Financial Reporting and Analysis 【Reading 25】Sample increase, marketing, 2012, profit

karoliukas

Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit?

Increase in raw materials cost

Increase in marketing expense

A) Yes No

B) No Yes

C) Yes Yes

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Gross profit is equal to sales minus cost of goods sold. Cost of goods sold includes the direct costs of producing a product or service such as raw materials, direct labor, and overhead (fixed costs). Thus, an increase in raw materials costs will result in higher cost of goods sold and lower gross profit. Marketing expenses are considered operating expenses (SG&A), not in cost of goods sold.

terpsichorefan

thanks for sharing

optiix

CPP Corporation has a contract to build a custom test chamber for a client for $100,000. CPP Corporation uses the percentage-of-completion method for accounting and estimates the total costs for the project to be equal to $80,000. CPP Corporation has promised to complete the project within three years. At year-end the customer has paid $60,000, equaling the total amount billed for the year, and total costs incurred to date are $40,000. On the income statement, net income for the year-end will be:

A) $10,000.

B) $20,000.

C) -$10,000.

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Under the percentage-of-completion method, one-half of the total revenue is recognized because one-half of the costs have been incurred ($40,000 / $80,000). Therefore, revenue will be equal to $50,000, expenses are $40,000, and net income will be $10,000.

optiix

The Better Building Company has a contract to build a building for $100 million. The estimate of the cost of the project is $75 million. In the first year of the project, BB had costs of $30 million. The Better Building Company’s reported profit for the first year of the contract, using the percentage-of-completion method, is:

A) $10 million.

B) $0.

C) $20 million.

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Reported profit (in millions) = ($30 / $75)($100 − 75) = $10.

optiix

At the beginning of 2007, Thunderbird Company started a 3-year construction project. The following data relates to the project:

Contract price	$100 million
Costs incurred in 2007	$50 million
Progress billings	$40 million
Collection of progress billings	$37 million

Because of cost overruns, Thunderbird cannot reliably estimate the total cost of the project. However, Thunderbird expects that its costs incurred so far are recoverable. What amount of revenue should Thunderbird recognize for the year ended 2007 under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS)?

U.S. GAAP

IFRS

A) $0 $0

B) $0 $50 million

C) $37 million $40 million

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The completed-contract method must be used under U.S. GAAP since Thunderbird cannot reliably estimate the project’s cost. Under the completed-contract method, no revenue is recognized until the project is complete. Under IFRS, when total cost cannot be reliably estimated, revenue is recognized to the extent that recovering contract costs is probable. Since Thunderbird incurred $50 million of cost in 2007, $50 million of revenue is recognized.

optiix

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) Yes Yes

B) No Yes

C) No No

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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.

optiix

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) Amortized cost Other comprehensive income

B) Fair value Other comprehensive income

C) Fair value Net income

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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.

optiix

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

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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.

clearlycanadian

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 $43,000

C) $41,000 $2,000

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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.

clearlycanadian

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) Yes No

C) No No

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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.