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Reading 32: Understanding the Income Statement - LOS l ~ Q

Q1. Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income?

          Inventory write-down         Acquisition of treasury stock

 

A) No                                                          Yes

B) No                                                          No

C) Yes                                                         No

Q2. For the year ended December 31, 2007, Milan Company reported the following financial information:

Gross profit from sales

$600,000

Operating expenses

100,000

Unrealized loss from foreign currency translation

30,000

Dividends received from available-for-sale securities

15,000

Increase in minimum pension liability

45,000

Interest expense

25,000

Acquired treasury stock for $25,000 more than original book value

75,000

Unrealized gain from available-sale-securities

20,000

Ignoring taxes, calculate Milan’s net income and comprehensive income for 2007.

          Net income                  Comprehensive income

 

A) $490,000                                  $2,000

B) $490,000                                  $435,000

C) $40,000                                    $44,000

Q3. For the year ended December 31, 2007, Cobra Company reported the following financial information:

Revenue

$100,000

Cost of goods sold

40,000

Operating expenses

20,000

Unrealized gain from foreign currency translation

5,000

Unrealized loss on cash flow hedging derivatives

3,000

Dividends paid to common shareholders

7,500

Realized gain on sale of equipment

1,000

Ignoring taxes, calculate Cobra’s net income and comprehensive income for 2007.

          Net income                      Comprehensive income

 

A) $40,000                                     $43,000

B) $41,000                                    $2,000

C) $41,000                                    $43,000

Q4. Barracuda Corporation, a U.S. corporation, owns a subsidiary located in Germany. The German subsidiary’s financial statements are maintained in euros. If the euro recently appreciated relative to the U.S. dollar, how would the unrealized translation gain affect Barracuda’s retained earnings and total stockholders’ equity?

          Retained earnings          Total stockholders' equity

 

A)  No effect                                No effect

B)  Increase                                 Increase

C)  No effect                                Increase

 

答案和详解如下:

Q1. Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income?

          Inventory write-down         Acquisition of treasury stock

 

A) No                                                          Yes

B) No                                                          No

C) Yes                                                         No

Correct answer is C)

Comprehensive income includes all transactions that affect shareholders’ equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income.

Q2. For the year ended December 31, 2007, Milan Company reported the following financial information:

Gross profit from sales

$600,000

Operating expenses

100,000

Unrealized loss from foreign currency translation

30,000

Dividends received from available-for-sale securities

15,000

Increase in minimum pension liability

45,000

Interest expense

25,000

Acquired treasury stock for $25,000 more than original book value

75,000

Unrealized gain from available-sale-securities

20,000

Ignoring taxes, calculate Milan’s net income and comprehensive income for 2007.

          Net income                  Comprehensive income

 

A) $490,000                                  $2,000

B) $490,000                                  $435,000

C) $40,000                                    $44,000

Correct answer is B)

Net income is equal to $490,000 ($600,000 gross profit – $100,000 operating expenses + $15,000 dividends received – $25,000 interest expense). Comprehensive income includes all transactions that affect stockholders’ equity except transactions with shareholders. Thus, comprehensive income is equal to $435,000 ($490,000 net income – $30,000 unrealized loss from foreign currency translation – $45,000 increase in minimum pension liability + $20,000 unrealized gain on available-for-sale securities). The treasury stock purchase is a transaction with shareholders and is not included in either comprehensive income or net income.

Q3. For the year ended December 31, 2007, Cobra Company reported the following financial information:

Revenue

$100,000

Cost of goods sold

40,000

Operating expenses

20,000

Unrealized gain from foreign currency translation

5,000

Unrealized loss on cash flow hedging derivatives

3,000

Dividends paid to common shareholders

7,500

Realized gain on sale of equipment

1,000

Ignoring taxes, calculate Cobra’s net income and comprehensive income for 2007.

          Net income                      Comprehensive income

 

A) $40,000                                     $43,000

B) $41,000                                    $2,000

C) $41,000                                    $43,000

Correct answer is C)

Net income is equal to $41,000 ($100,000 revenue – $40,000 COGS – $20,000 operating expenses + $1,000 realized gain on sale of equipment). Comprehensive income includes all transactions that affect stockholders’ equity except transactions with shareholders. Comprehensive income includes net income, unrealized gains and losses from available-for-sales securities, unrealized gains and losses from cash flow hedging derivatives, and gains and losses from foreign currency translation. Thus, comprehensive income is equal to $43,000 ($41,000 net income + $5,000 unrealized gain from foreign currency translation – $3,000 unrealized loss from cash flow hedging derivatives). Dividends paid is a transaction with shareholders and is not included in comprehensive income.

Q4. Barracuda Corporation, a U.S. corporation, owns a subsidiary located in Germany. The German subsidiary’s financial statements are maintained in euros. If the euro recently appreciated relative to the U.S. dollar, how would the unrealized translation gain affect Barracuda’s retained earnings and total stockholders’ equity?

          Retained earnings          Total stockholders' equity

 

A)  No effect                                No effect

B)  Increase                                 Increase

C)  No effect                                Increase

Correct answer is C)

Unrealized foreign currency translation gains and losses are not reported in the income statement; thus, retained earnings are unaffected. However, unrealized foreign currency gains and losses are included in comprehensive income. Comprehensive income includes all changes in equity except those that result from transactions with shareholders. So, the translation gain increases stockholders’ equity by increasing comprehensive income.

 

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