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Questions and Answers

What is the accrual basis of accounting?

Reporting revenues and expenses when cash is received or paid

Reporting revenues when cash is received and expenses when cash is paid

Reporting revenues and expenses only after cash is received or paid

Reporting revenues and expenses without waiting for cash to be received or paid (correct)

What does the Cash Flow Statement prepared using the indirect method aim to reconcile?

Revenue to expenses

Income position to cash position (correct)

Cash inflow to cash outflow

Assets to liabilities

What is the formula for the Balance Sheet equation using the indirect method?

Cash + Non-cash Current assets + Long-lived Assets = Current Liabilities + Long-term Liabilities + Capital + Retained Earnings (Net Income – Dividends) (correct)

ASSET = LIABILITY + EQUITY

Change in cash = Change in all the other items

Cash = Net Income – Non-cash Current Assets + Current Liabilities – Long-lived assets + Long-term Liabilities + Capital – Dividends

What does the formula Δ Retained Earnings = Net Income – Dividends represent?

Change in retained earnings Signup and view all the answers

What does the formula Δ +/- Long-lived Assets represent in the change in cash equation?

Cash flow from investing Signup and view all the answers

What is the formula for calculating goodwill?

Goodwill = Price paid - Equity book value – FMV adjustments Signup and view all the answers

What is the meaning of 'minority interests' in the context of consolidating A and B?

It refers to the residual part of B remaining in the hands of the shareholder of B Signup and view all the answers

If A acquired a 100% interest in B for $253 million, what is the FMV of its identifiable assets if the equity book value is $213 million and the building had a FMV of $35 million?

$228 million Signup and view all the answers

What happens to 'minority interests' when A only acquires a relevant portion of B?

It remains with the shareholder of B Signup and view all the answers

What is the tabulation for calculating goodwill?

Goodwill = Price paid - Equity book value – FMV adjustments Signup and view all the answers

What do accrued liabilities represent?

Expenses incurred but not yet paid or invoiced Signup and view all the answers

What is the purpose of provisions in financial statement analysis?

Set aside for future expenses and risks Signup and view all the answers

How are bonds reported on the balance sheet?

At their present value Signup and view all the answers

What affects bond prices according to the text?

Market interest rates Signup and view all the answers

How is the present value of a bond obligation computed?

Based on cash flows and market rates Signup and view all the answers

What is the threshold for ownership that constitutes a financial investment, leading to an affiliation where the investing company has power to influence decisions?

Between 20% and 50% Signup and view all the answers

How are available for sale or trading securities reported on the Balance Sheet?

Using mark-to-market Signup and view all the answers

What method is used for financial investments to adjust the investment based on the investee's profits and dividends?

Equity Method Signup and view all the answers

When should consolidated financial statements be prepared?

When an investor has control over an investee company (over 50% ownership) Signup and view all the answers

Where are unrealized gains or losses from available for sale or trading securities recorded?

Income Statement under other comprehensive income Signup and view all the answers

How are trading securities reported on the Balance Sheet?

At mark to market with unrealized gains or losses Signup and view all the answers

What determines the classification of short-term and long-term liabilities?

Financial criteria and when the obligation expires or needs to be settled Signup and view all the answers

What is the major difference between available-for-sale and held-to-maturity bonds?

Reporting at amortized cost vs. reporting at fair value Signup and view all the answers

What determines the accounting method for equity investments?

Level of influence exerted by the investor Signup and view all the answers

Who is responsible for making the decision on investment classification?

The Board of Directors Signup and view all the answers

How are liabilities of indefinite amount treated in financial statements?

They need to be estimated Signup and view all the answers

What is the primary method used by companies for preparing the cash flow statement?

The indirect method Signup and view all the answers

What does the cash flow statement explain?

Changes in a firm's cash balance during an accounting period Signup and view all the answers

How are short-term, definite, and certain liabilities reported in financial statements?

At nominal value Signup and view all the answers

What are the key issues to consider in bond valuation?

Amount of money at issuance, determination of interest expense, amortization of discount/premium, and payment due at maturity Signup and view all the answers

Study Notes

Bonds Valuation and Cash Flow Statement Preparation

Bonds are evaluated by discounting future cash flows at present value
Liabilities are classified as short-term or long-term, definite or indefinite in amount, certain or contingent
Short-term, definite, and certain liabilities are reported at nominal value, while long-term, definite, and certain liabilities are reported at present value
Liabilities of indefinite amount need to be estimated and contingent liabilities are disclosed in the notes
Four key issues to consider in bond valuation: amount of money at issuance, determination of interest expense, amortization of discount/premium, and payment due at maturity
Cash flow statement explains changes in a firm's cash balance during an accounting period
Cash inflows and outflows are grouped into operations, investing, and financing activities
Cash flow statement can be prepared using the direct method (labeling each cash flow as operating, investing, or financing) or the indirect method
The indirect method is used by 99.9% of companies for preparing the cash flow statement
The indirect method involves adjusting net income for non-cash items and changes in operating assets and liabilities to derive cash flow from operations
The direct method involves reporting actual cash receipts and payments for operating, investing, and financing activities
The cash flow statement provides a detailed explanation of cash inflows and outflows related to the functioning, investment, and financing of a business

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Description

Test your knowledge of bonds valuation and cash flow statement preparation with this quiz. Explore concepts such as discounting future cash flows, classification of liabilities, key issues in bond valuation, and the preparation of cash flow statements using direct and indirect methods.