CFA Level I:FSA : understanding income statements(Reading 25) 习题精选 method, income, revenue, statements

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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.

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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

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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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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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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

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69. Consider a manufacturing company and a financial services company. Interest expense is most likely classified as a non-operating component of income for:

A. both of these companies.

B. neither of these companies.

C. only one of these companies.

  
  Ans: C.

Interest expense is shown as a non-operating component of net income for a manufacturing company but would typical be classified as an operating expense for a financial services company.

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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. Original shares of CS 1,000,000x12 12,000,000 Stock dividend 100,000x12 1,200,000 New shares of CS 400,000x3 1,200,000 Total shares of CS 1,200,000 Stock dividends are assumed to have been outstanding since the beginning of the year.

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67. Which of the following statements about types of nonrecurring items under U.S.GAAP is least accurate?

A. Unusual or infrequent items are included in income from continuing operations.

B. Extraordinary items are unusual and infrequent items that are reported net of taxes and included in nonrecurring income from continuing operations.

C. Discontinued operations are reported net of taxes below income from continuing operating.

  
  Ans; B.

Extraordinary items are unusual and infrequent items that are reported separately, net of tax, after net income continuing operating.

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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.

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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.