease.

Q: The most popular method used by the majority of firms for reporting operating activities is the indirect method.

Q: The indirect method for cash flow from operating activities begins with accrual-basis operating income.

Q: Current GAAP for preparing the statement of cash flows using the direct method requires cash flows from "interest paid" and "interest received" to be shown as operating activities.

Q: The direct method and the indirect method are two alternative presentations for cash flows from investing activities.

Q: Under International Financial Reporting Standards, interest paid can be classified either as an operating or financing cash flow.

Q: According to U.S. GAAP, cash flows for interest resulting from a long-term investment in bonds should be reported in the investing activities section of the statement of cash flows.

Q: The statement of cash flows provides relevant information to lenders, bankers, and investors to help them analyze a company's cash flows from its operating, investing, and financing activities.

Q: Current GAAP requires firms to use the direct method when preparing the operating activities section of the statement of cash flows because it is more informative and transparent.

Q: A significant difference between income from operations and net cash flows from operating activities is a signal that reported income might have been distorted.

Q: Accrual accounting is often based upon subjective judgments that can introduce measurement errors and uncertainty into reported earnings.

Q: Monetary assets that arise from foreign currency transactions are shown in the financial statements at their dollar equivalent using the exchange rate in effect at the financial statement date.

Q: When consolidating foreign subsidiaries, the foreign subsidiary's financial numbers must be translated into the parents' currency unit. Under GAAP, if the foreign subsidiary is merely an extension of the parent, the current rate method is used.

Q: A variable interest entity must be consolidated into the financial statements of the sponsoring entity if the sponsoring entity has either a controlling or a noncontrolling financial interest.

Q: GAAP requires comparative financial statements to be retroactively adjusted to include data for the acquired company for periods prior to the acquisition.

Q: The amount of goodwill recognized on a consolidated balance sheet will always be the same when accounting for a business combination under either the acquisition method or the purchase method.

Q: When using the acquisition method to account for a business combination, the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values regardless of the level of ownership attributable to the minority shareholders.

Q: When using purchase accounting to account for a business combination, the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values at the date of purchase regardless of whether there is a noncontrolling interest.

Q: Intra-entity receivables and payables for an 80%-owned subsidiary are eliminated to the extent of ownership (i.e., 80% of balance is eliminated).

Q: The fixed assets reported on a consolidated balance sheet include assets of both the parent company and the subsidiary company.

Q: If a parent owns less than 100% of a subsidiary's stock, the non-controlling shareholders represent the minority interest.

Q: Consolidation procedures for 100%-owned subsidiaries require simply adding together the asset, liability, and stockholders' equity accounts of the two companies.

Q: Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required to avoid double counting.

Q: Consolidated financial statements must always be prepared when a corporation acquires more than 50% of the voting stock of another corporation.

Q: When two companies form a joint venture and each company owns exactly 50% of the joint venture, both parents will account for the joint venture using the equity method.

Q: Under the fair value method of accounting for equity investments, unrealized gains and losses as well as dividends received from the investee are reported in the investor's income statement.

Q: Once a company decides to use the fair value option to account for an equity method investment, the decision is irrevocable.

Q: A company can elect to use the fair value option to account for equity method investments at any time.

Q: The acquired goodwill is $30,000 when the investor pays $100,000 to acquire 40% of a company's outstanding voting shares at a time when the fair value of the company's net assets was $175,000.

Q: The investment account is adjusted for the investor's share of the reported income of the investee when the investor uses the equity method to account for the stock investment.

Q: The investment account is decreased by the dividends received by the investor when the investor uses the equity method to account for the stock investment.

Q: When the ownership percentage of voting stock exceeds 20 percent, GAAP requires that the investor use the equity method to account for the investment.

Q: When the ownership percentage of voting stock exceeds 20 percent, GAAP presumes that the investor is able to exert significant influence over the investee company.

Q: For available-for-sale debt securities the firm does not intend to sell, the previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.

Q: Debt or equity securities held in a firm's trading portfolio that suffer other-than-temporary declines in market value are recorded at fair value with the unrealized losses recognized in other comprehensive income, net of applicable taxes.

Q: Unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income.

Q: When trading securities are sold, the amount of the realized gain or loss is the selling price of the securities relative to the most recent fair value reflected in the financial statements.

Q: The upward or downward adjustment to reflect fair value of trading securities is a direct debit or credit to a market adjustment account.

Q: The unrealized gain from an investment classified as available-for-sale reduces net income.

Q: The realized gain on an investment classified as trading securities is calculated by comparing the selling price to the original cost.

Q: An unrealized loss for an equity securities investment classified as trading securities does not reduce net income.

Q: An investment of 30% of a company's voting shares must be accounted for using the equity method.

Q: An investment of 50% or more of a company's voting shares will require the investor to prepare consolidated financial statements.

Q: GAAP presumes that ownership of less than 20% of another company's voting shares constitutes a passive investment.

Q: Stock shares classified as trading securities are typically purchased by the investor to generate profits on holding gains.

Q: Equity securities designated by the investor to be held for a short period of time are classified as available-for-sale securities.

Q: Minority passive investments of less than 20% of the voting stock shares are classified as either trading securities or available-for-sale securities.

Q: For an investor each share of common stock and each share of preferred stock owned usually entitles the owner to one vote.

Q: Ford Corporation paid $10,200,000 for a 47% interest in Allen Corporation on January 1, 2011 when Allen had the following identifiable assets and liabilities: At the time of Ford's purchase, the fixed assets had a remaining life of 8 years. For the year ended December 31, 2011, Allen reported sales of $9 million and expenses of $5 million and declared and paid dividends of $1 million. At December 31, 2011, Allen reported the following balance sheet information: Required: 1. Give the income statement and balance sheet accounts and amounts as they would appear on Ford's financial statements under the equity method for the year ended December 31, 2011. Be sure to show calculations. 2. Explain how your answer to requirement a' would change if Ford determined that it actually controlled Allen and had to consolidate its investment. Give specific income statement and balance sheet accounts and amounts where possible. Be sure to show calculations.

Q: The Collins Company paid $1,050,000 to purchase 70% of Revsine Company's outstanding common stock on July 1, 2012. Revsine's balance sheet on the acquisition date reported net assets totaling $1,200,000. Revsine's land had a fair value which was $175,000 greater than book value, while the inventory's fair value exceeded its book value by $67,500. Immediately after the acquisition of the Revsine stock, Collins reported net assets of $5,785,000. Required: 1. Determine the consolidated net assets total as of July 1, 2012 using the acquisition method of accounting. 2. Determine the amount of noncontrolling interest to be reported on the July 1, 2012 balance sheet. How is the noncontrolling interest reported within the consolidated balance sheet? Assume that the acquisition method of accounting is applicable.

Q: The Kruk Company regularly sells merchandise to German customers. On December 1, 2012, Kruk sold merchandise to a German customer at a price of three million Euros; the customer is required to pay for the goods on February 1, 2013. The spot rate was $.875 per euro on December 1, 2012, it was $.8875 per euro on December 31, 2012, and it was $.865 per euro on February 1, 2013. Required: Prepare the journal entries that might be necessary on December 1, 2012, December 31, 2012, and on February 1, 2013.

Q: Mercedes Company paid $20,000,000 to purchase 100% of the outstanding common stock of Benz Incorporated on January 1, 2012. The book value of Benz's net assets on the date of acquisition was $17,000,000. Benz's buildings were undervalued by $1,500,000 as of January 1, 2012; the buildings had a ten-year remaining life as of the date of acquisition. All other assets and liabilities of Benz are being reported at market value. Mercedes retained earnings as of January 1, 2012 was $5,750,000, while Benz reported retained earnings of $3,175,000. Mercedes net income was $1,750,000 during 2012 and was $2,035,000 during 2013; the 2012 and 2013 net income amounts did not include any amounts pertaining to the Benz investment. Benz's retained earnings increased $1,050,000 from January 1, 2012 to December 31, 2013 even though Benz declared $225,000 of dividends during that two-year period. Required: Determine the December 31, 2013 consolidated retained earnings balance.

Q: Sub Company is a 100% owned subsidiary of Parent Corporation. During 2012, Parent sold inventory costing $500,000 to Sub for $750,000. Sub Company still had $150,000 (at transfer price) of the inventory on hand as of December 31, 2012. During 2012, Parent Company reported sales of $2,250,000 and cost of goods sold of $1,500,000, while Sub Company reported sales of $1,200,000 and cost of goods sold of $1,000,000. Required: Determine the 2012 consolidated gross profit.

Q: On January 2, 2012, the Rambler Company purchased 40% of the outstanding common stock of the AMC Corporation for $2,000,000. AMC's net assets had a book value of $3,900,000 as of January 2, 2012. AMC's buildings were undervalued by $350,000, their land was overvalued by $75,000, and their inventory was undervalued by $145,000. Required: Determine the amount of goodwill that Rambler acquired as a result of the AMC stock purchase.

Q: On April 1, 2012, GMR Company purchased 30% of the outstanding voting stock of the Victory Corporation for $960,000. Victory's net assets on April 1, 2012 totaled $2,500,000. Victory's equipment was undervalued by $500,000 and its inventory was undervalued by $200,000 as of the date of purchase. The equipment has a ten-year remaining life as of April 1, 2012; the inventory was sold during 2012. Victory reported $450,000 of net income during 2012 and paid dividends of $75,000. Assume that net income was earned evenly during 2012 and dividends were declared and paid evenly during 2012. Required: 1. Determine the amount of investment income to be reported by GMR during 2012 assuming that the equity method of accounting is applicable. 2. Determine the balance in the investment account as of December 31, 2012 assuming that the equity method is applicable. 3. Describe how the financial accounting and reporting would have differed if the equity method wasn't applicable. 4. Describe how equity method investments are accounted for when the fair value option is chosen.

Q: Beemer Company has provided the following information regarding its investment portfolios: Trading securities purchased for $150,000 during 2011 had a fair value of $165,000 as of December 31, 2011 and a fair value of $154,300 as of December 31, 2012. Available-for-sale securities purchased for $275,000 during 2011 had a fair value of $293,700 on December 31, 2011 and a fair value of $301,900 on December 31, 2012. Required: 1. Determine the impact that the investment portfolios had on net income during 2012. 2. Determine the amount of the realized gain/loss to be recorded during 2013 if the trading securities were sold for $159,500. 3. Describe the difference in the financial accounting and reporting when comparing trading security portfolios to available-for-sale security portfolios.

Q: Financial analysts must be wary of business acquisitions accounted for as pooling of interests because this method tends to inflate the A. current ratio. B. inventory turnover ratio. C. rate of return ratios. D. cash flow ratio.

Q: Pooling of interests method for accounting for business combinations has been criticized because it tends to allow recording of acquisitions A. at artificially high amounts. B. at artificially low amounts. C. at exact amounts. D. at amounts equal to fair value.

Q: If Sun Company acquired Star, Inc. in a pooling of interests transaction, the entry would have used which one of the following to account for the pooling? A. Fair value of Star's assets B. Book value of Star's assets C. Net present value of Star's assets D. Future value of Star's assets

Q: Under IFRS, SPEs are consolidated when evidence indicates that the reporting company "controls" the SPE. Control is presumed if which of the following conditions exist? I. The reporting entity performs activities on behalf of the SPE. II. The SPE has decision-making powers over the activities of the reporting entity. III. The reporting company has the right to obtain the majority of the benefits of the SPE activities. IV. The reporting company retains the majority of the residual or ownership risks related to the SPE or its assets. A. I and II only. B. I, II, and III only. C. III and IV only. D. I, II, III, and IV.

Q: Which of the following is not true regarding consolidations under IFRS? A. A parent and a subsidiary are permitted to have different accounting policies. B. While both IFRS and GAAP require a firm to consolidate entities it controls, IFRS defines control more broadly than does GAAP. C. The noncontrolling interest is classified on the balance sheet in the stockholders' equity section shown separate from the equity of the parent. D. On the income statement, noncontrolling interest is shown as a deduction from total entity (parent + 100% subsidiary) consolidated earnings.

Q: Susqua, Inc. has held-to-maturity debt securities it purchased in 2011. At December 31, 2012, Susqua, Inc. reported a $120,000 impairment loss related to these securities. During 2013, the debtor was successful in registering a new patent which improved the debtor's operating outlook. This change of events resulted in a reversal of $45,000 of the impairment loss. At December 31, 2013, the fair value of the debt securities had increased by $68,000 over the impaired value previously recorded. Susqua, Inc. uses IFRS for its external reporting. How much, if any, of this reversal can Susqua, Inc. report in its income for 2013? A. $ - 0 - B. $120,000. C. $68,000. D. $45,000.

Q: Mesquite, Inc. has held-to-maturity debt securities it purchased in 2011. At December 31, 2012, the amortized cost basis of the securities is $220,000 and the fair value of the securities is $208,000. The present value of estimated future cash flows discounted at the original effective interest rate is $210,000. Mesquite, Inc. uses IFRS for its external reporting. What amount of loss, if any, will Mesquite, Inc. report related to these securities for 2012? A. $ - 0 - B. $12,000. C. $10,000. D. $2,000.

Q: Which of the following is true regarding IFRS? A. Equity method investments may be accounted for under the fair value option if this option is selected at the inception of the investment. B. All impairment losses for Available-For-Sale debt securities are recognized in income regardless of reason. C. Fair value is used for debt and equity securities held in the trading portfolio with FV unrealized gains/losses reported in other comprehensive income. D. All of the choices are correct regarding IFRS.

Q: When accounting for self-contained foreign subsidiaries, the parent company uses which one of the following methods for the translation of its financial statements into dollars? A. Present value rate B. Historical rate C. Future value rate D. Current rate

Q: When accounting for a non-free-standing foreign subsidiary, translation exchange rates are accounted for using the temporal method which involves reporting all cost of goods sold accounts at the A. current rate. B. historical rate. C. rate at time of transaction. D. present value rate.

Q: Foreign currency nonmonetary assets and liabilities for non-free-standing subsidiaries are translated using the A. historic rate of exchange in effect when the asset or liability was acquired or incurred. B. current rate of exchange on the balance sheet date. C. temporal rate of exchange on the balance sheet date. D. present value rate of exchange when the translation takes place.

Q: Which of the following correctly describes the accounting for assets and liabilities that were created from foreign currency transactions? A. Foreign currency monetary assets and liabilities are measured using the current rate of exchange as of the date of the initial transaction. B. Foreign currency monetary assets and liabilities are measured using the current rate of exchange as of the balance sheet date. C. Foreign currency nonmonetary assets and liabilities are measured using the current rate of exchange as of the balance sheet date. D. Foreign currency nonmonetary assets and liabilities are measured using the average annual rate of exchange during the year.

Q: On November 1, 2011, A U.S. company sold merchandise to a foreign company for 375,000 francs. The payment in francs is due on January 31, 2012. The spot rate was as follows: $.20 per franc on November 1, 2011; $.21 per franc on December 31, 2011; and $.19 per franc on January 31, 2012 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction? A. The receivable was recorded at $75,000 on November 1, 2011. B. The receivable was recorded at $78,750 on the December 31, 2011 balance sheet. C. The foreign currency transaction gain included on the income statement for the year ending December 31, 2011 was $3,750. D. The foreign currency transaction loss included on the income statement for the year ending December 31, 2012 was $3,750.

Q: On December 1, 2011, A U.S. company sold merchandise to a foreign company for 750,000 francs. The payment in francs is due on January 31, 2012. The spot rate was as follows: $.20 per franc on December 1, 2011; $.19 per franc on December 31, 2011; and $.21 per franc on January 31, 2012 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction? A. The receivable was recorded at $150,000 on December 1, 2011. B. The receivable was recorded at $142,500 on the December 31, 2011 balance sheet. C. The foreign currency transaction gain included on the income statement for the year ending December 31, 2011 was $7,500. D. The foreign currency transaction gain included on the income statement for the year ending December 31, 2012 was $15,000.