HOCK international Review Session PDF

7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK internati...

7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international resources to the entity. Staff and customers may find the financial statements useful as well, but they are not the primary users for whom financial statements are prepared. If you need help with an ExamSuccess question, please ask in our Student Forums Correct Answer Explanation for B: (/student-forums/) and be sure to include the Question ID displayed above the question. Thank you! The objective of financial reporting is to provide useful financial information about the entity for decision-making. Those using the financial information to make decisions include present and When you are done reviewing your answers, simply close this page. potential equity investors, lenders, and other creditors who need to make decisions about providing resources to the entity. The decisions relate to buying, selling, or holding debt or equity instruments You scored 31 correct out of 150 (21%) questions in Section A - Multiple-Choice Questions. and providing credit. The investors, lenders, and other creditors need information that will help The average score on this set of questions is 65%. them assess the amount of, timing of, and prospects for future net cash inflows to the entity to 100 make their decisions. Other users who may or may not be providing capital to the firm—such as management, employees, financial analysts, and regulators—may find financial statements useful as well. 75  Show Other Explanations Percent Correct 50 25 2. Question ID: HOCK MP2 AF16 (Topic: The Financial Statements, Balance Sheet) 0 In times of rising prices, what effect does the use of the historical cost concept have on a The Financial Income Statement Statement of Statement of Owners Statement of Cash The Indirect Method Investing and Integrated Rep ​Statements, Balance ​Comprehensive ​Equity and ​Flows Overview ​Financing Activities, company's asset values and profit? ​Sheet ​Income ​Limitations of ​SCF Disclosures ​Financial Statements A. Asset values and profit will both be overstated in the financial statements. B. Asset values will be overstated and profit understated in the financial statements. Below is a review of your answers, with the incorrectly answered questions first, followed by the C. Asset values will be understated and profit overstated in the financial statements. correctly answered questions: D. Asset values and profit will both be understated in the financial statements. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this 1. Question ID: I22 1.01 (Topic: The Financial Statements, Balance Sheet) question. The primary objective of financial statement reporting is to meet the needs of This question is answered correctly on the first attempt by 66% of students. A. supervisors and managers. B. investors and creditors. Incorrect Answer Explanation for D: C. staff and customers. D. officers and auditors. In a time of rising prices, asset values and profit will not both be understated in the financial statements. The selling prices of inventory items will go up but their inventory cost will remain the Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this same in the financial statements while they are in inventory. Thus, cost of goods sold is unadjusted question. and so profits (revenue minus cost of sales) will be overstated, not understated. This question is answered correctly on the first attempt by 92% of students. Correct Answer Explanation for C: Incorrect Answer Explanation for C: In a period of rising prices, use of the historical cost concept will cause the value of assets on the financial statements to be understated, since the current fair value of the assets will be more than The objective of financial reporting is to provide useful financial information about the entity for was paid for them. Similarly, the selling prices of inventory items will go up but their inventory cost decision-making. Those using the financial information to make decisions include present and potential equity investors, lenders, and other creditors who need to make decisions about providing https://www.hockinternational.com/examsuccess/review/?id=4214905 1/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 2/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international will remain the same in the financial statements while they are in inventory. Thus, cost of goods 5. Question ID: ICMA 1603.P1.046 (Topic: The Financial Statements, Balance Sheet) sold is unadjusted and so profits (revenue minus cost of sales) will be overstated. Therefore, in a Blue Fox Industries had the following account balances at year end. time of rising prices, assets are understated and profits are overstated in the financial statements. Sales $452,000  Show Other Explanations Cash 23,400 Accounts payable 14,300 Rent expense 3,700 4. Question ID: HOCK MP2 AF14 (Topic: The Financial Statements, Balance Sheet) Accounts receivable 9,400 The historical cost convention A. values all assets at their cost to the business, without any adjustment for depreciation. Cost of goods sold 214,000 B. has been replaced in accounting records by a system of current cost accounting. Land 104,000 C. records only past transactions. Contract liability 6,800 D. fails to take into account changing price levels over time. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this Gain on sale 17,500 question. Equipment 28,800 This question is answered correctly on the first attempt by 54% of students. Inventories 2,200 Incorrect Answer Explanation for C: Notes payable 67,000 What is the amount of total current assets reported on the balance sheet? "Historical cost" is the amount of cash, or its equivalent, that is paid to acquire an asset. It is generally used for property, plant and equipment, as well as most inventories. Historical cost may A. $35,000. be adjusted after the acquisition for amortization or other allocations without changing the fact that B. $63,800. historical cost is being used, because depreciation and amortization are methods of allocating the C. $59,300. initial cost to the periods that will benefit from it. Therefore, historical cost can involve current D. $39,900. transactions as well as past transactions. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this Correct Answer Explanation for D: question. "Historical cost" is the amount of cash, or its equivalent, that is paid to acquire an asset. It is This question is answered correctly on the first attempt by 86% of students. generally used for property, plant and equipment, as well as most inventories. Historical cost may be adjusted after the acquisition for amortization or other allocations without changing the fact that Incorrect Answer Explanation for C: historical cost is being used, because depreciation and amortization are methods of allocating the This answer results from including the gain on sale and the contract liability as current assets. The initial cost to the periods that will benefit from it. However, changes in fair value such as in market gain on sale is an income statement item. The contract liability is a liability. prices over time are not reflected in the carrying amount of an asset accounted for using historical cost. Correct Answer Explanation for A: Current assets include cash of $23,400, accounts receivable of $9,400, and inventories of $2,200,  Show Other Explanations for total current assets of $35,000.  Show Other Explanations https://www.hockinternational.com/examsuccess/review/?id=4214905 3/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 4/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international 8. Question ID: ICMA 10Q.2.007 (Topic: The Financial Statements, Balance Sheet) An analyst uses the Statement of Financial Position as the primary source for all of the following 9. Question ID: HTB 1.1.003 (Topic: The Financial Statements, Balance Sheet) except: A statement of financial position provides a basis for all of the following except A. estimating the firm’s value as a going concern. B. identifying the firm’s capital structure. A. evaluating capital structure. C. determining measures for controlling solvency. B. computing rates of return. D. analyzing the potential cost of new financing. C. determining profitability and assessing past performance for a specific period. D. assessing liquidity and financial flexibility. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this question. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this question. This question is answered correctly on the first attempt by 36% of students. This question is answered correctly on the first attempt by 66% of students. Incorrect Answer Explanation for D: Incorrect Answer Explanation for D: An analyst may use the statement of financial position as a primary source for analyzing the potential cost of new financing because the statement of financial position (balance sheet) can help A statement of financial position provides a basis for assessing liquidity and financial flexibility. to determine the company's financial strength and ability to repay a loan. If a company is financially Correct Answer Explanation for C: strong, a lender will perceive less risk in lending to that company than to another, financially weaker, company, and the lender will charge a lower interest rate to the company that is stronger. A statement of financial position (balance sheet) cannot provide a basis for determining profitability and assessing past performance for a specific period. An income statement is required for that. For example:  Show Other Explanations An analyst would use the statement of financial position to compare the level of the company's liabilities to its level of equity, and the higher the equity in relation to the liabilities, the stronger the company and the greater loan repayment ability it has. The ratio of the company's current assets to its current liabilities gives an indication of the company's liquidity. A higher ratio indicates a more liquid company and a greater ability to 10. Question ID: HOCK MP2 AF15 (Topic: The Financial Statements, Balance Sheet) repay a loan. The accounting concept or convention which, in times of rising prices, tends to understate asset Correct Answer Explanation for A: values and overstate profits, is the A. historical cost convention. The statement of financial position is not appropriate for use in valuing a business as a going B. going concern concept. concern because assets and liabilities are not reported at their true values to the firm. For example: C. prudence concept. Assets are reported at their historical costs, not the assets' market value, replacement cost, D. conservatism concept. or value to the firm. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this Many assets are not even reported in the statement of financial position. question. Most liabilities are valued at the present value of cash flows discounted at the rate that was This question is answered correctly on the first attempt by 78% of students. current when the liability was incurred, not at their present values discounted at the current market interest rate. So gains and losses in value from changes in market rates are not Incorrect Answer Explanation for D: recognized in the statement of financial position.  Show Other Explanations https://www.hockinternational.com/examsuccess/review/?id=4214905 5/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 6/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international The conservatism concept means that when in doubt, choose the solution that will be least likely to the balance should be at year end, and then calculate the adjustment needed to bring the balance overstate assets and income. The conservatism concept would not lead to understated asset to what it should be. values, though, and it certainly would not lead to overstated profits. The total expense for the year consists of 7 months at ($36,000 ÷ 36) plus 5 months at ($63,000 ÷ Correct Answer Explanation for A: 36), or (7 × $1,000) + (5 × $1,750), which equals $15,750. That amount is debited to Insurance In a period of rising prices, the value of assets will be understated since the current value of the Expense and credited to Prepaid Insurance. assets is more than was paid for them. Similarly, the selling prices of inventory items will go up but To calculate the amount the second way, first calculate what the balance in the Prepaid Insurance their inventory cost will remain the same while they are in inventory. Thus, cost of goods sold is account was before the December 31 adjusting entries. The year-end balance in the Prepaid unadjusted and so profits will be overstated. Insurance account before adjustments would be the previous year's year-end balance of $1,000  Show Other Explanations per month × 7 months remaining on the policy at year-end, plus the $63,000 that would have been debited to the account when the new policy was purchased, or $70,000. The year-end balance should be $1,750 per month expense under the new policy × 31 months remaining at year end, or $54,250. To adjust the balance in the Prepaid Insurance account from $70,000 to $54,250, a credit of $15,750 is necessary. The balancing entry is a debit to Insurance Expense. 11. Question ID: CMA 1284 P4 Q7 (Topic: The Financial Statements, Balance Sheet)  Show Other Explanations Sanns, Inc. always charges prepaid insurance when it purchases or renews insurance policies. It adjusts the accounts for insurance used once per year, as of December 31. Thus, the 3-year renewal premium for a policy that expired on July 31 of the current year was charged to prepaid insurance. The 3-year renewal policy cost $63,000, up $27,000 from the $36,000 it had cost 3 years earlier. The adjusting entry necessary to reflect the insurance accounts at December 31 of the current year, Sanns' fiscal year-end, would be to A. Debit prepaid insurance for $8,750 and credit insurance expense for $8,750. B. Debit insurance expense for $54,250 and credit prepaid insurance for $54,250. C. Debit insurance expense for $15,750 and credit prepaid insurance for $15,750. D. Debit prepaid insurance for $15,750 and credit insurance expense for $15,750. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this question. This question is answered correctly on the first attempt by 39% of students. Incorrect Answer Explanation for A: The monthly expense under the new insurance policy is $1,750 ($63,000 ÷ 36 months), so expense for the 5 months from August 1 to December 31 would be $8,750. However, Prepaid Insurance should be credited, not debited; and Insurance Expense should be debited, not credited. Furthermore, that is not the only item to be included in the year-end adjusting entry. Correct Answer Explanation for C: There are two ways of arriving at the correct adjusting amounts. One is to calculate the total expense for insurance "used" during the year. The other way is to calculate what the balance in the Prepaid Insurance account actually is before the December 31 adjusting entries, determine what https://www.hockinternational.com/examsuccess/review/?id=4214905 7/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 8/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international Undistributed stock dividends do not create any liability, current or non-current. A stock dividend by 12. Question ID: CMA 1293 P2 Q2 (Topic: The Financial Statements, Balance Sheet) a corporation is a distribution of additional shares of stock to qualifying existing stockholders, and Prepaid expenses are valued on the Statement of Financial Position at the all the transactions to record it take place in the equity section of the balance sheet. A. Cost less expired or used portion. If the stock dividend is a large stock dividend (usually more than 20-25% of the total shares B. Face amount collectible at maturity. outstanding), on the declaration date a debit transaction for the par value of the new shares is C. Cost to acquire the asset. recorded to Retained Earnings and the opposing credit transaction is to Common Shares Issuable D. Cost to acquire minus accumulated amortization. as a Dividend, another equity account. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this If the stock dividend is a small stock dividend (usually less than 20-25% of the total shares question. outstanding), the stock dividend is valued at the fair value of the shares on their date of declaration. The fair value of the new shares is debited to Retained Earnings, the par value of the This question is answered correctly on the first attempt by 54% of students. new shares is credited to Common Shares Issuable as a Dividend, and the difference is credited to Additional Paid-in Capital, all equity accounts. Incorrect Answer Explanation for D:  Show Other Explanations Prepaid expenses are not amortized. Instead, they expire. Correct Answer Explanation for A: Prepaid expenses expire. Their expiration is either due to the passage of time, such as rent or insurance, or it is due to use and consumption, such as supplies. Prepaid expenses are valued on 15. Question ID: HTB 1.1.002 (Topic: Income Statement) the Statement of Financial Position at their cost less the expired portion. The financial statement that provides a summary of the firm’s operations for a period of time is the  Show Other Explanations A. statement of shareholders’ equity. B. income statement. C. statement of financial position. D. statement of retained earnings. 13. Question ID: ICMA 18.P1.012 (Topic: The Financial Statements, Balance Sheet) Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for Which one of the following would not be classified as a current liability? this question. A. Undistributed stock dividends. This question is answered correctly on the first attempt by 91% of students. B. A security deposit received from a renter for a one-year lease. C. Rent for the current year received on January 2 of the current year. Incorrect Answer Explanation for D: D. Ten-year bonds sold 110 months ago. The statement of retained earnings does not report the results of operations for a period of time. Study Unit 1: A.1. The Financial Statements, The Balance Sheet covers the information for this Correct Answer Explanation for B: question. The income statement reports the results of operations for a period of time. This question is answered correctly on the first attempt by 40% of students.  Show Other Explanations Incorrect Answer Explanation for D: Ten-year bonds sold 110 months ago will have less than one year to maturity (110 months is equal to 9.17 years), so the bonds are a current liability for the issuer. Correct Answer Explanation for A: 17. Question ID: ICMA 18.P1.029 (Topic: Income Statement) https://www.hockinternational.com/examsuccess/review/?id=4214905 9/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 10/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international A company received an invoice in January for the electricity used by its warehouse in December, D. Debit Insurance Expense for $72,000 and credit Prepaid Insurance for $72,000. and it recorded the expense in January. The company uses the accrual basis of accounting. What Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for is the impact to the company’s December financial statements? this question. A. Operating expenses were overstated and retained earnings were overstated. This question is answered correctly on the first attempt by 52% of students. B. Current liabilities were understated and retained earnings were overstated. C. Accrued expenses were overstated and retained earnings were understated. Incorrect Answer Explanation for C: D. Cash and cash equivalents were overstated and retained earnings were understated. The monthly expense under the new insurance policy is $2,250 ($81,000 ÷ 36 months), so Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for expense for the 4 months from September 1 to December 31 would be $9,000. However, that is this question. not the only item to be included in the year-end adjusting entry. Furthermore, debiting Prepaid This question is answered correctly on the first attempt by 57% of students. Insurance and crediting Insurance Expense would not be appropriate. Prepaid expense should be debited to an expense account as it is used up, not credited. Incorrect Answer Explanation for C: Correct Answer Explanation for B: The expense for the electricity used by the warehouse in December, a period cost, should have There are two ways of arriving at the correct adjusting amounts. One is to calculate the total been recognized and accrued as a December expense when it was incurred. Failing to recognize expense for the year. The other is to calculate what the balance in the Prepaid Insurance account the expense in December would not have caused accrued expenses to be overstated (rather, they actually is before adjusting entries, determine what the balance should be at year end, and then were understated), nor would it have caused retained earnings to be understated (rather, they were calculate the adjustment needed to bring the balance to what it should be. overstated). Please see the correct answer explanation for more information. The total expense for the year consists of 8 months at ($57,600 ÷ 36) plus 4 months at ($81,000 ÷ Correct Answer Explanation for B: 36), or (8 × $1,600) + (4 × $2,250), which equals $21,800. That amount is debited to Insurance The expense for the electricity used by the warehouse in December, a period cost, should have Expense and credited to Prepaid Insurance. been recognized and accrued as a December expense because that is when it was incurred. To calculate the amount the second way, first calculate what the balance in the Prepaid Insurance Because it was not, current liabilities (accounts payable) were understated as of December 31. account was before the adjusting entries. Since adjustments are done only once a year, the year- Because the expense was not recognized in December, net income was overstated and retained end balance in the Prepaid Insurance account before adjustments would be the Year 0 year-end earnings were thus also overstated. balance of $1,600 per month × 8 months remaining on the policy at year-end Year 0, plus the  Show Other Explanations $81,000 that would have been debited to the account when the new policy was purchased, or $93,800. The year-end balance should be $2,250 per month expense under the new policy × 32 months remaining at year end, or $72,000. To adjust the balance in the Prepaid Insurance account from $93,800 to $72,000, a credit of $21,800 is necessary. The balancing entry is a debit to Insurance Expense. 19. Question ID: CMA 1293 P2 Q9 (Topic: Income Statement)  Show Other Explanations Nichols Corporation renewed an insurance policy for three years beginning September 1, Year 1, and recorded the $81,000 premium in the Prepaid Insurance account. The $81,000 premium represents an increase of $23,400 from the $57,600 premium charged three years ago. Assuming Nichols only records its insurance adjustments at the end of the calendar year, the adjusting entry required to reflect the proper balances in the insurance accounts at December 31, Year 1, Nichols' 21. Question ID: ICMA 1603.P1.067 (Topic: Income Statement) year end, would be to A company uses the calendar year as its financial results reporting time period. On May 31 of the A. Debit Insurance Expense for $9,000 and credit Prepaid Insurance for $9,000. prior year, the company committed to a plan to sell a line of business. The sale represents a B. Debit Insurance Expense for $21,800 and credit Prepaid Insurance for $21,800. strategic shift that will have a major effect on the company's operations and financial results. For C. Debit Prepaid Insurance for $9,000 and credit Insurance Expense for $9,000. the period January 1 through May 31 of the prior year, the line of business had revenues of https://www.hockinternational.com/examsuccess/review/?id=4214905 11/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 12/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international $1,000,000 and expenses of $1,600,000. The assets of the line of business were sold on Operating results of a discontinued component or group of components must be reported on the November 30, at a loss for which no tax benefit is available. In its income statement for the year income statement as discontinued operations in the period when management commits to a plan ended December 31 of the prior year, how should the company report the line of business to sell the entity; the entity to be sold is available for immediate sale; an active program to locate a operations from January 1 through May 31? buyer or buyers and other actions required to complete the plan to sell the entity have been A. $600,000 should be reported as part of the loss on disposal of a component. initiated; the sale is probable within one year, unless events beyond the entity’s control occur; the entity is being actively marketed at a reasonable price in relation to its fair value; or actions B. $1,000,000 and $1,600,000 should be included with revenues and expenses, respectively, as part of continuing operations. required to complete the plan to sell the entity make it unlikely that the plan will be withdrawn or C. $600,000 should be included in the determination of income or loss from operations of significantly changed. a discontinued component. The period from January 1 through May 31 is in the period in which the criteria were met. D. $600,000 should be reported as an unusual or infrequent loss. Therefore, the operating results of the discontinued component must be reported net of tax in the Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for discontinued operations section of the income statement. this question. The gain or loss from the actual disposal of the entity, which did not take place until November 30, This question is answered correctly on the first attempt by 54% of students. should be reported separately along with the related results of operations of the discontinued component in the discontinued operations section of the income statement in the period when the Incorrect Answer Explanation for B: sale takes place. Operating results of a discontinued component or group of components must be reported net of Therefore, for the period January 1 through May 31, a $600,000 loss (revenues of $1,000,000 less associated taxes as discontinued operations on the income statement. expenses of $1,600,000) should be included in the determination of income or loss from operations of a discontinued component. ASC 205-20-45-1E requires the held-for-sale classification in the period in which all of the following criteria are met:  Show Other Explanations Management commits to a plan to sell the entity. The entity to be sold is available for immediate sale. An active program to locate a buyers or buyers and other actions required to complete the plan to sell the entity have been initiated. 22. Question ID: ICMA 10.P2.019 (Topic: Income Statement) The sale is probable within one year, unless events beyond the entity’s control occur. When a fixed asset is sold for less than book value, which one of the following will decrease? The entity is being actively marketed at a reasonable price in relation to its fair value. A. Net working capital. Actions required to complete the plan to sell the entity make it unlikely that the plan will be B. Current ratio. withdrawn or significantly changed. C. Net profit. D. Total current assets. Since the period from January 1 through May 31 is in the period in which the criteria were met, the operating results of the discontinued component must be reported net of tax in the discontinued Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for operations section of the income statement. this question. Correct Answer Explanation for C: This question is answered correctly on the first attempt by 78% of students. The sale of the line of business represents a strategic shift that will have a major effect on the Incorrect Answer Explanation for D: company's operations and financial results. Therefore, it qualifies for financial reporting as a discontinued operation. The sale of a fixed asset for cash will cause current assets to increase, not decrease. All gains or losses that are incurred by a discontinued segment are reported in the period in which Correct Answer Explanation for C: the gain or loss occurred and the gains or losses are reported net of associated taxes. https://www.hockinternational.com/examsuccess/review/?id=4214905 13/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 14/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international When a fixed asset is sold for less than book value, the company will have a loss. The loss will be According to the FASB’s Statement of Financial Accounting Concepts No. 8, Conceptual reported on the income statement and will decrease net profit for the period. Framework for Financial Reporting, Chapter 4, Elements of Financial Statements, revenues are inflows or other enhancements of assets or settlements of liabilities (or a combination of both)  Show Other Explanations that result from delivering or producing goods, rendering services, or other activities. “Other activities” are things like permitting others to use the company’s resources, resulting in interest, rent, royalties, and fees. For a charitable organization, “other activities” includes contributions received. 23. Question ID: HOCK MP2 AF11 (Topic: Income Statement) If a customer pays a deposit in advance of receiving the goods or services contracted for, the According to the FASB conceptual framework, revenue may result from amount received is debited to cash and credited to a current liability account such as deposits or contract liabilities, because the company has an obligation to provide the goods or services A. A decrease in a liability from delivering to a customer an item sold. represented by that deposit. The company cannot recognize the revenue until that obligation has B. An increase in a liability from an incidental transaction. been fulfilled and the customer has received the goods or services paid for. When the goods or C. A decrease in an asset resulting from delivering to a customer an item sold. services are provided to the customer and the customer obtains control of them, the company can D. An increase in an asset from an incidental transaction. recognize the revenue. At that time, the company will debit the liability account for the amount of Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for the deposit and credit revenue. Thus, the decrease in the liability will result in recognizing revenue. this question.  Show Other Explanations This question is answered correctly on the first attempt by 48% of students. Incorrect Answer Explanation for D: According to the FASB’s Statement of Financial Accounting Concepts No. 8, Conceptual 24. Question ID: ICMA 19.P1.008 (Topic: Income Statement) Framework for Financial Reporting, Chapter 4, Elements of Financial Statements, revenues are inflows or other enhancements of assets or settlements of liabilities (or a combination of both) that During the month of October, a company purchased 1,000 units of inventory for $500 per unit and result from delivering or producing goods, rendering services, or other activities. “Other activities” sold 900 of these units which represented 10% of the company’s annual sales budget in units. The are things like permitting others to use the company’s resources, resulting in interest, rent, company also incurred administrative costs of $300,000 during October. By applying the matching royalties, and fees. For a charitable organization, “other activities” includes contributions received. principle, the total amount of the company’s expenses on its October income statement is Therefore, an increase in an asset that results from incidental transactions is not revenue A. $810,000 according to the definition of revenue in Statement of Financial Accounting Concepts No. 8. B. $860,000 C. $750,000 An example of an increase in an asset from an incidental transaction is the sale of some land sold D. $800,000 at a gain, if the seller is not in the business of selling land. The receipt of cash for the sale would Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for increase the asset "cash" by the amount received. Removing the land from the accounting records this question. would involve decreasing the fixed asset, "land," by the book value of the land, which would be less than the cash received for it because the land was sold at a gain. The difference would be the This question is answered correctly on the first attempt by 60% of students. gain. The result of recording the transaction would be a net increase in assets. Since according to Concepts Statement No. 8, revenue results from delivering or producing goods, Incorrect Answer Explanation for D: rendering services, or other activities, and the company is not in the business of selling land, the This answer recognizes the cost of all 1,000 units purchased as an expense, not only for the 900 gain from the sale of the land would be recognized as a gain but it would not be considered units sold. revenue. Correct Answer Explanation for C: Correct Answer Explanation for A: https://www.hockinternational.com/examsuccess/review/?id=4214905 15/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 16/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international The matching principle requires that a company recognize the expenses that generate revenue in For example, a loss on a discontinued component would be presented in the discontinued the same period that the revenue is recognized. Or, looking at it in another way, a company should operations section of the income statement as: recognize revenue in the same period that the expenses that generate that revenue are expensed. Income from continuing operations (after tax) XXXXXX For this question, the company needs to recognize two expenses. The first is the cost of goods sold for the 900 units that were sold. These 900 units were purchased for $500 each, for a total of Loss from operations of discontinued Component X $450,000. (including loss on disposal of $XXXX) XXXXX The second expense is the $300,000 of administrative costs that need to be expensed as they are Income tax benefit on loss from discontinued Component X XXXX incurred. Loss on discontinued operation XXXX These two expenses together total $750,000. Net income XXXXXX  Show Other Explanations  Show Other Explanations 25. Question ID: ICMA 1603.P1.026 (Topic: Income Statement) According to U.S. GAAP, where on the income statement should a multinational company report 26. Question ID: HINT21 CMA 1.A.006 (Topic: Statement of Comprehensive Income) the loss from the disposal sale of a major operating unit? Which of the following statements is accurate with respect to the reporting of Comprehensive A. Report the loss, net of tax, in a separate section between income from continuing Income? operations and net income. A. The balance of Accumulated Other Comprehensive Income is represented in the B. Report the loss, net of tax, in a separate section between income before tax and net Shareholders' Equity section of the balance sheet. income. B. Comprehensive Income Per Share must be reported. C. Report the loss, pretax, in a separate section between income from continuing operations C. The Accumulated Other Comprehensive Income account is a temporary account and is and net income. closed out every year. D. Report the loss, pretax, in a separate section between income from operations D. Comprehensive Income must be presented as a single continuous statement and income before income tax. including both Net Income and Other Comprehensive Income. Study Unit 2: A.1. Comprehensive Income and the Income Statement covers the information for Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this this question. question. This question is answered correctly on the first attempt by 56% of students. This question is answered correctly on the first attempt by 59% of students. Incorrect Answer Explanation for D: Incorrect Answer Explanation for D: The loss is reported net of tax. The discontinued operations section of the income statement The Statement of Comprehensive Income can be presented as a single continuous statement, follows income from continuing operations (after tax). including Net Income followed by Other Comprehensive Income. Or, it can be presented as two Correct Answer Explanation for A: separate but consecutive financial statements: a Statement of Net Income and a Statement of Comprehensive Income presenting the components of Other Comprehensive Income. The The gain or loss from the disposal of a major operating unit should be reported net of tax Statement of Comprehensive Income should immediately follow the Statement of Net Income and separately along with the related results of operations of the discontinued component in the begin with the Net Income figure. discontinued operations section of the income statement. The discontinued operations section of the income statement follows income from continuing operations (after tax). Correct Answer Explanation for A: https://www.hockinternational.com/examsuccess/review/?id=4214905 17/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 18/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international Accumulated Other Comprehensive Income is a line in the Equity section of the balance sheet that Income Statement that are called “Other Comprehensive Income.” includes the items that are not reflected on the Income Statement. Net Income flows to Retained Comprehensive Income = Net Income + Other Comprehensive Income Earnings in Equity when the year-end close is performed, so Net Income ends up in Equity. However, certain specific items are considered “Other Comprehensive Income” items, and they are Thus, only items included in Other Comprehensive Income will cause Comprehensive Income not presented on the Income Statement. Instead, they go straight to Equity by means of the reported in the Statement of Comprehensive Income to differ from Net Income. Accumulated Other Comprehensive Income account. Transition pension assets or obligations that are not recognized immediately as a component of  Show Other Explanations net periodic benefit cost are items that are included as Other Comprehensive Income, so they will cause Comprehensive Income to differ from Net Income.  Show Other Explanations 27. Question ID: HINT21 CMA 1.A.010 (Topic: Statement of Comprehensive Income) Among the following items, which would cause the Comprehensive Income amount reported in the Statement of Comprehensive Income to differ from Net Income? 29. Question ID: HINT21 CMA 1.A.013 (Topic: Statement of Comprehensive Income) A. Introducing an initial public offering in the market. Which of the following is not part of Other Comprehensive Income? B. Gains and losses on a fair value hedge. A. Gain on a derivative instrument that qualifies as and has been designated as a cash flow C. Transition pension assets that are not recognized immediately as a component of net hedge. periodic benefit cost. B. Allowance for credit losses on accounts receivable. D. Unrealized gains on trading securities. C. Unrealized gains or losses on available-for-sale debt securities. Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this D. Prior service costs associated with a defined benefit pension plan. question. Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this This question is answered correctly on the first attempt by 37% of students. question. This question is answered correctly on the first attempt by 85% of students. Incorrect Answer Explanation for D: Comprehensive Income includes all transactions of the company except for transactions made with Incorrect Answer Explanation for D: the owners of the company (such as distribution of dividends or the sale or repurchase of shares). Prior service costs associated with a defined benefit pension plan are reported as Other It includes everything on the Income Statement plus some specific items that do not appear on the Comprehensive Income. Income Statement that are called “Other Comprehensive Income.” Correct Answer Explanation for B: Comprehensive Income = Net Income + Other Comprehensive Income The Allowance for Credit Losses on accounts receivable is a contra-asset account on the balance Thus, only items included as Other Comprehensive Income will cause Comprehensive Income sheet. Credit Loss Expense is an Income Statement item. Neither one is a part of Other reported in the Statement of Comprehensive Income to differ from Net Income. Comprehensive Income. Unrealized gains on trading securities are reported in Net Income, so they are also included in  Show Other Explanations Comprehensive Income. Thus, they would not cause a difference between Comprehensive Income and Net Income. Correct Answer Explanation for C: Comprehensive Income includes all transactions of the company except for transactions made with 30. Question ID: ICMA 1603.P1.006 (Topic: Statement of Comprehensive Income) the owners of the company (such as distribution of dividends or the sale or repurchase of shares). It includes everything on the Income Statement plus some specific items that do not appear on the https://www.hockinternational.com/examsuccess/review/?id=4214905 19/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 20/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international A company’s net income totaled $12,000,000. The company had an unusual loss of $250,000, an As of January 1, Year 7, XYZ Inc. had an opening balance of $358,000 in its Accumulated Other unrealized after-tax gain of $25,000 on available-for-sale debt securities, and a $900,000 Comprehensive Income account. Based on the following information, determine the amounts of distribution of cash dividends. The company’s comprehensive income was Net Income, Comprehensive Income, and Accumulated Other Comprehensive Income at year-end, A. $10,875,000. Year 7 (before income tax): B. $11,750,000. Net sales revenue $1,700,000 C. $12,025,000. D. $11,775,000. Cost of goods sold 750,000 Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this Operating expenses 285,000 question. Non-operating income 35,000 This question is answered correctly on the first attempt by 56% of students. Foreign currency translation adjustment (gain) 12,000 Incorrect Answer Explanation for D: Unrealized loss on trading securities 23,000 This answer excludes the unusual loss of $250,000. Comprehensive income includes everything Unrealized loss on available-for-sale debt securities 31,000 on the income statement plus several specific items that are called other comprehensive income (OCI) that do not appear on the income statement. The unusual loss of $250,000 is included in net income and thus is included in comprehensive income. Comprehensive Accumulated Other Correct Answer Explanation for C: Net Income Income Comprehensive Income Comprehensive income includes everything on the income statement plus several specific items I. $607,000 $588,000 $ 339,000 that are called Other Comprehensive Income (OCI) that do not appear on the income statement. II. $677,000 $658,000 $ 339,000 They do not appear on the income statement because U.S. GAAP requires them to be reported as OCI items in the calculation of comprehensive income. Accumulated other comprehensive income III. $700,000 $677,000 $1,016,000 is a line in the equity section of the balance sheet that includes these items that are not reflected IV. $677,000 $677,000 $1,016,000 on the income statement. The amount of change in the accumulated other comprehensive income account during a given year is included along with net income in calculating comprehensive A. III. income. B. IV. The unrealized after-tax gain of $25,000 on available-for-sale debt securities was reported in C. I. accumulated other comprehensive income. Thus, comprehensive income includes the net income D. II. of $12,000,000 (which includes the unusual loss) plus the $25,000 unrealized gain on available-for- Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this sale debt securities reported in accumulated other comprehensive income, for a total of question. $12,025,000. This question is answered correctly on the first attempt by 47% of students.  Show Other Explanations Incorrect Answer Explanation for A: Net Income of $700,000 is incorrect because it is not reduced for the unrealized loss on trading securities. All gains and losses on trading securities, realized and unrealized, are recognized in Net 31. Question ID: HINT21 CMA 1.A.009 (Topic: Statement of Comprehensive Income) Income. https://www.hockinternational.com/examsuccess/review/?id=4214905 21/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 22/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international Comprehensive Income of $677,000 is not correct because it does not include the Other C. The Statement of Comprehensive Income. Comprehensive Income items, which are the foreign currency translation adjustment and the D. The income statement. unrealized loss on available-for-sale debt securities. Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this $1,016,000 is not the correct ending balance of the Accumulated Other Comprehensive Income question. account because $1,016,000 is the total of Net Income and the ending balance of the Accumulated This question is answered correctly on the first attempt by 54% of students. Other Comprehensive Income account. Net Income is not included in the balance of the Accumulated Other Comprehensive Income account. Incorrect Answer Explanation for D: Correct Answer Explanation for D: Accumulated Other Comprehensive Income is not reported in the Income Statement. It is a The correct calculations for Net Income, Comprehensive Income and Accumulated Other permanent account in the Equity section of the balance sheet. Comprehensive Income are as follows: Correct Answer Explanation for B: Net sales revenue $ 1,700,000 Accumulated Other Comprehensive Income (AOCI) is a permanent account in the Equity section of Cost of goods sold ( 750,000) the balance sheet. The balance in the account is reported in the balance sheet and is also included in the Statement of Changes in Stockholders’ Equity. Operating expenses ( 285,000)  Show Other Explanations Operating income $ 665,000 Non-operating income 35,000 Unrealized loss on trading securities ( 23,000) Net income $ 677,000 34. Question ID: HTB 1.1.004 (Topic: Statement of Comprehensive Income) Foreign currency translation adjustment (gain) 12,000 Comprehensive income is best defined as: A. Net income excluding income from discontinued operations. Unrealized loss on available-for-sale debt securities ( 31,000) B. Total revenues minus total expenses. Comprehensive income $ 658,000 C. The change in net assets for the period excluding owner transactions. Ending balance of Accumulated Other Comprehensive Income = Opening balance + Credits during D. The change in net assets for the period including contributions by owners and distributions to owners. the year − Debits during the year Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this Ending balance of Accumulated Other Comprehensive Income = $358,000 + $12,000 − $31,000 = question. $339,000. This question is answered correctly on the first attempt by 67% of students.  Show Other Explanations Incorrect Answer Explanation for D: The change in net assets for the period including contributions by owners and distributions to owners is not the definition of comprehensive income. 33. Question ID: HINT21 CMA 1.A.011 (Topic: Statement of Comprehensive Income) Correct Answer Explanation for C: Accumulated Other Comprehensive Income is reported in which of the following financial Comprehensive income includes the results of all transactions except for those that are carried out statements? with owners, such as investments by owners and the sale of new shares and distribution of A. The Statement of Cash Flows. dividends. It includes all changes in equity (net assets, or total assets less total liabilities) of an B. Balance sheet. https://www.hockinternational.com/examsuccess/review/?id=4214905 23/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 24/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international entity during a period from transactions and other events and circumstances other than those Gains and losses of a cash flow hedge are reported in Other Comprehensive Income and not in resulting from investments by owners and distributions to owners. Net Income, so they would cause Comprehensive Income to differ from Net Income.  Show Other Explanations Note the difference between foreign currency translation gains and losses and foreign currency remeasurement gains and losses. Foreign currency translation gains and losses are reported in Other Comprehensive Income, whereas foreign currency remeasurement gains and losses are reported in Net Income. Thus, a foreign currency remeasurement loss would be reported in Net Income and would not cause the Comprehensive Income reported in the Statement of 35. Question ID: HINT21 CMA 1.A.007 (Topic: Statement of Comprehensive Income) Comprehensive Income to differ from Net Income. Which of the following would cause the Comprehensive Income reported in the Statement of  Show Other Explanations Comprehensive Income to differ from Net Income? A. Dividends declared but remaining unpaid at the end of the year. B. Foreign currency remeasurement losses. C. Gains and losses of a cash flow hedge. 36. Question ID: HINT21 CMA 1.A.005 (Topic: Statement of Comprehensive Income) D. Realized gain on available-for-sale debt securities. Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this Comprehensive Income includes which of the following: question. Foreign Currency Dividends Paid Loss on This question is answered correctly on the first attempt by 40% of students. Remeasurement Adjustments To Owners Discontinued Operations Incorrect Answer Explanation for D: I. No No Yes Comprehensive Income = Net Income + Other Comprehensive Income II. Yes No Yes Thus, only items included in Other Comprehensive Income will cause Comprehensive Income III. No No No reported in the Statement of Comprehensive Income to differ from Net Income. IV. Yes No No Realized gain on available-for-sale debt securities is reported in Net Income and so would also be included in Comprehensive Income, so it would not cause Comprehensive Income to differ from A. I. Net Income. (Unrealized gain on available-for-sale debt securities is not reported in the Income B. III. Statement but is part of Other Comprehensive Income and thus would cause Comprehensive C. II. Income to differ from Net Income, but this answer choice asks about realized gain on AFS debt D. IV. securities.) Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this question. Correct Answer Explanation for C: This question is answered correctly on the first attempt by 45% of students. Comprehensive Income includes all transactions of the company except for transactions made with the owners of the company (such as distribution of dividends or the sale or repurchase of shares). It includes everything on the Income Statement plus some specific items that do not appear on the Incorrect Answer Explanation for A: Income Statement that are called “Other Comprehensive Income.” Comprehensive Income includes all transactions of the company except for transactions made with Comprehensive Income = Net Income + Other Comprehensive Income the owners of the company. Comprehensive Income includes everything on the Income Statement plus some specific items that do not appear on the Income Statement that are called “Other Thus, only items included in Other Comprehensive Income will cause Comprehensive Income Comprehensive Income.” reported in the Statement of Comprehensive Income to differ from Net Income. https://www.hockinternational.com/examsuccess/review/?id=4214905 25/134 https://www.hockinternational.com/examsuccess/review/?id=4214905 26/134 7/24/24, 11:46 PM Review Session – HOCK international 7/24/24, 11:46 PM Review Session – HOCK international Foreign currency remeasurement adjustments are included on the Income Statement, so those are A. $155,000. part of Comprehensive Income. B. $204,000. C. $5,000. Note the difference between foreign currency translation gains and losses and foreign currency D. $171,000. remeasurement gains and losses. Foreign currency translation gains and losses are reported in Other Comprehensive Income, whereas foreign currency remeasurement gains and losses are Study Unit 3: A.1. The Statement of Comprehensive Income covers the information for this reported in Net Income. question. Correct Answer Explanation for C: This question is answered correctly on the first attempt by 47% of students. Comprehensive Income includes all transactions of the company except for transactions made with the owners of the company. Comprehensive Income includes everything on the Income Statement Incorrect Answer Explanation for A: plus some specific items that do not appear on the Income Statement that are called “Other Comprehensive Income = Net Income + Other Comprehensive Income Comprehensive Income.” Other Comprehensive Income items include the foreign currency translation adjustment (+23,000), Comprehensive Income = Net Income + Other Comprehensive Income the deferred net periodic pension cost (-21,000), the unrealized gains on AFS debt securities Foreign currency remeasurement adjustments are included in Net Income, so they are part of (+15,000), and the deferred loss on a cash flow hedge (-12,000). Comprehensive Income. Dividends to owners are transactions with owners of the company, so This answer also includes Net Income (+150,000), which is part of Comprehensive Income but not those are not part of Comprehensive Income. Gains and losses on discontinued operations are part of Other Comprehensive Income. included in Net Income, so a loss on discontinued operations is included in Comprehensive Income. Note the difference between foreign currency translation gains and losses and foreign currency remeasurement gains and losses. Foreign currency translation gains and losses are reported in  Show Other Explanations Other Comprehensive Income, whereas foreign currency remeasurement gains and losses are reported in Net Income. Correct Answer Explanation for C: Comprehensive Income includes all transactions of the company except for transactions made with 37. Question ID: HINT21 CMA 1.A.001 (Topic: Statement of Comprehensive Income) the owners of the company (such as distribution of dividends or the sale or repurchase of shares). On January 2, Year 1, ABC Ltd. started operations manufacturing widgets. By the end of the year, it Comprehensive Income = Net Income + Other Comprehensive Income had operations in six countries. At the end of the year, the company reported the following information: Certain specific items are not reported on the Income Statement but they are included in Other