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71. Which of the following items would affect owners’ equity and also appear on the income statement? A. Dividends paid to shareholders. B. Unrealized gains and losses on trading securities. C. Unrealized gains and losses on available-for-sale securities.

Ans: B. Unrealized gains and losses from trading securities are reflected in the income statement and affect owners’ equity. A is incorrect. Dividends paid to shareholders reduce owners’ equity but not net income. C is incorrect. Unrealized gains and losses from available-for-sale securities are included in other comprehensive income. Transactions included in other comprehensive income affect but not net income.

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72. For which of the following balance sheet items is a change in market value most likely to affect net income?

A. Debt securities issued by the firm.

B. Debt securities that the firm intends to hold until maturity.

C. Securities held with the intent to profit over the short term.
  Ans: C.

Securities held with the intent to profit over the short term are classified as trading securities, and changes in their values are reflected in their balance sheet values and also reported on the income statement.

  

A and B are incorrect. Debt securities issued by the firm, and debt securities that the firm intends to hold until maturity, are both reported at amortized cost, not market value. Debt and equity securities that the firm does not expect to hold to maturity or to sell in the near term are marketed to market on the balance sheet, but unrealized gains and losses do not affect the income statement.

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73. During the fourth quarter of the current year subject retail company reported the following: · $5,450,000 in credit sales, with $2,000,000 of cash collected during the quarter in connection with these credit sales. All sales were final with no uncertainties remaining. · The shipment of $750,000 in merchandise on consignment to a local specialty retailer. This merchandise can be returned within 60 days for a full refund is not sold. · $1,100,000 in cash sales during the quarter. All sales were final with no expense uncertainties remaining. Under the accrual method, the amount of revenue to be recognized for the specific transactions listed during the quarter would be closest to: A. $5,300,000. B. $6,550,000. C. $7,300,000.

Ans: B. Under accrual method, all credit sales in the first transaction would be recognized as revenue earned (earnings process complete and no uncertainties remaining), despite only $2,000,000 in cash being collected from these sales. In the second transaction, no revenue would be recognized under the accrual method given that the consignment and the right of a return of all merchandise within 60 days means the revenue and earnings recognition process hasn’t been completed (a consignment is not really a sale). In the last transaction, the cash sales would all be recognized as revenue since the earnings process has been completed and no uncertainties remain. Revenue = $5,450,000 + $1,100,000 = $6,550,000