Financial Statements and Taxation
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Questions and Answers

What is a reason for prior period adjustments to financial statements?

  • Using unacceptable accounting principles
  • Capital structure changes
  • Changes in estimates (correct)
  • Discontinued operations

    • What is an effect of double taxation?

  • Corporation pays tax on its income and stockholders pay tax on their dividends (correct)
  • A corporation pays taxes to the national government and local government
  • The corporation pays tax on its income and the officers of the corporation pay tax on their salaries
  • A corporation must pay double the amount of tax that an unincorporated business pays

    • What happens when a corporation issues capital stock at a price higher than the stated value?

  • The entire issue price is credited to the capital stock account and capital in excess of stated value (correct)
  • The amount received in excess of stated value increases retained earnings
  • The amount received in excess of stated value constitutes profit to the issuing corporation
  • The amount received in excess of stated value becomes a part of legal capital

    • What is a characteristic of mutual agency in a partnership?

    <p>A partner can commit or bind the partnership in any contract within the scope of the partnership business</p> Signup and view all the answers

    What is a consequence of using unacceptable accounting principles?

    <p>Inaccurate financial reporting</p> Signup and view all the answers

    What is not a step in the liquidation process of a partnership?

    <p>Issue new partnership agreements</p> Signup and view all the answers

    What type of taxation does a corporation face when it distributes dividends to its stockholders?

    <p>Double taxation</p> Signup and view all the answers

    What might explain the difference between a company's net income and net cash flow from operating activities?

    <p>Depreciation Expense</p> Signup and view all the answers

    When evaluating a company's current ratio, which of the following is the most important consideration?

    <p>Characteristics of the company and the industry in which it operates</p> Signup and view all the answers

    What do comparative financial statements compare?

    <p>The company's current statements with those of prior periods</p> Signup and view all the answers

    Why might a company's net income exceed its net cash flow from operating activities?

    <p>Depreciation expense recognized for the year</p> Signup and view all the answers

    What is an important consideration when evaluating a company's current ratio?

    <p>The trend in the ratio in recent periods</p> Signup and view all the answers

    What might cause a company's net income and net cash flow from operating activities to differ?

    <p>Depreciation Expense</p> Signup and view all the answers

    Which of the following is an example of a cash disbursement?

    <p>Payment of income taxes</p> Signup and view all the answers

    Why is a loss on sale of land added to net income in computing net cash flow from operating activities using the indirect method?

    <p>The sale of land did not result in the receipt of any cash</p> Signup and view all the answers

    Which of the following types of expenses would be classified as an operating expense in a multi-step income statement?

    <p>Depreciation Expense</p> Signup and view all the answers

    What is the primary purpose of an income statement?

    <p>To evaluate a firm’s performance</p> Signup and view all the answers

    What does the term 'cash' include in a statement of cash flows?

    <p>Bank accounts, cash on hand and cash equivalents</p> Signup and view all the answers

    When a partner contributes accounts receivable with an allowance for doubtful accounts to a partnership, which of the following is a proper treatment?

    <p>The balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value.</p> Signup and view all the answers

    What is one of the primary purposes of a statement of cash flows?

    <p>To evaluate the profitability of business operations</p> Signup and view all the answers

    What is the effect of a small stock dividend on total stockholders' equity?

    <p>It has no effect on total stockholders' equity.</p> Signup and view all the answers

    Where is additional paid-in capital resulting from a stock dividend reported in the financial statements?

    <p>In the stockholders' equity section of the balance sheet.</p> Signup and view all the answers

    Which of the following transactions would result in a cash disbursement?

    <p>Payment of the principal amount owed on a bank loan</p> Signup and view all the answers

    What type of transaction is not classified as an operating activity in a statement of cash flows?

    <p>Sale of land</p> Signup and view all the answers

    What is the term for a correction of a material error from a prior period?

    <p>Prior period adjustment.</p> Signup and view all the answers

    Which of the following statements is true about a stock dividend?

    <p>A stock dividend has no effect on total stockholders' equity.</p> Signup and view all the answers

    What is the term for a distribution of cash by a corporation to its stockholders?

    <p>Cash dividend.</p> Signup and view all the answers

    When a corporation reports a net income that is less than its net cash flow from operations, what can be inferred?

    <p>The corporation has an income recognition problem.</p> Signup and view all the answers

    What is the effect of a stock dividend on the market value of shares?

    <p>It has no effect on the market value of shares.</p> Signup and view all the answers

    What account will be credited when recording the receipt of payment from Maybelle Company?

    <p>Accounts Receivable</p> Signup and view all the answers

    Where are payments of interest usually classified in a statement of cash flows?

    <p>Financing Activities</p> Signup and view all the answers

    Which ratio relates most closely to the concept of leverage?

    <p>Debt Ratio</p> Signup and view all the answers

    When is the drawings account in a proprietorship credited?

    <p>When money is withdrawn by the owner</p> Signup and view all the answers

    What is the effect of a stock dividend declaration on Retained Earnings and Stockholders' Equity?

    <p>Retained Earnings remain unchanged and Stockholders' Equity remains unchanged</p> Signup and view all the answers

    When must Bonds Payable be discounted to their present value for balance sheet presentation?

    <p>When the bonds' stated rate of interest is less than the market rate of interest</p> Signup and view all the answers

    Which of the following is not a characteristic of the corporate form of organization?

    <p>Unlimited liability</p> Signup and view all the answers

    What measurement best reflects investors' expectation about future earnings?

    <p>The price/earnings ratio</p> Signup and view all the answers

    Study Notes

    Financial Statements and Partnership Liquidation

    • Prior period adjustments to financial statements can result from changes in estimates, changes in tax law, using unacceptable accounting principles, and discontinued operations.
    • Double taxation means a corporation pays tax on its income and stockholders pay tax on their dividends.

    Partnership Liquidation

    • The liquidation of a partnership involves four steps:
    • Sell noncash assets for cash and recognize a gain or loss on realization.
    • Allocate the gain or loss on realization to the partners on their income ratios.
    • Pay partnership liabilities in cash.
    • Distribute remaining cash to partners on the basis of their remaining capital balance.
    • The proper sequencing of the steps is: 3, 2, 1, 4.

    Corporation and Stock

    • When a corporation issues capital stock at a price higher than the stated value, the amount received in excess of stated value becomes a part of legal capital.
    • Mutual agency means a partner can commit or bind the partnership in any contract within the scope of the partnership business.

    Partnership and Accounts Receivable

    • When a partner contributes accounts receivable with an allowance for doubtful accounts, the balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value.
    • The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed.

    Stock Dividend and Retained Earnings

    • A small stock dividend increases total stockholders' equity by the market value of the shares.
    • Additional paid-in capital resulting from a stock dividend appears in the stockholders' equity section of the balance sheet.
    • A correction of a material error called prior period adjustment is made in the income statement.

    Financial Statements Analysis

    • A possible explanation for a company's net income being less than its net cash flow from operations is depreciation expense.
    • Comparative financial statements compare a company's current statements with those of prior periods, the budgeted level for performance for the period, those of the company's principal competitor, or those of other companies in the same industry.

    Cash Flow Statement

    • The F Corporation reported net income in excess of its net cash flow from operating activities for the current year, which may be due to depreciation expense recognized for the year.
    • A loss on sale of land is added to net income in computing net cash flow from operating activities when using the indirect method.
    • Cash includes bank accounts, cash on hand, and cash equivalents.
    • Payments of interest are usually classified as operating activities.

    Income Statement and Ratios

    • An income statement is the primary source of information needed to evaluate a firm's performance.
    • In a multi-step income statement, depreciation expense, interest expense, cost of goods sold, and income taxes expense are classified as operating expenses.
    • The measurement that best reflects investors' expectation about future earnings is the price-earnings ratio.

    Leverage, Proprietorship, and Bonds

    • The debt ratio relates most closely to the concept of leverage.
    • The drawings account in a proprietorship is credited when money is withdrawn by the owner.
    • A stock dividend declaration decreases retained earnings, does not change stockholders' equity, and increases contributed capital.
    • Bonds payable must be discounted to their present value for the balance sheet presentation when the bonds stated rate of interest is less than the market rate of interest.

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    Preliminary Examination PDF

    Description

    This quiz assesses your understanding of financial statements, specifically prior period adjustments and double taxation.

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