Careful reading of an annual report will reveal that off-balance-sheet debt includes
Answer (A) is correct.
Off-balance-sheet debt includes any type of liability for which the
company is responsible but that does not appear on the balance sheet.
The most common example is the amount due in future years on
operating leases. Under U.S. GAAP, operating leases are not capitalized;
instead, only the periodic payments of rent are reported when actually
paid. Capital leases (those similar to a purchase) must be capitalized and
reported as liabilities.
Which one of the following is not a form of off-balance-sheet financing?
Answer (B) is correct.
Off-balance-sheet financing takes four principal forms: investments in
unconsolidated subsidiaries, special purpose entities, operating leases,
and factoring receivables with recourse
In a multiple-step income statement for a retail company, all of the following are included in the operating section except
Answer (C) is correct. The operating section of a retailer’s income statement includes all revenues and costs necessary for the operation of the retail establishment, e.g., sales, cost of goods sold, administrative expenses, and selling expenses. Dividend revenue, however, is classified under other revenues. In a statement of cash flows, cash dividends received are considered an operating cash flow.
When reporting extraordinary items,
Answer (A) is correct. Extraordinary items are reported net of tax after discontinued operations.
The major segments of the statement of retained earnings for a period are
Answer (D) is correct. The statement of retained earnings is a basic financial statement. Together with the income statement, the statement of retained earnings is meant to broadly reflect the results of operations. The statement of retained earnings consists of beginning retained earnings adjusted for any prior period adjustment (net of tax), with further adjustments for income (loss), dividends, and in certain other rare adjustments, e.g., quasi-reorganizations. The final figure is ending retained earnings.
In recording transactions, which of the following best describes the relation between expenses and losses?
Answer (C) is correct.
Expenses are outflow or other usage of assets or incurrences of liability (or both) from activities that qualify as ongoing major or central operations. Losses are similar to expenses but generally do not occur in ordinary activities. For example, losses may result from the sale of noncurrent assets or from natural disasters.
An entity has a 50% gross margin, general and administrative expenses of $50, interest expense of $20, and net income of $10 for the year just ended. If the corporate tax rate is 50%, the level of sales revenue for the year just ended was
Answer (D) is correct. Net income equals sales minus cost of sales, G&A expenses, interest, and tax. Given a 50% tax rate, income before tax must have been $20 [$10 net income ÷ (1.0 – 0.5 tax rate)]. Accordingly, income before interest and tax must have been $40 ($20 income before tax + $20 interest), and the gross margin (sales – cost of sales) must have been $90 ($40 income before interest and tax + $50 G&A expenses). If the gross margin is 50% of sales, sales equals $180 ($90 gross margin ÷ 0.5).
Assume that employees confessed to a $500,000 inventory theft but are not able to make restitution. How should this material fraud be shown in the company’s financial statements?
Answer (A) is correct. Losses may or may not occur in the course of ordinary activities. For example, they may result from nonreciprocal transactions (e.g., theft), reciprocal transactions (e.g., a sale of plant assets), or from holding assets or liabilities. Losses are typically displayed separately.
An entity had the following opening and closing inventory balances during the current year:
Finished goods..... .. $ 90,000..... $260,000
Raw materials..... ... 105,000...... 130,000
Work-in-progress..... 220,000...... 175,000
The following transactions and events occurred during the current year:
$300,000 of raw materials were purchased, of which $20,000 were returned because of defects.
$600,000 of direct labor costs were incurred.
$750,000 of production overhead costs were incurred.
The cost of goods sold for the current year ended December 31 would be
Answer (A) is correct. Cost of goods sold equals cost of goods manufactured (COGM) adjusted for the change in finished goods. COGM equals the sum of raw materials used, direct labor costs, and production overhead, adjusted for the change in work-in-progress. Raw materials used equals $255,000 ($105,000 BI + $300,000 purchases – $20,000 returns – $130,000 EI). Thus, COGM equals $1,650,000 ($255,000 RM + $600,000 DL + $750,000 OH + $220,000 BWIP – $175,000 EWIP), and COGS equals $1,480,000 ($1,650,000 COGM + $90,000 BFG – $260,000 EFG).
If the beginning balance for May of the materials inventory account was $27,500, the ending balance for May is $28,750, and $128,900 of materials were used during the month, the materials purchased during the month cost
Answer (C) is correct. Purchases equals usage adjusted for the inventory change. Hence, purchases equals $130,150 ($128,900 used – $27,500 BI + $28,750 EI).