Reading 32: Understanding the Income Statement - LOS k ～ Q currency, included, foreign, border, common

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1.Are dividends paid to common shareholders and foreign currency translation gains and losses included in a firm’s other comprehensive income?

Dividends paid

Foreign currency translation gains and losses

 

A)  No                                          No

B)  No                                          Yes

C)  Yes                                         Yes

D)  Yes                                         No

2.According to the Financial Accounting Standards Board, what is the appropriate balance sheet treatment for available-for-sale securities and where are the unrealized gains and losses reported?

Balance sheet

Unrealized gains and losses

 

A)  Fair value                             Net income

B)  Fair value                             Other comprehensive income

C)  Amortized cost                     Other comprehensive income

D)  Amortized cost                     Net income

3.Where in the financial statements should a firm recognize the unrealized gains and losses on cash flow hedging derivatives and the unrealized gains and losses on available-for-sale securities?

Cash flow hedging derivatives

Available-for-sale securities

 

A)  Other comprehensive income                  Other comprehensive income

B)  Other comprehensive income                  Net income

C)  Net income                                                    Other comprehensive income

D)  Net income                                                     Net income

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答案和详解如下：

1.Are dividends paid to common shareholders and foreign currency translation gains and losses included in a firm’s other comprehensive income?

Dividends paid

Foreign currency translation gains and losses

 

A)  No                                          No

B)  No                                          Yes

C)  Yes                                         Yes

D)  Yes                                         No

The correct answer was B)

Other comprehensive income includes non-owner transactions that affect shareholders’ equity and are not recognized in net income. Dividends paid are transactions with the owners of the firm, so dividends paid are not included in other comprehensive income. Foreign currency translation gains and losses are non-owner transactions that are not recognized in net income. Thus, foreign currency translation gains and losses are included in other comprehensive income.

2.According to the Financial Accounting Standards Board, what is the appropriate balance sheet treatment for available-for-sale securities and where are the unrealized gains and losses reported?

Balance sheet

Unrealized gains and losses

 

A)  Fair value                             Net income

B)  Fair value                             Other comprehensive income

C)  Amortized cost                     Other comprehensive income

D)  Amortized cost                     Net income

The correct answer was B)

Available-for-sale securities are reported on the balance sheet at fair value. The unrealized gains and losses bypass the income statement and are reported as a component of stockholders’ equity as a part of other comprehensive income.

3.Where in the financial statements should a firm recognize the unrealized gains and losses on cash flow hedging derivatives and the unrealized gains and losses on available-for-sale securities?

Cash flow hedging derivatives

Available-for-sale securities

 

A)  Other comprehensive income                  Other comprehensive income

B)  Other comprehensive income                  Net income

C)  Net income                                                    Other comprehensive income

D)  Net income                                                     Net income

The correct answer was A)

Unrealized gains and losses from cash flow hedging derivatives and unrealized gains and losses from available-for-sale securities are not recognized in the income statement; rather, they are both recognized as a component of stockholders’ equity as a part of other comprehensive income.