Reading 32: Understanding the Income Statement - LOS k ～ Q statements, should, white, style, black

mayanfang1

Q1. 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     Net income

B) Other comprehensive income     Other comprehensive income

C) Net income                                      Other comprehensive income

Q2. 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                                  Other comprehensive income

B) Amortized cost                        Other comprehensive income

C) Fair value                                 Net income

Q3. 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                                         Yes

B)   Yes                                        Yes

C)   No                                         No

mayanfang1

答案和详解如下：

Q1. 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     Net income

B) Other comprehensive income     Other comprehensive income

C) Net income                                      Other comprehensive income

Correct answer is B)

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.

Q2. 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                                  Other comprehensive income

B) Amortized cost                        Other comprehensive income

C) Fair value                                 Net income

Correct answer is A)

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.

Q3. 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                                         Yes

B)   Yes                                        Yes

C)   No                                         No

Correct answer is A)

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.

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