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. |
2. An analyst complied the following information for Capital Company:
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= = =$0.12 |
3. Addy, Inc started a 3-year construction project on 1/1/20x2. Projected revenues are 30$ 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.
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. |
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:
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: |
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:
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
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10. The following financial information is available at the end of the year.
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.
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11. The following information is available on a company for the current year.
The company’s diluted EPS is closest to: A. $7.57. B. $7.69. C. $7.72.
| Ans: C. Since both the preferred shares and bonds are dilutive, they should both be converted to calculate the diluted EPS. Diluted EPS is the lowest value. $7.72 has calculated in the following table.
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12. During 2010, Company A sold a piece of land with a cost of $6 million to Company B for $10 million. Company B made a $2 million down payment with the remaining balance to be paid over the next 5 years. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. Company A would most likely report a profit in 2010 of: A. $4 million using the accrual method. B. $0.8 million using the installment method. C. $2 million using the cost recovery method. | Ans: B. An installment sale occurs when a firm finances a sale and payments are expected to be received over an extended period. If collectability is certain, revenue is recognized at the time of sale using the normal revenue recognition criteria. If collectability cannot be reasonably estimated, the installment method is used. Under installment method, profit is recognized as cash is collected. Profit reported in 2010 is: x2=0.8million A is incorrect. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. Normal revenue recognition method cannot be used here. C is incorrect.Cost recovery method could be used in this case, but the reported profit would be $0. Because under the cost recovery method, profit is recognized only when cash collected exceeds costs incurred. |
13. The table below shows changes to the number of common shares outstanding for a company during 2012:
To calculate earnings per share for 2012, the company’s weighted average number of shares outstanding is closest to: A. 215,000. B. 420,000. C. 430,000. | Ans: C. The weighted average number of shares outstanding is time weighted: 5/12 of the year there were 180,000 shares, and 7/12 of the year there were 240,000 (180,000+60,000) on a pre-split basis; the stock split is treated retroactively to the start of the year. [(180,000 x 5/12) + (240,000 x 7/12)] x 2 = 430,000 |
14. A company entered into a three-year construction project with a total contract price of $5.3 million and an expected total cost of $4.4 million. The following table provides cash flow information relating to the contract:
If the company uses the percentage-of-completion method, the amount of revenue (in $) recognized in Year 2 will be closest to: A. 2,800,000. B. 3,372,727. C. 3,616,636. | 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. In Year 2, the percent completed is $3,000,000/$4,400,000 = 68.2%, resulting in 68.2% x 5,300,000 = 3,616,636 revenue being recognized. |
22. An analyst gathers the following information about a company:
Using the treasury stock method, the number of incremental shares used to compute diluted earnings per share is closest to: A. 5,000. B. 15,000. C. 20,000. | Ans: A. Diluted EPS is calculated using the treasury stock method that considers what would be the effect if the options or warrants had been exercised. Only options or warrants that are in-the-money are included, as out-of-the-money options would not be exercised. Therefore only the warrants are dilutive: their exercise price is below the average market price of the stock. Using the treasury stock method, the number of new shares issued on exercise is reduced by the number of shares that could be purchased with the cash received upon exercise of the warrants: 20,000($30) = $600,000 in proceeds. $600,000 / $40 = 15,000 shares treasury stock. Incremental shares using the treasury stock method = 20,000 – 15,000 = 5,000. |
23. An analyst gathers the following information about a company:
The bonds were issued at par and can be converted into 300,000 common shares. All securities were outstanding for the entire year. Diluted earnings per share is closest to: A. $1.05. B. $1.26. C. $1.36. | Ans: B. Dividends of $140,000 (0.07 x 2,000,000) should be deducted from net income to determine the amount available to common shareholders: $1,360,000 = (1,500,000 –140,000). Basic EPS would be $1,360,000 / 1,000,000 or $1.36 per share. Diluted EPS would consider the convertible bonds if they were dilutive. Interest on the bonds is $400,000 and the after-tax amount add back to net income is $400,000 (1-.30) = $280,000. Diluted EPS, assuming conversion, is ($1,360,000 + 280,000) / (1,000,000 +300,000) = 1,640,000/1,300,000= $1.26 per share. The bonds are dilutive. |
24. An analyst gathers the following data about a company and the industry in which it operates:
Which of the following conclusions is most reasonable? Compared to the industry, the company: A. has the same cost structure and net profit margin. B. has a lower gross profit margin and spends more on its operating costs. C. is better at controlling product costs, but less effective at controlling operating costs. | Ans: C.
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25. An analyst is forecasting EPS for a company. She prepares the following common sized data from its recent annual report and estimates sales for 2009.
The capital structure of the company has not changed and the company has no short term interest bearing debt outstanding. The projected net income (in $ millions) for 2009 is closest to: A. 162.8. B. 164.9. C. 167.4. | Ans: C. The cost of goods sold and operating expenses are constant over the two-year period and they can reasonably be used to forecast 2009. Interest expense is declining as a percent of sales, implying it is a fixed cost. Conversion into dollars for each year shows what interest expense has been; 2008 =$80 (3.72% x 2,150); 2007=$80 (4.02 x 1,990) and that would be a reasonable projected amount to use. The restructuring charge should not be included as it is a non-recurring item. The tax rate, 35%, is given. Sales $2,250.00 COGS (45%) 1,012.50 Operating expenses (40%) 900.00 Interest expense 80.00 Pretax margin 257.50 Tax (35%) 90.1 Net Income 167.40 |
27. The following information is available from a company’s according records:
The company’s total comprehensive income (in million) is closest to: A. €1,150 B. €3,150 C. €3,650 | Ans: C. Total comprehensive income= net income + other comprehensive income Net income revenue – expenses Other comprehensive income includes gains or losses on available-for-sale securities and translation adjustments on foreign subsidiaries. (revenue - expense) + gain on AFS – loss on FX translation (12,500-10,000)+1.475-325=3,650 |
28. During 2012, Nagano Incorporated, a manufacturing company, reported the following items on their income statement:
Under U.S.GAAP, the correct classification of each of these items on the income statement would be as a(n):
A. Answer A. B. Answer B. C. Answer C. | Ans: B. Under U.S.GAAP: The loss on the disposal of fixed assets is an unusual or infrequent item but it is still part of normal operating activities. The interest expense is the result of financing activities and would be classified as a nonoperating expense by nonfinancial service companies. |
29. Melbourne Manufacturing has equipment with an original cost of $850,000, accumulated amortization of $300,000 and 5 year of estimated remaining useful life. Due to a change in market conditions Melbourne now estimate that the equipment will only generate cash flow of $80,000 per year over its remaining useful life. The company’s incremental borrowing rate is 8%. What is the amount of the impairment loss closest to and what would be the effect on the company’s return on asset (ROA) in future periods?(under U.S.GAAP)
A. Answer A. B. Answer B. C. Answer C. | Ans: C. The equipment is impaired. NBV=$550,000, which is greater than the sum of the undiscounted cash flow 5 years x$80,000=$400,000 The amount of the impairment is 550,000-PV of the cash flow=550,000-319,417(PMT=80,000, N=5,i=8%)=230,583. The company’s ROA will increase. ROA= There will be lower depreciation charges in the future, which will increase net income, and a lower carrying value of assets, which decreases total assets. Both factors would increase any future ROA. |
30. An analyst gathered the following information about a company:
Using the treasury stock method, the number of incremental shares should be used to compute diluted earnings per share is closest to: A. 5,000. B. 12,500. C. 15,000. | Ans: A. Diluted EPS is calculated using the treasury stock method that considers what would be the effect if the options or warrants had been exercised. Only options or warrants that are in-the-money are included, as out-of-the-money options would not be e3xercised. Therefore, only the warrants are dilutive, the exercise preice is below the average market price of the stock. Using the treasury stock method: 20,000($30)=$600,000 in proceeds. $600,000/$40=15,000 shares treasury stock. Incremental shares using the treasury stock method = 20,000 – 15,000 = 5,000. |
31. The following information was obtained from a company’s 10-k.
Firm’s weighted average number of shares outstanding for the one-year period ended June 30,20x3 is closest to: A. 3,000,000. B. 4,500,000. C. 6,000,000. D. | Ans: C. The weighted average number of shares outstanding is time weighted: 3/12 of the year there were 1,500,000 shares, 3/12 of the year there were 2,500,000 (1,500,000+1,000,000),3/12 of the year there were 2,000,000 (1,500,000+1,000,000-500,000) on a pre-split basis (the stock split is treated retroactively to the start of the year), and 3/12 of the year there were 6,000,000 (=2,000,000 x 3) Weighted average number of shares outstanding for the one-year period: [(1,500,000 x 3/12) + (2,500,000 x 3/12)+(2,000,000 x 2/12)] x 3+6,000,000 x 3/12= 6,000,000 |
32. An analyst gathered the following information about a company:
The bonds were issued at par and can be converted into 300,000 common shares. All securities were outstanding for the entire year. Diluted earnings per share for the company are closest to: A. $1.05. B. $1.26. C. $1.36. | Ans: B.
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33. Income statements for two companies (A and B) and the common-sized income statement for the industry are provided below:
The best conclusion an analyst can make is: A. Company B’s interest rate is lower than the industry average. B. Both companies’ tax rates are higher than the industry average. C. Company A earns a higher gross margin than both Company B and the industry. | Ans: C.
Company A earns a higher gross margin than both Company B and the industry. A is incorrect. The interest rate is not a function of sales and cannot be analyzed on a common sized income statement. B is incorrect. Tax rates are determined based on taxes ÷ pretax earnings, not as a percentage of sales (as shown in common sized analysis).
The tax rates for the companies are not higher than the industry. |
34. The following information is available for Ajax Company’s most recent fiscal year:
The $100 par value preferred stock pays a 5% dividend. Each preferred share may be converted into five common shares. The preferred stock market price is $102 per share and the common stock trades at $19 per share. Diluted earnings per share (EPS) for Ajax company is closest to: A. $1.00. B. $1.33. C. $1.50. | Ans: B. Diluted EPS is derived from the following calculation: Diluted EPS= To calculate the dilutive effect of the preferred shares, assume that the shares were converted at the beginning of the period. Assuming this conversion, the $5,000,000 preferred dividends would not have been paid and there would have been an additional 5,000,000 common shares (5 new shares for each preferred share outstanding). The formula is: Net income available to common shareholders was $15,000,000 ($20m-$5m in preferred dividends). If the shares were converted, the $5m in preferred dividends is added back. Diluted EPS cannot exceed basic EPS. Basic EPS is calculated as follows: The diluted EPS does not exceed basic EPS. Had diluted EPS exceeded basic EPS, the convertible preferred stock would have been anti-dilutive and diluted EPS would be the same s basic EPS. |
36. Bao Company reported net income for the year ended December 31, 2012 of $6,000,000. The company’s tax rate was 40%. At the same date, the company had outstanding $30 million in 6% convertible bonds with a conversion price of $60 per share and 3 million common shares with a par value of $10. The only change in the capital structure during 2012 was the repurchase of 100,000 common shares on April 1. Bao’s diluted earnings per share for 2012 were closest to: A. $2.01. B. $1.98. C. $1.91. | Ans: B. Weighted average shares outstanding = 3,100,000 outstanding before treasury repurchase for ? of the year = 775,000 3,000,000 outstanding before treasury repurchase for ? of the year = 2,250,000 Weighted average shares = 775,000+2,250,000 = 3,025,000 Basic EPS= income from continuing operations/ WASO =$6,000,000/3,025,000 = $1.98 Potential common shares from bond conversion =$30,000,000 /$60 = 500,000 shares Reduction of interest expense net of taxes =$30 million x 6% x (1-0.4) = $1,080,000 Adjusted EPS assuming conversion =($6,000,000+1,080,000)/(3,025,000+500,000) =$2.01 The adjustment for the bond conversion is anti-dilutive (the diluted EPS as calculated is smaller than basic EPS) so basic EPS and diluted EPS are the same at $1.98. |
Income statement For the year ended 31 August (U.S. $ thousands) | ||
2012 | 2011 | |
Sales | $100,000 | $95,000 |
COGS | 47,000 | 47,500 |
Gross profit | 53,000 | 47,500 |
Operating expenses | 34,000 | 38,000 |
Interest expense | 2,400 | 2,700 |
Earnings before taxes | 16,600 | 6,800 |
Income taxes 33% | 5,478 | 2,244 |
Net income | $11,122 | $4,556 |
Balance sheet As at 31 August (U.S. $ thousands) | ||
2012 | 2011 | |
Assets |
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Cash & investments | $21,122 | $25,000 |
Accounts receivable | 25,000 | 13,500 |
Inventories | 13,000 | 8,500 |
Total current assets | $59,122 | $47,000 |
Total long-term assets | 72,000 | 80,000 |
Total assets | $131,122 | $127,000 |
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Liabilities |
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Accounts payable | $15,000 | $15,000 |
Other current liabilities | 7,000 | 9,000 |
Total current liabilities | $22,000 | $24,000 |
Long-term debt | 35,000 | 40,000 |
Total liabilities | $57,000 | $64,000 |
Shareholders’ equity |
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Common stock | $58,000 | $58,000 |
Retained earnings | 16,122 | 5,000 |
$74,122 | $63,000 | |
Total liabilities & equity | $131,122 | $127,000 |
51. An analyst gathered the following data about a company: The company had 500,000 shares of common stock outstanding for the entire year. The company’s beginning stock price was $40, its ending price was $60, and its average price over the year was $50. The company has 120,000 warrants outstanding for the entire year. Each warrant allows the holder to buy one share of common stock at $45 per share. How many shears of common stock should the company use in computing its diluted earnings per share? A. 488,000. B. 500,000. C. 512,000.
| Ans: C. Dilution occurs since the exercise price for the warrants ($45) is less than the average market price for the shares ($50). The incremental number of shares outstanding is found from: () x # warrants = x 120,000 =12,000 Number of shares to use in diluted EPS calculation = 500,000+12,000=512,000 |
53. As of January 1, a company had 22,500 $10 par value commons shares outstanding. On July 1, the company repurchased 5,000 shares. The company also has 11,000, 10%, $100 par value preferred shares. If the company’s net income is $210,000, its diluted earnings per share is closest to: A. $5.00. B. $7.50. C. $10.00. | Ans: A. Since this company has a simple capital structure, basic and diluted EPS are equal. The numerator equal net income-preferred dividends =210,000-(11,000shares x 0.10dividend x 100 par) =210,000-110,000=100,000. The weighted average shares outstanding =22,500-(5,000 shares repurchased x 0.5 midyear) =22,500-2,500=20,000. Then, basic EPS = diluted EPS=100,000/20,000=$5per share. |
54. Which of the following statements about the appropriate revenue recognition method to use under U.S.GAAP, given the status of completion of the earning process and assurance of payment, is least accurate? Use the: A. completed contract method when the firm cannot reliably estimate the outcome of the project. B. percentage-of-completion method when ultimate payment is reasonably assured and revenue and costs can be reliably estimated. C. installment method when collectability of payments for a sale can be reasonably estimated. | Ans: C. The installment method should be used when future cash collection cannot be reasonably estimated. |
55. An analyst gathers the following data about a company: · The company had 1 million shares of common stock outstanding for the entire year. · The company’s beginning stock price was $50, its ending price was $70, and its average price was $60. · The company had 100,000 warrants outstanding for the entire year. Each warrant allows the holder to buy one share of common stock at $50 per share. How many shares of common stock should the company use in computing its diluted EPS? A. 1,100,000. B. 1,083,333. C. 1,016,667. D. | Ans: C. Use the Treasury stock method: Step 1: determine the number of common shares created if the warrants are exercised = 100,000. Step 2: calculate the cash inflow if the warrants are exercised: (100,000)($50 per share)=$5,000,000. Step 3: Calculate the number of shares that can be purchased with these funds using the average market price ($60 per share): 5,000,000/60=83,333 shares. Step 4: Calculate the net increase in common shares outstanding from the exercise of the warrants: 100,000-83,333=16,667. Step 5: Add the net increase in common shares from the exercise of the warrants to the number of common shares outstanding for the entire year: 1,000,000+16,667=1,016,667 |
59. Bao Company has the following changes in its stock: The company had 2 million shares outstanding on December 31, 2011. On March 31, 2012, the company paid a 10% stock dividend. On June 30, 2012, the company sold $10 million face value of &% convertible debentures, convertible into common at $5 per share. On September 30, 2012, the company issued and sold 100,000 shares of common stock. The company should compute its 2012 basic EPS based on: A. 2,225,000 shares. B. 2,250,000 shares. C. 3,225,000 shares. D. | Ans; A. Basic EPS does not consider potential dilution from convertible bonds. Original shares =2,000,000x12=24,000,000 +stock dividend=200,000x12=2,400,000 +new shares =100,000x3=300,000 ==2,225,000 Alternatively, 2 million(1.1)+(1/4)(100,000)=2.225 million. |
62. During 2012, Bao Inc. reported net income of $15,000 and had 2,000 shares of common stock outstanding for the entire year. Bao also had 2,000 shares of 10%, $50 par value preferred stock outstanding during 2012. During 2009, Bao issued 100, $1,000 par, 6% bonds for $100,000. Each of these is convertible to 50 shares of common stock. Bao’s tax rate is 40%. Assuming these bonds are dilutive, 2012 diluted EPS for Bao is closest to: A. $0.71. B. $1.23. C. $2.50. | Ans: B. Diluted EPS= 100(1,000)(6%)(1-0.4)=$3,600; Convertible debt shares=50(100)=5,000 =$1.23 |
63. Which of the following statements about the calculation of earnings per share (EPS) is least accurate: A. Shares issued after a stock split must be adjusted for the split. B. Options outstanding may have no effect on diluted EPS. C. Reacquired shares are excluded from the computation from the date of reacquisition. | Ans: A. Shares issued post-split need not be adjusted for the split as they are already “new” shares. Options with an exercise price greater than the average share price do not affect diluted EPS. |
64. Bao Company has 1,000,000 warrants outstanding at the beginning of the year, each convertible into one share of stock with an exercise price of $50. No new warrants were issued during the year. The average stock price during the period was $60, and the year-end stock price was $45. What adjustment for these warrants should be made, under the treasury stock method, to the number of shares used to calculate diluted earnings per share (EPS)? A. 0. B. 166,667. C. 200,000. | Ans: B. Diluted EPS uses average price. Since the average price is greater than the exe4rcise price, the warrants are dilutive. x1,000,000=166,667. |
65. A software company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will: A. reduce net income and shareholders’ equity by $2 million. B. increase shareholders’ equity by $1 million and have no effect on net income. C. reduce net income by $2 million and increase shareholders’ equity by $1 million. | Ans: C. Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders’ equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 millions. |
66. Analysts reviewing Amber Inc.’s and Bold Inc.’s long-term contracting activities observe that Amber’s contracts are being accounted for under the percentage-of-completion method while Bold’s are being accounted for under the completed contract method. This difference is least likely to affect the two companies’: A. income statement. B. statements of cash flows. C. assets on the balance sheets. | Ans: B. Cash flows are no different under the percentage-of-completion method compared with the completed-contract method. Income statement and balance sheet accounts will differ between the two firms. |
68. Bao Company has the following sequence of events regarding its stock: · The company had 1,000,000 shares outstanding at the beginning of the year. · On June 30, the company declared and issued a 10% stock dividend. · On September 30, the company sold 400,000 shares of common stock at par. The number of shares that should be used to compute basic earnings per share at year end is: A. 1,000,000. B. 1,100,000. C. 1,200,000. | Ans: C.
Stock dividends are assumed to have been outstanding since the beginning of the year. |
70. Financial analyst, Zhan Wang, gathered the following data about a company: · 1,000 common shares are outstanding (no change during the year). · Net income is $5,000. · The company paid $500 in preferred dividends. · The company paid $600 in common dividends. · The average market price of their common stock is $60 for the year. · The company had 100 warrants (for one share each) outstanding for the entire year, exercisable at $50. The company’s diluted earnings per share is closest to: A. $4.42. B. $4.55. C. $4.83. | Ans: A. The warrants are dilutive because their exercise price is less than the average market price. Shares issued to warrant holders = 100 Warrants generate cash of 100 x 50 = $5,000 Repurchased shares = = 83 Net new shares created = 100 -83 = 17 Alternatively, x 100=17 Diluted EPS = = =$4.42 |
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. |
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 |
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