A statement of cash flows is intended to help users of financial statements
Answer (A) is correct. The primary purpose of a statement of cash flows is to provide information about the cash receipts and payments of an entity during a period. If used with information in the other financial statements, the statement of cash flows should help users to assess the entity’s ability to generate positive future net cash flows (liquidity), its ability to meet obligations (solvency) and pay dividends, the need for external financing, the reasons for differences between income and cash receipts and payments, and the cash and noncash aspects of the investing and financing activities.
Unrealized gains and losses on trading securities should be presented in the
Answer (B) is correct.
Unrealized holding gains and losses on trading securities are included in
earnings and are therefore reported in the income statement.
Johnstone Company owns 10,000 shares of Breva Corporation’s stock; Breva currently has
40,000 shares outstanding. During the year, Breva had net income of $200,000 and paid
$160,000 in dividends. At the beginning of the year, there was a balance of $150,000 in
Johnstone’s equity method investment in Breva Corporation account. At the end of the year,
the balance in this account should be
Answer (C) is correct.
Johnstone holds 25% (10,000 ÷ 40,000) of Breva’s voting common
stock. Under the equity method, (1) an investor recognizes its share of
the investee’s net income as an increase in the investment account:
Investment in Breva ($200,000 × 25%) $50,000
Income -- equity-method investee $50,000
(2) a dividend from the investee is treated as a return of an investment:
Cash ($160,000 × 25%) $40,000
Investment in Breva $40,000
Thus, at the end of the year, the balance in the investment in Breva
account is $160,000 ($150,000 + $50,000 – $40,000).
Entity X owns 90% of Entity Y. Early in the year, X lent Y $1,000,000. No payments have
been made on the debt by year end. Proper accounting at year end in the consolidated
financial statements would
Answer (A) is correct.
In a consolidated statement of financial position, reciprocal balances,
such as receivables and payables, between a parent and a consolidated
subsidiary should be eliminated in their entirety regardless of the portion
of the subsidiary’s shares held by the parent. Thus, all effects of the
$1,000,000 loan should be eliminated in the preparation of the year-end
consolidated statement of financial position.