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.
Answer (B) is correct. Unrealized holding gains and losses on trading securities are included in earnings and are therefore reported in the income statement.
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 x 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 x 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).
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.
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