CFA Level I:FSA : understanding income statements(Reading 25) 习题精选 method, income, revenue, statements

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1. The percentage-of-completion method of accounting for long-term contracts: A. Minimizes the present value of income tax payments. B. Relies less on estimates of futures costs that a firm expects to incur. C. More accurately reports the current status of uncompleted projects.

Ans. C. The percentage-of-completion method recognizes revenue based on the construction activity completed for a period, the income statement thud more accurately reports the revenue/expense items of the uncompleted projects. A is incorrect. With the percentage-of-completion method, the present value of income tax payments is maximized, not minimized, because revenue is recognized earlier and taxes are paid earlier. B is incorrect. The percentage-of-completion method relies more, not less, on estimates of the degree of completion and the extent of future costs to be incurred.

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2. An analyst complied the following information for Capital Company: Net income 650,000 Common dividends 200,000 Preferred dividends 50,000 Weighted average # of common shares outstanding 5,000,000 Common shares outstanding, Dec 31, 20x2 6,000,000 Weighted average # of preferred shares outstanding 1,200,000 Preferred shares outstanding, Dec 31, 20x2 1,200,000 Basic earnings per share (EPS) for the one-year period ended Dec 31, 20x2 for Capital Company is closest to: A. $0.09 B. $0.10 C. $0.12

Ans:C. Basic EPS=                  =                   =$0.12

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3. Addy, Inc started a 3-year construction project on 1/1/20x2. Projected revenues are 30$ million and expenses (including taxes) are estimated at 75% of total revenue. The project is to be completed as follow: 25% by 12/31/20x2, 60% by 12/31/20x3, and 100% by 12/31/20x4. Cash will be received based on completion rates. All of the company’s revenue is generated by this project. The company’s equity is generated by the profits from this project and no dividends are expected to be paid. What will the return on average equity be in 20x4 under the percentage of completion? A. 40.0%. B. 46.9%. C. 50.0%

Ans: C. ($ in 000) Percentage of completion 20x2 20x3 20x4 Revenue 7,500 10,500    12,000 Operating profit 1,875 2,625 3,000 Equity at end of year 1,875 4,500 7,500 Average equity 938 3,188(1) 6,000(2) Note (1): average equity = ($1,875+4,500)/2= $3,188 Note (2): average equity = ($4,500+7,500)/2 =$6,000 Return on equity = net income/average equity 20x4 = $3,000/6,000 = 50% for percentage completion A is incorrect. Year-end 20x4 equity was incorrectly used for both methods. B is incorrect. Averages of 20x3 and 20x4 operating profit were incorrectly used for both methods.

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4.  A company suffered a substantial loss when its production facility was destroyed in an earthquake against which it was not insured. Geological scientists were surprised by the earthquake as there was no evidence that one had ever occurred in that area in the past. Which of the following statements is most accurate? The company should report the loss on its income statement:

A. net of taxes if it reports under U.S. GAAP.

B. as an extraordinary item if it reports under IFRS.

C. as an unusual item if it reports under U.S. GAAP.

  

  
  Ans: A.

To qualify as an extraordinary item, an item must be both unusual in nature and infrequent in occurrence: The description of the earthquake meets these criteria (-Geological scientists were surprised by the earthquake as there was no evidence that one had ever occurred in that area in the past). Extraordinary items are only allowed under U.S. GAAP and are reported on the income statement net of tax.

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5. According to International Financial Reporting Standards, which of the following conditions should be satisfied in order to report revenue on the income statement?

A. Payment has been received.

B. Costs can be reliably measured.

C. Goods have been delivered to the customer.

  
  Ans: B.

According to the International Accounting Standards Board (IASB), revenue is recognized from the sale of goods when:

1.       The risk and reward of ownership is transferred.

2.       There is no continuing control or management over the goods sold.

3.       Revenue can be reliably measured.

4.       There is a probable flow of economic benefits.

5.       The cost can be reliably measured.

The IFRS conditions that should be met include that the costs incurred can be reliably measured, and it is likely that the economic benefits will flow to the entity, not the actual receipt of any payment, and that the significant risks and rewards of ownership have been transferred, which is normally when the goods have been delivered, but not always.

  

C is incorrect. Receiving the payment is not a condition to report revenue under IFRS.

  

C is incorrect. According to the Financial Accounting Standards Board (FASB), revenue is recognized in the income statement when (a) realized or realizable and (b) earned. The Securities and Exchange Commission (SEC) provides additional guidance by listing four criteria to determine whether revenue should be recognized:

1.      There is evidence of an arrangement between the buyer and seller.

2.      The product has been delivered or the service has been rendered.

3.      The price is determined or determinable.

4.      The seller is reasonably sure of collecting money.

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6.A company entered into a three-year construction project with a total contract price of $10.6 million and an expected total cost of $8.8 million. The following table provides cash flow information relating to the contract: All figures in millions Year 1 Year 2 Year 3 Costs incurred and paid $1.2 $6.0 $1.6 Amounts billed and payments received $2.4 $5.6 $2.6 If the company uses the percentage-of-completion method, the amount of revenue recognized (in millions) in Year 2 is closest to: A. $3.5. B. $5.6. C. $7.2.

Ans: C. The revenue reported is equal to the percentage of the contract that is completed in that period, where percentage completion is based on costs. Revenue recognized (in millions) in Year 2:

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7.A retailer provides credit cards only to its most valued customers who pass a rigorous credit check. A credit card customer ordered an item from the retailer in May. The item was shipped and delivered in July. The item appeared on the customer’s July credit card statement and was paid in full by the due date in August. The most appropriate month in which the retailer should recognize the revenue is:

A. May.

B. July.

C. August.

  
  Ans: B.

The appropriate time to recognize revenue would be in the month of July; the risks and rewards have been transferred to the buyer (shipped and delivered), the revenue can be reliably measured, and it is probable that the economic benefits will flow to the seller (the rigorous credit check was completed). Neither the actual payment date nor the credit card statement date is relevant here.

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8. An analyst gathers the following information about a company’s common stock:

? 1 January 2011 200,000 shares outstanding

? 1 June 2011 50,000 shares issued

? 1 August 2011 2 for 1 stock split

? 31 December 2011 500,000 shares outstanding

To calculate earnings per share for 2011, the company’s weighted average number of shares outstanding is closest to:

A. 333,333.

B. 350,000.

C. 458,333.

  
  Ans: C.

The weighted average number of shares is determined by the length of time each quantity of shares was outstanding. A stock split is treated as if it occurred at the beginning of the year.

200,000 × 5/12
83,333

250,000 × 7/12
145,833

Total before split
229,166

Including effect of 2:1 split
458,333

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9. A company uses the percentage-of-completion method to recognize revenue from its long term construction contracts and estimates percent completion based on expenditures incurred as a percentage of total estimated expenditures. A three-year contract for €10 million was undertaken with a 30% gross profit anticipated. The project is now at the end of its second year, and the following end-of-year information is available: Year 1 Year 2 Costs incurred during year €3,117,500 €2,582,500 Estimated total costs 7,250,000 7,600,000 The gross profit recognized in year 2 is closest to: A. €617,500. B. €880,000. C. €960,000.

Ans: A. Percent completed= Gross profit= % Complete x Anticipated Profit - Profit Already Recognized Year 1 Year 2 Costs Incurred 3,117,500 3,117,500+2,582,500= 5,700,000 Percent Complete 3,117,500/7,250,000 = 43.0% 5,700,000/7,600,000 = 75.0% Gross Profit 43.0% x (10,000,000 - 7,250,000) =1,182,500 75.0% x (10,000,000 - 7,600,000)

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10. The following financial information is available at the end of the year. Share Information Security Authorized Issued & outstanding Other features Common stock 500,000 250,000 Currently pays a dividend of $1 per share. Preferred stock, series A 50,000 12,000 Nonconvertible, cumulative; pays a dividend of $4 per share. Preferred stock, series B 50,000 30,000 Convertible; pays a dividend of $7.50 per share. Each share is convertible into 2.5 common shares. Additional Information: Retained earnings at start of year = $6,000,000 The diluted EPS is closest to: A. $2.91. B. $2.93. C. $3.08.

Ans: A. The convertible preferred shares are anti-dilutive, as shown in the table below; therefore the diluted EPS is the same as the basic EPS, $2.91. Basic EPS Diluted EPS Net Income 1,000,000 1,000,000 PrefDiv, Series A (48,000) (48,000) 12,000 sh x 4/sh PrefDiv, Series B (225,000) 0 30,000 sh x 7.50/sh Using If-Converted Method Earnings available to common shareholders 727,000 952,000 Weighted Average Number of Common Shares (WACS) Shares o/s 250,000 250,000 If converted ______ 75,000 2.5 com/pf x 30,000 pf WACS 250,000 325,000 325,000 EPS = (Earnings available to Common Shareholders)/ (WACS) 2.91 2.93* * Exceeds Basic EPS; Series B is antidilutive and is therefore not included